Rio Tinto veteran talks of a turnaround

RIO Tinto's chief financial officer Guy Elliott has been known for making sensible acquisitions at the bottom of commodity cycles.

But Rio's reputation for value-enhancing acquisitions was turned on its head in July 2007, when the miner launched its ill-fated $US38.1 billion cash acquisition of Alcan.

It has taken Rio three years and the fifth-biggest rights issue in global corporate history -- along with a failed deal with Chinalco that soured the company's relationship with China -- to climb out of the mire.

Now London-based Elliott, 55, says the company is finally in a good place.

So much so that acquisitions, big capital spending and even capital returns over the next 12 months are on the cards.

"We've been through a period where we had to put the brakes on investment," Elliott tells The Australian.

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"We're coming out of that now and we're applying capital to all our product groups.

"Capital management is not top of the agenda -- top of the agenda is growth in the business -- but it is on the agenda as a serious option," he says.

And Elliott is determined to help fix Rio's tarnished image.

"There is a feeling of confidence in the company that we can go back to the Rio that was known in years gone by," he says.

"That combination of very good operator with very good investor; that's what we're aiming to do. We did it exceptionally well in the past and we can do it exceptionally well in the future."

Elliott has been with Rio since 1980, spending a great portion of that time working on the big acquisitions that have built Rio into the world's third-biggest miner by market value.

As with most of Rio's big transactions in the past 25 years, Elliott was heavily involved in the Alcan purchase, which set the company up with $US40bn of debt and a huge aluminium business just before the global financial crisis froze credit and wiped out commodity prices.

"In the purchase of Alcan, we made something that was strategically on target -- in the sense that these were long-life, expandable assets -- but we paid too much for that. Much too much," he says.

"That was where we deviated from past practice."

Despite the huge consequences of the price paid for the acquisition, which nearly saw Rio sell stakes in its best assets to Chinalco at the bottom of the market and take on the Chinese aluminium giant as an 18 per cent shareholder, Elliott and chief executive Tom Albanese have retained the support of the board under new chairman Jan du Plessis. Streams of cash flowing in from the company's huge Pilbara iron ore mines and other global businesses as the China boom regains speed means Elliott once again has the chance to look at acquisitions.

"If you set Alcan aside -- and I accept it's a big thing to set on one side -- and look at all the acquisitions for the last 20 or more years, you'd find, in contrast to what would be true in industry as a whole, most of those acquisitions have been good for the shareholder of Rio," he says.

"If we can apply those same disciplines, and make the good acquisitions, it will be worth doing."

The company is now trying to make its first multi-billion-dollar acquisition since Alcan -- a friendly $3.9bn takeover of Mozambique-focused coking coal explorer Riversdale Mining.

The price tag is in line with Elliott's plans for the company to make small-to-medium purchases, by which he means single-digit billion-dollar transactions.

Big, company-transforming acquisitions are not something for which the company currently has an appetite.

How the dual-listed miner deviated from past practice in its Alcan acquisition, which was transformative for all the wrong reasons, is something that has been heavily speculated upon, but something Elliott won't discuss.

Many believe it was driven by then chairman Paul Skinner, who had been privately approached by BHP Billiton about a merger, which he had knocked back, before the Alcan deal was floated.

BHP launched its ultimately unsuccessful $135bn bid for Rio four months after the Alcan bid was announced.

When the GFC hit in 2008, the enormous Alcan debt paralysed Rio's growth plans and its ability to refinance, forcing the company into an $US18bn asset sell-off deal with Chinalco.

That deal was eventually scuttled by shareholder discontent and an improving market in favour of a $US15bn rights issue, which angered China and left Elliott and Rio with a lot of fence-mending to do.

During the crisis, some investors called for Elliott's corporate head, along with that of Albanese, who had only been in the top job two months when the Alcan deal was struck, and Skinner.

But Elliott, the company veteran, and Albanese, who was still finding his feet in the top job, both survived.

Skinner, who had a reputation as a driver of strategy that made him effectively almost an executive chairman, made plans to leave in late 2008, shortly after it was revealed he was angling for the top board job at BP -- which he didn't get.

