Ashanti - the full story.


Everyday, at the Obuasi gold mine in western Ghana, the price of gold is written on a small black board that is circulated among miners. Everyday, miners from Obuasi prayed for gold prices to go up, ignoring the adage, 'Be careful what you ask for; your wishes might come true'. The surge in gold prices at the beginning of October may have been the answer to the miners' prayers but it was a nightmare come true for Ashanti Goldfields, their employer.

Exposure to derivatives, known as 'exotics', brought it to its knees eventually forcing it to give banks to whom it owed money, 15% of its equity at a knock-down price. It forced Sam Jonah, Ashanti's chief executive, to confess "I am prepared to concede that we were reckless. We took a bet on the price of gold. We thought it would go down and we took a position."

Dumbfounded by paradox

Obuasi miners were not the only ones to have been dumbfounded by this paradox; the banks and the managers seem to have been caught totally off-guard.

Although fairly new to Africa, derivatives and commodity price-linked scandals have an air of deja vu. Many first-class international banks made mistakes in the past and paid the price for them, the most famous example being Britain's oldest merchant bank, Barings, being driven into bankruptcy.

But if errare humanum est (to err is human), persevering in the same type of mistake is a crime that banks involved in the Ashanti turmoil may be guilty of. Unless they can argue that the problems faced by Ashanti were both exceptional and idiosyncratic.

To understand if this was the case, let us try to unravel the facts from heated rhetoric that ensued after the first warnings that Ashanti was unable to pay sums due to its bankers.

These warnings brought down the share price of Ashanti - in New York it fell from $10 to below $4 in two days, until trading of the shares was suspended on 6 October.

The following day, the 17 banks with which Ashanti had transacted its derivatives business agreed to a temporary moratorium on their claims. The management of Ashanti was still hard-pressed to explain what had actually happened and to find money quickly.

These were closely linked, since a thorough understanding of the problems was necessary for Ashanti to decide on the most adequate lifeline.

Ashanti said that it had been actively hedging its position in order to protect profits against falling gold prices. Its hedge book consisted of gold forward contracts and options and when the fall in gold prices unexpectedly reversed, the value of the hedge book suddenly fell to a negative $572m.

Based on gold prices of around $325 per ounce, Ashanti owed around $270m to its bankers in margin calls and other cash deposits.

Nothing exceptional so far. Margin calls are the rule for both exchange traded and over-the-counter (OTC) price derivatives transactions. They are based on the cash value between mark-to-market of the hedge book and aimed at protecting those at the other end of the derivatives' contract to make sure they get their money when the...

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