In 2012, the world’s second-largest mining company, Rio Tinto, reported a multibillion-dollar loss after CEO Tom Albanese made several expensive and unprofitable acquisitions. With haste, Rio’s board made tough decisions in order to get the firm back on track. Sam Walsh, then chief executive of Iron Ore, was called upon to get Rio Tinto firmly back in the black.
His calm and assured leadership style has put balance in to the company, which was reeling after the dramatic change in leadership and massive write-downs. Essentially, this is what it’s all about for Sam Walsh, who heralds finding the right balance as key to running any company.
Walsh replaced Tom Albanese as Rio’s Chief Executive in January 2013 when the group announced plans for a $14bn write-down after the takeover of Mozambique coal miner, Riversdale, which included a $11bn write-down on the value of its aluminium division.
This followed a major expansion of the division in 2007, when Albanese paid a whopping $38bn for Canadian aluminium manufacturer Alcan, at a time when the market was booming.
Albanese stepped down after the industry halted and the write-downs following his spending spree lead to shocked board reactions, as well as media reports that the firm had “lost its way”. “A write-down of this scale in relation to the relatively recent Mozambique acquisition is unacceptable,” said Chairman Jan du Plessis at the time. “We are also deeply disappointed to have to take a further substantial write-down in our aluminium businesses.”
Walsh was on holiday with his wife, Leanne, staying at the Raffles Hotel in Singapore when he got the call. He had been running the company’s iron ore business since 2004 and served as a Rio Tinto board director. Happy in Perth, he wasn’t looking for a promotion, when a swath of emails beckoned him to an emergency board meeting in London. Replacing his Hawaiian shirt with a tailor-made suit, Walsh got on a plane and was appointed chief executive within a few days.
“When I was asked to take on the role as chief executive of Rio Tinto, it was under pretty difficult circumstances,” Walsh said in a recent speech at the Australian-British Chamber of Commerce in Perth. “Put frankly, there was a crisis of cash and a crisis of confidence that permeated both inside and outside the firm”.
Up until then, Walsh had successfully run the firm’s Pilbara iron ore operations, fostering expansion and innovation. In the six months to June 30 last year, the iron ore business accounted for almost 90 percent of Rio Tinto’s earnings, as Chinese appetite for iron had boosted growth significantly. He was also responsible for the introduction of 150 driverless trucks, which are controlled from an operations centre in Perth, as well as the planned automation of a Pilbara railway system.
However, this was no guarantee that Walsh could turn around the firm’s sinking profits. Nevertheless, this is exactly what he did.
In his first year at the helm, Walsh brought Rio Tinto’s annual earnings to a $3.7bn profit after the $3bn loss in 2012. Through a more cautious business development tactic than that of Albanese, the CEO managed $2.3bn in cost savings – exceeding his $2bn target – as well as simplifying the business, divesting non-core assets, reducing capital and refocusing the business to what, in his words, matters: “delivering value to shareholders.”
Rio Tinto timeline
June 9, 2009
Pressure mounts with Chinalco’s President Xiao Yaqing after Albanese abandons the $19.5bn fundraising deal for a $15.2bn joint venture with BHP.
April 7, 2011
Rio Tinto takes control of Australian coal miner Riversdale Mining for $1.1bn.
November 29, 2012
Rio Tinto announces cost reductions by more than $5bn over the next two years and lower spending on exploration in an attempt to “roll back” unsustainable cost increases.
January 16, 2013
Tom Albanese steps down as CEO of Rio Tinto after a $14bn writedown.
January 17, 2013
Sam Walsh is appointed as the new CEO of Rio Tinto.
August 8, 2013
Rio Tinto announces operating cost reductions of $977m and a half-year profit of $1.7bn.
January 17, 2014
Rio Tinto breaks company records, producing 266 million tonnes of iron ore.
February 13, 2014
Rio Tinto unveils a $3.7bn earnings profit up from 2012s $3bn earnings loss.
