Following an investigation, the FCA found that Rio Tinto breached the disclosure rules by failing to carry out an impairment test and to recognise an impairment loss on the value of mining assets based in Mozambique which it acquired in August 2011 for $3.7bn (£2.8bn) when publishing its 2012 interim results in August 2012.

Had Rio Tinto complied with its obligation to carry out the test, a material impairment would have been required to have been disclosed at the time of its 2012 half year financial reporting. Rio Tinto’s financial reporting was therefore inaccurate and misleading. This continued until 17 January 2013 when Rio Tinto announced an impairment of the Mozambique assets, writing off approximately 80% of the value of the investment in the Mozambique mine.

When Rio Tinto acquired the Mozambique mine, its valuation was based on a plan to move rapidly into coal production. This plan assumed Rio Tinto would be able to barge coal from the mines down the Zambezi River to the coast for export.

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 began to carry out financial modelling of its mining business which indicated that the value of the Mozambique assets, based on the best information available at that time, was negative.

Despite the modelling results, Rio Tinto decided that it would not carry out an impairment test, as required by international accounting standards, to assess whether an impairment was required to be recorded in its financial reporting of its 2012 half year interim results. Instead, Rio Tinto decided there was a lack of clarity around how it would develop the mines which made it premature to revalue these assets. For this reason, and wrongly in the FCA’s view, Rio Tinto decided it was appropriate to continue to value the mining assets at the acquisition price.

The FCA said it considered that this demonstrated a serious lack of judgement. There were indicators of impairment for the Mozambique assets which meant that Rio Tinto was required to carry out an impairment test.

The FCA has therefore imposed a financial penalty on Rio Tinto of £27,385,400. Rio Tinto agreed to settle at an early stage in the investigation and therefore qualified for a 30% reduction in penalty, which otherwise would have been over £39m.

Mark Steward, FCA’s executive director of enforcement and market oversight, said: ‘The UK listing regime requires listed companies to adhere to high standards of disclosure and transparency.

‘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.

‘Reflecting the size of the company, this is the largest fine imposed to date by the FCA for a breach of rules relating to a firm’s official listing and demonstrates how vitally important high standards of disclosure and transparency are to ensuring our markets function fairly and effectively.'

US investigation

The SEC has charged Rio Tinto and two former top executives with fraud, saying it inflated the value of the coal assets acquired for $3.7bn which were then sold a few years later for $50m.

The SEC’s complaint alleges that Rio Tinto, its former CEO Thomas Albanese, and its former CFO Guy Elliott failed to follow accounting standards and company policies to accurately value and record its assets. Instead, as the project began to suffer one setback after another resulting in the rapid decline of the value of the coal assets, they sought to hide or delay disclosure of the nature and extent of the adverse developments from Rio Tinto’s board of directors, audit committee, independent auditors, and investors.

The SEC investigation also relates to the coal asset Rio Tino acquired in Mozambique in 2011, which the regulator says occurred shortly the company disclosed huge losses associated with its previous large-scale acquisition of Alcan.  Both acquisitions took place under Albanese’s leadership. 

The second acquisition was also unsuccessful as it was based on the incorrect assumption that Rio Tinto could inexpensively mine, transport, and sell large quantities of high-quality coal, chiefly using barges for shipping.  The SEC’s complaint, in line with the FCA’s, alleges that the project suffered setbacks almost immediately, as Rio Tinto, Albanese, and Elliott learned that there was less coal and of lower quality than expected, and that Mozambique had rejected its barge application. These factors significantly eroded the value of the acquisition.

The SEC alleges that after already impairing Alcan twice, Rio Tinto, Albanese, and Elliott knew that publicly disclosing its second failure and rapidly declining value would call into question their ability to pursue the core of Rio Tinto’s business model to identify and develop long-term, low-cost, and highly-profitable mining assets.

Instead, they concealed the adverse developments, allowing Rio Tinto to release misleading financial statements days before a series of US debt offerings.  Rio Tinto raised $5.5bn from US investors, approximately $3bn of which was raised after May 2012, when executives at Rio Tinto Coal Mozambique had already told Albanese and Elliott that the subsidiary was likely worth a negative $680m. The complaint alleges Albanese then repeated and reinforced the false positive outlook for the project in public statements.

The alleged fraud continued until January 2013, when an executive in Rio Tinto’s technology and innovation group discovered that the coal assets were being carried at an inflated value on Rio Tinto’s financial statements.  After an internal review allegedly triggered by the executive’s report to Rio Tinto’s chairman, Rio Tinto announced that Albanese had resigned and the company reduced the value of the coal assets by more than $3bn, or more than 80%.  After a second reduction, Rio Tinto sold the Mozambique subsidiary for $50m, billions of dollars below the acquisition price.

Steven Peikin, co-director of the SEC’s enforcement division, said: ‘Rio Tinto and its top executives allegedly failed to come clean about an unsuccessful deal that was made under their watch.  They tried to save their own careers at the expense of investors by hiding the truth.’

The SEC’s complaint charges Rio Tinto plc, Rio Tinto Ltd, Albanese, and Elliott with violating the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. 

Rio Tinto has it ‘intends to vigorously defend itself against these allegations’. 

In a statement, the company said: ‘Rio Tinto 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’.

With regard to the company’s settlement with the FCA over the timing of the impairment of Rio Tinto Coal Mozambique (RTCM), Rio Tinto said: ‘The FCA made no findings of fraud, or of any systemic or widespread failure by Rio Tinto. The case is now closed.’

According to its statement, the Australian Securities and Investments Commission is also reviewing the RTCM impairment, and Rio Tinto said it will update the market, as required, in due course.

The FCA final notice for Rio Tinto is here.

Report by Pat Sweet