Our strategy

Our strategy

Rio Tinto’s strategy focuses on the “four Ps” – portfolio, performance, people and partners – underpinned by disciplined capital allocation

Following the volatile and depressed market conditions experienced over recent years, 2017 was a strong year for the mining sector.

Many commodity markets continued to strengthen during the year, aided by economic expansion and positive consumer sentiment in advanced economies, and robust Chinese demand. Meanwhile, supply was impacted by several factors, supporting prices for a number of our commodities.

While supportive market conditions are always welcome, we continue to focus on the value levers that are within our control. During 2017, we delivered further cost reductions, increased our productivity from mine to market and continued to allocate capital in line with our value-over-volume approach.

Across the industry, companies remain focused on maintaining strong balance sheets, reducing costs and improving productivity. Our early and consistent action in these areas continues to position us well: our balance sheet is among the strongest in the sector; our cost and productivity programmes are delivering results; and we have new volumes coming on line from our ongoing investment in organic growth.

A clear strategy

A clear and effective strategy is critical for us to perform strongly under a range of industry conditions. Our goal is to deliver superior value for our shareholders through the cycle, and we believe the best way to do this is to focus on the "four Ps": portfolio, performance, people and partners.

We couple this with our disciplined approach to capital allocation. This seeks to ensure that every dollar we generate is applied to the highest-returning opportunity – whether that be for maintaining our balance sheet strength, investing in compelling growth opportunities or delivering superior shareholder returns.

 

+ Superior cash generation

1. Portfolio

At the heart of our approach is a portfolio of world-class assets – multi-decade sources of essential materials that deliver attractive returns throughout the cycle, and material long-term growth opportunities. 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 strong and stable returns.

2. Performance

Safety is our number one priority and is core to everything we do. We seek to generate value throughout the value chain, from mine to market, and prioritise value over volume in all of our operating and investment decisions. We have achieved significant cost savings over recent years and this remains a focus area, along with boosting the productivity of our assets.

As pioneers in the development and use of technology and innovation, we are well positioned to address the increasingly complex geological, environmental and cost pressures that lie ahead. Our centralised marketing function works hand-in-hand with our operations to maximise value from our activities and keep our resource management fully aligned to the market.

We will continue to develop new markets for our materials, deploy industry-leading supply chain optimisation and logistics solutions, and exploit our in-house centres of excellence for value-in-use analysis, pricing and contracting strategies, helping us manage risk and capture value in all market conditions.

3. People

Human progress is at the core of Rio Tinto’s purpose, and attracting, developing and retaining the best people will be crucial to our future success. We continue to strengthen our technical and commercial capabilities through our centres of excellence for these areas, and are committed to building a diverse and inclusive workforce throughout the organisation.

4. Partners

To remain competitive, manage the unique risk profiles of our businesses and secure access to new sources of essential materials, we must partner with a range of external stakeholders, including customers, suppliers, investors, governments and local communities. Partnerships impact every stage of the value chain and mining life cycle, and are critical in helping us secure and maintain our licence to operate.

+ Capital allocation discipline

We adopt a consistent and disciplined approach to capital allocation. Our first allocation is to sustaining capital. Secondly we fund dividends for our shareholders. Finally, we assess the best use of the remaining capital between 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.

+ Balance sheet strength

In a cyclical and capital-intensive industry such as mining, a strong balance sheet is essential to preserve optionality and generate shareholder value at all points in the cycle. At the end of 2017, our balance sheet was in a very strong position, with net debt of US$3.8 billion and a net gearing ratio of 7 per cent. We see this as a major competitive advantage – providing us with resilience against market and macroeconomic volatility, the ability to fund shareholder returns through the cycle and a readiness to take advantage of investment opportunities as they arise.

+ Quality growth

Our portfolio includes a high-quality pipeline of near-term and longer dated projects. By reinforcing capital discipline and reshaping our projects, we have retained significant, high-quality growth despite further reducing capital expenditure.

+ Superior shareholder returns

We are committed to delivering superior returns to shareholders over the long term, and the cash returns we pay out to shareholders are a vital component of this. In a cyclical industry such as mining, we believe the most prudent way to deliver strong returns is to allow the overall level of returns to vary with the cycle. We aim to deliver total cash returns of 40 to 60 per cent of underlying earnings through the cycle. This policy is sustainable during cyclical lows, and allows shareholders to share more fully in the upside during high points in the cycle.

Our 2018 strategic priorities

Throughout 2018, we will continue to focus on the "four Ps" (portfolio, performance, people, and partners) and our value-over-volume approach, to generate superior returns for our shareholders over the short, medium and long term. As always, safety will remain our number one priority. Our strong focus on operating and commercial excellence will continue in 2018, as we seek to extract efficiency improvements across our entire value chain and work towards delivering US$5.0 billion of incremental free cash flow from mine-to-market productivity initiatives by 2021.

We will continue to shape our portfolio of assets, ensuring that we focus only on the highest-returning, world-class assets in our preferred industry sectors and seeking to exit assets that do not fit these criteria. We expect to invest around US$5.5 billion in capital expenditure during 2018.

Investing in our people and our partnerships with external stakeholders remains a key focus. We are investing ever more in developing the technical and commercial capabilities that will enable us to unlock maximum value from our assets. In addition, we will continue building and maintaining strong partnerships across all stages of the value chain, founded on trusted relationships and our reputation for doing things the right way. Strong partnerships allow us to access and execute new opportunities, maximise value from our existing assets and manage licence-to-operate risks.

It is clear that we are living in a period of rapid change. In this environment, we will continue to apply our value-led approach to capital spending and will drive performance improvements right across our value chain. Maintaining balance sheet strength remains a priority, and we will continue to position Rio Tinto as an agile, open and collaborative company ready to respond to the opportunities and challenges that emerge.

The world's hunger for progress underpins a strong long-term outlook for the essential materials we produce – and our world-class assets, operating excellence and commercial capability position us for success.