UPDATE 2-Karnalyte lands India investor for Canada potash mine
* India's GSFC to buy 20 pct stake, assures potash supplies * Saskatchewan mine would compete against Potash Corp * Karnalyte shares jump as high as 21 pct (Adds comments from conference call) By Rod Nickel Jan 10 (Reuters) - Tiny Canadian mining company Karnalyte Resources has landed a small but highly strategic investment from India, likely reducing that country's future dependence on Canpotex, the marketing arm for North America's dominant potash sellers. Gujarat State Fertilizers & Chemicals Limited, an Indian farm business that makes fertilizer and industrial products, will buy a stake of nearly 20 percent in Karnalyte for C$45 million ($45.5 million), or C$8.15 per share. GSFC will invest a further C$15 million in the next round of public equity financing, making it more likely that Karnalyte's planned potash mine will win the funding it needs go ahead. Karnalyte shares jumped as much as 21 percent in Toronto before trading in late morning up 9 percent at C$8.74. GSFC closed down more than 3 percent on India's National Stock Exchange. GSFC also agreed to buy 350,000 tonnes of potash per year for 20 years, or more than half of the output from the first phase of Karnalyte's planned potash project near Wynyard, Saskatchewan. The off-take agreement increases to 600,000 tonnes per year once phase 2 is built. "At present, India is fully dependent on imports of potash," Atanu Chakraborty, managing director of GSFC, said in a statement. "This is a significant partnership by an Indian fertilizer manufacturing company with a potash mining company abroad to procure high quality potash for the Indian market." India imported 4.6 million tonnes of potash in 2011, according to data compiled by Scotiabank. Karnalyte's mine would be small compared with those operated in the resource-rich province by giant fertilizer companies Potash Corporation of Saskatchewan Inc, Mosaic Co and Agrium Inc. But if the mine is built it would be the first in Saskatchewan with such significant influence by investors from China or India, the world's two biggest importers of the nutrient used to boost crop yields. Fertilizer makers in those countries import much of their supplies from Canpotex Ltd, the offshore marketing arm for Potash, Mosaic and Agrium, or BPC, which performs the same role for Russia's Uralkali OAO and Belaruskali of Belarus. Karnalyte would operate independently, as would mines under construction in Saskatchewan by Germany's K+S AG and Anglo-Australian miner BHP Billiton Ltd . "If this is an indication of major purchasers like India moving outside of the cartel, that has long-term negative implications for Canpotex," said analyst Peter Prattas of Fraser Mackenzie, noting that the agreement won't make much impact in the near future. The Indian state of Gujarat holds a more than one-third stake in GSFC and is its biggest shareholder, according to Thomson Reuters data. The deal, announced by the companies early on Thursday, is a premium of less than 2 percent over the last traded price for Karnalyte on Tuesday before trading was halted the following day. But it is a 20 percent premium to the volume-weighted average price for the 20 trading days that ended Dec. 20. The stock has risen sharply in recent days. Karnalyte's solution-based mine would cost C$600 million in the first phase and produce 625,000 tonnes of the crop nutrient per year, starting in 2015. The funds combined with the buying commitment from GSFC - subject to Karnalyte's project gaining Saskatchewan approval on environmental grounds - will make raising the remaining capital through debt and equity far easier, Prattas said. "All of a sudden, in our view, this has greatly reduced the financing risk." Karnalyte's options for raising its remaining financing are "wide open," said the company's chief financial officer Ron Love, but include potentially taking on another strategic partner. A handful of large Indian companies buy Canadian potash, including Coromandel International Ltd, Tata Chemicals Ltd, Zuari Agro Chemicals Ltd and Indian Farmers Fertiliser Co-operative (IFFCO). Karnalyte's second phase would take production to 2.125 million tonnes of potash per year. The deal represents a shift toward potash by GSFC, which currently buys only about 100,000 tonnes of the nutrient annually, and mainly distributes urea and phosphate. Karnalyte is competing with Encanto Potash Corp and Western Potash Corp for funds to launch Canadian potash mines. Shares of Western rose 3 percent, while Encanto was flat. The trio of so-called junior miners owns the right to mine potash reserves in Saskatchewan, but lacks capital. The appeal of potash to investors, a soil nutrient used worldwide to boost crop production, has grown in recent years with population and income growth in developing countries. But the world's biggest miner, BHP Billiton, has delayed a decision on proceeding with its own Saskatchewan potash mine amid difficult economic conditions, and some analysts say there is too much global potash production capacity being planned. BMO Capital Markets advised Karnalyte, while PricewaterhouseCoopers Private Limited advised GSFC. ($1=$0.99 Canadian) (Reporting by Rod Nickel in Winnipeg, Manitoba; Editing by Maureen Bavdek, Nick Zieminski and Sofina Mirza-Reid)
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