Performance with purpose

Performance with purpose

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

2016 was by recent standards a good year for the mining sector. Prices for a number of commodities improved, aided by fiscal stimulus in China, policy-driven capacity reductions and a slowdown in new supply.

This helped us generate strong cash flow and further strengthen our financial position. We continued to focus on productivity, cost reductions and capital discipline, and our early and consistent action in these areas has enabled us to continue investing in our preferred organic growth opportunities, where others in the sector were not able to do so.

Our pioneering spirit remains strong, and we are confident that the world’s hunger for progress and its consequent need for essential materials provide us with excellent long-term prospects. In the near term, an uncertain geopolitical landscape, major political transitions and an increased threat of rent-seeking are all creating uncertainty. In this environment, we will continue to adopt a conservative approach to financial management and capital spending.

A clear strategy

A clear and effective strategy is crucial to maintaining strong performance through the cycle. Our strategy focuses on the “four Ps” – portfolio, performance, people and partners – underpinned by disciplined capital allocation.

+ 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 commercial and marketing teams work 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 are establishing dedicated centres of excellence to strengthen our technical and commercial capabilities, 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. We apply stringent governance and assessment criteria at every stage.

+ Balance sheet strength

A cyclical and capital-intensive industry like mining demands a strong balance sheet. We have a net gearing guidance range of 20 to 30 per cent. At 31 December 2016, our net gearing stood at 17 per cent and we intend to retain a conservative stance given the uncertain macroeconomic outlook.

+ 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. Our project pipeline has a compelling internal rate of return.

+ 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 2017 strategic priorities

Throughout 2017, we will continue to focus on the “four Ps” and a value-over-volume approach to generate superior cash flow and maintain balance sheet strength. We are confident that our pioneering spirit, along with the world’s hunger for progress and the essential materials to enable it, position us for success long into the future.

Safety will remain our number one priority. We will also maintain our focus on costs and performance, as we work towards delivering our 2016 and 2017 operating cash cost reduction target of $2 billion. Beyond this, we will seek to extract productivity gains across our entire value chain, as part of our commitment to deliver $5 billion of incremental cash flow from mine-to-market productivity improvements by 2021.

We will continue to reshape our world-class portfolio of assets, focusing on the highest returning assets in our preferred commodities, investing in high returning growth and exiting assets that don’t meet these criteria. We plan capital investment of around $5 billion during 2017.

Investing in our people and external partnerships is a key focus. We’re developing employees at every level, from graduates to leaders, and building and maintaining strong partnerships throughout the value chain. This is enabling us to access and exploit new opportunities, maximise value from existing assets and manage licence-to-operate risks.

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. Our pioneering spirit, and the energy and enthusiasm of our people, give us every reason for confidence. Nevertheless, the external environment remains unpredictable, and accordingly we will continue to focus on maintaining our balance sheet strength and resilience to downside risks. We believe pioneering and prudence go hand in hand.