Iceberg Research

Comments on FY2014 results and Noble's rebuttals

March 5, 2015

We refer to Noble’s recent announcements on Iceberg’s reports and the company’s FY2014 results.

It is clear that Noble’s reactions show that the management is extremely nervous. Noble has a well known history of trying to aggressively discredit people when the company dislikes them. We prefer to remain focused on the financial arguments.

FY2014 results

Impairment of Yancoal

Noble claimed that the decision to recognise a $200m impairment for Yancoal was not a consequence of our first report. “There was nothing in terms of our results that was impacted in any way by any anonymous report that was released”. The company said that the $200m impairment was made on the same day they announced the results. Yancoal’s financial statements are public information. The reasons why this company is struggling are public information: low coal prices, unsustainable level of debt, and expensive take-or-pay contracts. Noble did not suddenly realise that Yancoal’s valuation was too high. The regulator and Noble’s shareholders will not find this explanation credible.

In its FY2014 results, Yancoal reported A$353.5m net losses, (A$247m) operating cash outflows, A$3.6b net debt. Its market cap has fallen by 36% since our first report. If Noble thinks this company is vastly undervalued, we still do not understand why they do not buy shares from hedge funds. Buying undervalued things is what a trader does to make money.

The carrying value of Yancoal is now $322m and the market value of the 13% stake is worth $7m. There is still a $315m gap that Noble will have to recognise.

Delay for sign off

On February 26th, the auditor, EY, who had already completed its audit required more time to sign off. We understand EY contacted its New York office to get further sign off. The explanation given by Noble is that EY had to go through a process to review the Iceberg report.

EY has been the auditor of Noble since 1994 at least (the oldest annual report we could find). They perfectly know this company. They do not need our reports. Year after year, they have expressed their reserves on some key aspects of the financials in the annual report. We already gave a few examples in our two previous reports. There are many others.

If EY were comfortable with Noble’s financial reporting, they would have read our second report in ten minutes and they would have dismissed it.

FY2014 financial performance

The very poor FY2014 financial results validate our research.

Operating cash outflows

The most important number is the operating cash outflows. Noble lost not less than $1.16b in FY2014 (reported OCF of $1.1b minus interest ($320m) plus additions of cash balances with futures brokers not immediately available for use in the business operations (+$264m).

Since 2009, Noble’s operations have lost more than one billion in cash. Since Mr. Alireza was appointed as CEO, Noble’s operations have lost $447m in cash. In our second report, we explained that Noble will struggle to deliver high ROE, and will be unable to hide its true operating performance. We think Noble cannot stretch its working capital much more (e.g. repos). These predictions were correct.

Iceberg claims that Noble’s fair values are largely fabricated. We do not expect the market to believe us immediately. It took nine months for Enron to collapse and credit agencies downgraded Enron below investment grade only five days before the company filed for bankruptcy. Yet, we strongly believe that every investor, every bank, should be able to answer these simple questions: “Why is this investment grade group unable to generate operating cash flows? Why does Noble bleed cash? Why is there such a divergence between net profit and cash flow?”. Noble has been unable to answer these questions.

Net profit and ROE

With a profit of $132m, Noble’s ROE in 2014 was only 2.6%, down from 4.6% in 2013 and 10.3% in 2012. The ROE of this company has been consistently deteriorating. Noble still has massive impairments to book. Even if we assume that there is no aggressive accounting, the performance of Mr Alireza, who had no experience of the commodities industry when he joined Noble, is unimpressive.

Final price of Agri

We maintain that the recovery of Agri was fabricated and we explain the reasons in the first report. These are facts.

Noble stated that the final price is $1.463b. In the same document, they recognise that “during the transitional period (of around 18 months from signing), Noble Group will provide Noble Agri some corporate services, including risk management, human resources, insurance, internal audit, legal, tax, and other administrative services. Noble Group will bear the cost during the transition period, we do not expect the cost to be substantial.” Unless the salaries in all these departments are extremely low, we fail to understand how the cost will not be substantial. It is clear that the final price was not final. As we wrote in the first report, it was a fiction to allow Noble to record Agri as an associate at an inflated price.

Debt and repos

Noble refuses to confirm if it has or not massive repos. Repos are alluded to in the annual report. The repos are probably the issue that Noble is the most nervous about.

We will address debt-related issues, and how Noble misleads the market with its concept of liquidity headroom in the third report.

Some clarifications on the fair values

Noble did not impair its fair values although their calculation is based on the same instruments that are used for Yancoal (e.g. forward curve). At least, the market’s attention is now focused on Noble’s fair values. Net fair values increased by not less than $800m from $3.8b to $4.6b in one quarter.

During the conf call, the CEO’s answers were often awkward and there were many contradictions. None of the arguments given by Noble was a surprise to us. We read some of them before. We did not mention them in our second report because the document was already long, and we did not want it to be too technical. We now have the opportunity to address these points.

