Will Rio Tinto ever learn?
Published by MAC on 2008-12-15At the beginning of this year Rio Tinto was the world's second biggest mining company by market capitalisation.
But, last week, it suffered the biggest fall in share price - and possibly credibility - of any world-class mining company for some years. Any contention that this was all down to the "credit crunch" fell on death ears.
Having rejected BHP Billiton's take-over bid a month ago, the UK company's stock rating was bound to take at least a short-term hit. What persuaded investors that the company couldn't cut the mustard - not now, not in the near future, and perhaps not for a long time - is its huge carried debt. This stands at an acknowledged whopping US$40 billion but, according to some calculations, is closer to US$50 billion - more than the company itself was worth in the not-too-distant past.
At such moments of corporate crisis, many worms seem to step from the woodwork, either to blame or defend. The most convenient target has been Rio Tinto's CEO, Tom Albanese. He not only forged the company's historic merger with Alcan last year - propelling the St James Square outfit to the top of the global aluminium league - but also paid himself more than three million dollars in fiscal 2007 out of shareholder funds. Precious little comfort in that for the 14,000 Rio workers, now slated to lose their jobs as their employers tighten the belts.
But titanic Tom (prophetically dubbed "Over Easy" Albanese on this website) didn't stand in isolation to his board or key investors who, for the most part, uncritically welcomed the slick management style the Italian-American brought to Britain's ancient uber-miner and happily backed the risks he took.
Whatever Rio decides to do over the next few months, it will have to dispose of some of its assets. The easiest to sell will be stakes in mining joint ventures where its partners are ready to make a deal. Already the rumour mill is grinding that BHP Billiton may acquire the company's stake in Chile's Escondida Copper, and Canada's Harry Winston is interested in Diavik diamond play in northern Canada.
Whether some of Rio's massive coal interests will be put on the block, or it will withdraw from some of its uranium or recent nickel plays, is currently open to speculation.
And it's a speculation in which we might all participate, whether we know (or care) a damn about mining finance.
During its 130-year history, Rio Tinto has exploited a huge range of metals and minerals through outright trespass, employing unsafe or damaging technologies to extract materials, some of which (such as coal and uranium) present a potential risk to us all.
Could this be the moment when the acquisitive hubris, so long driving this uniquely British institution, is thoroughly examined and finally found wanting?
Unfortunately, recent indications give little cause for comfort.
Just as Rio was starting to wrap up its options in London, it announced new joint ventures with India's leading state-owned aluminium and iron ore producers. These envisage new projects in parts of the south Asian country where local communities have already forcibly rejected new mining or expansion.
As Joan Baez's rousing 1960's anthem pithily put it: "When will they ever learn?"
[Comment by Nostromo Research, London]
Ring the bell on Rio Tinto's top brass
The Australian
12th December 2008
BHP's disastrous $3.2billion Magma copper purchase eventually cost its chairman and chief executive their jobs but Rio's Paul Skinner and Tom Albanese are yet to even acknowledge that their $US38 billion ($57.5 billion) Alcan purchase is an issue.
BHP's Jerry Ellis and John Prescott eventually gave way to Don Argus and Paul Anderson and, while their departure was arguably due to a culmination of events, Magma took the blame.
The fault in both cases was misjudging the commodities cycle but, in Rio's case, this was compounded by an apparent desire to use the deal to defend the empire.
Skinner has, somewhat extraordinarily, deigned to stay until the end of next year; he hopes to then take the helm at BP, but surely his board comrades at Rio should push him out the door sooner rather than later?
The global recession will test corporate governance standards, and there is a risk that some executives will be chopped to sate shareholder demands when arguably the non-executive directors should be taking the fall.
So far, Albanese and Skinner seem to have dodged a bullet, but the rally in Rio's stock price is clearly unsustainable and due more to technical than fundamental value reasons.
