Carry on up the Nile
Martin Vander Weyer unravels the tale of an African oil venture which has startled the stock market White Nile is certainly a name to conjure with. It recalls Alan Moorehead’s epic account of the adventures of Livingstone, Stanley and Gordon of Khartoum; readers who have spotted it on the business pages these past few weeks may have been transported back to the childhood excitement of H. Rider Haggard’s King Solomon’s Mines. The White Nile story now buzzing round the City has all the ingredients of a Victorian classic, including a merchant adventurer who was once a sporting hero, an expedition among the warring tribes of darkest Africa and — so far — a distinctly cliffhanging outcome.
But it is also a morality tale of the modern stock market. The saga began in February with the flotation on London’s Alternative Investment Market (AIM) of White Nile Ltd, a would-be oil exploration business which at that stage was (and indeed still is) a ‘shell’ company, its only asset being £9 million cash raised in the flotation. Its promoter was Phil Edmonds, better known to cricket fans as the Middlesex spinner who took 125 Test wickets for England in the 1980s. Since then he has put on a little weight and acquired a new following among investors on the wilder shores of the natural resources sector, having made money in three previous African ventures.
He looked set to do the same again with White Nile, having bought his own 9 per cent holding at the nominal price of a penny a share and brought in other professional investors at the flotation price of 10p. After that, however, things seem to have gone haywire. Rumours of an oil deal in Sudan pushed the shares sharply upwards, and small investors of the kind who hunt for hot tips on Internet bulletin boards started chasing them. Other players — including one who likes to be known as Evil Knievil — took a sceptical view and started short selling, which means selling shares they had not yet bought in the expectation of buying them cheaper later. The effect, in a thin market, was to drive the price to a peak of 138.5p, making the shell worth £208 million and turning Edmonds’s £15,000 stake money into a theoretical £19 million.
At that stage White Nile asked for its shares to be suspended, and felt obliged to say a bit more about its plans. It had, it said, struck an agreement with the government of southern Sudan to acquire a 60 per cent stake in a 67,500 square kilometre block of the Muglad Basin oilfield. Sudan has proven oil reserves of 700 million barrels, so the proposition looked promising. Edmonds described it as ‘conceptually ... very simple’; his colleague Andrew Groves said they were just waiting for the lawyers to ‘dot the i’s and cross the t’s’.
This conjures a pleasing vision of City solicitors sweating under inadequate ceiling fans in the remote southern Sudanese capital of Rumbek. Their pens may be hovering over the documents for a while yet, because the situation is anything but simple. The former Sudanese People’s Liberation Movement gained power in southern Sudan only in January this year after a peace agreement ending a ruinous 21-year civil war between Muslim Arabs in the north and Christian and animist Africans in the south. The new regime confirms it first signed a deal with White Nile in August 2004.
The problem is, however, that Sudan’s other government — sitting in Khartoum says it retains power over all oil deals throughout the country, and is not about to approve this one. And the French oil company Total says it has held rights since 1980 to explore the block claimed by White Nile. The southern Sudan government says Total forfeited its rights when the civil war forced it to abandon the site in 1984; Total says it reconfirmed its rights with the northern government last year. Some commentators say the row could destabilise the whole peace settlement, and swift resolution is not looking likely at the time of writing.
It’s a gripping story, but not one on which any sane person would bet their savings. Or is it? If there’s oil under those Muglad marsh lands, a world price of $50 a barrel justifies quite a lot of hassle to find it. Edmonds and his crew are at the wildcatting, not to say buccaneering, end of the industry, but their record suggests that they usually know what they are doing. The commodities the industrial world wants — oil, copper for Chinese electronics factories, rare precious metals such as palladium and tantalum — tend to be found in inhospitable places, from the ice fields of Greenland to the steppes of Central Asia. Such places attract a special breed of entrepreneur.
And they are not all rogues. As one of them told me wistfully, ‘We’re in the same part of the investment spectrum as earlystage technology and pharmaceutical ventures. But for some reason mining has this reputation for charlatans.’ The Bre-X scandal in 1997 — in which a small Canadian company claimed fraudulently to have made huge gold finds in Indonesia — wiped out the possibility of raising start-up capital in the sector for years afterwards. Now, with commodity demand so strong, ‘mining minnows’ are all the rage again — with Cairn Energy, a Scottish oil company drilling in Rajasthan, as the role model. But promoters are worried that if White Nile turns into a fiasco, they will all be tarred with the same old brush again.
In Australia and Canada, they say, both the regulators and the investing public have a much better understanding of the risks and rewards of oil and mining exploration. But in London, knowledge is confined to a small circle of specialist investors; and misconceived listing rules make matters worse. Why should any company be allowed to offer its shares when it is only a cash shell with a vague sketch of a business plan? That was how loony ‘dotcom incubator’ stocks took off, and look what happened to them. Yet there are dozens of shell companies with snake-oil stories from all over the world queuing up to list on AIM and take advantage of the rising market.
Another anomaly is that because, for ‘investor protection’ reasons, these offerings cannot be marketed to the wider public in the way blue chip shares are, the wider public only gets to hear about them afterwards often from unreliable Internet sites. So the insiders get in at 10p, and the small fry follow blindly all the way up to 138 and a half.
‘Buyer beware’ is the moral of the story. I caught up with another veteran mining financier, Dr David Hargreaves, at Heathrow en route to South Africa in pursuit of a deal. ‘What you have to understand,’ he said, ‘is that these are highly speculative ventures by their very nature. If you’re nimble, you can make five or ten times your money. But you’ve also got to be prepared to lose your entire stake. So just don’t bet your children’s shoe leather.’
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