17 January 2013

Mozambique: Rio Tinto Writes Down Its Mozambique Assets

Maputo — Logistical problems, and an initial overestimate of coking coal reserves, have led the London-based mining company Rio Tinto to announce that it expects to write down its Mozambique coal assets by around three billion US dollars.

There will be an additional write-down of the company’s aluminium assets in the order of 10-11 billion dollars, and smaller write downs elsewhere of about 500 million dollars.

This leads to what is known as “a non-cash impairment charge” of around 14 billion dollars in Rio Tinto’s 2012 results. An “impaired asset” is defined as one in which its market value falls below its book value, and is not expected to recover.

The write-downs have led to the immediate sacking of the Rio Tinto Chief Executive Officer, Tom Albanese, although a Rio Tinto release puts a positive spin on this, stating that Albanese “has stepped down as chief executive by mutual agreement with the Rio Tinto board”.

The man who was in charge of acquiring the Mozambican assets, the former Rio Tinto Energy Chief Executive, Doug Ritchie, has also “stepped down by mutual agreement”.

The Mozambique coal licences, in the western province of Tete, were initially held by the Australian company Riversdale Mining. Rio Tinto took a controlling interest in Riversdale in April 2011, and then full ownership in June of that year. As a result the Riversdale operations in Tete were renamed Rio Tinto Coal Mozambique Ltd.

The final major purchase was the 26.27 per cent holding that Tata Steel had in Riversdale. Rio Tinto paid Tata 1.06 billion US dollars for those shares.

Riversdale’s main asset was the Benga coal project, in Moatize district, owned jointly with Tata Steel of India. Benga is a gigantic open cast coal mine which began exporting coal last year.

A second asset is the Zambeze Project, which may contain even larger coal reserves than Benga. In 2010 Riversdale signed an agreement with Wuhan Iron and Steel Corporation of China to develop the Zambeze reserves.

At the time of the Riversdale acquisition, Ritchie declared "This is a great outcome for Rio Tinto. The Riversdale acquisition reinforces our strategy of investing in and operating, long-life, cost-competitive mines and businesses with significant growth potential”.

But it now seems that the Riversdale assets were overvalued, and that Rio Tinto underestimated the logistical challenges involved in moving coal from Benga to ports on Mozambique’s Indian Ocean coast. Rio Tinto inherited from Riversdale a plan to move the coal by barge to the mouth of the Zambezi, where it would be transshipped onto larger vessels.

But the Mozambican government vetoed this plan on environmental grounds, which left Rio Tinto with no option but to continue using the Sena railway line to take the coal to the port of Beira. In the near future, the Sena line, and the Beira coal terminal, will be operating at full capacity.

Further options are needed, and Rio Tinto’s main rival, the Brazilian mining giant Vale, is already building a new railway that will cross southern Malawi and join up with Mozambique’s existing northern railway to the port of Nacala. Vale plans a new coal terminal at Nacala-a-Velha.

But Rio Tinto appears to have had no fall-back position, when its plan to use barges failed to win approval. Furthermore, the amount of coking coal that can be recovered from the Benga and Zambeze concessions was overestimated.

The Rio Tinto Thursday release said that the new estimates of recoverable coking coal volumes, plus the logistical constraints “have led to a reassessment of the overall scale and ramp up schedule of Rio Tinto Coal Mozambique, and consequently to the impairment announced today”.

The Rio Tinto chairman, Jan du Plessis, said "The Rio Tinto Board fully acknowledges that a write-down of this scale in relation to the relatively recent Mozambique acquisition is unacceptable. We are also deeply disappointed to have to take a further substantial write-down in our aluminium businesses, albeit in an industry that continues to experience significant adverse changes globally”.

Albanese and Ritchie are not receiving the bonuses that normally go to retiring chief executives. They will receive no lump sum payment, no performance bonus for 2012 or 2013, and no share award for 2013. When they leave the company in July, the release announced “all outstanding entitlements under Rio Tinto's long-term incentive plans will lapse and their outstanding deferred bonus share entitlements earned in previous years will be forfeited”.

However, they have not exactly been plunged into poverty. Their previous share options make sure of that. Thus Albanese, Rio Tinto reveals, “has 525,508 vested but unexercised share options which were granted between 2003 and 2009 at a range of exercise prices. Based on the closing share price on 16 January 2013 of 34.61 pounds, those options are currently valued at 10.7 million pounds sterling”.

The Board appointed Sam Walsh, up until now in charge of Rio Tinto’s iron ore operations as the new CEO. Walsh’s total remuneration will be 7.8 million Australian dollars (8.2 million dollars) a year.

Du Plessis put an optimistic gloss on the write-downs. "Rio Tinto's underlying business and balance sheet remain in good health”, he said, “and we are taking decisive action to improve our competitive position further with an aggressive cost reduction plan”.

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