KARNALYTE RESOURCES INC. KARNALYTE.COM
TSX: KRN
TABLE OF CONTENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS................................................................................... 3
2023-Year in Review .............................................................................................. 3
Nitrogen-The Proteos Nitrogen Project ........................................................................ 4
Related Party Transactions ....................................................................................... 11
Restrictions on Disposition of the Potash Project ............................................................. 11
CRITICAL ACCOUNTING ESTIMATES ............................................................................................ 12
Stage of Development ............................................................................................. 12
Intangible Assets and Property, Plant and Equipment ........................................................ 12
Decommissioning Provisions ...................................................................................... 13
Share-Based Payments ............................................................................................ 13
Contingent Liabilities ............................................................................................. 13
FINANCIAL RISK FACTORS ........................................................................................................ 13
Credit Risk .......................................................................................................... 13
Liquidity Risk and going concern ................................................................................ 14
Market Risk ......................................................................................................... 14
Currency Risk ....................................................................................................... 14
Interest Rate Risk .................................................................................................. 14
INTERNAL CONTROLS ............................................................................................................. 15
Disclosure Controls and Procedures ............................................................................. 15
Internal Controls over Financial Reporting (ICFR) ............................................................. 15
OFF BALANCE SHEET ARRANGEMENTS ........................................................................................ 16
OUTSTANDING SHARES ........................................................................................................... 16
FORWARD-LOOKING INFORMATION ............................................................................................ 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") is intended to provide a summary of the operational and financial results of Karnalyte Resources Inc. ("Karnalyte" or the "Company") for the year ended December 31, 2023 and 2022. This MD&A should be read in conjunction with the audited financial statements of the Company and the related notes thereto for the year ended December 31, 2023. This commentary is dated March 21, 2024. The financial statements have been prepared in accordance with IFRS Accounting Standards ("IFRS") as issued by the International Accounting Standards Board. These documents, the annual information form dated March 21, 2024 (the "Annual Information Form"), and additional information about the Company are available on SEDAR+ atwww.sedarplus.ca. Some of the statements made herein contain forward-looking information and accordingly please refer to the "Forward-Looking Information" section at the end of the MD&A.
OVERVIEW
GENERAL OVERVIEW
Karnalyte was incorporated under the Business Corporations Act (Alberta) on November 16, 2007 and is a Saskatchewan-headquartered company focused on the development of potash and magnesium operations in Saskatchewan. The Company's potash project in Wynyard, Saskatchewan (the "Potash Project") is a proposed 2.125 million tonnes per year ("TPY") potash mine utilizing conventional solution mining methods for potash production, with a vision of ultimately becoming the next greenfield, environmentally innovative mine. The Company proposes that the Potash Project, key to Karnalyte's goal of becoming a low-cost, sustainable producer of high-quality product, be developed in three phases using a modular approach, with a first phase ("Phase I") consisting of a production facility capable of producing 625,000 TPY of potash, increasing to 1,375,000 TPY of potash in the second phase, and ultimately to 2,125,000 TPY of potash in the third phase. Also under consideration is the secondary magnesium compounds, on Canada's critical minerals list.
2023 - YEAR IN REVIEW
In 2023, Karnalyte continued work on the update to its NI 43-101 Compliant Technical Report including additional work to identify cost efficiencies, optimize construction and operation plans and enhance project sustainability.
POTASH PROJECT
Market Update - The market conditions for potash softened in 2023 but remain positive. While capacity in Russia and Belarus following the Russian invasion of Ukraine are returning to normal, new projects in this region are still expected to face significant delays as compared to pre-sanction timelines. And in the long-term, demand is expected to stay strong especially for Canadian potash as continued geopolitical uncertainty makes the Saskatchewan region an attractive supply jurisdiction.
UPDATE TO THE NATIONAL INSTRUMENT 43-101 COMPLIANT TECHNICAL REPORT
In January of 2022, the Company announced the appointment of Wood PLC ("Wood"), a leading global consulting and engineering company, as lead author of an update to its NI 43-101 compliant technical report
("Technical Report" or "Report"). Wood was appointed after a significant improvement in the market conditions for potash which began in 2021 and continued through 2022.
Karnalyte has made diligent progress on this important step toward construction of its Wynyard Potash Project, despite unforeseen challenges that have resulted in delays.
There has been significant growth in Western Canada's economic activity over the past two years, and this, in conjunction with supply chain constraints impacting suppliers worldwide is, among other factors, causing delays to the update to the Technical Report. In conjunction with the update Karnalyte is also investigating certain capital cost efficiencies, opportunities to enhance sustainability and working towards getting more comfort on the assumptions used given the current market and economic conditions. In furtherance of these efforts, in the second quarter Karnalyte tasked Wood PLC with undertaking additional evaluation of costs savings related to the compaction, drilling and insulation areas of the potash operation. Significant progress was made during this evaluation during the last half of the year and to date. Karnalyte will provide a further update as appropriate once the Technical Report is finalized.
