力拓 (RIO) 2014 Q2 法說會逐字稿

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... but within this environment we've emerged a simpler more focused and leaner business, with greater options to make the most of the attractive long-term demand that we believe our products have for a developing world, for industrialization and urbanization.

But even though I'm very, very pleased with Rio Tinto's progress after the 18 months, we still do have a lot of work to do. We're working hard on embedding the improvements we've achieved so far.

We're confident that Rio Tinto's low cost diversified portfolio will continue to generate strong sustainable cash flows, and this solid foundation will result in materially increased cash returns to shareholders.

Let me emphasize this: if there's one message that we should all take away from today's results, it is our commitment to materially increase our cash returns to shareholders.

Our interim dividend is up 15%, in line with the increase we made for our full-year dividend six months ago. The Group remains committed to our progressive dividend policy, but we have considerable capacity to further enhance this with consistent additional cash returns to shareholders in the future.

So if I turn to the actual numbers, and some of you would have picked this up already, I'm happy to report that our interim results have ticked all of the boxes. Underlying earnings of $5.1 billion are up 21% over the same period last year.

We achieved $3.2 billion of sustainable operating cash cost improvements, exceeding the $3 billion target and six months ahead of schedule. And now we're focusing on delivering a further $1 billion of sustainable cash cost improvement by the end of 2015.

Net earnings for the period are $4.4 billion, reflecting a writedown at the Kitimat modernization project that we flagged back in February. This is very, very disappointing, but we are now on top of the project and I can talk a bit about that later.

Our tighter capital allocation processes mean that we're prioritizing investment only in the highest value opportunities and, as such, our capital has reduced $6 billion compared -- sorry, our capital expenditure has reduced to $3.6 billion in the first half of this year.

As you know, much of our capital is going into iron ore. I'm not apologetic about this as we are the lowest cost producer of quality benchmark ore.

Cash generation of this business is extraordinary, and it will get even stronger as we reap the benefits of our breakthrough expansion towards 360 million tonnes a year.

We retain complete confidence that there will be strong global demand growth for our key commodities over the medium to long term.

In the short term, volatility in the global economy is low, but there are likely to be some short-term fluctuations in our markets, with geopolitical uncertainty in the Ukraine, the Middle East and the South China Sea.

We expect, however, that global GDP growth for 2014 will exceed 3%, and in China, the government has shown that it is dealing effectively with the rebalancing of its economy, with the target GDP growth of 7.5% intact.

New supply is affecting some of our key markets at the moment, but high-cost producers are leaving the market and, for example, the fundamentals for iron ore remain strong.

So whilst we have experienced lower prices this half, we are confident in the outlook for our iron ore business, given the healthy demand outlook, our low cost of production, and our product quality.

The copper market has moved into surplus on the back of supply from new mines, but there's been limited impact on prices.

And we're beginning to get the shine back into aluminum. The aluminum market outside China is starting to recover, with modest supply deficit improving the LME prices and leading to record premiums.

So the outlook is good, and the work we've been doing over the past 18 months means that we, as an organization, are prepared for a range of economic scenarios.

We're in a good position to thrive: our portfolio of Tier 1, low cost, long life, expandable assets is ideally placed to take advantage of this attractive outlook.

These results demonstrate the strength of our business. We enter the second half with a stronger balance sheet. We've reduced our debt by $6 billion during the past year.

And it provides more options. Our efforts to transform the Company and our superior assets underpin our commitment to grow cash returns to shareholders.

So thank you for your attention, and I'll now pass back to the operator who will explain the system so that you can ask questions.

(Operator Instructions).

It sounds like we don't have a question at this time, but let me perhaps feed you back some of the items that were of particular interest this morning with the London and Australian based investors, and certainly they're interested in getting an understanding of the cost reduction and where we stand.

And certainly, if you look at the $3.2 billion, the major contributors have actually been the aluminum business, the energy business, and copper business, with each of those roughly achieving around $800 million each. Iron ore at about $600 million; diamonds and minerals have experienced lower volume and obviously achieved lower cost reduction.

Whilst the cost reduction has been very, very pleasing, in announcing our new targets it's important that I mention that that target has come bottom up from the organization. I was very loath to have a new top-down target that could run the risk of cutting into the muscle or cutting into the bone of the organization.

So it was important that, for sustainability, to ensure that we don't drop any balls, that the cost reduction actually came from the business and that's what we've developed. But as you read through the material you'll note that it is getting harder, and that shouldn't be any surprise at all.

