力拓 (RIO) 2016 Q4 法說會逐字稿

Good morning. Welcome to the Rio Tinto 2016 results. If you could turn your mobile phones onto silent, please. (Conference Instructions).

With that, I will hand over to J-S

Thank you, John. Good morning, all. I'm delighted to welcome you to the Rio Tinto 2016 annual results presentation. At our Capital Markets Day in November, we outlined our approach to deliver superior value for shareholders over the short, the medium and the long term.

Our value proposition is clear: to pursue a long-term strategy built on world-class assets; to maximize cash flow value over volume approach; to allocate capital with discipline and deliver superior returns; to develop a high performance culture across the Group.

I'm very pleased to report that, in 2016, we kept all our promises. We maximized cash generation through value over volume; we strengthened our world-class portfolio of assets; we invested in focused growth; we made our strong balance sheet even stronger; and, most importantly, we are providing significant cash returns to shareholders. Our strategy is working.

It has been a year of strong results where our teams, in all our operations, are exploring every avenue to drive a step up in performance. Let's now look at some of the highlights.

In 2016, we delivered on our promises to generate cash from our world-class assets, with net cash from operating activities of $8.5 billion. Our strong second half cash flow reflects the recovery in prices and improved operational performance during this period.

I've been very pleased with our cost reduction program. We delivered $1 billion in the second half. This comes in addition to the $580 million in the first half. So we are well on track to deliver on our promise of $2 billion in cost savings across 2016 and 2017.

During the year, we positioned our Company for the long term, making good progress on our Company growth projects; Oyu Tolgoi, Amrun and Silvergrass. Therefore, as we planned, capital expenditure increased in the second half. Despite this, we maintained tight control and finished the year with capital expenditure just over $3 billion.

In 2016, we further strengthened our portfolio, as we said we would; again, not just talking but delivering. We announced disposal of more than $1.3 billion in the year, closing the sale of Lochaber in the UK in December. And last month, we announced the divestment of our thermal coal business in Australia for $2.45 billion which, subject to approvals, should complete later this year.

Our success in generating cash, controlling CapEx and actively strengthening the portfolio, means we ended the year with a net debt of $9.6 billion. This is a reduction of more than $4 billion, or 30% down, compared to December 2015. And, most importantly, in 2016, even under challenging market conditions, we returned $2.7 billion to shareholders. Today, we have announced total shareholder returns of $3.6 billion, including a final dividend of $1.25 a share and a buyback of $500 million.

So a strong set of results and Chris will take you through the details shortly. Before he does so, I will cover some of our operational and product group highlights, starting with safety.

Safety comes first at Rio Tinto. Our ambition is clear: all of our employees must return home safely at the end of each and every day; there are no compromise. In 2016, most aspects of our safety performance improved, but this is simply not good enough. In June, a colleague died at our Pilbara operation in Western Australia; this is a tragedy. I am working very hard to ensure that this doesn't happen again. We are continuing to roll out our critical risk management system to support fatality prevention.

In 2016, we achieved the milestone of more than 1 million safety verifications, which give us a strong platform to step up our safety performance this year. Everyone at Rio Tinto, no matter where they work, is focused on personal and process safety. Safety must come first. A well-run operation is a safe operation.

Our aim is to maximize cash and productivity across the entire portfolio of assets. Every part of the business is prioritizing this work on a daily basis. We made good progress during 2016 with EBITDA of $13.5 billion, representing a margin of 38% for the Group.

In iron ore, we delivered industry-leading EBITDA margin of 63%, and cost savings of $315 million for the year. In aluminum, all of our assets were free cash-flow positive, despite lower realized prices in the first half. This, for the Group, reduced cash costs by nearly $500 million, against a full-year target of $300 million.

The copper and diamonds for the Group had an operating EBITDA margin of 35%, and continued to develop our world-class resources, including Oyu Tolgoi. And energy and minerals matched production with market demand, generating significant free cash flow in 2016, due to improved prices in some communities, including coal.

I am delighted with the strong performance across the Group, and with the hard work and commitment of all our employees around the world.

Now, let me hand over to Chris, who will take you through the detailed financials.

Thanks, J-S. These are another strong set of results. Let's have a look at the numbers in more detail, starting with the commodities.

Prices were depressed at the start of 2016; however, we saw an improvement during the year in most of our main commodities. Iron ore started the year at around $40 per tonne, ended the year around $75 per tonne. The average price was $53.60 per tonne, which was 6% higher than 2015.

Copper prices were, on average, 11% lower than 2015, notwithstanding a 25% increase during the year. Aluminum ended the year 20% higher, but the average was 3% below 2015. But market premia also fell; for example, the Mid-West premium declined by 40% to $162 per tonne in 2016.

As you can see here, the second-half improvement was not enough to bring prices above the 2015 comparison and pricing reduced underlying earnings by around $460 million. Volumes were relatively unchanged year on year. Higher sales across most of our commodities were offset by lower copper and byproduct sales. And there was a lower attributable share of coal, arising from the restructure of the Coal & Allied group, and the sale of Bengalla.

