MARTIN COLLINS: John Durie | December 12, 2008 Article from: The Australian
BHP's disastrous $3.2billion Magma copper purchase eventually cost its chairman and chief executive their jobs but Rio's Paul Skinner and Tom Albanese are yet to even acknowledge that their $US38 billion ($57.5 billion) Alcan purchase is an issue.
BHP's Jerry Ellis and John Prescott eventually gave way to Don Argus and Paul Anderson and, while their departure was arguably due to a culmination of events, Magma took the blame.
The fault in both cases was misjudging the commodities cycle but, in Rio's case, this was compounded by an apparent desire to use the deal to defend the empire.
Skinner has, somewhat extraordinarily, deigned to stay until the end of next year; he hopes to then take the helm at BP, but surely his board comrades at Rio should push him out the door sooner rather than later?
The global recession will test corporate governance standards, and there is a risk that some executives will be chopped to sate shareholder demands when arguably the non-executive directors should be taking the fall.
So far, Albanese and Skinner seem to have dodged a bullet, but the rally in Rio's stock price is clearly unsustainable and due more to technical than fundamental value reasons.
There was relief that there will be no equity raising, for the moment at least, and there was relief that Albanese was given the benefit of the doubt that he might not be able to achieve the planned cuts.
They are a forgiving bunch in London and, along the way, the arbitrage in prices between Britain and Australia has closed considerably.
But the price moves certainly should not be taken as vindication of the board's arrogant refusal to take responsibility for its actions.
Alcan was one issue but then there was the rejection of any thought of actually engaging BHP in negotiations which, as things have turned out, would have protected Rio's shareholders.
The anger in Australia, it must be said, is greater than it is in London for obvious parochial reasons, but the point remains.
The global economy is heading south in a hurry and Rio will fall with it.
South Korea yesterday chopped 1 per cent from its official interest rate to 3 per cent, the lowest in its history.
US three-month bills opened last night at 0.2 per cent, their lowest since 1929, which, from memory, was before the Great Depression.
The spread between US and Australian rates are at historic highs but one real danger is the lack of confidence implied by the fact that you can get three-month money for nothing.
The US 10-year bond is yielding 2.67 per cent.
Some say the US banking industry will have to shed another $US2 trillion in debt before it gets back intoorder but the reality, of course, is no one really knows yet.
China is falling quicker than expected with obvious implications for the resources industry and, in particular, the Australian economy. Yet Rio's stock price bounced more than 7 per cent yesterday to trade around $40.17 -- and this was below the high for the day of $41.69 a share.
This was reputedly because of Tom Albanese's plans to cut debt, but he was the guy who acquired the debt in the first place.
Explaining one-day movements in the stock market in the present climate is an impossible task and, as one veteran broker confided yesterday, "Wood ducks John, there are lot of Wood ducks out there".
Assuming he gets to hang around, Albanese has to start looking like he knows what he is doing, which, on past performance, will take some trying, but some figure he is up to it.
Step one is to go cap in hand to Marius Kloppers and ask him to buy Rio's 30 per cent stake in Chilean copper mine Escondida.
BHP owns 57 per cent of the mine and is probably the only mining company in the world that could write out a cheque for a few billion dollars right now. Without knowing fully any complexities of such a deal, it would solve some issues fast.
Now, from Rio's perspective, the deal would sink because, while it has always been a good cost cutter, Rio has always kept its growth options alive. This time around, thanks to Skinner et al, growth options have to be put on hold while the company tries to save itself.
Next there is the infamous Alcan, the aluminium company which has caused all the problems.
Alcan is not nearly as bad as some make out and comes with cheap long-term energy, which makes it a highly attractive asset in good times.
Maybe Albanese should take control of the asset by suggesting present boss and board member Dick Evans might like to step aside.
After all, if you are going to keep the business, then better look like you are running it.
The Rio statement was full of big numbers, big job cuts which were inflated by using contractors who would never be considered part of the team in any case.
The time for the public relations spin is gone. It is time for Rio's top brass to be accountable for their own snafus.
While they are doing this the Rio cutbacks are just another part of the jigsaw which spells prolonged downturn.
RIO Price at posting:
$31.55 Sentiment: None Disclosure: Not Held
(20min delay)