Rio Tinto Group (RIO) Earnings Call Transcript & Summary

So ready for the next session. So I'm Jason Fairclough. I run Metals and Mining Research for Bank of America in Europe and the wider EMEA region. So on behalf of myself and my colleague in Australia, James Redfern, it does give me great pleasure to introduce our next company, Rio Tinto. Speaking for Rio Tinto, we have CEO Jakob Stausholm. Now prior to becoming CEO at Rio Tinto, Jakob was the CFO. He's also worked in senior roles at Shell, at ISS and Maersk. And I recently learned that Jakob speaks Spanish fluently. [Foreign Language] Miami, Jakob, and we're looking forward to your presentation. So Jakob's chosen a hybrid session. So he'll do a couple of slides just to introduce Rio Tinto, and then we'll have a fireside chat. So Jakob, over to you. Thank you.

Thank you, Jason, and good morning to all. It's really a pleasure to be here in-person event, quite frankly. It's the first time I'm attending this conference in person. And what an interesting moment, I think it's a quite pivotal time for Rio Tinto and for the world. A time of huge uncertainty, but also a time where the societal expectations are changing very quickly. We produce materials vital for the energy transition, but that's not enough. As an industry and for Rio Tinto, in particular, we have a huge contribution to make and a large responsibility to deliver. So today, I'll be sharing an update on the progress we are making on how we can decarbonize our business and grow the company while maintaining financial discipline and enhancing our competitive advantages. So first of all, I'd ask you to draw attention to this statement here. And let me start off by taking a step back. A little more than 2 years ago, the COVID pandemic began. At the start, many were predicting a depression not seen since the 1930s. This was only 2 years ago. The following year, we've had another panel conference. What were people seeing there? Well, it was not exactly what happened. In fact, a company like Rio Tinto was faced -- because the economy Rio faced, with the physical economy, was faced with the growth rate that we barely have seen before. The same economists now talked about a new decade super cycle. And today, we are meeting, and we have a crisis in Ukraine, and people are now talking about a decade of inflation and high recession risk. So the only thing I can conclude from this is that I don't know, in the short term, the world is very unpredictable. What I can be happy about is that I work for Rio Tinto since we are actually an incredible, robust company and in general, done comparatively well during tough times. But also in good years, like last year, we actually reaped the benefits. And as you can see, last year, we recorded record results, $21 billion after tax and a return on capital employed of 44%. Now although the short term is quite unpredictable, we actually feel quite comfortable about the longer term. This is because, as you can see here, and as I heard Secretary John Kerry say the other day, climate change is not a matter of politics. It's about science and math. The world needs to respond. And the transition, which is primarily an energy transition, will require more the products we produce. We at Rio Tinto are not in fossil fuel extraction and therefore, all the commodities we are producing today are required today even more for the transition and beyond the transition. We just need to decarbonize the business we have. Historically, as Duncan talked about earlier, population growth and urbanization provided the base demand for metals. Now in addition, the world needs to find the bridge to expected supply gaps in key materials needed to make decarbonization a reality. From the 3 million tonnes of lithium needed by 2030 for up to 65 million electrical vehicles, to the extra copper needed for electrical vehicles, wind turbines, solar and grid electrification. We need to demonstrate why mining is part of the solution and essential to the world's low carbon future. Rio Tinto is absolutely committed to play its part, from steadily increasing our investment in decarbonizing our business and growing in the materials necessary for the energy transition, to engaging in genuine dialogue with governments, partners and society to ensure that there is shared benefit from our operations. Now when I speak here today, I know you want to hear about the direction, the strategy and the targets for the company. But ultimately, what really matters is can we deliver that. There is a wise saying, “Culture eats strategy for breakfast.” It's really true. And since I was appointed CEO, most of my time have been spent on that journey. We -- at Rio, we needed a reset. We needed a clear sense of purpose, putting respect for people, communities and land at the heart of our contribution, and we needed to listen. This started with strengthening relationships, relationships with traditional owners of the lands on which we are guests and where we are operating and to the communities close to our operations. We then set new values and are now working on embedding these. We need to make sure that everyone in Rio Tinto live and breathes care, courage and curiosity every day. We have gone deeply into our work culture. And while we have work to do, we are making real progress. And I'm committed not only to implement the recommendations that we have disclosed, but also to overseeing the culture change in the company. This is actually not just about doing the right things, it's the bedrock of our future performance and our ability to execute our