力拓 (RIO) 2016 Q2 法說會逐字稿

Morning, everyone. My name is John Smelt; Head of Investor Relations at Rio Tinto. Thank you all very much, and welcome to our 2016 interim results. (Conference Instructions).

With that I will hand over to J-S, thank you.

Thank you, John. I'm delighted to be here; this is my first set of results as the CEO of Rio Tinto.

First of all, I'm really proud of what the team has achieved, and that we have delivered on our commitments. Also really excited by the opportunities that we have in front of us.

Let's be clear our focus is on delivering value for shareholders through the cycle. This will not change. The team is committed to generating cash at every opportunity that we will allocate in a disciplined way.

We have three allocation principles. The first is to continue to deliver superior returns to our shareholders. The second is to maintain the strength of the balance sheet. Finally, to invest in compelling growth.

This approach will ensure we deliver shareholder value in the short, medium, and long term.

At the core of our business our world-class Tier 1 assets and the strong balance sheet, maintaining the strength of our balance sheet is fundamental in the cyclical and capital intensive industry such as mining. Chris and I are absolutely aligned on this.

Tier 1 assets allow us to deliver value throughout the cycle. We want a strong, high-performing business under any pricing or market conditions. We have seen some recovery in commodity prices recently, but we expect continued volatility in the future.

Against this backdrop, I'm proud to say the team has delivered a strong set of results. We are well positioned for the future. The future we approach with confidence, but definitely not with complacency.

There is more we can do to step up our performance to extract greater value from our existing asset base. We will do this through commercial and operational excellence. But, crucially, we will maintain financial discipline.

It's a real privilege to lead Rio Tinto. We have great people, great assets, and great opportunities, which we plan to make the most of.

Let me now give you an overview of how we performed in the last six months. Our focus is on generating cash. In the first half we delivered net cash from operating activities of $3.2 billion under challenging market conditions.

We have removed $580 million in cash costs, and we are on track to beat our $2 billion targets for 2016 and 2017. The momentum remains strong, even after three years of solid cost reduction. We continue to look for productivity gains across the entire business. We will improve both the top and the bottom line.

CapEx was $1.3 billion for the first half of this year. We do expect CapEx to increase in the second half, our spending on our compelling growth project such as Oyu Tolgoi, Amrun, and Silvergrass ramps up.

We also continue to streamline our portfolio. We achieved more than $600 million from disposals during the period.

Given our clear focus on generating cash, controlling CapEx, and portfolio management, we close the period with a net debt of $12.9 billion, $900 million lower than as of the end of December.

And, we have also delivered on our commitments to all shareholders returning $1.9 billion in dividends.

We have been disciplined in applying our capital allocation framework. We have made significant cash returns to our shareholders. Our balance sheet is in a very strong position. And, we are already investing for the future.

Thanks to our strong performance in the first half, the Board declared an interim dividend of $0.45 per share, equivalent to around $809 million in total. This is fully aligned with what we committed for 2016: a minimum dividend of $1.10 per share. We made a commitment and we delivered.

As I said Tier 1 assets are at the core of our business. For us Tier 1 means long life, low cost, expandable assets. Having core Tier 1 assets is the essential condition, and we must run them efficiently to extract maximum value. The focus on cost, productivity, and cash means that even in volatile commodity markets our business has maintained stable margins and delivered a strong cash flow.

Our Pilbara business delivered operating cash flow of $1.7 billion; costs reduced by $138 million in the first half, and fully loaded unit cost increased from $16.20 per tonne in the first half of 2015 to $14.30 per tonne in the first half of this year. The business has again delivered strong margins with an EBITDA margin of 58%.

But there is more we can do. Chris Salisbury moved to lead iron ore, we will continue to focus on maximizing the value of our Pilbara system.

Let's move to aluminum, in December last year our buyers noted that productivity improvement would be a big target for the aluminum business during 2016.

The business has already delivered $223 million of cash cost improvement, which shows great progress towards the full-year target of $300 million. This has gone some way to offset declining process and the aluminum group has delivered cash flow from operation of almost $1 billion.

Our furnace team expect further improvements, especially in the aluminum refineries which were all free cash flow positive in the first half.

An impressive EBITDA margin of [48%] was delivered by the low cost bauxite business, despite price pressure in the first half.

The Tier 1 Amrun project already underway in North Queensland will give the Group further quality growth opportunities with high returns in this attractive sector.

We restructured two of our product groups in June; we combined copper and diamonds and we also combined energy and minerals.

Let me start with copper and diamonds. Under Arnaud Soirat's leadership we have brought together our underground mining expertize, in particular in block caving. The business continues to deliver a margin of 30% and 35% respectively and generated cash flow from operations of $447 million.

The energy and minerals group under Alan Davies includes some solid and well-established business, such as [boring] and some potential rising star.

There are also challenged businesses in this portfolio, but Alan and his team are focused on cash generation, their cost and productivity improvement. The Group has managed to increase operating EBITDA margin to 23% against the backdrop of lower prices.

Moving back to corporate activities. We are always looking for new opportunities to recycle capital within our portfolio and to divest assets where we can join value.

The divestment of the Bengalla mine is a good outcome. We completed in March for $617 million. We also agreed the disposal of the Mount Pleasant project in the Hunter Valley. Maximizing returns from our Tier 1 assets should allow us to protect margins, even when commodity prices and economic conditions are volatile.

Our aim is for all assets to generate strong cash flow through the cycle, allowing us to deliver consistent returns, preserve our balance sheet and invest in high-quality growth for the future.

Now, let me hand over to Chris.

Okay, thanks, J-S. These are another robust set of results, but let's have a look at the numbers in a bit more detail.

Prices recovered during the period, but from a very low start to the year, and they remain volatile. Against the first half of 2015 declining prices lead to a reduction in earnings -- underlying earnings of $1.9 billion for the half. A small off-set to this was the benefit of $241 million from exchange rate movements, which brought flexed earnings of $1.2 billion as a comparator.

Volumes were relatively unchanged during the period. Higher output in iron ore and aluminum product groups was offset by lower volumes in copper, notably from Escondida.

As J-S has mentioned, there's no change in our focus on costs. We've already delivered $580 million of pre-tax savings in the first half or $414 million post tax and we maintain our target of $2 billion of cost savings over 2016 and 2017 combined.

We also repurchased $4.5 billion of bonds during the period, resulting in an impact of $125 million to underlying earnings and $266 million on cash flow from operations. However, the repurchase has extinguished the future payments associated with these bonds.

Driven by the cost savings we were able to deliver an increase in underlying earnings of 25% when compared to the flexed earnings for the first half of 2015, which brings us to the underlying earnings of just under $1.6 billion.

Turning now to the net earnings. During the half we recognized an onerous contract of $496 million relating to our take or pay for port and rail contracts at Abbot Point, which we now no longer expect to utilize.

Non-cash exchange and derivative gains of $558 million on US dollar-denominated debt in our non-US dollar companies have positively impacted earnings.

Importantly, these are mostly offset by currency translation losses booked to equity. Therefore, there's minimal impact to net debt; in the past this number has been more sizeable.

Some restructuring of these debts undertaken late in 2015 means that those gains and losses on the US dollar debt in our Aussie dollar-denominated companies now largely goes directly through the shareholders' equity.

Overall, we have delivered net earnings of $1.7 billion.

