Rio Tinto Group (RIO) Q4 2022 Earnings Report, Transcript and Summary

Good morning, and good afternoon, everybody. Welcome to the presentation of Rio Tinto's 2022 financial results. Here in the room, can I please ask you to switch off your phone or at least turn it to silent? As usual, you'll hear today from Jakob and Peter, and this time hopefully from Bold as well, followed by a Q&A session. For those of you on the phone, on the web, you'll receive instructions as per usual from the operator. [Operator Instructions]. For those in the room, there is no fire alarm planned. If you hear one, please leave the room. We provide these 2 emergency doors here and follow the instructions of the fire wardens. Having said that, please take some time to read the cautionary statements on Slide 2. Now that you have all finished speed reading, please, Jakob, the floor is yours.

Thank you, Menno. Good morning, and good evening. I'm really pleased to be here with you in London, and thank you for those of you joining virtually. Peter is with me, and I'm very excited that we have Bold joining us from 1.3 kilometers underground from the Oyu Tolgoi mine in the Gobi Desert of Mongolia in a moment. Before I start, I'd like to acknowledge and pay my respect to all traditional owners and First Nations people that host our operations around the world. For me, 2022 was about building an even stronger Rio Tinto by investing in the health of our business and shaping our portfolio for the future while also delivering during the year. We achieved strong financial results with underlying earnings of $13.3 billion, free cash flow of $9 billion and a return on capital employed of 25%. We will return $8 billion to our shareholders in line with our policy, and representing the second largest ordinary dividend in our 150 years history. These results continue our track record of delivering consistently strong performance in an ever-changing world. Since 2020, we have achieved $47 billion in earnings, paying $29 billion of taxes and royalties, investing $20 billion in the business and returning $33 billion to our shareholders. Our consistently strong financial results highlights the underlying strength of the business, our world-class assets, and most of all, our great people in meeting various challenges. As we look to build an even stronger future, it's clearly about more than today's financials. It's about meeting our objectives and progressing our strategy to set the business up for long-term success. It's also about having the right values of care, courage and curiosity and transforming our culture. 2022 was another fatality-free year, building on the prior 3 years. Much of the success is the result of work implemented through our safety maturity model, which provides a roadmap for our leaders. I recently visited many sites, and what I'm seeing gives me confidence that we are on the right track to restoring our DNA of being the best operator. The momentum from the rollout of our Safe Production System is clear. The teams are working together, are having open and transparent conversations and are finding better ways to address irritants and improve efficiency. This is translating into operational performance, higher level of employee engagement and improved safety performance. We have been working hard to implement meaningful change in the way we partner with communities. A real highlight was the agreement with the Puutu Kunti Kurrama and Pinikura people to create the Juukan Gorge Legacy Foundation as part of the remedy for the destruction of the rock shelters in May 2020. This is a significant step forward, but we know it will be a long journey to rebuild trust. In addition, we have signed new agreements with the Yindjibarndi and the Yinhawangka people in Australia and the Pekuakamiulnuatsh First Nation in Canada. An investment of $3.9 billion in sustaining CapEx and a more active approach to maintenance meant our existing assets were in a better health at the end of the year than they were at the beginning. In short, the health of our assets, our culture and our social license improved in 2022. Our acquisitions of TRQ and Rincon will add tonnes in materials essential to the energy transition and strengthen our ability to deliver strong returns for the long term. In addition, we realized value through divesting the Cortez gold royalty. I'm proud that we have reset our relationship with Mongolia. Coupled with the acquisition of TRQ, we are able to work much closer together to ensure all stakeholders benefit from Oyu Tolgoi. At Simandou, we incorporated the infrastructure joint venture with our various partners and the government of Guinea. This was an important milestone, and we are now working on finalizing the shareholder agreements, cost estimates and regulatory approvals necessary to progress the co-development of rail and port facilities. So we made real progress in 2022 reshaping our portfolio and thereby strengthening Rio for the longer term. As we strive to become a more outward-looking company, we are engaging broadly. I have met with customers, suppliers, governments, communities and other stakeholders in Canada, Japan, the U.S., to name a few, and I will be visiting China in the coming weeks. In particular, from the conversations I'm having with governments and customers, they're increasingly aware of the importance of mining to achieve the energy transition and strengthening supply chain security. It is now clear than ever that putting climate at the heart of our strategy is the right thing to do and the right business decision. While it is early days in a long journey with the progress to date, I'm confident that we have a pathway to achieve our 2030 and 2050 targets. In 2023, we will continue to invest in moving from ambitions to solutions. It's a complex challenge but there's real energy from our people and the many partners we are working with to decarbonize and deliver more of the materials needed for the transition. Let me now hand over to Peter to take you through the financials in details. Peter?

