Unethical Rio Tinto seeing shares surge up

As I write, Rio shares are surging up more than three per cent this morning on another lift in commodity prices, part of a bigger story about commodities bouncing off their lows.

But also this morning, Rio is in news for doubling the time it takes to pay its suppliers, blowing out payments to 90 days. Great timing.

Let’s be blunt about this: Rio is guilty of grossly unethical behaviour in shafting its suppliers – numerous small and medium-sized businesses – to gain a fractional improvement in its already fat profits in order for overpaid executives to score higher bonuses.

That’s part of the price of linking executive pay to the dubious description of “shareholder value” – short-term boosting of the share price.

Rio Tinto is a massively wealthy company that pays its directors and senior management substantially more than they are worth – as our mega corporations routinely do.

As one of the world’s Big Three established iron ore producers, it makes a motza even at low prices. In fact, it would make a return when everyone else is in the red – and the Big Three are a long way from being in the red at present.

When the China-led resources boom went crazy, so did mining management. They forsook cost controls, threw billions at any and everything that moved, launched damaging takeover bids (e.g. Rio’s $38.1 billion purchase of Alcan in 2007) and rewarded themselves as if they were geniuses.

Now that commodity prices have returned to something closer to normal, our mining industry overall has done a great job in regaining control to remain in business in many instances, shedding jobs, boosting their productivity and doing tough deals with suppliers and contractors to get costs back to where they were.

Many of the “negotiations” have been very hard indeed – hard for the suppliers anyway who have been told that they are simply going to be paid less. In one case, for example, a specialist equipment manufacturer was told half-way through construction that they would be paid 30 per cent less and too bad about the contract.

In such an environment, the richer, more ethical companies should shine. They also have to be tough to make up for past laxity, but they should have the ability to remain reasonably fair as they go about it.

Doubling their terms of trade, blowing it out from 45 days to 90, is not fair, is not ethical, is not necessary and is plain bullying, an example of corporate thuggery.

There are a lot of suppliers and contractors who have done their bit to keep marginal mines open and to make profitable mines more profitable.

Many of them have been squeezed to the edge of sustainability. To now whack them with 90 day payment terms is an insult.

West Australian Premier Colin Barnett is right to take a stick to Rio’s management. Maybe he should remind them that, while Rio has been good for WA over the years, the WA government has also been kind to Rio.

What immediately comes to mind was the government ignoring the letter of the law in 2006 after Rio stuffed up paying the rent for the Shovelanna prospect.

Given Rio’s new attitude to smaller companies, maybe the WA administration wouldn’t bother next time Rio makes a mistake.

Mining is a partnership between the state – the owner of the minerals – and the mining company that digs them up. Rio has just soiled that partnership with this tacky one-off grab for 45 days’ cash flow.

As they wallow in their multi-million dollar salaries, it seems Rio’s new CEO and its head of iron ore don’t give a stuff about the smaller businesses that are struggling, that will be hurt by the sudden loss of those 45 days.

Shareholders concerned about their company’s reputation and longer-term sustainability should perhaps send the board a message: Rio will want to keep mining in WA long after the current crop of hired corporate hands have taken their golden parachutes.

 

Michael Pascoe is one of Australia's most respected finance and economics commentators with over four decades in newspaper, radio, television and online journalism. He regularly appears on Channel 7's Sunrise and news programs and is a regular conference speaker, MC and facilitator.