By Tim O’Shannassy

Acknowledgement

Introduction

There has been much speculation in the Australian business press on the merits of Rio Tinto Group (Rio Tinto) being led from head office in London. Rio Tinto has a dual stock exchange listed structure comprising Rio Tinto Limited on the Australian Stock Exchange (ASX) and Rio Tinto plc on the London Stock Exchange that reflects the ethos, history and major sources of capital for the business. The London head office is a great distance from the biggest division by sales revenue and profitability – the Pilbara iron ore operations in Western Australia. Head office location and performance presents a strategic management problem.

One ongoing concern for some years at Rio Tinto Group has been risk management after difficulties emerged in relation to merger, acquisition and divestment activity during the tenure of Tom Albanese as Chief Executive Officer (CEO) from May 2007 to January 2013 (Walters, 2013). This era at Rio Tinto Group underperformed for shareholders with significant impairments on assets impacting annual results. Problem issues in this period included weakness in decision-making at executive level, questionable Investment Committee practices (Walsh, 2016), and shortcomings in board of director oversight (Walters, 2013).

The Board of Directors and Risk Management

Currently Rio Tinto conducts risk management across the whole business portfolio with emphasis on all organisation layers being able to identify, assess and manage risk in areas like M & A, divestment, occupational health and safety, and cultural sensitivity (Rio Tinto, 2019).

Rio Tinto has been heavily criticised in Australia in 2020 for the company’s decision to blast the 46,000-year-old Juukan Rock Shelter heritage site to expand the Brockman 4 iron ore mine, with the board and executive scrambling to rebuild the relationship with the Puutu Kunti Kurrama and Pinikura people (Hastie, 2020).

The Morrison Australian Government is furious with the Juukan Rock Shelter blast and the irreparable damage – a strategic error symptomatic of a business being run from London for London. Board composition and oversight of the executive influences firm performance (Fitzroy, Hulbert and O’Shannassy, 2016), and may be an issue here.  There are six United Kingdom based company directors, four Australian based directors and one each from Canada and France – refer to Table 1 below for further details. Chairperson and CEO co-tenure is low and a concern at the moment with chair Simon Thompson appointed to the role in March 2018 and CEO Jean-Sebastien Jacques appointed in July 2016 (Rio Tinto, 2019).

Table 1: Rio Tinto Board Composition and Demographics (Rio Tinto, 2019)

The Business Environment

The impact of Covid-19 has been traumatic economically for many countries across the world (Lowe, 2020). Global gross domestic product (GDP) is expected to fall between 6% and 7.6% in 2020 before recovering to 2.8% growth in 2021; many in the community have lost their jobs or are on reduced work hours and consequently reduced income, with younger age groups bearing much of the burden in Organisation for Economic Co-operation and Development (OECD) developed countries (OECD, 2020).

In Australia there is a strong and growing awareness of aboriginal disadvantage, respect for Aboriginal artefacts and culture, and need for national reconciliation (Hastie, 2020).

Technology is continuing to evolve and is having a number of impacts in iron ore and broader mining sector (Rio Tinto Limited, 2019). All players in this industry are seeking to improve the use of transport, automation and robotics. Technology disruption is a material risk in this industry (BHP Group Limited, 2019).

The Morrison Government has been reluctant to embrace long range emissions targets and using a price on carbon as a market-based solution to emissions (Gluyas, 2020). Climate change and a greener future is an increasing concern of the international business community including the Australian business community (Coles, 2019).

The mining industry is a capital intensive business with great rivals such as BHP Group Limited, Fortescue Metals Group Limited, Hancock Prospecting Pty Ltd and Vale S.A. investing significant financial resources. There are high financial stakes in play here (Rio Tinto, 2019).

The materials sector is a strong component of the ASX with many small and medium size firms plus these big rivals. The big challenge for any materials sector public company is to get access to quality resource assets, then achieve economies of scale in operations to ensure asset efficiency (BHP Group Limited, 2019).

In relation to buyer power China is the world’s largest purchaser of iron ore. There is a limited number of suppliers of key commodities including iron ore, copper, magnesium and alumina. The price for iron ore has been favourable in the past financial year (Rio Tinto, 2019).

In relation to supplier power the major iron ore players in Australia set out to be connected to their local communities, deliver strong community engagement, a desirable location for the workforce to live, transport links and a Covid-19 free work environment – these are strategic priorities for sustainable operations (Fortescue Metals Group Limited, 2019).

Threat of substitutes for a material such as iron ore is scrap, and aluminium is being increasingly used in mobile phones, jet engines, motor vehicles and aircraft (Rio Tinto, 2019).

Critical success factors required for survival in the industry include occupational health and safety, workforce, mining engineering, transport technology, transport capability, exploration, network alliances, distribution channels and research and development.

Company Analysis

Rio Tinto Group has operations in 36 countries and communicate their strategy as follows: “Our strategy is to create superior value for shareholders by meeting customers’ needs, maximising cash from our world class assets and allocating capital with discipline” (Rio Tinto, 2020a).

Rio Tinto is arranged into four main operational businesses: Aluminium (2019 Earnings before interest, tax, depreciation and amortisation (EBITDA) USD 2.29 billion), Copper & Diamonds (2019 EBITDA USD 2.07 billion), Energy & Minerals (2019 EBITDA USD 1.76 billion), Iron Ore (2019 EBITDA 16.10 billion) plus Growth & Innovation and Commercial (Rio Tinto, 2019; Rio Tinto, 2020b). Funding, design and build of each operation is carefully managed with safety, cost control and performance to schedule high priorities (Rio Tinto, 2019).

