Rio Tinto Group (RIO) Q2 2019 Earnings Report, Transcript and Summary

Thank you, JS. Ladies and gentlemen, good morning. As JS has already told you, we have today disclosed a set of strong financials. When you look at the profit and loss and cash flow statement from top to bottom, you'll see that all underlying comparisons from the first half of this year to the first half of last year have improved. Our top line has improved by 3%. However, if you exclude the coal businesses that we divested last year, the underlying growth is 7%. We saw a double-digit improvement in EBITDA, and we saw an even stronger improvement in cash from operations and free cash flow due to our high cash conversion in the first half. Following our project update on Oyu Tolgoi announced on the July 16, we've impaired the asset value with a net income impact of $0.8 billion. We've taken a cautious approach which captures the average of a range of potential outcomes. This Oyu Tolgoi impairment represents the main variance between IFRS net earnings of $4.1 billion and underlying earnings of $4.9 billion. JS will provide a further update on Oyu Tolgoi later. Because of strong earnings and a strong cash conversion, the Board was able to both increase the interim dividend to $3.5 billion, while we continued to strengthen our balance sheet as demonstrated by the reduction in pro forma net debt. Now let me step back before diving into the details of our results. The value creation, expressed in terms of profitability and growth, is strong for Rio Tinto. Our profitability continues to improve and reached the highest level on recent record in the first half. We saw our return on capital employed reach 23%, and this is based on underlying net earnings after tax. Despite being in a very capital-intensive business, our ROCE is not only the highest amongst our industry majors but, as JS said, at the top-end amongst industrial companies in general. We are also a growing company. Over the last 3.5 years, our growth have been a CAGR of 2.5%. The first half of 2019 was affected by weather and operational issues at the Pilbara. We expect though to return to production growth in the second half of the year, of course always driven by our value-over-volume mantra. China's economic growth has been strong in the first half supported by fiscal stimulus, while the rest of the world has experienced a weakening growth. In aggregate, this impact on our portfolio has, in fact, been positive with strong iron ore demand somewhat offset by weaker demand for aluminum and copper. The iron ore business has faced rather unusual conditions. We saw a strong growth in steel production in the first half. At the same time, we had a very high level of iron ore supply disruptions, starting from the tragic incident in Brazil in January and carrying on with exceptional weather conditions. And we have furthermore experienced operational issues, which JS will cover later in the presentation. As a result, the iron ore price increased significantly throughout the first half. Aluminum demand growth moderated to only around 1%, impacted by, in particular, the transportation sector. On supply, as we anticipated restructuring in the Chinese aluminum industry has been modest today. And in January, we saw the sanctions on RUSAL lifted, meaning that more supply came to market. As a result, there has been a decline in price during the first half compared to both the first and the second half of 2018. The Midwest premium though has stayed stable to the tune of $400 per tonne. Now moving on to copper. The slowing economy, world economy, has impacted market sentiment and demand growth. Combined with limited disruption in supply, this has resulted in an 11% deterioration in the copper price compared to the same period last year. Our underlying EBITDA in the first half of 2018 was $8.6 billion when you exclude the coal business that we still have last year. Higher prices were driven by the iron ore and favorable exchange rates, particularly by the weaker Australian dollar. Overall, the lower EBITDA compared with the flexed EBITDA for the same period last year is entirely due to weather conditions or weather disruptions in the first quarter. When we last presented to you here, we set out a target for this year to reach a run rate productivity improvement of $1 billion. Given the revised guidance, production guidance in iron ore that will not be achieved, the weather in the Pilbara removed $200 million from our productivity initiative, and as a result, we have seen our run rate reduce from $0.4 billion at last year to $0.2 billion in the first half of 2019. However, more importantly, the planned improvements in productivity, primarily in iron ore, was not achieved, and hence, we are updating the full year guidance. As a group, we are, though, confident that we will improve from here in the second half of the year. Our updated target run rate is $0.5 billion for 2019. We recognize the operational issues we had experienced in the Pilbara and are addressing them with rigor. However, looking forward, we anticipate generating between $1 billion and $1.5 billion of additional free cash flow by 2021. This new range is subject to an increase in iron ore volumes, which will be dictated by market conditions, of course, and a reversal in raw materials costs, primarily in our aluminum business. Now let me move to the results of each of the product groups. As previously mentioned, we've seen a significant hike in the price of iron ore. This has progressively developed throughout the half year. On average, the improvement in the realized price was 35%, whereas prices towards the end of the period are materially higher. Shipments in the first half fell short of our expectations. We had expected higher shipments compared to previous year, and instead, we saw an 8% fall. The shortfall against last year can be explained by weather impacts, a fire at Cape Lambert A and the operational issues, which J-S will cover later. The overall operating cost measured in U.S. dollars is at the same level as last year. Hence, the lower volume is entirely driving the 9% increase in unit costs. As a result of lower production guidance and additional total material moved, we have also updated our operating cost guidance from $13 to $14 per tonnes to $14 to $50 per tonnes. The financial metrics are very strong and we saw improvements in revenue, EBITDA and cash flow. And it is important to note that we have increased our investments in sustaining CapEx to improve the future reliability of our world-class assets. Our integrated aluminum business has faced a challenging price environment that kicked in, in the second half of last year and has further deteriorated in the first half of this year. You'll see the achieved aluminum price is down 15% and the alumina price is down 17%. We saw a slight increase in bauxite production as the Amrun ramp-p exceeded the negative weather impact. Our integrated aluminum business is, like the rest of the industry, experiencing right now a tough environment. Our financial metrics demonstrate this difficult environment, and we ended up with a return on capital employed of only 4% in the first half. Fortunately, we are well placed to weather the storm. We had the highest margin in the industry, and it looks like we have only extended that position in the first half of this year. We also tried to take advantage of this by doing everything we can to improve efficiency and reduce costs. You will see that our unit costs have gone down by 5% and we had a 1% production creep in the first half. Nonetheless, profitability is not at all at the level where we want it to be, and hence, we are therefore also very disciplined in our uses of capital protecting the free cash flow from aluminum. Copper & Diamonds as a product group faced lower prices in the first half but demonstrated stable performance against a strong prior year. The continued productivity improvements at Kennecott were a particular highlight. We saw a significant reduction in unit costs, mainly due to higher productions of by-product, which we do not expect will continue into the second half. Copper production was down 5% and at the lower end of our guidance. This was due to lower grades from where we are currently mining in the pit rather than a performance issue. Overall, the financial metrics are fairly stable. It was a good first half last year and it was a good first half this year. We see stable margins and a small variance in the financial statements. Return on capital employed of 6% includes significant development CapEx of not yet producing assets and significant expense costs for developing our growth options of Resolution's and Reno. Finally, Energy & Minerals experienced a strong recovery after a year of disruptions in 2018. Production is up