A razor man for Walsh's Rio

In tapping former BHP Billiton and Transurban CFO, Chris Lynch, to be his number two, Sam Walsh has an experienced cost cutter at his side for Rio Tinto's restructure.

There has been a whiff of panicky on-the-spot decision-making in Rio Tinto’s response to the unexpected and traumatic departure of Tom Albanese in January. In the end, however, it has produced a pretty good outcome.

When Albanese was crushed by the weight of the continuing write-downs of Alcan and the unexpected write-down on the Riversdale Mining coal assets, the Rio board’s succession planning was thrown into disarray. Chief financial officer Guy Elliott had already announced in the middle of last year that he would retire in April so it was confronted with the loss of its two most senior executives.

Rio turned to a trusted veteran and an executive already on its board, Sam Walsh, to fill the vacuum rather than conduct a lengthy search for Albanese’s replacement. Now it’s looked in the same place for Elliott’s successor.

Former Transurban chief executive – and former rival to Marius Kloppers for the chief executive officer role at BHP Billiton that Kloppers won – Chris Lynch was today appointed Rio’s new chief financial officer. Lynch has been on the Rio board since September 2011.

Lynch could just as easily have been chosen as Rio’s chief executive (he’s some years younger than the 63-year-old Walsh) and no-one in the market would have been surprised if he had. The pairing of Walsh and Lynch, however, is near-perfect for the position Rio finds itself and for the times.

Apart from his experience in the resources sector – he was BHP’s chief financial officer when he resigned after losing out to Kloppers and has had senior executive roles at Alcoa, which could be useful as Rio continues to struggle to make the Alcan assets work – Lynch demonstrated at Transurban that he is obsessive about costs and very focused on capital and risk.

Lynch, who joined Transurban just as the financial crisis developed, effectively created a new model for the listed infrastructure and property sector by dramatically reducing the leverage in Transurban and bringing its payouts more closely into line with its cash flows.

The pairing of Walsh and Lynch means Rio has two very experienced and tough-minded executives at the helm at a moment in its history where Walsh has already flagged a brutal assault on costs and a far stronger focus on the productivity and deployment of its capital. Lynch’s CV says he will be perfect in that role.

For Rio, getting its costs down and reducing the capital intensity of its business has some urgency attached, given that the ratings agencies have expressed some concern about its financial stability.

There is also a competitive dimension with BHP under its new chief executive, Andrew Mackenzie, vowing to pursue a very similar approach to lower the inflated cost base that is the legacy of the commodity price bubble and to impose more discipline on its capital allocation.

The two old hands at Rio, unlike Mackenzie at BHP (who had been groomed, with others, for the job over the past five years) have emerged from a very unconventional and somewhat ad hoc succession process. All is, however, well that ends well. The market will like the Lynch appointment.

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