Jan Du Plessis - Chairman, Chairman of Chairmans Committee and Chairman of Nominations Committee
Tom Albanese - Chief Executive Officer, Director of Group Resources, Executive Director, Member of Chairmans Committee and Director of Rio Tinto Limited
Guy Robert Elliott - Chief Financial officer, Executive Director, Member of Executive Committee, Director of Rio Tinto Limited, Member of Independent Committee and Member of Chairmans Committee
Jason Fairclough - BofA Merrill Lynch, Research Division
James Gurry - Crédit Suisse AG, Research Division
Myles Allsop - UBS Investment Bank, Research Division
Paul McTaggart - Crédit Suisse AG, Research Division
Paul Young - Deutsche Bank AG, Research Division
Brendan Fitzpatrick - Morgan Stanley, Research Division
Peter O'Connor - BofA Merrill Lynch, Research Division
Richard Hatch - RBC Capital Markets, LLC, Research Division
Rio Tinto plc (RIO) 2011 Earnings Call February 9, 2012 3:30 AM ET
Jan Du Plessis
So good morning, everyone here in London, and good evening to those of you joining us from Australia. And welcome also to those of you participating via the webcast. Tom Albanese is with me here in London, and Guy Elliott is presenting from Melbourne.
Rio Tinto has performed strongly in 2011. We have today announced another set of record-breaking underlying earnings and cash flow numbers reflecting favorable albeit increasingly unpredictable markets. This is, in my view, an excellent outcome. But I also want to acknowledge the significant impairment charge that we've taken in relation to the aluminum assets. This industry continues to be affected by oversupply and rising raw material cost, but I'm confident that we are doing all we can to turn this business around. On a more positive note, we were able to return $7.7 billion to our shareholders during 2011 through dividends and our share buyback program, which is now almost complete.
Looking forward, I remain cautious about near-term prospects for the global economy. I said to you 6 months ago that policymakers would grapple with these substantial economic imbalances that exist, and that, of course, continues to be the case. But looking further ahead and beyond the current volatile markets,the medium- to long-term picture remains positive for markets and -- metals and minerals with strong demand growth from emerging economies set to continue.
The quality of our tier one assets combined with our superior growth options and our positive long-term outlook gives us confidence in the sustainable long-term cash-generating abilities of our business. For this reason, and recognizing the importance of sustainable long-term returns to shareholders, we have today increased our annual dividend by 34% to USD $1.35 per share.
So that's all from my side. Thank you very much, and I hand you over to Tom.
Thank you, Jan. And before I start talking about quality of assets, as you say, Jan, the quality of the video feed's not so good. So Guy, when he gives his remarks, will be sort of coming in and out, but you can be assured that the sound -- he can hear us, and we can hear him.
So I'd like to speak about our full year results. But before I speak about those results, I'd like to start with safety. Last year, there were 6 fatalities at Rio Tinto-managed operations. I deeply regret each of these tragic deaths, the devastating impact they've had on their colleagues and certainly, their families. And I am certainly prepared to redouble any efforts to improve safety and tackle the root causes of all those accidents and their risks.
This year, we will focus on critical risks and some of the more serious accidents. But I do think as a sector, we should recognize we're seeing some new risks out there in the safety front. As the industry continues to expand to meet this increasing demand, more new people are coming onboard. We're seeing higher levels of turnover and higher levels of churn. We need to improve how we train new employees to learn safe working practices and how they can play their own part in keeping a strong safety culture. So this year, in addition to everything else, we would be focusing particularly on those front-line leaders, who are so important in maintaining a safe workplace for an expanding workforce. The road to 0 harm is challenging, but I'm not satisfied until our workforce entirely injury-free and harm-free across the group.
So let's now turn to the 2011 results. We achieved record underlying earnings, record EBITDA and record operating cash flows. This was despite the severe weather conditions in the first half and the fall in commodity prices we saw through the second half. Our Pilbara iron ore business broke annual production and sales
Now of course, as Jan said, not all divisions are enjoying those same tailwinds. At our November seminar, we outlined our refocused aluminum strategy in response to the uncertain and evolving macroeconomic condition. As we did flag, we've had to impair some aluminum assets, which have been written down by $8.9 billion. We're working hard to improve the performance of our aluminum business, which I will come back to in a moment.
Although we have made progress, I'm not content with our overall cost performance. Cost increases are an industry-wide problem, and I'm determined to tackle this at Rio Tinto and accelerating a number of productivity efforts. We're advancing our industry-leading portfolio growth projects, and it's worth highlighting that Pilbara has the highest quality iron ore expansion in the global sector. Pilbara 283 is now fully approved and on track to reach its milestone by the end of next year. We've brought forward plans for the next stage of expansion by 6 months, raised them 20 million tonnes to 353 million tonnes per year. Subject to board approval, we will reach this capacity in the first half of 2015. This is in stark contrast to broader iron ore industry trends, which has seen some projects subject to significant delay and increased capital intensity.
We've successfully completed a number of acquisitions through the year, which complement our organic pipeline and give us further growth options. We now own significant tier one resources in coking and thermal coal in Mozambique and uranium in Canada. And earlier this year, we moved to a majority stake in Ivanhoe Mines, further demonstrating our commitment to a safe and successful development of the Oyu Tolgoi copper-gold mine.
Of course, just last week, we announced that we'll be doubling our stake in Richards Bay Minerals. And as Jan mentioned, we have been able to balance this investment in growth with the return of capital to shareholders, and we've today increased our progressive dividend by 34%, demonstrating our confidence to the long-run outlook for this business.
Let's now turn to each of the product groups, starting with iron ore. The iron ore business has turned in another very impressive performance with another year of record production in shipments at our world-class silver operations. Of course, this is underpinned by the highest ever EBITDA and underlying earnings for the product group. In line with the broader markets, the second half of the year saw high levels of volatility in iron ore pricing, which led to a shift in the shorter term in our sales portfolio, with about 60% of our customers moving away from the quarterly lag price. We continue to sell everything we produced through this period, and we achieved record prices, on average, in 2011. We continue to work closely with our customers in order to align our resource base with customer needs and ensure the value and use of our products is recognized by the market.
On the supply side, we estimate that about 45 million tonnes of iron ore was removed from the market in 2011 due to adverse weather in the Pilbara, lower than expected Brazilian exports and rising export tariffs in India. We exceeded our production targets for 2011 and increased our annual capacity to Pilbara to 225 million tonnes, completing our first de-bottlenecking project on time and on budget in the first quarter last year. This incremental capacity, together with the continued productivity improvement from our industry-leading operations center, helped us achieve these records. It is important, of course, to -- remember, we're currently in the middle of the cyclone season in Western Australia. And already, this year, we've seen some disruption, and we'll keep a careful eye on all the weather forecasts.
At IOC, concentrate production was maximized in the latter part of 2011 in response to market demand. The operational leadership shown by our Pilbara team is exceptionally important and all the more impressive when you consider that we're also well underway with the major expansion. At Cape Lambert, all dredging for the expansion to 283 million tonnes is complete, and engineering is at 82%. We've just approved the construction of the Nammuldi mine, and so this 283-million-tonne expansion is now fully authorized. And of course, studies are progressing well at our accelerated and enhanced expansion to 353 million tonnes. We've already ordered the long-lead times, and just this week, we approved 1.2 billion for further early works.
Cape Lambert, as shown in the picture here, continues to be the best expansion opportunity in the industry, with embedded optionality for further growth. We continue to drill out the resource base in our tier one Pilbara ore bodies. And over the next 5 years, we plan to drill another 600,000 meters per year to add to our 2.9 billion tonnes of iron ore reserve in line with our multi-decade mine planning.
And our global growth options are not limited to Pilbara. At our Canadian operations, the first stage of the concentrate expansion project is currently being commissioned. And at Simandou in Guinea, solid progress has been made. Early works construction is ramping up, including the construction of roadworks and the development of early trucking options.
Moving on to aluminum. At start -- at the start of the year, with a tight physical aluminum market, global economic concerns took hold in the second half, leading to prices falling below $2,000 per tonne. Prices have recovered a little in early 2012 and are now trading about $2,200 per tonne.
