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RIO TINTO
Presentations in Hope Downs, Australia
18 June 2008
Alan Davies, Managing Director, Global Development &
Chief financial officer
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Presentations in Hope Downs, Australia 18 June 2008Alan Davies, Managing director, Global Development & Chief financial officer
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Today Id like to take you through a review of our financial strength in iron ore
and also update you on our performance in delivering value to date.
Firstly let me start with the traditional cautionary statement, after which Ill move
onto the key messages. The iron group is a significant earnings contributor to
Rio Tinto. In 2007 it represented close to 36% of the groups underlying
earnings, up on its historical average of around 30%. Our ability to deliver
expansion projects on time and on plan has underpinned our volume growth,
predominantly in our Pilbara based assets. This has allowed us to benefit from
the Chinese demand driven price increases that have occurred in recent years.
We continue to reinvest our cash flows into the business with over $5 billion of
capital expenditure over the last 3 years, predominantly in our integrated assets
here in the Pilbara but also at the Iron Ore company of Canada and in Rio Tinto
Brazil. We do remain excellently positioned at the bottom of the cost curve with
our Pilbara assets well placed to serve the high growth Chinese demand.
Cost containment remains a key focus for us, with our overall aim being one of
value maximisation. Like the rest of the industry however we are subject to worldpressures on prices and inputs for commodities, however we do leverage our
group size to alleviate these impacts to the greatest extent we possibly can. In
some cases weve chosen to invest where theres a value maximising opportunity
available, particularly in contractors to increase short term production. We are
moving forward at pace and later in my presentation Ill touch on some of the key
achievements weve posted so far this year.
As you can see from the two graphs on this slide the financial performance of Rio
Tinto Iron Ore continues delivering record financial results. Firstly looking at the
top graph youll see that EBITDA has grown at cumulative 40% annual growth
rates since 2002, demonstrating the efficiency with which weve converted the
strong market conditions into the bottom line. Our earnings growth shown in the
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Presentations in Hope Downs, Australia 18 June 2008Alan Davies, Managing director, Global Development & Chief financial officer
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second graph at the bottom is a slightly better 43.5 % which was also referred to
by Sam in his introduction and discussion. In fact in 2007 the iron ore group
earnings at $2.7 billion were some 70% higher than the whole of Rio Tinto in
2002. We continue to explore all opportunities to maximise value in the future
and many of our high return options come from the Brownfield expansions we
have here in the Pilbara. As you will see over the next 2 days our $5 billion of
capital expenditure over the last 3 years has delivered significant capacity
expansion by investment in our ports, mines and rail system. Were also
investing in our non-Australian based operations and as Sam mentioned in
March we announced the approval of the $473 million increase in Iron Ore
company of Canadas annual production of iron ore concentrate to 22 million
tonnes per annum from 17 million tonnes per annum.
Moving onto the subject of freight. As part of our marketing efforts, to offer a
range of supply solutions to our customers were increasingly becoming involved
in the provision of freight delivered sales, on a CFR basis. Throughout our
group, through our group specialist company Rio Tinto Marine we are able to
source competitive freight rates. In our results reporting, freight revenues arereported as gross sales in the revenue line whilst the freight costs form part of
our operating costs. The top graph here in this slide shows the revenue position
from 2004 with the incremental amount associated with freight revenues shown
in orange. Increased freight revenues have been both a function of our CFR
delivered volumes and the price of the underlying freight. The bottom graph in
this slide shows the proportion of the increase of revenues between 2007 and
2006 due firstly to the underlying increase in iron ore prices and secondly the
increase in sales volumes as a result of expanding the output of our business
and also the freight component of our revenues.
Now lets take this picture on revenue to look at our margins. Rio Tinto Iron Ore
is a very high margin business, this graph shows the EBITDA margins of Rio
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Presentations in Hope Downs, Australia 18 June 2008Alan Davies, Managing director, Global Development & Chief financial officer
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Tinto Iron Ores Pilbara operations since 2004. Ive split the graph into two sets
of data. The first is reported EBITDA margins and the second in red and on the
left are the same margins adjusted for freight. As we saw in the previous slide
our delivered sales business has increased in size over recent years. The
increased presence of freight in our gross revenues obviously distorts the
underlying EBITDA margin because the freight business has not shared as high
a level of margin as our iron ore sales. Our margins however remain extremely
strong, despite being impacted by a range of cost factors. Some of these are
external such as diesel costs, Pilbara specific price factors that is the Pilbara
inflation effect and the depreciation of the Australian dollar. The 2007 margin
change undoubtedly reflects some of the cost impacts which reflect the timing
difference between rising costs and the adjustment to pricing for our products.