significantly. At RTIT, two rebuild furnaces were restarted in the first half. The third will start in the second half of this year. Also, IOC was impacted last year by a strike. The financial metrics have improved significantly, with revenue up by a third and EBITDA more than doubled. Energy & Minerals obviously benefited from the high prices enjoyed for iron ore pellets, but also from higher titanium prices. Return on capital employed continued to improve, ending at 15% for the first half. Overall, it's a profitable and highly cash generative business. We continue to explore opportunities to further grow our business. In the first half, we approved $0.5 billion for further investments in the Zulti South project in South Africa. During the first half of the year, we have continued with a disciplined approach to capital investments. In total, we invested $2.4 billion, similar to what we invested in the first half of last year. What you'll see though is that we have invested more in sustaining CapEx so that we are taking best possible care of our existing assets and ensuring the future sustainability and reliability of our operations. Investments in gross projects was somewhat lower than anticipated, mainly because of completion of Amrun and less ramping up of our spending in Oyu Tolgoi than expected. Overall, the picture remains the same. We are in a phase of ramping up our investments from $5.4 billion last year and we expect around $6 billion this year and around $6.5 billion next year. We know we are going to spend the money, but there will always be some uncertainty over the exact phasing and some of this year's investments may tick over into next year. The strong cash generation and disciplined approach to capital means that we are able to further strengthen our balance sheet. Adjusting our reported net debt for future commitments regarding share buybacks, the return of disposal proceeds, tax lags combined with a new IFRS 16's rules changes shows a very consistent pattern of deleverage, taking the pro forma net debt from $8 billion at the beginning of the year to $5.6 billion at the end of June. We are very comfortable with this level of net debt. It provides optionality and the ability to provide superior cash returns to our shareholders. As previously announced, we have paid out $7.8 billion in the first half. On top of this, we have $0.7 billion of our ongoing share buyback program still to be completed between now and the end of February. Today, based on our first half results, the Board has approved an interim dividend of $2.5 billion, which again represents 50% of underlying earnings. We have also approved a special dividend of $1 billion. That brings the overall payout ratio to 70% and takes our total cash return paid in 2019 to approximately $12 billion. In summary, we have today disclosed a set of strong financial results. We are a very profitable company and our profitability is increasing. This enables us to make significant investment in further improving our world-class assets and pay superior returns to our shareholders. However, we fully acknowledge that we have had operational issues in the first half and we're working hard to address those. Before closing, I'm delighted to announce that we will be hosting a Capital Markets Day here in London on October 31. I look forward to seeing as many of you as possible on that day. On that note, let me hand back to you, J-S. Thank you. Jean-Sébastien Jacques: Thank you, Jakob. Now let's focus on the macro outlook and the financial results of our industry. Overall, they remain positive. As you know, there are two key drivers for our mining business: GDP growth and trade. On the first, economic growth is relatively stable. Despite consumer confidence being at record high, the U.S. economy is showing sign of slowing, and we saw it last night. And we see trade tensions starting to weigh on industrial indicators. Now in China, our main market, as expected growth is slowing, but was still strong at 6.3% for the first six months of 2019. I mean, this year has been quite tough time in China. And on one of my visit, I mean, I attended the council of global business leaders where I heard directly from the Chinese Premier that the government is focused on targeted stimulus measures to support domestic growth. And we see evidence that this policy shifts are working. For example, regional light rail projects, urban renewal programs and increased infrastructure investment are ramping up. On the second driver, trade. Volatility and risk remain and while we see these reflected in sentiment, we have not yet seen total volumes or global trade meaningfully back it. This is why I remain the optimist in the room and I'm still hopeful that common sense will prevail. Now of course, the real question is, what do these macro conditions mean for those of us in the commodity business? Let me share some thoughts on iron ore, on aluminum and copper. We'll continue to see a positive outlook for iron ore on the back of strong demand and supply disruptions globally. There have been record levels of zinc production in China at a run rate above 1 billion tonnes per annum over the past few months. Stimulus measures, I mentioned, have encouraged property and infrastructure investment which has largely flowed through into consumption. At the same time, supply has been weak. In 2018, for the first time this century, we saw no growth in iron ore seaborne supply. It remained almost flat at 1.6 billion tonne. The industry has experienced a material level of disruption, equating to around, for the full year in 2019, around 100 million tonne, which compares to around 40 million tonne in 2018. And there are multiple reasons, including the tragic events in Brazil, operational and weather issues in Australia and significant weather impacts in Northern Brazil. These combined factors have seen a lowering of port stock in China with around 26 million tonnes drawn down in the first half. As we have been saying for some time, the opportunity for supply-side response from Chinese domestic mines is less now than in the past, driven by several factors, including permitting environmental regulations, driving transition to underground mining and small artisanal miners have stopped processing some time ago. So all in all, we see the outlook for iron ore remaining positive. As we are on the topic of iron ore, let me share what we are doing to fully optimize our Pilbara system to maintain product quality and the reliability of our supply chain, particularly the Pilbara Blend, our flagship iron ore product in China. The value of the Pilbara Blend for our customers is clear. It's very consistent chemistry, provides the baseload of burden management in their blast furnaces and sinter plants. This is reflected in the price. This blend combines all from a network of mines, including Tom Price, Hope Downs, West Angelas, the Brockman hub. And from 2021, Koodaideri will be a major contributor. Of course, let's be clear, the Pilbara Blend is not the only product. Overall, iron ore system comprises of four ports, 16 mines, 1,700 kilometers of rail and around 400 trucks, big trucks, of which around 150 are autonomous today. As you would expect, the focus for us is to run the system first and foremost safely and then to maximize profitability by providing the quality product our customers want, but not at the expense of short, medium and long-term sustainability. So let me first talk about the mines and then the rail. We have been ramping up all parts of the Pilbara system for several years, including port and rail in the context where we defer capital on Silvergrass and Koodaideri for a number of years. It was the right decision to preserve capital, but it did require us to run our existing mines harder. As we disclosed in June, we are experiencing operational issues, particularly at our greater Brockman hub. We have fallen behind in mine development and waste movement. These resulted in us processing a higher proportion of ore and restricted our ability to access the right ore at the right time to produce at Pilbara Blend. This is a sequencing issue that happened for several reasons, including the challenging transition to autonomous trucks at Brockman 4, and more broadly, some pockets of inadequate equipment and workforce retention. None of this is acceptable from the start, so we have made two major decisions to protect our Pilbara Blend. One, we have reduced plant production in 2019 and changed our production guidance to between 320 million and 330 million tonne. Two, we are increasing our planned total material movement across the Pilbara mines by a few percentage points. To do this, we have bought in extra equipment and contractors. We spent around $80 million in 2019 on this activity. The work is well underway and further