The Asset
09 February 2010

The former non-executive chairman of Noble Group, David Eldon, wrote on November 11 in his letter to shareholders – with the release of the group’s third quarter results – about the slave on the back of the chariot whispering to the Roman general: “Remember, thou art mortal”.

Elman: Success is in our hands; we need to take advantage of all the good things that have happened

A month later, when The Asset visited Richard Elman, then CEO and now executive chairman, and the founder of the group, and asked him whether he is (mortal), Elman chuckled: "Absolutely! Very volatile and fragile; you’re only as good as what you did yesterday.” But especially in 2009, as the world confronted the worst financial storm in many decades, Elman’s Noble Group, which he started in 1987, seemed invincible; not only did it continue to raise financing in the choppy capital markets, it succeeded in spades with an investment-grade rating upgrade – in a year dominated more by downgrades; established a strategic partnership with China Investment Corporation (CIC), one of the most important sovereign wealth funds in the world; and erased any lingering doubts that it is a bit player in the commodities trade business raising a US$2.4 billion financing facility in which 63 banks all over the world participated. One investment bank, in a report on the group, gushed: Noble positions itself for the next 100 years! With the sale of part of his stake in Noble to CIC for US$201 million, and with Noble’s share price on January 6, 2010 hovering at S$3.32 (US$2.38), a historic high, Elman is now personally worth more than a couple of billions in US dollars.

Sitting down for a conversation with Elman at the end of last year in his 18th floor office in Hong Kong’s Wan Chai district overlooking the harbour, it is hard to detect that much of the eventful past 12 months has changed him and his approach. In part, it may be because the reality of it all has not sunk in – given that several of the key events happened in rapid-fire succession in the autumn of 2009. But more likely, Elman is true to form as an entrepreneur – always understated.

“I don’t know what is transformational until it has happened,” he replies to a question whether the CIC investment is going to be transformational for Noble, as many analysts have suggested and which coincidentally came just before Standard & Poor’s upgraded Noble to investment-grade credit rating of BBB- in September 2009 (and then followed in mid-October 2009 by Moody’s investment grade rating of Baa3, completing an investment-grade rating from all three international rating agencies including Fitch).

For Elman, building a business successfully is never just one thing or one event; it involves a lot of different things that are put together. “Our greatest success this year has been to be able to continually grow the business to where it is today. Everything feeds on each other,” he says.

Take the credit rating upgrades, which he reminds The Asset did not happen overnight. “We spent a lot of time with the rating agencies. We worked very hard,” he says. He suggests, as to emphasize the point, that the rating agencies in 2009 were in no mood to upgrade anybody.

The upgrade to investment-grade without doubt is significant. It enables Noble to acquire capital at a more competitive rate – and also provides it easier access to international investors. “Once you are investment-grade, you assume a lot of things that a sub-investment grade company does not enjoy,” he says. “It also helps us with suppliers’ credit. Many of our counterparties have certainly improved their financial relationships with us.”

In 1997, that actually happened. Elman recalls how his then CFO came to him and told him that one bank insisted on terminating an outstanding financing. “It was quite normal to roll it over for a few days or a week or ten days,” he adds. When the bank told his CFO it wanted the money back, his reaction was swift: “Pay them right now. Don’t even question them or fight with them or plead with them.”

He then turned to the CFO and said: “Now you go and build the largest cash bank that you can find in the company. We never ever want to be threatened again.” In the 1997 to 1998 period, during the dark days of the Asian financial storm, he says that Noble had enough cash on the balance sheet to pay off all the debts and still have cash left.

In 2008, at the height of the global crisis, Noble was in the same situation again. Total cash was US$1.3 billion at the end of the year. Add on the readily marketable inventories (RMI) of nearly US$1.6 billion, its adjusted net financial cash position was close to US$360 million. “We have enough cash on the balance sheet to cover all the debt regardless of what happens. This is the policy. We build up the cash; we build up the tools of the trade – the foundations of the business – and then we go and expand the business.”

