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      • Week the City caught White Nile fever

Week the City caught White Nile fever

Phil Edmonds' Test match bowling average of 34 was hardly distinguished, but the former England cricketer is now producing mind-boggling numbers. His £15,000 investment in White Nile, a company looking for oil in Sudan, has been transformed in a fortnight into a stake worth £20m.

It's a theoretical price, because trading in the shares was suspended on Wednesday. But, given that one of his other African mining companies also invested, Mr Edmonds can claim to have boosted his net worth by an average of about £1.5m a day this month.

After just four days trading on the Alternative Investment Market, White Nile is already a legend. The surge in the shares from 10p to 137p took the company's valuation to £212m, despite its sole asset being £9m of cash. It was an absurd over-valuation and proved White Nile fever is as dangerous and inexplicable as the speculative madness of the dotcom years.

Just as then, internet bulletin boards, where small investors swap rumours and opinions in the hope of quick profits, played a part. Nobody knew what deal White Nile had secured in Sudan, but the rising share price was interpreted as proof that it must be lucrative.

Yesterday was meant to be the day that White Nile revealed all. On Wednesday, the company said it had agreed to buy a 60% interest in a 67,500 sq km block in part of the Mugland basin in south Sudan and would elaborate further. It waited until 5.10pm yesterday to announce that it had "not yet been able to prepare such information". Wait until next week, it said.

White Nile may have something interesting. The problem is its £200m valuation. The political risks look real. The autonomous government of south Sudan was established only last month after 20 years of civil war. Even if the seismic results from the field are promising, more cash will be needed to build roads and other infrastructure in the area, notably a pipeline to carry the oil.

Even before the suspension of trading, such facts of life had not escaped another breed of investor from the dotcom days - the short-sellers. Betting that a share price will fall used to be the preserve of market professionals, but spread-betting companies made the process simple. Anybody can do it on the internet or by telephone.

The grandaddy of the shorters is Simon Cawkwell, who enjoys the nickname Evil Knievil and established his reputation long ago by shorting Robert Maxwell's companies. Mr Cawkwell announced his scepticism about White Nile from the outset, vowing in his internet diary not to be deterred by the rising share price.

He made the reasonable point that another Sudanese oil field, called Heglig, had just changed hands for $750m (£400m) but had a major advantage over White Nile's: it is actually producing oil - 220,000 barrels a day.

"So, 60% of Heglig is worth £246m and is throwing off cash like Billyoh," he wrote. "60% of an area where all we have is seismic data and which is miles away from any infrastructure is worth £197m. Give me a break."

Other shorters took their cue. Angus Campbell, head of sales and marketing at spread better Finspreads, said shorting White Nile has been "the trade of the year so far" for his clients.

IG Index, unable to get hold of White Nile shares to cover its position, refused to take bets. "It's extraordinary, it's almost like the tech bubble revisited," said senior dealer Will Armitage.

Indeed, a classic bubble had developed. White Nile's shares are tightly held by the directors and the handful of investors who were invited into the £9m pre-float placing. The harder the shares became to buy, the more the price rose. As it passed 100p, some even bought on the theory that the shorters would panic and start buying to cut their losses.

Hardly anybody paid attention to the prices paid by the directors and the initial investors. Mr Edmonds and his business partner Andrew Groves got their 9.7% stakes at 0.1p soon after the company was founded last December. The outsiders in the placing, who include George Robinson, co-founder of Sloane Robinson, one of London's most successful hedge funds, paid 10p a share. All these prices were disclosed in the flotation document.

Mr Robinson, a multi-millionaire, invested £800,000 of his own cash and describes as "bizarre" what has happened. He regards the 10p level for the placing as "fair" given that White Nile was a cash shell company. "We were paying 1.6 times book value, so there was a premium there," he says.

Mr Robinson also has a tentative answer to the question that has been bothering many: if south Sudan is really so lucrative, why is its government negotiating with an ex-cricketer and the 36-year-old Mr Groves? The pair have been successful in Africa in the past, but they are not BP.

"I think the oil majors are there," says Mr Robinson, "but this route - through a London-listed company that can raise money and get things going - may mean that they [the south Sudan authorities] get their oil revenues quicker.

"If you ask most people about south Sudan, they think of the Janjaweed [the militia] and throw their hands up in horror, and I think that applies to most corporates as well."

And, of course, small mining stocks can be highly profitable investments. Quoted hedge fund RAB Capital, which has invested £1m in White Nile, has generated spectacular returns from mining stocks in the past. Asia Energy, for example, has produced a 50-fold return, says RAB chief executive Philip Richards.

"It's a bit like the 19th century - the world is opening up and you can invest in places that 15 years ago it would not have been possible," he says.

"With Asia Energy, there was just a big field in Bangladesh with, we hoped, a large coal resource underneath," he says. "You can look at these things as a glass either half-empty or half-full. On the half-full view we were well on the way to proving there were a billion tonnes of coal there.

"It is the same with White Nile. It is just a patch of ground in war-torn Africa but, if you can get the oil out of it, it could be worth a lot of money."

It could be. For sophisticated investors such as RAB and Mr Robinson, it makes sense to invest at 10p a share in management they trust. They are running portfolios of such investments.

The bulletin board speculators, however, are playing a very different game. Their strategy tends to be quick-in, quick-out and trade on rumour. The more sophisticated may make money by exploiting wishful thinking, and the law of averages dictates that some will just get lucky.

Many more will not. Bubbles are bubbles, and whether they inflate dotcom wannabes or oil explorers, they still pop.

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