Rio Tinto is holding an investor seminar in Sydney today with an in-depth look at its Iron Ore and Aluminium product groups.
Highlights from the presentations:
- Rio Tinto continues to sell all it can produce, although customer sentiment is increasingly cautious in the face of global economic uncertainty. Commodity prices are mixed. Spot iron ore prices have been volatile but have recovered some ground recently. Copper, coal and other Rio Tinto product prices are holding up with the exception of aluminium which is now priced well below the industry's marginal cost of production.
- Full year capital expenditure in 2011 is expected to be around $12 billion, in line with previous guidance. Capital expenditure is set to trend upwards in 2012, with around $14 billion of investment in sustaining capital and approved growth projects already planned as Rio Tinto's high-quality growth programme gathers pace. Further project approvals may add to this level of investment, subject to Rio Tinto's rigorous approach to evaluating projects based on value.
- Rio Tinto Iron Ore has raised its production capacity expansion target in the Pilbara in Western Australia by 20 Mt/a to 353 Mt/a by the first half of 2015. This will be achieved by the replacement and upgrade of a car dumper at Cape Lambert, as previously foreshadowed. The expansion from 283 Mt/a to 353 Mt/a remains subject to Board approvals.
- Rio Tinto Alcan has set out further details of its plan to deliver long-term EBITDA margins of 40 per cent in 2015 and increase shareholder value through operational improvements, proposed strategic investments including at Weipa (South of Embley) and Kitimat and streamlining the portfolio.
- Rio Tinto continues to return excess capital to shareholders with more than $5 billion of its $7 billion share buy-back programme now completed. The Group's balance sheet remains strong, with estimated net debt at 31 October of $7.9 billion , a reduction of $0.7 billion since 30 June.
Rio Tinto chief executive Tom Albanese said "Rio Tinto continues to be well positioned in current markets. Our cash flow generation remains high and we are selling everything we produce.
"However, continuing stresses in the Eurozone and a weaker outlook for the US economy are inevitably affecting customer sentiment, which has become more negative in recent months. For the near term I am concerned about the general softening of prices when we continue to see cost escalation and strong currencies in Australia and Canada.
"But while there are signs of nervousness, we believe the impact of current economic concerns on our business is manageable, unless financial markets substantially deteriorate.
"The longer-term demand picture remains positive and we would expect to see additional supply constraints as a consequence of current financial uncertainty. The China growth story has a long way to run and, by utilising our strong balance sheet, we continue to invest throughout the cycle in high-quality growth options to meet this future demand."
Other key topics covered at the seminar include:
- As industry pricing mechanisms continue to change, Rio Tinto's iron ore sales portfolio has evolved to a balance of spot, monthly and quarterly price mechanisms during the fourth quarter of 2011.
- Rio Tinto continues to see an attractive long-term demand picture for iron ore, with Chinese steel production per capita not forecast to peak until circa 2030 at 750kg per capita (500kg per capita today). Other growth economies such as India should still be on an upward demand trajectory at this point.
- In the medium term, Rio Tinto forecasts that industry supply will need to increase by 100 million tonnes per year for each of the next eight years to meet demand growth and replace high cost supply. Rio Tinto expects to supply around 25 per cent of this industry growth.
- Rio Tinto's Pilbara expansion remains on time and on budget (AUD basis). There are options to increase capacity further from 353 Mt/a to 453Mt/a. Capital intensity of expansion from 220 Mt/a to 353 Mt/a is expected to be around mid-$150 per tonne on a 100 per cent basis (Rio Tinto share around mid-$130 per tonne). Expansion beyond 283 Mt/a is subject to Board approval.
- The development of Simandou is progressing as planned, with the early works already underway. Rio Tinto is adopting a phased approach to constructing the infrastructure to ensure delivery of first commercial production by mid-2015. Rio Tinto recently approved a further $211 million in study funding and $1.1 billion of early commitments for the next stage of the project.
- The short-term outlook remains challenging as the industry experiences higher input costs and lower LME prices, which are currently well below the industry's marginal cost of production. At current prices, Rio Tinto Alcan's underlying earnings are expected to be around break-even in the second half of 2011.
- The medium- to long-term fundamentals of aluminium remain strong, with demand forecast to grow by almost six per cent per year to 2020 and supply expected to remain in balance. The cost curve is expected to steepen mainly because of rising energy costs.
- Rio Tinto is advancing the second phase of transformation of the Aluminium product group to achieve an EBITDA margin of 40 per cent in 2015 and increase shareholder value. This will be achieved through:
- Further operational and business improvements to increase EBITDA by over $1 billion.
- Strategic investment in key growth projects, including Weipa (South of Embley) bauxite in Australia and the modernisation of the Kitimat smelter in British Columbia.
- Streamlining the portfolio to concentrate on its tier one assets.
- Capital investment at South of Embley would position Rio Tinto as the largest bauxite producer in the industry by 2016 with a very high-quality product and outstanding resources. This project and the modernisation of Kitimat are subject to Board approval. Following the transformation, Rio Tinto Alcan will have an unrivalled low-cost energy position with the lowest carbon footprint in the industry. The product group is positioned for lowest-cost quartile power for smelting with 97 per cent carbon dioxide-free. Rio Tinto Alcan will also be generating almost 65 per cent self-generated power against an industry average of 34 per cent.
All currency figures in this report are US dollars