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Rio Tinto slapped with ‘largest ever’ £27m fine for breach of rules

Written by: Paloma Kubiak
Rio Tinto has been handed a £27m fine by the financial regulator over a “serious lack of judgement” in reporting the value of mining assets in Mozambique.

The UK-based mining company is to pay a total of £27,385,400 for breaching disclosure and transparency rules, the Financial Conduct Authority (FCA) confirmed.

It comes as Rio Tinto failed to carry out an impairment test, and recognise an impairment loss on the value of mining assets based in the Republic of Mozambique (RTCM) which it acquired in August 2011 for $3.7bn.

The FCA said this meant its financial reporting for the 2012 interim results was “inaccurate and misleading” as it failed to comply with its obligations to carry out the impairment tests.

However, this reporting continued until 17 January 2013 when Rio Tinto announced an impairment of the Mozambique assets, writing off 80% of the value of the investment.

How and why did this happen?

When Rio Tinto acquired the Mozambique mine, its valuation was based on a plan to move rapidly into coal production.  This plan assumed Rio Tinto would be able to transport coal on barges from the mines down the Zambezi River to the coast for export.

However, before the 2012 half year, it became apparent that Rio Tinto would not be able to use barges to transport the coal to the coast as planned and that an alternative solution – at a higher cost – would be needed to transport coal for export.

As such, it realised the value of the Mozambique assets were negative.

Despite these findings, Rio Tinto decided it would not carry out an impairment test (to assess whether an impairment was required) as part of its 2012 half year results.

Instead, Rio Tinto decided there was a “lack of clarity” around how it would develop the mines so it would not be appropriate to revalue these assets.  Therefore, it continued to value the mining assets at the acquisition price.

‘Serious lack of judgement’

The FCA said Rio Tinto was required to carry out an impairment test and its failure to do so demonstrated a “serious lack of judgement”.

As Rio Tinto settled at an early stage of the investigation, the fine was reduced 30% from the original £39,122,007 amount. Even at the reduced level, this is the largest fine imposed by the FCA for a breach of rules relating to a firm’s listing.

Mark Steward, executive director of enforcement and market oversight at the FCA, said:

“The UK listing regime requires listed companies to adhere to high standards of disclosure and transparency. Rio Tinto should have been aware of its obligation to carry out the impairment test and the resulting material impairment should have been reported to the market at its half year results in 2012.

“Reflecting the size of the company, this is the largest fine imposed to date by the FCA for a breach of rules relating to a firm’s official listing and demonstrates how vitally important high standards of disclosure and transparency are to ensuring our markets function fairly and effectively.”

A statement from Rio Tinto, read: “Rio Tinto has reached a settlement with the United Kingdom’s Financial Conduct Authority (FCA) in relation to the timing of the impairment of RTCM. The FCA determined that Rio Tinto should have carried out an impairment review in relation to RTCM for its 2012 interim results and, if it had done so, those results published in August 2012 would have reflected the impairment it recorded six months later.

“The FCA made no findings of fraud, or of any systemic or widespread failure by Rio Tinto. The case is now closed.”

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