Rio Tinto Group (RIO) Earnings Call Transcript & Summary

Speaking of Tinto, they're right over there. So I'm very pleased to welcome our next company, Rio Tinto, representing Rio Tinto, we have CEO, Jakob Stausholm. Jakob is a very experienced global executive. He's worked at Shell. He worked at Maersk, before joining Rio Tinto. He and I also share the experience of having worked in Argentina back in the 1990s. So Jakob, maybe we'll do this one in Spanish. Okay. So Jakob's chosen the hybrid format. He will present a few slides and then he'll join me over here for a fireside chat. So Jakob, over to you. Welcome.

Thank you, Jason and good morning. Before I start, I just would like to acknowledge and pay my respect to all traditional owners and First Nations people that host our operations around the world. Jason, let's come back to Spain. We are, of course, in Barcelona, and we are in Spain and that's where it all started for Rio Tinto. Two months ago, we turned 150 years old. And the name of Rio Tinto stems from a mine next to the river Rio Tinto in Andalusia. But the learnings is important to extract here. So that mine had actually been producing for 5,000 years by the Phoenicians, by the Romans and it was seen as a depleted resource. The King tried to get money out of it. He lost money on it. He also lost the throne. And the new Republic, they were interested in getting a little bit money. So they decided to sell the mine and exactly 150 years ago, a few English investors established the Rio Tinto company and bought the mine, which was seen as a very risky investment at this time, buying a depleted resource in at that time, an unstable country. But with innovation with technology, they rebuilt the mine, they build a railroad, which you probably saw and they built a port. And within 10 years, this mine was the world's largest producer of copper. It's an amazing story. We are right now writing our history book for the 150 years and I've had some sneak peeks. And it's just an amazing history. There are, of course, some wonderful chapters and there are some more less wonderful chapters. But that is what goes with the history of a company. The key thing is, you learn a lot and you become stronger, both from the high points and the low points. And there's still so much we can learn from our history. And as you see here, it's not that different what we have started upon in Guinea by building a mine, building a railroad, building a port. Now --and I believe right now, Rio Tinto is entering a new exciting chapter in its history. I believe we have the right strategy and I believe that we are facing an opportunity-rich world. We have laid out a clear path for -- to building an even stronger Rio Tinto. By meeting our 4 objectives and progressing our strategy to set the business up for long-term success. This is a journey but we are making genuine progress. The rollout of the safe production systems, our investment in lifting the health of our assets and a shift in culture and mindset in achieving results. This is particularly true for our iron ore business in the Pilbara, where we consistently improved performance. In the last 2 quarters, this business achieved record operational results. We must maintain this momentum if we are to become the best operator but it does demonstrate that the changes we are putting in place are the right ones. We are also making progress as we shape our portfolio for the future. Starting underground production at the Oyu Tolgoi mine is a significant achievement,1.3 kilometers been beneath the earth in the remote Gobi Desert. It is set to become the world's fourth largest copper mine by 2030. And through our acquisition of TRQ's minority shareholders, we doubled our exposure, while simplifying the structure. The end result of this acquisition is less, not more work for our teams as we unlock increased production and value from an asset we are already operating. This shows the disciplined and thoughtful approach we are taking to managing our portfolio in a way that enhances and not distract us from the delivery of our strategy. As does the agreement, we recently entered into a joint venture to unlock La Granja in Peru, one of the largest underdeveloped copper resources in the world. Partnering with First Quantum Minerals, we'll bring our combined development capabilities and knowledge to bear on this exciting but complex project. And we continue to progress the Rincon lithium project in Argentina. These 3 projects will add tonnes in materials essentials in the energy transition and strengthen our ability to deliver strong returns for the long term. Turning to iron ore. Another commodity essential to the energy transition and ongoing urbanization, we continue to secure replacement and potential growth tonnes in our Pilbara operations. And at the Simandou iron ore project in Guinea, we are working on finalizing the shareholder agreement, cost estimates and regulatory approvals necessary to progress the codevelopment of rail and port facility and unlock this high-grade resource by drawing on the respective strengths of the partners to the table. All of the materials we provide are needed for today's world. And looking to the future, we expect the demand for our products will continue to grow at around 3.9% per annum for the next 10 years. This will be driven by the dual drivers of ongoing urbanization plus the energy transition. This is why our strategy is about growing in the materials the world needs, a strategy that will ensure Rio Tinto remain strong in the short, medium and long term, with the ability to invest for long term while also paying attractive returns. A key task for our industry will be about how we meet the growing demands for all our products and the need to develop new mines. We are well positioned for the role of steel as core materials in a low-carbon future and the impact this will have on the iron ore industry over coming decades. The Chinese steel industry emits around 2 billion tons of CO2 per year, with gradual but ultimately, very ambitious decarbonization plans that will see ores with lower impurity and more generally, ores with lower CO2 iron-making emission increase in value. Rio Tinto is positioned towards a well-balanced iron ore portfolio, which will be resilient to the various ways in which steel decarbonization could play out. Pilbara Blend fines will continue our baseload for conventional steelmaking even as the process improves its carbon footprint and Pilbara lump will increasingly be valued as a low CO2 substitute for [indiscernible]. And we have the potential to deliver significant value over the long run from further beneficiation of Pilbara ores together with our technology partnership approach. Our IOC products are some of the highest-grade iron ore in the market, while Simandou potentially provide a large DRI feedstock complemented by a premium blast furnace product. In grasping the opportunity offering by increasing demand, driven by the energy transition, we must not lose sight of the other fundamental drivers of commodity demand globalization. While GDP growth in China isn't what it was 5 or 10 years ago, we expect to see a compound annual growth rate of 0.6% in global steel demand through to 2050. Supplying the iron ore to help meeting this demand would be key not only both -- to both the energy transition and ongoing urbanization in China, India and longer term, Africa. Executing our strategy is a long-term journey. We are making notable progress but there's much more to do. We are energized by our purpose of finding better ways to deliver the materials the world's needs underpinned by our values of care, courage and curiosity and our 4 objectives. These are the foundations for improving our culture and unleashing our people to do their best day in and day out. One recent example of finding better ways is that our blue smelting demonstration plant in Quebec, where we are trialing new technologies to produce titanium dioxide, steel and metal powders, with radically reduced emissions. The plant has now started to produce -- reduce -- to produce reduced ilmenite using gas that is a byproduct from the smelter process. The next step will be to run continuously and later to trial preproduction using hydrogen, as we work towards meeting our aim of industrial size plant in 2025. We're also investing in the health of our business, while improving our operational performance through the rollout of the safe production system. This is how we once again will become the best operator. We are growing the business in a disciplined way and shaping the portfolio to mirror the growth in demand we are seeing for all the commodities we produce. We have a very strong balance sheet that enables us to run our business and maintain investments regardless of where we are in the cycle. So in summary, we are uniquely positioned to accelerate the decarbonization of our portfolio, to invest and grow in the commodities needed for the energy transition and to grow our value and future dividend potential. Thank you.

