Noble Group Blames Coal Price Collapse as Writedowns Mount

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  • About half of $1.2 billion charge taken on long-term contracts
  • Cashflow is positive in second-half ahead of full-year loss

Noble Group Ltd. blamed the tumble in coal prices for an additional $1.2 billion in charges that will force the embattled commodities trader to post its first full-year loss in almost two decades.

The company said most of the impairments are due to coal, warning that prices may remain at lower levels for an extended period of time, according to a statement Tuesday. Coal is a pillar of the Hong Kong-based trader’s energy unit, which accounted for 85 percent of revenue in 2014. The fuel’s fortunes have waned amid a broader slump in commodities and worldwide efforts to fight global warming, leaving prices near nine-year lows. Shares rose 1.4 percent at the close.

Noble Group endured a tumultuous 2015 as raw material prices sank, culminating in Moody’s Investors Service and Standard & Poor’s cutting the trader’s debt rating to junk. The shares lost 65 percent and its bonds tumbled as it parried attacks from short sellers and fended off claims that its accounts were misleading.

“The market was likely anticipating some form of writedown and the flat share price may suggest that as well,” Conrad Werner, an analyst at Macquarie Group Ltd. in Singapore, said by e-mail. “Banks may see an incrementally ‘cleaner’ balance sheet as a positive factor when they make their lending decision vis-a-vis Noble.”

Moody’s downgraded Noble’s credit rating another two notches Tuesday to Ba3 from Ba1.

“The asset impairment significantly heightens uncertainty regarding its ability
to achieve adequate profitability and cash flow, given our expectation of a
prolonged commodity down-cycle, and the consequent negative impact on its
relationships with banks and counterparties,” Joe Morrison, a senior credit officer at Moody’s said in a statement.

S&P said the profit warning was “credit negative” and the announcement “highlights the company’s weaker profitability and earnings volatility in a depressed commodity market environment,” the ratings firm said in a statement Tuesday. S&P did not change its rating for Noble, but said the company remains on Creditwatch with negative implications.

Noble had positive cash flow in the second half and ended the year with a cash balance of $1.95 billion, the company said. It expects to post a net loss in the fourth quarter and for the full year, which would be its first annual loss since 1998, according to data compiled by Bloomberg. The $1.2 billion in non-cash impairments and exceptional charges are in addition to a loss of $546 million from the sale of its Noble Agri Ltd. unit, which shareholders cleared last month.

Price Outlook

Noble Group’s new thermal coal price estimate of $55 a metric ton will underlie the value of its contracts for 2020. The World Bank forecasts Australian thermal coal at $58.10 a ton for that year, according to projections made in January. About half of Noble’s impairment -- $567 million -- will be applied to its long-term contracts. A further breakdown of the losses will be made available after it posts earnings on Thursday, Chief Executive Officer Yusuf Alireza said on a conference call.

Noble’s valuation of its stake in coal miner Yancoal Australia Ltd. and its treatment of long-term contracts has drawn particular scrutiny from the anonymous Iceberg Research, one of several companies to criticize the trader’s accounting practices. Noble has refuted all the allegations made against it and is suing the man it claims is behind Iceberg, Arnaud Vagner, calling him a disgruntled ex-employee.

Noble holds a 13.2 percent stake in Yancoal, according to data compiled by Bloomberg, and the trader booked a writedown on the asset early last year. Thermal coal at the Australian port of Newcastle, an Asian benchmark, tumbled to $47.37 in the week ended Jan. 22, the lowest since 2006, and was at $51 last week, according to data provider Globalcoal.

Cash-flow Generation

“The writedown reflects the depressed commodity price environment, particularly that of coal,” Nirgunan Tiruchelvam, an analyst at Religare Capital Markets in Singapore, said by e-mail. “Investors will be focusing on Noble’s cash flow generation in the fourth-quarter results. A second successive quarter of cash flow positive would improve the sentiments towards Noble.”

Noble’s last coal price assumption was $85 a ton for 2019, above a brokers’ consensus of $82, according to the company. Its new forecast for 2020 is below a consensus of $69 a ton. Over 2015, the company said its long-term contracts had performed to expectations, delivering $350 million in cash flow.

Noble’s shares have rebounded in recent weeks after being the worst performer on Singapore’s benchmark Straits Times Index last year and bottoming at 26.5 Singapore cents in January. They climbed and dropped as much as 4.1 percent before ending at 37.5 cents on Tuesday.

Noble Group’s 2020 notes surged 2.4 cents to 49.4 cents on the dollar as of 5:34 p.m. in Hong Kong, according to Bloomberg-compiled prices, the biggest jump in three weeks. While the notes have rebounded 9.2 cents from an all-time low on Jan. 21, they have slumped from 82 cents six months ago, handing investors a 40 percent loss. The cost to protect the company’s notes against non-payment for one year reached 5,209 basis points in New York on Feb. 22, the highest in Asia, according to data provider CMA. Five-year contracts stood at 3,680 basis points versus 1,598 on Dec. 31.