North American Palladium Ltd. TABLE OF CONTENTS

North American Palladium Ltd. TABLE OF CONTENTS Page Management’s Discussion and Analysis INTRODUCTION ...............................................
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North American Palladium Ltd.

TABLE OF CONTENTS Page

Management’s Discussion and Analysis INTRODUCTION ...................................................................................................................................................................... 2 FORWARD-LOOKING INFORMATION...................................................................................................................................... 2 OUR BUSINESS ........................................................................................................................................................................ 3 OPERATING AND FINANCIAL OVERVIEW................................................................................................................................ 4 LDI OPERATING & FINANCIAL RESULTS .................................................................................................................................. 5 OTHER EXPENSES ................................................................................................................................................................. 12 SUMMARY OF QUARTERLY RESULTS .................................................................................................................................... 13 FINANCIAL CONDITION, CASH FLOWS, LIQUIDITY AND CAPITAL RESOURCES ..................................................................... 14 OUTSTANDING SHARE DATA ................................................................................................................................................ 17 CRITICAL ACCOUNTING POLICIES AND ESTIMATES .............................................................................................................. 18 OTHER INFORMATION.......................................................................................................................................................... 22 RISKS AND UNCERTAINTIES .................................................................................................................................................. 22 INTERNAL CONTROLS ........................................................................................................................................................... 22 NON-IFRS MEASURES ........................................................................................................................................................... 23

Condensed Interim Consolidated Financial Statements CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS ................................................................................................... 26 CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS ................................ 27 CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS .............................................................................. 28 CONDENSED INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ............................................................ 29 NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS ............................................................... 30

1 Second Quarter Report 2016

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. 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 condensed interim consolidated financial statements and related notes to assess material changes in financial condition and results of operations for the three and six month periods ended June 30, 2016, compared to those of the respective period in the prior year. This MD&A has been prepared as of August 4, 2016 and is intended to supplement and complement the condensed interim consolidated financial statements and notes thereto for the three and six months ended June 30, 2016 (collectively, the “Financial Statements”), which have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting. 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 the 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’, ‘intend’, ‘estimate’ and similar expressions identify forward-looking statements. Forward-looking statements included in this MD&A include, without limitation: 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 the actual results to be materially different from those expressed or implied by the 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, events of default on its indebtedness, hedging could expose it to 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, 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.

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North American Palladium Ltd.

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 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 law. Readers are cautioned not to put undue reliance on these forward-looking statements.

OUR BUSINESS NAP is an established precious metals producer that has been operating its LDI 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 2-week per month batch process. 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 TSX under the symbol PDL and on the OTC Market under the symbol PALDF.

3 Second Quarter Report 2016

North American Palladium Ltd.

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 cash cost per ounce of palladium, EBITDA, adjusted EBITDA, or AISC represent Non-IFRS measures. Refer to Non-IFRS Measures on pages 23-25. Note that the mill was shut down for approximately six weeks in Q2 2015 due to water balance issues making year to year comparisons less meaningful. Three months ended June 30 2016 2015

OPERATIONAL OVERVIEW Mining Tonnes ore mined Milling Tonnes milled Palladium head grade (g/t) Palladium recovery (%) Palladium concentrate grade (g/t) Concentrate produced (tonnes) Palladium production – payable ounces Palladium sales – payable ounces Realized palladium price per ounce (US$)

1

484,877

625,093

863,954

1,411,393

539,461 2.8 82.9 323 3,897 38,203 38,192 $564

336,142 2.8 82.8 275 2,849 22,904 23,974 $758

893,062 3.5 83.4 337 7,670 78,419 75,960 $535

1,087,562 2.6 82.9 246 9,551 68,530 69,103 $771

Three months ended June 30 2016 2015

FINANCIAL OVERVIEW (C$ million) Revenue Production costs Mine restoration and mitigation costs Loss from mining operations Loss and comprehensive loss Loss and comprehensive loss per share EBITDA1 Adjusted EBITDA1 Capital spending, excluding non-cash items

Six months ended June 30 2016 2015

$ 39.9 $ 31.5 $($4.8) ($9.9) ($ 0.17) ($ 0.5) $ 1.1 $16.5

$ 27.3 $ 25.6 $ 3.7 ($ 10.1) ($96.8) ($98.4) ($72.3) ($4.0) $ 7.8

Six months ended June 30 2016 2015 $ 72.4 $ 91.3 $62.8 $ 67.2 $ 0.1 $ 3.7 ($17.7) ($ 6.1) ($23.0) $ (134.1) ($0.40) ($136.8) ($4.7) ($87.4) ($4.7) $ 5.8 $29.4 $ 13.4

Non-IFRS measure. Refer to Non-IFRS Measures on pages 23-25.

In the second quarter of 2016: 

484,877 tonnes were mined from underground Offset and Roby zones and from the low-grade surface stockpile.



The mill processed 539,461 tonnes at an average head grade of 2.8 grams of palladium per tonne and a recovery of 82.9%, producing 3,897 tonnes of concentrate with an average grade of 323 grams of palladium per tonne.



Payable palladium production was 38,203 ounces, while payable palladium sales were 38,192 ounces.



Production costs increased by $5.9 to $31.5 compared to $25.6 in the second quarter of 2015, primarily due to favourable inventory and other cost movements in the second quarter of 2015, as well as reduced operational overhead in the same period due to the mill shutdown in May and June as a result of water balance issues.



The Company incurred a net loss of $9.9, which included non-cash items of $7.5 depreciation and amortization and $0.3 foreign exchange loss. 4 Second Quarter Report 2016

North American Palladium Ltd.

In the six month period ending June 30, 2016: 

863,954 tonnes were mined from underground Offset and Roby zones and from the low-grade surface stockpile.



The mill processed 893,062 tonnes at an average head grade of 3.5 grams of palladium per tonne and a recovery of 83.4%, producing 7,670 tonnes of concentrate with an average grade of 337 grams of palladium per tonne.



Payable palladium production was 78,419 ounces, while payable palladium sales were 75,960 ounces.



Production costs decreased by $4.4 to $62.8 compared to $67.2 in the comparable period in 2015, primarily due to the mill transition to batch processing, less tonnes mined and lower general and administration expenses.



The Company incurred a net loss of $23.0, which included non-cash items of $16.0 depreciation and amortization and $2.9 foreign exchange gain.

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 ore 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 the three months ended June 30, 2016 (“Q2 2016”), the mill operated on a 14-day on/14-day off schedule processing primarily underground ore which was supplemented with low-grade surface material from the stockpile. During the three months ended June 30, 2015 (“Q2 2015”), 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; however, production costs for the three month period ended June 30, 2015 included $3.7 of mine restoration and mitigation costs.

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North American Palladium Ltd.

Results of Operations The key operating results for Q2 2016 and Q2 2015 are set out in the following table. Three months ended June 30 Ore mined (tonnes) Underground Surface Total Mined ore grade (Pd g/t) Underground Surface Milling Tonnes milled Palladium head grade (g/t) Palladium recoveries (%) Palladium concentrate grade (g/t) Tonnes of concentrate produced Production cost per tonne milled, before mine restoration and mitigation costs Payable production Palladium (oz) Platinum (oz) Gold (oz) Nickel (lbs) Copper (lbs) 1 AISC per ounce of palladium produced (US$) 1 Cash cost per ounce of palladium sold (US$) 1

Six months ended June 30

2016

2015

2016

2015

274,206 210,671 484,877

438,555 186,538 625,093

613,013 250,941 863,954

833,607 577,786 1,411,393

3.8 1.0

4.3 1.0

4.1 1.0

4.2 1.0

539,461 2.8

336,142 2.8

893,062 3.5

1,087,562 2.6

82.9 323 3,897

82.8 275 2,849

83.4 337 7,670

82.9 246 9,551

$59

$76

$70

$62

38,203 2,400 2,282 198,731 563,920 $ 699 $ 554

22,904 1,883 1,404 199,257 367,025 $ 1,456 $ 750

78,419 4,953 4,973 420,610 1,075,084 $ 671 $ 529

68,530 5,716 4,303 694,052 1,234,394 $ 1,022 $645

Non-IFRS measure. Please refer to Non-IFRS Measures on pages 23-25.

Mining In Q2 2016, underground ore mined at LDI consisted of 274,206 tonnes (3,013 tonnes per day) at an average palladium grade of 3.8 g/t compared to 438,555 tonnes (4,819 tonnes per day) at an average palladium grade of 4.3 g/t in Q2 2015. In Q2 2016, LDI processed 210,671 tonnes of surface feed having an average palladium grade of 1.0 g/t. This amount included 52,022 tonnes of tailings at an average palladium grade of 1.0 g/t extracted from the north cell of the Tailings Management Facility (“TMF”). In the same period in 2015, 186,538 tonnes at an average palladium grade of 1.0 g/t was extracted and processed from the low-grade surface stockpile. On a combined basis, Q2 2016 featured 22% fewer tonnes mined and processed at a 24% lower palladium grade compared to Q2 2015. The reduced ore production was primarily attributable to 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.

