The Rio Tinto headline result was always going to be disfigured by the massive new writedowns in its aluminium and coal operations and its underlying earnings undermined by the steep falls in the prices of most of its major commodities last year.
Thus the headline loss of $US3 billion and the fall in underlying earnings from the $US15.5 billion generated in 2011, when prices were strong, to a still-impressive $US9.3 billion in 2012, wasn’t exactly news.
Far more interesting was the first insight into what Rio’s new chief executive, Sam Walsh – parachuted unexpectedly into the role when former chief Tom Albanese was forced to fall on his sword after Rio’s costly Mozambique coal misadventure – might do differently now that he’s at the helm.
It is already apparent that he’s going to do quite a lot that’s different. Walsh, who previously ran Rio’s core iron ore business – responsible again for about 90 per cent of the group’s earnings – had already outlined a major attack on costs in that business to reverse the cost inflation experienced over recent years.
That program will continue under the new head of iron ore announced with the result, Andrew Harding, who previously had responsibility for copper. Having had its succession planning thrown into disarray when, with finance director Guy Elliott already having announced his retirement, it lost Albanese, Rio now has a clear internal successor to Walsh in place.
Walsh, however, made it clear that an assault on costs – he has reaffirmed the target of achieving $US5 billion of savings by 2014, which he said was equivalent to an annual run-rate of $US3 billion by 2014 – isn’t the only discipline he is going to impose.
Capital expenditure is going to be slashed from the $US17.5 billion spent last year to $US13 billion this year and exploration spending is going to be reduced by $US750 million. He’s also going to pursue ‘’significant’’ cash proceeds from divestments of non-core businesses this year and one suspects his definition of ‘’core’’ might be somewhat narrower than his predecessor’s.
More particularly, the self-described ‘’single-minded’’ Walsh, says Rio will in future invest only in assets that ’’after prudent assessment’’ offered attractive returns that were well above its cost of capital and also superior to returning cash to shareholders. It will only allocate capital in future to its highest-returning projects.
He would strengthen the existing management systems and bring greater rigour to internal challenge and debate, more clarity and accountability to its decision-making and clearer lines of sight to critical business issues within the company.
Walsh didn’t need to refer to Alcan or Riversdale but from his comments it would appear that he is determined to ensure that he responds aggressively to the severe shortcomings in Rio’s processes that were revealed by the complete failure of its assessment of Riversdale’s resource and the logistics of exploiting it.
He did say in the media conference there had been ‘’poor judgement’’ that led to the impairments and that it was his view and the board’s that this was "unacceptable". He said there had been a lot of soul-searching within the board over the latest writedown of Alcan and the Riversdale mistakes, which are now being subjected to an intensive post-mortem.
It would appear Rio – which had appeared to be in expansionary mode again after Albanese regained confidence as the company put some distance between itself and the near-disaster of the post-Alcan financial crisis period – is retreating to a far more conservative and introspective stance.
Walsh, currently with a three-year term, is signalling a tough-minded approach to changing the culture and disciplines of the organisation, introducing real accountability and prioritising shareholder value. After a 30 per cent increase in dividend last year Rio, despite the headline loss, has increased it another 15 per cent this year.
The result itself was, in the circumstances, a reasonable one given that the falls in price alone stripped $US5.3 billion from its 2011 earnings base. Lower volumes in some product groups accounted for nearly another $US1 billion, although increased volumes in others added $US634 million, and cost inflation amounted to $US270 million.
It did, however, highlight Rio’s continuing and near-total dependence on iron ore, which contributed $US9.24 billion of the product group earnings of $US10.2 billion. That was roughly $US4 billion less than in 2011, with volume gains unable to compensate for the big declines in price. Average prices were 24 per cent lower.
Copper, which contributed $US1 billion ($US1.9 billion previously) on the back of a 10 per cent decline in the price was the only other meaningful contributor. Aluminium, which made $US442 million in 2011, essentially made no contribution and, indeed, at an operational level lost $US57 million.
While Walsh said Rio was working hard to improve aluminium, and believes he can transfer some of the disciplines and approaches of the iron business to the rest of the group, there are structural issued in the aluminium industry that make it difficult to see how Rio can significantly improve the division's performance to the point where it is a material contributor in the context of the overall group.