In China, aluminum prices have historically traded at a premium to the LME and have been less volatile. Despite experiencing a rising cost of electricity, higher margin coal smelters in the coastal and central provinces are able to take advantage of this higher Shanghai-priced premium. This has also led to a further expansion of smelting capacity at the remote but coal-rich provinces in the west, particularly in the Shenzhen province. Outside of China, we estimate approximately 2.5 million tonnes of smelting capacity is at a loss-making position at the current prices and input costs. Further capacity reductions are necessary to move the aluminum market to a more balance state.
The impact of higher raw material costs were also felt in the second half. The Japanese earthquake had a global impact on caustic soda prices. The costs for other raw materials, such as pet coke, remained high and even as the price of aluminum fell. The squeeze effect has led to lower margins across the industry. As we did flag in November, our results were impacted by this margin squeeze in the second half, but the transformation program continued at Rio Tinto Alcan and delivered real benefits during the course of the year. Overall, we did achieve a full year EBITDA margin of 20% despite these headwinds.
Looking further ahead, we continue to believe in our long-run outlook for aluminum demand growth. The Chinese output of primary aluminum is still tracking internal demand. Production has shifted more toward the northwest, where stranded coal is being used to generate safe, cheaper electricity. We had not previously anticipated the extent of the shift in new smelting capacity to the west of China. These pressures, together with the strengthening of some currencies and escalating raw materials, may continue to squeeze our margins over the medium term.
I continue to believe a 40% margin is achievable, but I can't predict when the prices will recover or when raw material costs will improve, so that margin -- so when that margin can be achieved. So we are focusing all that we can do in areas that we control to improve the performance of our aluminum business and the quality of our aluminum portfolio.
In November, we've since [ph] outlined our strategy to do just this. We've had to make some tough decisions, such as the identification of a number of businesses that no longer fit with our strategy nor our portfolio and so will be closed or divested. And the result will be an aluminum business that's smaller than it is today but one that is of higher quality.
Programs are underway to deliver $1 billion of incremental EBITDA from business improvements, and we are focusing investment on the high return creep and modernization projects. We will longer in bauxite and aluminum, taking full advantage of our exceptional tier one bauxite resources and with a portfolio of modern, hydro-based smelters supported by leading industry technology. This is absolutely the right strategy, but it has required us to relook at the value ascribed to our aluminum assets. And as a result, we have recorded impairment charge this year, which Guy will speak to in more detail.
The current environment in the aluminum industry is tough. Rising LME inventories, high raw material cost and strong currencies are leading to less investment being allocated to growth projects. But I think the long-term outlook remains intact, and my focus to ensure that we've done all we can to optimize up our position when the industry improves. I firmly believe we're on track to secure our position as the lowest cost aluminum producer in the industry.
Turning now to copper. As we've been saying for the past 2 years, the physical tightness of copper is leading to copper continuing to trace significantly above the marginal cost of production. While supply and demand factors appear to support the price level, near-term price movements are highly geared to global macroeconomic indicators, the expectation of continued supply deficit and the relative strength of the U.S. dollar.
In 2011, the copper market was in deficit with the shortfall in supply met by drawing down supplies mainly in China. We expect the market to continue to be finely balanced in 2012. New global copper mine supply is expected to come online in 2012, however, experience has shown that project delivery and ramp-up timelines have taken longer globally than expected. Interruptions from industrial action and strikes, along with continued industry-wide declines and grades, will put further pressure on new supply.
We produced less copper in 2011 from an anticipated decline in grades at all 3 of our major operations, but it's also important to remember the benefits of our goal exposure in these uncertain markets. Although we don't have any primary gold mines and gold byproducts are likely to decrease in 2012, we are one of the larger gold producers in the world and the biggest among the diversified miners. And it shouldn't go unnoticed that Grasberg and Oyu Tolgoi are 2 of the world's largest gold resources. We do expect copper grades to recover in the second half of 2012. And from 2013, we'll also see new production coming from Oyu Tolgoi in Mongolia. Organic growth will be offset by the absence of production for Palabora, which we intend to divest as it's no longer in line with our strategic focus.
Just a few weeks ago and shortly after the expiry of the standstill agreement with Ivanhoe, we -- the -- our shareholding in Ivanhoe increased to a majority 51% interest. The project itself has made good progress. And as you know, discussions continue on securing a power source for the project. We still need it to remain on schedule, and the feasibility study to Phase 2 to develop the underground block cave mine continues to make progress.
We're also, of course, moving forward with our other tier one copper projects. La Granja received pre-feasibility funding to evaluate a 3-staged phase development using conventional milling and leaching. The feasibility study at Kennecott Utah Copper to extend the mine life to 2028 is expected to be complete in the first half of this year. And again, at Escondida, project approval for OGP 1 is targeted for the first half of 2012. The resolution project, the land exchange, took an important step in 2011 with the clearance in the U.S. House, and we now expect it to move to the U.S. Senate. While the land exchange process continues, we did approve $103 million expenditure with our partner BHP, and the shaft 9 development is expected to continue.
So again, now let's turn to our energy group. In 2011, coal markets were volatile with both global supply and demand disruptions occurring at different times throughout the year. After cheering near record prices in January 2011 following Indonesian and Australian supply-side disruptions, global thermal coal markets experienced broad price declines through the remainder of 2011. This decline reflected weaker global economic activity and strong supply growth. However, prices remained well supported.
While the uranium market is likely to be subdued over the next few -- 5 years, uranium will continue to form an important part of the overall energy mix with long-term demand expected to be driven by strong growth in China. Our energy operations in Australia recovered well from the effects of significant wet weather that occurred extensively in Queensland, New South Wales and the Northern Territory in the first quarter of 2011.
Disruptions to the supply of explosives in Eastern Australia has impacted overburden removal at some of our New South Wales operations as it has in the rest of the East Australian mining sector with a consequential effect to the level of in-pit inventories. While there was no overall significant impact to the Australian coal production in 2011, there will be some impact in the first half of 2012. As part of our continuous program to improve our portfolio, we just completed joint acquisition of the minority interest in Coal & Allied in December in partnership with Mitsubishi, and this has resulted in a simple -- simpler ownership structure with greater flexibility and access to funds for growth.
At ERA, extreme wet weather caused the prolonged suspension of operations in the first half, but the operations did recover well in the second half. A $500 million Australian dollar rights issue was completed in December, which will allow ERA to fund its strategic water management plan, closure obligations and a Ranger 3 Deeps exploration decline. Our Rössing grade will progressively improve over the next 2 years as we access lower benches in the mine. Meanwhile, work continues on excavation drilling to extend mine life beyond 2023.
Our energy group is now entering a new phase, with many prospects for value-adding growth in the near term and beyond. At Australia, our target has increased annual coal capacity to 73 million tonnes per year by 2015. This growth will be underpinned by the development of new mine at Mount Pleasant in the Hunter Valley, which is currently in feasibility study. In the short term, we're increasing capacity at existing operations, such as the Clermont mine and the brownfield expansions in the Hunter Valley, Mount Thorley Warkworth and at Bengalla. These will lead to an increase of about 15% to 20% in total Australian coal production in 2012.
The Kestrel mine extension is well advanced and scheduled to start production in 2013 with incremental annual production of around 1 million tonnes. Infrastructure will be a critical factor in the delivery of this growth, and our position for the future continues to strengthen.
In New South Wales and Queensland, investment has been made in the coal supply chain to meet this increasing demand. During the first half of the year, we completed the acquisition of Riversdale, which has now been renamed Rio Tinto Coal Mozambique. There's a good photo of it in the upper side of the plant under construction at present. This does provide a substantial tier one coking coal development pipeline in the emerging Moatize basin. Initial production from the Benga project is scheduled for the first half of this year.
Following the Riversdale transaction, we completed the acquisition to Hathor in Canada. And these encouraging uranium exploration development opportunities are in one of the highest grade uranium basins in the world. With the forecast demand for energy and steel production over the coming decades, I have real confidence the high quality growth projects being pulled together by the energy team will deliver excellent results over the long term.