strategy. Now as I laid out at the beginning of last year, we have set ourselves 4 objectives that will make Rio stronger, more relevant to society and ensure continued attractiveness to shareholders. We are making real progress against each of them. We are positioning the company to be more outward looking, more humble, more empathetic. We are investing significant time and effort in putting the right teams in place. We are focused on rebuilding relationships, particularly with the traditional owners in Western Australia. Doing this day by day is really about strengthening our social license. Operationally, we are not yet firing on all cylinders. We had a weak first quarter, but we believe we are now turning the corner. I have visited many operations, and I've had deep discussions with our leaders. And I can see how we are slowly but surely addressing all the opportunities we have in our business. The 4 objectives essential to our success continues to be: to become the best operator, to strive for having impeccable ESG credentials, to excel in development and to strengthen our social license. I've said this before, and I'll repeat it, it's a multiyear journey, but we are making progress. First of all, our great focus in the last 3 years has been fatality-free. This is, as others have said here today, safety is where it all starts in mining, and we're doing very well in this area. We have stepped up in a number of other ESG areas, and we have set much tougher targets for our climate change so that we are now aiming for having minus 50% Scope 1 and 2 emissions in 2030. And this journey is supported by around $7.5 billion of value-accretive direct investments between 2022 and 2030. And we are working right now with our partners to help decarbonize the full value chain. As an example, I'm proud to see that after many years of hard work, the ELYSIS joint venture with Alcoa was actually proven last year. We are now able to produce CO2-free aluminum. It is about changing a 100-year-old manufacturing method. This is fascinating. We are going now from R&D into how can we apply it. And we are now doing everything we can to think about how can we, as quickly as possible, roll that out in our world-class aluminum business. A personal highlight for me has been the commencement of the underground mining at Oyu Tolgoi. This could not have been possible without a reset of our relationships in Mongolia, both with the government, the parliament and the people of Mongolia. We have also completed the acquisition of the Rincon lithium project in Argentina, and we have signed a framework agreement for the Simandou iron ore development in Guinea. Two weeks ago, I went to the Pilbara with the whole Board and we went and looked at Gudai-Darri, our first greenfield iron ore mine for a decade. And quite frankly, it's shaping up extremely well. We are in the middle of commissioning, and we will declare first ore, as we have said earlier, at some stage here in this quarter. So really exciting development. I can recommend you, by the way, to listen to the fireside chat between Jason and Simon Trott later today. No doubt he will talk more about the development of iron ore. Last week -- well, actually, no, it was this week, I went to Sorel in Canada. And there, we have a lot of innovation happening. We have just announced that we have opened up a scandium plant. And there's a lot of talk in the world about critical minerals. We're actually making it happen. And we are making it happen for the waste stream. So what I have here is, it's not salt, it's not sugar. It's not something else. It is 99.99% scandium. And you think about it from the waste stream of our titanium slag business, there's 44 ppm. And we can now extract this. And it's profitable, it's profitable from day 1. We can extract this and we can build up and we will be able to deliver 20% of the world's need for scandium. You need scandium to lightweighting aluminum, it's much sought after in the aerospace industry. We will be able to have a 20% market share. We are the first producer in North America. Basically, all scandium is produced today in China and in Russia. At the same time, I couldn't be there, but in this country, at Kennecott outside Salt Lake City, we just opened a tellurium plant and another really exciting development, you need it for solar cells, you need it for a number of technical components. And again, the waste stream from our clinical operations, and we can extract that and it's profitable from day 1. We have more of those opportunities. The advantage of Rio is not just the mining, it's because we have the processing and the R&D capabilities so we can find the technological solutions to extract these critical minerals. Now let me conclude. When I presented my first results as CEO last year, I set out the 4 objectives to make Rio an even stronger company. While much, much more needs to be done, we are, as a company, totally focused on execution, and I'm proud to say we are making progress against each objective. We have an outstanding foundation of long-life assets, producing vital commodities for decarbonizing and urbanizing the world. Our balance sheet is stronger than ever, and we have a world-class pipeline of projects. Most importantly, we have great people who are committed to making Rio Tinto a better place to come to work. This means that despite an uncertain economic outlook, we can continue to invest and grow in the commodities needed for the energy transition, accelerate the decarbonization of our portfolio and continue to pay very attractive dividends. Thank you. Jason?

