Rio Tinto Group (RIO) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to the second session of our 38th Annual Global Metals Mining and Steel Conference. I'm Jason Fairclough. I run metals and mining research for Bank of America here in Europe and in EMEA. I'm joined by my colleague, James Redfern, who's Head of Australian resources research. We work together covering the dual-listed miners, so BHP and Rio. So first, this is our second year during this conference virtually. We're very much hoping that it's the last. And I would really like to thank both the companies and our investor clients for supporting us through this challenging period. We have around 1,000 people signed up for the conference. So we're very pleased with the participation. So on behalf of James and myself, I'm very pleased to introduce and to welcome our second CEO speaker, Jakob Stausholm from Rio Tinto. Jakob was previously CFO of Rio Tinto, before being appointed CEO earlier this year. And just to explain the format for everyone's benefit, Jakob will be presenting a few slides with some opening comments. And then we'll move to a fireside chat discussion. There is an opportunity to ask questions via the Veracast panel. So if you have a question, feel free to add it into the same system that you used to log in. James and I will see those questions, and we'll try to work them into the discussion. So with that, we'll invite Jakob to make his opening presentation. Jakob, over to you.

Thank you, Jason, and good morning, good afternoon to all of you. In preparing for today, I was reflecting on how the world looked 12 months ago when this conference was last held. At the time, we were in the middle of the first wave of the pandemic trying to deal with the human catastrophe. The macroeconomic outlook at the time was comparable to the depression of the service and commodity prices were generally depressed. Since then, a remarkable recovery has happened in the global economy, driven by a very strong recovery in China. The mining industry is currently benefiting from this strong recovery. I read predictions about a new super cycle for the next decade. But quite frankly, the last 12 months have told us to be really cautious. For Rio Tinto, we are certainly not going to rely upon a new decade-long super cycle. Instead, our focus is on building a stronger Rio Tinto, that is resilient and more competitive in a number of scenarios. But there is another reason why I'm positive about the long-term fundamentals. Many people looking at this picture, see solar cells, wind turbines, transmission lines, electric vehicles and urban development. I see huge niche for iron ore, for copper, for aluminum and materials for batteries. During the last 12 months, the governments around the world have become increasingly aligned in their focus on the transition to a lower carbon world. This transition requires more of everything you see in this picture and will underpin the demand for our commodities for the decades to come. Turning to Rio Tinto specifically. I've been Chief Executive for 4.5 months. As a result of the pandemic, it has been difficult. It has been different to how I would have expected to spend my first months in the role. Restrictions have meant that I can't visit certain Rio assets and meet face-to-face with a number of employees and stakeholders around the globe, which I would have liked to do. But importantly, I spent 3.5 invaluable months in Australia, our most important host country, engaging with employees and various other stakeholders, from our traditional owners in the Pilbara and the Northern Territory to key government representatives, business leaders and our shareholders on the East and the West Coast. I also met many talented current and former Rio employees. It has been an opportunity to listen to learn and to understand how we need to adapt in order to start earning the right to become a trusted partner once more for various stakeholders. A key thing for me is that so many of those I met wants to see Rio Tinto succeed. Right now, our focus is on 4 areas: Firstly, Rio Tinto must be the best operator. Our operations performed well last year especially with the additional challenges of COVID-19, but we can further sharpen the consistency of our performance; secondly, I firmly believe that the foundation for our business is about achieving impeccable ESG credentials; thirdly, we must excel in development, both organically and inorganically. We will only pursue opportunities though that create value and will maintain an absolute commitment to capital discipline. Finally, we must step up our external engagement and become a more output looking company more in tune with society. This is our social license to operate. It's judged by others and essential for long-term success. To achieve consistent real operational excellence and truly become the best operator, we must start by unlocking real and sustainable improvements at these assets. This is a great opportunity, which we are pursuing with rigor. Key to success will be our people. We have learned that focusing solely on top down process and system solutions will not deliver the right sustainable outcome. We must lead in a different way that is more supportive, inclusive and people focused. This is not a one-off improvement program, but a journey with our Chief Operating Officer, Arnaud Soirat, and his team, creating the Rio Tinto safe production system and then working hand in glove with the product group, Chief Executives and our Head of Technical and Safety to embed it. This is how we will achieve an operating culture that we all live and breath as we do with safety. As I've previously shared, one of our attributes that attracted me to Rio Tinto was the company's long-standing record and commitment to how it operates way beyond the financial performance. And often challenged and asked internally and externally exactly what do I mean by impeccable ESG credentials. I actually don't have a definition on exact answer, but what I do know is that safety has always been at the heart of our business and core to how we operate. We need to bring a similar focus that we have on safety to other areas of ESG. The destruction of Juukan Gorge illustrated to me that while we have areas of excellence in ESG, there are areas where we must improve. And I'm absolutely committed to making those improvements. The work we have to do with Juukan Gorge in Canada and elsewhere is to secure our shared future. We must focus on real engagement with our communities, understanding their felt experience and never forgetting that in so many places, we're guests on their land. We also have a critical role to play in transitioning to a more sustainable economic model. We have set clear 2030 CO2 emission targets and set on an ambition of being net 0 by 2050. Our portfolio of high-quality iron ore, copper, aluminum and minerals are not easily substituted and our vital for a greener future. Earlier this year, we set our first Go-3 goals, working with close partnerships with our customers. We will include climate change targets in management incentive plans and our TCFD-aligned climate change report will be put to an advisory Board vote at our 2020 Annual General Meetings. These are all significant changes that will drive behavior in our approach to tackling climate change. Aiming for impeccable ESG credentials also requiring optimizing our rich cultural diversity, including, for example, increasing the number of women in leadership role and developing indigenous leaders. Turning to our portfolio and how we renew it over time, we must make sure that we build the capabilities in project development, evaluation and execution that are required to create the portfolio for the next decade and the decade beyond. We have time to do so, and our portfolio should not be seen through a quarterly lens, but in terms of decades. Our history has demonstrated our ability to continue to renew the portfolio and we must pursue this with excellence, baring to take some risks within our tight capital allocation framework. There are important decisions to be taken on a number of development projects even this year. We will, as a team, work them as hard as we can with a commitment to be willing to take some controlled risk while maintaining capital discipline and not avoid making decisions. Finally, we continue to strengthen our project pipeline through our sector-leading exploration activity. Turning to my fourth area of focus. To truly unleash our full potential, we need to be more output-looking and earn and protect our social license. As I said earlier, we must understand our role in society and invest in building meaningful relationships and partnerships, giving back to society and thereby earning trust. It would be others who judge our social license. Clearly, this must happen wherever we are in the world. However, given the significance of Australia to Rio Tinto, that is where I started and the insights about how we strengthen Rio Tinto there internally and externally have been invaluable. Let me summarize. We tend to continue to perform strongly, driven by our outstanding foundations. Our 2020 safety performance is the strongest in our almost 150 years' history. Our people and our world-class assets continue to deliver strong free cash flow, resilient in almost all market conditions. This is why we achieved underlying EBITDA of $23.9 billion, return on capital employed of 27% and generated free cash flow of $9.4 billion in 2020. And our balance sheet remains very strong with net debt of less than $1 billion at year-end. But we can improve and have identified the 4 key areas that we need to address, and we are addressing those right now. I look forward to providing you with greater insights and updating you on how we are progressing against the priorities at our half year results and the Capital Markets Day in the second half. In the meantime, we are all focused on what needs to be done each day to make routine even stronger and over time, see our great company earn back its respect and credibility with all stakeholders inside and outside the mine gate. Thank you, Jason.

