力拓 (RIO) 2014 Q4 法說會逐字稿

Good morning, all, and welcome to the Rio Tinto 2014 annual results presentation.

It is great to be here today to share our seriously good results with you.

Chris and I came in to our roles about two years ago.

At that time, we talked to you about how we'd improve the business, how we'd strengthen the balance sheet, and how we'd deliver results.

Well, all of this is evident today.

During the past two years, our focus has remained on running Rio Tinto as efficiently as possible, not just for today but also for the long term and for the success of the business.

So if I can start by thanking all of our 62,000 colleagues for their efforts.

Rio Tinto is not just a set of Tier 1 assets, but more importantly, a company of truly world-class people.

And today's results show their dedication and, importantly, their capability.

We took decisive early action and we delivered on what we promised.

We said that we'd reduce costs and, since 2012, we've taken $4.8 billion out of the business.

We sold unwanted assets and we've realized $3.9 billion from this to recycle back into the business.

And we've more than halved capital expenditure to $8.2 billion, spending capital more efficiently for the best return.

We've made reducing working capital a particular focus and, over the two years, we've released $2.1 billion of working capital.

We said that we'd reduce our debt.

Well, we certainly delivered on that; a reduction of almost $10 billion since debt peaked in June 2013, creating a very sound balance sheet.

We also said, and possibly more than once, that we'd materially increase returns to shareholders.

Well, our focus on operating excellence has allowed us to do exactly that; an increase in shareholder returns of 64% this year, which takes a total returns to shareholders to almost $13 billion since the beginning of 2013.

Importantly, however, today's results are not a destination but a continuing journey, a journey in which we'll continually strive to deliver industry leading, sustainable shareholder returns.

In a moment, Chris will take you through the numbers in more detail, but let's look at a few highlights from 2014.

We reported underlying earnings of $9.3 billion.

We increased volumes and reduced costs, which enabled us to significantly reduce the impact of weaker prices.

A focus on cash generation throughout the business led to net cash from operations of $14.3 billion.

Prices reduced those cash flows by $4 billion.

However, we managed to close the gap considerably and the overall decrease in cash flow was just under $1 billion, compared to last year.

As a consequence of our disciplined approach to cash management, net debt finished at $12.5 billion, which is a stunning outcome in today's market conditions.

Our primary contract with you, our shareholders, is our progressive dividend, which we've increased by 12% to $2.15 per share, or $3.9 billion for the full year of 2014.

In addition, I'm ecstatic to announce today that we're entering into a share buyback program of $2 billion during 2015.

These amounts deliver our commitment to materially increase shareholder returns whilst, importantly, maintaining the strength of our balance sheet.

We said that we'd deliver, well, we have.

We said we were focused on shareholder returns; we are and we'll continue to be.

So let me now hand over to Chris.

Thank you, Sam.

In 2014, our industry was affected by difficult markets, but our focus remained on strengthening our business.

We set some ambitious targets, but both Sam and I have been impressed by all of our colleagues stepping up to the plate and ensuring that we exceeded all of them.

In tough conditions, we successfully marketed our products and operated at capacity when demand was there.

We beat our cost reduction and CapEx targets, and the reduction in working capital has been outstanding.

As a consequence, our cash flow generation has been strong and our balance sheet is now extremely robust.

This has put us in an ideal place to meet our commitment for the material increase in cash returns to our shareholders that Sam has mentioned.

When we started the journey to strengthen the balance sheet, we did so in anticipation of increased volatility in global economies and in the price of our products.

We're now in a position of strength which allows us to not only meet our commitment to materially increase cash returns to shareholders, but also to be robust against low prices, to be in a position to take advantage of opportunities which may present in the future.

Going forward, we'll continue with our policy of allocating capital.

Firstly, the necessary sustaining capital.

We intend also to maintain or increase the dividend per share, our primary contract with our shareholders.

The third area is compelling growth.

And we plan, this year, to have spending of just under $7 billion, so $2.5 billion to sustaining capital, and about $4.5 billion to growth.

Next comes the balance sheet positioning and, finally, further returns to shareholders.

But before we get on to that, let's have a closer look at the 2014 results.

Rio Tinto has delivered on its promises in these results.

In summary, our continued focus on costs has delivered an incremental $1.5 billion of savings, leading to an overall reduction of $4.8 billion versus 2012.

We identified working capital as an area for improvement and the results have been significant, with the release of $1.5 billion during the year.

As I'll show, this is not merely about cash release as a consequence of price declines, but active reductions in inventory and tighter management across the board.

We've continued to reduce capital expenditure.

In the November seminars, we said that this would be less than $8.5 billion and we've achieved that with $8.2 billion.

This represents a $4.8 billion reduction on 2013 and is less than half of the 2012 level.

And we've brought in $1.4 billion in proceeds this year from the divestments of Clermont and the sale of our head office building in the St James's Square in London, where we'll be moving back in later in the year as tenants.

Our strong operating cash flows, assisted by all these actions, have meant that we've further strengthened our balance sheet and reduced our net debt by $5.6 billion during 2014 to end the year at $12.5 billion.

As I outlined at the investor seminar in November, we'll be aiming to maintain our net gearing ratio within a range of 20% to 30%, and we'll finish the year well ahead of our target.

We believe that having a strong balance sheet is essential during an increasingly challenging time for commodity companies and for an industry as long term as ours is.

It protects the business, it protects shareholders, and it creates a platform for future returns.

2014 underlying earnings was $9.3 billion, which is 9% down on 2013.

The impact of prices alone was a reduction of $4.1 billion, partly offset by favorable average exchange rates of $691 million.

If we flex 2013 earnings for price, exchange and inflation, we could have expected earnings of about $6.5 billion.

However, we were able to offset much of that decline by our early actions.

Volume gains of $1.4 billion, notably from our iron ore business following the ramp up to 290 million tonnes in May last year.

The early actions we took to reduce our cost structure also bore fruit with nearly $1.2 billion of cash cost improvements flowing through to the bottom line, and further reductions in evaluation and exploration spend.

Furthermore, lower tax expense, as a result of removal of MRRT, had a positive impact on earnings in 2014.

Turning now to net earnings.

Net earnings of $6.5 billion for the full year, with $2.8 billion below underlying earnings, were affected by impairments and non-cash exchange movements, which I'll now explain in a bit more detail.

This compared with $3.7 billion of net earnings in 2013.

Overall net earnings increased by 78%.

There were impairments relating to overruns at the Kitimat modernization project, which were recognized at the half-year, and the write-down of the moly autoclave project at Kennecott.

These were partially offset by the reversal of a previous impairment taking on the PacAl assets.

This reversal reflects improved pricing in the industry, but more importantly, is driven by our successful work to improve the efficiency and cost competitiveness of the PacAl assets.

Losses on disposal mainly relate to the divestment of our interests in Rio Tinto Coal Mozambique, in October.

And following the repeal of the Minerals Resource Rent Tax, or MRRT in Australia, in the second half of last year, we wrote off the deferred tax asset to the tune of $362 million.

As we saw in our half-year results, the biggest impact to net earnings was due to non-cash exchange losses on US dollar denominated debt held in Australian dollar functional currency entities.

These losses of $1.9 billion mainly reflect the decline in the Australian dollar from $0.89 at the start of the year to $0.82 at the end.

