Edited Transcript of RIO.L earnings conference call or presentation 26-Feb-20 8:30am GMT

In the year, we invested in high-quality growth, and in the year we paid $11.9 billion — just to make sure people get the number, $11.9 billion of cash returned to our shareholders. Today, we have announced a record final dividend of $3.7 billion, taking our total cash return to our shareholders over the last 4 years to USD 36 billion. Our commitment is to deliver superior shareholder value through the cycle, and we are consistently achieving this.

In 2019, we generated $21 billion of EBITDA with a strong margin of 47%, resulting in an industry-leading return on capital employed of 24%. We generated $15.8 billion of operational cash flow that we allocated with discipline, including investing $2.6 billion in high-value growth. Our strong exploration investment of $600 million in 2019 shows we are also out there looking for next world-class business.

Most of all, I’m very proud of our safety performance. Safety is a core value at Rio. And in 2019, we had no fatalities at the Rio Tinto operation. This reflects the work of every one of our colleagues and contractors around the world, but we must maintain this and keep the focus, as we must with all other aspects of operational excellence.

Strong operational performance underpins strong financial performance, as does our commitment to sustainability. Sustainability is a key enabler of our strategy and financial performance. Core to approach to sustainability is profitability. Our goal is to run a safe, responsible and profitable business. Of course, the more profitable we are, the more we can contribute and share wealth across multiple stakeholders.

And in 2019, we deliver here as well. Let me give you some example. Rio Tinto employs around 46,000 people globally with over 100,000 contractors. We work with suppliers in more than the 120 locations, with a total spend of around $17 billion in 2019 and we have paid $7.5 billion in taxes and royalties globally to governments and communities. We also have thousands and thousands of retail shareholders.

So we are vital contributors to economies, communities, shareholders and supply chain. Over the years, we have been working hard to create wealth in a responsible and sustainable way. We have improved our environmental performance. Over the last 10 years, we have reduced our global greenhouse gas emissions by 46%. We continue to invest in renewables.

For example, just last week, we announced a $100 million investment in the solar and battery solution in the Pilbara in Australia. We will invest CAD 55 million in ELYSIS, our breakthrough technology for aluminum. Today, we will release our new climate change targets. I will share more on this shortly. And we ended 2019 as #2 on the global Human Rights Index only behind adidas. A great performance in a complex industry.

In summary, today, Rio Tinto is a stronger and more resilient company because we have the right strategy to perform and transform. As you can see, we have once again deliver industry-leading profitability, strong cash flows and significant returns to our shareholders.

We continue to invest in the future in both organic growth and in sustaining our operations. We have a world-class portfolio of assets, and we have the strongest or one of the strongest balance sheets in the sector, with $3.7 billion of net debt. This provide us with resilience, which is absolutely vital in an increasingly complex and volatile world. It also position us well for the future, and I will tell you more after Jakob shares some further details on 2019 financials. Floor is yours, Jakob.

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Jakob Stausholm, Rio Tinto Group – CFO & Executive Director [3]

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Yes. Thank you, J-S. Ladies and gentlemen, good morning. Well, as J-S already have told you, we’re very pleased here today that we have announced a set of very strong financials for 2019. Our top line grew by 6% compared to ’18 and we saw double-digit increases in underlying EBITDA and underlying earnings, which grew by 17% and 18%, respectively.

This is despite the absence in 2019 of significant revenue and earnings from now divested assets. In other words, we have delivered more from less. Net earnings were lower, entirely due to impairments. In the first half, we recognized an impairment related to Oyu Tolgoi, and at the year-end, there was an impairment at Yarwun. Our return on capital employed of 24% was the highest for almost a decade, and we were able to turn earnings into cash.

We had an excellent cash conversion of EBITDA to cash flow of 70%, and cash flow from operations grew by 34%, and our free cash flow, relating to 2019, reached $10 billion, an increase of 41%. This, combined with a strong balance sheet, meant that the Board was able to declare a final dividend of $3.7 billion, which will be paid in April. The full year dividend of $7.2 billion represents a 40% payout.

As you can see, in aggregate, higher prices and a strong U.S. dollar drove the increase in EBITDA in ’19. Operational challenges, including significant weather impacts, resulted in lower volumes, particularly in the Pilbara, leading to higher cash unit costs across the group.

Most commodities declined in 2019, reflecting a weakening in the global economy. We, however, in aggregate, had a positive impact from prices due to iron ore. The iron ore price benefited from significant supply disruptions starting with the tragic incident in Brazil but also very strong steel demand from China.

Steel production for the first time ever exceeded in a period of 1 billion tonnes on an annualized basis. However, both aluminum and copper prices were weaker last year compared to 2018. In aluminum, both the LME price and the Midwest premium fell in 2019, due to the slowing of global trade and a weaker demand from transportation in particularly, automotive. Copper prices, which often reflects the state of the world’s economy, also decreased in 2019, particularly in the second half of the year.

In 2019, Rio Tinto further improved profitability to 24% return on capital employed. The last year we had similar profitability was in 2011, and at that time, the iron ore price was approximately 80% higher than in 2019. Our industry-leading profitability is not a short-term trend, and the strengths and the resilience of our business is illustrated by the fact that during the last 2 decades, we’ve only had 1 year of single-digit return on capital employed.

Most importantly, we have a business model that has the ability to turn earnings into cash. And since we amended our capital allocation framework back in 2013, we have delivered strong free cash flow. In 2019, we generated $10 billion of free cash flow, excluding the tax payments made in ’19 related to divestments completed in 2018. This is the highest in almost a decade.

Now let’s dive into the individual parts of our business starting with iron ore. Our iron ore business is truly world-class. Revenue has increased by 29%; EBITDA by 41%, which generated an EBITDA margin of 72%. We started 2019 with the intention to slowly grow our shipments.

However, higher-than-planned weather disruptions, a fire at our Cape Lambert Port and some operational challenges in the first half meant that all the year — in the year, there was a 3% decline in shipments. It was, however, encouraging to see the increase in iron ore production in the second half. We were able to run the system at an annualized run rate of approximately 340 million tonnes, reflecting the investment we made in mine development.

Operating costs increased in 2019 to $14.40 a tonne. This was partly due to lower shipments, but also additional cost associated with waste movements. This year has had a challenging start, and we were impacted by the tropical cyclone, Damien, earlier this month. As a result, we have reduced our 2020 shipment guidance for the Pilbara to be between 324 million and 334 million tonnes.

We’re currently expecting a 12% increase in the work index at our mines and a higher proportion of below water table mining. Despite this, we are expecting similar unit costs at $14 to $15 per tonne in 2020, albeit based on a slightly weaker Australian dollar. We will focus on productivity and technology to sustain a low-cost position.

During 2019, we continued our controlled ramp-up of our investments in the Pilbara. This increase includes a spend on Koodaideri Phase 1, the Robe replacement project, our recently approved investment in Western Turner Syncline Phase 2 and the investment required to sustain and improve the future reliability of our world-class assets.

We expect sustaining CapEx for the coming years to stay between $1 billion and $1.5 billion a year. Strong financials, combined with continued capital discipline, led to an industry-leading return on capital employed of 67% last year.

Now moving on to aluminum. During the year, the business faced very difficult conditions across the value chain. Bauxite production grew by 9% during the year, following the ramp-up of Amrun, with third-party shipments increasing by 21%. Production in alumina and aluminum were stable, fairly stable despite some operational disruptions with earlier-than-expected pot relining required at Kitimat and the impact of significant maintenance in aluminum.

EBITDA has decreased 26%, and the EBIT margin fell 6 percentage points to 26% due to lower prices, which were partly offset by lower input cost and the increase in bauxite volumes. Despite the continued investments, particularly in sustaining CapEx, we continue to generate healthy free cash flow of $800 million. The return on capital employed in this business reflects the tough operating backdrop for the industry and was 4% in 2019.

