Noble Group

[BlueKelah]

IMHO the main contention is the accounting which was highlighted by Iceberg. Since then there has been an audit that is doubtful. How to believe completely when there are inconsistencies?

Take a step back and look at the larger picture before micro-analysing the doubtful balance sheet ::

Investment grade rating is - JUNK.
Sold Noble Agri for cash.
CEO has QUIT, now the position has to be run by 2 people 
Rights Issue needed.
PROPOSED selling of profitable NAES. Noble Group Sacrifices Profit in Pursuit of Cash After Loss
[The sale of Naes, a wholesale retailer of gas and power to large customers, is for a base price of $800m plus working capital — an amount that Noble said was almost $250m, while Calpine put it at $100m.] 

Already making losses liao, without this profitable NAES will next quarter losses continue piling up and continue to be cashflow negative? 

Dun get caught in the DEAD CAT BOUNCE...

[mulyc]

Probably explains why it dropped 6.6% today. Tomorrow looks like there will be another drop.

[CityFarmer]

I recalled two statements, which are at two extreme ends of spectrum. 

"When the facts change, I change my mind" - John Maynard Keynes
"刻舟求剑“ - 呂氏春秋 (please google to get translation)

We should always change, along with facts, and credible observations.

I believed, the credibility of iceberg's report when published. If you looked at 10-year history of balance sheet then, you saw "wonders". The fixed asset (Non-current-asset) "inflated" to 3.5x in 2013 vs 2008's. The equity "inflated" 2.5x over the same period. These were done without equity raising, but debts. There were seriously wrongs there.

What are the facts changed during these period?

- Mr. Chairman has openly acknowledged the issue, and solved it without the burden of his ego.
- Impairment of assets, to bring back the reality. The fixed asset is less than half of the peak in 2013
- Practical plans and executions, to bring back the liquidity of the company.
- Reversed the "grand-idea" of ex-CEO Leiman, to an asset-light CT company, with concrete actions.

How useful are the actions, at least to Mr. Market? I am using two rough indicators to gauge

- Markit's short level of Noble. The trend is down-trend. We have not seen it, in the latest issue of The Edge.
- Iceberg update. The last update was May 2016. Consistent with the short level trend.

https://iceberg-research.com/

I might be wrong, but higher chance of right, with support from facts and credible observations, rather than "burden" by outdated views.

(vested)

[specuvestor]

Hi CF,

It is just my hypothesis, based on my understanding of the commodities trading business and the following.

1) The annual report discloses that the bulk of the derivatives are physical contracts.

2) Page 3 of the PWC report, which reviewed 81% of derivative contracts with duration 2 years or longer, states 
"The relevant activities undertaken by Noble for the purposes of this report consist of long dated agreements with physical commodity producers. While the terms of these contracts are very specific to each individual agreement, in essence they are either (a) ‘off-take’ contracts, under which the producer typically agrees to sell the contracted amount to Noble at an agreed discount to the market price (such as a commonly-used benchmark price) at the time of delivery, or (b) ‘marketing’ contracts, under which Noble is paid a fixed percentage of the price achieved for assisting the producer in selling the contracted amount at then-prevailing prices." 

3) In the 4Q15 investor presentation, Noble disclosed that the derivatives are valued with a 20% discount rate. It is difficult for me to believe that Noble is unable to get a strategic investor or some other form of financing besides the rights issue, if the bulk the derivative contracts are contracts to receive cash-flows in the future valued at a 20% discount. It would make sense if the contracts require Noble to put up cash in the future and try to sell the resultant inventory to realize the fair values.

No problem, both of ours, are hypothesis   Let's validate them, with logic and facts, as far as we can.

I am not surprised by the fact, most of the derivative are physical contracts. Isn't it the role of CT companies, unlike financial institutions? The main role of CT companies is to move physical goods around globally with paid services.

It took me some time to get a reasonable hypothesis, for the (3). The purpose of the restructuring is to re-balance the liquidity. Derivatives, are part of working capital. No working capital, means no biz for CT companies. The asset-light strategy, is a viable means to reduce the debt, but equity raising is necessary for a more sustainable capital structure, IMO. Of course, it can be right issue, or strategic investor. Noble had chosen the right issue, probably a "quicker", "cheaper" and "safer" solution for Mr. Chairman then.