In February, we announced a cost reduction target of $2 billion for 2016 and 2017 combined. During the first half we have delivered more than half of this year's target and costs have reduced by $580 million. This takes our total cost reductions since we've launched this program against the 2012 cost base to almost $6.8 billion, and has assisted us in delivering an EBITDA margin of 33%.

As always it's important to note that this excludes the impact of exchange rates, in particular in Australia and Canada, and changes in oil and energy costs.

We've continued to make good progress, due to the cost culture that's now embedded throughout the organization. All of the product groups and central functions have contributed to this success.

Late last year the aluminum group set out their target of $300 million for 2016, and during the first half they've actually reduced their costs by $233 million -- $223 million, sorry.

Iron ore have delivered pre-tax operating cost savings of $138 million, further reducing their operating unit cash costs to $14.30 a tonne. This is actually an increase though on the second half of 2015, due largely to seasonally lower volumes and a stronger Australian dollar.

The energy and minerals group have contributed $152 million of operating cost reductions during the half, taking that group's total to $1.2 billion since 2012.

As operating cost reductions are measured on a unit cash cost to production basis the impact of lower volumes from Escondida means that the contribution from the copper and diamonds group is minimal this half. We'll continue to find opportunities and capture greater value in all of our businesses.

Turning to CapEx, we're maintaining our CapEx guidance through to 2018. We continue to find way of achieving the same outcome at lower cost, but spending has also reduced with the completion in 2015 of the iron ore infrastructure expansion and the Kitimat project.

We expect our overall spend to be second-half weighted, with CapEx of just $1.3 billion this half.

During the period, we progressed the Amrun bauxite project, which was approved in December of 2015, and so far have spent about $100 million on initial construction of accommodation, roads and river terminals. It should be noted that approximately 70% of the $1.9 billion approved for this project is expected to be spent in 2017 and 2018.

In May we approved the $5.3 billion underground project at Oyu Tolgoi in Mongolia. Activities have started, with the EPCM contract awarded and mobilization is in progress.

The Silvergrass project was approved by the Board yesterday. The team has done some excellent work in bringing the capital cost down with the final phase of this project approved at $338 million.

These projects are some of the very few that are being undertaken in the industry today, showing that we can and will continue to invest in value-accretive growth options, which will provide the basis for future shareholder returns.

When we make capital allocation decisions, we're focused on ensuring that we only fund the very best projects.

The action to further reduce costs and capital expenditure and proceeds from disposals of $600 million have helped reinforce the strength of the balance sheet.

A strong balance sheet is fundamental to the business: it provides robustness against volatility: it provides the ability to provide returns; and it also has a readiness to take advantage of opportunities should they arise.

During the half, we further reduced our net debt to $12.9 billion, $900 million below the December level, despite the payment of the $1.9 billion final dividend for 2015.

Our net gearing ratio is now 23%, which is in the bottom end of our targeted range of between 20% and 30%. In this sort of environment this is exactly where we like it.

During the period, we reduced our gross debt by $6 billion (sic - see slide 12, "$2 billion"), successfully completing two bond buy-back programs totally $4.5 billion and retiring debt of $1.5 billion. These actions reduced gross debt to $21 billion at the end of the project, and we have less than $1.5 billion maturing over the next three years. It's a weighted-average cost of debt of 4.1% and an average maturity of around 10 years.

Elsewhere on debt, over $4 billion of the project finance relating to the OT underground project has been drawn down during the period. As we fully consolidate this project, 100% of this debt is captured on our balance sheet. However, at this time, it's fully offset with the cash received.

The project finance has a five-year repayment holiday, such that the first repayment will not become due until 2021 with interest deferred until then.

Turning now to our capital allocation framework, which most of you will have seen before. Rigorous management of cash remains at the core of what we do, and we'll continue to be consistent in our allocation of capital. Having spent sustaining CapEx to ensure the integrity of the business, our next call on cash is our expected dividends to the shareholders.

We then have an iterative cycle of managing the balance sheet, pursuing value-accretive growth options, and considering further returns to shareholders.

At the full-year results we adopted a new dividend policy, which is designed to ensure long-term sustainable returns to shareholders throughout the cycle. Importantly, this policy made very clear commitments around the balance of capital allocation decisions so that shareholder interests are always at the center of everything we do.

In addition to committing to the balanced allocation of capital between growth and returns, under the new policy total shareholder returns should be between 40% and 60% of underlying earnings through the cycle.

As an interim measure, we put in place a minimum dividend for 2016 of $1.10 per share, to be weighted to the final dividend. Consistent with this policy, we have today announced an interim dividend of $0.45 a share.

With that, let me hand back to J-S.

Thank you, Chris. Let me start with a few comments on the market before moving to Rio Tinto's value-creation model.

There is no doubt the market remains volatile and we have seen higher prices in recent months. This was mainly due to improved macroeconomic trends, especially in China. On my most recent trip to China I met with a number of our customers, partners and government officials.

It is clear the construction industry has picked up with a drawdown of housing inventory. This positively impacted commodity prices, such as iron ore and met coal.

But the recovery is not wide ranging and is mainly driven by credit. Looking across the world, global growth remains reasonable. Ongoing market uncertainty resulted in delays to be expected to the reserves increase.

The left-hand side of this chart reflects the pickup in China, I just mentioned. The right-hand side shows the danger of being too optimistic and depending on hockey-stick shape recovery.

Markets will remain challenging and volatile. Clearly, hope is not a strategy.

Against this backdrop, we will drive shareholder value and improve our performance. For us, it's all about consistency and focus.

With that context, let me now talk about our value-creation model. It is simple. We will focus on what we call the 4 Ps: portfolio, world class assets; performance, safety and operating excellence; people, commercial and technical capability; and partners.

It will enable us to deliver superior shareholder value over the short, medium and long term. It will be a combination of shareholder returns, balance sheet strength and compelling growth]. The 4 Ps are the way we will deliver superior and sustainable cash flow.

Let's start with the first P; portfolio. World-class assets remain resilient even when prices dig deep into the cost curve. They generate cash and return their value at all points in the cycle, when other assets struggle to survive. When correlation kicks in, the strategy based on diversification alone does not provide protection.

Asset quality is the key to maintaining margin and delivering performance. Let me give you some examples.

Our Pilbara assets are not just low cost, they deliver a product of exceptional quality.

In aluminum, our position in bauxite mining and aluminum smelters is sector leading. Our smelters keep improving their cost position and their low carbon footprint makes our aluminum attractive to customers.

In copper, we have interest in three of the largest and highest quality copper deposits globally: Escondida, Grasberg and Oyu Tolgoi.

The energy and minerals group has a world-class thermal coal asset and the significant Ti02 business. This group can act as an incubator for smaller businesses and new commodities.

Which brings me onto the second P; performance. There are two key elements here; safety and operational excellence. The most important part of our operational excellence is safety; it is our priority number one. To reflect this, we have appointed Joanne Farrell, Joanne is on the front row, to the executive team to lead the step-change in performance of health, safety and environment across the Group.

Our ambition is as simple as this: everyone working at Rio Tinto must return home safely at the end of each and every day. A well-run operation is a safe operation; there are no compromises.

So far this year, most aspects of our safety performance improved; we reduced our all-injury frequency rate, but this is not good enough. Sadly, one of our iron ore colleagues in Western Australia died recently. Our deepest sympathies are with his family and his friends.