investment will be required in 2020 to increase the resilience, the health of the system. We will not stop until we have fully optimized our system. As you know, our other main focus is the Pilbara – in the Pilbara is rail. It’s worth remembering that our 1,700 rail system in Pilbara is one of the most utilized heavy-haul rail networks in the world. To further optimize our Pilbara system, we continue to invest in the maintenance of our rail network to ensure reliability and sustainability of these critical assets. This includes a major shift toward the end of Q3, which we advised you of last month. This will be an ongoing feature of our rail maintenance program. In this context, subject to market condition, we will continue to optimize our business from here with three principles in mind: one, the quality of our product and relationship with our customers; two, EBITDA margins; and last, strengthen the health of our asset base underpinned by the right level of cost and sustained CapEx. We will provide iron ore 2020 guidance at our upcoming Capital Market Day in Q4. Moving to aluminum. There is no doubt that the current aluminum market is challenging. We have three key factors impacting on the market right now: one, resell inventories that we have built during the U.S. sanctions are still flowing into the market as we’re having this conversation; two, the global auto sector is currently at a cyclical low; and the slow restructuring in China. However, storage inventories continue to decline. As we look ahead, the longer-term fundamentals for aluminum remain positive, with demand driven by return to trend growth on automotive lightweighting, electrification and a little side, on the supply side, governed by restructuring in China as well as market forces. On copper, macro conditions and market sentiment continue to impact the price as demonstrated by investment flows into copper future. On the physical side, despite low mine disruption in the first half of around 3% compared with the recently historical average of just over 5%, we expect mine supply to contract by around 1% in 2019, and we expect the market will remain relatively balanced in the short to medium-term. Longer-term, copper fundamentals remain strong, driven by the adoption of electrical vehicles, the electrification of industry and the growing share of renewables in the energy mix. On the supply side, ongoing resource depletion will require considerable investment in new and replacement supply in the long-term. Moving to growth. We have a strong pipeline of future growth options in iron ore, in copper and in minerals, to name but a few. Starting with iron ore, we are investing in a project in the Pilbara, including Koodaideri, our most technologically advanced mine today than Robe River sustaining mines. At Koodaideri, engineering and construction is progressing to plan, and we are starting a study on Koodaideri Phase 2. At the Robe River joint ventures, we have West Angelas and Mesas B, C and H sustaining projects are underway. All are progressing well except Mesa H where we are some delays with environmental approvals. We are working with both the state and federal governments to resolve it as quickly as we can. Of course, all investments are not limited to iron ore. In the first half, we have also approved an investment in Zulti South at RBM. The project offers an attractive return with an IR of 24%, and it is expected to come into production in late 2021. This investment of around $463 million, Rio Tinto share of $343 million, will be fully self-funded from RBM’s cash flows. We are working on the framework agreement with the provincial governments and communities, and we have all the permitting and approvals to proceed. We expect to start investment in that project in the coming weeks. On the copper side, our project in the U.S. Resolution is progressing well and we expect the environmental impact assessment to be finalized in the coming week. And of course, we are also progressing our copper project Winu in WA, which I will touch on shortly. Now let me give you an update on the Oyu Tolgoi in Mongolia. OT or Oyu Tolgoi is one of the best undeveloped copper resources in the world and has been in operations since 2013. It is one of the safest and most productive mines we have. The underground project is where the bulk of the value lies. It is also one of the most technically complex underground mine construction in the world in one of the most remote location. The project has three main components: the aboveground infrastructure, the shaft and below-ground infrastructure and the mine development. As you can see, substantial progress has been made in all three areas over the last three years. We have installed most of the aboveground infrastructure, the control center, the overland conveyer, the 5,500 camp and the batch plant. Now we are well underway with the large equipment on the ground, such as the production and ventilation shaft, the large jaw crusher and facilities for workforce. We have also done a significant amount of underground mine development. As we have progressed, we have experienced tougher than expected geotech conditions, which are impacting on a number of fronts and have resulted in slower than expected mine flipping advancement, slower conveyor to survey progression and the growth in the overall content of work. As we drill underground, we identified weaker rock in the western side of Panel 0, which could cause stability issues. And that’s meant we need to consider mine design options as we progress. The schedule and cost ranges we have disclosed to develop the underground project are driven by four key factors: mid-access drive requirement and location, lateral development productivity, location of our ore-handling facilities and our boundaries transitions. It is also important to note that none of the options under consideration will impact the existing already built underground infrastructure. It is all about what is ahead of us. The team is doing the work to define the best way forward and to minimize impact. The mine design work will continue through early next year. And the definitive estimate will be completed in the second half of 2020. We have significant experience in block caving within the group, and we are working with the best people in the industry on the productivity improvement program with the aim to accelerate the delivery of sustainable production. We are also looking at ways to improve the assumptions made and to optimize the scope of work. Above all, there are key consideration are the following, number one, safety, followed by value and sustainability. We continued to believe OT is a highly attractive valuable resource. While the underground is a technically challenging project, unlocking the value of this Tier 1 resource will underpin our copper business for decades to come and we are totally focused on doing so. We need to get this right and we are working with all the OT shareholders to find the best way forward. Moving on to Winu. As we announced earlier in the year, an intensive drilling program is underway. Results are encouraging. We have data now in from a further 42 drill holes. They show wide intersection of mineralization close to the surface. The primary studies have begun including environmental baseline studies, geotech and meteorological test work. And we are progressing quickly with around 200 people and even drill rigs on site. Work will continue throughout 2019, and we will then be in a position to provide a further update. Winu is a great example of the value of our exploration program. By the way, we have enlisted $138 million in the first half on eight communities in 18 countries. So in summary, once again, we have delivered a strong financial performance. Our EBITDA margin and return on capital employed was the best in the last 10 years. Our cash performance and conversion were strong. Our balance sheet is strong. We have world class assets, but we have room for improvement. We have the right plan to address the challenges we face, and our priorities are clear. We will keep the focus on safety, drive EBITDA margin and free cash flow, protect the quality of our products and strengthen the relationship with our customers, focus on our performance in the Pilbara and deliver our growth plans, including work at Oyu Tolgoi. We will do this while maintaining our capital allocation discipline and balance sheet strength. Our consistent track record over the last 3.5 years speaks for itself, with $32 billion returned form of cash to our shareholders, including $12 billion to be paid in 2019. For us, it’s all about creating superior returns for our shareholders in the short, in the medium and in the long-term. And then at this point, why don’t we open the Q&A? A - Jean-Sébastien Jacques: Wait for the...