These were functional currency adjustments only.

Our overall US dollar debt and cash flow is unaffected by these exchange movements.

As you will have seen from our quarterly production report, we had an extremely strong finish to the year, particularly in the iron ore division, following the completion of the 290 million tonne expansion in May of 2014.

This is translated through to the excellent product group earnings and cash flows that you're seeing here.

Iron ore prices declined significantly in 2014.

On average, the price of 62% iron declined by 30% from the prior year.

Notwithstanding this, our iron ore business's underlying earnings were $8.1 billion, a reduction of only 18%.

We increased our sales, with 90% of our expansion tonnes going into our premium Pilbara blend product.

In addition, continued cost reduction efforts, and the favorable effect of the weaker Australian dollar, partially offset the price decline.

The strong emergence of our aluminum business continued in 2014.

The improvement we have seen in the all-in price for our products, coupled with the business's continued focus on efficiency and productivity, has seen earnings more than double, from $557 million in 2013, to $1.2 billion last year.

Clearly, the stronger pricing environment and weaker local exchange rates have helped, but the cost saving program also continued to deliver.

This year, as promised, you will have seen that we've split out the revenues, EBITDA and earnings of our bauxite and alumina businesses.

This enhanced disclosure reveals that our bauxite business is generating strong margins, but also that more work needs to be done in the alumina refineries.

We have set some tough targets for 2015, so we expect that alumina's profile will steadily improve.

Our copper product group delivered an 11% increase in underlying earnings.

This was despite a 7% reduction in average copper prices, and reflects the efforts of our team there in reducing costs and boosting productivity.

Improved volumes from OT, and reduction in cash unit costs, and exploration and evaluation, were the main reasons for the improvement.

Our energy business faced a very tough year, and generated a loss of $210 million at underlying earnings.

This is down from a $33 million profit in 2013.

Lower prices across the coal sector reduced earnings by $433 million, but not all of this could be offset by cost reductions of $170 million.

Rio Tinto Coal Australia was profitable, at $21 million.

But ERA incurred a loss of $119 million, and Rio Tinto Coal Mozambique, a loss of $93 million, before it was divested in October of 2014.

The diamonds and minerals business achieved underlying earnings of $401 million, a 15% increase on the prior year.

Higher volumes and lower costs more than offset lower prices.

The team continued to align production to demand, and have been highly successful in releasing working capital, with more than $470 million freed up.

Compared with the 2012 base, we've now reduced our operating cash costs, and evaluation and exploration expenditure by $4.8 billion.

But we're not stopping there.

When we announced at the half-year that we had achieved $3.2 billion cash unit cost reductions, beating a $3 billion target six months ahead of schedule, we were keen to ensure that the momentum in the business was maintained, and the focus on reducing these costs continued.

We, therefore, set an additional target of a further $1 billion of sustainable cost improvements by the end of 2015.

In the second half of last year, we made good progress toward this target, and reduced our operating costs by $400 million, well ahead of the $250 million target we had for the second half.

Building on this momentum we're, therefore, maintaining our target for 2015 at $750 million, which we expect will be weighted toward the second half of the year.

Since the end of 2012, we've now delivered over $3.6 billion of operating cash unit cost savings, beating our original $3 billion target by about 20% by the end of 2014.

As you can see from the chart, we've achieved significant cost reductions across our portfolio, with around $900 million coming out of our copper group, $800 million from each of alumina and energy, and $700 million from iron ore.

The remaining $300 million came largely out of diamonds and minerals, other operations, and the head office cost reductions.

Additionally, we have saved $1.2 billion over the past two years by reducing our exploration and evaluation activities, focusing only on the highest value projects.

We continue to deliver greater operating and commercial efficiency in our unrivalled Pilbara assets.

In 2014, our cash unit cost was $19.50 per tonne.

But if you take current oil and currency rates, our estimate for Q4 unit cash costs would be equivalent to about $17 a tonne.

Our average realized price for our Pilbara blend products was $84.30 per wet metric tonne for the full year of 2014, equivalent to about $91.60 per dry metric tonne.

And our spot sales continue to be consistently above the Platts' 62% FE benchmark.

A combination of low cost and sound marketing has led to consistent and attractive margins.

We've often said that Tier 1 assets provide stability through the cycle, and this was clearly in evidence during 2014.

The action we took reinforced our low cost position and meant that, despite price declines, we maintained margins at a constant level, compared to 2013.

More than three-quarters of our assets generated EBITDA margins in excess of 30% in 2014, and almost half of our sales enjoyed margins of over 60%.

Now, turning to cash flows.

Despite significantly lower prices, the early action by all our businesses generated strong outcomes on operating cash flows.

Strong production results, volume growth, cost reductions, and liberation of working capital, resulted in operating cash flows of $14.3 billion.

Working capital was a significant contributor.

So let's turn to that now.

We identified working capital as an area for focus.

Sam has been relentless on this with the leadership group.

The release of $1.5 billion of cash was an excellent achievement, but we believe there's still further to go.

You can see from the chart that we freed up more than $1 billion from inventories and receivables.

Our success in releasing working capital, therefore, was not merely the benefit of pricing and exchange rates, but direct action for tighter inventory management across the business.

$400 million of the reduction was from prices on receivables, the price effect on receivables.

Over the past two years, we've consistently reduced our capital expenditure from a peak of $17.6 billion in 2012 to $8.2 billion in 2014, in line with the guidance we gave in November of less than $8.5 billion.

Our sustaining CapEx came in at around $2.5 billion in 2014 and we'd expect it to remain at around those levels over the next few years.

We demand exceptional return for every dollar spent.

As a result, we now anticipate total capital expenditure of just below $7 billion in 2015.

Some of this decrease from our previous guidance comes from exchange rate changes, but around half of the reduction reflects further conscious additional reductions in expenditure.

And our constant challenging and performance of the iron ore team, both in operations and capital expenditure, has allowed us to defer the decision on Silvergrass now to 2016.

We believe that having a strong balance sheet is extremely important, particularly in times of such volatility.

We've been working on this constantly over the last two years.

We reduced our net debt in 2014 to $12.5 billion, which sets our gearing ratio at 19%, slightly better than the target range that I outlined in the investor seminar of the low end of the range between 20% and 30% for net gearing.

Following the buyback, our net gearing, on a pro forma basis at the end of the year, end of 2014, would be equivalent to be about 21% on a pro forma basis I stress, which remains comfortably at the lower end of that range.

With cash of over $12 billion on hand at the end of the year, we expect to retire about $1.75 billion of maturing gross debt in 2015.

As well as boosting a progressive dividend and completing the share buyback, we still maintain a very strong liquidity position.

A sound balance sheet is a key competitive advantage.

It provides a wide range of options in the future, regardless of market conditions.

It allows us to invest in our business and provide security to deliver sustainable shareholder returns.

It's worth taking another look at our capital allocation framework, which should, by now, be very familiar to you.

Our first allocation is to necessary sustaining capital, which we estimate at around $2.5 billion per annum for the next few years.

Next comes the primary contract with our shareholders, the progressive dividend.

Our policy here is that the dividend per share will be maintained or increased each year.

The full-year payments in 2014 amounted to $3.7 billion and, following the Board's decision for a 12% annual increase, this will take the overall payment to just over $4 billion in 2015.

