Staged for Success Corporate Profile

2016 Annual Report Staged for Success Corporate Profile

North American Palladium is the only mining company in the world that is a pure palladium play. We are a Canadian company with 20 years of production at our Lac des Iles mine. We offer investors exposure to palladium in a stable mining jurisdiction.

With an experienced senior management team and guided by a supportive majority shareholder, our Company is well positioned to pursue its strategy to become a low cost, long term, sustainable palladium producer.

We have an enhanced focus on operational improvements and as an established PGM producer, North American Palladium offers investors:

 A clear growth strategy that is increasing production and lowering cash costs;  Exposure to palladium prices;  An attractive PGM investment jurisdiction;  Significant development and exploration upside; and  A quality asset with a long life.

Welcome to the New North American Palladium 2016 Letter to Shareholders

Fellow Shareholders, 2016 was a transformational year for North American Palladium

Following the events of 2015, that saw the financial restructuring of our business and the significant debt reduction on our balance sheet, 2016 has been focused on operational improvements and getting the company on a path to profitability. Our new senior management team is intensely focused on operational improvements intended to drive down costs, expand palladium production and optimize profits.

In 2016 the Lac des Iles (LDI) mine site continued on a program of fundamental change and redesign, setting the operation up for long-term success. This includes a change to our primary mining method that is already delivering more reliable production and has all but eliminated the seismicity issues that challenged us a year ago. We have signed a new 5 year smelter agreement at materially better terms that reduces risk by providing access to two Canadian-based smelters. With an investment of $35 million in 2016 we have begun implementing a new long-term tailings management strategy that will allow the operation to achieve its full production potential.

The other exciting piece of our story is the significant exploration potential at LDI and on nearby greenfields properties. Recent exploration on the mine property has resulted in the extension of known deposits, the discovery of additional mineralized zones, and the identification of new drilling targets. These positive outcomes will be reflected in a National Instrument 43-101 Technical Report that is expected to be published in mid 2017. Under the leadership of Dr. David Peck, the exploration team has acquired the dominant land position within 50 km of the mine site, encompassing all of the known Lac des Iles intrusions and capturing some of the best PGE exploration potential in the world. The Company is poised to discover additional palladium deposits in the region by drawing on its unique knowledge of the controls on palladium mineralization at LDI.

None of this happens without an equally intense focus on health and safety. The Lac des Iles site has become an industry leader in the adoption of risk assessment as a daily tool for every worker. The cultural change is evident in our recent safety performance, with only one lost time injury in 2016.

We see an improving outlook for palladium for 2017 and believe that the climate for palladium is more attractive than ever before. The majority of analysts are predicting a continuing supply deficit and strong price performance for palladium for the next several years. As the only mining company in the world that is a pure palladium play we offer investors direct exposure to palladium markets in a stable jurisdiction with significant development and exploration upside.

For 2017 our top priorities include refining and executing our business strategy, increasing palladium production, publishing a long term life of mine plan and delivering additional exploration successes at LDI and on our greenfields properties. North American Palladium is uniquely positioned to translate improved performance and a bright outlook for the palladium industry into financial success.

To reflect this new future for North American Palladium we have adopted a new corporate logo as seen on the front of this report. Its design reflects the strengths of this company: the stable North American base of operations, the positive market outlook for palladium and the fundamental role that palladium and hence, our mining operations play, in cleaning exhaust gases in automobiles around the world.

Welcome to the new North American Palladium!

Jim Gallagher President & Chief Executive Officer OPERATIONS

Significant changes at our Lac des Iles mine site – such as a new mining method, additional satellite mining zones and an expanded tailings management facility are increasing production and lowering costs over the long term.

2016 was a transition year for the Lac des Iles mine site as we implemented a number of significant initiatives to set the operation up for long-term success.

The recent change in mining method is already showing the intended results and the discovery of the B2 Zone will add ounces to an upcoming mineral reserve and resource report expected in mid 2017. We intend to follow this with an updated life-of-mine plan also to be published in mid 2017 which will incorporate a number of additional improvements and opportunities and extend the mine life. Exploration Upside Over the past several years we have acquired a dominant land position within a 50 km of the Lac des Iles mine that comprises approximately 38,000 hectares of mineral claims. Further work has identified a significant number of geophysical and geochemical anomalies that match the signature of the original mine site intrusion, which is host to the existing Roby, Offset and B2 zones. The Company intends to spend $5.5 million in 2017 to pursue a number of priority targets, including 14,000 metres of drilling. The exploration potential is further complemented by the existing surface and underground infrastructure, and the mill’s excess capacity. Accordingly, as an established PGM producer with a clearly defined strategy for growth, NAP is well positioned to convert exploration success into production and cash flow on an accelerated timeline

Environment The Company values the importance of its social license to operate and as such is committed to operating its LDI mine in a manner that respects the local environment and in full compliance with Canadian and Ontario environmental legislation. Annual monitoring of water quality surrounding the property is ongoing and will be continued years after the mine has closed. Every three years there is an extensive biological monitoring study that covers an area of 300 km2 around the mine site. This includes the monitoring of fisheries, plants, soils, water, and benthic invertebrates, as well as algae quality and assessment. To date, no negative trends have been associated with the Lac des Iles mine on the surrounding ecosystem. Corporate Profile

PEOPLE We recognize that people are crucial to strong corporate performance. As we transition our business, we recognize that our ability to execute our business strategy is highly dependent on employing the best people and motivating them to reach their full potential.

The success of our Company is fueled by our entrepreneurial culture, where every employee has the opportunity and potential to make a difference in our operations.

Employee contribution and entrepreneurship is encouraged and individuals are respected for their ideas, and granted accountability for their work.

Our scale of operations and team-oriented culture offers individuals the chance to bring ideas into action - the ideas and skills of each individual make tangible contributions to company accomplishments. Developing our Employees Having a “say” in the decision-making process is one of the many benefits of working for a growing and Maintaining an engaged workforce is important to us and entrepreneurial company. we believe it is important for our Company to invest in the development of our employees. Proving that our people matter by making safety, respect & training top priorities Working with the Communities in which We Operate

Our Company has a strong commitment to workplace We are responsible to the communities in which we operate safety, mutual respect, and the wellbeing of our in, and committed to our role as a responsible corporate employees. citizen. In keeping with this philosophy, North American Palladium always strives to be a good neighbor and employer, We are committed to ensuring a safe working to create economic prosperity for its stakeholders, and environment for all of our employees. Key features whenever possible, give preference to local and regional ensuring safety in our workplace include the internal suppliers when purchasing goods and services. responsibility system, our dedicated team of managers and supervisors who make safety an integral part of each We have partnered with a number First Nations and Metis workday, our Joint Health and Safety Committee which Nation Groups, all of whom claim the mine site and focuses on identifying safety concerns and making surrounding lands as traditional lands, and consider such improvements, crew safety meetings held to address relationships as key to the mines future success. worker concerns and communicate safe work issues, risk assessments, procedures that are developed and communicated for activities that may have related hazards, a fully-trained Mine Rescue team that is available to respond to any emergency situation, use of the Common Core modular training systems, and alliances with groups such as FM Global and the Electrical Safety Authority.

Safety is at the forefront of everything we do. We also encourage employees to excel in their work by providing the technical training and support to succeed.

Ethical and Responsible We always strive to maintain high standards of integrity and accountability in conducting business.

We have adopted a Code of Conduct that is applicable to all directors, officers, employees and contractors. As part of our commitment to ethical and responsible business conduct, we are committed to maintaining accountability for our accounting, internal controls and auditing processes. It is also our policy to ensure compliance with all applicable legal and regulatory requirements relating to our business. GOVERNANCE

North American Palladium strives to foster a In 2016, the Board adopted a revised Code of business environment that promotes integrity and Conduct for its employees, officers and directors. deters unethical or illegal behavior. Under the Code of Conduct, all of the Corporation’s directors, officers and employees are expected to be The Corporation has adopted corporate familiar and comply with the Code of Conduct in the governance guidelines to promote the effective daily performance of their duties with the functioning of the Board of Directors and its Corporation. Committees and to set forth a common set of expectations as to how the Board should manage The Board has also adopted a Whistleblower Policy to its affairs and perform its responsibilities. provide employees of the Corporation with a process for disclosing complaints or concerns regarding The Board is responsible for: perceived or suspected: (i) questionable accounting, internal controls or auditing processes; (ii) non-  reviewing the Company’s overall business compliance with the Code of Conduct; and (iii) strategy and its annual business plan unethical or illegal behaviour. The Whistleblower  identifying principal risks and implementing Policy allows employees to report concerns systems to manage those risks; assessing anonymously through a website or by telephone via a management’s performance against toll free number, both of which are administered by approved business plans and industry an independent third party service provider. standards Complaints submitted to the third party service  appointing officers and reviewing succession provider are communicated to the Chair of the Audit planning Committee.  developing a communication policy for Shareholders  overseeing the integrity of internal control and management information systems.

The Board discharges its responsibilities directly or through our Board Committees

 The Governance, Nominating and Compensation Committee  The Audit Committee  The Technical, Health, Safety and Environment Committee.

For further information about our governance policies and practices, please visit the Governance section of our website at www.nap.com. BOARD OF DIRECTORS

J. Peter Gordon, Chairman

Mr. Gordon is a Managing Partner at Brookfield Asset Management Inc. and has responsibility for the industrials portfolio of assets within Brookfield Asset Management’s private equity group. Mr. Gordon has 35 years of industry experience in operations and finance with Brookfield companies. He holds an engineering degree from Queen’s University and an MBA from the University of British Columbia.

David Nowak – Director

Mr. Nowak is a Managing Partner at Brookfield Asset Management and has responsibility for transaction origination and execution for Brookfield Asset Management’s private equity group. Prior to joining Brookfield Asset Management in 2011, he was a principal at a Toronto-based private equity firm. He holds a Bachelor of Laws from the University of Western Ontario and an MBA from Duke University where he graduated as a Fuqua Scholar.

John W. Jentz, CA, CPA – Director

Mr. Jentz is a financial and mining professional with 20 years of experience in corporate finance and mergers and acquisitions in both public and private markets. Mr. Jentz is currently Managing Director, Investment Banking at Clarus Securites Inc., a research driven institutional investment dealer. He leads the mining group in equity underwritings and M&A assignments. Prior to that, Mr. Jentz has worked in global investment banking firms such as Bear, Stearns & Co. Inc. and independent Canadian firms such as Westwind Partners Inc. Mr. Jentz is a CA and CPA in good standing with the Canadian Institute of Chartered Accountants. Mr. Jentz earned an MBA from McMaster University with a focus on Finance and Marketing.

Dean Chambers - Director

Mr. Chambers is a financial executive and professional engineer with over 35 years of business, technical, and financial experience. Mr. Chambers stepped down as Executive Vice President and Chief Financial Officer at Sherritt International Corporation (“Sherritt”) on January 1, 2017 but remains an Executive Vice President of Sherritt until his planned retirement on March 31, 2017. Sherritt is a major international resource company involved in the production of nickel, cobalt, oil and electricity. Mr. Chambers previously worked at mining and chemical firms including Dynatec Corporation, Falconbridge Limited and The Dow Chemical Company. Mr. Chambers holds a Bachelor of Engineering and Management from McMaster University.

Greg Fauquier – Director

Mr. Fauquier is a mining engineer with a broad range of management skills covering both mine and process operations, as well as development, together with experience in both open pit and underground operations. Mr. Fauquier recently retired as the Global Managing Director for Hatch Ltd., a consulting engineering and project implementation company, where he was responsible for mining and mineral processing, as well as the operational services. Prior to his employment at Hatch Ltd., Mr. Fauquier was the Senior Vice President of Barrick Gold Corporation where he was responsible for the U.S. and Peruvian operations. Mr. Fauquier holds a B.Sc. Mining from Queen's University.

Management’s Discussion and Analysis

(PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS) FOR THE YEAR ENDED DECEMBER 31, 2016 North American Palladium Ltd.

TABLE OF CONTENTS

Page

Management’s Discussion and Analysis INTRODUCTION ...... 1 FORWARD-LOOKING INFORMATION ...... 1 OUR BUSINESS ...... 2 OPERATING AND FINANCIAL HIGHLIGHTS ...... 3 LDI OPERATING & FINANCIAL RESULTS ...... 4 OTHER EXPENSES ...... 10 FINANCIAL CONDITION, CASH FLOWS, LIQUIDITY AND CAPITAL RESOURCES ...... 12 OUTSTANDING SHARE DATA ...... 14 CRITICAL ACCOUNTING POLICIES AND ESTIMATES ...... 14 OTHER INFORMATION ...... 17 RISKS AND UNCERTAINTIES ...... 19 INTERNAL CONTROLS ...... 19 SUMMARY OF QUARTERLY RESULTS ...... 21 NON-IFRS MEASURES ...... 23 North American Palladium Ltd.

Management’s Discussion and Analysis

INTRODUCTION

Unless the context suggests otherwise, references to “NAP” or the “Company” or similar terms refer to North American Palladium Ltd. and its subsidiaries. “LDI” refers to Lac des Iles Mines Ltd., or the Lac des Iles mine, as the context requires.

The following is management’s discussion and analysis of the financial condition and results of operations (“MD&A”) to enable readers of the Company’s consolidated audited financial statements and related notes to assess material changes in financial condition and results of operations for the fiscal year ended December 31, 2016 (“FY 2016”) compared to those of the comparative fiscal year ended December 31, 2015 (“FY 2015”). Selected quarterly data for each of the respective fiscal periods has also been provided. This MD&A has been prepared as of February 22, 2017 and is intended to supplement and complement the consolidated financial statements and notes thereto for the year ended December 31, 2016 (collectively, the “Financial Statements”), which have been prepared in accordance with International Accounting Standards (“IFRS”). Readers are encouraged to review the Financial Statements in conjunction with their review of this MD&A.

Dr. David Peck, the Company’s Vice President, Exploration and a Qualified Person under National Instrument 43-101, has reviewed and approved all technical items disclosed in this MD&A.

Unless otherwise noted, all dollar amounts are in millions of Canadian dollars, except share and per share amounts and cash cost and All-Inclusive Sustaining Cost (“AISC”) amounts calculated per ounce of palladium. All references to production ounces refer to payable production.

FORWARD-LOOKING INFORMATION

Certain information contained in this MD&A constitutes ‘forward-looking statements’ within the meaning of the ‘safe harbor’ provisions of Canadian securities laws and the United States Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are forward-looking statements. The words ‘planned’, ‘preliminary’, ‘expect’, ‘potential’, ‘believe’, ‘anticipate’, ‘contemplate’, ‘target’, ‘may’, ‘will’, ‘could’, ‘would’, ‘should’, ‘intend’, ‘estimate’ and similar expressions identify forward-looking statements. Forward-looking statements included in this MD&A include, but are not limited to: information as to our strategy, plans or future financial or operating performance such as statements with respect to project timelines, production plans, projected cash flows or expenditures, operating cost estimates, mining methods, expected mining and milling rates, metal price and foreign exchange rates and other statements that express management's expectations or estimates of future performance. The Company cautions the reader that such forward-looking statements involve known and unknown risk factors that may cause actual results to be materially different from those expressed or implied by forward-looking statements. Such risk factors include, but are not limited to: the risk that the LDI mine may not perform as planned, the possibility that commodity prices and foreign exchange rates may fluctuate, the possibility that the Company may not be able to generate sufficient cash to service its indebtedness and may be forced to take other actions, the risk the Company may not be able to continue as a going concern, the possibility the Company will require substantial additional financing, the occurrence of events of default on the Company’s indebtedness, hedging resulting in losses, competition, the possibility title to its mineral properties will be challenged, dependency on third parties for smelting and refining, inherent risks associated with development, exploration, mining and processing including risks related to tailings capacity and underground seismic activity, the risks associated with obtaining necessary licenses and permits, environmental hazards, uncertainty of mineral reserves and resources, changes in legislation, regulations or political and economic developments in Canada and abroad, 1 North American Palladium Ltd.

employment disruptions including in connection with collective agreements between the Company and unions and litigation. For more details on these and other risk factors see the Company’s most recent annual information form, which can be found on SEDAR at www.sedar.com.

Forward-looking statements are necessarily based upon a number of factors and assumptions that, while considered reasonable by management, are inherently subject to significant business, economic and competitive uncertainties and contingencies. The factors and assumptions contained in this MD&A, which may prove to be incorrect, include, but are not limited to: that the Company will continue in operation for the foreseeable future and will be able to realize on its assets and discharge its liabilities in the normal course of business, that metal prices and exchange rates between the Canadian and United States dollar will be consistent with the Company’s expectations, that there will be no material delays affecting operations or the timing of ongoing projects, that prices for key mining and construction supplies, including labour costs, will remain consistent with the Company’s expectations, and that the Company’s current estimates of mineral reserves and resources are accurate. The forward-looking statements are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, events or otherwise, except as expressly required by applicable laws. Readers are cautioned not to put undue reliance on these forward-looking statements.

OUR BUSINESS

The Company is an established precious metals producer that has been operating the Lac des Iles mine located in Ontario, Canada since 1993.

In 2015, the Company expanded the underground LDI mine and has transitioned from ramp access to shaft access while utilizing the long hole open stope mining method. The underground mine is currently transitioning to a sub-level shrinkage mining method. Ore from the underground mine is blended with low grade stockpiles on surface to feed the mill. The mill currently runs on a 14-day on and 14-day off batch processing operating schedule.

The Company has considerable exploration potential near the LDI mine, where a number of growth targets have been identified, and is engaged in an exploration program aimed at increasing its palladium reserves and resources. As an established precious metals producer on a permitted property, NAP has the potential to convert exploration success into production and cash flow on an accelerated timeline. NAP trades on the Toronto Stock Exchange (“TSX”) under the symbol “PDL” and on the OTC Market under the symbol “PALDF”.

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OPERATING AND FINANCIAL OVERVIEW

Financial results in this MD&A are expressed in millions of Canadian dollars, except share and per share amounts. References to Production cost per tonne milled, Palladium revenue per ounce sold ($US), Cash cost per ounce of palladium sold, net of by-product revenues, Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), adjusted EBITDA, or AISC represent Non-IFRS measures. Refer to Non-IFRS Measures on pages 23-27.

Note that the mill was shut down for approximately six weeks in Q2 2015 due to water balance issues, which may make year-to-year comparisons less meaningful.

