Many would say Tom Albanese, chief executive of Rio Tinto, received a bonus when he kept his job. His bet on Alcan in 2007 started to go sour almost from the moment $38bn in cash left Rio's coffers. The miner is still counting its losses on the deal, with today's $9bn impairment charge making $18bn in total. Not many chiefs of FTSE 100 companies would have survived that.
Indeed, the real cost of Rio's adventure in aluminium goes beyond the $18bn writedown. Its previously pristine balance sheet was so stretched that, after the collapse in commodity prices in 2008, emergency action was required to reduce a $40bn debt mountain. A highly dilutive $15bn rights issue was summoned in 2009 once Rio's board had accepted that a fundraising involving state-owned Chinalco of China was too embarrassing to be allowed to fly.
The corporate trauma, and the threat to Albanese's career, passed, thanks in large part to the astonishing post-2009 rebound in the price of iron ore, which these days can be dug out of the Western Australian desert for $40 a tonne, shipped to China for $10 a tonne, and sold to local steelmakers for $145 a tonne.
Rio, whose assets are heavily skewed towards iron ore, is now spitting out cash at a rate of $1bn a fortnight and its underlying earnings last year (ie, ignoring the Alcan charge) rose 11% to $15.5bn. A rising share price – up fourfold, if you caught the bottom – has made everybody feel better. Albanese's reputation as a competent nuts-and-bolts operator, as opposed to a deal-doer, has survived.
But let's not forget how reckless the gamble on Alcan was – and how it appeared so even at the time. Rating agency Standard & Poor's, which in 2007 couldn't spot a toxic CDO at two paces, called it a "material departure" from Rio's "historically prudent financial policy". Albanese suffered some bad luck on the way – the processing assets couldn't be offloaded before the global financial crisis struck – but the fundamental problem was poor timing. After a multi-year bull run in commodities, 2007 was a terrible moment to pick to bet the balance sheet on aluminium, even if Alcan was regarded as top of its class.
So, yes, it's right that Albanese should volunteer to live without a bonus for a year. He'll get by. Call it a modest – and overdue – advance for the cause of accountability in the boardroom. Others should take note.
