Among the business leaders who attended the Global Competitiveness Forum in Riyadh, Saudi Arabia, was Tom Albanese, CEO of Rio Tinto Group, the mining giant. In a recovering global economy, Rio Tinto has had a strong financial year: In early February, the company reported 2010 earnings of US$14.3 billion, a 194% increase from 2009. Demand and higher prices for all commodities drove the company's growth — Rio Tinto even booked US$682 million in diamond sales, a 52% increase from last year.
It's a different situation than the one Albanese faced when he became the CEO in 2007. Not even a month into the job, rival mining company BHL Billiton launched a US$66 billion hostile takeover bid. The global financial crisis followed, and a US$19.5 billion investment deal with the Aluminum Corporation of China collapsed. The Chinese also accused four Rio Tinto employees of bribery, and in a secretive trial, sentenced them to up to 14 years in prison last March. These challenges were an instant and intense test of leadership, Albanese says. But not only did they make him tougher, they forced him to focus on getting the mining company back to what it did best.
In the first half of a two-part interview with Arabic Knowledge at Wharton, Albanese says Rio Tinto believes a long-term market perspective and ongoing engagement with stakeholders are critical to business success. He adds it is extremely important not to take political sides in a country nor indulge in bribery for access. Albanese notes Rio Tinto's business strategy is to begin with shareholder demands and invest in large, long-life, low-cost operations that are profitable through all economic cycles and provide the right returns.
An edited transcript of the conversation follows. The second half of the interview will appear in the next edition.
Arabic Knowledge at Wharton: We want to start with your experiences in China and other Rio Tinto global operations and some of the conflicts they presented for your company. What does this tell us about the international market? Is it becoming more restrictive?
Tom Albanese: First of all, Rio Tinto is a longstanding multinational company that's been mining in Africa and Australia, South America, North America and Europe for more than 100 years. So we have had a long history of working in many different jurisdictions. We have about 130 years of experience, our first mine being reopening the Roman mines in Seville, Spain in 1873. Our business requires us to basically find, develop, build mines, and then operate them over long periods of time, [literally] decades of mining. That means you must have the appropriate license to operate in that location, and that license of operation becomes a very dynamic license. It's not what we might have received in, say, 1910. It's no longer applicable in 2010. We always have to learn, adapt, and basically modify ourselves as we go forward.
The biggest trend we've seen in our sector over, say, the past 20 years — [something] we thought would have happened after the collapse of the Soviet Union — is that we've seen an opening up of the world, a sort of profusion of new demand. And while there were signs of that, I think you also had areas that plateaued. It wasn't as manifest, and I think that probably for us, it crystallized with the Asian financial crisis in the late 1990s. There was investment ahead of itself, and then it collapsed quite quickly.
As we looked at 2003 and 2004, we saw China beginning to emerge. What happened at that point — in that period between the Asian financial crisis and the emergence of China's economy — is global stakeholder engagement needed to become quite a bit more sophisticated. We had to stop thinking like engineers, which I am one, and we had to think more about the stakeholders with whom we were involved.
During that period, we greatly expanded upon our sophistication with local communities and civil society, notably global non-government organizations. We probably had more of an orientation on environmental issues and on the avoidance of what I call disenfranchised communities. Also, internally we recognized we had to change the way we ran our businesses from a safety perspective. So in that period, we put into place global standards for health, safety, environment, and community engagement, and we recognized that our reputation was only as strong as the weakest point in that reputation anywhere in the world.
That [approach] served us well for that period of time. But what we've seen now over the past two to three years — a trend that's going to continue for the next 10 years — is that our sector, resources and commodities, is increasingly coming under pressure; that is, supply can't keep up with demand. As a consequence, we're seeing more geopolitical tensions that are coming out from that. You're seeing more government-to-government engagement, more country-to-company type engagement that we would not have had to put much of a focus on 10 years ago.
This is causing us now to reshape that stakeholder mapping, and the stakeholder agenda, to be more sophisticated. In some cases we've found that by having a very strong local community agenda, some capitals of countries see that as creating a destabilizing influence. So you're doing what you think you're supposed to be doing in your home patch to earn that license to operate. But we would be then underrepresented in the capital city.
We have had to deal with dramatic changes recently. We fought a hostile takeover offer, we had challenges with China, and we had the global financial crisis. Looking ahead, we are in a period of very rapidly rising metal prices. While those are good for our business, all of a sudden everyone wants a piece of the action. So we have to be more globalized in how we respond to that.
Arabic Knowledge at Wharton: So now you're competing not just with other companies but also with governments…
Albanese: Yes. The investment we made 10 years ago in shaping our stakeholder engagement around communities, around employee health and safety and our environment will be a key part of the strategy differentiating ourselves as others want to get in. What we've seen so far is that notwithstanding the rhetoric, many state-owned mining companies don't have the skills, and nor do they follow their ideals. I find it incredibly powerful that if I meet with the prime minister of an emerging country, I can say that we will use the same employee health and safety standards, the same environmental and community standards, in their emerging country as we do in Australia, the U.S. or Canada. It is very hard for someone to compete with that. And people do compete, people do try to undercut that, people do promise and can't deliver. It does represent a short-term challenge for us; but what we have to do is persevere for the moment.