We're expecting that, through the second half of this year, we'll achieve $250 million of cost reduction; through 2015 we'll achieve $750 million of reduction.

If you look particularly at this year, there are a couple of areas there that will actually offset the cost reduction. One of them is a smelter maintenance outage at Kennecott Utah Copper.

So we've taken all of that into account, in terms of developing the new set of numbers. It will be a challenge, but I've got the organization right behind me in terms of providing the focus, discipline and accountability to deliver that.

If I think more about topics that had focus, certainly there was a lot of commentary about, well, what does materially increase shareholder returns mean?

We didn't give any figures and that's a decision for the Board, but we have indicated to investors that this is a decision we'll make in February, not only in terms of quantum, but also in terms of in the exact distribution way of achieving that.

You know, as an organization, we're committed to the progressive dividend and we've seen dividends increase this year by 15%, last year by 15%, and the year before that by 34%,so we do have a track record of delivering increases. This time, the Board has indicated that it will be a material increase, so clearly, it's focusing us on something that is substantial.

The other point that I'd make is that progressive dividend, clearly there are other avenues through special dividends, or buyback, or whatever, and I know that different shareholders have got different views on this, and people are very vocal in describing their preference.

But it's a decision that the Board will make, looking firstly as to our economic circumstances, obviously depending on the full-year results and depending on what happens with commodity prices, exchange rate, energy costs and so on.

But also, the actual means of distribution is a Board decision, and that is something that they will be considering at the time and determining what is the best way to return this cash.

Perhaps if we could have another go and see if we've got any questions now?

(Operator Instructions). Nathan Littlewood, Credit Suisse.

Congratulations on the result. I was just wondering if you might be able to give us a little bit of color on some of the recent management changes at Iron Ore Company of Canada.

I know that there has been a few years of fairly disappointing ramp up and commissioning of the expansion there. I'm not sure whether the two were sort of related, but would be keen to get your thoughts.

Yes, the most important change is that Kelly Sanders has taken over. I think many of you will remember Kelly from his time at Kennecott Utah Copper. And since that time, Kelly has been working on our heavy mobile equipment tender where we're about to announce the results really of the first stage of that.

Zoe Yujnovich has been at IOC for quite some time, and Zoe was offered a number of positions elsewhere in the business but she's decided that she would like to go out on her own. As you know, we regularly change people, three, four, five years in their role and Zoe had reached that point.

Now, of course, what happens when you make a change like that, a new broom comes in, a new focus, a new sense of urgency, a new sense of what the opportunities are, with a fresh set of eyes, and that's exactly what I'm expecting with Kelly.

He is experienced, he does understand the fundamentals of the business and processing plants, and I'm working on the basis that Kelly will make a real difference on the ground there.

IOC has completed the expansion projects, step one and two, the concentrator expansion projects one and two, and that is now up and operating with the new conveyor or delivery system from the mining pits.

So it's a good platform for Kelly to come in and to make that difference.

Okay, great. Thanks very much.

Marisa Hernandez, Neuberger.

Congratulations on the excellent achievements. We are very happy to see Rio having a much better balance sheet and are encouraged by your commitment on [healthy] shareholder returns. I have two questions, if I may? Number one, on the Oyu Tolgoi mine in Mongolia, is there any growth CapEx earmarked for the underground development of OT in your CapEx guidance for 2014 and 2015? And if not, how would that change over time?

Okay, let me answer that question first. Yes, the OT underground expenditure is in our capital forecast. You would have picked up that we have reduced our capital guidance for 2014 by $2 million. We previously announced around $11 billion; we're now providing guidance of around $9 billion. And I think that's reflecting a whole raft of things where, obviously, tighter capital control, some improvements in terms of project delivery, and the iron ore business has returned $600 million of capital. Certainly, the OT project is a small part of that with the approval of the project finance now expected later this year.

But it's also comprehended, as we go forward in 2015 and onwards capital, we've provided guidance of around $8 billion, going forward. It's something we're working through with the government of Mongolia. The capital is in the project in our plan. Importantly, the project must be financed through project finance. This is an issue that we've made clear to everybody, including the Turquoise Hill shareholders, that every shareholder has got to take a responsibility for funding their part of it; albeit it will be through project finance.

So when that happens, that will be an addition to net debt in your balance sheet, Sam? You consolidate that, right?

Yes, we do consolidate it and yes, that will be comprehended in our balance sheet.

Understood. And if I may ask you a second question? Obviously you're making now huge progress in driving cash generation from cost and capital controls, which are the variables that you can control. And we very much appreciate your comments regarding shareholder returns. What type of adverse price environment do you think could impede further return to shareholders next year? How do we think about how bad it can be for that not being able to happen?

