Noble’s Iceberg Rebuttal Gets Few Prizes for Transparency

Noble’s Iceberg Rebuttal Gets Few Prizes for Transparency


March 6, 2015 7:10 a.m. ET

One of Asia’s largest commodities-trading houses is trying to convince investors that its accounting is transparent. The whole exchange offers a reminder, though, that the very business of trading commodities is opaque. Singapore-listed Noble Group late Thursday issued a rebuttal of claims by Iceberg Research, a little-known entity that has published two reports since mid-February questioning Noble’s accounting. It is impressive that Noble responded just a week after Iceberg’s second report, perhaps one reason its shares rose 5% Friday.

Yet the stock still is down some 12% since Iceberg’s first report came out. Speed aside, Noble’s response left some questions unanswered.

Iceberg’s first allegation was that Noble carried the stake it held in Australia-listed coal miner Yancoal at $678 million on its books at the end of 2013, when the market value was a fraction of that. Noble partly addressed this issue by writing down the asset to $322 million last week. That write-down seems too little, though, considering the market value currently stands at only $8 million. Noble classifies the miner as an “associate” despite holding a stake of just 13%, and values it through its own projections of what Yancoal’s cash flows will be. Noble suggests the market price of Yancoal matters less, since it is a thinly traded stock. Even so, at least investors can plainly see that price in contrast to Noble’s in-house projections.Iceberg’s other major accusation is that Noble inflates the fair value of its contracts to buy and sell commodities, which flatters its paper profits. Iceberg notes two instances where the mark-to-market gains seem too large. Noble denies the broader accusation, yet doesn’t say anything about the specific examples.

The company also doesn’t give details of which contracts account for its fair-value movements, which are based on its internal estimates and not always on market prices of commodities. Yet changes in the fair value of contracts and derivatives netted Noble a gain equivalent to 90% of its equity in 2014 and 60% in 2013.

Some of Noble’s refutations make sense. For instance, Iceberg compares Noble’s fair value gains with other commodity traders such as Glencore and Singapore-listed Wilmar International to show how large Noble’s are. But Glencore also is a miner that holds real assets on its books. And Wilmar trades a less diverse basket of commodities.

In fact, investors may find it hard to understand the accounting at any commodities trader, since each values assets at its own discretion. Perhaps that is why few trading houses are public. Glencore listed in 2011 mostly so it could raise the capital to buy mining assets, though its trading operations remain a puzzle. Fellow Singaporean trader Olam was the subject of short seller Muddy Waters’ attack in late 2012 because of how it valued biological assets.

Noble says it wants to become more transparent. Investors will appreciate more details, but they shouldn’t be surprised if there is a limit to disclosures. It may be wiser just to approach the commodities traders with caution.


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