Noble Group Fails the Micawber Test
(Bloomberg Gadfly) -- Trading businesses should be pretty simple. You buy something, and then sell it for more than you paid.
Joseph, in the book of Genesis, did some exemplary commodities trading by buying grain cheap in a glut, and warehousing it until famine pushed prices higher. Wilkins Micawber, in Charles Dickens's David Copperfield, applied the same principle to domestic economy:
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Why is it that after all these years Noble Group Ltd., once Asia's biggest commodities trader, is unable to get this right?
Operating cash flows in three months through March came to a negative $323 million, the Hong Kong-based trader said in first-quarter results Thursday. There's nothing so unusual about that: Noble has posted just four quarters of positive operating cash over the past three years. But it continues a worrying pattern that sits at the root of current concerns about Noble's ability to shoulder its $3.3 billion debt load.
Compare Noble to some other traders and the problem comes into focus. On a trailing 12-month basis -- every trader has down quarters as well as up quarters -- Archer-Daniels-Midland Co. and Bunge Ltd. have posted positive operating cash in every quarterly period since 2012 and 2013, respectively. Mitsubishi Corp. and Mitsui & Co. have been in the black in every period of the past 10 years. Noble, except for some brief periods of respite in 2009 and 2011-2013, has never managed to break out of misery territory.
It's disturbing that this pattern is so persistent. Noble hasn't been a slouch in reforming its business: In 2016 alone, it sold its North American power trading unit, closed its European gas and power division, shrank its metals desk, and completed the final stage of a $2.25 billion sale of its agriculture arm to state-owned Chinese giant Cofco Corp.
Typically, such drastic corporate actions are intended to leave a company with a profitable core business capable of servicing a debt load that's much reduced thanks to all the asset sales. But that's not happening any time soon: Noble's net loss in the first quarter was $129 million, and outgoing Chairman and founder Richard Elman forecasts a "long, hard slog" before the company finally becomes profitable some time during 2018 or 2019.
Noble has its reasons as to why this quarter didn't pan out so well. In particular, it argued the Asia Pacific coal market has become "dislocated from its fundamentals" -- but a commodity trader complaining that markets aren't reflecting fundamentals is like a sailor who complains about the weather. Noble is meant to be the sort of savvy trader with broadly distributed market intelligence able to treat such upsets as trading opportunities, rather than excuses for failure.
That fundamental weakness is making it hard for Noble to recover from its woes. The company's debt load may be unsustainable, Danny Huang, director of corporate ratings at S&P Global Ratings in Hong Kong, told Bloomberg News before the results were announced. The yield on Noble's $750 million 2022 bonds sold in March at 8.75 percent gapped as high as 18 percent, while the rate on its 6.75 percent 2020 notes shot up to 14.7 percent.
Until operating cash starts flowing again, Noble can only keep the wolf from the door by borrowing from its lenders or offloading more bits of itself -- and there's just $2.2 billion of long-term assets left to sell. Unless something changes, and fast, Noble could very well run out of time.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
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