African Potash Zambia Agreement – Pre Placing Ramp?

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The moment I finished writing my earlier article on the sordid details around the Beryl Holdings agreement, to my delight an RNS (Here) popped up on my phone from African Potash. My initial hopes of a clarification from the company to Tom’s allegations were immediately met with dismay as I realised it looked like a textbook pre placing Ramp.

The company has two working days before it needs to repay a £690,000 loan from the FD’s wife. By my calculations African Potash had bought forward cash of £400k as at 1st January 2016 and has received a further £1m through placing and exercise of warrants. Its last reported cashburn was £700k for the 6 months to 31st December 2015. Given the company has received no material revenues, is it therefore reasonable to assume it will be completely out of cash when it repays the loan on Wednesday next week?

It will need to do a placing and for me this will need to be in the region of £1m assuming current cash burn continues and revenues remain evasive. Bearing in mind the current Market Cap is £2.71m (Post RNS) this is going to be heavily dilutive and has to be at a discount to current Market Price, my belief would be a placing of around 0.25p. It could even be lower, bearing in mind the current controversy and decreasing liquidity on the shares. Therefore the RNS is well timed and could be a pre placing ramp that are all so common on AIM.

Let’s pick apart the latest RNS then:

African Potash, the AIM listed company focused on the vertical integration of fertiliser operations in Africa and Sub-Saharan potash assets, is pleased to announce that it has received a purchase order (the “Purchase Order”) for 1,500 Metric Tonnes (“Mt”) of urea from the Zambia Co-Operative Federation (‘ZCF’), a government body which counts over two million smallholder farmers as members

A purchase order? Does this guarantee the deal will be completed?

The Government of Zambia is investing approximately ZMK2.1 billion (~US$210 million) into the E-Voucher Scheme to create, enable and manage an integrated ecosystem of technical and financial support to promote agricultural development, empower the smallholder farmer and ultimately achieve food security. The E- Voucher Scheme will enable the purchase of inputs (fertiliser, seed, pesticides, equipment) by smallholder farmers. Under the E-Voucher Scheme, the Government of Zambia provides farmers with a voucher with a value that is used to buy agricultural inputs from specified, government approved outlets without cash changing hands

Irrelevant PR guff in my view, but let’s continue…

Under the arrangement, fertiliser is owned by Gavilon, part of the Marubeni Corporation (“Gavilon”), until payment is received from ZCF under the E-Voucher Scheme. African Potash would then expect to receive a margin payment from Gavilon of approximately US$65 per Mt of fertiliser sold. African Potash is not required to meet the cost of the fertiliser supply from its margin payment

Gavilon are a large reputable commodity trader, part of the Marubeni group, a major corporation in Japan. Gavilon have been operating in this region since 2009 and have an office and warehouse facility in South Africa, so they look like a much more experienced player than African Potash. So with the fertiliser also being owned by Gavilon what exactly do African Potash bring to the table? Why don’t the ZCF just deal directly with Gavilon? The Margin payment of US$65 is 38% of the current spot Urea price per MT of $179. This seems like one hell of a commission when it is appears that African Potash don’t contribute much to the deal. This to me doesn’t stack up. Lots of questions here – Do I have the wrong Urea price? Is this a premium product? Is 38% a fair margin for a broker? Do Gavilon make any money on the deal?

I really don’t understand the business model here but let’s take the RNS at face value, assuming payment is received from ZCF then I think we can expect revenues here at some point. At US$65 for 1,500 MT this would be a total ‘profit’ of $97,500 or £75,000. This is just 2.5% of African Potash’s Market Cap, so it is pretty marginal, but a start I guess. The RNS states that the cost of fertiliser supply is not required to be included from the margin, but whether the £75,000 is pure ‘earnings’ remains to be seen.

Deliveries have now commenced under the initial Purchase Order for 1,500Mt of Urea, with ZCF being responsible for logistics and transport. The Agreement provides African Potash with an opportunity to supply fertiliser to ZCF for a minimum period of three years and further trades are anticipated in the coming months.

Deliveries commenced, but when do African Potash expect to receive payment? The agreement provides an ‘opportunity’ to supply, so no guaranteed revenue stream then?

The Verdict

Unfortunately for African Potash, it has lost the trust of investors. Until it can confirm money is received in the bank then I doubt anyone will be getting excited about this news. As with all deals announced by African Potash, they just don’t seem to all stack up.

The shares are up 10% on the news, at one point trading as high as 25%. No surprise that this strength was sold into.

My belief is a mega discounted placing is still on the cards here. We will find out in a few days.


Disclaimer – I have no positions in this stock and to my knowledge nor do any close family, friends nor associates. This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.

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