SYDNEY Jan 18 As Rio Tinto was
edging closer to gaining majority control of little-known
Mozambique coal explorer Riversdale Mining, the Anglo-Australian
mining giant's chief executive Tom Albanese was convinced the $4
billion move was a sound one.
Less than two years later Albanese's decision to acquire
Riversdale would lead to $3 billion in unforeseen impairments
and cost him his $1.6-million-a-year job.
A key blunder by Albanese and the advance team of geologists
and accountants he dispatched from Rio Tinto's London
headquarters to assess Riversdale's holdings was a belief it
could replicate its Australian formula for mining coal in
Mozambique, according to several people familiar with Rio
Tinto's approach to Riversdale.
But in reality, Mozambique, one of the world's poorest
countries, shares little resemblance to the Australian model and
lacks the infrastructure to support major new mining projects.
Despite a shortage of detailed data on the project provided
to shareholders by Rio Tinto -- little was known beyond a
published reserves figure of 1.7 billion tonnes -- as early as
last January doubts were surfacing over the firm's due
French bank Societe Generale for one started valuing the
assets at 50 percent of the acquisition cost, as did others.
Post impairment the Mozambique assets will have a book value
of around $600 million, noted JP Morgan analyst Lyndon Fagan.
"We already value the asset at $619 million. A near full
write down within 18 months will remind shareholders of Rio's
recent chequered M&A track record," he said.
Rio Tinto sacked Albanese on Thursday after revealing the
Riversdale writedown along with an $11 billion impairment on the
Alcan aluminium group it acquired in 2007.
Rio Tinto declined to give further details on the Mozambique
QUESTIONS OVER DUE DILIGENCE
In early 2011, the type of coal Riversdale chairman Michael
O'Keeffe had unearthed at its Zambezi deposit was in high demand
by steelmakers willing to pay double the previous year's price
to secure supplies after heavy flooding of Australian collieries
slowed the flow of seaborne-traded coal worldwide to a trickle.
Some, including the United Nations, promoted Mozambique as
holding some of the world's richest coal deposits.
China was still seeing rampant growth and rival BHP Billiton
had recently shipped its first metallurgical
coal to Chinese mills, predicting ever-rising demand as the
country's modern-day industrial revolution unfolded.
Metallurgical coal sold for as much as $400 a tonne in 2011
but no more. Today's price is less than half that.
O'Keeffe, who previously ran Glencore's trading office in
Australia and knew a thing or two about coal markets, had long
been polishing Riversdale up for a sale and the stars were
lining up. Riversdale's stock had steadily climbed to A$16.50 a
share from less than A$1 in 2004, coal was the new gold and big
miners were again willing to "buy growth" through acquisitions
after a hiatus imposed by the economic crisis.
By the time Rio Tinto came along under advisement from
Macquarie Bank, other predators were rumoured to be set to
swoop, instilling a sense of urgency.
International Coal Ventures Ltd, a group of Indian state-run
metal companies, hired Citigroup to study a counter bid.
Brazil's Vale and Eurasian Natural Resources Corp
were also mentioned as interested suitors.
Adding to the mix, Indian conglomerate Tata Steel
Riversdale's biggest shareholder, said it was considering Rio
Tinto's offer "in the context of other alternatives" available.
In the end, no one else ever put a dollar on the table and
after lifting its bid to A$16.50 a share from A$15 Albanese
O'Keeffe later said he briefly entertained the idea of
staying on and working for Rio Tinto, but a visit to the
company's austere Brisbane office convinced him otherwise.
O'Keeffe and former Riversdale chief executive Steve Mallyon
have since formed another company looking to exploit coal
reserves in Alaska. Chief Financial Officer Niall Lenahan moved
to Italy after personally being handed a multi-million-dollar
final cheque by O'Keeffe.
Despite Riversdale's best efforts to endear its project to
the Mozambique government by building roads, and schools and
creating jobs -- even treating a spike in cataract cases in
villages near the mine -- Rio Tinto was met with less than open
arms when it came time to build.
A major re-think was underway to make the project viable
due to an unforeseen refusal by the Mozambique government to
allow barging of coal on the Zambezi River.
Equally concerning was the lower-than-expected quality of
the coal reserves Rio Tinto was counting on. This had negative
implications for any justification of alternative investment in
a rail line to ship the coal to port.
"We believe the scale of the writedown raises questions
about the due diligence process and was the primary driver of
the need for management accountability," said Glyn Lawcock a
mining analyst for UBS.