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SASKATOON, SK, June 23, 2021 /CNW/ - Karnalyte Resources Inc.
("Karnalyte" or the "Company") (TSX: KRN) is pleased
to provide an update on its corporate strategic review that was
prepared by MNP LLP (the "Strategic Review Report" or
"Report") as well as other corporate and governance
matters.
Strategic Review
As previously announced, Karnalyte's Board of Directors (the
"Board") initiated the strategic review process to evaluate
a broad range of potential strategic alternatives available to the
Company, including the evaluation of its existing and future
projects, with a focus on determining what is in the best interests
of Karnalyte and maximizing value for all of its shareholders.
Specific matters addressed in the Strategic Review Report
include but are not limited to: a review and analysis of the
Company's proposed nitrogen project; an analysis and market
sounding activities for the Company's potash project; and improving
Karnalyte's financial position.
Nitrogen Project
In the Strategic Review Report, the opportunity of building a
regional nitrogen production facility near Saskatoon, Saskatchewan (the "Nitrogen
Project") was analyzed as one of the options to maximize
shareholder value of Karnalyte.
The Report concluded that the Nitrogen Project could be a
profitable venture, with an estimated average annual cash flow of
US$52 million per year, an IRR of
9.06% and a payback period of under 10 years if all product
produced is sold at expected market values within the production
period. These projections were predicated on the market price
of nitrogen fertilizer, the capital cost of the facilities, labour
costs, costs of raw materials (including natural gas),
transportation and other costs of production all falling within the
levels assumed in the Report. Management notes that there can be no
assurance that such estimates and assumptions will prove to be
accurate. Accordingly, readers should not place undue reliance on
such estimates and assumptions.
While MNP noted that the economics of this project could be
positive, the Report concluded that the Nitrogen Project is high
risk without both an offtake agreement and a joint or independent
capital investment given the current market and competitive
conditions. Management and the Board are considering the various
challenges identified in the Report including market risk and
capital risk and are continuing discussions with multiple
prospective partners to assess interest in an offtake agreement and
capital investment. Further updates will be provided to the market
when appropriate or required as these discussions continue.
GSFC has indicated that, if requested by the Company, they would
support the Nitrogen Project but only as technical advisor at the
planning, design phase, and construction phase, and as initial
operator of the Nitrogen Project facility, to bring GSFC's
significant experience operating nitrogen fertilizer production
facilities to the project. However, GSFC has emphasized that
Karnalyte will require a strategic partner to support the Nitrogen
Project, as GSFC is not in a position to act as lead partner for
the Nitrogen Project.
Wynyard Potash Project
As further development of the Company's potash project (the
"Potash Project") is dependent on improved potash prices,
financing, and other matters, the Strategic Review Report provides
a future economic outlook on the global potash industry and
identifies how a Karnalyte potash facility would compare in the
industry.
While the Strategic Review Report noted that the potash price
has increased in 2021 and that potash demand is expected to grow
linearly year over year through to 2030, the market is expected to
be in a prolonged state of oversupply. This expectation is in part
derived from speculation in the market surrounding new mines coming
online in Belarus and Russia and Canada (BHP Jansen). An oversupply in the
market creates an ongoing structural problem between supply and
demand that will have a less predictable impact on the price of
potash. That said, Management is of the view that recent positive
developments in the industry could result in a shift in this demand
supply balance such that upward pressure on the price will be
realized. The market is showing signs of tightening at the writing
of this press release, with potash prices in North America showing significant increases
from 60 to 100%. Increases globally year over year are near 20% but
expected to be higher during the second half of 2021. Developments
include recent production curtailments as a result of the early
closure by Mosaic of its K1 and K2 shafts at Esterhazy, sanctions that may be imposed on
potash exports from Belarus that
are being discussed in the European Union and news that Nutrien and
BHP are in discussions about partnering on BHP's Jansen project which, if realized would result
in price stability as new production from Jansen is brought on in a disciplined
manner.
The Strategic Review Report noted that the Potash Project would
have a number of advantages that would make the project potentially
attractive to a strategic industry player despite current
conditions:
- Environmental: The mine would not produce tailing piles
or ponds, would require a limited use of fresh water, result in
minimal surface impact and has the possibility of a secondary,
marketable magnesium product.
- Pre-Work & Investment: There has been a significant
amount invested in pre-work and permitting, allowing for shorter
lead time to initiate construction.
- Strategic Partner: Karnalyte has an agreement with its
strategic partner, GSFC, for approximately a 56% off-take over 20
years of the expected production in phase 1 of the Potash
Project.
- Product Quality: The potash at the mine is a
high-quality product that would be produced in a desirable granular
form with the ability to upgrade quality to industrial-use
standards to attract additional demand at a higher margin in the
premium potash market.
The market sounding activities conducted to date have indicated
industry partner interest based on the above factors and others.
Although interest is limited in terms of number of players, it is
indicative that there is additional potential with an aggressive
and well-structured marketing effort.
