Rio Tinto Group Q4 FY2022 earnings call

Key managerial messages included: 2022 financial results with underlying earnings of $13.3 billion, free cash flow of $9 billion, and return on capital employed of 25%; returning $8 billion to shareholders. Safety progress with 2022 being a fatality-free year, driven by the safety maturity model and Safe Production System rollout. Community partnerships, such as the agreement with the Puutu Kunti Kurrama and Pinikura people to create the Juukan Gorge Legacy Foundation. Acquisitions of TRQ and Rincon to strengthen materials for energy transition. Progress at Simandou with infrastructure joint venture and work on shareholder agreements, cost estimates, and regulatory approvals. Culture transformation focusing on care, courage, and curiosity, with implementation of the Everyday Respect report and embedding change in mindset and behaviors. Rollout of the Safe Production System globally, with 30 deployments across 16 sites in 2022.

Rio Tinto's segments showed varied performance in 2022. Iron ore had underlying EBITDA impacted by lower prices, but ended 2022 with strong momentum, including best fourth quarter production ever and healthy inventories. Aluminum faced operational and market challenges with margins compressed from 41% in the first half to 15% in the second half, but has competitive advantages with low carbon footprint. Copper saw a market-related decline, but the acquisition of TRQ and Oyu Tolgoi ramp-up will increase production; consolidated copper production is expected to be between 650,000 and 710,000 tonnes in 2023, rising to around 1 million tonnes once Oyu Tolgoi reaches full capacity. Minerals had iron, titanium, and borates post strong recoveries, partially masked by lower prices at the Iron Ore Company of Canada. Revenue contribution details weren't explicitly broken down by percentage in the provided transcript, but each segment's financial performance was discussed in terms of EBITDA and production volumes.

Management provided several forward-looking statements: Pilbara iron ore unit cost guidance for 2023 is $21 to $22.50 per tonne, a modest increase on the prior year. Capital allocation includes continuing to invest throughout the cycle, balancing near-term returns to shareholders with reinvestment for growth and derisking future cash flows. Expectations of $8 billion in capital expenditure in 2023, including $2 billion for growth. Oyu Tolgoi is expected to reach sustainable production in the first quarter of 2023. Dividend policy remains consistent with returning $8 billion to shareholders, maintaining a 60% payout ratio.

Risks discussed include operational risks at Oyu Tolgoi related to block cave mining, such as cave propagation stability and seismicity risks. Inflationary pressures affecting costs across the industry, with general price inflation and rising energy costs impacting EBITDA. Geopolitical risks in Mongolia, including potential challenges with the government and the complexity of underground mining operations. Challenges in the aluminum business, including price declines, high input costs (caustic soda, gas), and refinery instability.

Q: What is the status of the projects like Nuton, Rincon, and ELYSIS, and how do you manage science success and risk in the portfolio?

A: Jakob Stausholm mentioned that Rio Tinto has a strong research and development foundation, with initiatives like ELYSIS working in the lab and at scale. He emphasized that while there are risks, the company is doubling down on R&D and has a Chief Scientist to drive progress. The success of these projects is not guaranteed, but the company is committed to developing them.

Q: How do you view the exposure to Mongolia, especially with Oyu Tolgoi, and the geopolitical risks there?

A: Bold Baatar stated that Mongolia is a parliamentary democracy with a third neighbor policy, and there is a vote of confidence from banks like IFC and EBRD. He highlighted the progress in Oyu Tolgoi's underground operations and the strong relationship with the Mongolian government, though there are technical risks in block cave mining.

Q: What is the status of the framework agreement for Simandou and when might it be signed?

A: Jakob Stausholm and Bold Baatar mentioned that progress is being made, with teams in Conakry negotiating. The agreement is critical path, and while there's no specific timeline, it's a matter of weeks to months as the Guinean government finalizes documentation.

Q: How do you see the aluminum business recovering from the tough second half of 2022?

A: Peter Cunningham noted that while the second half was tough due to price declines, input costs, and refinery instability, the aluminum business has competitive advantages with low carbon footprint. Jakob Stausholm added that the world needs aluminum and the company is optimistic about finding a balance despite recent challenges.

Q: What are the projects to double copper production, and what is the upside bar?

A: Bold Baatar explained that doubling copper production involves the ramp-up of Oyu Tolgoi to over 1 million tonnes, along with other projects like Kennecott's underground expansion. The upside bar includes various projects and opportunities, with a focus on disciplined execution and learning from Oyu Tolgoi's ramp-up.