Rio Tinto plc (ADR) CEO discusses Q4 2012 Results - Earnings Call Transcript

| About: Rio Tinto (RIO)

Rio Tinto plc (ADR) (NYSE:RIO)

Q4 2012 Earnings Call

February 14, 2013 03:30 AM ET


Jan du Plessis - Chairman

Sam Walsh - CEO

Guy Elliott - CFO


Rob Clifford - Deutsche Bank

James Gurry - Credit Suisse

Clarke Wilkins - Citi

Lyndon Fagan - JPMorgan

Peter O'Connor - Merrill Lynch

Menno Sanderse - Morgan Stanley

Glyn Lawcock - UBS

Jan du Plessis

Good morning everyone here in London and welcome to those participating via the webcast. Our Chief Executive Sam Walsh is with me here in London and Guy Elliott is presenting from Melbourne. Rio Tinto’s businesses performed well in 2012, generating strong underlying earnings and operating cash flows.

However, as foreshadowed a few weeks ago, we also recorded impairments of $14.4 billion, which resulted in the group reporting a net loss in 2012 of $3 billion. These write downs are deeply disappointing. In particular, the substantial impairment of our Mozambique coal business is unacceptable.

There clearly is a need for greater discipline – in particular in the way we allocate and manage capital at Rio Tinto. I believe Sam is ideally placed to cast a fresh eye over how we address

The challenges and opportunities in the business. He is a highly experienced and capable executive who has already made a significant contribution to Rio Tinto – not only as an executive but as a director of the company.

Sam and I – and indeed the whole board are completely aligned on the need to pursue greater value for our shareholders, and we will be working together to achieve this. I can assure you that Sam has hit the ground running, and is already making a tangible difference to the organization.

Looking forward, I am optimistic about the outlook for Rio Tinto. We have great assets, attractive near term growth and a positive long term outlook. This gives us confidence in the sustainable cash generating abilities of our business. That is why we have today increased our annual dividend by 15% to $0.0167 per share. That's all from me. Thank you very much, and with that I hand you over to Sam. Sam?

Sam Walsh

Thank you Jan, and you too for the trust you and the board have placed in me, to lead this company in its pursuit of greater value for our shareholders. It's a trust I feel deeply, which makes me even more conscious with the responsibility that I have taken on. I am setting a clear course, clear objectives and I am determined to deliver them.

Let me first recognize my predecessor Tom Albanese, particularly for the support that he had shown me in my new role as Chief Executive. This is a great company. It's got great assets, and I inherit a great team. People that I know well from my 21 years with the company.

I am confident in our core strengths and in my ability to lead the team. I am proud of my record, and the success of our iron ore operations. But this is a new challenge. And for those of you who haven’t met me, let me tell you a bit more about me the sort of person I am and how I see my role as Chief Executive.

I joined Rio Tinto in 1991, after 20 years in the car industry. I have spent the past eight years as chief executive of iron ore and I have worked in two other product groups, including heading the aluminum division. I am deeply familiar with this company, its strengths and its challenges and its people. And I am committed to making a real difference – building on Rio Tinto’s strong foundations to put it firmly on the path for sustainable, long term success.

I personally place the highest importance on integrity, accountability, respect and teamwork. These are values that play a big role in the way I do business, and what I expect from my team.

Today, I have strengthened my team, with the appointment of Andrew Harding to run the Iron Ore business, and Jean-Sebastien Jacques who will succeed Andrew as head of the Copper group. Andrew has spent the last three years doing an excellent job running the Copper group. He is now returning to iron ore, where he spent six years earlier in his career, and is very well qualified to take this product group to the next stage of its growth.

Jean-Sebastien has made a big impact running Copper’s international operations over the past year, and comes with a strong track record in the both the steel and aluminum industries.

Let me be absolutely clear – I will drive an unrelenting focus on pursuing greater value for you, our shareholders. I am asking every employee to run the business as if they owned it and I am determined to make this a more valuable company.

Now, let’s move on to one of my overarching priorities, which is safety. We are showing improvement, but quite frankly more needs to be done. It brings me great sadness that there were two fatalities at our managed operations in 2012, and a fatality at our La Granja project in Peru earlier this month.

I won’t let up in my constant efforts to improve safety, to reinforce our strong safety culture, and to ensure that every employee and every contractor plays their part in making our workplaces safer. Our core strategy will remain: to maximize shareholder value by investing in and operating large, long-life, low-cost, expandable mines and businesses, no change. But, under my leadership there will be a change. I will be insisting on greater focus, discipline and accountability for the delivery of this strategy across every part of our business. Let me tell you what this means.

Firstly, it’s about improving how we manage our capital. As I've said, I have made it clear to everyone that they must treat the company’s money like their own, and run the business like owners, not managers. To do this, we must rediscover the qualities and excellence that made Rio Tinto great.

We must get the right balance between risk and reward in assessing new investment opportunities. And we will rigorously evaluate those opportunities against all competing uses for cash - including, of course, returning the cash to our shareholders. And we will only invest in new projects with attractive returns that are well above our cost of capital. I am committed to rebuilding shareholder confidence that our investments will deliver value.

My second area of focus is on improving our current performance. We have world class assets, but some of these are under-performing, and that is simply not acceptable. We will unlock productivity improvements and aggressively reduce our costs. We will scrutinize all forms of capital spending – not just expansion capital, but also sustaining and importantly, working capital.

And we will harness our industry-leading technologies to deliver greater value from existing operations so from the strategic, let me turn to the specific, and my immediate focus and priorities for the year ahead. Today we have announced underlying earnings of 9.3 billion dollars, and operating cash flows of 16.5 billion dollars. These are good results and demonstrate the solid foundations of this business.

I am re-focusing the organization on a single commitment: the pursuit of greater value for our shareholders. This is a serious commitment that will inform all decisions and actions that we take right across the organization. And I am reinforcing discipline and accountability. Putting it very-very simply, this means individuals will have clear targets and will be accountable for their performance. It also means we'll strengthen our management and approval systems, bringing greater rigor to internal debate, and having more effective checks and balances, and clearer lines of sight to critical business issues.

We will deliver on our cost savings targets, will see an annual run rate improvement of $3 billion a year by the end of 2014. And Guy will talk us through this shortly. And we'll bring new production on-stream from our approved growth projects. We're taking a more aggressive portfolio approach to assets that no longer fit our strategy, and we're targeting significant cash proceeds from our divestment program during 2013.