Jakob, thanks so much for your presentation. So now we'll go on to our fireside chat. And just to remind everybody on the format, audience members can ask a question via the Veracast panel, and James and I will try to work those into our questioning for Jakob. We do have a couple of prepared questions, so we'll start with a couple of those. Jakob, you're not a miner by trade, you come from outside the industry. So you spent time at Shell and at Maersk. What has surprised you about the mining industry, either positively or negatively or both?

You're absolutely right, Jason. I have barely had my first 3 years in mining. There's a lot of similarity to my previous industries of oil and gas and shipping in terms of being long-lived and capital intense. But what really strike me when I joined Rio Tinto and the mining industry is, actually how profitable the industry is. Yes, it's cyclical. But I tell you, the cyclicality I knew from shipping meant that some days you earned money and some days you lost money. Here, it's kind of either you have an average profitability or you have a very good profitability. So somehow, I like the cycle cyclicality of mining more. The other thing I want to make is, I want to say is really, really strike me is how real ESG is, is so foundational. I mean any company on Earth, banks, including, I'm talking about ESG, but for a mining company like Rio Tinto, it's so foundational. I hadn't realized that before joining. Thanks.

Jakob, it's James here. Let's talk about Rio Tinto now and more specifically, the Juukan Gorge situation, if I may. The last 12 months, I saw, has been a tough time for Rio Tinto in terms of the negative headlines and I guess, perception issues. Can you please talk to what have you addressed so far? And what else needs to be done in relation to the Juukan Gorge issue and market perception of Rio Tinto. And beyond the immediate direct issues, what else needed to change within the organization?