In the fiscal year ending December 31, 2016: . 2,098,204 tonnes were mined from the underground Offset and Roby zones (as described below) and from the low-grade surface stockpile.

. The mill processed 1,996,484 dry metric tonnes at an average head grade of 3.0 grams of palladium per tonne and a recovery of 82.3%, producing 15,608 tonnes of concentrate with an average grade of 315 grams of palladium per tonne.

. Payable palladium production was 149,563 ounces while payable palladium sales were 149,120 ounces.

. The LDI mine experienced reduced underground production due to the impact of seismic activity and adverse ground conditions in the upper Offset zone resulting from sill and pillar removal as the mine transitions to the sub‐level shrinkage mining method.

. Mine site production costs decreased by $10.3 to $132.2 in FY 2016 compared to $142.5 in FY 2015, primarily due to lower mill production in 2016 as operations utilized a batch processing schedule compared to full-time production during the first three quarters of FY 2015. The Company realized cost reductions relating to power, contractors and parts and supplies, which were partially offset by increased labour and underground blasting costs in FY 2016. On a per-ounce basis, the average production cost per payable ounce of palladium sold was US$665 and US$656 respectively for FY 2016 and FY 2015.

. The non-IFRS measure for the average cash cost per ounce of palladium sold, net of by-product revenues, was US$572 compared to an average spot price for palladium during the year of US$624. The non-IFRS measure of AISC per palladium ounce produced showed a decrease of US$43 to US$728 in FY 2016 compared to US$771 in FY 2015.

. The Company incurred a net loss of $37.5, which included non-cash expense of $30.8 for depreciation and amortization. For FY 2016, the non-IFRS measures for EBITDA and Adjusted EBITDA were of $0.1 and $5.0 respectively.

. In the last quarter of FY 2016, the Company resumed its practice of using forward commodity and foreign exchange contracts to minimize the impact of negative pricing movements of palladium and strengthening of the Canadian dollar between the dates of sale and settlement. As at December 31, 2016, 35,300 ounces of past palladium production that had been delivered and sold to a smelter was priced using forward prices for the month of final settlement at an average price of US$693 per ounce. The Company also had forward foreign exchange contracts to convert US$18.0 of the proceeds on settlements into Canadian dollars at an average USD/CAD exchange rate of 1.35.

. During FY 2016, the Company made draws against its senior secured term loan in the amount of US$50.0. The funds were utilized to finance the expansion of the tailings management facility and for other capital infrastructure investments.

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LDI OPERATING & FINANCIAL RESULTS

Operations at LDI consist of an underground mine accessed via shaft and ramp, an open pit (currently inactive), a substantial low-grade surface stockpile and a mill with a processing capacity of approximately 15,000 tonnes per day. The primary underground deposits on the property are the Offset and Roby zones. During FY 2016, the mill operated on a 14-day on and 14-day off batch schedule processing primarily underground ore which was supplemented with low-grade surface material from the stockpile.

Year-to-year comparisons may be less meaningful since the Company ceased milling operations from May 8, 2015 until June 26, 2015 due to water balance issues. During this period, underground mining operations continued and ore was stockpiled for later processing. Operating Metrics

The key operating results for FY 2016 and FY 2015 are set out in the following table. Year ended December 31 2016 2015 Ore mined (tonnes) Underground 1,367,458 1,532,050 Surface 730,746 779,937 Total 2,098,204 2,311,987

Mined ore grade (Pd g/t) Underground 3.8 4.4 Surface 0.9 1.1

Milling Tonnes milled (dry metric tonnes) 1,996,484 2,135,915 Palladium head grade (g/t) 3.0 3.2 Palladium recoveries (%) 82.3 82.8 Palladium concentrate grade (g/t) 315 278 Tonnes of concentrate produced 15,608 20,784

Production cost per tonne milled1 $ 67 $ 67

Payable production Palladium (oz) 149,563 166,785 Platinum (oz) 10,230 12,295 Gold (oz) 9,671 10,484 Nickel (lbs) 810,111 1,297,664 Copper (lbs) 2,234,976 2,519,100 Palladium sales – payable ounces 149,120 169,448 Palladium revenue per ounce sold (US$)1 $ 634 $ 659 Other results1 AISC per ounce of palladium produced (US$)1 $ 728 $ 771 Cash cost per ounce of palladium sold, net of by-product revenues (US$)1 $ 572 $ 558 1 Non-IFRS measure. Please refer to Non-IFRS Measures on pages 23-27.

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Mining In FY 2016, underground ore mined at LDI consisted of 1,367,458 tonnes (3,736 tonnes per day) at an average palladium grade of 3.8 g/t, a decrease of 164,592 tonnes (11%) compared to 1,532,050 tonnes (4,197 tonnes per day) at an average palladium grade of 4.4 g/t in FY 2015. In FY 2016, 730,746 tonnes at an average palladium grade of 1.0 g/t were extracted from the low-grade surface stockpile and north cell tailings compared to 779,937 tonnes at an average palladium grade of 1.1 g/t in FY 2015. On a combined basis, 9% fewer tonnes of ore at a 14% lower palladium grade were mined in FY 2016 compared to FY 2015. Milling During FY 2016, the LDI mill processed 1,996,484 tonnes of ore at an average palladium head grade of 3.0 g/t with an average recovery of 82.3% yielding 15,608 tonnes of concentrate with a palladium concentrate grade of 315 g/t. In comparison, the mill processed 2,135,915 tonnes of ore in FY 2015 at an average palladium head grade of 3.2 g/t with an average recovery of 82.8% yielding 20,784 tonnes of concentrate with a palladium concentrate grade of 278 g/t. Payable Production Payable production for FY 2016 was lower for all payable metals compared to FY 2015. Additional factors which affected the decrease in payable production for FY 2016 in comparison to FY 2015 were the reversion to a 14-day on and 14-day off batch processing mill operating schedule in early Q4 2015 and the phasing out of low-grade surface stockpile ore and north cell tailings feed to the mill. During the first three quarters of 2015, with the exception of a 50 day mill shutdown in May-June 2015 that resulted from water balance issues, the mill operated on a full-time operating schedule contributing to higher concentrate production compared to FY 2016 which operated the full fiscal year using a batch processing schedule.

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Financial Results Income from mining operations for the LDI operations is summarized in the following table. Year ended December 31 ($millions) 2016 2015 Revenue $ 166.9 $ 193.6 Smelting, refining and freight costs 15.6 21.4 Royalty expense 6.8 7.7 Net revenue 144.5 164.5 Mine operating expenses Production costs Mining 81.9 84.3 Milling 31.3 34.0 General and administration 20.0 22.4 133.2 140.7 Inventory and others (1.0) 1.8 Total production costs 132.2 142.5 Mine restoration and mitigation costs 0.1 5.5 Depreciation and amortization 30.8 31.0 Inventory price adjustment 1.2 0.5 Loss (gain) on disposal of equipment 0.6 0.2 Total mining operating expenses $ 164.9 $ 179.7 Income (loss) from mining operations $ (20.4) $ (15.2) Loss and comprehensive loss $ (37.5) $ (216.4) Loss and comprehensive loss per share $ (0.65) $ (9.39) EBITDA1 $ 0.1 $ (138.3) Adjusted EBITDA1 $ 5.0 $ 13.5 Capital spending, excluding non-cash items $ 47.5 $ 32.2 1 Non-IFRS measure. Please refer to Non-IFRS Measures on pages 23-27. The Company has included income from mining operations as an additional IFRS measure to provide the reader with additional information on the actual results of the LDI operations.

The allocation of production costs, before inventory and others costs, for FY 2016 and FY 2015 are summarized in the charts below.

2016 Mine Operating Expenses 2015 Mine Operating Expenses

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Revenue Revenue is affected by production and resulting sales volumes, commodity prices, currency exchange rates, timing of milling campaigns and concentrate shipment schedules. Metal sales for LDI are recognized as revenue at provisional prices when the concentrate product is delivered to a smelter or a designated shipping point. Final pricing is determined in accordance with LDI’s smelter agreements. In most cases, final prices are determined two months after delivery for gold, nickel and copper and four months after delivery for palladium and platinum. In 2017, final pricing for palladium and platinum will be determined three months after delivery pursuant to a new smelter agreement. Final pricing adjustments can result in additional revenues in a rising commodity price environment and reductions to revenue in a declining commodity price environment. Similarly, a weakening in the Canadian dollar relative to the U.S. dollar would have a positive impact on revenues and a strengthening in the Canadian dollar would have a negative impact on revenues.

Revenue for the year ended December 31, 2016 Palladium Platinum Gold Nickel Copper Others Total

Sales volume(1) 149,120 10,200 9,639 804,600 2,225,826 n.a. n.a. Revenue before price adjustment $ 123.0 $ 13.2 $ 16.0 $ 6.6 $ 5.1 $ 0.1 $ 164.0 Price adjustment ($millions): Commodities 4.3 (0.1) 0.2 0.1 - - 4.5 Foreign exchange (1.3) (0.2) (0.1) - - - (1.6) Revenue ($million) $ 126.0 $ 12.9 $ 16.1 $ 6.7 $ 5.1 $ 0.1 $ 166.9 (1)Sales volumes are per ounce for palladium, platinum and gold and per pound for nickel and copper.

Revenue for the year ended December 31, 2015 Palladium Platinum Gold Nickel Copper Others Total

Sales volume(1) 169,448 12,543 10,650 1,329,588 2,574,402 n.a. n.a. Revenue before price adjustment $ 148.3 $ 16.9 $ 15.7 $ 9.2 $ 8.2 $ 0.1 $ 198.4 Price adjustment ($millions): Commodities (13.5) (1.5) - (0.5) (0.2) - (15.7) Foreign exchange 8.3 1.2 0.7 0.4 0.3 - 10.9 Revenue ($millions) $ 143.1 $ 16.6 $ 16.4 $ 9.1 $ 8.3 $ 0.1 $ 193.6 (1)Sales volumes are per ounce for palladium, platinum and gold and per pound for nickel and copper.

Revenue for FY 2016 decreased by $26.7 or 14% compared to FY 2015 primarily due to reduced sales volumes and lower realized prices for all metals.

2016 Revenue 2015 Revenue

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Spot Metal Prices* and Exchange Rates For comparison purposes, the following table sets out spot metal prices and exchange rates.

Dec-31 Sep-30 Jun-30 Mar-31 Dec-31 Sep-30 Jun-30 Mar-31 2016 2016 2016 2016 2015 2015 2015 2015 Palladium – US$/oz $ 676 $ 722 $ 589 $ 569 $ 547 $ 661 $ 677 $ 729 Platinum – US$/oz $ 907 $ 1,034 $ 999 $ 976 $ 872 $ 908 $ 1,078 $ 1,129 Gold – US$/oz $1,159 $1,323 $1,320 $ 1,237 $1,062 $1,114 $1,171 $ 1,187 Nickel – US$/lb $ 4.54 $ 4.74 $ 4.27 $ 3.75 $ 3.93 $ 4.57 $ 5.30 $ 5.65 Copper – US$/lb $ 2.50 $ 2.19 $ 2.19 $ 2.19 $ 2.13 $ 2.30 $ 2.61 $ 2.73 Exchange rate (Bank of Canada) – CDN$1 = US$ US$ 0.75 US$ 0.76 US$ 0.77 US$0.77 US$ 0.72 US$ 0.75 US$ 0.80 US$0.79 * Based on the London Metal Exchange as at period ending

For further comparison, the chart below illustrates the daily and annual average palladium prices for FY 2016 and FY 2015.

Smelting, refining and freight costs

For FY 2016, costs were $15.6 compared to $21.4 in FY 2015, a 27% decrease. A 25% reduction in concentrate produced at LDI resulted in lower smelter treatment and freight costs, while reduced payable metals produced resulted in lower refining costs. Additionally, smelting and refining costs are incurred in US dollars and were positively impacted by a stronger Canadian dollar in FY 2016. Smelting and refining costs are expected to decrease in 2017 as a result of a new smelter agreement. Royalty expense

For FY 2016, royalty expenses were $6.8 compared to $7.7 in FY 2015. The decrease for FY 2016 was primarily due to lower net smelter revenues in FY 2016 compared to FY 2015.

The following non-IFRS measure is derived from the sales, smelting, refining, and freight, and royalty costs.

Palladium Revenue per Ounce Sold ($US) Palladium revenue per ounce sold ($US) is a non-IFRS measure and the calculation is provided in the non-IFRS measures section on pages 23-27 of this MD&A.

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The palladium revenue per ounce sold ($US) for FY 2016 was US$634 compared to US$659 for FY 2015. Due to the timing difference that exists between the date of sale and the final settlement date, the reduction in the palladium revenue per ounce sold ($US) in FY 2016 is attributable to the decline in palladium price in the second half of 2015 and the first half of 2016, partially offset by a palladium price recovery in the third and fourth quarters of 2016.

2016 2015 Q1 Q2 Q3 Q4 Average Q1 Q2 Q3 Q4 Average Palladium – Spot Price (US$/ounce) $ 569 $ 589 $ 722 $ 676 $ 624 $ 729 $ 677 $ 661 $ 547 $ 680 Palladium revenue per ounce sold (US$) $ 438 $ 611 $ 884 $ 655 $ 634 $ 826 $ 682 $ 658 $ 481 $ 659

Production costs

Total production costs in FY 2016 were $132.2 compared to $142.5 in FY 2015, a decrease of 7%.

Mining costs decreased by $2.4 or 3% compared to FY 2015, primarily due to reduced costs associated with contractors, fuel, and power.

Milling costs decreased by $2.7 or 8% compared to FY 2015, primarily due to reduced reagent and power consumption related to operating under a batch processing schedule, partially offset by increased costs and parts and supplies resulting from a planned preventative maintenance program in Q3 2016.

Mine site general and administration costs decreased $2.4 or 11% compared to FY 2015, primarily due to lower propane prices and contractor costs.

Inventory movements decreased production costs for FY 2016 by $1.0, which represented a $2.8 change from the increased allocation to production costs of $1.8 in FY 2015. The variance was due to production costs allocated back to inventory as a result of the accumulation of stockpiles during the last week of December, 2016, following the final mill run for FY 2016.

In addition, the following non-IFRS measures were calculated based on production costs.

Production Costs per Tonne Milled Production costs per tonne milled is a non-IFRS measure and the calculation is provided in the non-IFRS measures section on pages 23-27 of this MD&A. Production costs per tonne milled were $67 for both FY 2016 and FY 2015.

Cash Cost per Ounce of Palladium Sold ($US), Net of By-Product Revenues Cash cost per ounce of palladium sold ($US), net of by-product revenues is a non-IFRS measure. The calculation of cash cost per ounce of palladium sold is provided in the non-IFRS measures section on pages 23-27 of this MD&A. The cash cost per ounce of palladium sold increased to US$572 in FY 2016 from US$558 in FY 2015. This increase in unit cost resulted primarily from reduced payable ounces produced. Payable ounces of palladium sold decreased by 12%, year over year while related costs, net of by-product credits, decreased by 6%, yielding a 9% increase in the Canadian dollar cash cost per ounce to $778 in FY 2016 compared to $715 in FY 2015. The US dollar-denominated cash cost difference was partially offset due to the weakening of the Canadian dollar, resulting in an average exchange rate (CDN/USD) of 0.75 for FY 2016, a 4% decrease compared to 0.78 for FY 2015.

9 North American Palladium Ltd.

AISC per Ounce of Palladium Produced AISC per ounce of palladium produced is a non-IFRS measure. The calculation of AISC per ounce of palladium produced is provided in the non-IFRS measures section on pages 23-27 of this MD&A.

The AISC per ounce of palladium produced decreased to US$728 for FY 2016 compared to US$771 for FY 2015. The decrease in the 2016 unit cost resulted from a 3.0% reduction in operating expenditures combined with a 10% reduction in exploration, corporate and sustaining capital costs. The lower unit cost was partially offset by a 10% reduction in the total ounces of produced payable palladium. Depreciation and amortization Depreciation and amortization for FY 2016 were $30.8 compared to $31.0 in FY 2015. The 2016 decrease over the prior year total was due to lower unit of production depletion related to lower in-situ palladium ounces produced.

OTHER EXPENSES Exploration

Exploration expenditures for FY 2016 were $4.6 compared to $8.0 in FY 2015. For FY 2016, 5,361 meters of underground exploration drilling and 5,910 metres of Offset conversion drilling was completed.

The year-on-year reduced costs are attributable to a workforce reduction in Q1 2016 and a decrease in drilling metres. Corporate general and administration

General and administration expenditures for FY 2016 were $5.8 compared to $11.5 for FY 2015. The reduced costs are attributable to a significant corporate workforce reduction and the relocation of the corporate office in late 2015. Interest expense and other costs and other income

Interest and other income for FY 2016 was $5.3 compared to $102.9 in FY 2015. The decrease was primarily due to the completion of the 2015 recapitalization transaction and the resulting reduction of debt. Foreign exchange loss (gain) The Company recorded a foreign exchange gain for FY 2016 of $0.1 compared to a loss of $39.5 in FY 2015. The 2016 and 2015 foreign exchange gain (loss) were primarily due to the impact of exchange rate movements on the Company’s US$ denominated senior secured term loan and the US$ denominated credit facility.

In FY 2016, the Company increased its senior secured term loan from $Nil to US$50.0. During FY 2016, the outstanding balance was subject to a foreign exchange increase from 0.72 in January to 0.75 December. In FY 2015, the Company began the year with a senior secured term loan of US$160.6 that was subject to a foreign exchange decrease from 0.79 in January to 0.75 in August when the debt was settled as a result of the Company’s recapitalization transaction.

10 North American Palladium Ltd.

FINANCIAL CONDITION, CASH FLOWS, LIQUIDITY AND CAPITAL RESOURCES Sources and Uses of Cash Year ended December 31 ($millions) 2016 2015 Cash provided by (used in) operations prior to changes in non-cash working capital $ 2.5 $ (4.4) Changes in non-cash working capital (11.9) 18.1 Cash provided by (used in) operations (9.4) 13.7 Cash provided by financing activities 52.4 25.0 Cash used in investing activities (39.2) (31.6) Increase (decrease) in cash and cash equivalents $ 3.8 $ 7.1

Operating Activities For FY 2016, cash provided by operations prior to changes in non-cash working capital was $2.5 compared to $4.4 of cash used by operations in FY 2015. The increase of $6.9 was due to a $10.3 reduction in production costs, a $5.8 reduction in smelting costs, a $5.4 reduction in mine restoration and mitigation costs, a $3.4 reduction in exploration costs, and a $5.7 reduction in general and administration costs, offset by a $26.7 decrease in revenue.