There was relief that there will be no equity raising, for the moment at least, and there was relief that Albanese was given the benefit of the doubt that he might not be able to achieve the planned cuts.
They are a forgiving bunch in London and, along the way, the arbitrage in prices between Britain and Australia has closed considerably.
But the price moves certainly should not be taken as vindication of the board's arrogant refusal to take responsibility for its actions.
Alcan was one issue but then there was the rejection of any thought of actually engaging BHP in negotiations which, as things have turned out, would have protected Rio's shareholders.
The anger in Australia, it must be said, is greater than it is in London for obvious parochial reasons, but the point remains.
The global economy is heading south in a hurry and Rio will fall with it.
South Korea yesterday chopped 1 per cent from its official interest rate to 3 per cent, the lowest in its history.
US three-month bills opened last night at 0.2 per cent, their lowest since 1929, which, from memory, was before the Great Depression.
The spread between US and Australian rates are at historic highs but one real danger is the lack of confidence implied by the fact that you can get three-month money for nothing.
The US 10-year bond is yielding 2.67 per cent.
Some say the US banking industry will have to shed another $US2 trillion in debt before it gets back into order but the reality, of course, is no one really knows yet.
China is falling quicker than expected with obvious implications for the resources industry and, in particular, the Australian economy. Yet Rio's stock price bounced more than 7 per cent yesterday to trade around $40.17 -- and this was below the high for the day of $41.69 a share.
This was reputedly because of Tom Albanese's plans to cut debt, but he was the guy who acquired the debt in the first place.
Explaining one-day movements in the stock market in the present climate is an impossible task and, as one veteran broker confided yesterday, "Wood ducks John, there are lot of Wood ducks out there".
Assuming he gets to hang around, Albanese has to start looking like he knows what he is doing, which, on past performance, will take some trying, but some figure he is up to it.
Step one is to go cap in hand to Marius Kloppers and ask him to buy Rio's 30 per cent stake in Chilean copper mine Escondida.
BHP owns 57 per cent of the mine and is probably the only mining company in the world that could write out a cheque for a few billion dollars right now. Without knowing fully any complexities of such a deal, it would solve some issues fast.
Now, from Rio's perspective, the deal would sink because, while it has always been a good cost cutter, Rio has always kept its growth options alive. This time around, thanks to Skinner et al, growth options have to be put on hold while the company tries to save itself.
Next there is the infamous Alcan, the aluminium company which has caused all the problems.
Alcan is not nearly as bad as some make out and comes with cheap long-term energy, which makes it a highly attractive asset in good times.
Maybe Albanese should take control of the asset by suggesting present boss and board member Dick Evans might like to step aside.
After all, if you are going to keep the business, then better look like you are running it.
The Rio statement was full of big numbers, big job cuts which were inflated by using contractors who would never be considered part of the team in any case.
The time for the public relations spin is gone. It is time for Rio's top brass to be accountable for their own snafus.
While they are doing this the Rio cutbacks are just another part of the jigsaw which spells prolonged downturn.
Albanese Irks Rio Holders as Defense Costs Billions
By Brett Foley and Rebecca Keenan
Bloomberg
11th December 2008
Rio Tinto Group Chief Executive Officer Tom Albanese cost investors almost $50 billion when he repelled BHP Billion Ltd.'s bid to make the world's largest mining acquisition.
As commodities prices plunge amid a global recession and Rio struggles with $38.9 billion in debt, shareholders say Albanese should have been more open to a deal. Rio has fallen 34 percent in London since BHP withdrew its bid on Nov. 25, making it the worst performing stock in the 14-member Bloomberg Europe Metals & Mining Index since that date. BHP advanced 26 percent in London.
"I don't know the Rio board that well, but they should be asking some questions," Tim Barker, who helps manage more than $54 billion of assets, including BHP and Rio shares, at BT Financial Group in Sydney. "I wouldn't want to be in Albanese's shoes."