Overall, we have a strong portfolio of aluminum assets. However, some are weaker due to structural power disadvantages. We are doing everything we can to improve this asset, and this led to the announcement of the strategic review of our assets in New Zealand and Iceland.

There should be no doubt that we are not satisfied with the profitability of our aluminum business. Nonetheless, what you need to ensure, particularly in tough times, is that you are competitive. What you can see here is that our assets continue to generate the leading EBITDA margin in the industry.

Now moving on to our Copper & Diamonds business. In 2019, we experienced really good operational performance, but the financial performance was masked by lower prices and one-off items. Our realized copper price fell 7% in 2019. We also had lower production of copper, due to — as anticipated, lower grades and lower productions of diamonds as these assets are getting closer to the end of mine life. Despite 11% lower grades at both Oyu Tolgoi and Kennecott, production at these assets only fell by 8% as we were able to offset the great decline with productivity improvements.

2020 is a transitional year where copper production is expected to be further impacted by lower grades, particularly at Oyu Tolgoi and Kennecott. However, higher grades will be achieved with the completion of the South Wall pushback project in early 2021. Unit costs were well managed and reduced significantly in 2019, partly due to higher byproduct credits. We expect that the unit cost for copper will increase in 2020 due to lower production and lower byproduct credits.

EBITDA was down 17% on an absolute basis, mostly due to lower prices and volumes. The reduction year-on-year was 9% when excluding the $200 million one-off cost of moving from a coal to a renewable power contract at Escondida. During 2019, we continued to invest significantly in copper, particularly in the OT underground project, and the sustaining south wall pushback project at Kennecott. In addition, we have invested in developing our understanding of the resolution ore body through increased evaluation expenditures, which goes to the P&L, and most of our exploration expenditure also goes towards copper.

Without stealing the thunder of J-S, a good example of that, which will be covered in a moment is the Winu prospect. We are heavily investing in our copper business, which is a short-term drag on profitability and cash flow. However, please note that Oyu Tolgoi CapEx is being reported on a 100% basis as it is fully consolidated.

Now our Energy & Minerals business recovered very well from disruptions in 2018. The external environment was strong, with favorable pellet prices for IOC and titanium slack prices for the RTIT business. On top of this, there were significant increases in production at both these businesses. Excluding the contribution of the coking coal assets, which were divested in 2018, we saw a 15% increase in revenues, 41% increase in EBITDA and the business generated a return on capital employed of 15% in 2019.

In late 2019, we curtailed productions at Richards Bay minerals in South Africa, following a series of security-related incidents as the safety of our people is first priority. Whilst we were able to safely restart operations, this will take time to ramp back to full capacity and this is reflected in our 2020 production guidance. We will review the restart of the Zulti South replacement project only when operations at RBM had normalized.

While Rio Tinto continues to adapt to the external world, there’s one thing that does not change, and that’s our capital allocation framework. We will continue to be very disciplined in allocating capital. First, we look carefully at the level of essential sustained CapEx required as maintaining our high-quality assets is our first priority. We need to invest in these not only to maintain them, keep them strong, but also to improve their productivity.

Secondly, we are committed to delivering against our dividend policy. And then, it is an iterative cycle of further returns to shareholders, compelling growth opportunities and continuing to maintain a strong balance sheet. We have, over the last year, consistently talked about a disciplined ramp-up of our capital investments, and this is exactly what we have done and exactly what we intend to do.

We indicated at our Capital Markets Day that our 2019 CapEx would be slightly below the guidance of $6 billion, and adjusted this to $5.5 billion due to the timing of expenditures. However, we still need to spend the money and therefore, increase the guidance for 2020 to $7 billion. Other than that, we see the level of capital expenditure in the short to medium-term to be around $6.5 billion per year.

Today, we are also announcing $1 billion of climate-related spend over the next 5 years. The portion of this spend, which is CapEx, is included in this guidance. In 2019, we increased our sustaining capital to $2.9 billion. However, we expect to spend, on average, around $2.5 billion per year in the years to come. We will continue to ensure that we are disciplined in our capital allocation and will only invest in value-accretive projects.

At the beginning of 2019, we implemented the IFRS 16 standard relating to leases. The overall impact of this was an increase to net debt of $1.5 billion. During 2019, we paid out $10.3 billion in dividends and bought back shares of $1.6 billion of our own shares. Overall, after the impact of operating cash flow and CapEx, our net debt at the end of 2019 was $3.7 billion.

On a pro forma basis, we have continued to delever our balance sheet over the last few years and also in 2019. We are, as a company, very comfortable with the strength of our balance sheet. During uncertain times, this gives us comfort that we are able to continue to invest in our business and continue to provide superior returns to our shareholders.

Our shareholders’ returns have consistently exceeded our dividend policy. The dividend policy is to pay out 40% to 60% of underlying earnings through the cycle. And as you can see, over the last 4 years, our ordinary dividend has been at the top of that band, and we have every year paid some additional return and have also returned the proceeds from divestments. On average, over the last 4 years, the payout ratio has been just over 70%, and if you take into account the divestment proceeds, the average payout ratios has been in excess of 100%.

Let me finalize here and take a step back before handing back to J-S, who will talk about the future. I wanted to leave you with my thoughts on what is behind the results we have disclosed today. It is, in my view, the strength of our assets. The way we run our business that has delivered double-digit earnings, double-digit free cash flow and double-digit shareholder returns in 2019, this demonstrates the strength and the resilience that should serve us well also for the future. Thank you, and over to you, J-S.

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [4]

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Thank you, Jakob. Let’s now spend some time looking ahead. Starting with the very near, near term before talking about our transformation journey. As we have always said, there are 2 key drivers for the mining industry: global GDP growth and trade. Today, we face a very uncertain world on both the drivers due to the outbreak of the coronavirus.

As we all know, this is resulting in restriction to global movement of people and potentially, trade flows. And the effects of the virus have also affected sentiment and creates a risk to global GDP. Indeed, the Chinese economy has already been impacted, mainly the services, construction and manufacturing sectors, and supply chain disruptions are a real possibility.

Our Singapore and Shanghai teams are closely monitoring the situation. We are watching high-frequency activities, such as the traffic in Shanghai and of course, production flows. Whether the recovery is a V-shaped or L-shaped or W-shaped, will be, in part, a result of people’s ability to return to work.

Now looking at Rio. Today, our iron ore books are full, but we are likely to see some short-term impacts such as in our supply chains and possibly in the provision of services from Chinese supplier. So there is uncertainty today, but what we know is that the Chinese government is acting. We were first priority to contain the virus then to resume economic activity and limit supply chain impacts. The government, the Chinese government, has many possible stimulus measures at their disposal, and we expect them to act. We do believe this action will have a positive impact later in the year.

As volatile as the current conditions are, Rio Tinto does well in tough times. Our strong balance sheet, world-class assets and the quality of relationship with our customers help us to outperform in an uncertain world. Across all our committees, the majority of assets sit at the bottom of the cost curve. Our world-class asset in Pilbara will continue to generate Tier 1 cash flow. And our Canadian aluminum smelters are in the first quartile, producing the most profitable and sustainable aluminum in the industry. Our balance sheet also offers protection in volatile times and we are comfortable where our net debt sits today.

As we manage short-term volatility, we are also planning for the future. Last year, we talked about the new era of complexity, one of: growing political tensions, higher expectation of society and technology disruptions. This has certainly been the case since we talked about it. However, we shouldn’t see complexity, though just as a downside risk.

There is also plenty of opportunity for a company like Rio Tinto in this new era. The transition to a low-carbon future and other demand drivers, such as electrification, urbanization and continued industrialization of the developing world, will be materials-intensive. We have been working on our transform agenda for some time now to make the most of these future trends. I will cover more on this in a moment.

We have applied our 4P strategies across a number of future scenario, and under each of them, we are well-positioned for success. I’m confident we will deliver high-quality products for our customers, superior value for our shareholders and wealth for all stakeholders in the years to come.