We must remain focused on fatality prevention. The rollout of our critical risk management program, or CRM, is well underway. We are set to deliver 1 million safety verifications this year, which will be a great achievement.

Of course, we must drive superior performance at all our world-class assets. This is what operational excellence is about. It means controlling costs, improving productivity, and protecting asset integrity. Many of our operations are the lowest cost in the sectors and we plan to run them even more efficiently.

Our growth and innovation group, led by Steve McIntosh, has a very important role to play here. This unit analyze data from across all our operations to improve performance, drive productivity and share best practices.

As an example, I've included a chart on truck utilization across the Group. As you can see, there is opportunity for improvement. We are working hard to chase opportunities like this around the Group to extract further value from our existing capital base.

The third P is really about building distinctive capabilities to enable a step-up in our delivery. At the core of it are our people; excellent commercial capabilities key to improving cash flow. It goes without saying that we must get full value for our products in order to deliver quality returns.

Let me give you some examples. In iron ore, we have a strong track record of achieving a premium on our Pilbara blend spot [sale]. During the first half of this year, this translated into $0.80 per tonne premium over the average flat price for the period.

In aluminum, more than 50% of our products are value added, allowing us to charge an additional premium.

In copper, we have taken advantage of the underutilization of the Kennecott smelter and processed over 600,000 tonnes of third-party concentrate since 2014, generating a margin on the return.

In thermal coal we have increased the premia achieved above the benchmark following the development of the (inaudible).

Clearly, there are real benefits derived from spreading marketing and commercial best practices through the Group. Our people are key to delivering both commercial and operational excellence.

Let me close this section with a comment on our last P, partnership, which, like people, is an enabler of our performance. It's really about our privilege to operate which we see as a make or break situation for our industry. Let me give you a very simple example.

At the end of this month, we will celebrate 50 years of operation at our Pilbara iron ore business. Without the consent of the region's traditional owners, TO, this extremely value-accretive iron ore business would not be what it is today.

Partnering will help us get access to resources, deliver value and be in business for decades to come.

As I mentioned, we focus on the four Ps to drive superior cash flow with a single purpose in mind: to deliver value for shareholders. We will deliver value by maintaining a strong balance sheet, delivering returns to our shareholders and compelling growth.

We have already covered the first two already. Let me briefly cover what compelling growth means for us. Since December last year we have approved three key capital projects: Amrun, OT Underground and, yesterday, Silvergrass. These projects all have IRRs in excess of our 15% hurdle rate and are highly value accretive. Only the best projects will be approved.

Investing in growth provides future shareholder returns and a smart use of capital. Let me give you an example.

The Silvergrass project, approved by the Board yesterday. It's low cost and offer extremely compelling returns, greater than 100% IRR, we will pay back over less than three years. Importantly, it will provide high quality low cost returns to the Pilbara blend maintaining premium quality and margin.

In closing, our first half performance was one of achievement and delivering on our commitments.

In terms of returns to shareholders, we announced an interim dividend of $0.45 per share, or $809 million.

In terms of balance sheet, we finished the period in an even stronger position with net debt of $12.9 billion and gearing of 23%.

In terms of cost improvement, we have reduced our cost base by $580 million.

And in terms of growth, we are investing Amrun, OT and now Silvergrass.

At Rio we would rather talk about what we have achieved and tell you when we've done it than focus on what we might do. But let's be clear, we are driven by safety and by value.

At all points in the cycle we are committed to generating cash flow, in order to deliver superior shareholder returns. We will allocate the cash we generate in a disciplined manner.

In a capital-intensive business like mining, balance sheet strength is absolutely key. We will preserve the Rio Tinto balance sheet, as it gives us option for further returns to shareholders and future growth.

So, there is a clear intent in everything we do to manage Rio Tinto well, and to generate shareholder returns. I know we have a lot to do, but I am absolutely confident that we have the team, the assets and the performance drive to deliver shareholder value in the short, medium and long term. Thank you.

I think we should open the Q&A session, so maybe one way is to take a few questions from the room and then we'll go on the conf call. I think there are mics. Any preference, Chris, where you want to start?

I think with who's got a microphone.

Who's got a mic, yes.

James Gurry, Credit Suisse. Congratulations on a solid set of results. Just in terms of the most important business for you, can you give us your view on the long-term outlook for iron ore and for steel production in China, and when you think it will peak or if it has already peaked?

And just a second question, just to do with your portfolio optimization. Can you perhaps -- you've made it clear this morning that you're not looking to increase your interest in Turquoise Hill at all at the moment. But can you give us a view on any other areas of the portfolio where you might want to optimize capital either by selling assets furthermore, or investing in things that you partially own at the moment?

I think there are more than a couple of questions here, so we're going to start with the iron ore piece and the market in China.

I had the opportunity in the last few months to go a few times in China to meet with some of our customers, some of our partners and some of the government officials. As I said earlier today, it's fair to say that the construction market did pick up in the first half of this year. The housing inventory or stock, whatever you want to call it, especially in Tier 1 and Tier 2 cities have gone down. If you look at the run rate in terms of production in the second quarter it's much higher than 2015, than last year.

But as I said, it's primarily underpinned by credit and we have to be very cautious from that perspective. And, we have to be ready that even if we had a good run in the first half of this year, we could end up at the end of 2016 more or less at the same level as 2015.

So, for us, from a planning standpoint, is, we assume that market conditions will remain challenging and volatile. Therefore, for us to be able to create value as I said today, short, medium and long term, it's really about two things. It's about the quality of the assets, and the Pilbara is a world-class asset, and the way we run the asset.

And that's what it's going to be. It's going to be about making sure that we remain low cost and, therefore, we can generate cash flow, and we hope more cash flow than our competitors. To be very clear, in order that we continue to maintain the strength of the balance sheet, pay dividends and be able to invest in compelling growth options. That's where we are.

On the portfolio optimization, not all the assets are world class, we know that. But as long as they are part of the portfolio they are part of the portfolio and we run them as best as we can with safety being in the priority number one.

We said in February that we want all the assets to be free cash flow positive, and that's where we're coming from. Now if somebody, even in this room, wants to knock on the door and ask to offer a good price for any asset in Rio Tinto then we will look at it. But as long as you're part of the portfolio you're part of the portfolio.

You want to add something, Chris?

No, I think that's fine. Thanks.

Jason Fairclough, BofA Merrill Lynch. Look, J-S, your predecessor took great pride in making Rio Tinto boring.

Do we look like boring people? I think we do. (laughter).

My question is, do you have a mandate to be a little bit more exciting and, I guess with that, how should we think about growth? You mentioned the three projects. Is there a lot more growth to come or is this enough excitement for the near term?

Are we exciting? Boring?

Actually, boring is the new exciting. (laughter).

I knew he was going to say that; thanks, Chris.

I think we have lots of excitement already in the portfolio. I think the important piece is really to deliver -- to meet all our commitments and we don't want to take too much at any point in time.

The three projects that we have, Oyu Tolgoi, Amrun and Silvergrass, plenty of activities in the coming years. So let's make sure we deliver them properly and then we can look at other options. That's the first part of the answer.

