RIO-TINTO-GROUP Earningcall Transcript Of Q2 of 2024

Jakob Stausholm -- Chief Executive Officer

Good  morning,  and  thank  you,  Tom.  I  also  want  to  thank  Brendan  for  a  wonderful  welcome  to

country.  I  acknowledge  the  Gadigal  people  of  the  Eora  Nation  on  whose  traditional  lands  we  are

gathered today. And I pay my respects to elders, past and present.

I  extend  that  respect  to  all  indigenous  people  across  the  globe.  I  acknowledge  the  important  role

that continues to play within communities and our business. It's great to be in Sydney today, the first

time Peter and I have reported our results from Australia. It's an excellent opportunity to highlight the

strength of our Australian operations, which are powerful drivers of our performance.

The  foundation  for  much  of  that  strength  can  be  traced  long  back,  back  to  Sir  Rod  Carnegie,  the

former  chief  executive  of  CRA.  Sir  Rod,  very  sadly,  passed  away  on  14th  of  July,  and  I  want  to

recognize the impact he had on our business. He was a remarkable leader and a true pioneer of our

industry. When you look at Rio Tinto, you can see a clear and consistent story.

We are profitable and we are growing, growing because we are improving the performance of our

assets,  growing  organically  because  we  are  investing  with  discipline  in  projects  that  will  create

significant value, not just in one or two decades' time, but also in the near term. And this growth is

supported  by  strategic  M&A.  We're  executing  this  growth  through  a  relentless  focus  on  our  four

objectives.  They  are  enabling  us  to  unlock  value  and  find  solutions  to  even  the  most  complex

challenges.

There has already been a step change in our road to best operator. This is, among others, clear in

our  bauxite  business  where  the  safe  production  system  has  helped  deliver  a  10%  boost  to

production  in  the  first  half.  Meanwhile,  we  have  taken  large  and  incremental  steps  to  be

decarbonized  while  delivering  materials 

for 

the  energy 

transition.  This 

includes  securing

competitively priced renewable power for our assets.

And  we  are  hitting  milestones  as  we  excel  in  development.  Simandou  in  Guinea  received  a  full

sanctioning earlier this month, a major moment for the largest greenfield mining and infrastructure

project in the world. We cannot operate unless we bring the local communities along with us, and we

want  communities  to  benefit  from  our  operations  as  we  grow.  That's  why  I  emphasize  the

importance of having a deep social license and working in partnership.

For example, partnering with the Ngarluma Aboriginal Corporation. Together, we are progressing a

solar  farm  to  supply  our  Pilbara  assets.  Ultimately,  delivering  our  objectives  in  the  right  way  will

benefit  our  shareholders,  too.  By  striving  for  impeccable  ESG  and  a  strong  social  license,  we  can

unlock even more business opportunities.

We're solving complex challenges and executing profitable growth with the support of governments,

customers  and  communities.  This  is  the  meaning  of  our  purpose  of  finding  better  ways  to  provide

the  materials  the  world  needs.  Our  financials  show  we  have  a  strong  base  from  which  to  grow

production  further.  In  the  first  half,  we  delivered  robust  underlying  earnings  of  $4.8  billion,  a  1%

increase year on year.

Copper equivalent production has grown 2% and is accelerating. I'll elaborate on that future growth

later. As we step up capital expenditure to deliver our big projects, we are securing the profitability of

our  business  well  into  the  future.  We  are  achieving  this  while  maintaining  a  strong  balance  sheet

and attractive returns to shareholders.

Once again, we will hand back $2.9 billion, a 50% dividend payout, in line with our policy. This is not

just a growing half year result. This is stable, reliable growth. We are confident executing significant

projects while building value.

Peter will now go into more details. Thank you. 

Peter Cunningham -- Chief Financial Officer

Thanks, Jakob. It's great to be here in Sydney to present our interims. We now have good stability at

most of our assets. We're strengthening our core business segments, creating value and options for

the future, and have real momentum across the group.

We're  also  solving  some  of  our  hardest  challenges.  For  instance,  the  Simandou  project  where

investment  is  now  proceeding  at  pace,  and  the  competitive  power  solutions  announced  for  Boyne

and NZAS. We'll add 170,000 tonnes of aluminum metal or 5% to our portfolio when the transaction

throughout  our  partners'  interests  complete.  Our  Pilbara  operations  are  very  consistent,  delivering

production above the five-year average in the first half.