Thank you, Jakob. Good morning and good evening, everyone. Let's now take a look at the numbers in more detail. Once again, we've announced a solid set of results. And of course, this is set against the context of record prices and financials in 2021. The business remained resilient and we entered 2023 with good operational momentum, especially in Pilbara iron ore, which I'll come back to later. However, lower prices and accelerating cost inflation throughout the year led to margin compression with underlying EBITDA down 30% to $26 billion. Cash flow from operations of $16 billion included some items of a nonrecurring nature which were not representative of the underlying strength of the performance of the business. In aggregate, the ATO settlement in respect of 12 historical years, the final payment on Australian taxes for 2021 profits and hedging losses on U.S. dollar dividend payments reduced operating cash flow by just under $2 billion. Free cash flow of $9 billion was after $6.8 billion of capital expenditure and a modest working capital outflow, reflecting elevated prices for raw materials in aluminum inventory. Following $11.7 billion of dividends paid and $3.8 billion of acquisitions, we ended the year with net debt of $4.2 billion. With a 25% return on capital and underlying earnings of $13.3 billion, we have declared an $8 billion full year ordinary dividend, a 60% payout. Now let's look at some of the key drivers. 2022 was a volatile year for commodity prices with declines in the first half, albeit from record highs, accelerating in the second. Realized iron ore prices dropped 22%; copper, 19%; and for aluminum, it really was a year of 2 halves with a significant pricing momentum we enjoyed in the first half tailing off sharply in the second, down 25%. Following 3 years of growth to an all-time high in 2021, global iron ore demand contracted. In China, the property market worsened while COVID restrictions impacted steel demand, exerting downward pressure on prices. This is clearly reflected in the graph on the left, but I would just highlight that our average realized pricing relative to Platts markedly improved in the second half. In aluminum, expectations of a stronger demand outlook and Russian supply cuts did not eventuate, leading to prices falling to a low point in the second half as fears of a global economic slowdown set in. This was compounded by higher coal prices and costs for key materials such as petroleum coke and coal tar pitch. Copper prices also trended down as a wave of uncertainty surrounded the global economy and China's Zero-COVID policy weighed on demand prospects. Let's now take a look more closely at some of the year-on-year movements. Overall, I should stress that it was a solid result with $26.3 billion of EBITDA, still at very attractive levels, 10% above 2020. As ever, commodity prices were the biggest driver of the 2021 variance, lowering EBITDA by $8.1 billion in aggregate. Iron ore was $9.2 billion negative following the record prices of 2021. This is partly offset by aluminum and a recovery from minerals, in particular titanium dioxide feedstocks and borates. Let me make a few points on inflation. I would like to highlight that this is an industry-wide phenomenon and therefore, supportive of higher prices as cost curves shift upwards. The impact of general price inflation is reflected on the left of this chart. This, together with rising energy costs, mostly diesel but also higher market-linked prices for raw materials especially in aluminum, lowered EBITDA by $3.5 billion. If we look at the right of the chart, you can see that the other factors were reasonably well contained despite the tightness in some of our key labor markets, which raised costs above the general level of inflation. This demonstrates the resilience of our operations and focus on controllables. Higher volumes and changes in product mix increased EBITDA by $600 million. This was mostly attributable to increased iron ore sales from China port side, along with some favorable value-added product premiums for aluminum. We are proactively incurring new costs as we build up teams to successfully deliver on our strategy to protect heritage, drive value-accretive growth and derisk the business as we decarbonize in the years to come. These include increased resourcing in the Pilbara to support the ramp-up of Gudai-Darri and additional resources in pit health and system reliability and higher evaluation costs at Simandou and Rincon as activities accelerate. We also incurred additional costs at Kitimat and Boyne as we recovered from disruptions. So overall, I'm reasonably comfortable with our cost performance. But I would like to point out the higher costs are not going away overnight. As supply contracts renewed and collective bargaining agreements come up for negotiation, we will see some inflation continuing to flow through to the cost base in 2023. Turning to product group performance. We've entered 2023 in good shape with our iron ore business having turned the corner operationally. Clearly, the financials were not as strong as 2021 when we enjoyed unsustainably high prices, but we did set a number of second half records in our Pilbara system and year-end inventories were healthy. Aluminum was more challenged both operationally and in terms of markets, which led to the significant squeeze I mentioned earlier with EBITDA margins compressed from 41% in the first half to just 15% in the second when we felt the full impact of cyclical downturn. However, markets have since recovered somewhat, and the longer-term outlook for the industry remains positive. With its superior hydro power position, our business has clear competitive advantages and is very well placed for the next cycle. We also have some production uplift ahead with output from Boyne and Kitimat recovering and 4 ramp-up expected later this year. The delta in copper was mainly market-related. Although lower gold volumes, as planned, were also a driver pushing up net unit costs. The success of the TRQ acquisition will see our copper production rise to between 650,000 and 710,000 tonnes this year on a consolidated basis, increasing to around 1 million tonnes once Oyu Tolgoi reaches full capacity. And lastly, minerals, where iron and titanium and borates posted strong recoveries, somewhat masked by lower prices at the iron ore company of Canada. Looking ahead, there is much uncertainty with high inflation and tight monetary policy carried into 2023 and the global economy expected to slow down further. Nevertheless, there are some green shoots. Commodity prices have found support in recent months with global base metal inventories at low levels and China policy pivoting to pro-growth. This could provide some support, especially in infrastructure and real estate. Cost pressures should ease over time with lower energy prices flowing through. However, we should expect further volatility with constraints for skilled labor and increases still to come in contracted costs, which are often lagged to an index. Returning to our Pilbara business. We finished 2022 with strong momentum with our best fourth quarter production ever and healthy inventories across the system. And this has not always been the case. The rate of cost inflation in the Pilbara is moderating with 2023 unit cost guidance of $21 to $22.50 per tonne, a modest increase on last year. It reflects our continued focus on asset integrity and disciplined management of controllables with some volume benefits. We continue to prioritize management of heritage sites as we engage and work with traditional owners. Western Ranger is a great case in point, our first co-designed mine. This will lead to better heritage and environmental outcomes and greater certainty for mine development. We remain focused on ramping up Gudai-Darri and expect it to reach nameplate capacity on a sustained basis later this year. The systematic approach of our Safe Production System, or SPS, is yielding results with full deployments last year at Tom Price and Brockman 4. We are targeting a 5 million tonne uplift -- production uplift across the system this year, as mentioned at our investor seminar last November. Following the success of SPS and the Pilbara, our productivity drive is gathering momentum globally. We met our 2022 target with 30 deployments across 16 sites, and we are already seeing improved performance at many locations. Each deployment addresses a different bottleneck. For example, at IOC and Kennecott, we focused on the concentrators; and at Amrun, on the fixed plant. Rollouts are ongoing to continuously improve safety, strengthen employee engagement and sustainably lift operational performance. And we will build on that in 2023, rolling out to new sites, and going deeper at existing ones, replicating the learnings from last year. The focus will be very much on improving asset health and performance in order to stabilize the variability we currently experience around production levels. We will also seek to identify key Kaizens for high-priority improvements, replicate these across the organization and upskill our people through training initiatives. Moving on to capital allocation. We will continue to invest throughout the cycle, balancing near-term returns to shareholders with reinvestment for growth and derisking future cash flows. Essential capital remains our priority for capital allocation. It includes sustaining capital to ensure the integrity of our assets, high returning replacement projects and decarbonization investment. This is followed by ordinary dividends within our well-established returns policy. We then test investment in compelling growth against debt management and additional cash returns to shareholders. In 2022, investment in essential capital dipped slightly to $6.2 billion, and we finished the year with total CapEx of $6.8 billion. We successfully completed all sustaining and critical path replacement projects with the lower spend driven by a weaker Australian dollar, timing of growth CapEx and phasing on decarbonization. Now it's worth looking at our third priority for capital allocation in more depth. Over the past few years, we've supplemented the ordinary dividend with specials given our strong earnings and cash flows. We're now seeing a modest shift towards compelling growth as we unlock opportunities with $5.3 billion allocated in 2022, including our first forays into M&A for over a decade. The largest component of our investment in growth were the $825 million acquisition of Rincon and the $3 billion purchase of noncontrolling interests in TRQ, doubling our holding in Oyu Tolgoi to 66%. This is, of course, our largest growth project, where we invested a further $500 million in 2022 with first sustainable production now expected in the first quarter. And Bold will be updating us shortly direct from Mongolia. Our exploration and evaluation spend also gathered momentum at $900 million with greenfield programs mainly focused on copper and evaluation prioritized on projects where we expect near-term investment decisions. We've included our usual CapEx slide as an appendix. We now expect our share of capital to be about $8 billion in 2023, including $2 billion for growth. Importantly, we're absorbing inflationary pressures within our total guidance. For each of '24 and '25, we expect this to rise to between $9 billion and $10 billion, including $3 billion of growth each year. And -- but as we said at our seminar, Simandou comprises around 45% of the forward-looking growth CapEx over the next 3 years. But as I've mentioned before, investment in growth is highly dependent on the timing of commitments. If we cannot develop value-accretive options, we will follow our capital allocation framework. And Simandou is a clear example. It's included in our capital guidance but we first need to reach agreement with our JV partners, the Government of Guinea and WCS on the infrastructure pathway. Now let's take a look at the balance sheet. We maintained our financial strength, ending the year with net debt of $4.2 billion compared with net cash of $1.6 billion at the end of 2021. The movement reflected, in part, our acquisitions of TRQ and Rincon. This balance sheet strength enables us to run our business consistently and maintain investment regardless of where we are in the cycle. We do not have a net debt target but have a principles-based approach to anchor the balance sheet around a single A credit rating. Finally, the dividend. We have declared a 60% payout for the full year. This equates to $8 billion and is our second highest ordinary dividend ever. Going forward, we will continue to review whether additional returns are appropriate in line with our policy of supplementing the ordinary dividend in periods of strong earnings and cash generation. We have remained very consistent with our shareholder returns policy, which has now been in place for 7 years. The dividend remains a core part of our equity story, which we see as paramount for maintaining discipline. Our financial strength means that we can accelerate our decarbonization, reinvest for growth and continue to pay attractive dividends through the cycle. And with that, let me hand over to Bold in Mongolia.

