Strategy

Strategy

Challenging market conditions

The mining sector is facing very challenging market conditions. In response to these challenges, we have redoubled our focus on productivity, cost reductions and capital discipline across our business – squeezing the maximum possible returns from our existing businesses and ensuring only the best growth projects attract fresh capital. While others in the sector have embarked on similar paths, our early and decisive action in this area is bearing fruit. Financial strength has become a key differentiator in the sector, and our balance sheet remains strong relative to industry peers.

Looking beyond the current challenges and uncertainty, the long-term outlook for the mining sector remains positive. In the period to 2030, we expect 220 million new urban residents in China alone. In India and ASEAN, current trends indicate that around 250 million people will urbanise over that same period. GDP growth in emerging Asian economies outside China is expected to average around five to six per cent per annum over the next 15 years. These factors drive demand for the minerals and metals we produce, as essential ingredients of modern life.

Consistent strategy underpinned by six value drivers

A clear and effective strategy is critical to surviving and outperforming in today’s challenging market conditions. We remain convinced that our longstanding and consistent strategy is the right one: to invest in and operate long-life, low-cost, expandable operations in the most attractive industry sectors.

Six critical drivers underpin our value proposition, and combine to create a unique platform for our ongoing success.

1. World-class portfolio
At the heart of Rio Tinto is a portfolio of world class assets – from our Pilbara iron ore business, to our Queensland bauxite ore reserves, our hydro-powered aluminium smelters, our global suite of copper mines and our sector-leading energy, diamonds and minerals assets. We use a clear strategic framework to assess our existing assets and new opportunities – taking into account the industry attractiveness and the competitive advantage of each asset, and its capacity to deliver best-in-class returns.

In 2015, we:

  • Announced increases of our Pilbara iron ore, Diavik diamond, Escondida copper and Hail Creek coal reserves
  • Achieved first production from the modernised Kitimat aluminium smelter in Canada
  • Agreed the sale of our interest in the Bengalla coal joint venture in Australia which completed on 1 March 2016
  • Announced that we supported Energy Resources of Australia’s decision not to proceed with the Final Feasibility Study of the Ranger 3 Deeps project. We also determined that we did not support any further study or the future development of Ranger 3 Deeps due to the project’s economic challenges
  • Completed the sale of our interests in Murowa Diamonds and Sengwa Colliery in Zimbabwe

2. Quality growth
We have a high-quality pipeline of both near term and longer-dated projects across the portfolio. By reinforcing capital discipline and reshaping our projects, we have retained significant, high-quality growth despite further reducing our capital expenditure. Our project pipeline has a compelling internal rate of return and is expected to deliver strong volume growth.

In 2015, we:

  • Reduced capital expenditure from US$8.2 billion in 2014 to US$4.7 billion
  • Completed the Pilbara infrastructure project on time and with the rail and port components of this project at a capital cost below initial estimates
  • Approved US$1.9 billion capital expenditure for the Amrun bauxite project due to commence production in 2019
  • Signed a US$4.4 billion project financing agreement for the proposed Oyu Tolgoi underground expansion

3. Operating and commercial excellence
The safety of our people is core to everything we do. A well-run operation is a safe operation. Our commercial activities ensure we reap the maximum value from each of our businesses.

Our marketing teams work hand-in-hand with our operations, so that our resource management is fully aligned to the market.

We have established a leading position in the development and use of technology and innovation – allowing us to deliver more tonnes, more cheaply and with less risk. As the industry faces increasingly complex geological, environmental and cost pressures, technology will be an increasingly important value driver.

Over the years we have leveraged our understanding of customer needs to create new markets for our products, including champagne and pink diamonds. We deploy industry-leading capabilities in supply chain optimisation and a variety of logistics solutions across the Group – and have in-house centres of excellence for value-in-use analysis, pricing and contracting strategies. Together, these activities allow us to manage risk and capture value in all market conditions.

In 2015, we:

  • Reduced our all injury frequency rate to 0.44 per 200,000 hours worked at the end of the year, compared with 0.59 in 2014. Regrettably we did not meet our goal of zero fatalities
  • Achieved US$1.3 billion of sustainable operating cash cost improvements (including exploration and evaluation savings), 35 per cent above target
  • Reduced exploration and evaluation spend by a further US$0.2 billion
  • Streamlined our organisational structure by reducing from five to four product groups and reshaping a number of corporate functions

4. Balance sheet strength
In a cyclical and capital intensive industry such as mining, a strong balance sheet is essential in order to preserve optionality and generate shareholder value through the cycle. We target a net gearing ratio of 20 to 30 per cent in order to maintain our robust balance sheet. This target positions us favourably to withstand current industry pressures and seize any opportunities these market conditions create.

At the end of 2015 our net gearing ratio was 24 per cent, in the lower half of our target range.

5. Capital allocation discipline
We adopt a consistent and disciplined approach to capital allocation. Our first allocation is to necessary sustaining capital. Next, we fund our primary contract with our shareholders – the ordinary dividend. Finally, we assess the best use of the remaining capital between alternatives of compelling growth, debt reduction and further cash returns to shareholders. At each stage, we apply stringent governance and assessment criteria to ensure that every dollar is spent in the right way.

In 2015, we adhered to our disciplined capital allocation framework, resulting in: sustaining capital of US$2.1 billion, dividends of US$4.1 billion, compelling growth capital of US$2.6 billion and a share buy-back of US$2.0 billion.

6. Free cash flow generation
Over recent years we have made ongoing improvements to our business – increasing our productivity, reducing operating and capital costs and delivering incremental volume expansions from high quality projects.

Together with the quality of our asset base, these actions enhance our capacity to generate free cash flows.

In 2015, tight management of working capital generated a cash inflow of US$1.5 billion, aided by lower commodity prices.

Our 2016 strategic priorities

We will continue to focus on our critical value drivers in 2016.

As always, we will maintain our relentless focus on safety, continuing to target fatality elimination, catastrophic event prevention and injury reduction.

We will continue to build strong and lasting relationships with local and regional host communities and governments, and mitigate the impacts that our activities and products have on the environment.

Generating and conserving cash will be a key business imperative during 2016. We will continue to ensure our capital is deployed in the most efficient way, and will continue to reshape our portfolio to focus on the highest-returning assets in our preferred industry sectors.

We will further enhance our portfolio as we progress a number of key growth projects, including the Amrun bauxite project and the preparatory work for the proposed underground expansion of Oyu Tolgoi. Importantly, we will deliver measured, value adding growth while maintaining our capital expenditure at around US$4.0 billion in 2016.

Our strong focus on costs will continue in 2016, as we target further operating, exploration and evaluation cost savings of US$1.0 billion and continue to reduce our working capital.

We will continue to leverage our strength in technology and innovation, and our leading commercial capabilities, to ensure we remain the supplier of choice to our customers and maximise the cash generated from every business.

Maintaining our balance sheet strength will remain a core priority. We aim to maintain our gearing ratio between 20 per cent and 30 per cent.