Dryblower on the mighty mess when geology meets money

IT WILL be cold comfort for departing Rio Tinto chief executive Tom Albanese, but he is not the first to be blamed for a botched deal which, in the case of a coal purchase in Mozambique, throws up eerie similarities to the famous Lady Bountiful sale of 25 years ago.
Dryblower on the mighty mess when geology meets money Dryblower on the mighty mess when geology meets money Dryblower on the mighty mess when geology meets money Dryblower on the mighty mess when geology meets money Dryblower on the mighty mess when geology meets money

 

Tim Treadgold

Western Australia’s Lady Bountiful gold mine was sold in the late 1980s at a high price, thanks to analyst reports that it contained a large amount of gold.

It did not. But it took another 10 years, several court cases, and an embarrassing settlement for Lady Bountiful to finally be buried.

The end has come much faster at Rio Tinto after its troubled acquisition of Riversdale Mining and the promised huge deposits of high-grade coking coal in Mozambique, which seem to have proved as elusive as the gold in Lady Bountiful.

The common thread connecting both cases is the gap between technical analysis and corporate deal-making, with a breakdown either in the accuracy of the technical work, or in the rush by the corporate team to complete a deal without really understanding the geological reports.

Whatever the reasons – probably a combination of technical failure and corporate urgency – the outcome is a disaster costing shareholders a pile of cash, executives their jobs, and technical staff their reputations.

If that is not enough, there’s the grim reality of the whole process being part of a systemic failure that has been endlessly repeated because the mining industry is guilty of failing to understand history, or learn from it.

Before looking at Rio Tinto’s latest crisis, it is worth reflecting on past flops to get a feel of how mining companies can get it horribly wrong, such as the 1998 acquisition of Aberfoyle by Western Metals which failed partly because the cash Western Metals expected to find in Aberfoyle had been pre-committed on a big cut-back at the Gunpowder (Mt Gordon) copper mine in Queensland.

But the doozy of failed transactions – until Rio Tinto found it had bought a coalfield in Mozambique with less coal than promised – was the Lady Bountiful case of 1987 that saw Western Mining Corporation (WMC) sell the mine for the then-handsome sum of $201.25 million to a junior explorer called Consolidated Exploration.

Everyone involved had their geological reports, and ConsEx engaged outside financial experts to provide a document supporting the purchase which, it should be said, was occurring at the height of a resources boom, and just before a crash – sound familiar?

In the rush to complete the deal, very few people seemed to have actually visited Lady Bountiful to inspect the plant and equipment, go underground, or take a close look at the gold-bearing system.

Astonishingly, one of the experts engaged to advise the buyer said later that he had relied largely on the geological reports of WMC, the vendor, because he was too busy to make the trip from Sydney to the mine site.

Court hearings later heard from a former WMC geologist who said he was concerned that the figures being given out about the mine before the sale were misleading as they were higher than the probable reserve estimate.

Rather than being the 60,000 ounce-a-year with the 10-to-15 year mine life that ConsEx expected the gold ran out in five years and the value written down to $50,000, somewhat less than the original $201.25 million purchase price.

Roll forward in time and as you go past other examples of failed geological interpretation and financial engineering you arrive at the latest, Rio Tinto’s analysis of the coal in the Tete region of Mozambique.

When Dryblower first heard of the Rio Tinto’s Mozambique $3 billion coalfield write-down he assumed it was to do with transport problems and the belated discovery of something everyone in Africa knew, you would not be able to barge coal down the Zambezi River.

Not so, it seems. The real issue is that the coal quality assumed when Rio Tinto beat off Brazil’s Vale for control the Benga coalfield was not there, nor were the tonnes.

How could this be? How could Rio Tinto have just discovered that the prime asset in a company acquired in 2011 simply is not there – just as WMC’s gold in the Lady Bountiful mine was not there.

Books will be written about the Riversdale purchase and lawyers will be pouring over the original data used to value the Benga coalfield, and the follow-up drilling which Rio Tinto must have carried out to justify the $4 billion purchase price.

Dryblower’ been around long enough to sense that issues swirling around the Benga coalfield are far from settled with the sacking of Albanese and his deputy, Doug Ritchie, but he will just have to wait to see who said what to whom, and why Rio Tinto’s skilled technical teams agreed on a price which was far in excess of what the asset was actually worth – just like ConsEx and Lady Bountiful.

It’s just a suggestion, but it might be worth watching for the next act in the Benga coalfield deal.

This article first appeared in ILN's sister publication MiningNews.net.

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