To do this, we are looking to accelerate our transformation drive in 3 key areas: one, building a portfolio of products underpinned by world-class assets to support the transition to a low-carbon economy. Let me give you an example. We are the only large diversified mining company, not mining coal or extracting oil and gas. Two, operating our assets in an economic and sustainable way, underpinned by technology and innovations, looking at things like land reuse and recovery of minerals from tailings. And three, enhancing our value chain through a partnership ecosystem approach.

This includes connecting the resources to the end market, building stronger relationships with our customers and suppliers and working with our communities such as our partnership with Baowu and Tsinghua University and our partnership with Apple, Alcoa and the Canadian and Quebec governments. These 3 actions will be underpinned by data to provide real-time insights and our program to build the relevant skills. Let me cover one of these now, building a portfolio of the future.

Any talk on our future portfolio must include a discussion on the transition to a low-carbon economy and what this mean for our industry in terms of profitability. First, let’s look at our portfolio today. Most of our assets already have very low emissions intensity compared to industry averages. This is a great place to be, but any material improvement in emissions intensity will be challenging without technology breakthroughs.

We acknowledge we have a challenge around our PacAl assets, which sits significantly below the carbon intensity EBITDA line. The message here is very clear and simple. We must improve our cost position starting with competitive power contracts and develop long-term pathways to reduce our carbon footprint. We are working with all our stakeholders to find solutions, but time is of the essence.

This is an example of how we are shaping our portfolio right now by looking at both cost competitiveness and emissions intensity. We will continue this approach to build our portfolio of the future, and we are confident the long-term fundamentals of our industry are very strong.

We also expect that greater electrification and the shift to a low-carbon economy will be highly materials-intensive. Our current portfolio and the growth we have in the pipeline means we are well placed to make the most of these trends.

The important point is this, we will not grow for the sake of it. We will assess the supply and demand fundamentals of each of our core markets and make informed decision aligned to our value-over-volume approach.

In iron ore, we have a world-class business. In 2019, we delivered 72% EBITDA margins. Our resource base will enable us to deliver superior cash flow for many years to come, and we are investing in renewables.

Our world-class Canadian aluminum business is at the bottom of the cost and emissions curve, thanks to our hydro base and sector-leading technology. It is well-positioned to meet future market demands in North America. We are growing our corporate exposure through our existing pipeline through exploration. We are also looking at options to invest in other materials of the future through internal and external growth.

What is important for us is to continue to build, over time, an asset portfolio and pipeline of growth options that contributes to a low-carbon future. Growth for us is all about sustainable value generation and returns to our shareholders. It is not about volume or emissions target per se. It is about building sustainable cash flows and we have 2 levers to improve our portfolio. One, new high-quality assets with a primary focus on organic options; our Ventures unit as a continuous and rigorous commitment to M&A; and we have reviewed more than 200 opportunities, but we will only transact if it is value-accretive to do so.

And two, we will continue to improve our margins on carbon footprint at our existing assets through operational and commercial excellence enabled by technology and innovation. Rio Tinto is patient, and we take the long-term view. We have managed to reinvest and transform ourselves over the history of this company and we will continue to do so. For example, in the 1960s, around 80% of Rio Tinto’s profit was coming from copper and uranium. So our job is to create option, which we can progress to meet market demand.

A great example is Winu, our copper opportunity in WA in Australia, and the project is progressing well. Drilling and geophysical testing continues with nearly 140 kilometers drilled to date and our study works is under way. We are looking to stage gate the project, starting small, but allowing optionality for growth over time. We are progressing discussion with the traditional owners with a target — with an aim to deliver first production as early as 2023.

I talked last year about the potential for the industry to look at growth in a different way. This is a good example of what I described in action. This approach allowed us to provide copper to society and quicker cash flow to shareholders, communities and government. We will keep you updated as we progress.

I will now make some specific comments on climate change, as we release our targets today. Let’s take a step back and consider the global low carbon transition challenge. There are no easy answers. There is no clear pathway right now for the world to get to a net 0 emission by 2050. The ambition is clear, but the pathway is not. This will require electrification of transport, energy and resources, efficiency across the value chain, decarbonization of energy generation, transformation of agriculture and land use, to name but a few.

New technologies, partnerships and effective government policies will be key. The challenge for the world and for the resource industry is to continue to focus on property reduction and wealth creation while dealing with climate action. This will require a complex trade-off, which mean we — all of us, all of us need to face up to some challenging decisions such as, for consumers, are you willing to pay a premium for services, products that are greener and to support developing nations? Are you willing to consume less? For governments, are you willing to sacrifice economic growth and associated jobs to deliver climate goals? And for shareholders, are you willing to see a reduction in shareholder returns to finance climate action? Are you willing to cap your growth in the short term?

There are very different views across countries, communities, politics and business. We need to have — we must have honest conversation here.

At Rio Tinto, we are pragmatic. We have a clear climate change strategy, which has 4 pillars based on producing, reducing, partnering and enhancing. That is: one, producing the materials for a low-carbon future; two, reviewing the carbon footprint of our own operations; three, partnering to reduce the carbon footprint across our value chains; and four, enhancing our resilience to physical climate change risk. We have delivered strong performance in each of these.

Our ambition is clear, to get to net 0 by 2050. This is a massive undertaking. It means all of our future growth will need to be carbon-neutral. And we will need new technologies and partnership. We do not have a full road map but we are working on it. Today, we are announcing our 2030 targets based on detailed analysis. An additional 30% reduction in emissions intensity from all of our operations, an additional 15%, 1-5, 15% reduction in absolute emission from our operations. It comes on the back of 46% reduction in emissions since 2008.

Our targets were developed through detailed marginal abatement cost curve, asset-by-asset. But for sure, of course, we’ll try to do better and more quickly. We believe it is now about action and results. Indeed, to support our work and that of our customers and supplier, we will invest a further $1 billion, $1 billion in climate change over the next 5 years, like the $100 million Pilbara renewable investment we just announced last week. Like technology breakthrough initiatives such as ELYSIS. This project will be delivered with the support of our new Energy and Climate Change Center of Excellence Group, which was established late last year.

Let me close with performance and by looking at our superior value creation. The last 4 years are not just about strong financial and portfolio performance. It’s also a story of consistent capital allocation. Our underlying business generated over $62 billion over a 4-year period. 80% or $50 billion of this came from cash from operations. On the back of this, we paid $36 billion since 2016 and paying a further $3.9 billion to our shareholders in the first half of 2020.

That is equivalent to over 67%, 2/3 of our market cap at the beginning of 2016. We have strengthened our portfolio, divesting $12 billion of assets. We have paid down $12 billion of our net debt and we have invested $18 billion in growth and in sustaining our world-class assets. Our track record is strong and we have a solid base for future investment and returns.

However, the next 6 months could bring some challenges, but the long-term outlook for the industry is positive. Rio Tinto is well-placed. We are a resilient business. We have a clear strategy to perform and to transform. For us, it’s all about creating sustainable and superior value day in and day out.

And now, I going to turn to questions. So before I — give me — bear with me 1 second on this one. We have Chris in Perth. We’ve got Alf in Montreal. We’ve got Steve in Miami, and I’ve got Simon Trott, our Chief Commercial Officer. I’m sure there would be a lots of question for you, Simon, on the outlook. Here, I’ve got Bold and I’ve got Arnaud. Why don’t we start? Menno, how do you want to [measure] the [Q&A]?

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Questions and Answers

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Menno Gerard Cornelis Sanderse, Rio Tinto Group – Head of IR [1]

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Let’s take 2 here and 2 from the (inaudible).

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [2]

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Okay. I see — okay, all right, it’s Dominic, I think you are in great shape. You want to go first?

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Dominic O’Kane, JP Morgan Chase & Co, Research Division – Analyst [3]

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Two questions for me. So very, very admirable on the CO2 targets. Could you just maybe comment on the financial costs to Rio of those targets? So if I look at Winu, what is the — what’s the things such as CapEx intensity? What’s the project parameters for access to power compared to a conventional mining project?