At every turn, we will evaluate the alternative uses for cash, between disciplined investment, strengthening our balance sheet, and returns to shareholders. And these are the right steps for us to take. They will build a stronger, better company. So, with that, let me pass over to Guy, to run through today’s results. Then I’ll be back with you to cover our operations, projects and the market outlook. Thanks Guy and over to you.

Guy Elliott

Thank you, Sam. We have reported underlying earnings of $9.3 billion and cash flows from our operations of $16.5 billion. Whilst lower than last year, principally due to lower commodity prices, these results demonstrate the good performance and healthy position of our underlying business. As we flagged in January, we have recognized an impairment charge of $14.4 billion, mainly related to our Aluminum and Mozambican coal assets.

The aluminum market deteriorated further in 2012, whilst the Australian and Canadian dollars remained strong. These factors, coupled with high energy and raw material costs, reduced market valuations substantially. In Mozambique, we had planned to barge coal along the Zambezi River. This has not received formal approvals, but we remain actively engaged with the Government of Mozambique on all transport options.

We have revised down our estimates of recoverable coking coal, which necessitated a reassessment of the overall scale and ramp up schedule resulting in the impairment. The impairment charge has been partly reduced by a deferred tax asset of $1.1 billion, following the introduction of the MRRT in Australia last year.

We recognized net gains on consolidation of Richard Bay Minerals in Turquoise Hill of around $800 million. So, overall, we recorded a net loss of $3 billion. Let’s now take a look at the key drivers of our underlying performance, starting off with price.

Lower prices for most of our products resulted in a $5.3 billion drop in underlying earnings. Weaker markets were driven by two main factors – the slowdown in China and subdued growth in the rest of the world. Of course, the lower average iron ore price had the greatest impact, reducing underlying earnings by $3.7bn. It was a tale of two halves for iron ore prices in 2012. The first half of the year was relatively stable. The second half was highly volatile, with prices falling to as low as $89 per tonne before recovering to reach the mid-150s in early 2013.

In aluminum, we continue to face challenging market conditions. The 16% decline in the LME price lowered earnings by just over $940 million. It was also a difficult year for coking coal, driven by a combination of a recovery in supply from Australia and a weak macro-economic environment.

In 2012, copper markets moved from a net deficit to a slight surplus. The 10% decline in the copper price lowered our earnings by just over $300 million. On a more positive note, the unwinding of legacy contracts for titanium dioxide feedstocks resulted in $270 million of additional earnings. This sector will become an even more important driver of our earnings momentum as re-pricing of legacy contracts continues.

One third of our long term contracts have now expired, increasing our exposure to current market prices, which are significantly higher than existing contract averages. By the end of 2013 around three quarters will have rolled off.

Turning now to volumes - Volume increases enhanced earnings by $634 million. Just over half of this came from rising iron ore sales following the debottlenecking projects in the Pilbara. Other significant gains included higher copper volumes at Escondida and at Northparkes in line with a recovery in grades. Volume declines of $943 million primarily reflected lower mill throughput and lower gold grades at Kennecott and no metal share at Grasberg where production did not reach the amount set, in the metal sharing agreement.

The net volume variance therefore lowered earnings by just over $300 million. We are confident that this trend will reverse in 2013 as our major projects come on-stream and copper grades continue to recover, in particular at Kennecott.

Higher operating cash costs during 2012 decreased underlying earnings by $304 million, excluding the effect of energy prices and inflation. The largest single driver of higher costs was operational readiness. These are costs which we incur in order to quickly ramp up our growth projects to full production capacity, in particular in the Pilbara.

One-off costs principally relate to the impact of the Alma lockout and furnace rebuilds in our TiO2 business. Raw material cost inflation continued, particularly in our aluminum business where higher coke, pitch and caustic soda prices persisted. Offsetting these cost increases was less weather disruption than we experienced a year earlier.

With continued cost inflation across the mining industry and with the Australian dollar above parity with the US dollar, a focus on costs has become even more essential. We saw an increase in our non-cash costs, due to higher depreciation in the Pilbara following recent investment, as well as higher depreciation at ERA.

Exploration and evaluation costs were lower, partly due to the gain on disposal of our interests in Kalahari Minerals and Extract Resources. We expect these costs to come down further and are targeting savings of $750 million in 2013 as part of our cost reduction efforts.

Turning to cash flow. At $16.5 billion cash flow from operations was lower than underlying EBITDA, mainly as a result of lower dividends from Escondida due to the financing of its investment program, and various non-cash accounting items included in EBITDA. Cash inflows included $1.35 billion from Chalco following the signing of the Simandou agreement.

Our large projects in the Pilbara and Oyu Tolgoi account for much of the total capital expenditure of $17 billion for 2012. This was higher than our previous guidance due to the accounting reclassification of a number of items at Oyu Tolgoi from operating to capital expenditure. This has no impact on the overall project cost, which remains on target at $6.2 billion. We also accelerated some spend in the Pilbara, allowing us to bring forward the timing of first production from the expansion to 290 to the third quarter of 2013, with no increase to overall project spend.

Turning to acquisitions, in September we doubled our stake in Richards Bay Minerals for $1.7 billion. We are very pleased with our increased share in this tier one asset in a market whose long-term outlook remains attractive.

Other large outflows included corporate taxes of $5.8 billion, which is comparable with 2011. We will be publishing our taxes paid report on 15 March. And cash returns to shareholders totaled $4.5 billion in 2012, comprised of the completion of the group’s $7 billion share buy-back program and the ordinary dividend. Overall, our net debt increased by $10.8 billion to $19.3 billion.

Now despite this increase, our balance sheet remains healthy. In 2012 the Group successfully completed bond issuances in US dollars, Euros and Sterling, raising around $8 billion with maturities ranging from 3 to 30 years, averaging around 12 years with a weighted average cost of borrowing of approximately 3.6%. We have cash on hand of $7 billion and undrawn committed credit facilities of $8 billion. All this is in the context of our aim to maintain our single A credit rating.

Let me turn now to one of our key priorities for the coming years – our cumulative $5 billion reduction in operating costs by the end of 2014. Approximately, $2 billion of savings will be achieved in 2013. This will be sustained into 2014 and a further $1 billion of savings will be made in 2014 - bringing us to $5 billion in total.

