Karnalyte receives positive Feasibility Study & 43-101 Technical Report

REPORT CONFIRMS STRONG ECONOMIC AND TECHNICAL VIABILITY OF WYNYARD CARNALITE PROJECT

(all dollar figures expressed in Canadian Dollars)

CALGARY, Oct. 24, 2011 /CNW/ - Karnalyte Resources Inc. ("Karnalyte" or the "Corporation") (TSX: KRN) today announced that it has received a positive Feasibility Study ("FS") for its 100% owned Wynyard Carnallite Project (the "Project"), portions of which are included within a National Instrument 43-101 ("NI 43-101") technical report on the Project's reserves and resources (the "Technical Report"). The FS was prepared by Foster Wheeler Canada Limited ("Foster Wheeler") and ERCOSPLAN Ingenieurgesellschaft Geotechnik und Bergbau mbH ("ERCOSPLAN"), and provides for an initial facility with annual capacity of 625,000 tonnes per year ("tpy") of potash product ("KCl"), increasing to 2.125 million tpy, in two additional phases over a five to six year period.  Based on the Technical Report, 144 million tonnes of potash product may be extracted and produced from the Project's reserves at 97% KCl and 90% plant efficiency, which suggests a project life of 68 years at a production rate of 2.125 million tpy.  Construction of the initial facility is slated to begin in early 2012, with production targeted for early 2014.

"The reclassification of our potash resources to reserves and the receipt of this positive feasibility study are pivotal events for Karnalyte," said Robin Phinney, President and CEO of Karnalyte. "We believe our staged approach to construction reduces project risk by shortening the timeline to production and lowering the upfront capital commitment.  We believe this strategy will be successful in developing the first potash mine in Saskatchewan since the 1970s."

The Karnalyte property is located approximately 175 kilometers east of Saskatoon and 175 kilometers north of Regina and is immediately adjacent to the Town of Wynyard on its southwest side. The Project consists of Subsurface Mineral Permit KP 360A comprising 68,301 acres as well as exploration lease KSLA 010 comprising 16,825 acres of Crown mineral lands.

Key Highlights of FS and Technical Report:

  • Development capital expenditure ("CAPEX") for the initial 625,000 tpy plant is estimated at $593 million with annual operating expenses ("OPEX") of $133 per tonne KCl.
  • Development CAPEX for the full 2.125 million tpy operation is estimated at $1,973 million (inclusive of the initial $593 million), with OPEX of $129 per tonne KCl.
  • Annual sustaining CAPEX is forecast to begin in the fifth year of production and to ramp up to approximately $22.8 million annually in the ninth year of production.
  • Estimated after-tax Internal Rate of Return ("IRR") of approximately 22%.
  • Estimated after-tax Net Present Value ("NPV") using a 10% discount rate of $1,866 million for the 2.125 million tpy operation.
  • KCl that can be mined from the Proven Reserves is 62.9 million tonnes
  • KCl that can be mined from the Probable Reserves is 92.0 million tonnes

The economic analysis for the proposed facility was based on the following assumptions:

  • 100% equity case.
  • A 60 year planned production life.
  • Estimated construction costs of $593 million include $46 million in contingency and escalation allowances for the 625,000 tpy facility.
  • Estimated construction costs of $1,973 million (inclusive of the initial $593 million) include $228 million in contingency and escalation allowances for the 2.125 million tpy facility.
  • A closure provision at the end of the planned mine life of 10% of development CAPEX.
  • Estimated operating costs of $45 per tonne KCl for transportation and marketing, and $5 per tonne KCl for general administration costs.
  • Potash price of $471 per tonne KCl based on the average long-term price for muriate of potash ("MOP") granular free on board ("FOB") bulk Vancouver from a consensus of equity research analysts from August 2011. The price per tonne has been adjusted annually for inflation.

Summary of Economic Analysis

Based on the foregoing assumptions, the Project yields an estimated full equity base case after-tax IRR of approximately 22% and an after-tax NPV estimate of $1,866 million at a discount rate of 10%The following table evaluates sensitivities based on a reduction in potash price, increase in OPEX, increase in CAPEX and a decrease in planned production.  The most significant factor that could impact the economic viability of the Project would be falling potash prices.

Sensitivity Table

  NPV ($ millions) IRR (%)
Base Discounted Cash Flow Model 1,866 21.9
10% Decrease in Product Prices 1,312 18.7
15% Increase in OPEX 1,606 20.5
15% Increase in CAPEX 1,690 19.6
10% Decrease in Sales Volume (planned production) 1,386 19.1

The following tables provide an estimate for CAPEX and OPEX costs.  The cost estimate for the 625,000 tpy plant is at a ±15% while the estimate for the expansion to the 2.125 million tpy plant has been made with an accuracy of ±25%.

