Rio’s share price rocked by fraud charges

Written by Justin Ware, edited and authorised by Jonathan Jackson. Published at Oct 20, 2017, in Special Reports

Rio Tinto has featured heavily in this week’s headlines after the Securities and Exchange Commission charged the company and two of its former executives with fraud.

The SEC claims that the company, its former chief executive officer Tom Albanese and former chief financial officer Guy Elliot, withheld key information in regards to its Riversdale Mining acquisition.

According to the US regulator, the accused “sought to hide or delay disclosure of the nature and extent of the adverse developments from Rio Tinto’s Board of Directors, Audit Committee, independent auditors, and investors.”

This is not the first indiscretion under Albanese’s tenure, with the former chief executive disclosing astronomical losses for Rio Tinto at its Alcan project shortly before the alleged fraud began.

Tom Albanese

Tom Albanese resigned in 2013

Albanese bought out aluminium producer Riversdale Mining for US$38.1 billion in 2007, but by 2013 a total of US$25 billion in write-downs had been accrued on the merger, making it one of the worst mining deals of all time.

It’s believed the catastrophic outcome of the Alcan deal was the catalyst for the alleged fraud. The Mozambique Riversdale Mining play, which cost Rio Tinto US$3.9 billion in 2011, was sold for just US$50 million in 2014.

Incorrect evaluations about the quality and quantity of the coal onsite meant that substantial setbacks were experienced at the asset almost immediately.

The mining titan planned to ferry coal from the new site via the nearby Zambezi River, but after the Mozambique government rejected its proposal in December 2011, only five percent of the initial projection could be retrieved.

“Rio Tinto raised $5.5 billion from US investors, approximately $3 billion of which was raised after May 2012, when executives at Rio Tinto Coal Mozambique had already told Albanese and Elliott that the subsidiary was likely worth negative $680 million,” the SEC said.

Former Rio Tinto CFO Guy Elliot

The alleged fraud is reported to have continued until January 2013, when an unnamed executive in the company’s Technology & Innovation Group discovered that Rio Tinto had inflated the coal asset by over 80 per cent.

An internal review triggered Albanese’s resignation in 2013, which led to the company underwriting the assets by more than US$3 billion upon his departure.

“Rio Tinto and its top executives allegedly failed to come clean about an unsuccessful deal that was made under their watch,” SEC co-director Steven Peikin said. “They tried to save their own careers at the expense of investors by hiding the truth.”

When pressed about yesterday’s developments, Albanese responded stating, “There is no truth in any of these charges.”

Rio Tinto also denied any wrongdoing, affirming that it would defend itself against charges.

“Rio Tinto believes that the SEC case is unwarranted and that, when all the facts are considered by the court, or if necessary by a jury, the SEC’s claims will be rejected,” the company said in its statement to the Australian Securities Exchange. Elliot’s spokesperson has denied the allegations and will contest charges.

Andrew Watson, who is the head of class actions at Maurice Blackburn, believes there is ‘potential’ for Rio Tinto to face a class action over the allegations.

Rio Tinto (ASX:RIO) closed 3.5 per cent lower at $69.12 on the back of the news.

This article is General Information and contains only some information about some elements of one or more financial products. It may contain; (1) broker projections and price targets that are only estimates and may not be met, (2) historical data in terms of earnings performance and/or share trading patterns that should not be used as the basis for an investment as they may or may not be replicated. Those considering engaging with any financial product mentioned in this article should always seek independent financial advice from a licensed financial advisor before making any financial decisions.

S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of Maven Capital Pty Ltd (AFSL No. 418504). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

Conflict of Interest Notice

S3 Consortium Pty Ltd does and seeks to do business with companies featured in its articles. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this article. Investors should consider this article as only a single factor in making any investment decision. The publishers of this article also wish to disclose that they may hold this stock in their portfolios and that any decision to purchase this stock should be done so after the purchaser has made their own inquires as to the validity of any information in this article.

Publishers Notice

The information contained in this article is current at the finalised date. The information contained in this article is based on sources reasonably considered to be reliable by S3 Consortium Pty Ltd, and available in the public domain. No “insider information” is ever sourced, disclosed or used by S3 Consortium.

Facebook
Twitter
LinkedIn