We're then into the iterative cycle of compelling growth, debt and balance sheet management and further cash returns to shareholders.

Compelling growth will require about $4.5 billion per year, all on strong returning projects.

Not all of this has been approved at this stage, but that's our expectation.

We've no further need for further debt reduction in 2015 as we're at the bottom of our target gearing range.

The desire to make additional returns to shareholders is clearly there and the potential for further returns beyond the progressive dividend will be reviewed by the Board each February, taking account of cash generation and balance sheet capacity.

And with that, I'll hand back to Sam.

Thank you, Chris.

As I've spoken before, our intention to deliver industry leading, sustainable shareholder returns and the evidence of this can be seen in today's results.

And this will continue to be our intention, not a single event, but a journey.

Our confidence is based on the quality of our assets, our financial discipline, our operating excellence, and our culture of safety and integrity.

So let's have a look forward into that journey.

As you all know, a culture of safety and integrity is central to Rio Tinto.

A well run operation is a safe operation and over the course of 2014, we improved our safety as measured by all injury and lost time injury frequency rates.

However, tragically, we had two fatalities in our operations and sadly, we also lost a colleague in Madagascar in late January this year, and my thoughts and prayers are with his family and his friends.

But fatalities are avoidable and we're all convinced that we can operate without fatalities, and everyone in the business is working towards this goal.

At our investor seminar in November, I spoke about the near-term outlook being challenging.

Well, this has certainly turned out to be the case and is set to continue for the immediate future.

But I also mentioned, against this backdrop Rio Tinto thrives.

These dynamics play to our strength and it's when our competitive advantages come into their own.

And the results that we release today just show how our Tier 1 asset base, combined with operating and commercial excellence and a strong balance sheet, allowed us to meet the challenges that the market threw at us in 2014.

2015 will be a tough year for the industry, but by us taking early and decisive action, we continue to maintain our strong position as we look ahead.

Our goal is to deliver on our commitment to the progressive dividend, to invest in our business, and provide the Board with options to consider this time next year.

We'll carry on seeking increased shareholder value in everything that we do, and ensuring that every dollar is spent wisely for maximum benefit.

Costs and cash management will continue to be key priorities; protecting shareholders through the strength of our balance sheet, sustaining the business and ensuring that we deliver measured value-adding growth.

Our iron ore business never stops improving and raising the bar.

In costs and production and marketing, we'll see continuous improvement.

In mid-2015, Andrew and his team will complete the infrastructure for 360, which will allow us to continue reducing our costs as well as delivering growth.

In the aluminum division, Alf and his team achieved sector-leading margins in 2014 and the quality of these assets is increasingly apparent.

In mid-2015, the commissioning of the new Kitimat smelter will make our smelting business even more competitive.

And for the first time, our enhanced reporting from our aluminum group allows you to see for yourselves the attract 44% FOB, EBITDA margins we made last year on our bauxite sales.

And we'll further expand our bauxite business at Gove and the South of the Embley project where we recently approved capital to complete the feasibility study this year, with first production expected in 2018.

We have further growth options also in the Cape York Peninsula, which we'll seek to develop in line with market demand as we continue to develop our product as the seaborne bauxite of choice.

Aluminum has grown into a significant contributor to Group earnings and cash flows.

Jean-Sebastien and his team in copper have delivered some impressive cost improvements, and they've also restructured the copper division, preserving EBITDA margins of 42% year on year.

And there's a continued focus on our copper portfolio.

We exited Pebble in 2014 and we're in the process of exiting South Gobi.

Ramp up of Oyu Tolgoi continues, and Kennecott will have a year of preparation as we work towards higher output in 2016.

We have some exciting medium-term growth opportunities in copper, but these will progress at the right time and only on sound commercial terms that protect the value of these projects.

We made some good progress in Resolution in 2014 with a land exchange, and we hope to make further progress in 2015.

But let me emphasize, there's no shortcuts in protecting value and delivering projects.

In diamonds and minerals, Alan continues to manage that business for cash, with $1.2 billion of net-net cash flows delivered during 2014.

A lot of hard work in this group has reduced costs, but it's masked by the impact of lower volumes from capacity matching production to the sales and the market.

The division is well placed for continued growth in consumer markets.

The feasibility studies for the Simandou mine and infrastructure project, which has the potential to be a truly world-class operation, has continued to the extent possible during the year, despite the outbreak of Ebola, and the work will continue in 2015.

In energy, and a pretty difficult industry environment, Harry and his team have worked hard to maximize efficiencies and reduce costs.

Our Australian coal operations continue to generate positive earnings and positive cash flows.

A key focus for 2015 will be progressing the Hunter Blend project.

This is a plan to operate our Hunter Valley assets as a full, integrated network of mines, rail and port.

And the strategy will be underpinned by the integrated operations center, which is expected to open in Singleton early this year, and the processing excellence center, which is already operating in Brisbane.

Our aim is to drive network productivity by improving yields and volumes and, at the same time, blending production across mines and pits, in order to enhance the consistency and value of our products.

These steps will deliver further cost and production efficiencies, further optimizing the assets we have in the spine of the Hunter Valley.

Our strategy of investing in Tier 1 assets means we can generate strong cash flows and margins from our key commodities throughout the cycle.

With $14.3 billion of operating cash flows in 2014 and, importantly, maintaining margins year on year at 39% despite the lower commodity prices, we've demonstrated the strategic value of our world-class portfolio.

We continue to invest in our growth projects, focusing on those which offer the best returns to shareholders, and fit our criteria of long life, low cost, expandable assets.

We also lead the industry in technology and innovation, which is a clear competitive advantage.

Operating excellence will sustain our low cost leadership position and drive our operations even further down the cost curve.

Our relationship with customers and partners have been built over 140 years, and supplying high quality products which have been developed to meet their needs is the basis of our business.

And the importance of these relationships should not be underestimated.

Our financial strength is at the heart of our business, giving protection to our shareholders in a challenging environment.

We constantly evaluate buy against build, but I repeat, we have no near-term plans for major M&A.

The capital in the business belongs to you, our shareholders, and it will be used wisely.

Sound generation of free cash flow is a sign that we're sticking to our knitting, and this is a foundation from which we can deliver sustainable shareholder returns throughout the cycle.

This was truly demonstrated today in our 64% increase in returns to shareholders, the 12% increase in dividend, and the $2 billion buyback.

So let me close with saying we've delivered on all of our commitments over the past two years.

Rio Tinto is now a more efficient and a much stronger business.

We're back at what we do best and we're positioned to thrive, providing stability to our workforce, the communities around us, and sustainable returns to you, our shareholders.

Now if we could move to questions, and if I could get you to provide your name and organization, I'll take three in the room, and then I'll take three from the phone.

Just a question on the mechanics of the buyback.

Can you talk about the -- and this is the on-market buyback, the timeframe that you're planning to do it; who's managing it; what are the price limits; is it going to be done weekly?

What are the mechanics around that?

And then just secondly on the buyback.

When the Board sits down in a year's time, how do they think about the ongoing nature of the buyback, in terms of sizing it and matching that with CapEx requirements?

How can you be confident about it being ongoing in nature, in terms of [the short term]?

Okay.

Let me answer the second part, and Chris, if you could help me in a moment with the first part?

