Rio Tinto Group (RIO) Earnings Call Transcript & Summary

Good morning, everybody. For those of you who don't know me, I'm Jason Fairclough. I run Metals and Mining Equity Research for Bank of America in EMEA. On behalf of my colleague, James Redfern, who works with me on Rio Tinto, down in Australia, very pleased to introduce our next company. So Rio Tinto, representing Rio, we have CEO, Jakob Stausholm. Jakob was previously the CFO of Rio Tinto. He's also worked at Shell and Maersk. And from a former life, I think he's actually fluent in Spanish as well. Ola. So he's been a big supporter of our conference. We're very pleased to welcome him back. And Jakob has chosen the hybrid option. So he'll show us a couple of slides and then we'll sit down and we'll have a follow-up chat and there's going to be an opportunity to ask Q&A because he's not subject to take [indiscernible] panel restrictions. So with that, Jakob, welcome and let's have your slides.

Well, thank you, Jason and great to be here. A couple of introductory comments. And before I start, I'd like to acknowledge and pay my respect to all traditional owners and First Nations people that host our operations around the world. We are operating in a complex but exciting environment, full of opportunities. To put it simply, the world is growing and so is demand for our products. We have a major opportunity in the renewable energy transition. We expect it to account for 22% of total copper and aluminum demand by 2035 versus only 7% last year. The rapid rise of electrical vehicle is a key contributor and is also increasing demand for battery materials such as lithium. EVs are only part of the story. As countries decarbonize they will need to build a whole new energy system. This vast electrification is already taking shape, reflected in the demand for copper and aluminum. The energy transition won't just happen in the future. It is happening as we speak, as the theme of the conference suggests the future is now. The energy -- and this opportunity comes on top of powerful traditional drivers, such as population growth and urbanization that will continue to fuel demand now and in the coming decades. That brings me to steel. The steel market remains very attractive. It's also evolving. When we look to China, a weaker property sector is being offset by a steady rise in share of demand coming from infrastructure and manufacturing, including new energy systems. And while Chinese demand will continue to make up a large proportion of the market, we see a lot of potential in India and Southeast Asia, which are becoming exciting drivers of growth for the long term. Scrap will satisfy some of those needs but demand for iron ore will remain resilient. However, the iron ore product mix is changing as the world decarbonizes. Direct reduced iron production is expected to pick up from 120 million tonnes in 2023 to around 250 million tonnes in 2035. This will require high-grade iron ores. We already supply high grade from Canada by diversifying our portfolio with Simandou in Guinea and Rhodes Ridge in the Pilbara, we are uniquely well positioned. And we are exploring sustainable economic pathways for all our grades, future-proofing our business in a way that makes good business sense. Iron ore is here to stay for the long term. So we have a very favorable market backdrop and I believe we are well positioned to benefiting by executing our strategy. We're energized by our purpose about finding better ways to provide the materials the world needs. We are relentlessly pursuing our 4 objectives: first of becoming best operator; secondly, about achieving impeccable ESG performance; thirdly, about thinking long-term excellent development and fourthly, about deepening our social license. And our culture drives performance, which is why we are building an environment of trust based on our values of care, courage and curiosity. We're laying the groundwork for future growth by stabilizing our operation and improving our operations, though a focus on -- the focus is on health of our people, our assets and our ore bodies. Much of this comes down