JONAH ADMITS: "WE WERE RECKLESS"

Sam Jonah, Ashanti's chief executive, said: "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." -- THE FINANCIAL TIMES

Ashanti left exposed by 'exotics' By Gillian O'Connor Mining Correspondent

Ashanti, the Ghanaian gold mining company that almost defaulted last month, was brought to its knees by holding cheap, high-risk derivatives known as "exotics".

Several investment banks, including Goldman Sachs, Ashanti's corporate adviser, sold the company the exotics as an insurance policy against the falling gold price. But a sudden turnaround in the gold price - caused by a declaration by European central banks limiting sales and loans of gold - left Ashanti and several other gold producers dangerously exposed and in some cases vulnerable to cash calls from the banks.

Ashanti, which last week abandoned plans to merge with Lonmin, the rump of Tiny Rowland's African empire, has since been forced to give the banks the right to 15 per cent of its equity at a knockdown price in return for the banks waiving their rights to margin calls. The affair has left Ashanti crippled and focused attention on the multiple roles of Goldman and other investment banks in the bullion market.

Goldman was a long-standing corporate adviser to Ashanti. It acted as one of the leading derivative counterparties and was a member of the syndicate of banks that had lent Ashanti $270m to finance its mining activities.

Like other big investment banks, Goldman operates "Chinese walls" to avoid conflicts of interest. In the middle of Ashanti's liquidity crisis, Dr Ewan Kirk - described as "a rocket scientist" in derivatives - was sent "over the wall" from the trading division to help Ashanti calculate the extent of its debts. The crisis team discovered an alarming state of affairs with Ashanti's hedge book at one point showing negative net worth of $570m which gave the banks the right to call for $270m of cash deposits.

About 15 per cent of the hedge was in exotics which were cheap when the gold price was low. But the potential liabilities for Ashanti escalated enormously when the gold price turned.

Mark Keatley, Ashanti's chief financial officer, said that a worst-case scenario would have pushed its total hedge exposure up by 50 per cent to 15m ounces - amounting to 70 per cent of its total gold reserves, the company's sole assets.

AngloGold, the large South African gold miner, said it would not buy such high-risk derivatives because the risks are unquantifiable. A bank involved in the Ashanti rescue described the cheap, high-risk derivatives as "toxic waste" because "they sit there quietly and contaminate everything".

A spokesman for Goldman Sachs confirmed that Goldman had "structured hedging transactions" with Ashanti but declined to elaborate, on the grounds of client confidentiality.

Sam Jonah, Ashanti's chief executive, said: "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."