Thanks very much. Paul Gait from Bernstein. I just wondered if you could sort of elaborate a bit more on OT. And in particular, I mean if you had the benefit of hindsight, what sort of... Jean-Sébastien Jacques: That’s a good question.

I wonder what technical work could you have undertaken ahead of time that would have identified the issues that you’re know sort of dealing with and the sort of learnings for that when we then sort of think about something like Resolution and potentially other block caves? And then sort of carrying on from theme, I’m just also thinking about the impairment that you’ve made sort of on the asset. Using the 8.3% sort of cost of capital, given the discussions that have been going on in sort of Mongolia with the government, how should one sort of think about that? Is that – and I suppose what I'm thinking about is, if that's 8.3%, how should – what's the discount rate for the Pilbara, right? And then finally, TRQ have already stated that they're going to run out of cash by the end of 2020. So clearly, some kind of recapitalization needs to take place there. And again, how does – how are you thinking about recapitalization of your sort of participation in OT from the state you've got now? Thanks very much. Jean-Sébastien Jacques: Yes. So thank you, Paul. I think the idea with the last one is an easy one. The funding of Turquoise Hill is a question for the Board of Turquoise Hill, so let them do the work and then we'll – we're a shareholder of Turquoise Hill and we'll discuss with them when the time is right. So I think this one was an easy one to deal with. The first one, I'll let Jakob to deal with the discount rate and the impairment. But I think the first one is very important issue, what is drilling we have done and we could have done? So as you want technical answer, I know, I'm going to ask Steve who's going to tell us what drilling we have done. I know – don't try to make it too complicated, Steve. If we can go back to the slide as well if – the slide where you have the footprint and so on. Go find it. Explain the level of drilling we've gone from the surface and then what we could see, what we couldn't see and then the drilling that we're doing now on some of the resource would be great.

All right. Thank you, J-S, and thanks for the question. So of course, in terms of defining the resource at OT, that drilling was done from the surface. A lot of drill holes 2 to 2.5 kilometers deep and vertical to subvertical drilling. So obviously, what we do there has been a very good definition of the ore, so the resource grade. But what happens is that, that in essence disproportionately will identify more the horizontal structures because you're drilling vertically downstream. It wasn't until we got underground that we can really start to see the vertical structures in more detail. We can see some of them but not in detail. As soon as we got underground, as soon as we had access to Shaft 1, we started drilling out horizontal holes. They're really the key ones in terms of understanding the infrastructure that you need to put in ahead of you. That drilling was done from the south to the north. And it wasn't therefore until we were able to drift up or develop up to the side of Panel 0, as we can see here, and start drilling across it that we actually see the more north-south running fault systems. So in essence, you have to be underground, you have to get to – off to the side to the ore body and you have to be able to drill across pretty much at right angles to be able to illuminate all of the structures in 3D. And it was, at that point, that – what we could see where faults on the Southwest corner and Panel 0. That's where we are planning, as J-S said, to build critical infrastructure, things that we call mid-access drives, ore handling systems, ore passes. And obviously, in those pieces of more broken ground, we either need to work out where to move them to or how to protect them as we move forward. And that's the basis for the mine design underway. Jean-Sébastien Jacques: So I think the important point is this is typical for a block cave, okay? There is nothing new there. And what we said in the past is until you can – you get into the ore body, that's where you can refine your design in that sense. So that's what we're going through. And it is here, at this point in time, we are looking at multiple options, okay? So some of the question, as I mentioned, where are we going to put the mid-access drive the oil handling, you can shift it. Do you need to have a mid-access drive, can you have it and so on and so forth, there are lots of question. And we're looking at multiple options. And we believe we will land on something early next year. And then we need to give time to the team of Steve to go through all the mechanics of doing the costs and so on and so forth in order to get the definitive estimate. So there was so much drilling we could do from the surface. And we're doing the last batch of drilling as we speak and still drilling as we are having this conversation, and then we are refining the model to make sure we really understand the stability. And remember, the model is 1 meter by 1 meter block, okay, as we have in there, in order to make sure we understand. And then what is important there is – I thought Steve was going to say, it's a 4D model. Time is of the essence here. So not only you've got the three dimensions, but the model is run forward. So as and when to we run the cave, then we can see how the stress is going to move into the system and so on and so forth. So it's a 4D model. So as you can imagine, you got million of cells and people have to run those model in order to see what is the situation on that one, 1 months, 1 year, 10 years and so on and so forth. So it's complicated. It's block cave. We just have to go through the process. Is there any concern about the ore body per se in terms of copper content and gold content, the answer is no from what we can see today. But what we need to get right, and I said safety is the priority number one on this one, is to make sure we have something which is stable and sustainable. We're going through this process. Mid-year production being looked at. We should have a better answer – we should have an answer in the early next year. And then the team will do the costing and we'll come back to the market with a definitive estimate. That's what we are going through. No different from – I mean you know that as much as I do, some of the other block caves globally that – so that's where we are. But I thought it was important to bring Steve today just to give you a better sense of what we could have seen. And your question is actually bang on the money, is what could we have seen from the surface, and there was so much we could do and so on so forth. On the discount rate, an easy one for you, Jakob.

Yes. Thank you. So look, with the project update on the 16th of July, we also wrote that, that was kind of a trigger for a full impairment assessment. And then what you do there, you have to kind of separate it out. We have a very systematic approach to discount rate, because actually all project-specific risks you build in with contingencies in your projections. We gave some updates on ranges to cost and schedule, and we have basically weighted a number of multiple development options together. And then, overall, the cash flow has been discounted, and you quoted them. Just first thing because – just so that people won’t misunderstand that, that number is in real terms, so you have to add the inflation to it. That’s important. So it is, of course, a higher number. Our – and actually, you can read it in the accounts because we have a smaller impairment in Mesa as well. Our WACC is to the tune of 6.9%. When it comes to gold business, we have a lower WACC. And therefore, the weighted WACC would be for Oyu Tolgoi is 6.3% and we add to it 2% country risk on it. We have carefully reviewed that, looked at a number of external measures for that and I think it’s an entirely appropriate risking in. So that’s how we have done it, and that’s consistent with how we are doing impairment system any assets across the world. Jean-Sébastien Jacques: So maybe before I go and get on this one, I’ll ask Arnaud, he was in charge of copper, in charge of Oyu Tolgoi. I mean he’s been involved now for a few years and dealing with the government and so on and so forth. So Arnaud, do you want to give us an update on the discussion with the government and how you see the sovereign risk from that just quickly. Because we’ve been in this project since a long time and discussion with the government has been a feature from day one and will be a feature for a long time. Arnaud, do you want to give us an update on this one?

