Rio Tinto (RIO) successfully diverted attention from its bribery story yesterday by revealing plans to generate another $US5 billion in free cash flows over the next five years.
The company revealed the moves as part of its long-term productivity push to work existing assets harder (or sell those that are not scale) in an investor day function in Sydney.
Not mentioned in the release were the sacking last week of two senior executives over a $US10.5 million payment to a consultant to help the company hang on to the Simandou iron ore project in Guinea, which Rio Tinto is now in the process of selling.
Rio’s reticence is understandable given how two former CEO’s have been mentioned in internal company emails discussing the payment with one of the departed executives (Tom Albanese and Sam Walsh). Rio has reported the payment to regulators in a number of countries (without revealing that the payment was discussed in 2011 and then picked up by internal lawyers in 2015).
Instead, the company chose to reveal what it called as the new strategy of newish CEO, Jean-Sébastien Jacques (JS Jacques as the company referred to him).
On top of trying to make the assets throw off more cash, Rio revealed that its much lauded AutoHaul autonomous train system will now be three years late, and cut its 2016 capex estimate by half a billion to $US3.5 billion.
Rio claimed its plans to raise productivity across its assets are expected to free up a total of $US5 billion of free cash flow by the end of 2021 in addition to the cash cost reduction target of $US2 billion for 2016 and 2017.
“Lifting the productivity on our $50bn portfolio creates a low risk and highly attractive return,” said Jacques.
The company has chalked up $US1.3 billion of asset sales so far this year including its announcement earlier yesterday it would sell the Lochbar aluminium smelter in Scotland for $US410 million, and brings the total amount of completed disposals since 2013 to $US 5.3 billion. While Rio cut its 2016 capex estimate, it held guidance for 2017 at around $US 5billion and around $US5.5 billion for the year after, and for 2019 as well (a new estimate).
Rio also confirmed the delay of its autonomous train system. Autohaul, which was to transport iron ore to and from its mines in Western Australia’s Pilbara, is now “expected to advance progressively during 2017 and be fully implemented by the end of 2018″ the company said. It previously intended for the trains to be running in 2015.
Rio has already revealed plans to chop 500 people in its WA iron ore and other businesses and is closing the Hope Downs iron ore mine for two weeks over Christmas to cut costs.
In contrast, BHP and Fortescue Metals are maintaining production and have made no announcements about further job losses. Rio shares rose 0.25% in Sydney to $60.30 after being weaker in early trading.
Iron ore prices had rallied solidly this week as the price of iron ore rebounded sharply from correction territory.
Jean Sebastien Jacques said operational excellence and other types of productivity offered a major opportunity for the company.
“We have placed our assets at the heart of the business to drive improved performance and ensure our resilience through the cycle. We are well on track to meet our target of $2 billion of cash cost savings by the end of next year. We are also taking advantage of any opportunity to generate value from mine through to market.
"Lifting the productivity on our $50 billion asset base creates a low risk and highly attractive return. It will deliver an additional $5 billion of free cash flow over the next five years.
Rio said its Koodaideri mine, which is expected to be the next major replacement mine built in the Pilbara, would likely cost $US2.2 billion and could be supplying iron ore by 2021.
Koodaideri, with capacity of around 40 million tonnes a year.
That estimated cost is less than many market forecasts.
In addition to improving the performance of its asset base, Rio Tinto said it is also committed to investing in growing the business. In the near term, this will be delivered via three high-quality growth projects – Silvergrass (Iron Ore in Western Australia), Amrun (Bauxite in Queensland) and Oyu Tolgoi (Copper and Gold in Mongolia).
This investment underpins an annual average copper equivalent growth in excess of 2% between 2015 and 2025. Longer term, exploration remains a priority for Rio Tinto, with a commitment to maintain the Group’s successful exploration programme.
Rio Tinto added that it is committed to maintaining an appropriate balance between investment in the business and cash returns to shareholders. “We expect total cash returns to shareholders over the longer term to be in a range of 40 to 60 per cent of underlying earnings in aggregate through the cycle,” the company said.
Rio said its Pilbara shipment guidance for 2017 remains at 330-340 million tonnes of iron ore. It was originally 350 million tonnes for this year, but trimmed to 325 – 330 million tonnes because of weather problems with the rail system and production problems.
And the company said its aluminium business production guidance for 2017: Aluminium 3.5 to 3.7 million tonnes; alumina 8.0 to 8.2 million tonnes and bauxite 48 to 50 million tonnes.