So by the end of 2014, we will have achieved sustainable reductions of $3 billion in our operating cash costs, compared with our 2012 cost base.

For context, in 2012, our net operating cash costs were $35 billion, around $6 billion higher than just three years ago. This is not a sustainable trend, so we are taking decisive actions to reverse it.

Let me explain the rules we will apply in measuring performance against this target. We are assuming constant market conditions and a stable operating environment. We will also strip out the effects of uncontrollable items including inflation, currency movements the impact of input prices linked to quoted metal prices, and major one-offs such as a significant weather event. Performance against this target will be measured by pre-tax unit cash cost improvements shown in our earnings variance analysis.

Productivity gains that reduce unit cash costs will be reflected in our performance against the target. Equally, any increases in unit cost as a consequence of operating conditions, such as greater haul distances, will need to be more than offset. All earlier cost reductions that we have talked about are included in our new target. This includes the costs savings from our aluminum transformation program, and from our service and support cost review. However, our planned reductions in exploration and evaluation spend of $750 million, and further reductions in sustaining capital, are in addition to this target.

Nearly two thirds of the $5 billion cumulative savings will come from our aluminum and energy businesses. These have experienced the highest cost increases over recent years. Central service and support costs also make up a substantial part of the reduction. What sorts of initiatives are we taking to get there?

A few examples may help here: In our Energy business we have implemented a salary freeze, which will result in a real terms cost saving, and are improving labor sourcing strategies. We have recently completed the first round of our service and support cost review, which included significant headcount reductions and the downsizing of a number of high cost city offices.

And we are now reviewing our central office locations, and are aiming for substantial savings through further relocations, outsourcing and offshoring. Beyond our cost reduction programs we are also taking action at some of our higher cost operations. For example, at Gove, we are working closely with the Northern Territory Government to finalize agreements for gas supply, and are advancing plans to convert the refinery from high cost fuel oil to gas. Turning to capital expenditure we would expect 2012 to be our peak year of investment.

We currently estimate that we will spend around $13 billion on approved capital expenditure in 2013. This may rise if we choose to approve further projects, such as Oyu Tolgoi phase 2 or South of the Embley or if we introduce new partners to provide funding, without additional cash commitments by Rio Tinto.

We will be looking at existing projects with a fresh pair of eyes and considering alternatives. These include, continuing with the current plan, slowing down, introducing partners or cancelling projects altogether. For example, we have slowed down the development of Kitimat over the winter period given aluminum market conditions and we have deferred work at the Argyle underground project not required to bring first production on stream.

And we are looking at options for reducing the capital we have invested in shipping, including novating two existing new ship orders to a third party provider of freight services. But we are mindful of the lessons learned when we put projects on ice in the wake of the global financial crisis in 2009. It can be significantly more expensive to demobilize and then re-start projects than to keep going. So it's too early to give a definitive list of what we will do, but this is a high priority.

So, to wrap up - our business performed well in 2012, generating strong underlying earnings and operating cash flows. However, we are deeply disappointed by the substantial write downs which led to the net loss of $3 billion. Looking forward, we will be delivering major volume growth in the near term as two of our landmark projects are scheduled to come on stream.

We will remove excess costs from all our businesses, as we seek to save $5 billion in total over the next two years. Our priority is to deliver greater shareholder value, through the disciplined allocation of our capital. To that end, will only invest in new projects that generate returns considerably higher than our cost of capital. Last year, we rebased our dividend by 34%, we're now increasing it by a further 15% today, demonstrating our confidence in the long term outlook for our business.

With that let me hand you back to Sam.

Sam Walsh

Thanks very much Guy. In a number of ways 2012 was a difficult year, with the fallout from the global financial crisis still having an impact on us. But our underlying business performed well, and there are plenty of reasons to be optimistic in 2013.

Let’s now take a brief look at the outlook, starting with the near term. The global economy ended 2012 in a healthier state than forecast, largely due to a better, or perhaps I should say less dire, performance in the OECD countries.

This in turn reflected a shallower recession in the Euro zone, and a weak but steady recovery in the US. However, the slowdown in China did turn out to be more pronounced. This raised fears of a hard landing, and sparked a debate on the sustainability of investment-led growth in China. This in turn led to increased risk aversion towards commodities.

But importantly, we did see some recovery in China at the end of the year, together with an improvement in confidence in the OECD. And we are seeing this positive momentum being sustained in 2013, with Chinese GDP expected to return to above 8% growth this year.

We do, however, expect market uncertainty and price volatility to persist. Rio Tinto is a company that is always focused on the longer term. Here our view is unchanged: that over the course of the next two decades, billions of people will move from rural to urban areas, driving up consumption of the metals and minerals that we produce.

Again, of course, China will be key. The Chinese population is still only around 50% urbanized. We would expect this to rise to closer to 70% towards 2030, with around 200 million additional people moving to cities in the next decade alone.

But importantly it’s not just about China. As India, Indonesia, Vietnam, the Philippines, Thailand, Malaysia and other southeast Asian countries urbanize and industrialize, they will increasingly demand more of the metals and minerals that we produce. This gives us the confidence that, despite all this short-term volatility, we are well placed to take advantages of strong growth in long-term demand.

So, the outlook for our markets is positive. And within this context, most of our businesses are performing well. We have strong growth prospects in a number of products, as you can see from the chart. But two of our divisions are not delivering adequate returns, and I will address this. The Aluminum industry is likely to face challenging market conditions for some years to come. A structural shift has occurred, driven by the decoupling of the supply chain for bauxite, alumina and aluminum, and continuing growth in the Chinese smelting industry.

We have seen some smelter closures and have been announced, but we have also seen local governments across the globe providing incentives to ensure that loss-making smelters continue to operate. These actions are preventing the rationalization of the high cost capacity that's required to rebalance the industry.

The impairments that we have recorded against our aluminum businesses in recent terms demonstrate that the impact of this structural market shift is extremely serious. We have achieved a great deal through our transformation efforts at Rio Tinto Alcan. But, as our results today show it quite simply isn't enough.

We need a fresh look at this business to ensure that it's able to generate the returns that we would demand. This means we need to take action to reverse the cost increases that we have experienced. We need to improve the productivity of our assets, and the returns that we generate on capital invested.

I'll ensure that no stone is left unturned, to turn around the performance of this business. Secondly, our Energy group also gave disappointing performance in 2012. And Under Harry Kenyon-Slaney’s new leadership I expect significant new steps to be taken, costs to be cut, and underperforming operations to be closed or divested. Harry is already taking tough decisions to turn that business around. So as I said, there is a lot to be done.

