From a low point in 1985, RTZ has gained control and cohesion in its far-flung empire by sticking to its true business - mining.
RTZ is the world's leading mining company and one of the very few British companies to lead its chosen sector internationally. For all that, not many members of the British public know much about it. This may be because, apart from the Anglesey Aluminium smelting operation, only the group's headquarters are in the UK, discreetly hidden behind an undistinguished facade in St James's Square, without even a brass plate to advertise its presence. It may be because the British assume that mining involves delving underground in dirty, dangerous conditions, whereas in fact most of RTZ's mines are open-pit, and working there is about as hazardous as working in advertising or finance. Or it may be because the use of metals and minerals goes largely unseen: who would have guessed, for example, that each inhabitant of the UK uses 12 lb of copper a year, 25 lb of aluminium, 700 lb of iron ore, 1.5 tonnes of coal, 3 lb of borates, and 5 lb of titanium dioxide?
There are, however, two sections of the public which follow the company's activities closely - the environmental lobby and the investment community. The first was highly critical of RTZ in the 1970s on a number of counts: the company was investigating gold prospects in north Wales, considering an open-pit mine in Snowdonia, and, in a move which offended both political and anti-nuclear sensibilities, opening a uranium mine in pre-independence Namibia. A combination of improved public relations, a tightening up of standards across RTZ, and, perhaps, a change in political climate has since served to quell criticisms on environmental grounds.
The investment community has shifted its opinion of RTZ even more radically. Static or falling in the early to mid-1980s, the share price has risen steadily since 1985, with the result that market capitalisation has more than quintupled, from £1.6 billion at the end of 1985 to £9.2 billion in August this year.
This increase in market value reflects a fundamental transformation of the company. The process started with the appointment in 1985 of Derek Birkin (now Sir Derek) as chief executive, working with the late Sir Alistair Frame as chairman. Birkin, 65, is a clear-thinking, plain-spoken Yorkshireman, who served as executive chairman from 1991 until May this year, when he relinquished his executive duties. He had joined the RTZ board in 1982 on the group's acquisition of the Tunnel Holdings cement business, where he was chairman. By 1985 he had been at RTZ long enough to appreciate its complexities.
The mining industry, he remarks, is extraordinarily rich in interest, more so than the other industries in his experience (textiles and construction). It involves judgments on political risk as well as on economic potential, environmental impact, and legal and fiscal intricacies. It is always an emotive, sensitive business, arousing fierce, probably primal, emotions wherever you operate (as do all activities connected with the land, he points out); but it also involves ever-advancing technologies of prospecting and production. It relies on exceptionally long-term planning (20 years and more) but also on swift calculations as to the worth of a proposition. It has to shoulder huge investments (up to $1 billion), high risk and severe cyclicality, but has the semi-certainty that the world will always need its products.
RTZ, for its part, is an especially complex company, in terms of its operations, holdings, cultures, markets and product range. This is true even today, after much simplification of its structure and strategic direction. It was dangerously true back in 1985 when the structural complexities and lack of any cohesive strategy were such that the company was veering towards anarchy.
The company history offers some understanding of the complexities. The Rio Tinto company was formed in 1873 to recommission an ancient copper mine in southern Spain; but today's company was really the postwar creation of three remarkable men - Sir Val Duncan, the deal-maker par excellence; Sir Mark Turner, the merchant banker and financial wizard who brought Duncan on board in 1950; and Roy Wright, the man of ideas.
This free-wheeling trio 'built the company from zero - an extraordinary feat', says Birkin. They started off with no capital - only that old copper mine in southern Spain, then yielding nothing in the way of profits; a portfolio investment in the copper belt in Northern Rhodesia which enabled them to pay dividends; and a small copper-refining plant in Delaware. What they did have, however, was the vision to see that the postwar reconstruction of the world economy would mean a robust demand for metals and minerals; the ambition to build up a chain of natural resource companies; and the entrepreneurial gusto and financial ingenuity to transform ambition into reality.
