Who will have the Midas touch in Ghana?

Randgold has come from nowhere to challenge the mighty AngloGold in a billion-dollar bid battle for Ashanti. Jason Niss? reports

Randgold Resources' London headquarters could not be less prepossessing. The company, which a week ago made an audacious $1.46bn (?918m) all-share bid for its rival Ashanti Goldfields, squats in a couple of rooms in a serviced office block on Piccadilly. Randgold's name isn't even on the door.

A visit to the offices of AngloGold or its controlling shareholder, Anglo American, couldn't be more different. There - in ornate, opulent surroundings - the whole history and importance of an organisation that not only dominated South African mining but had a big hand in moulding southern African politics, is impressed upon you.

When AngloGold made its recommended $1.1bn bid for Ashanti earlier this month, this was a powerhouse extending its tentacles to absorb the promising Ghanaian company. It could hardly have expected an upstart like Randgold, which only eight years ago had assets of just $10m, to take it on.

Mark Bristow, Rand-gold's ambitious, hungry chief executive, is keen to play down the David and Goliath aspect of the battle for Ashanti.

"We're not going up against Anglo," he argues. "We have a clear and credible alternative to create an independent African gold business."

However, in almost the same breath he says: "What we want to do is change the mining industry model."

So you can see, this bid is as much a battle of cultures as it is of finance.

Ashanti is the tarnished jewel of the mining industry. The company was built up in the 1980s with the backing of Tiny Rowland's controversial conglomerate, Lonrho, to develop a massive gold deposit in Ghana called Obuasi. Mr Rowland installed his prot?g?, a young mining manager called Sam Jonah, as chief executive. Seventeen years on, he is still in charge.

Famously, Obuasi was the cheapest producer of deep-mined gold in the world - an accolade that made it attractive to all sorts of rivals, including AngloGold. But the stakes owned by Lonrho, now renamed Lonmin, and the Ghanaian government stopped any takeover.

Subsequently, though, things have changed. A disastrous options deal with Goldman Sachs in 1999 nearly bankrupted the company, and it was only saved thanks to a $75m cash injection from Lonmin.

Sir John Craven, Lonmin's chairman, then decided that the UK-based company wanted to get out of gold mining and so it would sell the Ashanti stake as soon as the share price recovered.

Recently, things have become even more complicated. Ashanti developed a mine in Tanzania called Geita, but had to sell half of it to AngloGold because of its financial problems. At Obuasi it has plans to exploit attractive deposits lying deeper than the current gold seams, but the costs of this project are daunting and this is part of the reason why the company entered bid talks with AngloGold and was able to recommend its offer.

"If somebody who has 28 per cent says they want to get out of here, they are no longer interested in your company, then you've lost your opportunity to grow," argues Mr Jonah. "If you then consider the government of Ghana's 17 per cent, then nearly 50 per cent of shareholders cannot back you with equity.

"We are talking about significant sums - more than $1bn would be easily consumed over the project period at Obuasi. Not all that can come from debt. It would be like going into a fight with your hands tied behind your back."

The total cost of the Obuasi Deeps project, as it is called, along with upgrading work at the existing mine, could be $1.3bn. Of this, $200m will be needed in the next two to three years. Additionally, Lonmin's loan needs to be repaid, presenting a $300m bill at the feet of a financially stretched Ashanti.

The AngloGold deal not only offered a way out for Lonmin - it would have a stake in a much larger group that it could easily sell - but provided a source of ready finance for Ashanti. The company had recommended it, Lonmin appeared happy and all that was needed was for the Ghanaian government to agree.

Not securing that approval could have been a fatal flaw for AngloGold. "It's a typical Anglo mistake," said one mining source. "They believe they can control what governments do." On Friday, the Ghanaians said they would welcome all bids for Ashanti.

Certainly, this allowed Randgold to come in with its rival offer. Randgold is a Jersey-registered company, with market listings in London and on New York's Nasdaq, which was spun out of a larger South African company, Randgold & Exploration (R&E), which still owns 35 per cent of its stock. It has developed mineral deposits in central and western Africa, the star being the Morila mine in Mali, which cost $103m to build and has delivered more than $250m of profits.

Although, on the face of it, Randgold's offer is worth 20 per cent more than AngloGold's, life isn't that simple.

A lot depends on the stability of Randgold's share price, which dropped 12 per cent after the bid was announced but has since recovered.

Then there is the question of whether Randgold has the wherewithal to exploit the full potential of the Obuasi Deeps project. Muneer Ismail of stockbroker Cazenove said in a note last week: "Randgold does not have the deep-level mining skills to take on the challenge of Obuasi Deeps, let alone the capital to meet Obuasi's requirements."

Dr Bristow rejects this: "We have $100m of cash on our balance sheet. We have once of the strongest balance sheets in the mining industry."

He admits that Randgold does not have the deep-mining expertise, but says it can buy that in from any number of mining consultancies - something that makes his company far more efficient than Anglo-Gold. "We build things for a lot less money than the gold majors," he says.

But then there is a third problem: the South African Reserve Bank. It has been concerned about assets fleeing the country, and may block any further reduction of R&E's holding in Randgold. As the Randgold all-share offer would leave Ashanti shareholders owning 70 per cent of the new company, this would lead to R&E's investment being cut to just over 10 per cent.

However, a fourth and more serious problem may soon arise. There are two other potential bidders waiting in the wings: the Canadian groups Placer Dome and Barrick Resources. Both are seen as likely bidders which could offer an element of cash to sweeten the deal. Barrick, for instance, has $1bn of free cash on its balance sheet.

Mr Jonah admits there have been others showing interest in Ashanti as well as AngloGold, but won't name names. "We have been in discussions and went quite far with two companies, but were unable to conclude a deal." As for the potential of more bidders entering the fray, he laughs. "There may be other companies going forward. God bless Ash-anti shareholders."