The Securities and Exchange yesterday charged Rio Tinto, as well the company’s ex-CFO and former chief executive, with hiding the impairment of a Mozambican coal business, thus enabling the global mining giant to inflate the value of the coal assets it had bought for $3.7 billion. Three years later, it sold the assets for $50 million.

Tugboat Pushing a Heavy BargeFiled in U.S. District Court for the Southern District of New York, the SEC’s complaint contends that Rio Tinto, its former CEO Thomas Albanese, and former CFO Guy Elliott failed to follow accounting standards and company policies to accurately value and record its assets.  

In related news, Royal Dutch Shell reported in an SEC filing on Wednesday that Elliott, the Rio Tinto finance chief, resigned after seven years as a non-executive director on the oil company’s board.

Commenting on the announcement, Royal Dutch Shell plc chair Charles Holliday said: “We fully respect and appreciate Guy’s decision[,] which is related to his involvement in legal proceedings regarding his former employment at Rio Tinto.”

In April 2011, Rio Tinto, a publicly traded U.K.-Australian corporation, bought the Mozambican business “on the central assumption that it could profitably mine, transport, and sell more than 40 million tons of coal per year by barging the majority of the coal product down the Zambezi River to a port on the Indian Ocean,” according to the SEC complaint.

But by November of that year, the company realized that its assumptions about the barges were “unrealistic,” according to the complaint. The next month, in December, the Mozambique government rejected Rio Tinto’s plan to barge coal down the Zambezi River. The company also found out that the Southeast African nation’s railway capacity was “severely limited,” the commission noted.

Because of those transportation difficulties, Rio Tinto knew by the end of the year that it could transport and sell only about 5% of the amount of coal it had originally assumed, according to the SEC. “Rio Tinto also learned that there was significantly less and lower quality coal than it had assumed at acquisition,” the commission said.

The SEC charged the company, Albanese, and Elliott with concealing “the nature and extent of these adverse developments” from the Rio Tinto’s board, the board’s audit committee, and the capital markets.

If those negative developments had been disclosed, they would have triggered an impairment analysis of the Mozambican business, which is now called Rio Tinto Coal Mozambique (RTCM), the commission asserted.

In its complaint, the SEC charges Rio Tinto plc, its affiliate Rio Tinto Ltd., Albanese, and Elliott with violating the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws. The commission seeks “permanent injunctions, return of allegedly ill-gotten gains plus interest, and civil penalties from all the defendants, and seeks to bar Albanese and Elliott from serving as public company officers or directors.”

Rio Tinto divested RTCM in 2014. Noting that it “intends to vigorously defend itself against these allegations,” Rio Tinto stated yesterday that it “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.”

For their parts, Albanese said he was innocent, and Elliott, through a spokesperson, said he will fight the SEC’s charges, the Wall Street Journal reported.

Asset Impairments

In its complaint, the SEC noted that an impairment is required when an asset is worth less than its carrying value, or the amount reflected on the company’s financials. By the time the problems with the Mozambican company emerged, Rio Tinto had already twice recorded impairments of Alcan, a company it had bought in 2007.

Rio Tinto, its CEO, and its CFO “knew that impairing RTCM or publicly disclosing its rapidly declining value would call into question Albanese’s and Elliott’s ability to pursue the core of Rio Tinto’s business model—identifying and developing long-term, low-cost, and highly-profitable mining assets,” according to the lawsuit.

“Rio Tinto would have had two failed transactions with multi-billion dollar impairments and no successful large-scale acquisitions under Albanese’s and Elliott’s leadership,” the SEC added.

“Albanese and Elliott were aware that setbacks at RTCM had significantly eroded RTCM’s economic value,” according to the complaint. After spending months quantifying the effect of the setback, RTCM executives told the CEO and the finance chief “that RTCM’s valuation under the best configuration was negative $680 million in May 2012.”

Nevertheless, Rio Tinto continued to carry the Mozambican asset on its books at a value of more than $3 billion, and the company and the top executives promoted RTCM’s prospects to the capital markets, according to the charges.

Neither Albanese nor Elliott “took steps to ensure that Rio Tinto disclosed the nature of the adverse developments at RTCM or initiated an impairment process to determine its correct carrying value,” the SEC alleged. Instead, the CFO “reviewed and failed to correct materially misleading documents prepared for and submitted to the company’s Audit Committee and independent auditors[.]”

Ultimately, in December 2012, a company whistleblower from outside the Rio Tinto’s financial control function discovered that the public misrepresentation and inflation of the Mozambican assets were being hidden from the board, according to the complaint.

Bypassing Albanese and Elliott, the employee went straight to the company’s chairman and blew the whistle on the executives. That triggered an internal review and impairment process “that ultimately revealed the longstanding problems with RTCM’s valuation,” the SEC stated.

Albanese, a U.S. citizen now age 60, was Rio Tinto’s CEO from 2007 until 2013, when he was forced out in the wake of the announced impairments. Elliott, a U.K. citizen age 61, served as CFO of Rio Tinto plc and Rio Tinto Ltd. from 2002 to 2013, when he retired.

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