Rio Tinto Group (RIO) Q4 2023 Earnings Report, Transcript and Summary

Hello, everybody, and welcome to Rio Tinto's 2023 Results Meeting. As usual, a couple of housekeeping items before we start proceedings. Can I please ask you to put your mobile phones to silent or turn them off. And secondly, for those here in the room today, there's no fire drill planned. If you hear a fire alarm, please leave via the fire doors at the back or the front and follow the instructions of the fire marshals. Jakob and Peter will present the key items of the results and the forward-looking items for about 30 minutes, and then we'll have 45 minutes for Q&A. [Operator Instructions] Jakob, over to you.

Thank you, Menno. Good morning, good evening to everyone. Thank you for joining us. The 23rd of January was the saddest day of my 5 years -- 5.5 years of Rio Tinto. On that day, a chartered plane crashed near Fort Smith in Canada. We lost 4 colleagues from our Diavik mine and 2 airline crew members. We are completely devastated. When I went to Diavik and Fort Smith, I saw how heartbreaking this tragedy is for the loved ones, our team and the whole community. Our focus is on supporting everyone who has been affected as the authorities continue to investigate what has happened. A tragedy like this puts everything into perspective. It's a horrific reminder that nothing, absolutely nothing is more important than safety. Safety continues to be our top priority. Our work to evolve our culture and processes to ensure everyone, everywhere goes home safely everyday is never done. So allow me a moment of reflection. Thank you. I also wanted to acknowledge and pay my respect to all Traditional Owners and First Nations that host our operations around the world. Turning to our financials. Our business is very robust. These attractive results shows fundamental strength and stability. We have a very profitable business, a 20% return on capital employed despite $1.5 billion negative impact from lower commodity prices. Our overall production has grown. We have achieved underlying earnings of $11.8 billion, and we will return $7.1 billion to our shareholders, equating to a 60% payout on the ordinary dividend. And we have been investing with discipline to improve the health of our business for the long term while consistently delivering throughout the year. Even as we have stepped up our capital expenditures, made acquisitions and paid out a large dividend, our net debt is virtually unchanged from 2022 at $4.2 billion. We are resilient, and we are improving our operations even better. There's so much more to come. Our success starts with our clear understanding that we are a long-term business. To deliver for the long term, we are relentlessly following our purpose and our 4 objectives of becoming best operator, achieving impeccable ESG credentials, excel in development and deepening our social license. We are also investing in the health of our people, our assets and our ore bodies. Our culture drives performance, which is why we are developing a culture of trust based upon values of care, courage and curiosity. We're making progress, enabling our people to improve performance by deepening the rollout of the safe production system. At the same time, we are developing our portfolio to position our business for the future. We have really stabilized and improved our iron ore business, both in terms of short-term delivery and strengthening the long-term pipeline. We are progressing projects in the Pilbara, including Western Range and Rhodes Ridge. We're also achieving a balance across our portfolio, kicking copper into action with the ramp-up of the underground production at Oyu Tolgoi in Mongolia. And we're evolving our aluminum business, providing our customers with recycling options through our Matalco joint venture. We have a major challenge to repower our aluminum operations in Australia. Today, we announced the second agreement to provide some of the renewable power our Gladstone assets needs. And we are embedding co-design and co-management into our approach, working in partnerships with communities and indigenous people for mutual benefit. For example, collaborating with the Yindjibarndi Energy Corporation to explore opportunities for renewable energy projects in the Pilbara. Safe and empowered people, healthy assets and a balanced portfolio, all underpinned by social license. This is essential to achieve healthy operational and financial performance and deliver attractive returns over the long term. I'll now hand over to Peter to take you through the financials. Thank you.

