Iceberg Research

Noble Group: How Many Times Can You Fool the Same People?

February 24, 2017

The multi-year quest for a “strategic” investor

Here we go again. Noble is in early talks with an investor to potentially acquire a stake in Noble, and the share price surged following the news. Sounds familiar? Probably because this already happened a few times. Eighteen months ago (August 2015), Reuters reported that Noble was considering raising funds from a strategic investor to “revive confidence”. One year later, in September 2016, Bloomberg announced that Noble was still seeking a strategic investor. Shares jumped 9.5% that day. Noble’s supporters will argue that this time is different. We have a name: Sinochem. We heard the same name one year ago. But wait a second: Sinochem is now given access to the books and is conducting due diligence. This should be a good sign, right? In fact this means that Sinochem has not yet reviewed Noble’s balance sheet. The Chinese group is not the first company to review Noble’s books. For almost two years, Noble has desperately tried to find a “strategic” investor. The price-to-book ratio of 62% seems very attractive and Noble cannot be too picky because of its liquidity issues. Yet absolutely no investor came in.

Noble is not worth its book value, or even 62% of its book value. It is worth much less than that, if there is any residual value left. Discussions are only at early stage and due diligence typically takes six months to a year. Any potential investor needs to value the commodity contracts, which are the heart of Noble’s financial manipulations. This includes the fair value gains ($4b, not less than 102% of equity) but also importantly the future liabilities ($1.7b). The investor has to make sure that no off-balance commitment is hidden, etc. This is a very lengthy process. After we published our reports, Noble kept repeating that these contracts were correctly valued. Then 48 hours before their 2015 annual results, Noble and its auditor, EY, suddenly realised that these contracts had to be impaired by $1.1b. Oops!… So are the commodities contracts (assets and liabilities) correctly valued now? Of course, they are not. Noble has been battling liquidity issues for months and any trader would have sold these contracts a long time ago if they were valued correctly. Instead the company has sold everything else (Agri, Energy Solutions, etc).

Noble’s alternative facts to explain its crisis

The rebound in commodities prices in 2016 has turned around the fortunes of many commodities firms. To the disappointment of its shareholders, Noble has been the notable exception.

Since February 2015, when we published our reports, Noble, a trader, is down 77%. BHP, which is a miner, is down 20%. Glencore, a trader and a miner is up 25%. World Fuel Services (ticker: INT), a trader, is down 25%.

So how to explain Noble’s terrible performance? Facing criticism of its accounting and a falling share price, Noble has tried to reassure its shareholders. After various attempts, and contradictions, Noble and its chairman, Richard Elman, came up with a simple but effective narrative. It could be summarized as: “We don’t have any accounting issue. We are hit by low commodities prices like everybody else in the industry. This explains why we have bad results, and why our share price plunged.”

The narrative has been very successful outside the trading industry. Many analysts attribute at least part of Noble’s troubles to low commodity prices. It was built on the common misconception that a company like Noble, a commodity trader, is profitable when commodities prices are high, and suffer losses when commodities prices are low. Unfortunately, this is the business model of a commodity producer, for example miners like BHP or Rio Tinto. But it is not Noble’s business model, which is primarily a trader. Traders do not need high commodities prices to be profitable. They derive most of their profit from positions (long or short) or arbitrages. They can make money (or record losses) at any level of price. What they need is volatility, not high prices. Noble constantly complained about commodity prices or industry headwinds. Peers have been doing absolutely fine amid low prices. For example, Vitol recorded bumper profit of $1.6b in 2015 when oil prices fell. Trafigura recorded net income of $1.1bin in 2015. As the chart above shows, the share price of World Fuel Services is hardly correlated to commodities prices, which is normal for a trader.

Noble has an indirect long exposure to commodities prices with its suppliers’ contracts. However, the problem is that many of these suppliers don’t produce anything. Noble signed contracts with companies that exist on paper, but have no producing mines or have not even financing in place. For these contracts, it does not matter if prices are high or low: suppliers cannot supply anyway.

