A dummies guide to spotting a PUMP AND DUMP on AIM

Anyone who has seen The Wolf of Wall Street movie will be familiar with Jordan Belfort (played by Leonardo de Caprio) and his exploits in ‘pump and dump’ boiler room scams involving US Penny Stocks. The movie is sadly based on a true story which took place in the late 80s and eventually let to Mr Belfort’s downfall, rewarding him with a 22 month custodial sentence for his scheming. The events may have taken place some time ago but the sophistication of these schemes has not changed much in the almost 20 years since, these schemes are very much still alive and kicking on many international markets, including the UK’s AIM market.

wolf-of-wall-street-48

A SUMMARY OF THE AIM PUMP AND DUMP

The AIM pump and dumps come in all shapes and sizes, from the well organised boiler room scheme scams to a very loose and decentralized pump. Many of the ‘pump and dumps’ now operate exclusively online rather than through the traditional cold calling method used during Mr Belfort’s heyday in the late 80s. I will focus today on the typical social media promoted ‘pump and dump’, which tend to be low level and unsophisticated, but that is not to say significant financial loss does not occur. The typical schemes have some some or all of the following symptoms and follow a certain pattern:

Which companies are targeted for the pump and dump?

Some market commentators tend to exaggerate the extent to which stocks are pumped and dumped on AIM. It is actually a very small minority of the 973 companies quoted on AIM. My own experiences would suggest there are only a handful of stocks under the complete control of the P&Ders at any one time. These stocks though are almost always micro cap ‘penny stocks’, i.e. stocks with a market capitalisation of less than £30m. This tends to mean that with limited shares in existence that the price will jump quickly with any liquidity.

The other criteria is a stock in a sector which lends itself to speculation, this means junior resource stocks, junior biotech and other blue sky technology stocks. These sectors are the ones that capture the imaginations of gullible private investors, the ‘willy wonka’ effect where investors dream of the hallowed ’10 bag’ i.e. returning 1000% or 10x your initial capital. Two recent stocks that fell victim to these schemes were African Potash (Booted off AIM to the limited liquidity ISDX market) and Cloudtag (Booted off, private and I would guess soon to be in liquidation). There typically also usually needs to be expected news flow to drive interest and speculation.

Stage 1 – The Pump Takes Hold

It usually starts by one or a few experienced ‘pumpers’ purchasing stock in a company. The experienced pumpers will have a large following on the bulletin boards and increasingly also on twitter. The pumper will normally go by an ‘alias’ and often have pictures of flash cars, money and other tacky photos as part of his/her profile avatar or wallpaper. You can spot them a mile off.

The pumper will write confirming they have bought the stock and usually post some ludicrous claims about the company concerned. I will invent one, company XXX:

Screen Shot 2017-04-21 at 15.34.15Rocket emoticons or a similar GIF is normally posted for dramatic effect.

The statements usually have some ‘tie back’ to official company news. For example, the 1bn barrels could be the gross oil in place and this figure multiplied by current oil price gets to £100bn. The pumper has though conveniently forgotten the resource recovery factor, the CAPEX needs, the OPEX and critically that the company XXX owns just 10% of the licence, let alone commercial chances of success for this pre drill prospect.

The other method is to quote ‘a rumour in the city’ to imply they have inside knowledge, which may or may not be true.

Stage 2 – The Pump is Maintained

The next step is for ‘Sub Pumpers’ to join in, they have probably already had reasonable success on other stocks just hanging off the coat tails of big pumpers. Sub pumpers will typically have a reasonable following too, perhaps 300 or so followers on twitter. They will also use rocket emojis…

Screen Shot 2017-04-21 at 15.35.34A common tactic of sub pumpers is to outline how difficult it is to buy shares, comment on the Buy price being about to move up based on the Level 2 order book or they might instead post charts prophesying how the share is about to breach a key resistance level. This plays on the human phycology that you are about to miss out on the golden ticket. Simple but very effective.

These posts may also be genuine and relate to good shares too, so it is not always easy to sort the wheat from the chav (chaff). The surefire way though is to ensure ‘sceptical’ is always your default mindset when investing in small caps. For example, the easy way to test whether it is indeed difficult to buy the share is get a quote on the stock from your broker, don’t go in blind. IG Stockbrokers are particularly good as they allow you to get quotes from the market makers irrespective of whether you have funds in your account. Try obtaining a £10,000 BUY and SELL quote. It is normally very easy to buy these stocks at any level but very hard to sell with any size. This implies there is limited real demand for the shares and sub pumper is lying.