Thanks, Jakob. Good morning, good evening, everyone. I'm really pleased to have the opportunity to present this set of results because we've had good operational momentum with a steady improvement in our performance in the Pilbara, where we delivered iron ore shipments at the upper end of our guidance. We also had a strong start to underground operations at Oyu Tolgoi and Kitimat has returned to full production. But we do still have a lot of work ahead of us. Firstly, we have some assets where we need to stabilize production. In 2023, IOC and Kennecott in particular, face some challenges. And secondly, we need to push on with the implementation of the safe production system to deliver continuous productivity improvement in our operations. In summary, there is significant value remaining to be unlocked from our existing assets. On a net-net basis, our underlying EBITDA declined 9% to $23.9 billion. Cash flow from operations remained strong at $15.2 billion, but we do need to bring down inventory. Free cash flow was $7.7 billion after capital expenditure of $7.1 billion. Following dividends paid and funding of the Matalco transaction for just over $700 million, we ended the year with net debt of $4.2 billion, virtually unchanged from 2022. Overall, we delivered a healthy return on capital employed of 20% on underlying earnings of $11.8 billion. This underpinned our decision to continue our 8-year record of declaring a 60% payout on the ordinary dividend, equating to $7.1 billion. We did have some one-off items. As I presented at the half year, we made an adjustment to the carrying value of our Gladstone refineries. In the second half, we increased the closure estimates for a number of closed assets, in particular, ERA. As ever, markets are the biggest determinant of annual volatility in our financials and 2023 was no different. Overall, the price impact was negative. Although it is important to call out the stability of iron ore markets during the period. Despite the Platts Index being broadly flat, our realized iron ore price was actually 2% higher due to higher relativity of lower-grade products. The copper market was largely stable year-on-year with prices declining 3%. We've recently seen some disruptions in mine supply, about 1 million tonnes, resulting in much stronger concentrate markets. We're also seeing the effects of the energy transition on demand coming through, particularly from the EV market. Aluminum demand continues to increase, although at a lower rate. We saw our realized price come down by 18%, with lower LME price as well as market and product premia. The behavior of the aluminum price reflects its increased exposure to consumer markets. Let me now provide some context to the iron ore price stability. Critically, 2023 was the fourth year with Chinese steel production above 1 billion tonnes. The big driver was a significant increase in net steel exports to 84 million tonnes, mainly to Southeast Asia. China is also experiencing a fundamental change in demand. As shown by the chart on the left, since 2019, we've seen a steady rise in its share of finished steel demand going into infrastructure, the energy sector and manufacturing with properties share declining. Turning now to the EBITDA movement. In aggregate, commodity prices lowered EBITDA by $1.5 billion, primarily driven by aluminum. Weaker currencies in Australia and Canada offset this by about $600 million. The real positive in the period, though was the 3% rise in copper equivalent production. The increase in Pilbara output was a big factor behind this growth and added $600 million. In copper, we benefited from the Oyu Tolgoi underground ramp-up, but there was some offset at Kennecott due to a conveyor failure in the first half and the planned rebuild of the smelter in the second and third quarters. aluminum production was 9% higher as Kitimat returned to full production. However, we're not yet seeing the extra metal volume flow into higher earnings due to the additional costs of the ramp-up. Reducing these is going to be a key focus area for 2024. Somewhat counterintuitively, we're showing a negative volume variance for aluminum, which reflects lower value-added product sales of around $100 million. Our ongoing exploration and evaluation expenditure in 2023 was $900 million, which compares with guidance of around $1 billion. We saw a significant step-up in activities at Simandou, which we continue to expense until the end of the third quarter. Net-net, E&E was around $300 million higher than last year. More broadly, however, other options are progressing. And at the front-end of the pipeline, we now have the best exploration portfolio we've had for some time, having consistently invested in this area over the years. The cost picture is covered by several bars in this chart, but let me try and summarize what we're seeing in broad terms. Firstly, as foreseen at the half year, we did see the reversal of some market-based costs, particularly aluminum raw materials. You can see this in the first section of the chart. Secondly, many of our costs are under contracts, which renew periodically. As a consequence, the spike in inflation was only reflected in 2023 on renewal of these contracts. This process now looks to be largely complete. Thirdly, we continue to see some cost pressures from tight labor markets, particularly the Pilbara, Quebec and Utah. Again, these are in the unit cost variance. We have separated out the effects of the operational disruptions at Kennecott and IFC. You can see on the chart that they drove up our unit costs to the tune of $600 million. Overall, we do believe a lot of the forces driving up costs are now starting to moderate, and we expect to see more stability in the cost base going forward. Our business continues to be highly cash generative. This chart reconciles EBITDA and cash flow. Our cash conversion ratio was 63% compared to 61% in 2022 when tax payments were substantially higher. At the half year, I did say I expected working capital to reduce in the second half, but instead, it stayed roughly flat. We saw reductions in some areas such as raw materials, but the extended Kennecott smelter shut and softness in the TiO2 market meant that the aggregate balance of inventory did not come down as expected. This was compounded by the rise in the iron ore price late in the year, increasing balance sheet receivables. These were turned into cash in early 2024. We also had lower dividends from equity accounted units, mostly related to Escondida. Finally, the major driver of provisions is closure. We have a number of active projects underway with just under $800 million spent in 2023. Looking forward, we expect to spend around $1 million per year as we advance activities at the various sites. Spend will vary year-to-year as we execute individual programs of work and we continue to look at structural opportunities to reduce our closure exposure. Onto product group performance. Iron ore had a strong year, its second highest on record for shipments. Gudai-Darri is at nameplate capacity, and we're extracting more volumes from the Safe Production System with a 5 million tonne uplift in 2023. We're targeting another 5 million tonnes this year with the combined 10 million tonne benefit delivering significant incremental value to the business. We expect a small increase in unit costs in 2024, reflecting ongoing tight labor markets in Western Australia and costs associated with material movement and maintenance in our system. We're building a much stronger aluminum business. It was a tough year as the price dropped and margins compressed. However, as I said, Kitimat is now back to full capacity and we're making investments in North America that really strengthen this business for the future. These include investing in the AP60 technology and in Matalco, with the latter giving us exposure to recycled products. As Jakob mentioned, it is really positive to see the Oyu Tolgoi mine investment starting to pay off with the ramp-up of production from the underground. And at Kennecott, our focus is to stabilize the operation following the completion of the smelter rebuild. Lastly, it was a challenging year for minerals from both an operational and market perspective. IOC lost 1 month of production in June due to wildfires and we had some operational impacts in the third quarter. Whilst at our iron and titanium Quebec operations, 3 furnaces remain off-line in response to weak market conditions. Moving on to capital allocation. You've seen this slide showing our approach many times. My key message today is that nothing has changed. Sustaining capital, higher returning replacement projects and decarbonization remain our first priority where we're forecasting around $7 billion of spend per year, unchanged from previous guidance. That is followed by the ordinary dividend and then compelling growth. We believe that $3 billion remains the right level for us to invest in growth, and our largest project is expected to be our equity share of Simandou. While CapEx at Oyu Tolgoi underground will wind down as we complete key infrastructure investments. We expect the remainder to be mainly invested in copper and lithium projects, some of which are yet to be sanctioned. But as I've said many times before, we will remain very disciplined. Our investments in growth are highly dependent on the timing of commitments, but most importantly, by our ability to generate value. Just turning now to the key financials for Simandou. As previously guided, we saw $900 million of spend incurred on the project in 2023, $500 million of which is our share and $400 million will be refunded by our Simfer JV partner, Chalco Iron Ore holdings. This includes $300 million of qualifying costs, which we started to capitalize from 1 October. In 2024, we expect our share of spend to be around $2 billion. Now I was very pleased actually to have the opportunity to visit the project last month. And I must say, I was pretty impressed to see the progress being made on the ground. Finally, the dividend. We have declared a 60% payout for the full year, which equates to $7.1 billion and attractive dividend yield of more than 6%. We remain very consistent with our shareholder returns policy with a 60% payout on ordinary dividends and 71% total payout across the last 8 years. This highlights our continued discipline. Our net debt is unchanged year-on-year, and this financial strength, means we can accelerate our decarbonization investment, reinvest for growth and continue to pay attractive dividends through the cycle. And with that, let me hand back to Jakob.

