StockBeat: Rio Tinto – No Country for Old Shareholders By Investing.com


© Reuters.

By Geoffrey Smith 

Investing.com — The ESG juggernaut has claimed arguably its highest-profile victim yet.

Rio Tinto (NYSE:) chief executive Jean-Sebastien Jacques has been forced out after weeks of pressure from institutional shareholders in the wake of Rio’s destruction of a unique complex of prehistoric caves in the Pilbara region of western Australia.

Two other senior executives, iron ore head Chris Salisbury and corporate relations chief Simone Niven, will also leave, creating an awkward vacuum at the top of the division that makes most of Rio’s money. Rio shares, which have held up well enough throughout the furore, rose another 1.2% by mid-morning on Friday.

It’s a staggering fall from grace for the French-born Briton, who had made Rio one of the best-performing mining stocks in the world over the last three years, and a salutary lesson to any modern-day CEO who dares to under-estimate the importance of non-financial performance in today’s business.

ESG-themed investing (Environmental, Social and Governance) is a growing force in the developed world, reflecting the increased importance that (comfortably well-off) investors now put on issues of sustainability. 

In Europe in particular, inflows into ESG-themed funds have surged as a new generation of investors has flocked to the asset class. They accounted for a third of all European fund sales in the second quarter, according to Morningstar. The trend has been one of the factors behind the spectacular outperformance of renewable energy stocks vis-à-vis Big Oil this year.

Indeed, in a world where actively-managed funds are constantly losing market share to algorithm-driven ETFs, ESG-themed funds are one of the few remaining selling points for asset managers, a rare area where they still have a persuasive argument for their higher management fees.

Typically, it’s companies’ performance on the E (for Environmental) element that has garnered the most attention from investors so far. Indeed, part of the reason that Rio finds itself in many ESG portfolios is Jacques’ decision to sell off the company’s thermal coal assets due to coal’s role in driving climate change.

Unfortunately, though, the company took its eye off the S (for Social) part. The Juukan Gorge caves were a site of extraordinary archaeological interest, showing evidence of continued human habitation over 45,000 years ago (before the last Ice Age). By comparison, even sites such as Stonehenge look about as old as a Dubai skyscraper.

That alone ought to have been enough to stop Rio dynamiting them as part of its plans to expand a major iron ore mine.

What made it worse was that the direct descendants of those cave-dwellers – the Puutu Kunti Kurrama and Pinikura Aborigines – still live in the region and had lobbied intensively for the caves’ preservation.  The controversy was thus sharpened many times over by the controversial politics of Australia’s relations with its First Nations. To paraphrase Tommy Lee Jones’s sheriff in No Country for Old Men, if it ain’t a mess, it’ll do until the mess gets here.

The company’s protestations that they had acquired all the necessary legal approvals for the step are factually correct, but morally hollow. Big Mining’s power over such processes has been documented too many times for that excuse to hold much weight.

For better or worse, past generations of shareholders have accepted that reality for decades. Today’s generation, through the intermediation of asset managers desperate not to lose ESG mandates, is made of different stuff.  





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The two things that are most likely wrecking your retirement savings


If you earn a decent income but have trouble saving, the culprits could be the roof over your head and the car in your driveway.

Retirement savers who contribute more to their 401(k)s often spend less on housing and transportation than their peers, according to a study by the Employee Benefit Research Institute and J.P. Morgan Asset Management.

Better savers also spend less on food and drink, but housing and transportation are bigger expenses that tend to be less flexible. Once you commit to a place to live and a car payment, you’re typically stuck with those expenses for a while.

“It may be decisions that you’re making as you are building your life that will ultimately crowd out saving for retirement,” says Katherine Roy, chief retirement strategist for J.P. Morgan Asset Management.

The researchers divided 10,000 households into three groups: the 25% who contributed the least to their retirement plans, the 25% who contributed the most, and the “middle savers” whose contributions landed them in the middle 50%. High savers, not surprisingly, had higher incomes than the other two groups. Middle and low savers had similar incomes, but middle savers contributed about 5% at the start of their careers while the low savers contributed about 2%.

See: What if I’m in my 40s and don’t have a retirement fund?

That 3 percentage-point difference in contributions is largely attributable to the lower savers spending more on housing, transportation, and food and beverage, the researchers found. By retirement age, middle savers had accumulated savings equal to twice their salaries. Low savers had accumulated about half as much.

A ‘beater’ truck and a fat 401(k)

Driving older vehicles and owning a modest home are the top two sacrifices cited in a study of Principal Financial Group customers ages 20 to 54 who contribute big chunks of their income to retirement accounts.

One of those savers is Erryn Ross, 30, of Tigard, Oregon. For several years after college, the accounts receivable coordinator lived at home and drove a “beater” truck, a hand-me-down from his dad. By the time he was ready to replace the truck, he had saved enough to pay cash for a new one while also maxing out his 401(k) contribution.

