Noble plunges to US$1.67b loss

Singapore

NOBLE Group has plunged into the red for 2015, recording its first annual loss in almost two decades of US$1.67 billion as the weight of an earlier-announced impairment charge bore down on the firm.

Even as Iceberg Research - in a report published just an hour before the results release - called for the commodity trader to bring in new management in order to regain its credibility, Noble explained again that the large writedown on its coal contracts was not due to overly optimistic price estimates earlier, but to guard against a scenario of coal prices being lower for longer.

Chief executive Yusuf Alireza also said that the group was making progress on its revolving credit facility expiring in May. As commodity prices tumbled, Noble's revenue dropped 22 per cent to US$66.7 billion for 2015, despite higher trading volumes of 271.3 million tonnes, up from 215 million tonnes.

Its loss, compared to a net profit of US$132 million for 2014, was a result of a one-time US$1.9 billion charge. This comprises a US$1.06 billion writedown in the value of its long-term coal contracts; a US$178 million impairment on assets such as Cockatoo Coal and Yancoal Australia; a US$531 million impairment from the sale of its remaining stake in Noble Agri; and US$193 million from its share of Noble Agri's losses.

Without these, underlying net profit stood at US$244 million, Noble said. The group recorded positive operating cashflow, US$330 million, for a second straight quarter. This had been due to "aggressive steps" to shrink its capital-intensive and poorly performing metals business and to reallocate that capital, said Mr Alireza.

The segment's 2014 profit of US$282 million before interest and tax swung to a loss of US$229 million last year. The decision to reduce the size of the business was difficult as the firm had been working to expand it in the past two years, Mr Alireza said, but was necessary in view of the circumstances the firm is facing.

For the full year, however, Noble's operating cashflow was still a negative US$235.5 million, albeit an improvement over the negative US$1.1 billion for 2014. The group had US$1.95 billion in cash at the end of 2015.

In a conference call with analysts and the media, Noble took time to explain again the reasons for the reduced coal price assumptions behind the large impairment on the coal contracts. This, Mr Alireza said, was due to further reduced oil prices, which make up a large part of coal prices through transport costs, and expected impact of the Paris climate change agreement.

While Noble has hedged against lower coal prices for the next four years, it is exposed to price risks for the commodity up to a time horizon of 15 years for which no hedging instruments are available. "This change is to give us additional protection for the lower for longer scenario," Mr Alireza said, emphasising that this was not Noble's base case scenario.

Pointing to how the group's price assumption has been consistently below broker consensus in the past three years, he added that the revision in its assumed coal price was not because they had been inflated - which Iceberg has accused Noble of doing to boost its bottom line through higher mark-to-market value of its contracts.

In a presentation, Mr Alireza emphasised that Noble has delivered on its priorities in the second half of last year: generating positive cashflow, reducing its debt, raising at least US$500 million of capital and reducing costs, capital expenditure of investments in the second half of last year.

The group had an adjusted net debt position of US$1.5 billion as at the end of last year, from US$3.1 billion at end-2014. It is also due to receive US$750 million from the sale of its remaining stake in Noble Agri, when the deal is completed on March 3. For the first quarter of this year, Noble will first work to complete the refinancing of its revolving credit facility.

"We have agreed on the terms with a number of our core banks and we will move towards closing the transaction," said Mr Alireza. "Our plan is to get that refinanced long before May."

Despite numerous questions, he refused to be drawn into disclosing further details on the size or the cost of the facility. The Financial Times had reported that banks are charging Noble three times the interest rate of last year for a US$1 billion-plus credit line. "I wouldn't believe everything that's written in newspapers," Mr Alireza said. The terms of the facility is seen as an indication of banks' confidence in the firm - especially crucial now that Noble is cut off from the bond market given unusually high yields for its bonds.

Noble's other priorities for the quarter are to bring in US$1 billion of liquidity by end-March, including the US$750 million from the Noble Agri sale, reviewing its capital options and focusing on opportunities that have arisen from dislocated markets.

Asked whether the downgrades of its bonds to "junk" status by Standard & Poor's and Moody's have affected the costs of its bank loans, Mr Alireza replied that "there's been no impact at all". Moody's warned in a note on Tuesday, as it cut Noble's credit rating further into junk, that the impairment could have a "consequent negative impact on its relationships with banks and counterparties".

Meanwhile, Iceberg's fourth report, issued a year after it first launched its attack on Noble of inflating asset prices to boost its financial results, didn't have any discernible impact on Noble's shares, which ended 1.5 per cent lower at 33.5 Singapore cents. The anonymous group, noting that Noble's shares are down 72 per cent since a year ago, said the that firm's senior management has lost its credibility.

"The only chance for this company to regain credibility is to bring external executives on board," it wrote. "Only executives who have never been involved in this fiasco will have the courage to tell the truth."

Asked for his views on Iceberg's report, Mr Alireza was terse in his reply.

"I have not read it, I do not plan on reading it, and he will have his day in court," he said. "That's the only thing I have to say."