Rio Tinto Group, the second-biggest mining company, will take about $14 billion of writedowns for failed deals in aluminium and coal led by Chief Executive Officer Tom Albanese, who will leave after more than 30 years.
The 55-year-old New Jersey native is leaving as a result of the $38 billion cash takeover of Alcan Inc. in 2007, a deal that soured as China’s emergence as the world’s largest aluminium producer left Western rivals with few markets to chase. Albanese’s second-biggest deal, the Australian $3.9 billion ($4.1 billion) purchase of Mozambique coal producer Riversdale Mining Ltd in 2011, also deteriorated after coal prices fell.
The board picked Sam Walsh, the 63-year-old head of Rio’s iron ore unit, to turn around the London-based company, that had already cut the value of its Alcan purchase by $8.9 billion last year. The Alcan takeover, which also cost Albanese and Chief Financial Officer Guy Elliott their annual bonus, saw Rio’s debt rise as much as 19-fold and forced the company to seek a $19.5 billion deal with Aluminum Corp. of China that Rio later aborted.
“This was the straw that broke the camel’s back,” Paul Phillips, a Melbourne-based fund manager with Perennial Growth Management Pty who holds Rio shares, said by phone. “I’m surprised Albanese has been there throughout all of this.”
Rio dropped 2.6 per cent to £33.66 at 9:10 am in London after declining as much as 4.6 per cent and the company’s bonds led declines in European credit markets.
Bonds decline
The miner’s 2 per cent notes due 2020 fell 0.8 per cent, pushing the yield up 13 basis points to 2.08 per cent, for the biggest drop in Bank of America Merrill Lynch’s Euro Corporates Index. The cost of insuring Rio Tinto debt jumped in the credit- default swap market, with contracts climbing 8 basis points to 92.5, the highest since December 5.
Walsh will take over as CEO from today, Rio said in a statement. Doug Ritchie, who led the purchase of Riversdale will also step down as Rio will cut the value of the Mozambique coal assets by about $3 billion.
“The management change is quite interesting because of Sam Walsh’s age,” said Phillips. “I expect him to be an interim for a couple of years so someone can develop up through the ranks.”
Short term?
Walsh, who heads the unit that generated 78 per cent of Rio’s net income in 2011, will move to London from Perth in his new role. Under Walsh, iron ore is expanding to churn out 360 million metric tons by 2015 from its mines in Australia’s Pilbara region.
“Sam Walsh is well regarded,” said Ric Ronge, who helps manage about $1.1 billion in stocks, including Rio and BHP Billiton Ltd, at Pengana Global Resources Fund in Melbourne. “Iron ore is about 80 per cent of Rio’s earnings — so he’s basically in charge of the bulk of the company’s earnings power. It makes sense that he would probably be the person to step-up if they were looking for an internal appointment.”
The bulk of the writedown, about $10 billion to $11 billion, will be off the company’s aluminium businesses. Aluminium futures in London have declined 8.3 per cent in the past year, hurting producers such as United Co Rusal and Alcoa Inc.
Unacceptable writedown
“The Rio Tinto board fully acknowledges that a writedown of this scale in relation to the relatively recent Mozambique acquisition is unacceptable,” Chairman Jan du Plessis said in the statement. “We are also deeply disappointed to have to take a further substantial writedown in our aluminum businesses, albeit in an industry that continues to experience significant adverse changes globally.”
Albanese and Ritchie, while stepping down from today, will remain at the company until July 16. Neither of them will get a lump sum payment, or short term performance bonus for 2012 or 2013, the statement said.
“I would like to pay tribute to Tom for his considerable contribution to Rio Tinto over more than 30 years of service and for his integrity and dedication to the company,” du Plessis said. “I would also like to thank Doug for his 27 years of service to the group.”