Ross credits his mother — who drives a 2002 Honda Accord, previously owned by her father — with getting him started.

“She said, ‘OK, you can either pay me $1,000 for rent, or you can put $1,000 in index funds every month,’” Ross says. He put the money into his retirement account.

Ross recently bought a house with his fiancée, and they chose a home that cost about half of what their lender said they could afford. They figured out how much they felt comfortable spending each month and based their purchase on that amount.

“I don’t really need a million-dollar home here,” Ross says. “I just need something that’s going to house the family.”

It’s not all about choice

Both studies have their limitations. Perhaps the biggest one is that the researchers studied only people who had access to workplace retirement plans. Before the pandemic, 55 million working Americans lacked such access, according to Georgetown University Center for Retirement Initiatives. Access makes a huge difference: AARP found that people are 15 times more likely to save for retirement if they have access to a payroll deduction plan at work.

Also see: Has COVID-19 stopped Americans from chasing early retirement? Not exactly

The researchers also didn’t factor in the cost of living, which varies widely across the country. Living expenses are 46% higher in San Francisco and 86% higher in Manhattan than in Portland, Oregon, for example.

People’s personal costs of living matter hugely as well. Someone with health problems and lousy insurance likely will have more of their income eaten up by medical bills than someone in excellent health who has good coverage. The number of people you have to support — children, elderly parents, for example — affects how much you can save. People with student loan debt have less discretionary income than those whose parents paid for college. And so on.

Income matters, of course. Some people save on small incomes, while others don’t on large ones. But the more money you make, the easier it is to save.

Also read: The pros and cons of buying a certified used car

In other words, any number of factors — such as, say, losing a job during a pandemic — can affect someone’s ability to save.

When you do have choice, though, choose wisely. The decisions you make about the big expenses now can have a huge effect on what you can spend in retirement.

“Often in our financial wellness programs, we lead with, ‘You need to have a budget’ or ‘Don’t have that Starbucks
SBUX,
-1.14%

  cup of coffee,’” Roy says. “I think it’s more fundamental than that.”

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U.S. Q3 GDP Outlook Remains On Track For Strong Rebound


The record decline in US output in the second quarter is expected to post a strong but partial recovery in the upcoming Q3 GDP report, according to several recent nowcasts compiled by CapitalSpectator.com.

Economic activity is projected to rise nearly 21% in real terms on an annualized basis, based on the median nowcast. That’s a huge increase relative to the historical record, but it pales next to Q2’s dramatic 31.7% collapse. Even if the anticipated bounce arrives, the economy’s output will remain well below the pre-pandemic level. The Bureau of Economic Analysis is scheduled to publish its first Q3 GDP estimate on Oct. 29.

Despite the expected rise in Q3, by one economist’s estimate the US economy still needs another huge dose of stimulus to repair the damage from the coronavirus fallout: $3 trillion, says William Lee, chief economist at Milken Institute. “I think the one thing that everyone … agrees with is we have to get in there and get in big,” he told CNBC on Wednesday. “The issue is how do you get big without a permanent increase in fiscal deficit?”

Despite the need, the political climate at the moment isn’t encouraging for expecting that a new stimulus program will arrive soon, if at all. “At least today, I’m not getting good vibrations about any kind of agreement until after the election,” advised Bill Hoagland, senior vice president at the Bipartisan Policy Center and a former Senate staff member. “Unless something were to break, and pressure really builds, it’s going to be extremely difficult to find a package,” Hoagland said this week.

The good news is that there appears to be an economic tailwind blowing. Sentiment data is projecting a solid bounce for US economic activity, based on August data. The IHS Markit US Composite PMI Output Index, a GDP proxy, rose to 54.6 last month – moderately above the neutral 50 mark that separates growth from contraction. The rebound reflects the strongest increase in nearly 18 months.

“Combined with the stronger picture emerging from manufacturing in August, the improved performance of the vast service sector adds to signs that the third quarter will see an impressive rebound in the economy from the collapse seen in the second quarter,” said Chris Williamson, chief business economist at IHS Markit last week. “However, the survey also highlights how the rebound is very uneven and the recovery path remains highly uncertain.”

By some accounts, the potential for a robust recovery beyond Q3 can’t be ruled out. “One thing that I think is overlooked or underappreciated today, are the odds – and this is not my baseline forecast – but the odds that 2021 could actually be one of the best years for the economy in history, which sounds ridiculous given what we are dealing with right now,” said Morgan Housel, a partner at the Collaborative Fund, earlier this week.

The critical factor, of course, remains the path of the coronavirus and the timing of a vaccine that’s effective, widely distributed and accepted by the general population. Several reports indicate the possibility that a vaccine could be available in the next several months, although Dr. Francis Collins, director of the National Institutes of Health, urged caution on expecting a relatively quick solution.

“Certainly, to try to predict whether it happens on a particular week before or after a particular date in early November is well beyond anything that any scientist right now could tell you and be confident they know what they are saying,” Collins told a Senate panel on Wednesday.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.