Noble’s most loyal shareholders have patiently waited Noble’s recovery. Of course, there was a risk with Noble’s narrative: what would happen if prices go up? This is exactly what happened in 2016. Coal prices surged to levels last seen in 2012. But Noble’s operations have still recorded losses and burnt not less than $801m in 9M 2016, after burning $465m in 2015. Shareholders have been misled once again. Noble will continue to disappoint because the cause of the crisis has never been commodity prices (too low, too high) or any other external factor. The root of the crisis is how management and the auditor, EY, have misrepresented the financial performance of this company and its balance sheet for years.

From time to time, Noble may record positive operating cash flow due to working capital movements or seasonal factors. This is what happened last year in Q4 2016. Optimism was short-lived though. The stock fell again. Noble’s situation has not stabilized at all. The company is a shadow of its former self. Noble had to sell its assets and raise $500m in Q3 to survive. The cash cow Energy Solutions is gone. Noble used to be rated investment grade. It was downgraded by four notches. Banks have tightened the leash and raised interest costs. Higher interest is a slow poison for traders that require ample bank facilities for their daily operations.

The same people who created this fiasco still run Noble

Shortly after we published our reports, Chairman Richard Elman said: “I’d like to reiterate, for the record, that we categorically reject all allegations made in the recent reports as inaccurate, unreliable and misleading. You cannot get a stronger statement from a publicly listed company.” He added that “Noble is in a robust financial condition.” Then, the company was forced to recognize heavy losses. Its share price collapsed and Noble is now fighting for its life. All our arguments have been confirmed. One simple example: Noble overvalued Yancoal by $511m on its balance sheet when we published. Former CEO Alireza explained that when coal prices rebound, Yancoal’s market value would surge and the gap would narrow. Coal prices have rebounded but the gap between the carrying value at that time and the current market value is still $488m. So obviously, there are problems with Noble’s discounted cash flow models.

Noble was a repeat of EnronThe same accounting methods have been used to paint a fundamentally misleading picture of the balance sheet. Some would argue that Noble is different because it has not yet filed for bankruptcy. Enron’s shareholders lost 100% of their capital. Noble’s shareholders have lost 78% of their capital since the manipulations have been exposed. From their point of view, there is no big difference.

What happened was possible because a very small group of senior managers worked together with the assistance of the auditor and deceived investors. This small group financially benefited from these misrepresentations. Noble still refuses to disclose the individual remuneration of its senior managers. Shareholders invested in Noble based on these misrepresentations and lost billions. The institutional investors will survive the loss of hundreds of millions of dollars. But some individual shareholders have lost part of their retirement money. They thought that Noble was an investment grade blue chip because they trusted management and the auditor. 

A few managers who had an instrumental role in this fiasco have left the ship: for example, former CEO Yusuf Alireza or former CFO Robert van der Zalm who vanished suddenly. However, management has not really changed at Noble. In particular, founder Richard Elman, remains chairman. Due to his role and knowledge of the company, there is no doubt that he was the key person behind Noble’s accounting decisions. Not a single time since the beginning of the controversy, Mr Elman has publicly offered any detailed explanation on Noble’s accounting. Instead, he quoted Churchill and offered “blood, tears, sweat” to his shareholders who were not feeling particularly well already. What he did not offer was to share their “sacrifice” by suspending salaries to senior managers and himself.

In June, 2016, Mr Elman announced he would step down within 12 months. But two months later, Mr Elman clarified he “will not quit until we have restored value”. This is not going to happen. The FT reported that in an internal email, he planned to be around for “the next 50 years”. He is 76 years old.   

With Noble, denial and delusion are always fundamental in the way the company operates. With great fanfare, Mr. Elman launched a lawsuit against us. Beyond the combative rhetoric, the reality is that the legal action has been at a standstill for a long time. Noble’s lawyers do not seem to know what they sue us for. Noble has become almost completely unresponsive for a year. We are asking the Hong Kong Court to strike out Noble’s claims. We believe that courts of law should be used for more serious matters than delusional lawsuits launched by delusional companies.

