Reposted from KRN board.


Key Milestone Achievements At Hand

We recently hosted Karnalyte for investor meetings. Developments

not only appear to be advancing well, but even better than our

expectations on several fronts. Karnalyte is one of the few potash

developers near the completion of its permitting and predevelopment

work, and is ready to move to the next phase – mine

construction. We believe the environmental permit could be received

by the end of this year and Karnalyte is in advanced discussions

regarding debt financing and potential strategic partnerships. All

three of these represent potential key achievements in taking the

Company’s Wynyard project to the construction stage. We outline a

summary of the various recent developments here and reiterate our

BUY rating and $20.00 per share target price.

• Development Updates as KRN Nears Next Stage

We continue to believe that KRN is set to become the next potash

producer and will also provide investors with meaningful upside

through its premium potash product and magnesium compound

co-product offerings. KRN also filed a Final Short Form Base

Shelf Prospectus dated October 19, 2012.

• Watch for Key Developments

KRN is approaching key milestones such as the environmental

permit. It is also advancing discussions with potential partners,

which we believe are going hand-in-hand with the environmental

permitting process.

• Reiterate BUY

We believe that KRN’s shares will benefit from achieving any of

the aforementioned objectives (i.e. environmental permit,

potential strategic partnership, debt financing), and we see this as

an opportune time to invest in the Company. Karnalyte continues

to be a best-in-class developer with not only a proven

management team in the potash and chemicals industry, but also

one that possesses various differentiating strengths


Site preparations.


Karnalyte has surface stripped 10 acres of land on its property as a staging area in

preparation for the site’s solution mine, and has already begun to do the same in preparation for the plant

facilities. The Company has also begun some detailed engineering work in planning for construction after hiring

personnel and opening its Saskatoon office in Q3. About $5 million will be spent for these site preparations and

engineering studies, taking Karnalyte’s cash resources of $31.5 million as of June 30, 2012 to about $22-25

million by year end.

Environmental permitting looks near.


Karnalyte’s environmental permitting process is now awaiting the

government’s response to the EIS (Environmental Impact Statement).

This will be the first new greenfield

potash mine to receive an environmental permit in Saskatchewan.


Recall, Karnalyte’s plans are to inject its

tailings solutions back into its solution mine caverns, thus reducing the environmental impact from its

operations and also limiting the surface land occupied by tailings that can otherwise be employed for more

valuable agricultural purposes. We see minimal risk in obtaining an environmental permit as Karnalyte’s

tailings plans appear environmentally better than those of other mines (see a portion of Belle Plaine’s tailings

pile in Exhibit 1). The Wynyard project is located in close proximity to many of the world’s most prolific

potash-producing mines (e.g. 65 km east of PCS Lanigan).

Potential strategic partners.


We believe Karnalyte is at different stages of discussions with various potential

partners and an off-take partnership could emerge. We believe this would be a mutually-beneficial relationship

as many purchasers of potash would benefit from a new supplier outside of the current market oligopoly and

also from Karnalyte’s premium product characteristics while being produced at cash costs that are expected to

be in-line with the industry average. Karnalyte can save on marketing costs since a portion of its production

would already be allocated to this ready buyer.

What is the status of partner discussions?


Karnalyte is in the midst of discussions with various interested offtake

partners, and we believe one or more may be finalized even before the environmental permit is received as

the environmental permit will represent a key milestone confirming that KRN has all permitting in place to

proceed to production. Potential partners are conducting due diligence, and appear to be making parallels

between KRN’s proposed solution mine plan and that of DEUSA’s current long-standing carnallite mine in


Equipment vendors testing KRN’s brine.


Several prospective capital equipment providers have taken brine

samples from KRN to confirm specifications. These dealings are material with some brine samples consisting of

up to 10 tonnes for testing, whereby KRN’s brine is run through the vendors’ own testing operations to

determine exact size and specifications. This will help prepare ready delivery of the equipment when called

upon. Karnalyte’s hardware needs will be large and the Company is working with various industry-leading


Ample cash resources while financing and partnerships pursued.