And  the  underground  copper  mine  at  Oyu  Tolgoi  continues  to  ramp  up,  in  line  with  our  long-term

plan  and  will  drive  considerable  free  cash  flow  expansion  over  the  next  few  years.  And  we  saw  a

step  change  in  bauxite  production  and  a  very  stable  performance  at  our  smelters.  The  safe

production  system  is  delivering  results  and  unlocking  value.  Three  sites  set  best  throughput  rates

over a 90-day period during the half, and more on that later.

But  we  can  still  realize  much  more  from  our  existing  assets  through  productivity  improvements.

Kennecott remains the biggest challenge, but also a real opportunity to unlock value. So, turning to

the numbers. All in all, it was a very consistent financial performance.

On a net-net basis, underlying EBITDA increased 3% to $12.1 billion, with our aluminum and copper

divisions  more  than  offsetting  the  lower,  but  still  impressive  performance  from  iron  ore.  Cash  flow

from  operations  was  stable  at  $7.1  billion,  and  free  cash  flow  of  $2.8  billion  reflected  the  rise  in

capital  expenditure  to  $4  billion  as  we're  investing  growth  to  deliver  enhanced  future  earnings.

Following payment of the 2023 final dividend and receipt of $400 million from our Simfer JV partner,

CIOH,  we  ended  the  half  with  net  debt  of  $5.1  billion.  Overall,  we  delivered  a  healthy  return  on

capital employed of 19% on underlying earnings of $5.8 billion.

And  as  Jakob  said,  we've  maintained  our  practice  of  paying  out  at  50%  of  the  interims  for  the

ordinary dividend, equating to $2.9 billion. Now unusually, movements in commodity prices were not

a significant driver of our financials. The Platts 62% iron ore index dropped 3%. LME copper rose

4% and LME aluminum was up 1% compared with the first half of 2023.

The  prices  we're  currently  seeing  reflect  a  global  economy  which  is  not  firing  on  all  cylinders.

Construction in all major markets is soft, although for different reasons. Interest rates in the west and

overcapacity still being managed down in China. Steel demand from the Chinese property sector is

now down by as much as 30% from its peak in 2020.

However,  manufacturing  in  China  is  strong  with  the  energy  transition  at  the  heart  of  growth.  The

energy transition sectors accounted for nearly a third of Chinese GDP growth in 2023, and strong

growth  has  continued  in  the  first  half  of  2024.  Other  drivers  are  performing  OK.  So,  in  summary,

prices were below the average of the last 10 years when adjusted for inflation.

Focusing  on  iron  ore,  if  we  look  back  over  the  last  five  years,  consensus  has  underestimated  the

price by about $22 a tonne on a one-year forward look at an average of $39 a tonne on a two-year

forward.  And  over  the  last  three  years,  iron  ore  has  averaged  around  $120  a  tonne,  trading  in  a

range of around $20 per tonne either side, highlighting the market's resilience. And if we look at the

drivers,  firstly,  there's  been  a  steepening  of  the  cost  curve  with  broad-based  inflation  affecting

supply.  And  the  impact  of  this  is  heightened  for  the  higher  cost  marginal  producers,  which  has

limited their ability to supply economically in this price environment.

Secondly, the market has underestimated global iron ore consumption. This is partly due to China's

steel  production  outperforming  expectations,  supported  by  exports  and  a  shift  to  non-property

sectors, also due to scrap supply being less than predicted. Turning now to the EBITDA movement.

Overall,  we've  seen  more  modest  variances  this  half,  reflecting  the  consistent  performance  of  our

assets.

In aggregate, commodity prices and currency movements offset each other. Likewise, lower market

linked prices for raw materials like caustic, pitch and coke together with lower energy costs, offset

the  impact  of  3.5%  general  inflation  on  our  cost  base.  In  copper  equivalent  terms,  our  production

was  up  2%,  a  very  positive  outcome.  But  when  it  comes  to  the  bridge,  the  fact  that  we  had  lower

iron  ore  sales  in  the  period,  our  highest  margin  business  means  the  increase  in  our  productive

capacity has not yet flowed through to earnings.

Turning  to  cash  costs.  We  achieved  broadly  flat  period  on  period  outcomes,  except  in  the  Pilbara

and TiO2. Higher iron ore unit costs were driven by input price escalation and lower volumes. And

we  also  saw  fixed  cost  inefficiencies  at  our  TiO2  business,  again,  mainly  volume-led  from  weak

market conditions.

Overall, these pushed EBITDA down by some $400 million. With our iron ore volume set to rebound

and our active focus on cost management, we would expect a more positive cost performance in the

second half. Now there were some one-off factors in 2023 such as the smelter shut and conveyor

breakdown at Kennecott, the forest fires at IOC and the Kitimat restart. In addition, exploration and

evaluation expense to the P&L was $200 million higher last year, as Simandou costs were not being

capitalized.

