Karnalyte Resources Provides Update on its Strategic Review and Other Corporate Matters

Strategic Review

As previously announced, Karnalyte's Board of Directors (the "Board") initiated the strategic review process to evaluate a broad range of potential strategic alternatives available to the Company, including the evaluation of its existing and future projects, with a focus on determining what is in the best interests of Karnalyte and maximizing value for all of its shareholders.

Specific matters addressed in the Strategic Review Report include but are not limited to: a review and analysis of the Company's proposed nitrogen project; an analysis and market sounding activities for the Company's potash project; and improving Karnalyte's financial position.

Nitrogen Project

In the Strategic Review Report, the opportunity of building a regional nitrogen production facility near Saskatoon, Saskatchewan (the "Nitrogen Project") was analyzed as one of the options to maximize shareholder value of Karnalyte.

The Report concluded that the Nitrogen Project could be a profitable venture, with an estimated average annual cash flow of US$52 million per year, an IRR of 9.06% and a payback period of under 10 years if all product produced is sold at expected market values within the production period. These projections were predicated on the market price of nitrogen fertilizer, the capital cost of the facilities, labour costs, costs of raw materials (including natural gas), transportation and other costs of production all falling within the levels assumed in the Report. Management notes that there can be no assurance that such estimates and assumptions will prove to be accurate. Accordingly, readers should not place undue reliance on such estimates and assumptions.

While MNP noted that the economics of this project could be positive, the Report concluded that the Nitrogen Project is high risk without both an offtake agreement and a joint or independent capital investment given the current market and competitive conditions. Management and the Board are considering the various challenges identified in the Report including market risk and capital risk and are continuing discussions with multiple prospective partners to assess interest in an offtake agreement and capital investment. Further updates will be provided to the market when appropriate or required as these discussions continue.

GSFC has indicated that, if requested by the Company, they would support the Nitrogen Project but only as technical advisor at the planning, design phase, and construction phase, and as initial operator of the Nitrogen Project facility, to bring GSFC's significant experience operating nitrogen fertilizer production facilities to the project. However, GSFC has emphasized that Karnalyte will require a strategic partner to support the Nitrogen Project, as GSFC is not in a position to act as lead partner for the Nitrogen Project.

Wynyard Potash Project

As further development of the Company's potash project (the "Potash Project") is dependent on improved potash prices, financing, and other matters, the Strategic Review Report provides a future economic outlook on the global potash industry and identifies how a Karnalyte potash facility would compare in the industry.

While the Strategic Review Report noted that the potash price has increased in 2021 and that potash demand is expected to grow linearly year over year through to 2030, the market is expected to be in a prolonged state of oversupply. This expectation is in part derived from speculation in the market surrounding new mines coming online in Belarus and Russia and Canada (BHP Jansen). An oversupply in the market creates an ongoing structural problem between supply and demand that will have a less predictable impact on the price of potash. That said, Management is of the view that recent positive developments in the industry could result in a shift in this demand supply balance such that upward pressure on the price will be realized. The market is showing signs of tightening at the writing of this press release, with potash prices in North America showing significant increases from 60 to 100%. Increases globally year over year are near 20% but expected to be higher during the second half of 2021. Developments include recent production curtailments as a result of the early closure by Mosaic of its K1 and K2 shafts at Esterhazy, sanctions that may be imposed on potash exports from Belarus that are being discussed in the European Union and news that Nutrien and BHP are in discussions about partnering on BHP's Jansen project which, if realized would result in price stability as new production from Jansen is brought on in a disciplined manner.

The Strategic Review Report noted that the Potash Project would have a number of advantages that would make the project potentially attractive to a strategic industry player despite current conditions:

• Environmental: The mine would not produce tailing piles or ponds, would require a limited use of fresh water, result in minimal surface impact and has the possibility of a secondary, marketable magnesium product.
• Pre-Work & Investment: There has been a significant amount invested in pre-work and permitting, allowing for shorter lead time to initiate construction.
• Strategic Partner: Karnalyte has an agreement with its strategic partner, GSFC, for approximately a 56% off-take over 20 years of the expected production in phase 1 of the Potash Project.
• Product Quality: The potash at the mine is a high-quality product that would be produced in a desirable granular form with the ability to upgrade quality to industrial-use standards to attract additional demand at a higher margin in the premium potash market.

The market sounding activities conducted to date have indicated industry partner interest based on the above factors and others. Although interest is limited in terms of number of players, it is indicative that there is additional potential with an aggressive and well-structured marketing effort.

Offsetting the strategic advantages noted above are the current unfavorable market conditions including: current potash prices, low interest level from financial institutions, and limited capacity from the current shareholder group and the majority shareholder of Karnalyte to finance the Potash Project. Such unfavourable conditions could be overcome by attracting another strategic partner with a strong presence in the industry and a long-term development vision.

