3 Things to Loathe About Rio Tinto

LONDON -- There are things to love and loathe about most companies. Today, I'm going to tell you about three things to loathe about Rio Tinto  (LSE: RIO  ) (NYSE: RIO  ) .

I'll also be asking whether these negative factors make this FTSE 100 mining giant a poor investment today.

Remuneration
Remuneration committees bang on about having to provide executives with "competitive" pay packages. Fair enough, but I think shareholders like to see remuneration balanced toward a relatively low fixed element -- base salary, pension and other benefits -- with a significant element linked to performance.

The table below shows the FTSE 100's big four miners, their turnover for 2012, and the fixed element of the chief executives' remuneration.

Company

Turnover in 2012
(US$bn)

Chief Executive's
Fixed Remuneration
(US$m)

BHP Billiton

72

3.2

Rio Tinto

51

4.1

Xstrata (now Glencore Xstrata)

32

3.1

Anglo American

29

2.6

Not hard to spot the anomaly, is it?

Asset writedowns
During January this year Rio announced US$14 billion of asset writedowns. There was a reduction of US$10-11 billion in the carrying value of the group's aluminum assets (mostly those acquired by the 2007 takeover of Alcan), an impairment charge of $3 billion for coal assets acquired during 2011, and a number of other smaller writedowns.

What this means is that Rio has a recent history of paying over the odds for assets. Will there be further writedowns? I don't know, but the company has repeatedly reduced the carrying value of the Alcan assets, such that it has now written down something like US$28 billion of the US$38 billion purchase price.

Norway
What's Norway got to do with anything? Well, the country has the largest sovereign wealth fund in the world. The "Government Pension Fund – Global", established in 1990 to invest Norway's surplus oil income, has a current asset value of US$737 billion and holds about 1% of the entire shares of global equity markets.

The fund has an "ethical" screen, but not a very severe one. It's something of an embarrassment, then, that Rio, unlike its big Footsie peers, doesn't come up to scratch. Rio is ranked alongside Indian company Vedanta Resources as a no-go miner on account of "Actions or omissions that constitute an unacceptable risk of the Fund contributing to ... severe environmental damages".

A poor investment?
Let's be generous and say that the past is the past. Rio's previous chief executive, Tom Albanese, was given the heave-ho after the asset writedowns I mentioned, and new man Sam Walsh is well respected within the industry. Walsh has promised that Rio will be a very different company going forward, particularly with regard to discipline in capital allocation, which includes acquisitions.

With the mining sector currently out of favor generally, Rio, at a share price of around 2,800 pence, is trading on just eight times forecast earnings for 2013, falling to seven times 2014 earnings. At the same time, analysts reckon we'll see Rio deliver double-digit earnings growth for each of those years. And there's a prospective 4.2% dividend income just for good measure.

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