Is there a material increase in the financial costs to Rio with these admirable targets? And then the second question is on Mongolia. Could you just maybe give us an update on projects to Mongolia in relation to the government? And specifically, how does the coal-fired power station fit into your carbon-neutral — carbon 0 target?

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [4]

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Arnaud, you just came back from Mongolia, you want to pick up the discussion in Mongolia?

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Dominic O’Kane, JP Morgan Chase & Co, Research Division – Analyst [5]

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PSure.

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [6]

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You see, you have a frequent flyer points with…

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Arnaud Soirat, Rio Tinto Group – Chief Executive of Copper & Diamonds [7]

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Yes. Okay. So in terms of the power project in Mongolia, as you know, commitment was made in 2009 through the investment agreement to invest in a coal power station and to source 100% of the power within Mongolia.

We’ve made a lot of progress on these projects and we delivered to the governments in February, the feasibility studies of 300-megawatt coal power station based on the core deposits, which is called Tavan Tolgoi. In parallel, we are also looking at some other projects, particularly in renewables, and we’ve shared some numbers with the government. So we are now at the stage where we’re assessing with the government the different options. So in terms of the impact of these projects on our carbon footprint, would depend on which option will be chosen with goverment.

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [8]

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Yes. Thank you, Arnaud. I think the point we got in here, Dominic, is currently the power is coming from China, from Inner Mongolia, which is coal-fired. So from that perspective, it’s net, but we are clear that, as Arnaud is saying, is we have an agreement. At the margin, we can bring other source of power that we’re working at, but not this year. But the ambition remain the same, between now and 2030, we will have to reduce overall emissions — CO2 emission by 15%, no matter what we do, all right? So that’s a massive undertaking.

On Winu, do you want to say a few word, Arnaud, as well?

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Arnaud Soirat, Rio Tinto Group – Chief Executive of Copper & Diamonds [9]

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Sure.

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [10]

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Seeing that we’re looking at renewables?

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Arnaud Soirat, Rio Tinto Group – Chief Executive of Copper & Diamonds [11]

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So on Winu, it’s early stage, of course, but we’re already looking at different power solutions, including LNG or renewable. Personally, I don’t see actually clean power as a risk. I really see it as an opportunity. If you look at all over the world, with the cost of energy generated through renewable, particularly solar, it’s becoming more and more competitive.

And so we are definitely looking at a cleaner energy and renewable energy for Winu over potentially medium to long term because, as J-S explained, we’re looking at the first stage, which would be a smaller line, and then progressively growing. And so renewable power for Winu is both an opportunity to reduce our carbon footprint, but potentially, it’s an opportunity to reduce our cost as well.

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [12]

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So just to wrap up, because the question — your question, Dominic, is absolutely spot on — is what will be the financial impact. I think it’s important. If you step back on climate change, we shouldn’t forget what the first pillar of the climate change strategy is about. It’s about supplying the product, the aluminum, the copper, the high-quality iron ore or minerals for the battery, that the world is going to require.

So pretty often, people focus only on the internal stuff, the costs and so on and so forth, but we should not forget the top line growth aspect as well. So that’s the first aspect. The second aspect is we’ve done a lot of work between now and 2030, hence the 2030 targets. And what we see is in order to underpin our strategy and our mission, there is $1 billion of CapEx and OpEx. We don’t know how much it’s going to be CapEx, how much is going to be OpEx.

It will be for the finance people to decide the allocation, as always. But we are clear. So are we concerned today — when I look at the strength of our balance sheet, are we concerned about when I look at the quality of our asset base, the quality of our product and the quality of relationship with our customers about our ability to deliver superior return, as we’ve done for the last 4 years — superior returns to our shareholders in the short-, medium-, long-term? The answer is no. But we’re flagging that the cost will be $1 billion, which is fully embedded in our plan. So that’s where we are at this point in time. But I think we’ll continue the dialogue for a long, long time.

I still see one coming from the room. Jason? And then, we’ll go to the WebEx.

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Jason Robert Fairclough, BofA Merrill Lynch, Research Division – Head of the Developed & Emerging EMEA Metals and Mining Equity Research [13]

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Just 2 — Jason Fairclough of Bank of America. Two quick ones on iron ore. First, maybe for Jakob. I’m just wondering if you can give us a bridge on the unit costs. So you’re saying flat year-on-year, but it does sound like a lot of headwinds. So how much of that flat year-on-year is currency? How much of that flat year-on-year is efficiency? Maybe you just walk us through that. And then just more generally, on iron ore, I think you’re guiding flat in terms of volumes. You’ve always been a value-over-volume guy. Could you talk about the willingness of the business to flex iron ore supply, depending on what’s going on in China?

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Jakob Stausholm, Rio Tinto Group – CFO & Executive Director [14]

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Yes. Just very quickly on that front. You’re right, there’s a little assumption of a further strengthening of the U.S. dollar compared to the average rate of the Australian dollar we saw. Last year, we saw, I think, $0.7 and we now assume $0.67, but we came out at $14.4, and we are guiding $14 to $15. So you can make your own assumptions whether the cost would be lower or be higher within that band.

There’s no doubt that we are, and we have been very transparent for quite a while on this, that we are facing a couple of tough years in iron ore, where we have to work the mines very hard until Koodaideri goes onstream. And that means — I was referring to in my presentation, the increase in work in the mine index and more work — more mining below water table, which comes at a cost.

But I think, overall, what you see is we are offsetting some of the challenges with more productivity, and that’s why we can guide a fairly unchanged cost. I would, though, say as late as last week, we were hit very badly by the cyclone that hit us straight in the port and the way down the rain line, and therefore, we had to reset the production guidance for the year. And — but we are still on top of that, Jason.

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [15]

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Maybe Chris, Chris, if you’re on the call, you’re the one running this business. So if you can tell us more details on the ground, what you’re doing in terms of productivity, in terms of asset productivity, in terms of people, labor productivity, Chris, that would be great.

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Chris Salisbury, Rio Tinto Group – Chief Executive of Iron Ore Group [16]

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Yes, J-S. Thanks for the question. Just to come back to bridge on unit costs, Jakob was absolutely right on everything that he said. But of course, if you look at the margin we delivered last year despite the additional costs, a pretty good outcome after bouncing back in the second half. Look, in terms of productivity, we are facing headwinds. Jakob talked about the 12% increase in whole length we’re facing this year, which is really a result of working the brownfield mine a lot harder.

But to offset that, we’re continuing to push on automation. We’ve now achieved 50% of our truck fleet is automated, and we have halfway of 80%. And of course, we’ve previously disclosed that decreases cost by 15% to 20%. Look, we’re continuing to push on the next wave of productivity, particularly the focus on data, and we have a series of projects, and have outlined a number of these at the last Capital Markets Day, which I think is really the next horizon in the cost efficiency.

And then finally, of course, the investments we are making in Koodaideri and (inaudible) 2 are both going to be lower (inaudible) product line to come through, we will see benefit from those as well. Thanks, J-S.

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [17]

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No. Thank you, Chris. I know, everybody didn’t hear very well here. So push harder on automation on the trucks and the target is to get to 50% in the coming years of autonomous trucks, and it’s in the plan. It’s about using more of the data across the system. And remember, Koodaideri will be the first of the next wave of intelligent mine with twins in the cloud. So we can increase the availability of the mine and so on and so forth, to give you a sense.

Now there is pocket of labor inflation in the Pilbara as we speak but this is very, very focused, very targeted and so on and so forth. And as Chris said is at the end of the day, what we’re driving is the margins, and we delivered 72% of EBITDA margin in the Pilbara.

Simon, you want to say how you look at the value-over-volume approach for iron ore, the blending you’re doing in China because you’ve done some great stuff this year and you’re doing this year? And then maybe, I’ll come back to Chris about the value-over-volume, what it means in practical terms in the Pilbara.

Simon, the floor is yours.