Thanks, Peter. I hope you can hear me. I'm currently the Mongolia with our team celebrating Tsagaan Sar, Mongolian Lunar New Year. During this holiday, we Mongolians celebrated by visiting and paying respect to our elders, sharing our achievements of the past year with pride and talking about our plans and dreams for the future. Today, I'm talking to you live 1,300 meters below the surface next to drawbell 18 of this world-class underground development. I'm thrilled by the immense progress we have made in developing this true technological model that will generate value for our investors and stakeholders for generations to come. 2022 was a significant year for Oyu Tolgoi. In January last year, we achieved a mutual understanding and agreement with the government of Mongolia on a number of issues that have caused friction for many years. As a result, Jakob and Prime Minister, Oyun-Erdene stood side-by-side and together initiated the start of our underground caving operations. In June '22, we completed construction of the first drawbell, and since then, we have completed 27, bringing forward first sustainable production to the first quarter of this year. This means that the underground mine will start producing ore and generating revenues. It will take time for the underground mine to reach its full potential, but it is a huge milestone for investors, employees, our partners and my home country. This is a truly national achievement for Mongolia. In December '22, we completed the acquisition of Turquoise Hill Resources, which doubles our attributable volumes of copper and gold from Oyu Tolgoi going forward. But just as importantly, it gives us a direct shareholding in the business to work more closely with our partner, [indiscernible]. We are now entering a critical period of observation over the next 12 months to learn how the cave behaves. Block cave mining is complex. Our success rests on cutting-edge cave monitoring data and collection systems together with disciplined execution that benefits from our 25 years of block caving experience in Rio Tinto. Block caving always has risk in terms of footprint stability and how the cave propagates, whether it goes too fast or too slow or stalls. But our platforms give us an integrated view of the cave, offering early insights into potential problems and allow us to respond more quickly. All early indicators concerning cave propagation and seismicity suggests that we are tracking well on cave development. Other panels of the underground mine are progressing despite challenges. We were severely impacted by COVID-19 restrictions on the movement of people and global logistical challenges. We had to wait 9 months to mobilize our shaft sinking experts from South Africa during 2021 and 2022. And at times, we had to reduce our site population by more than 50%, where the average miner spent over 3 months out of the year in quarantine. Nevertheless, we responded with resilience and continued our progress. The remaining panels of the underground mine, Panels 1 and 2, are continuing with their design optimization and development based on data and learnings gathered from Panel 0. Shaft #4 passed 500 meters in depth and Shaft #3 400 meters underway to approximately 1,100 meters to support future production volumes. And the conveyor to surface is now around 30% complete. We are committed investors in Mongolia. Our acquisition of Turquoise Hill and ongoing investment in Oyu Tolgoi demonstrates our commitment and belief in Mongolia as an investment destination. We'll continue to work with the government, and there is a commitment from both sides to work through any past, current or future issues with patience and respect. I'm really encouraged by the progress and open dialogue. Mongolia has a lot to offer as an investment destination, and we look forward to welcome you investors during the year to visit the underground and to celebrate our achievement of commencement of underground production. Our talented workforce is 97% Mongolian, and we have over 850 local suppliers, of which 100 are from the Gobi. In the coming years, you will see a significant wave of Mongolians taking their place as part of the global mining expert community. We now have almost 100 Mongolian employees working across our product groups in other jurisdictions from the United States, to Madagascar and Australia. It has been a seminal year for our history in Mongolia, but 2023 will be an even bigger one. Ten years after the open pit first exported product to customers, we are perfectly positioned to begin to realize the true value of Oyu Tolgoi through an aligned partnership with our government partners. I could not be prouder. Delivering the TRQ acquisition and the underground mine is part of our strategy to grow in copper. We have an ambition to double annual copper out by end of the decade and have an interest in 2 of top 5 copper assets globally by 2030, according to Wood Mac. With the energy transition in the U.S. and the U.S. being short on copper cathode, we are well placed to provide U.S. domestic supply. Kennecott is 1 of 2 operating smelters and is an important strategic asset to us. We have approved investment to start underground mining and expand our copper production and provide critical minerals such as tellurium. Resolution in the established Arizona copper triangle is vital to the U.S. to bringing on more copper supply and critical minerals to support its energy transition. We continue to work with the indigenous people, the U.S. Forest Service and local and federal governments. And we won't to stop there. The ambition to double our production does not include some of our larger investment or expansion cases or Nuton. Nuton is the product of over 30 years in-house R&D and is a vehicle to copper growth through our proprietary bio-leaching technology. Nuton has the potential to deliver copper recoveries of around 80% from traditionally hard-to-mine and process primary sulfides such as chalcopyrite, providing access to the green and brownfield ore bodies around the world. It promises to deliver strong ESG credentials, has a lower footprint, uses less water and energy and has a very low capital intensity producing 99.9% copper cathode. We have seen a lot of interest in looking to have a pilot site up and running in 2023. I'm incredibly excited by the opportunities within our portfolio today. We have set our course in 2022 and '23 will require patience and execution discipline as we ramp up our world-class OT underground operation, a most immediate source of growth tonnes. I look forward to updating you on progress. Back to you, Jakob.

