Rio Tinto CEO Tom Albanese – Toronto PDAC Speech – Strong Markets, Big Challenges

Rio Tinto CEO Tom Albanese at Toronto PDACIntroduction

Thank you for your welcoming introductions. It is a pleasure to be here to address you this afternoon. Over lunch we’ve been reflecting on what a great time it is to be in the mining industry.

When I started in the late 1970s all the way through to the 1990s we saw demand growth rates falling and prices steadily declining in real terms. Many of us can remember 60 cent copper, two dollar nickel and 50 cent aluminum. And this was only a few years back.

As the large attendance at this convention shows, our industry is back in fashion. We are seeing almost unprecedented demand for the metals and minerals we produce.

One of my daughters is studying in New York. She tells me a lot of unlikely people keep asking her about the resources industry. Resource stocks have become cool, even hip, like dot coms were. None of us can remember mining being here before. There’s a whole new ballgame under way, with soaring asset valuations generating a great deal of excitement.

Rio Tinto’s friendly takeover of Alcan last October, along with several other company realignments, are all indicators of how rapidly times are changing as globalisation gathers pace.

Our positive outlook is not unique; certainly BHP Billiton’s conditional bid is a sign of others wanting what we have. While these are the best of times for our industry, the flip side is that it throws up a lot of challenges, which is my theme today.

Rio Tinto

I am pleased that the takeover of Alcan has moved Rio Tinto much closer to Canada.  We now have 14,800 employees in Canada, of which 10,300 are with Rio Tinto Alcan. Although we already had strong Canadian businesses producing iron ore, diamonds and industrial minerals, with Alcan’s aluminum assets we are acquiring a much stronger Canadian flavour, including Canadian board members. We already operate Diavik Diamond Mines, Iron Ore Company of Canada and Quebec Iron and Titanium.

And as you know, Rio Tinto Alcan, the name of our much enlarged aluminum product group, is headquartered in Montreal. Rio Tinto has picked up Alcan’s role as a champion of Canada and we will meet all of Alcan’s social, economic and environmental obligations in Quebec.
We are a global company dual listed in the UK and Australia. To underline our focus on value and performance Rio Tinto is organised into five product groups, of which Rio Tinto Alcan is one.

The others are Rio Tinto Iron Ore, Energy, which includes uranium, Copper, our biggest earner in 2007, and Diamonds and Minerals. Our strategy is about creating value for shareholders. We invest in large, long life and competitive mines and businesses, driven by the quality of opportunity, not the choice of commodity.

The acquisition of Alcan completely conforms with our strategy, which is to focus on value and quality. We have created a global leader in aluminum with quality assets, competitively positioned on the global cost curve. Rio Tinto Alcan is the world leader in bauxite production and smelting capacity. It owns a combination of sustainable hydropower and industry leading technology that can’t easily be duplicated.
Rio Tinto is strong in iron ore and copper and now in aluminum also. These are the three mineral commodities associated with the economic growth and urbanisation of China and, in the future, India.

We are well placed, but the story is far from over as we look forward to what many believe will be a multi-decade period of strong metal and mineral demand.

Outlook

While North America worries about the sub prime market, the housing slump and a contracting economy, last year China’s economy expanded at its strongest pace in 13 years, marking the fifth year of double digit growth. Industrial production was up by 18.5 per cent and urban investment by 25 per cent. These are key aggregate indicators of China’s industrialisation and urbanisation process.

These strong numbers underline the durability of China’s commodities demand, especially for iron ore, aluminum and copper. We expect continuing double digit GDP growth in China in 2008 and metals demand to continue to rise at a rate well above GDP growth. Because of the focus on troubles in the US economy, there’s a perception that mining and metals once again face declining demand and over capacity in the short term.

This is not how we see it. Important as the US is to the world economy, it is not as influential as it once was to global demand for metals and minerals. We are firmly of the view that there is an economic de-linkage between China on one hand and the rest of the world, especially the US, on the other. We don’t think a recession in the US will have a significant impact on the demand for steel, copper and aluminum in China. Our estimate is that if there is a recession in the US, the impact on Chinese GDP growth will be one per cent or less.

We often think of China as being powered by exports, and particularly exports to the US. This is not really the story any more. The direction has changed to one of internal demand in China driven by industrialisation and urbanisation. The market for the industrial mineral, borates, which Rio Tinto produces in California, illustrates this quite well. Demand for borates has slowed in the US because of the housing crunch.
But we can’t produce enough boric acid to satisfy the increase in demand in China.

China has more than made up for the softness in the US market. The same is true of talc and other industrial minerals. So rather than the impending doom and gloom of previous cycles, we in the mining industry face a different set of challenges.