Thanks, Jakob. So thanks for those introductory comments, Jakob. So the theme of our conference is the pivot to growth. Now when some mining companies decide to grow investors get worried. So I guess how do you think about growth? And I guess, both inorganic and organic. Maybe you could talk a little bit about which of your growth options you're most excited about.

Yes. Thank you. You asked the same question to Mike, and I thought he answered it extremely well. So let me not repeat that. But I understand the concern. I have been a CFO for 25 years. So things has to add up here and you have to be careful of not getting too carried away. I read newspapers as well. I see there's more M&A activities but it doesn't change anything for us. What we're trying to do is basically to develop the company in the best possible way and create most value. We are blessed with having a lot of opportunities, a lot of options in the copper. And you can see we are trying to unlock those. And then there are a few places where we have seen that we could actually do a transaction, always with what is the logic behind it. How can it create value? And as we also heard Mike saying earlier today, being sure that you don't try to do more than you actually can do. And if you look at some of the things we have done, look at TRQ, it doesn't lead to more work. It leads to less work. Look at La Granja, we have had that for a long time. We're getting help from First Quantum, who has got some really good skills. And together, I think we can unlock that one. Look at Simandou, it would have been really hard for us to do that project on our own, and we have some very competent Chinese partners that we're doing it together with because the reality is there is a financial constraint for us but there's more than anything, also human resources constraints. And we are trying to navigate within that path. Rio Tinto hasn't really grown for a decade. And if you look at just first quarter, do your numbers, you can see we are back growing again. A lot of this is coming from operational excellence. And a lot of it is also coming from, we start unlocking some things. But I can assure you, we will remain very disciplined. And discipline comes a lot from just being committed to delivering a dividend that puts some pressure into the system and make sure that you don't get too carried away.