Well, thank you, Bold. Really appreciate you taking time to connect with us here from Mongolia. Let me change tact from the exciting copper development. When I became Chief Executive, I introduced 4 objectives: to become the best operator, to strive for impeccable ESG, to excel in development and to strengthen our social license. The objectives, coupled with our values of care, courage and curiosity are the foundation of our culture and guide our people day in and day out. In 2021, we launched our strategy with climate at its heart, which sets out the long-term pathway for Rio, supported by the objectives. The final piece late last year was the launch of our purpose. Finding better ways speaks to our drive for both innovation and continuous improvement. It emphasizes how solutions are delivered with impeccable ESG performance. To provide the materials the world's needs connects our contribution to everyday life, our customers, the communities where we operate and society at large. There's always more to be done, but we are on the right track. In 2023, we will continue to focus on lasting chains to make our workplace a safer, more inclusive environment. Implementing the recommendations of the Everyday Respect report is absolutely crucial to driving this change, but it goes broader and deeper. We are embedding a change in mindset and behaviors throughout the organization. This is very clear to me as I visit our sites. Recently, I went to Tom Price, Paraburdoo and Marandoo in the Pilbara, and I was so encouraged by the honest and open conversation we had and proud of how the teams are working together to each make a difference every day. We will spend time listening and learning from our people, communities and partners as we continue to build better relationships by finding new and better ways to work together, for example, through co-management of country in Australia. I also visited the Western Range project, where we have commenced early works at our first codesigned iron ore mine. The approach we are taking with this project deepens our relationships with the traditional owners, the Yinhawangka people and with our long-term partner and customer, Baowu. 2022 was about progressing our strategy and delivering against our 4 objectives to strengthen our existing assets and build our portfolio for the future. We are on a multiyear journey but the progress we have made already gives me confidence that the best is ahead of us. In 2023, we will continue to empower and unleash the quality of our people through the deployment of our Safe Production System and by building a positive culture. We will create options to deliver future value and growth with projects like Rincon and Simandou. And as Bold just shared, we will reach sustainable production at our Oyu Tolgoi before the end of this quarter. We will focus the pathways we have mapped to decarbonize our business, working with a range of partners to innovate and develop solutions. And as we mark 150 years of Rio Tinto, we reflect on our past the role it has played in making us who we are today and helping us achieve our purpose in the future. All the materials we provide are needed for today's world. And looking to the future, the demand will only grow driven by ongoing urbanization and the energy transition. The demand we will face through 2035 will grow around 3.7% per annum with around half stemming from the energy transition. That is why our strategy is about growing in the materials needed such as copper, lithium, aluminum and high-quality iron ore. A key task for our industry will be to find better ways to provide for those needs at pace, reliably and with a low carbon footprint. And to work with our customers to reduce the impact of emissions across the entire value chain. This will be challenging, but we're up for it. We know we can't solve all these challenges alone so we are partnering with others, ramping up our technical skills and building capabilities for some of the bigger challenges we face. As I've noted before, it is a multi-decade journey. As we look ahead, the materials we provide are crucial to the world and the long-term outlook is attractive. In summary, 2022 was all about building an even stronger Rio Tinto by investing in the health of our business and shaping our portfolio for the future while also delivering during the year. We are uniquely positioned to accelerate the decarbonization of our portfolio, to invest and grow in the commodities needed for the transition and to continue to pay attractive dividends. We are progressing with purpose as we are building a stronger Rio Tinto for the long term. Thank you. We are now happy to take questions. Menno, over to you.

Thank you, Jakob, Peter and Bold. And clearly, the financial market is spending too much time on conspiracy theories. No, this is not set in scene. This is not in a shed outside London. This is 1.3 kilometers below ground, about 10,000 miles away from London. This is how more than this mine is, and we hope to take you there during this year.

So we'll take 2 from the floor here and then we'll take 2 from the phone. Bob, can you start please?

I'm struck by three of your future options revolve around science, if I think about Nuton, if I think about Rincon, if I think about ELYSIS. These are things that are scaling from the lab to pilots. Talk about how you manage science success and risk in the portfolio and give us some sense of odds. Will all 3 work? How will they progress? Which one are you betting on?

Yes. So thank you. We are -- the things that we are sharing here is, of course, the ones that we really believe in. But it starts much earlier. And I think a couple of things are really interesting to see is, first of all, we have a search facility outside Melbourne, Bundoora and that was inaugurated, I think, in 1992. And now it really, really starts delivering. Just to remind you of the time it takes, I hope you saw our capital market update, I did make a point out of inviting our Chief Scientist, Nigel Steward, to come and talk to you. And talk about what we are doing because 1 of the things I certainly observe is, we are probably one of the companies that has most research and development people, and we've had that for a long time. And some of the things we are benefiting from now things that has been in the making for a very long time. But we have actually decided to double down on it. And we hadn't had a Chief Scientist for many years. We appointed one, and we are really strengthening the development so that we will continue to see those new things coming. I'm absolutely convinced that ELYSIS will work. We just need to figure out how to scale it up. It works in the lab, it works at a reasonable scale. It is producing. The other things, the things that we're talking about here, I do think that they will work. But I will say one area that you didn't talk too much of what ELYSIS is in a way, but the whole decarbonization actually requires an awful lot of technology development. Some of the things are easy, just renewable plug-in if it's electricity needs, but some of the processing fundamentally needs new processing. So it has never been more important for us to get value out of research and development.

Jason? Then we'll go to the line.

So Jason Fairclough, Bank of America. Congrats on Oyu Tolgoi and it's great to see the asset coming good. I think Menno and I were there in 2016. I guess I'm struck by the fact that you're doubling down on what -- on paper looks like a great asset. But it's in a country which is sandwiched between 2 other countries where, to be frank, the relationship with the West is distinctly worse than it was in 2016. So how do you think about that exposure in the context of Rio Tinto?

Bold, you obviously have a lot of passion for that question. Do you want to start?

Yes. No, look, I'm very biased, of course. And I think you have to go back into history on what Mongolia is and what Mongolia isn't. Mongolia is a parliamentary republic and it's a parliamentary democracy that has embraced Western style and our democracy way of governance about 30 years ago. And I think you would find that we are an island of democracy, obviously, with very 2 powerful neighbors. And our government's policy is supporting actively the third neighbor policy, which is vital for our strategic geopolitical independence and the position in the region. Now I think the risk is everywhere -- when you look at the risk in many parts of Western world and countries, and I don't think Mongolia is any different. And I would ask you, is U.K. or U.S. any different than Mongolia from a political risk at the moment?

Yes.

But I would say one thing, Jason, if I may add one thing. I do feel we feel very comfortable about how we are investing in Mongolia. And one little piece of evidence is that it's less than 10 days ago that we did get the reprofiling of the project financing now going well beyond our, what do you call it, completion guarantee. So a whole raft of banks, including the IFC, EBRD, et cetera, have signed off new credits into Mongolia. And I think that's just a vote of confidence.

Just a follow-up, if I could. The -- in terms of the asset once upon a time, Friedland used to talk about this as a string of copper pearls across the desert. How are you thinking about life beyond 2030? Is there a lot of optionality regionally?

Bold?