Turning now to diamonds and minerals. Demand for borates and titanium dioxide feedstocks held up well despite ongoing market volatility. 2011 saw a continued tightness in the TiO2 feedstock supply, which is expected to continue over the medium term. Diamonds -- diamond prices were strong in the first half of 2011, but the second half did see lower prices due to higher inventories. Long-term fundamentals for diamonds do remain strong, with limited supply of new diamonds and further potential from diamond growth in China and India.
Diamond production did decline 15% overall due to heavy rains we saw due to flooding at Argyle early in the year and maintenance shutdowns that we saw at Argyle in the fourth quarter in the processing plant. The impact of the record wet season at Argyle, coupled with the continued strength of the Australian dollars, did result in the further $500 million of capital be improved -- being approved to complete the Argyle underground project. And we would expect to experience lower grades until the underground mine is at full production by 2014. Earnings for iron and titanium business did double in 2011 as we continue to replace its multiyear sales contracts with alternative pricing mechanism, increasing the business exposure to market prices for TiO2 feedstocks.
At QMM in Madagascar, production steadily increased due to successful dry mining operations. Full capacity is expected to be reached over the next 2 to 3 years. As you know, we sold our talc business in August and have created new opportunities in potash through a joint venture agreement in Saskatchewan, home to nearly half the world's potash reserves. And finally, just last week, we announced we'll be doubling our stake in Richards Bay Minerals, a tier one asset that we've been managing for many years, actually, many decades.
Overall, each of our product groups have delivered solid results through 2011. So with that, I'll hand it over to you, Guy, in Melbourne, recognizing that you're working on your video quality. But we can hear you, and I hope you can hear us.
Guy Robert Elliott
Thank you, Tom. Good morning, everybody. I can certainly hear you well, and I hope you can hear me. Let me start by taking a look at how our record underlying earnings were achieved. It will come as no surprise that the primary driver has been price, increasing earnings by $6.7 billion. By far, the largest benefit came from iron ore prices, although copper and hard coking coal increases were also significant. These benefits were partially offset by the impact of currency movements, notably the stronger Australian dollar. These collectively reduced our
As previously flagged, lower copper and gold grades at Kennecott Utah Copper, Escondida and Grasberg have led to lower sales volume which reduced our earnings by just over $0.5 billion. This was partially offset by record volumes from iron ore as increased port capacity was brought online.
Continued cost pressure is evident throughout the industry, and we are not immune. The impacts of inflation and higher energy costs reduced our 2011 earnings by over $600 million. And more importantly, higher cash costs reduced earnings by a further $2.1 billion, which I'll return to in detail in a moment.
During 2011, we progressed many of our evaluation projects, including Simandou, Resolution and La Granja as well as our newly acquired Mozambique coal project. The effect of higher exploration and evaluation costs together with the absence of gains on undeveloped property sales lured earnings by just under $800 million. And so after the impact of higher noncash costs and other items, our underlying earnings were $15.5 billion.
Turning now to net earnings. Back in November, we indicated that there would be some asset impairment following a deterioration of macroeconomic conditions and stronger currency. The valuation used for impairment testing is based on our assessment of fair market value less cost to sell at the testing date. This is determined using a number of reference points, including current industry share price multiples. Strong currencies in some regions, high raw material costs and rising LME inventory are delaying growth projects for new aluminum capacity and leading to much lower market values for aluminum assets than a year ago. Given these uncertain macroeconomic conditions, the market valuation used for impairment purposes does not fully reflect the value of our planned EBITDA improvement and the successful implementation of our growth project.
The combination of these factors has led us to write off $8.9 billion of our aluminum assets in 2011, of which $7.4 billion was goodwill. Elsewhere, there were net impairments of just over $400 million in our diamonds and other businesses. This was largely due to the higher capital costs now expected for us to complete the Argyle mine. Other exclusions included a deferred tax asset write-off due to change in French legislation and a number of other smaller items. So overall, net earnings came in at $5.8 billion.
We're turning now to costs. As previously discussed, the whole of the mining industry is experiencing cost pressures and localized inflation far in excess of normal CPI. Markets for raw materials remain tight as activity has increased across the industry. This was particularly felt at Rio Tinto Alcan as prices for caustic soda, coke and pitch have remained at elevated levels even in a softer aluminum market. Reduced production volumes from lower copper and gold grades led to higher unit costs of production. This effect will reverse in time as we anticipate grade recovery in the second half of 2012. The exceptional weather experienced in the first half of the year also impacted our volumes and as a consequence, increased our unit cash cost. And we've also incurred additional cost due to our investment in operational readiness as we prepare to bring online a number of major growth projects, in particular in the Pilbara.
We are determined to tackle these issues and are accelerating a number of cost and productivity initiatives. In order to combat rising raw materials costs, we are continuing to look at alternative suppliers. We spent approximately $1 billion in China in 2011, up from $0.5 billion in 2010. Purchases from China include coke, caustic soda, railcars and other supplies, and we will also continue to mitigate some of these cost increases through our industry-leading investment in technology. This will lead to increased automation and improved productivity across many of our operations in years to come.
Despite these pressures, we've generated record cash flows from our operations. And this was achieved with the decline in dividends from equity accounted units, primarily due to the retention of cash within Escondida in order to fund its growth plan. Momentum returned to our rate of spend on capital projects during the year resulting in total capital expenditure of $12.3 billion. We supplemented these investments with just over $6 billion of value-accretive transactions. This included the acquisitions of Riversdale and Hathor and the AUD $258 million we paid to increase our stake in Coal & Allied to 80%. And we also increased our interest in Ivanhoe mines from 40.5% to 49% and participated in Ivanhoe's rights offering for a total consideration of $1.9 billion. In January, we moved to a majority stake in Ivanhoe, taking our interest to 51%. Let me remind you that our average entry price into Ivanhoe has been under $12 per share.
During the year, we paid $6.2 billion of taxes, 50% more than 2010. Of course, taxes are paid with a slight lag. We had around $2.5 billion of tax accruals in respect to 2011 that will be paid in early 2012. These amounts relate to corporate taxes only. Our total payments to governments, including royalties, are much higher, and this will be set out in detail in our tax transparency report, which we'll be publishing in March.
We continue to balance investing in the business with returning capital to shareholders. During 2011, we returned a total of $7.7 billion to shareholders through the progressive dividend and share buyback program. Overall, after taking into account interest and various other cash flows, we increased net debt by $4.4 billion to $8.5 billion at the end of December.
As I just described, capital expenditure ramped up in the second half. Most of our projects remain on time and on budget in local currency terms. There have been a few exceptions, such as Argyle and Kestrel, primarily driven by decisions made in 2008 and 2009 to slow down the rate of spend. We expect capital expenditure of $16 billion in 2012 based on sustaining capital and major projects already approved. This amount is likely to rise as we approve further projects mainly in the Pilbara.
Looking further out, CapEx will remain around this level for several years as we complete a number of multi-year major construction projects. This is a substantial program of investment but one that we are undertaking in a controlled manner. We are taking a phased approach to many of our major project approvals, such as our decision to expand the Pilbara in 2 stages. This phased approach allows us to commit capital in a risk-measured way, balancing our capital expenditure commitments with the market environment and other potential uses of cash. This is critical when managing an investment program in the tens of billions of dollars, and it means that if market conditions were to rapidly deteriorate, we can defer or modify subsequent stages.
Our capital spend in 2012 is well distributed, both geographically and by product. Brownfield expansions in Australia, Canada and the United States account for the great preponderance of our planned spend. But we're also investing in new emerging resource basins, most notably in Mongolia.
While I believe we have an enviable track record of completing our expansion plans on time and on budget, we recognize that it's becoming increasingly difficult for the industry to bring new supply to market. This is well illustrated by the iron ore market, where projected industry supply growth has consistently over-promised and under-delivered. There are many different hurdles: technically challenging ore bodies, competition for skilled labor and higher stakeholder demands. Given the challenges that commercial banks are facing, project finance has become more difficult to source for some companies, a situation that has worsened in the past 6 months.
Resource nationalism is becoming more prominent. This manifests itself in many ways. One of the more visible in recent times has been the rapid changes in tax policy proposed by some governments. Rio Tinto's approach is to engage with governments in the development of tax policy and to be open and transparent about the amount of tax that we pay. These challenges all together lead to increased risk and higher cost of capital, not just for project developers but also for host communities as investors seek stable low-risk geographies for investment. Rio Tinto is well placed to address these challenges through our strong balance sheet and our emphasis on sustainable development and stakeholder engagement.
