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African Potash raised £500,000 though the issue of 235m shares this morning 1st September, before expenses, at 0.2125p. The RNS fails to mention it but this is a whopping 39% discount to the closing price of yesterday and even larger than the discount I predicted here. This is definitely up there as one of the biggest discounts to market price on an equity raise I have seen on AIM. Investors demanding that much of a discount tells you everything you need to know. We have already seen 53m shares traded by lunchtime, 10 times the normal volume, this means that many of the new shares are likely to be have been already forward sold before they commence trading on 6th September.
A further 70.5m of options were issued for the new investors to subscribe to further £150,000 of confetti at the same issue price. Unsurprisingly the share price has collapsed this morning to 0.25p, so these are unlikely to be exercised unless the price picks up and gets back over 0.3p.
The final equity issuance concerns £36k worth of shares that have been issued to African Management Services Limited for ‘administrative’ services. I’ll cover this further below.
We also saw in the RNS a one year extension to the bridge loan from the FD’s wife, Katrina Clayton. African Potash already has the award for the most expensive loan in AIM history, but do we now also have a contender for the longest bridge loan in AIM history? The ‘bridging’ loan is extended at the same coupon rate as previously, but with a 5% arrangement fee, this equates to £37.5k upfront and Katrina will continue to be paid £125k a year in interest. Katrina can also convert £50,000 parcels of the loan into equity at the 0.2125p issue price, a mechanism for her to start recouping back the loan if there is any strength in share price.
So how long should the money raised from the placing last?
It irritates me that African Potash have not included the current cash balance in the RNS, this is the most critical metric that the shareholders need right now. The fact the company hasn’t stated what the cash balance is suggests to me that the company is running on fumes. In fact, the last time we saw a cash balance from African Potash was 9 months ago, in December 2015 and at this point it was £0.4m. It has received £1.5m of funding since, including the money raised today. I estimate that African Potash is burning £1.4m a year on general trading/admin expenses, so we can expect that by 31st December 2016 a balance back around the £0.5m mark, assuming no revenues.
Could we have revenue? Don’t get your hopes up, the only tangible indicator of revenues since inception was the Zambia deal announced last week and covered here. This deal at best would lead to £75k of revenues in 2016…at best! I therefore believe we can assume another placing will be required. The timing for that will be at the latest March 2017 and that assumes it will be possible by then….
So will African Potash be able to secure further funding?
The fact that only £500,000 could be raised from ‘investors’ this time around is a big red flag. You could argue that perhaps African Potash only needs £500,000 to fund the business until it starts to receive revenues, of course in my view that is a naive argument. You could also argue that having loans can lower the cost of capital, also naive. That may be the case in well run businesses! In this case with such an expensive loan and a lack of earnings visibility it certainly doesn’t create any shareholder value at all having this loan. With the interest payments double the Zambia revenues announced I can’t see why the directors wouldn’t look to pay off the debt as priority number 1… if they could. This again leads me to once conclusion, I believe there was minimal interest in the equity raise and thus poor Katrina was given a choice, to either a) extend the loan or b) bring African Potash into default and with this option the chances of her getting her money back would be £nil rather than £remote.
Adding weight to the dire funding situation, the below table summarises the 3 equity raises since Chris Cleverly took the reigns as CEO:
As you can see African Potash have secured less funding each time they go to their broker. Even more ‘telling’ is that between January and September the discount needed to get the placing away has increased by 30%!
In summary, I cannot see a further placing being possible without material revenues between now and the next fund raise, which gives African Potash potentially 6 months before it may be forced to throw in the towel. On top of that, any stock market correction between now and then, i.e. change from the current ‘risk on’ environment and African Potash is quite simply f**cked. (excuse my language)
So what about the AMS Shares? Who are AMS and what services do they provide?
I was drawn to the AMS part of the RNS as it wreaked of related party transaction – I was correct. The Annual Return showing the current directors is here and the last accounts of AMS, year ended May 2015 are here.
Based on the information in the two documents, the directors of the company are Phillipe Henry Edmonds and Andrew Groves. Does the name Phil Edmonds ring a bell? Yes he’s an ex cricketer for England, taking part in 51 test matches in his heyday. He’s also accused of paying bribes to officials in Africa, see the Guardian story here and the more recent coverage by Forbes here. Phil’s fellow director and business partner Andrew Groves also had the honour to be a former director of African Potash – hence the related party.
The services which AMS are providing are apparently relating to admin and accounting services. I’m not sure Phil and Andrew are qualified bean counters, so are there also other services being provided here? I am all for ‘innocent until proven guilty’ in the case of Messrs Edmonds and Groves, but I think we should know whether Chris Cleverly and African Potash continue to have a business relationship with African Management Services? Or is this is an historic liability? So more concerns here for me, albeit probably unimportant compared to the potential death spiral unfolding…
SELL – Target 0p
I don’t think any further words are needed.
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.