There are four Group strategic priorities. First the portfolio of low cost, long term assets offering market growth opportunities. Second performance with focus on operational excellence, safety, value prioritised over volume. Third partnership – working thoughtfully and responsibly with partners (i.e. governments, community groups, local suppliers, industry leaders, NGOs, technology providers), Finally people – access to, developing and retaining the best talent; a diverse and inclusive workforce globally, plus growth of technical and commercial capability through centres of excellence (Rio Tinto, 2019).

Diversity is promoted with an increase woman in senior management roles 2% p.a. and 50% of each graduate intake is woman; more to do (Rio Tinto, 2020c). Rio Tinto has 47,000 employees with talent development and retention a priority (Rio Tinto, 2019).

The Commercial division of Rio Tinto Group maintains the focus on the customer. Mineral and metal products are used in a wide range of everyday products including motor vehicles, coffee pods and smart phones. Strong supply chain control is maintained through construction and management of end-to-end logistics (i.e. rail, port, ship). Rio Tinto is mindful of the impact of operations on the environment and the significance of this for brand management. China is a big importer of Rio Tinto Group iron ore including its high quality Pilbara BlendTM iron ore – better geographic spread of sales would assist risk management over the medium to long term (Rio Tinto, 2019).

Technology is a critical success factor for Rio Tinto especially as it relates to use of artificial intelligence, automation and robotics. An operations centre is located in Perth and is the base from which the AutoHaulTM operations are managed. STEM capability development is important to Rio Tinto including the benefits of learning and feedback from data-insight. STEM is promoted in partnership with QUT, UWA, McGill University and Polytechnique of Montreal (Rio Tinto, 2020c).

Group Revenue is up in the past financial year due to high iron ore prices; 2019 results also show a substantial impairment charge of USD3.49 billion mainly related to delays with the Oyu Tolgoi, Mongolia project and an impairment on the Yarwun alumina refinery and Weipa bauxite mines in Queensland – refer Table 2 below for the financial summary. Rio Tinto maintain strong cash flow generation capability, though delays on major projects can create big financial swings (Rio Tinto, 2019).

Table 2: Rio Tinto Summary Audited Financial Data 2017 to 2019 (Rio Tinto, 2019)

The Strategy Challenge at Rio Tinto Limited

Average tenure on the board of directors is an issue here. Are there enough woman on the board? How would you assess the financial efficiency of Rio Tinto? Calculate the interest cover, return on assets and return on equity ratios using the information in Table 1, then go to the Rio Tinto Annual Report for 2019 and extract any further financial data that will assist you in conducting further financial ratio analysis and making recommendations for the future strategy of this organisation. In particular comment on the dividend payment capability of the Group plus the available time and resources to deliver the strategy you propose. Will you recommend a change to risk management and board of director structure arrangements? How can Rio Tinto better manage indigenous issues in the future? Are industry conditions favourable?

Conclusion

Rio Tinto clearly have corporate governance and top management team issues to address in relation to their overall strategic management. One school of thought in the media is that Rio Tinto is run from London for London. This is a major issue when core cash flow is dominated by operations in Australia, especially in a region where Aboriginal reconciliation is a high Federal and State Government priority.

References

BHP Group Limited, 2019. Annual Report, Melbourne, Australia.

Coles Group Limited, 2019. Annual Report. Melbourne, Victoria.

Fitzroy, P., Hulbert, J. and O’Shannassy, T. 2016. Strategic Management: The Challenge of Creating Value, 3rd Edition, Routledge Publishing, London, UK.

Fortescue Metals Group Limited, 2019. Annual Report, Perth, Western Australia.

Hastie, H. 2020. ‘Rio chief to say sorry to gorge owners’, The Age, 1 September 2020, http://ezproxy.its.rmit.edu.au/login?url=https://www-proquestcom.ezproxy.lib.rmit.edu.au/docview/2438719888?accountid=13552, viewed 1 September 2020.

Gluyas, R. 2020. ‘Call to end 10-year war over climate’, The Weekend Australian, June 2728, p. 22.

Lowe, P. 2020. ‘Covid-19, the labour market and public sector balance sheets’, Address to the Anika Foundation Online, 21 July, https://www.rba.gov.au/speeches/2020/sp-gov-2020-0721.html, downloaded 28 July 2020.

Organisation for Economic Co-operation and Development, 2020. Global economy faces a tightrope walk to recovery, 10 June, http://www.oecd.org/newsroom/global-economy-faces-atightrope-walk-to-recovery.htm, viewed 4 September 2020.

Rio Tinto Limited, 2019, Annual Report, Melbourne, Australia.

Rio Tinto Limited, 2020a. Our Strategy, https://www.riotinto.com/can/about/strategy#:~:text=Our%20strategy%20is%20to%20create,%2C %20People%2C%20Partners%20and%20Performance., viewed 12 August 2020.

Rio Tinto Limited, 2020b. Our Business, https://www.riotinto.com/about/business, viewed 12 August 2020

Rio Tinto Limited, 2020c. People, https://www.riotinto.com/sustainability/people, viewed 12

August 2020

Walsh, S. 2016. ‘How I did it…the CEO of Rio Tinto on managing in a hypercyclical industry’, Harvard Business Review, March: 33-36.

Walters, K. 2013. ‘Why Rio Tinto gave its CEO, Tom Albanese, a push’, SmartCompany, https://www.smartcompany.com.au/people-human-resources/leadership/why-rio-tinto-gave-its-ceotom-albanese-a-push/, viewed 4 September 2020.