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North American Palladium Ltd.

In the first six months of 2016, underground ore mined at LDI consisted of 613,013 tonnes (3,368 tonnes per day) at an average grade of 4.1 g/t palladium compared to 833,607 tonnes (4,606 tonnes per day) at an average palladium grade of 4.2 g/t in the prior year. In the first six months of 2016, LDI processed 250,941 tonnes of the low-grade surface stockpile and tailings at an average grade of 1.0 g/t compared to 577,786 tonnes at an average grade of 1.0 g/t in the first half of 2015.

Milling In Q2 2016, the LDI mill processed 539,461 tonnes of ore at an average palladium head grade of 2.8 g/t and a recovery rate of 82.9% to produce 38,203 ounces of payable palladium compared to 336,142 tonnes milled in Q2 2015 with an average palladium head grade of 2.8 g/t and recovery rate of 82.8% producing 22,904 ounces of payable palladium. The increase in tonnes milled and palladium ounces produced was primarily due to the mill shutdown in the second quarter of 2015. During the first six months of 2016, the LDI mill ran on a batch basis and processed 893,062 tonnes of ore at an average palladium head grade of 3.5 g/t and a recovery rate of 83.4% to produce 78,419 ounces of payable palladium. For the same period in 2015, the mill processed 1,087,562 tonnes with an average palladium head grade of 2.6 g/t and a recovery rate of 82.9%, producing 68,530 ounces of payable palladium. In 2015, the mill ran on a full time basis at approximately 60% of capacity other than during the period of May 8, 2015 to June 26, 2015 when the mill was shutdown. The mill shutdown in the second quarter of 2015 makes year over year comparisons less meaningful.

Payable Production Payable production for Q2 2016 was higher for most metals compared to Q2 2015. The primary factor contributing to the increased production was the temporary mill shutdown in Q2 2015 as a result of water balance issues. Payable palladium production was higher in the first half of 2016 compared to the same period in 2015. The increased payable palladium in 2016 was also due to the temporary mill shutdown in the second quarter of 2015.

Production Costs per Tonne Milled Production costs per tonne milled in the three and six month periods ended June 30, 2016 were $59 and $70 respectively compared to $76 and $62, respectively, in the prior year. The decrease for the three month period was due to the increase in tonnes milled compared to Q2 2015, which was impacted by the temporary mill shutdown. The increase for the six month period was due to a lower amount of tonnes milled compared to the first six months of 2015.

AISC per Ounce of Palladium Sold AISC per ounce of palladium sold is a non-IFRS measure and the calculation is provided in the Non-IFRS Measures section of this MD&A. The AISC per ounce of palladium produced decreased to US$6991 in Q2 2016 compared to US$1,4561 in the same period in 2015. The decreased unit cost resulted from increased palladium production in 2016 combined with lower production costs, general & administration costs, exploration expense and reduced capital expenditures. The AISC per ounce of palladium produced decreased to US$6711 during the six month period ended June 30, 2016 compared to US$1,022 in the same period in 2015. The decreased unit cost resulted from increased palladium production in 2016 combined with lower production costs, general & administration costs, smelting, refining, and freight costs and royalty expense. 1

Non-IFRS measure. Please refer to Non-IFRS Measures on pages 23-25.

7 Second Quarter Report 2016

North American Palladium Ltd.

Cash Cost per Ounce of Palladium Sold Cash cost per ounce of palladium sold is a non-IFRS measure and the calculation is provided in the Non-IFRS Measures section of this MD&A. The cash cost per ounce of palladium sold decreased to US$5541 in Q2 2016 compared to US$7501 in the same period in 2015. This decrease in unit cost primarily resulted from increased palladium units sold. The period-on-period cash cost reduction was partly offset by negative movements in the metal prices, which reduced by-product revenues. Refer to the following sections of this MD&A for additional details on revenue, production costs, smelting, refining and freight costs and royalty expense. The cash cost per ounce of palladium sold decreased to US$5291 for the six months ended June 30, 2016 compared to US$6451 in the same period in 2015. The higher price in 2015 was due to lower metal production resulting from water balance issues and the mill shutdown. 1

Non-IFRS measure. Please refer to Non-IFRS Measures on pages 23-25.

Financial Results Income from mining operations for the LDI operations is summarized in the following table. Three months ended June 30 ($millions) Revenue Smelting, refining and freight costs Royalty expense Net revenue Mining operating expenses Production costs Mining Milling General and administration Inventory and others Total production costs Mine restoration and mitigation costs Depreciation and amortization Inventory price adjustment Gain on disposal of equipment Total mining operating expenses Income (loss) from mining operations

Six months ended June 30

2016

2015

2016

2015

$ 39.9 3.9 1.7 34.3

$ 27.3 2.7 1.0 23.6

$ 72.4 7.2 3.0 62.2

$ 91.3 9.4 3.5 78.4

19.0 8.1 4.7 31.8 (0.3) 31.5 7.5 0.1 $ 39.1 $ (4.8)

20.9 6.6 5.8 33.3 (7.7) 25.6 3.7 4.6 (0.2) $ 33.7 $ (10.1)

40.4 15.0 9.6 65.0 (2.2) 62.8 0.1 16.0 1.0 $ 79.9 $ (17.7)

44.8 17.6 12.9 75.3 (8.1) 67.2 3.7 13.2 0.5 (0.1) $ 84.5 $ (6.1)

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.

8 Second Quarter Report 2016

North American Palladium Ltd.

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 in 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. 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 by metal is summarized in the following tables: Revenue for the three months ended June 30, 2016 Palladium Platinum

Gold

Nickel

Copper

Others

Total

2,344 $ 3.9

198,313 $ 1.1

565,360 $ 1.6

n.a. $-

n.a. $ 38.9

1.7 0.2 0.1 0.1 (0.9) (0.1) (0.1) $ 29.9 $3.3 $ 3.9 $ 1.2 $ 1.6 (1) Sales volumes and prices are per ounce for palladium, platinum and gold and per pound for nickel and copper.

$-

2.1 (1.1) $ 39.9

(1)

Sales volume Revenue before price adjustment Price adjustment ($millions): Commodities Foreign exchange Revenue ($millions)

38,192 $ 29.1

2,446 $ 3.2

Revenue for the three months ended June 30, 2015 Palladium Platinum

Gold

Nickel

Copper

Others

Total

1,471 $ 2.1

215,922 $ 1.6

401,809 $ 1.4

n.a. $ 0.1

n.a. $ 30.8

(0.2) (0.3) (0.1) (2.4) (0.2) (0.1) (0.1) (0.1) $ 20.2 $ 2.3 $ 2.0 $ 1.5 $ 1.2 (1) Sales volumes and prices are per ounce for palladium, platinum and gold and per pound for nickel and copper.

$ 0.1

(0.6) (2.9) $ 27.3

(1)

Sales volume Revenue before price adjustment Price adjustment ($millions): Commodities Foreign exchange Revenue ($millions)

23,974 $ 22.8

2,006 $ 2.8

9 Second Quarter Report 2016

North American Palladium Ltd.

Revenue for the six months ended June 30, 2016 Palladium

Platinum

Gold

Nickel

Copper

Others

Total

4,783 $ 6.2

4,835 $ 7.9

401,528 $ 2.1

1,041,405 $3.0

n.a. $ 0.1

n.a. $ 74.7

0.8 0.4 0.5 (3.3) (0.4) (0.2) (0.1) $ 52.9 $ 6.2 $ 8.2 $ 2.1 $ 2.9 (1) Sales volumes and prices are per ounce for palladium, platinum and gold and per pound for nickel and copper.

$ 0.1

1.7 (4.0) $ 72.4

(1)

Sales volume Revenue before price adjustment Price adjustment ($millions): Commodities Foreign exchange Revenue ($million)

75,960 $ 55.4

Revenue for the six months ended June 30, 2015 Palladium

Platinum

Gold

Nickel

Copper

Others

Total

5,788 $8.5

4,327 $6.4

706,979 $5.4

1,257,930 $4.2

n.a. $0.1

n.a. $92.1

(5.0) (0.8) 0.1 (0.2) (0.1) 3.8 0.5 0.4 0.3 0.2 $66.3 $8.2 $6.9 $5.5 $4.3 (1) Sales volumes and prices are per ounce for palladium, platinum and gold and per pound for nickel and copper.