The Board and Management are actively assessing the recommendations in the Report to continue efforts to seek out and attract a major industry partner with a sound financial position and long-term strategic vision to produce and deliver this high-quality potash product to North American and global markets. These partnership options could include any or a combination of an equity offering with which to build out the Potash Project, royalty financing, debt financing, long-term off-take arrangement or other strategies. Discussions with a number of potential partners are in progress.

Improving Karnalyte's Financial Position

The Strategic Review Report also recommended that the Board and management team transition Karnalyte to a low-cost operation by developing and implementing a minimum cash flow budget to preserve available cash for investment in seeking out a strategic industry partner. Specifically, the report recommended that Karnalyte investigate alternative sources of funding to extend the operational runway, monetize existing assets to preserve a financial and liquidity foundation and maintain the minimum requirements to sustain an exchange listing.

In response to the recommendations, in the near term, management intends to investigate alternative sources of funding, divest of certain assets not essential to the Potash Project, reduce general and administrative expenses, and potentially move Karnalyte to the TSX Venture Exchange to reduce the higher regulatory and cost burdens on the TSX.

Corporate & Governance Matters

The Board remains committed to good governance practices. In light of the opportunities and risks facing the Company, and in the interests of strengthening the Board and improving its independence, the Board has decided to expand its composition to a board of five (5) directors. In doing so, the Board assessed the competencies, skills and personal qualities it requires in directors in order to provide it with the best opportunity to advance Karnalyte's projects to the next stage of development. The director nominees set forth in the Company's information circular dated May 31, 2021 include individuals with the skills and experience to assist the Company in advancing its interests.

Danielle Favreau, Interim CEO of Karnalyte, commented, "Over the coming weeks, our board and management team will continue to carefully assess the analysis and recommendations in the Strategic Review Report from MNP LLP. Although Karnalyte is facing challenges, we are ready to take on these challenges head on and remain focused on moving this company forward to create value for all of our shareholders."

ABOUT KARNALYTE RESOURCES INC.

Karnalyte Resources Inc. is a development stage company focused on two fertilizer products, potash and nitrogen, to be produced and manufactured in Saskatchewan. Karnalyte owns the Wynyard Potash Project, with planned phase 1 production of 625,000 tonnes per year ("TPY") of high-grade granular potash, and two subsequent phases of 750,000 TPY each, taking total production up to 2.125 million TPY. Karnalyte is also exploring the development of the Company's Nitrogen Project, which is a proposed small-scale nitrogen fertilizer plant with a nameplate production capacity of approximately 700 metric tonnes per day ("MTPD") of ammonia and approximately 1,200 MTPD of urea, and a target customer market of independent fertilizer wholesalers in Central Saskatchewan.

FORWARD-LOOKING STATEMENTS

Certain information included in this press release is forward-looking, within the meaning of applicable Canadian securities laws. Forward-looking information is often, but not always, identified by the use of words such as "anticipate", "believe", "could", "estimate", "expect", "plan", "intend", "forecast", "future", "guidance", "may", "predict", "project", "should", "strategy", "target", "will" or similar words or phrases suggesting future outcomes or language suggesting an outlook.

The forward-looking statements contained in this press release are based on certain key expectations and assumptions made by Karnalyte, including, without limitation, assumptions as to: projected economics for the Company's planned Potash Project, the confirmation in an independent feasibility study of Karnalyte's assumptions regarding the technical and economic viability of the Nitrogen Project, the ability of Karnalyte to obtain financing on terms favourable to the Company, and the ability of Karnalyte to receive, in a timely manner, the necessary approvals from the Board, shareholders, regulatory authorities, and other third parties.

Karnalyte believes the expectations and assumptions upon which the forward-looking information is based are reasonable. However, no assurance can be given that these assumptions and expectations will prove to be correct. Accordingly, readers should not place undue reliance on the forward-looking statements and information contained in this press release. Without limiting the generality of the foregoing, readers are cautioned that the Company has not received a feasibility study prepared by a third party with respect to the Nitrogen Project.

Actual results may vary from the forward-looking information presented in this press release, and such variations could be material. Risk factors and uncertainties could cause actual results to vary from the forward-looking information in this press release. Additional information on forward-looking statements and other factors that could affect Karnalyte's operations and financial results are included in documents on file with Canadian securities regulatory authorities and may be accessed through the Company's profile on the SEDAR website (www.sedar.com).

These forward-looking statements are made as of the date hereof and are expressly qualified in their entirety by this cautionary statement. Subject to applicable securities laws, the Company assumes no obligation to update or revise them to reflect new events or circumstances.

/NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR DISSEMINATION IN THE UNITED STATES/

SOURCE Karnalyte Resources Inc.



Contact
Karnalyte Resources Inc., +1 (306) 986-1486, info@karnalyte.com, www.karnalyte.com