Noble warns of Q4 loss from US$1.2 billion of impairments

Write-downs will push 2015 results into the red and NAV from S$1 to over S$0.70 a share


AHEAD of its results announcement on Thursday, commodity trader Noble Group announced US$1.2 billion worth of impairments and adjustments that will drag the firm to a net loss for its fourth quarter and a full-year loss for 2015.

The non-cash write-downs were due to assumptions - which Noble said were not in its base case - that coal prices will remain at lower levels for a longer period, in a way that its hedges do not protect against. Most of Noble's long-term contracts are in coal.

The impairments came on top of US$546 million already announced last year after Noble's sale of its remaining 49 per cent stake in joint venture Noble Agri.

Noble said on Tuesday that a conservative price of US$55 per tonne of thermal coal has been adopted for prices in 2020, US$14 per tonne below the average market consensus price of US$69. A similar process was undertaken for metallurgical coal.

Long-term consensus prices for coal have dropped in the past half-year partly due to the oil price crash, which leads to lower costs for coal producers and sustainably low coal prices.

Another reason was the Paris COP21 climate change agreement that "raises the probability of future substitution away from coal", Noble said.

Concerns about weaker global economic growth, and a weaker Chinese economy, also weighed on prices.

As a result of the impairment and other losses, net asset value per share at end-2015, with subsidiary Noble Americas Energy Solutions carried at cost, remains "in excess of S$0.70 a share", Noble said.

This is down roughly 30 per cent from net asset value of US$0.78 a share, or over S$1 a share, at end-September 2015.

In announcing the impairments, Noble argued for the strength of its balance sheet.

Cash realised from long-term contracts was in line with broker expectations at over US$350 million for 2015, it said. The group had a record US$1.95 billion of cash at end-2015.

The pro forma year-end net debt to capitalisation ratio, adjusted for cash proceeds from the Noble Agri sale and the impairments announced so far, was between the targeted 45 to 55 per cent, Noble said.

Iceberg Research, the little-known group that raised questions on Noble Group's accounting practices a year ago, said in an e-mail on Tuesday that "the problem is much bigger than US$1.2 billion".

Before the latest impairments, net fair value gains on contracts and derivative financial instruments on Noble's balance sheet - the real values which had been hotly debated in the past year - were US$4.5 billion at end-Sep 2015.

Iceberg last year said that at least US$3.8 billion in fair values were overstated. Iceberg said it will issue its fourth report on Noble Group before the company announces its financial results.

Others are more positive. Nirgunan Tiruchelvam, director of research in Singapore at Religare Capital Markets, told The Business Times in an e-mail: "The impairment is a positive step. They have assumed a conservative coal price."

A DBS research report on Tuesday said the impairments were expected and have already been factored in by the market.

"While we believe the market will like the expected delivery of positive operating cashflows in Q4 2015, evidence of positive operating cashflows on a consistent basis going forward will still be required before the market regains confidence in the stock," it said, keeping a "hold" recommendation with a target price of S$0.42.

Deutsche Bank credit analyst Colin Tan said in a report that his positive view on Noble's 2018 bonds, trading at a 40 per cent yield to maturity, is underpinned by the improved liquidity buffer Noble has after its Noble Agri sale.

Downside risks include a further decline in commodity markets, he said.

Noble's share price has been rebounding in the past month from a low of S$0.265. On Tuesday, the counter closed up half a cent to S$0.375.

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