Rio Tinto vow after its biggest loss ever

Miner pledges push on shareholder value and greater discipline

The new chief executive of Rio Tinto has promised a “relentless” focus on shareholder value and greater discipline and accountability after the Anglo-Australian mining group announced the biggest loss in its history.

Reaffirming plans to cut costs by more than US$5bn and promising significant asset sales, Sam Walsh said he wanted to make Rio, the world’s second-biggest producer of iron ore, a more nimble and responsive company run by “business women and men”.

“Under my leadership, Rio Tinto will have an unrelenting focus on pursuing greater value for shareholders,” he said. “To do this we need to run the business as owners not managers and my immediate priority is to build more focus, discipline and accountability throughout the organisation,” he said.

Mr Walsh, former head of the company’s iron ore business, replaced Tom Albanese, a geologist, four weeks ago after Rio wrote down the value of its aluminium and Mozambique coal assets. It was the latest in a series of embarrassing charges related to bad timed or bungled acquisitions by the company.

The US$14.4bn of impairments combined with a drop in commodity prices saw Rio report a net loss of US$3bn in the year to December, down from a net profit of US$5.8bn a year ago. Excluding writedowns, underlying earnings fell 40 per cent to US$9.3bn, a result that exceeded most analyst forecasts.

Rio declared a full-year dividend of US$1.67 a share, up 15 per cent on 2012.

It also said it had appointed Andrew Harding as the new head of its iron ore division, the miner’s biggest and most profitable. This places Mr Harding in pole position to replace Mr Walsh when he steps down in three years.

Nomura analyst Sam Catalano said Mr Walsh’s rhetoric and promise to enforce greater capital discipline would be welcomed by shareholders.

“The reinforced focus on capital discipline, along with the strong cash generation we expect, should pave the way for meaningful capital returns to shareholders over the coming 12-24 months,” he said.

Shares in Rio Tinto rose 1.5 per cent to £37 in early London trading.

Acknowledging the “poor judgment” that led to the US$38bn purchase of Alcan in 2007 and the more recent US$3bn purchase of Riversdale Mining, a Mozambique coal business, Mr Walsh said Rio would only invest in assets that offered “attractive” returns “well above” Rio’s cost of capital.

“There has been poor judgment and both I and the board have said this is absolutely unacceptable. It’s very, very disappointing. But importantly you do learn from these things,” he said, adding that he was not studying any acquisitions.

As well as plans to cut operating costs “aggressively”, Mr Walsh said he was also targeting “significant cash proceeds” from the sale of non-core businesses.

Rio has been looking to raise cash to pay for important expansion projects at its Western Australian iron ore operations and in Mongolia, where it is developing the Oyu Tolgoi copper-gold mine.

Mr Walsh said Rio would continue to engage with the government of Mongolia, which has been seeking to renegotiate the investment agreement that governs the mine. A decision on whether to proceed with phase two of the project, which will expand underground mining, would be taken in the first half of 2014 after Rio completes a valuation study.

The bulk of Rio’s US$5bn cost-cutting plan will fall on Rio’s aluminium and coal businesses, particularly in Australia, which have been hit hard by weak commodity prices and the strong Australian dollar. Rio also plans to slice US$750m from its exploration budget.

“Looking ahead, we see the positive momentum in the fourth quarter of last year being sustained into 2013 with Chinese GDP growth returning to above 8 per cent in 2013,” he added.

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