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Michael Dee: Response To Noble’s Open Letter (Revised)
Corporate Digest | 24 June 2015
By:

This post is republished from a letter written by Michael Dee addressed to Noble Group’s open letter filed on the SGX. Michael has been in the investment banking scene (ex Morgan Stanley CEO SE Asia, ex Senior MD of Temasek Holdings) for more than 30 years.

Dear Mr Alireza

I have now had two additional days to contemplate your extraordinary letter to me and provide an expanded version of my initial comments. Let me begin by restating a recent statement you made:

“We unfortunately live in a world where knowing that you run your business professionally is not good enough. You need to be able to prove it”.
Mr Yusuf Alireza
CEO Noble Group

There is nothing “unfortunate” about having to prove you are managing your shareholders business professionally…it is something you must willingly do every year, every quarter and every day. It’s your job, shareholders expect and deserve it. I further regret to report that “your” opinion of “your” performance does not matter. You don’t get to evaluate yourself. Also let me point out that it’s not “your” business, it’s your shareholder’s business. This quote says a great deal about both you and the culture at Noble which has brought these problems upon yourself and which gravely affect all your employees, shareholders, bondholders, lenders and customers. To fail is to leave a legacy of great destruction.

You are the hired help working for all shareholders, in particular the 80 percent not named Elman. You have been given tens of millions of shares by the owners of this enterprise and you owe them straight answers to simple questions not misdirection and obfuscation. You are a smart, well-trained, well paid, professional who can do a lot better. Maybe your new motto could be “No-Bull”.

Now that these legitimate issues seem to have Noble’s attention, it is to your suffering shareholders and employees I hope you will now pay attention. I only am highlighting critical questions and am interested in the facts, not mere empty denials. Unfortunately you do have to prove your case and I for one look forward to seeing you start. I am willing to change my opinion based on real facts and not a letter drafted by Noble’s PR team.

I write every word myself. I do my own analysis. My views are mine and mine alone. If I am presented information that answers my questions sufficiently, I will be the first to change my opinion. However, nothing in your letter or prior statements rises to the level needed to erase the market’s concerns as demonstrated by your falling share price, analyst downgrades, investor sales, and widening credit and CDS spreads.

Noble has had four months to respond, yet I responded in 30 minutes to your letter. I am trying to highlight questions which are legitimate and which predate Iceberg Research. Not only I but the market overall has found your presentation to date wholly unconvincing and as a result your share price sinks further when Noble is not buying shares. Confidence in Noble is crumbling for the very reason that questions remain unanswered. Mr Alireza, convince me you are right. Prove it.

Let’s start with Yancoal. You say Yancoal is an Associate company yet you only own 13 percent, not the required 20 to 50 percent. And how does someone with such a small amount get around this by saying you have substantial influence at the company? With only 13 percent this seems quite a stretch. How is that consistent with accounting standards and market practice?

You said Yancoal’s price had increased 5x but failed to mention that the price had declined 96 percent in the 18 months prior from $0.75 to $0.03. Yes it has risen from $0.03 to about $0.15 today but this is still 80 percent below the price of early 2014. You note that Yancoal still loses money yet your valuation seems to assume something else. If you are so confident of your Yancoal valuation then release the full valuation model, with all it’s assumptions and calculations, both before and after you recently wrote it down 40 percent. Let the market decide if your assumptions that Yancoal is worth 30 to 50 times the market value are realistic and justified. You ask us to believe all your mark-to-market valuations yet you will not show us your work. Release the full model, I dare you!

Now it’s important for employees and investors to understand why Yancoal matters. The Wall Street Journal Heard on the Street column recently showed a chart that made an incredible point. The percentage of Noble’s mark-to-market gains to shareholders equity was about 90 percent at year end and 81 percent at the end of the first quarter. Thus it matters if these positions are valued correctly as write downs result in losses as we saw in the first quarter with the Yancoal $200 million write down. The market is showing great concern over the book value as the company now trades below book value per share showing concern over these valuations.

Investors have no visibility into these contracts and you provide no meaningful support for it. Yancoal is a window into your valuation methodology and it is troubling at best given the extreme valuation differences and that you refuse to release the valuation model. As analysts increasingly focus on your book value and the sources of it we see dramatic downgrades of your stock.

Soon the credit markets will get interested in this along with the rating agencies, bondholders, traders, and banks. Any bank, bondholders or receivable holder needs to understand the source of your equity and these mark-to-market gains. The time for trusting management has now passed and credit departments need to do their homework. These large mark-to-market gains also lead to big difference between reported profits and cash flow that must be understood.

As for Mr Elman, I congratulate him for building a company from nothing and becoming a billionaire in the process. When CIC bought a 15 percent stake in Noble (reduced to about 10 percent in late 2014) about one-third of the shares were sold by Mr Elman. You say major investors increased their holdings but Mr Elman reduced his and then CIC reduced theirs. Mr Elman’s is a fantastic story. In fact I hosted him at my home when the Prime Minister of Mongolia and members of his cabinet accepted my invitation to dinner in Singapore. This was a sign of my respect at the time.

However, over the last five years $1 invested in the Dow is now worth four times that of the same $1 invested in Noble. You seem to not like me comparing Noble to market indices. However this is legitimate as all your investors have the option to invest in any stock or basket of stocks. So your performance versus a market index shows what a disaster your company has been as an investment vs the overall index. The company is in decline, its credibility in tatters, its stock down 40 percent in months. This is under his leadership (and yours). He is 75 and 80 percent of the company is owned by others than him and they matter too. It is time to move on and get a new Chairman and Auditor. Mr Elman has my respect for what he built, but not for how he has run it for the last five years. It’s time to step down.

