Rio Shareholders Have Themselves to Blame
Rio Shareholders Have Themselves to Blame
Doing the rounds with Rio Tinto’s 2005 interim results, then CEO Leigh Clifford told Bloomberg: ‘In the current market we don’t want to lose our head’. The same day he told CNBC News: ‘I think we’ve got to keep our feet on the ground; it’s a cyclical business; it’s pretty heady prices at the moment; and some people will make some imprudent investments. And we want to be around and have a strong balance sheet to take advantage of opportunities that might arise.’
Little more than a year later, in December 2006, Rio announced that Clifford would ‘stand down’ in April the following year and Tom Albanese would take the reins as CEO. Reading between the lines, Clifford was sacked for his conservative, contrarian approach.
The board now has a lot to answer for. The new CEO did exactly what they wanted him to do and threw Rio’s lot on the stronger for longer bandwagon. Just a few months after Albanese took the reigns, Rio paid US$38bn, funded entirely with debt, for Canadian aluminium producer Alcan.
Now that BHP Billiton has walked away from its proposed takeover of Rio, the stupidity of that deal is in the limelight for all to see. Aluminium prices have plunged and producers are no longer such hot property – the share price of ASX-listed aluminium producer Alumina has fallen by 80%. And Rio is saddled with a huge pile of debt in the midst of the worst credit crisis since the great depression.
The knives will predictably come out for Albanese. But it’s hardly his fault. The board appointed him to do a job and he did it. Chairman Paul Skinner and his team need to accept a large share of the blame, but even they were undoubtedly acting under significant pressure from shareholders. Sick of the company’s conservative approach in a raging commodities boom, institutional shareholders were pushing hard for a change of strategy.
They’ve only got themselves to blame for the company’s current predicament.
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Hi Steve
Thanks for the article.
I can't help but notice that II hasn't really rung a warning bell on RIO. I remember a comment in a podcast (by your good self, I think) saying at $140 or so RIO was very expensive and would suffer if the BHP buy failed.
But apart from that, there's very few updates and they are HOLD's or NO VIEW's
All too late now, of course, but it would have been nice to be warned about RIO and their mountain of debt a bit earlier ...
Couldn't most of the article you wrote here been posted months ago?
Thanks again
reading the II posts from the past, you guys have generally preferred rio then bhp. In the current situation, being a BHP shareholder, I am quite happy. RIO shareholders must be gutted, thinking of what could have been. RIO will surely face dilution, they may go cap in hand to China, but I would not expect any deal to be kind to current shareholders
So we have another example of Bristlemouth/Intelligent Investor saying "We told yu so", because over the past six years you have "constantly and consistently warned" the world that all was unsustainalble.
And that approach is just like the boy who cried wolf. Cry wolf constantly and consistently over a long time, and one day when the wolf does come you can point out to all your warnings.
Only problem is that at Intelligent Investor you sat on your hands for years while the boom went on around you bleating away about how bad it all was, and now that the collapse has taken place, you are exposed as being just as consistently poor at doing the analysis (few of your stock reccos since November last year have done anything but go severly backwards) while constantly sniping at everyone around you for their percieved shortcommings.
Its one thing to be a contrarian investor but it is quite another being constantly negative and then pointing accusatory fingers.
To say the shareholders only have themselves to blame is a generalisation. I'm sure Chinalco is delighted.
Firstly, I pinched most of those comments from previous reviews of Rio. See our update on the Alcan takeover and Rio Tinto: The Big Contrarian. But you're right, reviews have been few and far between.
And, while I wish I'd written what I said in the podcast about BHP's bid for Rio for everyone to read, the fact is I don't know enough about this business to have a strong conviction either way. Having a rant about board stupidity is one thing, telling people to sell their shares in Rio Tinto requires substantially more analysis.
We've been very clear that if people want to invest in resources stocks, they need to do their own research or get their advice somewhere else.
Although I do know a bit about buying stocks at less than net cash, and there are a few of those floating around in resources land at the moment. It's getting a lot more of my attention.
As The Intelligent Investor's research director, I'm prepared to accept constructive criticism where it's warranted. But I do want to respond to the accusation that 'over the past six years you have "constanty and consistently warned" that the world was unsustainable. And that approach is like the boy who cried wolf.'
