16 June 2008
Winning strategies for Global Champions
Speaker: Tom Albanese, chief executive
Location: Australia-Israel Chamber Of Commerce (AICC) - Sydney, Australia
INTRODUCTION
Good afternoon. It's a pleasure to be here and to be back in Australia.
While Rio Tinto is a mining company and Australia is a mature and vibrant nation, we have a lot in common - now, more than ever. We share a hundred years of common history and experience.
It's a great relationship. However, there is something about the current period that we share more than ever and that is likely to shape both of us fundamentally for the future.
You get a sense of it as you travel around this country, whether you are in Sydney or a mining community like Karratha in Western Australia. It is a sense of prosperity and opportunity driven by the fact that we are both front and centre in the biggest structural economic shift the globe has ever seen.
It is an exciting position to be in, and how each of us reacts to it will define a large part of how we look in the decades to come.
While some of you might be expecting me to talk about a certain pre-conditional takeover offer for Rio Tinto, the fact is that there is nothing new to discuss. Our Board's rejection of it stands on the basis that it significantly undervalued Rio Tinto's assets and future prospects.
What I am going to tell you a little about is how Rio Tinto is positioning itself to take advantage of the large global economic change underway, then I am going to give you some thoughts on how I see Australia's position.
THE GREAT OPPORTUNITIES AHEAD
Firstly, let me put things in perspective. Over the next 20 years 1.4 billion people around the world will move into cities. That is more than three times the population of Australia added to the global urban population, every year.
Now this unprecedented migration will primarily happen in developing countries - such as China and India. Countries relatively close to Australia. When these people move to cities what happens is that they require things such as housing, roads, schools, power stations and stadiums and they get the wealth to start purchasing consumer goods - their first refrigerator, car and air conditioner.
So metal consumption per capita rises significantly. In this phase of rapid economic growth, metals intensity tends to grow even faster than underlying GDP.
We are already seeing the massive impact of this change. 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.
China accounted for 60 to 90 per cent of the increase in the global demand for steel and aluminium between 2000 and 2006. But its per capita consumption of those metals remains well below that of many OECD countries, indicating scope for further growth as China's industrialisation proceeds.
Of course there will be volatility along the way. Recent economic events are a clear example. However, we remain confident that the medium to long term trend is for a sustained and substantial increase in demand for metals and resources. And that is also good news for Australia.
Overall, Rio Tinto believes that this global shift will see the size of our key markets double over the next fifteen years as demand balloons in line with rising urbanisation in developing countries.
To give you an idea of just how significant this is, it will require additional production equivalent to five of our current Pilbara iron ore businesses, 12 new Escondida copper mines and around 31 times the volume of aluminium currently produced by Rio Tinto Alcan's smelters in the Saguenay district of Canada.
This huge shift presents a tremendous opportunity for Rio Tinto and clearly a tremendous opportunity for Australia.
But, there are also big challenges for both of us. In particular being able to supply the resources to meet the higher demand from these countries will be a special challenge. It will require a large amount of capital, substantial infrastructure and project development and a significant level of expertise and skilled labour. At the same time we are likely to face higher energy, transport and input costs.
RIO TINTO'S CLEAR PLAN FOR GROWTH
As I said earlier, how each of us meets these challenges will define a large part of how we look in the decades to come.
Rio Tinto plans to do so primarily by focussing on Tier 1 assets - those large, low cost assets, with long lives, and strong potential for expansion. We aim to develop and expand our existing Tier 1 assets while also finding and developing new Tier 1 assets.
Amongst our existing assets we have already mapped out a substantial pipeline of developments.
In iron ore, for instance, we have mapped out a conceptual pathway that will lead to production of over 600 million tonnes per annum, including 420 million tonnes from the Pilbara in Western Australia.
In copper we recently announced significant new resources at La Granja in Peru and at Resolution in Arizona and a substantial upgrade at the Kennecott mine in Utah.
To give you an example of just what is happening in copper, our modelling indicates that over the next 30 years the world is expected to consume twice as much copper as used in all of world history. That is a lot of metal.
In aluminium and bauxite we have an excellent portfolio of growth options. Our purchase of Alcan last year has given us access to low cost, high quality assets and made us the world number one producer of bauxite and aluminium, the production of much of this metal powered by renewable energy. It has also contributed to our large Australian presence with the additions of Gove and Tomago. There are six projects planned or under way in bauxite and alumina and seven more in aluminium.
This substantial pipeline of growth in our major products should see Rio Tinto enjoy an average volume growth rate of 8.6% per annum for the next seven years to 2015.
