Iceberg Research claims Noble Group uses fraudulent accounting and shares plunge

Hong Kong-based commodity trader Noble Group has had a tough week. Things started off bad on Monday when Iceberg Research published a report claiming that Noble places a value on its stakes in some holding companies much higher than their actual market value, and shares (traded on the Singapore stock market) dropped by more than 10%. It didn’t get much better on Tuesday as Noble shares slipped another couple of percentage points for a total loss of $770 million in market cap. Then on Wednesday, just to top things off, Singapore stock regulators announced they were reviewing the allegations in the Iceberg Research report.

When queried by Bloomberg Business, the Monetary Authority of Singapore noted it was reviewing the report and would “take appropriate action if there are breaches” of the Securities & Futures Act.

As noted in the Wall Street Journal, Iceberg’s claims are the second time in two years that a commodities firm trading on the Singapore exchange has faced queries over its accounting practices. Back in 2012, short research firm Muddy Waters published a report claiming agricultural commodities trader Olam International was almost bankrupt, causing a sell off of company shares. Olam then filed a lawsuit against Muddy Waters, saying the research firm had committed libel and slander in its report (eventually withdrew the lawsuit).

Noble Group shares closed up around 2% at S$1.07 in trading in Singapore on Wednesday.

Noble Group

Statement from Noble Group

In its Monday statement made through the Singapore stock exchange, Noble noted that it “completely rejects” all of Iceberg’s charges, saying that there had been “no material adverse change” in its financial position since the company reported earnings for the third quarter of 2014.

“The carrying value of our associates, including Yancoal, are tested for impairment using discounted cash-flow models that are updated every quarter,” Noble noted in its statement. The current valuations for Yancoal and other investments are “currently being audited” as part of the 2014 fiscal-year audit, the company added.

More on the Iceberg Research report on Noble

In its report, Iceberg alleges that Noble “exploits the accounting treatment of its associates to avoid large impairments and fabricate profit.” A specific criticism of Noble relates to the worth of its 13.2% stake in Yancoal Australia, which the trading firm pegged as worth $678 million at the end of 2013. In its financial statements, Noble noted it was using a “value in use assessment of the recoverable amount of its investment”, meaning in essence that the value determination  was based on a projection of Yancoal’s future cash flows.

While Noble hasn’t disclosed any update in its valuation of its Yancoal stake since its 2013 annual report, the market value of Yancoal has dropped dramatically over the last year or so. Yancoal shares are off by 87% over the last 14 months as coal prices hit rock bottom. According to current FactSet data, Noble’s holdings in the firm are worth close to $10 million.

Noble Group

Iceberg claims that Noble uses accounting tricks to create inaccurate valuations of its stakes in several companies, including Indonesian coal concern PT Atlas Resources.

Of note, Noble Group is slated to release its 2014 financial statements on the 26th of this month. The firm noted it could not make any more detailed comments at the current time because of its impending results announcement.

Comments from Moody’s on Noble Group

When contacted by the WSJ, Moody’s Investors Service commented that it believed Noble is “comfortably positioned” with an investment-grade Baa3 rating.

“Noble maintains excellent liquidity, and we judge the company’s risk management practices to be on par with those of its investment grade rated peers,” noted Hong Kong-based Moody’s analyst Joe Morrison.

Noble Group

Iceberg Research wants to remain anonymous

In a somewhat unusual twist, Iceberg Research insists on remaining anonymous. Although there are cases of wrong doing, many short-sellers chose to remain anonymous due to legal threats or even death threats. Iceberg’s website does not mention the names of any analysts or provide links to research except for the report on Noble. Iceberg said it doesn’t have any position in Noble’s securities and doesn’t work in tandem with funds.

When contacted by The Wall Street Journal, an unnamed representative from Iceberg Research replied: “The structure is new but we have long experience in analyzing financials. For the moment, we cannot say more because we want people to focus on the strength of the arguments, rather than the identity.” The individual went on to say neither the firm nor its analysts trade in the Singapore market and they have not made any trades involving the Noble Group or its holdings.

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