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Rio Tinto sacked chief executive Tom Albanese on Thursday and revealed a $14 billion writedown in connection with his two most significant acquisitions, the Alcan aluminium group and Mozambican coal.
A heavyweight who joined the third-largest diversified miner two decades ago, Albanese will be replaced by iron ore boss Sam Walsh. Doug Ritchie, who led the acquisition of Mozambique-focused miner Riversdale, was also shown the door.
New Jersey-born, Alaska-trained Albanese had until now survived the consequences of his disastrous $38 billion acquisition of Alcan in 2007, a bruising top-of-the-market deal when Rio was under pressure from rivals to bulk up or be bought.
The deal, just two months after Albanese took the reins, turned bad as markets crumbled and aluminium prices slumped, battering Rio's balance sheet, nearly forcing it into the arms of Chinese state-owned Chinalco and triggering a $15 billion rights issue. Rio has since seen years of losses in aluminium and taken billions in impairments - it had already taken an $8.9 billion charge on those struggling assets a year ago.
Walsh was welcomed by investors and analysts on Thursday as a safe pair of hands, but many also questioned whether a 63-year-old veteran would be a long-term solution, raising concerns over management at a group that also announced the departure of its chief financial officer last July.
“It's another black mark in terms of (Albanese's) M&A record and I suppose, given the magnitude of this writedown ... I'm not surprised that he's stepping down with this, nor am I surprised that Doug Ritchie is,” analyst Jeff Largey at Macquarie said.
Rio had planned to shrink the aluminium arm, cutting back one of the world's largest producers of the metal by hiving off most of its Australian and New Zealand assets. But industry sources say it has not been mobbed by buyers.
Further damaging his reputation as a dealmaker, Albanese spearheaded a $4 billion deal to buy Mozambique-focused coal miner Riversdale in 2011, fighting off rival bidders. There, however, like many other miners in the region, Rio has struggled with the challenge of getting coal from pit to port.
Rail and port bottlenecks are the main headache for miners eager to cash in on Mozambique's coal rush, but it could take a decade for many of the current infrastructure projects to come to fruition on a scale to meet industry demands.
“(Alcan) was always a bad deal, and Albanese was lucky not to carry the can for it back in 2008,” one of Rio Tinto's 10 largest investors said. “Mozambique is more of a surprise, but the industry's record on acquisitions is appalling, and Rio is not alone in destroying shareholder value.”
Anglo American is facing potential writedowns linked to its Minas Rio iron ore acquisition in Brazil, a project set to cost more than three times initial estimates. BHP Billiton , meanwhile, failed to clinch three ambitious bids under its current boss - including two tilts at Rio - but then splashed out $17 billion on two shale gas takeovers in the United States just before gas prices slumped.
Like Albanese, BHP Chief Executive Marius Kloppers forfeited his bonus last year after BHP took a $2.8 billion charge on the value of its shale gas assets.
Much like Anglo, which appointed a mining engineer as chief executive earlier this month, Rio will now be led by a veteran operations man. Walsh was already in charge of the division that accounts for nearly 80 percent of profits and his appointment hints at a back-to-basics strategy that could turn Rio's back on big deals.
Walsh joined Rio Tinto in 1991 after 20 years in the auto industry working for General Motors and Nissan Australia and rose up Rio's management ranks before being appointed to head its biggest division, iron ore, in 2004.
Walsh is also a more chummy presence than Albanese, who rarely veered from the script. A lover of the great outdoors who walked across remote Alaska snowfields staking mining claims after college, these days he is more often found on Britain's canals in his own narrow boat.
News of Albanese's departure and the writedown, almost as large as the group's underlying profit in 2011, took the market by surprise, knocking Rio shares in early trade. At 12:40 SA time the stock was 1.8 percent lower, having been down as much as 4.5 percent earlier in the day.
“I wasn't expecting the $14 billion writedown,” said Tim Schroeders, a portfolio manager at Pengana Capital, which owns Rio Tinto shares. He said the departures pointed to a company under pressure to do a better job of managing its purse strings.
“I think it's clearly a case of the board's laid down the law in terms of stricter accountability than we had pre-(crisis),” he said.
Rio said the writedowns include a charge of around $3 billion relating to the Mozambique business - virtually its entire original price tag - as well as reductions in the carrying values of Rio's aluminium assets in the range of $10 billion to $11 billion.
The group also expects to report a number of smaller asset writedowns in the order of $500 million. The final figures will be included in Rio Tinto's full-year results on February 14.
“It is non-cash, it doesn't impact valuation, it doesn't impact the earnings near term. But (flagship Mongolian copper-gold mine) Oyu Tolgoi's still to plan,” said one London analyst who declined to be named. “For me, it's clearly negative, but it's not the end of the world.”
Neither Albanese nor Ritchie, who will leave in July, will take lump-sum payments, and both will forfeit bonuses on departure, including outstanding bonus share entitlements earned in previous years.
Albanese is not the only chief executive on the way out of a major mining company. BHP has said it is seeking a replacement for chief executive Marius Kloppers, and Anglo American earlier this month replaced chief executive Cynthia Carroll. - Reuters