Baker Street, London -- The market climbed rapidly this morning ahead of the Bank of England's decision on interest rates. Financials and telecoms were the main beneficiaries as the market responded to 2% gains on the Dow and NASDAQ indices yesterday. At noon the Threadneedle Street Posse decided to keep rates unchanged.
The flotation price for QXL has been set at 195p. This values the company at £263m and means the float will raise £55m before expenses. It was eight times oversubscribed and QXL members will each receive 256 shares. That's a whisker under £500 each. By way of comparison, Freeserve(LSE: FRE) was over thirty times oversubscribed and investors received shares worth £750. Did you hear TMFFoolUK, David Berger, discussing the company on Radio 5 Live just before 8 'o'clock this morning? Judging from the hush on our QXL board this float is considerably less popular than previous UK internet IPOs. What do you think about its prospects? Pop over to the message board and have your say.
N Brown Group(LSE: BWNG), the Manchester based direct catalogue home shopping retailer, reported some market pleasing interim results this morning. The shares rose 36.5p to 362.5p. Profits were up 14% and the group believes e-commerce will provide the opportunity to leverage its business. Trading in the last five weeks has shown an 8% improvement over last year. The group is looking for small acquisitions in fulfillment services and wants establish further alliances with big retailers, similar to the one it has with William Morrison(LSE: MRW)
Freeserve(LSE: FRE) is on the march again. This morning it stepped up 14.75p to 176p. The main reason seemed to be the very strong third quarter earnings reported by Yahoo!(NASDAQ: YHOO). The 'Hoo reported turnover up to $155m, compared with $63m in the same quarter last year. Profits (yes, profits!) were up to $40m from $7m. Later today, after they've woken up, we'll bring you a summary the results, courtesy of our new Stock Ideas feature, American Shares.
Kingston Communications(LSE: KCOM) have telephone services in the Hull area nicely sewn up. This morning they announced the launch of a new ADSL service. This will start on October 18 with 1,500 customers but will eventually be rolled out to all of Kingston's 155,000 users. The market approved and the shares climbed 29p to 462.5p.
Elsewhere in the telecoms sector, hopes of mergers and takeovers drove other stocks higher. Colt Telecom(LSE: CTM) rose 105p to 1675p and Orange(LSE: ORA) climbed 60p to 1284p.
Despite the hi-tech frenzy this morning one IT stock has not done that well. Misys(LSE: MSY) was the largest faller in the FTSE 100 after rumours circulated that Merrill Lynch had cut their forecasts for this year and next year by some 10%. Misys dropped 28.5p to 508p as the market waited to see if these rumours had any substance.
SSL International(LSE: SSL), recently formed by the merger of Seton Scholl and London International, fell 30p to 672p. The owners of the Durex brand are reputedly suffering from sluggish trading according to a national newspaper. Maybe this is a seasonal stock, that sees its best gains in the Spring?
Durlacher(LSE: DUC), the internet investment boutique, paused for breath after its frantic gains of the last three days. The shares were down 35p to 662.5p after last night's announcement that the company had not received any bid approaches. The directors of the company thought the price rise was due to "the growing recognition of our expertise in European emerging technology convergence and media markets". How modest.
Rank(LSE: RNK) pleasantly surprised us this morning. They are taking analysts and shareholders to Orlando for site visits to Universal Studios Escape and Hard Rock Cafe and decided to issue a trading update ahead of the trip. How refreshing! Perhaps the likes of Reuters(LSE: RTR) should take note? Unfortunately for Rank the market wasn't overly impressed with the small print and marked the shares down 11p to 213p.
One of the key tenets of Foolish investing is the avoidance of complicated derivative transactions. These are strategies using such instruments as options and forward sales and usually involve a company, or an investor, undertaking to complete a deal at a certain time in the future.
A salutary tale of the risks of these types of transaction has been provided this week by Ashanti Goldfields(LSE: ASN). Ashanti is a Ghanaian gold mining company that is listed in London, but is not part of the All Share index because the company is not domiciled in the UK.
As its name implies, the company mines gold. Its main mine is in Ghana but in recent years it has expanded into other parts of Africa by buying other companies such as Cluff. Despite this volume expansion the group has obviously suffered a lot from the declining gold price. To try and ease the pain Ashanti had gradually increased the size of its forward sales programme to lock in higher prices.
Gold is unique among commodities in that it always trades with a contango, i.e. it behaves more like a currency. This means that the forward price is always higher than the current price by a factor directly related to the gold interest rate. In other words gold is like money. If you put a pound in a bank for a year it should be worth about £1.06, after interest. Gold is the same.
What this means is that gold mining companies can arrange to sell gold at some time in the future, say one or two years ahead, and guarantee getting a price that is higher than today's.
Ashanti went into this business with gusto and, at the end of last year, had contracts in place for 7.2m ounces of gold. That is a very large position for a company only producing 1.5m ounces a year. In effect it had totally committed the next 5 years of production. The reserve base of 23m ounces is well placed to cope with that, but there was a risk to the banks if mining was interrupted for whatever reason and the company could not deliver metal to satisfy the terms. That didn't worry people too much because the deals were all above the current price. So, if there was problem it would buy gold more cheaply in the market to fill the deal.
In total this hedge book was worth $201m at the end of 1998. A big commitment for a company with shareholders' funds of only $549m and borrowings of $377m -- a ratio of 69% net debt to equity. Unusually stretched for a miner.
Last year the price of gold averaged $294 an ounce, and this year fell to a low of $252. Most mining companies attributed the weak price to continual selling by central banks, and the Bank of England in particular. Also overhanging the market were fears that the Swiss and the IMF would finally get round to selling some of their gold as well.
So there was great relief at the IMF meeting in Washington last week when all the European central banks agreed to limit the amount of gold they would sell over the next 5 years. Gold dealers rushed to cover their short positions and the price shot from $255 an ounce to $316 in the space of a few days. Gold shares reacted joyously and the Ashanti stock went from $6.7 to $10.
Then someone had a thought. All those short sales Ashanti had agreed to meant that it had to meet margin calls from the banks -- to demonstrate that it had enough cash to meet its obligations. Obviously, agreeing to sell 7.2m ounces over five years when gold is $255 is much less of a liability than selling 7.2m ounces at $316, when the gold concerned is still in the ground. The hedge book went from being an $200m asset to a very large, probably $200m, liability in a day or so. The company was facing a massive liquidity crisis.
By now the markets had got wind of this and pushed the shares down to $4.5. Now Ashanti is in deep discussions with its bankers and is likely to fall into the clutches of Lonmin (LSE: LMI). So now, basically, Ashanti is toast.
It is hard to resist this temptation to recall this maxim to sum up the whole sorry episode of Ashanti, so I won't.
Be careful what you wish for -- it just might come true.
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