Tag Archives: mercuria

Noble’s “Reverse Working-Capital”…

All traders share an aspiration to borrow OPM and most of them, one day, will trade with money they aren’t eligible. Noble fell very young in the powder pot.

At one point in the time, Noble Group certainly received liquidity that they didn’t qualify for–Now the same banks are scrambling to unwind Noble’s balance sheet.

From FT

“Noble said the lower than expected sale price for its gas and power assets reflected the conversion of working capital into cash and a revaluation of trading positions due to “market volatility”.

“Mercuria had paid $102m for the business and deposited a further $83m in an escrow account”. 

“That figure is much less than the $261m Noble estimated it would be paid for the business last month when it asked shareholders to approve the sale”.

  • The conversion of working capital to cash assets is the portion attributed to the Gas/power unit on Noble Group Q3’s consolidated Balance sheet, Statements of Cash-Flows and Income statement.

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  •  $76,000,000 of Noble Gas & Power valuation was the working capital attributed to third parties or Banks (payables finance, inventory finance, receivables finance).

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  • Mercuria has paid the agreed price on the BUs to the seller minus this reverse-supplied capital by third-parties e.g restating the sales and actual P&L of Noble Gas & Power.

 

Mercuria Noble Group value breakdown.png

 The unit was marked by Noble at $394M in 1H-2017.

  • The $185M paid by Mercuria for Noble Gas & Power also suggests that Noble self-estimated the BU at more than twice its net asset value.

“Under a deal agreed in the past couple of weeks, Mercuria has given Noble access to $400m of its unutilised credit lines in return for a fee and information about its trading positions in coal and iron ore, according to people with knowledge of the arrangement.”

To avoid confusion, Mercuria isn’t altruistically given access but is tentatively placing the deal externally for a 200-250bps fee, contingent to 80/20 banks money and two leveraged funds money-without any risk or fiduciary relationship to the related parties we muse.

These funds are not first-payee loss in the case of a total loss / get whacked.

(EFA and Inoks Capital) target 1000-1200bps net returns in Asia trade finance coveting borrowers who do not have a credit rating  / or that banks just don’t want as clients (the rotten fish).

Cost of capital is cheap, albeit distorted by low rates. 

Noble Group is the perfect designated candidate: has destroyed its credits and its WACC represents the best uncorrelated opportunity on a risk-adjusted basis.

(Except for two minor details).

  1. The counterparty in the transaction contemplated by the funds doesn’t trade for a profit.
  2. Doesn’t generate cash as the banks unwinding the counterparty’s balance sheet.

We think concerned investors would like to develop a discussion with their private wealth advisers.

Among other things EFA and INOKS disclose very little the break-down of their funds other than a monthly return or geographies. This is perhaps the only real “informational advantage” that the “trade finance funds” have.

The Noble Files 贵族档案

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Noble Group: Anatomy of a Zombie Trader

Noble Group Says Listing Top Execs’ Pay Would Hurt Its Standing…

Noble Group Ltd., the embattled commodity trader, has pushed back against guidelines in Singapore for disclosing information on executives’ remuneration.

What  would hurt more Noble Group’ standing than the compensation of their Managing Directors that the company has refused to advertise in an exchange query: It’s shaky financials.

Noble Group has booked gains on these contracts to the tune of 102% of shareholder equity as of April 2017.

The company has unrealistically booked large profits on long-dated contracts ($3.6B), the value of which relies on input assumptions that are not market-observable…

Two small things to worry about Noble’s are the valuation and the uncertainty of the cash realization of these gains.

One of these gains booked is on a 10 years offtake agreement with Sundance Resources (problem: it’s a junior Australian miner with production starting in 2019 (opps!)

Noble has repeated that these contracts were correctly valued. Then in 2016, 48 hours before the publication of their FY15 annual results, Ernst & Young suddenly realized that these contracts had to be impaired by $1.1b.

At least if you were a buyer, you would expect to pay for assets generating positive cash-flows.

Problem is that Noble Group has generated negative cash-flows from the operations to the tune of and -$1600M in 2014, -$600M in 2015, and -$900M in 2016 (and I also reckon that its cash flows from operations didn’t even covered the cash interests expense of its debt service in Q2-2016…)

Noble group has no intrinsic value (by DCF).

It remains difficult to value them and put a ballpark price but no, the current price share doesn’t reflect the accounting issues and net equity issues of the trader.

