In March I bought Calvalley Petroleum (TSX: T.CVI.A, Stock Forum) (94 cents) in the low sixties. An oil producer in Yemen (of all places) but sitting on a giant bank account worth almost $90 million. The Yemen assets were discounted to zero and the cash was trading at a discount of forty percent.
I was fortunate to make almost 50% in a month when they decided to take the company private and pay out the majority of their cash.
That same premise of speculating on deeply discounted cash (and distressed assets) applies here with Karnalyte.
I have no idea "when" a person could make money with Karnalyte but the odds are very good (from this level) that an investor "will" make money **.
So long as any cash rich company controls their burn rate, it simply boils down to speculating on a large bank account at a large discount. It doesn't "always" work, but it does work the large majority of the time.
Karnalyte Resources Inc. (TSX: T.KRN, Stock Forum) (75 cents)
www.karnalyte.com
1) Attractive share structure with only 27.5 million shares out
2) Net cash of approx. $37 Million = $1.35 per share *
* To the end of December the company reported $40.8 million in cash and $1.7 million in debt which actually gives them net cash close to $39 million or $1.42 per share. However, they will have incurred admin costs in Q1 and some termination fees in Q2 so I believe it's reasonable to use $37 million net as we head into summer.
Karnalyte had an uneconomic potash project in Saskatchewan and I have been ignoring them even with the discounted cash because I was worried they would turn that project into a money pit. April 13th they announced they would take a $59 million write-down on the project.
While existing shareholders cringed, this was the type of news I was looking for. A solid commitment to admit when you are wrong (commodity environment beyond their control), preserve the cash, and move ahead to rebuild shareholder value OR liquidate the company and pay back the cash to shareholders.
This Story gets more “complicated” though...
December 10th a former CEO, large shareholder, and original founder of KRN (Robin Phinney) surfaced with a dissident shareholder group seeking to oust the current CEO and board.
You can Google some Karnalyte news if you wish to review this public “gong-show” but I am not going to get into their public pi$$ing match here.
Oddly this works to our benefit because the existing management and board cannot sit around doing nothing - as many with large bank accounts do. They will be under extreme pressure to rebuild shareholder value OR liquidate the company like Calvalley did and pay out the cash.
One of the two dogs in this fight is going to emerge victorious – I am hoping it is the existing management team and board of directors.
On April 15th, the former CEO filed a press release saying he had the support of Gujarat State Fertilizers and Chemicals Ltd. (GSFC) who own 5.5 million shares or 20% of the company. The former CEO claims that with the support of GSFC, they influence control over 59%.
https://www.gsfclimited.com/
What I don’t understand – if GSFC (being a fairly large company in India) is that interested in saving this project, then why don’t they just take over the company themselves ? They could pay up to $1.35 per share (cash value) and get the potash project for nothing.
OR if GSFC thinks this is such a great project in Wynyard, Saskatchewan, why don’t they pay a decent price to Karnalyte for it? KRN can then add that money to their existing large bank account and find a new use for it OR liquidate the company entirely and pay out $1.35 + per share.
Personally I think GSFC wants to remain a minority partner so “someone else” can pay to hold onto the project until such time as it might become more economic. That could be a VERY long time. All that scenario does is drain money away from Karnalyte and there is little doubt the existing CEO and directors recognized that.
We are ONLY concerned with the cash and what they do to rebuild shareholder value using that money. If the old CEO came back into the picture to influence control, I would drop KRN like a hot potato. He would likely burn through all the cash in hopes of trying to salvage a project that isn’t worth salvaging (at least for a small company).
You can bet both sides will be gearing up for a fight ahead of their early summer AGM in Saskatoon, Saskatchewan (which I hope to attend). In the interim, the existing CEO and board will need to get their butt in gear to justify what their next plan is.
From my perspective, I am only interested in speculating on grossly discounted cash in the $0.70’s – this is almost half the net cash value. It might take some time tucking this one away and watching the fight from the sidelines, but in theory it should be an attractive low risk speculation from this level.
Liquidity seems tight at times but it has been trading decent volume in the 0.70’s. I am hoping that trend continues as old shareholders sell out of frustration.
RELEVANT NEWS FROM APRIL 13TH
Wynyard project
>>> After completing its impairment review, the corporation has recorded a non-cash impairment expense of $59.1-million related to the Wynyard project. The Wynyard project is now carried on the corporation's balance sheet at approximately $4.0-million, an amount which reflects its salvage value.
>>> The board of directors has therefore determined to suspend all activity in relation to the Wynyard project, other than the minimum required to maintain title to the project, secure the site on a care-and-maintenance basis and otherwise preserve intact the Wynyard project. The corporation intends to review whether there is any possibility of finding a buyer for the Wynyard project or whether it can be otherwise disposed of on reasonable terms.
>>> As a consequence of the decision to suspend activity at the Wynyard project, the corporation has determined to close its project office in Saskatchewan. The employment of a number of employees there and in Calgary has also been terminated. The corporation is actively seeking to further reduce its overhead costs and burn rate, and other cost-savings initiatives have been undertaken. As a consequence of these actions, the corporation's continuing overhead costs have been significantly reduced.
>>> As indicated in previous press releases, the board of directors of the corporation continues to evaluate alternative opportunities to enhance shareholder value.
IMPORTANT NOTE on KRN RISK and the AGM: **
(IF) the former CEO and the company from India gain control of Karnalyte following their AGM, I will drop coverage immediately and subsequently work on selling off the position. I have little doubt this group would DESTROY shareholder value and burn through the company's large bank account. The project in Saskatchewan is a waste of time and money. If GSFC of India want it so bad, KRN should sell it to them for $5 million and let the former founder and CEO run that separate company for GSFC. Wasting Karnalyte’s cash on this project would be a giant mistake.
KRN needs to take a page from the Calvalley Petroleum play book.
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Disclosure: Danny Deadlock owns 30,000 shares of KRN
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