Albanese, a third-generation Italian-American, yesterday unveiled a plan to eliminate 14,000 jobs, reduce spending on new projects by $5 billion and consider joint ventures in an effort to pare its debt. The cuts are the cost of Albanese's successful yearlong opposition to a takeover by BHP and his decision to buy Canada's Alcan Inc. for $38.1 billion last year.
Melbourne-based BHP, the world's largest mining company, said it abandoned the takeover bid because Rio's debt, regulatory hurdles and falling commodity prices made the deal too risky. At today's market prices, BHP's all-share offer for Rio would be worth $82.9 billion, or $49.2 billion more than Rio's market value of $33.7 billion.
Pyrrhic Victory
"It's a pyrrhic victory for Rio; You win the battle but you are the loser," said Richard Lockwood, managing director at London-based New City Investments, which oversees about $400 million. "You have always felt that they didn't want to do the deal because they wanted to go along on their own."
Albanese, 51, yesterday defended his decision not to meet with BHP CEO Marius Kloppers to discuss the offer. "I don't think it would have changed the outcome," he said on a conference call with reporters.
Since August, the recession has cut demand for commodities and snapped six years of gains in metals prices.
"These are periods that you don't enjoy at the time and they are very hard decisions to make," Albanese said in a telephone interview. "They are not necessarily popular decisions to make, but they are the right decisions."
Rio, traded in London and Australia, rose 47 pence, or 3.1 percent, to 1,561 pence at 10:33 a.m. on the London Stock Exchange. BHP slipped 1 percent to 1,222 pence. Rio's Australian traded shares rose 3.3 percent today.
Rio's Debt
Albanese, who was paid $3.1 million in salary and bonus last year, became chief executive at Rio in May 2007, just six months after Kloppers was named to head BHP. His opposition to BHP's offer and the purchase of Alcan, the world's third-largest aluminum maker, have defined his tenure.
Since Albanese bought Alcan for cash, pushing Rio's debt to $42.1 billion, the price of aluminum has dropped 48 percent on plunging demand for the lightweight metal as stockpiles advanced to a 14-year high. The plan announced yesterday is designed to reduce the debt by $10 billion by the end of 2009.
"Rio has really been hurt by this debt," said Graham Birch, who helps manage $40 billion in natural resources assets at BlackRock Investment Management in London. "Albanese has to tackle that. That is the big job in front of him. One way of doing that is to stop spending money."
Jersey Boy
Albanese, a mining engineer by training, made his name at Rio in 1993 when he convinced his bosses to let him try to turn around a money-losing zinc mine on Alaska's Admiralty Island that the company had acquired in a takeover. Within three years, Albanese had the mine turning a profit. Last February, nine months after becoming CEO, Albanese sold the Greens Creek mine to Hecla Mining Co. for $750 million to reduce Rio's debt.
"You can't be sentimental about these things," Albanese said in a March interview. "There was a tear in my eye when we sold Greens Creek."
Albanese grew up in New Jersey before earning a bachelor's degree in mineral economics at the University of Alaska, where he later completed a master's in mining engineering.
In 1981, he became a junior engineer at an Alaskan gold project that was later acquired by Portland, Oregon-based Nerco Inc., owner of the Greens Creek mine.
Albanese moved to London in 1995 to become Rio's exploration chief. Three years later he was appointed vice president of the Kennecott Utah Copper unit, and in 2006 he became director of group resources.
Blame Management
Married with two children, Albanese is a hiker and owns a canal boat moored on London's Thames River.
Even after Rio's stock declined, Albanese has his defenders.
"Of course, all shareholders would have wanted a deal, but I think the board of Rio was on his side and they weren't ready to fold their cards," said Ian Henderson, who manages $7 billion in natural-resource assets, including Rio shares, at JPMorgan Chase & Co.'s asset management unit in London. "No company wants to make major changes at the moment, and Rio is no different. We will have to see how he works these things out."
