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Sunday 3 March 2013

Poetically, it would be his inability to master a river that finally meant Tom Albanese could no longer keep the top job at Rio Tinto - 'red river’ in Spanish.

The world’s second biggest mining company paid $4bn (£2.5bn) for Riversdale’s coal assets back in 2011, but on Thursday had to admit the seriousness of its difficulties setting up infrastructure to make the Mozambique project a goer.

The country’s government has refused to let it transport coal down the Zambezi river, meaning the company has instead had to transport its product by more expensive rail.

That was not all. Rio had been too optimistic about the amount of coking coal – used in the production of steel – that it could realistically get out of the ground. That is seen at the company as a “judgement call” that went wrong, rather than a failure of its processes.

Nonetheless, the headaches meant Rio had to knock $3bn off its valuation of the project, costing Mr Albanese the job of chief executive after seven years in the role, as well as prompting the exit of strategy chief Doug Ritchie.

The Mozambique embarrassment was the last straw for Jan du Plessis, Rio’s chairman, already keeping a very close eye on his chief executive’s performance as the company continued to reel from its disastrous purchase of aluminium group Alcan for $38bn in 2007.

That meant the miner bought the assets at the top of the market, just before the credit crunch saw commodity prices plummet. As the aluminium market continues to struggle with overcapacity, Rio on Thursday announced a further $10-$11bn of write-downs at that arm.

That was just the balance sheet pain. Since the deal left Rio serving a debt pile greater than its market capitalisation, Mr Albanese ended up proposing a strategic alliance with its 9pc shareholder and customer Chinalco, a Chinese state-owned company. Management wanted to double Chinalco’s stake in Rio Tinto in exchange for an $11bn cash injection.

But Rio’s existing shareholders were furious as the plan ignored their pre-emption rights. Rio eventually walked away from that deal to announce a rights issue instead, as well as an iron-ore joint venture with rival BHP Billiton in Western Australia - which regulators ultimately blocked.

Meanwhile, the collapse of the Chinalco deal upset China, the world’s biggest commodities consumer. The dispute accelerated when members of Rio Tinto’s price negotiating team were arrested and imprisoned for allegedly taking bribes in annual price-setting talks.

Nonetheless, bridges were rebuilt by Mr Albanese and Chinalco, leading to a joint venture to develop an iron ore mine in Guinea.

Most would acknowledge that Rio has gone from strength to strength since the gloomy days of 2008, when some were questioning whether the company would even survive. For that, Mr Albanese can take much of the credit, as well as the “accountability” he yesterday admitted over the deals gone wrong.

And, while the issues have been unique to Rio Tinto, the wider context is not: this is a testing time for the world’s mining companies. With the peak of the commodity price boom, which saw miners scrambling to boost production, now past us, any shortcomings in the acquisitions and expansion plans born out of those days are becoming increasingly clear.

That has signalled a shake-up at the top of the tree, with Cynthia Carroll, over at rival FTSE 100 giant Anglo American, resigning in October as its flagship iron ore project, Minas Rio in Brazil over ran by billions of pounds. Meanwhile at BHP Billiton, the sector leader, management are working on an orderly exit for Marius Kloppers, who forfeited his bonus last year after BHP took a $2.8bn charge on the value of its shale assets.

Nor does the market expect the situation at Rio Tinto to remain stable. While well respected, at 63 its new chief executive Sam Walsh - coming from the iron ore division - appears a shorter-term leader whose job is to “steady the ship”, noted Credit Suisse analysts.

Still, despite the drama, it could be much worse for the company. Investors had long been valuing Rio’s assets at less than book values, so were primed for major write-downs.

Indeed, analysts have been busy flagging the potential of Rio’s iron ore assets - driving two thirds of its revenues - as China’s demand for the steel-making ingredient continues to grow.

As attention-grabbing as the changes at the top are, it is the assets that will decide Rio’s future success.


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