Continue to discuss the pathway forward for Oyu Tolgoi underground expansion

Continue to discuss the pathway forward for Oyu Tolgoi underground expansion

External pressures

The mining industry is cyclical and, following a decade-long growth phase, it is now experiencing a period of lower prices and compressed margins. Meanwhile, volatility – a characteristic of the macroeconomic environment since the global financial crisis – has been ongoing and is expected to continue, bringing with it further short-term risk.

Our response to this has been to focus on costs, cash flow and capital discipline. Others in the sector have embarked upon similar paths. Inefficiencies are also being exposed, and so reductions in costs and capital expenditure, productivity improvements, and project deferrals and cancellations have become a prominent part of mining industry strategy.

Despite the uncertain conditions that we currently face, the long-term outlook for our sector remains positive.

The world’s population is forecast to increase by 30 per cent in the next 40 years. Seventy million people enter the middle classes every year. In China alone, around 170 million people are expected to move to an urban environment by 2025. These factors are driving demand for the minerals and metals we produce, as essential ingredients of modern life. They make our business a good and valuable one to be in.

Despite the uncertain conditions that we currently face, the long-term outlook for our sector remains positive

Consistent strategy, sharper focus

Rio Tinto’s vision is to be a company that is admired and respected for delivering superior value as the industry’s most trusted partner.

The world we operate in today, and the future we are preparing for, require us to have a clear and consistent strategy. In 2013, we reaffirmed our direction of travel and recommitted to the strategy that has worked for us for many years: to invest in and operate long-life, low-cost, expandable operations in the most attractive industry sectors. This strategy will allow us to take advantage of the opportunities ahead, and we are confident that it is the right one for Rio Tinto.

In 2013 we reset our focus on executing the strategy by becoming a leaner, more cash-oriented and tightly-run business. We refocused our Group on improving performance, strengthening our balance sheet, and delivering results – to deliver greater value for shareholders.

We are doing what we said we would: reliably and relentlessly executing our strategy. We are making every dollar count, looking for ways to do things safer, smarter and better, and ensuring that we only invest in activities that add value.

2013 marked our 140th year in business. We have been around this long by being very good at what we do. Looking to the future, disciplined execution of our strategy is vital to building on our recent successes, and our industry-leading capabilities will equip us to do this.

We have world-class people and assets, and have developed pioneering and industry-leading systems and technologies. We pride ourselves on being innovative – finding solutions that help us operate more efficiently, sustainably and responsibly. We are recognised and respected for our exploration and operations expertise, for our values and our commitment to safety, and for creating benefits for our diverse stakeholders.

While these things will not change, our sharpened focus aims to transform us into the highest performer in our sector and will make sure we are fighting fit for the next 140 years and beyond.

Progress against strategy

In 2013, we refocused our business on three clear priorities to deliver greater value for shareholders: to improve performance, strengthen the balance sheet and deliver results.

What we said we would do in 2013	What we did	What we plan to do in 2014 and beyond
Improve performance
Improve our safety performance	Regrettably, our Group had three fatalities at managed operations during 2013 Our all injury frequency rate (AIFR) improved from 0.67 to 0.65      See our KPIs and      Sustainable development	Target, above all, the elimination of workplace fatalities Achieve a year-on-year improvement in AIFR and lost time injuries Improve how we manage critical risks and learn from serious potential incidents
Deliver US$2 billion in operating unit cash cost reductions	Achieved US$2.3 billion of operating unit cash cost improvements Exceeded our cost savings target while realising productivity gains across the portfolio and setting new production records      See our Financial review	Target further savings to reach US$3 billion full-year improvement in 2014 versus 2012 in operating unit cash costs
Reduce exploration and evaluation spending by US$750 million pre-tax	Reduced exploration and evaluation spending by US$1 billion      See Exploration	Sustain the reduced exploration and evaluation spend Continue to progress key evaluation projects at a pace that matches our overall view of investment priorities
Achieve targeted reductions of US$1 billion in sustaining capital expenditure	Reduced sustaining capital expenditure by US$1.9 billion      See our KPIs	Keep sustaining capital expenditure at around this reduced level
Strengthen the balance sheet
Simplify and strengthen our process for allocating capital	Set up “cash generation offices” to strengthen the focus on cash and improve visibility for senior managers in this area Elevated the role of subject matter experts in the economic and technical evaluation phase Reinforced our Investment Committee approvals process      See Capital allocation	Continue to apply our enhanced capital allocation systems and controls, to maintain discipline Allocate capital in the following order of priority Essential sustaining capital expenditure Progressive dividends Iterative cycle of compelling growth, debt reduction, and further cash returns to shareholders Pay down debt to a more sustainable level
Review capital expenditure plans across all of our businesses	Reduced capital expenditure from US$17.6 billion in 2012 to US$12.9 billion, completing five major capital projects, which enabled us to bring on significant new volumes Completed a ranking process for all our capital projects      See Capital allocation	Reduce capital expenditure further, to less than US$11 billion in 2014, and to around US$8 billion in 2015, while delivering steady growth
Invest only in new projects that provide attractive returns, well above cost of capital, and which compare favourably to other uses of capital	Outlined a breakthrough pathway to increase Pilbara mine production capacity towards 360 million tonnes per annum (Mt/a), at a US$3 billion lower capital cost than previously planned Funding and development of the phase 2 Oyu Tolgoi underground expansion delayed until discussions with Government of Mongolia are concluded      See Capital allocation	Increase Pilbara mine production capacity by 60Mt/a between 2014 and 2017, by focusing predominantly on brownfield expansions and low-cost productivity gains Continue to discuss the pathway forward for Oyu Tolgoi underground expansion
Deliver results
Streamline our portfolio through divestments, targeting significant cash proceeds	Announced or completed asset sales of US$3.5 billion Having been unable to divest Pacific Aluminium for sufficient value, the four smelters and Gove bauxite mine have been reintegrated into the Aluminium group After exploring options for the Diamonds business, including potential divestment, it has also been retained – this being the best path to generate maximum value      See Capital allocation	Continue our long-standing approach of reshaping our portfolio Curtail the Gove alumina refinery during the first half of 2014
Deliver the first phase expansion of the Pilbara operations – to 290Mt/a	Completed the first phase expansion four months ahead of schedule and US$400 million under budget, delivering first tonnes on the ship in August      See Iron Ore	Ramp up to reach an annual production rate of 290Mt/a before the end of the first half of 2014
Deliver first production of copper concentrate from Oyu Tolgoi	First copper-gold concentrate produced in January; first shipment took place in July; and operating at full capacity by the end of 2013      See Copper	Increase sales volumes at Oyu Tolgoi