Thank you, Peter. Rio Tinto is opportunity-rich and well-positioned. Our core markets are growing. We are at the heart of the energy transition and new opportunities are emerging. We're stretching our capabilities, but we are not doing more than we can execute. This discipline allows us to pursue a stable and profitable growth pathway. Our overall copper equivalent gross or production was up by over 3% in 2023. Based on our midpoint production guidance for 2024, we expect a further 2% year-on-year growth. It was only 3 years ago that we defined our 4 objectives. We had some repair work to do then. Now we are going from strengths to strengths, and we are just getting started. Productivity at our Pilbara iron ore operation is really improving. We had the second highest shipments on record and a 5 million tonnes production uplift from the Safe Production System. Meanwhile, we are on track to deliver 1 million tonnes of copper per annum by the end of the decade with the ramp-up of the Oyu Tolgoi on track. And decarbonization remains at the heart of our strategy. We're committed to reducing our Scope 1 and 2 emissions by 50% by 2030 and reaching net zero by 2050. We're also working closely with our customers to help them beat their own targets addressing our Scope 3. We have said from the start, this is both a huge challenge and a huge opportunity, and there's still uncertainty in the delivery. But we have created more definition around how we will achieve our targets, and I believe we are finding an economical pathway in partnerships with governments, customers and communities. On decarbonization, we are moving from strategy and target setting to real actions and we are making these strides in a way that makes good business sense. We're making progress with renewables most significantly repowering our aluminum Pacific operation, a hugely challenging but vital part of our decarbonization journey. At the same time, we're using research and development to reimagine our manufacturing processes, including a breakthrough piloting of our BlueSmelting technology, which reduces emissions from processing ilmenite into titanium dioxide. Our amazing R&D teams are also making progress in many areas, including Nuton for copper and ELYSIS for aluminum. Finally, we're developing our aluminum business to offer a full suite of options. The Matalco joint venture in North America provides our customers will recycle aluminum at scale, complementing our portfolio of low-carbon primary aluminum. We are also making focus important progress to decarbonize our iron ore business. We are working on over 50 projects to unlock the most sustainable and economic pathways for our iron ores, future-proofing our business in a way that makes good business sense. We recently announced a partnership with BHP and BlueScope to develop Australia's first iron-making electric smelting furnace pilot plant. By sharing our capabilities and knowledge, we can accelerate our progress. We are again leveraging our extensive R&D capabilities. We are excited about BioIron to support low-carbon steelmaking. And finally, we are using high-grade iron ore from Canada to help feed and accelerate low-carbon steelmaking. Simandou's high-grade, low impurity formation is a rare opportunity to diversify and grow our portfolio, particularly as demand increases for grade suitable for greener steel. At our Investor Day in December, we gave our estimate for our share of the capital expenditure needed to unlock this exceptional project. And the Rio Tinto Board has this week approved the project, subject to the remaining conditions being met. This includes joint venture partner approvals and regulatory approvals from China and Guinea. We are engaging with authorities in Guinea following the dissolution of the government. But we have been in Guinea for 50 years, and we have safely continued our operations throughout. We expect that will continue to be the case. We are working with our partners towards full sanction of Simandou and we're really excited about this project. We have much more work to do but we are already well positioned to continue delivering value to our shareholders. At Rio Tinto, we are gradually changing the culture of our company. It's a long journey. But in the last 3 weeks, I've been to 6 assets, and I'm pleased to see that the culture change is actually really happening. We are focusing towards a work place where people feel included, respected, empowered and step up and take accountability. We're improving the asset health, learning from still too many operational challenges and improving access to ore bodies in close partnerships with Traditional Owners. And I hope those of you who joined us at our Investor Day got a taste of our exploration pipeline, one of the best we ever had. These are the foundations of our success, operational improvements with a learning mindset and in parallel, developing a portfolio for the future with a focus on decarbonization. We're also delivering for today with disciplined growth and attractive financials that allow us to reward our shareholders and invest in the health of our business. Our business is robust, we are opportunity-rich, and the best, I believe, is yet to come. Thank you.

Great. Thank you, Jakob and Peter. It's now time for Q&A. Also thank you for those in Sydney and Melbourne for staying late today. It's much appreciated. So we'll start Q&A. [Operator Instructions] We'll start with one in the room, and then we'll take 2 on the phone, and then we'll get 2 back here. We have enough time for the next 49 minutes, so we'll get through it. I think someone has to [indiscernible] -- Rich, do you want to start?

Richard Hatch from Berenberg. First question, on iron ore costs. Can you just talk to us a bit about how you're going to get to that medium-term target of $20? I think the guidance is about sort of for this year is a good sort of 10%, 15% above that. So I guess there's going to be some productivity, some levers. Your peers seem to be cutting costs, perhaps that's going to impact their medium-term flexibility. So can you just talk about what you're going to do to get there?

So look, I'll ask Peter to explain the exact pathway to get there. But what is absolutely clear, and you might say that this year's unit cost target is not super stretchy. I want people in the Pilbara to get the maintenance done. To get every time we have an issue, to take the full learning and make sure that we address it systemically because it's so wonderful assets, and it deserves to be in the best possible shape. So the first point is -- the first game is not the unit cost. It's a long game where you have to get there. And what I -- I was just at Tom Price 2 weeks ago. And when I saw what they are doing there -- Tom Price is like 65 years' old. What they're doing now is fundamentally making the plant much better and can get it back to close to nameplate capacity. Things have changed a lot since it was built, et cetera. But I see that we are structurally doing the right things. So the SPS system is kicking in much, much more focus on asset management. I'm old school, calling it maintenance. Spending the money in the right way, having more internal resources to get the job done in the right way. That is just improving us and that will get us to our medium-term target. Peter, do you want to comment on how we get the numbers right?

Absolutely. So I mean if we look at 2024, I mean we've taken the bottom of that range based on really what we achieved in the second half of 2023. And then we are still seeing tight labor markets on top of that, and we still have a system where we need to do more material movement and some more maintenance as sort of Jakob says. So I think that then sets the top. And really the -- where we land is going to be how well we drive productivity through the system. And I think there is real momentum, but that's going to be the factor which drives it down. I mean we said $20, 2023 terms. I mean we'll sort of then have a set of more investments in the middle of the decade, which helps sort of strengthen the system as well towards that midterm. But it's a combination of sort of renewing the asset base or the mine base, if you like, and driving that productivity and maintenance. That's going to get us to the $20, real 2023.

Okay. Helpful. Second one is just on your TiO2 sort of business. Salty South has been on hold for a long time. If you look at the small cap arena, you've put your foot on sovereign some of the other small cap names, there's no value attributed to the market. You've got this BlueSmelting for ilmenite. Does -- would you consider inorganic opportunities for mispriced ilmenite assets, such can their base, something like that? Or are you happy with what you've got in the portfolio?

