Iceberg Research

Comments on Noble's 9M 2015 results

November 12, 2015

The CFO, Mr. van der Zalm, stepped down. He was appointed Vice Chairman of finance in London, a title with no meaning except that he’s gone, far from this accounting debacle and its legal risks. We understand that Mr. van der Zalm has been away for a while. It is only today that Noble made the announcement. At a time when the company is criticised for its accounting, the departure of the CFO speaks volumes.

Noble is trying to raise $500m. Glencore raised equity in a few days. Noble has been talking about an investor for months. The obstacle is simple: due diligence. We strongly encourage every potential investor to ask a key piece of information: the largest fair values (positive and negative). The fair values are where the most egregious manipulations are. Any investor in Noble, any stakeholder should have access to this information before committing one dollar. The banks do not have access to this information. Positive fair values (at a stratospheric $7.5b) represent 147% of Noble’s equity. How long will the banks accept that Noble refuses to give information on these fair values remains to be seen.

Noble’s net profit fell from $155m to $26m in Q3. What is remarkable is that the whole industry is recording large impairments but Noble is completely immune. Large mark-to-market (“MTM”) were recognised with shaky counterparties. Examples include Sundance Resources, an iron ore project in Africa, that will probably run out of cash soon, the petrochemical project in the US that will probably never take off, Resource Generation (Noble is in open conflict with this associate after signing huge contracts), etc. Noble recognised that the majority of its MTM is coal-related. The forward curve of this commodity is very low. Many miners, even companies that used to be seen as strong, are near bankruptcy. It is absolutely impossible to record so high MTM in the coal business considering the current and forward coal prices. Unless Noble uses a Yancoal customised forward curve of course.

The net fair values are near their record high: $4.5b, up from $4.08b. Despite all the promises, Noble is unable to bring its MTM down. The reason is that the MTM are largely manufactured. Manufactured assets are neither light nor heavy. They are immovable: they don’t leave the balance sheet until they are impaired.

Noble recorded operating cash outflow ($693) in the first nine months. As usual, Noble did not include interest expenses in its calculation. In what has become the celebration of chutzpah as a core value of financial communication, Noble announced: “Our year end target of positive cash flow has been achieved early” while the company lost almost $700m in nine months. The third quarter shows an improvement with positive OCF of $260m. It is easy to identify the reason for the rebound: Noble liquidated large amounts of inventories. Reuters reported that stockpiles had been ordered down. We now understand what happened. The decrease in inventories generated $674m inflow in Q3. Attributing the lower level of inventories to lower commodity prices is incorrect: inventories days fell from 13 to 9 days. Despite this measure, Noble recorded only $260m positive OCF. This inventory effect is only artificial and temporary though. Traders structurally need inventories in their business. Their job is to move them. If there are no inventories, there is no business. Besides, Noble will have to use the proceeds of these inventories to pay its suppliers in the next quarter. We expect the effect to reverse in Q4 and Noble to end the year with deeper negative operating cash outflow. This raises even more doubts over their ability to refinance debt.


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