03 March 2008
Vancouver Board of Trade Pacific Economic Forum - Dialogue Series
Speaker: Tom Albanese, Chief executive
Location: Vancouver, Canada
Thank you. Good afternoon ladies and gentlemen.
I would like to begin by thanking the Board of Trade for the invitation to speak here today. As someone who has long been an admirer of the Pacific Northwest, I always welcome an opportunity to visit your beautiful city and province. I'm honoured to address you today.
As you are no doubt aware, our Rio Tinto Alcan colleagues here in BC have been members of the Board of Trade for some 30 years. Indeed, I understand that I am just the latest in a long line of senior executives who have had the privilege of addressing one of your luncheons.
So I feel I am among friends, and I would like to take this opportunity to express my appreciation to the numerous businesses, governments and other organizations represented in the room today that have supported Alcan and other Rio Tinto interests here on Canada's west coast over the years.
Rio Tinto overview
Let's begin with a brief overview of our organization, for the benefit of those who may not be quite up to speed on Rio Tinto.
To say that the ten months since I took over as chief executive have been busy would be somewhat of an understatement. (pause)
As I'm sure you understand, I am not in a position here today to comment at length on BHP Billiton's stated intention to make offers for Rio Tinto. Our board considered the pre-conditional offers for Rio Tinto plc and Rio Tinto Ltd extremely carefully and concluded that they significantly undervalue Rio Tinto. Accordingly, we unanimously rejected them as not being in the best interests of shareholders.
Rio Tinto has an exceptional portfolio of assets and significant standalone growth opportunities, particularly in iron ore, copper and aluminium. We also have a strong track record for value delivery, project execution and successful exploration. We are very well positioned to take advantage of strong global markets and the growth in the resources industry. We remain focused on maximising value for our shareholders.
Having addressed that, let's deal with matters important to you. As you are no doubt aware, our company is a leading international mining group headquartered in the UK, combining Rio Tinto plc, a London and NYSE listed company, and Rio Tinto Limited, which is listed on the Australian Securities Exchange.
Our strategy is to pursue the world's best natural resources wherever they are located, using the best technologies and operating them safely. Our experience and our commitment to sustainable development is especially attractive and competitive in this respect.
Simply put, our business entails finding, mining, and processing mineral resources in a sustainable way. Major products include aluminum, copper, and iron ore as well as diamonds, energy - in the form of coal and uranium - gold, and industrial minerals such as titanium dioxide.
Rio Tinto is the world's second largest producer of iron ore, the fifth largest copper producer and number one in aluminum with the formation last year of Rio Tinto Alcan.
With 2007 EBITDA of approximately US$13.9 billion Rio Tinto's operations span the world. We have a very large presence in both Australia and North America, with significant businesses in South America, Asia, Europe and southern Africa as well.
A strong - and growing presence in Canada
Canada has emerged as a very important venue for us, and I believe that we have a shared interest in the economic wellbeing of this country. We now have about 14,800 employees in Canada, of which 10,300 are Rio Tinto Alcan people.
In addition to aluminium, our extensive Canadian interests include:
Quebec-based QIT (QIT Fer et Titane Inc.), which produces high-grade titanium dioxide feedstock for use in the manufacture of white pigments for paint, paper, plastics and titanium metal;
A majority equity interest in the Iron Ore Company of Canada - or "IOC"- which has been Canada's premier supplier of iron ore for five decades. In August 2007 we announced a $60 million expansion project to increase production capacity to 18.4 million tonnes by mid-2008 and a feasibility study to assess the further expansion to 21 million tonnes annual capacity.
As well, Rio Tinto has a 60 per cent joint venture stake in the Diavik Diamond Mine, located 300 km northeast of Yellowknife in the Northwest Territories. Discovery in the early 1990s of the Diavik reserves is often cited as an example of Rio Tinto's outstanding track record in exploration.
Our partnership with Harry Winston Diamond Corporation -- formerly called Aber Diamonds - is also an example of the valuable, lasting and mutually rewarding relationship that can be developed with a junior explorer.
Open pit mining operations at Diavik began in 2003. Rio Tinto has subsequently approved additional investments totaling almost US$800 million to establish underground mining operations at the site. It is an engineering marvel that employs northerners and aboriginal Canadians, and has contributed greatly to economic and community development in Canada's north.
In fact, Diavik is a good illustration of Rio Tinto's commitment to sustainable development and ensuring that local communities benefit from our operations. In this instance, formal agreements were concluded with local Aboriginal communities and businesses, providing for training, employment and business opportunities.
Rio Tinto Alcan
Of course, the biggest news over the past year regarding Rio Tinto's Canadian presence was our US$38 billion acquisition of Alcan. This catapulted us into the world number one position in bauxite mining and aluminium production. With the alumina projects now under way, we'll soon be world leaders in that sector too.
We are delighted with the quality of the Alcan operations, its assets - including the industry benchmark AP smelting technology - and, especially, its people. They have exceeded our expectations and the integration with Rio Tinto is well under way.