I love our titanium slag business, but it is not without challenges. It's actually the product where we have the highest global market share. It's quite a unique body, but we need to make sure that our manufacturing sites has got sufficiently feed from the mining. And therefore, we are actually relooking again at the Salty South that will be really, really good to unlock that part. I do think that BlueSmelting is very important because Sorel is the world's largest producer of titanium slag. It has got 1.1 million tonnes of CO2 emission. And we think that there's a pathway to fundamentally decarbonize that. So that 70-year-old site could get a complete new life. But around the manufacturing, we have a Sorel and we have at Richards Bay. It's really world scale. And we just need to be sure we can feed the system. On top of that, there are some challenges in terms of the customer landscape is changing, and we need to be sure that our business fit the needs of the customer for the future. So we are looking at things and how to address it. I don't necessarily think that it will require inorganic things. We are doing a bit of exploration as well, and we might actually find some -- we are looking at some very interesting prospects there. So I see a great business that does not necessarily require a big M&A.

Operator, can we take 2 questions from the line, please?

Yes, of course. Now we're going to take the first question, and the question comes from the line of Paul Young from Goldman Sachs.

Jakob, first question is on capital allocation. The balance sheet is strong. The growth pipeline is best in years. The dividend payout at 60%, but what's missing from here is the buyback. What we know the limitations with the major shareholders. So now that you're committing to Simandou with Chinalco, perhaps you've spoken to Chinalco about them potentially selling into buyback?

Yes. It's a highly relevant question, and it reminds me as CEO, I always have things that I haven't done. And it's probably a dialogue that we need to do. It's been very intense and we have very much deepened our ties to both Chinalco and Baowu in going through the Simandou process. But I do think, Paul, it's a little bit less urgent than it was in the past. If you look back in time, we had a decade where we didn't grow. And if you don't grow as a company, then of course, it's hyper important on how well you're sending cash back to the shareholders. Now, we are growing 2% to 3% a year, profitable growing. And we are paying at the top of our policy, we are consistently paying 60%. But actually, at the end of the day, 60% of our net income growth -- net income stream. So if you can grow the income stream, that's probably a quite good way. And of course, it goes without saying, it requires a little bit more CapEx to create that growth than in the past. If you look at the past, our CapEx composition was mainly sustainable CapEx, replacement mines, et cetera. Now we have a bigger growth component plus we cannot take away from the fact there, Paul, that we do need to put some capital towards decarbonizing our business. And that is kind of, in my view, future-proofing it. But it kind of takes a little bit the pressure off. I don't want to rule it out. And I think you're right, when you look at the numbers, we are plus $100 billion company with only a couple of billion dollars of debt. So we could pay more back. Yes, I'll take up the challenge and I'll probably talk a bit more about that.

Okay. That's great. Look forward to that. And then second question, Jakob is on the copper growth and CapEx inflation. Peter called out labor inflation in the Pilbara, U.S. and Canada, but he didn't mention Chile. We saw [indiscernible] announced that they're deferring the new concentrate Escondida by 1 to 2 years due to CapEx inflation. It looks like they're preferring to expand the heap-leach. Just curious what's your view on this decision?

Yes. Look, I think BHP and Rio has only improved its cooperation in the last few years, both on resolution and on Escondida. And I think BHP are taking very sound decisions here. We shouldn't forget we have been extracting from Escondida for 20, 30 years and is still the world's largest copper ore body. It is an amazing ore body. But obviously, what we need to do is get the value out. And therefore, if we can find a solution that has lower capital intensity, that's great. We're also testing at Escondida, our Nuton technology. And if we can really get leaching to work at scale, it goes without saying that that's much cheaper than the very capital-intensive concentrator route.

And the next question comes from the line of Kaan Peker from RBC.

First question is on Rio sales. Just wondering if you've been able to achieve preferential terms with customers for low-carbon products, particularly this year, as we see decarbonization efforts pick up and I suppose more talking towards the aluminum low-carbon assets?

Yes. Thank you. We do get a premium. But if you ask me, but actually, it doesn't matter what the premium will be. I would always give you the answer that is not high enough. But it is -- we do get a premium, but it's in the teens of dollars per ton, and it should be in the hundreds of dollars of tonnes. But -- so there's work to be done. It's too early. We only closed the deal with Matalco on 1st of December. But let's just face it. It is an amazing opportunity to now being at scale, a producer of both primary and secondary aluminum and our customer loves it, and we need to turn it in. So it doesn't just become a win for the customer, but it becomes a win both for the customer and for Rio Tinto.

Sure. And my second question is on OT. I think over the last 6 months, underground volumes have been relatively flattish, but development has been progressing, including drawbells. When should we see the next step up in volumes out of the underground? Is it when the conveyor is complete in 2H?

It goes -- I honestly believe it goes extremely well according to schedule. How would you describe it, Peter, the progress, ahead of us?

Yes, completely right. I mean I think we'll just continue to ramp up into 2024 from the first panel. That's key, and we're still on track for that ramp up to 500,000 tonnes in 2028. And all the infrastructure development is still on track for all the guidance we've given with the secondary crusher -- second crusher finished at the back end of 2025.

I think my short answer is that there's plenty of challenges around in Rio Tinto, but I'm struggling to see the things that goes wrong in Oyu Tolgoi. I'm very impressed with that development.

Jason? And then Bob Brackett.

So Jason Fairclough, Bank of America. Just a question, I guess, about a commodity, which I think is absent from your presentation, which is lithium, right? So we was not long ago, everybody was quite excited about it. Price is down 85%. Some people would look at this and say, "Isn't this a great opportunity to do some inorganic growth." So how are you thinking about lithium? How are you thinking about using that balance sheet? How are you thinking about Alcan?

I think, Jason, and Peter is often reminding me that it takes us back to a very good old mentor of Rio Tinto, namely, it's not just about we are excited about a product -- a certain product. No, we are interested in getting into the best ore bodies, and we need to develop things at the left side of the cost curve. And we actually believe that the development in Argentina can be a very good development. And we believe that one of the best ore bodies that exist in the industry is in Serbia. But we do need to get the government's approval. We do need to get social license for being able to develop that. So that's really where our focus is. And yes, it's down 85%, but it's actually just back to where it was before the bubble. We have always said lithium prices are bound to be extremely volatile. But I will say to you when it comes to battery materials, and I think that's very important. And I owe a great thanks to our Chief Economist that many years ago, said to us, it's very difficult to predict how batteries will develop, but it looks like almost any composition will have lithium. And that's exactly what is happening. You've seen in China now 2/3 of batteries are LFP, i.e., without cobalt and nickel, but with lithium in. So I do believe in lithium, but don't expect us just to go out and also grow. Lithium, we'll be thinking about what are the strong ore bodies where we can use technology and develop something really, really good. And yes, prices have gone down on lithium companies, but not as much as a price of lithium in itself. So you could argue that they're still very expensive.