Besides being cash-rich , Elman also prefers to keep things simple. In the commodity business that Noble is in, being able to hedge the price risk is paramount. Indeed, in the past three years, Noble has managed to ride from a commodity boom, followed by a swift commodity bust and now the mild recovery the industry is experiencing. In Noble’s world of razor-thin margins and high volume business (net profit margin is at 1.47% from total sales of US$21.6 billion at the end of the third quarter of 2009), being able to hedge out the price risk is essential.

Managing risk, he explains, starts with the culture of the company. “We are not proprietary traders,” he stresses. “We are physical merchants and we are risk managers. If you start out identifying yourself internally, then it is a question of how you build your risk management around the concepts that you have.”

Elman elaborates: “Firstly, you break it down to a lot of little boxes. Secondly, you need people managing it who actually do understand what risk is. Thirdly, we make money by performing services, working through the supply chain and managing the logistics. We de-emphasize speculative trading as much as we can. We have a full hedge policy – even though it is never 100%; and yes, things can go wrong and do go wrong but you need to manage it in such a way that nothing happens that shouldn’t happen that would be material to the company. So if somebody does something wrong, it won’t be material to the company; it is a survivable event.”

Noble also has the advantage of having a highly diverse risk profile. “We grow, we process, we ship and so on. We are diverse too in the types of businesses we are in. Rarely are all businesses in the same trajectory – some are up and some are down.”

The business itself, Elman says, is essentially in two areas, agriculture and energy, both of which, he points out, will continue to do well. “The world’s population is growing at around 3%; people want to eat a little better every day,” he says. “The potential for the agriculture business is enormous.”

Elman knows that in the international arena, Noble is still an acorn compared with the likes of Cargill and Archer Daniels Midlands. “We are the junior in the international arena [but] we will grow that business as fast as we can.”

Noble has an equally ambitious aspiration to grow its energy business – coal and clean-fuel. “Our ethanol business in the US and globally – particularly our production units in Brazil – are growing rapidly,” he says. “We will figure in the top half of a dozen producers in the next one to two years, with a world-class business that can compete with any company anywhere in the world.” The energy business, he adds, will become the largest business within the Noble Group in one to two years’ time.

Despite the deterioration of global financial markets at the beginning of last year, Elman reveals that he was not worried about its impact on Noble. “We were never concerned that we were going to struggle, because we have a strong balance sheet,” he explains. “As markets deteriorated, our balance sheet became stronger as the cash flow was very strong.”

The great thing about Noble, he continues, is that it actually succeeds better during adverse conditions than in good conditions. “We have the ability to stop, take two steps back, and just go forward and seize the opportunity. And that is what we did,” he says. “We have expanded the company more this year than we have for many years in the past. We’ve taken advantage of opportunities that were not there two or three years ago.”

He says that Noble would not have built some of the business were it not for the crisis. Opportunities came. For example, Noble bought nine storage facilities in the US, which were in Chapter 11. “If I were to pick the low of the market, it probably would have been that day. The value of those assets would have been double or even triple what we paid for them .”

He says that it was important for Noble to continue to acquire pipeline assets such as ports and storage. “If you are asset-light, you rely on just people. You need to have some asset base to understand what is going on in the marketplace and to have some foundation to do business. We don’t want to be a producer; we don’t have to own the assets – if we have an asset where we have the participation – the trade flow – that is good.” But he also says that in some of the businesses, such as agriculture, Noble needs to own the assets because it is the nature of the business. “The competition owns all their assets – no one is going to lease it to you or give you the trade flow.”

What is the next stage for Noble? “Well, that is when I start to get worried. But you know what? Every year, my life has been ‘What do we do next year?’ Come January 1, we say, ‘how is this going to work out?’ I hope we are up to the challenge. We certainly have a very full agenda and therefore lots of things to do. We believe and we can see a good picture at the end of this year based on our internal business planning.”

At the end of the day, Elman says that “the opportunity presented to us means it is ours to mess up. Success is in our hands; we need to take advantage of all the good things that have happened. If we do, hopefully we will succeed”.