As advisors to long-term investors, I'm pleased you're alluding to our long-term record. And I think if you examine it carefully on these big resource stocks, it's one we can be content with.
In the last downturn, we were actually recommending both BHP and RIO when nobody was on the resources bandwagon. The most recent of a string of positive BHP recommendations was in issue 131/Jul 03 (Long Term Buy - $8.89), titled BHP BIlliton in a new cartel?
That was followed by a string of Hold recommendations until we recommended shareholders start banking some reasonable gains in January 2005, issue 167/Jan 05 (Take Part Profits - $15.68).
With hindisght, I certainly wish we weren't so conservative in telling people to take some money off the table. But we've made worse mistakes than only making a 50% profit on part of a BHP recommendation, so I'm not beating the team (or myself) up over that particular episode too much (there are a few others where I have a big stick out, though).
Sorry for the long post, but I felt it worth defending our record to readers who may not know the story and may be concerned by the extreme characterisation put forward here. We have not been, and are not, 'Chicken Littles' who always insist that the sky is falling. But nor are we cock-eyed optimists who always believe that the market will bounce back tomorrow. We are, first of all, level-headed value investors. Secondly, we're students of financial history (and, like everyone in today's environment, trying to learn the right lessons from the current situation).
All the best to Bristlemouth readers in the current turmoil - both members and non-members of The Intelligent Investor alike - I hope you're all selectively adding a few bargains to your portfolio to beef up your future returns.
Thanks for the reply Steve
I understand your point about the level of conviction required from a magazine like II. It didn't really think of it that way.
Just to chuck a few more points into the ring:
- it's become very apparent to most shareholders that we should only have held shares we're were very comfortable with. Never before have I really understood the clause "all ships rise on an incoming tide". The long bull market made me, at least, really drop my guard.
- As much as we should do our own research, we are paying for the magazine. So, combinations of laziness and time-constraints often mean (in my case at least) a large reliance on published articles, especially ones that come up on a search on the website.
- A hold recommendation has been explained by II as not-a-sell. I think a "no view" would have been more appropriate, given your comments above.
I think the recent turmoil is enough to get anyone excited; and regretful about not selling out in the "good times". So, don't get me wrong - I'm not holding you to blame :) It's all too easy to play the hindsight card on so many stocks.
But when I get most of my share market information from II and "gut feels" it can be a bit annoying to be falsely comfortable with RIO and not bothered too much by the takeover going ahead or not.
Perhaps Bristlemouth is an appropriate place for "opinion" vs the magazine for "conviction"?
Thanks for your opinions and time taken to put your thoughts out there
Frankly, I'm getting tired of the moaning and groaning from subscribers who want to delegate personal responsibility to TII. TII isn't putting a gun to anyones head when it comes to stock recommendations. It is expressing an opinion. An opinion that I think, generally, is quite enlightening. If you think TII is adding no value - then go elsewhere. Or, if you want to follow mindless BUY/SELL recommendations, perhaps you should also go elsewhere (and good luck).
I agree Mars and hope my post didn't come across that way.
I was trying to offer some constructive criticism and assume that II would rather hear from people before they cancel their sub, rather than after :)
I'm a long term subscriber and generally happy - but we can always be happier!
If you're a value investor, you didnt pile money into RIO hoping the takeover would go ahead. You bought it when it was good value. When it took a poison pill to fight off the wolves and was then grossly over-valued, you sold.
Bizarre to blame II for staying out of resources when in fact they advocated buying when resources stocks were cheap and selling when it was expensive.
Having said that, I for one would value an II take on the resources sector at the moment - it's hard not to look around and see bargains everywhere, but no doubt that's coloured by stock prices over the last few years. I for one would appreciate more on the mid-sized companies than the bluechips, the smaller companies are harder for us part-timers to research, imo.
You guys at II are really copping it at the moment!
You did tell readers that your resource expertise was light recently & if people blindly hold then that is there problem.
I am sure we are all aware that Rio is not the only problem stock with debt in this market.
You guys at II should work double shifts so you can warn us about every problem stock at the moment........Not!
Thanks for warning us about ABC, Centro, Alco, CityPacific, etc. My portfolio might be hurting at the moment but it would be hurting much more if I hadn't avoided these total losses.
I am sure Rio will come back in time - the others above - not so sure.
When the next bull market hits and readers have made lots of money we will all be warm & fuzzy again.