Yes. Yes, definitely not looking to discover the next OT because we have our hands full with this one. So it's true marvel of an ore body of 30 million tonnes of copper and with this very high grades. It's really -- there's a lot of potential for us to maximize the production. And there's definitely a few things I will be hitting Peter and Jakob up in terms of investment. But we're not looking to drill or discovering next OT at the moment. We have to make sure we execute this one properly.

Okay. Let's go to the line. I'll take 2 from the line and come back here. There's plenty of time. Operator, please, first question from the line.

Your first question from the phone line comes from the line of Rahul Anand from Morgan Stanley Australia.

I have a question for Bold, just to make sure the communications work okay in the new mine. Bold, just considering you're in Panel 0 now, I just wanted to perhaps see how the ground conditions are progressing. That was a key issue in the past, especially looking at Panel 1 and 2. Are you seeing any signs of dilution? If you can give us a bit of an update into how Panel 1 and 2 are looking as well now that you're mining in Panel 0. And I'll come back with a follow-up.

Yes. No, thank you. We're obviously at the moment in drawbell 27 of Panel 0, so very early days. And we do need to make sure we have a much better understanding of the cave behavior before we can get into the next stages. So the learnings, obviously, from Panel 0 have been definitely incorporated into the learnings around geotech on Panel 1 and 2. We're still developing Panel 1. We're going at a pretty productive rate at the moment. I would say that one of the things that we have done is created a digital twin through a joint venture with Palantir that lets us understand the cave propagation and the sensors we have. And it's a foundry that is the single version of the truth that gives our decision-makers, the real-time data and within 15 minutes, they exactly know where the pressure points are and et cetera, and where we could see some movements. So definitely something we're watching. It's early days. I just want to be careful and cautious as we build confidence throughout the year.

So the follow-up, staying with copper. I noted that the ore reserves at Kennecott have increased as well by circa 70% post the completion of the PFS. I just wanted to understand broader plans around the asset and where do you see the key upside for this one.

Yes. Look, I think Kennecott is one of those ever expanding brownfield expansions because there's always ore around the walls and you could always create optionality in terms of the open pit expansion. But we're definitely looking much deeper into the underground and the integrated scans project, which we got a CapEx approval for. We're going underground and touching the ore body and obviously, that is a much higher grade than the open pit. So we're pretty excited about that, but it's still early days. I think the lesson from OT is you want to get underground, you want to touch the rock, you want to see what the ground conditions are before we can give any definitive views around the ore body development. So our key prerogative is Kennecott is a long-lived strategic asset. There's still a lot of ore in the ore body. So we intend to run it for years to come.

We will now go to the next question. And the question comes from the line of Paul Young from Goldman Sachs.

Maybe the first question for Bold. Bold, I'm just looking at the time frame that you've outlined, I think it's Slide 20 for OT. And I've noticed that the conveyor to surface will be completed before the vent shafts, Shaft 3 and 4. Can you start ramping up the underground before you complete Shaft 3 and 4 if the convey is complete?

Yes. Thank you, Paul. Absolutely. The answer is yes. We have enough ventilation here. And look, we're not going to be able to ramp up to fully the 95,000 tonne capacity per day. But the ramp-up is not a 12-month progress. It will take 2, 3, 4 years potentially to reach that its full potential. But I think I don't want to jinx it, Paul. I think we want to manage this very carefully. But at the moment, for this year's production guidance, we're very comfortable with the ramp-up schedule.

I was thinking 5-year ramp-up, so I'll take 2, 3 or 4. That's great. Next question, maybe switching to Peter and on the cost front. And just focusing, Peter, on the aluminum costs. I mean, you're seeing the same pressures as your peers in the industry. But I just want to zone on the alumina costs. I know caustic soda and gas prices were higher in the period. But the alumina assets actually made, I think, $200 million of EBITDA and costs were $430 a tonne. So I'm just wondering if there's anything to call out there on why the costs were so high in alumina or if they can reverse this half.

Paul, no, thanks, and you're absolutely right. There was a pretty tough second half of the year for alumina. I mean, it was price, the price of alumina following the metal price down. It absolutely was the caustic. And we quote the market prices coming in a half year. Some of that lags when it comes through the system, into our costs. And then the third factor was -- last year was actually a pretty tough year for the Gladstone refineries. They didn't perform, I think, as we would want them to do. There was some instability, and that was the third factor. But Paul, there wasn't anything else other than that. And as you say, a bit of a gas price come through. But other than that, coal and gas, caustic and the market price were the key factors.

But let me -- allow me to tell you that, Paul, we're still optimistic about our aluminum business because you've got to look at how hard it is for competition as well and think about the world, and the Western world needs a lot of aluminum and that needs to be produced. So the world will find this balance. We are still uniquely placed, particularly with a very low carbon footprint we have from most of our aluminum assets. But I have to admit, the last 6 months, they were tough.

Thank you. Just, Danielle, and don't worry, we'll get through everybody. I promise.

It's Danielle Chigumira from Credit Suisse. A question around Simandou. So on the framework agreement, how long should we be thinking about for that to be signed? Is it weeks or months or longer? And what's on the critical path in terms of the specifics around the infrastructure agreement and the agreement between the different stakeholders? Like what are the points of contention?

Thank you. We certainly need to get Bold out of the mine before we can sign. Bold, why don't you take that question?

Yes. No, look, I think the #1, I guess, objective for us is to work with the government of Guinea and the people of Guinea. It's their resource, they work on their timetable, they have to get comfortable. So we're going to take it one step at a time. We're making great progress. We signed a term sheet in December, now in the final stages of definitive documentation. But it's very important for agreements of this sort to have the utmost transparency and it takes the time for the right expertise to be provided to the government. So we'll progress it as fast as we can provided, obviously, the Guinean Government is comfortable with.

And it goes without saying, all of you would love to have cost and schedule. As soon as we finalize agreements, we will, of course, update you all. But it's impossible right now. The team is sitting in Conakry as we speak and are negotiating.

Just one follow-up in iron ore, that's slightly different asset. So in the Pilbara, obviously, you saw significant recovery through the year. Last year, ended up at a great run rate. Could you give a sense like halfway through the quarter now and where you are relative to where you ended up last year? The iron ore -- Pilbara iron ore run rate so far this year.

So where we are now halfway through Q1 relative to where we were in Q4. So how are we doing operationally? Is the good trend of Q4 continuing to Q1?

Yes. No, look, I went there, as I said here, I've just been visiting a number of mines and spent 2 weeks in Western Australia. We came into the year in a very good -- in a very good shape, really on all fronts, the assets were in a better shape than at the beginning of the year, the projects we finalized last year are working. We're still ramping up on Gudai-Darri, but it's working well. We haven't had the most terrible weather so far. It's -- Q1 is always unpredictable, and I can't tell you exactly how the weather is going to be in the rest of Q1. But we would not -- Peter will not have presented a chart like the chart he presented today unless we felt that we are on a good trend here.

Dom, please.

