Rio Tinto 2Q15 Earnings Call Notes

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The rate and nature of Chinese growth is changing

“Inevitably, the rate and nature of the growth is changing and it’s becoming less commodity intensive and more consumer focused. But let’s be clear, in the new normal, we’ll see continued economic growth from this larger base, including the ongoing increase in the long-term demand for all of our commodities.”

Tier 1 assets are key in mining

“There’s no substitute for Tier 1 assets. Across our commodities, we have a portfolio of leading assets, providing robust margins and cash flows. Others who own or develop third or fourth-quartile assets on a highly-geared balance sheet may do okay when prices are high, but it’s extremely challenging for them in the long term, and particularly in today’s environment. Well-run Tier 1 assets backed by a sound balance sheet is the only strategy that can create sustainable shareholder returns”

We believe that the iron ore market is fundamentally in balance

“a lot of things will happen during the rest of this year and who knows where sentiment will actually go. But if you look at the basic numbers, if you look at our forecast, which a lot of work and effort has gone into, we believe that the market is fundamentally in balance.”

We’re doing just fine at $55 iron ore

“With a unit cost of $16.20 a tonne, or converted to today’s exchange rate and energy costs, $15.20 a tonne, compared to an iron ore price of $55 a tonne, we’re doing okay. The margin is all right. And for me, sitting here today thinking that I’m going to sacrifice that margin, so that someone else somewhere in the world can bring capacity back on, to me, it just doesn’t make sense.”

I’m not about ticking boxes

“As I have mentioned during my comments, I’m very, very focused on shareholder value. I’m not about ticking boxes. I’m not about doing something, because it’s on somebody’s list, or it’s been reported in the media, or whatever. I’ll do it, because it delivers shareholder value. I believe it because it’s the right thing to do for shareholders. ‘

There aren’t enough copper projects coming on stream

“Copper’s going to be tough going forward. There aren’t enough projects that are coming on stream. Our projects are tough, because the ore bodies are complex; they’re deeper ore bodies, lower grade in a number of cases, and the approval cycle is extended.”

Energy costs benefit with a bit of a lag. Also generate energy from other sources

” as the price falls, we get a bit of a lag with regard to how it goes through into the cost structure. That’s one issue. Second one is, a lot of our energy inputs are self-generated in many cases. If you take the smelting system by way of example, we generate 50% of our own energy there, and a lot of hydropower there as well. So not all of our energy’s obviously in the oil sector.”

It’s getting tougher for us to reduce our costs

“we’ve reduced our costs by $5.5 billion over the past 2.5 years, and it is getting tougher.”

The industry may not get back to the demand that there was before prices started to decline

“post to global financial crisis, the market dynamics have actually changed. If you thought that the industry goes through cycles and you return to where you came from, I think the new normal is actually signifying that the return probably won’t be to the point that you left before prices started declining.”

Costs are reducing, efficiencies improving across commodities

“I think that’s a function of everything. We’re seeing, across the board, that costs are reducing; efficiency is improving; people are expecting greater value for less; and so on. And I think that we’ll see that across commodities as well. Still be a healthy place to be, but not the heady heights that we hit.”

We are asking ourselves are we spending enough to sustain installed capacity

“we are getting to the point where we’re asking the question now, are we making sure we’re spending enough to sustain that existing installed capacity, because if you cut to the chase, that installed asset base is a real powerhouse of this Company and the growth facilities that will come, will take their place in that portfolio. But the engine room that’s there now has to be sustained. And so I think we’re at a fairly balanced level here now.’