Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

(Updated )

It would be easy to suppose that the fraud claim against Rio Tinto Group filed by the U.S. Securities and Exchange Commission is ancient history.

The miner's Australian shares closed down 0.8 percent on Wednesday, only a slightly bigger loss than arch-rival BHP Billiton Ltd., which slipped 0.5 percent in the absence of a court case.

That would be a mistake, though. Rio Tinto's scramble for Africa at the peak of the last mining boom may not have been anywhere near as destructive as the one sparked in the 19th century by another ambitious miner, Cecil Rhodes. Still, it carries a stark warning to an industry gearing up for a fresh round of spending as copper bursts through $7,000 a metric ton for the first time since 2014.

Racing to Keep Up
For all the billions spent during the mining boom, the ranking of the world's top three iron ore producers hasn't changed
Source: Bloomberg Intelligence
Note: Fortescue shipped its first ore in 2008.

Looking through the papers filed in a U.S. district court Tuesday, one characteristic stands out: ambition. At the time of the $3.7 billion 2010 takeover of Riversdale Mining Ltd. at the heart of the SEC's complaint, Rio Tinto Chief Executive Officer Tom Albanese had for many years played third fiddle to BHP and Vale SA in producing the raw materials for China's steel boom. 

Vale was and remains the world's biggest producer of iron ore, and BHP of the coking coal used in steelmaking. Rio Tinto coveted a bigger role in each market.

Buying Riversdale's coking coal deposit in the interior of Mozambique "was consistent with RTE's strategy to become the world's third-largest coking coal producer," according to the SEC's paraphrase of a July 2010 memo from Rio Tinto's coal and uranium head. Management's alleged tardiness in writing down the value of the deposit after the takeover forms the core of the SEC's complaint.

On the other side of Africa at more or less the same time, the company's ambitions in iron ore were also leading it into uncharted waters. Email correspondence from 2011 between Albanese and iron-ore executives showed them discussing a $10.5 million payment to Francois de Combret, a friend of the president of Guinea, where Rio Tinto was looking to develop the Simandou iron ore deposit. The company contacted authorities in the U.S., the U.K. and Australia in 2016, after the correspondence came to light.

Rio Tinto's actions in those years have cast a long and baleful shadow. After leaving the company in 2013, Albanese worked for three years as chief executive of Vedanta Resources Plc, leaving that job earlier this year; his Chief Financial Officer Guy Elliott, who like Albanese is a defendant in the SEC's case, remains on the board of Royal Dutch Shell Plc. Walsh has also stayed in retirement since leaving the chief executive role in 2016.

Where did all this lead? The company still produces less iron ore and coking coal than BHP and Vale and it's yet to mine a ton of either commodity from Africa, but investors don't seem to care. Its valuation in price-to-book terms has been the best of the group for more than three years now.

Booking Process
Rio Tinto has been leading its peers in price-book valuation terms over the past three years
Source: Bloomberg

The secret of this success isn't hard to discern. Investors like the new Rio Tinto because it likes investors. It's currently paying the largest lump of dividends out of the group, and cut its payouts the least during the mining sector's cash crunch in 2015 and 2016. That seeming discipline now may well be in part a hangover from the splurge and writedowns during the Albanese era, but it bodes well for the future.

Binge and Purge
Rio Tinto cut its trailing 12-month dividends least in the mining crash, and now pays out the most
Source: Bloomberg

As Bernstein analysts led by Paul Gait argued in a note to clients last week, the discipline imposed by making generous returns to shareholders is the best insurance policy the mining industry has against unwise investments when prices are in an upswing. As Gadfly has argued, executives have a pretty dismal record of staying on the wagon in these matters -- but they have good reason to act differently this time around.

Capital discipline may not turn you into a continent-spanning colossus in the Rhodes model, but it could keep law enforcement from your door.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Updates with closing share prices in second paragraph. An earlier version of this column was corrected to amend data in second chart.)

  1. "RTE" refers to the Rio Tinto Energy Product Group, which covered the company's coal and uranium units.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net