Arabic Knowledge at Wharton: How will state-backed competition change the market?
Albanese: The mining industry is different from the oil and gas industry for two reasons. In mining, the preponderance of production is from private or public companies, and only a small part of the production is by state-owned mining companies, which is almost the exact reverse of the oil industry.
There are reasons why. The first is that if you look at the typical oil deposit and you map it against the geologic timeline — 4 billion years ago — the geologic window which is the modern oil deposit basically comes from a very, very narrow sliver, probably the thickness of a hair on a geologic table that is about a foot-and-a-half long. Oil is a hydrocarbon. Heat it up too much, and it will turn to coal or evaporate, or something else will happen to it.
In contrast, you can find copper that has been deposited 50 million years ago, and you can also find copper that was originally deposited 3 billion years ago. You can deposit it as lake sediment, which can be turned into a mountain, and then it can metamorphose. But copper doesn't melt, it doesn't disappear, it doesn't vaporize. It keeps getting reconstituted in different forms. So if you're looking for gold or copper, if you're looking for iron ore, you've got a much larger part of that geologic time horizon, which means you have a much greater range of geologic terrains and a few number of countries that concentrate that wealth. That [is why] national mining companies have to be careful; it's more difficult for them to create an unreasonable commercial situation, because we can just go somewhere else.
Arabic Knowledge at Wharton: We were talking about the resource scramble…
Albanese: The resource scramble is driven more by the long-time horizons needed to develop resources than the scarcity of resources. There are high risks of exploration — one in a hundred. Before you can build a copper mine in a new region, you've first of all got to find it. So you're going to spend at least five, maybe 10 years to find it if it's there. Then you'll spend five or 10 years to develop it. After that, you have probably five or 10 years before you start catching dividends back from it. So you're dealing with 10- to 20-year time horizons from the original spark of an idea to a dividend-producing mine. The supply response has a longer-term development period than sometimes the demand response. What we've seen over the past 10 years is that Chinese demand response has been so rapid, we as the industry leaders can't keep up with it.
What's interesting about it is people say, 'Well, copper prices are getting too high. We need copper for our iPads and our hybrid cars. What are you going to do about it?' Then those same people say, 'Well, we don't want you to build a copper mine in our backyard.' It takes longer because of community engagement and environmental studies to develop that copper than it would have 20 years ago. While some people say, 'You should should speed up development,' the changing nature of society and the greater range of stakeholder aspirations and requirements actually delay the time for development and actually dig in more [of] that higher-price period.
Arabic Knowledge at Wharton: Are more governments asking you to hand over information that could be private and proprietary?
Albanese: Our industry has never been too fussy about, say, trade secrets. In most of the countries that we explore, we're required to submit the data to the government. We have patented technology, but it's just straight commercial patents. For the most part, you buy a truck from the Japanese or Caterpillar. So, no secrets there. You buy your processing capacity from big international firms. Again, we may even use innovative technology with patents, but I don't think we have the same type of trade secret issues as some of the technology companies.
Arabic Knowledge at Wharton: What should companies do in situations that put them in conflict with governments?
Albanese: First of all, [what helps is] having a legitimized license to operate where you have recourse and you have a community relationship that's reasonably positive, meaning that you have the vast part of the community behind you. The law of the minority is sometimes a challenge. I mean, how big is the minority? Is this just one person out of a million that could speak up? You basically want to attract the bulk of a community to what you're doing, and that means delivering more than just the jobs that are being created by the mine.
Having a long-term perspective is important. The first part of it is being a good neighbor; the second part is having ongoing engagement. And the third part, which I think is very important, is that as a matter of our corporate policy we don't take political sides. We have a very strict policy against any corporate donations as political contributions.
We recognize that if we're going to be around for 50 or 100 years in a location, we can't afford to be backed by one political party. One constant in the world of politics is that parties change. We have that as a clear part of our code of conduct, as a core principle: No political donations or contributions.
The idea of transparency of payments to governments is very important. We were an original signatory of the EITI, or the Extractive Industries Transparency Initiative. We believe there should be full transparency of all payments between companies and governments, and they should be then subject to audit. That's part of our principles. Not all would believe in that, but that's where we want to differentiate ourselves.
Arabic Knowledge at Wharton: Maybe your company is large enough to buttress itself against the pressures of 'the cost of doing business.' How do you get around that?
Albanese: If you start saying yes to the wrong things early on, you're going to get stuck on a slippery slope downhill. It is about, first and foremost, educating every single employee about the need for compliance. If you make it clear upfront what your principles are, we do find over time that people do respect that. You don't see them asking for things that are unreasonable or not legal. But it does take longer, and we find ourselves at times frustrated by people who can run circles around us and then brag about being more nimble or this or that.
Arabic Knowledge at Wharton: It's almost a popular assumption that bribery is just a part of being competitive overseas and you have to work with that.
