Reposted from KRN board.
Key Milestone Achievements At Hand
We recently hosted Karnalyte for investor meetings. Developments
not only appear to be advancing well, but even better than our
expectations on several fronts. Karnalyte is one of the few potash
developers near the completion of its permitting and predevelopment
work, and is ready to move to the next phase – mine
construction. We believe the environmental permit could be received
by the end of this year and Karnalyte is in advanced discussions
regarding debt financing and potential strategic partnerships. All
three of these represent potential key achievements in taking the
Company’s Wynyard project to the construction stage. We outline a
summary of the various recent developments here and reiterate our
BUY rating and $20.00 per share target price.
• Development Updates as KRN Nears Next Stage
We continue to believe that KRN is set to become the next potash
producer and will also provide investors with meaningful upside
through its premium potash product and magnesium compound
co-product offerings. KRN also filed a Final Short Form Base
Shelf Prospectus dated October 19, 2012.
• Watch for Key Developments
KRN is approaching key milestones such as the environmental
permit. It is also advancing discussions with potential partners,
which we believe are going hand-in-hand with the environmental
permitting process.
• Reiterate BUY
We believe that KRN’s shares will benefit from achieving any of
the aforementioned objectives (i.e. environmental permit,
potential strategic partnership, debt financing), and we see this as
an opportune time to invest in the Company. Karnalyte continues
to be a best-in-class developer with not only a proven
management team in the potash and chemicals industry, but also
one that possesses various differentiating strengths
DEVELOPMENT UPDATES
Site preparations.
Karnalyte has surface stripped 10 acres of land on its property as a staging area in
preparation for the site’s solution mine, and has already begun to do the same in preparation for the plant
facilities. The Company has also begun some detailed engineering work in planning for construction after hiring
personnel and opening its Saskatoon office in Q3. About $5 million will be spent for these site preparations and
engineering studies, taking Karnalyte’s cash resources of $31.5 million as of June 30, 2012 to about $22-25
million by year end.
Environmental permitting looks near.
Karnalyte’s environmental permitting process is now awaiting the
government’s response to the EIS (Environmental Impact Statement).
This will be the first new greenfield
potash mine to receive an environmental permit in Saskatchewan.
Recall, Karnalyte’s plans are to inject its
tailings solutions back into its solution mine caverns, thus reducing the environmental impact from its
operations and also limiting the surface land occupied by tailings that can otherwise be employed for more
valuable agricultural purposes. We see minimal risk in obtaining an environmental permit as Karnalyte’s
tailings plans appear environmentally better than those of other mines (see a portion of Belle Plaine’s tailings
pile in Exhibit 1). The Wynyard project is located in close proximity to many of the world’s most prolific
potash-producing mines (e.g. 65 km east of PCS Lanigan).
Potential strategic partners.
We believe Karnalyte is at different stages of discussions with various potential
partners and an off-take partnership could emerge. We believe this would be a mutually-beneficial relationship
as many purchasers of potash would benefit from a new supplier outside of the current market oligopoly and
also from Karnalyte’s premium product characteristics while being produced at cash costs that are expected to
be in-line with the industry average. Karnalyte can save on marketing costs since a portion of its production
would already be allocated to this ready buyer.
What is the status of partner discussions?
Karnalyte is in the midst of discussions with various interested offtake
partners, and we believe one or more may be finalized even before the environmental permit is received as
the environmental permit will represent a key milestone confirming that KRN has all permitting in place to
proceed to production. Potential partners are conducting due diligence, and appear to be making parallels
between KRN’s proposed solution mine plan and that of DEUSA’s current long-standing carnallite mine in
Germany.
Equipment vendors testing KRN’s brine.
Several prospective capital equipment providers have taken brine
samples from KRN to confirm specifications. These dealings are material with some brine samples consisting of
up to 10 tonnes for testing, whereby KRN’s brine is run through the vendors’ own testing operations to
determine exact size and specifications. This will help prepare ready delivery of the equipment when called
upon. Karnalyte’s hardware needs will be large and the Company is working with various industry-leading
suppliers.
