Walsh takes charge of miner at the right time

Rio Tinto's $US14.4 billion impairment charge is old news, and in an important respect the 40 per cent slide in operating profit in 2012 to $US9.3 billion is, too. The 79 per cent leap in the iron ore price from a low of $US86.70 a tonne on September 5 to around $US155 a tonne today promises much higher earnings this year.

Rio Tinto's $US14.4 billion impairment charge is old news, and in an important respect the 40 per cent slide in operating profit in 2012 to $US9.3 billion is, too. The 79 per cent leap in the iron ore price from a low of $US86.70 a tonne on September 5 to around $US155 a tonne today promises much higher earnings this year.

Tom Albanese lost his job as CEO last month when the write-downs were foreshadowed, and Rio's new chief executive, former iron ore boss Sam Walsh, said the right things when he discussed Rio's result on Thursday evening.

He would bring greater clarity to decision-making, he said, and ensure Rio invested only in assets that offered returns well above its cost of capital, and were superior to returning cash to shareholders.

That, and comments that Rio was aiming at "significant cash proceeds" from asset sales and would balance the use of capital between returns to shareholders and capital expenditure, signal that the group is looking for ways to boost shareholder returns. A 15 per cent increase in the dividend despite the impairment charges was perhaps another.

Rio would not funnel cash back to its investors in volumes that threatened its single A credit rating, and Walsh said that Rio was not dramatically changing course. He also said, however, that Rio would not invest in growth for growth's sake.

Rio's determination to avoid costly mistakes needs to be tested in the field. The group said much the same thing after it realised that its $US38 billion takeover of Alcan in 2007 had been a disaster, and then went out and bought the Mozambique coal business that has separately produced an impairment charge of $US2.9 billion.

We can't know if the iron ore price strength will continue. But every $US1 a tonne extra is worth about $US200 million of revenue that flows cleanly to Rio's earnings. At $US155 a tonne, the recent uplift, if sustained, is worth about $US4.6 billion: Sam Walsh may have taken over at just the right time.

mmaiden@fairfaxmedia.com.au

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