Saturday, 19 January 2013 08:02
Mining bosses have been put on notice to stop using shareholder funds for ego-driven growth after Rio Tinto made US$14 billion ($13 billion) in writedowns, forcing chief executive Tom Albanese to step down.
Rio stunned investors on Thursday with news that Mr Albanese had departed as the global miner announced hefty writedowns of its aluminium and coal assets.
It promoted iron ore chief Sam Walsh, 63, to the top job.
The dual-listed company's shares shot up by $1.78, or 2.76 per cent, to $66.38 in what IG Markets market strategist Evan Lucas said was a vote of confidence in Mr Walsh.
There is widespread instability at the top of the global miners, with BHP Billiton - which recently wrote down its US shales assets by nearly US$3 billion ($2.9 billion) - under pressure to move on Marius Kloppers and Anglo American and Xstrata already planning to replace bosses.
Rio and the large miners generally were criticised on Friday for ignoring shareholder demands for better returns.
Rio's writedowns were labeled the largest in Australian corporate history on Friday with a second multi-billion-dollar mistake to buy a coal project in Mozambique deemed unacceptable following the disastrous 2007 US$38 billion ($36 billion) Alcan deal.
Veteran resources analyst Gavin Wendt, a Mine Life director, predicted that Rio's writedowns would have far-reaching ramifications because they crystallised how resource companies were not listening to shareholders.
Institutional investors like BlackRock have slammed the miners over poor dividends and returns caused largely by failed multi-billion-dollar deals and writedowns during the Chinese boom and record commodity prices.
Gold miners are often criticised for poor results despite high gold prices.
"Half the time they (big miners) don't really need to be managed, they just need to get out there and do what they're supposed to do: dig stuff up and efficiently sell it," Mr Wendt said.
"Management of these companies gets in the way ... particularly with these hare-brained high, expensive acquisitions, these guys seems to feel as though they need to leave their mark on the company."
Several writedowns have now whittled the Alcan assets from US$38 billion ($36 billion) down to less than US$15 billion ($14 billion) in book value, still above the US$11-US$13 billion ($10.5-$12 billion) analysts value them at.
The grossly over-priced Alcan acquisition nearly killed a debt-laden Rio and was largely ego-driven growth for growth's sake, partly due to management trying to avoid being taken over by BHP, Mr Wendt said.
Mr Kloppers' failure to successfully execute that deal is cited as one of his major mistakes.
"In some respects it was all about ego and the fact that these (Rio) guys didn't want their jobs to disappear so they used shareholders funds to engage in a major questionable acquisition and then had to be bailed out," Mr Wendt said.
Deutsche Bank analyst Paul Young agreed in a research note that miners needed to change their capital allocation strategies.
There is some sympathy in relation to Alcan and structural changes to the aluminium industry related to Chinese over-production.
However Rio's own chairman Jan du Plessis dubbed the US$3 billion ($2.9 billion) hit relating to Rio Tinto Coal Mozambique - less than two years after it was bought for US$3.9 billion ($3.7 billion) - unacceptable.
The quality of the coal is not as good as had been expected making the expensive construction of a railway line uncommercial.
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