Rio Tinto 2Q16 Earnings Call Notes

Rio Tinto’s (RTPPF) CEO Jean-Sebastien Jacques on Q2 2016 Results

Pilbara cost is $14.30 per ton

“Our Pilbara business, they were operating cash flow of $9.71 billion, cost reduced by $138 million in the first half and fully loaded unit cost decreased from $16.20 per ton in the first half of 2015 to $14.30 per ton in the first half of this year. The business as again delivered strong margins, with an EBITDA margin of 58%. But there is more we can do and we’ve three stars already to move iron ore, we will continue to focus on maximizing the value of our Pilbara system.”

It’s clear that construction industry has picked up in China

“There is no doubt that the market remains volatile and we have seen higher prices in the recent months. This was mainly due to improved macro-economic trends especially in China. On my most recent trip to China, I met with a number of our customers, partners and government officials. It is clear the construction industry has picked up with the drawdown of housing inventory. This positively impacted commodity prices such as iron ore and met coal. But the recovery is not wide ranging and it’s mainly driven by credit.”

Inventory in tier 1 and tier 2 cities is down

“Had the opportunity in the last few months to go to China to meet some of our customers, some of our partners and some of the government officials. As I said earlier, it is fair to say that the construction market will pick up in the first half of this year, of the housing inventory of stuff where you want to apply especially in Tier 1 and Tier 2 cities of have gone down.”

The iron ore strategy is about value not volume

“we stated a few months ago, the iron ore strategy is not about volume, it’s about value, okay. We have the infrastructure for 360 at the port level, we have the capacity more in the mine, we don’t have it today in terms of railway. But what we are trying to achieve is about the optimization of free cash flow profile for the next five to 10 years down, and it’s synchronization of three things, it’s about the cost, it’s about the mix, products and about the CapEx. And the old question for us is what are the right decisions, what are the right parameters that we should target in order to optimize the free cash flow of the business for the next 10 years. So we will not give you any indication of when we will get to 360 because that’s now irrelevant, we will get there at the right time. As I said, the iron ore strategy is about value and not about volume”

A lot of uncertainty around China

“Malaysia, anyway. So what we are just saying is there is a lot of uncertainty around China that is as simple as it was. So we need to make sure that under any kind of scenario we, all assets perform well and our free cash flow positive. And that’s what we are doing. We don’t control the market. Now if the market is better and prices are better for sure we would be happy but we can’t assume a quick recovery China that will not happen. The truth of matter is quite simple, China is slowing down that’s the fact, the top of growth in China is changing dramatically that’s a fact as well. Now I had the question earlier today is if I look at the order books that we have and my point is not really but I know which is about copper as well as and this could be bauxite we do not have any issues in placing material into China. So for planning purposes we are very cautious but at the same time is we don’t have any issues today in placing the material.”