$0.1

(6.0) 5.2 $91.3

(1)

Sales volume Revenue before price adjustment Price adjustment ($millions): Commodities Foreign exchange Revenue ($millions)

69,103 $67.5

Revenue before pricing adjustments increased by $8.1 or 26% in Q2 2016 compared to Q2 2015. The revenue increase resulted from a 37% increase in concentrate produced at a higher concentrate grade of 48 g/t, yielding a 59% increase in payable palladium ounces sold. Favourable pricing movements increased revenue in Q2 2016, whereas negative pricing movements reduced revenue in Q2 2015. Negative foreign exchange adjustments reduced revenue in both quarters. Revenue after pricing adjustments for Q2 2016 increased by $12.6 or 46% compared to Q2 2015, primarily due a 59% increase in palladium sales and a 40% increase in by-product revenue, partially offset by lower commodity prices. For the six month period ended June 30, 2016, revenue before pricing adjustments decreased by $17.4 or 19% compared to the same period in 2015. The decreased revenue resulted from a 20% decrease in concentrate produced (offset by an 87 g/t increase in concentrate grade), which yielded a 10% increase in payable palladium ounces sold in 2015. Favourable pricing movements increased revenue in the first half of 2016, whereas negative pricing movements reduced revenue during the same period in 2015. Negative foreign exchange adjustments reduced revenue in 2016, whereas positive foreign exchange adjustments increased revenue during the first half of 2015. Revenue after pricing adjustments for the six month period ended June 30, 2016 decreased by $18.9 or 21% compared to the comparable period in 2015 primarily due to a 20% decrease in palladium sales and a 22% decrease in by-product revenue.

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North American Palladium Ltd.

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

Palladium – US$/oz Platinum – US$/oz Gold – US$/oz Nickel – US$/lb Copper – US$/lb Exchange rate (Bank of Canada) – CDN$1 = US$

Jun-30 2016

Mar-31 2016

Dec-31 2015

Sep-30 2015

Jun-30 2015

Mar-31 2015

Dec-31 2014

Sep-30 2014

$ 589 $ 999 $ 1,320 $ 4.27 $ 2.19

$ 569 $ 976 $1,237 $ 3.75 $ 2.19

$ 547 $ 872 $1,062 $ 3.93 $ 2.13

$ 661 $ 908 $1,114 $ 4.57 $ 2.30

$ 677 $ 1,078 $1,171 $ 5.30 $ 2.61

$ 729 $ 1,129 $ 1,187 $ 5.65 $ 2.73

$ 798 $ 1,210 $ 1,199 $ 6.77 $ 2.85

$ 775 $ 1,300 $ 1,217 $ 7.49 $ 3.03

US$ 0.77

US$ 0.77

US$ 0.72

US$ 0.75

US$ 0.80

US$0.79

US$0.86 US$0.89

* Based on the London Metal Exchange as at period ending

Q2 2016 Palladium Price 850 800 USD / oz Pd CAD / oz Pd

750 700

Ave. C$ 731 / oz

650

Ave. US$ 568 / oz

600 550 500 450

Smelting, refining and freight costs Smelting, refining and freight costs for the three and six month periods ended June 30, 2016 were $3.9 and $7.2 compared to $2.7 and $9.4 in the respective 2015 periods. The increase in Q2 2016 compared to Q2 2015 was primarily due to the mill shutdown in 2015 when lower concentrate tonnes sold resulted in lower smelter processing fees and freight charges. The impact of a weaker Canadian dollar also offset the reduction to smelter costs in the 2016 period as these costs are incurred in US dollars. Royalty expense For the three and six month periods ended June 30, 2016, royalty expenses were $1.7 and $3.0 compared to $1.0 and $3.5 in the respective 2015 periods. The increase in the quarterly results and decrease in the six month periods is primarily due to the increase and decrease of revenues, after pricing adjustments, in 2016 compared to the respective 2015 periods.

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North American Palladium Ltd.

Production costs Production costs for the three and six month periods ended June 30, 2016 increased by $5.9 (23%) and decreased by $4.4 (7%) respectively compared to the 2015 periods. Production costs increased in Q2 2016 to $31.5 compared to $25.6 in Q2 2015 primarily due to favourable inventory and other cost movements in the second quarter of 2015, as well as reduced operational overhead in the same period due to the mill shutdown in May and June as a result of water balance issues. During the six month period ended June 30, 2016, production costs decreased to $62.8 compared to $67.2 in the comparable period in 2015, primarily due to the mill transition to batch processing, less tonnes mined and lower general and administration expenses. Mining costs for the three and six month periods ended June 30, 2016 decreased by $1.9 (-9%) and $4.4 (-10%) respectively compared to the 2015 periods. The decrease was primarily a result of lower production attributable to adverse ground conditions in the upper offset zone that resulted from sill and pillar removal as the mine transitions to the sub-level shrinkage mining method. Milling costs for the three and six month periods ended June 30, 2016 increased by $1.5 (23%) and decreased by $2.6 (-15%) respectively compared to the 2015 periods. The increase in the three month period ended June 30, 2016 was primarily a result of increased tonnes milled resulting from the mill shut down in 2015. The decrease in the six month periods ended June 30, 2016 was primarily due to a decrease in tonnes milled as a result of operating the mill on a batch basis. General and administration costs for the three and six month periods ended June 30, 2016 decreased by $1.1 (-19%) and $3.3 (-26%) respectively compared to the 2015 periods. The decrease in costs was primarily a result of reduced expenditures on consultants and lower propane costs, offset by an increase in expenditures on technical services.

Depreciation and amortization Depreciation and amortization for the three and six months ended June 30, 2016 were $7.5 and $16.0 respectively, compared to $4.6 and $13.2 in the comparable 2015 periods. The 2016 increases over the prior year periods were primarily due to higher unit of production depletion related to higher in-situ palladium ounces produced combined with additions to mining interests between the two respective reporting periods.

OTHER EXPENSES Exploration Exploration expenditures for Q2 2016 were $1.3 compared to $1.8 in Q2 2015. Exploration activities were focused on conversion drilling of the B2 Zone and included 9 holes and 2,153 metres. In addition, 2,423 metres of definition drilling and 3,219 metres of conversion drilling were completed in the quarter, all of which was focused on the Offset Zone. Exploration expenditures for the six month period ending June 30, 2016 were $2.8 compared to $4.3 in the comparable period in 2015. For the six month period ended June 30, 2016, 3,359 meters of underground exploration drilling, 9,521 meters of definition drilling and 3,219 meters of Offset Zone conversion drilling were completed. The reduced costs in each of the above periods are attributable to a workforce reduction in Q1 2016 and a decrease in drilling metres.

Corporate general and administration The Company’s corporate general and administration expenses for the three and six months ended June 30, 2016 were $1.6 and $3.1 compared to $2.2 and $5.0 in the comparable prior year periods. The decreases are primarily attributable to the corporate workforce reduction and relocation of the corporate office in late 2015.

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North American Palladium Ltd.

Interest costs and other Interest costs and other, net of interest and other income, for the three and six months periods ended June 30, 2016 were $1.9 and $2.1 respectively compared to $79.2 and $92.4 in the comparable prior year periods. The decreases were primarily due to the completion of the 2015 recapitalization transaction and reduction of debt.

Foreign exchange loss Foreign exchange gains and losses for the three and six month periods ended June 30, 2016 were a loss of $0.3 and a gain of $2.9, respectively, compared to a gain of $4.0 and a loss of $18.4 in the comparable prior year periods. The 2016 and 2015 gains and losses were primarily due to the impact of exchange rate movements on the US$ denominated senior secured term loan and the US$ denominated credit facility.

SUMMARY OF QUARTERLY RESULTS Summary of Quarterly Results ($millions except per share amounts)

2016 Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Revenue Production costs, including mine restoration and mitigation costs Exploration expense Capital expenditures Loss and comprehensive loss Loss per share – basic and diluted1

$39.9

$ 32.5

$ 37.6

$ 64.7

$ 27.3

$ 64.0

$ 74.5

$ 46.4

31.5 1.3 16.5 9.9

31.3 1.5 12.9 13.1

29.8 2.4 6.5 13.8

47.3 1.3 12.3 68.5

29.3 1.8 7.8 96.8

41.6 2.5 5.6 37.3

40.5 3.1 9.5 11.3

30.1 2.5 5.8 18.8

$0.17

$ 0.23

$ 0.60

$ 2.18

$ 98.35

$ 38.18

$ 11.70

$ 19.56

1.5

(3.7)

0.6

(14.0)

6.4

20.7

1.1

8.0

14.8

9.1

1.0

21.2

11.6

(8.8)

0.7

(34.7)

(16.2) 539,461 38,192

(12.9) 353,601 37,768

(6.5) 605,041 42,855

(12.3) 443,312 57,490

(7.2) 336,142 23,974

(5.6) 751,420 45,129

(9.5) 1,080,299 57,256

(5.8) 566,494 36,430

$564

$ 509

$ 587

$ 667

$ 758

$ 786

$ 787

$ 860

$554

$ 507

$ 472

$ 522

$ 750

$ 589

$ 473

$ 589

Cash provided by (used in) operations Cash provided by (used in) financing activities Cash provided by (used in) investing activities Tonnes milled Palladium sold (ounces) Realized palladium price (US$/ounce) Cash cost per palladium ounce (US$), net of by-product credits2

2015

1

2014

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. 2 Non-IFRS measure. Refer to Non-IFRS Measures on pages 23-25.

