On the creation of lasting value

With strong metal and mineral prices, the mining industry is currently at its most profitable in a generation. But historically, it has not been known as a sector that consistently creates value.

To the contrary: for periods of decades the mining industry has tended to return less to shareholders than its cost of capital – in other words, to destroy value.

The reason is the exuberance of the good times. Miners bring into production marginal or subeconomic discoveries that generate sufficient cash to cover mining costs in the short term, even though deeper analysis might show that the price assumptions are too optimistic or the overall return on capital too weak.

Rio Tinto can claim to be an exception, since it has consistently added shareholder value over a long time. But with record results for 2005, in which underlying earnings rose by 118 per cent, cash flow by 85 per cent, and earnings per share by 60 per cent, will the Group use its strong cash flow to pursue growth for its own sake?

Rio Tinto has consistently added value faster than the industry average over the last few years – but, as finance director Guy Elliott explains, this is a byproduct of its core, value centred strategy. “Pursuing growth for its own sake is sometimes like an aircraft gaining speed but losing height – and it often ends in an accident. A focus on value is what ensures our business a strong long term future,” he says.