That is a substantial and valuable growth pipeline. And there is more to come. Rio Tinto also has a substantial suite of projects and resources which have not yet reached the stage of development approval.
In the past these have tended not to be given significant value. But, in a world of high ongoing demand, high prices and strong margins, we believe these projects have a clearly discernible value arising from the expansion options they provide us and will play an important part in meeting the longer term needs of increased world demand.
Since 2000, Rio Tinto has identified two of the largest copper opportunities in the world - at Resolution in Arizona and at La Granja in Peru, and taken a strategic position in Oyu Tolgoi in Mongolia, which could be the next major world class copper project to come into production. We have found the world's largest-known undeveloped high-grade iron ore province at Simandou in Guinea. And later this year the Sulawesi nickel deposit in Indonesia should join our list of Tier 1 discoveries.
In 2007, we spent almost 200 million dollars on pure exploration compared with 100 million dollars back in 2002. In Western Australia in the past five years our Exploration group has identified about 2.2 billion tonnes of iron ore mineralisation. For every two cents we spend on exploration there, we are finding one tonne of mineralisation, which by any measure is a tremendous return on investment. Grass roots exploration in brownfield terrains can yield great results, but it does take exceptional experience and proven capabilities, which we have.
This combined pipeline of existing and new assets is a powerful one. It is not something that is available to every mining company - no matter how big they might be. It has been built up over decades through hard work by dedicated people, many of them here in Australia. This is something Rio Tinto is fully capable of carrying out on its own.
GLOBAL PARTNERS - GLOBAL CHAMPIONS
As I said at the start - Australia and Rio Tinto have a lot in common.
For decades we have been partners in development. In the 1960s Comalco had a part in creating an Australian aluminium industry from the bauxite of Cape York and Tasmania's hydroelectricity. Also in the 60s, Rio Tinto, through Hamersley Iron, had an extraordinary role in developing the Pilbara iron ore industry. In the 80s Argyle Diamonds made Australia a major player in world diamond markets in the face of considerable obstacles.
Our emphasis on Australia has actually intensified over recent years - with approximately 30 billion Australian dollars in investment since 1998. Last year our value added in Australia amounted to 10 billion US dollars and 40 per cent of our 2007 revenues of 41 billion US dollars were generated in Australia.
Many of you are, in fact, our owners, with over 100,000 Australians directly owning shares in Rio Tinto Limited and even more investing in us through superannuation funds.
We employ 17,000 people in well paid jobs in Australia. Queensland hosts our global Technology and Innovation group and is also home to the Bauxite and Alumina division of our Aluminium product group and our Australian coal operations. We also have a strong executive base in Melbourne, and Perth is the headquarters of Rio Tinto's dynamic global Iron Ore business. We are concentrating our 'mine of the future' efforts between Perth, Brisbane and Melbourne, with the Pilbara being our innovation flagship for mine automation. And of course, here in New South Wales hosts our Coal & Allied operations North Parkes and Tomago.
But, like Australia, we have also taken a global focus - we are looking out to the wider world so we can take advantage of the best opportunities in a rapidly changing world.
In a way Rio Tinto is a kind of "Global Champion" for the resources industry. We are identifying the best assets wherever they are and developing them and delivering them to the global market as efficiently as possible.
Australia too, I think, has the opportunity to be a kind of "Global Champion" as a country focussed on the resources industry.
As a frequent visitor to Australia I know its potential. It has an almost unrivalled breadth and depth of minerals and resources. It is situated in an unrivalled position - close to the major growth markets for these resources. It has a highly stable political, institutional and legal environment. And, most importantly, it has the talent needed to make it happen.
As I have said earlier, we believe that global demand for our products will double over the next 15 years. Just like Rio Tinto, Australia is poised at a crucial juncture. Like Rio Tinto, how does this country ensure that it gets its share of this phemonenal growth?
The kinds of decisions it makes now about how, when and who develops its valuable resources, will reverberate into the future and impact the lives of every Australian.
The benefits of getting it right are massive. According to Access Economics, the potential gain from Australia increasing its global mineral market share, rather than maintaining its current share is enormous. Access says if Australia gets everything right, Australia's national income and exports could be more than $100 billion higher by 2020 than if we simply hold market share across the board.
However, lifting supply capacity in Australia's minerals sector is going to be a challenging task.
Access Economics also suggests that to just maintain its global share of minerals, Australia needs to lift annual coal volumes by 211 million tonnes and iron ore volumes by 328 million tonnes over and above their 2007 levels. That is more than three times the growth achieved across the period 2002 to 2007.