13 Second Quarter Report 2016

North American Palladium Ltd.

Highlights: 

Palladium prices have historically been volatile and realized quarterly average prices for palladium have ranged from US$509 to US$860 per ounce in the last eight quarters. Palladium prices have increased in 2016 and, as of August 3, 2016, were US$ 712.65 per ounce.



Palladium ounces sold per quarter have varied historically depending on a number of factors, including number of tonnes milled and mined ore grade. The number of tonnes milled has fluctuated dependent on whether milling operations were either running on full-time basis, batch basis or temporarily shut down. Milling operations are currently operating on a batch basis and the Company is evaluating the feasibility of returning to a full-time operation. Mined ore grade has fluctuated with the underground mining sequence.



A reduction in cash cost per palladium ounce sold of $196 per ounce was recognized in Q2 2016 compared to Q2 2015. The realized palladium price per palladium ounce has also decreased by $194 per ounce in Q2 2016 compared to Q2 2015.



Cash used in investing activities over the last eight quarters have included: i) capital development, ii) new equipment purchases and rebuilds, and iii) expansion of the existing tailings management facility. Cash used in investing activities in 2016 were principally related to the expansion of the tailings management facility and the water management facility.

FINANCIAL CONDITION, CASH FLOWS, LIQUIDITY AND CAPITAL RESOURCES Sources and Uses of Cash Three months ended June 30

Six months ended June 30

($millions)

2016

2015

2016

2015

Cash provided by (used in) operations prior to changes in non-cash working capital Changes in non-cash working capital

$ 0.3 1.2

$ (5.7) 12.1

$ (5.4) 3.2

$ 2.0 25.1

1.5 14.8 (16.2)

6.4 11.6 (7.2)

(2.2) 23.9 (29.1)

27.1 2.8 (12.8)

$ 0.1

$ 10.8

$ (7.4)

$ 17.1

Cash provided by (used in) operations Cash provided by financing activities Cash used in investing activities Increase (decrease) in cash and cash equivalents

Operating Activities For the three months ended June 30, 2016, cash provided by operations prior to changes in non-cash working capital was $0.3 compared to $5.7 of cash used in the prior year. The increase of $6.0 was primarily due to higher revenue in 2016, offset by lower production costs in 2015. For the six months ended June 30, 2016, cash used in operations prior to changes in non-cash working capital was $5.4 compared to cash provided of $2.0 in the prior year. The decrease of $7.4 was primarily due to a decrease in revenue in 2015, offset by lower production costs in 2016. Changes in non-cash working capital for the three months ended June 30, 2016 resulted in a source of cash of $1.2 compared to a source of cash of $12.1 in 2015. The decrease of $10.9 was primarily due to a reduction in accounts receivable of $22.7. Changes in non-cash working capital for the six months ended June 30, 2016 resulted in a source of cash of $3.2 compared to a source of cash of $25.1 in 2015. The decrease of $21.9 was primarily due to a reduction in accounts receivable of $31.0.

14 Second Quarter Report 2016

North American Palladium Ltd.

Financing Activities and Liquidity For the three and six month periods ended June 30, 2016, financing activities resulted in sources of cash of $14.8 and $23.9 respectively compared to $11.6 and $2.8 in the comparable 2015 periods. For the 2016 periods, proceeds from the senior secured term loan financing were employed to fund capital expenditures and in Q2 2015, proceeds from the bridge loan were drawn. Interest paid in 2016 has decreased significantly as a result of the 2015 recapitalization transaction.

Investing Activities For Q2 2016, investing activities used net cash of $16.2 compared to $7.2. For the six month period ending June 30, 2016, investing activities used net cash of $29.1 compared to $12.8 respectively. The expenditures for both periods were due to additions to mining interests, net of disposals that are summarized in the following table. Three months ended June 30

Six months ended June 30

($millions)

2016

2015

2016

2015

Underground development Tailings management facility Mill equipment Equipment and rebuilds Total additions to mining interests Proceeds on disposal of mining interests, net Net additions to mining interests

$ 1.7 13.8 1.0 $ 16.5 (0.3) $ 16.2

$ 2.9 2.9 0.2 1.8 $ 7.8 (0.6) $ 7.2

$ 3.6 24.3 0.5 1.0 $ 29.4 (0.3) $ 29.1

$ 6.3 3.5 0.3 3.3 $ 13.4 (0.6) $12.8

Liquidity and Capital Resources1 ($millions) Cash and cash equivalents Total debt Shareholders’ equity

As at June 30 2016

As at June 30 2015

$ 3.8 71.6 425.8

$ 21.2 405.4 92.5

1

Also see critical accounting policies and estimates, going concern section of this MD&A.

As at June 30, 2016, the Company had cash and cash equivalents of $3.8 compared to $21.2 as at June 30, 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 first priority on the Company's accounts receivable and inventory and second priority on the property, plant and equipment and may be used for working capital liquidity and general corporate purposes. In December 2015, the Company extended its US$60 credit facility to November 30, 2017. As at June 30, 2016, the borrowing base calculation limited the credit facility to a maximum of US$32.7 which was fully utilized including US$12.7 of letters of credit. The Company’s credit facility contains financial covenants which, if not met, would result in an event of default. This loan also includes certain other covenants, including limits on liens, additional debt, payments, 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 June 30, 2016.

15 Second Quarter Report 2016

North American Palladium Ltd.

On December 21, 2015, the senior secured term loan financing (”Term Loan”) was further amended to include the availability of a US$25 term loan financing which bears interest at 10% per annum and is due December 31, 2016, with an option to extend for one additional year at the option of the Company. The loan is secured by first priority security on the fixed assets and second priority security on 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. An advance of US$10.0 was drawn on January 26, 2016 and the remaining US$15.0 was drawn in May 2, 2016. On June 30, 2016, the Company entered into an amendment of 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. 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. The Company has $12.8 of finance leases funding equipment for operations. See the contractual obligations below for additional commitments.

Contractual Obligations Contractual obligations are comprised as follows: As at June 30, 2016 ($millions) Credit facility Term loan Finance lease obligations Operating leases Purchase obligations

Total

Payments Due by Period 1-3 Years 3-5 Years

5+ Years

$ 26.5 32.3 12.8 2.0 1.2

$ 26.5 32.3 9.2 1.6 1.2

$3.6 0.4 -

$-

$ 74.8

$ 70.8

$ 4.0

$-

In addition to contracted obligations, the Company has asset retirement obligations at June 30, 2016 in the amount of $17.5 for the LDI mine and contractual obligations reflected in accounts payable. The Company obtained 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 June 30, 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 and Toronto stock exchanges whose general partner is a wholly-owned subsidiary of Brookfield Asset Management Inc. (“Brookfield”). An approximate 21% economic interest in BBU by way of limited partnership units was spun off to shareholders of Brookfield on June 20, 2016 as a special dividend, with Brookfield retaining the remaining limited partnership interest in BBU. BBU and Brookfield collectively hold approximately 53.5 million common shares, representing approximately 92% of the issued and outstanding common shares of the Company. Prior to June 1, 2016 NAP’s parent company was Brookfield Capital Partners Ltd., a 100% wholly-owned subsidiary of Brookfield. 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. 16 Second Quarter Report 2016

North American Palladium Ltd.

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 August 4, 2016, there were 58,126,526 common shares of the Company outstanding.

17 Second Quarter Report 2016

North American Palladium Ltd.

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 two committed sources of financing, the credit facility (note 9), which was fully drawn on June 30, 2016, and the US $25 Term Loan (note 11), for which the Company had drawn US $25 at June 30, 2016. Subsequent to June 30, 2016, the Term Loan has been amended to secure an additional US $25 available to the Company for the balance of 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 would result in an event of default. There is no assurance that the Company will be in compliance with its covenants. Certain events of default entitle the lender to demand repayment. The Company is in the process of upgrading its operations and will continue to incur capital expenditures throughout 2016. The Company has secured financing to fund forecasted operating and investing cash requirements in the year ending December 31, 2016; however, the Company’s cash and liquidity 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 and, thus result in a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern. The condensed interim 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.

b.

Use of estimates The preparation of the condensed interim 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 condensed interim 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 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.

18 Second Quarter Report 2016

North American Palladium Ltd.

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 the following:  



c.

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.

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 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.

19 Second Quarter Report 2016

North American Palladium Ltd.

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. 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 the mine site is accreted over time and the accretion charges are recognized as an interest cost in the condensed interim 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.

20 Second Quarter Report 2016

North American Palladium Ltd.

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 condensed interim consolidated financial statements of the Company.

New standards not yet adopted The following new standards are not yet effective for the period ended June 30, 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 is presently evaluating the potential impact of this new standard on the 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 presently evaluating the potential impact of this new standard on the financial statements of the Company.