Stage 3 – Peak Pump is reached

Once critical mass is gained a whatsapp or twitter private group will typically be created where all bulls will be invited to join. This is where naive and inexperienced investors begin to think they have the golden ticket, as in these forums they will only hear as to how fantastic the company’s prospects are. As a result they begin to tell the ‘offline’ friends, family and may even place large sums of their savings into the share. Significant volume is generated which can see sometimes 10-100x the average volume of shares changing hand in a day.

The bears will beginning to take note at this stage too, this includes experienced bearish investors such as Waseem Shakoor, Tom Winifrith, Gary Newman and many others. These guys usually highlight the flaws, or in the case of Waseem declare a short position. At this point the pumpers and ordinary investors who have far too much at stake will become aggressive and attempt smear campaigns. Any bearish posts will usually be reported on bulletin boards or twitter. This combined with ‘bulls only private groups’ means it is very difficult to receive any bearish commentary on the stock on question. At this stage the stock is likely to have achieved a valuation well in excess of fair value. This is the final stage of the pump and now it we are ready for…

Stage 4 – The DUMP.

The typical catalyst for the dump will be some sort of funding, usually a heavily discounted placing or other quasi equity issue. The price may have already come off a little ahead of the announcement as some participants in the placements (which may even be the same original pumpers) forward sell stock (sell stock with a delivery date in the future).

The dump can be horrific, for example the CloudTag Pump and Dump, dropped 40% on the day when the financing was announced. Those investors who bought into the Pump late could be nursing extreme losses over a very short period of time.

Once denial is overcome the usual reaction will be anger towards the various stakeholders in this order 1) The bears, 2) The board and 3) The broker. The individuals who actualy pumped the stock don’t get much flack. Quite often a lot of the social media accounts disappear often after the dump has landed and the cycle just repeats again…. Same tactics, different stock…..

REFLECTIONS

Pumping is grey area, how is it defined?

There is often a grey area with stock promotion, particularly for those in wave 2 or 3 of the pumping. The acid test for market abuse is ‘deliberate dissemination of false or misleading information’.

The issue is that some involved in distribution of information on bulletin boards and twitter might well believe what they are writing. The FCA Market Abuse Regulation does though not require the person engaging in such market abuse to actually intend to commit market abuse, however the FCA does define the below in MAR 1.8 as a factor to be taken into account in determining whether behaviour amounts to dissemination:

A normal and reasonable person would know or ought to have known in all the circumstances that the information was false or misleading, that indicates that the person disseminating the information knew or ought to have known that it was false or misleading.

It is though natural to be bullish on the stocks you own, I post positively about the stocks I own on twitter and on my own blog. The difference between blogers and other commentators such as I and the pumpers is that I genuinely believe in the investment case for the stocks I own and make considerable effort to verify what I post. I also have a financial background and post a transparent history of all my tips. On top of this I also outline the downside risks and make it clear to followers that this is not a recommendation to buy.

The FCA is not prescriptive on what is ‘false’ and ‘misleading’ but I believe the following factors are likely to be relevant if a case is bought:

  1. Posting content which you know to be false or misleading, which are deliberately designed to to make profit. As mentioned above.
  2. Correspondence proving intent to create a flase market. e.g. emails showing collusion between ‘pumpers’ and other documentation showing an organised ‘effort’.
  3. Your ability to impact the share price. If you have a significant following on social media or twitter then you have a higher degree of responsibility to verify your content in my opinion. Also important is the size of the company, with my 700 or so followers on twitter I can pump a FTSE100 company all day long, but it would not have a material impact on the share price. This does not make that activity moral though, as it still has the ability to cause financial loss to others.
  4. Selling your position whilst encouraging others to buy. It is natural to derisk some positions but to sell a large proportion of your holding substantially around the same time as promoting the share could be decisive factor as provide evidence as to whether there was an intention to make profit from the ‘false and misleading’ information or whether you had a genuine belief of the company as a long term investment.
  5. The level of financial gain made.

So Surely Convictions every week then?

Sadly there are limited convictions for ‘pumping and dumping’ on AIM. The FCA has limited  resources and simply does not have the time to investigate every case and naturally focuses on the market abuse at the higher end of the scale.

