Rio Tinto finally announced an impairment of the Mozambique assets, writing off approximately 80% of the value of the investment in the Mozambique mine in January 2013. The FCA said that when Rio Tinto acquired the Mozambique mine, its valuation was based on a plan to move rapidly into coal production. This plan assumed Rio Tinto would be able to barge coal from the mines down the Zambezi River to the coast for export but it became apparent that this would not be possible.
Mark Steward, executive director of enforcement and market oversight, said: “The UK listing regime requires listed companies to adhere to high standards of disclosure and transparency. Rio Tinto should have been aware of its obligation to carry out the impairment test and the resulting material impairment should have been reported to the market at its half-year results in 2012. Reflecting the size of the company, this is the largest fine imposed to date by the FCA for a breach of rules relating to a firm’s official listing and demonstrates how vitally important high standards of disclosure and transparency are to ensuring our markets function fairly and effectively.”
The SEC meanwhile has alleged that the actions of Rio Tinto and its former chief executive Thomas Albanese, and its former chief financial officer Guy Elliot regarding the mining operations, which were acquired for $3.7 billion in 2011 and sold in 2014 for $50 million, amounted to fraud. The US regulator has filed a complaint in the federal court in Manhattan which alleged that as the project suffered several setbacks resulting in the rapid decline of the value of the coal assets, the executives sought to hide or delay disclosure of the nature and extent of the adverse developments from Rio Tinto’s board of directors, audit committee, independent auditors, and investors.
Stephanie Avakian, co-director of the SEC’s Enforcement Division said: “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.”
The SEC sought permanent injunctions, return of allegedly ill-gotten gains plus interest, and civil penalties from all the defendants, and sought to bar Albanese and Elliott from serving as public company officers or directors. The SEC said the acquisition of the coal assets in Mozambique came shortly after the disclosure of huge losses associated with its previous large-scale acquisition of Alcan. As well as finding that the coal could not be shipped out by barge the SEC said the executives also discovered that there was less coal and this was of a lower quality than expected.
The complaint alleges that after already impairing Alcan twice, Rio Tinto, Albanese, and Elliott knew that publicly disclosing its second failure and rapidly declining value would call into question their ability to pursue the core of Rio Tinto’s business model to identify and develop long-term, low-cost, and highly-profitable mining assets. Instead, the SEC alleged that Rio Tinto concealed the adverse developments, allowing Rio Tinto to release misleading financial statements days before a series of U.S. debt offerings. Rio Tinto raised $5.5 billion from U.S. investors, approximately $3 billion of which was raised after May 2012, when executives at Rio Tinto Coal Mozambique had already told Albanese and Elliott that the subsidiary had lost value. The complaint alleges Albanese then repeated and reinforced the false positive outlook for the project in public statements.
Rio Tinto said it intends to vigorously defend itself against the SEC’s allegations. There has been a report in the Australian media that a class action against the company could be launched by investors following the fraud allegations in the US.