In relation to the process that the Board goes through in relation to assessing shareholder returns and analyzing the progress of the business, both current and forward, let me assure you it is a very robust process, and it's something that the Board is very interested in, but also takes it very seriously, with input from a range of areas.

We've had the tradition in recent years of reviewing that around this time each year, and that's really what is going to continue.

But importantly, what we're providing at this early point in the year is a strong balance sheet, with a debt/equity ratio of 21% which, depending on how the business flows through this year, will give the Board serious options to consider this time next year.

But we're very early in the year.

It is a very volatile market.

Chris and I believe that we have taken leading action, in terms of increasing our cost reduction activity, refocusing our capital, and really putting the business on alert that the year's going to be pretty tough for the industry.

But we're entering the year in a very, very strong position, a very strong balance sheet, with real momentum.

I've talked before about there's a pendulum, and it's moving, it's underway, and the organization is very focused on delivering the improvement that we started.

It's not a one- or two-year journey.

It is going to be over time, but it is a very strong business.

Now, Chris, if you could help us with the mechanics of exactly how the buyback is going to operate, hour by hour?

Thanks, Sam.

First up, I think the off-market buyback in Australia is probably the first thing to talk about.

It has a defined timeframe.

We're announcing it, and that will run the course.

It'll be completed within April, so the cash flow to that, it's AUD500 million is the sizing of it.

We reserve the right to go up and down, but that's the target, is AUD500 million.

And roughly the buyback's -- basically it's in the ratio of the DLC components of the plc and the limited stock.

So the first cab off the rank -- well, in the first half of the year the off-market buyback in Australia will take place, and we'll spend about $600 million in the plc buyback during the first half.

But the intent is that the $2 billion will be spread throughout the year, and it'll be done on that basis, and we'll have a series of different methodologies for achieving that.

But it's basically [stand in] the market in the plc stock, and the off-market in Australia.

We'll probably flesh this out over the next few days, as we get a bit deeper into the conversations, but the capital sum assigned to whatever the buyback price ends up being is $9.44 for the Australian off-market buyback.

The remainder will be what the Australian jurisdiction deems a deemed dividend, which will be fully franked.

So the way the mechanisms work, that's what allows people to bid at a discount to the market price.

So there is a discount available usually in those off-market buybacks.

So the first cab off the rank, off-market in Australia, and commensurate with that will be about $600 million in the plc stock for the first half.

Thanks, Chris.

Jason Fairclough, BofA Merrill Lynch.

Maybe a simple question, Sam.

You mentioned your colleagues in minerals, and how they're doing some work to match capacity production with the market demand for that product.

Maybe the bigger question for Rio Tinto's iron ore, you're one of the world's largest producers, to what extent do you feel a responsibility to play a role in balancing supply and demand with iron ore?

If you look at supply and demand for iron ore, it really hinges on the marginal producer, and we've seen that prices have dropped substantially during 2014.

If you look at 2015, we're expecting that about 100 million tonnes of new capacity will come on.

There will be growth in demand of about 20 million tonnes, and there's around 80 million tonnes of capacity that is likely to come off.

If you look at the cost production and their ability to respond, they're underwater.

Beyond that 80 million tonnes, there's about 80 million tonnes that we would describe as being at risk.

These are people that are currently underwater, but they've got the option of reducing costs and making the improvements to keep their business afloat.

Now, I know there's some people hanging on by their fingernails, and some of them are burning the furniture, and reducing expenditure on maintenance and sustaining CapEx, and firing Board members and all sorts of things.

You can only do that for a certain time, and sooner or later, you've really got to recognize the reality of life.

As we just mentioned during the presentation, if you take the current spot exchange rate and the spot energy price into account, then the iron ore business's costs are running at around $17 per tonne, cash cost.

And that's compared to the selling price today of $62 a tonne, so there's a significant margin there for us.

You saw the volume effect as Chris went through the numbers.

The impact for our business is substantial.

But as I've said before, if you want to balance the market, then you can't just take off 3 million or 5 million tonnes and expect that suddenly the price is going to go through the roof.

You've actually got to take off sizeable chunks, probably 100 million tonnes of capacity.

Guess what happens when you take 100 million tonnes off.

Well, the price goes up, and all those people that went out of the market come back into the market.

And guess what.

The price gets back to where it was, and wacko, we'd be down 100 million tonnes.

That's not in the best interests of our shareholders.

Whether you like it or not, there's no OPEC in iron ore.

It's independent producers making their independent decisions, and the decisions we make are in the best interests of our shareholders.

That's very, very important.

I'm sorry, can I put words in your mouth?

I don't know; it depends what they are.

(laughter)

As a low cost producer, you don't feel any responsibility to balance supply and demand in iron ore.

No, look, these people when they came into the market didn't phone me up and say, jump for joy; I'm going to bring on some high cost production.

So I don't feel any, any responsibility for them.

Yes, I'm sad for employees and communities and so on, but our people need to realize that the mining industry is cyclical.

It goes through cycles; it's supply and demand; it's seasons; it's a whole raft of things.

And importantly, people need to plan accordingly and that's why we focus on Tier 1 assets.

That's why we focus on having the most competitive businesses in the market.

That's what it's all about.

Now the good news is, yes, you go through the cycles, but if you look at the long-term picture, the world is going to continue to develop.

Urbanization is going to continue to happen.

China, a huge market; yes, we're seeing it more resembling a developed country, rather than a developing country, with growth slowing from 7.4% last year to around 7% this year, but the base is much, much bigger.

This morning, we woke up to read that India has now passed China in relation to growth.

Before you tell me, Sam, there's a bit of services and tertiary industry in that growth; yes, there is.

But we're all seeing the fundamentals increase for steel production and iron ore, as urbanization, industrialization, consumerization takes hold in India.

And beyond that, there's Asia, Middle East, Africa, South America, as the world continues to develop.

The long-term fundamentals for our business, whatever the commodity is, is very, very sound.

But it is a cyclical industry.

How do you cope with that?

You make sure you're Tier 1, and that's why I made the comments that, in these times, Rio Tinto thrives because of our positioning, because of our low cost position.

Menno Sanderse, Morgan Stanley.

Two brief ones.

First on corporate; you talked a lot about creating options for the Board, but the options in corporate seem to be quite long dated or progressing very slowly.

Is there anything you can do to push that business a bit harder, or make it look differently because 2015 is clearly going to be quite a tough year, to say the least?

Secondly, on steel consumption in China, Rio Tinto has always been very resilient or confident, some would say stubborn, in its view that 1 billion tonnes of steel is going to be consumed in China.

What gives you that continued resilience, despite last year being quite a tough year for steel consumption?

In relation to copper, of course we have our existing operations.

We have Kennecott Utah Copper; we have the OT open cut operation, which some people forget is operating and operating well.

We have our tonnes at Escondida, and the availability of tonnes out of Grasberg, depending on their production.

We've got the OT underground project; La Granja and Resolution are all in the hopper.

OT underground, we put our best and final offer to the Government of Mongolia in November, and they're currently considering that.

There have been some positive moves in relation to a number of shareholder issues.

There's been resolution of some operating constraints; for example, in relation to water availability for the project, and also the provision of third-party power into the project.

So there is progress.

We are patient; it is a long-term project; we need to get it right.