Unfortunately the best you can do for now is raise awareness of the ‘pump and dump’, which is the reasoning behind this blog post.

Are the companies concerned complicit?

There are four types of companies who find themselves those on the end of a pump and dump.

  1. Those directly responsible.
  2. Those indirectly responsible.
  3. Those who tolerate it.
  4. Those who extinguish it.

At the bottom end of AIM it is one of the CEO’s key roles to be able promote the company to enable it to raise money. The company leaking inside information directly to stock promoters is extremely rare though, two cases centre on African Potash and Cloudtag where both have been accused of lying in RNSs and therefore creating a false market. The information in these cases, if proven, also relates to deliberate dissemination of false information, albeit this is via the company directly rather than through a boiler room scam or a ‘pump and dump’

A source of inside information can also be from the city advisors of the company, i.e. indirectly. The broker arguably has the biggest conflict of interest in this context, they have an incentive to generate volume to enable the company to raise finance, and take a hefty commission as part of that process. This is of course is not sanctioned by the broker as a corporate but individual sales traders can lack the integrity and leak select information to known stock promoters.

Many companies tolerate the pump and dump, a single day pump and dump occurred on Fitbug where the company released a non regulatory news release (see article for details) which led to pumpers to propel the price to 550% in a single day. Rather than FITBUG immediately extinguishing and clarifying the news the company allowed the shares to trade most of the day before the NOMAD towards the end of the day pulled the plug and forced a clarification. The company followed up with a fund raise the following week on the back of this volume.

Some companies though immediately issue ‘speeding tickets’ when the share price rises on the back of no news – the right thing to do. Unfortunately though this is fairly rare and companies often let the share price get well ahead of fair value before taking any action.

Is this a victimless crime?

No. Some individuals recklessly promoting or pushing stocks on social media do not believe they are committing a crime. Ultimately though, selling stock in a false market to another punter is not a victimless crime. I don’t deny riding the momentum created by a ‘pumper’ can make you a lot of money, but there will always be someone left ‘holding the baby’ and the process is ultimately transferring wealth from the ‘Mugs’ to the ‘Pumpers’. For example, according to posts on bulletin boards some individuals who bought stock in Cloudtag at peak ramp have lost entire life savings. Think about that for a moment…

SUMMARY

The last year has seen some incredible gains on some small AIM stocks and whilst some of this has been as a result of renewed sentiment towards junior resource stocks on the back of a recovery in commodity prices, some I believe is as a result of an increase in the ‘pump and dump’ method.

Hopefully this piece though has given you an ability to spot when a stock is in the midst of a ‘pump and dump’. It should equally give you some insight into what is Market Abuse so you don’t inadvertently become a pumper yourself.

The pump and dump is not a victimless crime, it is a transfer of wealth from naive new investors to experienced pumpers.

African Potash – How long will £0.5m last? and who are AMS?

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


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:

afpo placing

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…

Summary

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.

African Potash Zambia Agreement – Pre Placing Ramp?

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


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.

SELL

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.

African Potash – The Beryl Agreement – More questions

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


I see Tom Winifrith has published an expose on African Potash regarding its December 2015 agreement with Beryl Holdings regarding the acquisition of African Fertilisers (Mauritus) Limited.

I have a lot of respect for Tom, he is one of the few people who has the balls to highlight some of the questionable practices that take place at the bottom end of the AIM market. I have already covered African Potash in detail in an existing article, the article raised a lot of questions on African Potash here, so I thought I’d look into the latest questionable deal on a list which is lengthening.

The Original Contract per RNS
Let’s start with what was originally published in the December 1st RNS. According to this RNS the deal was structured as a £1 up front consideration, with a deferred element based on the success of the new Mauritian subsidiary. Beryl has the existing knowledge, logistics, contacts of trading fertiliser and African Potash are paying to get access to this ‘know how’. The Deferred element is subject to meeting a minimum EBITDA of $4m in either the 1st or 2nd year, this would result in consideration of £8m ($10.4m) for the seller, Beryl Holdings.