Okay. So as exciting as growth is, I guess, the engine for cash flow at Rio Tinto still remains iron ore. We have a session with Simon later on. It's our deconstructed iron ore panel. But bottom line is, you undercapitalized that business for a long time You've got a huge new mine, Gudai-Darri. So is iron ore fixed or is there more to do here?

And look, it's -- nothing is ever fixed but we are on a really good journey. And maybe you can do my job this afternoon and ask some of the tough questions to Simon, asking him about how Gudai-Darri is ramping up and whether Gudai-Darri could get beyond its nameplate capacity, et cetera. But I would say, we have had some really good quarters. And I've spent some good time in the mines and I can see the culture change is happening right now. I can see how we are unleashing the full potential of our staff. So I would say there's much more to come but it takes time. And we -- and I just wanted to make the point, it is really a 5-year journey we have embarked upon them.

So just to follow up on iron ore. I was marketing in the U.S. recently. Investors were looking at your strong Q1 performance in iron ore and they're like, that's kind of interesting. But unfortunately, it was into a weakening market. And so I guess one question I had from investors was, how does Rio Tinto think about value over volume these days?

Look, you say -- I heard you saying a weakening market. I don't think you can say it's a weak market. We had $125 per tonne average iron ore price in Q1. It's a good market. And the supply -- we -- supply to the market was needed by the market. So I have less concern on that front at this point in time. We will, of course, never produce more than what the market needs. But right now, we have stepped up and there has been a demand for it.

Okay. So let's switch directions a little bit and chat about the balance sheet and shareholder returns. So we had several years of you returning way above your target payout ratio. But then with the most recent set of results, I think some investors were a little bit disappointed that there wasn't a top-up. So are those years of super normal returns behind us?

Well, first of all, to all of you investors being a bit disappointed, I like that you are pushing me hard but I do like to remind you that our ordinary dividend last year was the second highest dividend in our 150 years history. I get it, it was not as high as the year before but it's still a significant payback and a high dividend yield on it. Look -- we are blessed with a very profitable business. And it basically means that we have the ability both to pay a high dividend and grow our business. We're never going to be a high-growth company but growing a little bit, growing a little bit towards the market, where we are facing growing markets, makes sense. And our dividend policy, which says 40% to 60%, I'm very keen on. Every year since we changed the policy, we have delivered the 60% in ordinary dividend. I'm very, very keen on trying to stick with that. And then in the past for various reasons, we have -- particularly when we have sold things, we have paid out much more on top of the 60%. Now last year, we did some acquisitions. We didn't do any divestments. And therefore, we stick with the 60%. On average, the payout ratio have been 72%, the last 5, 6 years, anywhere between the 60% or the 72%, I consider now, what we are looking for. But we do ultimately have to look towards value. And if there's values in investments and we don't want to sacrifice the balance sheet too much, then maybe there's not extra dividend above the ordinary dividend.

Okay. Let's talk about your now 66% controlled world-class copper mine, Oyu Tolgoi, somebody called it a copper pearl in the Gobi Desert. I don't know who that was. But you've taken out the minorities in TRQ. You have a new agreement with the government. You've invited analysts to site. So is the asset fixed? How long until that's producing 500,000 tonnes a year of copper?

Yes, you're right. Look, there's a couple of things here. There's a technical development. We had 3 or 4 years ago, some challenges and we have learned from that and become better. I think it's an amazing technical team. We are making great focus, even during COVID, we were able to progress that. And we started undercut a year ago and we now have sustainable production. I went there 1.5 months ago and celebrated with the government that everything now seems to be going to plan, which is amazing, not just for us but probably even more for Mongolia. On top of that, we did have relationships issues, and I think we have made significant progress on that. So now we are really in a good place, very aligned. We have 2 shareholders, the government and ourselves and we want to progress this and we want to progress this towards its full potential. So not a bad time for analysts to come and see what we are working with. Nothing is ever solved here. But so far, the block cave is caving as well as we can hope for. So we are optimistic.

So 500,000 tonnes when...

Look, we have -- you typically have a 4 to 5 years ramp-up period and we have already been going for a year.