THE $1 billion rise in Rio Tinto’s market value after its chief executive Tom Albanese walked the plank following a $US14 billion ($13.3 billion) write-down sends a strong message to companies that investors will support decisive action from boards and punish the inactive.
Rio’s write-down in its Alcan aluminium assets and its coal business in Mozambique will not negatively affect its earnings or the size of its dividends, which suggests the share price rise is in support of the management changes. It begs the question whether the share price would have risen even further if the write-downs had been bigger and some members of the board had also decided to call it a day.
Rio Tinto announced it had written down its aluminium assets by between $US10 billion and $US11 billion, the fifth hit it has taken on its $US38 billion Alcan acquisition, bringing total write-downs in Alcan to $US30 billion. Further write-downs in aluminium had been expected by the market, with consensus valuations at between $US15 billion to $US20 billion, versus a book value of $US30 billion. There also remains a question over whether Rio will have to make further impairment charges to its Riversdale acquisition, which it bought in 2011 for $US4 billion and wrote down on Thursday night by $US3 billion.
Given the disconnect between the market valuations and the valuations in the group’s balance sheet, the board needs to reassess the company’s accounting systems and why it took so long to act.
Ultimately, the write-downs cost Albanese his job, along with Doug Ritchie, who led the acquisition and integration of Riversdale. The Rio board remains intact. Four of the 12 directors were on the board when the company bought Alcan. One, Guy Elliott, has said he will leave at the end of the year. The chairman joined the board a year after Alcan.
While the board might sheet the blame of the disastrous acquisitions to management, acquisitions of this size cannot be made without board approval. In the case of Alcan, the $US38 billion acquisition was viewed dimly at the time of the bid in 2007; seen as a ploy to keep BHP Billiton from making a successful takeover bid rather than a transformational change at the company.
In the case of Riversdale, there is no question that management made errors in judgment in terms of the quality and quantity of the reserves and resources in Riversdale, but it raises questions about risk management and due diligence systems.
Sam Walsh has been appointed CEO. He has been on the board for four years and has worked at Rio Tinto for 20 years, most lately in its iron ore division, which accounts for 80 per cent of profit and 50 per cent of revenue.
Walsh, 63, has agreed to stay in the role for three years. He is well regarded internally and externally, and was responsible for brokering the hugely successful joint venture with Gina Rinehart’s Hope Downs iron ore project.
The appointment of Walsh is also seen by some as a move that could prompt the board to revisit whether to return Rio’s headquarters to Australia from London.
At the end of the day, shareholders are assuming that Thursday’s announcements are the beginning of a new era at Rio. They are hoping that after five years of blowing up opportunities during a mining boom, the board and management will become better attuned to shareholder value.
With the Chinese economy slowing, commodity prices coming off their peaks and ballooning costs for building and operating mines, shareholders have shifted their appetite from growth stocks to yield stocks. For this reason it will be interesting to see how Rio and Walsh reposition the company.
It is a similar story for BHP Billiton, which has also missed out on some great opportunities during the mining boom.
Not surprisingly, it is on the hunt for a new chief executive after a British newspaper leaked that a search firm was looking for a replacement for Marius Kloppers.
The board will be eager to show it has succession under control and will make an announcement within the next few months.
The original release of this article first appeared on the website of Hangzhou Night Net.