Ashanti Goldfields, Ghana’s Golden Shares and a Hedge Gone Wrong

 Aa result of a hedging deal gone wrong on the back of the rally in gold prices buoyed by the decision of 15 European Central banks in September 1999 to curtail gold sales from their official reserves for five years, Ashanti Goldfield’s share price plummeted to a 12-month low of $3 on 6 October 1999 from an annual peak of $10.69 in January 1999. Here’s what Sam Jonah, the then CEO of Ashanti Goldfields had to say: “I am prepared to concede that that WE WERE RECKLESS. We took a bet on the price of gold. We thought that it would go down and we took a position”. Basically, Ashanti Goldfield’s liquidity problems were self-imposed by an ill-informed Goldman Sachs advise and subsequent management decision which not only took a major gamble (a.k.a lotto) on the price of gold by locking in a fixed price, but hedged an unusually high proportion of about 11 million ounces of Ashanti’s total reserves on the back of gold prices further plummeting.
Sam Jonah, Former CEO of Ashanti Goldfields

I am tempted to believe based on this transaction that the management of Ashanti Goldfields led by CEO Sam Jonah had little understanding about the complexity of these derivative transactions they got themselves into and engaged in a pure speculative hedging activity which its shareholders including the Government of Ghana weren’t entirely privy to until the company faced margin calls by counterparty traders. Why on earth would anyone lock in as much as 11 million ounces of production (50 percent of its reserves) in a deal which it had little control over external macro-economic forces – i.e. the buy or sell decisions of the major Central Banks? This is akin to GNPC’s derivative transactions with Societe General in which it accumulated losses of $47 million on crude oil bets it had little or no understanding of the complexity of the derivative deals. Ashanti Goldfields had contracted an almost $450 million loss on its derivative hedge book as a result of this bad and miscalculated move.

This is how the market played against Ashanti Goldfields bet. “In the last week of September 1999, the price of Gold jumped by $11 to $281.10 per ounce in London. This was after 15 European central banks gave a surprise announcement on Sunday 26 September 1999 to curtail the sale of gold from their official reserves for five years. This decision had come in response to the Sharp fall in the price of gold since the UK Treasury had decided in May 1999 to sell 415 tonnes from its reserves. The decision not to sell was welcomed within gold mining circles. A rise in Gold’s price it was argued will help gold mine operators hit hard by the collapse of the bullion price earlier that year. The bullion price as at 29 September 1999 was $281 per ounce nearly $30 higher than it was in August when it had reached its lowest for 20 years at $252. The price of gold was to surge to a new high amid volatile trading conditions. On 6 October, the price was fixed at $362.25 per ounce in the morning, before sliding back to $325.50 at the afternoon fix. This unexpected rise in the price of gold resulted in an increase in the long-term value of most mining companies.”