During the Q3 conference call in November, Mr. Alireza, Noble’s CEO, said: “We are committed to our stake on Noble Agri, we are a 49% shareholder and we are working with our partners to enhance and improve the performance of it.” One month later, Noble announced they want to sell their stake in Agri. Desperate times call for desperate measures. The threat of a downgrade by the credit agencies is only one reason. We believe the more pressing reason is simply Noble’s liquidity position. The guarantee to Agri is also probably not accepted anymore by many banks.

COFCO would buy 49% of Agri for $700-$750m. This compares with the $1.46b that COFCO already paid for 51% of Agri. A simple conclusion would be that the valuation of Agri collapsed by half in one year. For COFCO, it is easier to properly value Agri now that Noble is not in charge anymore. However, an important reason behind this drop is that the accounting game that Noble played one year ago is now fully exposed. The real price for the 51% majority stake has never been $1.46b.  This amount was the cash exchanged between COFCO and Noble but the net price included subsidies that Noble had to provide to Agri. Noble has always refused to give the total amount of these subsidies. They have always refused to release the Agri sale agreement. This document was only available for inspection at Noble’s office in Bermuda, in the middle of the Atlantic Ocean, far from the analysts’ eyes. If Noble had an office on the moon, they would have probably put it there.

This accounting illusion allowed Noble to avoid an impairment for the remaining 49% stake. Now that Noble has to sell its entire holding in Agri, the trick is exposed. In our first report, we conservatively estimated the real value of Agri at $2.4b, i.e. $500m less than the $2.94b implied by the transaction price of the 51% stake. The reality is worse. Agri is worth $1.5b+$700m=$2.2b and this is not even the final price since we need to deduct the subsidies (unknown amount).

Noble is expected to receive $700m-$750m in cash. This compares to a carrying value of around $1.25b for the Agri stake on the balance sheet in Q3. That means a projected loss of $500m-$550m for Q4. There is no reason to celebrate for Noble’s shareholders while this company is burning the furniture. Noble will try to reduce this loss with an earn out arrangement based on sugar price. This clause will be valued using a discounted cash flow model based on a commodity forward curve. If this sounds familiar, it’s normal. Noble uses the same methodology to value Yancoal and its commodity contracts fair values. As we know, no mountain is too high for the people in charge of valuing assets at Noble. We doubt this earn out will have any actual material value. Why would COFCO buy loss-making assets and leave the upside to the former owner while they are in a strong bargaining position? This would be a particularly bad proposal for a trader.

Once again, the same old accounting tricks are used by Noble: a few hundreds millions of additional fair values on the balance sheet and a shrinking list of saleable assets.