I had a question on the dividend. So Peter, I think you mentioned a modest shift in the dividend distribution in 2022. But I noticed that it's the first year since you enacted the current dividend policy that you haven't paid out more than 60% in total. So should we think about this as a reset towards your thinking towards excess capital distributions? And I suppose specifically, given where the leverage is and the framework for single-A credit, why didn't you pay out more in this period?

So I mean, Dom, we paid out exactly in line with our policy. So I think we've been really consistent there. In fact, we paid out at the top of that 60% of our policy. Now when we do that, then we go around and look at compelling growth, we look at the balance sheet and we look at additional returns. And I think this year, we certainly put money into what we see as compelling growth. I mean, the acquisition of the minorities of TRQ, Rincon, we're keeping, investing in the OT underground. So that was where we put our money. The -- actually, we paid out $8 billion, second half's dividend, and that was on free cash flow of $9 billion. So I think you just expect us to be very consistent with how we apply the policy. And this year, we applied it absolutely at top of our range.

Let's go back to the phone for 2 questions. Operator, please question from the line.

The next phone question comes from the line of Amos Fletcher from Barclays.

I had a couple of questions for Bold, and just complements on the Wi-Fi, by the way, very impressive. So on Oyu Tolgoi, I just wanted to ask on the project schedule, it would be helpful to get an update on how far behind schedule Shaft 3 and 4 are. Last time you mentioned, they are around 15 months behind relative to the 2020 technical report. Is that still your best working assumption? And any update on the CapEx as well?

Yes. Look, I think Shaft 3 and 4 are progressing really, really well. I think the one thing I would say, though, is that when we provided the schedule estimate at the time, it had estimated the shaft sinking to commence around June of '21. I mean, reality is we had 9 months of delay. So it kind of gives you a sense of the challenge we face. And oftentimes, we forget COVID. COVID was still around in January of '22. And at the time, there were restrictions on shaft sinkers to be actually to be able to travel. And so Mongolia did not allow inbound travel until, I think, April of '22. So there was a timing of course, on how we manage. So that's roughly -- I think in terms of the productivity, I'm actually very pleased. I was at the bottom of Shaft 3 and 4. Look, I think there they're about 400 or 500 meters, 1,100 meters. The teams are making progress. But that is not our bottleneck. Our ventilation is sufficient. We're working through, obviously, looking at what else to do in terms of mine planning and sequencing, primary crusher 2 and other things. So you should not assume that just because Shaft 3 and 4 that would be automatically that same commensurate delay in production. But everything that we do at the moment is on paper. The #1 priority for this year is to manage the cave and see how the cave propagates. So I just want to be really realistic that this is a year for learning for us, and we'll build confidence as the year goes on.

And the next question from the phone line comes from Lyndon Fagan from JPMorgan.

I just wanted to talk about Slide 22, where you're talking about doubling copper production. Do you mind walking through some of the projects to actually achieve that? And also, what is in that upside bar? And I guess specifically, can you talk about whether a plant expansion at OT is considered in all of that. I've got another question after that as well.

Bold.

Yes, sure. Look, if you look at the '21 and '22 production volume, they only had the 1/3 of OT in the numbers. So when you look at the future over 1 million tonnes of production for Rio Tinto, that obviously assumes the ramp-up of OT to 500,000-plus copper production. And to go from that '21 low base, to over 1 million, 80% obviously, is OT. There is a growth coming from Kennecott potentially, but that is natural coming from the kit expansions. And potentially, we're looking at the underground, but we don't have at the moment the precise numbers to give you on the underground because we need to finish the feasibility study on that. As far as the next expansions, what it does not have, it doesn't have Resolution, it doesn't have Winu, it doesn't have Nuton and any potential Escondida expansions. So together with BHP, we'll be obviously looking at that. The point I'm making is we have some of the best ore bodies in the world with Resolution, OT, Escondida. We have a number of opportunities for copper growth but we have to do it in a disciplined way. These are technically complex projects and we'll take one at a time.

Okay. I thought it said in the footnote, OT was adjusted for 100% there, but maybe we can take that off-line. The other question I had was just in relation to iron ore. It does look as though the January run rates have held strong, which is great to see. Isn't your guidance now too low for iron ore? I mean, it's early days in the year, but just considering where the business is at the moment, I mean, it does look as though the top end has got to be achieved. Or is there some other time activity or maintenance that we need to consider through the year that might actually hamper the shipments? And if so, which quarters should we think about there?

Thank you. This is -- this is very helpful because sometimes the pressure from the market is not helpful because if you're a little bit behind all the time and you're only thinking about tomorrow and how do I get the last tonnes, you're not doing the right thing. So we're actually in a much more comfortable place. And what I would love to see this company getting more into is underpromise and overdeliver, which we have not done too much of in recent years. So I would agree that we are in a good spot here at the beginning of the year. But I would also say that the guidance is absolutely the right guidance.

And the next question comes from the line of Glyn Lawcock from Barrenjoey.

Maybe we'll stick on iron ore, saying it's 70% of your EBITDA still. Maybe you could just share your thoughts. It seems like from what you've said and what you wrote in the report, you seem to be a lot more constructive on China, maybe Q2. Could you maybe talk a little bit what green shoots your team in China are seeing to give you some confidence around maybe iron ore. Could you share your view of steel production and iron ore demand in China this year relative to last year as well?

Yes. So a couple of things. First of all, you saw already the recovery happening in November. And if you are carefully following the stocks in -- the stock levels in China, they have been historically very, very low. So that already gives you some confidence about the needs for restocking, et cetera, plus, of course, that consumption were happening already in Q4. Secondly, when you really dive deep into the property market, there has been a number of indicators that has demonstrated a lot of disruption, but that only covers part of the property market. And when you look at the total property market, it's probably somewhat more robust than those indicators are showing you. And that's our assessment as well. We also believe that there will be good investments in infrastructure that is normally quite commodity-intense. So it feels good. And yes, you can read it in the news as well I spoke to our biggest customer, Baowu, about last week. And certainly, from them, there is a positive way of looking at the economy is going and there's a need for steel. So I'm quietly optimistic. It's not going to be kind of wild swings, but the market has already set itself for good demand from China, and that's what we are seeing happening.

And maybe just as a follow-up, just if you could share some thoughts on the China Buyers Group. You've signed an MOU. What's the -- how does that play out from here do you think? Anything you can share with us on your engagement with the new buyers group?

Look, the engagement has been very positive. Obviously, we know the Chairman very well because the Chairman used to be Chairman of Chinalco, our biggest shareholder. It's been entirely constructive. So there's no warning signs from our side. We used to deal with both private companies and state-owned enterprises in China. So -- and so far, what we have been exploring is areas of win-wins. And -- and yes, we have -- we are welcoming it with the agenda that they have shown us.

Thank you. Liam?

