CALGARY, ALBERTA--(Marketwired - Apr 24, 2015) - Karnalyte Resources Inc. ("Karnalyte" or the "Corporation") (TSX:KRN) announced today its response to the letter that it received on April 14, 2015 containing a series of demands from Robin L. Phinney ("Phinney"), a former CEO of the Corporation whose employment was terminated by the Board of Directors, and Gujarat State Fertilizers and Chemicals Ltd. ("GSFC"), an Indian company that is a shareholder of the Corporation and with whom the Corporation has various contractual arrangements relating to the Wynyard Project. In addition, the Corporation wishes to set the record straight.

The letter from Phinney and GSFC demands the immediate resignation of all of the directors of the Corporation other than an employee of GSFC who sits on the Corporation's Board of Directors. It also alleges that the Corporation's substantial cash balances are not being properly spent, because the Corporation has determined not to pursue development of the Wynyard Project, even though the Board of Directors has concluded that the Wynyard Project is uneconomic and development of the Wynyard Project in the current environment would completely destroy shareholder value. The Board of Directors also voted to write down the Wynyard Project to its salvage value, a decision which the senior executive of GSFC who is its representative on the Board voted in favour of. Mr. Phinney himself noted "continuing depressed potash prices" in his news release of December 23, 2014, yet contradictorily now urges shareholders to support his plans to develop the Wynyard Project.

A committee of independent directors of the Board of Directors of the Corporation was formed in November 2014 by unanimous vote of the Board (including by a senior executive of GSFC who is its representative on the Board) and met on December 6, 2014 (the "Independent Committee") to discuss a financing proposal which was being put forth by GSFC to bring the Wynyard Project into production. In late December 2014, the Corporation commenced direct discussions with GSFC about a possible financing structure for the Wynyard Project. While these discussions did not lead to an acceptable financing proposal, in March 2014 GSFC requested the Independent Committee come to India and personally hear a presentation of a term sheet for a financing proposal that GSFC's board had unilaterally approved. Despite the Independent Committee's repeated requests for additional information, GSFC declined to provide any details of its proposal. In India, GSFC formally presented a proposal for a financing that would have seen all of the Corporation's cash balances spent towards project development without clarifying how a significant portion of the remaining equity financing was to be completed. The proposal had many troublesome terms including a lack of clarity around potentially excessive fees to Indian counter-parties. The Independent Committee concluded that the proposal could not be supported and that it would not be in the best interests of all of the shareholders. The Independent Committee believes that, if accepted, the potential financing would have rendered the Corporation insolvent and would have completely wiped out shareholder value.

Suggestions by the Independent Committee to GSFC to modify its proposed structure in a manner designed to protect minority shareholders of the Corporation were rejected. The Independent Committee was told that these reasonable and typical structures were not acceptable to GSFC or the Indian financial institutions with whom GSFC was dealing.

Banking analysts covering and advising the Corporation suggested in their reports that at current potash prices a financing of Wynyard Project to production was likely not possible in a manner that would benefit shareholders. The project at current potash prices was viewed as uneconomic. Presentations from bankers including a major Canadian financial institution recommended not to proceed with financing the project unless structured in a manner that would protect shareholders. It was suggested to the Independent Committee that the Corporation consider looking at alternate businesses.

GSFC's interest in bringing the project into production appears to be motivated by its desire to obtain a long term supply of potash, regardless of the destructive effect on shareholder value. By aligning themselves against the current Board, which includes a person put forward only 5 months ago by GSFC as an independent director, it is clear that Phinney and GSFC are not acting in the interests of all shareholders.

As indicated earlier, the Independent Committee was concerned that GSFC's financing proposal, if accepted, would have triggered substantial commissions and finder's fees negotiated by Mr. Phinney while he was the Corporation's CEO, including a multi-million dollar finder's fee payable to an Indian national. It was not clear that the financial model on which GSFC was relying properly accounted for these fees or for banking fees due to Indian financial institutions. All told, the fees could have been excess of $30 million in the first year. In addition, the model put forward to justify the financing proposal had unconventional and, in the view of the Independent Committee, unduly aggressive, forecast commodity prices. Perhaps most significantly, the Independent Committee concluded that accepting the financing proposal as presented would have put the financial health of the Corporation at risk.

At meetings of the audit committee and Board of the Corporation held on April 10, 2015, a unanimous decision (including by a senior executive of GSFC who is its representative on the Board) was made to write down the Wynyard Project to its salvage value, a decision which was strongly supported by Karnalyte's independent auditors. The Board also unanimously determined (including by a senior executive of GSFC who is its representative on the Board) based on meetings with the financial community that in the current price environment for potash and magnesium, it would not be possible to finance and profitably construct and operate a production facility at the Wynyard Project. The Board therefore unanimously determined (including by a senior executive of GSFC who is its representative on the Board) to suspend all activity in relation to the Wynyard Project, other than the minimum required to maintain title to the Wynyard Project, secure the site on a care and maintenance basis, and otherwise preserve intact the Wynyard Project. It is expected that costs to maintain the site will be approximately $500,000 per year. Finally, the Board also unanimously resolved (including by a senior executive of GSFC who is its representative on the Board) to direct management to review whether there is any possibility of finding a buyer for the Wynyard Project or whether it can be otherwise disposed of on reasonable terms, consistent with the restrictions to which the Corporation and the Wynyard Project are subject in the Corporation's various agreements with GSFC.

On April 14, 2014 the Corporation announced that it is pursuing legal action against Mr. Phinney, his wife Mrs. Jean Phinney, and 1385659 Alberta Ltd, a company controlled by Mr Phinney. The legal action relates to, among other things, serious alleged breaches by Mr. Phinney of his past employment and termination contract with Karnalyte. In addition the Corporation claims that Mr. Phinney has also improperly solicited proxies. Furthermore the Corporation is seeking an explanation how Mr. Phinney could have spent substantial resources of the Corporation presenting the asset as "shovel ready" when he now suggests it is at a "proof of concept stage". The Board is convinced that spending the Corporation's treasury on further development and study of the Wynyard Project would not be a prudent use of those funds at this time. Further, the lack of clarity provided by GSFC and Mr. Phinney on their "framework" to develop the project is concerning. It appears to the Independent Committee that Mr. Phinney has accepted a proposal from GSFC that is not in the best interests of the Corporation or its shareholders.