So to wrap up with our well-established and consistent financial strategy. Our balance sheet is strong. Within the parameters of a A credit rating, our first priority for the use of our cash flows is to increase shareholder value by investment in high-quality growth. As I said earlier, we expect to spend $16 billion on capital projects this year, and we have a rich portfolio of opportunities ahead of us. And we're committed to a balance of investment in growth and returns to shareholders. As I've said, we returned a total of $7.7 billion to shareholders during 2011 through our progressive dividend and share buybacks.
The board continues to see attractive and significant growth opportunities and short-term uncertainty in the financial markets, particularly around the euro. For these reasons, the board does not believe that it's appropriate to expand the buyback program at this time. However, we continue to keep this under review. While share buybacks are an effective means to return short-term excess capital, a progressive dividend provides sustainable and predictable long-term returns to shareholders. It also demonstrates our confidence in the long-run outlook for our business.
Given this, we have now decided to raise our full year dividend by 34%. This leads to a final dividend of $0.91 per share and a full year payout of $1.45. Applying our usual formulaic approach, we therefore expect our interim dividend in 2012 to be $0.725 per share.
And with that, let me hand you back to Tom.
Thank you, Guy. Let me just take a moment for a deeper dive on what's driving our current market conditions. 2011 really was a year of 2 halves for commodity prices. We did see a strong first half followed by weakness though in the second half, where almost all of the commodity prices finished the year lower than they started. These price declines you see in the chart were driven by ongoing macroeconomic uncertainty associated with the debt -- sovereign debt crisis in Europe and the impact of policy actions in China aimed at cooling down the economy and reducing their own inflation rates. So far in 2012, we've seen some more positive signs, with improvements seen in most of our prices.
I've been following closely the performance on the ground and talking with each of the marketing teams. We are experiencing some softness in the European markets, more so in Southern Europe. For example, industrial minerals producers that sell into the, let's say, the Portuguese and the Spanish tile industry is going tough, but Northern Europe hasn't been so bad. Certainly, in the U.S., we have seen some robust buying conditions that are pretty much aligned with what we've been seeing in terms of job creation and GDP numbers out of the U.S. And I think, in general, stability in Asia, while everyone sees how Asia business has come out of the Chinese New Year. However, let's remember we are only in February. We do expect heightened economic and political uncertainty to continue to weigh on sentiment and increased market volatility over the course of the year.
In Europe, recent indications do suggest the sovereign debt crisis has finally spilled over to the real economy in Europe with expectations now pointing to a contraction in the Eurozone in 2012.
In contrast, in the U.S., a number of recent indicators have surprised on the upside, fueling expectations the U.S. may be stronger in 2012 than all of us would previously have thought. However, of course, in the U.S., as you know, risk remains with high unemployment and a weak housing market. In our key Chinese market, the signs continue to point to a soft landing, which is what we've been saying, and we've been saying for the past year, with growth in excess of 8% in 2012.
But of course, there's a wide range of uncertainties and potential outcomes ahead of us globally over the short term. There are a number of tensions in the global economy, including the sovereign debt crisis -- look at what was on the news on Greece this morning -- and elections that we see the number of key countries, not to mention structural imbalances. So while the risk of European contagion is high, we do expect emerging economies, particular in China, to remain resilient. And I believe the impact of current economic concerns on our business should be manageable, unless, of course, financial markets substantially deteriorate.
Looking further ahead and shifting to the long-term outlook. We strive the decisions we're taking today to invest in capital growth. Despite the volatility we're currently experiencing, our view of long-term demand remains pretty much the same. That is, as the world gets richer, we expect to see billions of people moving through the increasingly metal-intensive phases of development.
The industry, as Guy says, does continue to face challenges in the supply side from rising raw material and labor costs as well as industrial action and weather events. And projects, as you've heard, are becoming increasingly difficult to finance for some, and the capital intensity for growth projects is continuing to rise. Resource nationalism and long processes for permitting, stakeholder engagement and approvals also have the effect of reducing supply growth.
Of course, geologically the deposits are becoming more difficult to find and technically more difficult to develop. And all these factors will continue to put pressure on the supply side within an environment of this increasing demand. This development, of course, will go through periods of volatility, such as what we're currently facing right now.
At Rio Tinto, we have to look beyond the current market turmoil. We do see major structural changes happening in the global economy, so longer demand -- term demand picture remains positive, and the Chinese growth story does have some way to run. By utilizing our strong balance sheet, we continue to invest throughout the cycle on high-quality growth options to meet this future demand. We are clear about the strategy that we have been pursuing, which is continue to pursue, that is invest and operate large, long-term cost-competitive mines and businesses driven by the quality of each opportunity.
We own some of the world's best operating assets. We have an unrivaled portfolio of quality growth options and a proven track record of developing major projects on time and on budget. It's also becoming more difficult to bring new sources of supply [ph] to the market. Rising costs, more challenging ore bodies and greater stakeholder engagements are leading us to think more carefully and more creatively about how we will allocate our capital. Our phased approach to investment and growth allows us to manage some of this risk while creating embedded options that can deliver value over that long term.
So in line with this strategy, we currently have $33 billion worth of major capital projects underway, including those recently announced. The rate of spend for each of these projects ramped up in the second half of 2011 with higher levels of capital expenditure continuing in 2012 and as Guy said, 2013. Projects are making good progress. The first production from 9 of these projects listed here are expected to occur during the course of this year. This investment is focused on large, long-life, cost-competitive projects across a wide range of products in line with our strategy.
We'll also differentiate ourself through the leadership in the development and implementation of innovative technologies. I, for one, am genuinely excited by the step changes in technology, which include our Mine of the Future program. Late last year, we announced with Komatsu the expansion of our driverless fleet in the Pilbara from 10 to 150 trucks, the first operational deployment of this technology and deployment or -- in Australia or anywhere else on such a scale. These trucks can be run from the operation center in Perth, 1,200 kilometers away, and we're seeing the benefits of that operation center increasingly becoming evident in our day-to-day production and conduct of the businesses. We intend to also be deploying autonomous drills and driverless trains, expanding our leadership in this area.
Of course, in the copper group, our tunnel boring system remains on schedule. The trial is due to start in Northparkes early in the second half of this year. We're evaluating opportunities also to trial a second boring -- tunnel boring system.
Over in the exploration group, work has led to the finding and developing of the next generation of ore bodies. From bauxite in Brazil through the potash in Saskatchewan, new projects across the globe are delivering promising results.
So to conclude, 2011 has been another record-breaking year for Rio Tinto. We have delivered record underlying earnings, EBITDA and operating cash flows. Our balance sheet is strong as our investment program continues to gather momentum. We have accelerated our iron ore expansion to Pilbara, which I believe is the highest-value, lowest-risk iron ore project anywhere in the world.
Ore body knowledge. At the same time, we continue to balance our investment program with long-term shareholder returns through the rebasing of our dividends.
To summarize, we are delivering exceptional operating and financial performance. We have some of the best expansion options available in the industry today, a leadership position in operation, exploration, innovation and sustainable development and a long-established strategy of focusing a large long-life, cost-competitive and expandable asset. All of these advantages position us well to continue to enhance shareholder value over the long term as evidenced by -- today by the action on the dividend.
So with that, Guy and I will be happy to take any questions, and what I'll do is I'll start with the audience here in London and then we'll move over to the telephones.
I'll start maybe by talking about power to OT, and then I'll ask Guy to comment on the Australian and the Canadian capital projects. I know you've asked that question in the interims about hedging and what we do on the currency fluctuations. First of all, on OT, we have 2 things that are being done that will need to be done on the power. The first is the construction of the power line on the Chinese side of the border between power-generating capacity and the OT operations, and second would be the power supply agreement. While we have continued to, I think, make good progress on the construction activities, there will be a point in time we'll need that power to start the commissioning process to grade [ph] by 2013. We're well within that window now, and I'm very pleased with the work that's going on the ground, actually, on both areas. I think that part of it will be engineering activities on the ground, the actual construction which, again, is something that is measurable and definable. And I think there's -- there are actually good efforts that I'm confident are underway as we speak. The second area, in terms of power supply agreement, that will involve the activity of the Oyu Tolgoi teams on the ground but also close cooperation, which we've continued to see between the governments of Mongolia and China. And again, I'd be -- actually have been quite pleased with the progress on that front. To some extent, we can influence that. To some extent, that is a government-to-government discussion. So with -- Guy, can you maybe talk about capital and currencies?
