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January 17, 2013 9:54 am
For a while, it seemed that Tom Albanese would be the last one standing among the chief executives of the world’s largest mining companies.
With Cynthia Carroll standing down at Anglo American, Mick Davis set to leave Xstrata and a process under way to find a successor to Marius Kloppers at BHP Billiton, the Rio Tinto chief executive appeared a good bet to outlast them all despite the disastrous decision to spend $38bn on Alcan, the Canadian aluminium group, at the top of the cycle.
The 2007 deal, worth $44bn including debt, soured as aluminium markets buckled under rising input costs and massive overcapacity during the financial crisis.
Rio’s move on Thursday to write down a further $10-$11bn in value of its aluminium business, some of which predated the Alcan deal, brings the total impairments on the transaction to an estimated $20bn, said analysts at Liberum, more than half what Rio paid.
Yet the light metal, ironically, was not Mr Albanese’s downfall. Instead, he and the head of energy Doug Ritchie were forced to step down after another acquisition of coal assets in Mozambique went badly wrong.
The $3bn writedown to a deal struck only two years ago was, say people familiar with the matter, “a bridge too far” for the company’s board.
While the reduction in value to the group’s aluminium business was widely expected by analysts amid the global slump, the deterioration in the prospects of the coal business was a bigger surprise.
That Rio paid $3.7bn for the assets in 2011, net of cash, demonstrates the scale of the misjudgment.
The coal writedown was twofold, said people familiar with the company’s thinking. First, Rio had overestimated the quality and quantity of coal in the ground in Mozambique at the time of the 2011 deal, particularly for metallurgical coal, the more expensive, low-sulphur form of the commodity used to make steel.
Second, the group’s initial plans to barge out coal from the mines down the Zambezi river had proved impossible, blocked by the country’s government. Instead, Rio faced building infrastructure, such as an independent rail project, something that became harder to justify given the lesser prospects for the resource.
For Rio, two of its attempts to diversify away from Western Australia iron ore – where the group makes the vast bulk of its profits – have now gone awry, leaving the company among the least global and the least diversified of its peer group.
Sam Walsh, who has been running the iron ore business, was the “logical replacement” for Mr Albanese, said analysts at Liberum, praising his “strong operational heritage” and adding that the market may like a greater emphasis on growth in iron ore.
But Rio’s board and management has continued to emphasise that the group sees its future as a diversified, global miner. Among Mr Walsh’s challenges will be to reshape the business accordingly.
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