For FY 2016, changes to non-cash working capital resulted in the use of cash of $11.9 compared to a source of cash of $18.1 in FY 2015. The year-on-year change to non-cash working capital of $30.0 was primarily due a significant release of cash from accounts receivable in FY 2015 of $24.0 which was not realized in FY 2016.

Financing Activities and Liquidity For FY 2016, financing activities resulted in a source of cash of $52.4 compared to a source of cash of $25.0 in FY 2015. The $27.4 increase was primarily due to reductions of cash from interest paid and other financing costs totalling $33.5 in FY 2015. These costs did not occur in FY 2016 due to the Company’s recapitalization in August 2015 and the resulting debt elimination. Cash sourced from debt in FY 2016 totaled $64.1 compared to $69.4 sourced from debt and equity in 2015.

11 North American Palladium Ltd.

Investing Activities

For FY 2016, investing activities used cash of $39.2 compared to $31.6 in FY 2015. The expenditures for both periods were due to additions to mining interests net of disposals, which are summarized in the following table.

Year ended December 31 ($millions) 2016 2015 Underground development $ 7.9 $ 11.5 Tailings management facility 33.8 11.8 Mill equipment 1.2 0.3 Equipment and rebuilds 3.6 8.6 Total additions to mining interests before adjustments1 $ 47.5 $ 32.2 Non-cash accrual of capital investment ($7.8) - Total additions to mining interests $ 39.7 $ 32.2 Proceeds on disposal of mining interests, net (0.5) (0.6) Net additions to mining interests $ 39.2 $ 31.6 1Total additions to mining interests before adjustments excludes non- cash amounts relating to $3.0 (2015 - $0.9 ) of assets acquired under finance leases.

Liquidity and Capital Resources1 As at December 31 As at December 31 ($millions) 2016 2015 Cash and cash equivalents $ 15.0 $ 11.2 Total debt 108.8 47.1 Shareholders’ equity 411.5 448.3 1Also see the critical accounting policies and estimates and going concern sections of this MD&A.

As at December 31, 2016, the Company had cash and cash equivalents of $15.0 compared to $11.2 as at December 31, 2015. The change from the prior year end is due to the sources and uses of cash as noted above. The funds are deposited with major Canadian chartered banks.

The Company has, subject to a borrowing base calculation formula, a US$60.0 credit facility that is secured by a first priority charge on the Company's accounts receivable and inventory and by a second priority charge on the Company’s property, plant and equipment. The credit facility may be used for working capital liquidity and general corporate purposes. In December 2015, the Company extended the US$60 credit facility to December 11, 2017. As at December 31, 2016, the borrowing base calculation limited the credit facility to a maximum of US$37.1, of which US$35.4 was utilized including US$12.5 for letters of credit.

The Company’s credit facility contains financial covenants which, if not met, may result in an event of default. The loan agreement also includes, but is not limited to, covenants applicable to limits on liens, additional debt, repayments, material adverse change provisions and cross-default provisions. Certain events of default result in this loan becoming immediately due. Other events of default entitle the lender to demand repayment. The Company was in compliance with all covenants at December 31, 2016.

On December 21, 2015, the senior secured term loan financing with Brookfield Capital Partners Ltd. (“BCP”) was further amended to include the availability of a US$25 term loan financing which bears interest at 10% per annum and matured on December 31, 2016 (the “Term Loan”). An advance of US$10.0 was drawn on January 26, 2016 and the remaining US$15.0 was drawn on May 2, 2016.

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On June 30, 2016, the Company entered into an additional amendment to the Term Loan to increase available funds by US$25 to a maximum of US$50 under the existing terms. An advance of US$10 was drawn on July 5, 2016. An additional advance of US$5.0 was drawn on October 14, 2016 and the remaining US$10 was drawn on December 8, 2016.

The Term Loan included an option for the Company to extend the term for one additional year, provided that there had been no event of default or material adverse effect, as defined in the loan agreement. The Company exercised this option in November 2016, extending the maturity date of the US$50.0 principal balance of the senior secured term loan to December 31, 2017. The Company was also granted an additional extension for the maturity of US$35.0 of the principal balance to December 31, 2018.

The Term Loan is secured by first priority security on the fixed assets of the Company and second priority security on the Company’s accounts receivable and inventory. The loan is prepayable at any time, in whole or in part, without penalty. The Term Loan includes certain cross-default provisions with the Company’s available Bank Facility.

The Company’s cash position and covenant compliance is sensitive to a number of variables which cannot be predicted with certainty, including, but not limited to, meeting production targets, metal prices, foreign exchange rates, operational costs and capital expenditures. Adverse changes in any of these variables may have a material impact on the Company’s liquidity position.

As at December 31, 2016, the Company had $12.0 of finance leases in respect of equipment used for operations. See the discussion regarding the Company’s contractual obligations below for additional commitments. Contractual Obligations Contractual obligations are comprised as follows: As at December 31, 2016 Payments Due by Period ($millions) Total 1-3 Years 3-5 Years 5+ Years Credit facility $ 30.7 $ 30.7 $ - $ - Term loan 66.1 66.1 - - Finance lease obligations 12.0 12.0 - - Operating leases 0.8 0.8 - - Purchase obligations 1.2 1.2 - - $ 110.8 $ 110.8 $ - $ -

In addition to the contractual obligations above, the Company had asset retirement obligations at December 31, 2016 in the amount of $16.1 for the LDI mine and contractual obligations reflected in accounts payable. The Company has letters of credit of $14.9 related to the asset retirement obligation. Other Commitments Other commitments relating to a royalty agreement, operating leases and purchase commitments, and the Company’s letters of credit also existed at December 31, 2016. Please refer to note 16 of the Company’s Financial Statements.

Related Party Transactions Brookfield Business Partners LP (“BBU”) is a limited partnership publicly listed on the New York Stock Exchange (NYSE) and the TSX whose general partner is a wholly-owned subsidiary of Brookfield Asset Management Inc. (“BAM”). An approximate 21% economic interest in BBU by way of limited partnership units was spun off to shareholders of BAM on June 20, 2016 as a special dividend, with subsidiaries of BAM retaining the remaining limited partnership interest in BBU. Collectively, BBU and its affliates (“Brookfield”) indirectly hold approximately 53.5 million common shares, representing approximatey 92% of the issued and outstanding common shares of NAP. Prior to June 1, 2016, NAP’s parent company was BCP, a 100% wholly-owned subsidiary of BAM.

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On January 26, 2016, the Company drew the first advance of US$10.0 under the Term Loan provided by Brookfield. The loan is measured at amortized cost, net of transaction costs of US$0.3, and is being amortized at an effective interest rate of 12.8%. On May 2, 2016, the Company drew the second advance of US$15.0. On July 5, 2016, the Company drew the third advance of US$10.0. On October 13, 2016, an additional draw of US$5.0 was advanced with the final US$10.0 being drawn on December 8, 2016.

The Term Loan and all matters related thereto were reviewed and approved separately by the independent directors in conjunction with approval by the board of directors of the Company, and no contrary views or material disagreements were raised by any director of the Company.

OUTSTANDING SHARE DATA

As of February 22, 2017, there were 58,126,526 common shares of the Company outstanding.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies generally include estimates that are highly uncertain and for which changes in those estimates could materially impact the Company’s financial statements. The following accounting policies are considered critical: a. Going Concern This MD&A has been prepared on a going concern basis which contemplates that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. The Company currently has one committed source of financing; the credit facility, which had remaining credit of US$1.7 available on December 31, 2016 and which matures on December 11, 2017. The US$50.0 senior secured term loan was fully drawn at December 31, 2016. The Company utilizes its credit facility as needed to both supplement shortfalls in cash flow from operations and to fund certain capital expenditures. The Company’s credit facility contains several financial covenants, which, if not met could result in an event of default. As at December 31, 2016, the Company was in compliance with all its covenants under the credit facility agreement. The Company closely monitors compliance with its covenants, as a breach could result in an event of default under the credit facility agreement, which, if not addressed, would entitle the lender to demand repayment.

Availability under the credit facility is subject to a borrowing base calculation that relies on certain levels of inventory and accounts receivable balances; repayments are required in circumstances where the borrowing base is reduced relative to existing debt drawn. Furthermore, under the US$50.0 senior secured term loan, US$15.0 matures on December 31, 2017 and, based on current projections, management does not expect that cash flows from operations will be sufficient to repay this principal amount. Management has developed a plan to increase production and cash flows from operations and is presently evaluating potential financing options to satisfy address any additional funding or refinancing requirements that may be required necessary in 2017. The Company’s cash and liquidity position and covenant compliance is therefore sensitive to a number of variables which cannot be predicted with certainty, including, but not limited to, meeting production targets, metal prices, foreign exchange rates, operational costs and capital expenditures. Adverse changes in any of these variables may have a material impact on the Company’s liquidity position. These circumstances have resulted in a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include adjustments to the carrying values of recorded assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

14 North American Palladium Ltd. b. Use of estimates The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates, and assumptions that affect the application of accounting policies and the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the year. Significant estimates and assumptions relate to recoverability of mining operations and mineral exploration properties. While management believes that these estimates and assumptions are reasonable, actual results could vary significantly.

Certain assumptions are dependent upon reserves, which represent the estimated amount of ore that can be economically and legally extracted from the Company’s properties. In order to estimate reserves, assumptions are required about a range of geological, technical and economic factors, including but not limited to, quantities, grades, production techniques, recovery rates, production costs, transportation costs, commodity prices and exchange rates. Estimating the quantity and/or grade of reserves requires the size, shape and depth of ore bodies to be determined by analyzing geological data such as drilling samples. This process may require complex and difficult geological judgments to interpret the data. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period they are determined and in any future periods affected.

Because the economic assumptions used to estimate reserves change from period to period, and because additional geological data is generated during the course of operations, estimates of reserves may change from period to period. Changes in reported reserves may affect the Company’s financial results and financial position in a number of ways, including but not limited to the following:

 Asset carrying values including mining interests may be affected due to changes in estimated future cash flows;  Depreciation and amortization charged in the statement of operations may change or be impacted where such charges are determined by the units of production basis, or where the useful economic lives of assets change; and  Decommissioning, site restoration and environmental provisions may change where changes in estimated reserves affect expectations about the timing or cost of these activities. c. Impairment assessments of long-lived assets The carrying amounts of the Company’s non-financial assets, excluding inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. Impairment is assessed at the level of cash-generating units (“CGUs”). An impairment loss is recognized for any excess of carrying amount over the recoverable amount.

Impairment is determined for an individual asset unless the asset does not generate cash inflows that are independent of those generated from other assets or groups of assets, in which case, the individual assets are grouped together into CGUs for impairment purposes.

The recoverable amount of an asset or CGU is the greater of its “value in use”, defined as the discounted present value of the future cash flows expected to arise from its continuing use and its ultimate disposal, and its “fair value less costs to sell”, defined as the best estimate of the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date, less costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss on non-financial assets other than goodwill is reversed if there has been a change in the estimates used to determine the recoverable amount, only to the extent that the asset’s carrying

15 North American Palladium Ltd.

amount does not exceed the carrying amount that would have been determined, net of amortization, if no impairment loss had been recognized. d. Depreciation and amortization of mining interests Mining interests relating to plant and equipment, mining leases and claims, royalty interests, and other development costs are recorded at cost with depreciation and amortization provided on the unit-of-production method over the estimated remaining ounces of palladium to be produced based on the proven and probable reserves or, in the event that the Company is mining resources, an appropriate estimate of the resources mined or expected to be mined.

Mining interests relating to “light” vehicles and certain machinery with a determinable expected life are recorded at cost with depreciation provided on a straight-line basis over their estimated useful lives, ranging from three to seven years, which most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Straight-line depreciation is calculated over the depreciable amount, which is the cost of an asset, less its residual value.

Significant components of individual assets are assessed and, if a component has a useful life that is different from the remainder of that asset, that component is depreciated separately using the unit-of-production or straight-line method as appropriate. Costs relating to land are not amortized.

Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term.

Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate. e. Revenue recognition Revenue from the sale of metals in the course of ordinary activities is measured at the fair value of the consideration received or receivable, net of volume adjustments. Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. The timing of the transfers of risks and rewards varies depending on the individual terms of the contract of sale.

Revenue from the sale of palladium and by-product metals from the LDI mine is provisionally recognized based on quoted market prices upon the delivery of concentrate to the smelter or designated shipping point, which is when title transfers and significant rights and obligations of ownership pass. The Company’s smelter contract provides for final prices to be determined by quoted market prices in a period subsequent to the date of concentrate delivery. Variations from the provisionally priced sales are recognized as revenue adjustments until final pricing is determined. Accounts receivable are recorded net of estimated treatment and refining costs, which are subject to final assay adjustments. Subsequent adjustments to provisional pricing amounts due to changes in metal prices and foreign exchange are disclosed separately from initial revenues in the notes to the financial statements. f. Asset retirement obligations In accordance with Company policies, asset retirement obligations relating to legal and constructive obligations for future site reclamation and closure of the Company’s mine sites are recognized when incurred and a liability and corresponding asset are recorded at management’s best estimate. Estimated closure and restoration costs are provided for in the accounting period when the obligation arising from the related disturbance occurs.

The amount of any liability recognized is estimated based on the risk-adjusted costs required to settle present obligations, discounted using a pre-tax risk-free discount rate consistent with the time period of expected cash flows.

16 North American Palladium Ltd.

When the liability is initially recorded, a corresponding asset retirement cost is recognized as an addition to mining interests and amortized using the unit of production method.

Adoption of New Accounting Standards The following new accounting standards have been adopted by the Company. IAS 16 and IAS 38 Clarification of acceptable methods of depreciation and amortization

This pronouncement amends IAS 16 Property Plant and Equipment and IAS 38 Intangible Assets to (i) clarify that the use of a revenue-based depreciation method is not appropriate for property, plant and equipment, and (ii) provide a rebuttable presumption for intangible assets. The amendment is effective for years beginning on or after January 1, 2016. This amendment did not have an impact on the consolidated financial statements of the Company. New standards not yet adopted The following new standards or amendments to standards are not yet effective for the year ended December 31, 2016 or have otherwise not yet been adopted by the Company. IFRS 2 Share-based payment

IFRS 2 has been amended to address certain issues related to the accounting for cash-settled awards and the accounting for equity-settled awards that include a “net settlement” feature in respect of employee withholding taxes. The amendment is effective for annual reporting periods beginning on or after January 1, 2018. The Company does not have any share-based arrangements that would be impacted by this amendment. As a result, this amendment is not expected to have a material impact on the consolidated financial statements of the Company.

17 North American Palladium Ltd.

IFRS 15 Revenue from contracts with customers

IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognized. This new standard replaces IAS 18 Revenue, IAS 11 Construction Contracts, and IFRIC 13 Customer Loyalty Programmes. The amendment is effective for annual reporting periods beginning on or after January 1, 2018, with early adoption permitted. The Company is currently evaluating the potential impact of applying IFRS 15, primarily analyzing its concentrate sale agreements. The Company expects to report more detailed information, including estimated quantitative financial impacts, if material, in its 2017 consolidated financial statements. IAS 7 Statement of Cash Flows – Disclosures Related to Financing Activities IAS 7 has been amended to require disclosure about changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. These amendments to IAS 7 are effective for annual reporting periods beginning on or after January 1, 2017. The Company’s investing activities primarily include cash flows related to its credit facility and senior secured term loan which are denominated in the U.S. currency and are subject to drawdown and repayment. As a result, the Company expects to provide additional disclosures under this amendment in 2017 to reconcile movements within these liabilities during the respective reporting periods. IFRS 9 Financial Instruments: Classification and Measurement IFRS 9, published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial instruments, a new expected credit loss model for calculating impairment of financial assets, and new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39.

IFRS 9 is effective for annual reporting periods beginning on or after January 1, 2018, with early adoption permitted. The Company has made progress in its implementation of IFRS 9, however, has not yet determined the extent of the impact of the new standard on its consolidated financial statements. The Company expects to report more detailed information, including estimated quantitative financial impacts, if material, in its 2017 consolidated financial statements.

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IFRS 16 Leases IFRS 16 is a new standard that will replace IAS 17 Leases and related interpretations. IFRS 16 specifies how an IFRS reporter will recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17.

IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019. The Company expects to adopt IFRS 16 for the annual period beginning January 1, 2019. The extent of impact of adoption of the standard has not yet been determined. IAS 12 Income Taxes – Deferred Taxes IAS 12 has been amended to address certain issues related to the recognizing of deferred tax assets on unrealized losses, deferred tax where an asset is measured at a fair value below the asset’s tax base and other aspects of accounting for deferred taxed assets. These amendments to IAS 12 are effective for annual reporting periods beginning on or after January 1, 2017, with early adoption permitted. The Company presently provides disclosures regarding its deferred tax assets in the notes to its consolidated financial statements. However, the Company has determined that the probability of use of unused credits is not sufficient to recognize any deferred assets on its consolidated balance sheets. As a result, this amendment is not expected to have a material impact on the consolidated financial statements of the Company.

OTHER INFORMATION

Additional information regarding the Company is included in the Company’s annual information form, available on SEDAR at www.sedar.com.

RISKS AND UNCERTAINTIES

In addition to the risks and uncertainties discussed within the Company’s most recent annual information form, the reader should also consider the following risk factors:

Going Concern Risk – Please see the going concern section of this MD&A.

Liquidity Risk – Please see the liquidity and capital resources section of this MD&A.

Financing Risk – Please see the going concern section of this MD&A.

INTERNAL CONTROLS Disclosure Controls and Procedures Management is responsible for the information disclosed in this MD&A and has in place the appropriate information systems, procedures and controls to ensure that information used internally by management and disclosed externally is, in all material respects, complete and reliable.

For the year ended December 31, 2016, the Chief Executive Officer and Vice President, Finance and Chief Financial Officer certify that they have designed, or caused to be designed under their supervision, disclosure controls and

19 North American Palladium Ltd.

procedures to provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities.

