Rio Tinto pays a steep price for Alcan purchase

London-based mining giant Rio Tinto (RIO-N, RIO-L, RIO-A) is haunted by the ghosts of past acquisitions, with the largest culprit being its US$38-billion takeover of Montreal-based aluminum major Alcan in 2007.

On Jan. 17, the world’s second-largest mining company announced a US$14-billion writedown, including US$10 billion stemming from its ailing aluminum business, and US$3 billion related to Mozambique coal assets.

“The Rio Tinto board fully acknowledges that a writedown of this scale in relation to the relatively recent Mozambique acquisition is unacceptable,” chairperson Jan du Plessis comments. “We are also deeply disappointed to have to take a further substantial writedown in our aluminium businesses, albeit in an industry that experiences significant adverse changes globally.”

The two men responsible for the suspect acquisitions are both being shown the door. Rio’s chief executive Tom Albanese — who had a hand in the Alcan deal — and energy chief executive Doug Ritchie both stepped down following the announcement. Albanese and Ritchie will stay with Rio through July to help the transition, without receiving lump-sum payments or long-term share awards.

This is the second time Rio has been hit with a major writedown on its aluminum business in the past 12 months. During its 2011 annual report the company outlined a US$8.9-billion impairment charge relating to its troubled Alcan assets, which contributed to a 59% drop in yearly net earnings and prompted Albanese to forfeit his annual bonus.

The problems with the aluminium markets are many. China’s emergence as a major producer has added to supply, and the recent downturn in global industrial economies has contributed to demand shortfalls.

A variety of production variables have also caused problems for integrated aluminum outfits like Rio over the past few years. Converting bauxite to aluminium oxide is energy intensive, and those costs have been on the way up. New technological advances have increased efficiencies and impacted the bottom line on the mining side, as less bauxite has been required to generate similar aluminium outputs.

Though the Alcan acquisition has been more costly, the US$4-billion campaign to acquire Australian coal miner Riversdale Mining and its Mozambique coal assets has been nearly as troublesome. Rio overestimated the quantity of coking coal it could recover from Riversdale’s operations, and failed to achieve government shipping approvals it required to move its product.

Stepping in to fill Rio’s chief executive seat will be iron ore division head Sam Walsh, who joined Rio in 1991 after 20 years in the automotive industry. Walsh was chief executive of Rio’s aluminium business from 2001 to 2004 before heading the company’s iron-ore operations.

“[Sam] is ideally placed to cast a fresh eye over how we address the challenges and opportunities in the business, and derive greater value from it,” Du Plessis says, stressing that Rio’s underlying business and balance sheet remain in good shape. He points to Rio’s iron ore division, which recorded production with 253 million tonnes in 2012 and accounted for 80% of the company’s earnings.

“We are fortunate to have such a capable and highly experienced executive to take over and ensure there will be a rapid and seamless transition,” Du Plessis says.

News of the writedown triggered a drop in Rio shares, which fell as much as 4.5% in London during midday trading. The company later recovered to finish the day down 1.7% on large, 11.8-million share-trade volumes, en route to a £33.99-per-share close.

Rio maintained 1.9 billion shares outstanding at press time, which equates to a US$101-billion market capitalization.