Thanks, J-S. It is good to be in London actually for a change. So we are in ongoing discussions with the government as you know. We’ve agreed 1.5 years ago on working to get out on some four critical opportunities that are addressing the needs of the government and that are looking at how together – we can work together within our existing agreements to create more value for all shareholders in Mongolia. So the first working group is dedicated to power. And as you know, last year, we made an announcement where we agreed with the government’s framework, legal framework to be able to build a power station at Tavan Tolgoi on the core deposit, and so we’re working with the government to progress that project. And to know commitments that we made in the investment agreement about sourcing and one of our president of our power within Mongolia from gold. The second working group is on the tax. We had a tax audit 1.5 years ago that found that the government thinks that we should have paid more tax, and so we’re working with the government to resolve this issue and we’re working in a very collaborative way. The third working group is on interest rates. Within our investment agreement, there is a provision to review the interest rate every seven years and so we are in discussion with them on this. And the fourth working group is dedicated to increasing our support for the development of the economy. If you look at – and particularly the local economy, if you look at the big picture, Oyu Tolgoi is a major contributor to the Mongolian economy, if – already now with the open cut mine. In the future, what we are working with Steve’s team in building the underground project is going to make Oyu Tolgoi amongst the third or fourth bigger – biggest copper mine in the world. And so this is going to be a huge booster of benefits to our shareholders. And we are currently, with around 17,000 employees, the biggest employer – private employer in Mongolia. 90% of our employees are from Mongolia. We’ve invested around $9 billion in country. We’ve paid around $2.4 billion of tax or so since the beginning of the project. So the economic benefit to Mongolia is already very tangible. And we are continuing to work with the government to look at how we can even further increase the benefits within our existing efforts. Jean-Sébastien Jacques: Thank you, Arnaud. Okay, Paul Dominic? And then we’ll take – I’m looking for David, we will take a question from the conf call after. So Dominic first and then... Dominic O’Kane: Dominic O’Kane, JPMorgan. Two quick questions. Just on the CapEx guidance. So your 2019 CapEx guidance is unchanged, but you’re guiding to higher sustaining CapEx. So could you just help us understand what the change is in terms of gross CapEx allocation? And when we look at the 2020, 2021 numbers which again are unchanged, is there anything in there for the OT CapEx revisions, i.e., should we expect when you announce at the end of next year upside risk to those 2020 numbers? Jean-Sébastien Jacques: All right. So Dominic, I’ll pick up this one very quickly. There’s no change in the CapEx guidance. And we had already in the past guided that, over time, we will increase our sustained CapEx. So there is nothing new from that perspective part. There is no change whatsoever. We are coming out of a long period of high investment, as you know, and we had the sweet spot where we don’t have to spend a lot of money to maintain our assets. But we said six months ago or a year ago I think, we’ve guided this one for some time that we will increase the sustained CapEx going forward and as we would increase as well the replacement CapEx, particularly in iron ore going forward because as and when you move 1 million tonne every day, then at some point in time, you need to open new mines, hence, for example, the decision we made on Koodaideri, $2.6 billion. So there is no change on this one. The second part of the question on the CapEx on Oyu Tolgoi, there will be no increase per se because what you’re going to have to do is it will take more time to build the mine and so on and so forth, so that’s why there is a link in our range between the timetable, the timing and the CapEx per se. But are they going to be – spend more money in the short term? The answer is no to that.

And sorry, a second question... Jean-Sébastien Jacques: I thought that was two questions...

No, well that was two questions within 1 question. And just understanding the sort of capital framework. So pro forma reported net debt $6 billion. And I think back in May, you indicated that $6 billion was the level of net debt that you were comfortable with. Jean-Sébastien Jacques: We have said $5 billion to $7 billion, but okay.

So as we look forward, is that the type of net debt number we should be thinking about Rio is comfortable with in terms of capital headroom and implications for the future shareholder returns?

Yes, look, I’m very happy. I’m going to disappoint you a little bit because we’re really not setting a target debt. I was describing the capital framework last I presented here in March and we are very happy with the strong balance sheet. But ideally, we want to be able to act a little bit countercyclical, and that means that net debt can go up and down right now where we have very strong results. We are comfortable we’re seeing very low levels of debt. So I don’t think you should take that as the premise. So the key parameters is that we are – have a disciplined approach to capital investments independent of the cash flow we are generating and focusing on providing a superior return to the shareholders. Jean-Sébastien Jacques: Thank you, Jakob. I think, Dominic, is – there is no absolute formulaic solution to your question. I think what we’ll do is – to be on the point of Jakob is we will look at it on a regular basis on the back of two or three items. One is how we see the outlook in terms of commodities. That’s very – one important. What is the capital program that we have ahead of us? And therefore, what is the risk profile and what is the level we want to have on the net debt? But you know that if you step back, the equity story of Rio is pretty simple. It’s about the resilience of a business case. The resilience of value proposition under any kind of market environment, okay? And it’s a combination of a few things. I’m sure you heard the 4 Ps before. The quality of the portfolio with world-class assets like [indiscernible] which delivered 72% EBITDA margin in the first half. It’s about the strength of our balance sheet. And we fully accept that we are conservative or some people would accuse us of being conservative, but maybe we could return more cash or return to the shareholders on the back of the strength of our balance sheet. But we look at it through the cycle. And at the end of the day, it’s a cyclical business, it’s a capital-intensive business. And therefore, we believe – it’s a belief, people may have the strategy from that perspective, there is a belief that having a strong balance sheet at the end of the day is the best insurance policy you can have. And if you go back to your models in the last 10, 15 years, I think the proof point is there. Why don’t we take a question from the call, David? Come back to the room.

And your first question comes from the line of Lyndon Fagan. Your line is open.

Thanks very much. Look, the first question was just to try and break down some of the iron ore performance. Just wondering if you could perhaps share the root causes of some of these issues. Just look – listening to your commentary, you’ve linked the waste stripping to deferrals of Silvergrass in Koodaideri. And I guess I just wanted to try and understand, it’s a bit more – are you saying that those assets would have provided better access to higher grade ore? And therefore, that got the third and that’s what’s causing some of the issues? Or I just don’t quite understand how we got into this position. And then the next question is just to share – perhaps if you could share some of your views on Chinese steel production next year. So we’re still annualizing 9% growth in China in June. Just wondering, looking into 2020, whether you expect further growth in China’s steel production on an annual basis. Thanks. Jean-Sébastien Jacques: All right. Thank you – Chris, do you want to have a crack at the first question?

