November 24, 2016
The new chief executive of Rio Tinto said on Wednesday that he would focus on sweating the company’s assets and improving productivity rather than transformational mergers and acquisitions.
Ahead of his first in-depth strategy presentation, Jean-Sébastien Jacques said that the Anglo-Australian miner could boost cash generation by as much as $5bn by the end of 2021 by grappling with seemingly mundane issues, such as running its fleet of giant haul trucks more efficiently.
The company, under fire over questionable payments in Guinea, flagged that capital spending this year would come in at less than $3.5bn, compared with earlier guidance of about $4bn, and that it was on track to meet a target of $2bn in cost savings by the end of next year.
“We have placed our assets at the heart of the business to drive improved performance and ensure our resilience through the cycle,” Mr Jacques said before a presentation to analysts and investors in Sydney.
“Lifting the productivity on our $50bn asset base creates a low risk and highly attractive return. It will deliver an additional $5bn of free cash flow over the next five years.”
The plan is likely to disappoint some investors who were hoping for a more growth-orientated strategy under Mr Jacques who took charge of Rio in July, replacing Sam Walsh whose three-year tenure at the company was characterised by relentless cost-cutting.
Rio said that growth would come through investment in three projects: Silvergrass, an iron ore deposit in Western Australia; Amrun, a bauxite project in Queensland; and Oyu Tolgoi, a giant underground copper project in Mongolia.
“A relentless focus on generating cash, together with capital discipline, prioritising value over volume, means that investors can expect us to deliver superior shareholder returns whilst continuing to invest through the cycle,” Mr Jacques said.
The mining industry is emerging from the worst downturn in a generation which prompted companies to rein in spending, sell assets and cut dividends. Commodity prices have rebounded sharply this year, helped by supply cuts and stronger than expected demand in China, the world’s biggest consumer of raw materials.
Lifting the productivity on our $50bn asset base creates a low risk and highly attractive return.
Iron ore, the steelmaking ingredient that accounted for almost three-quarters of Rio’s earnings in 2015, has rallied more than 70 per cent to $75 a tonne.
If commodity prices remain at the average of the third quarter, Rio expects to generate operating cash flow of about $10bn next year, which could allow the company to pay a higher dividend and launch a share buyback.
In February, the FTSE 100 miner abandoned its promise of maintaining or increasing its dividend, moving to a defined payout ratio. The company, which has one of the lowest gearing ratios in the sector, has said it will pay at least 110 cents a share in 2016, guidance it repeated again on Wednesday.
Shares in Rio Tinto have risen 55 per cent this year, lagging behind its closest peers, which include Anglo American, BHP Billiton and Glencore. Last week, the company fired two senior executives after an investigation into a $10.5m payment made to a consultant who helped the company secure rights to a giant iron ore project in Guinea.
It made no comment on the decision to report the payment to regulators in the UK, US and Australia in Wednesday’s statement.
However, Mr Jacques told analysts and investors at the briefing that recent events related to the Simandou iron ore project had been “very challenging”.
“In the five months since I became CEO I have travelled across the group and everywhere I have met really impressive people and that is why recent events related to Simandou have been very challenging,” he said.
“What you need to know is the following: I take integrity and our code of conduct very seriously. For me, it’s absolutely non-negotiable. We must do the right thing wherever we operate.”
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