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Rio Tinto CEO's departure was inevitable The Albanese years at Rio Tinto: a squandered opportunity
(35 minutes later)
Tom Albanese had been on borrowed time at Rio Tinto for about four years. It was in early 2009 that the chief executive was obliged to confront his horrible mistake in paying $38bn – in cash, for heaven's sake – at the top of the commodities cycle in 2007 for Alcan, a major aluminium producer.Tom Albanese had been on borrowed time at Rio Tinto for about four years. It was in early 2009 that the chief executive was obliged to confront his horrible mistake in paying $38bn – in cash, for heaven's sake – at the top of the commodities cycle in 2007 for Alcan, a major aluminium producer.
Was it hubris, an attempt to bulk up to forestall a bid from arch-rival BHP Billiton, or an inherited deal from the former chairman Paul Skinner that prompted a gamble that, even at the time, smacked of staying on the dance floor too long?Was it hubris, an attempt to bulk up to forestall a bid from arch-rival BHP Billiton, or an inherited deal from the former chairman Paul Skinner that prompted a gamble that, even at the time, smacked of staying on the dance floor too long?
Whatever it was, the BHP bid arrived anyway – and then went away in the post-pop commodity world. The damage to Rio's balance sheet remained and Albanese's proposed repair job was humiliating. He wanted to flog minority stakes in some of Rio's operations to Chinalco, a Chinese state-owned firm, thereby creating a political storm in Australia. He was saved from himself only by the subsequent bounce-back in commodity prices, which gave shareholders the confidence to recapitalise Rio themselves via a $15bn rights issue.Whatever it was, the BHP bid arrived anyway – and then went away in the post-pop commodity world. The damage to Rio's balance sheet remained and Albanese's proposed repair job was humiliating. He wanted to flog minority stakes in some of Rio's operations to Chinalco, a Chinese state-owned firm, thereby creating a political storm in Australia. He was saved from himself only by the subsequent bounce-back in commodity prices, which gave shareholders the confidence to recapitalise Rio themselves via a $15bn rights issue.
Calm was restored as the price of iron ore – the source of most of Rio's profit – headed skyward again. By early 2011, the company was generating cash at a rate of $64m a day, or $1m every 23 minutes. The balance sheet was once again pristine. All Albanese had to do was avoid shooting himself in the foot with another over-priced acquisition.Calm was restored as the price of iron ore – the source of most of Rio's profit – headed skyward again. By early 2011, the company was generating cash at a rate of $64m a day, or $1m every 23 minutes. The balance sheet was once again pristine. All Albanese had to do was avoid shooting himself in the foot with another over-priced acquisition.
He failed. In 2011, the never-ending struggle to diversify earnings led to a $4bn offer for Riversdale, a Mozambique coal miner. Today Rio wrote down the value of the asset by an extraordinary $3bn, or 75%. The problem? The company hasn't won the expected permits to transport coal along the Zambezi river and the estimate of recoverable coal has been cut. Basic stuff, in other words.He failed. In 2011, the never-ending struggle to diversify earnings led to a $4bn offer for Riversdale, a Mozambique coal miner. Today Rio wrote down the value of the asset by an extraordinary $3bn, or 75%. The problem? The company hasn't won the expected permits to transport coal along the Zambezi river and the estimate of recoverable coal has been cut. Basic stuff, in other words.
To rub salt into shareholders' wounds, Alcan isn't judged to be worth even its written-down value. Another almighty impairment charge – $10bn-$11bn – in aluminium has been unveiled. The total from aluminium is now almost $30bn, with Alcan the major culprit.To rub salt into shareholders' wounds, Alcan isn't judged to be worth even its written-down value. Another almighty impairment charge – $10bn-$11bn – in aluminium has been unveiled. The total from aluminium is now almost $30bn, with Alcan the major culprit.
Albanese's departure by "mutual consent" was inevitable. By all accounts, he's terrific at the nuts-and-bolts business of organising the management of operations. But in the past decade's rollercoaster market for miners, success and failure has been dictated by acquisition strategy. The primary task of a chief executive was to avoid buying assets at the wrong time at the wrong price. Albanese has two stinkers on his record – one at the absolute peak of the market, one when on deal-doing probation – plus a highly dilutive rights issue.Albanese's departure by "mutual consent" was inevitable. By all accounts, he's terrific at the nuts-and-bolts business of organising the management of operations. But in the past decade's rollercoaster market for miners, success and failure has been dictated by acquisition strategy. The primary task of a chief executive was to avoid buying assets at the wrong time at the wrong price. Albanese has two stinkers on his record – one at the absolute peak of the market, one when on deal-doing probation – plus a highly dilutive rights issue.
The chairman, Jan du Plessis, is being commendably strict in limiting Albanese's payoff, and that of Doug Ritchie, who was the day-to-day executive on the Mozambique misadventure. But a measure of how great Rio could have been for its shareholders is seen in the value of Albanese's unexercised share options from the 2003-09 period – ie pre-Alcan – which he'll obviously keep. Even with the calamities, these are still worth £10.7m. If the mishaps and the emergency cash call hadn't happened, who knows? But miles more.The chairman, Jan du Plessis, is being commendably strict in limiting Albanese's payoff, and that of Doug Ritchie, who was the day-to-day executive on the Mozambique misadventure. But a measure of how great Rio could have been for its shareholders is seen in the value of Albanese's unexercised share options from the 2003-09 period – ie pre-Alcan – which he'll obviously keep. Even with the calamities, these are still worth £10.7m. If the mishaps and the emergency cash call hadn't happened, who knows? But miles more.
The pricing dynamics in iron ore, where Rio is the world's second-largest producer, are almost heaven-sent. It costs the company about $40 to dig a tonne of the stuff out of the Pilbara desert in Australia and ship it to China, where it can currently be sold to steelmakers for $145. That's why Sam Walsh, the new boss, starts on the front foot. But the verdict on the Albanese years is clear: what a wasted opportunity to make shareholders extremely rich. The pricing dynamics in iron ore, where Rio is the world's second-largest producer, are almost heaven-sent. It costs the company about $47 to dig a tonne of the stuff out of the Pilbara desert in Australia and ship it to China, where it can currently be sold to steelmakers for $145. That's why Sam Walsh, the new boss, starts on the front foot. But the verdict on the Albanese years is clear: what a wasted opportunity to make shareholders extremely rich.