As we continue to refocus on upstream growth opportunities in aluminium, we are looking at options for the sale of the Engineered Products business as well as the Packaging assets.
Meanwhile, our expanded global product group, Rio Tinto Alcan - headquartered in Montreal - is pursuing an ambitious growth agenda that includes major projects in Australia, Asia, the Middle East and of course Canada.
Of closer interest for this audience, is the planned US$2 billion modernisation of our Kitimat smelter here in BC, which will increase its production capacity by about 40 per cent to up to 400,000 tonnes per annum, by employing the latest evolution of smelting technology within the AP35 series.
We were very pleased to learn a few weeks ago of the decision by the British Columbia Utilities Commission to accept the 2007 Energy Purchase Agreement between Rio Tinto Alcan and BC Hydro. That was the last of three conditions necessary to be met for the project to go ahead.
The other two key conditions were the resolution of a long term labour agreement to ensure stability during the planning, construction and start up of the modernisation project - achieved in May 2007 - and assurances on environmental permitting issues, which we received in December.
I just visited Kitimat this weekend and reviewed the project. We are now moving toward final board approval for the project which may come later in the year.
Alcan's Kemano hydroelectric complex began operation early in 1954, followed by the official start of production at Kitimat that August. For more than half a century, our power experts have worked in close cooperation with BC Hydro to ensure that the lights remained on for residents and commercial customers in a sprawling region extending from Kitimat to Vanderhoof.
The new energy agreement will formally extend this productive relationship for another 26 years until 2034.
While I'm on the topic of productive relationships, let me take a moment to acknowledge the city of Terrace, and its mayor Jack Talstra, along with the people of the Haisla and Cheslatta First Nations, and also the Kitimat and Terrace Industrial Development Society and Terrace Economic Development Authority. Their unwavering support is greatly appreciated and a testament to our shared goal of creating a healthy business environment for the region.
Once approved, the modernisation of Rio Tinto Alcan's Kitimat smelter would increase Rio Tinto's annual global primary aluminium production capacity by more than three per cent. This will make Kitimat not only one of Rio Tinto's largest wholly owned smelters, but also one of the three largest in North America.
Kitimat's aluminium production capacity would increase by about 125,000 tonnes using clean, renewable hydroelectric power from our Kemano power station. At the same time, greenhouse gas emissions from the smelter would be slashed by 40% or half a million tonnes per year.
Combating climate change
A reduction in GHG emissions of that magnitude is obviously beneficial to British Columbia's footprint and is also very much in keeping with Rio Tinto's commitment to help combat climate change.
We believe GHG emissions from human activities do contribute to climate change. We aim to limit, to the greatest extent possible, our environmental footprint.
While I am on the subject of climate change, I wish to acknowledge the leadership on this issue demonstrated by the Government of British Columbia, which recently announced measures aimed at encouraging reduction in carbon emissions.
Climate change is a shared problem that will require the combined efforts of government, industry and the public to solve. Government action is essential as the climate system is a public good. Moreover, international cooperation is required to help ensure that the mitigation burden is shared in as equitable a manner as possible. However, it is crucial that the interests and concerns of business are clearly heard by governments as they develop the requisite policy framework.
And I don't say that simply because business has a vital role to play in delivering emissions reductions. The fact is, the private sector understands and routinely works with innovation, technology, investment and risk. Given a supportive and well specified policy framework, I am confident that industry can provide the required solutions on climate change.
However, there is no single acceptable measure that will reduce greenhouse gas emissions and halt climate change. Rio Tinto favors a pragmatic approach in the form of comprehensive policy packages - tailored to regional, national and sub-national circumstances - that would be environmentally effective, economically efficient and socially equitable.
While we laud the various governments for their good intentions - and appreciate that they are coming at the problem from differing perspectives - Rio Tinto will encourage coordination on certain emerging climate policies.
We must avoid ending up with a patchwork of overlapping and/or conflicting and trading schemes that would increase costs and distort investment and trade. Governments must work together to develop common approaches that will give businesses the security of knowing the rules and how they will be applied, both domestically and internationally.
The macro-economic outlook
While North America worries about the sub prime market, the housing slump and a contracting economy, last year China's economy expanded at its strongest pace in 13 years, marking the fifth year of double digit growth.
Industrial production was up by 18.5 per cent and urban investment by 25 per cent. These are key aggregate indicators of China's industrialisation and urbanisation process.
These strong numbers underline the durability of China's commodities demand, especially for iron ore, aluminium and copper. We expect continuing double digit GDP growth in China in 2008 and metals demand to continue to rise at a rate well above GDP growth.
Because of the focus on troubles in the US economy, there's a perception that mining and metals once again face declining demand and over capacity in the short term.
This is not how we see it. Important as the US is to the world economy, it is not as influential as it once was to global demand for metals and minerals.
We are firmly of the view that there is an economic de-linkage between China on one hand and the rest of the world, especially the US, on the other.
We don't think a recession in the US will have a significant impact on the demand for steel, copper and aluminium in China. Our estimate is that if there is a recession in the US, the impact on Chinese GDP growth will be one per cent or less.