We delivered a further $1.6 billion of unit cash cost savings in 2016, which equates to $1.2 billion post tax. But we maintain our target of $2 billion of cost savings over 2016 and 2017 combined. This strong achievement on cost savings has seen an increase of underlying earnings to $5.1 billion for the year; 12% increase on the previous year.

Cost savings of $1.6 billion were delivered across the Group. It's an exceptional outcome. As always, it's important to note that this excludes the impact of exchange rates and changes in oil and energy costs. This takes our total reductions against the 2012 cost base to $7.8 billion. A strong culture of cost control is required to assist in further cost reductions, especially when many of the easier wins have already been taken.

I'm sure that each of our businesses will apply this same tenacity to our new target of increasing free cash flow through productivity improvements by $5 billion over the next five years.

J-S has already mentioned the outstanding work that we have seen in the aluminum group this year, where cost reduction targets have again been beaten, delivering a further reduction of $481 million. Aluminum found a total now of $1.6 billion of cost reductions since 2012, and a program of more than 1,250 initiatives are still being worked on.

In iron ore, the completion of the major expansion projects now allows the team to focus on maximizing the value of the system and increasing productivity. This product group further reduced its cash costs by $315 million in 2016, and has achieved industry-leading margins.

The energy and minerals group also reduced costs further, taking out an additional $342 million in 2017, and bringing its cumulative total to $1.4 billion. And copper and diamonds took out $278 million in 2016, despite lower volumes.

Cost improvements mean that we generate quality margins and cash flow throughout the cycle. We've raised the profitability of the business, and are able to continue to deliver on our commitments to maintain a strong balance sheet, to invest in compelling growth projects, and to deliver superior returns.

I turn now to net earnings. During the year, we recognized $512 million relating to impairments and onerous contracts. We raised a provision in the first half of the year relating to our take-or-pay port and rail contracts at Abbot Point. Following a settlement with the port operator, this has been reduced to $329 million net of tax. There's also an impairment regarding lower volumes and pricing at Argyle.

Non-exchange gains on US dollar-denominated debt in our non-US dollar-denominated companies have positively impacted earnings by $536 million. Importantly, these are mostly offset by currency translation losses booked to equity; therefore, there's minimal impact on net debt. In the past, this number has been sizeable, but it's been reduced following restructuring of some of these debts in late 2015, mainly in the Australian dollar-denominated companies.

Other adjustments include a $282 million increase in the closure provision at Gove, and $380 million in respect of ongoing discussions with tax authorities regarding various multiyear reviews. So overall, we've delivered net earnings of $4.6 billion.

We continue to manage trade working capital closely, and will look for opportunities to make further improvements. But as can be seen here, our trade working capital has already reduced to 22 days at the end of the period.

Improvements in the prices of our products are clearly positive for the business. But from a uniquely working capital perspective, higher prices increased the value of our trade receivables by $610 million.

Let's turn to our capital allocation framework. 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 dividends for shareholders. We then have an iterative cycle of managing the balance sheet, pursuing value-accretive growth options, and considering further returns.

In 2016, we generated cash flows of $8.5 billion and, in addition to this, we realized $1.1 billion from total disposals, leading to cash available for allocation of $9.6 billion. This allowed us to meet our sustaining capital requirements; to invest in growth; to further strength the balance sheet; and we returned $2.7 billion to shareholders through the final 2015 dividend and the interim dividend for 2016.

Capital spend for 2016 finished at just over $3 billion, of which $1.7 billion related to sustaining capital for our existing operations and $1.3 billion for our compelling growth projects. The spend on our growth capital is starting to increase as we progress our key projects. But we maintain our guidance for the next three years, with $5 billion in 2017, and then $5.5 billion in 2018 and 2019.

Our highly value-accretive projects are some of the very few that are being undertaken in the industry today. The advantage of the strong balance sheet and asset portfolio is that we're able to continue to invest in world-class growth options which will provide the basis for future shareholder returns. When we make capital allocation decisions we'll ensure that we only fund the best projects.

The growth projects are progressing well under the oversight of our growth and innovation group. The Silvergrass project in the Pilbara will deliver high-grade, low phosphorus ore for the Pilbara blend and give us operating benefits. Our work and expenditure on this project is ramping up now and we're on track for production in the second half of 2017.

At the $1.9 billion Amrun bauxite project in Queensland, the access road is now complete and we'll have the river terminal operational this quarter. As previously guided, most of the project spend will be over the next two years, with first production in the first half of 2019.

And last but not least, at OT we're progressing well, with over 2,000 people now working on this significant underground development. Our current focus is on infrastructure, to enable increased lateral development grades. Our capital spend will increase into 2017, with momentum now building.

We're developing our portfolio of world-class assets and opportunities that others don't have and, importantly, we're continuing to invest through the cycle. Our compelling growth projects, and our focus on productivity, will deliver growth of over 2% each year over the next decade. And forms the basis of our commitment to deliver superior returns to the shareholders through the cycle.

The success of our actions to further reduce costs, to control capital expenditure and to deliver proceeds from disposals, have reinforced the balance sheet. During the second half of 2016, we further reduced our net debt to end the year $9.6 billion, an improvement of $4.2 billion over the course of the year.

