African Potash (LSE: AFPO) has become one of AIM’s hottest stocks during the past few months.
After hitting an all-time low of 0.29p at the end of July, African Potash shares have since risen tenfold following a sudden deluge of positive news releases from the company.
Indeed, at the beginning of August African Potash revealed that it had struck a deal with the Common Market for Eastern and Southern Africa and the Mask Africa Crowd Farm Fund Ltd, which seems to have been the catalyst for the recent rally.
And it’s easy to see why, as the agreement was signed with a view to creating a production and distribution platform for fertiliser in Eastern and Southern Africa. African Potash will be at the core of this process.
Deals, deals, deals
Since the initial agreement with the Common Market for Eastern and Southern Africa was signed, African Potash has gone on to ink separate deals with three separate parties for the supply of fertiliser. The largest of these deals was announced only a few days ago and saw African Potash sign a memorandum of understanding with an unnamed Zimbabwean fertiliser supply company to provide 150,000 metric tonnes of fertiliser per year.
Under the terms of the deal with the Common Market for Eastern and Southern Africa, African Potash has the capacity to supply a total of 500,000 metric tonnes of fertiliser per year to multiple customers. Management has already secured deals to supply 250,000 metric tonnes of fertiliser per year across three deals.
So, African Potash has impressed the market with its proactive stance. However, the company is still in its early stages, and as of yet, African Potash doesn’t have any product to sell to customers.
Exploration stage
African Potash holds a 70% interest in La Societe des Potasses et des Mines S.A., which holds the exclusive right to conduct mining research activities for potash salts over the 702.5 sq km Lac Dinga Project Area, located in the Republic of Congo.
The company’s strategy is to create a vertically integrated platform for the mining, production and distribution of fertiliser across sub-Saharan Africa. The Lac Dinga Project is at the core of this strategy. Initial exploration results have shown that Lac Dinga could be a significant commercial deposit.
But Lac Dinga is still at the exploration stage. What’s more, African Potash lacks the cash to carry out the other part of its business plan, the acquisition of firms with assets related to the fertiliser industry across sub-Saharan Africa.
Cash is king
African Potash needs to start generating cash before the company can move forward with its development plans.
Recent share placings have raised just over £1m and management is trying to reduce expenditure where possible, but the development of Lac Dinga won’t be cheap. Moreover, based on historic figures, African Potash is burning through £1m a year just keeping the lights on.