Liam Fitzpatrick from Deutsche Bank. Two questions, 1 on lithium and then 1 on Simandou. I think you quoted this morning on [indiscernible] saying you haven't given up. So what is the latest kind of status and pathway there? And is that really going to be key in determining whether you look at inorganic opportunities in lithium. And then on Simandou, just interested in kind of what is actually taking place on the ground at the moment in terms of work.

Well, thank you. Let me just take the [indiscernible] first. Look, there is an enormous need particularly in Europe for having more lithium for the massive automaker industry. So there's a lot of customer demands and wish for seeing this being developed. We believe -- we are very proud of having discovered what is at least looks like the best ore body in Europe for lithium. We have developed really good solutions. We keep on upgrading it in terms of really making sure that it meets the highest ESG standards. And we believe that it would be good for the development in Serbia. But ultimately, it's a societal choice. And therefore, the only thing we can do is offering the best and most compelling proposition to the government of Serbia and see -- and then see whether they want to develop it. I hope so. And that's why I keep on saying we have definitely not given up. And on Simandou, Bold, what is happening on the ground?

Yes. Look, Charles Zimmerman, who runs our projects has been there a few weeks ago. And he shared some photos around Blocks 3 and 4. We are clearing the site for camp construction. There's significant ramp-up activity in terms of starting to hire local Guineans. So there's a lot of activity in terms of the actual capital commitments and potential ramp-up of the project. But obviously, we're not going to do anything ahead until the finalization of the agreement, as Jakob and Peter had alluded to. So a lot of activity, but a lot of it is preparatory phases for a rapid construction period.

Tyler?

Tyler Broda from RBC. Just my question is on inflation. I would like to understand your views on sort of how much of this inflation do you see being sort of transitory and then how much is structural? I know it's a question, but in terms of your views from right here. And then I guess within that context, we've seen sustaining CapEx rise every year. And then on the growth CapEx side, we're probably going to see higher cost than maybe what we were thought 2 years ago. How -- within that context, how does that $10 billion number look mid-decade at this point?

That's very, very good. In terms of inflation, I think you -- in that waterfall, we show some of those market-driven factors. And we would expect those to be sort of exactly the same sort of cycle as our prices. So there's always a close correlation between our prices and our input prices going forward for those. I mean, clearly, there is that inflation there that we sort of -- general inflation that flows through. But I have to say, I think what we see is pretty much that felt, as I said, right across the cost curve. So what you're seeing is pretty much just the cost curve rise. And so that being reflected then into price. So we -- our job is to sort of try and minimize anything over and above that as much as we can to maintain our competitive position. And that is our full intent and how we're trying to run the business at this moment in time. So that's how we see it. In terms of the capital side, and as I said, I think we're absorbing that inflation within our sustaining capital guidance. So we don't see that changing. And I think we've now had pretty consistent levels of sustaining capital going to the business and going forward. And I think that talks to one of the Jakob's key priorities is. Every year, our assets come out at the end and better health than they go in. And that sustained -- having that level of sustaining capital is absolutely critical. So I think at the moment, we are comfortable with the capital guidance and just fully absorbing any inflation within that.

Alain?

Alain Gabriel, Morgan Stanley. One question is on the -- throughout your presentation, you have given a little reference to inorganic growth. You seem to be much more inwards looking at this stage. How do you think about M&A at this point in the cycle? And do you see opportunities with an acquisition at the asset level, not through the public markets?

Yes. Look, first of all, I probably much more believe in smaller M&A than big M&A. And I hope you can see with the things we are doing, they're all individual are very different but they all make industrial sense because that's where you actually get value out of M&A, in my view. We are trying to build -- shape the portfolio so it's relevant for our customers, for the future. There could be more things. But now you're saying looking inwards, looking outwards. That's simply because of the fact that Rio has had for decades a cupboard full of absolutely amazing opportunities. May I mention Resolution, Simandou, Rhodes Ridge, et cetera. You just don't find those on the market. And we already have in the copper. So this shouldn't be a surprise that we are looking inwards to try to develop those right now. But that doesn't mean that we are not looking outside as well. And I think we showed that with Rincon. We also showed that we were decisive and took TRQ private because it was just the wrong structure. So we're looking. But at the end of the day, we don't want to grow lithium for the sake of growing lithium. We want to be convinced that we can actually create value if we're doing it, buying an asset.

Your next phone question comes from the line of Paul McTaggart from Citigroup.

So back on the Pilbara, not to bore you. But in the short run, new steelmaking technologies are not going to be around. There's going to be some years before we develop sort of green steel, et cetera. Is there an increasing pressure to sort of reduce carbon intensity for steelmaking? And that means high-grade feedstocks, potentially DRI, even more scrapped BOS. Obviously, you're doing Simandou, which is high grade. But what longer term, what do you think is -- what will be the changes in the Pilbara with higher ore grades. And do you see an industry maybe perhaps the medium term, we start to do some downstream growth? How do you think this is going to play out?

Paul, you were slightly hard to hear so let me quickly repeat it for Jakob and Peter. So very -- we're moving towards a low steel -- low carbon steelmaking industry. That means initially because there are no new technologies. Higher grading the ore streams into that, how do you -- we're doing Simandou, which is higher ore grade. How are you seeing the Pilbara developing in the near term? That's your question?

Yes.

So let's just -- first of all, we, as Rio Tinto, are uniquely placed because we will soon be extracting iron ore on 3 continents. And you forgot to mention IOC, which is very, very high quality. And we will have Simandou, which is very high quality. And we have Pilbara, which is high quality, but you're right, not as high grade as the 2 others. Having said that, look at the expansions we're doing, Western Range is attractive. Rhodes Ridge is absolutely super quality iron ore. So we are upgrading there. And then on top of that, there is a lot of R&D happening. I think we used the word cracking the code. And we are really trying to find ways and means to progress this. But having said that, the world is not going to change away from blast furnace from 1 year to another. So this is -- I think I've said in my speech earlier, it's a multi-decade development. But I hope you see that we are already preparing us for that.

We will now take the next question. And the next question comes from the line of Kaan Peker World Bank of Canada.

Just 1 question on, I suppose, the Pilbara. In the Investor Day and also today, there was a discussion around being a best operator as the goal. However, if we look across the Pilbara, Rio has higher relative unit cost and sustaining CapEx despite being larger scale. So I suppose my question is, when will the best operator goal result in lower unit costs and lower CapEx? And when should we start seeing that come through?

