Rio Tinto Faces Reckoning Over Africa Bets

By Robb M. Stewart in Melbourne and Dave Michaels in Washington Features Dow Jones Newswires

A U.S. lawsuit alleging Rio Tinto PLC misled investors about the value of its assets in Mozambique is the second serious regulatory problem in less than a year to rock the mining giant over its forays in Africa.

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The world's second-largest independent mining company was already grappling with multiple investigations in the U.S., U.K. and Australia into a $10.5 million payment made to a consultant to help it acquire rights to a large iron-ore deposit in Guinea known as Simandou. That revelation forced the departure last November of Rio Tinto's energy and minerals chief and a legal and regulatory affairs executive.

On Wednesday, allegations that the British-Australian company misled investors over its Mozambique coal assets forced its former chief financial officer, Guy Elliott, to resign from the board of Royal Dutch Shell PLC. The U.S. Securities and Exchange Commission is seeking to bar Mr. Elliott and former Rio Tinto Chief Executive Thomas Albanese from serving as officers or directors of a public company.

Rio Tinto continued to value the mining assets in Mozambique at more than $3 billion despite an internal assessment that they were worth negative $680 million, according to a SEC lawsuit filed this week in Manhattan federal court.

The SEC is pursuing civil financial penalties and disgorgement of ill-gotten gains through its lawsuit. Separately, Rio Tinto agreed to pay GBP27 million ($36 million) to settle claims by the U.K. Financial Conduct Authority that the company didn't write down the value of the Mozambique mine in a timely manner.

Rio Tinto said Tuesday that the SEC's claims of fraud are "unwarranted" and would be proven wrong in court. Mr. Albanese said he is innocent of any wrongdoing and that the SEC's claims "will be proved baseless." A spokeswoman for Mr. Elliott said he also disputes the SEC's charges and will fight them.

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Shell said Wednesday that Mr. Elliott stood down over "his involvement in legal proceedings regarding his former employment at Rio Tinto" and that he would like to be considered for rejoining its board once the issue was resolved.

Rio Tinto's shares were down about 1.2% in afternoon trading in London. Tyler Broda, a mining analyst at RBC Capital Markets, said the revelations were unlikely to significantly affect Rio Tinto's share price.

"It will likely cause more noise around Rio's corporate culture, especially on the back of the Simandou bribery charges from last year," Mr. Broda said in a note. Rio Tinto says it is cooperating with all probes into the Simandou case.

The Mozambique and Guinea cases ramp up scrutiny of Rio Tinto's actions under Mr. Albanese, who resigned in 2013 after the company announced it was writing down the value of assets around the world by $14 billion, including $3 billion in Mozambique, as commodity prices began to fall.

Rio Tinto sold the Mozambique coal business in 2014 for $50 million, or about 2% of what it paid, the SEC said.

The $14 billion figure included a huge impairment on the value of Alcan Inc., an aluminum processing company that Rio Tinto acquired in 2007.

The SEC alleged that Messrs. Albanese and Elliott didn't disclose the problems with the Mozambique assets because they had already written down the value of Alcan and feared the market's reaction to another unsuccessful deal.

The project hit several major setbacks, including the Mozambique government's rejection of transport plans for the coal. The company knew by the end of 2011 that it could sell only about 5% of the coal that it had originally assumed, the SEC alleged.

The company later raised $3 billion through debt sold to investors without revealing the problems with the Mozambique assets, the SEC said.

In Guinea, internal emails reviewed by The Wall Street Journal showed that high-level executives including Mr. Albanese approved the payment in 2011 to a consultant who was close to senior Guinean government officials.

The emails, which were reviewed by The Wall Street Journal, show Rio executive Alan Davies asking permission from the company's then-iron-ore chief, Sam Walsh, to make the payments to François de Combret, a former Lazard Ltd. managing director.

Mr. de Combret had been helping the company negotiate with the Guinean government to retain an iron-ore concession in the country's Simandou mountain range, according to Mr. Davies's email, and his services "were of the most unique nature," including helping the company's communications with Guinea's president, Alpha Condé. Mr. Condé was at the time being advised by Mr. de Combret, a friend he had met in school in Paris, according to a person familiar with the matter.

Mr. Walsh, who was Rio Tinto's iron ore chief at the time, checked the idea with Mr. Albanese, the company's then-chief executive, who gave the green light but warned Mr. Walsh to "think of the optics to the [government of Guinea.]," according to the emails. Mr. Walsh later served as CEO from 2013 to 2016.

Mr. Davies has denied wrongdoing. This year he was named CEO of Moxico Resources PLC, a copper mining company with assets in Zambia. A Moxico representative didn't immediately respond do a request for comment.

Attempts to reach Messrs. Walsh and de Combret have been unsuccessful and they haven't publicly commented on the issue.

--Scott Patterson in London contributed to this article.

Write to Robb M. Stewart at robb.stewart@wsj.com and Dave Michaels at dave.michaels@wsj.com

(END) Dow Jones Newswires

October 18, 2017 09:53 ET (13:53 GMT)