Now, turning to our investment program, we have a number of projects at varying stages of completion. We are focused on delivering our major capital projects on time and on budget. In Queensland Yarwun 2 was completed in mid-2012, and we have ramped up at an unusually fast rate to 90% of capacity.

New tonnes are also being delivered from our Australian thermal coal operations, following the completion of brownfield expansions in 2012. And in British Columbia the Kitimat modernization is expected to deliver first metal by the end of 2014.

Looking further ahead, we continue to make good progress at Simandou. In 2012 we formed the joint venture with Chalco, received the $1.35 billion dollar earn-in and we also are focused on social and environmental impact study. We anticipate further progress once project financing has been put in place, and approvals are granted by the Government of Guinea for work on the ground.

Turning now to the Mongolia and the Oyu Tolgoi copper and gold project. I am very proud of this project and of what our management team in Mongolia has delivered. As you can see this is a truly world-class project. It has the potential to make a material contribution to the growth and prosperity of Mongolia, as well as delivering value for Rio Tinto shareholders.

The project was constructed on budget, over an optimized schedule of 34 months. And it has already achieved key commissioning milestones, including the first concentrate produced in January. It remains on track to ramp up to commercial production in the first half of this year.

The high quality ore body will provide further options for growth. We are continuing to optimize the phase 2 feasibility study, and now expect it to be completed in the first half of 2014.

Our investment of over 6 billion dollars in Mongolia to date is underpinned by the Investment Agreement, signed with the Government of Mongolia in 2009, and which came into effect in 2010.This agreement, as with any other investment agreement, is the foundation of the project, and an essential safeguard for investment in Oyu Tolgoi.

I am concerned by recent political signals within Mongolia calling in to question some aspects of the Investment Agreement. This undermines the partnership that we've built, and the stability on which a project of this size and scale depends. It puts at risk future investment, not only by Rio Tinto, but also by others considering investing in Mongolia and I will be totally supporting the copper team in their finding a solution.

It is important that we continue to work in partnership with the Government of Mongolia, to bring the benefits of OT to all parties. But I am also focused on delivering and protecting value for our shareholders. And this requires proper safeguards against risk, and continued respect for the implementation of the Investment Agreement.

In Western Australia, our Pilbara expansion project will see us grow annual iron ore production from 237 million tonnes per year today, to 360 million tonnes per annum by the first half of 2015. As you know in November, we re-rated our annual capacity from 230 million tonnes to 237 million tonnes, with minimal capital investment.

And today we have brought forward completion of the 290 project, from the fourth quarter of this year to the third quarter, delivering value faster. As a result, our global iron ore production will grow to around 265 million tons in 2013, on a 100% basis. And in 2014, we will have a full year of operating at this higher capacity, delivering further growth year-on-year growth.

This will be quickly followed by an additional 50 million tonnes of annual capacity by the end of 2014, and a further 20 million tonnes by the end of the first half of 2015, to reach annual capacity of 360 million tonnes. We have also saved one billion dollars of capital by removing the wet plant at Brockman 4 from the expansion program.

So, this means we have been able to maintain capital intensity in the mid-150 US dollars per tonne, despite facing some of the highest inflation rates in the industry, and a major headwind from the strong Australian dollar. This is an achievement unmatched by any other developer of a major iron ore project. We run a highly efficient, fully integrated mine, rail and port network in the Pilbara. I welcome last week’s decision by the Australian Competition Tribunal, regarding third party access to our rail. This protects the value of the system that we have created over decades of investment.

To sum up. You have heard me say that greater accountability will bring better performance from our people, from our operations, and from our projects. And, that getting the basics right will ensure the fundamentals stay strong. We will invest wisely – prioritizing the highest returning projects, bringing approved expansions on stream, and realizing good value from divestments.

I will be determined, and will demand focus from my team. Expect me to be disciplined, and to instill discipline in all who work at Rio Tinto. I require my management team to be accountable to me, and all of us to be accountable to shareholders.

This new approach is all about one single aim: pursuing greater value for our shareholders. You’ll hear a lot more about that from me. You’ll see me relentlessly focus on the principles and the projects that will get us there. And I expect the entire organization to do the same. I hope today that I have given you some indication of the kind of leadership I'll bring, and given you a confidence in the future, as we build a stronger, more sustainable company, delivering greater value for our shareholders.

Now, it’s time to take your questions. I'll just relocate to the cheering table. What I'd like to do here is to take three questions from the floor here in London and then move to the phone and take three phone call questions and then I'll come back to this room. So perhaps if we could take the first question here.

Question-and-Answer Session

Rob Clifford - Deutsche Bank

Rob Clifford, Deutsche Bank. Thanks for the presentation, I have three questions. Firstly can you give some examples of some of the excesses you have seen creeping over the last seven years that you think are easy to tackle? And secondly do you feel or do you see that the board relationship with the executive team will adjust with the changes we have seen over the last couple of months? And thirdly, the changes you're talking about requires some significant cultural change from the last few years. Have you got the skills within the leadership team across the levels to deliver? And specifically the two big divisions energy and aluminum. You talked about the factors well the change is already in - but aluminum has been looking for these changes for some years. How can do they things differently to get the outcome that you require?

Guy Elliott

I've got the track record of running the largest earning business at Rio Tinto, and many of you have heard me talk about the fact that we have an operation center in the Perth Airport and that optimizes the business in real time. The fact of the matter is that the total business operates in real time making decisions being more nimble, being more focused.

This is fundamental to the way that a business runs and I think as businesses get bigger they become less nimble. It's all businesses in a way, it's lucky because I have to be nimble to physically survive. What I'm intending is to overlay the approach we've taken in iron ore to the broader business.

It is about cultural change, but it's nothing radical, it's nothing revolutionary. It's a way that businesses evolve and as businesses get larger, sometimes the businesses get slower in terms of how they look at information and how they respond.

So are we refocusing the business to pick up? The type of culture that we operated in, in iron ore and taking at across the broader business ensuring that we're more responsive ensuring that we're nimbler in terms of the way that we look at data and the way that we analyze things, ensuring that we make well informed decisions on the basis of data that is responsively generated so that you got clean line of sight so that you can understand all of the issues that are impacting.