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Simon C. Trott, Rio Tinto Group – Chief Commercial Officer [18]

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I guess looking at the market as it stands at the moment. Obviously, coming into 2020, reasonably strong and a bit of a tick up in key industrial indicators. And then, of course, obviously, COVID and its emergence towards the end of January. We’re working really closely with our customers and our suppliers as we work our way through that.

We just went out and spoke to around about 200 or so of our customers and suppliers, and of similar themes to that which you’re saying, certainly shortages in terms of labor and restrictions on logistics, particularly trucking logistics. And so some of the steel mills, domestic suppliers and things like fluxes, access to scrap, have been somewhat curtailed.

And so you’re seeing EAF rates drop considerably for a lot of the fleet are largely closed, until — certainly into March. [Blast furnaces], less impacted. And as you look through that short-term disruption, we’re really focused, I guess, beyond that and some of the implications for the full year. We’re seeing stimulus measures are really in 2 phases, are currently very focused on availability of credit and making sure those businesses with cash flow constraints continue through.

And then obviously, the next phase is going to be much more targeted towards consumption, towards infrastructure and some of that more commodity-intensive. So we’re working really closely with customers, looking through the short-term disruptions. They’re obviously looking to that, (inaudible) to a medium-term resumption in some of that infrastructure spend. Clearly, additional optionality like the portside trading gives us — gets us closer to the market. It also gives us optionality in terms of response. You’ve certainly seen in the last few days, a little bit of a pickup in terms of — at the back end of the ports, some of those truck restrictions ease. And so it’s going to create some opportunities for us that we can enhance as we go through the balance of the year.

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [19]

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Thank you, Simon. So Jason, we had no impact on iron ore today. And if you look at the stats, if you look at the port stats, I know you’re looking at very carefully, the inventory has not increased. So the majority is flowing. Because I think if I step back at the macro level, during the Chinese New Year, you don’t stop a blast furnace unless you force — you can slow it down.

But what you can do very easily is stop, shut down the EAF converters, and that’s what they’ve done. So the demand for iron ore did remain pretty strong throughout the Chinese New Year and so on and so forth. What we’re watching very carefully is how much steel is stuck in rebars, slabs, HRC, are stuck in the value chain, the supply chain between the upstream and the downstream. That’s the piece we are watching very carefully. But as we’re having this conversation, we don’t have any plan in moving our iron ore products or high-quality iron ore product from the Pilbara back into China.

Shall we move to a couple of questions on the WebEx, and I’ll come back to London after.

David, do we have any questions from the (inaudible)?

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Operator [20]

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Your first question comes from the line of Paul Young from Goldman Sachs.

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Paul Young, Goldman Sachs Group Inc., Research Division – Equity Analyst [21]

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J-S, Jakob and team, I just — can you hear me?

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [22]

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Yes. Go for it, Paul. I can hear you loud and clear, my friend.

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Paul Young, Goldman Sachs Group Inc., Research Division – Equity Analyst [23]

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Okay. Great. Okay. First question. J-S, I’d say a question on the mine design. You stated that the removal of 2 of the 3 main access drives has had an unfavorable impact on the schedule. Does this mean we can expect the delay to be more towards the 30 months end of the guidance range now?

And then a question on just on the bauxite market. Your bauxite guidance for 2020 implies [50] million tonnes of growth. That’s despite completing and spending $2.5 billion on 25 million tonnes of new capacity at Amrun and CBG. So my indication here is that the growth in Guinea, exports has caught you by surprise. The question is, have you changed your view on the bauxite market? Or did you get this wrong?

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [24]

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Okay. Very good. So why don’t we start with the bauxite? Alf, you’re on the call. You picking up this one?

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Alfredo Barrios, Rio Tinto Group – Chief Executive of Aluminium [25]

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Hello? Can you hear me, J-S?

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [26]

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Yes. Yes, I can hear you.

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Alfredo Barrios, Rio Tinto Group – Chief Executive of Aluminium [27]

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Thank you, Paul, for the question. Yes. In terms of market, I would say that if you look to the market, the global bauxite mine is expected to grow by about 4% to 5% in 2020, and we expect Chinese imports also to grow at higher rates, around 20% in 2020, with new coastal plants ramping up and more in-land refining using imported bauxite, as a result of the Chinese domestic depletion and also quality deterioration and environmental controls.

And in that market scenario, if you look at what we’ve been doing, we have been growing. Amrun has achieved design capacity rates of 22.8 million tonnes a year in the fourth quarter of 2019. The mine delivers 50% replacement extend growth, and the asset is a significant long-term advantage asset. It’s in close proximity to our refining assets in Queensland and our other customers in China at the other end of the cost curve.

And it was delivered, as we mentioned before, early and under budget. It’s a high-quality product with increased efficiency in our Gladstone refineries, with the remaining export volumes sold the multiyear cost range of returns to our countries towards Chinese-based customers. Yes, supply from Guinea has come faster and in greater amounts than expected. But we are positive on demand from the market to deliver strong value from Cape York.

In 2019, as mentioned before by Jakob, our production performance enabled us to increase shipments of bauxite third parties by 21% to 40 million tonnes. And if you look at the last 5 years, we had increased our third-party bauxite sales by 60 million tonnes. That’s 70% increase, maintaining our positioning as a leading global supplier in the seaborne bauxite trade.

But we will continue to operate in a value-over-volume basis, optimizing our production by grades from Amrun, East Weipa, Andoom and Gove to supply not only Gladstone refineries, and the market demand. So overall, I think we see a trajectory of successful growth, and we will continue to explore options to continue to grow. But our focus clearly is on value-over-volume optimizing our (inaudible).

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [28]

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Thank you, Alf. I mean I will add only one point or strengthen the point made by Alf about the growth. There is no doubt, back to the discussion about climate change or both, the point I made earlier, but there is a need for more aluminum, there will be a need for more high-quality bauxite. The old question for us is we have options to grow in Guinea. We have options to grow in South America. We have options to grow in Australia. The question for us is how to develop a pathway at the right capital intensity to make sure that those options are attractive from an economic standpoint?

So it’s not a question about the next 5 years, it’s — if you take a 10-, 15-, 20-year perspective, because there will be a need for more bauxite. The question is to find a pathway because the competition from China is very strong and it’s not only about bauxite. It’s across aluminum, it’s across iron ore and so on and so forth. So a big chunk of the work that we are currently doing with the team is how can we improve the capital intensity by — and in a way, to leverage your Chinese experience approach to build mines or to build smelters in order to make sure that we can participate in the growth and create value on the back of this one.

If I move to your other question, Paul, it’s on Oyu Tolgoi. So I’ve got Steve on the call. Steve, do you want — Steve, do you want to pick the call– the question? Otherwise, I know that Arnaud is really jumping to answer the question. So Steve?

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Stephen McIntosh, Rio Tinto Group – Group Executive of Growth & Innovation, Health and Safety & Environment [29]

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So maybe I can start, J-S. So thanks, Paul. So as you will remember, Paul, originally, we had said that there was about a 3-month benefit by having the mid-access drive in tunnel 0, the mid-access drive across about 3 levels, apex undercut and extraction. As we went through all of the modeling and the updated geotech work, we took the decision that we would remove the undercut and extraction mid-access drives. We kept the apex and obviously, in that, we will lose a little bit of a benefit as originally planned.

But I think the piece I want to focus on is we’ve been working very hard on the productivity underground. As you probably would have seen was that Turquoise Hill end of year announcements, we now have lateral development rates in December, so very high rates now of lateral development productivity underground. We obviously now have the new mine design, which will come together in the second quarter of this year. And really, once we have that, we will understand the location of the ore handling system, the options relating to panel sequencing during the mining operations, and therefore, obviously, we’ll have a better understanding of schedule and cost impact ranges, so those things are ahead. And as we said, definitive estimates in the second half of this year.

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [30]

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Thank you, Steve. Another question from the call? And then I’ll come back — I’ll come back on — I know Paul did ask 2 questions, but…

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Operator [31]

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And your next question comes from the line of Hayden Bairstow from Macquarie.

