KRN.TO - Karnalyte Resources

[Patmo]

This company is at an inflection point, right between the resolution of a dirty power struggle and the start of development of its prize asset, a potash project in Saskatchewan. The stock is trading at $21mil cap, while the cash in bank net of debt, as of the most current quarter, is $28mil.

 

The key to this investment's success is whether KRN can unlock the value of this asset by financing its initial development, hopefully through debt as it keeps promising, something which the company says could be made possible thanks to the assistance of its strategic partner, an Indian fertilizer company.

 

 

The story is pretty simple at this point, if this financing deal is a go before the company runs out of cash you are probably sitting on a major bagger, otherwise you might as well be waiting in line at dunkin donuts. Anybody willing to roll the dice?

 

Disclosure: I rolled the dice

 

 

 

[Patmo]

To give an approximate idea of the value of this asset IF SUCCESSFUL, using Potash Corp's segment info as a comp and their last 9 months as full year run rate, the 650k tonnes expected annual production from Wynyard would eventually translate into a bit over $90mil EBIT, and trade at a 14 multiple for a 1.3bil EV. Back out the $700mil project financing and you would be looking at a $600mil market cap vs. $20mil currently. This is extremely back of the envelope and somewhat optimistic, but it gives a rough idea of what the asset could be worth.

[bizaro86]

I've owned this in the past for the cash. Potash corp is a bad comp for future ebit, imo, since their mines are underground and they dig it out. That results in higher capex but lower opex. Karnalyte is solution mining, which has lower capex, but higher opex to dissolve and then take the potash out of the brine solution after. Very energy intensive.

 

Anyway, i liked it better when the "dreamer" management was out and I thought I was getting the cash back. Now its probably either a home run or a zero, but you are getting in at a cheap price.

[Patmo]

Karnalyte and GSFC reached an "agreement in principle" on financing for the first phase of construction, expected to yield 625k tons annually. Non-core assets are also being spun off to current KRN shareholders (unexplored land and the magnesium project)

 

http://finance.yahoo.com/news/karnalyte-resources-inc-announces-agreement-130000526.html

 

http://www.canada.com/business/mining/karnalyte+resources+plans+begin+construction+potash+mine+this/11784271/story.html

 

 

[Patmo]

http://www.bnn.ca/Video/player.aspx?vid=829064&hootPostID=ed86415324b39dc8d0a74e948c89f79f

 

I'm surprised there continues to be literally 0 interest in this play on this board... Maybe the ZINC fiasco made investors wary of pre-production resource cos?

 

[bizaro86]

Congrats!

 

One thing that should help them is the economic situation in W. Canada. The building of a solution Potash mine is very similar to various types of oil facilities (especially thermal). As it happens, resources and people who did that are looking for work at lower wages right now. Drilling holes in the ground, putting in hot fluids, and pumping out a different fluid is something W. Canada has gotten pretty good at, and a large percentage of the labour/engineering firms/drilling rigs/mechanical contractors are available and making aggressive bids on anything that comes up.

[Patmo]

Thanks, I'm feeling a little queazy because share price jumped so much based on just an agreement in principle - no signatures yet, no spades in the ground. Today alone jumped 2x my cost basis... It's still a big discount if all goes well though. My plan is to sweat it out until the dotted lines are signed and the spincos are in my account, then revaluate.

 

I hear you on Western Canada situation, I live in Calgary and my brother works for one of the construction co's that would bid for the project - he says he worked on solution mining construction in Saskatchewan before. It was something like a hundred guys working the fields when he started at this company, now apparently it's down to him and the guy who referred him, and they're on "vacation" more often than not. With commodities and $cdn so depressed, it's a great time to build on the cheap.

[Picasso]

Congrats Patmo.  I would have gone in with you but ZINC at $20 and VRX at $250 seemed like much better risk rewards. Maybe I should roll what's left into BTU and this bad boy...

[Patmo]

My suggestion is to create a synthetic option straddle (patent pending). Sell calls on Karnalyte to hedge out the BTU commodity exposure and sell puts on BTU to play on the recent pullback, most likely due to a dirty short attack. Naturally you want to buy BTU calls with that income due to the company's moat. This plan is flawless

[Patmo]

On a more serious note though, there is still plenty of risk in the story before the big payoff can come. The deal could be delayed, fall through, or worse yet get delayed then fall through. Then construction could run into issues, and even if everything goes well till production, the project might not be as economically viable as it appears. Just ask the guys over at the ZINC thread...

 

 

Having that said, I like this situation too much to cut it loose in the first round... It's a cute project selling on the cheap, and run by a battle scarred industry warrior type of guy who has plenty of skin in the game. If this company doesn't succeed, it will be because of factors outside of the company's control in my opinion.

[bizaro86]

Thanks, I'm feeling a little queazy because share price jumped so much based on just an agreement in principle - no signatures yet, no spades in the ground. Today alone jumped 2x my cost basis... It's still a big discount if all goes well though. My plan is to sweat it out until the dotted lines are signed and the spincos are in my account, then revaluate.

 

I hear you on Western Canada situation, I live in Calgary and my brother works for one of the construction co's that would bid for the project - he says he worked on solution mining construction in Saskatchewan before. It was something like a hundred guys working the fields when he started at this company, now apparently it's down to him and the guy who referred him, and they're on "vacation" more often than not. With commodities and $cdn so depressed, it's a great time to build on the cheap.

 

I'm definitely experiencing a bit of seller's remorse here, although selling was probably the right decision for me, mining is not in my circle of competence, I just had it as a cash box.

 

I'm in Calgary as well, (as you can probably tell from my Avatar) and am curious how long it will take before they get building, as prices are probably == costs right now, so I doubt they have much room to go lower.

 

I think this is a great example of market inefficiency as well. They announce on the 14th, stock is up ~50% that day. Then, on no new news, the stock is up nearly 100% on each of the 15th and 16th. Shows how long it takes for good news to get priced in to these juniors. I do think its likely that the price will come off from here as there is unlikely to be any more good news until final signing, so probably no new buyers.

 

Of course, I have no idea what IV is here, since it is highly dependent on how much of the economics KRN's existing shareholders get. (IE terms of debt and amount of dilution)