To the guys at II, thanks for your effort & hang in there!
Bearing in mind that The Intelligent Investor is an advisor to long-term investors let's remember that Rio has performed pretty well over the last 10 years even after allowing for the recent chaos.
On a simple basis capital gains have been 10.48%p.a and dividends 8.89%p.a for a total return of 19.36%p.a. On a compound basis returns over the past 10 years have been 10.77% p.a.
Given the resource sector has been a driving force of the stock market both up and down over the past 5 years, and that it underpins the Australian economy it seems to me to be a major shortcoming of II (and a bizarre business strategy) to admit ignorance of the sector and play the card " we don't know much about resources".
If we are to consider breadth in our investment portfolio then is stands that resources have to be part of that. Why then is it acceptable for II to be light on for knowledge in this sector. As subscribers we are buying research, an educated opinion based on research.
We rely on TII providing research in those areas in which it has expertise. An absolutely critical component of this is that they recognise those areas in which they have minimal expertise (not withstanding the fact that resources can be highly speculative anyway). I find it breathtaking the number of subscribers who clearly have no clue what TII is all about and have obviously not bothered to familiarize themselves with the basics (as amply explained in the new investor segment). These people are wasting all of our time.
II are not admitting ignorance of the recourse sector. II obviously have a good knowledge of the sector and its implications but are unable to confidently provide in depth analysis on specific resources companies at present. (That's my impression)
Having received advice from other "expert" publications who recommend resources companies.....I wish you luck.
I respect Steve's knowledge and advice but am disappointed at his attack on the board of directors and executives of Rio. Does he have any evidence to back up his assertions?
I would be very interested to hear from Steve his opinions on who to blame for the current worldwide financial crisis and especially in Australia.
The long term contrarian shareholders in Rio should not be distressed because of the current drop in the price of its shares traded on the ASX. Australians are fortunate compared with investors and ordinary people in USA & Europe.
Hooray for Mars who knows how to invest. Terribly sorry to be wasting your time. Here's the rub. Practically all of the major brokers were working on the RIO / BHP deal so none of them were willing or able to provide in depth analysis of late. This makes it even more vital that alernative sources whose opinion you respect (and pay for) consider one of the biggest deals in the history of capitalism worthy of in depth analysis. These are two of the biggest mining companies in the world.....not lillte old Australia, the world ! Why would you not think in depth knowledge of these companies (which live in your own backyard) is worth comitting to ? I cannot recall anything in the II marketing literature that I received when being courted or upon subscribing that told me we don't have adequate knowledge or expertise in a sector that drives the ASX. I do hold RIO, but purchased at $42, not $142 so my concern is not sour grapes, it is bewilderment that the 2 major icons are not more prominent in II's thinking.
I'm not claiming I 'know how to invest'. What I'm saying is that we subscribe to TII for a style of investment that is well explained on their site. I suggest you get familiar with it if you wish to continue this conversation. By the way, you don't need the biggest players on the ASX to make sound investments. In fact, the biggest players are usually the most expensive, as everyone wants them.
GPJ. Some gentle advice; use your subscritpion money for an anger management class.
Thanks Fred. Wonderful advice, I feel better already however if you cast your mouse back to "Wrapping up Resources Aug '08" I think you will recognise II admitting ignorance of the resource sector.
My point is that II should finish what it starts. Stocks in the sector have been recommended for LONG TERM investment in the short term past so maintaining profile and depth of analysis is a fair expectation.
Get a resources analyst on the books. My guess is there will be plenty available over the coming months. It makes no sense to ignore a sector that so heavily influences the ASX given that a balanced portfolio is fundamental and the sector is so prominent in our economy.
I think we are all getting a bit carried away by RIO. If investors don't check the debt exposure of their investments at the moment then mabey they should consider an index fund. It was pretty obvious that RIO shares were being held up by the takeover premium. There was always a risk that the takeover would fizzle. This was a risk that Rio shareholders were taking.
The point is that RIO will come back. ABC, Alco, Centro, City Pacific, Commander communications, & numerous others that II warned about over the past several years won't.
Tha Banks had numerous buy recommendation at the height of the boom & were are they now.
Any long term subscribers of II would know that II have not had more than a hold on any bank for several years & I do not have to cast my mouse back to do this.