Others aren't as forgiving.
"Management has got to be blamed," said Albert Hung, who manages A$1.2 billion ($790 million) at Alleron Investment Management Ltd. in Sydney, including shares of Rio and BHP. "As far as the Rio shareholders go, they lost and they lost seriously."
Rio Tinto targets $7-billion in spending
Delays or suspends commitments in Canada as it labours under debt load shouldered with Alcan purchase
ANDY HOFFMAN
MINING REPORTER
Toronto Golbe and Mail
11th December 2008
More than $6.8-billion (U.S.) in Canadian spending commitments made by Rio Tinto PLC are being delayed or suspended as the London mining giant wrestles with the crushing debt load it took on to buy Alcan Inc.
Rio is suspending an $800-million expansion of its iron ore operations in Labrador and initiating a drastic company-wide cost-cutting plan that will see a dramatic slowdown in spending on three Canadian aluminum smelter projects in Quebec and British Columbia worth about $6-billion.
"Everything has fallen off a cliff to a degree that no one anticipated," Rio Tinto Alcan chief executive officer Dick Evans said in an interview yesterday.
In response to the commodities crash, which has decimated the price of aluminum and other metals, Rio is taking swift action to reduce the $39-billion in debt it shouldered to purchase Alcan last year. It is slashing 2009 capital expenditures by more than 50 per cent, putting key assets up for sale and cutting 14,000 jobs. Rio hasn't identified where the job cuts will come from, but the company's Canadian operations, including the Alcan aluminum smelters, are all but certain to be affected.
"I'm sure we will have some reductions enforced in Canada but we expect to keep the employment level commitments that we made [to the government]," Mr. Evans said. Rio is the latest international mining powerhouse forced to cut operations in Canada.
Anglo-Swiss miner Xstrata PLC is closing two nickel mines in Sudbury that were once owned by Canadian miner Falconbridge, and asking 250 workers to accept early retirement packages. Brazil's Companhia Vale do Rio Doce (Vale) is closing the Copper Cliff South mine in Sudbury, which was once owned by Canada's Inco. Vale also delayed some Sudbury development projects and offered employees early retirement packages. In order to win Investment Canada approval for the takeovers, which were worth $40-billion (Canadian) combined, Xstrata and Vale promised to not lay off workers for at least three years.
Rio Tinto also made a slew of commitments to win approval from Ottawa and Quebec for its $38.1-billion (U.S.) all-cash bid for Alcan, which gave it smelters in Quebec and B.C. and access to cheap Canadian hydro (electricity accounts for more than a third of the cost of producing aluminum).
The promises included minimum employment levels in Quebec and Canada, establishing Rio's aluminum division head office in Montreal and committing to two major projects: a state-of-the-art smelter, dubbed the AP50, in the Saguenay region of Quebec and the upgrade of Alcan's smelting operations in Kitimat, B.C.
The smelter projects, which will cost a combined $5-billion (Canadian) to build, have not been cancelled, but will be delayed in light of Rio's cash crunch.
"We will slow down the rate of spend on Kitimat and AP50," Mr. Evans said. The company has also suspended plans for a $1-billion expansion of its Alma smelter.
"There are all sorts of catastrophic scenarios running through our heads," said Alain Gagnon, president of the Syndicat National des Employés de l'Aluminium d'Arvida, which represents about 2,000 Alcan employees at its Jonquière and Laterrière smelters. "With Alcan's energy agreements [with the Quebec government] we shouldn't be as affected as much as others, but there is nothing in the agreements that prevents Alcan from reducing the work force."
Rio is cutting back drastically in other areas of Canada, too. An $800-million (U.S.) expansion of its iron ore operations in Labrador, which was trumpeted by the company this March as part of its commitment to the country, has been "suspended," Iron Ore Co. of Canada (IOC) spokesman Michel Filion said yesterday.