The jargon behind the MTM, fair values, hedging may sound technical. This is how Noble confuses analysts. However, the reality behind a commodity trader is simple: cargoes moved from one point to another point. We are happy to help anybody (shareholders, banks, etc) who needs clarifications. They can contact Iceberg.

Noble has stayed completely silent on the extremely suspicious profit booked with PT ALH, the Sundance Resources contract, the strange immunity of Noble to coal forward prices (very similar to Yancoal), etc.

Below, we review Noble’s arguments one by one.

”We believe in mark-to-market accounting” and “net fair value gains and losses are part of our financial statements which are audited by E&Y”.

We wrote in the report: “Let us be clear: there is nothing wrong with valuing unrealised commodity contracts and recording the variations in the income statement.” We agree with Noble that MTM accounting can help risk management. The problem is that this methodology provides ample room for manipulation. We explained in the report how easy it is to manipulate the MTM numbers. For example, there is no forward curve for many commodities or the maximum maturity of forward curves is generally limited to a few years.

There are two industries where derivatives play a major role: banks and commodities traders. Banks have an auditor and a regulator. Traders just have an auditor. There is only one safety net. If the auditor leaves its client responsible for anything of importance in the annual report, what happens? In the annual report, EY wrote that the MTM assumptions are management’s beliefs. The stakeholders of Noble should not be comfortable with this statement.

The track record of EY is not untarnished: Lehman Brothers, Sino-Forest, and many other companies involved in accounting scandals in Asia.

Finally, we note that Noble does not always “believe in MTM”. The valuation of Yancoal is clearly an exception.

The size of the MTM on Noble ‘s balance sheet would be the consequence of an asset light strategy

Noble keeps repeating that it has a different business model (asset light) so its balance sheet is different. There are thousands of asset light traders in the world. Being asset light is actually the norm for traders. Many of these traders sign offtake/supply contracts. They do not have the fair values of Noble.

Commodity banks finance traders every day and they are familiar with their balance sheets. They already know that this argument is not valid. As for Glencore, Bunge, Wilmar, they are not only producers. They are also very large traders. As shown in our report, their fair values are much lower and fluctuate over time. Noble’s fair values keep surging.

Every time a commodity group claims that it has a different business model (Enron, Noble), it generally ends badly. The commodity industry is quite traditional.

“Noble does not book 100% of the value of long dated deals on day one”

Noble is playing with words here. They do not book 100% but they book a large share. Do they book 90% of it, 85% of it? Playing with words is not a professional way to handle financial communication. It is easy to prove that the offtake contracts are a big share of the fair values. On the balance sheet, long term fair values are positive. There are almost no long term negative fair values. This is a typical sign of MTM generated by long term offtake/supply agreements. Trading MTM would be positive AND negative.

Some competitors do not book the MTM of offtake agreements on day one because they are more conservative. Noble does it. Whether they book 100% or 90% or 80% does not change the conclusion. Booking these MTM accelerates Noble’s profit. In our opinion, this has created a vicious circle: the company has to book more and more MTM.

Noble has refused to give information on the contract booked with Sundance Resources.

“Noble Agri’s net fair values are consistent with those of Bunge and Wilmar”

We explained in the second report that Noble‘s fair values are found at Continuing operations level, not really at Agri level. Noble refutes arguments we have not made.

“We have clear policies approved by the Audit Committee”

The audit committee is chaired by an independent director, Iain Ferguson Bruce, who has been “independent” for the past 13 years. Mr. Bruce was a director at China Medical Technologies, a company formerly listed on the NASDAQ that went bankrupt in 2012 with $400m funds missing.

“All of the contracts that are included in the fair value gains & losses as shown on our balance sheet include more than 12,000 contracts”

What Noble wants stakeholders to believe is that reviewing these contracts would be a herculean job. The number of contracts would also provide diversification benefits, mitigating any concentration risk.

In reality, the fair values of a traders are like the loans of a bank. There are very large exposures and very small ones. It is a mistake to assume that all these contracts have more or less the same size. There is no need to review the 12,000 contracts. Stakeholders just need to review the largest exposures. Lehman Brothers had more than 12,000 contracts. This has not prevented this bank from collapsing.

Banks very often disclose their largest exposures to address concerns over concentration risk. If banks are willing to disclose this type of information, we strongly believe that Noble’s stakeholders, especially the banks that finance this company, as well as the credit agencies should have access to it.

”Most of our partners are listed companies”

It is common industry knowledge that traders generally work with weaker counterparties. Very solid counterparties do not need traders: they trade directly. For example large iron ore miners generally sign contracts directly with Japanese steel mills. “Most of our partners are listed companies” is a statement we take with a pinch of salt.

“Working capital increased significantly because the company expanded its oil and gas business”

Based on numbers given by Noble, payable days is 28 days. It is sufficient to cover receivable days (16 days) + inventories days (10 days). In other words, the trade finances itself. The reason why working capital expanded is as usual the MTM.

