Did production problems lead to Rio's Juukan Gorge debacle?

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When Rio lowered its production forecast by 20 million tonnes last year, it cited mine operational challenges in its Greater Brockman hub in the Pilbara, within which the caves lie.

The problem seemed to relate to the fact that Rio hadn’t invested enough to remove the overburden – clear the site of dirt and rocks lying above the ore – from the mine.

Brockman’s rich ore is a key to Rio’s famed “Pilbara Blend,” its benchmark 62 per cent FE product and the one which delivers it a price premium. Rio was forced by the problems at Brockman to sell higher volumes of lower-grade ore to avoid diluting the quality of its Pilbara Blend but was under pressure to maximise Brockman output.

The issues at Brockman not only meant lost volume and margin but higher costs, enabling the previously unthinkable – Rio’s cash costs, for the first time, were higher than arch-rival BHP’s.

Those eight million tonnes of rich ore in the Juukan Gorge must have looked appealing.

Different era

In a different era, with different management and a different board supervision, the production issues would never have influenced the decision to blow up the caves.

Rio has been proud of its relationships with its indigenous land owners. Former chief executive Leon Davis was, in 1995, the first of the miners to sign a land rights agreement under what had been the highly-contentious Native Title legislation enacted in the wake of the High Court’s Mabo decision.

Over time Rio rolled out agreements in its operations that ranged from its Hamersley iron ore business, to the Weipa bauxite business operated by Comalco in far north Queensland and the Argyle diamond mine in Western Australia. It built strong relationships with its communities and indigenous leaders.

Rio staffers at the time say the decision to take the lead in the industry related to Rio’s history and its leadership at the time.

Rio was scarred by its experiences with the Panguna copper mine at Bougainville in Papua New Guinea. From the moment it gained access to the deposit in the early 1960s there was friction with local villagers. By the time it began operations in 1972 that had escalated into conflict and demands for secession by the locals, and ultimately into an armed conflict and civil war that persisted into the early 1990s.

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The conflict forced the mine to stop operating in 1989. In 2016 Rio transferred its majority stake in the mine to the local government authorities and the PNG government.

That experience informed both the local Rio management and the London head office at St James Square.

Davis – who had some experience at Bougainville — and Rio’s executive chairman, Bob Wilson, who had dealt with communities in Asia and Africa, decided there were no good reasons to exclude Australian Indigenous communities from the types of arrangements Rio had struck elsewhere.

Under Davis and his successors, who until American Tom Albanese was appointed CEO to succeed Leigh Clifford came out of the old Australian-centred CRA, Rio’s community relations and the organisational support for them continued to build.

Age-old tensions

The appointment of Albanese reflected age-old tensions within Rio. Rio’s history dates back to the forming of an investment consortium to acquire a base metals mine on the Rio Tinto river in Spain in the late 1800s.

It continued to operate that mine until the 1950s while diversifying, mainly into Africa and, in 1962, acquiring a majority stake in Consolidated Zinc, which became Conzinc Rio Tinto of Australia – CRA.

In 1996, with CRA wanting to expand more aggressively offshore and Rio rekindling ambitions of being an operator of mines rather than an investor, the potential conflicts were resolved by merging/subsuming CRA into Rio via a dual-listed entity structure.

There have always been some tensions between the London-dominated board of Rio and the Australians who actually managed the operations that generated the overwhelming bulk of the group’s earnings.

While there have always been Australians on the Rio main board – there are three today, albeit only one with any mining industry experience — the UK directors, and the London “City” have always been mindful of the threat that too much of an Australian influence within the management and board might lead to pressure to shift Rio’s head office from London to where its main operations are.

Walsh’s rescue mission

The $US38 billion Alcan acquisition just ahead of the financial crisis, which almost drove Rio into the clutches of China Inc, and a subsequent acquisition of a coal project in Mozambique, were disasters. Rio wrote more than $US30 billion off the Alcan investment and almost the entire $US4 billion it spent in Mozambique.

Albanese lost his job and Pilbara veteran Sam Walsh and his chief financial officer, Chris Lynch, were brought in to restore Rio’s finances and its reputation for operational excellence, which they did.

When Walsh retired in 2016, Frenchman Jean-Sébastien Jacques, who had been running Rio’s copper and coal businesses, succeeded him.

A host of former senior managers exited/were exited, there was heavy cost-cutting, a spate of asset sales and the community relations function and other Australian support functions were pared to the bone and responsibility centred within the corporate relations department in London. It is as tight and centralised a control as London has ever exerted over the Australian business.

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The losses of the on-the-job-executives and staffers who had written the land rights agreements and managed the relationships with local communities appears an obvious ingredient in the combustible mess Rio now finds itself in, as well as a thinning of the ranks of the senior executives with hands-on experience in the WA iron ore business.

Rio’s history over the past decade points to a gradual loss of management depth, organisational execution capacity and cultural awareness – and the proximity of those with ultimate responsibility — to the operations that are responsible for almost all Rio’s profitability and value, relatively briefly interrupted during Sam Walsh and Chris Lynch’s rescue job.

In the circumstances, is it all that surprising that a Juukan Gorge event could occur?

Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.

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