Karnalyte Resources Inc: Risky Deep Value Play

Karnalyte Resources Inc: Risky Deep Value Play

Karnalyte Resources Inc (TSE:KRN) is engaged in the exploration and development of potash mining projects. The company owns the lease for several prospective projects, all of which are located in Saskatchewan.

Karnalyte Resources Inc (TSE:KRN)’s largest 85 thousand acre project, located near the town of Wynyard, Saskatchewan, is an exploration and early stage pre-development property with a dominant zone of carnallitite and sylvinite (potassium-containing minerals). The Company has secured the surface rights to 260 acres of land for the plant and load-out surface facilities, of which 160 acres is proposed for use as the plant production site. Currently, Karnalyte has a market capitalization of CAD $41.2 million and an average daily volume of 75,112.

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Karnalyte Resources’s outlook

Unfortunately, at the end of July, Karnalyte Resources Inc (TSE:KRN)’s outlook was dented somewhat when Uralkali OAO (LON:URALL) announced that it was going to withdraw from its sales partnership with Belarusian Potash. This move blew open the world’s tightly controlled potash market and sent the shares of potash producers sliding. Karnalyte’s shares dropped nearly 50% on the announcement of the news.

However, good news came days later for Karnalyte Resources Inc (TSE:KRN), when it announced that BNP Paribas SA (EPA:BNP) and Natixis SA (EPA:KN), New York Branch, had agreed to become lead arrangers for the company’s senior secured project finance facility. The banks have given Karnalyte US$300 million to play with. What’s more, Karnalyte also received the go-ahead from environmental bodies regarding elements of its Wynyard facility.

Karnalyte poses many risks

Of course, as with any early stage development company, Karnalyte poses many risks. Still, at current prices the company could offer that ‘deep value’ factor that will mitigate many risk and offer a margin of safety.

Based on fiscal first half results, Karnalyte Resources Inc (TSE:KRN) had a shareholder equity of CAD$114.9 million, which gives an indicative book value of CAD$4.2 per share. Unfortunately, this figure contains CAD$47.3 million of intangible assets, discounting these gives a tangible book value of CAD$2.58 per share. Nonetheless, Karnalyte Resources Inc (TSE:KRN) does have $56.2 million of cash on its balance sheet, worth $2.04 per share. So, on this basis the company is trading below the value of the cash on its balance sheet. Funnily enough, income from this cash balance was the only profitable part of the Karnalyte’s business for the first six months of this year, generating $597,590 in net income.

I should mention that this margin-of-safety cash balance has come from stock issuances during the first half of this year. This is often one of the biggest risks to early-stage development resource companies: they continually issue stock to bolster balance sheets while eroding shareholder equity. Still, Karnalyte has financing in place for development, so the company should require limited funds from shareholders in the future.

Karnalyte Resources could be a lucrative investment

So overall, Karnalyte Resources Inc (TSE:KRN) is a early stage potash mining company with an an uncertain future. However, as the company is currently trading below the value of cash on its balance sheet and some funding is in place for the initial development of the company’s largest project, Karnalyte Resources Inc (TSE:KRN) could turn out to be a lucrative investment.

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