to culture and how we change mindsets and behaviors to create a workplace where everyone feels safe, respected and empowered to deliver results. We are also improving performance by embedding the safe production system. The safe production system delivered a 5 million tonnes uplift in our Pilbara iron ore business in 2023 with a further 5 million tonnes expected this year. The improvements are clear in our iron ore business and they are starting to come through in aluminum, where we are achieving greater operational stability at our smelters, including at Kitimat. Across Rio Tinto, copper equivalent production grew more than 3% in 2023. Based on the midpoint of our guidance, we expect another 2% year-on-year growth in 2024. We know we have a lot more work to do. But by developing a continuous improvement mindset and consistently investing in our assets, we are improving resilience and productivity. At the same time, we are applying our deep exploration and technical capabilities to strengthen our portfolio of commodities for the future. We are aligning our growth with the materials needed for the energy transition. We are growing in copper. Volumes at Oyu Tolgoi in Mongolia are steadily rising, which will help us deliver 1 million tonnes a year across our copper portfolio by the end of the decade. As mentioned, we are also making good progress at the Simandou project in Guinea, an exceptionally untapped source of high-grade iron ore for green steel. In addition, we're advancing the pre-feasibility study for Rhodes Ridge. We're evolving our aluminums business. In March, I visited the Ontario side of our Matalco recycling joint venture, to see how it's turning scrap into high-quality billet for the growing North American market. This broadens our product offerings to customers, complementing our portfolio of primary aluminum where we are also investing in low carbon smelting. And we have options with lithium. Earlier this year, I visited the Rincon 3000 project in Argentina, where the team is laying the groundwork for first lithium production at the end of this year. Finally, we're investing in partnerships in exploration and research and development to build even more options. It was so exciting to spend time with our talented exploration team in Chile in February to see the process we are making on Nuevo Cobre with our joint venture with Codelco. We have one of the best exploration pipelines we have had for a long time, having consistently invested in the areas for years. We know we don't have all the answers ourself, partnering with governments, customers and industry peers allows us to share ideas and accelerate our purpose to help us to grow and to decarbonize. For example, renewables. Earlier this year, we signed 2 power purchase agreements to provide wind and solar energy for our Pacific aluminum operations in Australia. These will make Rio Tinto the biggest industrial player of renewable power in Australia. In the Pilbara, we are partnering with the traditional owners exploring opportunities with the Yindjibarndi Energy to collaborate on renewable energy projects. At the same time, we're developing new technologies. For example, to decarbonize the steel-making process, combining our capability with BHP and BlueScope to pilot an electric smelting furnace also by advancing our BioIron technology, which uses microwave energy instead of coal. In the copper space, we are excited about commercially scaling up Nuton, our bioleaching technology. This represents very real opportunities to add copper volumes. Let me summarize. We are operating in favorable market conditions and we are well positioned to benefit from growing demand from traditional drivers and the energy transition, which is happening as I speak. Through our focus on our 4 objectives, we are stabilizing and improving our operations, building our portfolio of commodities needed for the future and creating more options through partnerships in technology and exploration. This is enabling us to deliver stable, profitable growth and more attractive returns for our shareholders over the long term. Thank you.

