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New Rio Tinto CEO unveils strategy

Feb 14 2013 20:18 Reuters

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Melbourne/London - Rio Tinto's new chief said he would slash costs, sell weak assets and spend more carefully after the company reported a $3bn full-year loss, its first ever.

Chief executive Sam Walsh, the group's former iron ore boss, was appointed last month after his predecessor was sacked for misjudged deals in aluminium and Mozambican coal 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.

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 the auto and mining industries, is one of a new generation of mining bosses committed to reversing past excesses. 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, 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 the end of 2014, two-thirds of that from aluminium and energy units which have seen much of the rise in costs. Efforts will include a salary freeze for its energy arm and cutting back city-centre offices.

Walsh said he would also review all the group's projects - including the troublesome Mozambique coal operations bought in 2011, which he said were not currently on the disposal list.

Fighting words

While head of of Rio's iron ore unit, the 63-year-old 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.

"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," said Mark Taylor, senior resources analyst at Morningstar.

There is no shortage of challenges ahead for Walsh, including decisions on Rio's Pacific Aluminium and diamonds units, both stuck on the auction block for over a year, and on driving growth outside its powerhouse iron ore arm, 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.

Walsh also faces a test to his diplomatic skills in Mongolia, home to the group's Oyu Tolgoi copper-gold mine. Walsh said the Mongolian government had indicated a wish to review a key 2009 investment agreement, as it comes under pressure to increase the country's share of mining 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 is also pushing ahead with its Simandou iron ore project in Guinea, where it is awaiting government decisions on a framework agreement and on financing for the country's share of infrastructure linked to the mine. Walsh declined to comment on whether this could delay the first shipment of ore, due in 2015.

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.

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