Should investors be looking at Rio Tinto plc (NYSE:RIO) now that CEO Tom Albanese has been shown the door? The real thesis is that after trading at depressed multiples for some time, could the multiple suppression be over? If so, Rio could be poised to move higher. Albanese's firing comes after his acquisition binge that has led a $14 billion write down on two of its large acquisitions, Alcan Aluminum Group and Riversdale. Doug Ritchie, the former head of strategy who played key roles in the acquisitions, is also being shown the exit as well.
The $14 billion write down of assets related to the acquisitions is $10 billion for Alcan and $4 billion for Riversdale. The $38 billion Alcan acquisition was made in 2007 and the Riversdale (coal) deal in 2011 for $4.2 billion. The recent news puts the total write downs for the acquisitions to around $30 billion. Riversdale had coal assets in Mozambique, but Rio Tinto was unable to secure government permits to transport coal down Zambezi River, thus the miner has been forced to hemorrhage capital to build out a rail system. Other issues with the coal assets is the fact that the amount of coal previously thought to be there was overestimated.
The new CEO, Sam Walsh, previously ran the iron ore segment that already accounts for some 80% of Rio's profits. Walsh took Rio Tinto plc (NYSE:RIO)'s iron ore reigns in 2004, and according to Credit Suisse, earnings for the segment have jumped fifteen-fold and production (measured by tons) has doubled. Other major miners that have managed to perform much better than Rio have been Vale SA (NYSE:VALE), BHP Billiton Limited (NYSE:BHP) and Cliffs Natural Resources Inc (NYSE:CLF). However, these miners have still had their share of troubles. At least 20 mining CEOs have stepped down in the past year due to costly mining projects that have not produced a suitable return on investment for shareholders. BHP is looking to replace its CEO, Anglo American recently replaced its CEO, Xstrata's CEO is leaving the company following its merger with Glencore, and Vale hired a new CEO last year. Over the last five years Rio Tinto and ArcelorMittal (NYSE:MT) are down 32% and 71%, respectively, where the other three major miners are up: Vale (+16%), BHP (NYSE:BHP) (+28%), and Cliffs (+67%).
In looking across the industry to see where some of the other mining companies may have failed, or may potentially fail in the near future, a good measuring stick is still cash flow growth to capital spending growth:
|Rio Tinto||Vale||BHP Billiton||Cliff Natural||ArcelorMittal|
|Cash flow growth (past 5-years)||2.4%||26%||7%||42%||-3%|
|Capital spending (past 5-years)||24%||26%||24%||46%||11%|