In comparison, this half year has been very clean. So, all in all, this brings us to a strong underlying

EBITDA  of  $12.1  billion,  a  3%  rise.  Turning  now  to  our  cash  generation.  As  ever,  this  half,  there

were a number of factors impacting the conversion of EBITDA to cash.

Some are one-offs. Some are seasonal. But overall, it was a very consistent strong performance. An

increase in working capital of $700 million was mainly driven by movements in non-trade payables.

Now  these  included  a  drawdown  of  royalties  in  taxes  as  prices  fell  from  late  2023,  along  with

seasonal movements in amounts due to our JV partners. We'd expect most of this to reverse in the

second half. If I look at our working capital rises over the last five years, the main driver has been

inventory. Now we've taken some decisions actively to increase inventory, for instance, around $400

million  of  iron  ore  held  port-side  in  China,  and  around  $900  million  in  our  Pilbara  supply  chain,

increasing overall system resilience.

However, the biggest driver has been the flow-through of inflation through cost to inventory over the

period. We certainly have opportunities to reduce the capital invested in inventory, but a substantial

proportion  of  the  increase  does  reflect  market  drivers.  On  to  product  group  performance.  Iron  ore

had  a  robust  half,  although  EBITDA  was  down  10%  with  some  pricing  impact,  higher  costs,  as

mentioned  earlier,  and  lower  shipments,  which  were  still  above  the  five-year  average  for  the  first

half.

And we're on track for another 5 million tonnes from SPS with 10 million tonne benefit in this year

and last, delivering significant incremental value. Unit costs were at the top end of our guidance in

the half with shipments weighted to the second half. Meanwhile, replacement mines are advancing

with construction of Western Range now 70% complete. The performance of the aluminum business

was strong, and we're well-positioned to take full advantage of better markets.

The 38% increase in EBITDA was driven by growing bauxite and aluminum production and margin

expansion as prices improved and input costs declined. Our copper business saw EBITDA rise by

67%, driven by LME prices, the rising output from the Oyu Tolgoi underground mine and the restart

of the Kennecott smelter following completion of the major rebuild last year. As I mentioned earlier,

Kennecott  remains  a  key  focus  as  recent  changes  to  the  mine  plan  to  manage  geotechnical  risk

have  delayed  access  to  higher  grade  ore  in  the  pit.  The  team  is  currently  reworking  the  plan,  and

we'd expect to update the market in our third quarter report.

Lastly,  minerals.  As  I  said,  volumes  were  significantly  down  at  our  TiO2  business,  reflecting  weak

market  conditions.  We  saw  a  recovery  at  IOC  with  a  further  pickup  in  volumes  expected  in  the

second half. And on lithium, the Rincon starter plant is on track for first tonnes by year-end, and we

expect to complete the feasibility study for full-scale operations in the third quarter.

Moving  to  the  safe  production  system.  This  is  now  being  deployed  at  26  assets,  and  we're

deepening maturity at the initial sites. It's simply how we do business. The early investments in the

cultural journey is beginning to show results.

We set best throughput rates over a 90-day period across three assets during the half, Weipa, Tom

Price,  and  Robe  Valley.  Using  the  Kaizen  process,  ideas  from  frontline  team  members  helped

increase  plant  feed  rates  at  the  Amrun  bauxite  mine  at  Weipa  by  9%  and  reduced  scheduled  lost

time by nearly 10 days per year. Moving on to capital allocation. Now you've seen this slide before

many times.

The  key  message  today  is  nothing  has  changed  with  strict  discipline  remaining  paramount.

Sustaining  capital,  high-returning  replacement  projects,  and  decarbonization  remain  our  priorities

with about $7 billion of spend per year, unchanged from previous guidance. That's followed by the

ordinary dividend and then compelling growth. Our guidance for growth capex is also unchanged at

$3 billion.

Now as I have said many times before, we will remain very disciplined. Our investments in growth

are highly dependent on the timing of commitments, but most importantly, by our ability to generate

value. Over the next few years, we will see the contribution from our growth projects take off, with

Oyu  Tolgoi  underground  ramping  up  significantly.  For  next  year,  it  will  become  free  cash  flow

positive as we complete the key infrastructure investments, building up to the resilience of our cash

flows.

Simandou is advancing at pace. As you can see from these images, the team is making impressive

progress. At the end of May, we achieved nearly 9 million hours with a simpler workforce of nearly

9,000,  more  than  80%  of  whom  are  Guineans.  We're  ramping  rapidly  up  with  more  than  20,000

supporting the entire project when you're factoring contractors and those working for WPS, and this

is set to peak at 50,000.

