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Rio Tinto in US$14bn write-down


CEO steps down, but analyst says aluminium write-down a ‘non-event’

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Global mining giant Rio Tinto has announced a US$14 billion write-down which is due to be included in its full-year results, scheduled for publication on 14 February.

In wake of the massive write-down, the company’s CEO Tom Albanese, who took office in 2007, has resigned. He has been replaced by Sam Walsh, chief executive of the miner's iron ore business. The revelations came on Thursday in a statement by the company to the London Stock Exchange.

Following the news, Rio Tinto’s shares dipped almost 3 percent at one point in intra-day trading. It said the write-down was related to its aluminium and coal-mining businesses in general and to the company's purchase of Canadian aluminium giant Alcan in particular.

Rio Tinto spent close to US$43 billion in 2007 on buying Alcan shortly before the global financial crisis ensued. The aluminium assets saw a write-down in the range of US$10 billion to US$11 billion. The company’s coal mining assets in Mozambique have also faced a write-down of US$3 billion.

The latter has resulted in the resignation of Doug Ritchie, who led the acquisition of the Mozambique coal assets as head of Rio Tinto's energy division. CEO Albanese stepped down by mutual agreement with the board.

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," he added.

However, Alain William, mining sector analyst at Société Générale, felt the bigger aluminium operations write-down was a ‘non-event’.

“Rather it is the US$3 billion write-down of the Mozambique assets which is a relative disappointment,” he told CFOWorld.

“As Rio Tinto’s aluminium business has been free cash flow negative for the last 18 months, we doubt investors assign much value to it – a view confirmed by our discussions with various market players. Therefore, the write-down is in our view simply an acceptance of what was obvious to most long ago,” the Société Générale analyst added.

By contrast, William felt the US$3 billion write-down of the Mozambique assets was much more serious. The mining company spent over US$4 billion acquiring these assets.

“After it reported infrastructure issues in Mozambique early last year, we started valuing these assets at 50 percent of the acquisition cost. Therefore, a US$3 billion write-down is US$1 billion worse than our current model. We also think the recent fall in coking coal price could be one factor exacerbating the extent of write-down,” he concluded.

At a time when Rio Tinto’s price is down, there could be an opportunity for some, according to William, who has maintained a buy rating on its shares.

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Rio Tinto in US$14bn write-down
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