Is Rio Tinto About To Commit A Massive Error? Or Make A Huge Pile? And Is There Any Real Difference?

Is Rio Tinto about to commit a massive error? Or make a huge pile? And is there any real difference between the two?

by London Calling

6th February 2006

London Calling Special: a cautionary tale of the bull and the bears

Almost unnoticed by financial journalists, Rio Tinto has formed a partnership with Norilsk Nickel - currently the world's biggest nickel producer (until Inco finalises its intended merger with Falconbridge).

In a single stroke, according to Mineweb's superlative Russian correspondent, John Helmer: "Rio Tinto has bought itself an admission ticket to the owner's enclosure for the running of one of the biggest and richest stakes race in modern mining history. And, unlike...Gold Fields...[Leigh] Clifford [Rio Tinto's CEO] hasn't paid, or risked a penny, for his place at this betting window."

The reference to Goldfields relates to the deal made two years ago, by which Norilsk ended up with 20% of Goldfields - a company notorious for its deadly dangerous operations in Ghana and elsewhere.

Although exact terms of the Norilsk joint venture aren't known, Rio Tinto has surely landed a Very Big Fish indeed. If we had any doubts about the company's legendary ability to trounce its rivals in the race for resources, this may put them finally to rest. It could make Rio's audacious 2000 seizure of Australia's North Ltd, from under the eyes of Anglo American, seem like grabbing oranges beneath a market stall.

On paper, the new joint venture doesn't give Rio Tinto direct control of any mine or deposit in Russia; nor is the UK-Australian megalith yet intending to purchase equity in Norilsk. This is hardly surprising, given the ongoing battle between president Vladimir Putin and the so-called "oligarchs" - a bitter contest which Putin intends to win by the time he steps down (should he actually do so) in 2008. If Putin does triumph, Norilsk may end up in state hands, and Rio Tinto find its 49% share in the joint venture bought out. Not having paid upfront for the stake - though it will have to fork out millions on exploration and proving-up deposits - it's a gamble Rio Tinto is both used to and obviously happy to make.

Only a couple of years back, Robert Friedland's Ivanhoe made a successful play for the huge Oyu Tolgoi copper-gold lode in Mongolia. The government late last year threatened to re-nationalise some mineral assets, but Ivanhoe claims it had already secured itself from any takeover. That won't be half so easy for Rio, as it trips across the taiga, but Putin himself may be looking to the Big Brit as an ally, rather than adversary.

Currently Vlad the impaler is locking horns with Vyacheslav Shtirov, the regional president of Sakha, which is home to Alrosa, the world's second biggest diamond producer. Putin wants Alrosa to diversify into other minerals and metals and possibly force a merger with Norilsk. Rio Tinto would then be more than happy to offer its expertise and attract foreign investment, in return for unprecedented access to new stamping grounds.

(London Calling remembers, back in 1994, standing with a Finish indigenous leader on the border between Saamiland and Russia, an area coveted by the UK company until international pressures forced it to withdraw. We could almost glimpse those Far Eastern Alrosa diamonds glinting in Rio's eyes).

It's not hard to see what benefits the world's second biggest mining company will get out of the joint venture if all goes according to plan: access to nickel of course, but also gold, copper and diamonds.

Until recently Rio Tinto and other multinationals in the extractive sector (a notable exception is BP) have left hands-on foreign involvement in Russia mainly to the juniors. But Rio's in no doubt of the potential value which can be "unlocked". In theory success in Russia could propel the company to world number one in output of a wide range of non-ferrous and precious metals. Its nearest and dearest rivals at BHPBilliton, Anglo American, Barrick, Newmont - possibly Inco, too - must be gnashing their teeth in disappointment and frustration.

The risks they run

But if Rio isn't running many fiscal risks - and stands to gain vast rewards - it may be a very different story for those currently being poisoned by Norilsk (almost certainly the worst single toxic polluter in Russia - and that's saying something!); and those in areas where expanded exploration may lead to new mines. Norilsk has stated that the joint venture will aim at digging up "gigantic" deposits - a prospect Rio Tinto must view with glee. After all, its fortunes were enormously boosted in 1995 when it secured a minority stake in Freeport McMoran, thus gifting it 40% of all copper and gold from what swiftly became the world's biggest single mine.

Already, the Chitka and Irkutsk regions of Central Siberia have been named as key targets for the joint venture. What does this mean for the "small indigenous peoples" (so-called) of the North? Over decades the Evenks in particular have experienced enormous attrition, both under state capitalism (Soviet communism) and, more recently from oil and gas exploration under the oligarchs. They suffer from pollution, alcoholism and general ill-health, underpinned by denial of basic land rights, let alone any semblance of fully informed prior consent to what is done with their land and resources (mainly reindeer herds).

One can hear Rio Tinto protesting that, precisely because these scattered communities are in such desperate shape, they need the programmes for income generation and social renewal which it can provide: "Look at what we did in Canada's North West Territories - where we carefully protected the caribou and their migration pathways from the impacts of the Diavik mine."

Which, of course is not the point - or at best only a marginal one. (If the company hadn't gone there in the first place, no threat would have existed). The Cree around Diavik at least had a right to pre-empt company proposals (the Evenks don't), and negotiate benefits packages (which the Evenks almost certainly wouldn't).

Whatever major deficiencies may be found in Canada's style of government, they don't come within a continental shift of the corruption, venality and brutality demonstrated by Putin's regime. Even by Russian standards, Norilsk has been notorious for its lack of transparency.

By offering a mighty hand to the Russian glove, Rio Tinto could reverse any recent (if often illusory) gains made in promoting its brand of corporate social responsibility.

The price it paid for its 1995 stake in the Grasberg mine wasn't to be measured simply in monetary terms. After climbing into the mountain with Freeport, it rained down detritus, not only on the people and rivers of West Papua, but ultimately on its own reputation.

Is it going to repeat the same morally disastrous mistake?