Second part of the answer is, you know, people focus a lot by growth -- volume growth, and so on and so forth. We shouldn't forget, we've got $50 billion of installed capacity, of installed assets, and the leverage we have by driving productivity to the next level is just massive. I think that's something we're going to focus -- that we are already focusing in a big way: in how we can extract more cash flow from our existing asset base.

In the last three years' massive achievement has been made in terms of cost savings. But focus on productivity is much more than that. It's about the top line and the bottom line. So that's another dimension that is very important for us.

Now, the question about the excitement must be in relation to M&A. We've been very clear. I've been on record; I'm going to restate my position.

Strategy of Rio Tinto is about build and smart buy, and smart you can put in capital letters. We are, and will be, very selective.

Do we have an M&A agenda per se? Yes, like everybody else. Do we know which Tier 1 asset we would love to have in the portfolio? Absolutely, but before we trigger anything it would have to be about the quality of the assets.

And, last but not least, does it make any sense for shareholders? Are we going to create value for shareholders? I have to say, if I look at the copper space that I know slightly well, for obvious reasons, look at the last three transactions Zaldivar, [Bor MC], Tenke very good price for the sellers.

So if you expect a lot of excitement from us in the M&A space, what did you say Chris, boring is the new exciting? Or whatever. So we could be boring for a long time.

But we will look at it. As I said, the strategy is very simple: build and smart buy, but smart in capital letters.

Thank you.

The first one's on Kennecott.

Menno, Morgan Stanley. Just two questions please. (Inaudible), clearly, all assets need to make money, but this grand dam burned through about $300 million in the first half; mine life is not very long; copper price environment is not great. How do you think about this asset and are you going to take extra steps to solve this or just execute what you've been doing so far?

And secondly, Grasberg, clearly it could be as interesting as Oyu Tolgoi in 2021. There are a lot of moving parts and it doesn't really appear that Rio Tinto is trying to influence those moving parts. Are you going to change that in the next 18 months or so to try to create the outcome you need to keep the value of that asset?

Chris, do you want to take Kennecott, and I'll take Grasberg?

Well, Kennecott -- the key issue with Kennecott really is around right now the south push back is underway. In the meantime, while we've been -- obviously, in the longer term we've been repairing from the [maniface] slide and the south push back going on, and a limit on how much material can be moved sort of curtailed our volumes there.

The anticipation is that we will come out of this process with a significantly longer life than probably is in your assumptions.

Then the other thing that we've been doing there to supplement the returns from Kennecott is really to utilize the idle capacity, or the spare capacity in the smelter and processing third-party concentrates through there.

So all that [build up], Kennecott, I think you rightly point out, it is in a -- over a 100-year of asset life it is approaching the sort of sunset years, but and there still plenty of juice left in that lemon, and the sale push-back will expose that.

All right. So if I move to the second question about Grasberg. As you said, and as you know, there are lots of moving parts. One important element is for people to understand that there is, as we speak a review of the mineral law, which is the mining law in Indonesia. It's a very important review, because it could impact the need to have an assessment in our smelter; it can impact the timing of the contract of work, when you [work] and so on and so forth.

As per the agreement we signed with Freeport in 1994/1995, Freeport is fronting the discussion with the government, but we are working very closely with Freeport. But the agreement -- the 1994/1995 agreement is very, very clear about who is fronting the discussion with the government.

A lot of activities are taking place at this point in time. Like all discussion with government, there can be lots of emotions, passions, whatever words you want to use, but usually you get to a pragmatic outcome at the end of day. But lots of moving parts as we speak; but the work is underway.

Any idea on when you'll get a final conclusion on this? On the discussions?

When the discussions are concluded, I'm sure there will be some announcement in marketplace, but -- all right, if I can take one questions from the people on the 'phone?

Lyndon Fagan, JPMorgan.

We might come back to you, Dominic (laughter).

The first question I've got is on AutoHaul. Clearly, that looks responsible for the 2017 guidance downgrade. Can you talk about whether that 10 million to 20 million tonnes downgrade is all AutoHaul; or whether there are other things driving that? And maybe an update on how that's going, and when you might get to [350]?

And then I guess just a high-level question. As new CEO, J-S, can you talk about the benefits of the new structure that you've got in place? And what that might deliver? Thanks.

I'm going to start with the second one, because that's pretty simple to answer.

The entire structure that we've put in place is to enable the step-up in terms of settlements. So if you look at the iron ore, I'm going to use iron ore as example is, what we want is, whoever is in Perth running the iron ore to focus, seven days per week, Saturday and Sunday included, on how we can optimize the Pilbara, and keeping IOC in the portfolio, which is on a different time zone, means rarity is people in Perth had no time to look after the IOC situation.

And I can run the ore chart along the same line is, copper and the -- maybe if I look at copper and diamonds, the reason why we've put copper and diamonds together is, about building a strong capability around underground. If you take the 20-year perspective on growth, we have multiple options with all of them -- or a big chunk of them, are underground. Therefore, we need to make sure that we have the right capabilities to be able to deliver on those growth options.

So the whole organization is really around stepping-up our performance. As we already said today, it's about productivity, which is about the improvement not only on the bottom line but the top line as well. So that's where we are in terms of organization.

Now, before you ask the question is, we are -- and I think Chris mentioned it in his speech, we are -- we will deliver on our $2 million cost-saving commitment over 2016 and 2017. The $580 million that we have delivered in the first half of this year is an important good step against this $2 million target.

On iron ore, we did revise the guidance a few months ago in relation to Pilbara. The guidance as it stands is 330 million to 340 million tonnes for next year. There were several drivers why we had to revise the guidance.

One of them is AutoHaul, AutoHaul is the complicated project. It's a combination of infrastructure and software, and we are working our way through it in a very phased and structured way. But today as we are standing here in London, we maintain our guidance for next year of 330 million to 340 million tonnes.

In relation to the next question you ask, about when do we get to 360. And thanks for asking the question. I'm going to restate what I said a few months ago: the iron ore strategy is not about volume, it's about value.

We have the infrastructure for 360 million tonnes at the port level. We have the capacity more or less on the mine. We don't have it today in terms of railway

But what we're trying to achieve is about the optimization of the free cash flow profile for the next five to 10 years in the iron ore. And it's a combination of three things: it's about the cost; it's about the mix, product grade, and about the CapEx. The whole question for us is, what are the right decisions, where are the right parameters that we should target in order to optimize the free cash flow of the business for the next 10 years?

I will not give you any indication of when we get to 360, because that's not really relevant. We will get there at the right time. As I said, the iron ore strategy is about value, and not about volume.

I don't know, Chris, if you want to add anything?

No, that's okay (inaudible).

Clarke Wilkins, Citi.

Sorry to dwell on iron ore, but just in regards to the iron ore costs. We saw them rise, as Chris pointed out, in the first half of this year on that (inaudible) sensitivity. Yet we've seen from one of your peers in the Pilbara that they continue to push costs lower in that first half of the year, despite those factors.

So what is the potential as opposed to further cost reductions in the Pilbara? And can Rio maintain its position as lowest-cost Pilbara producer, given the threat from Fortescue is pushing down to that $12 to $13 per tonne?

And just the other one is basically just in regards to the cash. I think, cash now down to about $8.25 billion. Is that the right sort of level that cash needs to run at for liquidity, or in terms of optimize the debt portfolio, is there a potential for further reduction in cash, given the opportunity cost, I suppose, of carry such a high-value cash at the moment?

All right, I'll take the first one, and you take the second one, Chris?