We're not about to rush this and jeopardize the long-term future of the project.

Resolution, the land swap, which went through the US Congress just before Christmas, that was a significant move for that project and provides us with full optionality in relation to how we develop that project.

Yes, it's got to go through a range of environmental and other governmental approvals, but work on that development is continuing, as with La Granja.

In relation to the 1 billion tonnes in China, that is still our forecast; that China will reach 1 billion tonnes of production by 2030.

That requires 1% growth per annum, and we believe that that is imminently possible, when you look at the fact that China is currently -- urbanization is around 54%.

We expect that it will move to 70%.

Everything that we're hearing from China indicates that that urbanization process is still underway.

Now importantly, growth in construction is continuing in the Tier 1 cities.

In lower tiers, yes we're seeing a surplus of real estate, and a lot of people are focused on that.

But the demand for high grade iron ore continues.

Not only is the issue of urbanization, industrialization an important issue for us, but also the issue of improving pollution in China.

This is particulates; this is smog; this is an increasing issue for the people in the major cities in China.

Improving the grade of iron ore is actually going to help improve the efficiency of their antipollution measures.

Do we have a question on the phone line?

Clarke Wilkins, Citi.

A question just in regards to the working capital release.

It was a great job in 2014 releasing that working capital to boost the cash flow.

Can we expect a further boost to cash flow for working capital release this year?

This is a very pet project of mine, but I see Chris there and Chris wants to get in and answer this, so over to you, Chris.

No worries.

Thanks, Sam.

We do talk quite a bit about this internally, but if you go to the $1.5 billion reduction, there was about $400 million of that was to do with the price effect on receivables.

The rest of it was all about the inventories and the overall discipline, and we're being keen to get after this idle capital.

Basically, any dollar that we tie up in working capital unnecessarily is a dollar that we can either put to work in growth or give back to our shareholders, so that's been the focus.

It's really saying that this stuff, unless it's actively promoting a different revenue outcome, then why do we have it?

Why do we have working capital?

Why do we have capital idle, if you like, on the balance sheet?

So this liberation of $1.5 billion, yes, $400-odd-million was as a result of lower prices, but the rest of it is all about making sure we collect receivables, making sure we have the optimum levels of inventory.

And that's been a lot of hard work but, across the business, the guys have all had a red hot crack at this.

Now, we do think that there is more scope, obviously not at that sort of level, but we are actively after it again on a continuing basis.

We're not going to stop here, but we do want to make sure that inventories, wherever they occur, are optimum.

And if you think about a business like ours, you can think about product inventory, but equally, we've got to have a good hard look at warehouse inventories as well.

What's on the input side into our process is still capital tied up that area as well.

So we've got opportunities to attack it on a variety of fronts.

It's a lot of hard work to get further reductions from where we are, but we are actively after it and we've got people charged with delivering that result.

Yes, thanks for that, Chris.

And for those of you that know me well, know that I started my career in a car industry that introduced just in time.

Whilst there are differences between mining and making cars, I have noticed, the same sort of philosophy can be applied, but it takes a different mindset.

It takes breaking 140 years of that tradition and it's a journey that we need to go through.

But as Chris said, we've both been very, very pleased at the work during 2013 and 2014 with a total of $2.1 billion being reduced out of working capital.

And as Chris says, there is other opportunities.

Of course, I'm outrageous and totally unbelievable when I say that, if I can buy a book and Amazon can deliver the next day, why do we even need warehouses now?

I'm being a little bit cheeky there in terms of saying that because we operate in a lot of remote locations, but it is a different mindset.

We're in 2015, not 1873, and you need to take advantage of that.

You need to take advantage of improved communications and improved logistics.

And the operation centers actually help us in terms of being able to integrate the process of maintenance shuts and schedules, and ensuring that everybody actually understands which widget, which rotable, which spare, you're going to need when.

Lyndon Fagan, JPMorgan.

Sam, just wanted to ask you a question about slide 17 where you've projected CapEx out to 2017 and reduced the ceiling to around $7 billion.

It looks as though that has largely come from the yet to approve section, and I'm just wondering whether you could provide a bit more color about why the yet to approve projects has come down.

And then a further question on that slide, it talks about comparing projects to a buyback.

Just wondering exactly how you do that internally.

Thanks.

Okay.

I'll let Chris describe how we compare our projects to the alternative of a buyback.

But in relation the capital, if you look at the reduction for 2015, we've indicated that, with capital that was going to be around $8 billion, we're now indicating less than $7 billion.

If you can get the full flow through, the full effect of exchange and oil prices, then that accounts for about $450 million of the reduction.

The balance of the reduction is actually looking at timing, streamlining projects, value engineering work, which is underway with South of the Embley and Zulti South and OT and other projects.

Part of that exchange effect will actually flow through, assuming exchange rates stay where they are, in subsequent years.

So there's a couple of factors there and, of course, we're always looking at improving the way that we actually develop our projects and recognizing that we're seeing a whole range of input costs, labor and materials that have actually also reduced.

It's one the things that flows through from people being more focused on capital that you actually see capital costs go down.

And certainly, we're seeing it, not only in the minerals industry, we're also seeing it in oil and gas, that the heady days of all these projects is coming to an end and it's important we actually take the benefit of that as we go forward.

Of course, the other answer in relation to that is the importance of being prudent in terms of our cash management and our balance sheet as we go forward.

And that's something that we consider important in terms of being ahead of the game, in terms of recognizing that the market fundamentals in the near-term have actually changed.

Chris, would you like to just comment on the comparison of projects versus buybacks?

Yes, thanks, Sam.

In simple terms, it's really a function about what cash flow stream are you buying, whether it's an investment in a project or a buyback.

And we'll always have a view about the future cash flows and, in the case of a buyback, you look to the future cash flows of the entire Company and make your judgments about that against that background.

I think one point that we haven't talked about in the presentation and all those sorts of things, but the efficiency of some our processes have been increased substantially, internal processes for review and the like.

And we are a whole lot more onerous and rigorous about making sure that projects are ready to go when they come through for approval.

There are some things that I would much rather spend three or six months longer making sure that we're as well prepared as we can be before pulling the trigger on a project, rather than going off early and having consequences at the later stages when spending can get out of control in that regard.

The other point too to make in regard to the reduction in some of the numbers, Sam referenced the point about the currencies.

And I think the other one is that the same cyclicality that's driving some of the price outcomes that we're seeing is also driving the capital construction cost dynamics as well.

So you can get a lot more bang for your buck in this sort of market than was the case back in the very hot markets for those assets.

We're saying it's not just a resources issue; it's across the board.

And if you go to the oil and gas industry, I think you're going to see some fairly significant reductions in that area pretty quickly.

The US shale is probably the most obvious example there where the response can be a bit quicker than, perhaps, the routine offshore oil.

But in answer to your deliberate question about how do you measure a buyback?

It's against the future cash flow stream that you're buying and what you pay for it and that's your return sort of so you can get a number on that.

We don't publish that number, but you can get a number on that quite easily.

Thanks, Chris.

[Peter O'Connor, The Shore Group].

My question is directed at Chris and it relates to franking credits, which must be the greatest under or unvalued asset in the entire Group.

Chris, could you walk me through what you're thinking about franking credits and [at core] value?

What your thoughts are on the recent precedents and developments in Australia regarding releasing that pool of franking credits?

