Noble Group reports first quarterly loss in over a decade

It goes without saying that we are very unhappy with this performance even if it does just cover a very short period.

We would obviously have much preferred to report records all over the place but we operate with the realities that you read about in the financial press every day.

We have to manage the external environment as best we can, and our profitability - especially in the last few weeks of the quarter - has been impacted by a number of factors - all of which are transitory in nature - against an overarching background of random, and extreme, volatility.

When volatility reaches such levels there is little that we can do except to ensure that our risk exposures – whether they be price, counterparty or credit - are as considered as possible, which obviously also means that profits are impaired in the short run.

In many ways, the quarter just ended actually enforces our previous comments that our risk management processes and diversified business model dissipates much of the risk that comes with the turf.

The volatility that we are experiencing is also not just restricted to our industry and markets, but is a result of the unstable macro economic environment which is a continuation of the financial crisis that has been rumbling on since 2008.

And it is not just price volatility that is an issue, we are also seeing volatility in the regulatory environment that may also impact the manner in which we do business in future not to mention political and governmental influences over world markets and stock piles.

Whatever outcomes may emerge, whether it be from new banking regulations and the Basel capital weightings, new limits for commodity “speculators”, or whatever, our experience tells us that demand for our physical services which focus on supplying emerging market demand will continue to be strong. People will still need food and energy.

As we have no “big views” on when and how the financial background may gain some degree of equilibrium, we will continue to manage the businesses as best we can to ensure that we remain in excellent shape to develop our strategy – which remains unaltered. We are of course in an evolutionary environment, and we will adjust to the changes.

Over and above the revenue generated in the difficult operating environment of the last few weeks, it is also worth bearing in mind in mitigation that we continue to carry significant levels of cash in the balance sheet and fund ourselves long term.

These are all “drags” on the profit and loss account, “drags” that ensure our business is sustainable over the long term, and while new plants may look all nice and shiny and highly efficient when running optimally - full depreciation charges kick in on day one !!

At the business level, the Agriculture business had a very taxing quarter with processing margins generally remaining under pressure, while below average crop yields in the sugar business in Brazil and continuing counterparty defaults in the cotton industry have undermined the short term operating environment in this - arguably - our most important segment.

Although the poor cane yields in Brazil have seen our plants recently run at 20 per cent below last year’s capacity levels, the current outlook for an improved crop going forward on the back of improved rains is encouraging.

Indeed, and despite short term weather fluctuations, we believe that in moving early as a consolidator into the Brazilian sugar industry we have already created very significant value for shareholders, as reflected by the continuing influx of foreign investment into the industry, whose best located assets would appear to have increased substantially in value over our cost.

As to the cotton business, which impacted profitability again in the last quarter, we have seen renewed defaults in the latest three months.

We have experienced extreme conditions in the cotton industry previously – most recently in 2008 which saw the demise of some of the biggest players in the industry - and moved to limit our risks this time around quite early on - but the issues have been unavoidable and industry wide.

Extreme price volatility, has resulted in participants walking away from contracts in an unprecedented way - so much for the sanctity of contracts !

Obviously, if the end result of the last few months is that it becomes the industry “norm” to walk away from binding commitments, we will have to review the business model in the light of its changed risk profile.

In the Energy Segment, good performances from our core Coal and our emerging Oil, Gas and Power operations were adversely impacted by our need to account through the profit and loss account for the very sharp decline in the price of Certificates of Emission Reductions - or “carbon credits” during the quarter.

Since the financial crisis of 2008, we have regarded the emissions trading system as being a luxury that the Europeans cannot afford, and as such have taken a cautious approach to the business, but the recent dramatic decline in the price of short dated CERs - a maturity that we cannot hedge against - has meant that further write downs are being made.

The Oil, Gas and Power segment continues to gain traction and operated very successfully in unstable market conditions, while the Coal business continued to build on its already substantial presence.

Most encouraging here has been the success of some of our smaller listed exploration partners in making strong progress towards identifying and hopefully ultimately commercializing what may well prove to be valuable resources in Australia, Mongolia and Indonesia.

Lifting our eyes above the last three month period, we continue to believe that the pieces of our business are coming together well, while an important component of that jigsaw puzzle is the ability to re-cycle capital.

We announced some weeks ago that we are in the process of obtaining approval for an IPO of our agriculture business, Noble Agri. Progress is good and we believe that the market will be receptive to this initiative. The market reaction from potential investors has been very encouraging. More about this later.

Also, we are engaged in a major review of all our businesses and the costs associated with them in order to improve margins and profitability.

We repeat, we are not at all happy with these results, but very simply “Things happen” which are out of our control. The Company, however, remains very healthy and strong.

So in closing, I would like to express our sincere thanks to our customers, our suppliers, all of our banks, and all others with whom we interact. Especially I would like to say thank you to our staff for their support and passion in executing our vision.