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Hayden Bairstow, Macquarie Research – Analyst [32]

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Just to circle back on the CO2 targets that you’re setting yourself. Is that the CapEx spend or the climate spend of $1 billion, can you sort of give us an idea of how far towards the target does that get? And obviously, then when looking at your assets and some of the charts in the presentation, Pacific Aluminium continues to stand out in terms of its carbon intensity. I mean, what are the options with all those assets? I know 2 of them are — or one of them is under review. What’s the options for the whole asset base?

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [33]

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Well, very good. So on the $1 billion, first of all, the $1 billion is not only CapEx, it can be OpEx. I’ll give you a sense. I’ll give you a couple of examples of how we’re going to spend the money going forward, right? One will be about investing in the repowering of our system. And I think a good example of it is what we spend the $100 million we disclosed last week in the Pilbara, which is to build a solar farm and the battery in the Pilbara to support our iron ore business. So we have a pipeline of such projects, which is under assessment. And therefore, during the next 10 years, we will do more and more of those. So switching from one source of fuel to another source of fuel. And in the context of the Pilbara, the beauty of it, if I may put it this way, is that it’s a closed system. We totally control the system. And we have invested a few years ago in very efficient gas turbine that you can switch on, switch off very easily and, therefore, provide the firming of the specific grid, which is very important. Because what people shouldn’t forget is, yes, renewable will give you a lower cost, but if you don’t have a firming in place because, as we all know, the sun shines only during daytime and the wind doesn’t work all the time, all right? So you need the firming. It’s something that is very important. In the context of Pilbara, the firming is there through those high-efficiency gas turbine, and therefore, enable us to invest further in the renewable, as an example. So there will be more investment in what we describe as a repowering of our existing needs.

The second element where I can give you a sense of where we’re going to spend the money is on technology. I think — and I’m going to use the example from the speech is, if you look at the aluminum industry, a big chunk of the carbon that is generated by the aluminum industry is about the power, if you burn coal, as an example, or in the anodes, because you need an anode to convey the electricity in the cells in order to smelt the alumina into aluminum. And the technology we are developing with Alcoa and Apple and the government of Canada and Québec is to move away from the carbon-based anode that, as it is consumed, release CO2, to an inert anode in order to make sure that as and when you convey the power through the cells, you don’t release CO2. So it will be a combination of things, but physical, primarily about renewable, as an example. And second point will be about technology, because the concern I have today, if I may sound negative, is not what we’re going to do between now and 2030. Between now and 2030, it’s going to be primarily based on existing technology. The real question we have is, how do we move from 2030 to 2050? And if we don’t develop the new technologies and new partnership now, we will not be ready by 2030. And therefore, we’ll try to strike the right balance.

The last item I would like to say the $1 billion is for the next 5 years. And clearly, we will spend more money in the following 5 years to get to 2030 target.

The second question is about PacAl. I think I can’t make it clearer and simpler is on PacAl, so we’re talking about mainly 3 assets. We’re talking about Tasmania, Bell Bay, which is hydro-based. So from an emission standpoint, there are no issues whatsoever. It’s really a discussion with the relevant authorities in order to strike the right tariff, the right power cost in order to make sure that the smelter can carry on for the benefit of Rio shareholders, for the customers and for the benefit of the communities going forward. The discussions are underway. Those are product conversation. When we get to a solution, we’ll disclose it.

Then we have 2 other smelters in-house. One is in New South Wales called Tomago and the other one is in Gladstone. They are currently mainly supplied from coal-fired power station. And therefore, there are 2 questions that are being discussed as we’re having this conversation. One is about the cost of power, because at the end of the day, if you are not profitable, then there is no way forward, okay? As a minimum, you need to be profitable. And then you need to develop in partnership with your relevant suppliers of government to develop a road map to be able to secure the right green energy over time. Once again, those discussions are underway. Product conversation, I don’t think it would be appropriate for me to say anything above and beyond that. But as I mentioned, time of the essence. You see from the appendix of the press release the profitability of those assets. There is a real urgency to tackle them, and that’s what we’re doing at this point in time.

So to answer your question, I mean, the options are from finding a new power contract and ensuring the long-term viability of the assets to all other options, as you can imagine. But the priority, because I believe there is a way forward, is to find the right source of power at the right cost, and that’s what we’re doing at this point in time.

If I go back to London.

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Sergey Donskoy, Societe Generale Cross Asset Research – Equity Analyst [34]

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Sergey Donskoy, SocGen. Two questions. One, on your commodity exposure and strategy. You, as a group, seem to be — seem to remain quite positive about diamonds. You want to maintain exposure and Falcon project earned the distinction of being mentioned today in your press release. At the same time, you seem to be rather disinterested in gold as a separate exposure. So is this something that you’re thinking about? Can this change going forward? Or there are reasons why you think gold just doesn’t belong to your mix?

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [35]

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Okay. I know you. I know you like diamonds.

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Sergey Donskoy, Societe Generale Cross Asset Research – Equity Analyst [36]

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As you do, actually.

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [37]

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I love diamonds, yes, especially pink ones.

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Arnaud Soirat, Rio Tinto Group – Chief Executive of Copper & Diamonds [38]

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Why do we like diamonds? Because actually, it’s a great business to be in. We’ve got the know-how, which is recognized. We’ve got a brand, a very strong reputation, and this is a business that generates strong EBITDA margin. So the challenge that we’ve got in Rio with our diamond business is Argyle is going to be closed by the end of this year. And we will do it very responsibly. And we’re making great progress in preparing for the closure. Diavik could be closed in the coming 3 to 5 years. And therefore, that’s the reason why we’re investing in Falcon project where potentially we could have quite a good asset. On top of it, we’re also investing in exploration. And with the Venture team, led by Bold, we were looking at potential M&A options only if indeed, we can create value for our shareholders. So our strong desire is to stay in the diamond business because it’s a highly profitable business, and we’ve got a good brand to create value for our shareholders.

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [39]

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And we’ve continued to put the pressure on our exploration team. On average, if it takes only 25 years to find copper, during that time, people find some nice colored, call it rocks, to cash flows. Diamonds is only 30 years, right? So it’s — that’s where you need to take a long-term perspective. But no, we like diamonds. And in our models, let’s be clear, is we believe that synthetic diamonds will capture some market share. But nevertheless, good quality diamonds has a future and we want to be part of it. But it is challenging, but we’re spending money and we’re looking into it.

Gold is — we are in the gold business today as a by-product. I mean, we’ve been in the gold business for a long time. When we — I mean, at Oyu Tolgoi, I know that the gold grade at this point in time are lower, but as and when we go underground, the gold content will increase. Because at the end of the day, Oyu Tolgoi is, in simple terms, is a big lump of copper and gold, right? So are we in the gold business? We are in the gold business.

Kennecott. We have been in the gold business at Kennecott for 125 years, all right? So — but it is as a by-product and so on and so forth. Are we interested in gold? The answer is yes. If our exploration — and I know it’s different from the past. I fully accept that. If today our exploration teams find a good gold deposit, I think we may keep it in the portfolio and so on and so forth.

So at the end of the day is what we want — we believe in diversification, okay, and gold could be part of it.

Another question in second row. I was going to say Menno. But that’s not Menno, you’re working for us now.

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Myles Allsop, UBS Investment Bank, Research Division – Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [40]

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Myles Allsop, UBS. So a few quick questions. First, just going back to Oyu Tolgoi and thinking about the politics, where we are with that. The recent development, looking for international arbitration around the tax audit doesn’t sort of feel good as you look at it from the outside. But give us a sense where those discussions are around investment agreements and what compromises you may have to make there. And then maybe going back to ELYSIS, the ELYSIS?

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [41]

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ELYSIS, yes.