Ample cash resources while financing and partnerships pursued.
With more than $20 million in the bank by
year end, Karnalyte has adequate resources to pursue the necessary sources of capital and partnerships for
strategic investment and/or off-take arrangements.
Debt financing.
Karnalyte has been advancing arrangements with debt lenders. About 50-60% of the Wynyard
project could be financed with debt given apparent debt arranger feedback. We are currently modeling 70% of
the project financed by debt.
Final Short Form Base Shelf Prospectus filed.
The Company filed a Final Short Form Base Shelf Prospectus
dated October 19, 2012, after filing a Preliminary Short Form Base Shelf Prospectus on September 7, 2012.
They were filed with the securities commissions of British Columbia, Alberta, Saskatchewan, Manitoba,
Ontario, Nova Scotia, New Brunswick, PEI, Newfoundland, and Labrador, which confirms the acceptance by
the commissions of Karnalyte’s technical reports for the offering of securities. We believe this acceptance helps
de-risk the project.
REITERATING KARNALYTE’S DIFFERENTIATING STRENGTHS
• Customers and potential partners must be interested in KRN’s offerings. As we have detailed
previously, Karnalyte offers a premium high-purity granular potash product that is preferred by many
agricultural customers for various applications, such as for fertilizer blending, for sodium-sensitive crops,
and better retention in the soil. On the magnesium products side, KRN, through its own innovative process,
can produce a 99%-pure basic magnesium carbonate that could displace competing offerings currently in the
market.
• Magnesium co-products upside. Karnalyte is poised to not just be a potash developer, but also an industrial
chemicals company due to its magnesium compound products. The prefeasibility study estimated an after-tax
NPV (11%) of $261 million, which would increase our NAV for Karnalyte of $1.7B by 15%. Should
financing be secured for KRN’s potash production, a significant barrier to pursuing this business would be
removed and would provide investors access to this value. As this component of KRN de-risks, we would
look to adjust our valuation. Customers are expressing indications of interest after having lab-tested brine
samples from KRN’s property.
• Exceptionally strong management team for a potash developer. We believe the proven engineering
expertise of this management team positions KRN well to bring the mine to production and compete
effectively in the marketplace with incumbent suppliers. Robin Phinney (CEO, 18% shareholder) spent 15
years at PotashCorp in various senior engineering positions. Ron Love (EVP & CFO) has over 16 years of
senior financial management roles and public company experience. Siu Ma (VP Engineering and R&D) from
PotashCorp, spent more than 20 years in potash and potassium chemical engineering and design. Ron
Olchowski (Surface Operations Manager) was at PotashCorp for over 8 years, and has managed and
designed several chemical plants. Mike Robinson (Underground Operations Manager) from Encana has
significant experience in geology and directional drilling in the Prairie Evaporite, where KRN’s deposit
resides. Robert Macgillivray (VP Sales) has over 30 years of experience in agricultural sales and marketing.
• Proven technology and processes. KRN has produced its premium potash granules and its high-purity
magnesium compounds from brine sourced from its mineral deposit. This has also helped prove proper
carnallite dissolution taking place and the brine grades achievable on site. KRN’s feasibility study draws a
parallel to DEUSA’s
existing process in Germany of the Bleicherode/Kehmstedt deposit, supporting KRN’s
process and exempts the need for a pilot plant to prove its technology. Karnalyte’s initial plans for its plant
are being designed according to existing technology. The Company is exploring potential proprietary
improvements that could be implemented in the future once the plant has been commissioned.
• By-product credits could make KRN’s potash production costs lower than the industry. Karnalyte’s
production cash cost per tonne is in-line with other Saskatchewan potash producers at about $130 per tonne.
This excludes any co-product credits from its magnesium compound products.
CONCLUSION
Karnalyte is the most advanced potash developer with soonest-junior-to-production prospects. With its
advantageous deposit and strong in-house technical expertise, KRN offers investors upside (e.g. magnesium
products) to a best-in-class potash project situated in the best potash-producing region in the world.
We reiterate our BUY rating and $20.00 per share target price.