Key initiatives and commitments
• Reduction of net capital expenditure guidance for 2009 from over $9 billion to $4 billion, while retaining future growth options
• Capital expenditure to be reduced to sustaining levels in 2010, absent an improvement in expected commodity market conditions
• Commitment to reduce controllable operating costs by at least $2.5 billion per annum in 2010
• Reduction in global headcount of 14,000 roles (8,500 contractor and 5,500 employee roles)
• 2008 dividend to be held at 2007 level of US 136 cents with no 20 per cent uplift in 2008 and 2009
• Expanded scope of assets targeted for divestment including significant assets not previously highlighted for sale
Introduction
Rio Tinto has announced a detailed package of measures in response to the unprecedented rapidity and severity of the global economic downturn, which has caused sharp falls in commodity prices and a significantly weaker outlook. The initiatives are aimed at preserving value for shareholders by conserving cashflow and reducing levels of debt.
In its third quarter operations review on 15 October 2008, the Group acknowledged that the economic outlook had substantially deteriorated, that demand conditions had weakened sharply, and that capital expenditure would be reviewed. Since that time, demand conditions have worsened further, and as a result the Group’s priorities have reoriented around conserving cashflow and reducing near term borrowings.
The Group’s net debt has reduced by $3.2 billion in the period from 30 June to 31 October 2008 to $38.9 billion. The Group is committed to reducing further net debt by $10 billion by the end of 2009.
The Group is expanding the scope of assets targeted for divestment to include significant assets not previously highlighted for sale. The Group is also working actively on measures to generate cash from joint ventures on its existing assets and projects.
Rio Tinto remains committed to its strategy of finding, developing and operating large, long life, low cost mining assets, which are cash generative at all points of the economic cycle. Rio Tinto’s existing portfolio of world-class, tier one assets continues to deliver strong cashflows in the current environment and provides the Group with optionality in terms of alliances and divestments.
The Group maintains its belief that the industrialisation of developing economies with large populations will support much higher levels of metals and minerals demand worldwide in future years. The purpose of these measures announced today is to ensure that the Group is well positioned to exploit this underlying trend when the global economy recovers. With its superior suite of assets, and a stronger balance sheet, Rio Tinto will be able to resume its growth programmes with renewed momentum.
Tom Albanese, chief executive, Rio Tinto, said “Given the difficult and uncertain economic conditions, and the unprecedented rate of deterioration of our markets, our imperative is to maximise cash generation and pay down debt. We have undertaken a thorough review of all our operations and are executing a range of actions.
“We will minimise our operating and capital costs to appropriately low levels until we see credible and meaningful signs of a recovery in our markets, but will retain our strategic growth options. We will expand further the scope of assets we are targeting for divestment. By taking these tough decisions now we will be well positioned when the recovery comes.”
“Notwithstanding the current financial turmoil, we continue to enjoy a suite of key assets which operate in the lower half of the cost curve in their industries, and our suite of growth assets remains capable of re-activation as soon as market conditions justify.”
Refinancing / debt repayment plans
The Group has established a hierarchy of options for the repayment of the amounts drawn under facilities A and B of the Alcan financing facility.
The Group’s primary intention is to utilise the generation of additional free cashflow following reduced capital and operational expenditure.
The Group is proceeding with an expanded divestment programme. The Group is in discussions with third parties related to further divestments or investment at the asset level, including but not restricted to joint ventures, which may lead to additional capital entering the Group, or reduced capital expenditure commitments in future.
The Group intends to pursue refinancing of the Alcan facilities in the term market, and will take advantage of credit market conditions as and when they improve.
In addition to these sources, the Group has available committed financing of $4.2 billion under Alcan Facility C (unused at 31 October 2008) and $2.3 billion unused committed bilateral banking facilities.
Reducing debt levels and managing debt maturities are a key priority of Rio Tinto’s Board and management. The Group’s policy continues to be to target a single A credit rating.
Capital and operating expenditure review and guidance for 2009 and 2010
In its third quarter operations review on 15 October 2008, the Group announced that it was reviewing its capital expenditure commitments in the light of current market conditions. Rio Tinto has concluded that it can make significant reductions in 2009 capital expenditure and significantly reduce project costs, while retaining growth options and realigning projects with revised expectations for market demand.
Total capital expenditure for the Group in 2009 is forecast to reduce from over $9 billion to $4 billion, of which $2 billion will be sustaining capital expenditure. There will be impacts on projects across the board and stakeholder engagements are currently underway. Some projects will be cancelled and others deferred until markets recover. Further detail will be provided to the market in the first quarter of 2009.
The Group will take the opportunity of project deferments to optimise project design, revisit costs and reduce further capex requirements.
Capital expenditure plans for 2010 will be reviewed throughout the year, assessing current and future market conditions. Capital expenditure levels will be reduced towards sustaining capital levels, if current demand and pricing weakness continues.
In addition to undertaking a review of capital expenditure, the Group has reviewed its controllable operating expenditure, and has plans in place to reduce operating and functional costs by at least $2.5 billion per annum by the end of 2010, based on current production rates and unflexed for currency and oil.
Measures to reduce costs include:
• Reducing global headcount by 14,000, comprising 8,500 contractor jobs and 5,500 employee roles (annual operating cost saving of $1.2 billion, upfront severance costs of $400 million)
• Consolidation of offices around the Group, including the London head office
• Rapid acceleration in 2009 of outsourcing and off-shoring of IT and procurement
• Deferral of exploration and evaluation expenditure
The impact of a decline relative to the US dollar of the currencies of the countries in which the Group primarily operates, particularly the Australian and Canadian dollars and the South African rand, has reduced the Group’s operating costs. The effect of currency declines has offset approximately one half of the impact of the fall in quoted metal prices on earnings since July 1, 2008.
The fall in the oil price has also been beneficial, with a $1 drop in the price of a barrel of oil improving the Group’s annualised underlying earnings by $11 million.
Sensitivities:
The following sensitivities give the estimated effect on underlying earnings assuming that each individual price, exchange rate or interest rate moved in isolation. The relationship between currencies and commodity prices is a complex one and movements in exchange rates can cause movements in commodity prices and vice versa. The exchange rate sensitivities quoted below include the effect on operating costs of movements in exchange rates but exclude the effect of the revaluation of foreign currency working capital. They should therefore be used with care.
Production and cost position guidance
In November 2008, Rio Tinto revised its estimate of iron ore shipments in 2008 from the Pilbara region of Western Australia to between 170 million tonnes and 175 million tonnes (on a 100 per cent basis) for 2008, while reducing the annualised production run rate by approximately 10 per cent. The capacity of the Pilbara operations at the end of 2008 is expected to be 220 million tonnes per annum (on a 100 per cent basis).
Depending on customer delivery requests and underlying demand conditions, the Group anticipates that global iron ore production and shipments for 2009 will be around 200 million tonnes on a 100 per cent basis.
In 2009, Rio Tinto’s share of aluminium production is estimated to be approximately 200,000 tonnes or five per cent less than existing capacity of 4.2 million tonnes, due to the curtailment of production at some higher cost smelters.
Rio Tinto’s share of mined copper production is anticipated to be approximately 830,000 tonnes in 2009.
The Group’s low cost assets are a source of competitive advantage, as they ensure robust cash flows at all points of the economic cycle.
Based on 2007 full year data, in iron ore, 93 per cent of Rio Tinto production is positioned in the lower half of the cost curve. In copper, 96 per cent of production is positioned in the lower half of the cost curve. In aluminium, 76 per cent of production is positioned in the lower half of the cost curve.
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