Offsetting the strategic advantages noted above are the current
unfavorable market conditions including: current potash prices, low
interest level from financial institutions, and limited capacity
from the current shareholder group and the majority shareholder of
Karnalyte to finance the Potash Project. Such unfavourable
conditions could be overcome by attracting another strategic
partner with a strong presence in the industry and a long-term
development vision.
The Board and Management are actively assessing the
recommendations in the Report to continue efforts to seek out and
attract a major industry partner with a sound financial position
and long-term strategic vision to produce and deliver this
high-quality potash product to North American and global markets.
These partnership options could include any or a combination of an
equity offering with which to build out the Potash Project, royalty
financing, debt financing, long-term off-take arrangement or other
strategies. Discussions with a number of potential partners are in
progress.
Improving Karnalyte's Financial Position
The Strategic Review Report also recommended that the Board and
management team transition Karnalyte to a low-cost operation by
developing and implementing a minimum cash flow budget to preserve
available cash for investment in seeking out a strategic industry
partner. Specifically, the report recommended that Karnalyte
investigate alternative sources of funding to extend the
operational runway, monetize existing assets to preserve a
financial and liquidity foundation and maintain the minimum
requirements to sustain an exchange listing.
In response to the recommendations, in the near term, management
intends to investigate alternative sources of funding, divest of
certain assets not essential to the Potash Project, reduce general
and administrative expenses, and potentially move Karnalyte to the
TSX Venture Exchange to reduce the higher regulatory and cost
burdens on the TSX.
Corporate & Governance Matters
The Board remains committed to good governance practices. In
light of the opportunities and risks facing the Company, and in the
interests of strengthening the Board and improving its
independence, the Board has decided to expand its composition to a
board of five (5) directors. In doing so, the Board assessed the
competencies, skills and personal qualities it requires in
directors in order to provide it with the best opportunity to
advance Karnalyte's projects to the next stage of development. The
director nominees set forth in the Company's information circular
dated May 31, 2021 include
individuals with the skills and experience to assist the Company in
advancing its interests.
Danielle Favreau, Interim CEO of
Karnalyte, commented, "Over the coming weeks, our board and
management team will continue to carefully assess the analysis and
recommendations in the Strategic Review Report from MNP LLP.
Although Karnalyte is facing challenges, we are ready to take on
these challenges head on and remain focused on moving this company
forward to create value for all of our shareholders."
ABOUT KARNALYTE RESOURCES INC.
Karnalyte Resources Inc. is a development stage company focused
on two fertilizer products, potash and nitrogen, to be produced and
manufactured in Saskatchewan. Karnalyte owns the Wynyard
Potash Project, with planned phase 1 production of 625,000 tonnes
per year ("TPY") of high-grade granular potash, and two
subsequent phases of 750,000 TPY each, taking total production up
to 2.125 million TPY. Karnalyte is also exploring the development
of the Company's Nitrogen Project, which is a proposed small-scale
nitrogen fertilizer plant with a nameplate production capacity of
approximately 700 metric tonnes per day ("MTPD") of ammonia
and approximately 1,200 MTPD of urea, and a target customer market
of independent fertilizer wholesalers in Central
Saskatchewan.
FORWARD-LOOKING STATEMENTS
Certain information included in this press release is
forward-looking, within the meaning of applicable Canadian
securities laws. Forward-looking information is often, but not
always, identified by the use of words such as "anticipate",
"believe", "could", "estimate", "expect", "plan", "intend",
"forecast", "future", "guidance", "may", "predict", "project",
"should", "strategy", "target", "will" or similar words or phrases
suggesting future outcomes or language suggesting an outlook.
The forward-looking statements contained in this press release
are based on certain key expectations and assumptions made by
Karnalyte, including, without limitation, assumptions as to:
projected economics for the Company's planned Potash Project, the
confirmation in an independent feasibility study of Karnalyte's
assumptions regarding the technical and economic viability of the
Nitrogen Project, the ability of Karnalyte to obtain financing on
terms favourable to the Company, and the ability of Karnalyte to
receive, in a timely manner, the necessary approvals from the
Board, shareholders, regulatory authorities, and other third
parties.
Karnalyte believes the expectations and assumptions upon which
the forward-looking information is based are reasonable. However,
no assurance can be given that these assumptions and expectations
will prove to be correct. Accordingly, readers should not place
undue reliance on the forward-looking statements and information
contained in this press release. Without limiting the generality of
the foregoing, readers are cautioned that the Company has not
received a feasibility study prepared by a third party with respect
to the Nitrogen Project.
Actual results may vary from the forward-looking information
presented in this press release, and such variations could be
material. Risk factors and uncertainties could cause actual results
to vary from the forward-looking information in this press release.
Additional information on forward-looking statements and other
factors that could affect Karnalyte's operations and financial
results are included in documents on file with Canadian securities
regulatory authorities and may be accessed through the Company's
profile on the SEDAR website (www.sedar.com).
These forward-looking statements are made as of the date hereof
and are expressly qualified in their entirety by this cautionary
statement. Subject to applicable securities laws, the Company
assumes no obligation to update or revise them to reflect new
events or circumstances.
SOURCE Karnalyte Resources Inc.