The disclosure controls and procedures are evaluated annually through regular internal reviews which are carried out under the supervision of, and with the participation of, the Company’s management, including the Chief Executive Officer and Vice President, Finance and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Vice President, Finance and Chief Financial Officer concluded that the design and operation of these disclosure controls were effective as of December 31, 2016. Internal Control over Financial Reporting For the year ended December 31, 2016, the Chief Executive Officer and Vice President, Finance and Chief Financial Officer certify that they have designed, or caused to be designed under their supervision, internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with IFRS as issued by the IASB.

There have been no changes in the Company’s internal controls over the financial reporting that occurred during the most recent period ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management is responsible for establishing and maintaining adequate internal controls over financial reporting. Internal control over financial reporting, no matter how well designed, has inherent limitations and can only provide reasonable assurance, not absolute assurance, with respect to the preparation and fair presentation of published financial statements and management does not expect such controls will prevent or detect all misstatements due to error or fraud. The Company is continually evolving and enhancing its systems of controls and procedures.

Under the supervision and with the participation of the Chief Executive Officer and the Vice President, Finance and Chief Financial Officer, management performs regular internal reviews and conducts an annual evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on that evaluation, the Chief Executive Officer and Vice President, Finance and Chief Financial Officer concluded that the design and operation of these internal controls over financial reporting were effective as of December 31, 2016.

20 North American Palladium Ltd.

SUMMARY OF QUARTERLY RESULTS

($millions except per share amounts) 2016 2015 Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total PRODUCTION RESULTS Ore mined (tonnes) Underground 338,807 274,206 348,709 405,736 1,367,458 395,052 438,555 356,680 341,763 1,532,050 Surface 40,270 210,671 273,392 206,413 730,746 391,248 186,538 86,632 115,519 779,937 Total 379,077 484,877 622,101 612,149 2,098,204 786,300 625,093 443,312 457,282 2,311,987 Mined ore grade (Pd g/t) Underground 4.3 3.8 3.3 3.5 3.8 4.0 4.3 4.1 5.3 4.4 Surface 1.3 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.4 1.1 Milling Tonnes milled (dry metric tonnes) 353,601 539,461 520,002 583,420 1,996,484 751,420 336,142 659,817 388,536 2,135,915 Palladium recoveries (%) 83.8 82.8 81.1 82.7 82.3 83.0 82.8 82.6 81.8 82.8 Palladium concentrate grade (g/t) 331 323 305 294 315 234 275 293 324 278 Tonnes of concentrate produced 3,773 3,897 3,524 4,414 15,608 6,702 2,849 6,968 4,265 20,784 Production cost per tonne milled1 $ 89 $ 59 $ 59 $ 66 $ 67 $ 55 $ 76 $ 68 $ 78 $ 67 Payable production Palladium (oz) 40,216 38,203 33,165 37,979 149,563 45,626 22,904 57,914 40,341 166,785 Platinum (oz) 2,552 2,400 2,446 2,832 10,230 3,833 1,883 4,138 2,441 12,295 Gold (oz) 2,691 2,282 2,224 2,474 9,671 2,899 1,404 3,590 2,591 10,484 Nickel (lbs) 221,880 198,731 171,643 217,858 810,111 494,795 199,257 325,700 277,912 1,297,664 Copper (lbs) 511,164 563,920 532,419 627,473 2,234,976 867,370 367,025 760,012 524,694 2,519,100

FINANCIAL RESULTS Revenue $ 32.5 $ 39.9 $ 48.5 $ 46.0 $ 166.9 $ 64.0 $ 27.3 $ 64.7 $ 37.6 $ 193.6 Production costs, including mine restoration and mitigation costs 31.3 31.5 30.8 38.7 132.3 41.6 29.3 47.3 29.8 148.0 Exploration expense 1.5 1.3 1.0 0.8 4.6 2.5 1.8 1.3 2.4 8.0 Capital expenditures (net of leases) 12.9 16.5 11.0 7.1 47.5 5.6 7.8 12.3 6.5 32.2 Loss and comprehensive loss 13.1 9.9 1.6 12.9 37.5 37.3 96.8 68.5 13.8 216.4 Loss per share – basic and diluted2 $ 0.23 $ 0.17 $ 0.03 $ 0.23 $ 0.65 $ 38.18 $ 98.35 $ 2.18 $ 0.60 $ 9.39 Cash provided by (used in) operations (3.7) 1.5 2.8 (2.2) (1.6) 20.7 6.4 (14.0) 0.6 13.7 Cash provided by (used in) financing activities 9.1 14.8 13.3 15.2 52.4 (8.8) 11.6 21.2 1.0 25.0 Cash provided by (used in) investing activities3 (12.9) (16.2) (8.5) (1.6) (39.2) (5.6) (7.2) (12.3) (6.5) (31.6) Palladium sold (ounces) 37,768 38,192 33,540 39,620 149,120 45,129 23,974 57,490 42,855 169,448 Palladium revenue per ounce sold (US$) $ 438 $ 611 $ 884 $ 655 $ 634 $ 826 $ 682 $ 658 $ 481 $ 659 Other results1 AISC per ounce of palladium produced (US$)1 $ 643 $ 699 $ 784 $ 795 $ 728 $ 797 $ 1,456 $ 561 $ 682 $ 771 Cash cost per ounce of palladium sold (US$), net of by-product revenues1 $ 504 $ 554 $ 603 $ 641 $ 572 $ 589 $ 750 $522 $ 472 $ 558 1 Non-IFRS measure. Please refer to Non-IFRS Measures on pages 23-27. 2 Loss per share amounts for all comparative periods have been restated to reflect the equivalent impact of applying the 2015 share consolidation on the basis of one common share for every 400 existing common shares. 3 Cash provided by investing activities of $0.8 in Q4-2016 reflects the exclusion of non-cash additions of $7.8 relating to accrued capital costs which have been netted against cash used for additions to mining interests reported in investing activities on the Consolidated Statements of Cash Flows.

21 North American Palladium Ltd.

Highlights:

In the fourth quarter of 2016: . 612,149 tonnes were mined from the underground Offset and Roby zones—the primary underground deposits at LDI —and from the low-grade surface stockpile compared to 457,282 tonnes in 2015.

. The mill processed 583,420 dry metric tonnes at an average head grade of 2.7 grams of palladium per tonne with a recovery rate of 82.7%, producing 4,414 tonnes of concentrate with an average grade of 294 grams of palladium per tonne. In 2015, the mill processed 388,536 dry metric tonnes at an average head grade of 4.3 grams of palladium per tonne with a recovery rate of 81.8%, producing 4,265 tonnes of concentrate with an average grade of 324 grams of palladium per tonne.

. Payable palladium production was 37,979 ounces, while payable palladium sales were 39,620 ounces compared to production of 40,331 ounces and sales of 42,855 ounces respectively in 2015

. Production costs increased by $8.2 to $38.6 compared to $30.4 in the fourth quarter of 2015, primarily due to favourable inventory and other cost movements in the third quarter of 2015, as well as reduced operational costs in the same period due to the mill being on a batch processing schedule in 2016 compared to full-time production in 2015.

. The Company incurred a net loss of $12.9, which included non-cash items of $7.0 (depreciation and amortization) and $2.4 (foreign exchange loss) compared to a net loss of $13.8, which included non-cash items of $7.0 (depreciation and amortization) and $2.1 (foreign exchange loss) in 2015

Highlights for FY 2016 and FY 2015 are as follows:

 For FY 2016, the mill operated using batch processing for the full year and continued to increase milled tonnes throughout the year. For FY 2015, the mill operated on a full-time basis during the first three quarters and transitioned back to batch process, effective for the start of the fourth quarter. Tonnes milled in Q2 and Q4 of FY 2015 reflect a shut down of the mill for approximately six weeks in Q2 2015 due to water balance issues and reduced production as a result of the transition back to batch processing.

 The impact to payable production of metals as a result of the reduction in tonnes milled and the resulting reduction to concentrate tonnes produced was partially offset by the realization of higher concentrate grades during FY 2016.

 Increasing palladium prices during FY 2016 assisted with offsetting the financial impact of the lower payable metals production.

 Following a workforce reduction late in the third quarter of FY 2015 and the initial conversion to the sub-level shrinkage mining method, the Company has experienced reductions to its production costs in FY 2016.

 Capital expenditures in FY 2016 were increased primarily due to the completion of the tailings management facility project.

22 North American Palladium Ltd.

SELECTED ANNUAL INFORMATION

($ millions except for per share amounts) 2016 2015 2014 Gross sales revenue $ 166.9 $ 193.6 $ 220.1 Income (loss) from mining operations (20.4) (15.2) 21.9 Loss and comprehensive loss 37.5 216.4 66.7 Basic loss per share1 $ 0.65 $ 9.39 $ 78.74 Diluted loss per share1 $ 0.65 $ 9.39 $ 78.85 Net cash provided by (used in) operating activities (9.4) 13.7 (11.5) Net cash provided by financing activities 52.4 25.0 29.4 Current assets 91.3 81.4 98.0 Total assets 562.7 535.3 550.8 Long-term liabilities 68.6 26.6 248.9 Total liabilities 151.2 87.0 326.4 Total cash used for capital expenditures 39.7 32.2 23.8 Basic weighted-average number of Common Shares outstanding (millions) 58.1 23.1 0.8 Number of Common Shares outstanding (millions)1 58.1 58.1 1.0 1 Loss per share amounts for all comparative periods have been restated to reflect the equivalent impact of applying the 2015 share consolidation on the basis of one common share for every 400 existing common shares. OUTLOOK

In the Company’s annual information form dated March 30, 2016, NAP provided guidance as to its payable palladium production for fiscal 2016 of between 160,000 and 175,000 (the “Guidance”). Due to certain ongoing challenges associated with the mine’s transition from the open stope blast hole mining method to the sub-level shrinkage method, NAP reduced the Guidance to between 150,000 and 155,000 ounces in Q3 2016. Payable production for the three months and year ended December 31, 2016 is 37,979 and 149,563 ounces, respectively.

In 2017, the Company expects production of between 180,000 and 190,000 ounces of palladium at an average AISC cost of US$700-720/oz of palladium. The AISC for H2 2017 is expected to drop to US$550-560 /oz of palladium produced.

For more information regarding the Company’s 2017 guidance, please see the Company’s news release announcing its year end 2016 results, dated February 22, 2017 as filed on SEDAR at www.sedar.com.

NON-IFRS MEASURES

This MD&A refers to Production cost per tonne milled, Palladium revenue per ounce sold ($US), Cash cost per ounce of palladium sold, net of by-product revenues, EBITDA, adjusted EBITDA and AISC which are not recognized measures under IFRS. Such non-IFRS financial measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. Management uses these measures internally. The use of these measures enables management to better assess performance trends. Management understands that a number of investors, and others who follow the Company’s performance, assess performance in this way. Management believes that these measures better reflect the Company’s performance and are better indications of its expected performance in future periods. This data is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.

23 North American Palladium Ltd.

The following tables reconcile these non-IFRS measures to the most directly comparable IFRS measures: Production Costs per Tonne Milled Production costs per tonne milled provides an estimate of the cost of production related to concentrate shipments to smelters and is computed as follows:

2016 2015 Q1 Q2 Q3 Q4 Average Q1 Q2 Q3 Q4 Average Production costs $ 31.3 $ 31.5 $ 30.8 $ 38.6 $ 132.2 $ 41.6 $ 25.6 $ 44.9 $ 30.4 $ 142.5 Divide by: Tonnes milled (dry metric tonnes) 353,601 539,461 520,002 583,420 1,996,484 751,420 336,142 659,817 388,536 2,135,915

Production cost per tonne milled $ 89 $ 59 $ 59 $ 66 $ 67 $ 55 $ 76 $ 68 $ 78 $ 67

Palladium Revenue Per Ounce Sold ($US) Palladium revenue per ounce sold represents the palladium revenue (in $US), after pricing and foreign exchange adjustments, per payable ounce of palladium that is recognized in revenue in each period. The measure provides a correlation between the estimated proceeds from the sale of the company’s primary metal at current market prices and the Company’s non-IFRS measure for cash cost per ounce of palladium sold.

The reconciliation for palladium revenue per payable ounce sold ($US) is as follows:

2016 2015 Q1 Q2 Q3 Q4 Average Q1 Q2 Q3 Q4 Average Revenue $ 32.5 $ 39.9 $ 48.5 $ 46.0 $ 166.9 $ 64.0 $ 27.3 $ 64.7 $ 37.6 $ 193.6 Deduct: By-product metal revenue 9.5 10.0 10.0 11.4 40.9 18.0 7.1 14.9 10.5 50.5 Palladium revenue $ 23.0 $ 29.9 $ 38.5 $ 34.6 $ 126.0 $ 46.0 $ 20.2 $ 49.8 $ 27.1 $ 143.1 Divide by: Payable ounces of palladium sold 37,768 38,192 33,540 39,620 149,120 45,129 23,974 57,490 42,855 169,448 Palladium revenue per ounce sold (CDN$) $ 609 $ 783 $ 1,148 $ 873 $ 845 $ 1,019 $ 843 $ 866 $ 632 $ 845 Average exchange rate (CDN$1 – US$) 0.72 0.78 0.77 0.75 0.75 0.81 0.81 0.76 0.76 0.78 Palladium revenue per ounce sold (US$) $ 438 $ 611 $ 884 $ 655 $ 634 $ 826 $ 682 $ 658 $ 481 $ 659

24 North American Palladium Ltd.

Cash Cost Per Ounce of Palladium Sold ($US), Net of By-Product Revenues The Company uses this measure internally to evaluate the underlying operating performance of the Company for the reporting periods presented. The Company believes that cash cost per ounce is a critical metric for evaluating the results of the underlying business of the Company.

Cash cost per ounce includes mine site operating costs such as mining, processing, administration and royalties, but are exclusive of depreciation, amortization, reclamation, capital and exploration costs. The cash cost per ounce calculation is reduced by any by-product revenue and is then divided by ounces of palladium sold to arrive at the by-product cash cost per ounce of palladium sales. This measure, along with revenues, is considered to be a key indicator of a Company’s ability to generate operating earnings and cash flow from its mining operations.

The Company’s primary operation relates to the extraction of palladium metal. Therefore, all other metals extracted in conjunction with the palladium metal are considered to be a by-product credit for the purposes of the cash cost calculation.

Cash cost per ounce of Palladium sold ($US), net of by product revenues is determined as follows:

2016 2015 Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total Production costs $ 31.3 $ 31.5 $ 30.8 $ 38.6 $ 132.2 $ 41.6 $ 25.6 $ 44.9 $ 30.4 $ 142.5 Smelting, refining and freight costs 3.3 3.9 3.6 4.8 15.6 6.7 2.7 6.8 5.2 21.4 Royalty expense 1.3 1.7 2.0 1.8 6.8 2.5 1.0 2.7 1.5 7.7 Operational expenses 35.9 37.1 36.4 45.2 154.6 50.8 29.3 54.4 37.1 171.6 Deduct: By-product metal revenue 9.5 10.0 10.0 11.4 40.9 18.0 7.1 14.9 10.5 50.5 $ 26.4 $ 27.1 $ 26.4 $ 33.8 $ 113.7 $ 32.8 $ 22.2 $ 39.5 $ 26.6 $ 121.1 Divided by: Payable ounces of palladium sold 37,768 38,192 33,540 39,620 149,120 45,129 23,974 57,490 42,855 169,448 Cash cost per ounce (CDN$) $ 700 $ 710 $ 783 $ 858 $ 762 $ 727 $ 926 $ 687 $ 621 $ 715 Average exchange rate (CDN$1 – US$) 0.72 0.78 0.77 0.75 0.75 0.81 0.81 0.76 0.76 0.78 Cash cost per ounce of palladium sold (US$), net of by-product revenues $ 504 $ 554 $ 603 $ 641 $ 572 $589 $ 750 $ 522 $ 472 $ 558

25 North American Palladium Ltd.

Adjusted EBITDA

The Company believes that EBITDA and Adjusted EBITDA are valuable indicators of the Company’s ability to generate operating cash flow to fund working capital needs, service debt obligations, and fund capital expenditures.

EBITDA excludes the impact of the cost of financing activities and taxes, and the effects of changes in operating working capital balances, and therefore is not necessarily indicative of operating profit or cash flow from operations as determined under IFRS. Other companies may calculate EBITDA differently.

Adjusted EBITDA, a non-IFRS financial measure, is defined as net loss and comprehensive loss before the following: change in carrying value of long-term debt; income and mining tax expense; interest and other income; interest costs, prepayment fees and other; financing costs; depreciation and amortization; exploration; foreign exchange loss (gain); loss on Recapitalization; mine restoration and mitigation costs; and, severance payments.

2016 2015 Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total Loss and comprehensive loss for the period $ (13.1) $ (9.9) $ (1.6) $ (12.9) $ (37.5) $ (37.3) $ (96.8) $ (68.5) $ (13.8) $ (216.4) Interest and other income (0.8) - - (0.2) (1.0) 1.3 2.4 (0.1) 0.1 (1.1) Interest costs, prepayment fee and other 1.0 1.9 2.1 1.3 6.3 11.9 14.8 10.0 0.5 37.2 Financing costs 0.2 - 0.4 0.9 1.5 0.4 7.5 2.2 0.9 11.0 Depreciation and amortization 8.5 7.5 7.8 7.0 30.8 8.6 4.6 10.8 7.0 31.0 EBITDA $ (4.2) $ (0.5) $ 8.7 $ (3.9) $ 0.1 $ (15.1) $ (72.3) $ (45.6) $ (5.3) $ (138.3) Exploration 1.2 1.5 1.0 1.1 4.6 2.5 1.8 1.3 2.4 8.0 Foreign exchange loss (gain) (3.2) 0.3 0.4 2.4 (0.1) 22.4 (4.0) 19.0 2.1 39.5 Mine restoration and mitigation costs 0.1 - - - 0.1 - 3.7 2.4 (0.6) 5.5 Severance payments 0.3 - - - 0.3 - - 3.7 - 3.7 Change in carrying value of - long-term debt - - - - - 66.8 - - 66.8 Loss on Recapitalization ------28.3 - 28.3 Adjusted EBITDA $ (5.8) $ 1.1 $ 10.1 $ (0.4) $ 5.0 $ 9.8 $ (4.0) $ 9.1 $ (1.4) $ 13.5

26 North American Palladium Ltd.

All-Inclusive Sustaining Costs (AISC)

The Company believes that, in addition to the above non-IFRS measures, the determination of AISC also represents an effective criterion for understanding the long term economics of its mining operations.