Estimated Development CAPEX

    625K Facility
($000s)
2.125 M Facility
($000s)
Estimated Direct Costs 427,990 1,500,301
Estimated Indirect Costs (EPCM and Field Indirects) 59,377 148,462
Subtotal  - Direct + Indirects 487,367 1,648,762
Other Costs
PST Tax
Miscellaneous
Escalation  
Contingency
Owner Costs  
 
11,411
1,761
18,674
26,873
46,986
 
30,487
5,692
133,666
93,886
60,997
Subtotal - Other Costs 105,705 324,728
TOTAL ESTIMATED COST
CAPEX PER TONNE OF CAPACITY
593,072
948.92
1,973,490
928.70

Note: A conversion rate of $1.04 USD to $1.00 CAD was used in the estimate.

Estimated Annual (OPEX)

Description 625K Facility
($ millions)/yr
Per Tonne KCl
($/tonne)
2.125 M Facility
($ millions)/yr
Per Tonne KCl
($/tonne)
Personnel 6.84 10.95 16.22 7.63
Natural Gas 29.37 46.99 99.85 46.99
Electricity 9.70 15.53 32.99 15.53
Brine Field Expansion 20.70 33.12 70.38 33.12
Maintenance & Spare Parts 7.83 12.54 26.64 12.54
Blanket Oil Replacement 3.99 6.38 13.57 6.38
Other 4.61 7.36 14.90 7.01
Total OPEX 83.04 132.87 274.55 129.20

Summary of Reserve and Resource Update

Based on the Technical Report, 144 million tonnes of potash product can be extracted and produced from the Project's reserves at 97% KCl and 90% plant efficiency, which suggests a project life of 68 years at a production rate of 2.125 million tpy.

The Technical Report has reclassified most of the "Measured Resources" and "Indicated Resources" to "Proven Reserves" and "Probable Reserves".  These resource areas have been reduced by the definition of technical exclusion areas where mining should not take place to avoid problems at the surface due to potential subsidence.  Proven Reserves have been estimated by placing caverns over the license area in grid as defined by the mining method. For each drill hole, a typical cavern recovery of mineralized material at a given grade has been estimated. This amount has been reduced by 10% to account for any anomalies below the 3D seismic resolution. Reserves were estimated by calculating the number of caverns in the Measured and Indicated Resource areas for each drill hole and multiplying by the typical cavern recovery.  The results for Proven and Probable Reserves are as follows:

Proven Reserves Mineralized Material
(million tonnes)
Average KCl Grade
(% KCl)
Mineable KCl Tonnage
(million tonnes)
Total Average Carnallitite 261.6 18.7 49.0
Total Average Sylvinite 52.7 26.3 13.9
Total 314.3   62.9

Probable Reserves Mineralized Material
(million tonnes)
Average KCl Grade
(% KCl)
Mineable KCl Tonnage
(million tonnes)
Total Average Carnallitite 416.0 18.5 77.0
Total Average Sylvinite 58.3 25.8 15.0
Total 474.3   92.0

In addition to the Mineral Reserves, the Technical Report provides an estimate of the "Inferred Resources".  It cannot be assumed that all or any part of the Inferred Resources will be upgraded to an Indicated or Measured Resources due to additional exploration.  Inferred Resources have not been considered in the FS as they are considered too geologically speculative.

Inferred Resources Mineralized Material
(million tonnes)
Average KCl Grade
(% KCl)
Mineable KCl Tonnage
(million tonnes)
Total Average Carnallitite 1320 13.8 50.2
Total Average Sylvinite 298 17.8 15.9
Total 1618   66.1

For estimation of Proven and Probable Reserves, a cutoff grade of 20% KCl was used in the sylvinite Esterhazy Member and a cutoff grade of 15% KCl was used in the carnallitite Belle Plaine and Patience Lake potash Members, with exclusion of halite layers over 0.5m thickness. For the Inferred Resources a cutoff grade of 15% KCl was used in the sylvinite Esterhazy Member and a cutoff grade of 15% KCl was used in the carnallitite Belle Plaine and Patience Lake potash Members, without excluding Halite layers. A radius of influence from cored drill holes of 1.0 km and 2.2 km were used for the Measured and Indicated Resource areas, respectively, to estimate Proven and Probable Reserves within the Project covered by 3D seismic and 1.0 km and 1.6 km were used for the Measured and Indicated Resource areas, respectively, to estimate Proven and Probable Reserves within the Property without 3D seismic coverage. A radius of influence from cored drill holes of up to 6km was used for the Inferred resource areas.

Summary of Recommendations

The authors of the Technical Report recommend continuing with the Project and taking the following steps:

  • Complete value engineering for the Project;
  • Obtain environmental approval;
  • Begin detailed engineering and advance it to a point where equipment packages can be awarded;
  • Perform detailed engineering to support preparation of the construction license application.

The costs for this stage are estimated at $30 - 40 million and these costs are included in the development CAPEX of approximately $593 million for the 625,000 tpy plant.