So, whilst Rio is down, is their debt so bad that they are going to fold? You cannot always fund growth from profits only. We have gone from debt is king to debt is a cancer. It is either off or on with this market. Bipolar disease has really caught on. Before Rio purchased Alcan, I thought it was worth around $100. Historically, the present $45 sits about 1 to 1.5 standard deviations below that estimate. So, the mistake has caused the price to deviate to the lower end. If they get another Leigh Cliffird, it should go back up. Unfortunately, at $140, it was only at 1.5 SD above the mean rather than 2 times where I would have sold but thinking that only makes me feel bad.
Hi GPJ, with regard to getting a resources analyst on the books - we're trying.
But we're always careful in adding new faces - there are almost as many traps in hiring people as there are in selecting stocks (with the double-whammy of a poor analyst then passing on unhelpful advice to our members).
It may take a few more months for the shake-out to produce a flood of talent on the market, though, and we're prepared to wait for quality.
If any Bristlemouth readers know anyone who's a skilled investor, has special (preferably hands-on) knowledge of the resources industry and is prepared to work non-investment banking salary - please direct them our way ASAP.
Hi Bill. Today we received the following from a very successful private investor who says:
"Read Steve’s comments on Rio Tinto - and for what it’s worth (probably not much) – I reckon he’s on the money; the driver for the whole deal was ultimately institutional shareholders. I’ve been (probably a misdirected invitation) to a couple of ‘private audiences’ (organised by now broke broker – dealers) with Rio’s management and they were clearly under intense pressure behind closed doors to do something stupid by all seeing and knowing city gurus. It’s truly astounding how everyone becomes a resources expert in the midst of a resources boom! Without a hint of irony it’s probably the same chaps now jumping up and down…….
Albanese clearly had his fingers all over the expansionist Mongolian copper foray; probably the reason he got the job. No doubt Alcan was a dumb deal. But it could have been a whole lot worse. They could have paid too much for a business with a high relative cost structure. At least with the Alcan deal they ended up paying too much for a business with a low relative cost structure. Of all the options on the table they probably took the least worst.
In my reckoning there are still plenty of sensible heads down at Rio – as for the team down at BHP... "
Fair call on the banks Fred and pats on the back to II for their against the wind stance. RIO's debt was indeed prominent in their balance sheet (and hence their valuation) however it was not at all prominent in their 2 out of 5 fundamental risk rating HOLD recommendation on RIO at $133. To quote II's own own glossary for fundamental risk rating .... "market-dominant, well-managed companies with low debt enjoy a low risk rating". In II's defence the share price risk was rated high. My point remains .... finish what you start. Maintain long term coverage for long term recommendations ....... and if Steve's own comments about there being a number of resource stocks trading at less than net cash then there is even more reason for the sector to be covered in more detail.
Mars, just as you are entitled to your opinions, so are other paid subscribers. This blog should not be just about "fans" of TII. I think TII needs to get a resources analyst. Unlike other markets the ASX and Australia in general have a big resources weighting. I do not think claiming ignorance is a defense.
GPJ, you are right on Steve’s comments about the resource stocks trading at less than net cash & I am sure Steve is looking at getting a resource analyst as we write.
Let me ask you this? If the credit crisis had not blown up and the Rio Takeover had gone through, would you have been so critical of II? I think not. They are doing their best short of a crystal ball and no lives. Cut them some slack. This is my last comment as people are going to start talking about us. Good luck with your investing GPJ, my tea is going cold.
Perhaps not as critical if the take-over went through but then II would not be saying "serves you right" shareholders either. I was not holding RIO until yesterday when I think some value was visible so my comments are not fueled by financial loss. II hangs itself out there and we pay for the privelege of their opinions (which I do in fact value) so I want them to be good opinions predicated on research and knowledge that provide insight and alert me to obvious danger. On the whole they do it well but criticism on RIO is warranted as much as boquets for their stance on the Banks.
See, GPJ, the anger management is working already.
Eswaran, I don't believe in fan clubs, and I'm no groupie. The point is that TII has an investment philosophy, which is well documented on the site. This philosophy may not be explainable in one or two sentences, and even requires some study. Worthwhile things usually require some effort. Do you think it fair that this philosophy should be corrupted for the benefit of those who are not interested enough to examine it? Anyway, perhaps it's more appropriate for someone from TII to comment further here.
Perhaps GPJ would make a good resources analyst.