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Myles Allsop, UBS Investment Bank, Research Division – Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [42]

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When can we have a concrete kind of step forward there? I mean is that going to be a big profitable kind of option more than just a climate change dynamic? Maybe the last question on net debt. So when do you think the balance sheet is getting lazy? And what can be the ideal net debt through the cycle?

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [43]

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I think of the ELYSIS as pretty simple. Next time you go through Saguenay in Québec, you’ll see a big bio plant, big cell using the ELYSIS technology and so on and so forth. So when you ask about concrete steps, the pilot plant is being built as we speak and so on and so forth, right? So it will take some time. The industry has been producing aluminum for 100 years. We’ve been trying for 100 years not to use carbon, all right? But for the first time is we believe — and Arnaud and myself have been in the industry for 25 years-ish, yes. And we may have the solution on this one, right? So we will ramp up slowly but surely. It’s not an easy one, but we believe that the combination of know-how of Rio on the cells design, especially from France, and the know-how of Alcoa on the ceramic on the other side is we may have cracked the code, but we need to ramp it slowly but surely. So we’re going to have a large-scale pilot as we speak. And then we will — the next phase will be to invest in 4 and 5 cells in one of the existing operations to take it further and so on and so on. So it’s not — do I believe it will have a big impact in the next 10 years? The answer is yes. But as I mentioned earlier, if we don’t develop the technology now, we will never be really beyond 2030. So it is the time to invest, and that’s what we’re doing on this one.

OT politics, and then I’ll come back to Jakob.

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Arnaud Soirat, Rio Tinto Group – Chief Executive of Copper & Diamonds [44]

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Do I have to answer the question?

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [45]

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You got exactly 2 minutes, Arnaud. –

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Arnaud Soirat, Rio Tinto Group – Chief Executive of Copper & Diamonds [46]

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All right. Okay. So in terms of the tax, you would remember that we had an audit for the years ’13 to ’15 in January 2018. That came from, as you know, $155 million. Just to put things in perspective, typically would be around $200 million to $300 million per year, so it’s not insignificant. We’ve worked a lot with the government representatives and with the tax authority in the country to generally look for settlements. We’ve made a couple of offers in writing. And after lots of discussions with the government, we both came to the conclusion that actually in the current context of Mongolia, political context of Mongolia, it’s — and based on the challenges of the finding of this audit, the best way forward was to agree to go to arbitration. And if you describe it as not a good omen, I think — but fundamentally, I see it actually as a sign of a healthy relationship. It’s not unusual to go to arbitration to resolve tax issues. We do it in other countries. And actually, the fact that we’re doing it in Mongolia is a sign of a healthy relationship where both parties have agreed. Actually, we need a third party to be able to help us understand the contracts that we signed. And I’m okay, that’s fine with this. The good thing about it is it will resolve the root causes of the misunderstanding in the agreements, which I think is a very good thing for medium to long term.

In terms of your other part of the question was on the negotiations. So a lot of progress has been made in the past 6 months about getting the government to publish a conclusion for the Paris working group. You remember we talked about it last time. That was a big unknown. And it has delivered more certainty, and it has opened more — some questions as well. So we are currently working with the government to be able to start negotiating. The government is putting its negotiation team together. I think it’s fair to say that the coronavirus and the big challenges that the governments has been facing and managing extreme efficiency in the country as a main — so the progress is a bit slower compared to what we would have anticipated earlier on. But we were progressing with this. I would say in terms of negotiation, the critical issue to start with is to progress power. As I said before, we’ve got the different options. That is also good progress. And it’s important that we progress with the government towards choosing a solution that we can all support.

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [47]

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Thank you, Arnaud. Lazy balance sheet, Jakob?

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Jakob Stausholm, Rio Tinto Group – CFO & Executive Director [48]

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Yes. No, we’ve got a lazy balance sheet. We’re very proud of how we have deleveraged over the last few years, but that’s really just because our business is so cash generative. We don’t have a net debt target. And therefore, further deleveraging is fine for us. But obviously, it has no value if you’re not prepared to use your balance sheet. So I explained about our strict capital allocation, but actually, think about this year, we are believing in the future despite short-term uncertainty. We are ramping up investments. We are indicating today that we will invest $1.5 billion more this year than last year. And also, our exploration and evaluation costs are at a very high level, and we feel comfortable about that. And that’s back to the question about lazy. We think that’s very valuable. You look at the history of Rio Tinto. You look at how profitable mining is. It’s really profitable. So think about the future as well. And therefore, whether you kind of optimize your balance sheet, that’s not the point. You want to have the balance sheet, so you can use it at the right time. So no debt targets and comfortable, if we further deleverage a bit. But right now, at least, we have good investment plans in place.

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [49]

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And to be clear, I mean, we have always been conservative from a balance sheet standpoint, because we are in a really capital-intensive business. We’re making investment not for 10 years, but 20 years, 40 years, 50 years. And therefore, the best insurance policy you may have is to make sure you have a strong balance sheet because — and I think being where we are having this conversation today, with all the uncertainty we have around the coronavirus and so on and so forth, I feel much better with the balance sheet that some of my peers may have, but I wouldn’t say anything much more than that.

David, do we have any other questions from the call? And then we’ll come back here. Yes. So can I have a few questions from the call, please?

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Operator [50]

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And your next question comes from the line of Ian Rossouw from Barclays.

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Izak Jan Rossouw, Barclays Bank PLC, Research Division – Director [51]

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I just had a question on your portside trading that you’ve mentioned in your production statement. That’s something you’re planning to ramp up. You obviously guide on shipments for the Pilbara business. So I was just curious, what’s the ambition over the next few years to grow that business? So typically, obviously, there will be some working capital build. So how much should we deduct for sales for this year and maybe over the next couple of years? Just to get a sense of that business at scale.

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [52]

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Simon?

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Simon C. Trott, Rio Tinto Group – Chief Commercial Officer [53]

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Thanks for the question. At the end of last year, we reported both sales, but also production. So you can see about 1.3 million tonne difference between those numbers, really a bit of indication of where we’re up to last year. Look, the portside initiative is really around making sure that we’re reaching customers that may not actually be customers today and thinking about our logistics chain in a different way. And thirdly, it just allows us to bring different products to market. So at Capital Markets Day, we talked a little bit about the blend that we’re doing between IOC and our SP10 product, which we’ve been continuing, which we’ve now got out to mills. And so that’s certainly an area that we’ll continue to look at. The shape that, that takes in the future, we’ll have to determine based on value considerations. It’s certainly something that customers are appreciating. I think the current backdrop in China also just underpins quality of customer relationships, having the right products. But we’ve got to continue to innovate, and we’ve got to continue to think about how do we position our portfolio as we go forward. So there are some of the things that we’re thinking about. Clearly, ultimately, it’s about meeting customer needs and about value, and that’s how we’ll manage the business.

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [54]

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Okay. Fair enough. And [second question] from the call?

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Izak Jan Rossouw, Barclays Bank PLC, Research Division – Director [55]

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Can I just ask a second question, please?

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [56]

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Well, that’s the second question from the call then.

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Izak Jan Rossouw, Barclays Bank PLC, Research Division – Director [57]

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Just on the ELYSIS. I’m curious just on the technology itself. I mean, we’ve heard some commentary from some of your aluminum peers that the carbon-free technology is much more energy-intensive. So just sort of curious if that’s the case with this technology. And also, what spare hydro capacity you have within the Québec business to actually employ that technology?

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [58]

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Okay. No worries. Alf, you want to take it, this one? Although we just have to be slightly careful because the technology is protected. So can you give some indication here?

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Alfredo Barrios, Rio Tinto Group – Chief Executive of Aluminium [59]

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Yes. The technology is protected, so I really can’t comment a lot on the ELYSIS technology, of course. But what I might say is, adding to what J-S said before, is that the work is progressing in earnest. We have announced this year the construction of the R&D facility that J-S was referring to in our facility, that Complexe Jonquiere. The restricted older facility is an investment of about CAD 55 million, which will be completed by the second half of this year and will employ about 25 technical experts. So we are moving ahead with the technology with the aim of being able to commercialize it by 2024. Also another, I think, big milestone that happened this year is Apple purchased the first commercial batch of aluminum made with this ELYSIS carbon-free smelting technology. So we are moving ahead. We are moving in at a rapid speed with that objective of having the technology commercially by 2024, so I can’t really comment a lot on the technical aspects of the technology.

