October 18, 2017 / 10:28 AM / 2 years ago

Factbox: Excerpts from U.S. SEC fraud filing against Rio Tinto former top executives

(Reuters) - The U.S. Securities and Exchange Commission (SEC) has charged mining company Rio Tinto (RIO.L)(RIO.AX) and two of its former top executives with inflating the value of coal assets in Mozambique and concealing critical information while tapping the market for billions of dollars.

Thomas Albanese, 60, was chief executive of Rio Tinto from May 2007 until January 2013, when he was forced out after the company announced massive impairments.

Guy Robert Elliott, 61, was chief financial officer of Rio Tinto from 2002 to April 2013.

“There is no truth in any of these charges,” Albanese said in a statement following publication of the SEC fraud case.

Christina Mills, a spokeswoman for Elliott, said Elliott would vigorously contest the charges.

Rio Tinto said it would defend itself vigorously against the SEC’s allegations. The company said Britain’s Financial Conduct Authority (FCA) had “made no findings of fraud, or of any systemic or widespread failure by Rio Tinto”.

The FCA also said on Tuesday it had reached a settlement with Rio Tinto under which the company would pay a fine of 27 million pounds ($35.6 million) to settle claims that it breached accounting rules in connection with the Mozambique assets.

Below are extracts from the U.S. filing against Rio Tinto, Albanese and Elliott.

This case concerns a course of deceptive conduct — a fraud — by Rio Tinto, its chief executive officer, Albanese, and its chief financial officer, Elliott (collectively, ‘defendants’) to conceal the rapid and dramatic decline in value of a coal business in Mozambique, Africa, that Rio Tinto acquired for $3.7 billion in April 2011.

This high-profile transaction was Rio Tinto’s second large-scale acquisition under Albanese’s leadership and Rio Tinto had already experienced dramatic setbacks with Albanese’s first large-scale acquisition Alcan Inc. (Less than two years after the acquisition of Alcan, in February 2009, Rio Tinto had announced a $7.9 billion impairment charge to Alcan’s carrying value. Together with three subsequent impairments, this wrote off substantially all of Alcan’s acquisition value).

The Mozambique acquisition was expected to restore the market’s confidence in Albanese’s deal-making acumen, but on-the-ground realities in Mozambique quickly undermined that narrative.

Rio Tinto purchased the Mozambican coal business on the central assumption that it could profitably mine, transport and sell more than 40 million tons of coal per year..... by the end of 2011, Rio Tinto knew that it could transport and sell only about 5 percent of the amount of coal it had originally assumed.

The defendants concealed the nature and extent of these adverse developments from Rio Tinto’s board of directors, audit committee, independent auditors and the market. If disclosed, the developments would have triggered an impairment analysis of RTCM (Rio Tinto Coal Mozambique).

RTCM executives advised Albanese and Elliott that RTCM’s valuation under the best configuration was negative $680 million in May 2012. Yet Rio Tinto continued to carry RTCM on its books at a value of more than $3 billion.

Rio Tinto raised a total of $5.5 billion in U.S. debt offerings that incorporated materially misleading statements and omissions concerning RTCM’s valuation. Of that amount, Rio Tinto raised approximately $3 billion in an offering initiated soon after Albanese and Elliott learned of RTCM’s negative $680 million evaluation.

... From in or about November 2011 until on or about January 17, 2013, defendants engaged in a series of misrepresentations, misleading omissions and deceptive acts to conceal from the market RTCM’s devastating loss in value and their own terrible decision to acquire RTCM for more than $3 billion. (In 2014, Rio Tinto sold RTCM for $50 million, less than 2 percent of the acquisition price.)

(Mozambique was believed to be an emerging coking coal region. Coking coal, used as an ingredient in steel-making, a market dominated by Rio’s rival BHP BLT.L(BHP.AX), is rarer than thermal coal, used in power generation.)

In the course of Rio Tinto’s pre-acquisition due diligence, Rio Tinto’s in-house experts identified a series of significant risks, including risks related to barging, other transport options and coal quantity and quality and they repeatedly described the risks to Albanese and Elliott. However, Albanese and Elliott did not disclose this material information to Rio Tinto’s board of directors.

The government of Mozambique formally rejected Rio Tinto’s barging proposal in December 2011, citing 36 separate grounds for the decision. In a letter signed by eight government ministries, the government summarized its position, stating:

The Zambezi River is part of a series of environmentally sensitive areas and protected by international conventions and holds the largest biodiversity in the country ... This project will bring significant negative impacts to the [environment] and to the population living along the Zambezi.

Reporting by Barbara Lewis in London; Editing by Dale Hudson

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