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Globe Investor Alberta’s tiny Karnalyte takes on potash’s global giants

The future mine site for Karnalyte near Wynard, Sask., is shown in an Oct. 29, 2012, file photo. The Alberta company’s recent deal underscores the growing push by top consumers India and China to distance themselves from Canada’s Canpotex Ltd. and Russia’s BPC.

DAVID STOBBE/The Globe and Mail

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.

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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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China finally signed a new contract with Canpotex in recent weeks, but only after agreeing to pay $70 less for each tonne of potash compared with a deal reached in March. Negotiations with India continue.

Potash is a crop nutrient that helps strengthen plant stalks and roots, making them more resistant to drought and disease and also improving yield, flavour, texture and the colour of plants.

Karnalyte plans to be a full potash miner by 2015, when it aims to be producing some 625,000 tonnes of the nutrient in pellet and powder form from its Wynyard, Sask. mine.

Construction is due to start late in the first quarter or early in the second quarter, pending a favourable environmental impact assessment from the provincial government.

An increasing number of independent companies are racing to become potash producers, many of them seeking so-called off-take agreements with major consumers and distributors in top markets like India, China and Brazil.

Germany's K+S AG, a key potash supplier to the European market, broke ground in June on the $3.25-billion Legacy project near Moose Jaw that could be in production by 2017, when it plans to start producing 2 million tonnes of potash a year.

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Canpotex, controlled by Potash Corp., Mosaic Co. and Agrium Inc., exported some 10 million tonnes of potash to markets in Australia, Brazil, China, India, Indonesia, Japan, Malaysia and South Korea in 2011.

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