Challenges

When I came in as chief executive, I said we should expect a great demand picture, but also much stronger competitors, so we needed to do everything faster, better and smarter.  Well, this has been playing out; first with Alcan and now with the rejected BHP takeover offer. This has given us the spur for Rio Tinto to undergo great and exhilarating change.

After the Alcan takeover, the offer from BHP-Billiton has caused us to be even faster. We have stepped up our value case to shareholders and we have done that with enthusiasm. Back in November I said that BHP Billiton needs us more than we need them. Certainly events, and respective financial results since then, have borne this out.

Events have encouraged us to push the urgency of operational improvement, to pick up the pace of our business, to deliver higher value growth, better than anyone else. Rio Tinto has an attractive independent future with higher quality assets and greater growth prospects than our peers. We will continue to move ahead with our proven strategy that creates significant value for our shareholders. In doing so there are deeper, wider challenges faced by ourselves and the industry as a whole that we have to prepare for.
The most basic challenge is the need to find the big orebodies in a world hungry for metals. Taking copper as an example of a commodity in strong demand, our modelling projects that over the next 30 years the world is expected to consume twice as much copper as used in all of world history. To supply this demand will take a lot of copper. It’s a consequence of giving everyone the hybrid cars, iPods, billions of cellphones and the wiring that goes with it.

And it is not just copper. China accounted for 60 to 90 per cent of the increase in the global demand for steel and aluminum between 2000 and 2006. But its per capita consumption of those metals remains well below that of many OECD countries. The implication is that Chinese demand for these commodities, fuelled by growing consumer demand, has substantial scope to grow rapidly for some time.

And India is not far behind. Its per capita consumption is a fraction even of China’s, suggesting scope for rapid sustained demand growth over the longer run.

To step up supply we are challenged to develop resources that in the past were either considered to be too complex, or low grade, or in regions with high country risks and poor infrastructure. This presents a double whammy, as new skills and technologies are required to develop those resources. There is also increased capital intensity and risks in delivering projects on time.

The industry and its suppliers and contractors are facing acute shortages in the labour market – especially in relation to skilled professionals such as experienced mining engineers with project management experience. This leads to increased project costs and delays. As an example, the SME, a professional body covering mining professionals in the US and many other countries, had a membership in the early 1980s of  about 28,000. By 2004 it was down to 11,000, and even in 2007 it had only risen to about 12,000.
 
Further constraints extend to access to supporting resources such as energy and water. Environmental considerations in new developments are also long term resource related challenges. Additionally, regulatory approvals and government demands for a bigger slice of the pie are becoming increasingly significant barriers to being able to quickly ramp up supply.

Some answers

Some of the answers to these challenges lie in the opportunities that can be gained from:

-operating at a bigger scale, by which I mean consolidation,
-greater use of technology,
-increased exploration on new ground,
-smarter recruitment of skills, and
-contributing to sustainable development.

Consolidation

Globalisation has encouraged consolidation in the mining industry because scale really does matter. Scale confers a greater ability to compete not only with other miners but in the world of global business. Competition is for capital and access to exploration ground and the opportunities created by others.

Scale helps to attract the best skills and to develop improved technologies, the latter requiring deep pockets. There is also the cost of meeting legal, regulatory and community standards. The most important reason for consolidation however is that it unlocks value. For example the takeover of Alcan is expected to reduce costs at Rio Tinto by 940 million dollars a year in synergies.

Let me mention here that the process of integration of Alcan with Rio Tinto is going well and is being executed very quickly. Speed is a key success factor in any acquisition. In our case it was the result of it being a friendly transaction. The agreed nature of the transaction removed a great deal of uncertainty and allowed us to plan the integration from the time we announced our offer last July. We’ve decided on all the functional changes we want to make and at level of the board and executive committee we are already running Rio Tinto Alcan in exactly the same way as the rest of the Group.

Technology

The application of better technologies in mining and processing is another opportunity to meet our challenges. For Rio Tinto the acquisition of Alcan gives us the cost advantage of self generated power, as well as industry leading technology for the efficient use of electricity in smelting, and a reduction in the amount of greenhouse gases produced.

By the nature of our industry, many of us are not aggressive innovators. Our innovation is generally around reducing unit costs and increasing production, versus the creative destruction typified in some industries. As a matter of fact, Rio Tinto, like the whole industry, has under invested in R&D up until recently due to the lower prices for our products. Now though, the strong demand I spoke of earlier has given us an urgent business case to innovate.

