Delivering superior returns J-S Jacques, chief executive Bank of America Merrill Lynch 2017 Global Metals & Mining Conference, Barcelona 16 May 2017 **Check against delivery** This is my first time here as chief executive of Rio Tinto. Let me start by saying Rio is in very good shape and it is my ambition to make it even stronger. Our value proposition Last year, we set out a clear approach to delivering superior value for our shareholders in the short, medium and long term. It s about: a long-term strategy built on world-class assets; maximising cash through our value-over-volume approach; developing a high-performance culture across the Group; and allocating capital with discipline. 2016 was the beginning of this journey we made a number of promises and we have kept them all. We delivered EBITDA of $13.5 billion with a margin of 38 per cent. Our focus on cash enabled us to maintain the best balance sheet in the sector and declare $3.6 billion of cash returns to our shareholders. $3.1 billion of dividend and $0.5 billion of share buy-back. More on that later. To make our business even better we will focus on three things: Our $5 billion productivity programme; Our quality growth; and Reshaping our portfolio. We will not slow down. Let s take a step back and look at some key issues facing all of us. Supportive Chinese macro indicators We ll start with China. We all know growth rates have slowed down. But the Chinese economy remains healthy, as shown in the slide. We expect government stimulus to be sustained ahead of their senior leadership conference later this year. Even the early action to control credit will be helpful in the medium and long term. The Chinese government is taking real action around pollution and the environment. We think this is the right thing to do and will have a positive impact on industry. Page 1 of 6
Let me give you a few examples. In aluminium, it s clear that the new policies will have a positive impact in the medium and long term. We expect environmental permits to become harder to obtain which will slow new capacity. However, in the short term we remain cautious. We all know switching aluminium potlines on and off during winter is not realistic. The restructuring of the steel industry in China does not mean a reduction in output. We believe it will increase demand for higher grade iron ore, as older, more polluting blast furnaces are taken off-line. So all in all, if you ask me, am I confident about China, the answer is yes. Industry returns have declined Our industry is all about capital allocation and efficiency. This slide shows just how badly mining has performed. The mining industry s productivity has gone backwards; costs have gone up; and there has been no investment discipline. We have given money away. In the same period that commodity prices have doubled, returns have actually gone down. Just riding the ups and downs of commodity prices is not good enough. It is not about buy versus build it is about managing returns, investing with discipline and focusing on every dollar. At Rio Tinto, we are increasing our return on capital compared with our peers. But there is no room for complacency. We know there is much more to do. Maintaining a disciplined and consistent strategy It is all about having the right strategy, and sticking to it. Our strategy is to create superior value for shareholders by meeting our customers needs, maximizing cash from our world-class assets and allocating capital with discipline. To remind you, we will deliver this by focusing on our 4Ps Portfolio, Performance, People and Partners: Portfolio, is about world-class assets; Performance, is about operating and commercial excellence our value-over-volume approach; People, is about developing industry-leading capabilities; and Partners, is about long-term relationships with our customers, investors, governments and communities. It s about protecting our assets in the short term and securing our access to new resources and markets in the long term. Our value-creation model will deliver superior cash which we will use to: maintain our balance sheet strength; provide quality growth; and deliver superior shareholder returns. Page 2 of 6
World-class portfolio Looking at the first P, portfolio: our multi-decade, expandable, high quality assets generate around 90 per cent of our EBITDA; our Pilbara business delivers industry leading margins; we have an excellent position in Bauxite, with attractive growth options; our smelters in Canada are the most profitable in the industry and the greenest; and we have large, high-quality resources in copper with Oyu Tolgoi the most exciting copper growth story today. Safety and operating responsibly key priorities Maximising the value of our world-class assets depends upon the second P, performance. Performance starts with safety and safety comes first at Rio Tinto. Our ambition is very clear: all of our employees and contractors must return home safely at the end of each and every day. Everyone at Rio Tinto, no matter where they work, is focused on personal and process safety. A safe operation is a well-run operation. Operating excellence is focused on cash Every day, every shift we seek to improve the return on our asset base with a focus on cash and efficiency. Over the past four years we have reduced our costs by around $8 billion. We