Maintaining and enhancing the strength of our balance sheet remains a key priority; it's a major competitive advantage. Our net gearing ratio is currently 17%. We mentioned in December that, in the current environment, we're comfortable being below the bottom of the guidance range of 20% to 30%.

Conservative balance sheet is appropriate, given uncertain global economic environment. A strong balance sheet provides robustness against volatility, provides the ability to make returns through the cycle, and it provides a readiness to take advantage of opportunities, as and when they arise.

Whilst our primary objective is to manage the level of net debt, the level of gross debt is also important. It's inefficient to run too much cash on the balance sheet, especially in the current interest rate environment. During the year, we reduced gross debt by $5 billion. We completed three bond repurchases, totaling $7.5 billion, and repaid $1.5 billion of maturing bonds.

The early repayment led to redemption costs of approximately $500 million. The reduction in cash was partially offset by the drawdown of $4.1 billion of project finance for the OT underground.

So we've reduced gross debt and have delivered a notable improvement in our debt maturity profile. There's a weighted average cost of total debt of 4% and a weighted average maturity of around 10 years with no more than $1.7 million maturing in any one year.

We continue to refine our portfolio to ensure that we make the most efficient use of our capital. In 2016, we announced $1.3 billion of divestments. We closed the sales on our Bengalla mine and the Mount Pleasant thermal coal project. We announced the sale of the Lochaber aluminum smelter, for which we received slightly more than half the proceeds in 2016 with the remainder to be received later this month.

Two weeks ago, we announced that we'd agreed the sale of Coal & Allied for up to $2.45 billion, plus potential royalties. This sale is subject to a number of conditions, but the transaction should close in the second half of this year.

Including Coal & Allied, we've announced divestments of more than $7.7 billion in the last four years, but we retain flexibility in our portfolio. Some of our assets are smaller, but they're valuable and highly cash generative. We'll continue to exit any assets or projects that don't fit our portfolio and where we can realize attractive values.

I'd like to finish by talking about shareholder returns. Last February, we adopted a new returns policy, which is designed to ensure superior returns to shareholders. The new policy set out clear intentions so that shareholder interests are always at the center of everything we do. The policy requires that we maintain an appropriate balance between investment and compelling growth projects, to drive future returns and total shareholder cash returns of 40% to 60% of underlying earnings through the cycle.

At our Capital Markets Day, I laid out the items that we consider for our dividend and I've set these out again here for completeness. At the start of the year, we stated that the dividend would be not less than $1.10 per share; this has been more than honored.

The outcome for the year has been positive. We controlled costs and generated significant cash. We have a well-defined growth profile with clear and deliverable CapEx commitments, the balance sheet is in a strong position and, as you can see here, we've beaten expectations in seven of the eight items that I talked about as decision criteria.

This gives us the confidence to move beyond the 60% threshold. Our principal concern is around the uncertain macro outlook, and the best defense against this uncertainty is to maintain a strong balance sheet. So the Board's, therefore, decided to pay a total of $3.6 billion, which represents 70% of underlying earnings, in total returns. The form of the return will be ordinary dividends and a share buyback.

The ordinary dividend will be a total of $1.70 per share for the year, of which $0.45 was paid at the interim. The final dividend, therefore, will be $1.25 per share, which will be paid in April.

The buyback announced today will be an on-market purchase of shares in Rio Tinto plc. All shareholders, both limited and plc, will benefit equally from the EPS accretion arising from the smaller number of shares in total issue. This demonstrates our commitment to deliver superior cash returns of shareholders. And with that, let me hand back to J-S.

Thank you, Chris. I will now cover our views on the macro outlook and demonstrate why our strategy is right for the challenges ahead.

Global businesses always face volatility, but in recent times the level of uncertainty has increased in a material way. These uncertainties could have an impact on growth, trade, currencies and, subsequently, our industry fundamentals. I firmly believe our industry is underpinned by free trade and level playing field. Political transitions are occurring around the world, with more elections to come in 2017. We are also keeping a close eye on the economic reforms in China. As our key customer, China is important for Rio Tinto.

Against this backdrop, we need a resilient business. Our strategy is delivering that resilience. In 2016, there was a significant recovery in many commodity prices, especially iron ore. This, in part, reflects renewed growth in China's industrial sectors, which was stimulated by policy actions.

As an example, stimulus packages for the property and construction sectors led to higher property prices and lower inventory levels. Stimulus was also provided to the infrastructure sector, with road and rail investments remaining at around 15% for the full year. The renewed industrial growth in China, combined with a higher degree of consumer confidence in some global markets, resulted in a [better] operating environment for our industry in 2016.

Rio Tinto's history with China goes back a long way. For example, this year we will celebrate 30 years of our China joint venture with Sinosteel; a partnership that has delivered significant value for our business, but also strengthens economic ties between Australia and China. Our strong relationship with China position us to better understand the market and our customers, suppliers and partners.

If you were to ask me if I'm worried about China, I would say no, [non for you, Chris]. We expect the current government stimulus to be maintained ahead of the senior leadership conference towards the end of this year. But we are closely monitoring the pace of growth and state run enterprise reform across all commodities.

Let's look at the iron ore market. Recently, the market has been much stronger than expected by many observers. There are four key drivers that will continue to impact the iron ore supply/demand balance in 2017.