Clearly, the biggest driver of our cash generation is the iron ore business, and we're seeing iron ore prices stabilize at around $95 a tonne. If you look at the forward curve for iron ore, the prices are holding at around that level through 2017. The price will, obviously, be what the price will be, but I think it's important to look below the spot price to really see what is the flexibility below that. And by that, I'm referring to the juniors and the lower quality ore.

Firstly, the spot price is a landed price, so for example, if you want to look at Australian suppliers, you've got to take off $8 for freight. Then you've had the juniors with 56% iron content, 58% iron content, offering between $15 to $20 of discount in order to move their material.

Why have they had to do that? Primarily, because the Chinese mills are being forced to improve their environmental performance in order to reduce the amount of smog that the Chinese are seeing in 17 of their major cities. And the best way for the mills to do that is to actually go upmarket in relation to the quality of the product so that they produce less slag and, obviously, use less energy and are more environmentally efficient.

For the juniors, in order to even persuade the mills to take some of their ore, have had to discount very, very steeply. So you're seeing their prices some $23 to $30, or $28 below that current spot price of around $95. That's starting to severely impact a number of juniors. We've seen 85 million tonnes of capacity already come off around the world year to date.

We're expecting through 2014 that 125 million tonnes will come off, so the current price levels have had quite an impact. And in a way, I think the forward curve is picking up the fact that, when you look at the impact on the juniors below the spot price, it actually almost puts a floor, if you like, on iron ore prices. Prices will be what they will be but, personally, I'm not expecting any major dislocation to the iron ore prices.

Clearly, when we're looking at our projection for cash flow, we look at our price assumptions. When the Board looks at the actual dividend decision, they will look at the performance for the full year. They will look at the calendar year results and our expectation, going forward in 2015, for our cash flow. But the Board have taken all that into account and the Board has endorsed the comment that we will materially increase our dividend. I think we're on pretty stable ground.

Wonderful. Thank you very much.

Eliot Glazer, Wm Smith & Co.

Thank you so much Sam, for giving us that color on the situation in iron ore amongst the juniors and how much is coming offline. Could you extend that, please, and shed some light on how the competition is conducted between the three majors, Rio Tinto, BHP and Vale? Does China accept everything all three have to offer? Is there some kind of allocation? How is that business conducted, please?

It's a free market. It really is the dynamics of supply and demand that's taken into account. The three majors are providing grades that are attractive to the steel mills and, as such, it really is the situation of free supply now.

Of course, there are impacts of price that need to be taken into account, and I mentioned the freight from Australia to China of $8. Currently, the equivalent price from Brazil, for example, is between $18 and $19, so obviously, there is a price tradeoff that the mills need to take into account. Some of the Brazilian ore is higher grade product, so there is a value in use factor that they take into account, but it certainly doesn't offset all of that $10 to $11 freight disadvantage that Brazil has, purely and simply because of the distance.

The other thing that the mills will do is to enter into long-term contracts. They will be priced by a market price mechanism, but the mills will enter into whatever, five, 10 year contract, whatever they deem appropriate for supply. That will actually determine how much of a particular supplier's ore is taken up.

But the price mechanism, it varies quite a bit. It's all, as I mentioned, based on market prices, but some of it is based on spot, i.e., what's the price today, or what's the price when the ore lands in China. Some of it is the average of the price over the current month, so it tries to move some of the daily variations out of the [equation] by averaging over a month.

Some are based on a three month period, a quarter, and this can either be three months in arrears, or it can be the current three months. So there's a range of factors there and, quite plainly, the mills shape their portfolio so that it suits their particular needs.

For example, where you've got a situation where a steel mill is supplying, for example, the car industry on the basis of quarterly pricing, they will go to quarterly iron pricing; where they're supplying steel into the spot market, they will want to base it on the spot price. But it's different horses for different courses, depending on what actually suits them.

Does that answer your question?

That's an excellent answer and I'm very grateful.

[Debbie Polovnikova, Voya].

Actually, I have a couple of questions. First, on the cost reduction program, so there's $1 billion still left by end of next year. Can you help us understand how you think of it breaking down between your main segments?

And then the second question is on your CapEx; you said $8 billion for next year and probably thereafter. Can you help us understand how much of that is your sustaining capital and how much of that are projects that are already approved, i.e., what is the room to play around with in terms of either things that are not yet approved, or projects like Oyu Tolgoi underground? I guess they're not officially approved, so maybe that's it, maybe just in terms of understanding what is the potential for that CapEx number to actually come down unless you approve further projects.