And how I could think about that issue, going forwards?

Thanks, Peter.

Well, franking credits, they're obviously a well-regarded asset in the Australian environment.

They're probably not as well understood actually in the UK, so maybe just a little bit about.

Basically, distribution of a dividend in Australia, you get the distributor a tax credit with that dividend, on the basis that the Company's already paid tax before it declared the dividend in earning the profit.

And so long as you've paid corporate tax on the way through earning that profit, when you come to distribute the dividend, the dividend itself, in the hands of the shareholder, can carry a tax credit with it.

Our dividends in the limited stock are all fully franked.

By fully franked, it means they carry a $0.30 tax credit with them.

And the off-market buyback in Australia allows you to utilize some of those franking credits, because the nature of the off-market buyback, it allows -- this is complicated, but it's worth taking a bit of time to try and explain it.

It allows people to bid a discount to the market price to sell into the tender.

And the reason they can do that is because the -- we have an agreement with the Australian tax office about the allocation between -- whatever the purchase price ends up being, between capital and a deemed dividend.

The capital, in the case of our buyback, is estimated to be $9.44 per share.

So the remainder of the buyback amount that's ultimately tendered will be a deemed dividend and it will carry with it a deemed franking credit.

That franking credit is what allows people to bid the discounted offer into the tender.

Now, what Peter's referring to is some recent activity in this area in Australia.

Peter, I presume you're talking about the Tabcorp issue just recently where -- I haven't seen the full details of this so it's a little bit difficult to get too far away from it.

But Tabcorp here in the Australian jurisdiction have done basically an accelerated renounceable entitlement offer, a form of a rights issue.

And the proceeds from that will be basically, as I understand it, will be a special dividend with a franking credit attached to it.

Now, again, I haven't got all the details of that and I haven't seen the tender booklet and so on, so it would be imprudent to get too far into that.

In our own case, we've got to be a little bit circumspect about that sort of mechanism, because we have the issue of the DLC structure requires equal treatment of both ends of the DLC.

So if we were to pay a dividend in Australia, a real dividend in Australia, we'd have to have either the same dividend or some form of matching action in the plc stock.

And that's a significant difference for us with the DLC structure versus someone who's just in a limited structure.

So we'll get a chance to talk more about that offline, Peter, but I think that's the sort of short answer.

So in terms of what are we doing with the franking credit balance.

We do have a significant franking credit balance.

Clearly, the dividend in the limited stock will be fully franked, and the off-market buyback will be another utilization of some franking credits that will go to benefit the price we ultimately pay to buy back the stock.

Thanks, Chris.

Let's come back into the room.

James Gurry, Credit Suisse.

Just want to talk a little bit about aluminum.

You're actually earning more EBITDA in net earnings from aluminum that you are from copper.

The aluminum group's never been worth more to you now, as a group, than since you bought it.

How sustainable do you see the earnings within that aluminum portfolio?

And what do you think the dynamics are of expanding your bauxite and alumina exports into China?

And, at the same time, China is recently exporting a significant amount of aluminum products to the rest of the world.

Does that have the potential to potentially harm the earnings of the smelter portfolio?

Thanks for the question.

I mentioned during the presentation that we've seen significant improvement in the aluminum business and I guess everybody is now seeing it.

2012 we made $50 million net earnings in aluminum; 2013 $550 million; this year $1.25 billion.

So very significant journey.

And Jacynthe, and followed on by Alf, have taken $800 million of costs out of the business.

We've taken 700,000 tonnes of metal out of our production.

We've shut, curtailed and sold businesses, we've renegotiated power contracts, a whole raft of activities.

If you look at the metal business, when Kitimat comes on stream, the Kitimat modernization expansion, whatever you want to call it, around 80% of our businesses will be in the first cost quartile.

That's a very strong position for us to be in metal.

In relation to alumina; alumina continues to be a tough business and clearly, there's a lot of work underway at Queensland alumina, at Yarwun and Vaudreuil in terms of improving our cost base there.

And we've indicated by separating our bauxite and alumina earnings, for the first time this year, the alumina business lost $200 million last year.

So a lot of focus, big spotlight, and we're working to improve that business.

We did take action last year to curtail the Gove refinery and action like that is actually improving the bottom line of the alumina business.

In relation to bauxite; bauxite continues to be a very prospective business for us with the increase of export capacity from Gove, from around the 6 million to 8 million tonnes of export.

It's infrastructure, that means we're having to ramp that up during this year with new conveyors and handling systems and what have you.

The South of the Embley project; we've approved the study funding recently for the full feasibility study and we're expecting that the full project will come into the investment committee and the Board later this year.

There is some preliminary expenditure that we're looking at to ensure that we'll hold the timing of 2018 for that project.

And there's further work underway; [small bikkies] in Guinea at the CBG project looking to have a small expansion there to match port capacity.

So in terms of sustaining the business, there's a lot of work underway in bauxite and metal to continue to improve that business and to continue the journey.

In alumina, it's special effort to get that business back to positive earnings.

In relation to the trade-off; do you supply bauxite or do you hold back and hope that that will mean that China and elsewhere will reduce their exports?

Well, our view of that is that, one way or another, the bauxite will be supplied.

And we're in the ideal position with proximity to China out of Weipa to actually supply that material to them.

If we don't, it will come from somewhere else.

And South of the Embley is actually one of the most attractive projects that we've got, so it is something that is of particular interest to us.

It is something that we will continue to progress.

And, by having 80% of our aluminum metal business in the first cost quartile, that keeps us in a very strong position, going forwards, regardless of what may happen in China.

Let me just close this item off by saying, look, you've also got to look at the long-term prognosis for aluminum in China.

Currently, they're using a lot of stranded power, and what better than build an aluminum smelter, and that will provide jobs and provide other business opportunities and what have you.

But, as China moves to a more consumption-led economy, and during the past year they've moved from 34% consumption to 48% consumption, which means that households are buying refrigerators and washing machines and air conditioners, and every electrical gadget known to man, they're going to need that power.

And there will suddenly be a huge draw on that power as the middle class in China increases.

And, having bought their fridge, they want to actually be able to turn it on.

So there is a shift there.

For those of you that say, Sam, you're dreaming, just have a look at what happened in Japan.

Japan, prior to the 1970s, had an aluminum smelting industry, and exactly the same thing that I'm talking about happened there.

Today, there's not an aluminum smelter in Japan.

So, over time, the same thing will actually happen there.

There will be a transition, and that will limit their ability to domestic requirements of aluminum so that they can put it, actually, into the refrigerators and washing machines and everything else.

Tim Huff, RBC.

Just two quick questions, coming back to the themes on the financials.

CapEx, you mentioned that you got your sustaining CapEx down to $2.5 billion.

That seems a pretty significant reduction from six months ago.

I was just wondering, you mentioned the $450 million of flow through that can come from FX and other things, but I was wondering if you could give us some color around how you've managed to reduce that so sustainably.

And then, on the working cap.

Obviously, at half-year and at the Investor Day, you talked a bit about looking at working cap reduction longer term, with respect to the Japanese auto industry just in time.

Obviously, that's a multiyear process, not a monthly process.

With respect to that, did I get it right that you said you freed up $470 million of capital from diamonds alone?

