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.”

Rio Tinto 4Q15 Earnings Call Notes

Sam Walsh

Signs of recovery in industrial demand are yet to emerge

“Signs of recovery in industrial demand are yet to emerge, and a prolonged downturn brings increased risk. Housing sales in China stabilized during the second half of 2015, but we are yet to see a turnaround in China’s construction activity. The transition to a less commodity-intensive and slower growth path, often referred as the, New Normal, is further compounded by these soft industrial trends.”

Assets for sale are distressed and for good reason

“Right now, there is distressed assets that are out there and they’re distressed for a good reason; high costs, low quality, no infrastructure, people trying to get rid of – I was going to say get rid of their trash, but I could never say that. But we are mindful that there could well be opportunities.”

We’d certainly be interested in copper

” Certainly in the area of copper, as Chris said, if there was an attractive project in that area, that could be of interest to us, at the right price or right value.”

Almost everything people use requires our materials

“As the world continues to develop, urbanize, industrialize, there is basically nothing that people use on an everyday basis that can be produced without using our materials, even down to the iPhone that’s in your pocket. All of these require us.”

We have confidence in the long term demand for iron ore

“In terms of long-term demand for iron ore, we still have confidence in this. As I mentioned, as the world continues to develop, urbanize, industrialize, whether it’s China, the ASEAN nations, India, Middle East, South America, Africa, all of these regions will require iron ore and steel as they urbanize.”

No one quite understands what Xi Jinping means by the new normal

“So we’re going through a transition period. Nobody quite understands what the new normal means when President Xi Jinping mentioned it, but I think he mentioned that – it means that things are not going to be quite as they were in the past and that we need to adjust to it, we need to be responsive to it.

Chris Lynch

There are some good assets on distressed balanced sheets but they’re not on the market yet

But the key issue really is around — there are some very good assets in what you’d probably describe as distressed balance sheets, and they’re not on the market as yet. But we’ve got a watching brief on a lot of things and we’ll continue to do that. Whether we get to pull the trigger on anything, we’ll always look at a hell of a lot more than we ever pull the trigger on. But we do have capacity in the event that we wanted to do that.

Rio Tinto 2Q15 Earnings Call Notes

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.’

Rio Tinto 4Q14 Earnings Call Notes

Each week I read dozens of transcripts from earnings calls and presentations as part of my investment process. Below are some of the most important quotes about the economy and industry trends from the transcripts that I read this week. Full notes can be found here.

Cash from ops 14b

“We reported underlying earnings of $9.3 billion. We increased volumes and reduced costs, which enabled us to significantly reduce the impact of weaker prices. A focus on cash generation throughout the business led to net cash from operations of $14.3 billion. ”

We’re now in a position of strength

“We’re now in a position to strength, which allows us to not only meet our commitment to materially increase cash returns to shareholders, but also to be robust against low prices, to be in a position to take advantage of opportunities, which may present in the future.’

100m tonnes of new iron ore next year but only 20m in new demand

“If you look at 2015, we’re expecting that about 100 million tonnes of new capacity will come on. There will be growth in demand of about 20 million tonnes.”

Our cost is $17, still making nice margin

” if you take a current spot exchange rate and the spot energy price into account, in the iron business, costs are running at around $17 per tonne cash cost, as compared to the selling price today of $62 a tonne.”

You have to take off a lot of capacity to really balance the market

“as I’ve said before, if you want to balance the market, then you can’t just take off three or five million tonnes and expect that suddenly the price is going to go through the roof. You’ve actually got to take off sizable chunks, probably 100 million tonnes of capacity.”

No OPEC in iron ore

“So whether you like it or not, there is no OPEC in iron ore, its independent producers making their independent decisions. And the decisions that we make are in the best interest of our shareholders. That’s very, very important.’

Hi cost producers didn’t phone us up and say I’m bringing iron ore to market, so I’m not doing anything for them

“No, look, these people when they came into the market didn’t phone me up and say, jump for joy, I’m going to bring on some high cost production. So I don’t feel any responsibility for them. Now, yes, I’m sad for employees and communities and so on, but our people need to realize that the mining industry is cyclical. It goes through cycles. It’s supply and demand. It’s seasons. It’s a whole raft of things.”

Not lookng at M&A

“In relation to M&A, yes, I was very strident in my comments that we’re not looking at any major M&A. There are raft of things that, I don’t know, are on the market. These are a lot of the stress assets, and guess what, they distress for a reason. The high cost, the sorts of businesses that we are talking about earlier when we talk about and people needing to take the business of the market because it’s underwater, losing money.

If you look at the true opportunities for M&A, never say never, but these are few and far between if you’re really focusing on tier-1 low-cost opportunities. And unfortunately if one of those came on to the market and who knows when, that will be contested. So despite the fact that we’ve got a very strong balance sheet, it doesn’t automatically flow that we’re going to rush out and do it.”

Rio Tinto 2Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“I believe that we’ve set ourselves firmly on the path forward to becoming a leaner might tightly run business in pursuit of greater value for shareholders”

“We are seeing slightly slower growth in China but at least off a much bigger base. We are seeing continuing underlying structural issues in Europe and increasing uncertainty over the unwinding of the easing programs particularly in the USA.”

“Look in relation to capital allocation and investment decisions, I have mentioned that we have strengthened investment committee process and the inputs into that process from business evaluation group and our technical evaluation group. Quite frankly during the growth period, we had relaxed some of the checks and balances that those groups provided to our investment committee.”

“I think the best way I can describe it is that there are things that need to be worked through in the middle of an organization. You can’t actually determine these from the top of the organization.”

“You need the subject matter experts. The investment community can’t make decisions as to whether there has been enough infill drilling. They can’t make decisions as to whether the hydrology model rather the geo-technology. They’ve really got to rely on the middle level experts to do that. We had weakened that process.”

“Some people have said why don’t you spend your time traveling around the world whatever? The answer is no. I spend the majority of my time focusing on the contour of change that we need to make, focusing on the steps that we need put in place in terms of clear goals, clear vision, clear incentives, clear delivery rather than being administrator for tourism. I have visited our major operations around the world, Montreal, Perth, Sydney, Brisbane, Melbourne and so on. I have visited those to deliver the message. Then I step back and I know that I am looking at what they’re doing, I know what they need to do and they are delivering. So is the journey to finish an element? No, it’s not but we’ve got the right steps in place and have a look at the results, we’re delivering.”

“in relation to Tom Price. We’ve got a lot of good equipment there, it’s being well looked after, well maintained, it has got a lot more life in it and that’s how we’ll extend the life there.”

“I have learned in my career, if you want to transfer technology, if you want to transfer knowledge, the best way to do it is actually to transfer people. And that way you can principally keep people working side by side and see closely what’s going on and how you can get the same sort of benefits really flowing through, it’s not the concept – we all, private equity, yeah we don’t know what they do. The trick is how you actually implement it, implementation is hard and you need to have the knowledge and experience and you always need to have done it do it. ”

“Last year is definitely our peak [Capex] for the foreseeable future.”