Yes, okay. Dealing with the cost reduction firstly, as I mentioned, we've indicated that we're expecting $250 million through the rest of this year, and then $750 million in 2015. And as you would expect, the cost reduction is really in line with the cost base of the businesses.

Energy and aluminum have still got a way to go on their original targets. For example, the energy group had a target of roughly $1 billion. They're sitting at around $800 million, so they've got a couple of hundred million to go.

Aluminum had a target of $900 million. They're at $800 million; they've got $100 million to go. But the rest, as I say, will be evenly spread across the businesses according to their size. We've not actually gone through the numbers today.

Clearly, it will be a range of factors: productivity improvements, overhead improvement, purchase costs improvement, really the whole gambit in terms of how that cost improvement will actually be generated.

The capital for 2015 and beyond, we're sitting with sustaining CapEx at around $3.5 billion a year. I suspect that there is room to fine tune that number, but that's really the basis of how we arrived at those numbers. Clearly, we've got $4.5 billion beyond that in terms of straight development capital.

There's a range of projects over the near term for us to complete. Certainly, the Pilbara 360 [million tonnes], that is en train, certainly during the immediately path of our forecast. Kitimat also is a project that we need to complete. And OT underground that you mentioned, OT stage two, is a project that we're very hopeful that we would commit to this year. But of course, it will depend on the negotiations with the Mongolian Government and, obviously, project finance is going to be a very important part of that.

Beyond that, there's a range of projects across the product groups and, obviously, there will be different timeframes. But one that I've mentioned today is the aluminum division bauxite project in far North Queensland, the South of the Embley project, which is a very attractive project, and the team right now are looking to determine how we could accelerate that project by 12 months, i.e., shorten the construction process.

We have in South Africa, at Richards Bay Minerals we have the Zulti South project, the titanium dioxide project. In far North Canada, we have the A21 diamond project, which is again, highly prospective.

We have, in the coal business in Australia, the Mount Pleasant project, which, despite the fact that coal prices are currently under pressure, this is a very low strip ratio project, low operating cost, which makes it quite an attractive project.

Of course, in copper, beyond OT underground, we have the La Granja in Peru, and we have Resolution in the USA. And there are, clearly, a range of other projects: in iron ore, once 360 is completed, there are clearly options there to creep that volume further; and there's the Simandou project in Guinea

So there are a range of attractive projects in the portfolio to provide the growth, but recognizing that -- we believe that $8 billion is sufficient to deliver the necessary growth.

Meanwhile, as I've said, we are committed to materially increasing our shareholder returns. And I think, for those of you that have done your modeling and had your analytic team look at these numbers, it does provide us with the opportunity to materially increase our returns.

And what can 2015 and 2016 look like in terms of CapEx, if there are no further new projects sanctioned by the Board?

CapEx will be $8 billion in 2018, and we've given guidance today that, in the near term, our capital will continue at around $8 billion a year.

Okay. So you have a high confidence that all the projects will be sanctioned to fill that $8 billion?

Yes. I've mentioned a range of projects, and some of these projects are well developed, some are not, but some are well developed, so I think we've got a pretty good view of what the pipeline consists of.

Okay, great. Thank you.

As there are no further questions at this time, I'd like to hand the call back to Mr. Walsh for any additional or closing remarks.

Thank you all for coming on the line; I appreciate it. It's been a good day for Rio Tinto. It's good news. For me, it's rather odd because the first half was completed in June 30. In a way, it's like having a grand final, and immediately after that grand final where you're focusing on the next, and that's very much where I sit. And clearly, we're well into the next quarter and focusing on what we need to continue to do to deliver value.

Importantly, we do have these solid foundations, as I've mentioned, that will result in materially increased cash returns to shareholders. It is stronger words than we've used before and it's important that shareholders realize that this is a Company that's very, very focused on shareholder returns.

We believe that we've got the fundamentals tracking well. We've over-delivered on our cost reduction and set new targets. We are now at the mid-teen level for debt that we were targeting, so we're well positioned in relation to that.

We have given guidance on our capital that gives you assurance that the growth is there, but also that it allows the returns to shareholders. I think the business is well positioned. Today's results are good. We remain a very focused organization: focused on delivering value, focused on delivering our capital projects and, importantly, focused on shareholder returns.

Thank you very much for coming on the call today. I really appreciate your time and your support. Thank you.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.