And does that imply that you're going to be making ---that there are also significant gains to be made in other divisions?

Or was it just that there was more opportunity to free up capital in diamonds and minerals?

Chris, can you help me with this?

First, Tim, regarding the sustaining capital, we have talked consistently, there's a currency effect; there's a value for money effect.

Everything now is currently being able to be bid far more aggressively and more competitively, so we have that aspect.

At the start of any year, if you went into any one of the businesses, they'd probably have a long laundry list of projects that they would have some inkling or some intention to do, either this year or on their work agenda, for some sort of time period that would be relevant to that scale of business.

Probably, at the end of any year, about 50% of that's been done.

And the other 50% has been displaced by other things that became maybe either, near term, more pressing, or that emerged as a better thing to do than what was originally in that mindset, if you like.

So where we are now is to say, yes, we have had questions about, people, can you manage this as tightly as you can and we've had the response, and the like.

We've also had improvements in productivity.

So some of the sustaining capital will go into things like fleet and that type of heavy mobile equipment.

And that, again, we're getting better life and we're getting better time between refurbishment, or meantime the phase is getting longer, and the like.

There's a raft of things where improvements are going on to help you with things.

So currency, more bang for the buck, and better practice, means less demand on the sustaining capital.

With regard to working capital, the cash released from diamonds and minerals, so it's not just diamonds, it's diamonds and minerals business, has been significant.

But they did have quite high inventories, relative to the scale of their business.

We've been actively working to reduce that; Alan and his team have been on that for some time now.

And that sort of activity -- the opportunity varies across the patch.

But we've still got, for instance in iron ore, we've still got product up at the mine end of the infrastructure chain which has been bulked out.

Once we've got capacity to be able to move that down the infrastructure chain and get it available to a port, then that can be further reduced, by way of example.

If you go into the smelting business, there's probably less opportunity in there in the aluminum smelters side of the house.

We've been able to achieve a fairly significant reduction in Mongolia, by way of example.

Earlier on, there were some concerns and difficulties about actually getting permitting to actually ship the production.

We've been able to reduce that, get that inventory down to a totally normal level now.

So if you look at the data for Mongolia, we actually shipped slightly more than we mined during the course of the year.

And that's a result of moving down that inventory chain.

So there's opportunities across the patch.

I mentioned earlier, and Sam's probably mentioned earlier, I'm not sure, about the whole area about the warehouse inventories and the like.

We're not going to get a D10 delivered by Amazon the next day, but we can improve the outcomes of our warehousing in terms of what do we actually need if we were smarter with the way that we ran them.

What would we actually need for the various systems that we have around the patch.

So there's a lot of opportunity, hard work, a lot of focused work.

And that's really where we're going to be going after it.

Thanks, Chris.

Myles Allsop, UBS.

Just following up on three questions earlier in the day.

In terms of the sustainability of the buyback, if you look at spot commodity prices, and given your working capital guidance, your CapEx guidance saying no significant M&A, do you think it's highly likely that the Board will be in a position to announce at least a $2 billion buyback in 2016, this time next year?

We're not going to hold you to it, but it would be interesting to see what your sense is at spot commodity prices.

I won't be here, I'll be fired.

(laughter)

And then, secondly, on the CapEx side.

Every two months you reduce by $1 billion, and from the sounds of it, this is a deflationary currency move.

Is it right to assume that your long-term volume growth target is still around 5%?

Or is that starting to come down, or at risk of coming down?

And then, finally, just on iron ore and supply discipline; obviously, you're adding 50 million tonnes of the 100 million tonnes, so you're kind of the biggest contributor this year.

But, I think, the more interesting side is IOC because, at current prices, I suspect, it's not generating a huge amount of cash flow.

Are you prepared to take action there if it moves into a cash flow negative situation?

Thank you.

Thanks for those.

In relation to shareholder returns, I jokingly commented about that, but it really is a Board decision.

The Board represents you; the Board represents shareholders; and the Board will want to look at that this time next year to really assess where we are.

There's a lot of moving parts.

The world is far more volatile today than, I suspect, it's ever been, not just in relation to commodities, but in relation to world politics, in relation to a whole range of things that impact, in one way or another, on our business.

And, quite sensibly, the Board will want to look at that after we've finished 2015 and determine exactly what returns.

Having said all that, we are absolutely committed to the progressive dividend.

Beyond that, it will depend on the economics; it will depend on the business.

But let me assure you that Chris and I, and all 62,000 of us, are very focused on continuing to improve the business, continuing to provide the options to the Board that will allow them to consider what they do in relation to returns.

I think in relation to growth, our intention is that our growth would be continuing at the indication that we gave of 5% copper equivalent growth.

Clearly again, moving parts in relation to what does happen with exchange rates and energy prices, and, as Chris mentioned, what happens with capital equipment, and so on.

But we are very focused on getting the balance right between shareholder returns, future growth of the business, future value to shareholders, and our feeling is that 5% is getting it about right.

Certainly, when we raised it in November/December with shareholders, shareholders accepted that that's pretty reasonable, that's pretty fair, that ensures that you've got ongoing growth.

The last question, IOC.

Look, what we are very pragmatic about ensuring that our businesses are actually cash positive.

It's a hypothetical question, but clearly it's something that the business is aware of, the business is taking aggressive action to improve its cost base, in terms of a whole raft of activities, getting the manning right, getting the shift patterns right, getting the balance right between internal work versus contractor work, and so on.

Kelly Sanders is running that business.

Kelly has actually moved out of the IOC head office in Montreal; he's moved into Lab City, so he can be very focused with his team there on the ground, and that's obviously for a reason.

And I think that with the reductions that the businesses has, the iron ore business in Canada has seen in relation to Wabush, in relation to Plume Lake, Millennium, you name it, we're seeing a community there, we're seeing suppliers, we're seeing a workforce that is actually far, far more attuned to the realities of life.

Having said all that, IOC produces a premium product, it produces a premium concentrate and a premium lump, and attains a significant value in use for that.

So it's not just a cost equation, it's also a value equation in terms of what they're actually receiving for their sales.

Perhaps with that, we'll move to the phones for another three questions.

Craig Sainsbury, Goldman Sachs.

Just a quick one on the balance sheet, probably for Chris; we're all really surprised by the debt and that's really quite positive, getting that down to around that $12 billion which is probably $4 billion or $5 billion below where consensus had it pegged.

What also surprised me was there was a really big drop in the [hire] of property, plant and equipment from the half-year to the full year, it was down by about $5 billion over that period, and a lot of that was in iron ore.

I think it's about a $3.7 billion drop in the operating assets over that period of time.

Now I know currency has fallen, I worked it out to be about $1 billion differential, so just wondering whether you can talk me through why there was such a big drop in six months in the PP&E and particularly in iron ore which is obviously growing business?

The key thing in this sort of market, they do raise the issue of balance sheet strength.

And I think I do want to make the point about this market being so fundamentally benefitting from a strong balance sheet.

And Sam's earlier references to potential future buybacks and the like, the strong balance sheet is essential in order to be able to be in a position to be able to do that, and do have balance sheet capacity there.

In relation to your specific question on the iron ore PP&E, we'll get back to you on that directly, but the key thing, from our point of view here now, is to make sure we maintain this strong balance sheet, and that's why the buyback's been sized the way it has.

