Annual Report 2020

Annual Report

Group Highlights

$15.9B

Net Cash from Operating Activities (2019: $14.9B)

110.1%

Total Shareholder Return (TSR) (2019: 49.6%)

557c

Total Dividend per Share (DPS) (2019: 4.43c)

0.37

All Injury Frequency Rate (AIFR) (2019: 0.42)

4

New Scope 3 goals

3.2%

Reduction in CO2e, equivalent emissions against 2018 baseline

A Message from our Chairman, Simon Thompson

Key Performance Indicators

We use a range of financial and non-financial metrics, reported periodically, to measure Group performance against the four key areas of our strategy (portfolio, people, performance and partners).

 

  • All injury frequency rate (AIFR)
    per 200,000 hours worked

    Relevance to strategy & executive remuneration

    People, Performance, Partners

     

    Safety is our number one priority, it is the first of our core values and essential to everything we do. We are committed to maintaining zero fatalities, preventing catastrophic events and reducing injuries. We are a learning organisation enabling a safe, responsible and productive business that protects and cares for human life and wellbeing. In 2019, we introduced the safety maturity model and safety coaching framework. These programmes focus on building strong safety culture and leadership capability through the line. In 2020, we continued to implement these programmes. Our facilities also developed improvement plans and improved their safety maturity despite the pandemic-related challenges faced during 2020. This is supported by fewer injuries and serious incidents in 2020 compared to previous years.

    We are focused and committed to strengthening our partnerships with industry and associated committees (eg ICMM), contracting partners and local communities with the priority of learning and sharing to protect everyone’s health, safety and wellbeing.

    Link to executive remuneration

    Included as a performance metric in the safety component of the short-term incentive plan.

    We marked a second year in a row of zero fatalities, aligning with our top safety objective. As we recognise this milestone, we are not forgetting the colleagues we have lost in the past. Sadly, a permanent disabling injury occurred at our Richards Bay Minerals Smelter in October, when one of our employees lost their hand while undertaking operational activities. We also had a permanent disabling injury at the Diavik Diamond Mine, in Canada. We are doing everything we can to support our colleagues and their families and endeavouring to learn and improve from these tragic incidents. Our all-injury frequency rate has improved to 0.37 from 0.42 in 2019, continuing the performance trend delivered over the past ten years, reducing from 0.69 in 2010. In 2020, our management of catastrophic event prevention continued to mature through embedding of improved standards, assurance and governance processes. The strong safety performance of 2020, accomplished while facing and adapting to the challenges of the COVID-19 pandemic, is testament to the organisation’s relentless focus on safety.

    Forward plan

    We will:

    • Continue to implement our critical risk management programme and safety maturity model
    • Strengthen our safety leadership and coaching programmes
    • Work more closely with contractors and joint venture partners to improve our safety record
    • Continue to implement our major hazard standards, including process safety, water and tailings, with strong assurance processes
    • Innovate to reduce exposure to safety and health risks

    Associated risks focus

    • Operational
    • ESG

    Definition

    The number of injuries per 200,000 hours worked by employees and contractors at operations that we manage. AIFR includes medical treatment cases, restricted workday and lost day injuries.

  • Total shareholder return (TSR)1
    measured over the preceding five years (using annual average share price)

    Relevance to strategy & executive remuneration

    Portfolio, Performance


    Our strategy aims to maximise shareholder returns through the commodity cycle, and TSR is a direct measure of that.

    Link to executive remuneration

    Reflected in long-term incentive plans, measured equally against the EMIX Global Mining Index and the MSCI World Index.

    TSR performance over the five-year period was driven principally by movements in commodity prices and changes in the global macro environment. Rio Tinto significantly outperformed the EMIX Global Mining Index over the five-year period, and slightly outperformed the MSCI World Index.

    Forward plan

    We will continue to focus on generating the free cash flow from our operations. This allows us to return cash to shareholders (short-term returns) while investing in the business (long-term returns).

    Associated risks focus

    • Economic
    • Strategic
    • ESG

    Definition

    Combination of share price appreciation (using annual average share price) and dividends paid and reinvested to show the total return to the shareholder over the preceding five years.

    1. The TSR calculation for each period is based on the change in the calendar year average share prices for Rio Tinto plc and Rio Tinto Limited over the preceding five years. This is consistent with the methodology used for calculating the vesting outcomes for Performance Share Awards (PSA). The data presented in this chart accounts for the dual corporate structure of Rio Tinto.