The first is the health of the Chinese economy, which I've just covered. Next, the Chinese domestic steel market is looking to drive out high-polluting production. This is a clear opportunity for us, as we will see demand switch from low-grade ore to high-grade products we offer. The third, the initial supply from seaborne iron ore producers; we expect about 40 million tonnes of new capacity in 2017.

And last, but not least, the domestic iron ore production in China is a key source of uncertainty and could tip the balance. We have not seen the material restart of idle capacity at this stage, but this could change going into the summer.

These factors all add to the uncertainty facing the iron ore market and shows why we need the right strategy in place to navigate any volatility and make the most of any opportunities.

As I said in November, our strategy is to create superior value for shareholders by meeting our customer needs, maximizing cash flow from our world-class assets and allocating capital with discipline. To remind you, we will deliver this by focusing on the four Ps; portfolio, performance, people and partners.

Portfolio is about world-class assets; performance is about operating and commercial excellence, or value-over-volume approach; people, it's about developing industry-leading capabilities; and partners, it's about long-term relationships with our customers, investors, governments and communities, to deliver commercial success.

Our value-creation model, and our world-class assets, will deliver spare cash, and we will use this cash to provide compelling growth, deliver superior shareholder returns, and maintain our balance sheet strength. Let me start with the first two Ps, portfolio and performance.

Put simply, in 2017 we will continue to strengthen our portfolio of world-class assets. Those are low cost and expandable. We want to deliver a superior performance in safety and in profitability. Increasing the productivity of our $50 billion asset base is the highest return available to us. As such, we have promised to deliver an initial $5 billion of free cash flow over the next five years.

As we speak, our teams are looking for every opportunity to generate value from mine to market. Let me give you one example. All leaders in iron ore have a smartphone app that shows, in real time, the truck utilization of our haul fleet [in the Pilbara]. This is already helping us to improve productivity.

We are looking for improvements in all aspects of the business. Operational excellence will drive superior performance, now and in the future, which brings me to the last two Ps, people and partners.

Both are very important enablers of value creation. In 2017, we will have a greater focus on developing our employees. We have increased investment in our graduate intake, and the executive committee is now strengthening the development of the top leaders across the organization. We want to build the capabilities of our people, both commercially and technically.

Now I'll turn to partnership. In all jurisdictions, governments and committees are asking for a greater share of the wealth created by their natural resources. We are seeing this in Australia, Chile and, more recently, in Indonesia. Mining is a capital-intensive industry, and we need transparency and certainty as a platform for investment.

For us, partnering is about building long-term relationships to create value and reduce license to operate risk, which are becoming more and more significant for our industry. We need strong partnerships and stable operating environments to grow our business for the benefit of all stakeholders.

If the economic and geopolitical changes of the past year have told us anything, it is the importance of having a clear value-creation approach, and the right strategy in place.

Let me wrap up. Every, every decision we make at Rio Tinto will prioritize value over volume; that's what we did in 2016, and it is working. On cash, we generated net cash from operating activities of $8.5 million (sic - see slide 32, "$8.5 billion"). On cost, we delivered total cash cost savings of $1.6 billion. On growth, we progress our projects at Oyu Tolgoi, Amrun and Silvergrass. On the balance sheet we closed the year with a net debt of $9.6 billion, and we are returning $3.6 billion to shareholders.

You can expect more of the same from us in the years to come. Rio Tinto is in great shape. We have a resilient business, world-class assets, committed employees, and the right strategy. We will continue to deliver superior value to shareholders through the cycle, and to invest for the long term. For us, it's all about keeping our promises day and day out. Thank you.

On this note, I will open the Q&A.

Menno, Morgan Stanley. To be honest, not much to ask, given the solid set of numbers, but maybe one question. The Company's clearly been very good at giving away assets, and selling assets at fair value, or a reasonable value and giving some dividend back. But clearly, the main value driver's reinvestment. The Company's committed to two projects, but considering the very good balance sheet and the state of the commodity markets now, are you considering accelerating anything else in the pipeline? And what are the main considerations around this topic?

And in addition to that, are there any jurisdictions that are out of bounds after the issues you've encountered over the last two or three years?

All right. So in terms of growth, the plans are pretty set for the next three years, hence the capital guidance that we reconfirm today. Now, the teams are really looking at long-term opportunities. The work is underway, but for the next three years it's pretty cast in stone, to be honest.

Myles Allsop, UBS. Maybe a couple of questions. First of all, on the cost savings, it feels that either you're low-balling the potential here; $1.6 billion delivered in 2016, $400 million to come in 2017 or we're getting towards the end of the potential from cost savings. Could you just give us a better sense whether not revising the cost saving target is because you want to beat it? Or because you just genuinely believe that there's not a huge amount more to come?

And then could you just, maybe Chris, give us a bit of sense as to how you thought about the buyback versus the dividend? Why didn't you just give a $2 dividend, rather than through this small buyback?

I'll pick the first one, so you can pick the second one. I think, Myles, I go back to [where we were] last year; we were very clear that, at some point in time, we need to look not only at the cost line but the top line. And that's why this will be captured through the productivity.