While we are at it I commend your purchase of five million shares earlier this year at about $1 per share. This proves you were not a trader at Goldman and that the only safe way to catch a falling knife is to let it hit the floor first. Mr Alireza, you got your enormous share position given to you from the shareholders. The stock is down another 30 percent from your last purchase. Show us your confidence in Noble and start buying even more with your personal funds. Do it until it hurts. Put your skin in the game. Until you do your letter is just empty words. Invest as you believe others should do. Show us your money!

As for those other shareholders buying Noble stock you tout? According to public SGX filings Invesco on June 2nd bought 1.8 million share and on June 3rd they sold over 12 million! One day later they sold ten times what they bought a day earlier. And all your banks showing confidence? Well, the Wall Street Journal and Bloomberg are reporting that ANZ is selling down the syndicated loan you so proudly promote. You say that is normal practice. Really? After only a few weeks? With 30 years of history in the capital markets let me inform you this is not standard practice. The highly respected Carey Wong at OCBC just lowered their fair value to $0.61 and he was at $1.05 just a few months ago. Goldman Sachs is now a hold at $0.77 from a buy at about $1.30. This is a 40 percent decline. Does any of this show confidence? Sure doesn’t look that way to me.

As for your inventory sales I have asked a simple question you have not answered. “How many ‘inventory sales’ have you done in each of the past three years by number and amount and how many times have you not repurchased them?”.

In your letter you say “more often than not we exercise the option to take them back”. Thank you for making my point for me. A sale is a sale. If you sell something just to buy it back later at a fixed price and date to provide a rate of return to a purchaser… and you do this over and over again…then you are stretching the accounting rules too far, and in substance the sale and repurchase is really debt and should be booked as such…in my humble opinion. Just because the firm auditing you for the last 20 years gives you a green light to do something, and someone else does it, this does not make it right. I learned that in kindergarten.

So quantify this more clearly for investors. My working hypothesis in the absence of other information, is that virtually every time you have repurchased them. If this is the case then, in substance, they are no different from a repurchase obligation which is a liability. Just because your auditor says it’s not a debt obligation does not mean that, in substance, it’s not. It just means they are willing to be too aggressive. And Mr Elman has publicly confirmed that your accounting is aggressive. My opinion is that this goes too far. If it looks like a duck, quacks like a duck and floats like a duck, it’s not a turkey.

You hide behind technical definitions when the substance is not addressed. Tell us for each of the last three years, by number and amount, what percentage of the time you have not repurchased these inventories from these banks. Show us the data, prove your assertion. You say you’d be happy to take these inventory sales onto the balance sheet. Great idea, so do it. Over to you Mr Alireza.

You asked why I have listened to Iceberg Research. It’s because they presented issues which have existed for a while and they are legitimate. It’s the message not the medium. It is striking that a bottom 10 percent performer in the freight department has now got the attention of the global financial markets and their three part presentation has now gained traction. Perhaps you underestimated his abilities. It’s not about him but rather the issues he raises. Stop your absurd lawsuit against him and show the market the data.

You are a multi-billion dollar company and you are suing a guy for saying what you can’t disprove with facts, and what the market clearly now believes. Your actions or lack thereof have raised the profile of his concerns but they are the same others have had. I don’t hear anyone but you and your PR flacks saying his analysis is not legitimate. You have invested great effort in discrediting Iceberg but shockingly little in responding to the allegations.

You can’t intimidate the market or the media with your bluster and your hired PR flacks. You’re acting like a bully. Grow up and just answer the questions fully and professionally. I for one will continue to express my professional opinion based on 30 years of experience in the investment banking field. I take no side but listen to all sides to form an opinion. Mr Elman said “our silence has, in fact, not been silence”. I have no idea what that really means. I would say “your silence has been deafening”. Having said that I will change my view when, and only when, you prove your assertions to the market.

As for your AGM I had read the transcript, and spoken to others who were there. There was a clear attempt by Mr Elman to not respond to your shareholders. It was a terrible performance by an Imperial Chairman. I completely disagree with Mr David Gerald of SIAS and had told him how disappointed I am in their lack of support for investors and have thus let my membership expire. Your people also barred people from the AGM who deserved to be present in a heavy handed way.

I am easy to find. If you wanted to reach me you could have. I reached out and committed to your banker that I was willing to talk. My phone didn’t ring, you just sent a letter. So be it. When I challenged Olam the CEO was the first to call at 530am and he earned my respect for that. He sat down and listened to my points carefully. Even if I disagree with him on issues I respect him as a concerned listener with an open mind. This is not about me because I have no stake in this at all. It is about those shareholders and employees who have no voice and yet who want answers. The only answer you’ve given is a denial with no detail. It’s about time you really speak to shareholders, debt holders and employees, and explain your position.

So far the short position has gone from 0.2 percent to about 7 percent in just a few months according to media reports. You have been the buyer of 63 million shares yet Jefferies says that there are 400 million shares that are short. Your repurchase efforts are a failure and have not moved the price a meaningful amount. Only the truth and facts and details will suffice at this stage. Your best defense is not wasting the shareholders cash on futile buy backs and lawsuits but rather providing facts and explaining your position. That you haven’t been able to achieve this convincingly for the last four months tells us all we need to know.

Just to be clear, I am not satisfied with your answers however, more importantly I am not satisfied with your business and financial performance. The time for trust is over, it is now time to honestly discuss your financials and get a new auditor who can come in with a clean slate to assure investors the financials are a true reflection of the financial condition of Noble.

I commit to you I will not short your stock, but you have a long way to go before you will convince me to buy it.


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