OCBC bank and many analysts at brokerage houses bave simply stopped the coverage the company. Compliance officers now refuse them to cover the company on reputational risk.

It is also said in the market that the company is likely also good candidate for a downgrade by S&P.

The trader has lost its access to their counter parties in the commodity market because of stricter limitations to deal with them now. (must put down collateral to execute trades that in the past required none)

If one wishes to be very conservative:

Exclude the $1.6B inventory from its liquidity it belongs not to shareholders but is used by Noble as the collateral to pony up $5B borrowings with the banks (because Noble Group also celebrates the envied 4th position among the top 10 commodity borrowers in the world…).

The cash realization of these gains:

Noble’s “Net Fair value on commodity and derivative instruments”. End FY 16, the net gain in fair value stands at 2,776,419,000 while end FY 15, it stood at 3,178,351,000.

Noble should have realized approximately 400,000,000 of gains, however cash flow shows its has only realized about 234,234,000 in gains (57% of the amount).

The valuation of these gains:

So one could conservatively remove the fair-value gains from Noble’s net equity computation, or give it a haircut of say 60%) when valuing the company.

Have you hear about something called inverse-leverage

The problem is that it cannot be done because a depreciation net fair value G/L gains on commodity contracts of -19% would render Noble Group insolvent and precipitate the Asian trader into liquidation.

The further that the coal API2 curve goes on the Bloomberg terminal is 5 years… I’m curious how does William Randall, Coal Kingpin Australian brainmaster of Noble Group pulls out a 30 years mark-to-market gains. what’s that !

Do people realize that IF Noble Group contracts were properly valued a long time ago a credentiate trader (such Castelton Commodities) or and investor (like Temasek) could have bought them out.

This said, the thought process at Noble isn’t very different from the rest of the industry peers (Glencore…)

e.g MDs in independent units, under minimal supervision have crafted positions that have bleed into outright wagers. With limited trading views, constantly fight the HQ to punt more working capital.

Their entrance in some commodity markets has been always marked by spectacular moves.

Their tactic has been volume is at any cost, throwing their weight around; (Noble Agri, Noble Americas…)

This has naturally created a pattern of brutal exits.

More people doubt the revenues of Noble Group.

Noble Group inventory in-transit

Noble Group growth seems very artificial,  volume is at any cost in order to compel name recognition.

A great deal of criticism should be levelled at Noble Group for their lack of financial substance.

How can any trader in the world have an Inventory-in-transit of $2.6M for a  cost of goods sold of $48.524B ?

sales peers noble

If we believed Noble, by its revenues, the Singapore-listed trader would be a trading giant second to Mercuria, (company with traceable flows and assets).

However the revenue per employee of Noble’s peers, only brings more questions about the veracity of Noble Group reported revenues and volume.

noble employee per sales

The revenues/employee of Mercuria and Gunvor put Noble Group in the   88.4B$  revenues fork.

At $101M per employee and the sales of Mercuria, Noble would have estimated $8B revenues.

At $4.9M per employee and the sales of Gunvor, Noble would be a $8.4B revenues company.

The audited inventory-in-transit, the level of RMI, and the peers analysis both place Noble as a company with implied revenues 11X to 12X less than the amount reported.

It is not clear how Noble can claim a turnover of nearly $100B per year with an unaudited physical traded volume of 182 million metric tons (2016) and 183 million metric tons (2015).

Noble is known very active in the financing market.

Yet no evidences have suggested that the physical operation of Noble  possesses any of the hallmarks normally associated to one of the largest commodity trader (chartering of ships and by tonnage)…

Noble Group has generated negative cash-flows from the operations to the tune of

-$900M in 2016,

-$600M in 2015

and

-$1600M in 2014.

Worse, the core of its booked net equity which is 102% of fair value gains/losses booked on assets.

How a company with no acceptable performance can still present a net positive equity of $3.92B ?

With $5B, Noble makes the top 4th position on the top 10 commodity borrowers list.

Figure_1.jpg

TXF data

Cautionary tale:   We need to know with some precision what Noble are actually using the money- for ato-arrive net-equity” that the trader has  to continuously re-finance.

The struggled acquisition of Noble Agri by Cofco has shown how difficult it is to impose success to a company’s assets with a substantial booked value despite no acceptable performance and very few financial substance (if not any of it).

Noble is known as remarkably active in the financing market but less in the commodity market.

These anomalies only reinforce our belief that Noble is not even close to one-fifth of the $97 billion sales company it touts to be.

The Noble Files 贵族档案