Productivity is, you've got two ways to value it. When you improve the efficiency of your trucks, your trains, your shovels, either you produce more and you sell more from the same cost base, or you produce the same thing, the same quantum, for a lower cost base. But the decision will be made on the market-by-market, on the asset-by-asset basis, depending on the supply/demand balance in relation to this asset or this market.

So are we going to slow down on cost? The answer is, no, but we're already working on the $5 billion improvement program, which is in relation to productivity, and that's what the team is working on. So that's where we are. So are we going to slow down? No.

But as we said today, the best investment, and the best return we can have, is by improving the cash yield of our $50 billion investment base. And that's what we doing. It's much more leverage, in that sense.

Then the technical questions about buyback and so on and so forth, Chris, you're the man.

Well, Myles, I think the key, really, this is the first outing of the new dividend policy and I think we've honored everything we said we would do in the policy settings that we published this time last year. Going to the top of the range for the dividend I thought was important for all jurisdictions of shareholders, and it gives us -- what we want to make sure is that we've embraced the variability in achieving this dividend policy. I know some people won't find that attractive, but that is our reality, and it's important that we honor that promise to have a distribution.

When you go through those decision criteria, we did have a favorable answer to most of those questions. The one I mentioned earlier in the speech was about the uncertainty on the more macro geopolitical outlook. But the key was really to honor the -- and we had the chance to go to the top end of the range in the first outing.

The extra was to say, well, we've also got capacity for more, and we had that extra 10% return of $500 million. The choice to buy back was just another way to return that capital, and we think we've honored all those commitments on that basis. So I think it's a fairly modest buyback, I do agree with that, but it's a good indication that we mean what we say when we're talking about returns.

In this year, Myles, we have delivered on all our promises. We said we would continue to invest for the long term in a very focused way. We said we'll deliver superior cash returns, and the same time we'll continue to maintain and strengthen the balance sheet. That's what we've done and what you should expect, going forward, is exactly the same.

And then the next one we'll take from the call.

(Operator Instructions). (multiple speakers)

First on CapEx. If I look at your sustaining CapEx to depreciation this year, $0.3 billion, you've got it rising up to $0.5 billion next year; Chris, I know I've asked you about this before, but is this really sustainable for the medium term?

And then the other one is just [on] tax. Any comments on the events, the evolution of the situation in Western Australia?

Okay, I take the first one, you take the next one. So we did challenge all the teams about the level of sustaining CapEx, to make sure that they don't do anything stupid because, as we said, we are looking at the business with a long-term perspective. And we did some very specific, very technical review and today, we are comfortable with the level of sustaining CapEx across all our system.

Now, going forward in the future, you will see an increase in terms of sustaining CapEx; that is absolutely clear. And this will be combined as well, especially in the context of the Pilbara, as you see it on the graphs, that we will have to spend more and more money in relation to replacement CapEx, because when you move 330 million/340 million tonnes per annum, at one stage you need to open up some new mines. So today, are we comfortable with the level of sustaining CapEx in our strategy? Yes, but in the coming years, it will increase.

And then on the ATO, do you want to pick up this one, Chris?

It's not the ATO; I think you're talking about the [Grylls group], so actually, if I'd been allocating the two parts of your question, it would have gone the other direction, but I'll take it. So look, the --

You mean you don't have the answer or -- (laughter)?

No, but anyway, we can talk more about that later. But the issue on this one is really about international competitiveness and J-S mentioned Indonesia on the way past, but throwing changes into an environment like that unilaterally, and targeting two companies only unilaterally or whatever the right word is for two, targeted two, just is a big statement about what the country risk or the investment risk is in those sort of jurisdictions.

Now, having said that, that's as much as I'd say, but we've got to make sure that we don't take advantage of people who are doing well purely to solve other problems. That's the challenges there. So I think, in the balance, I doubt it will happen, but the key is really it's just the wrong way to go about solving a state budgetary problem to change state agreements.

All right. Why don't we take a question from the conference call?

Paul Young, Deutsche Bank.

The first question is on the aluminum division. Cost performance continues to be pretty impressive; division did most of the heavy lifting for the Group in 2016. My calcs show that your primary metal unit costs dropped to $0.66 a pound and the December half so a great performance. Question is, how much further can you reduce primary metal unit costs through overhead reductions and production creeps? And really interested in what the contribution of the aluminum division is to the $5 billion free cash flow target. That's the first question.

I have a second question, more specifically probably for you, J-S, is actually on Grasberg. Yes, listened to the comments about investing in these jurisdictions, etc., but you've spent $1 billion on the Grasberg block cave and the [DMLs] of that underground mine. Yet, my interpretation is now there's a real risk that the ramp up of the underground is delayed, but the price here is significant. So the question is with Freeport negotiating the contract of works extension, how do you ensure that shareholders will achieve a return on your investment? Thanks.

All right, so I'm going to pick the Grasberg one, if you can do the other one, Chris. So the question on Grasberg is the following. We were, all of us, taken by surprise by the new change or the changes of regulation that occurred three weeks ago. First of all, it's across the entire mining business; it's not only targeted at Grasberg per se, as a first point.