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 is presently evaluating the potential impact of this new standard on the financial statements of the Company.

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 is presently evaluating the potential impact of this new standard on the financial statements of the Company.

21 Second Quarter Report 2016

North American Palladium Ltd.

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 is presently evaluating the potential impact of this new standard on the 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 For the six month period ended June 30, 2016, the Chief Executive Officer and Interim Vice President, Finance and Chief Financial Officer certify that they have designed, or caused to be designed under their supervision, disclosure controls and 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.

Internal Control over Financial Reporting For the six month period ended June 30, 2016, the Chief Executive Officer and Interim 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 six month period ended June 30, 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.

22 Second Quarter Report 2016

North American Palladium Ltd.

NON-IFRS MEASURES This MD&A refers to cash cost per ounce, 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. The following tables reconcile these non-IFRS measures to the most directly comparable IFRS measures:

Cash Cost Per Ounce of Palladium The Company uses this measure internally to evaluate the underlying operating performance of the Company for the reporting periods presented. Management believes that cash cost per ounce sold 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. Reconciliation of Palladium Cash Cost per Ounce Sold For the six months ended June 30

For the three months ended ($millions except ounce and per ounce amounts)

Jun 30 2016

Mar 31 2016

Dec 31 2015

Sep 30 2015

Jun 30 2015

2016

2015

Production costs including overhead Smelting, refining and freight costs Royalty expense Operational expenses Less by-product metal revenue

$31.5 3.9 1.7 $37.1 10.0 $ 27.1

$ 31.3 3.3 1.3 35.9 9.5 $ 26.4

$ 30.4 5.2 1.5 37.1 10.5 $ 26.6

$ 44.9 6.8 2.7 54.4 14.9 $ 39.5

$ 25.6 2.7 1.0 29.3 7.1 $ 22.2

$ 62.8 7.2 3.0 73.0 19.5 $ 53.5

$ 67.2 9.4 3.5 80.1 25.0 $ 55.1

Divided by ounces of palladium sold Cash cost per ounce (CDN$) Average exchange rate (CDN$1 – US$) Cash cost per ounce (US$), net of by-product credits

38,192 $710 0.78

37,768 $ 700 0.72

42,855 $ 621 0.76

57,490 $ 687 0.76

23,974 $ 926 0.81

75,960 $ 705 0.75

69,103 $ 797 0.81

$554

$ 504

$ 472

$ 522

$ 750

$ 529

$ 645

23 Second Quarter Report 2016

North American Palladium Ltd.

EBITDA and 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 fee and other; financing costs; depreciation and amortization; exploration; foreign exchange loss (gain); loss on Recapitalization; mine restoration and mitigation costs; and, severance payments. For the six months ended June 30

For the three months ended ($millions) Loss and comprehensive loss for the period Interest and other income Interest costs, prepayment fee and other Financing costs Depreciation and amortization EBITDA Exploration Foreign exchange loss (gain) Mine restoration and mitigation costs Severance payments Change in carrying value of long-term debt Loss on Recapitalization Adjusted EBITDA

Jun 30 2016

Mar 31 2016

Dec 31 2015

Sep 30 2015

Jun 30 2015

2016

2015

$ (13.1) 0.2 0.2 8.5

$ (13.8) 0.1 0.5 0.9 7.0

$ (68.5) (0.1) 10.0 2.2 10.8

$ (96.8) (2.4) 14.8 7.5 4.6

$ (23.0) 2.1 0.2 16.0

$ (134.1) (1.1) 26.7 7.9 13.2

$ (0.5) 1.3 0.3 -

$ (4.2) 1.5 (3.2) 0.1 -

$ (5.3) 2.4 2.1 (0.6) -

$ (45.6) 1.3 19.0 2.4 3.7 28.3

$ (72.3) 1.8 (4.0) 3.7 66.8 -

$ (4.7) 2.8 (2.9) 0.1 -

$ (87.4) 4.3 18.4 3.7 66.8 -

$ 1.1

$ (5.8)

$ (1.4)

$ 9.1

$ (4.0)

$ (4.7)

$ 5.8

$(9.9) 1.9 7.5

24 Second Quarter Report 2016

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 the 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. For the six months ended June 30

For the three months ended 30-Jun

31-Mar

31-Dec

30-Sep

30-Jun

2016

2016

2015

2015

2015

2016

2015

27.1

28.3

26.1

29.9

27.5

55.4

62.4

On-site general & administration costs

4.7

4.9

4.2

5.2

5.8

9.6

13.0

Royalties & production taxes

1.7

1.3

1.5

2.7

1.0

3.0

3.5 9.4

(C$ millions) On-site mining costs

Third party smelting, refining & transport costs

3.9

3.3

5.2

6.8

2.7

7.2

Stock-piles/product inventory write down

0.1

0.9

-

-

-

1.0

0.5

(10.0)

(9.5)

(10.6)

(14.9)

(7.1)

(19.5)

(25.1)

27.5

29.2

26.4

29.7

29.9

56.7

63.7

Corporate general & administrative costs

1.6

1.5

1.4

4.6

2.2

3.1

4.9

Reclamation & remediation - accretion & amortization

0.1

0.1

0.1

0.1

0.1

0.2

0.2

Exploration & study costs (sustaining)

1.3

1.5

2.4

1.3

1.8

2.8

4.3

Capitalized mine development (sustaining)

1.6

1.9

2.3

3.0

2.9

3.5

6.3

Capital expenditure (sustaining)

2.3

1.7

3.6

4.0

4.1

4.0

6.7

34.4

35.9

36.2

42.7

41.0

70.3

86.1

38,203

40,216

40,341

57,914

22,904

78,419

68,530

$ 900

$ 892

$ 897

$ 738

$ 1,790

$897

$1,260

0.78

0.72

0.76

0.81

0.75

0.81

$ 699

$ 643

$ 682

$ 1,456

$671

$1,022

By-product credits Adjusted Operating Costs

All-inclusive sustaining cost Ounces of palladium produced AISC per palladium ounce produced (CDN$) Average exchange rate (CDN$1 – US$) AISC per palladium ounce produced (US$)

25 Second Quarter Report 2016

0.76 $ 561

North American Palladium Ltd.

Condensed Interim Consolidated Balance Sheets (expressed in millions of Canadian dollars) (unaudited) June 30 2016

December 31 2015

$ 3.8 47.4 16.9 2.8 70.9

$ 11.2 51.4 15.2 3.6 81.4

468.6 468.6 $ 539.5

453.9 453.9 $ 535.3

9 10

23.8 26.5 6.9 57.2

$ 23.1 32.4 4.9 60.4

8 10 11

0.8 17.5 5.9 32.3 56.5

0.1 16.7 9.8 26.6

1,313.0 10.8 8.9 (906.9) 425.8 $539.5

1,313.0 10.3 8.9 (883.9) 448.3 $ 535.3

Notes ASSETS Current Assets Cash and cash equivalents Accounts receivable Inventories Other assets Total Current Assets Non-current Assets Mining interests Total Non-current Assets Total Assets LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Accounts payable and accrued liabilities Credit facility Current portion of obligations under finance leases Total Current Liabilities Non-current Liabilities Income taxes payable Asset retirement obligations Obligations under finance leases Long-term debt Total Non-current Liabilities Shareholders’ Equity Common share capital and purchase warrants Stock options and related surplus Contributed surplus Deficit Total Shareholders’ Equity Total Liabilities and Shareholders’ Equity

4 5 6

7

13

Nature of operations and going concern – Note 1 Commitments and contingencies – Notes 16 and 19 Subsequent events – Notes 11 and 12 See accompanying notes to the condensed interim consolidated financial statements

26 Second Quarter Report 2016

North American Palladium Ltd.

Condensed Interim Consolidated Statements of Operations and Comprehensive Loss (expressed in millions of Canadian dollars, except share and per share amounts) (unaudited)

Revenue Mining operating expenses Production costs Smelting, refining and freight costs Royalty expense Depreciation and amortization Inventory pricing adjustment Loss (gain) on disposal of equipment Mine restoration and mitigation costs Total mining operating expenses Income (loss) from mining operations Other expenses (Income) Exploration General and administration Interest and other income Interest costs and other Financing costs Foreign exchange loss (gain) Total other expenses, net Loss before taxes Income taxes Net loss and comprehensive loss Loss per share Basic and Diluted Weighted average number of shares outstanding Basic and diluted

Notes 17

Three months ended June 30 2016 2015 $ 39.9 $ 27.3

Six months ended June 30 2016 2015 $ 72.4 $ 91.3

31.5 3.9 1.7 7.5 0.1 44.7 (4.8)

25.6 2.7 1.0 4.6 (0.2) 3.7 37.4 (10.1)

62.8 7.2 3.0 16.0 1.0 0.1 90.1 (17.7)

67.2 9.4 3.5 13.2 0.5 (0.1) 3.7 97.4 (6.1)

1.3 1.6 1.9 0.3 5.1 (9.9) $ (9.9)

1.8 2.2 (2.4) 81.6 7.5 (4.0) 86.7 (96.8) $ (96.8)

2.8 3.1 (0.8) 2.9 0.2 (2.9) 5.3 (23.0) $ (23.0)

4.3 5.0 (1.1) 93.5 7.9 18.4 128.0 (134.1) $ (134.1)

13(d)

$ (0.17)

$ (98.4)

$ (0.40)

$ (136.8)

13(d)

58,126,526

984,226

58,126,526

980,612

5

18 18

See accompanying notes to the condensed interim consolidated financial statements

27 Second Quarter Report 2016

North American Palladium Ltd.