GETTING IT RIGHT
Clearly the prize is high if Australia - and Rio Tinto - get it right.
Fortunately, the Australian Government is aware of this opportunity. It has recently given positive signals that it is aware that there are a number of measures it can take to maximise and prolong the current prosperity in resources. And I welcome that.
However there are a range of formidable challenges. These include how Australia addresses supply constraints, how it deals with the issue of direct foreign investment, how it approaches the regulatory and fiscal regime, how it deals with land access, as well as how it responds to the skills shortage, and deals with the challenges presented by the energy shortage, climate change and new technologies.
I want to deal with each of these in turn:
First, in relation to infrastructure, I am pleased that the Federal Government outlined in its recent Budget, steps to establish a fund to meet some of the future needs in infrastructure. It has also publicly stated its recognition of the need for further infrastructure investment in Australia.
Certainly infrastructure has lacked investment and attention. For example the difficulty faced by port facilities on the East Coast coping with a rapid increase in demand for coal. This has placed constraints on Australia's ability to fully supply the demand for coal from export markets. Australia has lost traded coal market share to Indonesia and other suppliers. Even in Western Australia, recent events reinforce how tightly balanced energy supply infrastructure is at present.
I look forward to further significant investment in infrastructure here.
Secondly, I have heard it said that Australia needs to be defensive on the issue of direct foreign investment in Australia, particularly when it comes to the subject of China. There is a sense in which the temptation at present is to see the risks before we see the opportunities.
Certainly the emergence of sovereign wealth funds has attracted plenty of headlines in recent months. While I agree there is a case for prudence, I don't think that Australia would want to miss out on this substantial opportunity by not taking advantage of the full breadth of global capital and global relationships that might be on offer in its own region.
This has worked for Australia in the past. Rio Tinto was one of the first involved in a substantial direct investment in Australia's resources, when it partnered with the Japanese steel manufacturers in the original build up of Hamersley Iron in the Pilbara in the 1960s. Australia also has very successful Japanese partnerships in aluminium and coal. These partnerships benefit Rio Tinto, Japanese investors and of course, the broader Australian and Japanese trade relationship, which all of us still value half a century later.
I support comments made by the Federal Treasurer, Mr Swan, last week that sovereign funds present few direct threats to the global financial system and I support his call for cooperation between Australia and China on the subject.
The fact is that Australia's robust and flexible institutions and regulatory framework has worked well in the past and will work well in the future to protect and promote Australia's national interest.
For Australia to be a "Global Champion" it should take a positive role in meeting the needs of these growing markets and grasping the opportunity, rather than creating new barriers. The framework it creates now will shape the future.
In some ways the situation today with China is similar to that faced with Japan in the 1950s and 1960s. A rapidly growing and urbanising economy wanted sure and stable access to resources. Indeed, many of the Japanese investments in Australian resources were seen at the time as being strategically sponsored with Japanese Government sanction. But Australia handled it well and prospered as a result.
Most of us agree that unlocking the full force of Australia's mineral potential will require further direct foreign investment. That's why I believe the best approach is one that is based not on short term fear, but is considered, prudent and focussed on the opportunity. Importantly, this needs to retain sufficient flexibility so that opportunities are assessed on their merits.
As a regular visitor to China I sense some of the excitement in the country about the future. They know they have big things ahead. There is a tremendous amount of goodwill and interest in Australia; as there is a large amount of goodwill and focus on China here. I have no doubt that each can work together for the benefit of each other.
The third point I want to make concerns how a country maintains the stability of its regulatory and fiscal environment. Rio Tinto can vouch for Australia's credentials. We have a long history of recognising the benefits of investing in this country thanks to its stable laws, rules, regulations and taxes. And we think it has been a relationship with mutual benefits.
Of course it couldn't be more important now. That's why moves by state or federal governments to alter the playing field, including through changed royalty or tax regimes, present difficulties for companies making substantial investment decisions.
It is a global investment market today and companies such as Rio Tinto make their investment decisions on a global scale and consider a broad range of markets, countries and commodities, when doing so and the costs involved.
Of course we remain highly confident of Australia as an investment destination. As I mentioned earlier we have a significant pipeline of expansions planned for our key assets.
For example, the Iron Ore group is rapidly expanding its Pilbara operations to 320 million tonnes a year and in Queensland, the Yarwun alumina refinery is being more than doubled in size, representing combined well over US ten billion dollars in investment.