The second point is, it was clearly not in the spirit of the discussion even four weeks ago. And remember, a couple of years ago, we had signed an MoU with the government in order to extend the contract of work and so on and so forth, so everybody was taken by surprise. It's a very challenging situation. I can tell you we are working very closely with Freeport. The last call we had with them was on Sunday and Richard Adkerson, as far as I understand if I got the timing right, should be in the plane as we speak on his way back to Jakarta, and so on and so forth.

It's a very serious matter; we're taking it very seriously. Now, having said that, we shouldn't forget that Grasberg for us is an option, all right. We don't have equity ownership; it's an option. And depending on what may happen in the coming weeks and months, we may have to take some decision, but early days. I can tell you there are lots of governments which are very concerned, at this point in time, about what's happening in Indonesia. Lots of support to Freeport, to Rio and a few others. Discussions are underway; as and when progress are made, we'll inform the market for obvious reasons. So that's where we are at this point in time.

Chris, if you'd pick up the other?

And with regard to [ali], Paul, I guess you need to isolate the three components, but the bauxite has the same productivity opportunity as any of the other mine sites does with regard to fleet and efficiency of those types of processes. The refineries have made some significant progress and are now cash neutral where, if you went back a couple of years, they were draining cash.

On the smelting side, and in terms of productivity, we haven't actually allocated productivity to this business, that business or whatever at this stage. We've got some broad metrics and we'll be talking more about more detailed metrics in future times. But when you get to the smelters, productivity can have the same cost structure with more output, or the same output with less costs, and both of those are productivity gains.

The smelters are relatively fixed environments, so we've got capacity there for basically creep in the tonnage. The other thing to keep an eye out, though, for in the smelters is they will have a few headwinds as well with costs. Just think about the carbon material side of the business for the coke and pitch and the like that will go in there.

So we expect them to be a healthy contributor to productivity gains. They'll be under the same sort of internal pressures as everybody else will be, and they have made great progress on their cost structure thus far. There's more to come, but I think you should expect, I think it was Myles' earlier question, the low-hanging fruits have been well and truly harvested here, so we are getting to the stage where incremental improvements are getting more and more difficult.

So the productivity drive's important, and it's important to get the focus not only on cost, but also on the top-line aspects of that as well. So it can be different product, it can be ability to ramp up and down with production as well; that's also an important payback of productivity. The more you're in control of your process is what's going to deliver the productivity gain.

All right. Thank you, Chris. Why don't we come back to the room.

Paul Gait, Bernstein. Just following up on the really the question about the sustaining CapEx and it's related to the growth profile. You were saying you want a cost equivalent of 2% per annum in a trend sense. I was just wondering if you had dimensioned anything around the growth CapEx over the medium and longer term that would be required to support that. Should we be looking at $3 billon, $4 billion as per what seems to be indicated here, or where's your thinking on that?

And second of all, to mention again the magnitude of that 2%, where does that sit relative to your assumptions about, say, global growth? Are you looking at growing output below or above a trend GDP line? Thanks very much.

Thanks for the question. The 2% that was quoted in November, that you see on the first slide again, is what we have in the pipeline today; that's in the pipeline. And we've given you, or we reconfirmed today, the capital expenditure for next three years, so that, no change from [that]. The 2% that we currently have for the next 10 years is below GDP.

Anna Mulholland, Deutsche Bank. You mentioned the need to eventually increase replacement CapEx in the Pilbara. Back in the November Investor Day I think you put a $1 billion number in there --

For the next three years.

Yes. When do you have to approve that $1 billion; when does that go to the Board?

So [it's just a result]; it's not only one project it's a series of different projects and it's on a regular basis. For example, in December we did approve the next phase of development of Yandi, so it's just on the regular basis.

So is that in your Group CapEx guidance?

Yes, absolutely it's fully [backed here], no change.

And in terms of the ongoing investigations at Simandou and on the Mozambique coal side, in your statement this morning you've spoken about a potential material financial cost. At what point do you have to provision for that?

Well, the investigations are at early stage. We have no feedback even as to outcome much less consequence, so we have to have a statement in the release to identify the fact of the investigations. But it's quite early and we have no basis for any even assessment of outcome or consequence of any outcome, should it be a negative outcome. So we don't have any basis to provide at this stage. But the instant we do, we'll be in communication.

So a regular situation on a regular basis but it's early days but we had to put something in the press release today.

Fraser Jamieson, JPMorgan. First question on copper, and Resolution in particular; quite early days obviously in the new US administration, but some indications that they might be a bit more friendly and quicker in terms of [permitting] processes, etc. Could you talk a little bit about any engagement that you've had there and what your feeling is on timings?

And secondly, just a very quick one on the buyback. I think, historically, you've only announced buybacks with your annual results; should we expect that to be the same, going forward, or is this now a cyclically decision?

Resolution, I take the Resolution; that's an easy one. Quick resolution on this one. Early days with the Trump administration. We don't do politics as far as Rio is concerned. Remember, some of our assets, like [Borates], this year is a pretty special year because we've been there for 125 years. So we are engaging with the Trump administration, it's early days. I will go to DC in March to meet directly with some of the key officials; we'll progress as much as we can, so that's the only thing I can say at this stage.

