Alberta’s tiny Karnalyte takes on potash’s global giants – by Pav Jordan (Globe and Mail – January 10, 2013)

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A small Alberta company is readying a deal with a major Asian partner to help finance a potash mine in Saskatchewan, positioning itself to become one of the first new producers of the crop nutrient in Canada in years.

According to sources familiar with the situation, Karnalyte Resources Inc. is expected to ink a $45-million agreement this week that will see the small Okotoks, Alta.-based company sell a 19.98-per-cent stake for $8.15 a share.

The buyer, believed to be either a Chinese or Indian company, has also committed to a subsequent equity injection of $15-million over the next year or so and will buy potash from Karnalyte at market prices for 20 years once production begins.

The dollars involved in the deal are small, but the significance to the industry is great. The deal underscores the growing push by top consumers India and China to distance themselves from Canada’s Canpotex Ltd. and Russia’s BPC, producer groups that have long controlled most of the world’s supply amid strong profits.

Independent producers such as Karnalyte are banking on that trend and are building mines to sell potash directly into those markets. Similarly, BHP Billiton Ltd., the world’s largest diversified miner, is building a $14-billion potash mine in Saskatchewan called Jansen that will be twice the size of any other currently producing mine.

For the Asian buyer, the Karnalyte deal is a chance to tie up a source of potash supply outside the Canpotex/BPC networks.

“They (the buyer) want to be able to lock in a secure source of supply for the future and in order to do that they are willing to put up equity to guarantee that they are going to get the product on a secure basis,” said one source, who spoke on condition of anonymity. “They are putting their money where their mouth is” by buying equity in the company rather than simply agreeing to purchase future production, the source added.

For Karnalyte, which takes its name from the carnallite deposit it plans to develop, the deal will give banks and investors more confidence to back construction of a mine that will require an initial capital outlay of $626-million.

Stock in Karnalyte was halted at $8 a share on Wednesday before the market opened, pending news. The stock has rallied in recent weeks, climbing from $6.17 per share on Dec. 11.

The grip of potash producer groups, accused by some of being cartels, has visibly weakened over the past year as China and India resisted signing new long-term purchase contracts while pushing for better deals.

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