I mentioned earlier that we're facing more volatile times, well it actually means that you need to change the way that you operate in an environment like that. These are some of the overarching changes but you know I mentioned focus, I mentioned discipline, I mentioned accountability. I mean this is not rocket science, if you get out any management handbook I'm sure it'll make mention of these types of things. But I seriously mean it, I seriously mean this is what you need to run a business in 2013 and to succeed.

Businessmen, businesswomen running the business as if you own it, I mean these are the correct characteristics of a business as it's formed it's a characteristics of smaller businesses. Somehow as the business develops it gets a little bit more removed from the sort of things that we're talking about here today.

Well I want to inject that straight back into the business, I want to ensure that people within Rio Tinto understand that the prime driver of the business is pursuing greater shareholder value, that's why we're here, the shareholders are the owners of the business, the shareholders have invested in us, they have the confidence in us to deliver this value and I'm committed to creating greater value for our shareholders. It’s just a fundamental of what is the basis of the business.

Robert, you mentioned excesses. Look, quite frankly I'm not a bat looking backwards, I mean history is interesting, history does have learnings for the future but I'm more focused on delivery, I'm more focused on the future, I'm more focused at ensuring that this business is run tightly, is responsive, is responding to the marketplace, is reflecting what governments and other stake holders expect of us and most importantly that were delivering value.

I think there's huge opportunities within the business, yes I've got to find the key to unlock that, yes it's going to change some of the ways in we do things. But this is not a revolution, in way it’s reinstating a lot of the strength that this company has within the business and when I talk to leadership about the sort of things that are mentioning here today, I feel very comfortable, I get it they understand. They know exactly what I'm talking about.

Board relationship - I think we are extremely fortunate with our board. Our directors come from a very diverse background. I'm amazed at times that the commitment and the time that our directors spend in terms of their engagement and involvement in the business and how seriously they take their responsibility.

You know I've had the advantage in the past week to be a part of committees that I had seen minutes of and I had seen sort of the output of those committees, but I had not seen a detailed rigor and analysis and what have you that goes on.

I don’t believe that there is an issue in relation to relationship between board and management, I just don’t see that - I do see that there were instances of poor judgment by management. I do see that two of my colleagues were separated from the business, I do realize that the board takes their responsibilities very seriously and that's reflected on what we have seen. But it doesn't reflect on the broader relationship. This is a great company. The foundations are very sound, we do have good assets, we do have good people. We actually do also have a good board.

And I think in relation to the culture change within the organization, some parts of the organization are already operating in the culture that I'm talking about. I think if there's a significant sort of rethinking in a way about how people within the business operate.

Creation of business women and businessmen, business people in terms of their outlook, in terms of all spending money as if they were own acting, as if they own as the business, this is a cultural shift in terms of how a larger organization operates but again let me say, this is not a drastic shift from where we have been, it’s a reorientation, it’s a new way of looking at how people operate but the many of the fundamentals I am talking about you will recognize from the Rio of all, you will recognize that, well yeah Sam is making senses, Sam is talking about the things that help make this company great and I am (inaudible) sure that we have got to focus that we have got the nimbleness that we have talked about, we have got the sense of urgency, most importantly that we have got this focus on shareholder value.

I want to convert mining engineers in geologists and accountants and HR specialist, I want to convert them into business women and business men that to me is probably the biggest cultural change but I think it’s something that people will jump for joy. And they will say thanks goodness, we are recognizing what the company needs to do. So perhaps another question here, that was a bit longer than I thought by the way.

Rob Clifford - Deutsche Bank

May be just two quick questions. the first of all, when do you think Rio will be in a position to stop properly considering returning cash to shareholders. In terms of what debt level do you feel comfortable with your single A rating, if investments accelerate that process, will the board consider bringing forward some cash returns. And secondly just in terms of management change, Guy was planning to retire at the end of the this year, you can revisit that plant to ensure continuity of that.

Sam Walsh

Let me start with the second question first and then Guy and in fact if I could get you to respond on the cash return to shareholders. Yes, we have announced quite some time ago the Guy will be retiring at the end of the year. he will be staying on board through 2013 and we have always indicated that the time that we bring on his successor that she/he will move into that role of course supported by Guy in terms of all the handover but that we will retain Guy experienced in expertise through the end of the year and that is very-very important to us. In relation to considering cash returns, Guy why don’t you pick up on that question?

Guy Elliott

Thanks well (inaudible) I mean when are we going to stop probably returning cash to shareholders and I think we all return here to show right now, I mean we had a 34% increase in the dividend. Last year and here we have a 15% increase in the dividend, so that is properly return in cash to share holder but I know what you mean.

You mean when we might have another buyback program. Now we have been very willing to end our buyback programs as we demonstrated in the period 2004, 05, 06 and then again more recently in the period 2011, 12 when we return $7 billion through buybacks. I think we are serious though about our single A rating. And I think that if taking into account the level of capital that we expect to spent this year, there is no immediate likelihood that we would return a cash to shareholders through buybacks.

You mentioned disposals and it is true as Tom said that we are looking at further disposals than the ones that we have announced depending upon how many of those are accomplished when there accomplishment how much we get for them. I suppose it’s possible that the balance sheet could return to a point where that question became relevant but I would not encourage you to expect that this year.

However we are serious as we have demonstrated in the past about the idea of returning cash to shareholders if that makes sense. And we have said by the way both today and in previous announcements that we are measuring our investments against that sort of approach so we are looking at our investments against the alternative of returning cash to shareholders. Although that's not an immediate prospect for the reasons that I have said.

(Inaudible) commented that you generate shareholder value in a range of ways I mean certainly returns is part of it but delivering real value increase for the business that also is an incredibly important part of delivering this increase in shareholder value. Do you have another question here in the room?

James Gurry - Credit Suisse

There's a lot focus on the areas of the business where we've invested a lot of capital, but there's not much returns. But at the moment I think it's all about iron ore, can you talk a little bit more about the iron ore, the pace of ramp up in your expansion in the Pilbara, and how you see the iron ore market over the next year and perhaps 3 to 5 years? And just further to that, can you just outline given your in-depth knowledge of Simandou and IOC - can you just outline your long term vision for those two projects and where they sit?

