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Rio Tinto’s plans to mine more than 20 million tons of coal from Mozambique by the end of the decade are in tatters. Thursday’s shock $3 billion (R26bn) write-down of its Mozambique assets, bought from Riversdale Mining for $4.2bn only two years ago, highlights the risks of doing business in countries with major infrastructure challenges, and the dubious value of over-hyped acquisitions.
Rio lays no blame at the feet of the Mozambique government, which last year rejected its plans to barge coal down the Zambezi River. Instead Rio’s board has laid the blame squarely at the feet of management, which paid too much for a resource it is now downgrading.
Spare a thought for Doug Ritchie, 57, the low profile Queensland lawyer who was at one point tipped as a future Rio chief executive, but was dumped suddenly along with Tom Albanese on Thursday.
Ritchie, who began his mining career in the Ipswich coal fields, had risen to energy chief after 26 years with Rio and also ran its China business, negotiating the controversial Chinalco deal to save the company in 2009. Ritchie was on Rio’s powerful executive committee and his star was rising, with the announcement in July that he would move to London to become the head of strategy from the start of this year, after a period of long service leave.
But Ritchie also spearheaded the 2010 takeover bid for coal explorer Riversdale Mining, a company linked to the late Ken Talbot. Priced at $16 a share – a hefty 24 percent premium to Riversdale’s prevailing share price – the bid was later sweetened by 50c, taking the total acquisition cost to $4.2bn.
When it bought Riversdale, which had two projects in Mozambique’s Moatize Basin, Rio believed it was putting its foot on one of the best undeveloped hard coking coal deposits in the world.
The Mozambique assets were described as a “tier one” resource – cost-competitive, with a lifespan of 50 years-plus – and Rio was targeting production of 25 million tons a year by 2020.
Longer-term Rio believed the Mozambique region would export up to 100 million tons a year.
By last June Rio had announced its first coal shipment from the Benga mine, owned in a 65:35 joint venture with India’s Tata Steel. Stage one of the mine was meant to ship a million tons in its first year and a second stage would lift production to 10 million tons from 2015.
The Zambeze project, still in the early stages, was expected to be as big or bigger, but last March, reports emerged that Rio’s plan to barge coal down the Zambezi River had been rejected.
Rio’s Mozambique production figures now look fantastic. So far it has shipped just 200 000 tons from Benga.
According to Rio, the scale of the problems in Mozambique only became clear recently. Infrastructure constraints, combined with a downward revision to estimates of recoverable coking coal volumes, caused a reassessment of the scale and ramp up schedule of the operations.
In an investor briefing in November, outgoing finance chief Guy Elliott flagged write-downs against Rio’s aluminium assets and was then asked specifically whether the Mozambique coal assets might also be due for revaluation.
Elliott was as clear as mud: “What we said was that it was likely, as far as we can see without having finished the study, that there might, therefore, be an impairment in the area of aluminium. We have not finished that work, neither have we finished it with respect to coal. So I didn’t mention coal as a potential area, I just mentioned aluminium.”
Until Thursday night, investors were unsure. In a note to clients just after the shock announcement, UBS resources analyst Glyn Lawcock said the scale of the $3bn impairment of the Mozambique coal assets “raises questions about the due diligence process and was the primary driver of the need for management accountability”.
Morningstar’s UK equities director Elizabeth Collins was equally forthright: “There’s a lesson here,” she said. “When a company acquires an asset that’s highly sought after by multiple other parties – as both Riversdale Mining and Alcan were – it’s a good leading indicator of shareholder value destruction.
Paddy Manning is a Bloomberg columnist. The views expressed are his own.