Thanks, Jakob. So we've got a couple of questions just to get things going here and then we'll take some questions from the audience. I mean, obviously, I think 3 of our presentations so far, little bit focused on M&A. How does Rio Tinto think about appropriate M&A? How do you weigh small bolt-on deals versus transformational deals? And can you even drive growth at a big miner without transformational M&A?

We are not afraid of M&A. The best thing is, we don't depend on M&A. And I've just spoken, we have a lot of growth options organically and we have strengthened our capability to execute projects. It's really a pleasure for me to see how we execute projects now than we used to do. That means that it's not a need, it's a choice. And I think we have done some good M&A deals. We took Turquoise Hill private. We bought the Rincon project. We sold some [ gold streams ]. I think they have all been good deals but there have been small deals and it hasn't derailed our overall transformation of the company. There's still so much potential on that path. What I'm talking about here in terms of best operator, we're implementing a production system. It's making great progress by [indiscernible]. The real big economic impact is ahead of us. These things takes a long time. So we look at anything on M&A. But obviously, we need to think about, that if you do bigger M&A, it might derail what you're trying to do and that's a negative synergy.

Okay. Let's talk a little bit about the core of the company, and I will -- for those of you who haven't looked through the agenda, we've got Simon Trott later doing an iron ore fireside chat. So we don't want to steal too much of his thunder. But just briefly, when you took over as CEO, it seemed like iron ore had been undercapitalized. And now, Gudai-Darri, essentially fixes that undercapitalization problem. From here, how do you think about the balance between investing in Pilbara versus falling through on your commitment to Guinea?

You're absolutely right. And let me just make the announcement here. 4:30 this afternoon, there will be 45 minutes fireside between you and Simon Trott and you can get all your answers to this. So let me be brief. But I will say to you, our Pilbara iron ore business is one of the best industrial assets on the planet, full stop. So, of course, we will take well care of that. Of course, we will invest in it. And isn't it great to see that Gudai-Darri was designed for 43 million tonnes. And we have with very small debottlenecking already got it to 50 million tonnes. So we're doing the right things but the reality is, it has been running for many years. It's massive. It's almost 1 million tonnes a day that's been moved and it does require ongoing care and you're not going to solve it from one day to the other. So I still look Simon in the eyes and say, we can do much better.

Any questions from the floor? There's one right here, right up front, from my esteemed former colleague.

While we are waiting on the microphone. I've only been 6 years in mining, so I worry about your question.

I'm sure it's an easy one for you. Again, I'm harkening back to a different era where political risk was a major issue. I see the world changing again, where political risk is on the rise, not the decline as it has been for 2 decades. In that context, with your broad exposure, do you have any concerns about where things might be migrating to? Or is the press overblowing it? And then a corollary to that. We recently saw the President of the United States make the comment about China and not to be dumping steel on the world market. With the heavy focus I'm seeing on iron ore and steel growth, there's no doubt in my mind, it's needed but I see a building of trade war in steel like we saw in prior decades, just your thoughts.

You're right. The geopolitical tensions is going up a lot and I spend a lot of time visiting both Beijing and Washington, D.C. And there's a lot of choices the world can do in terms of the globalized world where you put manufacturing. But mining is slightly different because it depends on geology. It depends on geology. And we both -- we all -- all parts of the world need each other here. So you just have to find the right balances. I don't think the big balances are going to change a lot. You talk about export of steel. Yes, China is exporting but it's only around 10% of their production that they're exporting. They are basically the main consumer of steel in this world and they will continue to be so. So yes, it's good stuff for the media to write about. But I feel quite comfortable from our business. We are relevant for different parts of the world.

Is that your question over here?

You made a move into recycling in a public way last year and we're obviously seen Glencore doing similar things in recycling. What are your thoughts? Is this the beginning of a long-term strategy where you're going to be recycling more and growing your business in recycling?

Well, absolutely, where we have -- where we are in the processing, so for example, iron ore, we're not in steelmaking. So it's not that relevant for us. But we have the Western world's largest integrated aluminum business. Not going into recycling would be just sitting on the sideline and being cannibalized by recycling bottle and going into, in my view, a very exciting, growing business, growing much faster than primary aluminum, provides a more integrated offering. The customer wants both, sometimes performance aluminum, sometimes the lowest carbon impact, which is recyclable. And not least, it's very capital light compared to aluminum. So you shouldn't always think about EBITDA margin, you should think about return on capital employed. We are with the acquisition, increasing our global sales of aluminum by up to 30%. It's significant. We are now in recycling, not just kind of as a hobby but at scale.

So let's change direction a little bit. Just to talk a bit about copper and in a way this ties a bit into Dan's questions on political risk. So one of your big copper investments, Mongolia, sandwiched between Russia, China, things have evolved a little bit since you made the initial investment, maybe. It feels like it's finally a Tier 1 copper asset but it's really come at a price, right? So some people feel like it's been over capitalized. But I guess if we look at some of the best copper assets in the world, in the early days, they do end up being overcapitalized. So how do you think about sort of the upside potential? I mean 500,000 tonnes is the official number. But is there more to play for? Are there easy levers to pull?