Condensed Interim Consolidated Statements of Cash Flows (expressed in millions of Canadian dollars) (unaudited)

Notes Cash provided by (used in) Operations Net loss Operating items not involving cash Depreciation and amortization Inventory pricing adjustment Accretion expense Share-based compensation and employee benefits Unrealized foreign exchange loss (gain) Realized foreign exchange loss on financing activities Loss on disposal of equipment Interest expense and other Financing costs

Three Months Ended June 30 2016 2015

Six Months Ended June 30 2016 2015

$ (9.9)

$ (96.8)

$ (23.0)

$ (134.1)

7.5 0.1 -

4.6 4.3

16.0 1.0 0.2

13.2 0.5 6.3

0.3 0.3

0.1 (0.2)

0.5 (2.5)

0.5 21.7

0.1 1.9 0.3 1.2 1.5

(0.2) 75.0 7.5 (5.7) 12.1 6.4

0.2 2.0 0.2 (5.4) 3.2 (2.2)

(0.1) 86.1 7.9 2.0 25.1 27.1

7.8 (8.5) 18.8 (1.3) (1.4) (0.6) 14.8

30.9 (13.6) 17.6 (1.2) (14.6) (7.5) 11.6

9.8 (13.9) 32.5 (2.5) (1.9) (0.1) 23.9

38.7 (20.3) 17.6 (2.3) (23.0) (7.9) 2.8

(16.5) 0.3 (16.2) 0.1 3.7 $ 3.8

(7.8) 0.6 (7.2) 10.8 10.4 $ 21.2

(29.4) 0.3 (29.1) (7.4) 11.2 $3.8

(13.4) 0.6 (12.8) 17.1 4.1 $ 21.2

Cash and cash equivalents consisting of: Cash

$ 3.8

$ 21.2

$3.8

$ 21.2

Foreign exchange included in cash balance

$ 0.6

$ 3.7

$ 0.6

$ 3.7

Changes in non-cash working capital Financing Activities Proceeds of credit facilities Repayment of credit facilities Proceeds of Term Loan Net proceeds of bridge loan Repayment of obligations under finance leases Interest paid Other recoveries (costs) Investing Activities Additions to mining interests Proceeds on disposal of mining interests Increase (decrease) in cash Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period

5 18 13(e)

20

9 9 11 10

7

See accompanying notes to the condensed interim consolidated financial statements

28 Second Quarter Report 2016

North American Palladium Ltd.

Condensed Interim Consolidated Statements of Shareholders’ Equity (expressed in millions of Canadian dollars, except share amounts) (unaudited)

Notes Balance, January 1, 2015 Common shares issued: Pursuant to conversion of convertible debentures (Series 1 & 2)

Number of shares

Capital stock

Stock options

Equity component of convertible debentures

386,514,777

$ 866.4

$ 9.7

$ 6.9

$ 8.9

$ (667.5)

$ 224.4

5,258,170

1.7

-

-

-

-

1.7

1,917,594

0.3

0.2

-

-

-

0.5

-

-

-

-

-

(134.1)

(134.1)

393,690,541

$ 868.4

$ 9.9

$ 6.9

$ 8.9

$ (801.6)

$ 92.5

$ 1,313.0

$ 10.3

$-

$ 8.9

$ (883.9)

$ 448.3

-

-

0.5

-

-

-

0.5

-

-

-

-

-

(23.0)

(23.0)

$ 1,313.0

$ 10.8

$-

$ 8.9

$ (906.9)

$ 425.8

Contributed surplus

Deficit

Total shareholders’ equity

Stock based compensation: Stock-based compensation Net loss and comprehensive loss for the period ended June 30, 2015 Balance, June 30, 2015

Balance, January 1, 2016 Stock based compensation: Stock-based compensation Net loss and comprehensive loss for the period ended June 30, 2016 Balance, June 30, 2016

58,126,526 13(c)(e)

58,126,526

See accompanying notes to the condensed interim consolidated financial statements

29 Second Quarter Report 2016

North American Palladium Ltd.

Notes to the Condensed Interim Consolidated Financial Statements (expressed in millions of Canadian dollars, except per share amounts and metal prices) (unaudited)

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. The address of 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 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 condensed interim consolidated financial statements of the Company include the Company and its subsidiary (collectively referred to as the “Company”). NAP’s parent company, Brookfield Business Partners LP (“BBU”), is a limited partnership publicly listed on the New York and Toronto stock exchanges whose general partner is a wholly-owned subsidiary of Brookfield Asset Management Inc. (“Brookfield”). An approximate 21% economic interest in BBU by way of limited partnership units was spun off to shareholders of Brookfield on June 20, 2016 as a special dividend, with Brookfield retaining the remaining limited partnership interest in BBU. BBU and Brookfield collectively hold approximately 53.5 million common shares, representing approximately 92% of the issued and outstanding common shares of the Company. Prior to June 1, 2016 NAP’s parent company was Brookfield Capital Partners Ltd., a wholly-owned subsidiary of Brookfield. These condensed interim 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 two committed sources of financing, the credit facility (note 9), which was fully drawn on June 30, 2016, and the US $25 million senior secured term loan (note 11), for which the Company had drawn US $25 million at June 30, 2016. On June 30, 2016, the senior secured term loan was amended to secure an additional US $25 million available to the Company for the balance of 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 would result in an event of default. There is no assurance that the Company will be in compliance with its covenants. Certain events of default entitle the lender to demand repayment. The Company is in the process of upgrading its operations and will continue to incur capital expenditures throughout 2016. The Company has secured financing to fund forecasted operating and investing cash requirements in the year ending December 31, 2016; however, the Company’s cash and liquidity 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 and, thus result in a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern. The condensed interim 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.

30 Second Quarter Report 2016

North American Palladium Ltd. 2. BASIS OF PRESENTATION Statement of Compliance These condensed interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), applicable to the preparation of these financial statements, including IAS 34, Interim Financial Reporting. These condensed interim consolidated financial statements should be read in conjunction with the Company’s annual financial statement for year ended December 31, 2015, which have been prepared in accordance with IFRS as issued by the IASB.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies disclosed in the Company’s annual consolidated financial statements for the year ended December 31, 2015 have been applied consistently by all Company entities for all periods presented in these condensed interim financial statements, unless otherwise indicated.

Basis of Consolidation These condensed interim consolidated financial statements include the accounts of NAP and its wholly-owned subsidiary.

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 condensed interim consolidated financial statements of the Company.

New standards and interpretations not yet adopted The following new standards are not yet effective for the period ended June 30, 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 is presently evaluating the potential impact of this new standard on the 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 presently evaluating the potential impact of this new standard on the financial statements of the Company.

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 31 Second Quarter Report 2016

North American Palladium Ltd. reporting periods beginning on or after January 1, 2017. The Company is presently evaluating the potential impact of this new standard on the financial statements of the Company.

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 is presently evaluating the potential impact of this new standard on the financial statements of the Company.

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 is presently evaluating the potential impact of this new standard on the financial statements of the Company.

4. ACCOUNTS RECEIVABLE 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 June 30, 2016 (2015 - December 31, 2015) 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 party customers. All of the accounts receivable are due from four customers at June 30, 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, refer to note 17. First priority security of accounts receivable has been pledged as security against the credit facility described in note 9.

5. INVENTORIES Inventories consist of the following: At June 30 2016 $ 12.7 2.3 1.9 $ 16.9

1

Supplies 1 Concentrate inventory 1,2 Crushed and broken ore stockpiles Total

At December 31 2015 $ 12.1 0.1 3.0 $ 15.2

1

Inventories have been pledged as security on 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 period ended June 30, 2016, concentrate inventory was written down in the amount of $1.0 to reflect net realizable value (June 30, 2015 - $0.5) and has been recorded as an inventory pricing adjustment. No write-downs were recorded for crushed and broken ore stockpile inventories in 2015. 32 Second Quarter Report 2016

North American Palladium Ltd. 6. OTHER ASSETS Other assets consist of the following: At June 30 2016 $ 1.9 0.8 0.1 $ 2.8

Prepaids HST receivable Other

At December 31 2015 $ 2.7 0.1 0.8 $ 3.6

7. MINING INTERESTS Mining interests are comprised of the following: Mining leases and claims, royalty interest, and development

Plant and equipment

Underground mine development

Equipment under finance lease

$ 74.3

$ 353.2

$ 15.9

$ 10.5

$453.9

25.8

4.1

0.8

-

30.7

0.7

-

-

-

0.7

(0.4)

-

(0.3)

-

(0.7)

Total

Carrying amounts As at December 31, 2015 Additions of physical assets 1

Revaluation of ARO assets Disposals

Depreciation for the period As at June 30, 2016 1

(2.8)

(11.0)

(1.8)

(0.4)

(16.0)

$ 97.6

$ 346.3

$ 14.6

$ 10.1

$468.6

Refer to note 8 regarding the revaluation of the Asset Retirement Obligation (“ARO”).