But a strong balance sheet in volatile markets is absolutely essential for robustness against whatever that volatility throws.

It also gives you the capacity for returns via balance sheet capacity, and it also gives you the readiness to be able to respond to whatever opportunities present.

Okay.

Thanks, Chris.

We'll get back on that PP&E question.

Paul Young, Deutsche Bank.

Two questions on the aluminum division.

Considering it delivered the largest [hit] versus consensus forecasts, the first thing on costs; the original target you provided, I think it was back in 2013, was $1.1 billion in total cost reductions.

So you've achieved $800 million thus far and I wanted to know does the $1.1 billion target still stand, or can you go beyond this?

And also, considering the PacAl assets performed pretty strongly, have you completed your portfolio simplification or rationalization for aluminum?

And then also on bauxite, I noticed that the spot bauxite price has increased by about $15 a tonne over the last 12 months, yet it looks like your realized bauxite price was flat year on year, if I look at it on a CIF or a FOB basis, so wondering when you'd expect higher bauxite prices to start flowing through.

Thanks.

In relation to the cost target, yes, aluminum still has their target to further reduce their costs, and Alf and the team are very, very focused on that.

In relation to PacAl, look, we've seen a significant improvement in that business with some very impressive cash generation from the business.

In relation to any of our businesses, we're open to anybody if they want to make a stunning offer that values the business more than we do.

Beyond that, I'm not going to comment on what we may do and what have you.

But I've got to say, in this market, divestments are pretty challenging.

We've got a strong balance sheet; I was brave enough to say that we've probably got the strongest balance sheet of anybody in the industry, but we're certainly amongst the strongest.

And that puts us in a unique position, but it also signifies that others are treading water.

In relation to bauxite prices, we do have some legacy contracts; we also have some internal transfers.

But Chris, beyond that, I can't think of why that increase in bauxite prices may not be flowing through.

Do you have any feel?

Well, we had the Gove effect of we're now selling more direct bauxite rather than processing it through Gove over the last year and a half, or whatever.

And I guess not all bauxite is fungible; depending on the characteristics that present in the bauxite depends on what the audience is for that particular bauxite, is it high or low temperature and so on.

So there are some idiosyncrasies about bauxite.

It's one of the reasons why we'll continue to treat -- we'll give you the data about bauxite and alumina separately, which we've done now, and hopefully, that will be appreciated for more transparency on that data.

But from a business and accounting point of view, we'll continue to see that as one, what we call, cash generator unit on the basis that we still have a relatively balanced system in the aggregate.

And not all bauxite can go to all refineries; a refinery has got to be set up to receive a particular type of bauxite if you like.

So we've got to be a little bit careful about translating across a headline number to every particular tonne.

They're not all the same and they will attract different prices, depending on how big the audience is for that particular type of bauxite.

Thanks, Chris.

Fraser Jamieson, JPMorgan.

A couple of quick ones.

You made a pretty unequivocal statement about M&A; I just wondered, though, if you could talk about what you're seeing in terms of value, in potential opportunities.

Is value becoming more attractive, given some of the share price moves, etc., and the pressure on people's balance sheets?

And the extension I guess is, is it still right to be quite so unequivocal about that M&A point, given the strength of your balance sheet relative to the rest of the industry?

And then if I could ask a second quick one; iron ore lump premium has clearly been a big benefit for you guys in insulating against some of the downside in the benchmark price.

Could you maybe talk a bit about what you're seeing in terms of customer behavior, etc?

There was, I think, an expectation that we would see that lump premium come off a bit by now; it doesn't seem to have happened so far.

Are you expecting that to remain at current levels through the course of 2015?

In relation to M&A, yes, I was very strident in my comments that we're not looking at any major M&A.

There are a raft of things that, I don't know, are on the market.

These are a lot of distressed assets and, guess what, they're distressed for a reason.

They're high cost; they're the sorts of businesses that we're talking about earlier when we talk about people needing to take the business off the market because it's underwater, losing money.

If you look at the true opportunities for M&A, and never say never, but these are few and far between if you're really focusing on Tier 1 low cost opportunities.

And unfortunately, if one of those came onto the market, who knows when, they will be contested.

So despite the fact that we've got a very strong balance sheet, it doesn't automatically flow that we're going to rush out and do it.

There's also been a lot of journalists and what have you have said, well, you know, you should rush out and buy Freeport or Anglo or whatever, and it's not on our radar.

It absolutely is not.

In relation to our iron ore prices, you're actually seeing a couple of effects there.

You're seeing the effect of the balance of our sales portfolio between quarterly lagged and monthly lagged and spot, plus as you quite rightly say, the lump premium.

We have seen a stronger premium than we thought, which comes back to my comments earlier about the Chinese mills trying to improve environmental performance, and they are coming under significant pressure to do that.

But look, it's a very volatile world out there and I'll leave the market to determine where the price is going to be, going forward.

Heath Jansen, Citi.

Just two quick questions.

Just going back to your gearing ratios, you put out the 20% to 30% target and then obviously Chris has said, we want to be at the bottom end of that target.

I guess effectively what you're saying to the market is effectively that range is actually much narrower between 20% to 22%, not 20% to 30% because of all the uncertainty and everything else [they gear].

I guess the question is, what would make you gear up, effectively would you gear -- what you're saying obviously today is, you don't want to gear up to do a buyback, but would you gear up to maintain your progressive dividend and sustaining CapEx?

Or are you saying, well, you think things are going to get worse, therefore, you want that headroom in your balance sheet to basically drawdown if market conditions get worse?

Because if it gets worse, the cyclical mining companies obviously gear up at the bottom of the cycle, not gear up at the top of the cycle, which you've been renowned to.

And then second a really quick question; obviously, with your CapEx guidance, I know you have historically given out your FX guidance around that, but that would help in modeling in terms of that $7 billion, what are you assuming for the CAD and Aussie dollar?

Thanks.

I'll let [John] and his team come back to you on the FX.

In relation to the gearing ratio, it is what we said it is, that we are shooting for a ratio of 20% to 30%.

And we indicated back in November that we prefer to be, in this market, at this point in time, at low 20%s rather than high 20%s.

It does give us the optionality that you describe.

It puts us in an incredibly strong position.

No-one should under estimate the volatility of the market right now, and I don't think anybody would have predicted the drops that we saw between November and February in terms of a range of commodity prices.

We would like to see a bit of a stability there; we like to see that things have stabilized out before we change our position in that gearing ratio.

Having said all that, quite rightly, we are in an incredibly strong position and that's a huge competitive advantage for us to do whatever we want to do in terms of returns or investments or M&A or whatever.

But right now, a very prudent position to be is exactly where we are.

I think, with that, if I could wind up and if I could just thank you all for being here.

Thank you all of you on the line.

Chris, thanks for staying late in the office Melbourne; I really appreciate that.

We said we'd materially increased our shareholder returns; we've done exactly that.

We said we'd reduce our costs, we'd improve our business, and we would position ourselves in a challenging market, and that's exactly what we have done.

We said we'd strengthening our balance sheet, well, we have.

And the good news is it's a journey.

We've not arrived at our destination; it's part of a journey.

We will continue to improve the business; we will continue to provide the options to our Board to increase our shareholder returns.

So thanks, once again, for being here.

I appreciate your interest and your support.

Thank you.