Albanese's predecessor, Leigh Clifford, who had Elliott as his deputy for most of his tenure, says the deal should not automatically reflect badly on the CFO.

"The question is -- who had their hands on the tiller at the end of the day?" Clifford says.

"I have the highest regard for Guy.

"He's very experienced, he's a very clear thinker and he's someone who is very conscious of seeing opportunities and creating options.

"He's also a very good devil's advocate and always was ready to speak his mind, even when he was in a minority of one.

"I don't know what transpired with the Alcan stuff.

"Whatever it is, he would have been putting his views forward quite courageously."

Clifford was there when the Alcan plan was formulated but had been gone for two months when Rio revealed the price it was prepared to pay.

Elliott was one of two contenders for Clifford's job but, unlike many who are passed over for CEO jobs, has stayed on at the company.

A fund manager at one of Rio's biggest London investors shares Clifford's impressions of Elliott.

"Guy is an excellent CFO and has served shareholders very well during the last few years," the fund manager said.

"Without him, I think things could have been even worse."

Elliott describes the past three years as a rollercoaster and a very stressful, time-consuming period but rejects the notion the 138-year-old mining company was taken to the brink.

"That expression would be overdoing it -- whatever happened through that period, the underlying assets of Rio Tinto and the underlying people were still the same ones, and they were going to come through well," he says.

Overall, he feels satisfied with the process now that the company is through it.

"Was every decision the right decision?

"With the benefit of hindsight, no. But at the time it was made, every decision was made with the best interests of the company in mind, and some of those were very difficult."

Elliott is notable among big-company CFOs in that he has no formal accounting qualifications.

He began his career with Rio Tinto Zinc fresh out of business school, before which he had done a short stint at a bank.

In 1996, Elliott went to run's Rio's Brazil operations, which were concentrating on building gold and nickel projects, before becoming CFO and a company director in 2002.

If there has been a bias in his 30 years at the company, it is toward mergers and acquisitions and appraisal of capital projects.

And in that respect, there was another casualty of the Alcan acquisition.

Along with not being able to invest in project growth through the downturn, Rio was unable to snap up global financial crisis-inspired bargains it would have been able to had it kept its debt levels in check.

This was the case with most of its peers too, apart from BHP Billiton, who had the strongest balance sheet in the game but chose not to make any acquisitions during the depths of the crisis.

"There were some very attractive valuations at certain points （in the financial crisis）," Elliott says.

"There were, for those who were brave . . . some great opportunities, but few were taken up."

If Rio's current trajectory continues -- along with recent bullishness around commodities and in particular iron ore -- so will Elliot's focus on M&A and capital appraisal.

In November, Rio declared itself back in growth mode, committing to $US11bn of capital investment this year, and flagging $US10bn of fresh iron ore expansion in Western Australia's Pilbara region.

Over the next year, barring any unforeseen negative developments, Elliott sees Rio investing more in growth, possibly completing some small-to-medium sized acquisitions and, potentially, lining up capital management.

Rio's impressive iron ore operations -- they tend to run smoother than BHP's -- are by far Rio's biggest earner, with Credit Suisse estimating the unit will bring in $US11bn, or three quarters of Rio's expected 2010 profit of $US14.9bn.

And with the $US15bn investment in WA iron ore expansions over the next five years, this is unlikely to change soon.

"Some people say: you are making this into an iron ore company," Elliott says.

"First of all, I would say iron ore is a great place to invest.

"But let's suppose we were concerned about it from a portfolio point of view -- what would you do?"

The options, he says, are investing less in iron ore and tolerating lower returns or accepting higher risks in other businesses.

"Another thing you might do is make a transformational acquisition in something other than iron ore -- that sounds like a bad idea too."

When Elliott, who is married and has an 18-year-old son, is not travelling the globe or working in London for Rio, his interests turn to skiing, walking in the country, reading and, recently, playing bridge.

He also spends a lot of time in art galleries and auction houses, building up a collection he describes as "a joke", consisting mainly of pictures by friends and old bits of junk.

"For the last two or three years, there hasn't been very much time, but there is a bit more