However, growing to meet the needs of Asia will require not just expansion of existing brownfield sites, but the discovery of new or greenfield sites.
As I mentioned earlier we have an industry-leading exploration team. We are expected to spend 46 million Australian dollars in 2008 on greenfield exploration in Australia. As I come from an exploration background I know that new discoveries are critical to building and growing the industry.
That's why my fourth point is that access to land is a crucial issue for us. As a key leader in exploration, we require access to new land for Greenfield exploration. It is the development of new discoveries that will ensure countries such as Australia remain competitive.
Exploration continues to be the most cost effective way of finding new resources to supply the metals and minerals that consumers need in ever greater quantities.
Of course we also need the experts who can identify those resources, evaluate them and extract them from the ground and my fifth point relates to the critical place skills and training must play.
When I graduated in the late 1970s, mining schools in Canada, the US, Australia and the UK were turning out engineers and earth scientists in greater numbers than today.
Now companies are having difficulty in recruiting the right people and we will need to work with governments to identify and promote the skills required to ensure countries such as Australia have the right talent pool for the future.
Some change is starting to occur. In Australia, we've made a special effort to engage with indigenous people, many of whom live where we work. By offering culturally sensitive recruitment methods and pre employment training we have increased indigenous employment on our sites.
Ten years ago, indigenous people made up less than 0.5 per cent of our workforce in Australia. Today we are Australia's largest private employer of indigenous people and they account for around eight per cent of our workforce or 1,200 people. We intend to significantly increase that figure given they represent a stable, long term workforce, frequently in very remote parts of the country.
My last point is that technology will also be crucial in capturing opportunities as we move forward and in managing costs, particularly in a world increasingly concerned about the impact of climate change. In fact, for some time, Rio Tinto has been exploring ways to reduce the emission of greenhouse gases through technology and through changing the way we work. Recently, we have called for the establishment of a national low emissions technology strategy.
Rio Tinto is a world leader in remote operation of equipment. Our Iron Ore group in Western Australia is currently our first testing ground for the automation of a range of equipment and remote controlled operation of mines, processing plants and trains.
A new remote operations control centre in Perth is being developed to direct and monitor operations at our iron ore mines 1,200 kilometres away, and we are introducing automated train driving systems from mine to port. Today we announced a $370 million investment in this system.
Automation will reduce the use of energy and water, have a smaller environmental footprint, and better alignment with the lifestyle aspirations of our employees.
We are also active in the field of decarbonised coal, cleaner iron and aluminum smelting, and putting greater emphasis on underground bulk mining to avoid the disturbance caused by surface operations.
CONCLUSION
All of these factors are challenges and opportunities we must face in order to grasp the opportunity before us.
I have great confidence in the future of Australia. There is no doubt that Australia punches above its weight.
Like Rio Tinto, Australia faces an incredible, generational opportunity - and how it responds to that will determine a large part of its economic future.
Rio Tinto has put in place a strong plan for the future and is confident it can fully benefit from strong sustained resources demand.
I am sure that Australia will do the same.
FORWARD-LOOKING STATEMENTS
This announcement includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this announcement, including, without limitation, those regarding Rio Tinto's financial position, business strategy, plans and objectives of management for future operations (including development plans and objectives relating to Rio Tinto's products, production forecasts and reserve and resource positions), are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Rio Tinto, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.
Such forward-looking statements are based on numerous assumptions regarding Rio Tinto's present and future business strategies and the environment in which Rio Tinto will operate in the future. Among the important factors that could cause Rio Tinto's actual results, performance or achievements to differ materially from those in the forward-looking statements include, among others, levels of actual production during any period, levels of demand and market prices, the ability to produce and transport products profitably, the impact of foreign currency exchange rates on market prices and operating costs, operational problems, political uncertainty and economic conditions in relevant areas of the world, the actions of competitors, activities by governmental authorities such as changes in taxation or regulation and such other risk factors identified in Rio Tinto's most recent Annual Report on Form 20-F filed with the United States Securities and Exchange Commission (the "SEC") or Form 6-Ks furnished to the SEC. Forward-looking statements should, therefore, be construed in light of such risk factors and undue reliance should not be placed on forward-looking statements. These forward-looking statements speak only as of the date of this announcement. Rio Tinto expressly disclaims any obligation or undertaking (except as required by applicable law, the City Code on Takeovers and Mergers (the "Takeover Code"), the UK Listing Rules, the Disclosure and Transparency Rules of the Financial Services Authority and the Listing Rules of the Australian Securities Exchange) to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in Rio Tinto's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
