Approximately half of all known reserves (worldwide) are located in Saskatchewan.
In today’s chapter we look back to the last decade for guidance as it relates to M&A activity and valuation.
Becoming a Potash miner has been a long-time coming for BHP. The world’s largest miner’s early expression of interest and entry into Saskatchewan dates back to around 2008, with their Jansen Project. In 2010 BHP further entrenched itself into Saskatchewan’s rich Potash real estate market (for the long-term) by acquiring Athabasca Potash, which held land adjacent to Jansen, for $341 million.
All-in, BHP has spent $4 billion advancing Potash projects in Saskatchewan thus far. It’ll take another $5 billion and 5 years for BHP to finally become a producer.
Germany’s fertilizer producer K+S bought Potash One for $434 million, joining a rush for scale in an industry that will play a crucial role in feeding the world, Reuters reported during November 2010.
Potash One’s Legacy project (now called Bethune) is a solution mining process, same as Karnalyte (KRN, TSX) is envisioned to be. Bethune began producing in 2017, following an investment of $4 billion.
Let’s not forget – the Canadian government blocked a $39 billion hostile bid by BHP, for Potash Corp. (also in 2010).
So Saskatchewan is the land of large long-term investments. Most of the world’s largest Potash producers are represented in Saskatchewan (and those who aren’t probably desire to be). During the last bull cycle 2 development stage assets were acquired for a combined $775 million.
With Potash prices firmly back into bullish territory, and the prospects of 30% to 40% of world production being off the market (or perceived to be tainted by Russian interests), do you think global producers might be shopping for a deal?
Where better to look than Saskatchewan, and the price is right for Karnalyte’s Wynyard Project.
Trading 84 cents, their market cap is a meagre $35 million, 90% less than what was paid for either Athabasca or Potash One. Size and scale of those is comparable to what Karnalyte’s got.
Compared to what else is available on the market today (only 2 others I see), KRN has the cleanest share structure and it’s the largest in terms of reserves and mine life. Plus Karnalyte already has the prospect of development cost sharing built-into its equity structure. Seemingly, having financed the project to date and holding an off-take agreement for about half of annual production, Gujarat would want to hang on to Wynyard in some capacity – Gujarat would prefer to finance Wynyard with a partner, you’d think, and their plan was for this to be a direct source of supply to India (independent from Canpotex).
Remember, back in 2016 there was an agreement in principle for $700 million in financing for Phase I.
If terms were floated before, in a much more bearish environment, you’d think it could happen again. Gujarat is also in a much stronger financial position with its stock making new all-time highs.
The news alone, just the potential for concluding a project financing, would put KRN into another space (dollars per share).
Volume has been dwindling as KRN works its way down (gradually) toward its 50 dma, 73 cents. 75 cents was the key breakout point early last month, so there’s huge support there. Consider some stink bids.
Verde Agritech (NPK, TSX), the other relative strength leader along with KRN, is showing the same pattern.
Given we’re still in the early innings of this Potash bull run, odds should favor a continuation of this bullish trend. After going down for 10 years, aside from a brief spike to $4 on the $700 million financing news in 2016, KRN has only being going up for about 6months.
Potash stocks are in short supply and money flows into the industry are increasing.
Talk and the reality of food shortages (and rising food prices) will remain headline news, as will the crucial role fertilizers and Potash plays in growing food.
At some point things will cool down. Hopefully sooner rather than later. However the facts of Potash and it being a depleting resource will remain the same. Majors like Nutrien, Mosaic, and BHP aren’t running out of Potash – they are all aiming to grow production actually for years to come. Some worry this could place a damper on Potash prices down the road. And that wouldn’t be a bad thing.
Rather than sign up for that class or macroeconomics of the Potash industry, I’m just signing up for the class teaching how Karnalyte is valued 90% below that paid for comparable Potash projects last decade. To me it just seems like someone would want to snatch it off the market for pennies on the dollar while they can. In the process the acquirer gains a large land package and a 70+ year reserve in Saskatchewan. Only a few parcels are remaining, in the world’s best place to own Potash real estate.
Phase I financing would set the stage for bigger paydays than Karnalyte getting acquired.
Wynyard is located 42 km (or a 27-minute drive) east of BHP‘s Jansen Project.
Finally I’ll just note Karnalyte also has its 100%-owned Proteos Nitrogen Project, so a differentiating factor in having Nitrogen as another lever to possibly pull on.