Noble: overstating Yancoal's value? (2)

I have written several times about Noble Group, and in particular the "attacks" made by Iceberg Research.

My attention was drawn to the "strange" valuation of the valuation of its shares in Yancoal, I wrote:

• Noble owns 13% of their shares;
• Yancoal is listed and the 13% of the market cap is worth about $11M;
• Yet the investment is in the books of Noble for $614M;
• Noble doesn't seem to have significant control over the company

That looks very weird, to put it mildly.

Iceberg has written an open letter to Noble Groups's creditors, one snippet:

You suffered losses because a small group of people inside Noble and its auditor, EY, intentionally misrepresented the balance sheet and the performance of this company. For instance, an associate, Yancoal, was overvalued by $480m or 48 times. A few weeks ago, Noble finally capitulated, recognising the impairment.

The authorities should really look into this, that old valuation of $614M looks very, very wrong. That valuation was approved by the board of directors and the external auditors, surely shareholders and creditors based their investment decisions on this kind of information.

Noble Group, an overview

Great article in The Financial Times about Noble Group (I wrote several articles about them in the past):

Commodities: Noble’s House of woe

Some snippets:


Today the market value of the company — which is listed in Singapore — has collapsed to $1.1bn, its chief executive has left, and Mr Elman, 76, has announced he will step down as executive chairman in the next 12 months. In February, it reported annual losses for the first time in more than 20 years after taking $1.2bn in writedowns and charges, largely related to the value of long-term contracts it has been accused of overstating by short sellers, hedge funds and a former employee turned financial blogger.

Noble, which acts as a middleman for oil, coal, iron ore and metals deals, is now tapping its shareholders for $500m of cash and trying to sell prized assets in its efforts to pay down debt and free up capital for its trading operations.


“Noble compounded its problems with aggressive accounting,” says Craig Pirrong, a finance professor at the University of Houston who has written on the industry for Trafigura. “The accounting issues took a big toll on management’s credibility, and that made it very difficult to climb out of the hole.”


Mounting debts and high costs began to weigh on the company as bets in niche markets such as carbon credits backfired. As a listed company, it wanted smoother earnings to keep the stock market happy, former employees say.

Noble did this by recognising upfront a portion of gains from long-term marketing and supply agreements and recording their value on its balance sheet, say ex-employees. This technique, while legal under accounting rules, has seen only limited use among Noble’s rivals who say it is risky because the volatility of commodity prices means the amount of cash eventually received from the deals can be lower than the recorded profits.


Noble's 5-year price chart:

Noble: overstating Yancoal's value?

"Iceberg Research", an unknown and anonymous website, has issued a negative report about Noble Group, the commodity trading company listed on the SGX.

For me, the most important is if the allegations are true and the most interesting item is the valuation of Yancoal in Noble's books:

• Noble owns 13% of their shares;
• Yancoal is listed and the 13% of the market cap is worth about $11M;
• Yet the investment is in the books of Noble for $614M;
• Noble doesn't seem to have significant control over the company.

That looks very weird, to put it mildly.

Macquarie writes:


"But the shares are thinly traded, which can distort market value. This is one reason why Noble can use a financial model, reviewed by auditors Ernst & Young, to value the stake. With sustained weak coal prices, we have been flagging the risk of further write downs for YAL (2012 carrying value: US$813m). The Noble CEO himself hinted at such a potential outcome at a recent sell side event. Whilst we do not see the full carrying value at risk, there could be a non-trivial impact vis-à-vis Noble’s S$0.98 BVPS (excluding perpetuals). But, again, we have been flagging this risk for well over a year."


Regular readers of this blog will know what I think about the many financial calculations (most of them DCF models) that are being used. Changing one single parameter would already later the outcome of the model hugely, but there are often many important parameters. The result is a very wide range of valuations (not a single valuation), the lowest of which has to be zero.

In other words, giving a single valuation through the use of these kind of models is (in most cases) useless, rubbish and self-serving.

Noble has since responded, no surprises here:

If the DCF model of the stake in Yancoal does indeed indicate a valuation of $614M, 56 times as much as the current market price, then the company really should publish the model's assumptions and calculations, for all to see. We could then also check the model with the outcome say three years down the road.

Unfortunately, publishing the model's details hardly ever happens is my experience.

The Monetary Authority Singapore (MAS) is looking into the case, Noble's year report will be announced on February 26, 2015.