Executive management is also the same. A protégé of Richard Elman, William Randall, was appointed co-CEO. Mr Randall was previously the co-head of “Hard commodities” where we identified most of Noble’s financial manipulations, including Yancoal. It is difficult to see how the appointment of a manager who has been so deeply involved in Noble’s aggressive accounting could lead to better transparency for Noble’s stakeholders.

And last but not least, the auditor remains the same: EY Hong Kong. Without EY, this scandal would have never been possible. EY Hong Kong and its audit partner (Peter Picton-Phillipps) were fully aware of what was going on. It is surprising that no lawsuit has been launched against the auditor yet, considering its role. In Hong Kong, the SFC has recently commenced legal proceedings against Hanergy’s directors, another major accounting scandal audited by exactly the same auditor: EY Hong Kong.

There is nothing fundamentally new at Noble: the same toxic balance sheet, the same key managers who created one of the largest financial manipulations in recent history, the same smoke and mirrors tactics to explain Noble’s struggles, and from time to time the same false hopes of recovery.


  1. anyone can shed some lights about what exactly went wrong with Noble with their recent massive loss on betting coal prices? Given this further value destruction at the firm are we seeing the end coming near?

  2. So Noble goes on its duping spree again. Or should we say investors continue on a duped spree. How daft can bond analysts be? Noble today announced a 5Y bond at 9% area. Just a few days back, the company’s earnings report said they had ample liquidity (to quote “USD 2 bn of liquidity headroom”). They said they had enough liquidity to cover 2017 debt maturities. Then why the desperation to issue at such high cost? Especially if Sinochem is buying a stake, Noble as a trader should know most of all, that they just need to wait till Sinochem buys a stake and then they can issue at half this cost. So this desperate bond issue means the company has no liqudiity and no upcoming strategic investment.
    It beats me that so many sell side bond analysts still have a Buy recommendation on Noble. Wake up bondholders. Havent you learnt enough?

  3. For posterity – there are some rich ironies here.

    Yancoal and its Chinese parents have obviously received Beijing approval to dive in to the overflowing pot of FX and recycle some dollars in return for assets outside China.

    When the CEO of Rio says:

    Yancoal provided “the only offer that represented compelling value for the assets”.

    That means there was daylight between Yancoal’s bid and the runners up. Going to be hard for others to match Yancoal’s valuation model and, by extension, value Noble’s stake.

    There are some moving parts to the deal, but Yancoal is going to have to raise A$2-3 billion. Present market cap is A$338 mil. The mother of all dilutions is coming to Noble soon. Or they have to find a pile of cash to toss in to the pot.

    At the same time, another branch of China Inc, Sinochem, is supposedly circling Noble looking for value to have a crack at more of the China Inc FX pile.

    Going to be fun to see how Sinochem squares the circle on Noble after the Yancoal/C&A deal.

  4. What is left ?: the U.S unit.

    and Dmitry (noble americas corp.) is the type of trader that is always swinging for the fences or home run, when losing will keep betting more to reverse the loss.

    the performance of his Oil liquids business line(111M vs 507M in 9M15) nurtures doubts.
    Refi has been executed on the premise of this business line “EBITDA indestructibility”.

    Interesting how everything revolves around a Small handful of Large Bet (one or two) at these trading houses.

    Credit lines granted by the banks (USD 1B unconsolidated revolving credit facility and USD 2B secured revolving base financing) in May 2017.

    So far Noble has only refinanced 1B revolving credit facility out of 3B. that’s the real story.

    The insufficient disclosure on the commodity/derivative contracts and borrowing facilities terms are concerning.

  5. Noble didn’t reveal that Sinochem’s new CEO Frank Ning, who has also bought Noble’s Agri in the past, was interested in taking a stake in Noble. It was Reuters that first reported there had been several meetings last year, forcing Noble to put out a statement on SGX’s request

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