Shares in African Potash (LSE: AFPO) have jumped by as much as 19% in early trade this morning, after the company announced that it had signed a deal with South African investment company Beryl Holdings.
The deal will see African Potash and Beryl Holdings collaborate on fertiliser operations in southern and eastern Africa. Under the terms of the agreement, African Potash will enter a long-term deal with Beryl whereby Beryl will restructure its main fertiliser trading activities into a newly-formed Mauritian company, which will become a wholly-owned African Potash subsidiary. The Mauritian company will not be inheriting or having novated to it, existing revenue generating contracts of Beryl, however, Beryl will help the company build new relationships with customers via its existing presence in the market.
As part of the deal, African Potash is paying Beryl £8m but this payment will be issued retroactively towards actual earnings achieved. The Mauritian company needs to achieve minimum earnings before interest tax amortization and depreciation (EBITDA) of $4m in either the first 12 months after the deal completes, or second 12 months after the deal completes (first and second period) before the payment is due to Beryl.
It’s clear that the deal announced today between Beryl and African Potash is extremely significant for the AIM minnow. African Potash is trying to build an African-focused potash company, and while management has had some success signing deals with customers for the supply of potash and fertiliser, revenue has remained elusive. But today’s deal should change that. Beryl and African Potash are now working towards a common goal, and Beryl won’t get paid unless it helps African Potash meet earnings targets.
All in all, it has been a year of progress for African Potash. According to the company’s last trading update (before the Beryl announcement), the group is close to closing its inaugural fertiliser trade and is in discussions with lenders about the availability of a trade finance facility for $50m to fund operations. If all goes to plan, African Potash should be generating revenue and even cash flow within six months to a year, the agreement with Beryl should help speed up the group’s growth.
Still, while the future looks bright for African Potash, it looks as if the market doesn’t trust the company to meet its own growth targets. Indeed, after rallying to a high of 3.3p in September, African Potash’s shares have languished since and currently trade 47% below their September peak. And it remains to be seen if the company’s shares can return to their all-time high of 9p reached at the end of 2011. One thing is for sure, however: without any revenue, this company isn’t suitable for widows and orphans. Until African Potash starts to generate revenue and cash, the company will remain a high-risk bet, suitable only for those investors with a high-risk tolerance.