Yes. Thank you, James. This has been a traumatic experience for the company, and it's been hard for all of us to have, not just to get it wrong, which we clearly got but also to live with the consequences of bad press for all our staff for a long period of time. It is a fundamental reset of a company, a company that is very strong, built on very strong foundations, but a few things needed to change. We obviously needed to address the issue of Juukan Gorge. We build relationship with PKKP and that will take time. We also needed to overlook our whole cultural heritage, but that's only the narrow part. The reality is, we are now a complete new management team. The whole executive team, everyone are new in roles. A few people have come from the outside. And we're also seeing changes to our Board. So it's a very seismic change that we are going through right now. I am trying to address it with the 4 objectives that I've laid out. And behind those 4 objectives, you actually, if you look carefully, you can see that there are some collateral changes as well that where I simply believe we can unleash more value from the organization, we can be more valuable to society at large by addressing those things. And that's what I'm doing with the new team. I've deliberately not gone out and talked too much in detail externally yet because my new team is only kind of in place for months. And it really is teamwork. One of the key things that we need to be even better is teamwork and that's what we are trying to practice from the top. So I'm looking forward to later in the year to talk more where we can also look back and see and talk about what has changed. But quite frankly, I do think we are focusing significantly on our agenda on rebuilding relationships with traditional owners and implementing all the actions that was agreed as part of the Board review in the autumn. Thank you.

Jakob, let's talk a little bit about Mongolia. So that's another challenging situation for you. Oyu Tolgoi, the Turquoise Hill, you've got a large challenging underground copper mine to build. It's behind schedule. It's over budget. You also seem to be revisiting the investment agreement with the government. And of course, COVID isn't making life any easier. So can these assets ever create value for Rio Tinto? And then I also have a question that's come in on the Veracast, which is why aren't you recycling peak iron ore cash flows into copper through M&A? Right? So a couple of questions in there.

Well, yes, look, let's talk about Mongolia first. I'm very, very proud of what Rio has been building in Mongolia. It is an impressive development, and it's going to be a great mine that is getting closer to completion right now. So the starting point is that it's not just an engineering achievement, it's also, I firmly believe, really in the interest of the people of Mongolia. And then the question is, can we ever get value out of it? I think so. It's very clear that we still have some discussions with the government of Mongolia, but I just firmly believe that there is so much win-win for both parties. We have now set up a new team that is supporting the development leading the effort. And Bold Baatar from my executive team is leading the effort. He's doing a very, very good job on rebuilding relationships in Mongolia, but it's very difficult, of course, to progress things here less than a month ahead of a presidential election. But after the presidential election, I hope we will be able to progress fast as we're also getting to a point where we will get into the so-called undercut decision. But Jason, you're making a good point. The COVID situation in Mongolia is very serious right now. I really fear for people there. And we have had to take a number of cautionary measures, which has had an impact on how much we have been able to operate and develop on the site. But I remain optimistic that we will come through that as well. I'm sorry, you got -- you added another question, why not just swap iron ore for copper. Well, I would argue that copper assets are not cheap at this point in time. And people are saying, you have too much iron ore, quite frankly, I'm very happy to have iron ore assets right now. So yes, look, of course, we are looking at the development of our portfolio for the longer term. But right now we're very, very happy with the portfolio we have. It's delivering very, very well. And quite frankly, more copper, yes, we are developing much more copper. We are progressing the renal development. We just talked about developing Oyu Tolgoi underground that will become the world's fourth largest copper mine. We have a number of other prospects around in the world. So we are focusing it organically at this point in time. But as you know, copper prices hit a 10 or 12-year high, the other day, probably not the best time to buy a mine. Thank you.

Jakob, while we're talking about iron ore, I've got 2 questions on iron ore, please. The first one is, there is a bit of a perception in the market that the iron ore business has been underinvested over the years by previous management teams. Is this a fair comment? And then the second question relates to the proposed Simandou iron ore project in Guinea. Just wondering if you could please provide an update on Rio's, I guess, plans for Simandou, Blocks 3 and 4 in the South.