Guy Robert Elliott
Yes. Let me start by challenging a little bit, Rob. I mean, the purpose of drawing attention to the whereabouts of the lot of our capital spend was to remind you that we have very great opportunities to invest in the heartland of our business. Some people have perceived that the company has moved in the direction decisively of investing in emerging market regions, and we are doing some of that. We're obviously investing in Mongolia and Mozambique and Guinea, Madagascar, et cetera. But the point that we're making in relation to the spread of capital expenditure is that a lot of it's going into our traditional heartlands, such as North America and Australia. Now on the subject of the particular risk you're talking about, of currency, this is something that we are looking at again. And as I've said before, we will tell shareholders if we make a change. It's actually quite difficult to suddenly lock in when the Australian dollar is at $1.07. Your capital expenditure. Is that a good judgment or not? That's the kind of question we're asking ourselves. We recognize, as you say, that we have had some currency hit on our project. You mentioned Argyle. Actually -- I mean, although currency contributed to that, there were a number of other features to that overrun, the first being that we slowed the project down in the global financial crisis, and that had a whole lot of demobilization and then remobilization effects. And on top of that, we had the effects of the weather last year, which certainly had led to some difficult conditions which had safety implications within the mine. So we had to slow things down. So there were a number of other features in the case of Argyle. But anyway, to reassure you, we are looking at it, and if we make a change, we will to the shareholders.
Jason Fairclough - BofA Merrill Lynch, Research Division
Jason Fairclough from Merrill Lynch. Two questions, if I may. First, just on CapEx. Yesterday, we heard from BHP that they're dialing back CapEx expectations a little bit, and that seems to be driven by 2 things. It's a concern on -- feel like bottlenecks and the capital formation process, and then beyond that, they're concerned about a deceleration of steel demand growth in China. So I'm just wondering -- it's quite a different message from you today. Maybe you could talk a little bit about your confidence about committing this much capital to -- to iron ore still.
Well, thank you, Jason. Let me talk about iron ore and our longer-term view of iron ore, and frankly, we're -- we probably have some similar ideas of where we might have a different approach from BHP. Our view on steel demand in China is that we are moving toward a point, which you would expect, of deceleration of steel -- steel consumption growth in China. And that's nothing that would be surprising to us as all modelers, and econometric forecasters have been saying at some point in the S curve, it's inevitable that there will be a slowdown. And we're in that stage that you're moving from steel consumption leading GDP to steel consumption beginning to lag GDP while GDP growth begins to moderate. So from a much larger base -- and just as a reminder, that larger base -- we had very, very rapid steel consumption increases in 2007, which we had been flagging. It's slowed down since then, but the overall level of steel consumption in China is more than 40% higher than 2007, so slowing down from a much larger base. Meanwhile the Chinese domestic iron ore production is not getting any better. It's not getting any cheaper. It's not getting any more efficient. It's actually rising in terms of overall cost levels. You have expansions flagged in Australia, in Brazil and in lesser extent, in -- coming out of the market, likely on a trend basis, from India. So we have to look at all of these individual balances when we map out what levels of capacity is there in the seaborne market. I do think that, as I said in my comments, we have some of the best quality iron ore assets. So I think that I want to refer to quality in several ways. The first is it is closer to the Chinese market than the Brazilian material. The Australian material is actually more accessible, and no matter how big you build the ship, it's still -- proximity makes a difference. So I think that I'd rather have proximity over size any day. I think that in the case of, then, the resource, it's about having the large amount of resources. That's actually clustered and can be developed as we have been so successful in doing and the ability to continue to improve and innovate and add to the efficiencies, which is exactly also what we're doing. The third piece of it would be the ability to phase the capital. And what we have been doing, different than what BHP has been doing, is that we have the ability to phase this in 50 million increments by just, frankly, adding 2 berths at a time to the Cape Lambert facility. That allows us -- when we look at this capital, we discuss it with the board, it allows us to say, "Well, we'll take this look at it and then let's wait to see how the markets eventuate before we come up with the next tranche." And by having a series of smaller tranches and having a construction project that's phased and organized actually adapt to those tranches, it gives us time to see what is the actual trajectory of the Chinese demand growth. I mean, it has surprised the upside so far. At some point in time, it's inevitable it's going to be slowing down. This gives us a chance to manage that. And the final step, I think, is capital intensity. I'm very, very pleased with the capital intensity comparative to the rest of the sector, although I'm concerned about the fact that capital intensity, in general, has increased, which probably has just increased the reason why we do need to phase in some of these next tranches. Now in addition to Pilbara, of course, we have IOC, which is -- basically, we have added an even smaller pipe [ph] with these various smaller expansions, essentially in concentrate capacities. We have the magnetite resource, it's just a matter of developing the -- concentrating the gravity separation, the magnetic separation so we can increase concentrate production. And then at Simandou, where in addition to the rail line developments, which will take over the next several years, I think I would expect to see parallel road shipping, which allows us again to build tonnes in the market and then as the market continues to grow, it allows the market to understand the quality of material. And I would expect to see a premium value and use for that material. Thank you.
Jason Fairclough - BofA Merrill Lynch, Research Division
Just a follow-up question, if it's okay. In iron ore, I think it's fair to say that you guys got dragged kicking and screaming to the spot market. Could you talk a little bit about price discovery for titanium dioxide and how that's going to eventuate?
Yes. I think that the market in iron ore has evolved to a point where, basically, there's been more volatile -- there's been more volume in the spot market from -- [indiscernible] 5 years ago. So there has been, actually, a price discovery mechanism in the shorter term. As you know, we've said that we will work with customers who want longer-term contracts as long as it's deliverable on both sides of that contract. And so I think you will see differentiation between customers, some which will be ready to live with the good and the bad of a longer-term, say, quarterly contract; others that probably going to be better suited for a very short-term market. Now in terms of TiO2, I think that the structure of the TiO2 market, which is not as -- it's not as big as iron ore, obviously, but we have a very big part of it -- has been one of contracts on a business-to-business basis. And I think these contracts have served -- reticent [ph] to iron ore and titanium, well over the past 20 years during a period in time when the sector had been, I think, a mature sector, primarily driven off of North American and European building construction and painting seasons and sort of the conventional attributes on the pigment sector. What we've seen -- and we would have seen it coming, but it's finally happened -- is that the Chinese are beginning to play into these industrial minerals that are more consumer oriented. So the Chinese consumer is actually demanding a higher quality of paint. That means a higher quality of pigment, which means a higher quality of feedstock. So we're well positioned on the supply side for that, but we still have these existing contracts that we do -- we will honor them. We will work them through. In some cases, we're finding some the customers are coming to us saying, "Well, they're worried about the end of those contracts. Will they make it to good price for a longer period? At the end of it, they might not have any supply at all." So again, they're coming and say, "Well, let -- we will be happy to talk with you about moving to a shorter term earlier on if you can give us some security supply after the end of what would have been the contract." Thank you. Yes, at the back.
James Gurry - Crédit Suisse AG, Research Division
It's James Gurry from Credit Suisse. Just want to talk about Pacific Aluminium. And can you just tell us when do you think you might divest that asset and whether you expect to achieve above book value for that asset when you do eventually divest it?
Okay. Well, first of all, as we have said that we're not going to be in a rush to do it for balance sheet purposes. We're going to the look to the market opportunities. But maybe, Guy, if you could cover both those points?
