By James Regan
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 diligence.
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 coal deal.
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 bought Riversdale.
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.