Hogsback on Rio's latest blooper

WHEN a company makes a series of bad decisions spread over several years, why would you expect it to start making good decisions, which is how Hogsback sees a move by Rio Tinto to try to sell some of its thermal coal mines – into a falling coal market.

Tim Treadgold

Linking Rio Tinto’s past with the present might seem unfair, but it’s not if you see the sequence of events behind a business that has driven itself into a hole, and risks spending its future in the same hole.

The coal-sales decision, which might be understandable if coal prices were at a reasonable level, is appalling, being announced just as Australian coal miners and their Japanese customers square off in their biggest price dispute in a decade.

Who, apart from someone prepared to make a bargain-basement offer, wants to buy any of Rio Tinto’s coal assets at a time when the price of coal is in dispute, and could be heading sharply lower if the customers get their way.

Unfortunately for Rio Tinto shareholders, they are watching their company botch another aspect of its operations, a process that started five years ago with the purchase of the Alcan aluminium business at a sky-high $40 billion, and which has continued with a series of other bloopers.

The list of failed, or failing, deals includes over-paying for the coal assets of Riversdale in Mozambique, messing up its relationship with the government of Mongolia over the Oyu Tolgoi copper mine, and marching blindly into Guinea, one of the world’s most corrupt countries, to secure a slice of the Simandou iron ore prospect.

Now there is a plan to sell coal assets at a time of falling coal prices, which might seem like a minor mistake compared with those earlier blunders, but it is enough to cause critics to wonder whether Rio Tinto actually has a future as an independent business or whether it would be better for everyone if it was merged with another company run by people able to make better decisions.

Much has been written about Alcan, Mozambique, Mongolia and Guinea, four dud deals that left Rio Tinto in the uncomfortable position of being a “one-trick pony” with about 80% of its annual profit coming from a single business unit, iron ore.

When some of its coal assets are sold that unbalanced concentration of profits for a company that likes to call itself a diversified miner will remain.

So, why did Rio Tinto choose the worst possible time to appoint Deutsche Bank as the marketing agent for some of its coal mines with reports indicating that it is seeking to dispose of the Clermont and Blair Athol mines, as well as a sell down of part of the Coal & Allied operation?

The answer could lie in a growing concern within the senior management ranks of Rio Tinto and BHP Billiton that thermal coal has become a marginal business, thanks to the world entering a period of energy glut thanks to rising gas and oil production, and the imposition of punitive carbon taxes in coal mining (and consuming) countries.

BHP Billiton is yet to declare its hand on the future of thermal coal, whereas the man in charge of Rio Tinto, Sam Walsh, seems to have made up his mind. Given his roots in the iron ore division, it should not come as a surprise that he has moved first to sell marginal thermal coal projects.

The two unanswered questions are, what price will Rio Tinto get for the thermal assets it is offering and, whether it might withdraw the mandate issued to Deutsche until the price dispute with Japan is settled.

On price, there is no doubt that any offers will be at the low end of the spectrum. Talk of Rio Tinto getting $3 billion, or more, for marginally profitable mines is fanciful no matter how much coal is left in the ground.

As for a withdrawal of the sale until the Japanese dispute is resolved, well that could be a sensible move given the stand-off that has developed with Australian miners demanding $US102 a tonne and the Japanese offering $94/t for 6700kcal/kg coal.

With the official deadline for a coal-price agreement passing on April 1, everyone in the thermal coal business is in a sort of no-man’s land. Buyers and sellers are retreating before a fresh attempt to settle in mid-April, when it seems likely that for the first time in three years the price will be fixed at less than $100/t.

When you look at the coal-price outlook, and marry that with the decisions Rio Tinto has made over the past five years, you have to wonder whether the company has a future as anything other than an iron ore miner – with its fingers crossed that there isn’t a price collapse in that commodity as well.