So we'll now move to the fireside chat part of our program. Let me open up with a question here, Jakob. So when you started as CEO, you inherited more than one tricky situation. There's a couple. Do you want to talk a little bit about those? And then how do you see your mandate, and what progress have you made in terms of solving those problems?

Jason, thanks. I actually look at it completely different. I think I was extremely lucky because I came into a job in a company, an incredible company with a very impressive history, has got amazing people, amazing assets. And you know what, we could do a little bit better. And that's basically what we are trying to do. I had the opportunity to set a new team. And I think we have got an incredible leadership team in place. I got the full freedom to set that team up. And together, we have started on a journey that is -- yes, it's challenging, but it's also quite exciting, quite frankly, because if you look at it, there are very few companies who can -- who has this kind of opportunity set, can work with things like Oyu Tolgoi, starting a new iron ore mine in Western Australia, the size of 43 million tonnes. We are working on the Simandou development, lithium in Argentina. It's amazing. We take it step by step, and we are making slowly, but surely making progress. I find it fascinating that when you get into an opportunity set where you actually can do better.

Jakob, I wanted to ask you about the Oyu Tolgoi copper project in Mongolia, that's also had a few issues with the government and technical issues. Can you please talk about the progress at OT? And also the rationale for bidding for the minorities in Turquoise Hill, please?

Yes. So look, it was a quite tricky situation, and we owe our much thanks to our global CEO of Copper, Bold Baatar, who really went all in. And we figured out what was really the needs of the government of Mongolia and the people of Mongolia and we suddenly realized how much of a win-win there was. And that reset we actually did hand-in-hand with all TRQ shareholders. So we did it together with TRQ, and we have both reaped the benefit from that reset and starting up the underground mine. Now that is underway, and there's still a lot of technical risks with the projects, but it's a very complex structure. And that's why we have suggested to take the company private. We believe we have made a very attractive offer to the shareholders. But we're also very respectful for the very clearly laid out process in Canada. So we'll have to await that process. And we'll see. I mean we will be disciplined. We'll see whether we will take it private or not, but we thought we should give the shareholders a choice. We believe that it's the right thing to simplify the structure.

So Jakob, I don't want to preempt our ESG panel later on too much. So that's later on this morning. But just as a teaser, can you tell us how you think about fixing ESG? So is it people? Is it structure? Is it something else? How long does it take?

Look, it's all of it. And there are certain things where we are doing outstandingly well. I mean we haven't had a fatality for 3 years. That's quite an achievement in such a big business. And obviously, we should never have that. But it is the first 3 years in the company's history where we have been fatality free. So that's a good example. Some of the other things are actually similar journeys that we have to go on, like the safety journey. We published a report about the work culture with some confronting information. It's the same thing. Get it out in the open, talk about it, learn about it, learn to intervene, et cetera. That's the journey we have been -- all companies have been on, on safety for the last 25 years. That's the journey we are at here. And I can't change the tragic events around Juukan Gorge, but I can learn from it. I think our company have learned tremendously from that, and we are a different company. And just as late as 2 weeks ago when I was at Gudai-Darri, we started out meeting with the elders of Banjima and we have a completely different dialogue than what we used to have. It's very rewarding, and it does come down to values. And I can sense on the whole organization, they want this. And together, we are also getting better business outcomes.

Jakob, let's talk about iron ore, which accounts for roughly 70% of EBITDA for Rio Tinto. There's a view, rightly or wrongly, in the market that the iron ore business might be undercapitalized over the years. Do you think that's a fair assessment? And then also maybe if you can please comment on the new mines that are going to be tied in to Gudai-Darri for one? What that means for the iron ore business in terms of revenue, costs and quality, please?

I think several of mining executives today talked a bit about how difficult it is to balance supply and demand. Duncan mentioned it, Gary mentioned it. And the reality is it's very, very difficult to predict. China's demand for iron ore has been surprisingly strong over the last couple of years. Had I known that, we might have sanctioned Gudai-Darri a year or 2 earlier. But now it's there. And when we have finalized commissioning, we will ramp it up and that will take pressure off and we will be able to produce more iron ore out of the Pilbara.

Let's just see if there's any questions in the room. Anybody want to ask a question? We've got lots. Okay. Let me keep going. So we'll talk a little bit about aluminum, something of a hidden gem in your portfolio -- actually, we're here. Aluminum, yes. So Rio Tinto is seen as having overpaid for the assets back in 2007. But now in a carbon-constrained world, is this investment finally coming good? How do you think about aluminum? Does it attract capital within Rio Tinto?

