Investment Matters

What matters this week

The upwards march of the US market continues in earnest, with the Dow Jones index breaking though the 23,000 mark for the first time on their Wednesday.    Good company results (it is now their reporting season), including from IBM, buoyed their market.  The Australian market (XJO ASX200 index), has had a nice little 8 day saunter of positive moves, although some days by the skin of its teeth.  The New Zealand stock exchange had a benign reaction to the unexpected ascendency of Jacinda Ardern to PM of NZ, down -0.1% today. 

The major corporate controversy this week was Rio Tinto.  The crux of the issue is the valuation of a Mozambiquan coal asset in the FY-11 and H1 FY-12 financial reports.  The then CFO and CEO apparently didn't write down the value of the asset when they knew it was worth significantly less than the holding value in the accounts.  They were essentially forced to do so in the FY-12 report because an internal whistleblower dobbed to the company's Board. 

Knowingly incorrectly overvaluing assets is essentially committing fraud against shareholders, as shareholders believe they own an asset worth more than it actually is.  It might have been hard to admit the acquisition was a stuff up, but the company didn't have a choice.

This week the US regulator, the Securities and Exchange Commission (SEC,) initiated court action.  If the allegations are proven true, the US regulator / court system is likely go to town on them (including fines orders of magnitude greater than Australia's slap-on-the-wrist fines).

Rio also advised it has received a hefty US$36.4m fine (~AU$45.7m) from the UK regulator, the Financial Conduct Authority, in relation to these same matters. 

Rio Tinto is widely considered to be an Australian company, or Australian/UK company.  It is listed in Australia (with dual listing in the UK).  Given this, one would perhaps think that Australia's regulator, ASIC, would be at the forefront of such matters.  But no.  Australia's regulator is investigating.  Still.  In Australia, it really is a case of regulation via class action - not the most efficient way to do things.

Back to Rio's shareholders - Rio stated in their release this week: "RTCM was acquired in 2011 and divested in 2014."  RTCM is the Mozambiquan coal asset in question.  Perhaps the release should have said: ''RTCM was acquired in 2011 for AU$4 Billion, and divested in 2014 for US$50 Million.  Now we also face big fines and reputational damage.  Sorry shareholders."

On to other matters - a number of mining and energy companies have released quarterly production updates this week (including OZ Minerals, Evolution, Rio Tinto, Oil Search, Santos).  Production levels are quite buoyant and in line with with expectations.  Woodside was the slight disappointment with a downgrade to expected FY-17 production volume (for Woodside FY=CY).

Australia Pharmaceutical Industries (distributor and retailer via Priceline and Soul Pattinson) released its FY-17 results (to 31-Aug-17).  Underlying profit grew 5.4%.  Like-for-like sales in retail decreased 0.4%.  This reflects the difficult conditions retailers are facing, which the company does not expect to change in the short term.

As the press is apt to highlight, this week is the 30th anniversary of the '87 crash.  But perhaps of more relevance when looking at history is the 1920s and 1930s...