“There was a lot to do and none more important than to provide a sense of direction and steady the ship,” Walsh said, when discussing his approach to the challenge. At the beginning of his tenure, Walsh said he would cut exploration and development costs by $750m – he ended up slashing them by $1bn, while also pulling capital expenditure down from more than $17.5bn to $13bn. However, it remains to be seen whether cutting exploration to this extent is a long-term benefit, as the firm remains overly dependent on iron ore and continues to reign in and divest Albanese’s diversification efforts.
Walsh’s strategy also involved a bold headcount reduction of 4,000 across the group’s managed operations, as well as 3,300 roles leaving the group through divested businesses. Rio Tinto’s financial results were also bolstered by strong operational performance as iron ore, bauxite and thermal coal set annual production records.
Finally, Walsh re-shaped the aforementioned aluminium business by closing, curtailing or divesting six non-core aluminium assets, including the suspension of production at the Gove alumina refinery to focus on more profitable bauxite operations.
The turnaround, and especially the divesting of bad businesses such as its African and Australian coal-mining units, even prompted shareholders to increase their stakes in the company. “We have been encouraged by the changes in Rio. They are focusing more on running the business for shareholders. They had those excursions into Alcan, Mozambique and elsewhere that really torched a lot of shareholder value, so we’ve welcomed the changes and would be prepared to add to our holding when we saw appropriate opportunities,” said Ross Barker, Managing Director of the Australian Foundation Investment Company, and a stakeholder of Rio Tinto, in an interview with The Sydney Morning Herald.
Walsh, a major supporter of the arts, said his successful leadership strategy all came down to finding the right balance for Rio Tinto. A strategy which, just like his favourite Puccini operas, has three parts.
“Many of the problems in failing businesses today have come because they fell out of balance. This is partly why we lost our way at Rio Tinto in 2012 – because we focused too much on growth and not enough on value, and because we focused too much on capturing the tonnes, while not focusing on the cash flow. So my personal mission is to transform our business to find the right balance between shareholders and stakeholders, employees and customers, assets and liabilities,” said Walsh.
His three-pronged strategy is based on identifying and dealing with points of tension within a business. He suggests that it’s all about retaining perspective, while focus is critical, when trying to get a business back on its feet. To this end, the first possible point of tension is that between “business as usual” and innovation.
Walsh himself has been known for his innovative projects – having helped create the high-tech Rio Tinto operations centre in Perth, a mine automation centre based on robotic technology, as well as future innovations – which will help push the firm towards the ‘mine of the future’.
“The choice for business in today’s fast-paced world is between innovation and stagnation. Finding a balance in this is how you truly find your competitive edge – not through reckless innovation, but targeted innovation. I’m talking about continued learning, incremental changes and measured transformation,” explains Walsh.
The second point of tension is between enthusiasm and experience, says Walsh, arguing that it’s crucial to strike the right balance between learning and tradition, especially nowadays where firms have a much flatter structure than the traditional hierarchy of previous years. “I love diversity of opinion. Ensuring that when things are being discussed, there’s a diverse range of perspectives around the table,” the CEO explains.
Those next in line
To this end, Walsh has ensured that he is surrounded by a strong leadership team. At 64, he is not ready to retire and recently told The Wall Street Journal that he intends to remain as the CEO of Rio Tinto for longer than his contract stipulates, should the board wish so. However, Walsh also said he would be happy to hand over to a better candidate after three years, if the board preferred that outcome.
Arguably, Rio Tinto’s Chief Financial Officer Chris Lynch could be next in line. The former BHP Billiton CFO and Transurban CEO, was hired by Walsh in February last year and has played a key role in the turnaround of Rio Tinto’s finances. However, Andrew Harding, the executive who moved across from Rio’s copper group to run its iron ore business is considered to be Walsh’s protégé, and could very well take over the business should the board want a change of leadership.
Sam Walsh CV
Senior roles at General Motors
Management at Nissan Australia
Managing Director, Iron, Steel and Aluminium Foundries, Rio Tinto
Managing Director of Sales and Marketing, Iron Ore, Rio Tinto
Managing Director of Operations, Iron Ore, Rio Tinto
Vice President of Rio Tinto Iron Ore
CEO< Aluminium Group of Rio Tinto
CEO, Iron Ore at Rio Tinto
CEO, Iron Ore and Australia, Rio Tinto
CEO, Rio Tinto Group
To this extent, Walsh has been praised for having put such a strong leadership team in place, which he himself considers imperative to running a strong business. His strategy has therefore been to ensure that leadership talent runs throughout Rio Tinto.