  • Underlying Earnings and Underlying EBITDA
    $ millions

    Underlying Earnings

    Underlying EBITDA

    Relevance to Strategy & Executive Remuneration

    Portfolio, Performance


    These financial KPIs measure how well we are managing costs, increasing productivity and generating the most revenue from each of our assets.

    Link to Executive Remuneration

    Underlying earnings is reflected in the short-term incentive plan; in the longer term, both measures influence TSR, which is the primary measure for long-term incentive plans.

    Underlying earnings of $12.4 billion were $2.1 billion higher than in 2019. Underlying EBITDA of $23.9 billion was $2.7 billion higher than 2019. The 13% increase in underlying EBITDA resulted from higher iron ore and copper prices and lower energy costs, partly offset by lower prices for aluminium, movements in sales volumes and changes in product mix across the portfolio and higher operating cash costs.

    Forward Plan

    We will continue to drive superior margins and returns through a focus on operational and commercial excellence and our value over volume approach.

    Associated Risks Focus

    • Economic
    • Operational
    • ESG

    Definition

    Underlying earnings represent net earnings attributable to the owners of Rio Tinto, adjusted to exclude items which do not reflect the underlying performance of the Group’s operations. These items are explained in note 2 of the financial statements.

    Underlying EBITDA represents profit before tax, net finance items, depreciation and amortisation. It excludes the EBITDA impact of the items mentioned above.

  • Return on Capital Employed (ROCE)
    %

    Relevance to Strategy & Executive Remuneration

    Portfolio, Performance


    Our portfolio of low-cost, long-life assets delivers attractive returns throughout the cycle and has been reshaped significantly in recent years. ROCE measures how efficiently we generate profits from investment in our portfolio of assets.

    Link to Executive Remuneration

    Underlying earnings, as a component of ROCE, is included in the short-term incentive plan. In the longer term, ROCE also influences TSR, which is included in long-term incentive plans.

    ROCE increased increased 3% to 27% in 2020, reflecting the increase in underlying earnings driven by higher iron ore prices, partially offset by an increase in capital employed due to capital expenditure and exchange rate movements.

    Forward Plan

    We will continue to focus on maximising returns from our assets over the short, medium and long term. We will also maintain our disciplined and rigorous approach and invest capital only in projects that we believe will deliver returns that are well above our cost of capital.

    Associated Risks Focus

    • Strategic
    • Economic
    • ESG

    Definition

    Underlying earnings before interest divided by average capital employed (operating assets before net debt).

  • Net Cash Generated from Operating Activities
    $ millions

    Relevance to Strategy & Executive Remuneration

    Portfolio, Performance


    This KPI measures our ability to convert underlying earnings into cash.

    Link to Executive Remuneration

    Included in the short-term incentive plan; in the longer term, the measure influences TSR, which is included in long-term incentive plans.

    Net cash generated from operating activities of $15.9 billion was 6% higher than 2019. This was primarily due to higher iron ore prices, partially offset by higher taxes paid and an increase in working capital.

    Forward Plan

    We will focus on effectively converting earnings into cash, underpinned by operational and commercial excellence, including our careful management of working capital.

    Associated Risks Focus

    • Economic
    • Operational
    • ESG

    Definition

    Cash generated by our operations after tax and interest, including dividends received from equity accounted units and dividends paid to non-controlling interests in subsidiaries.

  • Free Cash Flow
    $ millions

    Relevance to Strategy & Executive Remuneration

    Portfolio, Performance


    This KPI measures the net cash returned by the business after the expenditure of sustaining and growth capital. This cash can be used for shareholder returns, reducing debt and other investment.

    Link to Executive Remuneration

    Included in the short-term incentive plan; in the longer term, the measure influences TSR, which is included in long-term incentive plans.

    Free cash flow increased by $0.2 billion to $9.4 billion in 2020, primarily due to the increase in net cash generated from operating activities. This was partially offset by an increase in capital expenditure.

    Forward Plan

    We will focus on effectively converting earnings into cash, underpinned by operational and commercial excellence, including our careful management of working capital.

    Associated Risks Focus

    • Economic
    • Operational
    • ESG
    • Strategic

    Definition

    Net cash generated from operating activities minus purchases of property, plant and equipment and payments of lease principal, plus sales of property, plant and equipment.

  • Net Cash/(Net Debt) $ Millions
    $ millions
     

    Relevance to Strategy & Executive Remuneration

    Portfolio, Performance


    This measures how we are managing our balance sheet and capital structure. A strong balance sheet is essential for giving us flexibility to take advantage of opportunities as they arise, and for returning cash to shareholders.

    Link to Executive Remuneration

    Net debt is, in part, an outcome of free cash flow, which itself is reflected in the short-term incentive plan. In the longer term, net debt influences TSR, which is reflected in long-term incentive plans.