Can I just push you on this a little bit?

You should.

So the projects that you're talking about, I mean, for a little while, it seemed like the one in Serbia was approved and then it wasn't approved. But when we put it in the model, it wasn't really that material. And so I suppose to push you, inorganic growth could give you scale that's maybe more appropriate for a $100 billion company than a little organic growth project in Argentina or Serbia?

I love to be pushed and sometimes I push back. May I remind you that the world markets for aluminum is 98 million tonnes. The world market for copper is 32 million tonnes, and the world market last year for lithium was 0.8 million tonnes. It's just different scales.

We'll go right to left. Sorry.

Bob Brackett at Bernstein. You've guided to less than but approaching $3 billion of growth CapEx this year, next year following year. For the first 2 years, the moving pieces are quite clear. In year 3, they're less clear. You've got competing opportunities perhaps. So the 2 questions would be: one, what's competing sort of explicitly copper and lithium, but a little more specifically? And two, why do they have to compete? Why are you capping growth CapEx at $3 billion if the projects hit hurdle rates and clearly, you can fund them?

I completely agree with that. Now Peter has a role to do to make sure that there is money. But I actually look completely different at it. I look at our pool of technical resources. And I ask ourselves, how much can we do? And I hate if they only have a halftime job. So I like to stretch them. But I have tried before in my career when I was in energy to see what happens to a company if a company undertakes one project too many, then all the project starts falling apart. And I just don't want to get real there. So it's really an assessment of what are we able to do. I am, for example, very happy that we're doing Simandou with 3 partners because that means that our scope is less than half, and that is executable. I'm also very happy that we took in First Quantum to help us. They are actually driving the development of La Granja because when we decided to do Rincon, I realized we could not do La Granja. La Granja is a much more complex project than Rincon. So it's much more that kind of what our technical capability stretch them, but not overstretch them.

So that was sort of the second half of the question. By absence, it's interesting the word resolution, I couldn't find it in the materials, and we've mentioned some other projects. What are the projects that are competing for that technical capability?

No, no. But -- resolution, I really believe in resolution, and I was in Washington, D.C. last week, and I'm talking to it. But okay, it's not a big presentation here today because the reality is it's not in my hand, for the next step. We need to see the land swap happening. We're doing -- I'm so pleased with the local team. We are engaging with all the First Nations' people, and we are making really good progress there. But as you know, there is also a dispute in the Ninth Circuit and we'll have to await the outcome of that.

Before we go back online, Bob, Page 15 of the press release resolution in the future options table -- you nearly got me in trouble here young man. We'll talk about it afterwards. Nadia, can we have 2 more questions from the line, please, before we go back in the room?

Yes, of course. Now we're going to take the question from the line of Rahul Anand from Morgan Stanley.

Look, 2 for me. Firstly, in terms of Simandou, this has been well flagged for some time. But looking at the sustaining CapEx numbers of $1 a tonne at the mine and $2 a tonne at the infrastructure side, I just wanted to test you on those estimates a bit and try to figure out if we compare these numbers to what's being achieved in the Pilbara, admittedly for older assets and even if we look at Fortescue's assets, which are more recent, the numbers are significantly higher, and these are life of mine estimates. So is this asset or project being built differently that you can keep those sustaining costs as low? And then for my follow-up, Slide 10 talks about more flat steel use. Just wanted to get your views on how you see that feeding into additional iron ore demand this year and perhaps into next year, if you've done any sort of internal modeling around scrap use? That's my 2.

Peter?

So I think you actually said it yourself in terms of those sustaining capital numbers. I mean, these are new assets. We are talking life of mine sort of overall averages that will be inflated up because these are real terms numbers that we've given. So I don't think there's anything I'd particularly point to. I think we're -- those are the numbers that we're using and I think pretty comfortable with them that were embedded in Simandou modeling.

And steel too -- the China steel...

Yes. I mean well, I think we've seen 4 years, as I said, of kind of steel production, crude steel production over 1 billion tonnes. And that's clearly been good for iron ore. This year, clearly, well, '23, clearly, the 84 million tonnes of exports were an important component part of that. But absolutely, we've always said that we would see sort of China steel demand peaking, and it's exactly what we've said. And then you just see demand sort of from elsewhere in ASEAN and in India growing as well. So I think all of this is playing out exactly pretty much as we thought it would play out over time.

Peter, just to quickly follow up on that. Just you flagged how manufacturing is increasing as a proportion. And I guess my question is more around the use of scrap in the mix of steel production. And obviously, when you move away from scrap, iron ore units continue to rise. Is that a trend that you think continues perhaps to support the iron ore market? Is that part of your internal modeling as well because you presented solar cell production up a lot and a lot of other manufacturing uses of steel rising, which then obviously leads to better demand for iron ore units as scrap use becomes reduced.

Yes. So certainly, in all our modeling, we would see scrap increasing, on an increasing trend as part of those overall iron units. So absolutely, absolutely right. So differentiating between the sort of change in the demand profile and the iron units that feed it. We absolutely see -- we see sort of that scrap of piece as being an important part of the mix.

And the question comes from the line of Lyndon Fagan from JPMorgan.

The first one I had was just on the $1 billion a year spend on closure provisions or cash out the door on closure costs. I'm wondering if you could elaborate on the scope of work there? And I mean, are we just dragging that right indefinitely. I'm just trying to get a feel for how we schedule that and whether it inflates over time. And then the second question I had was just on the aluminum assets. So I guess still losing money in alumina -- at breakeven. I'm wondering whether the new power announcement today will help alleviate some costs and whether there's any benefits from that repowering agreement?

