VANCOUVER — Alberta-based Karnalyte Resources (KRN-T) received a financial boost in its drive to develop its wholly-owned Wynyard potash project — located outside the township of Wynyard, Saskatchewan — when India’s publicly-traded Gujarat State Fertilisers & Chemicals elected to make a strategic investment in the Canadian company to the tune of $45 million.
Karnalyte has 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 will be developed in two phases.
A first stage would carry a price tag of roughly $600 million and produce around 625,000 tonnes of potash in pellet and powder form annually starting in 2015. Karnalyte has a plan in place to boost annual production to 2.13 million tonnes by Wynyard's sixth year of operation. The upgrade would cost $2 billion in capital expenditures and carry an after-tax net present value of $1.7 billion, with a 21.4% internal rate of return at a 10% discount rate.
Under terms of the investment agreement, Gujarat will purchase a 20% equity stake in Karnalyte for $45 million, or $8.15 per share. Also included is a 20-year off-take arrangement where Gujarat will buy roughly 350,000 tonnes per year of potash from Wynyard's first-stage operation, with that quantity jumping to 600,000 tonnes per year when Karnalyte completes its expansion plan.
"The [strategic investment] and the off-take agreement will support Karnalyte's growth strategy of constructing its potash production facility and commercializing a superior product," said president and CEO Robin Phinney. "This investment by [Gujarat] is a significant 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 future success of the project."
Gujarat had reportedly been searching for an independent potash supplier for the past three years. Managing Director Atanu Chakraborty stated that the partnership is significant due to India's full dependence on potash imports, explaining 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 a public comment period to finish up in late January, with full approval following closely behind.
Gujarat has committed to contributing 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 of over 70 years. Karnalyte wagers it will maintain a lower operating cost of around $127 per tonne due to its solution mining methods and could feasibly fund a portion of its second stage development plan from cash flow.
Karnalyte has been on a run over the past four weeks, with its share price jumping 27% or $1.70 since early December en route to an $8.47 close at the time of writing. The company has room to maneuver financially with 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 roughly 5.5 million shares and is expected to close by the end of February.
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