Rio Tinto slapped with 'largest ever' £27m fine for breach of rules

Gladys Abbott
October 19, 2017

FTSE 100-listed mining giant Rio Tinto PLC and two of its former executives have been charged for fraud by USA regulators for inflating the value of coal assets as it also paid a more than GBP27 million fine to United Kingdom regulators related to the same issue.

The SEC said misleading statements were made days before a series of debt offerings. Rio Tinto should have been aware of its obligation to carry out the impairment test and the resulting material impairment should have been reported to the market at its half-year results in 2012.

It comes as Rio Tinto failed to carry out an impairment test, and recognise an impairment loss on the value of mining assets based in the Republic of Mozambique (RTCM) which it acquired in August 2011 for $3.7bn.

The SEC demands that Rio Tinto, former CEO Thomas Albanese and former CFO Guy Elliott disgorge all ill-gotten gains, in addition to paying prejudgment interest and civil penalties.

The African coal-assets acquisition turned out to be less valuable than anticipated, according to the lawsuit, as it was based on the incorrect assumption that Rio Tinto could inexpensively mine, transport and sell large quantities of high-quality coal, primarily using barges for shipping. "They tried to save their own careers at the expense of investors by hiding the truth". 2013 - Albanese resigns at request of board.

Shell announced that Guy Elliott was immediately leaving his position as a non-executive director at the Anglo-Dutch oil company as a result of his involvement in the legal case.

The UK's Financial Conduct Authority (FCA) also fined Rio Tinto £27.4 million for breaching disclosure rules - the largest such fine - over the Mozambique coal purchase.

"We sincerely hope he satisfactorily resolves those proceedings and, that in that event, he would like to be considered for rejoining the board".

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Despite the modelling results, Rio Tinto decided that it would not carry out an impairment test, as required by global accounting standards, to assess whether an impairment was required to be recorded in its financial reporting of its 2012 half year interim results.

Rio pledged to fight the charges, saying it "believes that the SEC case is unwarranted and that, when all the facts are considered by the court, or if necessary by a jury, the SEC's claims will be rejected". Citigroup Inc. lowered shares of Rio Tinto PLC from a "buy" rating to a "neutral" rating in a research note on Tuesday.

The SEC alleges that Rio Tinto's fraud continued until January 2013, when an executive in its Technology & Innovation Group discovered the inflated coal assets figures in financial statements.

As Rio Tinto settled at an early stage of the investigation, the fine was reduced 30% from the original £39,122,007 amount.

Mark Steward, executive director of enforcement and market oversight, said the fine demonstrated how "vitally important" high standards of disclosure and transparency were.

Prior to half year 2012, it became apparent that Rio Tinto would not be able to barge the coal to the coast, as planned and that higher cost alternatives would be needed to transport coal for export.

Rio Tinto said in a statement in response to the FCA fine that the regulator "made no findings of fraud, or of any systemic or widespread failure by Rio Tinto".

Shares in Rio Tinto were 1.2% lower at 3,666.00 pence on Wednesday, one of the worst performers in the FTSE 100, although the stock is still up 16% in the year to date.

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