Why Rio Tinto chief Tom Albanese is mining's latest casualty

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.

View the original article here

Continue

Hopes rise for reopening of Rio Tinto mine blamed for civil war

It was the mine blamed for sparking a civil war in Papua New Guinea, before it was left to rot with billions of dollars worth of gold and copper still untapped.

But now, a quarter of a century since workers at the vast Panguna mine were chased off in an uprising, mining giant Rio Tinto is eyeing the riches within.

Bougainville Copper, the mine’s owner in which Rio Tinto has a majority stake, has released a study which found it contains more than 5m tonnes of copper and 19m ounces of gold, worth $41bn (£26bn) and $32bn at current prices. That is much more metal than previously thought obtainable.

Peter Taylor, managing director of Boungainville Copper, said the company “continues to work with stakeholders on exploring ways in which the project may be advanced.”

If the mine does reopen, it would mark a turning point in its bloody history. Once the largest open-cast copper mine in the world, the wealth and environmental damage stemming from the site is said to have exacerbated tensions on Bougainville, the island province.

In 1989, production ceased after local farmers, armed with bows and arrows, home-made shotguns and bombs left over from the Second World War, succeeded in closing the mine, inflicting huge damage on the local economy.

As the violence escalated, the government panicked about the loss of revenue and sent in the national defence force.

The rebellion mushroomed into full-scale civil war which lasted 10 years and cost an estimated 15,000 lives, mostly from disease and starvation, before it ended in a ceasefire in 1998.

The current government of Papua New Guinea, which has a stake in Panguna, is keen to see it reopen, but exploration or mining has yet to resume at the site.

View the original article here

Continue

Rio Tinto CEO promises change as miner posts first yearly loss

The balance sheet pain came as the FTSE 100 company’s revenues dropped to $51bn from $60.5bn the previous year, amid falling commodity prices.

Together, these factors meant the company swung to a pre-tax loss of $2.6bn for 2012, against a $13.2bn profit the year before.

Mr Walsh, presiding over his first set of results, promised to deliver shareholders better value in future, stressing his credentials as an experienced mining operator rather than a deal-maker.

“There are no acquisitions that I’m working on,” he said. “One can never say never, I have learnt that in business, but there’s nothing on my radar screen. My focus will be on delivery of value to shareholders.”

He added that spending this year would drop to $13bn, with the option to push back some projects. His stance reinforced the wider shift taking place across the sector, as miners turn their attention from expensive growth projects to running their existing assets with greater efficiency.

The $14bn of writedowns mostly related to Rio’s ill-fated purchase of aluminium company Alcan at the top of the market. However, it was unexpected writedowns at its coal assets in Mozambique, bought less than two years ago, which forced Mr Albanese out.

Mr Walsh put past mistakes at the company “down to poor judgment rather than flawed systems” but said he would be working on getting everyone – from geologists to HR staff – to think as “businessmen and businesswomen” rather than just as sector specialists.

He also announced a board reshuffle, with head of copper Andrew Harding succeeding him as Rio’s iron ore chief. Mr Harding will in turn be replaced by Jean-Sebastien Jacques, from within the copper division.

On the economic outlook, Mr Walsh predicted growth in China of more than 8pc, which would represent the “soft” landing that markets are hoping for.

Despite the balance sheet pain, the company raised its total dividend by 15pc to $1.67, to be paid on March 18.

“Returning [value] to shareholders is very important - that to me is the mark of success, if I can deliver greater value to shareholders,” Mr Walsh said.

Rob Clifford, an analyst at Deutsche Bank, said this was “a very positive demonstration of a focus on shareholder returns”.

Rio Tinto shares fell 11½ to £37.45½.

View the original article here

Continue

Rio Tinto chief resigns following surprise writedown on aluminium

And the situation did not improve last year, according to Rio, as it explained the latest blot on its balance sheet.

"The further deterioration in aluminium market conditions in 2012, together with strong currencies in certain regions and high energy and raw material costs, has had a negative impact on the current market values in the aluminium industry," it said.

