Chief executive steps down after two decades with mining giant as value of company assets lost rises to $14bn
Tom Albanese, ousted from Rio Tinto on Thursday after a series of disastrous acquisitions, pocketed almost £22m in cash and share options during his stint leading the mining company, which ended abruptly in the wake of a further $14bn (£8.8bn) writedown.
The company said Albanese, who will not receive his contractual entitlement of an £8m payoff when he leaves the company in July, will be immediately replaced by Sam Walsh, the 63-year-old head of its iron ore division which is Rio’s largest and most profitable business. Doug Ritchie, who led Rio’s acquisition of its Mozambique coal business, also stepped down by “mutual agreement”.
The changes came after the company admitted that the value of its aluminium assets had slumped once again – this time by up to $11bn following an $8.9bn writedown last year. The total rose to $14bn after the company added that its coal assets in Mozambique, which it paid $4bn for in 2011, were now worth just $1bn. It is also expecting smaller writedowns in other businesses totalling around $500m.
Rio’s chairman Jan du Plessis said: “The Rio Tinto board fully acknowledges that a writedown 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 writedown in our aluminium businesses, albeit in an industry that continues to experience significant adverse changes globally.”
The company said a “further deterioration in aluminium market conditions … together with strong currencies in certain regions and high energy and raw material costs” had caused the latest revaluation of its aluminium operations, while in Mozambique it misjudged the ease with which it would gain approval to transport coal by barge on the Zambezi river.
Rio paid $38bn in cash to buy Canada-based aluminium group Alcan in June 2007, shortly before the worst of the global financial crisis hit in 2008 and shortly after Albanese became chief executive. The deal, which left Rio with large debts, led to a $15.2bn rights issue, while the first writedown also prompted Albanese to forgo his 2011 bonus.
One major Rio shareholder, who pressed Albanese to abort the Alcan deal, said: “This is a big writedown. For that to come on the back of the first and wipe out such a large chunk of value is shocking. Hopefully this will be a reminder to the mining industry not to get carried away when the going is good with regards to takeovers and capital expenditure. The industry is littered with examples of deals being done at the top of the market when chief executives’ blood is flowing.”
While Du Plessis paid tribute to the decades-long service of both Albanese and Ritchie, he was keen to point out that the pair would be receiving “no lump sum payment, no annual short-term performance bonus for 2012 or 2013 [and] no long-term share award for 2013”. He added: “Quite frankly the world has changed and I believe very strongly that large corporations are going to have to be more sensitive about societal expectations.”
Albanese and Ritchie will both receive base pay, benefits and pension contributions until they leave in the summer. In total Albanese had already earned almost £11m in salary since being promoted to chief executive in May 2007, while his unexercised share options from the 2003-09 period are his to keep – and are also worth almost £11m.
Furthermore, he leaves with a pension that, at the end of 2011, was calculated to pay out a yearly sum of £476,000, which would cost around £8.5m to buy in the open market.
Shares in Rio lost 18.5p to £34.40 although market watchers said that most investors had already written-down Rio’s assets in their own calculations.
Nic Stanojevic, an analyst at stockbrokers Brewin Dolphin, said: “We think the more important driver for the shares has been the iron ore price which was down 5% overnight.”
What is a writedown?
A writedown, or impairment charge, is an accounting term that means a company no longer believes that the value of certain assets on its balance sheet can be justified. As a result, it will take a hit to its annual profits – though this may not be accompanied by much of a change in the company’s cashflows. Companies often invite investors not to dwell on these “non-cash”, one-off charges, and to focus on “underlying” profit performance.
Writedowns are designed to draw a line under discrete issues facing a business, allowing it to move on. However, they are not always final, and contain a good deal of guesswork. The company may later be forced to make further writedowns; the original writedown can also turn out to have been overly pessimistic.
On one level, writedowns are an accounting technicality. However, they are a clear indication that a company has made poor investment decisions.
The CEO who failed to avert a crisis
Tom Albanese has two degrees in mineral economics from the University of Alaska and is a huge Sudoku fan.
Yet he never quite mastered the puzzle of handling mining investors during almost six years running Rio Tinto.
Albanese was promoted to chief executive just before the Rio’s acquisition of Alcan in 2007 – having joined Rio after it acquired his previous employer, NERCO, in 1993. But while he was not entirely to blame for what turned out to be a total disaster, shareholders recall how their protests to the new boss at the time were waved away.
From there, the company descended into crisis under Albanese and, in a desperate attempt to repair the balance sheet, he went begging to China with the proposal of a $20bn (£12bn) injection from the state-owned Chinalco. Chairman-designate Jim Leng was unimpressed and quit. The shareholders eventually insisted on recapitalising Rio themselves via a $15bn rights issue.
A bounce-back in commodity prices helped restore Albanese’s reputation in the City for a while but the first write-down in the value of Alcan prompted him to waive his 2011 bonus at the beginning of last year.