Rio Tinto Fires Two Senior Executives Amid Payment Investigation

Rio Tinto, long the bluest of blue-chip companies, finds itself mired in a corruption scandal over how it was able to secure a fabulously large iron ore project in the jungles of the Simandou Mountains, in the historically corruption-challenged west African nation of Guinea.

The company says it is shell-shocked that its reputation is being trashed over the affair. And the senior Australian executive in charge of Simandou in 2011, Alan Davies, is equally distressed about the damage to his own reputation now Rio has sacked him without actually saying what he has done wrong.

The root cause of the mess Rio now finds itself in was the 2008 global financial crisis. Rio had extended itself the year before with an ill-timed and overpriced $US38 billion ($51bn today) acquisition of Canadian aluminium group Alcan. When financial markets froze and commodity prices collapsed, Rio was battling to survive.

One of the first decisions it made was to go slow on the development of Simandou.

Previously and much to the Guinea government’s delight, Rio once had a bold, $US20bn ambition to develop a project to rival Australia’s Pilbara.

But the global financial crisis killed that plan and Guinea’s military ruler at the time was not impressed. Rio was stripped of the northern half of the deposit, which was shunted to an Israeli diamond dealer, Beny Steinmetz.

Rio was panicking that Guinea would boot it out of Simandou altogether and set about convincing the government of its bona fides. A “settlement’’ payment in April 2011 of $US700 million to the government secured Rio’s southern half of Simandou.

But the following month came time to pay the well-connected French investment banker whom leaked emails implicated in greasing the wheels for the settlement to occur.

It was that $US10.5m payment that finally so worried Rio that it has taken the findings of its own investigation to corruption authorities in the US, Britain and Australia. By self-reporting to corruption authorities, Rio is trying to limit the damage to its reputation as a company that it can be trusted by its home jurisdictions, Britain and Australia, to do the right thing when operating in third-world locations.

The $20 billion Simandou project, which Rio agreed to exit last month, was once one of the world’s most prized mineral assets.

It has been at the center of a power struggle for almost a decade having attracted some of the biggest mining companies, Israeli billionaire Beny Steinmetz and powerful advisers including investor George Soros and former U.K. Prime Minister Tony Blair. It’s also spawned many legal challenges and a U.S. grand jury probe into potentially corrupt payments to Guinean officials.

“Many people across Rio Tinto are still shell-shocked,” Rio’s Chief Executive Officer Jean-Sebastien Jacques said in an internal memo seen this week by Bloomberg News.

“The day I was made aware of a potential issue we launched an investigation. It wasn’t a decision we took lightly.

We will fully cooperate with the authorities. Their investigations may take several years.”

The board made the decision on Davies and Valentine after reviewing the findings so far by the internal inquiry, the company said. In accordance with contract termination, neither executive will be eligible for any short-term incentive plan awards for 2016, it said. Rio will also cancel all unvested incentive plan awards from previous years.

“This treatment of me and my past and recent colleagues is totally at variance with the values and behaviors of the company to which I have devoted my professional life,” Davies said in the statement. “My rights are fully reserved, and I have been left with no option but to take the strongest possible legal action in response.”

Davies, who joined Rio in 1997, had been among internal challengers to become CEO ahead of the appointment of Jacques, who took the role in July.

Bold Baatar, a Mongolian and former investment banker, will replace Davies on Rio’s executive committee as energy and minerals chief executive, the company said. Davies was accountable for Simandou at the time of the payments.

Chief Financial Officer Chris Lynch has temporarily assumed accountability for corporate, legal and regulatory affairs. The recruitment process for a new chief legal counsel has started, the firm said.

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