Guy Robert Elliott
Yes. I mean, we are value-driven, and we're open-minded as to the way in which we sell this business. We could IPO it. We could distribute it to our shareholders in specie. We could sell it to trade buyers in -- as a whole or in pieces. So there's a lot of different ways we could do this. We're not under any pressure. As we said earlier, we got a strong balance sheet, and we're in a position where we can look for value. As to the value that we might get for this business, it is not an easy time to be selling aluminum assets right now. But as I've tried to explain, when dealing with the impairment, we have taken the values of the aluminum businesses, including Pacific Aluminium, down to what we think the market level is. Now that's difficult to be quite sure what it is, but we've done our very best through a mechanistic process. And therefore, you might think that it does approximate to the value that might be attainable in a tra -- in a sale. But as I say, we're not going to be rushed into that. We're going to look to maximize value. And one means that we're using to get there is to try and manage the business in a different way. So we put a new team into that business. We have separated the business from Rio Tinto Alcan, and we're running it as if it were already a separate entity altogether. And we're hoping that that's going to generate real improvements in the business. That should all help in the sale process.
Thank you. And I just wanted to say that the team at Pacific Aluminium is -- I think they're doing a real good job and even just the first 100 days of work in terms of thinking about ways to improve the business, thinking about the business differently than -- in the larger Rio Tinto. And I think we're going to learn some things that we can apply elsewhere to Rio Tinto as a consequence of that.
So one more question from here and then we'll go over to the phone lines, please.
Myles Allsop - UBS Investment Bank, Research Division
Myles Allsop, UBS. Could you talk a bit more about your uranium strategy more broadly? But in particular, how far do you see that as a standalone project or a platform for further growth in the region?
Yes. Thank you, Myles. If I look at the uranium markets and I talk with our team in Rio Tinto Energy, my view is that uranium is going to be probably one of the least exciting one of our markets for at least the next 5 years. And the way we can plot that out is the fact that you can really see plans here. They're in construction or they're not in construction. It'd take many years to get built. And we've seen with, certainly, the post-Fukushima world, some countries deferring projects some. Some countries leading policies right or wrong that basically are trying to be moving away from nuclear power. But that being said, there continues to be, especially in China but I think elsewhere in the world, a need for large, central sources of power, a large distributing systems. The environmentalists might think that's all you need, is windmills in every house, but that's not going to work. You're going to need large central systems. You've got options of basically hydro, and that's not an easily expandable power source. You've got options of nuclear. You've got options of coal. And increasingly, there's more and more pressures on future generators to think about something besides coal, and that's going to be even more the case as we see the markets for carbon beginning to eventuate and, of course, natural gas. And I guess I think natural gas will probably one in the post-2020 which would go more head-to-head with nuclear. But for those countries that don't have natural gas, or they're not conveniently situated for LNG, or it's just LNG is fairly expensive by then, nuclear power looks quite attractive. And I think in China and elsewhere, in the post-2020 environment, I do see nuclear power and uranium to be a growing part of the global energy mix. I would not be surprised if by post-2020, global energy requirements are actually higher than what people are forecasting for the same reasons that we're looking at higher steel consumptions and higher copper consumption. So for that, what it means for our strategy is essentially be prudent, at least in the next 5 years, in terms of what we're investing in the sector. No big bets. We have some housecleaning to do at our ERA business. We have to move from open pit to underground over the next year. We have to deal with the water issues from a series of what were record high rainfalls. And then we will be well positioned, I think, in that post-2020 period with options at that point. Rössing, too -- Rössing's a mature mine. The existing ore body is sort of at the bottom of the pit. It's not -- there's not a lot of room in the bottom pit to move. We have to undertake the next stage of pre-stripping, which is what's going at Rössing to basically expose that next generation of ore, which will be in there in the post-5-year period. Of course, as the commercial situation of Rössing South eventuates, I would hope to be in a position where we could think about the benefits of unitization [ph], which I think makes sense commercially. I think it makes sense from a sustainable development perspective. I think it makes sense from a national Namibian perspective. And then finally, in Canada, we should remind ourselves that the Athabasca Basin contains, by an order of magnitude, some of the highest-quality and highest-grade uranium ores in the world. I mean, this is -- materially, you have to actually dilute before you can put in the mill, it's so rich. It's 100x higher in grade than the grade at Rössing. So grade does make a lot of sense in this business if you can get good grades. Our geologists, basically, they looked around at all sorts of opportunities and all sorts of sectors. And our geologists were quite excited about this opportunity that came to us. As you know, I've listened to geologists in the past. We've had some pretty good hits, Oyu Tolgoi being one of them. And they said this is the place to look, and I was ready to back the energy group and the geologists for Hathor. And I'm quite excited about what that will deliver, but again, it's not going to be a 5-year place. So again, what we've got to do in our sector is we got to look out past the next 5 years, and we have to set aside the options for the future generations of Rio Tinto so we can actually create great businesses. And that's where I can think we can go with uranium.
From the phone lines please, if there are any.
[Operator Instructions] We'll take our first question from.
My question actually relates to the aluminum business, and what I was wondering is, is there -- and we've seen yesterday BHP highlight the fact that they'd be wiling to make quite aggressive moves in terms of curtailing production, looking to the best assets, which quickly become cash negative. Within the aluminum business and in particular, within some of those high cost assets that are flagged for divestment, including those within Pacific Aluminium, are there any in there that might fit that criteria? And is that something you'd be willing to move on quite aggressively, particularly given that they are flagged for divestment? And then I guess the second part of the question is we've heard quite a bit in relation to the phased approach to capital, which certainly gives you benefits relative to some of your peers. Can you just elaborate on that a little bit in relation to the aluminum assets, perhaps particularly Kitimat, given the magnitude of the spend there?
I will -- maybe I'll tackle for the first part of aluminum. But I think, Guy, if you can add to that, and then I'll say something about Kitimat. On aluminum, in these markets, with a -- really, a strained LME price and higher input costs, I think it's fair to say that every plant manager of every smelter in Rio Tinto and in the global sector is really paying very close attention to their own marginal cost of production versus the LME price. And we should remind ourselves, the marginal cost for aluminum capacity is somewhere in the $2300 to under $2400 per tonne range or even higher. So there is a fair amount of global capacity that's probably running in the red as we speak. You've seen in the global financial crisis and again, you've seen some of our actions that we have had over the past year or so that -- if a project is not viable on a marginal cost basis, we will turn it off the power. And that's something that is appropriate and legitimate. We will do it in a way which is sensitive, of course, to stakeholder concerns, but we've got to look after the shareholder. We've got to look after the business. So that's something you've seen us do, frankly, you've seen most others in the sector do. And I would say that every plant manager knows just that, and it's in their best interest, safely [ph], to find a way to run their businesses in this environment of low LME and high input price. Guy, if there's anything else you want to say about aluminum first?
Guy Robert Elliott
Well, look. I mean, I think that whether an asset is within Pacific Aluminium or within Rio Tinto Alcan or for that matter, within anybody else's portfolio, you do have to look at anything that is bleeding cash. And of course, that would happen. At the same time, we've got a plan to improve the Pacific Aluminium -- well, all our assets, but in particular, we're focusing on Pacific Aluminium at the moment. And we're hopeful that that will get over those kind of problems. I think we will see a lot of closures in this industry. That will help the supply side a bit. So I would underline what Tom said.
On Kitimat -- and certainly, we really pushed hard on the system and the engineering team at Kitimat to create phases there. As you may recall, we had approved the construction of Kitimat before the financial crisis and then we basically unapproved it during the middle of the financial crisis. So we have had a facility that's actually an older prebaked facility, and it's -- we'll not winning any awards for prettiness as you walk through that facility at Kitimat. And it's definitely something -- anyone looking at it would say, "This isn't, probably -- yesterday's technology. It's not tomorrow's technology." So we looked at these various options. We did push on whether we could create a smaller starting point. But we also have a very large -- a very low-cost source of power. I think it's in the first debt file in terms of power cost at Kitimat. And we have so much more that actually -- you have more power that you can actually distribute down the transmission line. So you've got to find a market for them. I think Kitimat, as we've designed it and as we approved it in December, took into account both our objectives for phases. But frankly, it also had to take into account the fact that we had some of the most attractive, most competitive power anywhere in the world, but sitting with some of the oldest technology anywhere in the world.
Yes. We will take our next question from Paul McTaggart from Credit Suisse.
