Noble Group

[Clement]

Hi CF,

It is just my hypothesis, based on my understanding of the commodities trading business and the following.

1) The annual report discloses that the bulk of the derivatives are physical contracts.

2) Page 3 of the PWC report, which reviewed 81% of derivative contracts with duration 2 years or longer, states 
"The relevant activities undertaken by Noble for the purposes of this report consist of long dated agreements with physical commodity producers. While the terms of these contracts are very specific to each individual agreement, in essence they are either (a) ‘off-take’ contracts, under which the producer typically agrees to sell the contracted amount to Noble at an agreed discount to the market price (such as a commonly-used benchmark price) at the time of delivery, or (b) ‘marketing’ contracts, under which Noble is paid a fixed percentage of the price achieved for assisting the producer in selling the contracted amount at then-prevailing prices." 

3) In the 4Q15 investor presentation, Noble disclosed that the derivatives are valued with a 20% discount rate. It is difficult for me to believe that Noble is unable to get a strategic investor or some other form of financing besides the rights issue, if the bulk the derivative contracts are contracts to receive cash-flows in the future valued at a 20% discount. It would make sense if the contracts require Noble to put up cash in the future and try to sell the resultant inventory to realize the fair values.

No problem, both of ours, are hypothesis   Let's validate them, with logic and facts, as far as we can.

I am not surprised by the fact, most of the derivative are physical contracts. Isn't it the role of CT companies, unlike financial institutions? The main role of CT companies is to move physical goods around globally with paid services.

It took me some time to get a reasonable hypothesis, for the (3). The purpose of the restructuring is to re-balance the liquidity. Derivatives, are part of working capital. No working capital, means no biz for CT companies. The asset-light strategy, is a viable means to reduce the debt, but equity raising is necessary for a more sustainable capital structure, IMO. Of course, it can be right issue, or strategic investor. Noble had chosen the right issue, probably a "quicker", "cheaper" and "safer" solution for Mr. Chairman then.

I agree that it is not surprising that the contracts were mainly for physical delivery, i just wanted to point out that they are contracts obligating Noble to pay cash and do not in themselves result in positive cash-flow. 

If fully hedged and facing no commodity price exposure, a commodity trader makes money by earning the physical delivery premium over a benchmark price and, if possible, paying below the benchmark price for the commodities it procures. Fluctuations in the spot price itself can be hedged, maybe not perfectly but adequately, in the futures market or through cash settled contracts. Given that Noble chose to pursue an asset light model, which involves minimal investments in mining / production assets, the off-take / marketing agreements are needed to secure supply below spot prices. I wouldn't equate them to working capital but capital commitments.