Yes. Thank you. It's a good question about the past. I wasn't here. So it's difficult for me to judge. But I would say to you a couple of things. I think there were very few -- when I joined in 2018, only a couple of months afterwards, we sanctioned the Gudai-Darri project that will be finalized by the end of this year. And that was before [indiscernible] bought in. And I think no one, of course, had expected something tragic like this should happen. And I think we have also been positively surprised about how strong the Chinese economy has developed. So your question -- the risk of answering the question is with the benefit of hindsight, which we don't have. I do think that there was a lot of rationale in what we did. The challenge that we are doing right now is, of course, to complete a number of investments that we took in 2018 because it is right now a very, very tight market. And if you've seen over the last couple of years, we have slowly but surely ramped up both our development CapEx and our sustainable CapEx. So I think we are getting into a better situation. And then, of course, we have another prospect far away in Guinea. And we're keen to develop it with our Chinese partners. The problem we are facing right now is just that there are 4 blocks. We are in 2 of the blocks and the 2 other blocks -- you will not have 2 separate projects within the separate infrastructure. So the 2 consortias have to find a plan together, and that's probably what needs to happen over the next couple of months. If we can find out of doing that, for me, what is critical is to look at the economics on a stand-alone basis and more above everything assure ourselves that we can do it to the right ESG standards. If so, we are very committed to progressing that development. And I think we have a lot to offer. We are the only iron ore producer in the 2 consortia. We have been in Guinea for 50 years, and we have good experience working in Guinea as well. So that's our position on Simandou. Thanks.

Thanks, Jakob. Well, let's pick up on the ESG comments you made, and we'll talk a bit more specifically about carbon emissions. So Rio Tinto was the first big miner to fully exit production of fossil fuels. Obviously, you're still a major supplier to the steel industry, which was about 8% of the world's CO2 emissions. So how do you think about this challenge. What is Rio Tinto doing? And your peer Fortescue is actually investigating making iron in the Pilbara. Is this something that you'd ever consider?

Well, I guess that we and PSP have been producing steel in the past in Australia. So -- but look, It's a fascinating world. And I do think we are entering a decade of enormous technological development. The reality is, we don't exactly know what the solutions are. But in order to achieve the targets that the world have said and that Rio Tinto have said, we will have to learn a lot, develop a lot on technology and push it to application. So one area where we are pretty advanced actually is in the aluminum industry, where we have a very integrated chain and where we are focusing the ELYSIS, it has taken, in my view, my humble view, far too long, but that's how science works. You build something in the lab and you scale it up. And right now, we have just announced that we are going to apply in 1 of our smelters in the Saguenay, the new technology that will be basically making the smelting process carbon neutral. And the same thing has to happen in the steel chain, in the steel supply chain because as you rightly say, it's one of the major emitters of CO2, and we have to play a role here. And that's why we, this year, went from only talking about scope 1 and 2 to scope 3 as well. What we have done is, we have set up joint ventures with our major customers, Baowu in China and Tsinghua University, Nippon Steel in Japan and also a joint venture with European players because we don't really know what the answer is. We have something to bring. They have a lot to bring. And together, we can find the technologies, develop that and implement it. It's a long drive. And yes, I've seen that Fortescue is going hard in and I complement them for their effort there. We are absolutely looking at the same things, but I have to be humble and say we don't exactly know what the exact solutions will be yet.

Jakob, let's talk about aluminium. Rio Tinto is one of the world's largest producers of aluminium and also a producer of lower carbon aluminium as well. And China seems to be moving towards exploiting less aluminium and prices have recovered very strongly this year on the back of those supply restrictions, but also improved demand. I'm just wondering, given the strong aluminium price that we're seeing now, how do you think about the future for aluminium? And could it now start to attract capital to grow?

Yes. Thanks, James. I mean, I have always tried to defend our aluminium business, which has been under enormous pressure. And I don't know how many investor comments I've got in my 2.5 years here about aluminum, that certainly had some really tough years. And now it looks better. But on top of that, the economics looks better. We have a very unique portfolio. On average, our CO2 emission on producing aluminium is only 1/5 of what the average CO2 emission is of the whole world of using aluminum plus, we are focusing the technology that can significantly further reduce the CO2. So I would argue, aluminium is a material for the future. And we have the best portfolio, and we have a chance also for making it better. And the industry seems to get into a slightly better position. So I'm very, very happy with what we have. Now what we have not tracked yet, James, is the ability to grow. So first things first, we still have a number of challenged assets in the PacAl portfolio, and we are trying to see whether we can find solutions for those. I'm very committed to try to find the right energy solutions. We're working on that. But beyond that, of course, it would be nice if you could find a pathway forward also to grow the portfolio, but that's probably years up.

Okay. Thanks for that, Jakob. Well, with that, I think we've got about 1 minute to go, and I don't want to sort of run over because I know James has to immediately jump into his next session. So in 10 minutes, we'll be starting with Elizabeth Gaines from Fortescue. So speaking of Fortescue, so we hope you can join us there. And it just remains for me to thank Jakob so much for his time. You've been very generous, very patient with your answers to our questions. So thank you for that, sir. And we hope to see you in person in 12 months.

Absolutely. Thank you.

Thank you.

Thanks, Jakob.