We have decided Rio Tinto should not only be a fast implementer of technology developed by others, but also take the lead in areas that have particular significance and leverage for Rio Tinto. Among these are remote operation of equipment, automation and robotics, decarbonised coal, cleaner iron and aluminum smelting, and greater emphasis on underground bulk mining to avoid the disturbance caused by surface operations.
Automation will bring about superior performance, reduced use of energy and water, a smaller environmental footprint, and better alignment with the lifestyle aspirations of our employees, today and in the future.

Tremendous computing power and precision in global positioning systems have become available to offer a future in which our capital equipment is used with greater safety, efficiency and productivity. Our mine of the future will have excavators and draglines that make operational adjustments for themselves. There will be driverless haul trucks, automatically reporting to the workshop as maintenance falls due or faults are predicted. In the processing plant, sensors will make constant fine adjustments to win more metal from the stream of ore, using less energy, water and time.

Rio Tinto’s Iron Ore group in Western Australia is currently our first testing ground for the automation of a range of equipment and remote controlled operation of mines, processing plants and trains. Rio Tinto and Komatsu have agreed to work together to establish a mining operation in Australia that will feature an autonomous haulage system. It is expected to be commissioned before the end of the year and will be more widely deployed in our iron ore operations by 2010. Also, a new control centre in Perth is being developed to direct and monitor operations at mines 1,200 kilometres away, and we are introducing automated train driving systems from mine to port.

Exploration

Turning now to exploration, since 2002, exploration investment has risen in line with strengthening markets. In 2002, global exploration expenditure was in region of 2.5 billion dollars. By 2007 it had risen fourfold, to more than 10 billion.

Rio Tinto’s exploration expenditure has reflected this trend. In 2007, we spent almost 200 million on pure exploration compared with 100 million back in 2002. At the same time the exploration sector has witnessed substantial cost inflation, with prices rising steeply for drilling services, aviation and people.

Rio Tinto’s approach is to stick to the quality end of the spectrum. We focus on discovering orebodies that ensure positive returns at all points of the business cycle. This is in itself another challenge. Our explorationists have to set very high targets for what would represent a reasonable opportunity. For a discovery to be converted into a profitable mine, it has to be larger in volume and with higher grades of ore, than equivalent orebodies anywhere in the world. To do this we stick to the basics, prioritising our efforts to focus on what can make a difference to Rio Tinto.
Most of our exploration programme is carried out using in-house resources. We work closely with juniors, but not at the expense of out sourcing a core competency.

By keeping the programme mainly internal we can exercise control over the management of important issues such as business ethics, health, safety and the environment. Yet we recognise that our junior partners offer the advantages of flexibility and specialised local knowledge.
To give ourselves the best chance of success we aim for a multi-commodity portfolio that’s built up by putting together the best opportunities we can find. That may mean very little coal exploration and a lot of copper in one year and the reverse a couple of years later. The Exploration group aims to bank, on average, one discovery a year and over time it has managed to hit this target fairly consistently.

As you know, the best place to look for ore is on a mine site. At Bingham Canyon in Utah we’ve been mining for 100 years and thought we knew it very well. To our surprise, right below the open pit, we’ve discovered a molybdenum dominated orebody, about one kilometre high and 300 metres wide.

In Western Australia in the past five years our Exploration group has handed over about 2.2 billion tonnes of mineralisation to Rio Tinto Iron Ore. For every two cents we spend on exploration there, we are finding one tonne of mineralisation, which by any measure is a tremendous return on investment.

At La Granja in Peru, we thought we were evaluating a single copper deposit but in the last 12 months we’ve found four more deposits close to the original one, meaning that instead of two billion tonnes of mineralisation, we could be looking at eight billion.

In aluminum we’ve obtained some very interesting results from reconnaissance exploration for bauxite in Brazil and Colombia, including some from areas where no bauxite had previously been found. In Mozambique we’re working on heavy mineral sands prospects that could supply our Richards Bay smelter in South Africa. 

We have some good zircon finds in Australia. Zircon is a high value, heavy mineral used in the manufacture of ceramics and TV screens, and is much in demand in China. There are several promising coking coal projects under way around the world – notably in southern Africa, where we have announced a billion tonne resource at the Chapudi thermal coal project.

In northern India, an order of magnitude study of a diamond discovery should be completed later this year. It’s one of the top three diamond discoveries made anywhere in the last five years. Exploration continues to be the most cost effective way of finding new resources to supply the metals and minerals that consumers need in ever greater quantities.

Recruitment

The mining industry has for a long time been affected by the worldwide skills shortage. The situation can only become more serious as we go at full stretch to meet the strong demand for our products. When I graduated in the late 1970s, mining schools in Canada, the US, Australia and the UK were turning out engineers and earth scientists in greater numbers than today.

