Annual Report

Alignment to our four objectives and associated risks

• Best operator
• Impeccable ESG credentials

Definition

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

Relevance to strategy

The safety and wellbeing of our employees and contractors is our number one priority and essential to everything we do.

We are committed to having a safe work environment and our focus is on maintaining zero fatalities, preventing catastrophic events and reducing injuries. We continue to implement our safety maturity model which, as our blueprint for safety, describes the systems and behaviours we apply to create a strong safety culture. In 2023, we will begin planning for the integration of our safety maturity model (SMM) with our Safe Production System. This is our new, people-centric approach to engage our workforce and develop and share best practice solutions across our assets.

We continue to share learnings and strengthen our partnerships with industry and associated committees (eg the International Council on Mining and Metals), contracting partners and local communities to improve health, safety and wellbeing outcomes.

Link to executive remuneration

AIFR and SMM are included as performance metrics in the safety component of the short-term incentive plan.

Our performance in 2022

We had a fourth year in a row of zero fatalities. Our AIFR has remained stable at 0.40 compared to 2021.

Forward plan

We will renew focus on our critical risk management programme. We will also work on embedding enhancements to the SMM.

We will increase our focus on managing psychosocial hazards, and continue to innovate to reduce exposure to safety and health risks.

We will continue to implement our major hazard standards, including process safety, underground safety and tailings, and apply strong assurance processes.

Alignment to our four objectives and associated risks

• Best operator
• Impeccable ESG credentials
• Excel in development
• Social licence

Definition

TSR is a 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.

Relevance to strategy

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

Link to executive remuneration

TSR is reflected in the long-term incentive plan, measured equally against the EMIX Global Mining Index and the MSCI World Index.

Our performance in 2022

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 both the EMIX Global Mining Index and the MSCI World Index over the five-year period.

Forward plan

We will continue to focus on generating 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).

^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.

Alignment to our four objectives and associated risks

• Best operator

Definition

Underlying earnings and underlying EBITDA are non-IFRS measures. Underlying earnings represents net earnings attributable to the owners of Rio Tinto, adjusted to exclude items that do not reflect the underlying performance of the Group’s operations. These items are explained in note 1 to 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.

Relevance to strategy

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 are reflected in the short-term incentive plan. In the longer term, both measures influence TSR, which is the primary measure for the long-term incentive plan.

Our performance in 2022

Underlying earnings of $13.3 billion were $8.1 billion lower than in 2021. Underlying EBITDA of $26.3 billion was $11.4 billion lower than in 2021. The 30% decrease in underlying EBITDA resulted from lower iron ore prices, higher energy and raw material costs, partially offset by movements in sales volumes.

Forward plan

We will continue to drive attractive margins and returns throughout the cycle through a focus on best operating performance and a disciplined focus on cash costs.

Alignment to our four objectives and associated risks

• Best operator
• Excel in development

Definition

Underlying ROCE is a non-IFRS measure defined as underlying earnings excluding net interest divided by average capital employed (operating assets).

Relevance to strategy

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

Link to executive remuneration

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

Our performance in 2022

Underlying ROCE decreased 19 percentage points to 25% in 2022, reflecting the decrease in underlying earnings driven by lower iron ore prices, and an increase in capital employed due to capital expenditure and acquisitions.

Forward plan

We will continue to focus on maximising returns from our assets over the short, medium and long term. We will invest in value-accretive growth options for materials that will be privileged in a decarbonising world.

Alignment to our four objectives and associated risks

• Best operator

Definition

This KPI refers to 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.

Relevance to strategy

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

Link to executive remuneration

Net cash generated from operating activities is included in the short-term incentive plan. In the longer term, the measure influences TSR, which is included in the long-term incentive plan.

Our performance in 2022

Net cash generated from operating activities of $16.1 billion was 36% lower than 2021. This was primarily due to lower iron ore prices, higher energy and raw material costs partially offset by lower taxes paid.

Forward plan

We will focus on effectively delivering strong and resilient cash flows from our quality portfolio of assets throughout the cycle.

Alignment to our four objectives and associated risks

• Best operator
• Excel in development

Definition

Free cash flow is a non-IFRS measure defined as net cash generated from operating activities minus purchases of property, plant and equipment, intangibles, and payments of lease principal, plus proceeds from the sale of property, plant and equipment, and intangible assets.

Relevance to strategy

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

Free cash flow is included in the short-term incentive plan. In the longer term, the measure influences TSR, which is included in the long-term incentive plan.

Our performance in 2022

Free cash flow decreased by $8.7 billion to $9 billion in 2022, primarily due to the decrease in net cash generated from operating activities. This was partially offset by a decrease in replacement and development capital expenditure as projects reached completion.

Forward plan

We will focus on effectively delivering strong and resilient cash flows from our quality portfolio of assets throughout the cycle.

Alignment to our four objectives and associated risks

• Best operator
• Excel in development

Definition

Net (debt)/cash is a non-IFRS measure defined as total borrowings plus lease liabilities less cash and cash equivalents and other liquid investments, adjusted for derivatives related to net (debt)/cash.