The aim of Rio Tinto’s capital allocation process is to invest in a sustainable way through the cycle, having consideration of shareholders’ expectations of returns, and the robustness of our balance sheet. This is achieved through an evaluation and prioritisation of the Group’s portfolio of investment opportunities over a number of years to determine what will be the best use of capital.

In 2013, Rio Tinto enhanced the systems and controls in place to ensure that capital expenditure is kept at a suitable level, while continuing to invest in the best projects. Key considerations in determining the best use of capital include the progressive dividend policy, and the strength of the balance sheet. This, together with financial policies, existing capital commitments and operating cash flow forecasts set the boundaries for how much capital is available for investment.

In today’s capital-constrained environment, only the highest-returning investments will be approved. The Group analyses each investment based on net present value but also considers a number of further factors, including internal rate of return, payback period and risk profile. This suite of ranking criteria, together with the application of strategic judgment, ensures that capital is deployed to the best opportunities.

Rio Tinto’s capital expenditure reduced by 26 per cent to US$12.9 billion in 2013, compared to the peak level in 2012 of US$17.6 billion. It is expected to be reduced further to around US$11 billion in 2014.

Rio Tinto enhanced the systems and controls in place to ensure that capital expenditure is kept at a suitable level, while continuing to invest in the best projects

Major capital projects (>US$1bn)

(Rio Tinto 100% owned unless otherwise stated)	Total approved capital cost (100%) US$		Status/milestones
First production in 2013
Copper – construction of phase one of Oyu Tolgoi copper and gold mine in Mongolia.	$6.2bn		First copper-gold concentrate was produced in January 2013 with first shipment on 9 July 2013.
Iron ore – expansion of the Pilbara mines, ports and railways from 237Mt/a to 290Mt/a. (Rio Tinto share US$8.4bn).	$9.8bn		The expansion was delivered in August 2013. The elements related to fuel, accommodation, and the Nammuldi mine expansion are not yet fully complete. Ramp-up to nameplate capacity is scheduled to take place before the end of the first half of 2014.
Iron ore – development of the Hope Downs 4 mine in the Pilbara (Rio Tinto 50%, US$1.3bn) to sustain production at 237Mt/a.	$2.1bn		First production occurred in the first half of 2013. The new mine is anticipated to have a capacity of 15Mt/a.
Iron ore – Marandoo mine expansion in the Pilbara to sustain production at 237Mt/a.	$1.1bn		The expansion is expected to sustain Marandoo at 15Mt/a for 16 further years to 2030.
Coking coal – 20 year extension and expansion at Kestrel (Rio Tinto 80%), Queensland, Australia.	$2.0bn		Production came on stream in July 2013. It is expected to expand production from 4.3Mt/a to 5.7Mt/a.
Diamonds – Argyle underground mine, extending the mine life to at least 2020.	$2.2bn		Production commenced in the first half of 2013 and is ramping up to full capacity.
Aluminium – AP60 plant (60kt per annum (ktpa)) in Quebec, Canada.	$1.1bn		First hot metal was produced in September 2013 and full capacity was reached at the end of the year.
Ongoing and approved
Iron ore – expansion of the Pilbara port, rail and power supply capacity to 360Mt/a. (Rio Tinto share, US$3.5bn).	$5.9bn		The port, rail and power supply elements include investment in autonomous trains.
Iron ore – investment to extend the life of the Yandicoogina mine in the Pilbara to 2021.	$1.7bn		The investment includes a wet processing plant to maintain product specification levels.
Aluminium – modernisation and expansion of Kitimat smelter in British Columbia, Canada to increase capacity from 280ktpa to 420ktpa.	$3.3bn		First production is now expected in the first half of 2015, subject to any additional capital required to complete the project receiving board approval.
Copper – development of Organic Growth Project 1 (OGP1) and the Oxide Leach Area Project (OLAP) at Escondida (Rio Tinto 30%), Chile.	$1.4bn (Rio Tinto share)		Replacement of the Los Colorados concentrator with a 152kt per day plant, accessing higher-grade ore. Initial production is expected in the first half of 2015. OLAP maintains oxide leaching capacity.
Copper – construction of a desalination facility to ensure continued water supply and sustain operations at Escondida (Rio Tinto 30%), Chile.	$1.0bn (Rio Tinto share)		The project will provide a sustainable supply of water for the new OGP1 copper concentrator. Commissioning is scheduled for 2017.

