Wednesday, 4 December 2013

Karnalyte Resources Inc (TSX:KRN) $1.38

Karnalyte Resources is a junior with a development ready potash project in Saskatchewan. That description accounts for the company's current low price, as the potash industry has been recently rocked. Events include the breakup of a Russian/Belorussian cartel that culminated in the arrest of one of the CEOs involved, subsidies in India for non-potash fertilizer hurting demand, and huge layoffs at existing producing mines as the current producers try to support the price by reducing supply. The potash producing companies enjoyed super-normal profits in the 2006-2008 timeframe as they kept the price propped up through their cartels, but that has now come home to roost, as prices have come well down from their peaks. Additionally, players throughout the industry expanded supply capacity during the high price periods, and much of that capacity is now idle, which will likely mute future price gains.

Karnalyte had approximately $52 million of cash on its balance sheet, against $2.5 million of liabilities, leaving a net current asset value (NCAV) for the company of $49.5 million. With a current market capitalization of $37.9 million, the company is trading at 76% of NCAV. When the company reported its Q3 2013 results it indicated the following "the Company does not expect to spend further material amounts on Capital or Intangible Assets until further financing is available."

Thus, we should expect to see a minimal cash burn until either the potash space improves enough to make the project feasible or the company is liquidated for its cash by either management or an activist/competitor.

Disclosure: Long KRN

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