Regarding the buybacks, I think we've been pretty clear on the record about the -- this time is really the key returns decision timeframe for the year. We do, though, have to make more decisions now at the interim than we previously did with the -- under the old progressive dividend, we had an arithmetic outcome for the interim. Last year, we had the undertaking of not less than $1.10 so we provided towards that in the interim. So the Board does have to make some more decisions in August, but you should expect the February decision timing to be the main conduit for all those decisions about returns.

Tyler Broda, RBC Capital Markets. You've got this year $9.6 billion available for capital allocation, and that included this year $3.9 billion that was used to reduce the balance sheet debt, with the gearing target at 17% below where we are and also with prices likely to be higher than where they were through the year as well as with further cost savings, etc. I guess the question I have is, is there a point where there's, I can't believe I'm saying this 12 months after last year, but is there a point where there's too much cash return?

And further to Menno's question, can you start to think about other growth projects to speed up at this point?

So we are working in terms of beefing up our growth pipeline but, for the next three to four years, it's pretty set. And it takes an awful lot of time to develop new options and so on and so forth. If you look at, or you talk about as an example, is 25 years. I think I saw a statistic last week from our exploration people, on average between the time you find potentially nice rock where you can have diamonds and the time you've got cash flow is 30 years, all right. So let's do the work properly in that space.

So in the short term, as we said, that's why we are very comfortable in reconfirming the guidance because those are the projects we want to pursue; not because that the only one which are available, it's because they will provide the right level of returns to our shareholders. So that's what we have in the pipeline for the next five years and then, beyond that, we're working on it. For obvious reasons, we'll provide you with more details as and when we can do in that space.

Now in terms of allocation of cash, the model is very simple. The first priority is to generate the cash through productivity, for example, through the strengthening of the portfolio, and then, we'll go through the so-called [pre-clean] washing machine that you have seen many, many times. At that point in time, we will take the right decision and we want to have a balance between shareholder return, long-term growth, and the strength of our balance sheet. So we go through the process on regular basis.

But let's create the problem, the good problem to have. Let's make sure we've got all the cash generated and then we can have a good conversation on how we allocate the cash.

James Gurry, Credit Suisse. Just harping on a little bit more about copper and options. It's a little bit unusual for a diversified miner to have 0% of earnings coming from the copper and minerals division; does it concern you that it is quite small?

And, obviously, the copper market could tighten in the coming months because of production disruptions to mines that you've got a stake in. So are there any other ways to heighten the contribution of copper to the portfolio that you're looking at, maybe on acquisitions, smart acquisitions, or other Greenfield opportunities, like the Resolution copper project?

The question on the M&A, the answer is pretty simple: for us, the growth strategy is about build and smart M&A, answer to your question. When I look at the recent valuation of some of the transactions, like the DRC, like Morenci, which was a private transaction to some extent, or even Zaldivar, great price, or even Northparkes that we sold, if you remember, a few years ago, great price for the seller.

We will keep a watching brief on the M&A. But unless the alignment of stars is the right one, and unless we have a compelling business case, we're not going to rush into any M&A space. That doesn't make sense; it's not consistent with strategy.

Everybody knows, more or less, in this room what are the four/five [major] assets, world-class copper assets I would absolutely love to have, and I have on my Christmas list. I won't tell you which year, by the way. But everybody knows which one they are. But none of those assets are for sale today and the current owners have repaired their balance sheet, that give you some indication here, in a very significant way.

So we have a situation today if one of those assets was for sale, you can be sure one thing; there will be an auction process, and there will be the Chinese and a few others in the process. Therefore, you can be sure one thing, the price will be very good for the seller; I'm not sure about the buyer. So, yes, we need to grow but today, it's about build and smart buying, with a very high level of threshold in relation to the buy.

You mention in your report, to Paul's question on the phone, that Grasberg was an option; can you just thrash that out a little bit more?

Yes. For us, is there is no doubt that Grasberg is a world-class resource. But the key question, especially in light of what happened three weeks ago, is, is Grasberg a world-class business for Rio Tinto? The 1995 agreement is a complicated one. We don't have equity in Grasberg; it's a stream. For us, if we want to have a meaningful offtake and stream beyond 2021, we would need to invest in a big way in the coming years. Clearly, in the uncertain context that we have just described a few minutes ago, we're going to watch very carefully what's happening before we commit additional material money into this project. That's what I mean by an option.

We don't have equity, in the normal sense, in Grasberg; it's a stream. Complicated stream, but it's a stream. I hope I've answered your question.

Maybe, from the conf call?

Clarke Wilkins, Citi.

Just a couple of questions. First off, just in regards to the additional rehabilitation costs for Gove, quite significant increase, we've seen that happen, I suppose, with the range of ERA. Has that been looked at and applied across the other closure provisions across the other assets, given the potential risk we've seen across the industry for closure costs to be underestimated?

And also, just in regards to AutoHaul, there seems to be some progress being made there. What steps are actually required before you can actually run the trains without a driver on board, with the automated systems, like in terms of government approvals, etc?

Yes, I'll take the AutoHaul. I share with you that both Chris and myself, I shouldn't say, had a race in the Pilbara last year, but the two of us were on different trains. I have to say, I left the station early and I did win the race. Sorry, Chris.

