Karnalyte Resources gets started on a $600 million project

1 of 3Panoramic view of wellsite testing. — Photo courtesy Karnalyte Resources

2 of 3Disposal wellhead at SW16-32-16 W2. — Photo courtesy Karnalyte Resources

3 of 3Second water well, SE21-32-16 W2. — Photo courtesy Karnalyte Resources

Karnalyte Resources is in the business of development and production of premium potash and magnesium products. This is big news for Wynyard, Saskatchewan, where the company has found, according to its president, the biggest deposit of potash on the planet.

Karnalyte intends to develop and extract a carnallite-sylvite mineral deposit through a known solution mining process at competitive costs and with minimal environmental impact. Using a staged approached to potash plant construction, the company plans to operate a solution mining facility that will initially produce 625,000 tonnes of potash per year, increasing to 2.125 million tonnes of potash per year.

Karnalyte's president and CEO, Robin Phinney, started his career in mining working on base metal purification at Vale Inco in Thompson, Manitoba, and Kidd Creek Mines in Timmins, Ontario. Phinney subsequently held various engineering positions through his 15 years at Potash Corp.

Phinney co-founded Whitemud Resources Inc., a mining and manufacturing company listed on the TSX Venture, where he developed a new process to produce quality metakaolin for the concrete industry from Saskatchewan ores. Phinney founded Karnalyte to explore the development of the carnallite resource in the Karnalyte Property. He holds 39 patents and has developed patent-pending technology that is anticipated to produce high quality fertilizer products.

"I initially found out there was going to be a nice market for mag oxide," said Phinney. "I remembered from working with Potash Corp that the Wynyard area was a high magnesium area. I found a market for 200,000 tonnes of mag oxide for oil well cement, thinking it would be a cool process. I would just do a 200,000 tonne plant and be happy and look after the cement world.

"I went to the look at the property, which was the only one available since no one wanted it. At that time, BHP and the rest of the guys in Saskatchewan had bought up all the potash leases and this is the only one nobody wanted because it was a high magnesium area. I got the property after paying only $28,000 for it from the government."

Phinney's luck continued when he found out there were two previous drill cores on the property, according to the Saskatchewan government. Phinney went and checked it out and sure enough the two dill cores were perfectly preserved. One drill core is worth about $1.3 million, so this saved him a lot of money.

After completing the first assays, Phinney said he believes he has the biggest find of potash on the planet.

"The ore seams are really thick compared to what the potash industry currently has," he said. "Overall we got about 45 metres of really high-grade pay."

After he got the assays back, in 2007-2008, Phinney couldn't believe what he had. He spent another million dollars to do a seismic. Soon after, he got friends and family together at a dollar per share and in three to four hours raised five million dollars.

"I was so exhilarated that day, it was amazing," he said. "I used the five million to complete the two wells and did a resource estimate so we could go to the Bank of Montreal. We are the only guys who have ever come to the Bank of Montreal as a junior. They funded us and helped us from day one through to where we are today. We are happy we were able to inspire them to take us on."

Not too long after, Phinney wanted to take the company to the public market, but the economy and the market went bad in 2008 and Phinney and his team became the only guys, according to him, to raise $15 million privately with the help of the Bank of Montreal. They used the money to complete engineering projects, put down a couple more drill cores and a water well. Their resource inventory moved up to about 56 million tonnes of proven and probable and in 2010, they went public. They altogether raised $64 million and ended up with proven and probable inventory of 156 million tonnes.

Fast forward to today. On September 19, 2013, the company announced that after years of hard work the Saskatchewan Ministry of Environment met an additional condition of the Wynyard Carnallite Project's Environmental Impact Statement (EIS) dated February 7, 2013, enabling the company to proceed to the construction permitting phase of the project.

"Meeting this condition of the Wynyard Carnallite Project's EIS enables Karnalyte to pursue the permits required for plant construction, and is thus a major milestone for both the project and the corporation," said Phinney. "Karnalyte remains committed to advancing the project towards construction, commissioning and production. Our unique mineral deposit will produce a premium-quality potash product with an attractive economic profile, and supports the opportunity to produce and market magnesium products as a second product line."

When asked when the project will go into construction, Phinney said that will be up to both money and the potash markets.

"Currently on our balance sheet, we have about $50 million in the kitty," he said. "I have no major capital to burn except for employees. This will be a $600 million project. We are about $250 million from kicking the project over. We just need the potash prices to come back up."

In addition to receiving EIS approval from Saskatchewan and meeting all conditions of the EIS, Karnalyte has made significant progress in the development of the Wynyard project, including:

• Receiving a positive bankable feasibility study confirming economic viability of the project, with:

• Development capital expenditure (CAPEX) for the initial 625,000 tonne per year (tpy) plant estimated at $593 million with annual operating expenses (OPEX) of $129.12 per tonne potassium chloride,
• Development CAPEX for the full 2.125 million tpy operation estimated at $2,002 million (inclusive of the initial $593 million), with OPEX of $125.45 per tonne potassium chloride;

• Receiving a positive preliminary pre-feasibility study providing for a magnesium product facility (contingent upon the development of the 625,000 tpy potash facility), with an annual capacity of 100,000 tpy of magnesium chloride (MgCl2) brine at 32 per cent concentration and 104,000 tpy of hydromagnesite at 99 per cent purity;

• Entering into a strategic investment and off-take agreement with GSFC, where GSFC has agreed to purchase approximately 350,000 tpy of potash from Phase 1 of the project, increasing to 600,000 tpy with the commencement of Phase 2, at prevailing market prices;

• Engaging BNP Paribas and Natixis, New York Branch, on an exclusive basis, to act as lead arrangers for a senior secured project finance facility of up to U.S. $300 million

• Selecting Whiting Equipment Canada Inc. as its major equipment supplier;

• Advancing surface and underground detailed engineering; and

• Progressing site preparation activities at the future production facility site.

"The way I look at it, we have a basic construction window of two years for each phase," said Phinney. "We will have a man camp structure for engineering and construction for about 300 to 350 people. As the plant goes up, operations for each phase will require about 75 to 90 full-time positions in order to keep production going and look after sales and marketing. We will look to hire locally first and then go beyond that."