Editorial: Code Red For Rio Tinto

Rio Tinto’s debt pangs grew acute during the week ended Dec. 13, the fiftieth trading week of 2008. They were set off this time around by the late November collapse of BHP Billiton’s drawn-out hostile bid, which had allowed Rio Tinto management to put off making tough decisions for the past half year.

• Rio Tinto borrowed US$40 billion to buy Alcan for US$38 billion in cash in the fall of 2007, but by Halloween 2008, the British mining giant’s net debt still stood at a spine-tingling US$38.9 billion.

The company now vows to chop this by US$10 billion by the end of next year. That latter figure doesn’t come out of thin air: an US$8.9-billion portion of the Alcan loan is due on Oct. 22, 2009.

Worldwide, the company will now axe 8,500 contractor jobs and 5,500 employee positions, saving US$1.2 billion annually after US$400 million in severance costs. Mineral exploration will be deferred, and IT and procurement jobs will be outsourced.

Rio Tinto is slashing its planned capex for 2009 from US$9 billion to US$4 billion, of which half will be sustaining capital. The company says that “there will be impacts on projects across the board” and more details will follow in the coming months.

Rio Tinto already raised US$3 billion in early 2008 by selling substantial assets — especially non-core gold ones — but now emphasizes that it’s “expanding the scope of assets targeted for divestment to include significant assets not previously highlighted for sale.” That’s the corporate-speak equivalent of “Hey, I wonder how much we can get for gramma’s wedding ring?”

At least Rio Tinto is getting a break from falling oil prices: each US$1-per-barrel price drop annually adds US$11 million to its bottom line.

• Another giant, German engineering firm Siemens, was humbled as it agreed on Dec. 15 to pay a record US$1.3 billion in fines to U. S. and European authorities for routinely using bribes and slush funds to win public-works projects around the world, beginning in the mid-1990s.

Joseph Persichini Jr., head of the Federal Bureau of Investigation’s Washington office, told a media briefing that Siemens’ actions “were not an anomaly. They were standard operating procedures for corporate executives who viewed bribery as a business strategy.”

While it’s the worst corporate scandal in post-war Germany, you can’t say it’s the worst Siemens has ever admitted to: during the Second World War, the company routinely used forced labour from Nazi concentration camps. In 1998, it announced it was setting up a US$12-million fund to compensate its former slave labourers, following a similar move by Volkswagen.

• In Canada, the mining sector joined the long line of industries cap in hand and looking for some government help it get through the onsetting recession. Federal Minister of Industry Tony Clement hinted the government would be receptive to aiding the mining sector during an interview on CTV’s Question Period, when he stated that the finance minister was consulting widely with industry, and that “other extractive industries are on the table for our budget,” to be presented Jan. 27. Industry associations are asking for tax relief, and other similar measures, rather than a bailout.

One easy way to help out gold miners would be for the government to announce that it will rebuild Canada’s gold reserves, which were almost completely sold off beginning in the 1980s. As of Oct. 31, 2008, Canada’s Department of Finance reports a foreign currency reserve of US$41.4 billion, of which a mere US$80 million (or 0.2%) is gold, based on a gold price of US$731 per oz. That’s about 109,000 oz. gold, compared with U. S. gold reserves of 261 million oz. and Germany’s 110 million oz.

• Indonesia’s parliament has approved a sweeping new mining law that tips the scales of power from the central government and large, foreign producers towards regional governments and smaller-scale miners. The familiar, old contract-of-work (CoW), which has been granted by the central government and is valid for 30 years, will be replaced by a 20-year licence that will be granted typically by a district government.

While the CoW allowed for both exploration and production, miners will now need separate licences for both activities, and the size of exploration licences will be dramatically curtailed. Of far more concern, these new licences can be invalidated by the district government with no warning, and raw ore will no longer be allowed to be exported.

The move puts into further doubt whether Rio Tinto will bother spending US$2 billion to build a nickel mine on Sulawesi Island. The company was unable to secure a CoW there before the new law was passed.

Send your Letters-to-the-Editor and other op-ed submissions to the Editor at: tnm@northernminer.com,

fax: (416) 510-5137, or 12 Concorde Pl., Suite 800, Toronto, ON M3C 4J2.