Neil Collins

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Rio: We rejoice at a sinner that repenteth

June 5, 2009

(Refiles on October 19, 2010 to add disclaimer for author’s personal investment. Neil Collins is a Rio Tinto shareholder.)

“The directors of Rio Tinto believe that attracting, developing and retaining a skilled and engaged workforce is critical to business performance”. Thus Jan du Plessis in his long, rambling chairman’s statement to Rio shareholders today asking them for a spare $15 billion to dig them out of the hole their directors have dug for them.

This admirable approach might start at the top, among his colleagues who had seemed determined to ignore the most sensible course of action. It’s a measure of investors’ relief that the request for the biggest non-financial rights issue London has ever seen, coupled with a suspension of dividend payments, was greeted with a 10 per cent jump in the share price.

Every chief executive makes mistakes, but Tom Albanese’s list is getting uncomfortably long. Rio’s woes started with the acquisition of Alcan, funded with short-term debt and at a price which assumed that the price of aluminium was going to the moon.

On its own, that would have been a poor judgment, but when rival BHP Billiton launched a bid to create the world’s dominant supplier of base metals, Rio’s board appeared to go into a collective funk, seemingly incapable of considering anything else.

The fact that the then chairman, Paul Skinner, was being lined up to take the chair at BP caused further distraction. Then late last year, the metals boom ended and the BHP bid ran into the sand. By February 2009 the first instalment of the Alcan debt repayment, due this October, suddenly looked uncomfortably close. With the capital markets virtually closed to new borrowers, the awful possibility of default loomed.

Albanese’s answer was a sweetheart deal with an arm of the Chinese state, his biggest customer. An issue of convertible loan stock, big minority stakes in Rio’s best mines and two seats on the board would have left Chinalco just one step short of effective control.

This was a devastating error of judgment. Worse yet, it looked that way at the time, not only to outside observers, but also to Jim Leng, the highly-rated chosen successor to Skinner. He looked at the terms, and turned down the job offer.

It went instead to du Plessis, the chairman of BAT, who took on the hopeless task of selling the deal to the shareholders with unnecessary gusto. As it fell apart this week, he is now tainted with advocating something that has looked worse value with every passing week.

Rio remains a well-regarded business with impressive long-term prospects. The joint venture with BHP to exploit the Pilbara iron ore reserves in the Australian desert captures many of the gains which drove BHP to bid in the first place.

The shareholders will find the $15 billion Rio wants, but the price should include an acknowledgement that the board does not have people at the top of the calibre that du Plessis says he wants in the mines themselves.

Neil Collins is a Rio Tinto plc shareholder