On the costs in the Pilbara, I've got to repeat what I said. The way we want to run the Pilbara is about value; and it's about the optimization of the cost; the product mix; and it's about the CapEx. At the end of the day, it's really about free cash flow.

It's not about being the lowest-cost producer for the sake of it. It's really about generating the best margin we can, and generating as much cash flow as we can.

I give you a very simple example: if it costs you -- I'm going to pick whatever number, $20 billion or $30 billion to maintain the very low-cost position, that doesn't make any sense for us. What we want is to drive value and to optimize the free cash flow. And that's what we're doing.

So do I believe our Pilbara assets are well the lowest producer on the cost curve? Do I believe that our iron ore business is on the first quartile of the cost curve? Yes, I believe so.

But what we're trying to achieve is to generate as much cash flow as we can from our iron ore asset. It's about value, and nothing, nothing else.

Chris, if you want to pick up the second question, on the debt and the cash on the balance sheet?

Yes. As I said in the -- on the way through, we had -- we did pay down $4.5 billion of repurchase bonds and $4.5 billion during the first half early. We've also allowed another $1.5 billion to roll off as it matured.

But in the same time period we also drew down the OT project finance for a little bit over $4 billion. So that cash is still sitting on the balance sheet, so that will be applied to the CapEx as the project progresses. But I think the ideal levels that these sorts of net debt levels.

Our ambition is probably a little bit more reduction in the net debt level, and commensurate with our -- eventually a reduction in gross debt and, also, the amount of cash we hold.

But we'll play that out in -- over coming periods. But it's -- we did make quite a bit of progress, as we needed to, actually, in the first half to get that gross debt level down a little bit.

As I said the OT project finance will gradually be spent into the capital expenditure program.

Thank you Chris. If we go back to the room, I think Dominic had a question.

It was related to the cost savings, so just -- you partly answered it. $580 million in the first half and -- so good run rate. Is it reasonable to expect that the $2 billion target over two years is on the conservative side, or do you think you're pushing the central items as hard as you can?

And then I guess second question, coming out of copper, could you maybe just give us your thoughts looking at longer-term growth on Resolution, do you think that's a project that we should think will see the light of day or do you think there are project specific issues that are insurmountable?

I'll pick up the first one, and you know what I'm going to say, Dominic, is we made a commitment of $2 billion over 2016 and 2017, we're working on it. The $580 million in the first half should give you some comfort that we'll get there.

On the Resolution, the permitting has started as you know; it's going pretty well. Now we are in the US, which means the permitting is very slow, very comprehensive but very slow. We are still four/five years away from having the notice at the end of the permit process.

Do I believe Resolution is a very good ore body? Absolutely. Do I believe that one day there will be a mining Resolution? The answer is yes, but it's still early days in the permitting process. I said the US can be challenging. It's very well defined, but very slow and therefore we provide you as and when we made significant progress on this one.

But the work -- the study work is still underway and we're still doing some drilling, and I can tell you there's lot of people who are excited.

But we will do it in a very phased and structural way, so what we want is to progress the permitting as quickly as we can and to spend the right quantum of money to progress the study at the same time. So not to go in a big bag in the short-term, but we need to progress the two at the same time to some extent, so that's where we are on Resolution.

But do I believe there will be a mine Resolution at some stage? Absolutely.

That's okay, Dominic?

Yes, no worries.

Anna Mulholland, Deutsche Bank. Two questions please. You use the words at least when you're talking about your $1.10 dividend per share commitment for the year, under what free cash flow or cost saving or debt circumstances by the yearend would we see and move upwards on that $1.10?

And secondly, what place does coal have in your portfolio, specifically thermal coal, obviously you've been selling some of your thermal coal assets?

We did say at least $1.10, and I'm going to repeat, actually, it's $1.10. The priority for us today is to generate as much cash -- free cash as we can in the second half.

In February next year we will have discussion with the Board and Chris and myself will make a clear recommendation at that point in time, in terms of if we've got more cash I will allocate it along the capital allocation framework that you saw. You know the [washing] machine has [disclosed it].

The priority for us is to generate the cash and then to have a good problem to solve in February next year. So the word at least remains unchanged.

A couple of comments there, when we did the dividend policy change in February we made a series of decisions.

The first one was to -- given that we had a progressive dividend policy in the market at the time, the first decision we had to make was to -- whether or not we would honor that promise and we saw that as a matter of integrity and we did.

We did.

We're fairly lonely territory, but we did honor that promise. So that money you've seen flow through in the $1.9 billion out in April.

The second one was to change the policy. We did, and we announced all the precise wording on that. But some of that wording included the third decision was around guidance about the range for the distribution, was between 40% and 60% of underlying earnings through the cycle.

The fourth decision was around the weighting of the dividend to the final dividend for any full year.

And the fifth one was whether or not to give guidance for 2016, given that we've had virtual certainty of the dividend up until that point. We figured it was prudent to issue some guidance about what 2016 could be, hence the wording. I think the official wording at the time was not less than $1.10. That's the wording.

But the key thing really is around this interim dividend is an installment towards that, not less than $1.10. But the final decisions about returns to shareholders, in all their forms, will be made by the Board in February when we've got a full-year set of results, we'll have cash flow position and a view on prospects at the time for the go-forward position.

As I just said, if you look at the slide on screen, is priority in the next six months is to tackle the left-hand slide in order to have a good conversation with the Board in February next year.

On thermal coal, which was your second question, first of all, I would like to say that we are really pleased with all the good work of our teams in the coal business; it's one of the safest business we have across the Group and it is free cash flow positive, including take-up obligations.

They are in the portfolio today, you saw with the Bengalla transaction or the MTP transaction that some people knock on the door and they offer some very good value. I hope you would agree that the Bengalla value was a very good value. At that point in time, we look at it and we thought that it was the right decision to sell it.

As I said, if anybody in this room wants to make any offer on any asset of Rio Tinto, you know my number, you know his number as well, we'll look at it, all right.

Today, the coal are in the portfolio, tomorrow if somebody knock on the door and offer a good price we will look at it, it is what it is. In the meantime, we will run them as best as we can. Safekeeping the priority number one and the free cash flow being the number two.

Thank you.

Myles Allsop, UBS. Just following up on a couple of the earlier questions. With the Pilbara production is there a scenario if demands soft -- softer than everyone expects, doesn't get to your million tonnes of steel production in China, in fact, you never get to 360; and you have to approve Koodaideri to get to 360, is Silvergrass largely maintenance? Just to give a bit more clarity as to how aggressive you'll be on the value over volume strategy?

Secondly, with Anna's question on the dividend. Do you need the gearing to -- we saw the buyback when you got to 19% net gearing, is that the thought process we should assume going forward with a step-up in returns?

And then just finally on Simandou, $90 million in the first half, it's a lot of money. Where should that normalize now that the pre-feasibility has been concluded and what should we expect with Simandou going forward?

Chris, you start with the gearing?

I think with Pilbara we've been very clear, and you know what I'm going to say, Myles, value before volume, it's all about the cash flow -- free cash I should say. It will be all about the free cash flow, so I can't say much more than that.

On the gearing and the --

Well, the gearing this year we talk about the range of 20% to 30%; we're 23% currently. That will bounce around a little bit.

