This Canadian mining company is sitting on billions worth of potash. Inside the battle that has angry shareholders alleging vote rigging and stock sabotage

Down the hall they marched and into the conference room at the Hampton Inn near Saskatoon's airport, four armed city police officers acting as a security detail for the board of directors of a small Saskatchewan mining company called Karnalyte Resources Inc.

It was June 7, 2018, and Karnalyte's annual general meeting was about to start. A handful of frustrated investors hoped to dethrone the board they believed was mismanaging the company. Including the police and the company's board members, there were maybe 30 people in the room, 40 tops.

I just remember thinking What in the world is going on here?'" said Tom Villeneuve, a significant Karnalyte shareholder who was in the audience. By calling in the police, Villeneuve and the other angry shareholders sensed the company was prepared for a battle, figuratively and literally, if necessary.

But the real fight took shape in the weeks and months after Karnalyte's pivotal 2018 AGM when some shareholders began to claim the vote for the board of directors was rigged. They say their votes, submitted electronically, were changed.

And, they say they have the evidence to prove it.

Karnalyte, once a promising Canadian company sitting on potash and magnesium resources potentially worth $5 billion and rising, has seen more than 90 per cent of its value wiped out in the past decade. The company has been mired in lawsuits alleging everything from governance irregularities to improper lobbying of the federal government.

The dissident shareholders have one clear target for their anger - a foreign government-owned company that has become Karnalyte's largest minority shareholder.

They claim Gujarat State Fertilizers and Chemicals Ltd., owned by the Indian state of Gujarat, has taken control of Karnalyte, stacked its board with GSFC representatives and is prepared to stifle development of the company's potash project, possibly for a long time.

Karnalyte's current board has five directors - two, including the board's chair, are employees of Gujarat State Fertilizers and Chemicals and a third is a director of GSFC.

The backdrop for this unlikely battle is the small Saskatchewan town of Wynyard, population 1,800, where Karnalyte hopes to develop its potash project.

It's not exactly a David vs. Goliath fight - more like David vs. a small company that happens to be sitting on the shoulders of an Indian giant.

Most of Karnalyte's first investors, including those now taking aim at the company, weren't institutional investors from Bay St. firms but were regular folks from Kenora, in northwestern Ontario. They were friends and relatives of the founder of the company and his brother. Some have seen their investments lose hundreds of thousands of dollars in value.

Karnalyte, meanwhile, has reported no revenue for the first nine months of 2021 and its third-quarter financial statement showed an accumulated deficit of $135 million. GSFC, on the other hand, with its diverse product mix of fertilizers, plastics and industrial gases, reported $1.27 billion in revenue last year and profits of $70 million.

Karnalyte's CEO denies all of the allegations made by the shareholders.

Karnalyte strives to put the best interests of all shareholders at the forefront of everything the company does and to adhere to all applicable rules and standards of corporate governance," stated interim CEO Danielle Favreau in responses sent to the Star by email.

GSFC's representatives did not respond to questions.

The company's name is a play on a mineral called carnallite, a potentially lucrative mix of potash and magnesium.

Potash is an important fertilizer and Saskatchewan is one of the world's leading potash producers. Meanwhile, magnesium is now in demand as a component for a new generation of electric vehicle batteries.

In the past year and a half, the spot market price of potash has nearly tripled, not far off record highs and there's no end in sight. The two next largest producers of potash are Belarus and Russia and both are facing sanctions related to the war in Ukraine.

Karnalyte controls the mining rights to about 370 square kilometres of central Saskatchewan around the small town of Wynyard, about 160 kilometres north of Regina.

By some accounts, the potential value of Karnalyte's mineral assets is staggering - perhaps $4 billion worth of potash and another $1 billion in magnesium.

There's enough potash there to do the world for I don't know how many years," said Dave Van Dam, a prominent Kenora businessman and Karnalyte shareholder. It's monstrous."

Even better, the company's patented mining process promises to extract the carnallite in a much more environmentally friendly way, eliminating the need for toxic tailings ponds or salt piles.

And yet Karnalyte's Wynyard site sits dormant and desolate. The test wells drilled in a flat field two kilometres south of town are no longer in service and the company appears to be far from ever extracting any of the riches that lie underground.

They moved a lot of earth and they started having some people working here," Wynyard Mayor Albert Boylak said. And then one day, everything kind of got hauled away and shut down. It's just kind of sitting in limbo."

The company sprang to life in 2007 thanks to a hunch and a good memory.

Born and raised in Kenora, Robin Phinney earned a chemical engineering degree and then spent 15 years rising up the ranks at Saskatchewan's PotashCorp, now known as Nutrien, the world's largest producer of potash.

