In 2011, during Rio Tinto’s $US4 billion bid for Riversdale Mining, Tata Steel tried to drum up a competing bid from a coalition of Indian steel, coal and power companies. In the end it sold its 26 per cent stake in Riversdale for $US1.1 billion. Today India Inc bought all the Riversdale assets for a paltry $US50 million.
Riversdale and its coal assets in Mozambique was, of course, the reason Tom Albanese and one of his key lieutenants, Doug Ritchie, lost their jobs last year when Rio announced a $US3 billion writedown of the value of the acquisition. It wrote off another $US470 million of the remaining value earlier this year.
That came after a review of the project established that Rio had underestimated the challenge and costs of the massive infrastructure required for the Zambeze project – at one point regarded as a major new and world-class coking coal province – and that Rio had overestimated the reserves and quality of the recoverable coal in the project.
An initial plan to move the coal by barge down the Zambezi River to a port was rejected by the Mozambique government and the reduced amount and quality of the coal made building rail infrastructure uneconomic.
Given that Riversdale was the first significant acquisition Rio had made after recovering from its Alcan-inspired near-death experience during the financial crisis, those responsible for the decision to acquire it had no option but to fall on their swords.
Now it appears Rio will have to include a further sizeable writedown of the residual value of the Mozambique assets when it reports its half-yearly results next week to reflect the token price International Coal Ventures – a joint venture whose promoter companies include a number of Indian state-owned steel, coal and power entities – has paid.
The original India Inc interest in Riversdale was driven by the relative proximity of Mozambique to India and the rate of growth in India’s demand for coal (which explains the controversial proposal to develop the $16.5 billion Carmichael Coal project in Queensland Galilee Basin). The ICV joint venture was established by the Indian government to acquire coal mines and deposits outside India.
Against the scale of the losses it has experienced on the $US38 billion it paid for Alcan (nearly $US30 billion has been written off) the Riversdale losses weren’t nearly as shocking but did represent a failing of what Rio regarded as one of its core competencies, its ability to assess projects and their risks.
Hence Albanese’s abrupt departure and his replacement by a safe and vastly experienced pair of operational hands in the form of Sam Walsh.
The ultimate outcome -- essentially losing 100 per cent of an investment that was supposed to represent a demonstration that Rio had survived the crisis and the Alcan fallout and had resumed business-as-usual – completely validates that decision.
Rio has two other big “new frontier” projects in its portfolio – the big copper-gold Oyu Tolgoi project in Mongolia, where it is encountering some issues with the Mongolian government, and the giant Simandou iron ore project in Guinea.
At Simandou, regarded as perhaps the world’s best undeveloped iron ore deposit, Rio has sensibly shared some of the risk with China’s Chinalco and separated the $US20 billion or so of infrastructure required from the iron ore project. The rail and port assets will be built and owned by third parties.
Riversdale was supposed to be the third of those big new projects in riskier jurisdictions. Walsh will be hoping/praying that he can resolve Rio’s differences with the Mongolian government and that those third party investors needed to get Simandou to port can be found. Rio doesn’t need any further shocks emerging from its remaining projects in new and riskier jurisdictions.