Thank you. That's a super good question. I think there are different perspectives around what is best operators because, first of all, what we needed to do was to stabilize operations and stabilize our production as -- well, that's pretty evident. And one of the message to do that was to complete well and implement and now also finally ramp up the 4 replacement projects. But we have done much, much more in terms of a period of time now investing more in sustaining CapEx, seeing that those money are being spent well, improving maintenance. And I have to tell you, this Safe Production System, Peter spoke a lot about it, is I'm super, super excited about it. Because what does it mean to be best operator in the Pilbara? Actually, you have to go from mine to mine and meet the teams and find out how you're actually working things here, how are you addressing things. And what I've seen in the places where we have implemented is absolutely amazing. It is kicking in, but you just have to be a little bit patient. If certainly I become too impatient, we will not get the full value out of it. It doesn't happen by setting top-down targets. It actually happens by empowering people. They're super people, they all want to achieve. We just need to make that happening. So the first thing you see was stabilizing production. I hope you can see we are on a good trajectory. The second thing as well is we're actually improving the quality of the iron ore as well. And the third thing is absolutely efficiencies. But you've got to take it a bit -- take a bit more time for it. And obviously, right now, there's enormous inflationary pressure. But the more successful we are in terms of removing idle work, irritants, et cetera, being more productive, the less requirements we have to people and there are very few people available there. So that is kind of getting into a positive cycle. I'm not pushing it too hard because there are pieces of work on maintenance that to me is more important than demonstrating short term the perfect unit cost. But I would say to you, it was a bit of a bet when I, 2 years ago stated this about being best operator. But particularly here in the fourth quarter and early this year, where at my site visits, I think I see the data points that gives me confidence that we are on the right track on the journey. And I think I said in the presentation today, we have the best ahead of us. Thank you.

Thank you, Kaan. Next one here in the room, Robert -- Richard, sorry.

Richard Hatch, Berenberg, Robert is my friend. A question on OT. Sorry to harp on about it again. It's around comfort. First question, Slide 20, your production guidance is based on 2020 technical report. Are you comfortable that you're not going to have to cut that based on having to leave stability pillars in Panels 1 and 2. And also comfort around fiscal terms, say -- sorry, not fiscal terms, comfort around the intercompany lane. So the intercompany lane must be sitting about $9 million, $9.5 billion, LIBOR plus 6.5%, so compounding at about $1 billion a year. Are you comfortable that all of that cash coming to you and not being shared -- well, shared in your terms with the government is not going to frustrate relations with the government and, therefore, create challenges in the medium term?

Thank you. Great question. So Bold, I have the same questions for you.

Now, look, I think I could be as comfortable in predicting the future with certainty. And yes, I mean, I think at the moment, we have a great relationship with the government. We work with them on a transparent basis. But this is a risky underground technical block-caving project. And I think we just have to be absolutely honest about that because I think we need to look at and how we have the best technological data sensors and, et cetera, but it's going to be an evolution. And certainly, we have the best team and capabilities looking at it, but we'll be transparent with you as things develop. But the one thing I cannot give you is a guarantee on your NPV with absolute 100% certainty. This is a risk that investors, we are all taking. And at the moment, we're very comfortable with partnering with the government and, obviously, our stakeholders here.

Look, it's a very good question. It's a very difficult question. We had a setback in 2019, as you will recall. I'm absolutely convinced that we learned big time from it, and I am very impressed with the teams that are working on it. And they are also very honest. There are real risks here, but I feel that they're really on top of it. So I'm kind of cautiously optimistic on that front. And the better we perform in the mine, the better we can also find good solutions with the government. Obviously, the last thing we want to do is to disappoint the government.

Myles? Sorry, Richard, just one second.

Myles Allsop from UBS. Maybe a question for Peter. You got a 40% to 60% payout range but you've never paid less than 60%. So why keep the 40%? And maybe just how does that play relative to net debt? I mean, it's obviously crept up a little bit, $4 billion. Where -- should we expect specials when you go back to net cash? And how much M&A firepower do you have?

That's a lot of questions in one.

Multi-pronged.

I mean, I think the policy has been well set. I mean I think last year, when you look at it, it was still a very strong year for us financially. So when you look at the EBITDA and what we produce and $9 billion free cash flow, we're actually paying out 8 of that in the dividend. So I think that's reflective of the overall approach we're really adopting here is by looking in and around at all the metrics, looking at the market and taking that sort of broad view. So we're very, very comfortable that 60% was the right payout on this year's results. I think when it comes to net debt, I mean, again, having a strong balance sheet gives you so much flexibility. When you think of the cyclicality of this industry, it allows you just to keep investing through it and to keep giving returns to shareholders and to take opportunistically -- take opportunities when they come up. So that's what we want to do. And that's why having that strong balance sheet really makes, I think, such good sense to us. So we're very comfortable. We're very comfortable having a bit of cash on the balance sheet when markets were so, so strong, very comfortable at the 4.2%. We've got lots of flexibility and headroom to the extent we want to use that within our sort of principles-based approach to the balance sheet.

Could you ever imagine paying up 40%?

I think at the moment, I think we're very comfortable what the track record we've got, but you don't know what the future looks like.

Ever is a long time. So last question here in the room.

It's a very difficult question. I just wanted to make the point of you've seen Rio Tinto that hasn't grown a lot for a long time. That actually, take the guidance of this year, is indicating that it will be growing. And the real trick for us is how do we stick with a 60% payout ratio and start getting the company to grow? And so far, it looks very encouraging. And we don't want to -- we don't want to go into wild growth. This company has tried this kind of swing too much. We don't want to be there. We want to be disciplined. And one of the ways to keep it disciplined is having the dividend. But on the other hand, just paying extra dividend cannot be an end in itself. It's an amazing company, and we have opportunities to get it to grow in the right order, and we should do so because that is actually in the interest of the shareholders.

The last one.

Sorry, boring question on CO2 emissions, Scope 1, 2 has reduced. Good job. Scope 3 has increased, I think, as from 553 million to 583 million tonnes. Not growing volumes or not increasing Scope 3 is a stupid idea. But does it -- or how much does Scope 3 increases play into your investment decisions these days?

Look, Scope 3 is only going to be more and more important, and I would say we can still do much, much more. The way I tend to look at Scope 3 is try to break it down into things. There is one element is the upstream Scope 3. It's not that enormous for us, but we need to manage our suppliers very well. Another area that's quite significant, 8 million tonnes of CO2, is our logistics. And even though Scope 3, I feel that we can influence that and we must do more and do a better job on that front. And then the real big thing, of course, is the downstream, and that's kind of an influencing role. But frankly, the steel industry is just asking to join up with us and trying together to find solutions. And there is a lot happening at this point in time. So I would not be surprised if you see -- the only point is, of course, many of these things will have an impact 5 or 10 years from now. But it's actually happening now with the technology development, et cetera. So it is a vital part. I think the key thing though is it's very difficult to use annual numbers because you need to think about projections 5 and 10 years down the road. But I do think that when we stand here next year, we need to be much more tangible on Scope 3. There is more work to be done.

Okay. We are literally 1 minute to 10. So I'd like to close it up here. Thank you, everybody, so much for joining here. Thank you, everybody in Australia for staying up somewhat later in the office. And thank you Bold for coming in from Mongolia. Clearly, Bold is looking forward to welcoming some of you on-site during this year. If you don't join us there, then we'll see you at the half year. Thank you very much.