Yes. Thanks, Lyndon. Chris Salisbury. Thanks for your question. Just firstly, I think what J-S was describing about the deferral of Koodaideri, that was a good decision, still is a good decision. But what it meant was we do have to kind of run our existing mines, our brownfield mines harder. If I then dive into more specifically the issue that arose at Brockman hub. Brockman is a very large part of our system. It’s about 100 million tons coming out of the Brockman hub. And more specifically, if I get to the root cause of the downgrade that we made, that was associated with Brockman 4, which is 40 million tons of the 100 million tons. And to be very specific, it was simply around conversion of IHS. It was a convergence of events. We had some poor fleet performance. We bought in a backup fleet while we’re converting some trucks. That backup fleet didn’t perform to expectations. And secondly, at the time, there was a lot of labor turnover. The market is tight – the labor market is tight in Western Australia. So we actually had literally some trucks standing because we didn’t have the people. So none of that is acceptable and we’re going to fix it, already started fixing it. And as J-S said, we brought in extra equipment to do it. And then secondly, looking further ahead, we’ll continue to invest to ensure that we’ve got a robust and reliable system right across the Pilbara. Jean-Sébastien Jacques: Thank you, Chris. I mean let’s be clear, is we knew the plan will stretch. We knew that because of all the reason mentioned by Chris that we had to run the mine hard. And if you look at the slide here, it’s a blend. Okay? And we attract – because it brings so much value to our customers, it attracts a premium. But it’s complicated to get there and we were earning at a very high level. All right? Now as we say, it’s not acceptable referring the resources to deal with it and so on and so forth. Right? But we had a choice. We had a choice. And the choice we made with Chris and with Simon, Simon Trott was dealing with the customer, was very simple. We made the choice to protect the quality of our blend. We made this choice. It is absolutely essential. And I will link it to the next part of your question about the market demand and so on and so forth. We made the choice to protect the blend, not to damage, not to lessen the quality of the product. That could have been an option. We took the decision to protect the quality of our product and to protect the relationship we have with our customers. And as a result, we took two major decision, as I said, is – one is to reduce the production of the PRL [ph] and the second one is to throw resources to fix the problem and so on and so forth. But that was a very important position. And that was the conf call I mean, I was Simon in Korea at that point in time when we had this conf call with Chris and a few others. The decision was, in the current environment, when you look at forward, when you look at the market conditions, you look at the market demand from a customer – mainly in China, in that context, the need to provide high-quality product, the need to build a strong relationship with our customer, we took this fundamental decision to protect the quality of our product. And therefore, we did reduce the guidance and so on and so forth. I have got no doubt, because when we took the decision, I was in Korea on my way to China. So, I was getting the 11:00 p.m. flight from Seoul to Beijing and met with César there, the key association the following morning and we met also a few others. I’ve got no doubt in my mind that it was the right decision. We didn’t want to pass on the problem to our customers because that is not sustainable. All right? So that’s the first part of it. I mean, Simon, you want to talk about China and the demand? How optimistic you are?

I’ll have to stand up here. I’m shorter than my colleague, I know, so people can see. Thanks for the question, and morning, all. Clearly, we have seen really strong numbers out of China during the first quarter, and in fact, the first half. The [indiscernible] meeting over the weekend and the notes released, I think what you have seen consistently is China taking very targeted measures to continue to support. And as we expect, China continues to slow and those target measures are having impacts. So you’re seeing a really strong construction numbers through the first half and that’s certainly underpinning steel demand. And as we go forward I think we’ll see fluctuations in those numbers, but the overall macro conditions continue to be sound, and those targeted measures will continue to flow through. Jean-Sébastien Jacques: So I mean – to add on what Simon is saying, there is no doubt that the Chinese economy will continue to slow down. Okay? So 6.3 in the first half will continue to slow. And they are managing very smartly, to be honest. I’ve got no doubt that they will put stimulus package in place. I have to say the stimulus package if put in place so far, I’ve been – how can I put it this way, heavy on steel, all right? So do I believe that the Chinese government will continue to implement stimulus package going forward? The answer is yes. Okay? And there are a couple of areas, which give us some confidence about the future. One is the work they have started to do on rebuilding cities or refurbishing cities or part of cities that were built 20 years, 30 years ago of not the right quality. And that is a great piece of news for us. Okay? And then further investment, especially in the – in some of the Tier 2 or Tier 3 cities, around building subways, light rail train and so on and so forth, which will give us some comfort as well. But is the economy – is going to continue to slow down? The answer is yes. Now the second point we should never, never forget. There is no doubt that the Chinese government will continue to implement their environmental policies, taking capacity out in order to underpin their blue sky strategy and so on and so forth. So, seeing from a Rio standpoint, there will be an ongoing demand for high quality iron ore going forward. Hence, the decision to protect the Pilbara that’s already. So, are we having any issues at this point in time in placing our product? The answer is no. But we have to place the right product and making sure we have a strong, and good and sustainable relationship with our customers. So, what we’re going to do in the next two weeks, so flying to the U.S. next week to do the road show in the U.S. And then after, we are going – bring back to us for a few days with Chris to be underground. And then we’re flying back to China to meet with our customers and so on and so forth. But for us, at this point in time, we have seen no material impact on trade and we have seen no material impact in relation to demand from our customer in China. So, if we move to another question from the conf call and then I’ll come back to the room.

Thank you. And your next question comes from the line of Paul Young from Goldman Sachs. Your line is open, please go ahead.

Yes. Good morning, J-S and team. J-S, first question is on the Pilbara rail maintenance. Maybe, a question for Chris actually. Can you add some context as to this, i.e., what percentage of the rail capacity is this impacting? And you also mentioned this is continuing into 2020. So how this will impact shipments in 2020? That’s the first question. The second question is on OT, I know it’s a really complex in the study phase of the mine but looking at the 13 – sorry, 16 to 30 months away on the project, it’s a very wide range. So considering your steady time frame, seems quite fixed, what are the one or two main items that’s driving that 14 months’ range? Jean-Sébastien Jacques: All right. Very good. So I’ll go over to Chris in one minute. But the rail maintenance is very simple. The macro level is, as I said in the speech, it’s one of the most heavily used rail work system in – on planet earth. So we will have to maintain it at a high level. And what we – what we did today is – because I thought we had done it in the past, but clearly people didn’t pick it up, is there will be a series of shuts on the regular basis to maintain and strengthen the health of the asset. So, we want to flag or to reflag the fact that we have a superior shut at the end of October for a couple of weeks and you will – sorry, end of September. My mistake. And then there will be a series of super shut next year. And there’ll be a series of super shut the year after and the year after and the year after. So we’re just flagging that there will be a heavy load of maintenance, I can say forever, in the Pilbara for that reason. So Chris, you want to say much more on that? And I think we had disclosed some level of costs as well. So...

Yes. Thanks. Thanks, Paul, for the question. Look, just be clear. This is already built into our guidance. But we chose to be transparent, it’s a fairly major shut, it’s two weeks. It’s going to take over two weeks. It’s 25 kilometers of rail. We’re going to shut the whole line for three days and then action the east line for five and the West line for five, so it’s a major piece of work. It’s already built into guidance, but because it was so significant, we decided to flag it. And of course, we will then, as part of the detailed planning for 2020, continue to plan these super shuts at the appropriate time and the appropriate scale. Jean-Sébastien Jacques: And Paul will give you, as I mentioned, a 2020 guidance for iron ore at the end of October. That’s right. It was confused between the Capital Market day – so we’ll give you more granularity around this piece. Study, Steve, what are the key element? I thought we had the slides showing the key decision point, but go for it.

