London Calling asks whether Rio Tinto will be lost (or saved?) at seaPublished by MAC on 2009-08-25
Source: Nostromo Research
Barry Sergeant is Mineweb's leading mining and metals' market guru. He regularly produces an invaluable survey of the fortunes of the world's leading mining companies and their rankings, based upon market capitalisations. (That's what investors are prepared to pay for a company's shares at any point in their being traded.)
Last week, Sergeant took an uncharacteristically mordant swipe at Rio Tinto.
His language wasn't sparing: he accused the company of generating "spin" and "slapping a veneer" over its "wrecked body work."
Although Rio has now regained third position in the global hierarchy (based on its market capitalisation) Sergeant ascribes this achievement almost wholly to the company's ascendancy in the seaborne iron ore trade. (What he doesn't add is that, as last month's arrests of Rio's top Chinese negotiators have shown, Rio isn't exactly flavour of the month at the moment in the Peoples' Republic which, after all, is by far the company's chief target of that trade).
Meanwhile, despite a great show of recently getting back on its feet, Rio's recent rights issue actually reduced value to its shareholders rather than increasing it. (The number of shareholders leaped by nearly a third, while the worth of their shareholdings fell).
And - despite some reduction in its overall debt - Rio is still the world's most indebted mining company.
Lost with all hands?
The big hope for the great white whale (elephant?) lies in its joint venture with BHP Billiton. This would see the two companies streak past Vale of Brazil as the leading global seaborne iron ore supplier. Indeed, according to Sergeant, this would make that particular combination the world's most important (highly-capitalised) mining venture after BHP Billiton itself.
Seven months ago, in this column, we asked: "Can Rio get off the rocks?" See:
At that time Rio's favoured, partially life-saving, deal with Chinalco already looked set to capsize. But so too, we suggested, was the alternative of floating a rights issue - one which now seems to have almost spectacularly failed.
We went on to point out that "[w]hether such a strategy will work depends on several factors; including timing of the rights issue, bankers' perceptions of the length and severity of the current 'recession', and just what the company will get rid of next. Rio must clearly demonstrate not only a prudent fiscal strategy, but that it will be left with projects with a viable and competitive future. Confidence in Rio's ability to do precisely that has been severely eroded under the aegis of CEO, Tom Albanese over the past two years."
This prognosis seems to have been pretty much on course.
"The UK-Australian conglomerate is currently a shadow of its former self in broad financial terms", we said. "Rio Tinto is still the world's biggest titanium producer, one of its largest coal producers, and second in the global iron ore hierarchy."
In these sectors "the company is far from ‘squeaky clean' with regard to adverse social impacts. There is still opposition to its Madagascar titanium project and the planned Simandou iron ore mine in Guinea; while its Global Greenhouse Gas contributions from coal don't endear it to an increasingly sensitive and militant climate change lobby."
"Nonetheless", we went on: "[I]t's not unthinkable that a 'Reformed Rio', concentrating on titanium and iron while cutting back on the black stuff, and acknowledging the hazards of nuclear power, would render it not only more viable, but also environmentally and socially responsible."
Okay, that statement was uttered with some tongue in cheek: Rio's legendary hubris won't be dashed simply by exhortation to do the right thing.
However, being forced by cold economic reality to trim its sails may be the only way that an (iron-clad) SS Rio stays afloat. Rather than sink to the bottom as extractive industry's equivalent of the "Mary Celeste."
Readers may recall that this ocean-going vessel was discovered riding the Atlantic in December 1872 with all its goods still on board, yet no trace of the captain or crew.
It's often been called "the greatest maritime mystery of all time."
No such mystery over the circumstances leading to a possible Rio Tinto demise. Here we could ascribe, in almost gory detail, responsibility for what happened - not only on the part of those at the ship's helm, but also those who subscribed for so long to its parlous, ill-fated, voyage.
Source: Barry Sergeant, "Zen and the art of Rio Tinto maintenance", Mineweb, 20 August 2009
[London Calling is published by Nostromo Research. The content of this column does not necessarily reflect the opinion of anyone else, including the editors of the Mines and Communities website. Reproduction is welcomed, so long as all sources are quoted and copyright for the whole is acknowledged as belonging to Nostromo Research]