"Karnalyte continues to focus on advancing the update to the NI 43-101 Compliant Technical Report and has continued making steady progress, despite challenges the mining industry is facing beyond our control and the Company's desire to move forward in a responsible way." said Danielle Favreau, interim Chief Executive Officer of Karnalyte. "The Company remains committed to following best practices as we work through this critical step, which will serve as a strong foundation for our Wynyard Potash Project."
To date, Karnalyte has achieved a number of key milestones in relation to the update to the Report. This includes engaging industry leading solution mining and engineering firm ERCOSPLAN ingenieurgesellschaft Geotechnik und Bergbau mbH ("ERCOSPLAN"), which provided Karnalyte with a positive review of core samples, and confirmation from Saskatchewan's Ministry of Environment that Karnalyte's previous Environmental Impact Study approval from 2013 remains valid.
NITROGEN - THE PROTEOS NITROGEN PROJECT
The Proteos Nitrogen Project remains under consideration as part of Karnalyte's future and may diversify our business by adding a second fertilizer product line. The Proteos Nitrogen Project is a proposed regional-scale nitrogen fertilizer plant to be located in central Saskatchewan, with a nameplate capacity of 700 metric tonnes per day ("MTPD") ammonia and 1,200 MTPD urea. Our primary target market is local, independent wholesalers within a ~400-kilometre radius of Saskatoon, Saskatchewan, with a secondary target market of Midwest USA wholesalers near the Canadian border. There were no significant developments to report on this project in 2023.
INVESTOR RELATIONS
In February of 2024, the Company retained IR Labs, a leading investor relations firm in Canada to provide investor relations services. Danielle Favreau, Karnalyte's Chief Executive Officer stated, "We are pleased to retain IR Labs as part of our strategy to increase business development activities and enhance communication with investors - both existing investors and outreach aimed at growing our shareholder base. Our strategy includes engaging in investor webinars and other events with a goal to communicate the strength of Karnalyte and its projects and to outline the opportunities for growth to potential investors."
OUTLOOK FOR 2024
In 2024, the Company plans to complete the update to its NI 43-101 technical report, to continue to work on identifying cost efficiencies, optimizing construction and operation plans, and enhancing project sustainability. Furthermore, the Company plans to increase business development activities to seek out and attract investment and strategic partners to move one or both Company's projects forward to development.
SELECTED ANNUAL INFORMATION
The information has been summarized from the Company's audited financial statements.
Selected annual results
(CAD $ thousands)
Year ended December 31
2023 | 2022 | 2021 | |
Total revenue | - | - | - |
Interest and other income | 133 | 62 | 19 |
Net and comprehensive loss | (1,422) | (1,728) | (2,193) |
Basic and diluted per share | (0.03) | (0.04) | (0.05) |
Total current assets | 2,716 | 4,209 | 2,498 |
Total assets | 8,378 | 9,883 | 8,393 |
Total current liabilities | 572 | 628 | 884 |
Total liabilities | 1,891 | 2,006 | 2,630 |
Total shareholders' equity | 6,487 | 7,877 | 5,763 |
During the year ended December 31, 2023, the Company's focus was on updating the NI 43-101 compliant technical report.
During the year ended December 31, 2022, the Company's focus was on updating the NI 43-101 compliant technical report, successfully raising capital through the Rights Offering and the preparation of an ESG strategy report.
RESULTS OF OPERATIONS
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") costs for the year ended December 31, 2023 amounted to $1,228,000 which is a decrease of $111,000 from the comparative 2022 amount.
The key components of the G&A costs are as follows:
Salaries, wages and benefits
Business development, investor relations, regulatory fees Accounting and legal
Consulting
Directors Fees Office and general
315
355
Total general and administrative
1,228
1,339
Salaries, wages and benefits for the year ended December 31, 2023 were $258,000 compared to $257,000 in 2022 which is an increase of $1,000. The Company currently does not have plans to significantly increase the number of full-time equivalent employees.
Business development, investor relations and regulatory fees for the year ended December 31, 2023 amounted to $62,000 compared to $101,000 for the year ended December 31, 2022, which is a decrease of $39,000 largely relating to a SEDAR filing fee reduction in 2023 and website and brand update efforts in 2022.
Accounting and legal expenses for the year ended December 31, 2023 were $217,000 compared to $246,000 in the comparative year which is a decrease of $29,000. In 2023, there was a reduction in accounting quarterly review costs and legal costs as the originating application filed by Messrs. Peter Matson and Gregory George Szabo was settled in the second quarter of 2023 and the statement of claim filed by Mr. Dan Brown was settled in the fourth quarter of 2022. An insurance reimbursement was received in both 2023 and 2022 related to these matters, which partially offset the legal expenses in the respective periods.