By the end of the 1950s, they had got into uranium in Canada and Australia. In 1962 came the merger with the Consolidated Zinc Corporation, another long-established British company, which in 1955 had discovered the world's largest deposit of bauxite (the source of alumina) at Weipa in Queensland.
The merged group, Rio Tinto Zinc, powered ahead through the 1960s and early 1970s. Major mines were developed - Hamersley (iron ore) in Australia, Palabora (copper) in South Africa, Bougainville (copper and gold) in Papua New Guinea. The web of cross-shareholdings spun by a company growing very fast without much capital became ever more intricate. The adroit deal-making continued.
Partly on the back of these deals, the group also developed major enterprises in non-mining activities - cement, chemicals, oil and gas, and industrial products. This 'seeping diversification', as RTZ chief executive Robert Wilson calls it, also stemmed partly from the loss of confidence which beset the mining industry in the 1970s and early 1980s. Two oil-price-led recessions had damaged both prices and demand for metals and minerals. Economic nationalism was powerful in such countries as Australia and Canada, particularly in mining. Elsewhere, large tracts of the world were effectively out of bounds to mining companies, being either part of the Communist bloc or governed by unstable regimes sustained by power bloc rivalries. 'It was very difficult to see where new developments would come,' recalls Wilson. By the mid-1980s, however, the diversification was beginning to put a strain on the management. Says Wilson, 'We were growing in areas where we lacked the management skills.'
In addition, the lack of clear structure to the group was beginning to blow the company apart. The RTZ management philosophy has always been based on the 'disciplined autonomy' of its subsidiaries and associated companies - not just for the familiar reasons of motivation, but because mining companies, more than most others, need a local identity and are unwise to flaunt their foreign ownership. By the 1980s, however, the independence of the 'barons' in the group's operations, stiffened by economic nationalism and by the preponderance of minority shareholdings, meant that an unruly autonomy had become more evident than the discipline.
Meanwhile, Duncan and Turner had died (in 1975 and 1980 respectively), and Wright had retired, without providing for management succession, and without devising a means of handling affairs on a considered basis. Decisions were still being made inspirationally, a mode which had been natural to the early days of fast, entrepreneurial growth, but was inappropriate to a major multinational (1985 turnover was £3.6 billion). And since the board had been gathering members with each succeeding acquisition (reaching 31 at one point), it was becoming increasingly difficult to take any decisions at all.
'The company needed pulling together, but without destroying the basic philosophy of disciplined autonomy and without stifling its entrepreneurial flair and talent for deal-making,' says Birkin, summing up the challenge that faced him and Frame in 1985. 'We needed cohesion around the world, so that we could establish a group strategy in consultation with all the operations.'
And so they began. Their first move was to introduce a new management structure at a greatly reduced head office in London. Numbers were cut from 550 to 250 in one swoop, and later to 220. From now on, the role of the centre would be to devise strategy; to handle (and finance) the major acquisitions; to act as a catalyst for the transfer of people and know-how across the group; to ensure best practice across the group in such critical areas as environment; and to plan for management development and succession.
To this end, it seemed to Birkin essential to have people with operating experience at head office: 'After all, this was not an investment house, but an operating mining company.' He accordingly called the chairmen of the operating units into head office, and appointed young chief executives to run the operations overseas in their place. The board of directors, which then numbered 22, was cut to 14 (including executive and non-executive directors in equal measure), and later to 12.
The roles of chairman and chief executive had already been split (by Sir Mark Turner, in 1978), in recognition of the excessive burden that running such a huge company placed on one pair of shoulders. Those shoulders were now to be joined by others. Birkin set up the chief executive's committee, consisting of the executive board directors, and decision-making would now be based on consensus (as it had been, informally, in the early decades of the company). 'This ensures the best input, which ensures quality of decision-making and commitment to the outcome, because everyone is involved,' he says. 'We now had a clear structure, with clearly defined jobs.' The major operations are, he points out, sizeable companies in their own right, and some, like CRA in Australia, have large public shareholdings. They could now view RTZ as a 'sophisticated shareholder that could add value' and not as a bureaucratic machine or autocratic owner.