Guy Elliott

I would comment that the business is broader than iron ore and as I mentioned in relation to Yarwun 2 coal, Oyu Tolgoi, I mean we have a range of projects that are in the portfolio. And we are diversified importantly and different parts our business go through different parts of the cycle and they have their time in the sun. In relation to iron ore I mentioned Chinese GDP growth, increase in growth to 8% this year. I mean that's an important indicator, also in January I made comments about the fact that we're expecting volatility in iron ore prices. We had seen a ramp up of prices surrounding potential weather effects in the Pilbara, in fact elsewhere in iron ore production.

Also we had seen destocking, we've not seen that restocking take part at the pace that we expected. The iron ore stocks at the major Chinese ports is hovering around $70 million tones. It used to be around $95 million to $100 million. So there is restocking that's required, but we're seeing continuing investment in urbanization, we expect that will flow to industrialization sort of during that 3 to 5 year period that we met.

We're also seeing in India, we have seen still capacity there come on and we've not seen commensurate increase in iron ore mining. That's been as a result of a number of factors that are relating to land access relating to infrastructure and relating to power. And these are issues that are slowing down expansion of iron ore and India has made the decision to address the clear reduce their exports of iron ore. So those things are helping produce an iron ore market that's a bit stronger. Iron ore prices are currently $115 (inaudible), will prices remain at that level.

I suspect not, but I think that they'll remain relatively robust particularly when I look back and think that I can remember when prices were 25 bucks a ton, it's certainly, I think it's a good outlook for iron ore notwithstanding the fact that we'll expect volatility during 2013, notwithstanding the fact that we expected iron ore prices will come back a bit.

I think in relation to Simandou, there are two critical issues for Simandou and firstly I should say that Allen and his team are doing a great job there in terms of taking the project forward. We are however waiting for the framework agreement to be put in place, we're expecting at the end of last year and Allen and his team are working with the government of Guinea in terms of taking that forward.

That is like a state agreement, it's like an investment agreement, this is needed to be the fundamental underpinning of that project and the investments there and co parties understand that, they're complex but that needs to be put in place and the second is the funding of the government of Guinea's share in the project, and again a lot of work is being done there, but we need to see that funding and that financing put in place actually to move the project to the next stage.

We’re continuing with work on the ground but we're very focused as are our shareholders, government of Guinea, Chalco and International Finance Corporation in terms of getting those two building blocks for the project put in place.

IOC has brought on its concentrated expansion project 1, it's working through the second phase of that, step 2 concentrated expansion project 2, they've had a difficult year in relation to those projects and in terms of weather events and we’re working with the IOC team in terms of what more we can do in relation to that business in terms of generating value for shareholders.

But let me come back to the fact that we are a diversified, we are a portfolio company, iron ore's important and it's got its time in the sun today but we're very encouraged by the work that's happening in other areas. So perhaps it's time to move to the phones and if we could take a question from the phone line.


Our first question comes from Clarke Wilkins of Citi. Please go ahead, your line is open.

Clarke Wilkins - Citi

Just a question I suppose iron ore and also just on return. When you look - you are a diversified company but at the moment the vast majority of earnings comes from iron ore and we saw a lot of volatility in the iron ore market last year. Is there anything you can do with second largest, maybe going to the biggest producer, to smooth out the volatility in terms of pricing at least etcetera or with the sort of transition thing, spot prices we basically stop with this volatility and could we expect similar episode in the second half of the year?

The second question just, you talked about you know sort of credit display on investments etcetera, does that require sort of higher returns on some of the projects like Simandou to justify the investment given some of these projects get into increasingly risky countries?

Guy Elliott

Firstly Clarke on your question about volatility - because I think the entire industry would prefer a scenario where we had reduced volatility but the old days are passed. We won't see a return to annual prices and quite frankly both customers and iron ore producers are moving to even more frequent pricing reviews, whether it be monthly or in fact daily.

This is no different to what we see with other traded commodities, no different to aluminum and copper. It reflects to an extent, the vagaries of whether that I've just mentioned, it reflects seasonal factors, it reflects holiday seasons, it reflects a whole raft of issues. But we need to sit back and we need to look at overall at the trends that we see with iron ore.

And importantly this urbanization, industrialization that I talked about is going to continue, certainly in China, but then we'll see the benefit of this slowing forward in terms of India, Indonesia, Vietnam, Philippines, Thailand, Malaysia. We're seeing it in South America, we're seeing it in Eastern Europe and if I want to really stretch your imagination it'll happen in Africa too, we're seeing growth there and we'll see a time there are actually more people than they are in China, there is already a billion people in Africa.

All of these are building blocks, the building blocks of developing economies and we are fortunate to be in a position where we are providing the fundamental to provide these buildings blocks. I think in relation to the right of return for projects, as Guy mentioned we fit our (inaudible) capital last year, just over $17 billion of capital this year from the charts, it saying that we are projecting 13, there are some unapproved projects there that (inaudible) some of the growth but that depends on the market, it depends on a range of factors but we have seen the peak.

Now, importantly if you forward, ensuring that we invest in the projects that are well above the rate of return, well above an highly competitive all of the turn, this is physical important to us and that’s the way that will evaluate projects.

I should also mention that we have revised the way, that systems operating into projects review, we are reinforcing the disciplines in our decision making there to ensure that we are making the best decisions. Ensuring that we have got rigorous analysis ensuring that we review the sensitivities that you would expect that ensuring that it’s very rigorous to (inaudible) as these projects go forward. This will ensure that the projects are actually get to be reviewed by the investment committee and the board, the projects with the highest rate of return.

So that’s another question from the front line.


Our next question comes from the line of Lyndon Fagan of JPMorgan. Please go ahead.

Lyndon Fagan - JPMorgan

Sam, a lot of the issues that you have talked about trying to resolve the product M&I, I am just wondering if you all prepared to rule out for the M&I for the foreseeable future that was the first question, and then in terms of (inaudible) I guess you are talking about an underground that could cost up $5 billion.

I am just wondering if you have sufficient confidence in geopolitical situation at the moment to actually we're going ahead with that project, thanks.

Okay firstly in relation to M&A I sure will indicate to you that I am not spending anytime looking at that potential acquisition. I have learnt in my career you can never say never but it’s not on my writer screen. My writer screen is focusing on delivering the projects that we have got on the pipeline ensuring that future investments in our organic growth are the best possible projects ensuring we delivering on commitments in relation to cost improvement productivity improvement, the way that we are physically operating our business. As I said, the foundation (inaudible) is a great company.

