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Rio Tinto Plc fined £27 million for DTR breaches

Posted on 31 January 2018

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.


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 with IAS 36. Rio Tinto's conduct also amounted to a breach of DTR 1.3.4R, having failed to take all reasonable care to ensure that the information in its interim accounts was not misleading and that it did not omit anything that would affect the import of the information.


In the circumstances set out in this Notice, the FCA's censure of Rio Tinto is perhaps not surprising. Whilst there were certain criticisms impliedly made of individuals, we have no indication of whether there is any action against individuals, certainly not in the UK.  In the US by contrast, there has been a well-publicised commencement of proceedings by the SEC for civil fraud against the company and two of its former executives.

An interesting aspect of this notice is the calculation of the fine, once again demonstrating the scope of the FCA's discretion when it comes to setting fines. As in the Tejoori case that we cover elsewhere in this issue "13 December 2017: AIM Company Fined For Late Disclosure", the starting point for the FCA's calculation was Rio Tinto's average daily market capitalisation (for its UK listing) for the period of the breach. In Rio Tinto's case, this resulted in a starting point in excess of £41bn. Applying its level 2 percentage, this produced a figure of over £52m. This was considered to be disproportionate to the breach and it was therefore reduced to just over £39m excluding the settlement discount. These cases demonstrate that whilst average daily market capitalisation might be a starting point for the FCA, it can end up having no real bearing on the final figure that is determined. In the Tejoori case, the fine was 12 times its average daily market capitalisation. In Rio Tinto's case, the fine was only just over 9% of its average daily market capitalisation.

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