The Company's methodology for calculating AISC follows guidelines provided by the World Gold Council released June 27, 2013, which may not be similar to methodology used by other precious metal producers that disclose AISC.

2016 2015 Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total Production costs $ 31.3 $ 31.5 $ 30.8 $ 38.6 $ 132.2 $ 41.6 $ 25.6 $ 44.9 $ 30.4 $ 142.5 Deduct: Inventory adjustments 1.9 0.3 1.2 (2.4) 1.0 0.5 7.7 (9.8) (0.1) (1.7) On-site mining, general & administration costs 33.2 31.8 32.0 36.2 133.2 42.1 33.3 35.1 30.3 140.8 Royalties & production taxes 1.3 1.7 2.0 1.8 6.8 2.5 1.0 2.7 1.5 7.7 Third party smelting, refining & transport costs 3.3 3.9 3.6 4.8 15.6 6.7 2.7 6.8 5.2 21.4 Stock-piles/product inventory write down 0.9 0.1 - 0.2 1.2 0.5 - - - 0.5 By-product credits (9.5) (10.0) (10.0) (11.4) (40.9) (18.0) (7.1) (14.9) (10.6) (50.6) Adjusted Operating Costs $ 29.2 $ 27.5 $ 27.6 $ 31.6 $ 115.9 $ 33.8 $ 29.9 $ 29.7 $ 26.4 $ 119.8 Corporate general & administrative costs 1.5 1.6 1.4 1.3 5.8 2.7 2.2 4.6 1.4 11.0 Reclamation & remediation - accretion & amortization 0.1 - 0.1 - 0.2 0.1 0.1 0.1 - 0.3 Exploration & study costs (sustaining) 1.5 1.3 1.0 0.8 4.6 2.5 1.8 1.3 2.4 8.0 Capitalized mine development (sustaining) 1.9 1.6 1.8 2.6 7.9 3.4 2.9 3.0 2.3 11.6 Capital expenditure (sustaining) 1.7 2.3 2.0 4.0 10.0 2.6 4.1 4.0 3.6 14.3 All-inclusive sustaining cost $ 35.9 $ 34.3 $ 33.9 $ 40.3 $ 144.4 $ 45.2 $ 41.0 $ 42.7 $ 36.1 $ 165.0

Ounces of palladium produced 40,216 38,203 33,165 37,979 149,563 45,626 22,904 57,914 40,341 166,785 AISC per palladium ounce produced (CDN$) $ 892 $ 900 $ 1,023 $ 1,061 $ 967 $ 990 $ 1,790 $ 738 $ 897 $989 Average exchange rate (CDN$1 – US$) 0.72 0.78 0.77 0.75 0.75 0.81 0.81 0.76 0.76 0.78 AISC per palladium ounce produced (US$) $ 643 $ 699 $ 784 $ 795 $ 728 $ 797 $ 1,456 $ 561 $ 682 $ 771

27 Annual Audited Consolidated Financial Statements

(PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS) North American Palladium Ltd. Management’s Responsibility for Financial Statements

The accompanying consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards (IFRS). Financial statements include certain amounts based on estimates and judgments. When an alternative method exists under IFRS, management has chosen that which it deems most appropriate in the circumstances in order to ensure that the consolidated financial statements are presented fairly, in all material respects, in accordance with IFRS. The financial information presented elsewhere in the annual report of the Company is consistent with that in the consolidated financial statements.

The Company maintains adequate systems of internal accounting and administrative controls. Such systems are designed to provide reasonable assurance that transactions are properly authorized and recorded, the Company’s assets are appropriately accounted for and adequately safeguarded and that the financial information is relevant and reliable.

The board of directors of the Company is responsible for ensuring that management fulfills its responsibilities for financial reporting, and is ultimately responsible for reviewing and approving the consolidated financial statements and the accompanying management’s discussion and analysis. The board of directors carries out this responsibility principally through its Audit Committee.

The Audit Committee is appointed by the board of directors and all of its members are non‐management directors. The Audit Committee meets periodically with management and the external auditors of the Company to discuss internal controls, auditing matters and financial reporting issues, and to satisfy itself that each party is properly discharging its responsibilities. The Audit Committee also reviews the consolidated financial statements, management’s discussion and analysis, the external auditors’ report, examines the fees and expenses for audit services, and considers the engagement or reappointment of the external auditors. The Audit Committee reports its findings to the board of directors for its consideration when approving the consolidated financial statements for issuance to the shareholders. KPMG LLP, the external auditors, have full and free access to the Audit Committee.

Toronto, Canada

February 22, 2017

Jim Gallagher Tim Hill

President and Chief Executive Officer Vice President, Finance and Chief Financial Officer

1 KPMG LLP Telephone (416) 777-8500 Bay Adelaide Centre Fax (416) 777-8818 333 Bay Street Suite 4600 Internet www.kpmg.ca Toronto ON M5H 2S5 Canada

INDEPENDENT AUDITORS’ REPORT

To the Shareholders of North American Palladium Ltd.

We have audited the accompanying consolidated financial statements of North American Palladium Ltd., which comprise the consolidated balance sheets as at December 31, 2016 and December 31, 2015, the consolidated statements of operations and comprehensive loss, cash flows and shareholders’ equity for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

2 Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of North American Palladium Ltd. as at December 31, 2016 and December 31, 2015, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards.

Emphasis of Matter

Without modifying our opinion, we draw attention to Note 1 in the consolidated financial statements which indicates that North American Palladium Ltd.’s cash and liquidity position may not be sufficient to repay debt balances as they mature in 2017. This condition, along with other matters as set forth in note 1 in the consolidated financial statements, indicate the existence of a material uncertainty that may cast significant doubt about North American Palladium Ltd.’s ability to continue as a going concern.

Chartered Professional Accountants, Licensed Public Accountants February 22, 2017 Toronto, Canada

KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG Network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP

3 North American Palladium Ltd.

Consolidated Balance Sheets (expressed in millions of Canadian dollars) December 31 December 31 Notes 2016 2015 ASSETS Current Assets Cash and cash equivalents $ 15.0 $ 11.2 Accounts receivable 4 55.0 51.4 Inventories 5 15.8 15.2 Other assets 6 5.5 3.6 Total Current Assets 91.3 81.4 Non‐current Assets Mining interests 7 471.4 453.9 Total Non‐current Assets 471.4 453.9 Total Assets $ 562.7 $ 535.3 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Accounts payable and accrued liabilities $ 25.5 $ 23.1 Credit facility 9 30.7 32.4 Current portion of obligations under finance leases 10 6.3 4.9 Current portion of long‐term debt 11 20.1 ‐ Total Current Liabilities 82.6 60.4 Non‐current Liabilities Income taxes payable 0.8 0.1 Asset retirement obligations 8 16.1 16.7 Obligations under finance leases 10 5.7 9.8 Long‐term debt 11 46.0 ‐ Total Non‐current Liabilities 68.6 26.6 Shareholders’ Equity Common share capital and purchase warrants 13 1,313.0 1,313.0 Stock options and related surplus 11.0 10.3 Contributed surplus 8.9 8.9 Deficit (921.4) (883.9) Total Shareholders’ Equity 411.5 448.3 Total Liabilities and Shareholders’ Equity $ 562.7 $ 535.3 Nature of operations and going concern – Note 1 Commitments and contingencies – Notes 16 Subsequent events – Notes 9 and 21

See accompanying notes to the consolidated financial statements

On Behalf of the Board of Directors

J. Peter Gordon, Director Dean Chambers, Director

4 North American Palladium Ltd. Consolidated Statements of Operations and Comprehensive Loss (expressed in millions of Canadian dollars, except share and per share amounts)

Notes 2016 2015 Revenue 17 $ 166.9 $ 193.6

Mining operating expenses Production costs 132.2 142.5 Smelting, refining and freight costs 15.6 21.4 Royalty expense 6.8 7.7 Depreciation and amortization 30.8 31.0 Inventory write down 5 1.2 0.5 Loss on disposal of equipment 0.6 0.2 Mine restoration and mitigation costs 0.1 5.5 Total mining operating expenses 187.3 208.8 Income (loss) from mining operations (20.4) (15.2)

Other expenses (Income) Exploration 4.6 8.0 General and administration 5.8 11.5 Interest and other income 18 (1.0) (1.1) Interest costs and other 18 6.3 104.0 Financing costs 1.5 11.0 Foreign exchange loss (0.1) 39.5 Loss on recapitalization 13(b) ‐ 28.3 Total other expenses, net 17.1 201.2 Loss before taxes (37.5) (216.4) Income taxes 19 ‐‐ Loss and comprehensive loss for the year $ (37.5) $ (216.4) Loss per share Basic and diluted 13(f) $ (0.65) $ (9.39) Weighted average number of shares outstanding Basic and diluted 13(f) 58,126,526 23,050,059

See accompanying notes to the consolidated financial statements

5 North American Palladium Ltd. Consolidated Statements of Cash Flows (expressed in millions of Canadian dollars)

Notes 2016 2015 Cash provided by (used in) Operations Net loss $ (37.5) $ (216.4) Operating items not involving cash Depreciation and amortization 30.8 31.0 Inventory write down 5 1.2 0.5 Accretion expense 18 0.6 10.6 Share‐based compensation and employee benefits 13(g) 0.7 1.0 Foreign exchange loss on financing activities 0.7 37.1 Loss on disposal of equipment 0.6 0.2 Interest expense and other 5.5 92.3 Financing costs (recovery) (0.1) 11.0 Loss on recapitalization ‐ 28.3 2.5 (4.4) Changes in non‐cash working capital 20 (11.9) 18.1 (9.4) 13.7 Financing Activities Issuance of common shares, net of issue costs 13(c) ‐ 49.6 Proceeds of credit facilities 9 16.3 54.4 Repayment of credit facilities 9 (17.2) (34.6) Net proceeds of term loan 11 65.0 ‐ Proceeds of bridge loan 13(b) ‐ 31.4 Repayment of bridge loan 13(b) ‐ (31.4) Repayment of obligations under finance leases 10 (5.6) (4.8) Interest paid (5.6) (27.8) Other recoveries (costs) (0.5) (11.8) 52.4 25.0 Investing Activities Additions to mining interests 7 (39.7) (32.2) Proceeds on disposal of mining interests 0.5 0.6 (39.2) (31.6) Increase in cash 3.8 7.1 Cash and cash equivalents, beginning of year 11.2 4.1 Cash and cash equivalents, end of year $ 15.0 $ 11.2 Cash and cash equivalents consisting of: Cash $ 15.0 $ 11.2 Foreign exchange included in cash balance $ 2.5 $ 0.2

See accompanying notes to the consolidated financial statements

6 North American Palladium Ltd. Consolidated Statements of Shareholders’ Equity (expressed in millions of Canadian dollars, except share amounts)

Equity component of Total Number Capital Stock convertible Contributed shareholders’ Notes of shares stock options debentures surplus Deficit equity Balance, January 1, 2015 386,514,777 $ 866.4 $ 9.7 $ 6.9 $ 8.9 $ (667.5) $ 224.4 Common shares issued: Pursuant to conversion of debts payable to Brookfield Capital Partners Ltd. (“Brookfield”) 13(b) 18,214,401,868 364.3 ‐ ‐‐‐ 364.3 Pursuant to conversion of 2012 convertible debentures 13(b) 1,181,002,018 30.5 ‐(6.9) ‐‐23.6 Pursuant to conversion of 2014 convertible debentures (Series 1 & 2) 13(b) 12,151,926 1.8 ‐ ‐‐‐ 1.8 Pursuant to conversion of restricted share units 13(g) 2,274,717 0.1 ‐ ‐‐‐0.1 Share consolidation (400:1) 13(b) (19,748,767,244) ‐ ‐ ‐ ‐ ‐ ‐ Pursuant to rights offering, net of issue costs 13(c) 8,630,870 49.6 ‐ ‐ ‐ ‐ 49.6 Stock based compensation: Stock‐based compensation 13(d)(g) 1,917,594 0.3 0.6 ‐ ‐ ‐ 0.9 Net loss and comprehensive loss for the period ended December 31, 2015 ‐ ‐ ‐ ‐ ‐ (216.4) (216.4)

Balance, December 31, 2015 58,126,526 $ 1,313.0 $ 10.3 $ ‐ $ 8.9 $ (883.9) $ 448.3

Balance, January 1, 2016 11, 13(b) 58,126,526 $ 1,313.0 $ 10.3 $ ‐ $ 8.9 $ (883.9) $ 448.3 Stock based compensation: Stock‐based compensation 13(d)(g) ‐ ‐ 0.7 ‐ ‐ ‐ 0.7

Net loss and comprehensive loss for the period ended December 31, 2016 ‐ ‐ ‐ ‐ ‐ (37.5) (37.5)

Balance, December 31, 2016 58,126,526 $ 1,313.0 $ 11.0 $ ‐ $ 8.9 $ (921.4) $ 411.5

See accompanying notes to the consolidated financial statements

7 North American Palladium Ltd. Notes to the Consolidated Financial Statements (expressed in millions of Canadian dollars, except per share amounts and metal prices)

1. NATURE OF OPERATIONS AND GOING CONCERN

North American Palladium Ltd. (“NAP”) is domiciled in Canada and was incorporated on September 12, 1991 under the Canadian Business Corporations Act (CBCA). The Company’s registered office is One University Avenue, Suite 402, Toronto, Ontario, Canada, M5J 2P1. The Company’s 100%‐owned subsidiary is Lac des Iles Mines Ltd. (“LDI”).

NAP operates the LDI palladium mine, located northwest of Thunder Bay, Ontario, which started producing palladium in 1993. The Company has transitioned the LDI underground mine from mining via ramp access to mining via shaft while utilizing bulk mining methods. The underground mine is currently transitioning to a sub‐level shrinkage mining method.

The consolidated financial statements for the Company include the Company and its subsidiary (collectively referred to as the “Company”).

Collectively, Brookfield Business Partners LP and its affiliates (“Brookfield”) indirectly hold approximately 53.5 million common shares, representing approximately 92% of the issued and outstanding common shares of NAP.

These consolidated financial statements have been prepared on a going concern basis which contemplates that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. The Company currently has one committed source of financing, a credit facility (note 9), which had remaining credit of US$1.7 available as at December 31, 2016 and which matures on December 11, 2017. The US$50.0 senior secured term loan (note 11) was fully drawn as at December 31, 2016. The Company utilizes its credit facility as needed to both supplement shortfalls in cash flow from operations and to fund certain capital expenditures. The Company’s credit facility contains several financial covenants, which, if not met could result in an event of default. As at December 31, 2016, the Company was in compliance with all its covenants under the credit facility agreement. The Company closely monitors compliance with its covenants, as any breach of covenant could result in an event of default under the credit facility agreement, which, if not addressed, would entitle the lender to demand repayment.

8 North American Palladium Ltd.

2. BASIS OF PRESENTATION Statement of Compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), applicable to the preparation of these financial statements, including IAS 1, Presentation of Financial Statements.

These consolidated financial statements were authorized for issuance by the board of directors of the Company on February 22, 2017. Basis of Measurement These consolidated financial statements have been prepared on a historical cost basis, except for the following items in the consolidated balance sheet:

(i) Accounts receivable are measured at fair value. (ii) Financial instruments, at fair value through profit or loss, are measured at fair value. Functional and Presentation Currency These consolidated financial statements are presented in Canadian dollars, which is the Company’s and its subsidiary’s functional currency. All financial information is expressed in millions of Canadian dollars, except share and per share amounts. Use of Judgments and Estimates The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates, and assumptions that affect the application of accounting policies and the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the year. Significant estimates and assumptions relate to recoverability of mining operations and mineral exploration properties. While management believes that these estimates and assumptions are reasonable, actual results could vary significantly. (a) Critical judgments Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements are included in the following note:

Note 8 – Asset retirement obligations and reclamation deposits (b) Key estimates and assumptions Certain assumptions are dependent upon reserves, which represent the estimated amount of ore that can be economically and legally extracted from the Company’s properties. In order to estimate reserves, assumptions are required about a range of geological, technical and economic factors, including quantities, grades, production techniques, recovery rates, production costs, transportation costs, commodity prices and exchange rates. Estimating the quantity and/or grade of reserves requires the size, shape and depth of ore bodies to be determined by analyzing geological data such as drilling samples. This process may require complex and difficult geological judgments to interpret the data. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period they are determined and in any future periods affected.

North American Palladium Ltd.

Because the economic assumptions used to estimate reserves change from period to period and additional geological data is generated during the course of operations, estimates of reserves may change from period to period. Changes in reported reserves may affect the Company’s financial results and financial position in a number of ways, including, but not limited to the following:

(i) The Company's estimates of recoverable amounts of mining interests may be affected due to changes in estimated future cash flows; (ii) Depreciation and amortization charged in the statement of operations may change or be impacted where such charges are determined by the units of production basis, or where the useful economic lives of assets change; and (iii) Decommissioning, site restoration and environmental provisions may change where changes in estimated reserves affect expectations about the timing or cost of these activities. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently by all of the Company’s entities for all periods presented in these consolidated financial statements, unless otherwise indicated. Basis of Consolidation These consolidated financial statements include the accounts of NAP and its wholly‐owned subsidiary. (a) Subsidiaries Subsidiaries are entities controlled by NAP. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. (b) Transactions eliminated on consolidation Inter‐company balances and transactions and any unrealized income and expenses arising from inter‐company transactions are eliminated in preparing the consolidated financial statements. Foreign Currency Translations The reporting and functional currency of the Company and its subsidiaries is the Canadian dollar. Accordingly, the Company translates monetary assets and liabilities denominated in foreign currency at the rate of exchange prevailing at the consolidated balance sheet dates, non‐monetary assets and liabilities denominated in foreign currency at the rate in effect at the date the transaction occurred and revenues and expenses denominated in foreign currency at the exchange rate in effect during the applicable accounting period. All resulting foreign exchange gains and losses are recorded in the Consolidated Statements of Operations and Comprehensive Loss. Financial Instruments (a) Non‐derivative financial assets The Company initially recognizes loans and receivables and deposits on the date they originated. All other financial assets (including assets designated at fair value through profit or loss) are recognized initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument.