With the new structure in place, the group was ready to review strategy, a 'bottom up, top down' process, which involved consultation with all the operations over two years of dialogue. In 1987, the board eventually decided to concentrate on the group's undoubted expertise in mining and to sell off all the non-mining interests. 1988 saw the sale of the cement business (jointly to Aker Norcem of Norway and Euroc of Sweden), oil and gas (to Elf Aquitaine), and Everest double-glazing (to Caradon). The chemicals business was subsequently sold to Rhone-Poulenc. Prices fetched averaged a p/e of 24, which pleased RTZ shareholders; and with disposals in 1988 alone totalling a tidy £900 million, the company ended the year with a virtually debt-free balance sheet.
As luck would have it, it was just at this cash-rich time (December 1988) that BP ran into problems over the Kuwaiti Investment Office's shareholding, and needed cash to buy back its shares. For over two years, RTZ had made it plain to BP that it would be glad to buy the BP Minerals division; but BP had spent some $6 billion on building up its minerals business, which included the Kennecott Corporation (one of the world's largest copper producers) and the division was not for sale. Now, in changed circumstances, the £2.4 billion transaction was rapidly drawn up, and signed at the New Year.
Birkin sees this acquisition as equal in significance to the 1962 merger, transforming the company in scale, and bringing an 'immensely complementary' set of assets - taking RTZ into titanium dioxide feedstock as well as strengthening its portfolio of low-cost copper mines and turning it into one of the world's largest gold producers outside South Africa. 'The deal made it possible to dispose of Pillar when the business cycle had improved' - or at any rate, when the cycle had improved considerably (the business was sold for £900 million last year).
Therefore 1993 saw the final curtain fall on the group's diversification phase. It also saw the acquisition of Nerco and Cordero in the US, two companies with coal mines in the Powder River Basin in Montana and Wyoming, giving RTZ a significant position (fifth in the US) in low-cost, low-sulphur coal mining operations.
The acquisition also provides one illustration of the new, cohesive RTZ strategy. The focus is on large ore deposits that can be operated for many years at low cost. 'We're not interested in fashionable commodities or geographical areas, but in the quality of the resource,' says Wilson. And the group invests continuously in its mining operations to make sure it retains its competitive edge.
Executives are happy to explain the strategy further. First, they say, consider the group's spread of product, unique in the mining industry, spanning practically all the major metals, from aluminium to zinc; industrial minerals, from borax to zircon; and energy minerals, in the form of coal and uranium. The aim here is to ease cyclicality and price volatility, since although all metals and minerals are cyclical, their cycles do not coincide. Secondly, consider the group's geographical spread. With operations in 35 countries, it is as broad as that of any non-mining company (and again, unique in the industry). The aim here is to spread economic and political risk - thriving on good times in the US and Europe, say, when Japan is in the economic doldrums. Alas, with the most recent recession, economic gloom has been experienced across the industrialised world. Even so, the group's policy of operating close to a wide range of markets has paid off, since the fast-growing Southeast Asian economies are now at a metals-intensive stage of development (busily engaged in shipbuilding, construction, telecommunications infrastructure, car production).
Next, consider the strategic emphasis on low-cost production. This is absolutely critical for a number of reasons. The mining industry deals in commodities, with limited differentiation (although this is less the case with industrial minerals than with metals), and customers look for reliability of supply and financial strength in a company rather than nuances in product line. It is also an industry which suffers from over-supply more years than not. This has been severely true over the last five years, since the break-up of the Soviet Union, when the fall in industrial production, domestic demand and military 52e spending in the CIS has pushed vast quantities of aluminium, nickel, ferrochrome and uranium on to world markets, driving prices down to their lowest ever in real terms - down 44% below their 1988 level last year (using average-to-average comparisons, the fall from peak to trough is even more dramatic, at 59%), although happily beginning to rally now. But a mining company with low production costs will generate cash and earnings even in bad times. 'The world will always need commodities,' says Birkin. 'If you're truly low-cost, you'll survive.' And then come the upturns, profits take off, as the group's pre-tax margins of 25% and 21% in 1988 and 1989 demonstrate.
