Rio Tinto sees great promise

On November 26, Rio Tinto today presented its annual investor seminar setting out in detail its strategy and growth plans. Chief executive Tom Albanese and some of his senior management team provided additional information to investors on the significant value within Rio Tinto and how the Group’s portfolio of assets and growth options are exceptionally well placed to benefit from the global rise in demand for metals and minerals.

Five key value drivers were outlined:

  • An exceptional growth strategy in iron ore and a strong pricing outlook, with a conceptual pathway to treble production to over 600 Mt/y  
  • Positioned as the world’s leading aluminium and bauxite producer with an excellent portfolio of growth projects and a strong market outlook. Anticipated post tax synergies resulting from the Alcan integration have been increased by more than 50% from $600 million to $940 million per annum
  • As one of the world’s leading copper businesses Rio Tinto has an impressive pipeline of exciting projects with interests in many of the world’s largest undeveloped mineralisation opportunities. Recent exploration at La Granja in Peru has highlighted the potential for doubling forecast production to in excess of 500,000 t/y
  • An increase in the divestment target from at least $10 billion to at least $15 billion following a strategic review 
  • A capital management strategy focused on enhancing shareholder returns from cash flow while providing flexibility for ongoing growth. The total 2007 dividend will be increased by 30% with a further annual total increase of no less than 20% in each of the following two years. This reflects the Board’s confidence in the business.

Tom Albanese said: “The rise in global mineral demand is a trend that we expect to continue for decades because of fundamental demographic and economic shifts, especially in developing economies like China and India. We believe that the value in Rio Tinto is yet to be fully reflected by the market. We believe we have a better growth pipeline than our competitors, which puts Rio Tinto in a strong position to supply the metal-hungry world. We have the people, execution capability and resources to work smarter, faster and better than our competitors. We also believe our track record of delivery is unrivalled and we look forward with confidence to a hugely exciting future.”

Looking in more detail at the key value drivers:

1. Exceptional growth prospects in iron ore and strong pricing outlook

  • Conceptual pathway to production of over 600 Mt/y, including 420 Mt/y from the Pilbara in Western Australia
  • $2.4 billion has been committed to develop the Mesa A and Brockman 4 iron ore deposits in the Pilbara
  • Targeted additional mineralisation in the Pilbara region of 20,000 to 30,000 Mt and 8,000 to 11,000 Mt at Simandou in Guinea (non-JORC compliant Rio Tinto estimates)
  • Pilbara rail and port infrastructure secures Rio Tinto’s position as the premier supplier, positioning Rio Tinto to reap maximum benefit from strong pricing outlook.
  • Simandou is a major new discovery of high quality haematite (with a targeted grade of 65% iron) in proximity to the Atlantic Basin and the Middle East. Simandou has a potential production capacity of 70 Mt/y with options to expand to 120 Mt/y and 170 Mt/y in the future. Feasibility studies are likely to be completed by 2010 with first production in 2013.
  • Demonstrated capability to deliver growth with a compound annual growth rate in iron ore production of 14.8% over the period from 1999 to 2007.

2. Number one position in global aluminium with excellent growth and market outlook following integration of Alcan

  • Strong outlook for pricing and demand.
  • Post tax synergy target from Alcan integration increased to $940 million per annum (up from $600 million), deliverable by the end of 2009.
  • Enhanced growth options to achieve number one global position in alumina and retain number one position in bauxite and aluminium.
  • Strong fit with strategic focus on the best assets in the aluminium industry – competitively positioned operations with improving cost position backed by hydro power.
  • Cutting edge technology, global reach and operational expertise to capitalise on the demand outlook.
  • Renewed focus on upstream assets with decision to explore divestment of the Engineered Products division.
  • Attractive growth opportunities in alumina refining with expansions at Yarwun and Gove and primary aluminium smelting with expansion at Kitimat in British Columbia, a new smelter in Oman and other projects in Abu Dhabi, Malaysia and South Africa