But the key issue really for the returns conversation in February with the Board is exactly what you see here, it's really around and there will be an aspect of how we feel about the future prospects at that time as well and those sorts of things.

But it's a decision that will be taken by the Board. It's pure and simple that, it's not -- we've got no better guidance for you today than $0.45 is the interim dividend. The full-year returns and whether that be dividends or other returns will be at least $1.10. That's it; I don't have words [remaining]. That's what it means.

All right. So, on the -- the third part of your question was about Simandou. So, where are we on Simandou?

We have delivered the BFS a few months ago, as per the agreements. There is no doubt that Simandou is a world-class deposit but it's a very expensive capital-intensive. You saw the numbers can be up to $20 billion.

We've been working for the last two years in a very intense way to try to find a way to finance the infrastructure part, because it -- a big chunk is infrastructure. We had, I think, more than 200 meetings globally to try to see if we could finance it.

Today, as we're having this conversation, there is no way to finance it. People -- discussions are still underway but we have not been able to secure a way to finance Simandou at this point in time.

The situation, and I'm sure you've read the press recently as well, is the following: there is no obvious way to take Simandou to the next phase. Now, if in three months or six months down the road there is a solution on the infrastructure, it would be a different story, but today there is no secure pathway.

What's happening as we speak is that we are reducing our cost in a very aggressive way in-country. This is fully supported by all shareholders and I think that's something that people should understand.

The Board met two or three weeks ago now and the restructuring plan has been approved by not only Rio Tinto but Chinalco and the Government of Guinea.

That's what we are doing in order to make sure that if there were no secure pathway in terms of financing for Simandou, particularly in the coming months, then next year the run rate will be very, very low.

I can't give you a number per se today, but it's a very small number and nothing to do with what we have spent so far this year. That's all I can give you, Myles, today.

Heath Jansen, Citi. You mentioned volatility probably about 10 times during the presentation, so I just had two questions on that.

The first one for Chris. Obviously, with greater commodity price volatility you've got greater earnings volatility, cash flow volatility and dividend volatility. How does that impact your cash flow planning going forward?

And also, is the gearing ratio the right metric to be looking at? Should we be expecting that you guys -- or Rio and the industry have to run much lower debt levels going forward to cope with that volatility?

My second question is for JS, just in terms of that volatility. Does that diminish your competitive advantage going forward, to actually deal with that volatility?

For example, take iron ore now. You've just seen a big restock while the prices go up, marginal production comes in the market. Guys that should be going bust are de-gearing faster than what you guys are doing and staying in the market and, obviously, as we get a destock, the iron ore price then crashes back down.

I know you were talking about shareholder value, but should we be thinking about this sharp ratio where the volatility, the risk-adjust returns that you can deliver actually diminish going forward from what you've been able to achieve in the past? And can you actually alter your pricing structure potentially to try and minimize that bulk?

Thanks. The key really is around the -- I guess the overall position on cash and the volatility in markets and what does that -- back to a cash flow risk-type analysis and the like. But I think the fundamental thing that we've got to maintain is a strong balance sheet.

We will not be the heavily geared mining investment that -- you have that alternative elsewhere. But our process is more conservative than that and it's a longer-term view, and it's straight for the balance sheet, can't weather through a volatile market and I think that's important. We intend to maintain that status.

That allocation methodology is not -- it's not accidental or trivial. It is absolutely serious. We will -- if you go back to that dividend question earlier, we talked about the issue, about the Board wanting to have a balance, this is not 50/50, but a balanced view about how they make decisions about growth versus returns.

Similarly, we'll have a conversation about what's the appropriate level of debt to carry in that robust balance sheet. But I think there's scope for all three of those to be satisfied, as we see it.

Yes. And the second part of the question about the volatility in relation to the iron ore business, you could argue it could impact all the business in which we operate. There are things we can influence, there are things we cannot influence, and we really want to be the master of our destiny on this one.

What it means in practical terms is to be very selective and very focused on what we do. That's the key word. It's going to be about the quality of the assets, really having -- investing in Tier 1 assets which are low cost. And it's really about the performance in terms of making sure we take the right customer and deliver the right product, so we can influence the things we can influence and continue to work very hard on the cost structure. That's the only thing we can do.

So, we remain low cost. We remain -- or we build the appropriate portfolio in terms of customer and products, in order to make sure that whatever market pricing environment we have, all our assets remain free cash flow positive and, therefore, we can pay dividends and so on and so forth. The market is what it is, but we can influence several items and that's what we are doing.

Can we go to the phones? There are quite a few there because we've been heavily in the room so far. So, maybe five or six questions, if there are that many, on the phones.

Paul Young, Deutsche Bank Research.

The first question is on OT, great to see the approval of the underground but a bit disappointing to see the CapEx estimate did not fall, despite industry-wide CapEx deflation.

Can you discuss the scope for any CapEx reduction and also the possibility for bringing forward first production from the current 2020 target? That's the first question.

And, secondly, on aluminum, the transformation of the aluminum smelters has been pretty impressive and Kitimat, of course, will reduce costs further, but when I look at some of the number of people in that business it's clear that you have more work to do on reducing overheads across the smelting business.

Beyond Kitimat, what is your strategy now that you've looked at the aluminum business for lifting returns across the smelting portfolio? Thanks.

Well, I can start with the alumina, as Alf said last year, we have a clear target, $300 million. We are already making good progress against the full-year target. Are we going to stop there? The answer is no.

We believe there is still room for improvement and we'll go after it. That's exactly what -- we need to start somewhere. As you said, lots of improvement has been achieved already, but we're not going to stop there. We just keep going.

We'll continue to keep going to improve our cost position, not only with our smelter part, but the alumina as well and look at the turnaround of the alumina refineries so far. All of the refineries in the first half were free cash flow positive.

Look back last year and the year before and you'll see a very different situation. So, the only thing I can say, Paul, is we'll continue to work on it and make progress.

On Oyu Tolgoi, for sure, if we can improve the ramp up, we will do it but, at the same time, and it's very important, it's a big capital project; as you know, five, six years to be on the infrastructure, seven to nine years to ramp it up. If we can speed up the ramp-up, we will do it, but we have to do it in a very phased and structured way. We're not going to take risk. It's an investment for the long term.

This mine will be there for 75 or 100 years. That's the context in which you need to look at OT.

The CapEx is the best view that we have today. Remember, Mongolia is far, far away from everything. In Australia, for example, we saw the unit cost or the unit price on CapEx to drop in a material way in the last few years.

Mongolia, being at the end of the pipeline, if I put it this way, it's a very difficult environment; a very different environment and I would rather be very careful before we put some new numbers into the system.

We've been through -- we've been working on a case for seven years. We did the feasibility study for the last two years. This is the best view as of today.

Now, you shouldn't be under any illusion, and maybe the message is not for you, it's for the team, we'll continue, with Chris, to put people under pressure in order to make sure that they deliver Oyu Tolgoi in a safe manner, on budget, and we hope, ahead of time.

We can take another question on the conf call from abroad.

Andrew Hodge, Macquarie.

The question I just wanted to ask was around capital, particularly in the Pilbara. If I look at the capital that you're saying that (inaudible) in the second half, you've got about $358 million, and then combining that with --I guess it's now a two-part question.

One was, at the beginning of the year you were saying there was still about $400 million left to spend on the 360-program. I wanted to check to see that that (inaudible).