These are fundamental things in relation to how our business should be operated. In relation to (NYSE:IT) I have mentioned that the Phase 1 of that project has gone very well and I think Andrew and his teams have done a great job there in terms of bringing that project on.

First concentrated in January respecting that Phase 1 will be up on operating in the first half of this year. In relation to Phase 2, we are going through the normal process that we go through in relation to a project as we move from prefeasibility into feasibility in terms of the value analysis and value engineering that we take to ensure that we are optimizing the project to ensure that this is the best possible project that we could expect. And we're expecting the results of that work will be completed in the first quarter of 2014 in relation to the political scene on the ground.

We are as we sit here engaging with government in relation to the investment agreement which basically is a certainty that's behind the project and these are important issues for us in terms of how we make investment decisions. I am an optimist, I am optimistic that through those discussions we can put forward that point of time of a shareholder that we have invested on the basis of the fundamentals in decrement.

That certainty is absolutely critical to this industry, required frankly we are not just doing this on behalf of Rio Tinto, we're actually doing it on behalf of anybody who is looking to invest in Mongolia, and a sort of certainly that we're looking for is the certainty that you see elsewhere in the world. So this is nothing sort of strange of peculiar that we're talking about here. This is fundamental requirement for any project where you're investing this sort of money. Perhaps with that if we could move to the next question on the phone.


Our next question comes from Peter O'Connor of Merrill Lynch. Please go ahead sir.

Peter O'Connor - Merrill Lynch

Two questions - Pacific Aluminum, can you give some update about the mechanisms that you're looking at to divest or move that asset and what timeframe we should expect? Secondly, I'm mindful that when you used words, you used them very carefully - you're significant in your release regarding asset filed this year. How do I understand the term significant, is that 1 to 5, doing five, doing or more. How do I read that? And lastly with regards to the Australian political landscape and doing business in Australia, how are you seeing that evolve this year given recent political channel potential political changes and particularly with your comments about MRRT etcetera. How do you feel landscape going forward?

Sam Walsh

Perhaps if I move backwards through those three questions. Peter, thank you very much for your congratulations. If I can move backwards through those three questions and guy if I could signal to you that I'd like you to cover the issue of (inaudible). Look I was trying political landscape, are in politics is politics and you know I think a week a long time in politics. Well seven months is an even longer time and we have seen the crawling of election for September 14.

I'm not sure that will see a lot of joy rations between now and September 14. Importantly we work with governments all around the world and we respect the government, we got a good relationship. Like if I would have actually just focus on the Gove refinery just for a moment, I think the support that we have seen from the federal government and the northern territory government in relation to those negotiations.

I think it's been first class, I mean clearly a very complex and difficult issue for both governments in terms of taking forward and clearly for us. Moving to a more competitive source of energy for that refinery, absolutely essential.

Yes we did take a tough stance in relation to that and yes if we didn’t get gas we would have in fact multiplied that plant, but through a process of very healthy engagement working with both governments we've moved to a situation where not only for the people of Nhulunbuy and the Northern Territory in Australia but also for Rio Tinto, we've got the best possible outcome.

We'll have an asset of Pac-Al that is an integrated aluminum business - bauxite, alumina and aluminum, that's important to maximize the value of the sale, but importantly the gas will enable us to move that operation into the low area of the second quartile. That is physically important.

In relation to asset sales, I'm sorry to disappoint you Peter but I'm not going to get into any details here except to assure you that we refocus on delivering value. There are assets that we're looking at for divestment that are not core assets they're underperforming assets, but delivery of value here is a very important issue. I guess my focus here is to ensure that we're putting in the same sort of priority and focus on this that we are elsewhere in the business and clearly the team there has done a lot of good work, we've seen over 20 projects divested generating $12 billion of value.

So, that team has shown that they've got the capabilities of delivering value and I'll look forward to the work that they generate during this year.

I think in relation to divestment of Pac-Al, I wonder if you could walk us through the number of potential scenarios we are looking at there.

Well first of all let me say Peter that the readiness of this business for sale is very well advanced. The separation has all been carried out, we've been running it as you know under Sandeep Biswas for just over a year now. And I must say the team has done an excellent job in preparing this business for sale in terms of cost, in terms of culture and in all sorts of other terms, you may have read that we’ve appointed an advisory board, Sam has talked about what we’ve done at Gove, but all of these things are positive for the future value of this business.

The approaches that we might take to sell it are the same as we have always said, namely that we might sell it to a trade buyer as a whole. We might break it up, we might IPO it or we might spin it to our shareholders. And all of those options are bring run concurrently and I think that I'm not going to say which of them we're likely to follow. And not am I going to say when, for exactly the reason that Sam just gave, which is that while we do want to move this business along, and we want to do that before too long.

We are driven by value and we are going to want the best value outcome that we can find from each of the different options that we're looking at. So that's what we're examining, but what I would say is that the separation and the readiness of this business for sale is now well advanced, particularly with the Gove solutions, which of course has got to be finalized and we're going to get all those agreements actually ironed out. Thank you.

Sam Walsh

Thanks Guy and thank Peter for your question Let's move back to the room in London and we've got a question over here.

Menno Sanderse - Morgan Stanley

Coming back on the cultural change Sam, the financial industry has gone for a very similar process in the last three years, and the only thing that seem to work is a change in incentive and a change in discount rates and cost of equity. Are you implementing things like that in the company, changing management incentives, changing discount rates, are you increasing discount rates on projects to accelerate this cultural change. And secondly on the volume side, volumes are clearly a negative contributor to the business this year. There is clearly a bit of a tension there between depletion and negative volumes and on the other hand capital discipline actually the business wants to grow, therefore more eager to approve new projects. On the other hand you want to just slow down and only go for the best. How do you deal with that? Thank you.

Sam Walsh

I think in relation to your first question about incentives and discount rates, certainly in terms of our establishment of short and long term incentives for the business is something that we give a lot of thought to. We are considering some changes in relation to how that operates, it's not totally reinventing it, but insuring that it relates to the sort of focus that I've been talking about here, reflecting the priorities of the business, particularly in relation to cost reduction and to focus there. In relation to discount rates, I mean something that we continue to evaluate and it something that’s important in terms of how we look at projects but equally so the assumptions that we have in relation to forward commodity processing and exchange rates that’s equally important and the sensitivities that we put through projects ensuring that they reflect realistically the potential outcomes that you could have in the projects could phase. And rather and taking sort of stock standard sensitivities, looking at the cases that could actually represent movements we are seeking in relation to various inputs and outputs for the projects.

