Rio Tinto’s foray into coal in Mozambique was a costly exercise. In 2011 the acquisition of these coal assets cost $US1.4 billion. It cost Rio Tinto’s profit about $US3 billion when it needed to be written down last year. And it cost the then chief executive, Tom Albanese and his head of strategy Doug Ritchie, their jobs.
The announcement on Wednesday that the coal assets would be sold for $US50 million closes the book on one of the company’s most humiliating and reputation-challenging moves.
About a year ago Rio Tinto back-flipped on existing plans to attempt to further develop the troubled assets, having decided that the inability to find an infrastructure solution for the mines and the continued political turmoil in the region made the sale of the mines a more palatable outcome.
Rio had wanted to transport coal by barge along the Zambezi River but the proposal failed to receive formal approvals in March 2012. This was only a year after it acquired the assets, which were part of Riversdale Mining.
Additionally, Rio ultimately admitted that the reserves in the coal mines, which included the Benga coal mine, were less than it had originally thought. In the first half of this year, the mines produced 733,000 tons of coking and thermal coal, according to Rio Tinto Coal's latest quarterly report.
The humiliation was compounded earlier this year when an additional $US470 million was written off the assets, due in part to falling coal prices.
The assets would have been ascribed little or no value in Rio books at June 30.
It has taken 14 months to find a buyer – International Coal Ventures Private Ltd – which is a joint venture mandated by the Indian government to buy offshore coal assets to supply Indian government-run metal and mining entities.
The announcement caps almost 18 months of an intense asset sale process that has been undertaken by the current chief executive, Sam Walsh, whose appointment signalled the start of a new and conservative era for Rio Tinto.
The sale price is even less than the $108 million that had been speculated only a few days ago.
The other leg of Walsh’s brief was to cut a swath through the miner’s cost base, reduce capital expenditure and improve productivity.
He has been credited with having successfully transformed Rio into a leaner and more focused company, which has simultaneously expanded production from its West Australian iron ore assets.
Walsh said he would cut operating costs by $US2 billion in 2013, and bettered this target by achieving cuts of $US2.3 billion. He said he would cut exploration and development costs by $US750 million and again beat this guidance by cutting them by $US1 billion. He said he would pull capital expenditure from more than $US17.5 billion to about $US13 billion, and hit that target.
Earlier this year Walsh said his aim was to get annualised cost-cuts up to $US3 billion by the end of this year, and to pull capital expenditure down to $US11 billion, and to $8 billion in 2015.
His appointment co-incided with the writedown of the Mozambique assets and the even larger $US11 billion that was sliced off the value of Alcan assets – whose acquisition was poorly thought out and even more poorly timed.
Meanwhile, the severe cost-cutting moves and additional production volumes that have been achieved by Rio and BHP have led to expectations that despite soft iron ore and coal prices both companies should report higher underlying profits for the year to June 2014.