This RNS is not particularly well written (standard African Potash), but the substance of the deal is that it represents a payment of 2.5x Earnings (todays fx) from African Potash to acquire a fertiliser trading operation, subject to a minimum hurdle of $4m earnings of the NEWCO. So at first glance, a very good and also low risk deal. Feels almost too good to be true? Yes, my only side note would be that there appears to be no ‘non-compete’ clauses included, so as far as I can see there nothing to stop Beryl continuing to trade fertiliser during the 2 years (less likely) or after the deferred consideration is triggered (more likely).

The RNS does then become murkier, what does this mean?

afpo 3

Does this mean that consideration will be payable based on the formula ‘EBITDA/EBITDA Minimum ($4m) x £8m’? But earlier in the RNS it was stated there is a minimum EBITDA, which surely implies no consideration is payable until EBITDA>EBITDAMinimum?

afpo 4

So then why further down the RNS does it say that consideration will not be made only if no EBITDA? I thought no consideration at all should be paid if EBITDA is <$4m? At best this is badly defined, at worst this RNS is misleading. Which one is it African Potash?

What has come to light on this agreement since the original 1st December RNS?
Tom Winifrith has published the legally binding heads of terms of the Beryl agreement on his website and it includes the following clause, which is not referenced above in the original RNS:

‘Beryl has a number of associated and subsidiary companies involved in agriculture, commodities and mining in Africa and will select with AFPO’s agreement another one of its associated or related companies suitable for a London Stock Exchange IPO, RTO or similar transaction or pre IPO Investment and AFPO will either introduce third party funding or invest itself GBP£600,000 for equity or quasi equity to enable this transaction or other necessary costs to be met’

To me there is a liability here, it appears that African Potash must itself or find a third party to inject £600,000 of funding into a Beryl Holdings related company. The clause is sufficiently vague to be any company that Beryl choses. The only caveat is that African Potash must agree, but what does that mean and what are the consequences of not agreeing? Tom has only received the heads of terms, they state that a long form agreement will be put into place subsequently to these terms being agreed. So is this clarified in the Long Form Agreement?

Having now read the full heads of terms myself I can see a few other inconsistencies between the Heads of Terms and the RNS, but in summary it looks like the deal might not be so good as implied. One could argue that this is in fact consideration for the acquisition, it is also clearly material, so why was it not included in the 1st December RNS?

What is the status of the contact today? Has the £600,000 been invested?

This is not clear. Assuming African Potash has released RNSs in compliance with AIM rules then no shares have been issued to Beryl Holdings as consideration. This is not unexpected as African Potash does not appear to have generated any material revenues on any of its deals so far.

In fact I can’t even see any evidence of the company African Fertlisers (Mauritus) Limited ever being incorporated on the Mauritian Companies Register. A bit concerning? Or is the Mauritian register out of date? Perhaps….

mauritian

Regarding Tom’s revelation, the £600,000 requirement from the contract would be a material investment and would require an RNS when the investment was made even if it was omitted from the original agreement RNS with Beryl. So far African Potash nor any counterparties to an investment have disclosed any investment on the LSE other than the Blenheim Natural Resources investment. Regarding this investment, having looked through the current shareholders and the TR1s disclosed I can’t see any evidence of ownership or other relations between Blenheim Natural Resources and Beryl Holdings so I think we can rule that one out. By the way, I still think the Blenheim Natural Resources investment stinks as covered here, but for different reasons.

But perhaps it has paid the £600,000 and not disclosed it as an RNS? On review of the unaudited interim cashflow African Potash has spent around £720,000 in the 6 months to the end of December 2015 and the balance sheet at that point shows no investments and $509,000 (£391k) of cash. African Potash raised a further £825,000 in a placing on 12 January 2016 and another £190,000 through warrant exercises with Bergen. So Total Cash would have been around £1.4m, and with the interest charges, PLC costs, trading costs and upcoming loan repayment to the FD’s wife then I think African Potash would have had to increase its funding to get a £600k ‘investment’ away.

So on balance I think it is unlikely that this £600,000 has been spent (‘INVESTED’) so far, but we will only know for sure or whether a liability has been included once the auditor gets its hands on the books and the final results for 30th June 2016 are published, past form dictates this will probably on 30th December 2016, i.e. right at the deadline when no one is watching. I’ll set a reminder though don’t worry Chris Cleverly!

So as a shareholder should I be worried about Tom’s revelation? Is it Fraud?

Should I be worried? Absolutely, I have already summarised the stinky smells that surround African Potash. This just adds to a long list of questionable deals that for me make this uninvestable at any price.