Relevance to strategy

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

Link to executive remuneration

Net cash/(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 cash/(debt) influences TSR, which is reflected in the long-term incentive plan.

Our performance in 2022

Net cash reduced by $5.8 billion in 2022, resulting in a net debt position of $4.2 billion. This reflected $11.7 billion returned to shareholders in the year, $3.0 billion¹ acquisition of the remaining non-controlling interest of TRQ and $0.8 billion acquisition of the Rincon Lithium Project, partially offset by $9.0 billion of free cash flow and the $0.5 billion received from the sale of the Cortez royalty.

Forward plan

We will focus on effectively delivering strong and resilient cash flows from our quality portfolio of assets throughout the cycle.

1. Total consideration of $3,139 million for the minority interest in TRQ excludes transaction costs of $74 million. In 2022, we paid $2,928 million to shareholders and $33 million of transaction costs. In 2023, we expect to pay the remaining $41 million of transaction costs and approximately $211 million to dissenting shareholders, depending on the outcome and timing of dissent proceedings.

Alignment to our four objectives and associated risks

• Best operator
• Impeccable ESG credentials
• Excel in development
• Social licence

Definition

We measure our Scope 1 and 2 greenhouse gas emissions on an equity basis. It includes the equity share of Scope 1 and 2 emissions from managed and non-managed operations expressed in million metric tonnes of carbon dioxide equivalent.

Relevance to strategy

Climate risks and opportunities have formed part of our strategic thinking and investment decisions for over two decades. The low-carbon transition is at the heart of our business strategy. We focus on growth in the materials that enable the transition, decarbonising our operations and partnering with our customers to decarbonise our value chains.

Link to executive remuneration

Climate change is included in our ESG metrics for executive remuneration with a weighting of 5% of the short-term incentive plan. In 2022, we approved or delivered abatement projects towards our 2025 target that would contribute 0.29Mt CO₂ of abatement compared to an abatement target of 0.8Mt that year.

Our performance in 2022

In 2022, our Scope 1 and 2 emissions were 30.3Mt CO₂e, 7% below our 2018 baseline. This reduction is primarily the result of switching to renewable power at Kennecott and Escondida in prior years, as well as lower than planned production from our Kitimat and Boyne aluminium smelters in 2022. We did not advance the actual implementation of our abatement projects as fast as we would have liked last year. Challenges have included late delivery of equipment, resourcing constraints impacting study progress, construction and commissioning delays, and project readiness.

Forward plan

We announced ambitious climate targets in 2021 and aim to reduce emissions from our operations by 15% by 2025 and by 50% by 2030. We are committed to reaching net zero emissions by 2050. In 2022, we established six abatement programmes, with dedicated people, to focus on the decarbonisation challenges that cut across our product groups: repowering our Pacific Aluminium Operations, renewables, ELYSIS^TM, alumina process heat, minerals processing and diesel transition. We are building capability and gaining a deeper understanding of our decarbonisation challenge and are better placed to deliver the structural change needed to achieve our 2030 target.

Our progress and plans to meet these targets are summarised in the Climate Action Plan in our 2022 Climate Change Report.

^1. The 2018 figure is the baseline for our 2025 and 2030 targets and is adjusted to include emissions from acquisitions and exclude emissions from divestments. Actual emissions in 2018 were 33.7 Mt CO₂e.

Alignment to our four objectives and associated risks

• Best operator
• Impeccable ESG credentials
• Social licence

Definition

Includes our total workforce based on managed operations (excludes the Group’s share of non-managed operations and joint ventures)³.

Relevance to strategy

Inclusion and diversity are imperative for the sustainable success of the business. Our sustained performance and growth rely on having workforce diversity that is representative of the communities in which we operate and having a workplace where people are valued for who they are and encouraged to contribute to their full potential.

Link to executive remuneration

In 2022, our target was to increase the proportion of women in our workforce by 2 percentage points. This target is included in our ESG metrics for executive remuneration, with a weighting of 5% of the short-term incentive plan.

Our performance in 2022

In 2022, we increased our representation of women at Rio Tinto by 1.4 percentage points⁴ from 21.6% to 22.9%. This falls short of our 2 percentage points target. The increases were distributed across all levels of the organisation with senior leaders increasing from 27.4% to 28.3%, and operations and general support increasing by 1.1 percentage points to 16.2%.

Forward plan

Our aspiration to increase the proportion of women in our workforce by 2 percentage points year-on-year will continue in 2023. The implementation of the Everyday Respect Report recommendations remains our priority and we are confident that this will improve both the attraction and retention of women and other diverse groups to Rio Tinto.

^2. Baseline reset with definition for 2020 to 2021 gender diversity.

^3. In 2020, we updated our definition of our total workforce to include those employees who were unavailable for work (eg on parental leave) and temporary contractors. Note: less than 1% of the workforce gender is undeclared.

^4. 1.37 percentage points rounded to 1.4 percentage points.