Consulting expenses for the year ended December 31, 2023 amounted to $141,000 compared to $143,000 in 2022, which is a decrease of $2,000. Expenses in this category are largely due to a consulting contract with the interim CFO. In the third quarter of 2023, an Executive Assistant was contracted by the Company.
Director fees for the year ended December 31, 2023 amounted to $235,000 compared to $237,000 for the 2022 comparative year, representing a decrease of $2,000. The number of directors remains unchanged at five.
Office and general expenses for the year ended December 31, 2023 amounted to $315,000 compared to $355,000 for the comparative year representing a decrease of $40,000. The majority of this decrease is due to capitalizing certain subscriptions required for the NI 43-101 compliant technical report update in 2023.
OTHER COSTS IMPACTING COMPREHENSIVE LOSS
Depreciation for the year ended December 31, 2023 was $12,000 compared to $13,000 in 2022.
Share-based compensation expense for the year ended December 31, 2023 was $32,000 compared to $38,000 in the 2022 comparative year. Share-based compensation expenses in the first three quarters of 2022 related to the 460,000 stock options granted in July 2020. In November 2021, 300,000 stock options were granted and also contributed to the share-based compensation expense for the entire 2022 and 2023 years. In August 2023, 380,000 stock options were granted and resulted in share-based compensation expenses in the third and fourth quarters of 2023. These expenses are all non-cash in nature and stock options are expensed over a two-year vesting period using a declining balance method. During the year 2023, 245,000 options expired and 75,000 options were cancelled.
Impairment expenses for the year ended December 31, 2023 were $546,000 compared to the year ending December 31, 2022 of $1,029,000. In 2014, previous management determined assets with a carrying amount of $63,165,000 were no longer recoverable. At December 31, 2023, the Company determined that those impairment indicators continue to exist. Therefore, the incremental expenditures incurred on intangible and mine development assets in 2023 were determined not to impact the previously determined recoverable amount. For additional information, refer to the notes to the financial statements dated December 31, 2015 available on SEDAR+ atwww.sedarplus.ca.
Other income for the year ended December 31, 2023 was $307,000 compared to $607,000 in the 2022 comparative year. While there is some rental income in this category from leasing the Company's land holdings to local Wynyard area farmers, the majority of the decrease relates to a $103,000 recovery recorded as a result of a change in estimate of the Company's decommissioning liability, as compared to the $406,000 recovery recorded in 2022.
Gain on disposal of mineral properties and intangible assets for the year ended December 31, 2023 was $nil compared to $66,000 in the 2022 comparative year. During the second quarter of 2022, the Company disposed of a mineral properties and intangible asset for net proceeds of $275,000 which had a net book value of $209,000 at the time of sale.
Net finance income for the year ended December 31, 2022 was $89,000 compared to $18,000 in the 2022 comparative year. The amounts recorded as net finance income are mostly the result of the amount of cash and cash equivalents that the Company is holding at a given time and the corresponding interest income the cash and cash equivalents generates. Interest income increased by $71,000 from 2022 to 2023 as a result of the Company's increased cash balance in the third quarter of 2022 and higher interest rates.
SUMMARY OF QUARTERLY RESULTS
The following table provides selected financial information of the Company for each of the last eight quarters ended at December 31, 2023:
2023 | |||||||
Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 |
- | - | - | - | - | - | - | - |
2022
Comprehensive loss | (417) (229) (390) (386) |
Basic and diluted loss per share | (0.01) (0.00) (0.01) (0.01) |
Total current assets | 2,716 2,904 3,335 4,069 |
Total assets | 8,378 8,568 9,003 9,740 |
Total liabilities | 1,891 1,679 1,896 2,246 |
Total shareholders' equity | 6,487 6,889 7,107 7,494 |
*Expressed in thousands except loss per share
(453) | (432) | (424) | (419) |
(0.01) | (0.01) | (0.01) | (0.01) |
4,209 | 4,628 | 1,504 | 1,934 |
9,883 | 10,306 | 7,185 | 7,826 |
2,006 | 1,976 | 2,225 | 2,468 |
7,877 | 8,330 | 4,960 | 5,358 |
The comprehensive losses in all of the 2023 quarters were driven primarily by G&A expenses and particularly office and general expenses, salaries and wages, directors fees and accounting and legal expenses. The comprehensive losses in all of the 2022 quarters were driven primarily by both impairment and G&A expenses, particularly office and general expenses, accounting and legal expenses, salaries and wages and directors fees.