Paul McTaggart - Crédit Suisse AG, Research Division
Pretty simple question. Yesterday, BHP talked about the rate of pace of cost increases, and you obviously touched on that. They did quantify in unit cost terms, generally, and basically noted that they moved from kind of the 5% inflation rate cost terms I guess in the previous corresponding half, to a rate of 10%. So I wanted to get a sense of whether you're feeling those same sort of cost pressures. If you can kind of quantify it in those terms, please? And they also made the comment, which was interesting, that they felt that 80-odd percent of that was non-structural, and we really didn't buy linked prices, input prices, et cetera. So they were, I guess, trying to give us a sense that, "Yes, we're seeing high cost pressures," but at some point, they would like [ph].
Guy, why don't you start off with that? What I make is some closing remarks about that -- this structural observation.
Guy Robert Elliott
I think that when we look at our cost increases -- I'll give you some numbers which are year-on-year as opposed to half-on-half. And the reason I'm going to do that is that last year was a complicated one to analyze because of the effects on unit cost of weather that harmed the first half and also because of grade, which also reduced volume in the copper group. But if you exclude royalties, freight and the trading activities, which go on in aluminum to save transport costs, the overall increase in our unit cost was 14.6%. Now that included what we consider to be mining inflation and input price increase of about 8.4% and the effects of weather, which we computed just under 4%. So I think that when we look at this, we feel that -- I mean, of course, it's much too high a level of increase. We're tackling it in the various ways, which were -- we described during the presentation. But I think that breaking it down by half is distorted by that weather and particularly, that weather effect.
Thanks, Paul. I think maybe Guy would help me with this one, too. And the point about 80% is non-structural and only 20% is sort of enduring, I hope BHP is right. I'm worried about that one. I don't think we can be complacent. If we look at what we see around the world, it's very evident in Australia, but it's also evident in many other parts of the world. We're seeing rising rates of labor inflation. And unfortunately, it's being matched by lowering rates of employee productivity. And if we get that twin challenge of rising labor rates, which by -- basically, wage rates don't go down. They only go up over time. And then that's matched by lower levels of employee productivity, partly because high turnover, partly because the skills may be there. Then we're going to see a larger than 20% component of this inflation being structural. So we've got to actually be ahead of that curve. We've got to do more in terms of, first of all, what we can we do in the industrial relations environment, particularly in countries that are going through periods of industrial relations reform, to assure that we put productivity in the same box as all the other components of IR. The second thing we've got to do, which is critically important, is to actually look at the labor capital trade-offs. Can we actually, without necessarily reducing the number of employees, reduce the rate of employee growth by increasing productivity? In 2015, I hope to see half the tonnes we moved in the Pilbara being moved with driverless trucks, and that's where I come about looking at shifts between capital labor. So I hope that BHP is right that only 20% of these cost increases are structural, but I think we'd actually have to work harder to keep that from getting worse.
Maybe next, we have a question from the audience and I'll -- a couple here from there from them and then go back to the telephone.
Operator, you got it over the telephone. Do you have any questions?
Yes. We will take our next question from Paul Young from Deutsche Bank.
Paul Young - Deutsche Bank AG, Research Division
Question on your pipeline of projects and about study files on Slide 31 of the presentation. Can you just talk through how you sequence or you think about sequencing these projects? And also on your cash flow forecast, can you actually build all these projects once? And then a question on your aluminum division in Alma, which is, certainly, on my numbers, the most profitable and valuable smelter in your fleet. It's running at just 30% output. Are there any sort of one-off costs that we should be aware of? Can you give us an update on the industrial action there? And then referring to that, just the flow and effects upstream on your aluminum production, where are you placing that 600,000 tonnes of spare aluminum now?
Guy, why don't you maybe handle the capital pipeline one, and I'll talk about Alma?
Guy Robert Elliott
Okay. Our objective is we've got -- we have got a lot of high-quality projects, as you say. They are screened all the time. They go through a process as they're developed, both at a conceptual stage, at feasibility stage. And we are constantly looking for quality and value, and we have to throw things out or send them back to be reassessed and to come forward maybe under some different design, different size, different timescale. We would not propose a schedule of projects that we could not finance, obviously. While it is our first objective to invest in high-quality projects, we don't want to do that if it threatens the strong balance sheet that we have on the commitment to a A that we have. And so for that reason, we are -- we are tending to delay some of these projects. But the best ones, such as the ones in the Pilbara, for example, are getting through without any real difficulty, because they are so high quality, so high return and so low risk. And so when I look at these projects, some of them, of course, have not been approved. I think you're looking at the ones that are in advanced study. I mean, not all of those will come through for certain. Some of them may get rescheduled. At the moment though, we do add -- they all are in our plan, I have to say. So I think that this is a question that we constantly reassess as we prepare our cash flow forecasts, and we have the flexibility -- this is the point we're trying to make -- of phasing them should we need to. And that is why we have a few months before we make the final decision on the 353 project in the Pilbara, for example. I think it's very likely that we will take that decision. But -- so I hope I can give you a sense that we are balancing all the time this question of the balance sheet strength on the one hand with the quality of each investment on the other.
Thank you. On Alma, just a little bit of backdrop for those who have not been following it. We were at a period where, instead of having a strike, we locked out the Alma plan, and we are running it with the salaried staff of the plant. And in order to do that on a safe basis, we've reduced capacity by about 1/3 of normal capacity. And you're right, Paul. It's one of our lower-cost plants, so yes, we're doing that, basically -- well, basically because of industrial relations matters. The outstanding matters have nothing to do with pay and conditions. They are related to contracting out provisions and the union's request to basically control the plant floor. Neither of those are acceptable, either at Alma or anywhere else in Rio Tinto operations. And frankly, it's an ask that you don't see anywhere else within Québec. So we are basically choosing to keep that plant locked out until we come to a point where we can come to an agreement with the union, and that'll be as long as it takes. Now that does put us in a position. We probably have excess water. It will affect the supply chain, and we have made the moves accordingly, but it has led to us having excess hydro capacity. And so that's allowed us -- so that's very low incremental power cost with that. And so we have diverted some of that into restarting two of the lines at Shawinigan, which will run as long as that makes economic sense to do that. The net effect has probably been to just create some additional tightness in the North American aluminum physical market. And again, this does suggest that all the low LME pricing is a problem in different parts of the world, particularly in the U.S., because you see in some buying demand growing you are seeing some physical tightness occurring in the metal markets.
So we'll take our next question from Brendan Fitzpatrick from Morgan Stanley.
Brendan Fitzpatrick - Morgan Stanley, Research Division
Two questions on the Richards Bay Minerals transaction, if I might. Just wondering, first one, get a sense for were there discrete windows during which BHP could elect to exercise the option to transfer the stake? Or was it an open-ended timeframe? And the second part, there was reference to the pricing mechanism already being established in the agreement. But given the price isn't disclosed, am I right in thinking there's a components to the mechanism still to be determined and can we get a sense for what those might be?
Brendan, that is a confidential agreement between us and BHP, and I think we both chose to keep it confidential and probably best to keep it that way in both aspects.
Next question will come from Peter O'Connor from Merrill Lynch.
Peter O'Connor - BofA Merrill Lynch, Research Division
Tom, just a thought on your latent capacity in your system. Guy walked through the copper issues and flow grade at Escondida, Kennecott and also Grasberg. I'm just wondering, compared to the tonnage you put out in 2011, what could we reasonably expect in terms of copper units that would come back out the next couple of years? And similarly, with whether in iron ore and whether in coal, what low-capital latent capacity do you have that's available over the next 1 to 3 years?