On a serious note, AutoHaul is working. The technology is working. We are improving the technology further, and now we are really in the ramp up, and we do it a very phased and structured way. There are lots of discussions, as we speak, with the regulators, and we still have, I don't know if it's, 18 months to two years ahead of us before it's fully deployed.

But the technology today is working, and is working pretty well. When we were there in the Pilbara with Chris, they show us all the safety tricks, putting a car in the middle of rail to show that the train can stop, and so on and so forth; it's working. Now, it's about deployment. It was a difficult process, because we had lots of IT issues, a lot of telcom, but today is working and we're going through the ramp up. At the same time, as I said, we are working very closely with the regulator to get all the authorization to be able to do it. Phased and structured way, but we can see the light at the end of tunnel, if I may put it this way.

The question about closure provisions, the Gove issue is we curtailed the refinery at Gove. We're still continuing to mine there, and we'll continue to do that for some time, but it's really around the refinery and the residue dams pertaining to the refinery. So we are in the normal capital expenditure approval process for the ideal path for exactly what will happen is the remediation there. And we do have a process where we look at closure provisions on a regular basis, on an annual basis.

But the issue really, as you get closer to the period we're actually closing the operational or actually remediating, then it gets a whole lot more specific scrutiny about exactly how will that project happen. So we'll continue to work on that because we don't have the perfect answer for exactly what we want to do yet, but we had enough to warrant a review of that provision.

And I think the same is true in the case of ERA; the current mining lease expires in 2021 and rehabilitation remediation has to be completed by 2026. So that's our plan, we're working towards that, and we're making sure that we've got cash there available to do that rehabilitation.

Hayden Bairstow, Macquarie.

Just a couple of quick ones from me. Firstly just Kennecott; obviously did a pretty tough year, as we know, still carrying a fair amount of book value, still confident you'll be able to turn that asset around. Obviously, processing other's ores through the smelter isn't a very profitable exercise by the result so just wondering whether you're confident in the turnaround there.

And just on the presentation, on page 3, I noticed you had a picture of an electric car; are we to take from that that the Jadar lithium project is moving along quite nicely in the feasibility stage?

I'll take the car, definitely. The electric car is made of aluminum, copper, lithium for the battery and even high strength steel in some of them. So don't draw any conclusion, but I can confirm that we are studying very, very carefully the Jadar project. The study is underway and when we have something else to share to the market we will do it. I think it's a broad range of products here.

On the KUC piece, we still have a few years which are challenging at KUC because we are doing the south pushback. But so far, we are on track and we believe, with the south pushback, we'll be able to extend the life of the mine in a profitable way. Now let's be clear, Kennecott will never come back to Q1 asset, we have to be really clear, but there can be a solid Q2 or Q3 asset in a place which is the US, which is a pretty friendly environment.

And then back to a question earlier today about the Trump, early days. If Trump is serious about investing in infrastructure, that could be very positive for the copper industry. And we are the largest player, as you know, or one of the largest players in the US. The mine has been there for 112 years and I can tell you, with the [Obama] administration, and with the Trump administration, there has been a lot of discussion about how we can contribute even further to the US economy by providing what they call critical minerals, which is not only about copper but about premium and other byproduct that we can extract from Kennecott today and potentially from Resolution in due course.

Work underway at Kennecott, the south pushback is going well, and I hope that, in a few years from now, you will see some nice meaningful cash flow coming out of Kennecott.

If we go back to the room, I'm just conscious of time, so there won't be too many questions; there will be one last question.

Hunter Hillcoat, Investec. There's a lot of people around who think iron ore is going be [$0.55] by the end of this year; I'm not one of those people. You can manage value over volume to some extent, but is the price really being set by a bunch of taxi drivers and day traders out of just China and the Dalian Exchange? What is actually setting the price at these sorts of levels, given supply/demand fundamentals?

Yes, my sense is, the key source of uncertainty in relation to China, and therefore the iron ore, is the whole question about the domestic iron ore production. If you go back to three years ago, they produced 400 million tonnes, last year, we don't have the latest statistic but it was between 250 million/275 million. We are in winter in China, so a lot of those small mines are shut down.

The whole question is around, when we get into the summer month are those mines going to restart or not? Depending on the answer to this question it could have an impact on the prices. Now what is important for us and when we talk about value over volume, in the context of iron ore one dimension is really around making sure we produce the right product for the right customers.

And back to the point I mentioned today, as and when the governments restructure the SOEs in China because of pollution issues, and as they want to increase the productivity of their best blast furnaces, mainly on the coast by the way, in order to increase the productivity of your blast furnace you need to improve to upgrade your [burden]. And that's where you're going to need higher coking coal quality, and that's where you're going to need higher iron ore quality. So we see lots of opportunities in that space, so that's where we are.

I'm just conscious of time. Thanks a lot for coming. I think the story is pretty straight forward, if I wrap it up. If I go back to the Capital Market Day in November, in this room or December in this room, sorry, November was in Sydney, we have delivered on all our promises, including the shareholder return, the superior cash returns, and I think $3.6 billion is a good quantum. And what you should expect from us is exactly the same, going forward, and we look forward to meeting you in August. Thank you. Bye for now.