Additionally, project financing (approximately $593 million) has to be secured.

A further recommendation of a Pilot Testing Facility at an additional cost of $2 - 3 million is made in order to obtain detailed operational experience for the future brine field and provide the proper controls of production brine composition.

Technical Report and Qualified Person

A copy of the Technical Report has been filed on SEDAR at www.sedar.com titled "Reserve and Resource Estimate for the Wynyard Carnallite Project, Subsurface Mineral Permit KP 360A and Subsurface Mineral Lease KLSA 010, Saskatchewan, Canada" effective October 21, 2011. The principal author of the Technical Report is Dr. Henry Rauche EurGeol, of ERCOSPLAN. Further authors are Dr. Sebastiaan N.G.C. van der Klauw, EurGeol of ERCOSPLAN, and Ms. Lola Piché P. Geo. of North Rim Exploration Ltd. The authors are Qualified Persons under NI 43-101 and have reviewed the scientific and technical information contained in this news release relating to the Technical Report.

The feasibility study was prepared under the supervision of Messrs Arun Balakrishnan, M.B.A., P. Eng. and Paul Rogers, P.Eng., of Foster Wheeler Canada Limited and Dr. Sebastiaan N. G. C. van der Klauw of ERCOSPLAN. Messrs Balakrishnan, Rogers, and, Dr. van der Klauw are Qualified Persons under NI 43-101 and are independent of Karnalyte. Messrs Balakrishnan, Rogers and Dr. van der Klauw have reviewed and are responsible for the technical information contained in this news release and have verified all the data disclosed in this news release relating to the feasibility study.

About ERCOSPLAN

ERCOSPLAN is a private engineering company with more than half a century of experience in the potash and mineral salt industries. The Company employs 125 engineers, scientists, technicians, economists and computer experts. ERCOSPLAN offers a wide variety of services with expertise in both conventional and solution mining; mineral salt exploration, evaluation, extraction and processing; and environmental sustainability of resource mines and processing plants.

About Foster Wheeler

Foster Wheeler is an subsidiary of Foster Wheeler AG, which is a global engineering and construction contractor and power equipment supplier delivering technically advanced, reliable facilities and equipment. The company employs approximately 13,000 talented professionals with specialized expertise dedicated to serving its clients through one of its two primary business groups. The company's Global Engineering and Construction Group designs, engineers and constructs leading-edge processing facilities and related infrastructure for the upstream oil & gas, LNG and gas-to-liquids, refining, chemicals & petrochemicals, pharmaceuticals, biotechnology & healthcare, mining & metals, environmental and power industries. The company's Global Power Group is a world leader in combustion and steam generation technology that designs, manufactures and erects steam generating and auxiliary equipment for power stations and industrial facilities and also provides a wide range of aftermarket services. The company is based in Zug, Switzerland, and its operational headquarters office is in Geneva, Switzerland. For more information about Foster Wheeler, please visit http://www.fwc.com.

About Karnalyte Resources Inc.

Karnalyte is engaged in the business of exploration and development of high quality agricultural and industrial potash and magnesium products.  Karnalyte intends to develop and extract a carnallite - sylvite mineral deposit through a known solution mining process at competitive costs and with minimal environmental impact.  Using a staged approache to potash plant construction, the Corporation plans to operate a solution mining facility that will initially produce 625,000 tonnes of potash per year, increasing to 2.125 million tonnes of potash per year. Karnalyte owns a 100% interest in Subsurface Permit KP 360A and Subsurface Mineral Lease KLSA-010 located near Wynyard, Saskatchewan, comprising a total of 85,126 acres.

Reader Advisory

This press release contains forward-looking statements. More particularly, this press release contains statements concerning the Corporation's future operations, reserves and resources. The forward-looking statements contained in this document are based on certain key expectations and assumptions made by Karnalyte, including with respect to the Corporation's future operations. Although Karnalyte believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because Karnalyte can give no assurance that they will prove to be correct. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, the failure to obtain necessary regulatory approvals, including environmental approval, the failure to secure full project financing, the failure to implement the recommendations set out in the Technical Report, the failure to raise financing to implement the recommendations in the Technical Report, risks associated with the mining industry in general (e.g., operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of estimates and projections relating to production, reserves and resources, costs and expenses; and health, safety and environmental risks), decrease in potash prices and exchange rate fluctuations. The forward-looking statements contained in this document are made as of the date hereof and Karnalyte undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.  Mineral resources that are not mineral reserves do not have demonstrated economic viability.

SOURCE Karnalyte Resources Inc.

For further information:

Robin Phinney, President & Chief Executive Officer
Ron Love, Chief Financial Officer & Vice-President Finance
Julius Brinkman, Vice-President Corporate Development
Telephone: (403) 995-6560
E-mail: info@karnalyte.com
Website: www.karnalyte.com


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