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.

8. ASSET RETIREMENT OBLIGATIONS AND RECLAMATION DEPOSITS The changes in asset retirement obligations during the six months ended June 30, 2016 are as follows: Asset retirement obligations, beginning of period Change in discount rate and estimated closure costs Accretion expense (note 18) Asset retirement obligations, end of period

$ 16.7 0.7 0.1 $ 17.5

Asset retirement obligations comprised the following as at June 30, 2016:

Property 1

LDI mine 1

Expected timing of cash flows 2029

Asset retirement obligation $ 17.5

Mine closure plan requirement $ 14.6

Letter of credit outstanding $ 14.6

Undiscounted asset retirement obligation $ 20.3

Including a letter of credit for the Company’s Shebandowan West project, the total letters of credit outstanding are $14.9 for asset retirement obligations. Refer to notes 9 and 16.

33 Second Quarter Report 2016

North American Palladium Ltd.

The key assumptions applied for determination of the asset retirement obligations are as follows: At June 30 2016 2.00% 5.00% 1.12%

Inflation Market risk Discount rate

At December 31 2015 2.00% 5.00% 1.39%

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

9. CREDIT FACILITY The Company has a credit facility with a Canadian chartered bank, maturing December 11, 2017. The credit facility is 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. The credit facility contains certain financial covenants, as defined in the agreement, including a current ratio test and evaluations based on earnings before interest, taxes, depreciation and amortization (“EBITDA”) that include minimum EBITDA requirements and senior debt to EBITDA ratios. 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 June 30, 2016, the Company was compliant with all financial covenants. Under the credit facility, as of June 30, 2016, the Company utilized $16.5 (US$12.7) for letters of credit, primarily for reclamation deposits (December 31, 2015 - $16.5 (US$11.9)), and had $26.5 (US$20.3) in borrowings outstanding (December 31, 2015 - $32.4 (US$23.4)). As at June 30, 2016, the borrowing base calculation limits the availability under the facility to the amounts drawn. First priority security of accounts receivable, supplies inventory, and inventories of concentrate, crushed and broken ore and second priority security on the property, plant and equipment have been pledged as security against the credit facility. Refer to notes 4, 5 and 7.

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.

34 Second Quarter Report 2016

North American Palladium Ltd. 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:

Less than one year Between one and five years Less current portion

At June 30, 2016 Present Future value of minimum minimum lease lease payments Interest payments $ 7.5 $ 0.6 $ 6.9 6.2 0.3 5.9 $ 13.7 $ 0.9 $ 12.8 6.9 $ 5.9

At December 31, 2015 Present Future value of minimum minimum lease lease payments Interest payments $ 5.6 $ 0.7 $ 4.9 10.4 0.6 9.8 $ 16.0 $ 1.3 $ 14.7 4.9 $ 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 following schedule provides the future minimum lease payments under non-cancellable operating leases outstanding at each of the reporting dates: At June 30 2016 $ 1.3 0.7 $ 2.0

Less than one year Between one and five years

At December 31 2015 $ 0.9 1.3 $ 2.2

The total minimum lease payments recognized in expense during each of the stated three and six month end periods are as follows:

Minimum lease payments expensed

Three months ended June 30 2016 2015 $ 0.4 $ 1.1

Six months ended June 30 2016 2015 $0.8 $ 1.8

11. LONG-TERM DEBT Long-term debt is comprised of the following: At June 30 2016 $ 32.3 $ 32.3

Senior secured term loan Less current portion

At December 31 2015 $$-

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 is due December 31, 2016, with an option to extend for one additional year at the option of the Company, 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 security on the plant and equipment and second priority security on 35 Second Quarter Report 2016

North American Palladium Ltd. 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. On January 26, 2016, the Company drew the first advance of US$10.0. 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 June 30, 2016, the Company entered into an amendment of its existing secured term loan with Brookfield to increase available funds by US$25 million. The additional funds are available immediately in up to four advances and available until December 31, 2016. On July 5, 2016, subsequent to the end of the quarter, the Company drew the third advance of US$10.0.

12. RELATED PARTY TRANSACTIONS On January 26, 2016, the Company drew the first advance of US$10.0 under the Brookfield Term Loan. Refer to note 11. Accumulated interest of $0.1 and a related commitment fee of $0.3 owing on the first advance were subsequently settled in April 2016. On May 2, 2016, the Company drew the second advance of US$15.0. Refer to note 11. On July 5, 2016, subsequent to the end of the quarter, the Company drew the third advance of US$10.0. Refer to note 11. 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.

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) Group Registered Retirement Savings Plan The Company has a group registered retirement savings plan, in which eligible employees can participate in 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 treasury shares of the Company on a quarterly basis. If the matching contribution is made in treasury shares, the price per share issued is the 5-day volume weighted average trading price of the common shares on the Toronto Stock Exchange (“TSX”) preceding the end of the quarter. During the three month period ended June 30, 2016, the Company elected to settle $0.5 of RRSP contributions in cash and did not make any share contributions to the plan. For the three month period ended June 30, 2015, the Company made cash contributions of $0.5 and did not make any share contributions. For the six months ended June 30, 2016, the Company made cash contributions of $0.8 and did not make any share contributions to the plan. During the six month period ended June 30, 2015, the Company made cash contributions of $0.5 and contributed 4,794 shares (original issue of 1,917,594 shares consolidated at 400:1 per note 13 (d), which was equal to the market value of the shares on the contribution date).

36 Second Quarter Report 2016

North American Palladium Ltd. (c)

Corporate Stock Option Plan

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. Under the terms of the Stock Option 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. The following summary sets out the activity in outstanding common share purchase options:

Outstanding, beginning of period Granted Cancelled/forfeited Expired Outstanding, end of period Options exercisable at end of period

-

At June 30, 2016 Weighted Average Options Exercise Price $1,125,000 $ 5.97 $$1,125,000 $ 5.97 $-

The fair value of options granted during the six month period ended June 30, 2016 have been estimated at the date of grant using the Black Scholes option pricing model with the following weighted average assumptions: June 30 2016 1,125,000 $ 1.82 26% $ 5.97 $ 5.11 50% 0.66% 0% 4.41

Awards granted Weighted average fair value of awards Pre-vest forfeiture rate Grant price Market price 1 Volatility Risk free rate Dividend yield Expected life (in years) 1

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

(d) Loss per share: The recapitalization of the Company, as disclosed in the Company’s annual consolidated financial statements for the year ended December 31, 2015, included a share consolidation, on the basis of one common share in the capital of the Company for every 400 existing common shares, which occurred without a corresponding change in the Company’s financial resources. Therefore, for the purpose of presenting the basic and diluted loss per share for the comparative period, the weighted average number of shares outstanding has been adjusted retrospectively as if the share consolidation had been applied to all of the shares issued and outstanding for all periods presented in these condensed interim consolidated financial statements. For the three and six month periods ended June 30, 2016 and June 30, 2015 the dilutive effects of stock options have not been included in the determination of diluted loss per share because to do so would be anti-dilutive. For the three and six month periods ended June 30, 2016 and June 30, 2015, the dilutive effects of the convertible debentures, warrants, restricted share units and stock options have not been included in the determination of diluted loss per share because to do so would be anti-dilutive. 37 Second Quarter Report 2016

North American Palladium Ltd. (e) Summary of Share-based compensation and employee benefits The following table details the components of share-based compensation expense: Three months ended June 30 Registered retirement savings plan Common share stock options Restricted share units

2016 $0.3 $ 0.3

2015 $0.1 (0.2) $ (0.1)

Six months ended June 30 2016 $0.5 $ 0.5

2015 $ 0.3 0.2 $ 0.5

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 high-quality 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 product to large international companies with strong credit ratings. Historically, the Company has not experienced any losses related to individual customers. The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: At June 30 2016 $ 3.8 47.4 $ 51.2

Cash and cash equivalents Accounts receivable

At December 31 2015 $ 11.2 51.4 $ 62.6

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 movements 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. There were no outstanding foreign currency forward contracts in place at June 30, 2016. 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 reporting date, the impact of which is reported as a separate component of revenue or foreign exchange gain or loss in the condensed interim consolidated statements of operations and comprehensive loss. 38 Second Quarter Report 2016

North American Palladium Ltd. The Company is exposed to the following currency risk on cash, accounts receivable, accounts payable and borrowings at June 30, 2016. US$ $ 2.1 36.4 (20.3) (25.0) $ (6.8)

Cash Accounts receivable Credit facility Senior secured term loan

A 1% strengthening or weakening of the Canadian dollar against the US dollar on June 30, 2016, assuming that all other variables remained the same, would have resulted in a $0.1 decrease or increase, respectively, in the Company’s loss and comprehensive loss for the six-month period ended June 30, 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. Any interest rate fluctuations realized are expected to be offset by favourable changes in the interest on debt instruments. A 1% increase or decrease in the interest rate on the Company’s credit facility would have resulted in a $0.1 decrease or increase, respectively, in the Company’s statement of loss and comprehensive loss for the six month period ended June 30, 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.