“Cash realization on physical contracts over last 3 years: approximately $800m”

This number is interesting. The problem is that it includes physical contracts only, not paper contracts. One part of the trade will always be positive. Does this include carbon credit exposure for example? Furthermore, during that period, Noble was supposed to generate $1.8b from its MTM, not $800m (source: annual reports).

“The comment that our MTM feeds directly into our P&L is factually incorrect.”

We maintain that the variations in MTM feed into the P&L. From the annual report: “Any gains or losses arising from changes in the fair value of derivatives are recorded in the income statement in the cost of sales and services in the period of change.” The exception is for cash flow hedges which is a very small percentage of the fair values on the balance sheet.

What we did not write is that MTM variations equate to the P&L of the company (see below).

“It is misleading to presume that the net fair value gains and losses equates to the profit and loss of the Company.”

We have never written the term “equate”. Noble should read our report. However, we maintain that the profitability of Noble has been completely supported by the remarkable surge in net fair values over the past few years.

“This ignores (i) the movement in the fair value of the inventory”

This is a key argument used by Noble. We expected it when we wrote the report.

What Noble means is:

  1. Physical Inventories are by definition a long position
  2. These physical inventories are hedged by sales contracts or paper hedge, which are a short position. The MTM of the sales contracts can be found under fair values on the balance sheet. These MTM have been surging over the past years. Inventories paper hedges can be found at the same place as physical inventories on the balance sheet.
  3. Over the past years, commodities prices have fallen. It is then perfectly normal that the fair values have surged.

Superficially, the reasoning seems acceptable. Yes, the value of physical inventories goes down when prices fall. Yes, the corresponding hedge will go up. So we agree with (a) and (b). However, there is one very practical aspect that any commodity trader will immediately see: inventories are short term most of the time. Inventory turnover is 10 days according to Noble. The buyer takes delivery of the cargo very fast. After the title passes to the buyer, the cargo inventory becomes zero on the balance sheet. Similarly, the hedge (sales contract or paper hedge) becomes zero. So after just a few days, all the fair values should be zero. Do Noble’s net fair values gravitate around zero? No, they keep surging. They are now $4.6b. Then, we are left with the same initial question: why Noble’s fair values are so large and why they keep growing? Inventories are short term and the MTM of short term assets can never grow too big. Finally, the maturity profile of the positive fair values shows that 59% of the fair values are more than one year. These cannot be the hedge of short term inventories.

Note that since the end of 2014, traders like Noble have been engaged in oil contango. For oil contango, a trader can hold inventories for a longer period. However, our analysis covered a period of 4.75 years from 2010 to Q3 2014. The recent influence of oil contango does not affect our conclusion.

The CEO said : “And in an environment that we’ve been in for the last three years where commodities prices have consistently gone down, you can imagine that the mark-to-market of inventory offsets.” The only way for this sentence to make sense is to assume that Noble has been keeping the same inventories since 2012. This is impossible of course.

“(ii) the recognition of profit or loss as hedges are rolled via an active hedging program;”

Our analysis covers a long period of 4.75 years. This argument cannot have a significant influence over such a long period. Besides, it is worth nothing that in the industry, long term offtake agreements are generally based on floating price. Floating price contracts do not need to be hedged.

“(iii) the fact that what is shown on the balance sheet is a snap shot as of that date and would not reflect the full transaction cycle.”

The fair values of Noble have kept surging since 2009. This is not a recent trend.

On Iceberg Research

We have stayed anonymous because we want people to focus on the strength of the arguments. It does not matter who is behind Iceberg if the arguments are solid. Everything can be checked: we work with Noble’s public financial information. People would not listen to our arguments if they were not valid.

We have no short position. So far, we have been acting as a whistleblower for Noble, not as a short seller. Whistleblowers should be given the choice of being public or staying anonymous. If whistleblowers are forced to give their names, there will be no whistleblower. We talked to a few hedge funds about this project and the idea of having a short position with them. However, we did not have a track record. We also did not want to talk to too many people for confidentially reasons. Some hedge fund managers were also afraid of Noble’s reactions. At the end, it was decided to launch the project without any short position (even with our personal funds). We will have short positions for the next projects.

We found the comment that “A current Noble employee has confirmed that he approached him at a social event approximately 12 months ago and said that he was preparing a report “in several parts” and was going to “work with short sellers to blow up Noble”” quite amusing because the decision to split the report in three parts was made only a few weeks ago. All the people we talked to saw only one long document, not three.


  1. As I read your comments, I feel the 2014 financial statements has a serious problem in not making allowance on impairment losses for their investment in Associates.
    According to IAS 28 (2011):Investments in Associates and Joint Ventures para 42 “the entire carrying amount of the investment is tested for impairment in accordance with IAS 36 as a single asset, by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount, whenever application of IAS 39 indicates that the investment may be impaired.”
    It appears that the aforesaid impairment test may not have been run properly. Since the Auditors is EY in HK, please make a complaint to HKICPA and the information is at the below link.

    I was given to understand that a shareholder could make a complaint to SGX for their members and the contact information is at low.

    Looking forward to reading your next report.

    [From a HK reader]

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