Corporate attitudes can cost shareholders

Many moons ago, on leave in the UK while working overseas, I decided to take my first tentative steps to becoming a property owner.

Returning home for a relatively short spell, one always accepted the mad dash nature of catching up with friends and family who you may not see for another year, but having taken the decision to invest in real estate, that particular leave was especially frenetic; I must have viewed 20 properties in the space of three days.

Eventually I found a three-bed semi close to a famous hospital and almost directly opposite where I had attended school; it was an area I knew extremely well. My plan was to rent the house to staff working at the hospital while I remained abroad and sell it upon my full-time return to the UK.

As a single guy earning a sizeable tax-free salary, obtaining a mortgage wasn’t  a problem, although one thing bothered me as I pondered over whether to make an offer. The house, in seemingly perfect condition, was on the market for £27,995, similar to comparable properties in the area (I should mention this was more than 25 years ago), but I was nervous as it was to be my first property purchase and I wanted to avoid an expensive mistake.

The cause of my concern was a stream slightly beyond the foot of the house’s garden and the direction it appeared to take when it disappeared from view behind a collection of bushes, brambles and old iron bedsteads. Unable to investigate this more fully however, as I needed to return to my job abroad, instead I instructed a surveyor to undertake a full structural survey. I remember it cost £435, but what a sound investment it proved to be.

Bear in mind, this was pre-internet, pre-email days when receiving a telex (ask your parents if you don’t know), was the height of cutting-edge technology. Before making an overseas phone call, pre-Skype, callers required an additional mortgage. In other words, communication was not as easy, nor as cheap, as it is today.

Nevertheless, a few weeks later, a thumping great structural survey report arrived at my desert base. The surveyor confirmed that the house was in fine structural condition, from the roof to the foundations. However, he noted, a stream ran directly beneath the property which may affect its longer-term appeal to future buyers and the likelihood of a lender advancing a mortgage against it.

Having put so much into getting this far, I was disappointed to have to withdraw from the purchase and return to the drawing board. The only consolation was that I hadn’t bought something which may not appreciate in value as I imagined.

While this episode may make me sound like a very cautious soul (I was only 25), I prefer to concentrate upon the two important lessons it taught me. First, that before making a sizeable investment, it pays to do your research thoroughly. Second, you should always be prepared to walk away from a deal, irrespective of how much emotional capital you may have expended.

Which brings me neatly on to Rio Tinto, a long-time cornerstone of many investors’ equity portfolios.

I was truly astonished to read recently the reasons behind the sudden departure of the company’s former chief executive, Tom Albanese.

A man with thirty years service under his belt, Mr Albanese left Rio just over a week ago after it was revealed that the Mozambique-based coal assets the company paid $3.7 billion for less than two years ago were to be written down by a staggering 81%, or $3 billion. What a phenomenal waste of shareholders’ money!

According to Rio Tinto, developing infrastructure around the coal assets it paid top dollar for had been more ‘challenging’ than it anticipated and – get this – it had failed to obtain government approval to transport coal along the Zambezi river.

It beggars belief that, prior to spending an extraordinary amount of other people’s money, Rio’s top brass did not ask the Mozambique government to confirm that such approval would be forthcoming. No doubt Rio’s board felt similarly perplexed before asking Mr Albanese to leave.

Buying a house for £28,000 or coal mining assets for $3.8 billion may seem a world apart, but I would argue that only one buyer’s attitude would be welcomed by investors.  

posted on 01 February 2013 10:29 byPJS