Don't hold your breath for an improvement any time soon. Fitch, the credit rating agency, is not optimistic. Rio's latest writedown only supports its view that "weak pricing and net market surpluses are likely to continue for at least the next two years, pressuring producer profitability".

Between 30pc and 50pc of the metal's producers are failing to break even, it estimates, as high stock levels keep official prices in check and cheap electricity becomes more scarce.

It also notes that more than 5m tonnes of aluminium is held in official London Metal Exchange warehouses and reckons that probably the same volume is held in unofficial storage. That points to a heavy surplus of the metal.

In response to the terrible conditions, producers have cut back, but not enough. People do pay high premiums in some markets to actually lay their hands on the metal, since up to 70pc of global stocks are tied up in financial transactions, Fitch notes.

However, a particular issue for producers elsewhere is that in China, political will and the high premiums paid locally for aluminium have helped many smelters stay in operation, putting pressure on rivals.

And as for the cheerier sentiment in the wider metals market?

Overall, last year was not great for commodities. Investors only saw profits in passive, long-only investments in the grains and, to a certain extent, the precious metals sectors, notes Ole Hansen, head of commodity strategy at Saxo Bank. "Investors will look towards 2013 hoping for better opportunities to emerge than during 2012," he says.

And, generally, it seems the market feels the global economic environment is improving. Last year was "sub-trend" for commodities as companies let their stocks of raw materials run down, say analysts at Macquarie, but they think 2013 will be a year of recovery – albeit "subdued" for commodity markets.

"An end to the destock cycle which weighed on industrial commodities over the past six months should help bolster apparent demand," they argue.

However, that looks unlikely to get the aluminium market out of the doldrums. Barclays analysts think that while sentiment over metals demand has improved, it may be overstated.

"The fundamentals for most metals do not support sustained big increases in prices, in our view. Most base metals are in surplus this year, stocks are comfortable and the supply picture is ample, though not without risk."

They conclude, "for many metals, we would view this as an opportunity to sell short, particularly when price action starts to look a bit frothy – as aluminium is already."

Wheat futures rose sharply last week as it became clear the drought in the US Midwest would continue, raising concerns about this year's crop.

The drought will probably persist over the next three months because the dry earth isn't getting soaked by winter storms, the US Climate Prediction Center said on Thursday.

"On the new wheat crop, traders remain concerned about the weather as analysts believe as much as 30pc of Kansas's wheat crop was destroyed after sprouting on dry land," Arnaud Saulais, a commodity broker told Bloomberg.

Soybean prices also jumped almost 5pc over the week.

Last week, Germany's central bank unveiled plans to repatriate gold held in foreign vaults.

The Bundesbank will bring home 674 tonnes of their total 3,391 metric tonne gold reserves from vaults in Paris and New York to restore public confidence in the safety of Germany's gold reserves.

"We view the repatriation and upgrade of old gold by the Western World's central banks as a further positive in gold's evolution as a legitimate form of money," Deutsche Bank analyst Daniel Brebner said.

"While this is unlikely to have any impact on the near-term price performance of the metal, it could have important longer-term implications."

Over the past several years central banks have moved from being net sellers of gold to net buyers. Indeed, central bank buying is central to the case for gold hitting $1,900 in the first half of this year, according to precious metals advocate GFMS.

Central banks, known as the official sector, added the most gold to reserves in 48 years in 2012 and are expected to buy another 280 tonnes in the first half.

Official sector buying of gold rose 17pc in 2012 on a year-on-year basis to 536 tonnes.

China is expected to be a major buyer, increasing the proportion of its reserves held in gold. China currently holds $1.17 trillion of US Treasury bills in its reserves.

View the original article here

Continue

Rio Tinto CEO promises change after miner's first yearly loss

The balance sheet pain came as the FTSE 100 company’s revenues dropped to $51bn from $60.5bn the previous year, amid falling commodity prices.

Together, these factors meant the company swung to a pre-tax loss of $2.6bn for 2012, against a $13.2bn profit the year before.