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Rio Tinto may need to tap outsider for new chief By Reuters


© Reuters. FILE PHOTO: Rio Tinto CEO Jean-Sebastien Jacques poses for photographs before announcing Rio Tinto’s 2017 first-half results in London

By Sonali Paul

MELBOURNE (Reuters) – Four years after mining giant Rio Tinto (NYSE:) swept out its veteran managers to make way for a new generation of business heads, its leadership team has come unstuck.

The world’s biggest iron ore miner is looking for a new chief and iron ore boss after they allowed the blasting of ancient Aboriginal rock shelters to expand a mine in Western Australia against the wishes of the traditional owners.

Investors and analysts saw no clear internal candidates and said following the damage done to the company’s reputation, it was likely Rio would tap an outsider to replace Frenchman Jean-Sébastien Jacques.

“Clearly from the comments of the chairman they want to reset the culture, which would imply an external candidate would be more likely than an internal one,” said Macquarie analyst Hayden Bairstow.

Chairman Simon Thompson said on Friday the company was determined to “re-establish our reputation as a leader in communities and heritage management”.

Potential external candidates that analysts and investors pointed to included Anglo American (AX:) CEO Mark Cutifani, Orica (AX:) CEO Alberto Calderon, former Fortescue Metals Group (AX:) boss Nev Power, and ex-Shell Australia chair Zoe Yujnovich, who previously ran Rio’s Canadian iron ore business.

“Zoe has the relevant mining background, international management experience, government relationships, acute sensitivity to indigenous and remote community engagement, and strong Australian roots,” said one analyst, who declined to be named as he does not cover Rio.

If the company wants to overhaul its culture, it might be tough to turn to former Rio executives, although several were seen as potential candidates: Newcrest Mining (AX:) Chief Executive Sandeep Biswas, Aurizon CEO Andrew Harding, OZ Minerals (AX:) CEO Andrew Cole and Fortescue Chief Operating Officer Greg Lilleyman.

However analysts said the company may want to look beyond mining expertise to set a new vision for the company.

“You don’t need to be able to do a mine plan for an iron ore pit to run Rio Tinto. Look at (former travel industry executive) Elizabeth Gaines’ success at Fortescue,” Bairstow said.

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Corporate bond issuance off to a bang in September


Corporate borrowing is off to the races.


Getty Images

Companies wasted no time going back to the borrowing trough after the long Labor Day weekend.

U.S. investment-grade companies already borrowed $46.7 billion in the bond market this month through Wednesday, a single day that accounted for $21.3 billion of the total, according to BofA Global Research.

Notable among the week’s deluge was a debut $1 billion green bond issued by JP Morgan Chase & Co.
JPM,
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putting it alongside other major corporations from Google parent Alphabet
GOOG,
-1.60%

GOOGL,
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to Visa Inc.
V,
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which in recent weeks have raced to borrow with do-good purposes.

September often can be a busy month for corporate borrowing, as companies focus on the remaining weeks left in the year to lock in optimal financing — meaning before Thanksgiving, when the typical year-end lull begins to take hold.

Here’s a look at how September bond issuance stacked up over the past five years:

The pandemic has made this year anything but typical, including with a record $1.5 trillion already borrowed by investment-grade companies so far in 2020 to help fund their operations through the year’s end.

Many highly rated businesses borrowed fresh mounds of debt at lower rates than ever before, even though they are now carrying record levels of leverage.

Read: U.S. corporate debt soars to record $10.5 trillion

However, with the Federal Reserve’s unprecedented pandemic support, there’s little reason to think big businesses have had enough of today’s ultra-low borrowing rates.

“It’s a very busy September,” said Wendy Wyatt, a portfolio manager at DuPont Capital, of investment-grade bond supply. While she doesn’t expect to see the same eye-popping borrowing boom as in March, April and May, when companies were panic-borrowing, Wyatt has been encouraged by the recent trend where bond issuance has been used by more companies to kick their debts down the road or to repay near-term maturities.

“It’s not hideous. It’s a smart business decision,” she said of the debt replacement or reduction strategy, even through she’s also keeping an eye on companies that look to take on more debt to fund mergers and acquisitions.

“M&A has picked up and you’ve got to be cautious about that,” she said.

Related: Coronavirus slashes deal-making globally: What to expect next

To be sure, some of the big winners of the pandemic debt boom have been investment banks hired to arrange the funding.

Revenue at investment banks jumped 32% to $101.6 billion in the year’s first half from a year prior, its highest level since the first half of 2012, according to Coalition, a global analytics company.

What’s more, Coalition expects the year’s swift uptick in investment banking business, particularly in fixed-income, currencies and commodities, to combine with further head-count reductions at banks and produce an 12% return on equity for institutions it tracks in its index.

That would mark a significant reversal of a trend where ROE for banks in the index have declined each year since 2016, when it hit 9.5%.



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