Karnalyte lands Indian investor for Wynyard potash

Karnalyte Resources (KRN-T) is getting a much-needed financial boost in its drive to develop its wholly owned Wynyard potash project located outside the township of Wynyard, Sask. India’s publicly traded Gujarat State Fertilizers & Chemicals has decided to invest $45 million in the Okotoks, Alberta-based junior.

Karnalyte had been sizing up its options since a planned $115-million, bought-deal financing collapsed in November 2011. 
According to the company’s feasibility study, Wynyard could be developed in two phases. The first would carry a $600-million price tag and produce around 625,000 tonnes of pellet and powder potash per year, starting in 2015.

Karnalyte could boost annual production to 2.13 million tonnes by Wynyard’s sixth year of operation. This upgrade would cost $2 billion in capital expenditures, and carry an after-tax net present value of $1.7 billion and a 21.4% internal rate of return at a 10% discount rate.

Under the investment agreement, Gujarat would purchase a 20% equity stake in Karnalyte for $45 million, or $8.15 per share. A 20-year offtake arrangement is included, whereby Gujarat would buy 350,000 tonnes per year of potash from Wynyard’s first-stage operation, and 600,000 tonnes per year when Karnalyte completes its expansion plan.

“The [strategic investment] and the offtake agreement will support Karnalyte’s growth strategy of constructing its potash production facility and commercializing a superior product,” president and CEO Robin Phinney says. “This investment by [Gujarat] is a milestone for [our company], and establishes Karnalyte as a leader among the new class of potash developers. We are confident that [this development] will be instrumental in the project’s future success.”

Gujarat has reportedly been searching for an independent potash supplier for the past three years. Managing director Atanu Chakraborty says that the partnership is important because of India’s full dependence on potash imports, adding that Karnaltye was ahead of other Canadian junior developers in terms of project advancement.

The agreement is conditional on Karnalyte securing approval of Wynyard’s environmental impact statement by May 2013. The company expects to finish a public comment period in late January, with full approval following closely behind.

Gujarat has committed to contribute an additional $15 million in a subsequent round of public financing and holds a first right to maintain its 20% equity position in Karnalyte.

During a conference call, Phinney stated the partnership would be instrumental in securing full debt financing for the first stage of Wynyard’s development.

Wynyard hosts reserves of 786 million tonnes at 22.4% potassium chloride for 155 million contained tonnes, which translates to a mine life that exceeds 70 years. Karnalyte expects it will maintain a lower operating cost of $127 per tonne due to its solution-mining methods, and could fund a portion of its second-stage development plan from cash flow.

Karnalyte’s shares have been on a run over the past weeks. Since December, its share price has jumped 27%, or $1.70, en route to an $8.47 close at press time.

The company has room to manoeuvre financially, with only 21.8 million shares outstanding for a $185-million press-time market capitalization.

The initial $45-million investment from Gujarat will create further dilution to the tune of 5.5 million shares, and is expected to close by the end of February.