Now companies are having difficulty in recruiting, not only professional talent but also skilled artisans and technicians. Years of industry belt tightening, combined with the attraction of well paid careers in other sectors of the economy, discouraged recruitment and closed many mining schools. Today’s managers are challenged to reverse this trend. It is starting to happen, for instance we are seeing more women enter the industry at all levels.

At Rio Tinto, indigenous people in Canada and Australia are being given scholarships and culturally appropriate training. In Australia, we’ve made a special effort to engage with indigenous people, many of whom live where we work. By offering culturally sensitive recruitment methods and pre employment training we have increased indigenous employment on our sites.

Ten years ago, indigenous people made up less than 0.5 per cent of our workforce in Australia. Today they account for more than seven per cent or 1,200 people and our intention is to significantly increase that figure.

We use the same approach at Diavik Diamonds in the Northwest Territories. Nearly 70 per cent of the workforce are northerners and about a third are indigenous people. Diavik conducts an Aboriginal Leadership Development Program that provides individuals with additional skills to help advance their careers.

Elsewhere, apprenticeships are increasing and bridging courses exist that allow engineers to acquire mining qualifications. We are recruiting globally for professionals. In short the task of attracting developing and retaining talent has not only become a priority but is a competitive advantage for us. We still all have an obligation to step up our efforts to promote mining education and mining as a career for incoming professionals. This requires external communications which will become even more important while the mining sector is experiencing a cyclical high.

Sustainable development

It is also true that good community relations around our projects and respect for the environment are key to our future success. Rio Tinto has learned to follow community and public values in the way we operate and to reconcile these values with our economic goals.  Some of you may recall that a mining industry initiative to further mining’s contribution to sustainable development culminated here in Toronto in 2002.

The International Council on Mining and Metals was formed, which today is made up of 16 of the largest mining and metal companies, and 28 national mining and global commodities associations. Members believe that by practising their commitment to environmental, economic and social responsibility they will gain preferential access to land, capital and markets. Observing sustainable development goals is clearly an important part of the mix to gain competitive advantage.

These days people like to know where their products come from and whether they were ethically produced. Copper or gold may look the same but it can be differentiated and made more valuable according to origin.

-Copper from Bingam Canyon in Utah was chosen as roofing for a visitor attraction in the UK that promotes sustainable use of resources,
-Tiffany buys our gold because it is produced responsibly, and
-Rio Tinto’s diamond production is sold according to its mine of origin with a strict chain of custody process.

It shows good intentions are not enough; you can promote your financial goals by acting responsibly. Sustainable development should be part and parcel of managing the technical facets of our operations. Done well, this yields a reputational dividend that opens doors to new projects.

BHP Billiton offer

Before I conclude, I would be remiss if I did not say a few words about BHP Billiton’s pre-conditional takeover offer. The Rio Tinto boards unanimously rejected the proposal last November that three BHP Billiton shares be offered for each Rio Tinto share. We countered by outlining plans to deliver exceptional growth and announced a series of increased dividends.

In February, BHP Billiton followed with a pre-conditional offer of 3.4 BHP Billiton shares for each Rio Tinto share. Once again our boards gave this careful consideration and concluded BHP Billiton still significantly undervalues Rio Tinto and its prospects. The offer was unanimously rejected as not being in the best interests of Rio Tinto shareholders.

Rio Tinto is all about value. The conditional offer fails to recognise the underlying value of our highh quality assets and prospects. We are forging ahead with our strategy of developing and operating large scale, long life, low cost assets to generate significant value for shareholders.

Our record financial results for 2007 announced last month bear witness to our strong position. The momentum favours Rio Tinto and time will continue to favour Rio Tinto. This is reinforced by our recent strong moves in iron ore and aluminum, in both of which Rio Tinto is better positioned.

Conclusion

To sum up, we are going through a period of historically high demand for materials that is stretching our industry’s capacity to deliver. The challenges lie in finding the new resources to feed the supply chain, and to attract the talent and skills to keep the wheels turning.

As tools we need improved technology and better performance in the way we conduct our activities to meet society’s expectations. I have tried to offer some answers to our challenges such as my belief that larger scale can bring about many of the solutions that are needed.

Clearly that larger scale is the story of our times. It is part of the shift in economic power from the developed world to the developing world. And while new players crowd in we see mounting challenges.

As an optimist I know that our challenges will be overcome, but it will be fascinating to see how it plays out. What’s certain is that the consolidation we are seeing heralds a new era that we have not seen before and probably won’t see again. We’re on the edge of something huge.

And I have to say, it’s a great privilege to be leading a great company like Rio Tinto in these exciting and challenging times.

Thank-you

Check Against Delivery

05 March 2008
PDAC annual convention – Strong markets, big challenges
Speaker: Tom Albanese, Chief executive
Location: Toronto, Canada

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