Elman's journey, from scrap heap to Noble rise

The Australian Financial Review
29 June 2009

The company he founded is worth $5 billion, but Richard Elman is thinking bigger, writes Anne Hyland in Bangkok.

At 69, Noble Group chief executive Richard Elman is far from slowing down. The driving force behind the commodities trading firm that recently mounted a successful hostile bid for Gloucester Coal, he is pushing Noble towards doubling its size in the next three years.

Such a bold bid for growth in the worst economic downturn since the Great Depression could be dismissed as the boast of either a brave or foolish executive. But the tough-talking Elman is not to be underestimated. He is adamant he can grow Noble - a proxy on global growth - even though the world economy will shrink almost 3 per cent this year and remain weak in the next few years.

"Regardless of whether the economy is growing, we as a company are still growing," says Elman.

"We can take market share. We believe there has been a flight to quality and the company is very strong financially and we get lots of opportunities as a result of that."

One of those opportunities was NSW miner Gloucester Coal, a business prized by Noble and which it finally captured for an estimated outlay of $US301 million ($378 million).

Elman's whole career has been built on defying the odds. At 15 he dropped out of school and went to work in a scrap yard. From those humble beginnings, he went on to build a career as a commodities trader, working for Phibro, before gambling $US100,000 to establish Noble in 1987.

Noble, which is listed on the Singapore Exchange but based in Hong Kong, is now capitalised at $S6.1 billion ($5.2 billion) and employs 10,000 people. Last year, the company reported $US36.1 billion in revenue and a record profit of $U5577 million. Elman gained his trading experience at Phibro, which coincidentally was where Marc Rich also worked. Rich is the controversial co-founder of the biggest commodities firm in the world today: Glencore International. Rich became infamous for allegedly manipulating the US oil system, trading with Iran during the American hostage crisis, and evading taxes. He was later pardoned by US president Bill Clinton.

Glencore is Noble's most similar rival, although Noble also competes with agriculture suppliers such as Cargill, Bunge and Clam. Glencore's enormous success is acknowledged by Elman, but he doesn't like the comparison. "We're not positioning to be anyone else," he says bluntly. and yet Noble's businesses are split into three main product divisions that are similar to that of Glencore: agriculture, energy and metals, minerals and ore. The latter two make up more than 60 per cent of Noble's sales.

Noble prefers to describe its business as a pipeline, whereby it controls each link in the delivery of commodities from production to consumption, profiting at each point along the way. It owns or has stakes or contracts with an array of businesses from coal and iron ore mines, grain crushing facilities, sugar and ethanol plants, ships and ports to warehouses and trading desks.

For the past few years, Noble has been riding high on stratospheric commodity prices. But as the global financial crisis began to unfold in earnest last year, the company's fortunes declined along with commodity markets. Standard & Poor's GSCI, an index of global commodity prices, has risen only 6 per cent since the start of this year and is down 60 per cent from its record set last July.

The plunge in commodity prices was reflected in Noble's bottom line in the first quarter of this year, when its profits almost halved to $US90.2 million. Brokers are predicting an equally bleak full year.

CLSA forecasts that Noble will report a net profit of $US236 million this year, while Macquarie has estimated $US357 million.

Noble's shares, unsurprisingly, have been on a roller-coaster ride. The share price hit a low of S46 last October and since then has recovered to $S1.83. But the stock is still trading shy of its 12-month high of $S2.46. Almost half of Noble's shares are owned by senior management, employees or their families, with Elman's wife and children owning a 34 per cent stake. Noble shifted its sharemarket listing from Hong Kong to Singapore in 1997 after management felt that Noble was not understood by Hong Kong investors - a surprising claim given Hong Kong investors are used to investing in conglomerates. (may be now is the right time to do dual listing in HK)

While Noble's managers are attempting to grow the business, they also admit that 2009 will be the company's most challenging year. What they are counting on to see them through are Noble's diversified earnings pool and the fact that even during economic downturns people still have to buy food and fuel. Noble also has a strong balance sheet. In the first quarter of 2009, Noble had $US1.2 billion in cash and has secured credit at a time when many other companies are finding the doors to their bankers closed. This month, Noble obtained a $US800 million standby borrowing facility.

Noble has already used its deep pockets to acquire Gloucester. The takeover was an unusual step because Noble doesn't usually undertake outright acquisitions, preferring instead to develop start-ups or take minority stakes in companies to secure the supply of commodities. This strategy makes Noble's goal to double the size of the company - as measured by the volume of product it handles annually - even greater. Noble expects to handle 256 million tonnes of product by 2012. Last year, it handled 141.5 million tonnes.

Noble's portfolio of Australian mining investments are a small portion of the company's sprawling empire and are mostly concentrated in coal and iron ore along Australia's east coast. The company has investments and contracts with half a dozen companies, of which two - Territory Resources and Windimurra - are experiencing financial difficulty.

Still these might prove minor hicccups for Noble's Australian strategy since it is likely to have grander plans for Gloucester. Elman intends to detail Noble's intentions soon and notes that "we have a lot of synergistic things we can do with Gloucester".

Noble's hostile takeover of the coal miner scuppered a merger that Gloucester had proposed with Whitehaven Coal. Singapore-based broker CIMB-GK estimated that Noble spent $US301 million lifting its shareholding in Gloucester from 21.7 per cent to 87.7 per cent.

It's possible that Noble's management will derive synergies between its Donaldson Coal operations and Gloucester by pushing output through the Newcastle export terminal, in which Donaldson has a stake.

"With Gloucester Coal keeping its Australian Stock Exchange listing, there is a possibility that Noble's other Australian coal assets, such as Donaldson Coal, might be injected into Gloucester, rather than opt for a separate listing," says Ho Choon Seng, an analyst wits CIMB-GK.

There has been speculation for some time that Noble might merge Gloucester and Donaldson. Last year, Macquarie Group was apparently hired by Donaldson, of which Noble owns 68 per cent, to consider a sharemarket listing but the deal was shelved because of poor market conditions. Noble's Australian coal division is run by Gloucester's former chief executive Gavin May, and its former chief financial officer, Barry Tudor. Both men left Gloucester in 2007 after their contracts were not renewed and joined Noble.

Noble prides itself on hiring well. It has often acquired a team of people to build a business from the ground up so it should be no surprise that Elman identifies the biggest risk to Noble as not the swings in commodity prices but rather the quality of the people it recruits. If Noble hires the wrong person then it could result in poor judgment, costing the company millions, or worse. A former aluminium trader at Noble will go on trial this year for fraud.

But when it comes to hiring for the very top job, Elman is cagey. Some investors have expressed concern about Elman's age - at 69, he is a year younger than BHP Billiton chairman Don Argus - and his dominance over Noble. They worry about how Noble would perform without Elman's leadership, which has been synonymous with the company's success.

"Richard Elman has a very strong vision and that has been the success of the company," says Roger Groebli, the Singapore-based head of market analysis at LGT Capital Management. "But companies managed by one strong person tend to have a bit of leadership risk."

If such a risk exists at Noble then Elman is not acknowledging it. "I'm strong, healthy and I feel good and I love to come to the office every day," he says, ducking the retirement question. And on who might be his replacement, he is equally unforthcoming. "At the appropriate time there will be an announcement."