Karnalyte snags $300 million

The last six months have been very kind to Karnalyte Resources (KRN-T) and its massive Wynyard carnallite potash project in Saskatchewan.

In January it landed a strategic investment and off-take agreement from Indian agribusiness company Gujarat State Fertilizers & Chemicals. In February Wynyard’s environmental impact statement was approved by the Saskatchewan Ministry of the Environment. And at the end of last week, management announced that it had nailed down a US$300 million project finance facility underwritten by BNP Paribas and Natixis.

The net proceeds from the debt facility, together with funds received from Gujarat State Fertilizers and Chemicals earlier this year for its 20% stake in the Alberta-based junior, means Karnalyte now has almost 60% of the capital it needs to build the project. The remainder of the funds, about $250 million, will be raised either through an equity raise if the capital markets improve, or through further project financing, president and chief executive Robin Phinney says in an interview.

Phinney says the project financing “gives a lot of comfort to major investors.”

“The banks are really tough when it comes down to doing due diligence, so it is a fairly significant milestone,” he adds. “It took about eight months to get there so it is a major achievement…The banks we engaged to underwrite the debt are extremely supportive of our project and this is a huge advantage for us to have such well recognized banks as part of our project.”

The Wynyard deposit, about 175 km east of Saskatoon and 175 km north of Regina, will be developed in two phases. In Phase 1, the mine and the solution mining facility is targeted to start operating in 2015 at a rate of 625,000 tonnes per year of potassium chloride (KCL). In year five or six, production will then ramp up to 2.13 million tonnes of KCL.

The project will be built modularly with all equipment coming from North America. Capex for the initial 625,000 tonne-per-year facility will be $626 million with opex of $129 per tonne. Capex for the 2.13 million tonne-per-year stage will be $2 billion with opex of $125 per tonne.

A feasibility study completed in 2011 envisioned a 60-year production life based on proven reserves of 62.9 million tonnes of KCL and probable reserves of 92 million tonnes KCL. The study also outlined an after-tax net present value of $1.7 billion at a discount rate of 10% and an after-tax internal rate of return of 21.4%. Free cash flow in Phase I alone is estimated to reach $100 million.

These numbers don’t include the project’s potential to eventually produce magnesium co-products, which are worth more than the potash, Phinney says, and are likely to be developed as another business line as the project evolves. (Magnesium compounds made from magnesium chloride are used in a number of applications including as raw materials for steel and cement industry refractories, fire extinguishing chemicals, and as additives or fillers in plastics, paper and paint.)

A prefeasibility study for the production of magnesium compounds released in July 2012 demonstrated  that a facility could be built to produce 100,000 tonnes a year of magnesium chloride brine with a 32% magnesium chloride concentration and 104,000 tonnes per year of hydromagnesite, a form of basic magnesium carbonate, at a purity rate of over 99%.   

“This is the only potash deposit that could have two major production lines coming from the same deposit,” Phinney says. “For every tonne of potash I can get a tonne of hydromagnesite. The reason why this works for us is the grade for the brine that comes out of the ground. We have no sulfate impurities or calcite impurities, so all we can make is hydrate.”

As for the potash potential at Wynyard, Phinney says, the bankable feasibility study was based on only 20% of the property package and the remaining 80% has yet to be explored. “The deposit is so enormous, the resource is unbelievable,” he says. “When I first saw the drill core four and a half years ago and saw the size of the intervals, I couldn’t believe it. And the crystals in the lower zone are three inches by three inches thick…when you see crystals three inches thick, you know this thing had a lot of time to grow.”

Phinney compares the seam width of forty metres to the height of a sixteen-storey office building, adding that it is all continuous, except for one relatively small salt seam.  “And that’s only in our top two zones, the lower third zone is equally as big and we haven’t been given the full extent of it yet.”

The chief executive, an engineer who started his career in mining working on base metal purification at Vale Inco in Thomson, and held various engineering positions through fifteen years at Potash Corporation of Saskatchewan (POT-T, POT-N) before co-founding Whitemud Resources in 2003 and subsequently founding Karnalyte Resources, says the 40-metre interval demonstrates uniform assays, which “gives us a huge competitive advantage in the industry.”

Another reason why the project is exciting, he says, is that the ore body allows Karnalyte to “do things that the rest of the industry just can’t do, and that’s why our capex is so low.” For instance, the deposit, which starts from a vertical depth of about 960 metres, is covered by a thick rock cap (to a depth of between 800 and 960 metres). The thickness of the rock cap allows the company to carve out caverns of about 100 metres by 170 metres that be can used to extract the potash and also serve as areas to dispose of the salt, so there is no need for tailings ponds at surface.

As for infrastructure, Phinney says, it couldn’t get much better. The project is about half a kilometre south of Highway 16 near Wynyard, and is close to existing rail. “We get to use the entire industry’s infrastructure and it doesn’t cost us anything,” he enthuses. “This is the richest, highest grade potash deposit ever found on the planet…it’s the most amazing project I’ve ever seen in my life.”

At presstime Karnalyte Resources was trading at $7.00 per share within a 52-week range of $4.85-9.65 per share. The company has about 27.5 million shares outstanding.