We often think of China as being powered by exports, and particularly exports to the U.S. This is not really the story any more. The direction has changed to one of internal demand in China driven by industrialisation and urbanisation.
The market for the industrial mineral, borates, which Rio Tinto produces in California, illustrates this quite well. Demand has slowed in the US because of the housing crunch.
But we can't produce enough boric acid to satisfy the increase in demand in China. China has more than made up for the softness in the US market. The same is true of talc and other industrial minerals.
Providing a bridge to Asia
To compete successfully in the 21st century global marketplace - particularly in the mining and metals sector - BC and Canada must be closely attuned to global trends and able to factor them into its strategies.
Rio Tinto sees itself very much as Canada's partner in this regard. Like BC, we saw the China opportunity early on and are well positioned to capitalize - be it through our strategically located iron ore assets in Australia or a low cost, state of the art aluminium business here in Canada.
I know this audience is well aware of how the BC economy stands to benefit from booming markets in China and other parts of Asia. In that context, the coming together of Rio Tinto and Alcan is a very good thing.
Just as Vancouver, with its vital port facilities, serves as Canada's Pacific gateway, Rio Tinto represents a very real "bridge to Asia" for Canadians, creating jobs and opportunity right here, while fuelling that incredible growth story.
An exciting growth story
Against that global backdrop, our significant investments over the past few years to expand Rio Tinto's capacity are paying off, as reflected in 2007 production records for key products like iron ore, copper, alumina and primary aluminium. And our future looks even more exciting, thanks to a pipeline of growth opportunities among the best in the global industry.
Looking at the world's major mineral basins, it is evident that at almost every turn Rio Tinto has a leading position in terms of both existing assets and growth potential. I do not have sufficient time here today to go into detail, but let me cite just a couple of examples of our exceptional growth opportunities.
With regard to iron ore, we have mapped out a conceptual pathway that will lead to production of over 600 million tonnes per annum, including 420 million tonnes per annum from the Pilbara in Australia.
In copper, the Oyu Tolgoi copper project in Mongolia - owned by Ivanhoe Mines Ltd. of Vancouver, in which Rio Tinto currently holds a 10 per cent interest - is one of four of the largest undeveloped copper projects in the world in which Rio Tinto has an interest.
Our Copper Projects group based here in Vancouver is also heading up the development of La Granja in Peru, and Resolution in Arizona.
Our pipeline of aluminium projects includes the US$1.7 billion Sohar smelter project nearing completion in Oman as well as the proposed Ma'aden project in Saudi Arabia among others.
Given the bullish long term market prospects, there's never been a time when a development pipeline like ours is worth as much as it is today.
In addition to its outstanding project pipeline, Rio Tinto benefits from a scope and scale that facilitates cost effective operations and the development and deployment of 21st-century technology.
Major role for Canada
As I indicated at the outset of my remarks, Canada and British Columbia figure strongly in Rio Tinto's growth plans. I have already spoken about Diavik and Kitimat. Our strong pipeline of greenfield opportunities also includes two other very interesting situations in Western Canada - a potash deposit near Regina and the Crowsnest coalfield in southeastern BC.
Rio Tinto's Crowsnest property consists of 109 square kilometres of coal licenses issued in January 2008, plus an additional 82 square kilometres still under license application. The property contains an estimated three to four billion tons of in-situ coal resource. The presence of large quantities of low- and medium-volatile coking coal near existing rail infrastructure increase the prospects for developing a high tonnage, long life mine.
Turning to eastern Canada, Rio Tinto Alcan is committed to an ambitious ten year, US$1.8-billion investment program in Quebec's Saguenay-Lac-Saint-Jean region. The centrepiece of this program is a US$550-million pilot plant being constructed to develop the company's proprietary AP50 smelting technology.
The pilot plant is expected to produce approximately 60,000 tonnes of aluminium per year and will be the platform for future generations of AP50 technology.
We made big commitments to BC, to Quebec and to Canada in acquiring Alcan. And I can tell you that we are going to keep our promises, and continue with investments that will create opportunity for Canadians everywhere.
As you can see, Canada clearly stands to benefit from our success in capitalizing on the worldwide mineral boom. Rio Tinto will continue to help to stimulate prosperity and foster healthy communities in BC and Canada.
Concluding remarks
In a nutshell, Rio Tinto aims to be the best mining company in the world: global in outlook, while sensitive and responsive to national and local issues; efficient and able to capture the benefits of scale; organised in a way that streamlines decision making; and being the 'preferred developer' in countries and communities where we wish to operate.
I'm excited about our future - and with good reason. As I've stated, we believe the demand outlook for our products is exceptional, based upon fundamental demographic and economic shifts that are reshaping today's world. While this will certainly be a tide lifting all boats, some will do better than others.
I am delighted to count on Canada as a key partner with Rio Tinto in building value for our shareholders, employees and communities. And Canada can count on Rio Tinto - we are here for the long haul and proud to be part of this country's progress.
Thank you very much.