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5 September 2020

9:00 AM

5 September 2020

9:00 AM

London rules the roost at Rio Tinto

If push came to shove between Australia and China, don’t expect Australia’s biggest iron ore miner to stand with you on the ramparts. Rio Tinto’s self-interest does not necessarily match Australia’s. Rio, which has just reported a buoyant profit and increased dividend despite the economic devastation of Covid-19 (mainly by selling Australian iron ore to China) is not really an Australian company. Despite its description as an ‘Anglo-Australian miner’, and in the face of undertakings to Prime Minister Keating 24 years ago to maintain its Australian identity after the merger of Britain’s Rio Tinto with Australia’s CRA, its headquarters are now in London, only a quarter of its board is made up of Australians, Australia provides the great bulk of its profit, but only a fraction of its ownership and Rio’s biggest shareholder by far at 14 per cent is the Chinese-government-owned Chinalco (The Aluminium Corporation of China).

And now Rio has decided to take a role in potentially undermining Australia’s (and Brazil’s) highly profitable dominant position in the world’s quality iron ore trade. Last month on this page I warned about China’s determination to develop alternative sources of supply in Africa – and not only of iron ore. As the Australian reported last month, Rio’s London-based CEO Jean-Sébastien Jacques has confirmed his discussions with Chinese steel giant Baowu, noting that Rio has been working with its Chinese partners to determine the costs of developing their half-share of Guinea’s massive Simandou deposit, with its two billion tons of high-grade iron ore. As Nick Evans has pointed out in the Australian, Baowu would be a familiar partner for Rio having a long-established joint venture in the Rio-operated Eastern Ranges iron ore mine in the Pilbara which they plan to duplicate nearby. The Simandou stirrings are in line with Chinese media speculation that Baowu is set to lead a syndicate of Chinese state-owned companies keen to buy out Rio’s 40 per cent partner in its half of the deposit, Rio’s biggest shareholder, Chinalco, and to proceed with the development in partnership with Rio. Despite widespread local assurances that nothing is likely to destroy the Pilbara’s dominance any time soon, there are suggestions that the deposit, with its $20 billion price tag, ‘has the potential to open up a vast new high-grade ore province in Africa, potentially relegating the Pilbara down the pecking order of China’s preferred suppliers’.

With Rio’s corporate reputation once again on the nose in Australia, it may be in no rush to be seen to be undermining the Australia’s iron ore dominance. But Jacques has told Bloomberg news that ‘Simandou will be developed, with or without Rio Tinto. There is a huge incentive for the Chinese to make it happen now.’ This is not simply to blood Australia’s nose in any trade dispute, but also in the expectation that Simandou could dampen iron ore prices for the world’s biggest importer.

Doing business in Africa has serious sovereign risks (as some former Rio senior executives have discovered when charged with fraud) but China may be in a favoured position in Guinea. Three years ago, Beijing lent President Condé’s administration $US20 billion over almost 20 years in exchange for bauxite concessions. Commentators acknowledge that the size of the challenge in developing the rich ore under a jungle-covered mountain range let alone the financial burden of building a 650 km railway is diminished by the prospect of Chinese money.

The media has deservedly been giving Rio a rough time, with the Australian Financial Review leading the charge with recent headlines like ‘Rio Tinto’s global calamity careers on like an unstoppable train’ – Rio’s ‘wanton obliteration of the 46,000-year-old Juukan Gorge cave over the protests of their traditional owners has revealed its deep dysfunction and organisational malaise’. In what has the unfortunate appearance of colonialist arrogance, London’s response to this PR disaster has resulted in the CEO and top executives suffering substantial pay cuts (described by most critics as inadequate). The SMH claimed last week that Jacques, as Rio Tinto’s chief executive, oversaw the dismantling of internal controls that former insiders say would have stopped the miner from blasting the gorge. And on 27 July the AFR reported an insider’s ‘serious misgivings about unethical behaviour’ to the company’s board of directors in November 2019, even claiming the elimination of leadership rivals had been ‘orchestrated’.

Another on the anti-Rio campaign wrote ‘Having a bunch of non-Australian white fellas running Rio Tinto out of London while the Chinese Communist Party is the major shareholder is unacceptable’. That shareholding was engineered by then CEO Tom Albanese as a means of blocking BHP’s unsuccessful 2009 takeover bid for Rio. Although this shareholding is by far the biggest in a share register dominated by disparate institutional investors, Rio directors are happy to certify that ‘Rio Tinto is not directly or indirectly owned or controlled by another corporation or by any other government or natural person.’

Whatever the cause, the revolving door at the Rio Tinto boardroom means that only three of the 12 directors have been there longer than three years, two of these being Australia’s long-serving (and distinguished) Michael L’Estrange and Dr Megan Clark who have seen a succession of overseas directors and top management departing, many for reasons that did not enhance Rio’s reputation. Only one of the nine non-Australian directors, British chairman 61-year-old Simon Thompson, has been there for longer than three years. The CEO is French, the CFO is Danish.

Chairmen, CEOs and board members have come and suddenly departed; senior executives have ended up in the clink. Two years ago, Rio Tinto’s head of iron ore business in China, Stern Huw was released after spending nearly nine years in prison in Shanghai, following a 2010 conviction for corruption and industrial espionage. In 2017, the US Securities and Exchange Commission (SEC) charged former CEO Tom Albanese, who resigned from Rio Tinto in 2013 at the request of the board, and CFO Guy Elliott, with fraud over their involvement in an African scandal. Whatever the legal outcomes, the unpleasant aura hangs around what is a British, not Australian, company.

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