In June, we announced the completion of 327 bridge piles on our 70-kilometer rail-spur, and these

were completed six months ahead of schedule, forming the foundations of five bridges with a total

length  of  1.7  kilometers.  The  team  achieved  this  operating  safely,  24  hours  a  day,  seven  days  a

week.  In  summary,  our  scope  and  WSC  scope  are  on  track.  First  ore  at  the  Simfer  mine  gate

remains on track for 2025, together with the 30-month ramp-up of 60 million tonnes per annum.

Turning now to Simandou's capital expenditure. The majority of the full Simfer scope would impact

our free cash flow under construction with $5.1 billion of capex for the mine and $3.5 billion for the

TSV  port  and  rail-spur,  reflected  against  free  cash  flow.  Meanwhile,  the  cash  contributions  from

CIOH are a financing activity, and therefore, fall outside our free cash flow. However, as the mine

ramps up from 2025, it will become a significant cash contributor.

We  saw  $900  million  invested  in  2023,  of  which  $500  million  was  our  share  and  $400  million  has

now been refunded by CIOH. In 2024, our share of expenditure remains at about $2 billion. Now as

is typical of large capital projects, this has started quite slowly with just $400 million invested in the

first half. Now that we've received the funds from our partner, including a further $575 million in July,

I'd expect to see the cash flow spend rise quickly.

In fact, just earlier this month, together with CIOH, we made our initial funding for investments into

the WCS managed port and rail infrastructure, where our Chinese partners are making impressive

progress. Finally, the dividend, in line with our usual practice, we've declared a 50% payout for the

interim,  which  equates  to  $2.9  billion,  consistent  with  our  now  eight-year-old  shareholder  returns

policy.  It's  been  another  period  in  which  we've  proven  that  our  financial  strength,  we  can

decarbonize,  reinvest  for  growth,  and  continue  to  pay  attractive  dividends  through  the  cycle.  With

that, let me hand back to Jakob. 

Jakob Stausholm -- Chief Executive Officer

Yes.  Thank  you,  Peter.  When  I  tell  you  our  growth  is  accelerating,  I  can  say  that  with  a  level  of

certainty because the ingredients are already in place. There has been a step change in production,

particularly from aluminum, while iron ore is proving resilient.

There's  a  clear  link  between  improved  performance  and  the  rollout  of  the  safe  production  system,

which is empowering our frontline employees to problem-solve. We're now getting real value out of

SPS, and we will see more improvement as we deepen its maturity at existing sites. We're only at

the  foothill  of  this  mountain,  and  there's  so  much  more  to  come.  Pilbara  iron  ore  is  on  track  for

midterm capacity of 345 million to 360 million tonnes a year.

This is subject, of course, to the delivery of the next tranches of replacement mines as we previously

have set out. We're comfortable delivering production growth of around 3% from 2024 to 2028. This

growth path is already embedded in our portfolio from our existing assets and organically from major

projects in execution. And we are growing in confidence that we can execute these projects well.

Oyu  Tolgoi  is  ramping  up  to  deliver  half  a  million  tonnes  a  year  of  copper  from  2028  to  2036.  At

Simandou,  we  are  on  track  for  first  iron  ore  production  at  the  end  of  next  year,  ramping  up  to  60

million tonnes for block three and four. Simandou is vast, complex, and difficult to deliver, but we are

progressing  at  pace.  And  while  we  do  not  depend  on  M&A  to  grow,  strategic  acquisitions  have

added value to our portfolio.

We moved quickly to close the Matalco joint venture for half a year. Now we have been able to tap

into  the  growing  market  for  recycled  aluminum.  The  ingredients  for  further  growth  are  there,  and

they're  coming  together  through  our  focus  on  the  four  objectives.  We  are  achieving  this  while

delivering attractive shareholder returns and maintaining a strong balance sheet.

There's  real  momentum  across  Rio,  and  we  are  at  an  inflection  point  in  our  growth.  First,  we

stabilized  the  Pilbara  iron  ore  business,  in  part  by  using  the  safe  production  system  to  spark  a

process of continuous improvement. Now we are replicating this step change in performance across

the product groups. In aluminum, we expect bauxite production toward the top end of guidance for

the year, thanks to improvements at sites such as Weipa, as Peter already had mentioned.

Those of you joining the site visit to the Saguenay in September will hear more about how we are

improving asset health, with investments such as the AP60 project and diversifying our offer through

Matalco. Aluminum has a great future. Production is stable and growing, while the price environment

is becoming more attractive. Next, copper progress at our Tolgoi underground has been exceptional,

and we expect to complete our spend on the project by the end of '25 as planned.