Rio Tinto had planned to sell Alcan's engineered products and packaging divisions to help pay for the takeover but the global credit crunch has culled the list of potential buyers. Rio is now putting other "significant" assets up for sale to reduce debt.
Mr. Evans said it was "highly unlikely" that low-cost smelters and hydro assets in Quebec and B.C. would be sold but said other Alcan assets could be auctioned off.
Damien Hackett, an analyst with Canaccord Adams in London, suggested that Rio could sell its interest in IOC. "They've always been less than 100 per cent committed to IOC," Mr. Hackett said in an interview.
The analyst also believes Rio might unload its stake in the Grasberg mine in Indonesia, most likely to its joint venture partner Freeport-McMoRan Copper & Gold Inc.
Others pointed to Rio's 60-per-cent interest in the Diavik diamond mine in the Northwest Territories as a potential asset sale. Shares of Harry Winston Diamond Corp., which have lost about 85 per cent this year, jumped 41 per cent yesterday on speculation that a buyer for Rio's interest in the mine would also want Harry Winston's stake.
Rio Tinto to slash 14,000 jobs, not known whether wil include Wyoming
by DUSTIN BLEIZEFFER
Star-Tribune, Wyoming
10th December 2008
Saddled with some $40 billion in debt, global mining company Rio Tinto announced Wednesday it would slash 14,000 jobs. However, the company is not saying whether the job cuts will include any of its 1,650-plus workers at its coal mines in Wyoming's Powder River Basin.
"At this point, that's just a global figure," said Bob Green, director of sustainable development for Rio Tinto Energy America.
Rio Tinto operates five coal mines in the Rockies: one in Colorado, three in Wyoming and one in Montana. Its Wyoming coal mines are:
* Cordero-Rojo, which produced 40.4 million tons in 2007 with about 582 employees.
* Jacobs Ranch, which produced 38.1 million tons in 2007 with about 619 employees.
* Antelope, which produced 34.5 million tons in 2007 with about 462 employees.
Rio Tinto also owns a uranium mill in Sweetwater County that has been idle for several years.
In November 2007, the company announced it would review its U.S. assets for a possible sale. That decision was in relation to Rio Tinto's pending acquisition of Canadian aluminum producer Alcan, and a hostile takeover attempt by BHP Billiton.
So far, there have been no takers for any of Rio Tinto's Wyoming properties.
Shares of Rio Tinto plummeted after Billiton dropped its hostile takeover attempt last month. Now, Rio Tinto executives say the company will try to shed $10 billion of its $40 billion debt by the end of 2009.
The company said the job cuts would be split: 8,500 "contractor" jobs and 5,500 "employee roles."
Rio Tinto's global work force is 97,000. Speculation in the industry is that many of the job losses will be in Australia because demand for iron ore has dropped off significantly in the global economic downturn.
Just who might pick up Rio Tinto's Powder River Basin mines has been the source of much speculation during the past year. Industry analysts have said fellow basin producers Arch Coal and Peabody Energy already hold too much of the southern Powder River Basin market, and the federal government would object based on concerns of a monopoly in the basin.
Yet other Powder River Basin operators may be too small to buy one or more of the Rio Tinto mines. That leaves big foreign mining companies and the possibility of a private equity firm consolidating a number of Western operations.
Nalco signs deal with Canadian co
Economic Times (India)
12th December 2008
MUMBAI: National Aluminium Company Ltd (Nalco) has signed a strategic alliance agreement with Rio Tinto Alcan, a Canadian company and global supplier of bauxite, alumina and aluminum, for increasing its presence in India and abroad. Rio Tinto's business in exploring, mining and processing mineral resources. Major products are aluminum, copper, diamonds, energy, gold, industrial minerals and iron ore. Activities span the world but are strongly represented in Australia and North America with significant business in South America, Asia, Europe and Southern Africa. The company shares were down 6.81 per cent to Rs 182.70 on BSE.