By Stuart Burns
"Another one bites the dust" reads the headline in the Telegraph, as Rio Tinto's (RIO) Tom Alabanese resigns with immediate effect, and other observers make similar arguments that Rio's ex-CEO is just one of several prominent mining company leaders to be nudged out in the last six months. His sudden exit was followed by that of Doug Ritchie, Rio's head of strategy, who had been involved in buying assets that have subsequently been written down and clearly shared the blame for what, in hindsight, were a string of disastrous acquisitions and poor policy decisions.
The straw that broke the camel's back was the announcement, which I'm sure you've all read by now, of a staggering $14 billion write-down of Rio's assets. The losses have come from two principal investments -- one old, one new. The latest followed the purchase in April 2011 of Canadian company Riversdale for A$3.9 billion. Riversdale owned a number of coal assets in Mozambique, but Rio Tinto did not secure the government permits it needed to ferry its coal down the Zambezi River. Instead, Rio has had to use more expensive rail, and getting the right infrastructure in place has proved a major problem.
The bigger issue, however, is simply that the amount of coking coal that it thought it could dig up, is not there. Hence the write-down of a $3.9 billion asset by $3 billion -- what more can you say? Someone clearly didn't do their due diligence. But that's arguably an investment in which Albanese had much less of a role to play had a greater impact on his tenure as CEO.
The group has suffered years of embarrassment over its top-of-the-market purchase of Canadian aluminum company Alcan for $38 billion in 2007 -- just prior to the financial collapse -- and, it must be said, at a time when many were already calling the top of the aluminum market. However, the Alcan story illustrates the malaise of the wider aluminum market – more on this in Part 2.