Thank you, Peter and the Audit Committee has very appropriately provided for closure, and it is a very big amount you can find in our annual report. But that is what goes with mining. And right now, of course, we are doing some of the world's largest closure project on EIA, Argyle and Gove in Australia and that's a big cash outflow in the years to come. I think the key thing is, at the end of the day, it just has to be done very, very well and we executed well. And we're looking at that I think they're really doing a great job in Gove. I think we have had troubles in EIA, but we are finding a pathway forward where we can do things in the most efficient way. And there has also been a bit noise on exactly what the scope should be in Argyle, but we're also finding the way there. Ultimately, you should think about it like projects. It just has to be really well scoped and setting a high bar, but really well scoped and then executed very, very well. Second part, your question on aluminum. It's a tough business in that sense, but it also represents a massive opportunity. We are the Western world's largest producer of aluminum. The Western world is structurally short in aluminum. And we are now also at scale into recyclable. So we are building a stronger and stronger aluminum business. And sometimes it's not a bad thing to do that while the profitability in the industry is low. It's too early to answer your question on what would it mean to the cost structure with the new renewable deal. So because we have done 2 things. The biggest solar farm in Australia, we are building the biggest wind farm in Australia, we are building. That was the announcement this morning. But ultimately, the next step has to come from the Queensland government and the Commonwealth, namely to offer Rio Tinto a competitively priced firming power. And if we can't get that to work, then we don't have a long-term solutions for our Pacific aluminum business. So you will have to wait a bit on getting your answers, but let me be very clear, we are super focused on that. We want to protect the Australian business, but we have to bear in mind that it is not an Australian business, it's an export business that competes with our aluminum in Canada that competes with aluminum from the Middle East, everywhere. So we need to make sure that it becomes competitive. But it is also probably the biggest manufacturing assets remaining in Australia. So it is -- I would argue we are in the same boat we should be interested in finding a viable pathway forward for those assets.

Perfect. Let's go back in the room. Alain first, then Chris, behind you...

This is Alain Gabriel at Morgan Stanley. So the first question is on Simandou. There was a timing disparity between when you pay for Simandou CapEx and when you get reimbursed by your partners, should we expect this disparity to continue going forward? Or will that close? That's the first question.

So allowed at closure, the finance closure when all those approvals are in place, we will get repaid.

And the second question is probably for Jakob. The spread between your Limited and the PLC lines is back into focus given how elevated it is at the moment, should we see this as a catalyst to revisit the whole DLC debate?

The whole, which?

Collapse of the DLC basically.

Oh, DLC. That question is for you. But look, it's terrible because I'm going to answer the same question I said before, on my list of CEO agenda items, there's always a number of things I can't hit. And the DLC is the smallest issue to my mind. It serves us well to be a global business. It's not bad to have a headquarter here in London. The DLC works very well. Yes, we have 2 company secretaries, and we could probably save 1 company secretary. But it makes no sense. So for us to focus on -- the DLC works very well for Rio Tinto.

It's Chris LaFemina from Jefferies. So you mentioned First Quantum earlier. They announced last night a long list of measures to kind of aggressively repair their balance sheet. And one of them was bringing in a strategic partner for the Zambian copper assets as a possibility. My first question is, is that something that you could potentially do something with? Would you be interested in being a minority nonoperating owner of a relatively high-quality asset base in copper? That's first.

Yes. So thank you. We do a lot in Africa, not just in Guinea and in South Africa and Madagascar, where we're operating, but we do a lot of exploration. So we are very close to the governments in the mineral-rich countries in Africa. And we are open to look into business in those places. But I always ask myself, what are we bringing to the table? And just a non-operated minority share, what are we really bringing to the table? I don't want to rule it out, but it's just -- my question is, if I can -- when my -- a lot of people, particularly bold, comes to me and says, we should do this, we should do that, et cetera. So the first question I ask is just, what are we bringing to the table here. And if I can't get an answer to that, you will probably not see us investing in that. But yes, we would love to go deeper into a couple of African countries.

And secondly, just on SP10. You had a -- I mean the portion of iron ore production that has been SP10 has been rising over the last 4 or 5 years. I think last year it was quite a bit higher than initially expected. I think when we were in the Pilbara back in the fall, you explained why that was the case. But just wondering how that production mix will shift over the next couple of years? I mean, obviously, by the end of the decade, with Rhodes Ridge, the problem kind of goes away. But first question is how that production mix shifts? And then secondly, maybe more importantly, how do you expect those price discounts to trend over the next 2, 3 years?

Well, look, this is the $100 question that we are also working in our strategy. And I don't have a full answer to you. One of the things that we have done, in my view, very well over the last couple of years is we have really reinstated a good understanding of our ore bodies. And on top of that, the way we are working with Traditional Owners of the land is just at a different scale than it was in the past, post Juukan. And those 2 things have, unfortunately, you can't fool the rocks, it's a given thing. And on top of that, you cannot freely access land, you need to -- it's a partnership. So those 2 things have led to elevated levels of SP10. And then you have a bit of a choice of how much absolute volume are you producing versus the share of SP10. And that's what we -- that best served to the market more volume and with elevated level of SP10 or other products, et cetera. So it's an open question. But what I will say to you is we have more information now, we work in harmony with the Traditional Owners of the land, and we know what we can producing. But you're right, we have learned lessons that it was difficult to just meet the Pilbara Blend grade at that scale that we had hoped so. So I'll say we will keep on informing you more about that level. You should expect the next few years elevated levels of SP10.

And price discounts?

Well, Chris, what's the steel market going to be like? I mean it's -- all I can say is last year, it was very good. We were getting relative, it is about 90%.

Let's go back to the line. Nadia, can we have 2 more questions from the line, please?

Yes, of course. The next question comes from the line of Lachlan Shaw from UBS.

Two questions for me. So just on Pacific aluminum, the carbon firming. Just interested what technologies are shaping up there? And then in the way that you're thinking about that commercial negotiation, do you see yourself coming to impute a carbon price to get the economics to fly in terms of that decarbonization process? I'll come back with my second question.

It's a super good question. You should probably ask it to the Australian government because the way I look at it is -- and I would say, I learn a lot, and I think we, as an organization, learn a lot. We need to be to learn much more about new energy systems because renewable energy systems are inherently less stable and therefore, more complex to firm up. But it is probably a combination of batteries gas peakers and maybe some existing infrastructure. Ultimately, the firming as anticipated, is how is access the grid. So it's not our firming, but it is the Queensland government's firming. So I can't -- I mean, from my perspective, it doesn't matter. What I'm focusing at is how can I get competitively priced firm power with the lowest possible carbon footprint.