Is it Fraud? Potentially. I disagree with Tom that this a ‘Slam dunk’ case but it does raise a lot of questions. I think it hinges on the ‘with African Potash agreement’ clause. However, the best thing is for the company to put out an immediate statement clarifying the facts around this case.

It goes without saying this company in my view is an outstanding SELL.

African Potash – it’s not just the fertiliser which stinks here…

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One early childhood memory of mine was trapsing around the countryside collecting ‘cow pats’ for composting with my late grandfather, he’d add some kitchen waste to his finds, a load of earthworms and a few months later he’d have some fertiliser for whatever he was growing in his garden that year. Unsurprisingly his garden always hummed.

So with bad smells and fertiliser in mind I turn to African Potash, which is attempting to establish an integrated fertilizer company in Africa and in African Potash’s case its fertiliser smells like roses compared to its corporate governance.

Tom Winifrith has covered this in detail here but I thought I would join in with my favoutite African Potash transactions, i’ve got four for your below which quite frankly stink…

Note – The following article simply contains facts and poses questions, I am happy for the company to address these or correct as it feels necessary.

#1 The loan from the Finance Director’s Better Half

Katrina, wife of the FD loans the company money, a related party transaction.

afpo loan

The effective annual interest rate I have calculated here including the arrangement fee is 29.59%! Tom claims this is the most expensive loan in AIM history, i’m not sure but it must be close.

As I’m a nice guy i decided to help out the board of African Potash, I have found a credit card for them to use for their future funding needs, it’s a few % cheaper than Katrina’s loan and furthermore as a bonus the more they spend the more the board will earn free air tickets and hotels, which they can use towards their next trips to Uganda or Zambia:

afpo credit

Jokes aside, as at August 30th 2016, the loan would have cost them around £150,000 to service, this assumes the loan does not default (I’m not suggesting it will). My questions are – Why was this source of finance used? Was there no other way to raise money?

#2 The Investment in Blenheim Natural Resources

Just two weeks later African Potash used 10% of its bridge loan, £69,000 to invest in a small AIM Investment company Blenheim Natural Resources at 0.8p a share. This company invests in companies associated with Natural Resources. Some questions: What has this investment got to do with fulfilling the strategy of African Potash? Are any synergies created? How does it create value for African Potash shareholders? The shares of Blenheim Natural Resources stand today at 0.35p, less than half the level that African Potash subscribed at, so I can answer the third question then myself – no value has been created.

#3 Mr Chris Cleverly becomes NED of Blenheim Natural Resources

As part of the same transaction noted above the CEO of African Potash became a Non Exec at Blenheim Natural Resources. The RNS from African Potash did not mention the details but Mr Cleverly was also granted 27.5m share options. The options are yet to be exercised due to the failure of the shares to reach 1.6p for a period of 7 days, the vesting condition. It looks unlikely this will be achieved now, but it will be interesting to see whether any further options are granted at any point.

In the interest of being balanced though, the director pay at African Potash was at the year ended June 2015 was not actually obscene:

afpo directors

However, was Mr Cleverly’s NED appointment and the investment in BNR an attempt for Mr Cleverly to get a source of income?

#4 What happened to the 20,000MT of Urea?

Saving the best (worst) until last, let me run through the timeline of AFPOs maiden revenue:

6th January 2016
Goody Gum Drops, $10m of revenue and payment expected 35 days max to a customer. No mention of profit but good to get some revenues. Letter of Credit too so this is pretty much guaranteed cash!

Iadpo rns 1

12th January 2016
A placing of shares to raise £825,000 6 days later. With the joy of its maiden revenues due then no problem getting the placing away.

9th February
33 days after the deal was done, no sign of the money yet… Perhaps it is just a minor hiccup…

afpo rns 2

22nd April 2016
It all goes quite for three months and then….

afpo rns 3

After all that, no customer. Why did it take so long for African Potash to clarify the position? Why did the letter of credit fail? At what point did African Potash learn there was no customer? Was this before or after the placing?

What’s the verdict then?

SELL – Target 0.15p

I don’t think I need to say anything more. There are some serious unanswered questions here and it is no shock to see that the share price has collapsed since the 22nd April RNS. This company in my opinion is not an investment without answering these questions, pure and simple. Look forward to hearing from African Potash…

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.