Rio Tinto pays a steep price for Alcan blunder

VANCOUVER — London-based mining giant Rio Tinto (RIO-N, RIO-L, RIO-A) continues to be haunted by the ghosts of past acquisitions, with the largest culprit being its US$38-billion takeover of Montreal-based aluminum leader Alcan in 2007.

On Jan.17 the world’s second largest mining company announced a US$14 billion write-down, including US$10 billion stemming from its ailing aluminum business, and US$3 billion related to Mozambique coal assets.

“The Rio Tinto Board fully acknowledges that a write-down of this scale in relation to the relatively recent Mozambique acquisition is unacceptable,” commented chairman Jan du Plessis. “We are also deeply disappointed to have to take a further substantial write-down in our aluminium businesses, albeit in an industry that continues to experience significant adverse changes globally.”

Not surprisingly, the two men responsible for the suspect acquisitions will both be shown the door. Rio’s chief executive Tom Albanese — who basically orchestrated the Alcan deal — and Energy chief executive Doug Ritchie both stepped down following the announcement. Albanese and Ritchie will stay with Rio through July to facilitate the transition, but will take no lump-sum payments and no long-term share awards during that period.

This is the second time Rio has been hit with a major write-down on its aluminum business in the past year. During its 2011 annual report the company outlined a US$8.9 billion impairment charge relating to its troubled Alcan assets, which contributed to a 59% drop in yearly net earnings and prompted Albanese to forfeit his annual bonus.

The problems with the aluminium markets are many. China’s emergence as a major production power has impacted market availability, and the recent downturn in global industrial economies has contributed to demand shortfalls.

In addition, a variety of production variables have caused problems for integrated aluminum outfits like Rio over the past few years. The process of converting bauxite to aluminium oxide is energy intensive and those costs have been rising. New technological advances have also increased efficiencies and impacted the bottom line on the mining side, as less bauxite has been required to generate similar aluminium outputs.

Though the Alcan acquisition has been more costly, the US$4 billion campaign to acquire Australian coal miner Riversdale Mining and its Mozambique coal assets has been nearly as troublesome. Rio overestimated the quantity of coking coal it could recover from Riversdale’s operations and failed to achieve government shipping approvals it required to move its product.

Stepping in to fill Rio’s chief executive seat will be iron-ore division head Sam Walsh, who joined Rio in 1991 following 20 years in the automotive industry. Walsh was chief executive of Rio’s aluminium business from 2001 to 2004 prior to making the switch to head the company’s iron-ore operations.

“[Sam] is ideally placed to cast a fresh eye over how we address the challenges and opportunities in the business and derive greater value from it,” du Plessis said, stressing that Rio’s underlying business and balance sheet remain in good shape. He made specific mention of Rio’s iron ore division, which recorded production with 253 million tonnes in 2012 and accounted for roughly 80% of the company’s earnings.

“We are fortunate to have such a capable and highly experienced executive to take over and to ensure there will be a rapid and seamless transition,” he concluded.

News of the write-down triggered market struggles for Rio, which saw its shares drop as much as 4.5% in London during mid-day trading. The company later recovered to finish the day down 1.7% on massive 11.75 million share trade volumes en route to a £33.99 per share close. Rio maintains 1.85 billion shares outstanding at the time of writing, which equates to a US$101 billion market capitalization.