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 hedge the effect on revenues of changes in the price of metals it produces. Gains and losses on derivative financial instruments used to mitigate metal price risk are recognized in revenue from metal sales over the term of the hedging contract. From time to time, the Company may enter into financial contracts to mitigate the smelter agreements’ provisional pricing exposure to rising or declining palladium prices and an appreciating Canadian dollar for past production already sold. Such palladium financial contracts are generally recognized on a mark-to-market basis as an adjustment to revenue. The Company did not have any palladium financial contracts outstanding at June 30, 2016 or December 31, 2015. For substantially all of the palladium delivered to the customers under the smelter agreements, the quantities and timing of settlement specified in the financial contracts matches final pricing settlement periods. As at June 30, 2016, the Company’s exposure to commodity price is limited to accounts receivable associated with provisional pricing of metal concentrate sales particularly palladium. A 1% strengthening or weakening of the palladium price on June 30, 2016 would have resulted in an approximate $0.4 decrease or increase, respectively, in the Company’s loss and comprehensive loss for the six-month period ended June 30, 2016.

39 Second Quarter Report 2016

North American Palladium Ltd. 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 June 30, 2016 to the contractual maturity date. Notes Accounts payable and accrued liabilities Credit facility Obligations under finance leases 1 Senior secured term loan 1

9 10 11

Total $ 23.8 26.5 12.8 32.3

In less than 1 year $23.8 26.5 6.9 -

Between 1 year and 3 years $5.9 32.3

More than 3 years $-

The senior secured term loan contains an option to extend for one additional year at the option of the Company. Refer to note 11.

The Company also has asset retirement obligations in the amount of $17.5 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, $1.6 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 9 for additional disclosures 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. Fair Values The Company’s financial assets and liabilities consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, 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 may be extended from June 30, 2016 to maturity on November 30, 2017.

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 June 30 2016 $ 32.5 12.8

Senior secured term loan Finance leases

40 Second Quarter Report 2016

At December 31 2015 $14.7

North American Palladium Ltd. Fair Value Hierarchy The table below details the carrying values and fair values of the assets and liabilities at June 30, 2016:

Financial assets Cash and cash equivalents Accounts receivable Financial liabilities 1 Senior secured term loan Finance leases

Notes

Carrying Value

Quoted Prices in Active Markets for Identical Assets (Level 1)

4

$ 3.8 47.4

$ 3.8 -

$47.4

$-

$ 3.8 47.4

32.3 12.8 $ 6.1

$ 3.8

32.5 12.8 $ 2.1

$-

32.5 12.8 $ 5.9

Net carrying value

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Aggregate Fair Value

1

The fair value of the senior secured term loan is based upon face value of the debt while the carrying value is based on amortized cost using the effective interest rate method.

The table below details the carrying values and fair values of the assets and liabilities at December 31, 2015:

Financial assets Cash and cash equivalents Accounts receivable Financial liabilities Finance leases Net carrying value

Notes

Carrying Value

Quoted Prices in Active Markets for Identical Assets (Level 1)

4

$ 11.2 51.4

$ 11.2 -

$51.4

$-

$ 11.2 51.4

14.7 $ 47.9

$ 11.2

14.7 $ 36.7

$-

14.7 $ 47.9

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Aggregate Fair Value

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.

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 Lac des Iles mine. The royalty had been previously payable to Sheridan Platinum Group of Companies (“SPG”). This obligation is recorded as royalty expense.

41 Second Quarter Report 2016

North American Palladium Ltd. (b) Operating Leases and Other Purchase Obligations As at June 30, 2016, the Company had outstanding operating lease commitments and other purchase obligations of $2.0 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 10). (c) Letters of Credit As at June 30, 2016 and December 31, 2015, 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.

17. REVENUE FROM METAL SALES

2016 Three months ended June 30 Revenue – before pricing adjustments Pricing adjustments: Commodities Foreign exchange Revenue – after pricing adjustments 2015 Three months ended June 30 Revenue – before pricing adjustments Pricing adjustments: Commodities Foreign exchange Revenue – after pricing adjustments

2016 Six months ended June 30 Revenue – before pricing adjustments Pricing adjustments: Commodities Foreign exchange Revenue – after pricing adjustments 2015 Six months ended June 30 Revenue – before pricing adjustments Pricing adjustments: Commodities Foreign exchange Revenue – after pricing adjustments

Total

Palladium

Platinum

Gold

Nickel

Copper

Other Metals

$38.9

$ 29.1

$ 3.2

$ 3.9

$ 1.1

$ 1.6

-

2.1 (1.1) $ 39.9

1.7 (0.9) $ 29.9

0.2 (0.1) $ 3.3

0.1 (0.1) $ 3.9

0.1 $ 1.2

$ 1.6

-

$ 30.8

$ 22.8

$ 2.8

$ 2.1

$ 1.6

$ 1.4

$ 0.1

(0.6) (2.9) $ 27.3

(0.2) (2.4) $ 20.2

(0.3) (0.2) $ 2.3

(0.1) $ 2.0

(0.1) $ 1.5

(0.1) (0.1) $ 1.2

$ 0.1

Total

Palladium

Platinum

Gold

Nickel

Copper

Other Metals

$ 74.7

$ 55.4

$ 6.2

$ 7.9

$ 2.1

$ 3.0

$ 0.1

1.7 (4.0) $ 72.4

0.8 (3.3) $ 52.9

0.4 (0.4) $ 6.2

0.5 (0.2) $ 8.2

$ 2.1

(0.1) $ 2.9

$ 0.1

$ 92.1

$ 67.5

$ 8.5

$ 6.4

$ 5.4

$ 4.2

$ 0.1

(6.0) 5.2 $ 91.3

(5.0) 3.8 $ 66.3

(0.8) 0.5 $ 8.2

0.1 0.4 $ 6.9

(0.2) 0.3 $ 5.5

(0.1) 0.2 $ 4.3

$ 0.1

-

During the period ending June 30, 2016, the Company delivered all of its concentrate to four customers under the terms of the 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.

42 Second Quarter Report 2016

North American Palladium Ltd. 18. INTEREST EXPENSE AND OTHER COSTS AND OTHER INCOME

Note Interest expense and other costs Interest on finance leases Asset retirement obligation accretion Accretion expense on long-term debt Interest expense Other expenses Change in fair value of convertible debentures Change in carrying value of senior secured term loan Other income Decrease in fair value of 2014 Tranche 1 and 2 warrants, net Change in fair value of convertible debentures Interest income Other recoveries

8

Three months ended June 30 2016 2015 $ 0.2 1.1 0.6

$ 0.2 0.1 4.2 10.3

$ 1.9

$

Six months ended June 30 2016 2015 $ 0.4 0.1 0.1 1.7 0.6

$ 0.5 0.1 6.2 19.6

-

-

0.3

66.8 $ 81.6

$ 2.9

66.8 $ 93.5

-

-

$ (1.8)

$$ 1.9

(0.2) (0.4) $ (2.4) $ 79.2

$

-

-

$ (0.7)

(0.1) (0.7) $(0.8) $ 2.1

(0.4) $ (1.1) $ 92.4

19. CONTINGENCIES From time to time, the Company is involved in litigation, investigations, or proceedings related to claims arising in the ordinary course of business. The Company considers its provisions for outstanding and pending legal claims to be adequate. The final outcome with respect to actions outstanding or pending as at June 30, 2016 cannot be predicted with certainty.

20. OTHER DISCLOSURES Statement of Cash flows The net changes in non-cash working capital balances related to operations are as follows: Three months ended June 30 2016 2015 Cash provided by (used in): Accounts receivable Inventories Other assets Accounts payable and accrued liabilities Taxes payable

$ 3.0 (0.6) 0.1 (2.0) 0.7 $ 1.2

43 Second Quarter Report 2016

$ 25.7 (8.2) (2.9) (2.5) $ 12.1

Six months ended June 30 2016 2015 $ 4.0 (3.1) 0.9 0.7 0.7 $ 3.2

$ 35.0 (9.2) (1.1) 0.4 $ 25.1