Other cost increases which we have decided to take on relate to investment in
our business. These include drilling costs, expansion studies, investments in our
technology projects that will deliver future benefits like our recent announcement
on the automated train operations, driverless trucks and the remote operation
centre.
I spoke earlier about the levels of reinvestment in our business. Id like to briefly
touch on this again. We have been investing an increasing amount back into our
iron ore business in recent years. In 2007 we invested just over $2 billion of
capital in our worldwide iron ore operations. This graph shows that just over $1.8
billion of that investment was in our Pilbara business. Weve also obtained
further significant capital approval so far in the first half of 2008. Were also on
track for another strong year of capital investment in the Pilbara with our existing
projects including mine developments at Mesa A/Warramboo, Brockman 4 and
the expansion of Cape Lambert to 80 million tonnes per annum.
I spoke a bit earlier about the CFR deliveries in our business. This chart shows
the cost curve of iron delivered to China over the last 2 years and a projected
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Presentations in Hope Downs, Australia 18 June 2008Alan Davies, Managing director, Global Development & Chief financial officer
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view of 2008. On the right hand side of the graph, the average spot prices in
those periods and for April in the case of 2008. Starting with 2006 it shows that
Rio Tinto is favourably positioned at the lowest quartile of the curve. The spot
price is roughly around the 90th percentile at around $65 per tonne delivered.
The Chinese domestic producers sit mostly at the top of this curve.
Moving into 2007, rising costs of production and freight of ore delivered to China
have been driving up spot prices. The market clearing price is $113 per tonne.
Costs have risen for all supplies including Rio Tinto, but the relative position of
Rio Tinto has improved. Were well positioned towards the bottom of the curve.
This structural shift is likely to continue due to declining grades in China as Sam
referred to and pressures on India to withhold ore for domestic use as Sam also
referred to. Increasingly high spot prices are required to provide an incentive for
the high cost suppliers in China and exporters from India. This is a hypothetical
2008 cost curve, some adjustments have been made for illustrative purposes
including assuming an oil price of $125 dollars a barrel, further Renminbi
revaluation and other cost pressures. As the cost curve undergoes a structural
shift upwards it will provide fundamental cost base support to iron ore prices. Forcomparatively well positioned suppliers like Rio Tinto where we are actively
managing our cost base, this is an environment where margins will remain strong
and substantial value can be created through price and volume growth and of
course appropriate cost containment.
Now looking at our costs in the context of the Western Australia operating
environment. Despite cost pressures we have continued to demonstrate an
ability to manage these impacts. Most importantly were applying a combination
of approaches to achieve this. Weve successfully maintained our focus on the
underlying process improvement delivered through the implementation of the
lean process including Project Drum Beat in our rail operations that Sam
introduced. Well explain further in detail tomorrow.
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Presentations in Hope Downs, Australia 18 June 2008Alan Davies, Managing director, Global Development & Chief financial officer
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This is combined with our functional approach to specialised areas such as
strategic sourcing through Rio Tinto procurement and our CFR in logistic
offerings through Rio Tinto Marine which I mentioned earlier. This is then
combined with the innovative use of emerging and applied technologies that have
the potential to deliver a favourable future cost position via automation and
placing functions in the lower cost operating environments outside of the Pilbara,
like what were doing with our remote operation centre in Perth.
Id like to reflect for a moment on just some of the key milestones achieved within
Rio Tinto Iron Ore so far in 2008. Our performance in the first quarter saw a
record for Rio Tintos global production of iron ore which is up 16% on the first
quarter of 2007. Our Pilbara operations also achieved record performance in the
first quarter, up 15%. And this was despite being impacted by a number of
cyclonic events. Our pace of identifying and developing value accretive capital
projects has continued with a further approximately $2 billion of capital projects
approved so far this year, including the large ore carriers, the automated train
operations and the long lead time items for the 320 million tonne expansion,including studying Western Turner Syncline that Warwick will go into further detail
in his presentation.
So in summary Rio Tinto Iron Ore is performing strongly as a key contributor to
Rio Tinto. We are delivering increased value to shareholders now with our cost
competitiveness, high margin and high volume business, while ensuring that we
remain a leader in the industry through significant investment in the future of the
business.
Thank you very much.
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