--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Jan 18 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
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
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
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
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
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.
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
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
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
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.
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