How Rio Tinto out-manoeuvred the Aussies - for decades

Published by MAC on 2020-08-04
Source: The Australian

Rio’s Londoners started to make big errors

How London took control of Rio Tinto

Robert Gottliebsen

The Australian

July 31, 2020

The tragic story of how Australia in 1996 was duped by Rio Tinto’s London executives and board into ceding control of the vast Hamersley iron ore deposit and other Australian mineral riches is finally out.

And the colonial-style desire for London control eventually led to the Chinese state-owned enterprise Chinalco becoming Rio Tinto’s largest shareholder.

I learned what happened this week after accusing the Prime Minister of the day Paul Keating of making a “mistake” in allowing a dual listed structure combining London’s Rio Tinto and its then Australian controlled affiliate CRA without stipulating the number of Australians that had to be in the combined board and that head office be in Australia. Five years later, Treasurer Peter Costello insisted these stipulations be in writing when he approved a similar deal between BHP and Billiton.

As you might expect, it wasn’t long before Paul Keating was on the phone to me. And by combining both our experiences we can now fit together the jigsaw. We do not know when the Londoners at Rio Tinto’s plush St James Square offices decided that it was inappropriate for the former convict settlement to control the Australian assets. But some years earlier, Rod Carnegie, as CEO of CRA in Australia, had wanted to make a bid for Rio Tinto. Carnegie was blocked by Rio Tinto’s mates on the CRA board, but a seed was planted.

It started germinating when Robert Wilson became Rio’s CEO in 1991. Wilson patiently waited until Rod Carnegie’s successor, the boy from Broken Hill, John Ralph, had retired as CEO. Then it was then time to move on a dual listed structure which would see two companies, RTZ and CRA, owning the total business with the same boards and management – exactly what now happens with BHP. At the time Shell had a similar structure in the UK and Holland.

Rio/CRA had to gain permission from Paul Keating and then treasurer Ralph Willis. Among their requirements were that there be at least one third of Australian directors, similar to what Peter Costello would later do with BHP.

But then a stunning event took place. The chairman of CRA was John Uhrig, a great Australian who was a former CEO of Simpson Pope. He is a legend in Australian corporate history for his role as chairman of Westpac in resisting the push by Kerry Packer and his henchman Al “Chainsaw” Dunlap to control the bank.

Uhrig’s ultimatum

Uhrig – with the support of the other Australians on the CRA board including former Ford Australia CEO boss Bill Dix – met with Keating and Willis. Uhrig stunned Keating and Willis by stating that if they insisted on the requirements about the makeup of the board, the Australian directors would immediately resign and Keating would have to find new Australian directors to satisfy the requirement.

Uhrig’s genuine view (which he discussed with me at the time) was that Australians would gain their posts on the joint board on their merits and didn’t require a government direction. He told Keating that he didn’t want to be a director of a combined company on government orders. I have no doubt that neither Uhrig or Dix had knowledge of the Rio Tinto/ St James Square master plan and indeed assured Keating and Willis that there would be greater Australian control. Keating and Willis did not relish the task of finding Australian directors, and so gave in. And the rest is history.

Uhrig became chairman and for a time Australian influence grew as he promised. But he retired some three years later and was replaced by Londoner Robert Wilson as “ executive chairman”. Australians Leigh Clifford (later Qantas chairman) and Leon Davis initially played key management roles but it was all over. Control had passed to St James Square and the Australian head office over time was disembowelled. Chinalco Xiao Yaqing signs an agreement with then Rio Tinto CEO Tom Albanese in London in 2019.

City control

But London’s anti-Australian control culture did not end with the dual listing saga.

Later around 2007 BHP wanted to bid for the combined company and the horror of seeing control pass to Australia prompted the Londoners to buy Alcan for $US38bn — mostly borrowed. That made the company too big for BHP but it was a horrendous mistake and huge losses were incurred by Australian shareholders. Australia had not only lost control but its shareholders were hit hard by the St James Square brigade. BHP bid again for the crippled Rio Tinto but that led to the Londoners at St James Square bringing Chinalco in as “a white knight” so they would retain control.

Australia has curbed Chinalco’s holding to 15 per cent and so far has prevented board representation. But as I explained earlier this week, Rio Tinto, Chinalco and Chinese state owned steel maker Baowu are looking to develop Simandou as an alternative supplier to Australia. .

The strategy has the backing of Chinese President Xi Jinping. When the BHP case came before Peter Costello there were only three Australians on the board of 15 Rio directors. Today there are still three but the board number is down to 12. However the chairman, CEO and chief finance officer are all non Australians. Rio Tinto shareholders will be hoping Simandou is not another Alcan. Meanwhile currently in Australia the St James Square brigade is in a dispute over the destruction of sites of great significance to Aboriginal Australians.

Robert Gottliebsen has spent more than 50 years writing and commentating about business and investment in Australia. He has won the Walkley award
and Australian Journalist of the Year award.

