Why this food and oil play could be a multi-bagger
For years, Sub-Saharan Africa's oil sector has been dogged by politics and war. But that could all be changing, says Bengt Saelensminde. That would be a boon for this unlucky explorer.
On Monday I told you about a fantastic play on the thrilling emerging market of Sub-Saharan Africa. We looked at how it's making money by helping develop beef, maize and cocoa farming.
But this stock is far more than just a punt on Africa's growing agrarian sector. What I'm really excited about are the opportunities it's developing in the oil business. This is what could really drive its share price.
Today I want to delve a little deeper into Agriterra's (AGTA:LSE) business.
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I mentioned on Monday that Agriterra has caught the attention of City financiers recently. And there's more to that than meets the eye, as I'll show you.
From world class spin bowler to successful entrepreneur
This company is not run by just anybody. If your memory stretches back far enough, you may remember former England cricketer, Phil Edmonds a great spin bowler during his 70s and 80s heyday.
Well, since hanging up his whites Edmonds has become a leading entrepreneur in Africa. He and his business partner Andrew Groves have set up several successful businesses operating on the continent.
And these guys seem to know what they're doing. Not only are they growing the agri-business at great guns (as we saw on Monday), but they've also got their eye on the bigger picture.
They've seen first-hand the massive export potential from countries such as Guinea, Mozambique, Mali, Niger and Burkina Faso. But they also know that there's only limited infrastructure in place for getting goods shipped out of these countries to market.
That's why in February last year, Edmonds and Groves signed a deal with the Guinean authorities to greatly expand the port of Conakry. AGTA won the concession to build a 30 hectare East Zone to the port. This will include grain storage silos, processing plants, logistics depot, a fuel depot and freight hangars. And AGTA gets to run these facilities for 20 years.
Basically, they want to bring modern logistics and freight infrastructure to this part of the world.
And given how they're growing their business it looks like they're going to need it...
Cornmeal, cattle, cocoa, palm oil, coffee. You name it...
On Monday we looked AGTA's farming businesses in Mozambique. Having made a success of that, the directors have moved on to fresh pastures.
AGTA recently expanded into Sierra Leone. As well as cocoa production, it's snapped up a palm oil business too. And, as in Mozambique, they don't just run their own holdings, they buy production from existing farmers too. This means they can grow the business quick-smart.
Executive director Euan Kay says he's confident that he can finance the port development from existing cash-flow and finance initiatives from interested parties. He has no plans to come back to the market for more money. And that should be great news for shareholders.
But I told you there was more to this stock than meets the eye...
Why an oil bonanza could be on the cards
As I said on Monday, this stock isn't without risk. In fact, it has a rather chequered past. Before 2009, the business was quite a different beast. Trading under the name White Nile, it was an oil exploration business based in Africa.
Tens of millions of pounds were pumped into buying oil licences and forming alliances in Africa. A quick look at the balance sheet shows they've written off nearly $108m over the years (mostly from the oil business).
But I don't see that as a failing of Phil Edmonds and Andrew Groves.
Basically AGTA was the victim of African politics and war. The result of which was nothing ever came of the oil business. When the directors saw the opportunities in agriculture, they quickly changed tack.
And the great thing is that those horrible losses in the oil game are all ancient history. They aren't hanging over the business now. What's even more exciting is that there could be a couple of very interesting profit-kickers here. That's because AGTA still has some exposure to those old oil exploration licences. Here's why.
When AGTA decided to go into agriculture, the directors struck a deal with Canada's Africa Oil. In return for 80% of their exploration rights in Ethiopia (in a place called South Omo), Africa Oil would undertake all the expensive exploration work. The deal means that AGTA retained a 20% stake and had a free ride on the exploration and drilling works.
And now the prospects of finding oil have been given a decent fillip. That's because Tullow Oil (a big-wig oiler with extensive experience in Africa) has bought into the deal. Having bought-in their shares from Africa Oil, Tullow now owns 50% of the project. Knowing Tullow's experience in Africa, my bet is that it wouldn't have bought in if there weren't decent prospects here.
With oil prices surging and users looking to move away from Middle Eastern hot-spots, AGTA's 20% stake could, in the words of AGTA's chairman "be very lucrative for shareholders". I expect to get news on how the exploration is going later this year.
And there could be another nice little left-over from the oil days. White Nile also had exploration licences in Sudan. Yet war (and politics) blew a hole in this side of the business.
Now that there's peace, AGTA says it's in negotiations with the Sudanese government and hopes to receive some compensation for its losses. We don't know how much (if anything) will be payable. But then again, anything would be a boon.
The point is, it all adds to this very exciting play on Africa's natural resources.
What you need to know before you invest
Let's not be under any illusions here. This is a penny-share punt that comes with high risk. We've already seen how operating in Africa can cost dearly.
And though I sincerely hope management is right when they say they're not coming back to shareholders for more money, you can never be certain. If they do, it could dilute the value of your holding (even if, as last time they got a deal away at a premium to the share price).
The fact is, dealing with food commodities and oil can be a risky business. Commodity prices are all over the place these days and can make a company's profits (losses!) volatile.
And to top it all off, we know that emerging market (and risky) stocks can take a hammering if the markets start to get a little twitchy. It's the classic risk-on trade that can get hit hard as soon as investors panic.
All of that said, I think the potential rewards outweigh the risks on this one. Especially when you consider what could be a very lucrative oil find. We'll just have to sit tight and wait for news on that.
Interim trading figures out this morning look pretty positive. Nothing new there as far as I'm concerned. The company is showing a loss of $3.5m over the last six months. That's because it's aggressively writing down recent investments and focusing on growth. AGTA tells us it's got $11.4m in the bank.
I've seen a target price of 7.1p from broker Matrix and that doesn't take into account the possible oil pay-out. So that's a potential double from here if they're right but who knows?
As far as I'm concerned, there are so many variables that putting a target in is a bit difficult. I'm just hoping for a multi-bagger over a five to ten year period. But I would say that you need to take that punt knowing that you could lose it all if it doesn't pay off.
Agriterra is one for a small punt as far as I'm concerned. I'd buy some shares, sit on them and see if it works out. If you fancy that kind of high-risk/high-reward, tuck it away and see what grows. If we get that oil bonanza then so much the better!
Ticker: AGTA:LSE
Mid-Price: 3.4p
Bid/Offer Spread: 3.35p/3.4p
52 Week High/Low: 3.85p/1.975p
Market Cap: £36m
Five year performance: 2007 -66.74% | 2008 -93.3% | 2009 +182.14% | 2010 -52% | 2011 +1.56% | 2012 (to 28 February) +26.39%
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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.
He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.
Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.