Last week I covered Karnalyte Resources, as at first glance, the company appeared to offer deep value. In particular, the company’s cash balance is currently worth $2.04 per share, 33% above current levels.
All in all, Karnalyte Resources Inc (TSE:KRN) looked like an interesting play to me. So, I did some further research on the company in an attempt to try and figure out what the future held for the company, and if there are any negatives that investors should be aware of.
Indeed, we know that Karnalyte already had cash of $51.5 million as of the end of the third quarter. But, as with any early stage resource company, Karnalyte Resources Inc (TSE:KRN) is likely to burn through this cash and more as it develops its project.
A side note: the cash balance was built up from a non-brokered private placing.
According to Karnalyte Resources Inc (TSE:KRN)’s feasibility study, the initial development CAPEX for first stage of the company’s mineral extraction and production plant is estimated to cost $593 million, which will give the company a production capacity of 625,000 tonnes per year. Development costs for the company’s larger, 2.125 million tonne per year plant, the end goal, is expected to cost a total of $2 billion including the initial plant development.
Karnalyte will need additional financing
With only $51.5 million in cash as well as financing in place for an additional $300 million, it would appear that Karnalyte is going to have to seek additional financing.
Still, the company has, for the most part prepared itself to begin development ASAP. Specifically, Karnalyte Resources Inc (TSE:KRN) has already drilled and tested two of its planned wells, started consultations over the construction of the plant with a contractor and received clearance form environment and government bodies to go ahead with the project.
Nonetheless, the biggest risk facing Karnalyte Resources Inc (TSE:KRN) is the volatility in the global potash market. As I briefly covered last week, the global potash market remains in trouble after Uralkali OAO (LON:URALL), one of the worlds largest potash producers, announced that they were going to start marketing their product outside of their agreement with the Belaruskali potash cartel, effectively blowing apart the carefully controlled potash market.
As a result, potash prices collapsed (so did Karnalyte’s stock price) and Karnalyte’s management believes that potash prices will remain under pressure for some time. Karnalyte Resources Inc (TSE:KRN)’s management has therefore take the decision to cease operations until favorable conditions return within the market for potash and further financing becomes available.
Potash uncertainty may be clearing up
Having said all of that, according to the Financial Times, the price war and collapse in potash prices sparked by the Uralkali OAO (LON:URALL) move may soon be coming to an end. According to the paper, many greenfield projects such like Karnalyte Resources Inc (TSE:KRN) currently has under development, require the price of potash to be above $450 per ton to be profitable. Currently, the price of potash is bouncing around the $300 to $350 level, which means that many new entrants are unprofitable. Prices at these levels are also castrating the profits of larger producers.
In addition, according to the Financial Times, there could be a ‘demand side’ problem in the industry, leading to the conclusion that the numerous new potash projects currently under development (now stalled) would only exacerbate oversupply when they came online. So, perhaps in the long-term lower prices are a good thing.
Still, there are signs that this war may be coming to an end as Russian fertilizer producer, Uralchem recently announced that it was taking a 20% stake in Uralkali. Uralchem and Uralkali are not competitors and each manufacture a different fertilizer ingredient. A change of management here to could lead to Uralkali re-joining the Belaruskali cartel stabilizing potash prices. Certainly, it is in all parties interests to see the price of Potash return to profitable levels.
So overall, despite the deep value on offer Karnalyte Resources Inc (TSE:KRN)’s future lies in the hands of the Eastern Europe potash industry.
>Rupert owns shares in Karnalyte.