I agree that it is not surprising that the contracts were mainly for physical delivery, i just wanted to point out that they are contracts obligating Noble to pay cash and do not in themselves result in positive cash-flow. 

If fully hedged and facing no commodity price exposure, a commodity trader makes money by earning the physical delivery premium over a benchmark price and, if possible, paying below the benchmark price for the commodities it procures. Fluctuations in the spot price itself can be hedged, maybe not perfectly but adequately, in the futures market or through cash settled contracts. Given that Noble chose to pursue an asset light model, which involves minimal investments in mining / production assets, the off-take / marketing agreements are needed to secure supply below spot prices. I wouldn't equate them to working capital but capital commitments.

Hi Clement / CF

Great discussion... I dont think I have much more to add The scope of PwC doesn't cover the counterparties but I would think with all the attention, E&Y would have checked on the validity of the counterparties. But that doesn't mean there is no counterparty risks when it comes to the crunch, as we have seen in property, shipping , O&G etc. Getting funding for these contract deliveries should not be a big issue if there are commodity assets underlying it.

I think one of the killer is their venture into Gloucester Coal (now Yancoal) which was worth >AUD800m and less than AUD25m now, not even counting the AUD FX loss. I hope not many of their contracts are coal related.
http://www.theaustralian.com.au/archive/...6291190607

For the record there is $1.9b in Fair Value losses so it might not be a simple "margin-plus" agreement but I would think Noble covered both legs of the transactions, as CF mentioned. In any case 2H17 we should start seeing these contracts maturing and for Noble to show us the "net liquidation value" of these contracts in cold hard cash though I think most of the PnL has already been booked.

[brattzz]

"I think one of the killer is their venture into Gloucester Coal (now Yancoal) which was worth >AUD800m and less than AUD25m now, not even counting the AUD FX loss. I hope not many of their contracts are coal related."

something very wrong here.... 800m -> 25m.... total wealth destruction?!!

:O

[specuvestor]

If u read in context of my previous comments, I don't think the VALUE is AUD25m as Yanzhou is trying to privatise on the cheap. But unlikely to worth AUD800m either during the boom years

[BlueKelah]

Take a look at Yancoal latest quarterly.
http://www.yancoal.com.au/content/Media/...202016.pdf

Revenue 465.6m
Net loss 180.4m
EPS -$0.18
NAV -$0.74

Net asset value is negative and losses are mounting. Not a pretty sight.

However share price is now 24c but was as low as 9c a few months back as SPOT coking coal prices have more than doubled from China reducing its coal production and increased steel production from its infrastruture stimulus helping demand.

How long coal price rebound last is the question. China may have overdone their intended cut to coal production by reducing working days at mines to 276days earlier this year. Anytime they decide to relax that coal price will plummet again for sure, and the tightening on property boom will not help demand for steel. 

As we all know, China is not very good at rebalancing stuff. Things tend to often go to extremes when Beijing is involved. The current drop in production and coal price boom is another good example, Beijing intended this rebalancing to happen over next 5 years.

Will Yancoal be able to recover its negative NAV?

[specuvestor]

Perhaps reading this will put in better context what is happening in the LBO background than just the numbers:
http://in.reuters.com/article/yancoal-se...T120141110

"Most of the funds raised will be used to repay existing debt owed to Yanzhou, effectively refinancing short-term debt into long-term debt. The debt is the legacy of Yanzhou's A$3.5 billion acquisition of Felix Resources in 2009 at the height of the coal boom and its takeover of Gloucester Coal in 2011."

In short Noble thought they could swim with the chinese sharks

http://www.valuebuddies.com/thread-457-p...#pid107256

[cfa]

Perhaps reading this will put in better context what is happening in the LBO background than just the numbers:
http://in.reuters.com/article/yancoal-se...T120141110

"Most of the funds raised will be used to repay existing debt owed to Yanzhou, effectively refinancing short-term debt into long-term debt. The debt is the legacy of Yanzhou's A$3.5 billion acquisition of Felix Resources in 2009 at the height of the coal boom and its takeover of Gloucester Coal in 2011."

In short Noble thought they could swim with the chinese sharks

http://www.valuebuddies.com/thread-457-p...#pid107256

Just wonder why a veteran could have so grossly overpaid for this acquisition,  despite being in the commodity trade for so long ?

[brattzz]

good question,

maybe csi the ownerships of yanzhou to find out more....