Got it. And the second question is just on iron ore and just around the China Mineral Resource Group. I'm just wondering, are you seeing or experiencing any sort of differentiated pricing terms with CMRG yet? Is there any sort of difference in the terms that you're realizing between CMRG and your existing portfolio of CMR customers?

Well, it's 2 sides of the same coin. Isn't it? Because our major customers are in China, and we work through CMR. We have had entirely constructive engagements. We are trying to find things that can work for both parties. And we're focused on many things. We made an agreement last year, and we are progressing on another agreement, et cetera. And they are, by any standard, the biggest buyer of iron ore. So obviously, we have to listen very carefully to them and find mutually acceptable solutions. But I can't really comment on ongoing negotiations.

And now we're going to take our next question and it comes to an of Robert Stein from Macquarie.

So just a quick question on Guinea. So the obvious dissolution of the government there. The other day, the project is still awaiting some approvals, but as [indiscernible] accounts progressing well. What do you think the major risk is to Simandou off the back of that dissolution of government? Is it that the approvals get delayed? The project gets delayed? Is it that the project continues on, but there is a renegotiation as the financial terms with the government? What are the major risks that you see there?

I don't think so. The President is the President and he wants and the government wants now the government is dissolved. They all want to focus Simandou. What we have been awaiting has been some approvals in China, and that is progressing according to schedule. So I don't think that it should lead to delay. I cannot give you 100% guarantee, but that was what I was saying in my presentation, we have actually operated 50 years in Guinea with continuous production despite many changes in government.

And just a follow-up, the closed border. Will that change how technical staff can come to the project and work on the project? Or is that largely absent, say, your workforce there?

Border restrictions, et cetera. Is there any impact on our operations? That's question.

You might know more than I do, but I'm not aware of that. No.

Right. Let's go back in the room, Grant and Liam, and then we'll come back that way.

It's Grant Sporre from Bloomberg Intelligence. It's just a follow-up really on a question that's been asked. In terms of your sort of closure costs going forward, are you planning to exclude them from underlying earnings going forward? And the reason I'm asking is, it just strikes me as it's now become sort of business as usual for at least for the next few years. So should it actually be excluded?

So the answer is we don't. For ongoing -- for our ongoing assets, we do exclude them. For closed assets that have been closed and most of them are legacy assets, we exclude them if they're material. So we -- for most of our assets, the closure cost in the year, the accumulation of the provision goes through the income statement.

Okay. So just so I understand, I know it's a technical point. You basically provisioned for it, and that's why you can exclude. Okay, got it.

So when you think about the $1 billion of cash flow, there's 2 components, these projects we're working on now, but there is also continuous rehabilitation work we're doing around all our assets that is part of that $1 billion. So all of that cash flow is part of our operating cash flow. So the $15.2 billion of operating cash flows after that cash flow that we spend.

So every time we sell a tonne of iron ore, we take a few cents and provide it for a rainy day when we have, so we rehabilitate.

Liam Fitzpatrick, Deutsche Bank. First question, just on the downstream aluminum strategy. Is this Matalco deal? Is this like a won and done? Or could we see more on that front? Because particularly on the green premiums theme. It seems like you probably have to go further downstream or back downstream. So would that be something that you'd look at?

Well, first of all, I may say that Matalco is not a standstill. I expect Matalco to grow a lot. It is already North America's biggest. I do think that it's not that we could, of course, go in and do recyclable in Australia, but it's just a tiny market compared to North America. So we need to be in markets where we have primary aluminum and where they scale. So it's not that there's a lot of other options. But I do think that we have really good growth opportunities, Matalco. I'm going there in 10 days' time, and I can't wait to see how we want to grow the market. I like us to deepen that because it's a given that there will be more growth in secondary than in primary in the future.

I know there's the history with the Alcan acquisition and the disposals, but would you consider moving back downstream into extrusions and areas like that?

Look, let us digest the Matalco first.

And the quick follow-up is on Jadar. There seem to be some positive moments recently. What's the state of play there?

Yes. So in Davos, I met with President Vucic, and we had a very constructive meeting. And he went out to the press afterwards and said that he wants to see the project progress. So I'm very happy with that. I need to work with the government of Serbia, but he's still to appoint the government because there was an election in December. So as soon as a new government is being appointed, we expect to engage with them on seeing how we can progress the project.

Let's go back to the line for 2 more questions. So we've got about 10 minutes. So let's speed it up a little bit so we can get through everybody please.

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

Maybe just drill down a little bit more into lithium, if I could. You said earlier, you want to be -- you want strong ore bodies where Rio can use its technology. I mean, when you say we've been through a bubble, which I guess we all agree with. But just when you look at the lithium industry, like you've got upstream, you've got downstream. Where do you think the value lies in the industry now? Just your thoughts on how the industry is evolving and where you see the best value.

It's a very good question, Glyn. Thank you. I think it's fair to say that the Western world hasn't yet entirely solved its supply chain, which is not lithium, it's batteries. And how are you going to build the future supply chains. And we can see that we kind of could be part of that puzzle, and it is emerging. But I think it's also pretty clear that most countries that has lithium in the ground would like to have or will only accept that to be extracted if there's also the processing happening there. And therefore, our presence in lithium is likely to be both mining and processing. But I have to say, after you have produced battery-grade lithium, whether it's -- what is called carbonate or hydroxide, it doesn't matter, but then it stops for us. We're not going to go into cathode and anode production, et cetera. So we're quite clear about what our role can play. But I think the supply chains are still to be defined. And we are just slowly but surely progressing. Well, I have already answered that question.

Yes. And Jakob, just maybe a follow-up to that. Price formation is obviously key when trying to work out what the value is of a lithium asset. The 2 -- or the recent bubble how do you make you think about the price formation now? Are you reconsidering what you think prices should be?

Not really because when we took the investment decisions on, for example, Rincon, that was before the big bubble. That was probably the same price as you have today. And in any case, we work with some long-term prices. In a way, the way I would think about it is we are a big company compared to many of the other lithium players and we can probably better take the volatility. And I think lithium prices are bound to be volatile in the future. What really matters to us is what's going to be the average price over the next decade. If you know that, I'd like to know it, but we feel that there could be a decent business case here.

Okay. And then if I could, just with my second question, asked about just China. There seems to be some concerns on growth on the ground. I mean I realize we just come out of Chinese New Year. But is there anything you're hearing any observations from your large team on the ground on the state of the Chinese economy that gives you concern for this year?

