After the shock, ore brings relief to Rio
Being the chief executive of one of the largest and most eminent global miners should be a dream job, especially in a boom.
For Rio Tinto's former boss Tom Albanese, it has been a nightmare - of his own making.
His departure and the appointment of former iron ore boss Sam Walsh as his replacement points to two important conclusions.
The first is that Rio's strategy of being a global, diversified mining house is dead: Rio is now a plain-vanilla iron ore play.
The second is that this may be the trigger for far better times.
Albanese finally wore the blame for perhaps the worst takeover in Australian corporate history - the $US38-billion acquisition of Alcan, $US30 billion of which has now been written off.
But the real kicker was $US3 billion written off Rio's relatively recent buy of Riversdale Mining.
The elevation of company veteran Walsh is a tacit admission of defeat.
Coal expansions will probably be canned and Rio is already looking to sell its irreparable aluminium assets.
Iron ore prices have surged this year but we expect them to remain between $70 and $100 a tonne over time.
As the industry's lowest-cost producer, Rio will still generate splendid rates of return and lower prices may prevent competitors from expanding, further strengthening the dominance of the big three producers: Rio, BHP Billiton and Vale. Despite the writeoffs, Rio remains in good health.
Were it not for the Chinese demand for iron ore during the past decade, the company might not have survived.
Then again, without the iron ore profits, it probably couldn't have made the Alcan purchase.
For long-term investors, these are promising signs.
The board has acted at last - though it's disgraceful that it signed off on the Alcan deal in the first place - and conservative, careful language has replaced the testosterone-infused announcements of old.
The former Rio Tinto, the cautious contrarian of the industry, is being rebuilt.
There are still improvements to make: costs must be cut, technology initiatives need to be implemented and a coda for the aluminium drama scripted. But new management is capable of this and more.
This article contains general investment advice only (under AFSL 282288). Nathan Bell is the research director at Intelligent Investor, www.intelligentinvestor.com.au.
Frequently Asked Questions about this Article…
Tom Albanese stepped down after costly mistakes including the US$38 billion Alcan acquisition (largely written off) and a US$3 billion write-off from the Riversdale buy. For investors, his departure signalled a shift away from aggressive diversification toward a more focused, conservative strategy under new leadership.
Sam Walsh, a long-time Rio veteran and former iron ore boss, was appointed to replace Albanese. His elevation signals a clear return to Rio Tinto's core strength in iron ore, with likely cuts to non-core coal and aluminium plans and a focus on protecting returns for shareholders.
The Alcan acquisition resulted in about US$30 billion being written off and the Riversdale purchase led to a roughly US$3 billion write-off. Despite these losses, the article notes Rio remains in good health thanks largely to past iron ore profits.
By refocusing on iron ore—where Rio is one of the industry's lowest-cost producers—the company should continue to generate strong returns. The article suggests this disciplined approach and cost control could mean better times ahead for long-term investors.
The article expects iron ore prices to settle between US$70 and US$100 a tonne over time. Stable, mid-range iron ore prices matter because they still support high returns for low-cost producers like Rio, and can discourage costly expansion by smaller competitors.
Yes. The article suggests coal expansion plans will probably be cancelled and Rio is already looking to sell its aluminium assets as part of a strategy to simplify the business and focus on core iron ore operations.
The article argues the industry dominance of the 'big three'—Rio, BHP Billiton and Vale—should be reinforced. As a low-cost iron ore producer, Rio is well positioned alongside these peers to maintain strong market share even if prices moderate.
The article highlights three priorities: cut costs, implement technology initiatives, and resolve the aluminium issues. New management is portrayed as capable of delivering these improvements, which should strengthen Rio's long-term performance for investors.
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