Rio Tinto’s (RIO) Simandou iron ore project payments scandal continues to rattle on with the company overnight Thursday revealing in its 2016 annual report that former CEO, Sam Walsh would not receive thousands of bonus shares until the story was sorted out.
That news was accompanied by a cautious outlook for commodity prices this year after the 2016 boomlet, especially for iron ore and coal. Rio warned there was now “moderate downside risk” for commodity prices in “short to medium term.”
But it will be the decision regarding the shares for Mr Walsh that will grab the headlines.
Last November, Rio notified law enforcement authorities in the US, UK and Australia about a $US10.5 million payment in 2011 to François Polge de Combret, a French consultant who helped the company reach a settlement with Guinea over the Simandou deposit.
It then fired two senior managers: Alan Davies, the head of energy and minerals who was previously in charge of Simandou, and Debra Valentine, head of the company’s legal affairs department.
Those firings followed an internal inquiry triggered by the leak of company emails. These showed senior executives, including Mr Walsh and Mr Davies, discussing Mr de Combret’s consultancy fee.
Rio faces the risk of large fines (especially in the US) if it is found to have broken anti-corruption laws.
The decision was revealed in Rio’s annual report, published overnight Thursday: “The board has determined that it would be inappropriate, while investigations are ongoing, to make any determination about Sam Walsh, our former chief executive, or about his outstanding remuneration,” Rio said in the report.
“The company has therefore reached an agreement with Sam to defer the payment of his 2016 Short Term Incentive Plan (STIP) award and all remaining unvested Long Term Incentive Plan (LTIP) awards for a minimum of two years.”
“The outcome of the regulatory investigations, and any potential litigation, is uncertain,” Rio chairman Jan du Plessis said in the annual report.
"There is unfortunately little more I can say at this time, other than to assure you that the board is giving these matters its full and proper attention, and that we are continuing to co-operate fully with the relevant authorities.
"Under my chairmanship, we have established a dedicated board committee to monitor progress,” he added.
The ability to limit or claw back bonuses paid to directors, both past and present, was a policy introduced at Rio by Mr du Plessis.
He was unhappy with remuneration policy that allowed executives receive share awards regardless of errors or bungled deals such as Rio’s $4 billion acquisition of Riversdale, an Australian coal company with a coking coal project in Mozambique that was never viable. That saw the departure of Tom Albanese as CEO and the company executive who led the Riversdale deal in January 2013.
Albanese and Ritchie did not receive any lump sum payments or bonuses on their departures. Mr Albanese does, however, had share options awarded over 2003 to 2009 which were worth more than $A16 million. The new rules are aimed at blocking executives receiving those types of shares.
Under these provisions, Rio can reduce or cancel any share award made from 2013 because of gross misconduct, an error in its financial statements or “exceptional events that have a materially detrimental impact of the value of the company”.
The company can also claw back the value of any shares that have vested in “the event of deliberate misconduct by a participant that may have a material impact on the value or reputation of a Rio Tinto”.
Meanwhile looking at commodity markets and the global economy, Rio Tinto is cautious about how long the 2016 rebound in prices can continue.
"The global economy starts 2017 with improved manufacturing conditions but also evidence that cost pressures and tighter credit conditions in the US, the UK and China are affecting corporate profit growth.
"Europe’s economy has gained momentum, though the pick-up in household consumption remains very weak and is vulnerable to inflation. Meanwhile, Japan should benefit from a planned fiscal policy expansion.
"China is facing the wind-down of its short-term property cycle and renewed policy calls to constrain credit growth and push through heavy industry restructuring and capacity reduction.
"At the same time, the Chinese government is working hard to keep growth relatively stable ahead of the 2017 mid-term leadership transition, with growth this year likely to be only slightly weaker.
"The stronger dollar, higher interest rates and inflation will constrain the pace of US recovery. However, should the new US Administration follow through with fiscal expansion, there is potential for higher US growth later in the year. Further strengthening of the dollar and higher interest rates and inflation could ensue for the global economy.
"Overall, the reflationary conditions that dominated global commodity markets in 2016 may be reaching their limits, though positive sentiment and further steel and coal capacity cuts in China may provide further support,” Rio said.
"Consensus now points to moderate downside risk for commodity prices in the short to medium run.
"This context continues to favour producers at the lower end of the cost curve and those that can improve productivity. Longer-term demand prospects remain positive.
"The attractiveness of growth opportunities in some commodities is amplified by stronger mine depletion resulting from recent cutbacks in capital expenditure,” Rio added.
Rio Tinto plc will hold its 2017 annual general meeting in London on 12 April 2017 and Rio Tinto Limited will hold its 2017 annual general meeting in Sydney on 4 May 2017.
