By Arindam Nag and Patrick Chalmers
LONDON, Oct 6 (Reuters) - Ghana's Ashanti Goldfields Co Ltd and mining group Lonmin Plc were in talks with major banks on Wednesday to solve a potential liquidity crisis ahead of a possible Lonmin takeover of the African group.
A sudden spurt in gold prices has brought Ashanti face-to-face with heavy margin calls from its counterparties and threatens the company in which Lonmin owns a 32 percent stake and the Ghanaian government has 20 percent.
On Wednesday, the London-listed shares of Ashanti fell further, down $2.45 or over 30 percent to $5.70. Overnight its stock price closed at $5.00 in New York. Lonmin's shares were down 26 pence or four percent to 621p.
Lonmin -- former Lonrho Plc -- and Ashanti revealed on Tuesday that they were in talks aimed at Lonmin buying the remaining 68 percent stake it doesn't own.
Ashanti, which was valued at $890 million on Tuesday is now capitalised at around $620 million, down from around billion dollars on Tuesday morning when both parties announced they were in talks.
TALKS WITH COUNTERPARTIES
Industry sources familiar with the talks told Reuters that both companies were now trying to get a commitment from the counterparties, the banks with which Ashanti transacted its gold derivatives business, to agree not to ask for margin payments.
Ashanti hedged part of its production using a combination of forward sales and options built on the assumption of a continuing slide in bullion prices.
But gold surged from the $250s in mid-September, first in response to unexpectedly robust demand at the Bank of England's second gold auction and then more spectacularly after 15 European central banks pledged on September 26 to limit gold sales, lending and derivatives activity for the next five years.
As the dust settled from the rally, market participants in the banking and mining sectors were beginning to count the cost of having been resolutely bearish on gold's prospects.
Industry sources told Reuters that Ashanti executives had met officials of the Bank of England for support to ensure that the banks refrain from pushing the company into default by asking for margins calls. However, Ashanti could not confirm this.
VALUATION WILL DIP
Analysts say the two companies would now have to thrash out a value for the Ghanaian miner taking into account its total debts including hedge book liabilities, using a Net Present Value calculation to set the price.
``If you think you can pinpoint the liability then $5.50 is a good price. Someone may pay a 20 percent premium which could take it back to $7 or $8,'' one analyst said.
Industry analysts said South Africa's Anglo American and Canada's Barrick Gold Corp could also make a bid for Ashanti. However, some believe Lonmin would work hard to get this deal done to consolidate its gold interests.
U.S. investment bank Merill Lynch said in its note to its clients: ``Ashanti's hedge book could now seriously detract the company's ability to participate in gold price rallies.''
Ashanti said on Tuesday it had a net hedge position of 10 million ounces of gold with a replacement cost of $450 million.
The company had around $109 million in cash as on June 30, 1999 and has also long-term debts of over $600 million, making it difficult for it to raise further substantial funds.
A Lonmin-Ashanti combine would produce 1.9 million ounces of gold, making it one of the world's largest precious metals producers with potential of its stock being re-rated.
By Arindam Nag and Patrick Chalmers
LONDON, Oct 6 (Reuters) - Ghana's Ashanti Goldfields Co Ltd and mining group Lonmin Plc were in talks with major banks on Wednesday to solve a potential liquidity crisis ahead of a possible Lonmin takeover of the African group.
A sudden spurt in gold prices has brought Ashanti face-to-face with heavy margin calls from its counterparties and threatens the company in which Lonmin owns a 32 percent stake and the Ghanaian government has 20 percent.
On Wednesday, the London-listed shares of Ashanti fell further, down $2.45 or over 30 percent to $5.70. Overnight its stock price closed at $5.00 in New York. Lonmin's shares were down 26 pence or four percent to 621p.
Lonmin -- former Lonrho Plc -- and Ashanti revealed on Tuesday that they were in talks aimed at Lonmin buying the remaining 68 percent stake it doesn't own.
Ashanti, which was valued at $890 million on Tuesday is now capitalised at around $620 million, down from around billion dollars on Tuesday morning when both parties announced they were in talks.
TALKS WITH COUNTERPARTIES
Industry sources familiar with the talks told Reuters that both companies were now trying to get a commitment from the counterparties, the banks with which Ashanti transacted its gold derivatives business, to agree not to ask for margin payments.
Ashanti hedged part of its production using a combination of forward sales and options built on the assumption of a continuing slide in bullion prices.
But gold surged from the $250s in mid-September, first in response to unexpectedly robust demand at the Bank of England's second gold auction and then more spectacularly after 15 European central banks pledged on September 26 to limit gold sales, lending and derivatives activity for the next five years.
As the dust settled from the rally, market participants in the banking and mining sectors were beginning to count the cost of having been resolutely bearish on gold's prospects.
Industry sources told Reuters that Ashanti executives had met officials of the Bank of England for support to ensure that the banks refrain from pushing the company into default by asking for margins calls. However, Ashanti could not confirm this.
VALUATION WILL DIP
Analysts say the two companies would now have to thrash out a value for the Ghanaian miner taking into account its total debts including hedge book liabilities, using a Net Present Value calculation to set the price.
``If you think you can pinpoint the liability then $5.50 is a good price. Someone may pay a 20 percent premium which could take it back to $7 or $8,'' one analyst said.
Industry analysts said South Africa's Anglo American and Canada's Barrick Gold Corp could also make a bid for Ashanti. However, some believe Lonmin would work hard to get this deal done to consolidate its gold interests.
U.S. investment bank Merill Lynch said in its note to its clients: ``Ashanti's hedge book could now seriously detract the company's ability to participate in gold price rallies.''
Ashanti said on Tuesday it had a net hedge position of 10 million ounces of gold with a replacement cost of $450 million.
The company had around $109 million in cash as on June 30, 1999 and has also long-term debts of over $600 million, making it difficult for it to raise further substantial funds.
A Lonmin-Ashanti combine would produce 1.9 million ounces of gold, making it one of the world's largest precious metals producers with potential of its stock being re-rated.
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