The second part is just about, given that you're (inaudible) later on you said about $150 million as part of the [NIT] program. Is that (inaudible). Is that pretty fair?

Okay, the sound quality coming through is pretty poor there, but let me have a crack at it, as I think I heard it.

The key with CapEx is that, in the Pilbara especially, we've completed the bulk of the infrastructure spend for the 360 for the full capacity and during 2015. So this year has been a relatively modest spend.

Now overall, CapEx for the total corporation's been $1.3 billon, and about $700 million of that was sustaining capital.

The Silvergrass approval that was approved yesterday is the remainder of the Silvergrass project. If you think about the Silvergrass complex in total, you can talk about the Nammuldi incremental tonnes [one] and [two].

Then this latest spend, the $338 million was approved yesterday. If we were talking six to 12 months ago, we would have had probably just shy of $500 million allocated to what was yesterday approved, the $338 million.

That is, in part, a utilization of equipment from elsewhere; that we've been able to improve the utilization of equipment that we can make it available for that project. So that's already spent.

The other one is around project work in determining a lower path to the same outcome. I think there's some efficiency in there.

It also goes to Paul's earlier question, there is still pricing pressure on capital projects in Australia, given that the general climate has slowed down considerably.

That's particularly true in Gladstone, where the gas projects have also pretty much completed. We've got a lot of work in the refineries in Gladstone, to Paul's point about the aluminum cost structure.

I don't know that we can give you much more, because we couldn't really get the full [note] of the question. But I think the key issue --

Chris, I'm not sure whether -- yes, I'm not sure if you can hear me any better now.

That's much better, yes.

Okay. The question, I guess, was about the $100 million that you said that you'd spent in the half on the NIT program. And you're saying that in Pilbara, you spent on iron ore $358 million. The implication of that is that the (inaudible) for the business then was about $1.80 a tonne or thereabouts.

Okay, so the key really is if you go to the two NIT programs plus this $338 million, you end up with something like $600 million there or thereabouts. That's the first thing.

Second thing is if you add up all the tonnage that would be associated with those, that equals 20 million tonnes.

The third thing is that --

But it is in the guidance, the $330 million to $340 million guidance for next year is fully included this one.

That's the third thing.

Okay, yes.

That's really where it is. There's no -- I think what we should be observing here is that the capital expenditure reduction there is actually a result of a lot of good work.

It's taken a little bit more time, but it's been worthwhile time. Yes, it's time well spent.

Yes. The growth project, obviously you've obviously done a great job of bringing that down. It's more about the [sustainability]. If I look at the [trimming] out the NIT stuff (inaudible).

All right. Again, with sustaining capital, we're currently enjoying a period of both low activity and low price. That's largely a function of the fact that the large capital expenditure is relatively recent. If you go back to 2012, we spent something like $17 billion in the business in total, which is the peak of that.

We've reduced that down now. That $17.6 billion has become $4 billion, so that's -- there's a reduction there. But I think in the fullness of time, you would probably have an expectation of slightly more activity, and shouldn't be surprised if there's some cyclicality in terms of the price of that activity.

But I don't think we've got anything more for you on that.

We need to go another question on the phones.

Yes. Thanks.

Tony Rizzuto, Cowen & Company.

I really wanted to focus on China and the steel and iron ore supply chain. You've indicated the creditor-driven strength in the first half. Seaborne imports were up about 9% year on year. Steel production annualized, hitting, at points, 850 million tonnes.

I wonder if you could discuss has there been further displacement of Chinese iron ore supply in the first half and is there further to go there? How do you see the seaborne iron ore supply demand playing out in the back half, with new supply ramping up? What are you assuming for Chinese crude steel production for the full year, if you can? Thank you.

All right, so there are a few questions. All we're saying today is that year on year the iron ore production in China has reduced. If you look compared to where we were a few years ago, ahead of 400 million tonnes, we must be below 250 million tonnes today, could be even, 230/240 million tonnes. But there is -- China, it can be a slightly complicated picture, let's put it this way.

As I said earlier today is good steel demand in the first half. If you look at the run rate for Q2, it was much, much higher than what it was for the full year of 2015.

But back to what I said is really it was fueled by availability of trade, and there are some question marks about, if this one is going to continue or not. We have to be ready for a situation where at the end of this year, we could be at same level as last year.

We don't control the market, for obvious reasons. But what is -- and there is clearly, and we use the word again, uncertainty here and lots of volatility.

Therefore, what we need is really to focus on what we can focus, which is really about the performance of our iron ore assets here, to make sure that even if there were to be a slowdown, that would transfer it into a lower price environment. If our asset remains cash flow positive in a very much [our way] and therefore we can pay the dividend and so on and so forth.

That's where we are. There is uncertainty. The way we look at it from a planning standpoint is the following. We have several markets and IOs. They have lots of fancy names. Chris has a full team looking at China all the time and they come up with all those names. You know, kicking the can down the road or whatever, kick the can down the road, what --?

Fits and starts.

Yes, whatever they are.

China malaise.

Anyway, what we're just saying is there is lots of uncertainty around China. That's as simple as that.

So we need to make sure that under any kind of scenario, our assets perform well and our free cash flow positive. And that's what we're doing. We don't control the market.

Now, if the market's better and prices are better, for sure, we'll be happy, but we can't assume a quick recovery of China. That will not happen. The truth of the matter is very simple. China is slowing down. That's a fact. The type of growth in China is changing dramatically. That's a fact as well.

Now, I had the question earlier today is if I look at the order book that we have and my point is not only about iron ore, it's with copper as well, and this could be about bauxite, we do not have any issues in placing raw material into China today.

For planning purposes, we are very cautious but, at the same time, is we don't have any issues today in pricing or material.

Thank you very much.

I hope I've answered your question as much as I could on this one.

Yes, I appreciate that. Thank you.

Glyn Lawcock, UBS.

I have two questions, J-S, if I can, directed at yourself. Firstly, if I listen to today, the focus remains, costs, returns and growth; so no real change from your predecessor. But just want to hear from yourself where you think you make a difference going forward.

And then secondly, if I read the press correctly you were pretty quick to dismiss a South32-style demerger of non-core assets. Just interested in why. You have tried to sell assets without success in the past. It does seem to be a relatively good way to get full and complete disposal of unwanted assets; so just interested in your thoughts on that as well please.

Thank you, Glyn. I'll start with the first question about the costs, productivity and the growth is, look, this year when I got the job a month ago, the business is in good shape. Lots of good work has been carried out for the last three years under the leadership of Simon and Chris. I mean, look at where we are in terms of balance sheet today.

What's going to be different going forward is, and I think the organization is a good reflection of this one is we want to step up our performance in two areas, one is on safety and the other area is about free cash flow generation, which, if you look at the slide, I don't know you have access to the slide, Glyn, the last slide, is really focusing on the left-hand side, which is the yellow box. What we want is to step up our performance in terms of free cash flow generation.

If I reflect on what we've achieved in the last few years it was primarily driven on focusing on the costs and costs only, cutting CapEx, cutting costs. What we want is to drive productivity, which is not only about costs, but it's about the top line as well. It's really about how can we attract more cash flow from (inaudible) assets.

We did use, during the speech, the example of the smelter in Kennecott. There are only three smelters, copper smelter, in the US. The US today has to import lots of copper so we have this very awkward situation where they ship concentrate to New Mexico or to Mexico, sorry, or to Japan and then they have to import copper wire back into the US.