“I particularly like that Sam has put the next generation of leaders in positions where they can demonstrate their capability,’’ said former Rio Tinto Chief Executive and current Qantas Chairman, Leigh Clifford to The Sydney Morning Herald, when commenting on Walsh’s positioning of Rio’s future talent.
Walsh also hopes that this proliferation of talent and ideas will ensure that mistakes of a certain magnitude won’t happen again. This follows the financial impact after former CEO Tom Albanese in his eagerness to grow the firm made some poor purchases at a time when the market price was far above their real value.
“It’s about making sure that there is a balance between differing perspectives. So that one person can’t wake up with a huge idea in the bath one morning and then put it into practice and it costs the company billions. We need proper checks and balances,” said Walsh. In this respect, it’s clear that Walsh, who has spent more than 23 years at Rio Tinto, cares about the firm, its employees and its shareholders. This is also why he claims that the third point of tension that any leader should be aware of, is trying to keep a balance between head and heart, between rational processing and emotional commitment.
“You need to care passionately about what you’re doing in order to give your best. This is true at every level in business and life,” said Walsh. At Rio Tinto, Walsh has worked hard to generate passion about the firm and increase focus on the company’s values. A key point has been to improve the firm’s CSR strategies in order to change the destructive view of mining, implement better security for its employees and improve the firm’s initiatives on environmentally friendly production.
“He’s advocated a change in thinking so that Rio Tinto’s business is now more about prime assets, logistics, efficiencies, and treating the business with a sense of ownership,” commented Nic Tole, a leading energy and resources lawyer, who has advised Rio Tinto on several occasions. Walsh has implemented a shift in culture in order to get his 66,000 employees to view themselves as Rio’s shareholders and treat the company’s money as if it is their own.
“It’s about every single employee acting as if they’re owners. It sounds trite, but I’ve had people say, ‘If it were my business I wouldn’t be doing it.’ And I say, ‘Well, we’re not going to do it then,” Walsh told The Australian in January.
Challenges to overcome
In this respect, Walsh may very well rely on his employees and management team when facing the challenges ahead. Having achieved the financial goals set out for him, one could think that the intense cost-cutting strategy would be put aside. However, Walsh maintains that the job isn’t done yet. For 2014 the CEO hopes to cut annual costs by $3bn and reduce capital expenditure down to $11bn in 2014 and $8bn in 2015. Debt reduction will also remain a priority and furthermore, Walsh is working to restrict the demand Rio’s big divisions can make on resources.
The firm’s finances aside, there is one other major issue that might require the CEO’s focus in the coming year. With little critique of Walsh’s first year at the helm, shareholders and industry commentators have questioned Rio’s dependence on the iron ore business.
Currently supplying 90 percent of the firm’s overall earnings, the business is integral to the group’s future success. Aside from the record production of 266 million tonnes of iron ore in 2013, Rio’s management expects to increase this to 290 million tonnes by the third quarter of 2014, with a target of 330 million tonnes by 2015.
However, concerns about a slow-down in China’s economic growth along with geo-political developments in Crimea have seen the price of iron ore deteriorate, experiencing the largest price drop in one day in March, in more than four years (see Fig. 1). With Rio Tinto’s earnings still dominated by iron ore, shareholders like Aberdeen Asset Management have warned that things could get tougher.
‘’From now on the shape of that iron ore price curve is going to be critical to them. That’s one of the things we’ve been focusing on here as well,’’ said the Senior Investment Manager Andrew Preston. Similarly, analysts at JP Morgan said that iron ore price volatility is something to watch out for, but that it maintains an overweight stance on Rio Tinto.
That said, under Walsh’s leadership, shareholders are happy, the business is thriving, a solid management team is in place and production targets continue to be met. As such, Rio Tinto’s 2014 and the years to come could prove very interesting.