The Financial Conduct Authority (FCA) has fined Rio Tinto plc (Rio Tinto) £27,385,400 for breaching Disclosure and Transparency Rules (Disclosure Rules).
Following an investigation, the FCA found that Rio Tinto breached the Disclosure Rules by failing to carry out an impairment test and to recognise an impairment loss on the value of mining assets based in the Republic of Mozambique which it acquired in August 2011 for US$3.7 billion when publishing its 2012 interim results (published 8 August 2012).
Had Rio Tinto complied with its obligation to carry out the test, a material impairment would have been required to have been disclosed at the time of its 2012 half year financial reporting. Rio Tinto’s financial reporting was therefore inaccurate and misleading. This continued until 17 January 2013 when Rio Tinto announced an impairment of the Mozambique assets, writing off approximately 80% of the value of the investment in the Mozambique mine.
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 barge coal from the mines down the Zambezi River to the coast for export.
Prior to half year 2012, it became apparent that Rio Tinto would not be able to barge the coal to the coast, as planned and that higher cost alternatives would be needed to transport coal for export. Rio Tinto began to carry out financial modelling of its mining business which indicated that the value of the Mozambique assets, based on the best information available at that time, was negative.
Despite the modelling results, Rio Tinto decided that it would not carry out an impairment test, as required by international accounting standards, to assess whether an impairment was required to be recorded in its financial reporting of its 2012 half year interim results. Instead, Rio Tinto decided there was a lack of clarity around how it would develop the mines which made it premature to revalue these assets. For this reason, and wrongly, Rio Tinto decided it was appropriate to continue to value the mining assets at the acquisition price.
The FCA considers that this demonstrated a serious lack of judgement. There were indicators of impairment for the Mozambique assets which meant that Rio Tinto was required to carry out an impairment test.
The FCA has therefore imposed a financial penalty on Rio Tinto in the amount of £27,385,400.
Mark Steward, Executive Director of Enforcement and Market Oversight, 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.'
Rio Tinto agreed to settle at an early stage in the investigation and therefore qualified for a 30% reduction in penalty. Were it not for this discount the FCA would have imposed a financial penalty of £39,122,007 on Rio Tinto.
The FCA acknowledges not only the considerable assistance but also the collaboration of the U.S. Securities and Exchange Commission and the Australian Securities & Investments Commission in this matter.
About the FCA
- Final notice for Rio Tinto plc.
- On 1 April 2013, the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
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