Analyst Actions: Fraser Mackenzie Bullish on Karnalyte

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Fraser Mackenzie has released an analyst report on Karnalyte, with the company's stock as its "Top Pick." It said:

"This morning, Karnalyte announced the Saskatchewan Ministry of Environment (MOE) has approved the Environmental Impact Statement ( EIS ) for Karnalyte's Wynyard Carnallite Project. EIS approval is essential to the advancement of the project, and was a condition of the $45 million strategic investment by Gujarat State Fertilizer and Chemicals (GSFC) previously announced in January 2013. The company is now in a stronger position as they actively pursue additional funding opportunities to enable the start of Phase I of the Project's construction in the second quarter of this year. Karnalyte will now focus on obtaining the permits required to initiate construction while continuing detailed engineering activities and finalizing site preparation.

"We expect the company will be moving forward on arranging funding for the development. Development capex for the project is US$2 billion to get to 2.125 million tpa of production with a Phase 1 requirement of around US$600 million. While the company will attempt to maximize the debt component, we assume a base case for debt being half of the CAPEX requirement which leaves a balance of $300 million equity which plausibly could largely be financed from cash ($29 million), this GSFC investment ($45 million), GSFC maintaining its pro-rata interest (say $45 million), possibly a second strategic investor (say $45 million) and existing leading institutional holders leaving a balance of less than $100 million to be raised from additional sources.

"We reiterate our bullish stance on KRN which we believe to be the world’s most attractive potash play to have surpassed the BFS stage. The project boasts exceptional merits including a prime location (Saskatchewan), a high quality potash product, a low cost profile (most notably low CAPEX) and a high after-tax IRR (21.4%). The project has material upside beyond this study including substantial optimization (potential to materially reduce OPEX) and co-product opportunities (a magnesium PFS shows a $262 million after-tax NPV = or $11/share).

"Overall, we view this as a positive step in further advancing the project. We continue to recommend KRN as our Top Pick and maintain our C$16.00 target price. We base our target on a 0.5x multiple against our $28.47 per share NAV calculation using a 13% discount rate and adding $1.86 per fully diluted share of net cash (on a fully diluted basis). We foresee large upside beyond our target as the company moves into production and ramps up to a 2.125 million tpa operation while possibly adding a secondary product line (magnesium). We believe the cash flow from an operation of that magnitude is supportive of a stock price eventually near $100 per share."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Commodities

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