So Paul, thanks for the question. So basically, what we have looked to do here is book in at the range of different options through the study phase. And to JS' point, with the view to making sure that we can safely construct, operate and protect on this, but looking out over 25 to 50 years ahead. So – and again to this image that we have here, we have some critical questions that are right ahead of us, as JS also noted. Are we able to hold things like what we'd call a mid-access drive? That drive, essentially, a horizontal tunnel that cuts transversely across the resource across the mine footprint actually is in three different levels. So in what's called the apex, the undercut and the extraction level. We get enormous construction efficiency by having that drive in because, as you can see with those areas, it means that we can develop north-south into those headings. If they are removed, we have to develop all the way from the south, all the way to the top of Panel 0. So there's a schedule impact. So we're looking at everything here. How do we keep, protect the critical infrastructure and the mine footprint through that complex 4D modeling that JS referred to. And we will sequence our way through each of those decisions. But basically, if we remove some of them and we have to then actually take the ore handling system potentially outside the footprint of Panel 0, that has a time – a schedule impact for us. So as we do the modeling through the back end of this year, by the end of the year, into Q1 next year, we expect to take the final – essentially, design into feasibility. And then we will take that final design that we have approved into the definitive estimate process. And so in half two 2020, we'll have that final definitive estimate. Jean-Sébastien Jacques: And probably as we hear, there are multiple options, that we said, multiple scenario because just to make it, to give a sense of we're looking at all options, including maybe not a full map. The map needing – need access drive, we could have only half of it, and so on and so forth. So that's the level of optimization that we're doing, so we've thrown the best resources we have in order to get the best solution to unlock the value of this world-class resource, but keeping in mind that the priority number one is safety. I mean, that is absolutely clear as well. Why don't we go back to – into the room?

And I'll try and exhaust a few more Oyu Tolgoi questions. So three things. First of all, on the impairment, because back in December, you had $3 billion of headroom in your annual report. So it looks like quite a big impairment. Have you changed any long-term pricing? I mean, the WACC's obviously moved up a little bit. But why is it such a large impairment to the NPV? Secondly, I was reading this kind of financing support agreement from the Turquoise Hill website and I was getting a bit confused because as I read it, it looks like you have an option to basically determine whether they do an equity issue if there's a cost overrun. Is that – I mean just to get more clarity as to the position with Rio in Turquoise and deciding how the cost overrun gets shared out. And then the other one was around a parliamentary working group because there is a lot of noise and it looks like they're going to put some proposals forward to change the Dubai Agreements and add some stuff. So how should we – should we see that as just noise at this point or how worried should we be around the agreements? Jean-Sébastien Jacques: Arnaud, you want to pick up the last two? I thought you had provided that on the debt. But if you can give more details on – about the working group? And then the financing agreement, I think you should cover it, Jakob.

Okay. Good. Yes. Thanks. Thanks for that question. So you would all be aware that the Parliament decided to do some audits on the benefits that OT are bringing to the country. So we fully collaborated with those OT terms. We provided thousands of pieces of information for months. And out of these quite extensive audits, a report was published. And that report has been shared with a subset of the Parliament which is called the Economic Standing Committee. So the Economic Standing Committee. So the Economic Standing Committee has nominated some parliamentarians to review all this information and to come up with a recommendation to Parliament and to the government, which is called the Parliamentary Working Group Resolution. So that work is in progress. And we see how things are evolving in the coming weeks. Meanwhile, in parallel to this, there are some typical positions that are being taken by some politicians around OT, around the agreements. You’re referring to the UDP and so on and so forth. I think it’s important to understand that the UDP has been an important agreement because, fundamentally, it has clarified some of the previous agreements and it has an enabled for the project financing. So the $4.4 billion that we’ve borrowed to around 20 different international lenders and institutions is underpinned by all of those agreements. So the UDP is as important as the ARSHA, as it is important for the investment agreement. And those agreements are really foundational. This is on those agreements that we’ve been able to borrow money. And this is on those agreements that we are able to continue heavily investing through TRQ in Mongolia. So as I said before, we are in continuous discussion with the government and working collaboratively with them to look at what can we do using our existing agreements to create more value for our shareholders Jean-Sébastien Jacques: Thank you, Arnaud. Jakob, if you can comment on the agreement and the financing.

Yes. The impairment part it’s very well captured by you that you have carefully read our annual accounts. So you are in part right. We gave an update and explained that we had some delays, on particularly the main production shaft. And we built that into our cash flow and we came to a result where there was headroom of $3.1 billion. At the same time, we raised the issue that the ground – the weakened ground condition might lead to significant redesign of the mine below the orebody. But we couldn’t state anything else that we would get on with that. And therefore, what we convinced ourselves was that what we knew at that time was that there should be sufficient headroom to cover for that uncertainty. So you could say the headroom that we saw in March was between 0 and 3.1. We were just not able to establish that. Now with the update on 16th of July, that was a trigger, and we have new information and we have done this thoroughly and we have come to – on a 100% basis, the $2.3 billion – $2.2 billion lower as... Jean-Sébastien Jacques: You want to cover the Turquoise Hill financing?

Turquoise Hill, I mean they have independent governance, so it is really for them to talk about the financing. We are very happy to enter the dialogue with them. And when there is news, it will come out. Jean-Sébastien Jacques: Any other questions?

Good morning. Richard Hatch, Berenberg. Jean-Sébastien Jacques: Hi Richard.

Two questions. First one, just on your iron ore costs. And perhaps it’s too early to ask the question. Maybe it comes with the Capital Markets Day. But do you expect your costs for 2020 to trend back down to the 13, 14, or is it too early to say? Jean-Sébastien Jacques: I think it’s too early to say. Now I made two comments right away is to say we will continue to drive iron ore business on the back of EBITDA margin, okay? And as I mentioned in the speech, it’s what we need. I will give you more details when we are in Capital Markets Day, is to make sure we have the right level of costs and sustained CapEx to maintain the health and maintain the resilience of our business, and so on and so forth. So the important piece, if there is message to take away from this one is we drive this business on the back of EBITDA. If you drive it only on the back of cost, then you may have a very, very different outcome. And look, first half of this year is 70% – 72% EBITDA margin. So we’ll provide more details at the time of the Capital Markets Day. Chris will cover here. And the second question? Yes, second question?