At the same time, we had some spare capacity, so we decided two years ago to open up our capacity to third-party concentrates in order to make sure that we are seen by the government as being part of the solution. Back to the question we had earlier about the Resolution, because if you are seen by the administration as being part of the solution, that will help us in relation to the permitting process of Resolution, for example.

And the second point, second payment (inaudible) to generate more free cash flow from an existing asset. So that's one example.

The other example if you go back to one of the slides we used today is when I look at all the truck productivity across the Group, it's very contrasted picture. There are plenty of opportunities by being more consistent in the way we operate the trucks across the Company by extracting more value.

So we are in good shape today. But going forward, the focus is going to be stronger on safety and generating cash. When we talk about generating cash, it's not only about the bottom line, the costs, but the top line as well.

Then the second part of the question, Glyn, I think you and I already had this conversation two or three times. The energy and minerals group is not a South32, or 33, or 34, whatever number you want to pick. You have some stars in the portfolio. I mean, look at the borates. The

borate business has been there for more than 100 years, generating lots of good cash flow. It's a real Tier 1 asset. If you look at in the TiO2 space, Richards Bay in South Africa is a Tier 1 asset.

The way we have organized ourself is to make sure that iron ore is really focusing on the Pilbara; that aluminum is focusing on the aluminum assets; that copper and coal are really trying to build capability in Russia and to underground that will be critical for us going forward.

The portfolio of Alan and the mission of Alan and his team is really to run the smaller assets in a more aggressive way to drive cash on one side and the second mission is really to act as an incubator for new commodities -- or new business as we would like to build them.

And I think lithium, you know that we have a project, Jadar project in Serbia, where we could enter some new commodities, is under the accountability or responsibility of Alan.

Alan has to run a portfolio of smaller assets; some of them are Tier 1, some of them are not Tier 1. Let's be clear, as I said in the speech, some of them are challenged assets, but we want to run them in the best possible way. Safety being the priority number one; free cash flow being the second priority.

At the same time, he needs to look at new commodity or new space where we could build a position in the future.

Thank you.

Thanks, Glyn.

Duncan Simmonds, BofA Merrill Lynch.

Congratulations on the results. So I just want to just finalize just a thought I had on iron ore.

It seems like, from the new team that you have, culture change was very important. Should I read into it the greatest opportunity to extract values, cost over others such as blend and volume? Or is it too early in the piece to conclude on that?

Then secondly, Chris, just on cash conversion in the half, was there any unusual things that were coming in the first half mix? It looks a bit like there's EBITDA and that's after backing out the impact of tax and interest costs. Thanks very much.

I'll take the first one; you take the second one.

I think I've already covered the question on iron ore is to optimize value in the iron ore business in the future is about free cash flow and there are three drivers: cost, product mix and CapEx. You need to optimize those three elements in order to create more value in Pilbara.

It's not only one element. It's really getting the right combination of those three ingredients and the working is underway. The ambition or the aspiration that, with Chris, I have given to the business are very clear.

The first week of July was the week where we review all the five-year plan of the entire Group. We had some very deep conversation with all the product group including iron ore and we are very clear around what we want to see in that space going forward.

Pick up the other one.

Yes, okay. Regarding the cash, I think the cash generation was $3.2 billion. That's actually after spending $266 million early in terms of interest pre-payment on the bond repurchases.

Then on the up-flow side, as well, we had the dividend of $1.9 billion and CapEx of $1.3 billion.

I guess the key issue really is around price aids from disposals came through and we should have some more of that coming in the near term. We had a -- we talked about the Bengalla proceeds, the $600 million. There was about another $100-or-so million on a variety of smaller assets that were disposed.

All up, all up, I think the key end-of-the-day metric that we look at there is the net debt is down $900 million in the six-month period, which we think is a pretty good outcome.

Thanks very much, J-S.

Thank you.

Thank you, Chris. We can take another question from the phone and then we'll come back to the floor.

Paul McTaggart, Credit Suisse.

Just quickly back to OT you were talking about, because you mentioned earlier Chris about that you've got all of the debt on your balance sheet now. As Paul mentioned earlier, you're not looking to do that fourth shaft, I think, until 2021.

Staged CapEx over a long period of time, but all the debt drawn and the cash sitting there, pretty inefficient. Is there any way you can do better with that capital structure to make that work better for you in terms of a return on the cash that's sitting around?

First up the draw down on the project finance has a series of other implications to it, but none the least of which is a sort of assembly of that syndicate of international players into that investment.

We haven't drawn all the cash down. We have drawn down a little over $4 billion, so there's still further expenditure to go. But the money that has been drawn down is earmarked for a progressive capital spend on the way through.

We'll manage that in accordance with the -- on a totally integrated basis from our planning point of view as we consolidate it through. So we've currently got the cash sitting there that is inefficient; we want to get that working. Some of it will be the OT project finance cash will be assigned to the project obviously, but elsewhere with surplus cash we'll have opportunities to put them back into that allocation mechanism. That's where we'll be with that.

All right, if I come back to this room, I'm not sure, I'm looking at John in the background, how much time do we have John? Two minutes, so we have one last question.

Rene Kleyweg, Deutsche Bank. We've touched on the iron ore market in various guises and the focus has been in terms of uncertainty on the demand side within China.

Vale commented that in their opinion the market was over estimating new supply coming through next year and also under estimating depletion medium term. Could you comment on how you see those two issues in terms of the next 18 months to 2 years?

And then secondly, you mentioned that we have your phone number but I seem to have lost it, so if you could just give out your mobile number again that would be --?

That's fine no worries, I can deal with the second one pretty easily.

On the iron ore. We, once again we are looking at different market scenario and when we talk about market scenario it's not only about the pricing per se, it's about the supply given balance. There was an assumption here, because -- I won't make any comments about what my competitors may be doing, but there are lots of variable here.

And one which is very clear, and that's why I spent a lot of time in China in the last few months is to meet with not only our customers, but the authorities, for example of [SASA], which is very positive, because at the end of the day they have a lot of influence in the system.

I have no doubt in my mind that the Chinese authorities want to restructure both, part of the steel business and the iron ore business. But the phase of restructuring in the SOE space, special enterprise, is a big question mark, is a big source of uncertainty.

So what we want is and I said today under any kind of market scenario, market pricing scenario, which would be derived from the supply and the demand, is that our assets, and [mainly] Pilbara, to remain free cash flow positive and be able to pay a dividend, and so on and so forth.

So, a lot of uncertainty; I can influence what I can influence. You can make assumptions about our competitors, but making assumptions in relation to the pace of restructuring in China, is very challenging to be honest. That's why we have to work with different scenarios and influence what we can influence.

What we want is clearly the Pilbara to be free cash flow positive under any kind of market scenario. That's what we're doing.

I think the combination of what we discussed today about the productivity drive, which is not only about cost, but about the revenue line as well on one side and investing in a very focused way where it makes sense, and Silvergrass being a very good example of it, that's what it is about.

We would drive the Pilbara for value and not volume, and it's going to be over the optimization [with] the cost element, about the mix element and the CapEx profile. That's the only thing I can say today.

On this note I would like to say thank you. Thanks a lot for joining. Have a safe journey back to wherever you're going back and I'm sure we'll talk soon. Thank you.