Regulator flays rogue Rio duo
The US Securities and Exchange Commission outlined a devastating critique of how former Rio Tinto CEO Tom Albanese and chief financial director Guy Elliott misled the company's board.
The US Securities and Exchange Commission (SEC) outlined a devastating critique of how former Rio Tinto CE Tom Albanese and chief financial director Guy Elliott misled the company’s board and its shareholders in a disastrous $3.7bn investment in a Mozambican coal project that had little to no value.
The detailed charges should serve as a warning to other executives disregarding corporate governance. The Financial Times has reported on a probe by the US Federal Bureau of Investigation into the financial dealings by individuals linked to the Gupta family, and their bank accounts and companies in the US. The SEC complaint lodged with a New York court shows the extent to which financial malfeasance will be chased down and prosecuted.
Albanese, until recently Vedanta CE, touted the 2011 purchase of the Moatize coal assets from Australia’s Riversdale as a new frontier for hard coking coal and one that would more than double Rio’s exposure to the coal, which fetched a far higher price than thermal coal.
The hype around Rio’s entrance into a rare and what was then thought to be sizeable coking coal deposit was convincing enough to make other large companies look for coal investments in Mozambique.
Cynthia Carroll, then Anglo American CE, followed closely behind Rio, saying in July 2012 Anglo wanted to invest $555m to buy a 58.9% interest in the Revuboè metallurgical coal project in Mozambique. The project bordered Rio’s interests. Unlike Rio, Anglo had the sense to bin the deal in March 2013, citing conditions that had not been satisfied. At the end of 2015, it closed its Mozambique office.
Rio’s coal purchase was supposed to offset the growing negativity around the greatly impaired $38bn purchase of aluminium producer Alcan, Albanese’s first major deal for Rio, which the SEC said “did not go well”. Albanese and Elliott are alleged by the SEC to have gone out of their way to misrepresent the true extent of the rapidly diminished value of their Mozambican investment, failing to disclose information to which they were privy to the board, auditors and those assessing assets for impairment.
This failure to impair the coal assets meant Rio was able to raise $5.5bn against financial statements that did not reflect the true state of affairs.
They also misrepresented the challenges facing Rio in transporting coal from the mine to a port after the Mozambican government forbade it to barge 30-million tonnes of coal a year down the Zambezi.
The railway could only cope with 2-million tonnes a year of Rio coal, a far cry from the 15-million tonnes to which the company had pegged its valuation of the project along with the barging option. It turned out the quality of the coal was not what Rio had been led to believe.
These factors led to an internal valuation of the asset to be negative $680m.
The project was completely impaired after a Rio employee approached the company’s chairman about the true state of affairs. Albanese was fired and the assets sold for $50m, less than 2% of the purchase price three years earlier.
ALBANESE TOUTED THE 2011 PURCHASE OF THE MOATIZE COAL ASSETS … AS A NEW FRONTIER FOR HARD COKING COAL