Mr Walsh, presiding over his first set of results, promised to deliver shareholders better value in future, stressing his credentials as an experienced mining operator rather than a deal-maker.

“There are no acquisitions that I’m working on,” he said. “One can never say never, I have learnt that in business, but there’s nothing on my radar screen. My focus will be on delivery of value to shareholders.”

He added that spending this year would drop to $13bn, with the option to push back some projects. His stance reinforced the wider shift taking place across the sector, as miners turn their attention from expensive growth projects to running their existing assets with greater efficiency.

The $14bn of writedowns mostly related to Rio’s ill-fated purchase of aluminium company Alcan at the top of the market. However, it was unexpected writedowns at its coal assets in Mozambique, bought less than two years ago, which forced Mr Albanese out.

Mr Walsh put past mistakes at the company “down to poor judgment rather than flawed systems” but said he would be working on getting everyone – from geologists to HR staff – to think as “businessmen and businesswomen” rather than just as sector specialists.

He also announced a board reshuffle, with head of copper Andrew Harding succeeding him as Rio’s iron ore chief. Mr Harding will in turn be replaced by Jean-Sebastien Jacques, from within the copper division.

On the economic outlook, Mr Walsh predicted growth in China of more than 8pc, which would represent the “soft” landing that markets are hoping for.

Despite the balance sheet pain, the company raised its total dividend by 15pc to $1.67, to be paid on March 18.

“Returning [value] to shareholders is very important - that to me is the mark of success, if I can deliver greater value to shareholders,” Mr Walsh said.

Rob Clifford, an analyst at Deutsche Bank, said this was “a very positive demonstration of a focus on shareholder returns”.

Rio Tinto shares fell 11½ to £37.45½.

View the original article here

Continue

Rio Tinto drops $2.99bn into red - first loss since 1995

"Our business performed well in 2012, generating strong cash flows and underlying earnings of $9.3bn," said Rio chairman Jan du Plessis.

"However, we are deeply disappointed by the $14.4bn writedowns that we have taken in 2012, primarily in our aluminium and energy businesses, which led to the group recording a net loss of $3bn."

The results for the 12 months to December 31 compares with profits of $5.83bn last year.

Sam Walsh, the incoming chief executive who is to formally replace Mr Albanese in July, said the company was targeting cash savings of more than $5bn by the end of 2014 and reducing capital expenditure to $13bn this year.

"My immediate priority is to build more focus, discipline and accountability throughout the organisation," said Mr Walsh, promising "aggressive" cost-cutting.

"Demonstrating this commitment, we will deliver our capital reduction and cost savings targets and improve performance across our business."

Rio said the full-year loss - its first since becoming a dual listed company in 1995 - had also been due to a dip in commodity prices which had wiped $5.3 billion off the bottom line.

Iron ore plunged 24pc compared with 2011, copper was 10pc lower and aluminium was down 16pc.

The aluminium arm has long been a problem for Rio Tinto, after it bought Canadian company Alcan for $38bn in 2007, just before the market crashed.

An impairment charge of $8.9bn from the aluminium business saw Mr Albanese forgo his bonus last year, and Rio said conditions in the aluminium market had worsened further in 2012 due to high costs and currency swings.

Under his watch, Mr Walsh said Rio would have an "unrelenting focus on pursuing greater value for shareholders," promising to invest only in projects that offer "attractive returns that are well above our cost of capital".

The new chief offered an upbeat assessment of global prospects, saying Rio saw "the positive momentum in the fourth quarter of last year being sustained into 2013 with Chinese GDP growth returning to above 8pc".

However, he warned that Rio did expect "market uncertainty and price volatility to persist as long as the structural issues in Europe and the United States remain unresolved".

Rio said industry-wide cost pressures had also weighed on earnings, particularly the price of energy.

The mining giant offered shareholders a $1.67 dividend - 15pc higher than last year - which Mr Du Plessis said reflected confidence in its prospects.

A slowdown in China and debt strains in Europe and the United States have weighed on mining companies in the past 12 months, with projects delayed or shelved as commodity prices have plunged on a drop in demand.

View the original article here

Continue