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Rio CEO vows cost cuts and disposals

Feb 14 2013 14:10 Reuters

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BHP BILLITON PLC [JSE:BIL]

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Melbourne/London - Rio Tinto's new chief signalled he would slash costs, focus on selling weak assets and spend more carefully after the world's no.3 miner reported a $3bn full-year loss, its first ever.

Chief Executive Sam Walsh, the group's former iron ore boss, was anointed last month after his predecessor was sacked for misjudged aluminium and coal acquisitions that led to $14.4bn in writedowns and left the company in the red.

"We can do better and I will improve this great company further," Walsh told reporters, saying he would take a more aggressive approach to selling assets that no longer fitted with the company's goals, and aimed to control a cost base that has soared $2bn per year since 2009.

"I am asking every employee to run the business as if they owned it," Walsh said.

Rio, like rivals across the sector, has come under fire over boom-year investment decisions that have cost investors billions as deals soured and big-ticket projects overran.

Walsh, a veteran of both the auto and mining industries, is one of a new generation of mining bosses seen to be committed to austerity and he took pains to all but rule out any further acquisitions.

Walsh is also under pressure to return more cash to shareholders, in a sector where yields have lagged as miners chased growth.

Eager to woo bruised investors, Rio raised its full-year dividend 15%, more than analysts had forecast.

But the miner dashed hopes it could launch a fresh campaign to buy back shares, telling investors there was no immediate likelihood of such a move, citing its commitment to a single "A" credit rating, planned spending on growth and market conditions.

Rio Tinto, like bigger rival BHP Billiton [JSE:BIL], has a "progressive" dividend policy that calls for it to steadily increase dividends in good times and bad, a policy that analysts say should be scrapped. Rio has excluded that for now.

"The dividend is better and the company is showing a renewed focus on pleasing its shareholders through better capital discipline," said Tim Schroeders, portfolio manager at Pengana Capital. "Managing costs is going to be a challenge, in terms of meeting their prescribed targets."

Rio plans to cut a cumulative $5bn by 2014, two-thirds of that from its aluminium and energy businesses which have seen much of the rise in costs. Efforts will include a salary freeze for its energy arm and cutting back large city-centre offices.

"We will be looking at existing projects with a fresh pair of eyes," Chief Financial Officer Guy Elliott added, pointing to alternatives that include slowing projects - as with some underground work at Rio's costly Argyle diamond mine - bringing in partners or even cancelling some altogether.    

Fighting words

Walsh, 63, was at the helm of Rio's iron ore unit for nine years, during which time he cut costs, secured stakes in high-quality deposits and automated operations with driverless trucks and trains run from a high-tech centre 1,500 km away from the mines. Cost-cutting remains high on his agenda.

"The new CEO Sam Walsh has come out with fighting words," said Mark Taylor, senior resources analyst at Morningstar. "It's really kind of laying down the law and it's a very stoic, serious strategy of focusing on cost-cutting, driving only projects with superior returns from investment capital."

Investors have pointed to challenges ahead for Walsh, which include a decision on Rio's Pacific Aluminium and diamonds businesses, both stuck on the auction block for over a year, and how to drive growth outside its powerhouse iron ore business, which generates nearly all of Rio's profits.

The company is considering selling Pacific Aluminium, with assets in Australia and New Zealand, as a whole or in parts, or floating it, but has yet to make a decision. "I'm not a person that knee-jerk reacts and I'm not ... going to give assets away below their expected value," Walsh said.

The former iron ore boss also faces a potential diplomatic challenge in Mongolia, home to the group's Oyu Tolgoi copper-gold mine, and where he complained of "political signals" questioning a key investment agreement, as the government comes under pressure to increase its share of profits.

"This undermines the partnership we have built and the stability on which a project of this size and scale depends," Walsh said. "It puts at risk future investment.

Rio reported a 47% plunge in half-year underlying profit, its worst since 2009 due to sharp falls in commodity prices, although the result was slightly better than expected.

Underlying profit excluding writedowns fell to $4.15bn for July-December 2012, based on Reuters calculations.

With iron ore prices having nearly doubled from a trough around $87 a tonne last September, the iron ore business is likely to dominate again in the first half of 2013.

Rio's shares touched a one-year high in Australia of A$72.30 ahead of the result. In London, the stock was down 1.8% by 10:44 GMT, underperforming a 0.7% dip in the sector.  

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