Noble tells more but critics left unconvinced

Singapore

IN A move towards greater transparency amid criticisms of its accounting practices, commodity trader Noble Group has for the first time made certain disclosures that it would normally not make in interim results. However, critics remain unconvinced about the group's overall transparency.

Hong Kong-based Noble on Tuesday disclosed its net fair value gains and losses by segment and region in its first-quarter results ended March 31, 2015. The trader also adopted earnings before interest & tax level segmental profit and loss disclosure, and has split its energy coal and oil liquids business into one reporting segment and its power and gas, as well as its US energy services business, Noble Americas Energy Solutions, into another.

Beyond that, Noble has also created a metals and mining segment, and has added a new corporate segment which incorporates its freight business, the results of its associates and joint ventures, as well as corporate unallocated revenues and costs.

But several critics whom BT spoke with on Tuesday night remain sceptical about the trader's added disclosures, and are adamant that Noble should reveal more meaningful information.

Noble's shareholder and veteran investor Mano Sabnani told BT that the added disclosures, are a step forward for Noble, but noted that it "should have been done earlier".

He added that Noble should look again at writing down the value of its 13 per cent stake in Australian coal company Yancoal, which it still values at US$322 million, versus the substantially lower market value.

Iceberg Research, the little-known outfit which since Feb 15 has been launching a series of criticisms on Noble's accounting approaches, told BT that Noble's disclosure of its fair values "is not what the market wants".

Under the net fair value measurement of its commodity contracts and derivative financial instruments, Noble had further provided details on its 'Level 3' balances, stating that US$1.14 billion, or 27.4 per cent of its total net fair value has been classified as 'Level 3'. Under the US Financial Accounting Standards, 'Level 3' inputs are considered 'unobservable' due to the lack of data.

But Iceberg said it would not place much emphasis on Noble's levels categorisation as the latter's auditor, Ernst & Young, had acknowledged that Noble makes the decision on what is Level 2 or 3. "It is possible to manipulate 'Level 2' easily," Iceberg claimed. "For example, the cargoes traded every day are almost always different from the index specifications. So you can play on the differences in price between index and actual cargo."

Instead, Iceberg reiterated questions that it had previously posed to Noble, but still remain unanswered. Iceberg wants to know the marked-to-market (MTM) contribution of Sundance Resources, an African iron ore project which it believes Noble to have booked a very large MTM contract with, and which Iceberg suspects will run out of cash this year. It also wants to find out the MTM contributions of Noble's Mongolian associates AML and XML, which it claims to be unoperational.

Meanwhile, short-seller firm Muddy Waters Research, which issued a "short" position on Noble last month, voiced similar sentiments. "There was little truly useful disclosure from Noble," its founder Carson Block told BT.

The two areas which Muddy Waters wants to see substantive information are in contracts generating fair value gains and in Noble's trade and other payables. Additionally, it wants to understand 'Level 2' balances as well as 'Level 3'.

"What we really want is disclosure about how many contracts have accounted for fair value gains of over US$20 million, US$40 million, US$60 million, US$80 million and US$100 million," it said. "The concentration of fair value gains goes directly to how aggressive Noble's accounting is."

Michael Dee, investment banker and a former senior managing director at Temasek Holdings, described Noble's latest attempt at increased disclosures as a "childish obfuscation".

Most importantly, in Mr Dee's perspective, Noble still has not proven that its "inventory sales" are not really repos with banks.

"I challenge Noble to tell us how many inventory sales they have done over the last three years and how many were not repurchased by the banks," he said. "Until then, I will continue to believe they are repos, and repos are debt ... Noble needs to tell the truth, and nothing but the truth."

READ MORE: Noble Q1 profit down 30%