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 its underlying operating profit in 2012 from $US15.55 billion 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 Rio CEO last month when the write-downs were foreshadowed, and Rio's new chief executive, former iron ore division boss Sam Walsh, said the right things when he discussed Rio's result on Thursday evening.
He would bring greater clarity and accountability to decision-making, he said, and ensure that Rio invested only in assets that offered returns that were well above its cost of capital, and were superior to returning cash to shareholders.
That comment 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, and perhaps at sending more money directly to shareholders. A 15 per cent increase in full-year dividend despite the big impairment charges was perhaps another: the group does not boost the dividend unless it believes it can defend it.
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 new 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 - three-quarters of the purchase price has been written off after the latest $US11 billion aluminium division hit - and then went out and bought the Mozambique coal business that has separately produced an impairment charge of $US2.9 billion.
Walsh knows the iron ore business he ran until last month is surging. Its earnings fell by 31 per cent from $US13.3 billion to $US9.2 billion in 2012 but it still carried the $9.3 billion underlying group profit, and iron prices are now higher.
They averaged $US128 a tonne in 2012, were as low as $86.70 early in September, and finished the year at $145 a tonne. Iron ore is $US155 a tonne now, and has averaged $US151 a tonne in 2013.
We can't know if the iron ore price strength will continue. Demand from China is, as usual, the key. But every $US1 a tonne extra is worth about $US200 million of revenue that flows cleanly to Rio's earnings. At $US155 a tonne, in other words, the uplift if sustained is worth about $US4.6 billion: Sam Walsh may have taken over at just the right time.