How Rio plans to leapfrog BHP

This weekend I urge all chief executives of major companies to watch the KGB interview with Rio Tinto chief Sam Walsh, which will be published later today. He is developing a new set of strategies that can be applied to a wide range of businesses. But one man should take particular notice: BHP chief executive Andrew Mackenzie.

Sam Walsh believes he has initiated a strategy that will see Rio move ahead of BHP and most global miners. And Walsh, with a twinkle in his eye, reveals how he is managing Rio Tinto like it is a family business.

When I was involved in the management of privately owned media operations, we used monthly figures so we could jump on a problem quickly. Operations were monitored on a cash basis, which alerted you to problems but also kept the bank account under control.

That’s how most family businesses operate, and that’s how Sam Walsh runs Rio Tinto. He is trying to teach executives to act and plan as though they are spending their own money. However, few large public companies are managed on a monthly cash basis, trying to instill family business values.

But that’s not where Walsh believes Rio will have the wood on Andrew Mackenzie.

Walsh believes that the mines of the future will be operated entirely differently from current mines and he believes that Rio Tinto is leading the world in these developments.

Today, most talented engineers and mining executives prefer to live in capital cities rather than at remote mine sites. Walsh believes that the mining industry must recognise this and so, in the Pilbara, Rio Tinto has some 53 automated iron ore trucks that can be remote controlled.

Rio is extending remote control into the operations of trains. Later, these systems will be extended to other mines in the group.

Recently, one of Rio’s control centres in Brisbane was able to tell Rio’s Mongolian copper mine that a part in its treatment plant was broken.  The part was fixed before it could seriously affect production.  

But for Walsh, it’s not just the use of top talent and remote control technology that provide big gains in efficiency.

He believes that the mining industry has to explore the methods being used in other industries (including agriculture) so that it can improve processes. Rio is working with universities to develop these mining and treatment techniques.

I believe that what Rio Tinto is doing in reexamining its total business should be the model for all industries. It’s the only way Australia can improve its productivity.

Rio Tinto has an extra reason to mine more efficiently. About 80 or 90 per cent of its earnings come from iron ore but some two thirds of its assets are in non-iron ore activities such as aluminum and coal.

On the basis of current profits, these assets are overvalued in the books. Walsh believes that over time, the profitability of these assets will be increased, helped by the new mining methods.

Given his age, Walsh is not a long term CEO of Rio Tinto but he hopes to set the company up so that in later years it can cheaply acquire ‘uneconomic’ mineral deposits from other miners and use Rio techniques to transform their profitability.

In the meantime, these new techniques are going to lift mineral output but lower costs.

Footnote: In conversations after the KGB interview, I pointed out to Walsh that privately owned enterprises had acquired loss-making Queensland coalmines and managed them far more efficiently using independent contracting. Walsh said that there was no reason why the same gains could not be achieved using staff members. Staff willingness to change to enable coal mines to remain open had greatly improved the ability of groups like Rio to improve efficiency.