FTSE 100 miner Rio Tinto (RIO) and two former directors have been accused of fraud by the US Securities and Exchange Commission (SEC) for not accurately disclosing the value of a troubled coal mining project in Mozambique in 2012.
The SEC alleges that former CEO Thomas Albanese and former CFO Guy Elliott failed to follow accounting standards and company policies to accurately value and record its assets.
‘As alleged in our complaint, Rio Tinto’s top executives allegedly breached their disclosure obligations and corporate duties by hiding from their board, auditor, and investors the crucial fact that a multi-billion dollar transaction was a failure,’ says Stephanie Avakian, co-director of the SEC’s Enforcement Division.
At the same time, Rio Tinto has been fined £27.3m by UK regulator the Financial Conduct Authority (FCA) for breaching disclosure and transparency rules, relating to the same assets in Mozambique.
Rio says it intends to ‘vigorously defend itself’ against the SEC’s allegations, saying the case is ‘unwarranted’ and that the claims will be rejected once the court or a jury have had time to look at the facts.
The news failed to trouble investors as Rio’s shares traded 0.3% higher at £37.20 in early trading on the London market.
WHAT IS THE BACKGROUND TO THIS STORY?
The coal assets in question relate to Rio’s $3.7bn acquisition of Riversdale Mining in 2011. It had hoped to develop a large coal mining business in Mozambique and transport material by barge and export via the Indian Ocean.
The Mozambique government refused to let Rio use this transportation route, thus leaving the company owning a project that wasn’t economically viable using alternative transportation methods.
Rio ended up booking a $3bn impairment charge on the coal assets as part of a wider $14bn write-down of group assets. That ultimately cost Albanese his job as chief executive.
WHY HAS RIO AGREED A SETTLEMENT WITH THE FCA?
The FCA fine relates to when Rio announced impairment charges for the Mozambique coal project. The regulator says the miner should have carried out an impairment review for its 2012 half year results. Had it done so, those results would have reflected the impairment it recorded six months later.
‘Had Rio Tinto complied with its obligation to carry out the test, a material impairment would have been required to have been disclosed at the time of its 2012 half year financial reporting,’ says the FCA. ‘Rio Tinto's financial reporting was therefore inaccurate and misleading.
‘This continued until 17 January 2013 when Rio Tinto announced an impairment of the Mozambique assets, writing off approximately 80% of the value of the investment in the Mozambique mine.’
The FCA says Rio’s financial modelling of its mining business indicated the value of the Mozambique assets, based on the best information available at that time, was negative.
‘Despite the modelling results, Rio Tinto decided that it would not carry out an impairment test, as required by international accounting standards, to assess whether an impairment was required to be recorded in its financial reporting of its 2012 half year interim results.
‘Instead, Rio Tinto decided there was a lack of clarity around how it would develop the mines which made it premature to revalue these assets. For this reason, and wrongly, Rio Tinto decided it was appropriate to continue to value the mining assets at the acquisition price.’ The coal assets were subsequently sold for $50m.
