22/01/2013 - 09:58

Analysis: Bigger woes for international miners

22/01/2013 - 09:58


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Until now the skills shortage which has dogged the resources sector has been all about a lack of tradesmen and technical professionals whereas the Rio Tinto crisis reveals that the real problem is a shortage of skilled managers …. and misplaced managers.

The first part of that observation is obvious because of the dud decisions Rio Tinto made in first buying the Alcan aluminium business, and then compounding the mistake by over-paying for the Riversdale coal business.

The second part of the comment relates to managers trying to straddle the globe, seemingly in the belief that they can work in all 193 countries at the same time, which they obviously cannot without making awful mistakes, destroying shareholder’s funds in the process.

Riversdale, with its prime assets in the east African country of Mozambique, is the best example of management misreading local conditions and apparently misreading local geological data.

It might have been different if Riversdale’s coal had been in Australia where there are no language, legal, or social differences to overcome which, in a way, adds to the call by Gina Rinehart that Rio Tinto shift its head office to Perth.

Rinehart’s suggestion, unfortunately, was politically motivated and had more to do with her anti mining tax crusade than for improving management decision-making inside Rio Tinto, and for that it will not be taken seriously.

If, however, Rinehart had said basing more senior Rio Tinto managers and directors in Perth would improve the business performance of the company then she would have the support of the company’s major shareholders.

Proving that point about a better business performance by making Perth the management centre for both Rio Tinto and its great rival, BHP Billiton, is not easy but can be done by starting with the premise that all companies should have their decision makers close to where they make most of their profits.

In the case of Rio Tinto, which has become the sort of “one-trick” pony much maligned by Leigh Clifford, a former chief executive of the company, 80% of its profits come from WA iron ore, which makes a powerful case for saying that you ought to have your decisions makers alongside the wealth creation.

BHP Billiton also earns a large share of its profits in WA from iron ore, petroleum, nickel and even the sick man of the portfolio, alumina.

Whatever the profit mix, the point is that the conventional argument about directors and top executives being based close to the centres of capital formation (London, New York and Melbourne) is less valid than ever before.

Managers of capital, the people who run investment funds, do not need Rio Tinto or BHP Billiton directors in the same street. They would actually prefer the top people to be at the coal face, literally, ensuring that their money is invested wisely.

Globalisation, and a management belief that it really can move freely around the world, is a theory that is starting to wear thin, and could become an even more serious problem for Rio Tinto than the $3 billion Riversdale write down which cost two senior executives their jobs, and with more to follow.

The problem with spreading a company across the globe is in the same negative category as another Clifford classic about a mining company focussing on the most profitable commodities and “not trying to mine the periodic table” – just as it should not try to operate in all jurisdictions.

In going to Mozambique Rio Tinto failed to take the advice of locals who warned that barging coal down the Zambezi River would not be allowed … and it wasn’t.

In going to Guinea to mine iron ore, Rio Tinto has ignored outside advice that the country is corrupt to the core and just waiting for a chance to expropriate the company’s assets – but only after a few billion dollars of shareholder’s funds are committed.

In going to Mongolia to mine copper, Rio Tinto is encountering a far worse “tax” problem than it has in Australia because the government of that country is demanding a bigger direct ownership share of the Oyu Tolgoi mine without paying a cent for the privilege.

For the new man in charge at Rio Tinto, Sam Walsh, there will be conflicting pressures as he packs for London.

On the one hand, he will have a chance to stabilise a troubled ship.

On the other hand he probably already knows that London is not the best place to run a mining business that has its most important assets in Australia and Canada – and its problems in Africa and Asia.

Shifting Rio Tinto’s head office to Perth would mean keeping a much closer eye on the profits, and put him the same time zone as the country which could be the next big problem, Mongolia.


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