The conveyor to surface is now 97% complete, and commissioning is expected in September. The

conveyor is critical to ramp up production. So, it's really a turning point now to our copper business.

Minerals is also at an inflection point as projects into new phases and soon you will see the results.

In  March,  I  visited  Rincon  3,000-hour  lithium  starter  plant  at  3,900  meters  above  sea  level  in

Argentina. I saw how the team is laying the groundwork for first production by the end of this year.

They  are  leveraging  the  BLE  technology  to  advance  the  project  in  a  sustainable  way,  developing

methods  and  improving  processes  while  considering  environmental  impacts.  Lithium  will  soon

change the shape of our portfolio.

I  believe,  in  the  future,  we  can  produce  this  critical  mineral  in  Argentina  and  in  Serbia.  I've  been

encouraged by the change in conversation around the Jadar lithium project. 10 days ago, I was in

Belgrade  at  the  Serbian  Critical  Raw  Materials  Summit  where  governments,  customers,  and

European  leaders  endorsed  the  project.  Jadar  has  huge  potential  as  part  of  Europe's  electrical

vehicle value chain.

Of course, we have experienced challenges this year, and we still have more improvements to make

across the business. But that means just that there are more opportunities to be realized. So, with

our operations improving and some of our major value-creating projects just around the corner, you

can expect a bigger step-up in production across Rio Tinto. As we grow in these materials, we are

creating the building blocks for the global energy transition.

Decarbonization  is  at  the  heart  of  our  strategy,  both  in  terms  of  supporting  the  transition  and  in

terms  of  reducing  our  own  carbon  footprint.  There  has  been  real  momentum  in  the  first  half.  Our

targets  are  ambitious,  but  we  are  on  track  to  half  our  emission  by  2030.  We  are  delivering

abatement  projects  in  a  technically  and  economically  disciplined  way,  implementing  commercial

solutions to reduce emissions as soon as we can while investing in innovation required to reach net

zero for the longer term.

We are repowering our operations with renewable energy, including in Queensland, where we are

working hard to create the conditions which deliver a competitive solution for our Pacific operations

aluminum business. Earlier this year, we signed two PPAs that make us Australia's largest offtake,

our  wind  and  solar  generation.  It  was  amazing  to  celebrate  this  milestone  with  the  team  at  Boyne

Smelter. But this is only the first step in transitioning these assets, and more is required to position

them as internationally competitive, as Australia is transitioned to its renewable energy future.

We  cannot  solve  all  problems  alone.  That's  why  we  are  working  in  partnership  with  governments,

customers, peers, and communities to understand how we can better deliver projects that meet our

shared  climate  ambitions.  In  the  Pilbara,  we're  working  closely  with  traditional  owners  to  progress

two solar projects. In New Zealand, we work with stakeholders, including the government to secure

a  20-year  renewable  energy  deal  that  extends  the  life  of  the  NZA  smelter,  supporting  jobs  and

communities on the South Island.

And  we  expect  to  soon  own  100%  of  this  great  business.  We're  also  driving  technological

breakthroughs  that  will  have  impact  for  our  industry  and  beyond.  We're  collaborating  on  projects

such  as  Elysis,  potentially  transforming  decades-old  industrial  processes.  We  are  now  proving  we

can scale up technology by installing 10 smelting pots at/ Arvida in Quebec.

We're  also  very  excited  about  Nuton,  our  bioleaching  technology  that  represents  opportunities  to

add copper volume in a more sustainable way. And we are finding ways to decarbonize our value

chains, for example, building a new reaseach and development facility in Western Australia to pilot

BioIron, a potential solution for greener steel making using our Pilbara ores. We are moving at pace

with a largely value-accretive portfolio of projects and opportunities to truly transition our assets for a

sustainable future. Yes, we still have a long way to go.

The challenge is large, technical, complex, and requires us and society to move even more quickly.

But  by  working  together,  we  can  achieve  our  ambitions.  There's  huge  value  already  embedded  in

Rio Tinto. We're profitable and our production is growing.

This is set to accelerate over the next few years. And through technology and partnership, we are

finding solutions to the real complex challenges, including decarbonization. Ultimately, we're deeply

driven  by  our  purpose,  finding  better  ways  to  provide  the  materials  the  world  needs.  This  is

delivering profitable growth today and in the future.

Thank you.

Tom Gallop -- Head of Investor Relations

Thank  you,  Jakob  and  Peter.  We  now  move  to  the  Q&A  session.  Also  available  in  the  room  to

answer questions is Mark Davies, Chief Technical Officer. Please limit yourself to one question and