After he left the company, he remembered a core sample he had seen from the Wynyard area that was drilled back in the 1980s.

Carnallite isn't the preferred form of potash because of its tricky chemistry. But one of Phinney's many patents was for a new way to extract carnallite in a brine solution that could be easily separated into potash and magnesium.

He founded Karnalyte Resources and paid $75,000 in 2007 for the mining lease rights to the area around Wynyard.

Phinney drilled another test core and said he hit a seam of carnallite 30 times larger than a normal potash seam in Saskatchewan.

With the help of his brother, Stan, back in Kenora, they reached out to family members and friends for seed money - 43 people around town anted up $5 million for a million shares in the span of about four hours.

Not long after, there was a second placement of three million shares at $5 a pop that Stan sold to friends, family and business associates in Kenora. We sold all three million in about two days," Stan said.

Karnalyte's $65-million IPO raised $14 million more than expected and the company went public on the Toronto Stock Exchange in 2010.

A couple of years later, Karnalyte was looking to fund a $600-million project to mine and process the carnallite deposits. Robin Phinney says a representative of the Saskatchewan government introduced him to people from GSFC.

Saskatchewan had recently signed a formal relationship agreement with the state of Gujarat, promising that the two governments would strengthen business ties and exchange expertise in areas such as mineral exploration, oil, gas, and fertilizers.

In 2013, GSFC agreed to inject about $45 million into Karnalyte in exchange for 20 per cent of its shares. In addition, GSFC agreed to purchase 350,000 tonnes of potash a year from Karnalyte, and then larger amounts after production ramped up.

Tensions had been building around Karnalyte, ever since Gujarat State Fertilizers and Chemicals Ltd. bought its stake in Karnalyte, a stake that has increased to more than 38 per cent.

In 2011, Karnalyte's stock price had reached as high as nearly $17 a share. By the 2018 annual general meeting, it had evaporated to about 36 cents a share, another big reason for the shareholders' displeasure.

At the Saskatoon meeting in 2018, the results of the computerized voting done in advance were announced and the company's slate of nominees for the board were approved.

The board members hustled out of the room with their armed escort. There was no hint of violence requiring police intervention.

Interim CEO Favreau said the company requested police protection because of threats made against management on an online forum for investors. She declined to provide any specifics about the threats.

But something about the vote seemed fishy to the dissident shareholders, which includes, among others, Villeneuve, Van Dam, Stan Phinney and Karnalyte's founder, Robin Phinney, who's twice been CEO of the company and twice been turfed by the board over allegations he breached his employment contract, improperly solicited proxies, and improperly spent the company's capital.

They knew how many votes they represented through proxies and their own shareholdings, and the AGM vote tallies didn't make sense, they allege.

After Tom Villeneuve returned home from the AGM to St. Catharines, he started to hear from other shareholders claiming their votes had been changed.

Karnalyte shareholders had just two options when it came to their votes - For," which meant in favour of a board nominee, or Withhold," which meant against.

Villeneuve had made printouts of the website pages after he voted against Karnalyte's slate of directors.

Three months after the 2018 AGM, he contacted his brokerage and they sent him the records of how his votes had been recorded by the administration agent. All of his votes were marked Abstain."

Abstain wasn't even a choice, so that baffled me," said Villeneuve.

Both Stan and Robin Phinney received records from their bank showing the same - votes they say had been cast as Withhold" had been recorded as Abstain."

All three men provided copies of their voting records to the Star.

They now allege that Karnalyte or its proxy administration and solicitation agent improperly changed some of the votes cast in connection with the 2018 annual meeting.

Had the votes not been changed, they allege, the company's directors would have been forced to resign and the shareholders could have put forward an alternate slate of nominees for election.

Favreau denied that Karnalyte engaged in vote changing.

Karnalyte did not and would not change votes in connection with an AGM," Favreau stated.

She said the receipt and tabulation of proxy votes is handled by a third party, not the company itself.

Karnalyte employed a company called D.F. King to act as its proxy solicitation agent for the 2018 AGM vote.

D.F. King was a subsidiary of AST Investor Services. AST, in turn, was responsible for the tabulation of Karnalyte's votes. (AST has since been acquired by TMX Group, a financial services company that also owns and operates the Toronto Stock Exchange.)

On May 29, 2018, nine days before the AGM, Karnalyte put out a news release stating D.F. King had been engaged at an anticipated cost of $125,000 - a base fee of $50,000, plus $35,000 if management's nominees are elected" and a further $40,000 based on the number of votes cast in favour of or withheld from voting for each of management's nominees."

Some shareholders, including Villeneuve, Van Dam and the Phinneys, allege that the payment terms to D.F. King provided an incentive for vote tampering.