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Rio Tinto could help China lessen reliance on Australian iron ore

Robert Gottliebsen

The Australian

28 July 2020

Given our COVID-19 monumental borrowings Australia is going to need Chinese iron ore revenue like never before. And China’s President Xi Jinping knows it.

China has openly pronounced that one of its national goals is to lessen its dependence on Australian iron ore. And as China takes steps to do that it will refocus our nation on the controversial decisions that were made decades ago that led to our major iron ore exporter, the then Australian controlled Hamersley, becoming controlled in London via Rio Tinto, with a Chinese state-owned enterprise Chinalco becoming Rio’s largest shareholder.

Rio Tinto now looks like being a long-term leader in the Chinese thrust to lessen dependence on Australia.

The first step the Chinese are undertaking to lessen dependence on Australia is to boost Brazil. China’s largest steel maker, Baowu, has entered into a co-operation agreement to boost Brazilian production and undertake research and development.

Africa focus

But the really big challenge to Australia comes from the world’s largest high-grade iron ore deposit, Simandou in Guinea in West Africa.

Areas one and two of the deposit are now controlled by Chinese state enterprises. Areas three and four were jointly controlled by Chinalco and its “associate” Rio Tinto. But Chinalco has sold its direct interest to Baowu which, when combined with its Brazilian exercise is clearly spearheading the challenge to Australia. Fascinatingly, Rio Tinto for some fifteen years has operated a joint venture mine in Australia with Baowu.

The amount of money required to develop the Simandou mine is colossal, because a major rail link is required. BHP looked at Simandou a decade or so ago and concluded it was too hard. But with iron ore prices now well above $US75 a tonne the mine in its own right suddenly looks more attractive, although the outlay looks to be in the vicinity of $US20 billion. But for the Chinese its part of a strategy to lessen dependence on Australia.

While the Chinese will provide a big proportion of the total funding if Rio Tinto retains its stake it will be a major outlay for the London-based company as it becomes part of the Chinese challenge to Australia. Theoretically, it might be cheaper to develop additional iron ore capacity in Australia. Given the current calibre of the Rio Tinto board they will only proceed with Simandou if it make sense for shareholders.

The Hamersley shift

Some years ago they tried to sell their stake to their major shareholder Chinalco. But if Rio Tinto seeks to raise capital as part of the move of the Chinese to diversify from Australian iron ore, it will bring the Hamersley history back into focus.

With Rio Tinto, Hamersley moved from being part of a “naturalised” Australian company to being London based with a relatively small Australian equity of around 20 per cent. Having a Chinese state-owned enterprise as its major shareholder (albeit without board representation) remains a very sore point in Australian political circles.

Back in the mid 1980s Hamersley was owned by CRA, which was then less than 50 per cent owned by the Londoners at Rio Tinto. Under CEOs Rod Carnegie and John Ralph our biggest iron ore producer was very much an Australian operation.

But in one of his few errors Paul Keating as Treasurer agreed that Rio Tinto could absorb CRA in a dual listed operation. Keating did not insist on a majority of Australian directors and that control had to be based in Australia. The Londoners outsmarted Australia and control moved to the UK and Australian equity ran down. It was one if Keating’s few big mistakes and when Peter Costello, as Treasurer set the rules for a similar duel listing deal between Billiton and BHP he made sure the BHP head office remained in Australia.

Chinalco rescue plan

Meanwhile Rio’s Londoners started to make big errors. In 2007 they bought Alcan in Canada with heavy borrowing. Rio Tinto suffered huge losses and was on its knees. BHP tried to buy it, and then in came the state owned Chinalco to the rescue as a “white knight”.

The state-owned company wanted influence over the supply of the Australian iron ore and board representation so China could see the Australian costs. For that they would pay a big premium. BHP withdrew and the government was opposed to the Chinalco deal, which fell over. There was great bitterness in China. The Australian government approved Chinalco taking a major interest but limited the long term share holding to 15 per cent with no board representation.

Chinese state-owned enterprises operate independently to government but are beholden to major national policies. The bitterness remained despite the deal. Soon after, in 2009, Rio executive Stern Hu and three of his colleagues were arrested during iron-ore contract talks and were convicted of accepting bribes totalling about $14 million and stealing trade secrets. The Rio executive was jailed for nine years.

About two years ago Rio Tinto wanted to buy back more of its own stock but was blocked by Chinalco because it would have caused them to go over 15 per cent, given they did not want to sell.

Back in the spotlight

But the amount of money that will be required to be raised for the massive Simandou development, as well as other Rio Tinto expansions, could put the long term capital structure of Rio Tinto and its relations with Australia back in the spotlight.

Of course, it maybe be some years before capital will need to be raised.

But if that process involves ending the dual listing and/or allowing Chinalco to increase its shareholding in the group, then the “Keating mistake”, all the undertakings and historic statements, as well as the rulings of the Foreign Investment Review Board and the Australian government will be re-examined. A decision will be made as to how they should be applied.

Meanwhile in the current environment, executives of Australian companies should learn from the Stern Hu saga. Right now there is almost no political contact between Australia and China.