Some shareholders might say ‘about time’.
Rio Tinto Limited’s (ASX: RIO) chief executive, Tom Albanese, has been given the boot from the giant miner, after the company announced US$14 billion of write-downs, although the company announcement says it was ‘by mutual agreement’.
Rio is writing down its aluminium assets by between US$10-$11 billion, and a further US$3 billion related to its Mozambique coal acquisition.
Energy chief, Doug Ritchie has also been shown the door, after he engineered the acquisition of Rio’s Mozambique coal assets .
The impairment of its aluminium assets comes after the company had previously written off US$17.3 billion, after purchasing Canadian aluminium producer Alcan for US$38 billion in 2007. Rio wrote off US$8.4 billion in 2008, and a further US$8.9 billion in 2012. Including the current US$10-$11 billion, Rio has now taken impairments of between US$27-US$28 billion against the US$38 billion purchase.
Now that’s an acquisition that destroys shareholder value.
The company blamed those previous write-downs on difficult economic conditions, but really, the Alcan acquisition was a giant mistake. After the company revealed the 2012 impairment, We questioned how Mr Albanese had managed to hang onto his job. It seems a third write-down was his third strike.
90% of earnings are now estimated to come from iron ore, showing how dependent Rio is on the commodity. Should iron ore prices continue to fall, as they have over the previous week, Rio could see its profits hit materially. The miner’s plan to ramp up production even further to compensate for the falling price, is likely to exacerbate the issue.
Brazilian iron ore giant, Vale, BHP Billiton (ASX: BHP) and Fortescue Metals Group (ASX: FMG) are all pushing ahead with their iron ore expansion plans, as well as Rio. Medium and small miners such as Atlas Iron Limited (ASX: AGO) are also expanding their output.
With massive supplies of iron ore coming on-line, and China likely to reduce its iron ore imports as demand for steel falls, basic economics suggests that the iron ore price can only fall further from here. The writing is on the wall for iron ore miners – Foolish investors take note.
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Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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