Investors in potash mining firm Sirius Minerals (LSE: SXX) have seen a 70% gain so far this year.
That’s not bad, but it’s dwarfed by the 226% profit seen so far this year by shareholders in the Yorkshire firm’s smaller rival, African Potash (LSE: AFPO).
For small-cap investors, does African Potash offer a more profitable outlook than Sirius Minerals?
The case against Sirius
Sirius now has the planning permission it needs to build a large potash mine in the North York Moors National Park. That’s the good news.
On the other hand, Sirius is pretty much out of cash. Chris Fraser, the firm’s chief executive, is now working hard to raise the estimated £2bn that will be needed to fund building the mine.
Mr Fraser has said that he expects to raise the money through debt, to avoid shareholder dilution, but this could be a double-edged sword. The interests of lenders always rank above those of shareholders, so if Sirius does manage to borrow this money, but then fails to make as much money as quickly as it is expected to, shareholders could suffer poor returns.
There’s also a real risk that Sirius will encounter delays or cost overruns during the build process. This is a fairly common occurrence with large mining projects.
In my view, Sirius shares are likely to drift lower over the next year or so.
What about African Potash?
Making big profits from small commodity stocks is all about timing. These are rarely ‘buy and forget’ shares.
African Potash is still at a fairly early stage in its development, and the firm has recently stirred things up by signing a number of potash fertiliser supply agreements under which it will import up to 250,000 million tonnes of fertiliser a year into Africa. Alongside this, appraisal and development of the Lac Dinga potash project will continue.
This approach has two key advantages. African Potash’s move to become a trading firm means it can generate some revenue to cover its corporate overheads and some of the costs of its ongoing appraisal of the Lac Dinga prospect. This should reduce shareholder dilution.
Alongside this, investors can enjoy the potential for a major re-rating if Lac Dinga lives up to expectations and proves to be a major potash resource.
I suspect that the firm’s newish chairman, Chris Cleverly, who was appointed in March. In his first set of results, Mr Cleverly promised to use his experience to crystallise value for shareholders. I’m encouraged by the progress made so far.
A word of caution
Despite this, it’s worth pointing out that African Potash remains a risky play. I estimate that the firm is unlikely to have more than £1m in cash and, as yet, it has no revenue. The shares also trade at 2.1 times their last reported book value, so there isn’t much asset backing to support the share price.
African Potash shares have been drifting lower after hitting a 52-week high of 3.7p earlier this month. If I were interested in investing, I’d be tempted to wait a little longer and see where the shares settled before hitting the buy button.