    Net debt decreased by $3 billion to $0.7 billion. This reflects $9.4 billion of free cash flow in 2020, partially offset by $6.3 billion of cash returns to shareholders through dividends and share buy-backs.

    Forward Plan

    We will focus on effectively converting earnings into cash, underpinned by operational and commercial excellence, including our careful management of working capital.

    Associated Risks Focus

    • Strategic
    • Economic
    • Operational
    • ESG

    Definition

    Net borrowings after adjusting for cash and cash equivalents, other liquid investments and derivatives related to net debt (see note 24 of the financial statements).

  • Scope 1 and 2 Greenhouse Gas Emissions
    (equity Mt CO2e)

    Prior to 2018 we reported our greenhouse gas emissions on a 100% managed basis.

    *The 2018 figure is the baseline for our 2030 emissions target and has been adjusted to exclude emissions from assets divested in that year. Actual emissions in 2018 were 34.0Mt CO2e.

    Relevance to Strategy & Executive Remuneration

    Performance, Partners


    Climate risks and opportunities have formed part of our strategic thinking and investment decisions for over two decades. We now have a portfolio that is well positioned for the transition to a low-carbon economy and most of our assets already sit in the low end of their respective commodity carbon intensity curves.

    Link to Executive Remuneration

    Since 2018, our Chief Executive’s performance objectives have been reflected in the short-term incentive plan (STIP), which includes delivery of the Group’s strategy on climate change. These are cascaded down into the annual objectives of relevant members of the Executive Committee and other members of senior leadership.

    This year, the Remuneration Committee approved revisions to how we include climate change in the STIP.

    Since 2018, we have reduced Scope 1 and 2 emissions by 1.1Mt CO2e, or 3%, which is on track with our 2030 target for absolute emissions. However, in 2020 our emissions remained at the same level as in 2019 at 31.5Mt CO2e. We expect progress on emissions to accelerate in the target period as we start to deliver our decarbonisation plans.

    Forward Plan

    Our ambition is to reach net zero emissions by 2050 across our operations. Our 2030 greenhouse gas targets are to reduce our emissions intensity by 30% and our absolute emissions by 15%, compared with our 2018 equity baseline. These targets are consistent with a 45% reduction in absolute emissions relative to 2010 levels and the Intergovernmental Panel on Climate Change (IPCC) pathways to 1.5°C.

    Our targets are supported by our commitment to spend approximately $1 billion on emissions reduction initiatives, research and development and activities to enhance the climate resilience of our business over the first five years of the ten-year target period.

    Associated Risks Focus

    • Strategic
    • ESG

    Definition

    Equity emissions: equity share of Scope 1 & 2 emissions from managed and non-managed operations expressed in million metric tonnes of carbon dioxide equivalent.

  • Gender Diversity
    Gender Balance in Senior Leadership
     

    Relevance to Strategy & Executive Remuneration

    People


    Inclusion and diversity is an imperative for the long-term sustainable success of our business. Having a diverse workforce where people are valued for who they are and what they contribute is key to our sustained performance and growth. This KPI measures the number of women in the senior leadership cohort.

    Link to Executive Remuneration

    Included in the short-term incentive plan. In 2020, we increased our female representation in senior leadership by 3.5% to 26.1%, surpassing our 2% year-on-year target. After a number of years of limited progress, this result represents significant focus on both attraction and retention of senior women in our organisation.

    Forward Plan

    In 2021, we will focus on improving the representation of women, who comprise half the world’s population but only about 20% of our workforce. We do this because we aim to have our company reflect the perspectives of the communities in which we operate; we undertake this effort alongside others, including efforts to strengthen Indigenous leadership across our business in Australia.

    Associated risks focus

    • Strategic
    • ESG

    Definition

    We define senior leadership as general managers, chief advisers and managing directors, including people not available for work due to extended leave.

Jakob Stausholm

Jakob Stausholm

Chief Executive

Everything I know about this company – the talent and commitment of our employees, the quality of our assets and our contribution to society – excites me and makes me optimistic about the future. We have the strength and capabilities, built over our 148-year history, to restore our leadership in cultural heritage and communities and social performance, and we will emerge a better company for the lessons we have learned in 2020."

Peter Cunningham

Interim Chief Financial Officer

Our world-class assets, combined with our very strong balance sheet, supports our ability to provide superior cash returns to shareholders. While we continue to adapt to an unpredictable external environment, one thing that does not change is our capital allocation framework."

Peter Cunningham

Form 20-F