Rio Tinto Plc Fined £27 Million For DTR Breaches

In October last year, Rio Tinto Plc was fined £27,385,400 for breaches of the Disclosure and Transparency Rules (this figure represented a 30% early settlement discount). A brief summary of the facts is as follows.

Background

In 2011, Rio Tinto acquired a mining company in Mozambique (later named Rio Tinto Coal Mozambique (RTCM)) for USD 3.7bn. Rio Tinto's valuation of RTCM had been based on a plan to rapidly establish coal production and to barge the coal down the Zambezi River to the coast for export to market.

In the months that followed the acquisition, risks that had been identified as part of the due diligence process began to come to fruition. First, it became clear that Rio Tinto would only be able to transport by barge one third of the intended maximum volume of coal and would have to look to more expensive transport solutions. Later, at the end of 2011, Rio Tinto discovered that its application to barge on the Zambezi River would be rejected. A resubmitted barging proposal was again rejected in April 2012. When RTCM recalculated its financial models using more expensive transport solutions, the models indicated that the NPV of RTCM was negative.

International Accounting Standard (IAS) 36 (Impairment of Assets) requires relevant firms to assess whether an impairment is required to be recorded as part of its financial reporting. Given the setbacks that RTCM faced and the consequent uncertainty as to how RTCM would be developed, Rio Tinto decided that it was premature to revalue RTCM and that it would continue to value RTCM at the acquisition price. Consequently, Rio Tinto did not report an impairment in its financial reporting for half year 2012. It was not until January 2013 that Rio Tinto finally announced an 80% write down of RTCM's value.

The FCA's Findings

The FCA found that there were clear indicators of impairment which required Rio Tinto to carry out an impairment test and that its failure to do so demonstrated "a serious lack of judgement". The FCA also found that, if Rio Tinto had conducted such a test, a material impairment would have been required to be reported to the market in its 2012 half year report.

These failures amounted to a breach of DTR 4.2.4R(1) (failure to comply with IAS 34 (Interim Financial Reporting)). Rio Tinto was required to carry out an impairment test and to record the resultant impairment in accordance...