Yes, on aluminum, just the operating efficiency, $1 billion to $1.5 billion. If we’re seeing the costs stay as they are and they don’t retreat back in the aluminum business, what does that $1 billion to $1.5 billion do just out of interest? Jean-Sébastien Jacques: It's in the range. So what we want to flag I think is the following. So we know that the costs last year, the impact on the bottom line was around $500 million of cost input. And it was not only aluminum. There was – a big chunk of it was aluminum. Do we believe that some of the costs have reverted as we're having this conversation? The answer is yes, but not to offset totally the $500 million that we had last year. So there is an element there. But the important piece is, why we give a range. And that's a focal point is to say, we will – and that's back to the first question about, we will continue to drive our iron ore business on the back of EBITDA margin, and it links back to the value over volume. What I'm not ready to do is to drive volume for the sake of it in order to have a fixed cost absorption, and therefore to meet a target, which is slightly artificial in that sense. We will continue to drive the iron ore on the back of EBITDA margin. If it means producing more, yes, if it creates value. If it means not producing more, so be it. And I think that is absolutely essential. So that's why we're trying to flag. What we are to flag is we could be at $1.5 billion; we could be at $1 billion. There are two key elements to the driver. And the main driver is iron ore. It's not the aluminum cost. You can make the sensitivities, but the bulk of it – of the range is about aluminum volume. But the message I want to convey is we will take a decision about the iron ore volume on the back of the value over volume. And I think what we've decided is a good example of it. I want to protect the Pilbara Blend. I want to protect the premium. And that's why. So why we're just flagging is – and maybe we had done it before and maybe we didn't do it well enough and so on and so forth. At the end of the day, it's about EBITDA; it's about cash, and not just picking a target on costs and so on and so forth. Now am I continuing to put Chris and the team and the other extra member under pressure on cost? Absolutely, because I don't want the business to drift along the cost curve but the priority to run this business is on EBITDA margin, otherwise, you have the wrong outcome. That makes sense? Another question. I mean, in the third row from the back. Yes? Don't move. It's coming. It's coming.

Good morning. Jatinder Goel from Exane BNP Paribas. A couple of questions. First, on iron ore would you be happy to keep this year's volumes in Pilbara if you can't get to your optimal blend until Koodaideri comes in? And in that scenario, does the $1 billion to $1.5 billion improvement still hold? Jean-Sébastien Jacques: I think I've just answered the question on this one. I've just answered exactly the question, which is value over volume is we will add volume in any year, at any point in time only if it creates value and so on and so forth. Hence, the range we're giving on the mine to market.

So the $1 billion to $1.5 billion still holds even if you don't increase any volumes from this year in iron ore until Koodaideri comes in? Jean-Sébastien Jacques: Yes, I just said it. Is to say, if you get to $1.5 billion on the cost target, if you increase the volume above and beyond where we are today, okay? But we will take this decision only if it creates value on the EBITDA margin. No. Go ahead.

I mean, I mean, look we're not going to guide today about future volumes. That's clear. But I can help you a little bit. The updated guidance for this year actually is quite a significant step-up in production in the second half compared to the first half. So I think you can get half the answer there.

Thank you. Second question on OT. Obviously, every investment competes with each other. But if it makes financial sense, would you be comfortable taking more attributable country risk if it comes to that point by increasing your ownership effectively? Jean-Sébastien Jacques: I think well for the answer to the question is this contract, if you want to pick it up, Jakob?

Yes. But I just want to understand fully what's behind your question. Sorry, just one thing...

So you are adding 300 basis points as continuous premium to your impairment calculations. If it comes to a point, would you be comfortable increasing your attributable country risk by increasing OT ownership at some point?

Yes, so there is two different things. But I actually said 200 basis points real-term. And look, that has nothing to do with the project. That has something to do with the country risk, yes? And the ownership, we are very comfortable with the current shareholder composition. It's very normal that major projects, this joint venture, and you have some kind of share risking. That's our position. Jean-Sébastien Jacques: I'll pick it up on this one. It's pretty simple. I mean there is no change of policy because your question is about M&A. Do we have a working brief on the M&A? The answer is yes. There is no change. And are we looking at opportunities, options? Yes. But we will trigger the options only if it means creating value for our shareholders and nothing else. All right. Why don't we take a question from the conf call, David? David any – okay, one more. Let’s wait. David, any chance, otherwise we’ll come back to…

Thank you. Your question comes from the line of Hayden Bairstow from Macquarie. Your line is open. Please go ahead.

Hi, J.S, just a couple of quick ones. Firstly, we've obviously done iron ore to death. I just want to touch on IFC a little bit. Realized pricing seemed a bit soft. Can you just remind us how they sell iron ore versus spot and how we should think about that just given it did seem – it didn't seem like all the spot premium prices came through in that half. And then just on Pacific aluminum back here, it's back to an EBITDA loss. I mean where are you sitting with that asset base, there's obviously the power price pressure in Australia, thanks. Jean-Sébastien Jacques: So you want to pick up IFC and I'll pick up PacAl, thanks.

There's a number of factors in the IFC pricing including, for example, Japanese fiscal year including some lag similar to our iron ore business where the prices are reflecting a prior period. So that's the main two you've actually got in the realized pricing. Jean-Sébastien Jacques: All right. Thank you. And then on PacAl is – absolutely. I mean there is an energy cost issue in Australia. I mean it's a well-known one, which is – it shouldn't be the case if you step back and you think about Australia being very mineral and energy rich, that should be one of the most competitive place to have energy. Right? So we are working very closely with the federal – the feds and the state government in order to find a solution to this challenge, all right, because the energy cost is massive. We are not making money in those assets and so on and so forth. So those conversations are now taking place as we speak. But we inform the market, we did – in the appropriate manner, but we are taking it very, very seriously and there are active discussion because the current situation is not sustainable here. I know that we – the market – the aluminum market is not being helpful in the sense of, for the first time is in terms of demand, the demand on aluminum is pretty weak. Historically, we said – and it's the case, that the demand for aluminum products is above GDP growth rate, whereas currently, it's around 1.4, 1.5, which is pretty low. And the reason being why the aluminum demand is low is because of the situation around transportation, and automotive and so on and so forth. So we have a situation where the demand for aluminum product is pretty low. At the same time, as I explained, the supply side is being challenged for a series of reason. One which did not surprise us too much which is the pace of the restructuring of the aluminum industry in China. But the second point is, as and when one of our competitors was under sanction, they didn't stop producing. They did build a big inventory. And as we are having this concession, they are releasing and monetizing this inventory. So we have a pricing environment which is not very favorable, but at the same time is we have challenges, especially in Canada in relation to the cost structure, and energy is a big component of it, and that's why we are having those conversations. So I see John telling me that I'm going to have to wrap up this meeting. So I think we have a – we had a pretty good conversation. We did cover lots of ground. I'm sure a few of you still have a few questions. And I understand there are a few of the meetings coming up, so we're looking forward to it. So now let's step back. We had a very strong set of results. I mean look at the results. I mean 47% EBITDA margin, 23% return on capital employed. This combined with all the hard work over the last few years, a very strong balance sheet. So all in all, we are in a position to return $12 billion of cash to our shareholders this year. Yes, we had operational issues. We fully acknowledge it. It's mining. Are we addressing those issues? Absolutely. And that's – the team is working on as we speak and we're making good progress. And looking at the outlook, the outlook is positive. China is slowing down. We talked a lot about it. But we have a strong position to work from. This range is working. And what the shareholders should expect from us is what we've been doing for the last 3.5 years is to continue to create value, a superior value in the short, medium and long-term. Jean-Sébastien Jacques: That's all I have on my side today. And on this note, thanks for coming and I look forward to the ongoing dialogue. Thank you.