African Potash (LSE: AFPO) has become one of AIMs 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 hadstruck 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 its easy to see why, as the agreement wassigned 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 theCommon Market for Eastern and Southern Africa was signed, African Potash has gone on to ink separate deals with three separate parties for the supply offertiliser. The largest of these deals was announced only a few days ago and sawAfrican Potash sign amemorandum of understanding with an unnamed Zimbabwean fertiliser supply company to provide 150,000 metric tonnes of fertiliser per year.
Under the terms of thedeal 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 hasalready 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 doesnt 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 theexclusive right to conduct mining research activities for potash salts over the 702.5sqkm LacDingaProject Area, located in the Republic of Congo.
The companys strategy is to create avertically integrated platform for the mining, production and distribution of fertiliser acrosssub-Saharan Africa. TheLacDingaProjectisat the core of this strategy. Initial exploration results have shown thatLacDingacould be asignificant commercial deposit.
ButLac Dinga is still at the exploration stage. Whats more, African Potash lacks the cash to carry out the other part of its business plan, the acquisition offirms 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 ofLacDingawont be cheap. Moreover, based on historic figures,African Potash is burning through 1m a year just keeping the lights on.
The bottom line
Overall, it’s difficult to place a value on African Potash’s shares at present. Although it’s clear that there are plenty of risks ahead.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.