Financial instruments are measured on initial recognition at fair value plus, in the case of instruments other than those classified as “fair value through profit and loss”, directly attributable transaction costs.

The Company has the following non‐derivative financial assets: financial assets at fair value through profit or loss and loans and receivables.

A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. These financial instruments are measured at fair value, and changes therein are recognized in the Consolidated Statements of Operations and Comprehensive Loss. The Company’s accounts receivable from the sale of palladium and by‐product metals from the LDI mine primarily represent the material financial instruments which have been recorded at fair value through profit or loss (see note 4).

10 North American Palladium Ltd.

Cash and cash equivalents are stated at fair value and include cash on account less outstanding cheques, demand deposits and short‐term guaranteed investments with original maturities of three months or less. Financial assets classified as loans and receivables are measured subsequent to initial recognition at amortized cost using the effective interest method, less any impairment losses. The Company’s loans and receivables are included in other assets (see note 6). (b) Non‐derivative financial liabilities The Company initially recognizes debt securities issued and subordinated liabilities on the date they originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognized initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument.

The Company derecognizes a financial liability when its contractual obligations are discharged, cancelled or expired. Financial assets and liabilities are offset and the net amount presented in the consolidated balance sheet when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

The Company has the following non‐derivative financial liabilities: long‐term debt, finance leases, bank overdrafts, credit facilities, and trade and other payables.

Long‐term debt is initially recognized at fair value, net of any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities measured at amortized cost using the effective interest method.

Finance leases are initially recorded at the lesser of fair value and the present value of minimum lease payments (“FVMLP”).

Bank overdrafts, credit facilities, and trade and other payables are recorded at fair value. (c) Derivative financial instruments The Company periodically holds derivative financial instruments to minimize its foreign currency and market price exposures. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss.

Derivatives are recognized initially at fair value and any associated transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below. Separable embedded derivatives Changes in the fair value of separable embedded derivatives are recognized immediately in profit or loss. Other derivatives When a derivative financial instrument is not held for trading and is not designated in a qualifying hedge relationship, all changes in its fair value are recognized immediately in profit or loss. Inventories Concentrate, crushed and broken ore stockpiles are valued at the lower of average production cost (including an allocation of the depreciation of production related assets) and net realizable value. Crushed and broken ore stockpiles represent coarse ore that has been extracted from the mine and is available for further processing. The amount of stockpiled ore that is not expected to be processed within one year, if any, is shown as a long‐term asset. Supplies inventory is valued at the lower of average cost and net realizable value.

11 North American Palladium Ltd.

Mining Interests Recognition and measurement Property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.

Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self‐constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and borrowing costs on qualifying assets. Where funds used to finance a major project form part of general borrowings, the Company capitalizes interest on those borrowings proportionate to the project funds used.

When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items or major components of property, plant and equipment.

Spare parts and servicing equipment are usually carried as inventory and recognized in profit or loss as consumed. However, major spare parts and stand‐by equipment qualify as property, plant and equipment when the Company expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with an item of property, plant and equipment, they are accounted for as property, plant and equipment.

Exploration costs relating to properties are charged to earnings in the year in which they are incurred. When it is determined that a mining property can be economically developed as a result of reserve potential and subsequent exploration, expenditures are capitalized. Determination as to reserve potential is based on the results of studies, which indicate whether production from a property is economically feasible. Upon commencement of commercial production of a development project these costs are amortized using the unit‐of‐production method over the proven and probable reserves. Capitalized exploration costs, net of salvage values, relating to a property that is later abandoned or considered uneconomic for the foreseeable future, are written off in the period the decision is made. No amortization is provided in respect of mine development expenditures until commencement of commercial production. Any production revenue earned prior to commercial production, net of related costs, is offset against the development costs.

Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and are recognized within mining operating expenses. (b) Subsequent costs The cost of replacing a part of an item of property, plant and equipment is recognized at the carrying amount of the item if it is probable that the future economic benefits embodied within the item will flow to the Company and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day‐to‐ day servicing of property, plant and equipment are recognized in profit or loss as incurred. (c) Depreciation and amortization Mining interests relating to plant and equipment, mining leases and claims, royalty interests, and other development costs are recorded at cost with depreciation and amortization provided on the unit‐of‐production method over the estimated remaining ounces of palladium to be produced based on the proven and probable reserves or, in the event that the company is mining resources, an appropriate estimate of the resources mined or expected to be mined.

12 North American Palladium Ltd.

Mining interests relating to small vehicles and certain machinery with a determinable expected life are recorded at cost with depreciation provided on a straight‐line basis over their estimated useful lives, ranging from three to seven years, which most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Straight‐line depreciation is calculated over the depreciable amount, which is the cost of an asset, less its residual value.

Significant components of individual assets are assessed and, if a component has a useful life that is different from the remainder of that asset, that component is depreciated separately using the unit‐of‐production or straight‐line method as appropriate. Costs relating to land are not amortized.

Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term.

Depreciation methods, useful lives and residual values are reviewed at each financial year‐end and adjusted if appropriate. Impairment The carrying amounts of the Company’s non‐financial assets, excluding inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. Impairment is assessed at the level of a cash generating unit (“CGU”). An impairment loss is recognized in the Consolidated Statements of Operations and Comprehensive Loss for any excess of carrying amount over the recoverable amount.

The recoverable amount of an asset or CGU is the greater of its “value in use”, defined as the discounted present value of the future cash flows expected to arise from its continuing use and its ultimate disposal, and its “fair value less costs to sell”, defined as the best estimate of the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date, less costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre‐tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

An impairment loss is recognized in the Consolidated Statements of Operations and Comprehensive Loss if the carrying amount of an asset or a CGU exceeds its estimated recoverable amount.

Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss on non‐financial assets other than goodwill is reversed if there has been a change in the estimates used to determine the recoverable amount, only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of amortization, if no impairment loss had been recognized. Mining Interests ‐ Open Pit Mining Costs In open pit mining operations, it is necessary to remove overburden and other waste materials to access ore from which minerals can be extracted economically. The process of mining overburden and waste materials is referred to as stripping. Stripping costs generate a future economic benefit by providing (i) access to ore to be mined in the future; (ii) increases the fair value of the mine (or pit) as access to future mineral reserves becomes less costly; and (iii) increases the productive capacity or extends the productive life of the mine (or pit). For production phase stripping costs that are expected to generate a future economic benefit, the current period stripping costs are capitalized as open pit mine development costs.

Stripping costs incurred during the production stage of a pit are accounted for as costs of the inventory produced during the period that the stripping costs were incurred, unless these costs are expected to provide a future economic benefit.

13 North American Palladium Ltd.

Capitalized open pit mine development costs are depreciated once the open pit has entered production and the future economic benefit is being derived. Capitalized open pit mine development costs are depreciated using the unit of production method over the life of the ore body to which accessibility has been improved by the stripping activity. Employee benefits Defined contribution plans A defined contribution plan is a post‐employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in future payments is available. Contributions to a defined contribution plan that are due more than 12 months after the end of the period in which the employees render services are discounted to their present value. Compensation Agreements Share‐based payment transactions Prior to August 6, 2015, the Company had a stock option plan (the “Stock Option Plan”). The grant date fair value of equity‐classified share‐based payment awards granted to employees was recognized as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The amount recognized as an expense was adjusted to reflect the number of awards for which the related service were expected to be met, such that the amount ultimately recognized as an expense was based on the number of awards that did meet the related service and non‐market performance conditions at the vesting date.

On March 24, 2016 the Company adopted a new stock option plan pursuant to which a maximum of 5,000,000 common shares or 8.60% of the current issued and outstanding common shares of the Company may be reserved for issuance pursuant to the exercise of options. The stock options have a term of ten (10) years, with one‐fifth of the grant vesting every twelve (12) months from grant day.

Prior to August 6, 2015, the Company had a Restricted Share Unit (“RSU”) plan under which eligible directors, officers and key employees of the Company were entitled to receive RSUs. Each RSU was equivalent in value to the fair market value of a common share of the Company on the date of the award and a corresponding liability was established on the balance sheet. The value of each award was charged to compensation expense over the period of vesting. At each reporting date, the compensation expense and liability were adjusted to reflect the changes in market value of the liability based on the fair values of RSUs for each vesting period determined using the Black‐ Scholes model.

Share‐based payment arrangements in which the Company issues its own equity instruments as consideration for goods or services are accounted for as equity‐settled share‐based payment transactions, regardless of how the equity instruments are obtained by the Company. Provisions A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre‐tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. (a) Asset Retirement Obligations In accordance with Company policies, asset retirement obligations ("ARO") relating to legal and constructive obligations for future site reclamation and closure of the Company’s mine sites are recognized when incurred and a liability and corresponding asset are recorded at management’s best estimate. Estimated closure and restoration costs are provided for in the accounting period when the obligation arising from the related disturbance occurs.

14 North American Palladium Ltd.

The amount of any liability recognized is estimated based on the risk‐adjusted costs required to settle present obligations, discounted using a pre‐tax risk‐free discount rate consistent with the time period of expected cash flows. When the liability is initially recorded, a corresponding asset retirement cost is recognized as an addition to mining interests and amortized using the unit of production method.

The liability for each mine site is accreted over time and the accretion charges are recognized as an interest cost in the Consolidated Statements of Operations and Comprehensive Loss. The liability is subject to re‐measurement at each reporting date based on changes in discount rates and timing or amounts of the costs to be incurred. Changes in the liability, other than accretion charges, relating to mine rehabilitation and restoration obligations, which are not the result of current production of inventory, are added to or deducted from the carrying value of the related asset retirement cost in the reporting period recognized. If the change results in a reduction of the obligation in excess of the carrying value of the related asset retirement cost, the excess balance is recognized as a recovery through profit or loss in the period. (b) Production Obligations A provision for an obligation based on achieving specific production targets is recognized when the Company, based on estimates of recoverable minerals and planned production in the current mine plan for each property, determines the production target expected to be achieved. Revenue and Accounts Receivable Revenue from the sale of metals in the course of ordinary activities is measured at the fair value of the consideration received or receivable, net of volume adjustments. Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. The timing of the transfers of risks and rewards varies depending on the individual terms of the contract of sale.

Revenue from the sale of palladium and by‐product metals from the LDI mine is provisionally recognized based on quoted market prices upon the delivery of concentrate to the smelter or designated shipping point, which is when title transfers and significant rights and obligations of ownership pass. The Company’s smelter contracts provide for final prices to be determined by quoted market prices in a period subsequent to the date of concentrate delivery. Variations from the provisionally priced sales are recognized as revenue adjustments until final pricing is determined. Accounts receivable is recorded net of estimated treatment and refining costs which are subject to final assay adjustments. Subsequent adjustments to provisional pricing amounts due to changes in metal prices and foreign exchange are included in revenues on the Consolidated Statements of Operations and Comprehensive Loss and disclosed in the notes to the consolidated financial statements.

Interest expense and other costs and other income

Interest expense and other costs are comprised of interest expense on borrowings, accretion expense, and changes in the fair value of financial assets or liabilities at fair value through profit or loss. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in profit or loss using the effective interest method.

Other income is comprised of interest income on funds invested (including available‐for‐sale financial assets), gains on the disposal of available‐for‐sale financial assets, and changes in the fair value of financial assets or liabilities at fair value through profit or loss, and gains on hedging instruments that are recognized in profit or loss. Interest income is recognized as it accrues in profit or loss, using the effective interest method.

Foreign currency gains and losses are reported on a net basis.

15 North American Palladium Ltd.

Income and mining taxes Income tax expense is comprised of current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences:

(i) the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; (ii) temporary differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; and (iii) temporary differences arising on the initial recognition of goodwill.

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income or mining taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

Basic and Diluted Earnings (Loss) Per Share Basic earnings (loss) per common share (“EPS”) is computed by dividing the income (loss) for the period by the weighted average number of common shares outstanding during the reporting period.

Diluted EPS is computed using the treasury stock method whereby the weighted average number of shares outstanding is increased to include additional common shares from the assumed exercise of stock options. The number of additional common shares is calculated by assuming that outstanding equity instruments were exercised and that proceeds from such exercises were used to acquire shares of common stock at the average market price during the reporting period. These common equivalent shares are not included in the calculation of the weighted average number of shares outstanding for diluted loss per common share when the effect would be anti‐dilutive.

For convertible financial instruments classified as debt, the consolidated comprehensive net income (loss) is adjusted to reflect the profit or loss which would have been reported in the period if the debt instrument had been converted immediately at the beginning of the period. These adjustments to profit or loss and the equivalent shares realizable on conversion are not included in the diluted earnings per share calculation when the effect would be anti‐dilutive. Adoption of New Accounting Standards The following new accounting standard has been adopted by the Company for the year ended December 31, 2016. IAS 16 and IAS 38 Clarification of acceptable methods of depreciation and amortization

This pronouncement amends IAS 16 Property Plant and Equipment and IAS 38 Intangible Assets to (i) clarify that the use of a revenue‐based depreciation method is not appropriate for property, plant and equipment, and (ii) provide a

16 North American Palladium Ltd.

rebuttable presumption for intangible assets. The amendment is effective for years beginning on or after January 1, 2016. This amendment did not have an impact on the consolidated financial statements of the Company. New standards and interpretations not yet adopted The following new standards are not yet effective for the year ended December 31, 2016 or have otherwise not yet been adopted by the Company. The Company is evaluating the impact, if any; adoption of the standards will have on the disclosures in the Company’s consolidated financial statements: IFRS 2 Share‐based payment

IFRS 2 has been amended to address certain issues related to the accounting for cash‐settled awards and the accounting for equity‐settled awards that include a “net settlement” feature in respect of employee withholding taxes. The amendment is effective for annual reporting periods beginning on or after January 1, 2018. The Company does not have any share‐based arrangements that would be impacted by this amendment. As a result, this amendment is not expected to have a material impact on the consolidated financial statements of the Company. IFRS 15 Revenue from contracts with customers

IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognized. This new standard replaces IAS 18 Revenue, IAS 11 Construction Contracts, and IFRIC 13 Customer Loyalty Programmes. The amendment is effective for annual reporting periods beginning on or after January 1, 2018, with early adoption permitted. The Company is currently evaluating the potential impact of applying IFRS 15, primarily analyzing its concentrate sale agreements. The Company expects to report more detailed information, including estimated quantitative financial impacts, if material, in its 2017 consolidated financial statements. IAS 7 Statement of Cash Flows – Disclosures Related to Financing Activities IAS 7 has been amended to require disclosures about changes in liabilities arising from financing activities, including both changes arising from cash flows and non‐cash changes. These amendments to IAS 7 are effective for annual reporting periods beginning on or after January 1, 2017. The Company’s investing activities primarily include cash flows related to its credit facility and senior secured term loan which are denominated in the U.S. currency and are subject to drawdown and repayment. As a result, the Company expects to provide additional disclosures under this amendment in 2017 to reconcile movements within these liabilities during the respective reporting periods. IFRS 9 Financial Instruments: Classification and Measurement IFRS 9, published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial instruments, a new expected credit loss model for calculating impairment of financial assets, and new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39.

17 North American Palladium Ltd.

Accounts receivable consist of the following: At December 31 At December 31 2016 2015 Accounts receivable $ 53.9 $ 51.4 Unrealized gain (loss) on financial contracts1 1.1 ‐ Accounts receivable $ 55.0 $ 51.4

1 As at December 31, 2016, 35,300 ounces of past palladium production , delivered and sold to a smelter, was priced using forward prices for the month of final settlement at an average price of US$693 per ounce and the Company also had forward foreign exchange contracts to convert US$18.0 of the proceeds on settlements into Canadian dollars at an average exchange rate of 1.35 (December 31, 2015 – no past palladium production was priced using forward prices for the month of final settlement and no forward foreign exchange contracts were in effect). Refer to note 14.

Accounts receivable represents the value of all platinum group metals (“PGMs”), gold and certain base metals contained in LDI’s concentrate shipped for smelting and refining, using the December 31, 2016 forward metal prices and foreign exchange rates applicable for the month of final settlement, and for which significant risks and rewards have transferred to third parties.

All of the accounts receivable are due from three customers at December 31, 2016 (December 31, 2015 – three customers). A reserve for doubtful accounts has not been established, as in the opinion of management, the amount due will be fully collected. The Company is not economically dependent on its customers. Please also refer to note 17.

A first priority charge on the accounts receivable of the Company has been pledged as security against the credit facility described in note 9.

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5. INVENTORIES

Inventories consist of the following: At December 31 At December 31 2016 2015 Supplies1 $ 12.7 $ 12.1 Concentrate inventory1 0.6 0.1 Crushed and broken ore stockpiles1,2 2.5 3.0 Total $ 15.8 $ 15.2

1 This portion of inventories has been pledged as security in connection with the Company’s credit facility. Refer to note 9. 2 Crushed and broken ore stockpiles represent coarse ore that has been extracted from the mine and is available for further processing.

During the year‐ended December 31, 2016, write‐downs to concentrate inventory of $1.2 were recorded to reflect net realizable value (December 31, 2015 ‐ $0.5). No write‐downs were recorded for crushed and broken ore stockpile inventories in 2016 or 2015.

Supplies inventory of $34.5 were recognized as an expense during the year ended December 31, 2016 (2015 ‐ $33.0). During the year ended December 31, 2016 the Company recognized a write‐down of obsolete supplies inventory in the amount of $0.6 (2015 ‐ $0.2).