Albanese: We have no allowance for facilitation funds in any country, anywhere, and we make it very clear. We are working in global markets. We have listed our stock in Australia, in the U.K. and in the U.S., so we are subject to a whole set of global laws. And they do tend to overlap. I refer to the U.K. Anti-Bribery Law as being the equivalent to the Foreign Corrupt Practice Act in the U.S., but on steroids. That'll keep a cottage industry of lawyers going for a long time. What you've got to recognize is if you start going down that wrong path in any country, including the United States, you're going to be on the wrong path.
Arabic Knowledge at Wharton: When you talk about new markets, how does Rio prepare itself in entering new markets and working with those nations?
Albanese: First of all, we're not selling a consumer product. We only have a few thousand customers around the world and it's a business-to-business transaction. When we look at opening up new markets, the most important part is gaining access to new geologic terrain that we can explore, or we can be a partner with someone that's already there, or with the government to get access to that land. It means having the opportunities to secure tenure for doing exploration, and having assurances that success in exploration gives us the first right for development.
In principle that's no different than the patenting process around inventions. If you're going to look for the next pharmaceutical [blockbuster], the next Facebook, the next Microsoft Windows or the next version of refrigerator, you're not going do that research and development (R&D) unless you have some assurance that if you're successful you can get your patent and that that patent will hold. If you have that confidence then you will put risk capital in place, knowing that risk capital on R&D is a lottery ticket: You have one-in-a-million chance of winning. But you want to make sure if you have the right ticket that you can actually cash it in.
This means having, first of all, engagement in those countries. We have found, and certainly so in a more globalized world, that we have had to make efforts over the past five years to build the Rio Tinto brand. In the past, we've actually been happy to leave the subsidiary businesses to carry on in their brands locally. But if you can actually have that global brand, you can more clearly articulate global standards.
We want to use our global brand to access new terrain and new markets. Then we need to begin putting the right people on the ground. That is always challenging, particularly in remote locations, because you have to have people with the necessary intellectual skills of exploration but also the empathy skills, particularly around community relationships, to be that first contact point that a community or that country may have with Rio Tinto. Generally you think of geologists as people who are just happy to get out there and hammer rocks. What we find now is that geologists have to be the first emissary. It's very challenging, because imagine if you've got your house and a geologist goes into your backyard saying, 'I want to look for copper in your backyard.' You might initially be sort of excited [with] the thrill of the hunt. But you also may be scared about what that means, because you really don't want to have a big open pit in your backyard. So when we move into a remote location that happens to be a community's backyard, we have to be incredibly sensitized to how we present ourselves as Rio Tinto. We have to have the right first emissary and we're realistic about what it means without creating excess expectations.
That represents a dilemma of sorts, because on one hand you've got to put resources in to create that right first impression. On the other hand, if you put too many resources in, you actually elevate the expectation. And for us, one in a hundred of these first emissary contacts are successful. From a commercial perspective, 99 of those are unsuccessful. So, you start building resources, you start putting a presence in those areas, you start creating the dialogues, including with host governments who actually get their expectations built up.
I can remember close to home, before we acquired Alcan, we consolidated our ownership interests in the Diavik diamond mine in Australia from a company called Ashton. They had a small Canadian subsidiary, Ashton Canada, in northern Quebec, [where] they had made a discovery of a few small diamond-bearing dikes. I couldn't go to Montreal without people talking about setting up a cutting and polishing industry — diamonds in their eyes, literally — because we created this expectation.
Arabic Knowledge at Wharton: So, there are community demands. Then there are Rio Tinto's needs, and shareholder needs. How do you balance these?
Albanese: Let us start with the demands of the shareholders, because that drives our strategy and creates the basis for how we have to go in. Our strategy is to invest in large, long-life, low-cost operations that basically make money through all parts of the economic cycle and provide beneficial returns to shareholders. A very, very important part of that description [is that] you can't disappoint early on and lose that license to operate. That requires you to put that foundation in place.
If I look at our most profitable business last year, it was the Hamersley Iron mine business [in Australia], and that's been in business for more than 45 years. It was slowly nurtured during the 1960s and 1970s and is now very important for Rio Tinto. Look at the Kennecott Utah copper mine in Salt Lake City. That's been around for more than 105 years. Our aluminum assets in Canada have been around for more than 80 years. These are long-term assets and you can't assure yourself of that long-term license to operate with just engineering skills. You need a broader range of skills and also relationships to basically assure you have another 100 years ahead of you. The strategy is driven by our shareholders wanting part of their financial portfolio tied into large, long-life, low-cost mineral resources that produce a commodity product.
That's generally why they are there. Our shareholder base has been stable. Even in the past couple of years of difficult financial conditions, they want that access to those types of resources, and they are making a portfolio decision on the basis it might be on commodities… it gets it within an overall diversified portfolio. That means we have to have that long-term presence on the ground, and ultimately we have to have global standards.
There have been some unfortunate examples over the past year or so where if you breach those standards or you create disenchantment between yourself and a host country, and you end up destroying shareholder value.