During the four quarters of 2022, impairment expenditures increased due to the update of the NI 43-101 technical report. The first quarter of 2023 was positively impacted by a reduction in regulatory filing fees and consulting expenses. The second quarter of 2023 was positively impacted by a reduction in legal and accounting fees. The third quarter of 2023 was positively impacted due to the change in estimate of the Company's decommissioning liabilities as a result of the average bond and inflation rates. This third quarter positive impact was reversed in the fourth quarter of 2023 as the change in estimate of the Company's decommissioning liabilities was similar to the first and second quarter change in estimates, resulting in a larger comprehensive loss than the previous third quarter of 2023.
Past performance is not a guarantee of future performance and the information in this MD&A is not necessarily indicative of results for any future period. Factors expected to impact general and administrative expenses in future periods have been described throughout this MD&A.
Current assets principally reflect activity in the cash and cash equivalents account. Cash outlays vary over the quarters depending on the Company's activities. On August 3, 2022, the Company's Rights Offering was completed which resulted in an issuance of 11,034,135 common shares at a price of $0.35 per share for gross proceeds of $3,862,000.
Total assets on a quarterly basis reflect two main components, cash from financings still available to the Company and capitalized expenditures on capital assets and mineral properties for moving the Potash Project forward. Total assets remained relatively constant for most of the periods above, with the exception of the increase in the third quarter of 2022 due to the Rights Offering.
Total liabilities for the periods above relate to trade and other payables and the decommissioning liability. These balances vary in the analysis due to the timing of the payments required relative to the work performed in bringing the Potash Project to its current level, as well as adjustments to the decommissioning liability due to changes in the average bond and inflation rates. Balances in all the quarters presentedinclude the accrual of an estimate of the costs of restructuring that took place in the second and third quarters of 2017.
Total shareholders' equity is impacted by the quarterly comprehensive losses and the share-based compensation expense as the number of shares outstanding remains unchanged, with the following listed exceptions. In the second quarter of 2022, share options were exercised and, as a result, the Company issued 75,000 common shares for proceeds of $14,000. Also, on August 3, 2022, the Company's Rights
Offering was completed which resulted in an issuance of 11,034,135 common shares at a price of $0.35 per share for gross proceeds of $3,862,000. The Company did not pay any commission on the Rights Offering. The Company paid $72,000 in legal, regulatory and printing costs in relations to the Rights Offering. As at December 31, 2023, the Company had 53.28 million common shares outstanding.
INVESTING
The Company capitalizes costs that are determined to provide future benefits and charges other costs to comprehensive loss including salaries, support and office costs, community relations programs and other administrative related expenditures. Costs directly related to capital assets are capitalized to appropriate categories and depreciated over their useful lives.
Expenditures to date were focused on the completion of the Company's resource reports, including updating the Company's prior technical reports, and 2013 environmental impact statement, confirming the resources and reserves through drilling wells on the initial focus area and preparing the Company for construction by advancing detailed engineering and completing initial site preparation.
INTANGIBLE ASSETS
During the year ended December 31, 2023, all of the 2023 additions to intangible assets were impaired. The additions to intangible assets all related to the Potash Project. The net balances classified as intangible assets are as follows:
Intangible Assets (CAD $ thousands)
December 31, 2023 | December 31, 2022 | |
Mineral property | ||
Surface land | 4,804 | 4,804 |
Drilling | 245 | 245 |
Balance, end of period | 5,049 | 5,049 |
CAPITAL ASSETS |
The net balances classified as capital assets are as follows:
Capital Assets (CAD $ thousands)
Machinery and equipment Buildings
Land
Land improvements Furniture and equipment Computer hardware Assets under construction Balance, end of period
There were no additions to capital assets in 2023. The decrease in capital assets is a result of depreciation expenses of $12,000 recognized during the year.
The Company's ability to secure adequate financing for the development of the Potash Project on economic terms could result in a material difference from the Company's estimate of the recoverable asset.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2023, the Company had net working capital of $2.1 million compared to $3.6 million at December 31, 2022 including $2.3 million and $3.7 million, respectively, in cash and cash equivalents.
As at December 31, 2023 and 2022, the Company also had $0.4 million in restricted cash that was set up as a requirement from the Government of Saskatchewan with respect to reclamation obligations regarding the Potash Project. The Company has updated its reclamation program for the Potash Project in accordance with Government of Saskatchewan regulations. This update may result in the requirement to increase the amount held as restricted cash in order to satisfy the financial assurance requirements of the Government of Saskatchewan in future periods.
The Company maintains cash in bank accounts for day-to-day operations and invests the excess in overnight financial instruments in high interest saving accounts and guaranteed investment certificates that are highly liquid.
The Company has sufficient cash to meet its short-term corporate operating and capital requirements but does not currently have adequate funds to proceed with full-scale development of the solution mining facility. Please refer to the Liquidity Risk and Going Concern section under the Financial Risk Factors heading below.
CONTRACTUAL OBLIGATIONS
The following are the commitments of the Company as at December 31, 2023:
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Karnalyte Resources Inc. published this content on 23 March 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 27 March 2024 04:44:05 UTC.