Then, too, lowering costs and raising productivity are not once-and-for-all achievements, but have to be ceaselessly sustained if you are not to be left behind by the competition. Executives cite the case of Kennecott as a salutary warning. 'Kennecott was a really major mining name after the war, with a great orebody in Bingham Canyon,' says Wilson. 'But by the early 1980s it was losing money and had lost its independence. It was clear that management had been using the same old methods over several decades. There had been a lack of investment, and out-dated labour practices. They were employing 7,500 people to produce less copper than 2,500 do today.' But fruitful capital expenditure obviously depends on knowledge and experience. Under BP Minerals' ownership, there had been investment; but, comments Wilson, 'The way Kennecott was operating the business was nowhere near optimal.' With open-pit mines, he explains, operators have to choose a cut-off grade. 'One of the first things we noticed was that their cut-off grade was higher than ours around the world.' So RTZ invested $220 million in additional milling capacity, which made it possible to lower the cut-off grade (the ore was being mined, but dumped). Now production has been lifted by 25% without reducing the mine's life. 'That sort of understanding is one of our inherent skills in the business'.
Continuous improvement applies equally to environmental matters, says Ian Strachan, deputy chief executive and executive director responsible for the environment. 'Standards do change, and we would like to think we are in the forefront.' It appears that the 1985 restructuring has helped to equalise environmental standards across the group, bringing them up to the level of the best operation.
So what of the future? In management terms, RTZ is now well-supplied, with the orderly succession of the 51-year-old Wilson to the role of chief executive, and of Strachan (also 51) as deputy chief executive. But what of the prospects for the mining industry as a whole? 'The whole geopolitics of the industry has changed over the past five to 10 years,' explains Wilson, 'not just in terms of the growth in demand from the developing economies, but on the supply side.' South America has seen gradual liberalisation so that almost the whole continent is now open to foreign investment. So, too, are countries like Zambia and India. As to the former Soviet Union, long believed to have untold mineral riches, he is more dubious. 'We have been looking quite closely at resources there, and contrary to the belief through the 1970s and 1980s, some are not of world competitive quality.'
There are, however, plenty of other opportunities for acquisitions and new projects. The coal industry, for one, seems to offer scope for rationalisation, being 'a large, fragmented industry, with a number of uncommitted owners and players'. Not all parts are equally appealing, however, to a group with very tough criteria for investments. British Coal, if privatised, does not seem a likely candidate, given the number of fairly obvious negatives: expensive coal; industrial relations problems and the risk of becoming a political football. Certainly, when it comes to acquisitions, RTZ has no problems with finance. Uniquely in the mining industry, the group has a double A credit rating with both major agencies. One of its great strengths is its cash flow, even in the depths of recession: this helped cut balance sheet gearing from 36% at the end of 1992 to 12% a year later, despite the year's investments and acquisitions.
But the real measure, stresses Birkin, is the long-term return to shareholders. Here, he allows himself a moment's self-congratulation: 'We have never cut our dividend; we have offered capital appreciation to all our shareholders; our share price has comfortably outperformed the All-Share Index, even in a highly cyclical industry and even during some of the worst market conditions we can remember,' he concludes. Looking ahead, he is equally buoyant. 'At this stage of the cycle, we are very well placed to profit from the growth ahead, provided we stick to our true business, which is mining.'
RTZ FINANCIAL FACTS
TURNOVER/PROFIT BEFORE TAX* (£m)
Copper and gold 1,080 276
Iron ore 301 137
Coal and uranium 590 144
Aluminium 447 26
Lead and zinc 163 (5)
Other mining and metals 73 (16)
Industrial minerals 1,001 220
Group costs (178)
Discontinued ops/exceptionals 1,162 (169)
Total 4,822 435
TURNOVER/PBT BY ORIGIN* (£m)
North America 1,426 233
Australia + NZ 1,040 200
Africa 465 136
Europe (including UK) 411 (9)
Other countries 318 94
Discontinued ops/exceptionals 1,162 (169)
Finance charges (50)
Total 4,822 435
SHAREHOLDERS' FUNDS (£m) 3,190
NUMBER OF EMPLOYEES 59,975
* For year to 31 December 1993.