Suddenly, investors are really digging potash. Perhaps it is understandable in the case of Sirius Minerals (LSE: SXX), as the prospect of the world’s largest mine under the North Yorks Moors National Park is quite a novelty. But now investors are also sinking their teeth into AIM-listed exploration company African Potash (LSE: AFPO), a stock that has whipped up plenty of message board excitement lately.
African Adventure
It isn’t hard to see the sudden surge of interest in African Potash. It traded at 0.3p at the start of August. Today, it has soared to a dizzying, 10-bagging, 3p. This is the kind of penny share that traders dream of but usually only notice when it was too late. Hindsight is great but it never made anybody rich.
The earth shook for AFPO investors in August after it announced a trading agreement with Comesa, a free trade union of 20 African countries, to supply 500,000 tonnes of fertiliser a year. Securing the distribution deal was a great leap forwards, as reflected in the share price. Since then it has signed two new deals: a memorandum of understanding to supply a Zambian fertiliser group with over 50,000 metric tonnes of fertiliser, followed by another 50,000 tonnes for an unnamed Malawian fertiliser company. This has helped the company shrug off ugly and probably untrue rumours of a discounted share placing.
Ifs And Buts
The problem with sudden soaraway stocks is that there is always a “but” or an “if”. First, the but: African Potash hasn’t actually mined any potash yet. Second, the “if”. Its distribution plans are great news but only if it actually locates some potash. Early soundings at its Lac Dinga project suggest significant deposits, but there is further exploration to be done. Talk of creating a vertical platform for the mining, production and distribution of fertiliser looks a little far-fetched given the uncertain reality on (or rather, under) the ground.
Recent distribution deals should help African Potash raise the funds it needs to develop Lac Dinga, and the cash from that – if it flows – will help pursue the wider strategy. There is a long way to go, and from the heady height of 3p, there is some way to fall also.
Mineral Men
The sheer uncertainty of the stock makes home-grown miner Sirius Minerals look like a solid vanilla investment by comparison, but it certainly isn’t. Like AFPO, Sirius is low on cash. But the recent green light to develop its North Yorks mine should empower chief executive Chris Fraser in his search for the estimated £2bn required to develop the mine and export facilities at nearby Teeside, which would be a tricky enough without the added responsibility of protecting the integrity of the national park.
SXX is up 122% over six months but the share price is now flatlining as investors size up to the scale of the task ahead. Having secured planning permission, and struck a series of polyhalite supply agreements with major agri-business customers, I would be surprised if the Potash project doesn’t ultimately come through. But investors should brace themselves for delays, shocks, budget overruns and shredded nerves for some years to come.
It is impossible to say which is the better bet, given that both are a shot in the dark. Maybe split your investment and play a game of racing demons, but only if you fancy a potashtic gamble.