Regarding your second question is about the hydropower at the moment. We are balanced on hydropower in Québec. We do buy and sell power from Hydro-Québec, depending on the hydrology every year. We are balanced at this moment in time in terms of power. But you have to take into account that any retrofit to new build, we are most likely better in terms of power efficiency to what — to the power efficiency is now so the technology will be more advanced.

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [60]

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Thank you. Okay, we have time for one last question, Menno, you’re saying? One more question from the call. Thank you, Menno.

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Operator [61]

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And your next question comes from the line of Glyn Lawcock from UBS Sydney.

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Glyn Lawcock, UBS Investment Bank, Research Division – MD, Head of the Australian Mining & Energy Team and Research Analyst [62]

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Two very quick ones then. Just with the pro forma net debt now less than $5 billion versus $8 billion 12 months ago, just the absence of the on-market buyback extension, is that a balance sheet issue? Or is it more a Chinalco? And if it’s the latter, does that mean that’s the end of buybacks for the company?

And then the second question, just quickly on Koodaideri Phase 2, which you brought up and flagged 27 million tonnes. Maybe Chris could just put that into context. Is that envisaged in the mine plan to be replacement or incremental to the 360 million? And therefore, you may have a lot more flex in the business once that comes on?

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [63]

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Okay. Chris, if you want to pick up Koodaideri, and then I’ll ask Jakob to pick up the other one.

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Chris Salisbury, Rio Tinto Group – Chief Executive of Iron Ore Group [64]

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Yes. Okay. Thanks, J-S. Thanks, Glyn, for the question. Look, Koodaideri first phase is 43 million tonnes, and we are studying options, which could take Koodaideri Phase 1 and 2 up to 70 million tonnes. And within that, we also have a number of quality options to choose. The other thing, Glyn, is, of course, our value over volume optimization. So we will always look to optimize the right capital, operating cost, quality option that creates value for customers and for ourselves. So the short answer is, we could use Koodaideri either as a growth option if there is potential or also look to optimize the complete portfolio of mines by potentially growing Koodaideri and not replacing somewhere else. So that’s a continuous optimization, and we’re looking at all of the options.

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [65]

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Yes. Thank you, Chris. Jakob?

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Jakob Stausholm, Rio Tinto Group – CFO & Executive Director [66]

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Yes. Thank you for the question. Let me just take a step back and remind you that today, the Board announced actually a record dividend. The ordinary dividend has never been higher. So — and we end up with a total payout ratio of 70%. So the deleveraging is not from not paying dividend. The deleveraging is from having a very, very strong cash generation last year. We have the freedom to use all instruments. We have done share buybacks last year. We have actually even done it this year here in January and February. We have bought back shares. Today’s announcement is entirely about record-high ordinary dividends. And look, it’s a discretion of us, the Board every half year to look at what instrument is the right thing. I cannot comment on any discussions that might be between 2 other parties, our biggest shareholders and our biggest host government. So that’s what I have to say. But we have freedom, and we are distributing a lot to the shareholders.

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [67]

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So thank you, Jakob. I understand we have time for one last question from the call.

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Operator [68]

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And your next question comes from the line of Lyndon Fagan from JPMorgan.

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Lyndon Fagan, JP Morgan Chase & Co, Research Division – Analyst [69]

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Look, the first question is just about Slide 32, which talks about 200 opportunities that have been reviewed since first quarter ’17. I think that’s more than 5, sorry, 1 every 5 days or something like that. J-S, I’m just wondering what your vision for the company is in 2030 to align with the emissions target. There’s obviously an M&A agenda there. What — you mentioned gold might be something that the company would be prepared to retain in the portfolio. But around those opportunities, what are the commodities that perhaps Rio Tinto is not producing today that may have been assessed? Or could you give us some color about sort of what that includes?

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [70]

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It seems that Bold and Andrew on the third row have been very busy. So can you give some flavor of what you’ve been doing during the Saturday and Sundays, Bold?

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Bold Baatar, Rio Tinto Group – Chief Executive of Energy & Minerals [71]

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Yes, sure. Thank you for the last question. I thought that I was going to — I was not going to have a question today. So — but look, we have been busy, and you pointed out correctly that, obviously, it is a very — M&A buy side is very process intensive. I think that, first and foremost, our attention has been on lithium. We have to understand the hard rock and the brine. We have to understand the low-cost position. We’re in a fortunate position to have lithium in our product, not just in Serbia, but as a by-product of Boron. So understanding the customer supply dynamics as well as the cost position as well as the chemical composition of what the customers will buy and what means to be battery grade is essential. So we have done a lot of work on lithium.

The other one is, of course, we’re primarily focused on battery-grade materials. And so that, of course, as Arnaud alluded to, spending a bit of time in assisting together with copper around looking at the copper acquisition opportunities. And then secondly, we are spending a lot of time understanding high-purity nickel and class nickel and what the proposed price dynamics are, and that’s primarily the focus. As far as the other minerals, they’re more tertiary in nature. And at the end of the day, I would say everything has to create value, and it has to meet our IRR thresholds in — depending on the jurisdiction. It actually has to be very attractive in order for us to make a decision on that.

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Jean-Sébastien Jacques, Rio Tinto Group – CEO & Executive Director [72]

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Thank you, Bold. That’s a very good question. I can’t tell you exactly what the portfolio will look like in 2030. I mean I know for a fact that they’re really high quality I know. I know for a fact there would be high-quality copper, high-quality aluminum and so on and so forth. That is for sure. We look at other opportunities, mainly in the battery space. But without saying too much, because that’s typically in Rio Tinto is if we could have PGMs in the portfolio, not from South Africa, could be very good as well. And we’re looking at exploration in that space. So — but are we going to have oil and gas? Or are we going to have thermal coal in the portfolio? I think I’m pretty confident to saying no. And that’s what it is about.

So I can’t tell you what the breakdown is going to be because what is very important, we’re not allocating. That’s back to the disciplined capital allocation. We are not allocating capital. We are commodity. At the end of the day, if you step back, the portfolio and the strategy of Rio is an asset portfolio, okay? We want to invest to allocate the money toward the best assets and the best project no matter which commodity they are as long as they sit nicely in this climate, carbon-free world. That’s what it is about, climate change friendly. That’s what it’s about.

So are we ready to invest? The answer is yes. Are we investing? The answer is yes. But at the same time is I can’t make it clearer. Today, when we look at the opportunities, and clearly, Bold and Andrew have been pretty busy, is the first part of coal for us to grow will be around organic growth, okay? M&A is a watching brief. We’re looking at stuff, but we will not transact if it doesn’t create value. I can’t make it clearer. At the end of the day is what we want is Rio Tinto to be regarded as a good investment on the back of the quality of our returns, the disciplined allocation, the profitability and not growth for sake of it or carbon emission for sake of it and so on and so forth. We can’t make it clearer. I know that doesn’t excite lots of bankers and journalists and so on and so forth, but that’s what it is about. And I think the last 5 — 4 years is a good example of it. You don’t have many companies who have delivered $36 billion of cash returned to their shareholders the last 4 years. It is as simple as that. And when I look forward and you look at the quality of assets, the quality of the pipeline we have in terms of exploration, when I look at the quality of our product, quality of our relationship with our customer and the balance sheet, I’m pretty confident that we will continue to deliver superior value for our shareholders in the short, medium and long term, and that’s what it is about.

On this note, Menno is saying enough is enough. Thanks for coming. That’s not the end of the discussion for obvious reason. I see there are still some questions. So order drinks, coffee, maybe you can continue your conversation with some of us, and I’ll see you in August. On this note, thank you very much.