In response to a comprehensive list of questions from the Star about D.F. King and AST, Karnalyte and the 2018 AGM vote, TMX Group declined to comment in a one-sentence response.

TMX Group does not comment on individual issuer matters," said a TMX spokesperson.

Karnalyte's CEO said the company would not ask its third-party agent to alter votes in connection with an AGM and can't explain why some shareholders' votes were recorded as abstain."

D.F. King was engaged in proxy solicitation - in essence reaching out to shareholders and asking them to support management's recommendations for voting," said Favreau. This is a common and legally permitted practice by companies of all sorts in Canada."

The dissident shareholders have contacted provincial securities regulators, banks, the Toronto Stock Exchange, the Attorney General ministries of Ontario, Saskatchewan and Alberta, the RCMP, OPP and Saskatoon police and handed over copies of their voting records.

But they say there's been no action taken on their complaints over the past three years.

All of the agencies told the Star they are either not investigating or do not comment on whether an investigation is in process.

Two weeks before the 2018 annual meeting, Karnalyte circulated a letter to shareholders filled with nasty allegations directed at Robin Phinney and another shareholder, Dan Brown, a retired Calgary firefighter.

A number of self-interested actors threaten Karnalyte's ability to move forward," the letter started. They have tried to enrich themselves at shareholders' expense, and their reckless self-interest has destroyed shareholder value and hindered Karnalyte's growth."

The letter alleges that Phinney harassed employees and single-handedly scuttled" a $700-million (USD) financing deal sponsored by GSFC for the Wynyard potash project because of his unbridled greed."

Phinney dismissed the statements made about him in Karnalyte's letter as false."

None of the allegations had merit as they made up everything," Phinney said.

Brown declined to comment on the letter's allegations about him because of an ongoing lawsuit.

He had learned about Karnalyte from some of his fellow firefighters. Over time, he spent about $700,000 to acquire nearly 340,000 shares.

It was basically my retirement," Brown said.

He says he sold most of his Karnalyte shares to pay his legal costs fighting the company.

Three days after sending out the letter to shareholders and 10 days before the 2018 AGM, Karnalyte went a step further and launched a lawsuit against Phinney, Brown and Van Dam, the Kenora businessman.

The company alleged the three men improperly solicited proxy votes ahead of the 2018 annual meeting in violation of corporate and securities law.

Karnalyte asked the Alberta court to approve the company's decision to decline to accept shareholder proposals made by Phinney and Van Dam along with an order that certain votes cast at the 2018 meeting be declared null and void.

The lawsuit did not go well for Karnalyte.

Judge Barbara Romaine eventually dismissed the company's lawsuit against the three men in 2020 and, with one small exception, rejected all of Karnalyte's claims.

On top of that, the judge took the rare step of awarding full costs to Phinney and Brown, $213,500 and $49,700 respectively, because of Karnalyte's aggressive and occasionally questionable behaviour in their pursuit of the two men.

That's not the end of the legal battles.

Karnalyte also launched a $1.4-million defamation lawsuit against Brown over some posts he allegedly made on the Stockhouse website. Brown then filed a $1.4-million countersuit against Karnalyte in 2020 for defamation related to the company's 2018 letter to shareholders.

A couple of former board members who helped oust Phinney in 2017 turned around and launched their own lawsuit against Karnalyte last year, alleging the company violated rules around board independence and that one of the GSFC representatives improperly lobbied the federal government without being registered as a lobbyist.

Those lawsuits are still before the court and the company has denied the allegations.

Potash prices are skyrocketing around the world, and it's the same for magnesium.

The potential value of Karnalyte's mineral deposits keeps growing. So why, shareholders wonder, is the company no closer to extracting the riches buried underground?

That's a good question," said Van Dam.

The shareholders have their suspicions. They point the finger at GSFC.

They believe the Indian company is prepared to wait patiently - perhaps decades, if necessary - before developing the Wynyard site. And when they do move, the shareholders say, it will be based on what's best for the Indian market.

Their intent was to end up with this property," said Van Dam.

GSFC, he said, wanted to get this thing for nothing."

Favreau said depressed prices for potash in recent years hurt Karnalyte's development prospects.

The company has found it very difficult to finance its project," said Favreau. Prices have recently been improving so the company is updating its technical report in order to support the attraction of strategic investment to develop the Wynyard potash project.

As far as GSFC's strategy, that is a question best asked of GSFC," she added.

GSFC's representatives did not respond to questions.

Stan Phinney said it's hard to walk around Kenora without facing a barrage of questions from Karnalyte investors he once recruited.

I couldn't walk down the street," he said. My wife quit going shopping with me because of it."

Steve Buist is a Hamilton-based investigative reporter at the Spectator. Reach him via email: sbuist@thespec.com