October 18, 2017 / 11:35 AM / a year ago

Breakingviews - Mistimed writedowns lesser of mining M&A evils

Global miner Rio Tinto Chief Executive Tom Albanese listens to a question at a news conference in Sydney November 29, 2012. REUTERS-Tim Wimborne

LONDON (Reuters Breakingviews) - Rio Tinto bought a coal mine in Mozambique in 2011 for too much money. U.S. and UK regulators now say it came clean about the real, diminished value of the mine too late. The second type of problem is less likely to recur. Rio has settled one case already and, in any event, the accounting rules for writing down badly priced acquisitions are relatively clear. If only there were similar safeguards against mining bosses getting carried away with deals in the first place.

Tom Albanese, who was the boss of Rio Tinto six years ago, paid $3.7 billion for Riversdale Mining. That was around three-quarters more than the price at which it had been trading in September 2010. Britain’s Financial Conduct Authority said on Oct. 17 that the board felt the premium was justified, even though internal reports had warned that this may not be the case. The problems turned out to be twofold: the mine had less recoverable coal than Rio thought, and its plan to ship the stuff out on barges proved unrealistic. The inevitable writedown came in January 2013.

When to write down the value of a business is subjective, but not entirely so. Accounting rules oblige businesses to look regularly for signs that an asset’s worth may have changed. In Rio’s case, the UK regulator says that those warnings didn’t reach the audit committee. Where the U.S. regulator sees fraud, its British peer sees poor judgement. Regardless, there was a strong incentive at the time to wait and see whether a writedown would be necessary. Albanese had already presided over huge writedowns from the poorly timed acquisition of aluminium miner Alcan.

Albanese and his then-finance director have gone, but the incentive to get carried away with the resources cycle hasn’t. Company bosses, often former miners, usually want to dig more rather than less. Governments in resource-rich frontier markets remain unpredictable. And miners’ debt levels have come down, giving them more firepower. Acquisitions in the mining sector almost doubled in the first half of 2017 compared with a year earlier, consultancy EY says. So yes, mining bosses should follow accounting rules. But the bigger worry is what happens when they follow their natural instincts.


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