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Update 2: Noble refutes Iceberg's claims, says auditors will sign off on accounts, will lift trading halt on Feb 27
NOBLE Group, which halted the trading of its shares on Thursday after Iceberg Research launched its second litany of allegations against the commodities trading firm, said its auditors Ernst & Young have completed their review of their internal procedures and will sign off on the year-end accounts.
"The results briefing will therefore take place as scheduled at 18:30 today, 26 February. We will request the Singapore Stock Exchange to lift the trading halt tomorrow 27 February before market opens,'' Noble said.
Earlier, the company said its auditors had requested for more time to review their own internal processes before signing off on the group's annual accounts in the light of the allegations. The trading halt was requested in order to allow time for consulting the auditors and management about fresh allegations made.
Noble stressed the allegations are without substance: "To be clear, the statements made by Iceberg are materially and factually inaccurate. Our core businesses are in robust health and the statements made by Iceberg cannot be relied upon in assessing the company's financial condition.''
It added that the Iceberg report does not take account of the contributions of its many other businesses such as oil liquids, power and gas, metals, as well as energy solutions business.
In its latest report, the anonymous group, which launched its first analysis on Noble on Feb 15, 2015, alleges that Noble's profits are overstated due to the "remarkable increase" in the fair values of unrealised commodities contracts (mark-to-market or MTM).
"These contracts surged from near zero in 2009 to an unprecedented net US$3.8 billion (US$5.8 billion assets and US$2 billion liabilities)," Iceberg said in its second report on Noble, which analyses the group's fair values and operating cash flows.
"We have analysed Noble's OCF (operating cash flows) and working capital in depth over the past few years. The group has been largely unable to realise the MTM that matured during that period. Based on this analysis, we believe that at least US$3.8 billion in fair values are overstated and should be impaired. Impairing these fair values dramatically impacts Noble's performance indicators.''
According to Iceberg, Noble books fair value gains on long-term offtake agreements it has with its suppliers upfront. That means expected profits for the duration of the contract which could be more than 20 years is booked on day one in the income statement. It asserts that Noble has been doing this for contracts that have yet to start, or from mines that have yet to secure financing.
It said the fair value of unrealised commodity contracts (mark-to-market) which are related to its long-term offtake agreements is too high and needs to be written down.
Iceberg said Noble's operating cash flows are weak and the reported operating cash flows are inflated as it excludes interest expenses and includes cash balances with futures brokers not immediately available for use in the business operations.
"The divergence between Noble's net profit and OCF is striking given its status as an investment grade company. Noble has recorded a combined US$2.7 billion net profit since 2009. However, its operations have lost US$485 million in cash in the same period. OCF have continued to deteriorate since 2011, e.g. (US$620 million) outflows in 9M 2014,'' it said.
"We believe the OCF would have been even worse without the help of inventories repos.''
Iceberg said there will be a third report which will focus on Noble's debt and the investment grade.
"We will show that the way Noble reports its debt (gross, net, post inventories), and its so-called "liquidity headroom" are highly misleading. Noble does not report its entire debt. We will also write about very obvious governance issues (e.g. the board of directors), the number of key executives who left the group, and the role of the auditor. We will present our final valuation of Noble,'' the report said.
The research group stressed that it is not claiming that Noble is performing outright accounting fraud, but rather stretching the accounting rules to the maximum.
It concluded that "Noble is engaged in a vicious cycle...When a trader uses fair values to hide the performance of a bad quarter, the assumption is that the future quarters will be better. It is "ok" to do it because there will be better times later on...The problem for Noble is that the better quarters probably never came.''
"It is now too late for Noble. There will be no miraculous recovery. The market will progressively realise the company's fair values are largely fabricated,'' Iceberg said.
Responding to the latest report, Noble insists it "has a robust and disciplined profit recognition policy for its commodity contracts'' and that it takes a conservative risk management position.
"As the products underlying the contracts are delivered, cash is generated and profit is recognized as the difference between the cash inflow and the discounted value on the balance sheet."
It added that it is misleading to presume that the net fair value gains and losses equates to the profit and loss of the company.