3. One of the world’s leading copper businesses with an impressive pipeline of projects

  • Low position on cash cost curve.
  • Excellent long term growth prospects with interests in many of the world’s largest undeveloped copper targets.
  • La Granja in Peru has targeted mineralisation of 4,000 to 8,000 Mt at a copper equivalent grade of 0.5% (a non-JORC compliant Rio Tinto estimate). The mine has the potential to produce in excess of 500,000 t/y, double what was previously anticipated. It was acquired in 2005 for $22 million plus a work commitment of $60 million. First production is expected in 2014
  • Development work on Oyu Tolgoi is progressing well with significant further exploration potential in Mongolia. Average production is projected at 440,000 t/y of copper and 320,000 oz/y of gold over the projected life of the mine
  • Significant extension options in copper, gold, and molybdenum at Kennecott Utah Copper operations and upside on the Resolution project
  • Nickel projects in Indonesia and the US offer a pathway to becoming a top tier global nickel producer.

4. Raising divestment target from at least $10 billion to at least $15 billion following strategic review

  • Asset divestment target following the Alcan acquisition raised from at least $10 billion to at least $15 billion following the completion of a strategic review, which has highlighted approximately $30 billion of potential divestments.
  • Rio Tinto will explore options for the sale of a shortlist of assets. These are all good businesses and any sales will be value driven and dependent on price. The following businesses are included in the short list:

    o Rio Tinto Alcan Packaging (previously announced)
    o Rio Tinto Energy America (previously announced)
    o Rio Tinto Alcan Engineered Products (global)
    o Cortez/Pipeline (gold, 40% stake, US)
    o Greens Creek (zinc, lead, silver, 70% stake, US)
    o Rio Tinto Minerals Talc (Europe, Australia, North America)
    o Northparkes (copper/gold, 80%, Australia)
    o Sweetwater (uranium project, not operational, US)
    o Kintyre (uranium project, not operational, Australia)

5. Capital management strategy focused on enhancing shareholder returns and providing flexibility for ongoing growth. 

  • The total 2007 dividend will be increased by 30% with a further annual total increase of no less than 20% in each of the following two years, reflecting the Board’s belief in the business.
  • Estimated post tax $1.7 billion per annum cash flow enhancement expected by 2010.
  • Financial strength to pursue capital expenditure programme, forecast at $9 billion in 2008 and 2009, while maintaining the goal of a single A credit rating and a commitment not to raise equity as part of the refinancing of the debt incurred in the Alcan transaction.

Rio Tinto chief economist Vivek Tulpulé notes the following with regard to the world scene:

  • Commodity markets are entering a fifth straight year of growth with mineral and metal prices at levels well above their long term average and in many cases above levels at the start of this year
  • Firm global economic activity led by China is expected to support strong increases in demand for most metals and minerals over 2008 and 2009
  • With low stocks and a likely continuation of supply side difficulties, most commodity prices are expected to remain well above their long run trend over the short and medium term
  • It is too early to suggest that the current price cycle has peaked across the range of commodities
  • While the central case is positive, we are mindful of the short term risks associated with the predicted slowdown in the US economy
  • But, it is important to recognise that the USA is now significantly less important in world commodity demand than it was just five years ago
  • Rio Tinto’s analysis suggests that even a sharp slowing in the US economy would have only a small impact on Chinese and Indian economic growth and consequent demand for commodities
  • Viewed from a longer run perspective recent history and the IMF’s forecasts suggest that we are currently going through a period of global growth not seen since the period of fast growth and reconstruction in OECD economies following World War 2
  • Specifically, there has been a structural shift favouring rapid growth in developing countries with large populations such as China and India. Growth in these economies will be resource intensive as they industrialise and urbanise.
  • The implications for commodity markets are nothing short of profound. Projections for iron ore, aluminium and copper suggest that demand could double and even triple over the next 25 years.