6. OTHER ASSETS

Other assets consist of the following: At December 31 At December 31 2016 2015 Prepaid expenses $ 2.6 $ 2.7 HST receivable 2.8 0.1 Other 0.1 0.8 $ 5.5 $ 3.6

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7. MINING INTERESTS

Mining interests are comprised of the following: Mining leases and Underground Equipment claims, royalty Plant and mine under interest, and equipment development finance lease development Total Cost or deemed cost Balance at January 1, 2015 $ 87.1 $ 425.7 $ 24.7 $ 15.9 $ 553.4 Additions of physical assets 16.2 16.4 0.9 ‐ 33.5 Revaluation of ARO assets 0.6 ‐‐‐ 0.6 Other reclassifications (0.9) 0.9 ‐ ‐‐ Disposals (1.1) (0.4) (0.1) ‐ (1.6) Balance at December 31, 2015 $ 101.9 $ 442.6 $ 25.5 $ 15.9 $ 585.9 Additions of physical assets1 36.9 10.6 3.0 ‐ 50.5 Revaluation of ARO assets (0.8) ‐ ‐ ‐ (0.8) Other reclassifications ‐ ‐ ‐ ‐ ‐ Disposals (1.2) (0.1) (0.6) ‐ (1.9) Balance at December 31, 2016 $ 136.8 $ 453.1 $ 27.9 $ 15.9 $ 633.7

Depreciation and impairment losses Balance at January 1, 2015 $22.8 66.9 6.1 4.8 100.6 Depreciation for the year 5.5 22.2 3.6 0.6 31.9 Other reclassifications (0.5) 0.5 ‐ ‐‐ Disposals (0.2) (0.2) (0.1) ‐ (0.5) Balance at December 31, 2015 27.6 89.4 9.6 5.4 132.0 Depreciation for the year 5.7 21.1 3.7 0.5 31.0 Other reclassifications ‐ ‐ ‐ ‐ ‐ Disposals (0.6) (0.1) ‐ ‐ (0.7) Balance at December 31, 2016 32.7 110.4 13.3 5.9 162.3 Carrying amounts As at December 31, 2015 $ 74.3 $ 353.2 $ 15.9 $ 10.5 $453.9 As at December 31, 2016 $ 104.1 $ 342.7 $ 14.6 $ 10.0 $471.4 1 Additions of physical assets represent the gross cost of additions to mining interests during the year. The gross costs of $50.5 include non‐ cash amounts relating to $3.0 of assets acquired under finance leases and $7.8 of accrued capital cost. The resulting net cash used of $39.7 is reported as additions to mining interests on the Consolidated Statements of Cash Flows. Also refer to note 20. Depreciation and amortization As a result of the finalization of the technical report for the LDI mine, which was filed on March 27, 2015 (amended on April 20, 2015), the Company had revised its estimate of in‐situ ounces of palladium used as the denominator for depreciation and amortization of certain assets under the unit‐of‐production method. The revised estimate was based on the inclusion of the proven and probable reserves and measured resources expected to be converted to reserves based on prior conversion rates.

This change in estimate was prospectively applied for all depreciation and amortization calculations effective February 1, 2015. No revisions were made to the estimated in‐situ ounces denominator during the year ended December 31, 2016. Asset restrictions and contractual commitments The Company’s assets are subject to certain restrictions on title and property, plant and equipment. Substantially all assets are pledged as security under the Company’s credit facility, lease agreements and debt agreements. See notes 9 and 11.

20 North American Palladium Ltd.

8. ASSET RETIREMENT OBLIGATIONS AND RECLAMATION DEPOSITS At December 31, 2016, the changes in ARO are as follows:

Asset retirement obligations, beginning of year $ 16.7 Change in discount rate and estimated closure costs (note 7) (0.8) Accretion expense (note 18) 0.2 Asset retirement obligations, end of year $ 16.1

ARO comprised the following as at December 31, 2016:

Undiscounted Asset Mine closure asset Expected timing retirement plan Letter of credit retirement Property of cash flows obligation requirement outstanding obligation LDI mine1 2029 $ 16.1 $ 14.6 $ 14.6 $ 20.1 1 Including a letter of credit for Shebandowan West project, the total in letters of credit outstanding is $14.9 for asset retirement obligations. Refer to notes 10 and 17.

ARO comprised the following as at December 31, 2015:

Undiscounted Asset Mine closure asset Expected timing retirement plan Letter of credit retirement Property of cash flows obligation requirement outstanding obligation LDI mine1 2029 $ 16.7 $ 14.6 $ 14.6 $ 20.3 1 Including a letter of credit for the Shebandowan West project, the total letters of credit outstanding are $14.9 for asset retirement obligations. Refer to notes 9 and 16.

The key assumptions applied for determination of the ARO obligation are as follows as at December 31, 2016: At December 31 At December 31 2016 2015 Inflation 2.00% 2.00% Market risk 5.00% 5.00% Discount rate 1.71% 1.39%

The ARO may change materially based on future changes in operations, costs of reclamation and closure activities, and regulatory requirements.

21 North American Palladium Ltd.

9. CREDIT FACILITIES Bank Facility The Company has secured a credit facility with a Canadian chartered bank, maturing December 11, 2017. The credit facility is comprised of a series of short term LIBOR loans, renewed monthly based on availability under a borrowing base calculation, which is to be used for working capital liquidity and general corporate purposes. The maximum that can be utilized under the facility is the lesser of US$60 and an amount determined by a borrowing base calculation. As at December 31, 2016, the credit facility contained certain financial covenants, including a minimum current ratio, the requirement of minimum earnings before interest, taxes, depreciation and amortization (“EBITDA”), and senior debt to EBITDA ratios.

On February 17, 2017, the Company’s credit facility agreement was amended to replace the senior debt to EBITDA covenant with a minimum EBITDA covenant and to modify the current ratio covenant for the 2017 fiscal year.

Failure to satisfy these covenant requirements would result in an event of default. The loan also includes other covenants, including material adverse change provisions and cross‐default provisions. Certain events of default result in the credit facility becoming immediately due, while other events of default entitle the lender to demand repayment. As at December 31, 2016, the Company was compliant with all covenants.

Under the credit facility, as of December 31, 2016, the Company utilized $16.5 (US$12.3) for letters of credit, primarily for reclamation deposits (December 31, 2015 ‐ $16.7 (US$11.9)), and had $30.7 (US$22.8) in borrowings outstanding (December 31, 2015 ‐ $32.4 (US$23.4)). Subsequent to year‐end, the Company utilized an additional $0.5 for a letter of credit as security against an existing finance lease arrangement.

A first priority charge of the accounts receivable and inventories of the Company and second priority charge on the property, plant and equipment of the Company have been pledged as security in connection with the credit facility. Refer to notes 4, 5 and 7. Brookfield Interim Facility On April 15, 2015, the Company entered into a US$25 interim credit facility (the “Interim Facility”) with Brookfield and utilized the full balance of the available credit. A commitment fee of 3% of the Interim Facility amount had been capitalized to the principal and interest had been accrued at the Interim Facility rate of 16% per annum. On August 6, 2015, all amounts owing relating to the Interim Facility were consolidated and settled as part of the amounts owing to Brookfield for the purposes of conversion under the Recapitalization. Refer to note 13(b). 10. LEASES

At the respective reporting dates, the Company was party to the following lease arrangements: FINANCE LEASES (OBLIGATIONS UNDER FINANCE LEASES) The Company leases production equipment under a number of finance lease agreements. Some leases provide the Company with the option to purchase the equipment at a beneficial price. The leased equipment secures the lease obligations. The net carrying amount of leased equipment at each reporting date is summarized in the mining interests under the category of equipment under finance lease. Refer to note 7.

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The following is a schedule of future minimum lease payments under finance leases together with the present value of the net minimum lease payments at each reporting date:

At December 31, 2016 At December 31, 2015 Present Present Future value of Future value of minimum minimum minimum minimum lease lease lease lease payments Interest payments payments Interest payments Less than one year $ 6.7 $ 0.4 $ 6.3 $ 5.6 $ 0.7 $ 4.9 Between one and five years 5.9 0.2 5.7 10.4 0.6 9.8 $ 12.6 $ 0.6 $ 12.0 $ 16.0 $ 1.3 $ 14.7 Less current portion 6.3 4.9 Long term portion $ 5.7 $ 9.8

OPERATING LEASES The Company, from time to time, enters into leasing arrangements for production and other equipment under a number of operating leases. These leases are generally short‐term in nature and subject to cancellation clauses. The Company periodically reviews the nature of these leases to identify if there have been any significant changes to the terms and use of the items under operating lease which would require reclassification as a finance lease. Any required reclassification is applied prospectively from the date the revised lease terms become effective.

The following schedule provides the future minimum lease payments under non‐cancellable operating leases outstanding at each of the reporting dates:

At December 31 At December 31 2016 2015 Less than one year $ 0.3 $ 0.9 Between one and five years 0.5 1.3 $ 0.8 $ 2.2

The total minimum lease payments recognized in expense during each of the stated years are as follows:

December 31 December 31 2016 2015 Minimum lease payments expensed $ 1.7 $ 3.0

11. LONG‐TERM DEBT

Long‐term debt is comprised of the following as at each reporting date: At December 31 At December 31 2016 2015 Senior secured term loan $ 66.1 $ ‐ Less current portion 20.1 ‐ $ 46.0 $ ‐

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Senior secured term loan The senior secured term loan financing with Brookfield provides for the availability of US$50.0 pursuant to a US$25.0 term loan (“Brookfield Term Loan”), which was amended to include an additional US$25.0. The Brookfield Term Loan bears interest at 10% per annum and includes an option to the Company to extend the term of the loan to December 31, 2017, provided that there has been no event of default or material adverse effect, as defined in the loan agreement. A fee based on a percentage of the loan amount is payable at the time the option to extend is exercised by the Company. The loan is secured by first priority charge on the Company’s plant and equipment and second priority charge on the Company’s accounts receivable and inventory. The loan is repayable at any time, in whole or in part, without penalty and does not contain any financial covenants. The loan includes certain cross‐default provisions with the Company’s available Bank Facility. Refer to note 9.

On January 26, 2016, the Company drew the first advance of US$10.0.

On May 2, 2016, the Company drew the second advance of US$15.0.

On June 30, 2016, the Company entered into an amendment to its existing secured term loan with Brookfield to increase available funds by US$25.0 to US$50.0.

The Company made draws against the amended term loan on July 5, 2016 (US$10.0), October 13, 2016, (US$5.0), and December 8, 2016 (US$10.0).

On November 29, 2016, the Company exercised its option to extend the maturity of the secured term loan to December 31, 2017. At the time of exercise, an amount of $0.5 was paid and has been included in financing costs on the consolidated statement of operations and comprehensive loss. The Company also entered into an amendment to its existing secured term loan with Brookfield to further extend the maturity date on US$35.0 of the principal balance to December 31, 2018.

The loan is measured at amortized cost, net of transaction costs of US$0.3, and is being amortized at an effective interest rate of 11.3%.

As at December 31, 2016, the senior secured term loan financing with Brookfield was fully drawn.

12. RELATED PARTY TRANSACTIONS

Brookfield Business Partners LP (“BBU”) is a limited partnership publicly listed on the New York Stock Exchange (NYSE) and the TSX whose general partner is a wholly‐owned subsidiary of Brookfield Asset Management Inc. (“BAM”). An approximate 21% economic interest in BBU by way of limited partnership units was spun off to shareholders of BAM on June 20, 2016 as a special dividend, with subsidiaries of BAM retaining the remaining limited partnership interest in BBU. Collectively, Brookfield indirectly holds approximately 53.5 million common shares, representing approximately 92% of the issued and outstanding common shares of NAP. Prior to June 1, 2016, NAP’s parent company was Brookfield Capital Partners Ltd. (“BCP”), a 100% wholly‐owned subsidiary of BAM.

On June 18, 2015 the Company entered into a recapitalization transaction (the “Recapitalization”) with Brookfield, aimed at reducing the Company's debt and enhancing the Company's liquidity.

The Company has senior secured term loan financing of US$50.0 with Brookfield (the “Brookfield Term Loan”); therefore, all borrowings and related interest relating to the senior secured term loan are related party transactions. Refer to note 11.

The Brookfield Term Loan and all matters related thereto were reviewed and approved separately by the independent directors in conjunction with approval by the board of directors of the Company.

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Transactions with Directors and key management personnel Directors and key management personnel compensation The Company, prior to the Recapitalization, provided non‐cash benefits to directors and executive officers and contributed to a defined contribution plan on their behalf in addition to regular salaried amounts. Managers and executive officers are entitled to receive stock‐based compensation on an annual basis through participation in the Company’s group registered retirement savings plan (“RRSP”). Prior to August 6, 2015, directors and executive officers were also entitled to incentives issued under the Company’s Stock Option Plan and RSU plan. Refer to note 14. Summary of directors and key management personnel compensation

December 31 December 31 2016 2015 Short‐term employee benefits $ 2.3 $ 3.7 Post employment benefits 0.1 0.1 Termination benefits 0.2 3.0 Share‐based payments (note 13(e)) 2.0 ‐ $ 4.6 $ 6.8

13. SHAREHOLDERS’ EQUITY (a) Authorized and Issued Capital Stock The authorized capital stock of the Company consists of an unlimited number of common shares. (b) Recapitalization On June 18, 2015, the Company entered into the Recapitalization with Brookfield. On July 30, 2015, the Recapitalization received shareholder approval and was completed on August 6, 2015, resulting in the cancellation of all outstanding options and warrants of the Company and the conversion of all amounts owing to Brookfield, except for a bridge loan that had been advanced to the Company; the 2012 and 2014 convertible debentures; and outstanding RSUs.

A fair value of $0.02 per common share was determined for accounting purposes based on the closing price of the Company’s common shares in the market for the days immediately preceding and up to the closing date of the Recapitalization. At the time of the Recapitalization, the Company issued 19,404,572,359 common shares with a fair value of $388.1 to settle debt amounts with an aggregate carrying value of $359.8, resulting in a loss on recapitalization of $28.3 being recorded in the Consolidated Statements of Operations and Comprehensive Loss. A total of 19,798,262,900 common shares were outstanding after the Recapitalization on August 6, 2015.

Immediately subsequent to the issuance of common shares under the Recapitalization, all of the common shares issued and outstanding were consolidated on the basis of one common share in the capital of the Company for every 400 existing common shares. On August 6, 2015, subsequent to the share consolidation, the Company had 49,495,656 common shares outstanding, not including common shares issued in relation to the Rights Offering (as defined below).

As a result of the Recapitalization, Brookfield acquired 92% of the issued and outstanding common shares of the Company on August 6, 2015.

On September 18, 2015, the US$25.0 outstanding balance of the bridge loan plus accrued interest, was settled in cash, with the exception of a nominal balance settled separately at a later date.

25 North American Palladium Ltd.

(c) Rights Offering and Backstop Agreement On September 15, 2015, the Company completed a rights offering. Pursuant to the terms and conditions of the rights offering (the “Rights Offering”), each shareholder of record at the close of business on August 20, 2015 received one right (the “Right”) for each common share then held. An aggregate of 49,495,656 Rights were distributed to shareholders pursuant to the Rights Offering. Every 5.91 Rights entitled the holder thereof to purchase one common share at an exercise price of $5.97 per common share thereof to acquire up to 8,379,613 common shares for gross proceeds of $50.0.

The Company also entered into a backstop agreement with Brookfield pursuant to which Brookfield and another third party had, subject to certain terms and conditions, agreed to purchase, in aggregate, all of the common shares which remained unsubscribed for by the holders of the Rights at the expiry of the Rights Offering. The Company incurred fees relating to the backstop (the “Backstop Fees”) in the amount of $1.5 that were recognized as transactions costs and which were netted against common share capital and share purchase warrants on the consolidated balance sheets. On closing of the Rights Offering, the Company settled the liability relating to the Backstop Fees with the issuance of 226,131 common shares to Brookfield and 25,126 common shares to the other third party, representing a conversion price of $5.97 per common share.

On September 15, 2015, the Company issued 8,630,870 common shares pursuant to the exercise of the Rights for cash proceeds of $49.6, net of transaction costs.

Upon completion of the Rights Offering, and related transaction costs, a total of 58,126,526 common shares were issued and outstanding. (d) Group Registered Retirement Savings Plan The Company has a group registered retirement savings plan (RRSP), in which eligible employees can participate at their option. Union employees are entitled to an employer contribution of either: (a) $1.00 for each $1.00 contribution up to a maximum of 5% of base salary for employees who have been employed for 6‐18 months (maximum $2,500 per year); or (b) $2.00 for each $1.00 contribution up to a maximum of 10% of base salary for employees who have been employed for greater than 18 months (maximum $5,000 per year). Non‐union employees are entitled to an employer contribution equal to 3% of base salary plus an employer matching contribution of up to a maximum of 2% of base salary for employees who have been employed for greater than 90 days. The Company contributions are made either in cash or through the issuance of shares from treasury on a quarterly basis. If the matching contribution is made in treasury shares, the price per share issued is computed using the 5‐day volume weighted average trading price of the common shares on the TSX preceding the end of the quarter.

During the year ended December 31, 2016, the Company made RRSP contributions in cash of $1.7 and did not make any share contributions to the RRSP. During the year ended December 31, 2015, the Company made cash contributions of $1.4 and contributed 4,794 shares with a fair value of $0.3 (original issue of 1,917,594 shares consolidated at 400:1 per note 14 (b), which was equal to the market value of the shares on the contribution date). (e) Corporate Stock Option Plan Until August 6, 2015, the Company had a corporate stock option plan (the “Old Stock Option Plan”); under which eligible directors, officers, employees and consultants of the Company could receive Company options (“Options”) to acquire common shares. The completion of the Recapitalization on August 6, 2015 resulted in the cancellation of all outstanding Options and the termination of the existing Old Stock Option Plan. Refer to note 13(b).

On March 24, 2016 the Company adopted a new stock option plan (the “New Plan”) pursuant to which a maximum of 5,000,000 common shares or 8.60% of the current issued and outstanding common shares of the Company may be reserved for issuance pursuant to the exercise of Options. The Options have a term of ten (10) years, with one‐fifth of the grant vesting every twelve (12) months from grant day. Under the terms of the New Plan 3,875,000 common shares or 6.67% of the current issued and outstanding common shares of the Company remain available for future grants.

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The following summary sets out the activity in outstanding Options: December 31, 2016 December 31, 2015 Weighted Weighted Average Average Options Exercise Price Options Exercise Price Outstanding, beginning of period ‐ ‐ 5,371,142 $ 0.99 Granted 1,125,000 $ 5.97 100,000 $ 0.16 Cancelled/forfeited (40,000) $ 5.97 (5,463,642) $ 0.96 Expired ‐ ‐ (7,500) $ 8.87 Outstanding, end of period 1,085,000 $ 5.97 ‐ $ ‐ Vested and exercisable, end of period 225,000 $ 5.97 ‐ $ ‐

No options were exercised during the years ended December 31, 2016 or December 31, 2015.

