LONDON -- Rio Tinto Group, the second biggest mining company, will take about $14 billion of writedowns for failed deals in aluminum and coal led by Chief Executive Officer Tom Albanese, who departs after almost six years in charge.
Albanese, 55, is leaving as a result of the $38 billion takeover of Alcan in 2007, a deal that soured as China's emergence as the largest aluminum producer left Western rivals few markets to chase. Rio is writing down 70 percent of the value of Albanese's A$3.9 billion ($4.1 billion) purchase of Mozambique coal producer Riversdale Mining, less than two years after closing it.
The board picked Sam Walsh, 63, head of Rio's iron ore unit, to turn around the London-based company that under Albanese and departing Chief Financial Officer Guy Elliott has written down asset values at its aluminum division by more than $29 billion since 2009. The Alcan takeover saw Rio's debt rise as much as 19-fold and forced it to seek a $19.5 billion deal with Aluminum Corp. of China that Rio later aborted.
"Rio Tinto is a clean-up exercise of some mistakes that were made in the past," Evy Hambro, manager of BlackRock Inc.'s $12 billion World Mining Fund and who counts Rio as his biggest holding, said Thursday in an interview with Bloomberg Television in London. "It's time for this to stop. We need greater capital discipline. We need to see companies much more diligent in their analysis."
BlackRock is Rio's second largest shareholder with a 9.1 percent stake, according to data compiled by Bloomberg.
The mining company's 2 percent notes due 2020 fell 0.8 percent, pushing the yield up 13 basis points to 2.08 percent, for the biggest drop in Bank of America Merrill Lynch's Euro Corporates Index. The cost of insuring Rio Tinto debt jumped in the credit-default swap market, with contracts climbing 8 basis points to 92.5, the highest since Dec. 5.
Walsh will take over as CEO from today, Rio said in a statement. Doug Ritchie, who led the purchase of Riversdale, will also step down as Rio cuts the valuation of the Mozambique coal assets acquired in 2011 by about $3 billion.
"The management change is quite interesting because of Sam Walsh's age," Paul Phillips, a Melbourne-based fund manager with Perennial Growth Management Pty who holds Rio shares, said by phone. "I expect him to be an interim for a couple of years so someone can develop up through the ranks."
Walsh, who heads the unit that generated 78 percent of Rio's net income in 2011, will move to London from Perth in his new role. Under Walsh, iron ore is expanding to churn out 360 million metric tons by 2015 from its mines in Australia's Pilbara region.
"Sam Walsh is well regarded," said Ric Ronge, who helps manage about $1.1 billion in stocks, including Rio and BHP Billiton, at Pengana Global Resources Fund in Melbourne, Australia. "Iron ore is about 80 percent of Rio's earnings, so he's basically in charge of the bulk of the company's earnings power. It makes sense that he would probably be the person to step up if they were looking for an internal appointment."
Walsh has been contracted to be in the role for three years, according to a person familiar with the appointment who asked not to be identified as the details are confidential. Walsh will be paid a base salary of $1.9 million, a 15 percent increase, Rio said today in a statement. His target annual bonus is 120 percent of base salary, Rio said.
"The Rio Tinto board fully acknowledges that a writedown of this scale in relation to the relatively recent Mozambique acquisition is unacceptable," Chairman Jan du Plessis said in the statement. "We are also deeply disappointed to have to take a further substantial writedown in our aluminum businesses, albeit in an industry that continues to experience significant adverse changes globally."
The bulk of the writedown, about $10 billion to $11 billion, is for the carrying values of aluminum assets. Futures for the material in London have declined 8.3 percent in the past year, hurting producers such as United Co. Rusal and Alcoa Inc. The scale of Thursday's writedown has surprised the market, Citigroup analysts wrote in a report.
"The most disappointing element of that is the Riversdale transaction," BlackRock's Hambro said. "This is an acquisition that only happened very recently, so this is a significant mistake by current executives."
Building infrastructure to support the Benga coal mine in Mozambique has been "more challenging than Rio Tinto originally anticipated," the company said. The country has blocked a plan to barge shipments of the fuel along the Zambezi river. Rio remains in talks with the government on all transport options, it said. Estimates of recoverable coking coal have also been cut, Rio said.
Albanese, who became CEO in May 2007, and Ritchie will step down Thursday and remain at the company until July 16. Neither will get a lump-sum payment, or short-term performance bonus for 2012 or 2013, the statement shows. Rio announced in July that CFO Elliott will retire from the role at the end of this year. A replacement has yet to be announced.
"This was the straw that broke the camel's back," Perennial's Phillips said. "I'm surprised Albanese has been there throughout all of this."
Rio Tinto's largest shareholder, Aluminum Corp. of China, which owns about 13 percent, doesn't expect the change of CEO to affect its "strategic relationship" with the mining company, General Manager Xiong Weiping said Thursday at a news conference in Hong Kong.
_ With assistance from Andrew Hobbs in Sydney, Michelle Yun in Hong Kong and John Viljoen in London.