The aim of Rio Tinto’s progressive dividend policy is to increase the US dollar value of ordinary dividends per share over time. The rate of the total dividend, in US dollars per share, is determined annually, taking into account the results for the past year and the outlook for the Group. Under our progressive dividend policy, the total dividend for each year should be equal to or greater than the total dividend for the previous year. The interim dividend is set at one half of the total dividend for the previous year.

The full year dividend in respect of 2013 was increased by 15 per cent, to 192 US cents per share, reflecting the board’s confidence in the business and its attractive prospects. This follows a 15 per cent increase in the 2012 full year dividend, and a 34 per cent increase for 2011.

In 2011 and 2012, Rio Tinto bought back US$7 billion of shares. US$5.5 billion of shares were repurchased in 2011 and the remaining US$1.5 billion were repurchased in 2012.

Divestments and acquisitions

During 2013, Rio Tinto announced or completed US$3.5 billion of divestments, including a binding agreement for the sale of the Clermont thermal coal mine in Queensland for just over US$1 billion, due to complete in the first half of 2014.

Asset	Consideration US$m		Status
Divested in 2013
Northparkes mine	820		Sold to China Molybdenum Co. Ltd.
Constellium	671		Shares sold to general public.
Palabora Mining Company Limited	373		Sold to a consortium led by Industrial Development Corporation of South Africa and Hebei Iron & Steel Group.
Eagle nickel-copper project	315		Sold to Lundin Mining Corporation.
Altynalmas Gold	235		Sold to Sumeru Gold B.V.
Inova Resources Limited	81		Sold to Shanxi Donghui Coal Coking & Chemicals Group Co.
Sebree	48		Sold to Century Aluminum Co.
Divested in 2012
Alcan Cable	229		Sold to General Cable Corporation.
Specialty Alumina businesses	Undisclosed		Sold to H.I.G.
Lynemouth Power Station	Undisclosed		Sold to RWE.
Energy – Extract Resources Ltd/Kalahari Minerals plc	429		Equity investment sold to Taurus Mineral Limited.
Divested in 2011
Alcan Engineered Products	Undisclosed		Sold 61 per cent to investment funds affiliated with Apollo Global Management, LLC (Apollo) and the Fonds Stratégique d’Investissement (FSI).
Minerals – talc	340(a)		Sold to Imerys SA.
Energy – Colowyo	Undisclosed		Sold to Western Fuels-Colorado LLC.
Exploration – sundry assets	52		Sale of projects including Altai Nuurs coking coal deposit and Sari Gunay gold deposit.
Acquired in 2012
Copper – Turquoise Hill Resources Ltd. (formerly Ivanhoe Mines Limited)	307		Purchase of additional shares increasing the Group’s holdings to 51 per cent.
Minerals – Richards Bay Mining Proprietary Limited	1,700		Acquisition of BHP Billiton Group’s entire interests in Richards Bay Minerals, doubling the Group’s holding to 74 per cent.
Acquired in 2011
Copper – Ivanhoe Mines Limited	1,860		Participation in the strategic rights offering, exercise of outstanding share warrants, exercise of subscription rights granted in 2010 and purchase of additional shares, in aggregate increasing the Group’s holding to 49 per cent.
Energy – Riversdale Mining Limited	4,168		Staged acquisition of shares in Riversdale Mining Limited; acquisition of a controlling interest of 52.6 per cent on 8 April 2011, increasing to 100 per cent by 1 August 2011, and renamed as Rio Tinto Coal Mozambique.
Energy – Hathor Exploration Limited	550		Purchase of shares in Hathor Exploration Limited resulting in an aggregate of a 70.2 per cent controlling interest being reached on 30 November 2011, increasing to 88 per cent by 31 December 2011 and completed on 12 January 2012.