COLUMN-Sacking of Rio boss heralds risk-off management era: Clyde Russell

Thu Jan 17, 2013 9:59pm EST

--Clyde Russell is a Reuters market analyst. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, Jan 18 (Reuters) - The demise of Tom Albanese as Rio Tinto's chief executive probably heralds a new era of conservative management of the world's top mining companies.

Instead of the almost relentless focus on making deals, expanding reserves and output to meet the expected insatiable Chinese and Indian appetite for commodities, the focus will now shift to controlling costs and running existing assets at peak efficiency.

It's a fairly good rule of thumb in recent years that when a mining major makes an acquisition, it's a strong signal that the market for that particularly commodity is about to head into a tailspin.

The big players seem to have timed many of the deals absolutely wrong, and Rio isn't alone in this, with BHP Billiton and Anglo American also having howlers of their own.

In some ways the surprising thing about Albanese's axing, along with Rio's energy boss Doug Ritchie, is that it didn't happen sooner.

While you may have cut Albanese some slack over the 2007, $38-billion purchase of Alcan just as the economics of aluminium was about to be changed by the rise of Chinese producers, the subsequent mess over the failed deal with Chinalco should have sunk him.

Very few chief executives would survive a proposal to sell 20 percent to a Chinese state-controlled company, which was then shot down by angry shareholders who demanded that Rio instead do a rights issue to repair its Alcan-weakened balance sheet.

But Albanese did survive and went on to shell out $4.2 billion in 2011 to buy Mozambique-focused coal miner Riversdale.

MOZAMBIQUE RISKS

While there is no doubt that Mozambique is one of the few large, undeveloped and rich coal areas left worldwide, questions have to be asked about how sensible it was investing in a frontier basin.

Even a cursory look at Mozambique would have revealed enormous infrastructure challenges, with the coal located in Tete province, about 600 km (360 miles) from the coast, linked only by a dilapidated colonial-era railway and rough roads.

Even when the coal gets to Beira, the port is unable to handle large vessels due to draft restrictions.

It's no surprise that Mozambique's ambitious plans to become an exporter of 100 million tonnes of coal a year are still just that: plans.

Mozambique shipped about 4 million tonnes of its own coal last year, and the rehabilitation of the Sena railway line from Tete to Beira should see that rise to about 6 million this year, and double that within five more years.

But Rio is just one the users of the line, meaning that even if it can produce millions of tonnes of coal a year, exporting them is the real challenge.

Other miners in Mozambique, including Brazil's Vale and London-listed Kazakh company ENRC, are looking at building, or rehabilitating other rail lines of around 1,000 km each to Nacala port in the north of the country, but these plans would cost at least $12 billion to realise.

This means that Rio, along with others hoping to exploit Mozambique's resources, face much larger capital costs than they probably anticipated.

The price of coking coal, which is the prize in the Mozambique mines, has also halved since the Riversdale deal, dropping from around $300 at tonne at the start of 2011 to around $150 a tonne currently. However, Rio should have realised that the $300 a tonne price was an unusual peak caused by extensive flooding in Australia's Queensland state, although the company probably didn't think the price could collapse by as much as it has.

This explains why Rio has virtually written off the entire value of its Mozambique operations, but doesn't explain how it got it so wrong in the first place.

INVESTOR DEMANDS

Part of the problem appears to be the pressure placed on chief executives to be seen to be "doing something" to grow their businesses, hence the desire to be dealmakers.

It was this thinking that probably was behind Rio's Alcan and Riversdale purchases, as well as BHP's ill-timed foray into U.S. shale gas and Anglo American's Brazilian iron ore acquisition, which has seen project costs blow out by three times initial expectations.

The short-term nature of stockmarket investors and analysts can probably also take some of the blame for encouraging dealmaking during the commodity boom period, but equally well it's now these same investors that are demanding more conservative approaches from resource companies.

Albanese's replacement is Sam Walsh, head of the company's biggest division, iron ore, and he is viewed as an operations man, not a dealmaker.

It's the same at Anglo American, where mining engineer Mark Cutifani has succeeded Cynthia Carroll and it won't be a surprise to see BHP's Marius Kloppers replaced by an executive more familiar with running mines than takeover battles.

This doesn't mean that the major mining companies will withdraw from the game of acquisitions, it's just that they will likely be considerably more circumspect.

It also means that the high-risk, high-reward developments, such as Mozambique's coal fields, will likely become the preserve of either state-controlled Chinese companies, or Indian ventures desperate enough to take chances in order to secure reserves.

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