With more than $20 million in the bank by

year end, Karnalyte has adequate resources to pursue the necessary sources of capital and partnerships for

strategic investment and/or off-take arrangements.

Debt financing.


Karnalyte has been advancing arrangements with debt lenders. About 50-60% of the Wynyard

project could be financed with debt given apparent debt arranger feedback. We are currently modeling 70% of

the project financed by debt.

Final Short Form Base Shelf Prospectus filed.


The Company filed a Final Short Form Base Shelf Prospectus

dated October 19, 2012, after filing a Preliminary Short Form Base Shelf Prospectus on September 7, 2012.

They were filed with the securities commissions of British Columbia, Alberta, Saskatchewan, Manitoba,

Ontario, Nova Scotia, New Brunswick, PEI, Newfoundland, and Labrador, which confirms the acceptance by

the commissions of Karnalyte’s technical reports for the offering of securities. We believe this acceptance helps

de-risk the project.


• Customers and potential partners must be interested in KRN’s offerings. As we have detailed

previously, Karnalyte offers a premium high-purity granular potash product that is preferred by many

agricultural customers for various applications, such as for fertilizer blending, for sodium-sensitive crops,

and better retention in the soil. On the magnesium products side, KRN, through its own innovative process,

can produce a 99%-pure basic magnesium carbonate that could displace competing offerings currently in the


• Magnesium co-products upside. Karnalyte is poised to not just be a potash developer, but also an industrial

chemicals company due to its magnesium compound products. The prefeasibility study estimated an after-tax

NPV (11%) of $261 million, which would increase our NAV for Karnalyte of $1.7B by 15%. Should

financing be secured for KRN’s potash production, a significant barrier to pursuing this business would be

removed and would provide investors access to this value. As this component of KRN de-risks, we would

look to adjust our valuation. Customers are expressing indications of interest after having lab-tested brine

samples from KRN’s property.

• Exceptionally strong management team for a potash developer. We believe the proven engineering

expertise of this management team positions KRN well to bring the mine to production and compete

effectively in the marketplace with incumbent suppliers. Robin Phinney (CEO, 18% shareholder) spent 15

years at PotashCorp in various senior engineering positions. Ron Love (EVP & CFO) has over 16 years of

senior financial management roles and public company experience. Siu Ma (VP Engineering and R&D) from

PotashCorp, spent more than 20 years in potash and potassium chemical engineering and design. Ron

Olchowski (Surface Operations Manager) was at PotashCorp for over 8 years, and has managed and

designed several chemical plants. Mike Robinson (Underground Operations Manager) from Encana has

significant experience in geology and directional drilling in the Prairie Evaporite, where KRN’s deposit

resides. Robert Macgillivray (VP Sales) has over 30 years of experience in agricultural sales and marketing.

• Proven technology and processes. KRN has produced its premium potash granules and its high-purity

magnesium compounds from brine sourced from its mineral deposit. This has also helped prove proper

carnallite dissolution taking place and the brine grades achievable on site. KRN’s feasibility study draws a

parallel to DEUSA’s

existing process in Germany of the Bleicherode/Kehmstedt deposit, supporting KRN’s

process and exempts the need for a pilot plant to prove its technology. Karnalyte’s initial plans for its plant

are being designed according to existing technology. The Company is exploring potential proprietary

improvements that could be implemented in the future once the plant has been commissioned.

• By-product credits could make KRN’s potash production costs lower than the industry. Karnalyte’s

production cash cost per tonne is in-line with other Saskatchewan potash producers at about $130 per tonne.

This excludes any co-product credits from its magnesium compound products.


Karnalyte is the most advanced potash developer with soonest-junior-to-production prospects. With its

advantageous deposit and strong in-house technical expertise, KRN offers investors upside (e.g. magnesium

products) to a best-in-class potash project situated in the best potash-producing region in the world.

We reiterate our BUY rating and $20.00 per share target price.