Rio’s Iron Man Made CEO After $40 Billion Profit

When Rio Tinto Group decided it had to part with Chief Executive Officer Tom Albanese, the second-largest mining company turned to Sam Walsh, whose iron ore unit has generated almost $40 billion in profit in seven years.

In choosing the 63-year-old Australian grandfather of four, the mining giant picked a leader whose reputation is as a cost-cutter and a steady hand on the tiller. Walsh himself has committed to the role for three years, according to a person familiar with the appointment who asked not to be identified as the details are confidential.

“Sam Walsh is a shorter-term CEO,” Credit Suisse Group AG analysts Paul McTaggart and Michael Shillaker said in a report yesterday. “His job will be to steady the ship, drive out costs and see through the current growth projects.”

The appointment isn’t temporary, a spokeswoman for Rio said today.

Walsh was put in charge yesterday after Albanese quit as Rio said it will take a $14 billion writedown on the value of takeovers the 55-year-old New Jersey native signed off on. Albanese’s predecessor Leigh Clifford resigned in September 2007 at the age of 60 after seven years in the role.

Albanese is the third CEO among the largest London-traded miners to announce their departure within the last five months. Mick Davis of Xstrata Plc said in September he will give way to Ivan Glasenberg six months after Glencore International Plc completes its $36 billion takeover of the coal producer.

Cynthia Carroll

Anglo American Plc announced Cynthia Carroll’s departure in October. Mark Cutifani takes over in April. BHP Billiton Ltd. has started searching for a successor to CEO Marius Kloppers, the Financial Times reported in November.

Walsh will relocate from Perth to London to take the helm of the $107 billion company after overseeing its most profitable division for eight years. In that time, he drove expansions of mines, ports and railways in Australia amid record prices for the steelmaking raw material.

“I think he’ll be there for a year or two,” Paul Gait, a London-based analyst at Sanford C. Bernstein & Co., said in an interview. “The company will continue to look for someone.”

Walsh’s appointment coincides with an industrywide surge in costs and a Chinese-led slowing in consumption of commodities, which has led to rising demands from investors for mining companies to rein in spending and boost returns. Walsh will be paid a base salary of A$1.9 million, a 15 percent increase from his previous role, Rio said yesterday.

Melbourne University

The Melbourne University commerce-degree graduate spent 20 years in the automotive industry in Australia with General Motors Co. and Nissan Motor Co. prior to joining Rio in 1991. Eighteen years later, he was appointed to the Rio board. He’s on the board of Seven West Media Ltd., the Australian television broadcaster controlled by billionaire Kerry Stokes.

Away from the office, Walsh’s passion is the arts. He is chairman of the Perth-based Black Swan State Theatre Company, which Rio sponsors, and on the board of Western Australia’s Chamber of Arts and Culture. He collects antique milk jugs and told a Fairfax Media Ltd. interviewer that he has 350, including one that is 2,000 years old.

As head of Rio’s iron ore unit, Walsh oversaw a more than $24 billion expansion of operations to feed surging steel demand in China, the company’s biggest customer and the world’s largest consumer of the raw material. His time as head of the division coincided with a shift in the way sales to customers were priced as the industry, led by rival BHP Billiton Ltd., moved from annual contracts to shorter periods.

BlackRock’s Hambro

“We’ve known Sam Walsh for a while so this is not a new person that we will be dealing with inside of Rio Tinto,” Evy Hambro, manager of BlackRock Inc.’s $12 billion World Mining Fund, who counts Rio as his biggest holding, said yesterday in an interview with Bloomberg Television in London. “Sam has obviously had the benefit of world-class assets, he’s also had the benefit of a very strong iron ore market for many years.”

Rio has partially completed an expansion at its flagship iron ore assets in Western Australia at a cost of $22 billion, according to Credit Suisse Group AG, that will increase export capacity to 360 million tons a year by 2015. The unit generated $12.8 billion of net income in 2011, 78 percent of profit.

Walsh was in charge of the division when Rio’s head of iron ore in China, Australian Stern Hu, was jailed for 10 years for taking bribes and espionage. Three of his Chinese colleagues were given sentences of as long as 14 years. The incident led to Walsh ordering an independent review of the company’s processes and controls.

Straight Shooter

“He is seen as a straight shooter, but the market will likely adopt a wait-and-see approach to his leadership of this large and diverse business,” Nomura International Plc London-based analysts Sam Catalano and David Radclyffe wrote in a report yesterday. “We do not expect to see any major change in strategy.”

A call on whether to proceed with development of the Simandou iron ore mine in Guinea will be one of the largest spending decisions that will cross Walsh’s desk. Rio, the second-biggest exporter of the raw material, has said Simandou will cost more than $10 billion to build and described it as the world’s largest undeveloped iron ore deposit.

“He’s got a pretty good strong reputation for capital discipline,” Bernstein’s Gait said. “I can see him coming out more publicly or more definitively on projects like Simandou in West Africa than has been the case.”

Walsh may refrain from M&A in the near-term given the failures of the $38 billion Alcan Inc. takeover in 2007 and the A$3.9 billion ($4.1 billion) acquisition of Mozambique-focused coal company Riversdale Mining Ltd. in 2011, which accounted for Albanese, Nomura said.

‘Continuity Candidate’

“He probably is somewhat of a continuity candidate,” Jeff Largey, a mining analyst at Macquarie Group Ltd., said yesterday in an interview with Bloomberg Television. “I wouldn’t really think that someone like him is going to come in and drive a really big shake-up of Rio Tinto or its strategy.”

Since 2008, Rio has sold more than 20 assets with total proceeds of more than $11 billion. A planned disposal of its diamond projects was “well advanced,” while the divestment of 13 aluminum assets had stalled, Chief Financial Officer Guy Elliott said in August. Walsh will also oversee the start of production at the $6 billion Oyu Tolgoi copper and gold mine this year.

Walsh declined to be interviewed yesterday. “I will be working flat out to build an even stronger, more valuable Rio Tinto,” he said in a statement.

Before it's here, it's on the Bloomberg Terminal.