Rio Tinto’s Chinalco U-Turn May Not Be Enough to Save Albanese

June 5 (Bloomberg) -- Rio Tinto Group Chief Executive Officer Tom Albanese’s decision to ditch an Aluminum Corp. of China investment in favor of a $15.2 billion rights offer to appease shareholders may not be enough to keep him in the job. Albanese, 51, described the proposal from Chinalco, as the state-owned company is known, in February as “the best financial solution” to reduce debt, having earlier rejected a $66 billion takeover bid from BHP Billiton Ltd. Now, the $19.6 billion investment is off, and BHP will pay $5.8 billion to create an iron-ore joint venture with Rio. “He has to go,” said Charles Kernot, a London-based analyst at Evolution Securities. “He’s been so closely associated with this deal that its failure must almost seal his fate.” Rio’s shareholders such as Legal & General Group Plc and the Association of British Insurers had criticized Chinalco’s proposed purchase of convertible bonds and asset stakes because it excluded other investors. Australia began an inquiry into foreign investment rules and some politicians called for the plans to be blocked. Earlier transactions have also raised ire. Albanese took over in May 2007, just a month before Rio made a $38.1 billion offer for aluminum producer Alcan Inc. That left London-based Rio needing to make payments on its debt as commodity prices fell. The CEO rejected the takeover offer from BHP last year, before BHP abandoned its bid. Albanese said on a conference call today he still has the support of the board. ‘Crisis of Confidence’ There is “a significant crisis of confidence in the investment community and the board surrounding his decisions of late,” said Ric Ronge, who helps manage the equivalent of $775 million, including Rio shares, at Pengana Capital Ltd. in Melbourne. “He got into a problem with Alcan, and then he didn’t entertain BHP and then he courted Chinalco. He is now back to doing a discount raising.” A boardroom disagreement over how to reduce Rio’s debt led Chairman-Elect Jim Leng to resign in February. His replacement, Jan du Plessis, took over in April 20 and last month held talks with Rio investors in the U.K. and Australia. “Jan du Plessis has come in and managed to get Rio out of a hole that the current management team had dug for themselves,” Iain Armstrong, an analyst at Brewin Dolpin in London, said today by phone. “The positions of the CEO, and maybe the CFO, could be untenable, because of their 100 percent backing of the Chinalco deal.” Shares Surge Rio surged today in London and Sydney trading after the Chinalco proposals were abandoned. The stock rose 281 pence, or 10 percent, to close at 3,001 pence in London. “We have had quite a bit of volatility in the market,” Albanese said today on the conference call, when asked how confident he was in his position as CEO. “When I look at what we or any company could have done differently over a couple years’ period of time, everyone would have taken different views of different things.” Albanese is “a great CEO” with the full support of the board, du Plessis said today at a briefing in London. For sure, mining industry valuations were lower four months ago, when Albanese put forward his proposals. Since Rio and Chinalco announced their accord on Feb. 12, stocks and metals have rebounded. The Bloomberg Europe Metals & Mining Index has jumped 41 percent while the London Metal Exchange Index of industrial metals has risen 36 percent. Fewer Choices “People thought the world was falling off the map, so they didn’t have too many choices at the time,” said Kerry Smith, an analyst at Haywood Securities in Toronto. “Hindsight is a wonderful thing.” Legal & General Investment Management said today it was “pleased” Rio had conducted a rights offer because it is important for companies “to honor shareholder rights.” A share sale was the “correct approach,” the ABI said yesterday in a separate statement. A rally in Rio’s shares also meant some of the convertible debt to be sold to Chinalco was close to being in the money. The first tranche of the $7.2 billion of bonds was to have been convertible into stock at $45 apiece. Rio’s London stock closed at 2,720 pence ($44) yesterday in London, and traded as high as 3,193 pence last month. “Clearly the markets have come a long way in the last three months,” said John Stephenson, who helps oversee about $900 million at First Asset Investment Management Inc. in Toronto. “Revenues look a little bit better, capital markets have firmed up quite a bit and there’s a lot of appetite for” a rights offer, he said. Albanese, who was raised in New Jersey and studied mining at the University of Alaska before joining Rio in 1993, has been more aggressive than his predecessor. Leigh Clifford’s biggest acquisition was the A$3 billion ($2.4 billion) purchase of Australian iron ore producer North Ltd. in 2000. By comparison, Albanese sanctioned buying Alcan in what was then the world’s largest metals acquisition.