Thank you, Peter. Let me try on that latent capacity, because I listened to the words with interest yesterday. For example, Escondida was doing that latent capacity. If they can put another tonne of ore through the concentrator, they would put it through the concentrator. It's not a question of capacity of ore. It's a question of what the grade is of the ore that's being mined, and it is going through a period of lower phases. So I wouldn't necessarily have called that latent capacity, but I think as they flagged what the grade profile will be at Escondida, as we flagged it, that's probably what you're going to see. There's not a sort of a mill sitting there that's just not running at this time. I think, certainly, from our perspective, and personally, every one of our businesses -- if we can produce a product that we could sell at a profit, we are producing a product and selling it at a profit. Now a lot of latent capacity, one would argue, is because of weather. And I wish could -- I can predict the weather, but we're no better at it than they were 1,000 years ago. So we have -- I mean, you've seen that we can the Pilbara, for example, at 240 million tonnes per year. And people say, "Well, if you do that in the one quarter, why can't you do it for the whole year?" And I do have to remind you that these cyclones do come through, and I have been assured and I can certainly -- the past several years, I've seen evidence of this, that the cyclonic activity in the Western and Northwestern Australia is actually the most unpredictable cyclone activity of any hurricane-cyclone-typhoon system in the world. And these things do literally turn on a dime, so it's very difficult to make any kind of prediction. All we could do is basically derate our capacity during these summer wet seasons and then just hope for the best, and then during the dry season, hope we can make up for whatever the gaps were. We had 2 weather systems that came through the Pilbara. In January, one hit -- all of the Pilbara hit land, and it probably made an effect across the board. The second one didn't hit land, but boy, it created some sea swells and also impacted production. Because with these cyclones, you have 3 things that can drive the outcome. One is the wind effects, and basically, you have to tie down and protect the plants from wind damage. And the wind effects with winds that -- in over 200 kilometers an hour, can actually be quite enormous. You have to actually shut down facilities and spend lots of days of prep and un-prepping. The second would be rain. And again, you have not only the rain hitting the site, but more likely, because you don't have mature river systems in the Pilbara, you have washouts, and you have large valleys that flood with water. And that could have the effect on rail capacity and do quite a bit of damage to rail systems. And then the third would be, which is probably the least noticed, is sea swells. And that is that if the storm's sitting off the coast and it's creating sea swells -- and I think the last system, we saw sea swells of 3 meters in the port, you've got to actually -- you've got to take the ships out to sea, so you can't load during those periods. Unpredictable, I wish I could predict them, but I wouldn't have called that latent capacity. I think we got to build our own overall assumption of capacity, making the presumption that we will have a weather factor, and we'll try to calculate that as best we can.
Peter O'Connor - BofA Merrill Lynch, Research Division
Tom, could I follow on on Coal & Allied? And first to congratulate you, after 4 decades of trying, you finally got there last year. Where does that business go? And how quickly can you make that business actually work?
Sorry, I missed that. I never want to miss a congratulations. Can you repeat that again, please?
Peter O'Connor - BofA Merrill Lynch, Research Division
I -- congratulations on your Coal & Allied deal, which is 4 decades in the making. So well done, finally.
I said that in the last seminar, that it took us 20 years to do, and I was corrected afterwards, and they said, "No, it was actually 30 years." And you're saying 40. That's probably right.
Peter O'Connor - BofA Merrill Lynch, Research Division
[indiscernible] can you do that?
Sorry. Guy, can you talk about Coal & Allied, please?
Guy Robert Elliott
Where do we go to with Coal & Allied? Well, I think that this business has had a tough, if we go back over that -- the last 10 years, particularly. We have seen a mismatch between what we might have liked to put through that system. It's quite distinct from what we have in the west in the sense that we don't control the railway. We don't fully control the port either. And so what we would like to do
go through that system, and that's the work that we're doing. That's always been the intent, and I'm not going to give you numbers for it. I think that's partly contingent on capital expenditure on things like Mount Pleasant, which you saw in the list that we showed and we were talking about a few minutes ago. But there is, as it were, latent capacity there. If the whole system worked like a Swiss watch and if we had the mining capacity to match up with the port capacity, more would be produced at a lower cost. And so that is something that we would like to take advantage of in future years.
Can I get one more question from the audience here so we'd have...
Yes. We will take...
James Gurry - Crédit Suisse AG, Research Division
This is James Gurry again from Credit Suisse. Just -- if it took you 30 years to consolidate Coal & Allied, can you just tell us -- I hope it doesn't take that long to consolidate Oyu Tolgoi -- and how you feel about that asset going forward and perhaps how you are in control of the rest of the Ivanhoe? You're the majority shareholder, so how do you feel about the rest of the Ivanhoe assets?
Well, I hope it doesn't take that long. I think we are -- first and foremost, what attracted us to Ivanhoe, with the discussions with Robert Friedland and I were around both of us seeing the potential for Oyu Tolgoi. And if we had moved it over the past several years from an exploration project to what is becoming a great mine, we're -- we'd have several steps left to go. But I think if you look at our progress from 2006, I think it's been quite extraordinary. And while we have been focusing on the proper development of Oyu Tolgoi, we've been doing it under mechanisms that actually are respectful of the commercial regimes, respectful of the market. Ivanhoe is a listed -- separate listed company. It has its own shareholder base. We have been making our investment to OT on a risk phase -- risk-weighted basis -- so same theme we're hearing elsewhere today -- by making individual tranches of investments in Ivanhoe. And then our agreement with Ivanhoe was those funds would be reinvested in Oyu Tolgoi for the development of the site, and that's actually provided us with phases of risk assessment. It also provided us with optionality going forward, and that's essentially what we have been doing since 2006. I don't think it's the end of the story. We still have more work to do. We will do so in a way which is, of course, respectful of all our contractual commitments, the various exchange requirements and very respectful of what I would say is the partnering, wherein the biggest stakeholder being the government of Mongolia. The question, maybe you haven't heard, is when we would see a CapEx estimate. It's in feasibility for the second phase. I think it'd be too early to give any time on that.
I think we have room for one my question from the room in here. Here we go.
Richard Hatch - RBC Capital Markets, LLC, Research Division
Richard Hatch, RBC. Just a quick question on your CapEx. So your aluminum CapEx and your copper CapEx is around about the same sort of money in total. Given the fact that copper's contributing more than aluminum, could you put more money into copper than -- sorry, given that copper is putting -- contributing more money than aluminum, would you push more money into your copper assets than your aluminum?
I'd like maybe Guy to make some comments about capital allocation in general, but I would say, just in terms off the -- if you just deep dive into the numbers themselves, you'll see that Kitimat has a large portion of the total capital which we committed to in December. And of course, we have the Phase 2 of Yarwun, which was something we committed to before the financial crisis, which will be successfully commissioned in, we expect, middle of this year. Whereas copper, the bulk of the investments would be in those projects like Oyu Tolgoi, which I just talked about. But Guy, if you want to talk more generally about the principles of capital allocation.
Guy Robert Elliott
Well, we don't really do it in the way that you're suggesting, in other words, just putting money into things that are making money today. We try and take a long-term view of all the capital projects that we do. We're not deterministic. In other words, we're not trying to create a particular percentage portfolio for copper and aluminum by 2020, let's say. What we're doing is looking at numerous options in all our products, and in fact, sometimes, in products that we're not in at all, such as potash, for example, where we've recently invested. And so what we look for are individual opportunities. And if they past muster, in terms of being high-quality tier one resources, and if they look as if they will generate good value at acceptable risk, then we try to do them. And it is true indeed that today the copper business is earning much more than the aluminum business, absolutely right. But over the next 40 to 50 years, I wouldn't be so certain that that was going to be the case. I think that copper will have a good few years, and in time, I think aluminum will come back. So I think we're making these investments for periods like that. We're not making them for just a few months or even just a few years. We're making them for a very long time. So Kitimat, the big investment that we're making, is actually, as Tom was explaining earlier, a very good project indeed, the best probably in the aluminum industry by far. So we have no regrets about that project. And I think that the other point to make is although we look -- it looks as if we're spending quite a lot on aluminum, much of it is just finishing Yarwun, which is, after all, going to be in production in August. So most of that capital has actually already been spent. So the big one, as I've said, is Kitimat, and it's a good project, as are our copper projects. They're also good. And by the way, finding new copper projects to put money into at the moment is problematic. That is part of the bull case for copper. There just aren't very many opportunities that are available in the short term. We'd very much like to have more of them, and we're putting money where we can, but there is a limit.
Thank you. With that, anyone that's got a copper opportunity, please see us after the meeting. I think we'll draw that to a close. I guess as you're having the chance to see lots of companies in this results season, there aren't too many of them that are delivering more than $27 billion of cash flow, more than $15 billion of underlying earnings and a 34% dividend all at the same time. So thank you very much.
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