have reduced our trade working capital to 22 days. And we have announced $7.7 billion of divestments. Strongest balance sheet in the sector Our success at managing cash and our asset base means we have the best balance sheet in the sector. This is a major competitive advantage. It makes us resilient against any volatility. It also allows us to provide superior cash returns to our shareholders through the cycle. And, last but not least, a strong balance sheet means we are ready to take advantage of any opportunities, should they arise. But let me be clear, any transaction must create value for our shareholders. And our threshold is very high. We returned 28 per cent of cash generated in 2016 to shareholders Now let s move to the best slide of today. As you can see here, most of the sector has been focusing on repairing their balance sheets. Our stronger financial position allows us to maintain a balanced allocation between capex, debt reduction and shareholder return. Page 3 of 6
In 2016, we returned $2.7 billion or 28 per cent of our cash to our shareholders. Remember this was achieved at an average iron ore price of $53.60 FOB. The average year to date has been $74 so a price of $42 for the rest of the year will give us a similar outcome. So, we delivered the highest return in absolute and relative terms across the industry. And if you combine the cash returns of the top five mining companies on this slide, we delivered 60 per cent. We accounted for 50 per cent of the total cash returns of the FTSE All Share mining index. High return growth projects We are building our portfolio of world-class assets. An opportunity that many others simply don t have, and importantly, we are investing through the cycle. When we make capital allocation decisions, we ensure that we only pick the best. Our three quality growth projects Silvergrass, Amrun and OT will deliver IRRs in excess of 20 per cent. Delivering $5 billion of free cash flow from productivity At Rio Tinto, growth is about cash and profitability, not volumes or market share. And productivity creates growth. There are two ways to add value through productivity: sell more with the same cost structure, or produce the same with a lower cost structure. The decision will be made on an asset by asset and commodity by commodity basis. Depending upon the supply demand balance. As I keep repeating, we always place value over volume. Increasing the productivity of our $50 billion asset base is the best return available to us. We have more than 800 trucks which can use more effectively. We have around 50 processing plants which today are not fully loaded. And we can reduce rail and shipping times by at least 5 per cent. This is free money, and you can be absolutely sure we will go for it. We will be generating an additional $5 billion of free cash flow over the next 5 years. And a run rate of $1.5 billion of free cash flow per year by 2021. Let me give you two examples. The first is to deliver best practice in a consistent way across the group. We have been benchmarking our operations for some time now. Examples of our stand-out performers are Kennecott for truck maintenance, Oyu Tolgoi for truck utilisation and the Pilbara for truck payload. Page 4 of 6
So we know where we are at our best. We now need to ensure we are at our best everywhere we operate. The second example is how we will convert data into business insight. We are using real-time data and visualisation to safely increase truck speed and maximise plant throughput. An example of this is our Hail Creek processing plant which produced an additional 2 million tonnes of throughput last year. Now, combine this with the marketing initiatives underway in Singapore. We have the recipe for increased margins and returns. To put all of this in context, $1.5 billion in free cash flow would have improved our EBITDA margin last year from 38 per cent to 42 per cent. So, to wrap up: Every decision we make at Rio Tinto prioritises value over volume. That s what we did in 2016. And it s working. We have world-class assets and the best balance sheet in the industry. This creates a strong platform for the future. We will remain focused on cash and value over volume. As I said at the start we will deliver superior returns to our shareholders in the short medium and long term. For us, it is all about keeping our promises day in and day out. Page 5 of 6
Contacts media.enquiries@riotinto.com riotinto.com Follow @RioTinto on Twitter Media Relations, United Kingdom Illtud Harri T +44 20 7781 1152 M +44 7920 503 600 David Outhwaite T +44 20 7781 1623 M +44 7787 597 493 Media Relations, Australia Ben Mitchell T +61 3 9283 3620 M +61 419 850 212 Anthony Havers T +61 8 9425 8557 M +61 459 847 758 David Luff T +44 20 7781 1177 M +44 7780 226 422 Investor Relations, United Kingdom John Smelt T +44 20 7781 1654 M +44 7879 642 675 David Ovington T +44 20 7781 2051 M +44 7920 010 978 Investor Relations, Australia Natalie Worley T +61 3 9283 3063 M +61 409 210 462 Rachel Storrs T +61 3 9283 3628 M +61 417 401 018 Nick Parkinson T +44 20 7781 1552 M +44 7810 657 556 Rio Tinto plc 6 St James s Square London SW1Y 4AD United Kingdom T +44 20 7781 2000 Registered in England No. 719885 Rio Tinto Limited 120 Collins Street Melbourne 3000 Australia T +61 3 9283 3333 Registered in Australia ABN 96 004 458 404 Page 6 of 6