I think it is an amazing business, but it has been through some tough years. The competition from China has been relentless. And the decarbonization of the world hasn't happened that fast. Don't forget that what we have in aluminum is not just a full chain of aluminum. We also got the hydropower associated with it. And I think that asset in itself is hugely valuable. And when you look at the demand for aluminum, it's actually one of the commodities that faces the best growth prospect, perhaps even better than copper. Over the next 20 to 30 years, there is an enormous need for aluminum. The only thing -- the only problem with aluminum is it's probably the most energy-intensive industrial process on earth. And therefore, it's so important to decarbonizing. And the fact that we are already at a much, much, much lower carbon point than any of our competitors is a huge advantage. And I think that you will increasingly see value from that in the future.

So at the risk of sounding like an investment banker, do you think the value of the business is maximized inside Rio Tinto?

No. I don't think we will ever get there. There's so many opportunities, so many opportunities. Look, I said just a moment ago, we're still not firing all cylinders. You go around and look at our operations, we can do better, and we will do better with our safe production system that we are implementing all across. We also have to take up the challenge and making sure that when we develop new projects, we do it as capital intensive -- as capital efficient as possible. Your question just before about aluminum, one of the tricky thing is really how can we invest in aluminum in a capital-efficient way. So we need to stretch ourselves on projects, and we can do better in operations.

Okay. Last chance on the floor if anyone's got a question. There's one right there. Jim?

If your ELYSIS technology plays out, it should be tremendously profitable, how do you realize the profit?

Yes. Of course, we are thinking a lot about that. But right now, we are basically just trying to figure out how we can scale it up. And there's something around just manufacturing of the inert anodes, but more than anything, we have to figure out, can we retrofit in an efficient way and how fast can we do that and what size of pots should we do that, et cetera. But it's a fact that right now, we have a fairly industrial scale pots running at -- up in the Saguenay and they have been running since October, and they produce the highest quality aluminum. So we kind of know it works. We're now focusing on how do we fast scale up. The full potential I don't dare to talk about yet, but you think about it, and it's pretty obvious that it's becoming more and more difficult to invest in conventional technology. If you can see around the corner, you'll have a technology that actually is carbon neutral. And I don't know whether you saw -- I hadn't brought my iPhone here, but Apple announced the other day that the next version of the iPhone will be based on CO2-free aluminum. So the other thing to think about, we [ tend ] as miners to think about the technical part, but there is a big marketing issue around this, as well opportunity because it's very difficult for consumer goods not to be prepared to have as low carbon aluminum as possible. So I see a lot of commercial opportunities as well. But I don't dare to talk about the profitability yet. We haven't really proved the upscaling yet.

Any other questions from the floor? James, do you want to ask another?

Yes, Jason. Jakob, maybe a quick question on -- or maybe a quick comment on lithium. The Jadar project in Serbia has been canceled effectively, what's the pathway to having Jadar restarted? And also the time line on Rincon to first production, please, in Argentina?

Yes. Look, there was some discussion about the cost curve of lithium. I don't know. The only thing I know is that the world needs 10x more lithium by 2030 compared to 2020. And that means that it must be possible to attract capital into developing lithium. And that gives me some confidence that it actually could end up being quite attractive. And then on top of that, there is a lot of lithium in the world, but the 2 assets we have Rincon project and Jadar, I consider some of the best assets in the world, maybe not the very best, but amongst the absolutely top assets, one in brine and one in hard rock. The Rincon project, we are ramping up. We are having people on the ground progressing the project. And that will -- we will learn much more about how that will turn out. And the trick is, of course, to try to optimize production as quickly as possible -- as much as possible. Ever since the acquisition, there hasn't been bad news in that way. It's just confirmed that it's a very good asset. Jadar, look, the thing about Jadar is just -- we just have to recognize it's not easy to sanction new greenfield mines. It's a societal choice. It's a great opportunity for Serbia. And I really feel we have a project that meets our high bar of impeccable ESG credentials. So we are just basically ready to engage with everyone in society about the project. And I think at the end of the day, society will realize that it is a mutual benefit. So I still remain cautiously optimistic. But yes, it has been a bit volatile the last year.

Could you join with me please in thanking Jakob for his presentation? Thanks.

Thanks a lot, sir. See you later.