Rio Tinto Group Q2 FY2022 earnings call

Management Statement and Operational Highlights

• Safety and Performance: Achieved a fatality-free half, with the Rio Tinto Safe Production System rolled out at 15 deployments across 11 sites, resulting in a 9% year-on-year improvement in processing plants and drill rigs at deployment sites.
• Decarbonization: Has a $7.5 billion plan until 2030 for decarbonization, including renewable energy projects like a 100-megawatt solar farm near Karratha and electric haul truck trials at Kennecott.
• Stakeholder Engagement: Worked closely with Traditional Owners, including co-management heads of agreements with PKKP and Yinhawangka. Progressed ERA rehabilitation efforts to align with Kakadu National Park standards.
• Growth Options: Advancing the Simandou project, ramping up Gudai-Darri in Western Australia, and studying replacement mines. Completed acquisition of Rincon Lithium and approved early works infrastructure for it.

Segment Performance

• Iron Ore: Shipments were 2% lower due to COVID-19 disruptions and heavy rainfall, but second quarter production recovered with Gudai-Darri commissioning. Operating cash flow was $8.5 billion, free cash flow $7 billion. Unit cost for the half was $21.20 per tonne before COVID-related costs. Revenue contribution significant as China accounts for over half of Rio Tinto's revenues.
• Aluminum: EBITDA was $2.9 billion, benefited from higher market and product premiums early in the year but offset by higher input costs. Kitimat operated at 25% capacity due to strike action, with a controlled restart in Q2.
• Copper: Underlying EBITDA was $1.5 billion, down 27% due to lower sales volumes and cost inflation. Oyu Tolgoi made milestones like underground mining commencement, with the total project estimate reforecast to $7.06 billion.
• Minerals: Underlying EBITDA was $1.3 billion, 10% lower due to higher cash costs. Completed acquisition of Rincon Lithium in March, with $190 million approved for early works infrastructure.

Guidance

• Capital Expenditure: 2022 capital expenditure guidance reduced to ~$7.5 billion from $8 billion due to a stronger U.S. dollar and rephasing of projects. 2023-2024 estimate remains $9 billion to $10 billion, including up to $3 billion annually for growth.
• Decarbonization Spend: Best estimate for decarbonization spend until 2030 is $7.5 billion, with $1.5 billion over the next 3 years back-ended.
• Dividend: Declared an interim dividend of $4.3 billion, a 50% payout, with the final dividend to be decided in February based on major commodities outlook.

Risks

• Economic Uncertainty: Inflation, geopolitical tensions, and potential recessions impacting demand and pricing of commodities.
• Operational Challenges: Supply chain issues, COVID-19 disruptions, and cost inflation affecting margins across segments.
• Regulatory and Stakeholder Risks: Delays in approvals for projects like ERA rehabilitation and compliance with ESG standards, which could impact timelines and costs.

Question and Answer

• Q: Simandou progress and iron ore volumes A: Jakob Stausholm stated Simandou negotiations are progressing well, optimistic about ink on paper, and iron ore volumes will align with market conditions, confident in ongoing demand.
• Q: ERA rehabilitation funding A: Jakob Stausholm noted Rio is committed to ERA rehabilitation but emphasized it's a public company, working with the Board to efficiently funnel funds, respecting remaining shareholders.
• Q: Decarbonization spend and Pilbara projects A: Peter Cunningham explained decarbonization spend is back-ended, and Gudai-Darri Phase 2 is under study while focusing on Phase 1 ramp-up to 43 million tonnes.
• Q: M&A strategy and lithium A: Jakob Stausholm mentioned focusing on existing assets but monitoring market, and the TRQ acquisition process is ongoing with market changes since the initial proposal.
• Q: Relationship with China and Simandou A: Jakob Stausholm stated no specific concerns about China's new SOE, and Simandou is a separate high-quality asset complementing Rio's Pilbara operations.
• Q: Traditional Owner engagement and project timelines A: Jakob Stausholm highlighted progress in co-management agreements and engagement, but timelines for projects depend on collaborative, iterative processes with Traditional Owners