The fair value of Options granted during the years ended December 31, 2016 and December 31, 2015 have been estimated at the date of grant using the Black Scholes option pricing model with the following weighted average assumptions:

December 31 December 31 2016 2015 Awards granted 1,125,000 100,000 Weighted average fair value of awards $ 1.82 $ 0.10 Pre‐vest forfeiture rate 26% 27% Grant price $ 5.97 $ 0.16 Market price $ 5.11 $ 0.17 Volatility1 50% 78% Risk free rate 0.66% 1.08% Dividend yield 0% 0% Expected life (in years) 4.41 3.52

1 Expected volatility is estimated by considering historic average share price volatility based on the average expected life of the options.

(f) Reconciliation of the diluted number of shares outstanding: December 31 December 31 2016 2015 Net loss available to common shareholders $ 37.5 $ 216.4 Effect of dilutive securities ‐ ‐ Adjusted net loss available to common shareholders $ 37.5 $ 216.4 Weighted average number of shares outstanding 58,126,526 23,050,059 Effect of dilutive securities ‐ ‐ Weighted average diluted number of shares outstanding 58,126,526 23,050,059 Diluted net loss per share $ 0.65 $ 9.39

For the year ended December 31, 2016, the outstanding Options have not been included in the determination of diluted loss per share because to do so would be anti‐dilutive. As a result of the Recapitalization completed on August 6, 2015, no convertible debentures, warrants, RSU’s or Options remained. Therefore, no dilutive effects existed relating to these instruments at December 31, 2015.

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(g) Summary of Share‐based compensation and employee benefits The following table details the components of share‐based compensation expense:

Year ended Year ended December 31, December 31, 2016 2015 Shares contributed to Group Registered retirement savings plan $ ‐ $ 0.3 Common share stock options 0.7 0.6 $ 0.7 $ 0.9

14. FINANCIAL INSTRUMENTS

The Company has exposure to the following risks from its use of financial instruments: credit risk, market risk, currency risk, interest rate risk, commodity price risk and liquidity risk. Credit Risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company limits credit risk by entering into business arrangements with credit worthy counterparties.

The Company’s exposure arises from its cash and cash equivalents and accounts receivable. The Company invests its cash and cash equivalents primarily with major Canadian banks and sells its products to large international companies with strong credit ratings.

Financial contracts are entered into with counterparties that are Canadian chartered banks. As a result, credit risk exposure is considered to be minimal.

Historically, the Company has not experienced any losses related to individual customers or financial contracts and no allowance for bad debt has been recorded by the Company at December 31, 2016.

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: At December 31 At December 31 2016 2015 Cash and cash equivalents $ 15.0 $ 11.2 Accounts receivable 53.9 51.4 Financial contracts 1.1 ‐ $ 70.0 $ 62.6

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Market Risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk is comprised of currency, interest rate, and commodity price risks. Currency risk Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Currency risk is related to the portion of the Company’s business transactions denominated in currencies other than Canadian dollars. The Company is exposed to fluctuations in exchange rates due to revenues, debt and payables to foreign based suppliers being in foreign currencies. The Company’s primary exposure is based upon the movement of the US dollar against the Canadian dollar. The Company’s foreign exchange risk management includes, from time to time, the use of foreign currency forward contracts to fix exchange rates on certain foreign currency exposures. At December 31, 2016, the Company had forward foreign exchange contracts to convert USD$18.0 of the proceeds on settlements of metal sales into Canadian dollars at an average exchange rate of 1.35 (December 31, 2015 – no forward foreign exchange contracts were in effect).

For the Company’s foreign exchange transactions, fluctuations in the respective exchange rates relative to the Canadian dollar will create volatility in the Company’s cash flows and the reported amounts for revenue, operating costs, and exploration costs on a year‐to‐year basis. Additional earnings volatility arises from the translation of monetary assets and liabilities denominated in currencies other than Canadian dollars at the rates of exchange at each balance sheet date, the impact of which is reported as a separate component of revenue or foreign exchange gain or loss in the consolidated statements of operations and comprehensive loss.

The Company is exposed to the following currency risk related to the following financial instruments denominated in U.S. dollars at December 31, 2016.

US$ Cash $ 7.2 Accounts receivable 40.1 Financial contracts 0.8 Credit facility (22.8) Current and long‐term debt (66.1) $ (40.8)

A 1% strengthening or weakening of the Canadian dollar against the US dollar, assuming that all other variables remained the same, would have resulted in a $0.4 decrease or increase, respectively, in the Company’s statement of loss and comprehensive loss for the year ended December 31, 2016.

The Company’s revenue is affected by currency exchange rates, such that a weakening in the Canadian dollar relative to the US dollar will result in additional revenues and a strengthening in the Canadian dollar will result in reduced revenues. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company does not enter into derivative financial instruments for speculative purposes. The Company does not hold any specific hedging instruments, nor does it hold any short term investments that would be significantly impacted from fluctuations in interest rates.

Based on the outstanding balance at December 31, 2016, a 1% increase or decrease in the interest rate on the Company’s credit facility would have resulted in a $0.3 decrease or increase, respectively, in the Company’s statement of loss and comprehensive loss for the year ended December 31, 2016. The senior secured term loan contains provisions for a fixed interest rate and therefore is not subject to risk from potential movements in interest rates.

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Commodity price risk Commodity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in commodity prices. The Company is particularly exposed to fluctuations in commodity prices from its sale of metals. From time to time the Company may enter into forward commodity sales contracts to economically hedge the effect on revenues from changes in the price of metals it produces. The Company does not use hedge accounting for these instruments. The contracts are recorded at fair value on the balance sheet with changes in fair value recorded in earnings as they occur. Gains and losses on derivative financial instruments used to mitigate metal price risk are recorded on the statement of operations in revenue from metal sales.

The Company enters into financial contracts to mitigate smelter agreements’ provisional pricing exposure to rising or declining palladium prices and an appreciating Canadian dollar for past production already sold. As at December 31, 2016, 35,300 ounces of past palladium production, delivered and sold to a smelter, was priced using forward prices for the month of final settlement at an average price of USD$693 per ounce. (December 31, 2015 – no past palladium production was priced using forward prices for the month of final settlement). For substantially all of the palladium delivered to customers under smelter agreements, the quantities and timing of settlement specified in the financial contracts matches final pricing settlement periods. The palladium financial contracts are being recognized on a mark‐to‐ market basis as an adjustment to revenue. The fair value of these contracts at December 31, 2016 was an asset value of $1.1 (December 31, 2015 ‐ $nil). Refer to note 4.

As at December 31, 2016, the Company’s exposure to commodity price is limited to accounts receivable associated with provisional pricing of metal concentrate sales, particularly palladium and outstanding financial contracts. A 1% strengthening or weakening of metal prices would have resulted in an approximate $0.5 decrease or increase, respectively, in the Company’s loss and comprehensive loss for the year ended December 31, 2016. Liquidity Risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s liquidity may be adversely affected by operating performance, a downturn in capital market conditions impacting access to capital markets, or entity‐specific conditions. The Company manages liquidity risk by maintaining adequate cash and cash equivalent balances, by having adequate available credit facilities, by preparing and monitoring detailed budgets and cash flow forecasts for mining, exploration and corporate activities, and by monitoring developments in the capital markets. Forecasting takes into account the Company’s debt financing, covenant compliance and the maturity profile of financial assets and liabilities and purchase obligations. Refer to note 1.

The table below analyzes the Company’s financial liabilities which will be settled into relevant maturity groupings based on the remaining balances at December 31, 2016 to the contractual maturity date.

In less than Between 1 year More than Notes Total 1 year and 3 years 3 years Accounts payable and accrued liabilities $ 25.5 $25.5 $ ‐ $ ‐ Credit facility 9 30.7 30.7 ‐‐ Obligations under finance leases 10 12.0 6.3 5.7 ‐ Senior secured term loan1 11 66.1 20.1 46.0 ‐

The Company also has asset retirement obligations in the amount of $16.1 that would become payable at the time of the closure of its LDI mine. As the Company issued letters of credit of $14.9 related to these obligations, $1.5 additional funding is required prior to or upon closure of these properties. The letter of credit obligation is not included in the table above. Refer to notes 8 and 10 for additional disclosure regarding these amounts. The majority of the asset retirement costs are expected to be incurred within one year of mine closure. Refer also to note 16.

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Fair Values

The Company’s financial assets and liabilities consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, its credit facility, obligations under finance leases and long‐term debt.

Cash and cash equivalents and accounts receivable are stated at fair value. The carrying value of other assets and trade accounts payable and accrued liabilities approximate their fair values due to the immediate or short‐term maturity of these financial instruments. The carrying value of the amount outstanding under the credit facility approximates its fair value due to short‐term LIBOR loans included in the facility which can be extended from December 31, 2016 to maturity on December 11, 2017, provided the Company maintains compliance with lending covenants.

Derivatives From time to time, the Company may enter into forward exchange contracts. The fair value of such contracts is based on listed market prices, if available. If a listed market price is not available, then fair value is estimated by discounting the underling currency cash flows for the residual maturity of the contract using risk‐free interest rates applicable for the respective currencies.

Fair values reflect the credit risk and include adjustments to take into account the credit risk of the Company entity and counterparty when appropriate.

The Company periodically enters into financial contracts to mitigate smelter agreements’ provisional pricing exposure to declining palladium prices and an appreciating Canadian dollar (relative to the US dollar) for past production delivered and sold to a smelter. For substantially all of the palladium delivered to customers under smelter agreements, the quantities and timing of settlement specified in the financial contracts matches final pricing settlement periods. The palladium financial contracts are being recognized on a mark‐to‐market basis which is classified with revenue. Other non‐derivative financial liabilities The fair values of the senior secured term loan and finance leases, which are determined for disclosure purposes, are calculated based on the present value of future principal and interest cash flows, discounted at the estimated market rate of interest at the reporting date. For finance leases the estimated market rate of interest is determined by reference to similar lease agreements.

The fair values of the non‐derivative financial liabilities are comprised of the following as at each reporting date:

At December 31 At December 31 2016 2015 Senior secured term loan $ 66.1 $ ‐ Finance leases 12.0 14.7

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Fair Value Hierarchy The table below details the carrying values and fair values of the assets and liabilities at December 31, 2016: Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Carrying Assets Inputs Inputs Aggregate Notes Value (Level 1) (Level 2) (Level 3) Fair Value Financial assets Cash and cash equivalents $ 15.0 $ 15.0 $ ‐ $ ‐ $ 15.0 Accounts receivable 4 53.9 ‐ 53.9 ‐ 53.9 Fair value of financial contracts1 4 1.1 ‐ 1.1 ‐1.1 Financial liabilities Credit facility (30.7) (30.7) ‐‐ (30.7) Senior secured term loan2 (66.1) ‐ (66.1) ‐ (66.1) Finance leases (12.0) ‐ (12.0) ‐ (12.0) Net carrying value $ (38.8) $ (15.7) $ (23.1) $ ‐ $ (38.8) 1 As detailed in note 4, the asset relating to the mark‐to‐market on financial contracts is included in the carrying value of accounts receivable on the balance sheet. 2 The fair value of the senior secured term loan approximates the carrying value of the debt.

The table below details the fair values of the assets and liabilities at December 31, 2015: Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Carrying Assets Inputs Inputs Aggregate Notes Value (Level 1) (Level 2) (Level 3) Fair Value Financial assets Cash and cash equivalents $ 11.2 $ 11.2 $ ‐ $ ‐ $ 11.2 Accounts receivable 4 51.4 ‐ 51.4 ‐ 51.4 Financial liabilities Credit facility (32.4) (32.4) ‐‐ (32.4) Finance leases (14.7) ‐ (14.7) ‐ (14.7) Net carrying value $ 15.5 $ (21.2) $ 36.7 $ ‐ $ 15.5

15. CAPITAL DISCLOSURE

The Company’s objective is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business.

Management defines capital as the Company’s total shareholders’ equity and any outstanding debt. The board of directors does not establish quantitative return on capital criteria for management but rather promotes year over year sustainable profitable growth.

In order to maintain or adjust the capital structure, the Company may issue new shares, issue new debt or replace existing debt with different characteristics.

32 North American Palladium Ltd.

16. COMMITMENTS (a) PGM Royalties Ltd. (“PGMR”) Commitment The Company is required to pay a 5% net smelter royalty to PGMR from mining operations at the LDI mine. The royalty had been previously payable to Sheridan Platinum Group of Companies (“SPG”). This obligation is recorded as royalty expense. (b) Operating Leases and Other Purchase Obligations As at December 31, 2016, the Company had outstanding operating lease commitments and other purchase obligations of $0.8 and $1.2 respectively (December 31, 2015 – $2.2 and $1.2 respectively) the majority of which had maturities of less than five years (see also note 11). (c) Letters of Credit As at December 31, 2016, the Company had outstanding letters of credit of $16.5, consisting of $14.9 for various mine closure deposits and $1.6 for a regulated energy supplier (December 31, 2015 ‐ $16.5 outstanding letters of credit, consisting of $14.9 for various mine closure deposits and $1.6 for a regulated energy supplier). 17. REVENUE FROM METAL SALES

Other Total Palladium Platinum Gold Nickel Copper Metals 2016 Year ended December 31 Revenue – before pricing adjustments $ 164.0 $ 123.0 $ 13.2 $ 16.0 $ 6.6 $ 5.1 $ 0.1 Pricing adjustments: Commodities 4.5 4.3 (0.1) 0.2 0.1 ‐ ‐ Foreign exchange (1.6) (1.3) (0.2) (0.1) ‐‐ ‐ Revenue – after pricing adjustments $ 166.9 $ 126.0 $ 12.9 $ 16.1 $ 6.7 $ 5.1 $ 0.1 2015 Year ended December 31 Revenue – before pricing adjustments $ 198.4 $ 148.3 $ 16.9 $ 15.7 $ 9.2 $ 8.2 $ 0.1 Pricing adjustments: Commodities (15.7) (13.5) (1.5) ‐ (0.5) (0.2) ‐ Foreign exchange 10.9 8.3 1.2 0.7 0.4 0.3 ‐ Revenue – after pricing adjustments $ 193.6 $ 143.1 $ 16.6 $ 16.4 $ 9.1 $ 8.3 $ 0.1

During 2016, the Company delivered all of its concentrate to four customers, including one that received a bulk sample, under the terms of their respective agreements (2015 – five customers, including two customers that received bulk samples).

Although the Company sells its bulk concentrate to a limited number of customers, it is not economically dependent upon any one customer as there are other markets throughout the world for the Company’s concentrate.

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18. INTEREST EXPENSE AND OTHER COSTS AND OTHER INCOME

Note 2016 2015 Interest expense & other costs Interest on finance leases $ 0.7 $ 0.9 Asset retirement obligation accretion 8 0.2 0.3 Accretion expense on long‐term debt 0.4 10.3 Interest expense 5.0 25.5 Other expenses ‐ ‐ Change in fair value of convertible debentures ‐0.2 1 Increase in carrying value of senior secured term loan ‐ 66.8 $ 6.3 $ 104.0 Other income Change in fair value of warrants ‐ (0.7) Interest income (0.1) (0.4) Other recoveries (0.1) ‐ 2 Reduction in carrying value of senior secured term loan (0.8) ‐ (1.0) (1.1) $ 5.3 $ 102.9 1 On June 18, 2015 the Company entered into the Recapitalization with Brookfield aimed at significantly reducing the Company's debt and enhancing the Company's liquidity. Refer to note 13(b). In applying the effective interest method in the three months ended June 30, 2015, the Company reassessed its estimated cash flows under the senior secured term loan and recorded an adjustment to the carrying value of the debt of $66.8 to reflect the present value of accelerated interest expense, primarily related to the expected settlement of the prepayment fee payable under the debt agreement. 2 As a result of amendments to the senior secured term loan, the Company recognized a reduction in its carrying value due to the effect discounting the principal due at the extended maturity dates. Refer to note 11.

19. INCOME TAXES Rate Reconciliation The provision for income and mining taxes differs from the amount that would have resulted by applying the combined Canadian federal and Ontario statutory income tax rates of approximately 26.5% (2015 – 26.5%):

December 31 December 31 2016 2015 Income tax recovery using statutory income tax rates $ (9.9) $ (57.3) Increase (decrease) in taxes resulting from: Change in unrecognized temporary differences 9.9 45.2 Statutory permanent differences 0.4 12.5 Difference in statutory tax rates (0.4) (0.4) Income tax (recovery) expense $ ‐ $ ‐

Deferred tax liabilities Deferred income tax liabilities have been offset by deferred income tax assets as follows: December 31 December 31 2016 2015 Deferred tax liabilities Mining Interests $ (6.7) $ (8.6) Deferred tax assets Non‐capital loss carryovers $ 6.7 $ 8.6 Net deferred tax liabilities $ ‐ $ ‐

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Unrecognized deferred tax assets Deferred income tax assets have not been recognized in respect of the following items: December 31 December 31 2016 2015 Loss carry forwards $ 81.7 $ 71.2 Deductible temporary differences, income taxes $ 24.8 $ 28.4 Deductible temporary differences, mining taxes $ 4.1 $ 4.6

The tax losses not recognized expire as per the amount and years noted below. The deductible temporary differences do not expire under current tax legislation. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the Company can utilize the benefits there from. Income tax attributes As at December 31, 2016, the Company had the following approximate income tax attributes to carry forward: Amount Expiry Date Non‐capital losses $ 349.2 2027 ‐ 2036 Capital losses $ 1.7 Indefinite Undepreciated capital cost allowance $ 114.6 Indefinite Tax basis of mining interests $ 300.3 Indefinite

20. OTHER DISCLOSURES Statement of Cash flows The net changes in non‐cash working capital balances related to operations are as follows:

2016 2015 Cash provided by (used in): Accounts receivable $ (3.6) $ 24.0 Inventories (1.7) ‐ Other assets (1.8) 0.9 Accounts payable and accrued liabilities1 (5.5) (6.8) Taxes payable 0.7 ‐ $ (11.9) $ 18.1 1 The net change in accounts payable and accrued liabilities excludes the non‐cash amount of $7.8 relating to accrued capital costs, which have been netted against cash used for additions to mining interests in investing activities reported on the Consolidated Statements of Cash Flows. Also refer to note 7.

21. SUBSEQUENT EVENTS

In January 2017, the Company entered into forward commodity price derivative contracts for 31,500 ounces of 2016 palladium production, delivered and sold to a smelter, priced using forward prices for the month of final settlement at an average price of US$740 per ounce. The Company has not entered into any additional forward foreign exchange contracts in 2017.