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Has Muddy Waters Joined Forces With Iceberg Research To Turn On The Heat For Noble Group Limited?

In an unexpected turn of events, Muddy Waters Research, the investment research outfit that publicly criticised Olam International Ltd’s  (SGX: O32) business back in late 2012, announced last Wednesday that it’s shorting commodities trader Noble Group Limited’s (SGX: N21) shares.

When you go short, you’d profit if a company’s share price decreases.

This latest short-attack by Muddy Waters on Noble Group comes after Iceberg Research, an anonymous blogger, had issued its own reports on Noble Group which criticised the company’s accounting practices amongst other issues.

The first of Iceberg Research’s three reports were released two months ago in February. You can read more about my analysis on the reports here: Part 1, Part 2, and Part 3.

Muddy Waters’ proclamation of its short position came with a 14-page report which, amongst other criticisms, thumbed down the strength of Noble Group’s balance sheet and (also) the company’s accounting practices.

The report mainly focused on Noble Group’s acquisition of PT Alhasanie – a mining company based in Indonesia – and how the former might have stretched accounting standards in valuing those transactions. But compared to the reports done by Iceberg Research, Muddy Waters’ piece seems rather mild.

Interestingly, Noble Group has issued an official announcement directed at Muddy Waters’ allegations and rebutted some of the issues raised by the short-seller. In particular, Noble Group went into detail regarding the deal involving PT Alhasanie.

The nuts and bolts of Muddy Waters’ view on the PT Alhasanie acquisition are too technical to repeat here. But, the basic premise is that Muddy Waters has accused Noble Group of overstating the value of PT Alhasanie by more than US$40 million when acquiring it in 2011; to lend strength to this view, Muddy Waters also wrote that PT Alhasanie was then sold by Noble Group for just US$4 million in 2012.

Noble Group on the other hand, claims that the transactions involving PT Alhasanie have been conducted on an arms-length basis and had involved independent third party valuations. Moreover, the company stated that, “since [its] involvement in the asset, Noble has realized over $40 million in direct cash gross profits on sales from this mine.”

Foolish Summary

Although this current tussle between Noble Group and Muddy Waters can be really interesting to follow, investors should take caution with regard to the act of investing in the company in the current situation.

Many of the concerns raised by Iceberg Research have not been fully explained and the complexity of the issues are so high such that investors would likely have to expend a huge amount of time and effort in order to fully understand the whole picture.

For me, with more than 700 other companies listed in Singapore’s stock market, there are so many other areas of opportunities where investors might rather spend their energy on.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn’t own shares in any companies mentioned.