First, let me say that I have owned (and sold) both RIO and BHP and have made profits on both so I am not posting in bitterness.
However, I do feel that it is a bit rich for TII to claim any moral high ground on their RIO recommendations. The views of one analyst do not represent the published opinion of TII. If we gather ten analysts in a room, one will usually be right. The last official "view" from TII was "hold" at $133. It has been pointed out several times that a TII "hold" is not the usual secret broker code for "sell". Many TII subscribers, as long term investors, would have heeded that advice. I acknowledge that TII did recognise the problem with the Alcan takeover in July 07 but nevertheless maintained a "hold" recommendation at $102 and subsequently at $137 in Nov 07 and at $133 in Feb 08. TII cannot hide behind the latest "no view" and pretend to be right.
Agree 100% with those sentiments Ross. I'd even say the same about the banks. Sure we told members to limit their total exposure to less than 15% and wrote plenty of good research, like Danger lurks in the banking sector, about the risks people weren't thinking about. But at the end of the day we didn't have a "sell" recommendation on any of the big four, and we should have.
For those of you that are complaining because some buy recommendations by I.I. are down in the current market, i suggest bearing in mind one very relevant issue.
The difference between being down on some value stocks and being down on ABC learning, alco finance etc, is that once the market recovers (and it will in its own time), you have a chance for those value shares to ride the next upswing. Cant say the same about ABC learning and Alco finance.
Preservation of capital, doesnt mean never incurring an unrealised loss, it means your capital is intact. If you dont sell, and the share recovers then your capital is intact.
Why does II need to cover resources at all ?
As commodity producers they are always going to be price takers. There are few barriers to entry. Returns over the cycle, not just the last 5 years, are poor. RIO had good returns due to sound management, and look what the board did to Liegh Clifford.
If you want a balanced portfolio, get a manged fund.
If you want a profitable portfolio, start by not making mistakes.
IE cross out businesses and sectors with poor characteristics such as capital intensive; low barriers to entry; lack of pricing power.
II no longer covers QAN for these reasons, why not put resources in the same NO COVERAGE category for similar reasons.
Enough said.
Dan
Do you mean value stocks like Croesus (Dead) and Timbercorp (Soon to be dead)
My biggest concern with TII, and why I no longer subscribe, is the blind devotion to value with no consideration of market sentiment. Slapping BUYs on stocks whose prices were plummeting and who are now worth close to zero, such as RHG or TIM. Why not wait for prices to stabilise? Didn't you guys know the market was tanking? It has cost me a fortune buying "opportunities" in stocks which have continued to crash because there actually was no value. I have learned now that it is just plain dumb to say XYZ stock is cheap so BUY now, when it is still being heavily sold off. I believe value investing is sound, but it should be done patiently and not without knowing the mood of Mr Market.
And how about Rams?
I'd suggest the issue here is not a deficiency in the 'method of value investing', but rather an error of judgement made by TII in assessing the business quality, in these cases.
We can't always pick winners, and that's why we need some degree of diversification.
However, as much as I value TII, I do believe TII should have been less than comfortable with some of these businesses. In the cse of TIM, a business model that depended on people wanting a big tax deduction rather than an adequate return, never sat well with me. This may have indicated something about thie culture of, or character of TIM.
I guess we choose to buy based on whether we ourselves are comfortable, and we wear the consequences. I don't need to feel comfrortable with everything TII publishes in order to extract value from it.
I greatly value the offering of TII.
However I chose not to invest in TIM (and FEA and Great Southern) largely because I could not trust a business that paid 10% up front commissions to the Financial Planners and seemed to make a profit in an area that no one else could. Secondly primary production has no end of risks involved and an area I totally avoid for that reason. It clearly takes time to read thru the prospectus for investors or "owners of woodlots" but if one wanted to invest in these companies a couple of hours of reading would likely have helped one to realize where the incentives lay in these products. Untrustworthy business managers will not get my investment at any price despite TII suggesting often that a cheap price makes up for a lot of problems.
Essentially if an investor thinks they can outperform the market by buying stoks recommended by TII or any group of analysts for that matter I would respectfully suggest they will need a good dose of luck. In my experience it aint that easy.
Now 14000 jobs to go at RIO. Yet again Sir Rod Eddington's name pops up as a Director and ANZ shareholders must be glad he is a recent addition to their board.
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