Doing the rounds with Rio Tinto’s 2005 interim results, then CEO Leigh Clifford told Bloomberg: ‘In the current market we don’t want to lose our head’. The same day he told CNBC News: ‘I think we’ve got to keep our feet on the ground; it’s a cyclical business; it’s pretty heady prices at the moment; and some people will make some imprudent investments. And we want to be around and have a strong balance sheet to take advantage of opportunities that might arise.’
Little more than a year later, in December 2006, Rio announced that Clifford would ‘stand down’ in April the following year and Tom Albanese would take the reins as CEO. Reading between the lines, Clifford was sacked for his conservative, contrarian approach.
The board now has a lot to answer for. The new CEO did exactly what they wanted him to do and threw Rio’s lot on the stronger for longer bandwagon. Just a few months after Albanese took the reigns, Rio paid US$38bn, funded entirely with debt, for Canadian aluminium producer Alcan.
Now that BHP Billiton has walked away from its proposed takeover of Rio, the stupidity of that deal is in the limelight for all to see. Aluminium prices have plunged and producers are no longer such hot property – the share price of ASX-listed aluminium producer Alumina has fallen by 80%. And Rio is saddled with a huge pile of debt in the midst of the worst credit crisis since the great depression.
The knives will predictably come out for Albanese. But it’s hardly his fault. The board appointed him to do a job and he did it. Chairman Paul Skinner and his team need to accept a large share of the blame, but even they were undoubtedly acting under significant pressure from shareholders. Sick of the company’s conservative approach in a raging commodities boom, institutional shareholders were pushing hard for a change of strategy.
They’ve only got themselves to blame for the company’s current predicament.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.