Yes, Glyn, it's really sad you can't see me wearing a very red tie today. Happy New Year. It's a year of the dragon. That should be a good indicator for the year to come. Look -- I am not an expert in everything in Chinese economy. But the Chinese economy that we are seeing, and that's obviously the very physical part of the Chinese economy is growing. And we feel quite comfortable about that. I thought the slide that Peter is showing is super good. I was actually trying to nick that slide because I think it just shows that, yes, there are issues in property, but the infrastructure and some of the industries like automotive is outpacing that. And net-net, the Chinese economy is growing.

Nadia, one more question from the line, and then we'll take another 2 here.

Yes, of course. And now we're going to take our next question, and it comes from line of Myles Allsop from UBS.

So it's Myles. So just on lithium, could you give us a bit of an update on Rincon, how much you spend? When you're hoping to get to FID? What is needed to get to FID? How credible is that as a project in the pipeline? It's the first question.

I'm leaving that question to Peter because I'm going to Rincon in 10 days' time, so I reserve my judgment.

And I I've been there. So Myles, I think we're spending on the lithium, the 3,000 project and the capital costs are as disclosed first production at the end of this year. So that's all on track. Otherwise, it studies for the bigger, more expanded case, which we're working through in parallel with that development of the 3,000. So still to be determined exactly scale and capital costs of what that looks like. But we have said, we think this is competitive industry benchmarks.

And Page 15, Myles, of the project table for the Rincon 3,000 numbers.

Okay. Maybe as a kind of a follow-up just on kind of iron ore and medium term. So production, you're still talking about capacity [ 345 to 360 ]. I mean we haven't talked about value over volume in iron ore. I mean obviously, there is a concern out there that the market will be surplus. I mean how are you thinking today around sort of managing the Pilbara production, medium-, long-term in a potentially softer [indiscernible] price environment with your kind of more marginal SP10 volumes and so on. And should we kind of plan for Rio to be more disciplined in the future or to just push out as Simandou ramps up?

Yes. So look, you never hear me talking about value over volumes. We are here to serve customers but we should be disciplined and we should be very disciplined. And everything we develop is at the very low end of the cost curve. And we have now had a number of years with high iron ore prices. And the beauty of that is that there's actually quite a lot of production that has come in at a very high cost. And that means that there is much more support from the cost curve at higher prices than there were some years back. So I actually feel we are in a very good position with the iron ore market.

Matt, please, and then Alex and then we'll wrap it up.

Matt Greene from Goldman Sachs. Jakob, on resolution, you mentioned you were in the White House recently. Given we're in an election year, do you believe that if we see a change in government, you can see an acceleration of the porting and development time line? And if I could just follow up, Peter, just on 2026 CapEx guidance on the yet-to-be sanctioned copper, have you budgeted for Escondida at all? And with that deferral, does that free up some of the budget to perhaps accelerate other copper options with the new portfolio?

Yes. So let me start. I just think that resolution will happen. We are making progress, good progress with the First Nation's people. There are 11 tribes that claims connection to the land. We're making really, really good progress there, including with the San Carlos tribe. So that's kind of a first thing because even if you get approval from the government, we also need to have FPIC with the First Nation people. Then there is an approval process, which in the U.S. also goes through the courts and it's in the Ninth Circuits right now, and we'll just have to respect that process. But leave no doubt that we are arguing our case. But I think we are arguing to an open door because it's so much in the U.S. interest, critical minerals have never been more important. The U.S. right now is consuming 2 million tonnes of copper. It only produces 1 million. It has only got 2 smelters left. One of them is ours and Kennecott, and we can load that up copper in resolution. And the U.S. demand of copper because of the energy transition is likely to go from 2 million to 4 million, and there's not a lot of copper production growing in the U.S. So I do think that it's actually have national importance to develop it. So I'm very optimistic. The only thing I can't give you is a time line around it.

And on Escondida. I mean, remembering the $3 billion when we talk about it is for incremental copper equivalent units, so right across the portfolio. And so the Escondida numbers are embedded in our forward numbers, but not part of that $3 billion.

And finally, Alex, ahead of your big conference on Monday. So be kind.

So Alex Pearce, BMO Capital Markets.

But in fact, let me just have the tough questions now, so it's -- easy one on Monday.

This is an easy one. So on IOC, you mentioned actually, you've got better volumes at the end of the year after a pretty challenging Q2, but it still seems to be running at least from a guidance perspective, below the long-term target there. And it does seem like it's infrastructure constrained. I just wonder, maybe you can comment on some of the initiatives you've got in place to try and meet that guidance that you've got this year? And also, can you just provide an update on some of the projects in terms of value add, I think HBI is being looked at, et cetera?

So Alex, I mean it was a tough year for IOC, but I mean they did lose almost a month's full production due to those wildfires. And that when you sort of take that into account, you can see that gives us more of a platform going into 2024 on production terms. So that's the big piece. I mean, haulage, we had some constraints. So we had a bit of extra inventory in IOC as well just on the haulage because we had production actually very good or suddenly going right down. And so that made that whole system a bit unbalanced and we're working through that. I mean I think they are really sort of focused on the Safe Production System and working this through. I mean there's a big piece around asset integrity at IOC and a big piece around driving productivity through the integrated system to really get the most out of that. I mean I think on product, I mean, it's just the product -- the IOC product is [ lone ] purity pellets, high-grade pellets. I mean it will be and that world of sort of steel -- green steel production that Jakob talked to. I mean it's right in the sort of middle section there of HBI production. I mean it's going to be a product in demand, and that's where we want to position it.

Look, it is, by any standard, a disappointing production year last year from IOC. Maybe I'm too patient, but I am very patient because we are learning from these things. We have -- you know that the asset have been on the block. We have not maintained it well for a long period of time. That takes time. And the team is getting on. They're getting more competencies, and we just need to get better maintenance in place to make this stable. I would have loved to have seen it happening faster. But in a way, every time you have a setback with an issue, it has a negative short-term impact, but it also has the opportunity for real learning and saying, how can we avoid that this ever happens again.

Great. Thank you very much. Thank you, everybody, for coming very early this morning. Thank you for staying up late in Sydney and Melbourne. Jakob and Peter are looking forward to seeing many of you face-to-face in the next 2 weeks. For those we don't see, see you in 5 months here again. Thank you.