Volumes are important to have business, they are important to any business but giving the tradeoff run between value and volume, is an important issue and importantly on focusing on every part of that business in relation to how they contributing to our earnings and how they are contributing to our cash generation. The business is seeing an increase focus on granularity in terms of how we are physically operating and we (inaudible) is not being generated.

I mentioned before the volatility and I agree that if the (inaudible) less volatile, that will be wonderful thing but unfortunately I don’t drive that but it is important that as we move the business forward, the nimbleness and the responsive (inaudible) that have talked about that were affecting that in terms of how we are physically running the business.

Annual plans and annual reviews are an important, they provide the foundation (inaudible) operating. But if the circumstances change then you need to physically respond to those and it is not adequate to say well in October last year, that this what we have planned but the rules changed completely in the meantime. It can be by the way, it can be positive changes or in fact it can be negative changes and you need to take stock and you need to take advantage of both. So we are not an organization as committed to volume for volume sake. We are an organization as committed to value and we are committed to delivering shareholder value and that needs to take into account, the very trades of that I have been talking about in terms of many moving parts in terms of the world economy and that effects on different commodities and different ways. Perhaps another question here in the room we have a gentleman here who has been very patient.

Menno Sanderse - Morgan Stanley

It's (Frazier Jameson) from JP Morgan, really a question around the cost saving targets and first part of which is could you just confirm that $5 billion number is not reliant on disposals to be reached? The second part, could you just remind us about the existing targets that are already fitting into that, I think we've got $1.6 billion of EBITDA improvement in aluminum of which both 50% is cost related. Could you just remind us what else is in there and then the third part is just drawing Guy's comments on an absolute and productivity driven cost. If we look at the pie chart, is it reasonable to say aluminum and energy divisions not growing nor schedule to grow much over the next couple of years therefore we should think of those cost savings in absolute terrains and the central cause whereas iron ore and copper obviously you are going to get the benefit of higher volumes so therefore they are more productivity and fixed cost leverage related.

Tom Albanese

Guy sort of gave us certainly a field during his presentation of what was in and what was out. But I think we need to clarify the point you rose, let me assure you disposals are not included in cost reductions but I think in relation to the existing targets and the pie chart Guy could you pick that up for me?

Guy Elliott

Yes, I mean I think we are trying to make high quality sustainable cost reductions here so if we make a disposal which we may to, as we've discussed just now. It will have to be deducted from both the starting point and the end point so we will have to make an adjustment for that. I have given all the conditions that apply to this but to try and answer your questions about existing target, we have existing targets that relate to aluminum as you've said.

Actually the $1.6 billion of improvement in EBITDA came from multiple sources. So for example it came from a revenue enhancement through various means of the creep of capacity through getting hard premiums from things of that sort. We have also deferment or more efficient use of capital, we have improvements in working capital as well as cost savings. And so what we've done is subsume the cost savings that were in the $1.6 billion within the $5 billion. But the other improvements, the ones that I've just tried to describe are still underway and being pursued by written to aluminum.

On the question of absolute and productivity driven cost, I think that the characterization that you have described is approximately right. I mean we do have the benefits of volume and because this is fundamentally based on a unit cost approach, we have the benefits of volume in those two iron ore and copper divisions as you say.

That will depart of the contribution that's being made by those. Also as you say aluminum and energy aren’t really expanding and we're having to look elsewhere. I gave some instances of it, but to give a little bit more color to this we're looking very hard for example at procurement.

Can we achieve better deal negotiating hard with those who supply us? Can we really reconstitute the areas on which we spend money. Can we eliminate whole areas of cost as well as reducing the price of the things that we’re buying. We want better visibility and KPIs on all our costs, and on top of that of course there are all the labor productivity benefits that we're looking for. And this applies everywhere, but especially in those two divisions. I touched on off shoring and outsourcing. I think would be important I touched on the salary freeze in energy.

I think there are volume increases a little bit in aluminum, particularly in the area of bauxite and alumina. But I don’t think they're going to be quite as marked in their effect as in the iron ore and copper areas of course. And we're looking at organizational design changes in aluminum in various ways. Productivity improvement through the use of technology, that's not confined to aluminum but it is present there. So I think there are multiple sources of all these improvements.

It is a very serious commitment that we're making here which provides the discussions that we're having with the product groups about their plans and about their performance every month. And what you can be assured is that we're going to chase this improvement so that we actually can make it a sustainable improvement in the cost base. So that gives a bit more texture to it and when we next get together in August I'm hoping that we will have some flesh to put on these bones.

Sam Walsh

Thanks very much Guy, I was just been handed a wind up note. So perhaps if I could just take one quick question from the phone and then I'll need to make the hard close of 10:00.


Our next question comes from Glyn Lawcock of UBS. Please go ahead.

Glyn Lawcock - UBS

Good morning Sam. Just wanted to check two things, I'll question you on two issues. Firstly you said government have been stepping in and they're barrier to rebalancing the industry, I think that was your quote. And then you went onto say, we've accepted the government's handout to keep Gove open. I'm just trying to understand how do you justify those two comments, because I think counter ensured it to each other that you've said the industry won't rebalance if we take handouts and you have. And then secondly, just to understand the mineral sands cuts that you've announced today. If you had any feel for - is that just for a year or do you haven’t really thought through this about it. Thanks very much.

Sam Walsh

Thanks very much Glyn. Look in relation to Gove, there is no government handout. This is physically the government in their own territory making available gas, there is no cost to them. In fact I've got take or pay obligations that will be removed. So there's actually a benefit to the northern territory there, but there are no handouts by government. In relation to mineral sands, that relates to the market dynamics, if it relates to where we currently see processing for industrial minerals is part of what I described in terms of all being responsive to market forces.

I think with that if I could thank everybody for your questions, I think we've covered the field pretty well. I certainly look forward to spending more time speaking to investors over the course of the next few days, weeks and months.

Today I have set out how I intend to deliver the strategy and my priorities for the year ahead. But if I leave you with just one impression today, just one important message today, I want it to be that I am single-minded, that I am determined to deliver greater value to shareholders. This is what drives me, this is what makes me tick. This is what gives me great satisfaction. This commitment will inform all of my decisions and the actions that we take across the business. Thank you all for being here, thank you for those on the phone line. Thank you very much.

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