REG - Rio Tinto - Rio Tinto 2016 half year results <Origin Href="QuoteRef">RIO.L</Origin> - Part 2
03/08/2016 07:35
- Part 2: For the preceding part double click ID:nRSC0884Ga
Notes to financial information by business unit
Business units are classified according to the Group's management structure. The financial information by business unit has
been recast in accordance with the organisational restructure announced on 21 June 2016. The main impacts are as follows:
Iron Ore Company of Canada has moved from the Iron Ore Product Group to the Energy & Minerals Product Group; Coal
businesses have moved from the previous Copper & Coal Product Group to the Energy & Minerals Product Group; and, Diamonds
businesses have moved from the previous Diamonds & Minerals Product Group to the Copper & Diamonds Product Group.
(a) Gross sales revenue includes the sales revenue of equity accounted units on a proportionately consolidated basis
(after adjusting for sales by EAUs to subsidiaries) in addition to consolidated sales. Consolidated sales revenue includes
subsidiary sales to equity accounted units which are not included in gross sales revenue.
(b) EBITDA of subsidiaries and the Group's share of EBITDA relating to equity accounted units represents profit before:
tax, net finance items, depreciation and amortisation charged to the income statement in the period. Underlying EBITDA
excludes the same items that are excluded from underlying earnings.
(c) Represents profit after tax for the period attributable to the owners of the Rio Tinto Group. Business unit earnings
are stated before finance items but after the amortisation of discount related to provisions. Earnings attributed to
business units do not include amounts that are excluded in arriving at underlying earnings.
(d) Pilbara represents the Group's 100 per cent holding in Hamersley and 65 per cent holding of Robe River Iron
Associates. 30 per cent of Robe River Iron Associates is held through a 60 per cent owned subsidiary and 35 per cent is
held through a 100 per cent subsidiary. Therefore the Group's net beneficial interest is 53 per cent.
(e) Presented on an integrated operations basis splitting activities between Bauxite & Alumina, Primary Metal, Pacific
Aluminium and Other integrated operations (which in total reflect the results of the integrated production of aluminium)
and Other product group items, which relate to other commercial activities.
(f) Under the terms of a contractual agreement, Rio Tinto is entitled to 40 per cent of material mined as a consequence
of expansions and developments of the Grasberg facilities since 1998.
(g) Rio Tinto's interest in Oyu Tolgoi is held indirectly through its 50.8 per cent investment in Turquoise Hill
Resources Ltd (TRQ) which in turn owns 66 per cent of Oyu Tolgoi LLC, which owns the Oyu Tolgoi copper-gold mine. The
principal asset of TRQ, as at 30 June 2016 and 31 December 2015, was its interest in Oyu Tolgoi LLC.
(h) Includes Rio Tinto's interests in Argyle (100 per cent) and Diavik (60 per cent). Murowa (77.8 per cent) was included
until its disposal to RZ Murowa Holdings Limited on 17 June 2015.
(i) As at 30 June 2016, includes Rio Tinto's 100 per cent shareholding in Coal & Allied Industries Limited and its
wholly-owned subsidiaries and in Hunter Valley Resources Pty Ltd. Rio Tinto, as a 100 per cent owner of Coal & Allied,
holds 67.6 per cent, 80 per cent and 55.6 per cent respectively, with management rights, in Hunter Valley Operations, Mount
Thorley and Warkworth; and holds a 100 per cent interest in the Mount Pleasant project.
As at 30 June 2015 and 31 December 2015, this represented Rio Tinto's 80 per cent interest in Coal & Allied, through which
Rio Tinto held its beneficial interests in Bengalla, Mount Thorley and Warkworth of 32 per cent, 64 per cent and 44.5 per
cent respectively.
Mitsubishi has moved from holding a 20 per cent stake in Coal & Allied (as at 30 June 2015 and 31 December 2015) to holding
a direct 32.4 per cent stake in the Hunter Valley Operations mine.
(j) Includes Rio Tinto's interests in Rio Tinto Fer et Titane (100 per cent), QIT Madagascar Minerals (80 per cent) and
Richards Bay Minerals (attributable interest of 74 per cent).
(k) Includes Rio Tinto's interests in Energy Resources of Australia (68.4 per cent) and Rössing Uranium Limited (68.6 per
cent).
(l) Simfer Jersey Limited, a company incorporated in Jersey in which the Group has a 53 per cent interest, has an 87.88
per cent interest in Simfer S.A. the company that operates the Simandou mining project in Guinea. The Group therefore has a
46.58 per cent indirect interest in Simfer S.A. These entities are consolidated as subsidiaries and together referred to as
the Simandou iron ore project.
(m) Other Operations include Rio Tinto's 100 per cent interest in the Gove alumina refinery and Rio Tinto Marine.
Notes to financial information by business unit (continued)
(n) Capital expenditure comprises the net cash outflow on purchases less disposals of property, plant and equipment,
capitalised evaluation costs and purchases less disposals of other intangible assets. The details provided include 100 per
cent of subsidiaries' capital expenditure and Rio Tinto's share of the capital expenditure of joint operations and equity
accounted units.
(o) Operating assets of subsidiaries comprise net assets excluding post-retirement assets and liabilities, net of tax,
and are before deducting net debt. Operating assets are stated after deduction of non-controlling interests, which are
calculated by reference to the net assets of the relevant companies (i.e. inclusive of such companies' debt and amounts due
to or from Rio Tinto Group companies).
(p) Assets and liabilities held for sale at 30 June 2016 comprise Rio Tinto's interests in the Blair Athol coal project,
Mount Pleasant, and certain separate assets at Rio Tinto Kennecott. Carbone Savoie and Bengalla were disposed of during the
period.
Assets and liabilities held for sale at 31 December 2015 comprised Rio Tinto's interests in the Blair Athol coal project,
Carbone Savoie, Bengalla and Molybdenum Autoclave Process assets.
Review of operations
Iron Ore
First half2016 First half 2015 Change
Pilbara production (million tonnes - Rio Tinto share) 131.3 118.6 +11%
Pilbara production (million tonnes - 100%) 160.8 146.3 +10%
Pilbara shipments (million tonnes - Rio Tinto share) 129.8 118.3 +10%
Pilbara shipments (million tonnes - 100%) 158.9 146.5 +8%
Gross sales revenue (US$ millions) 6,331 7,004 -10%
Underlying EBITDA (US$ millions) 3,438 4,010 -14%
Underlying earnings (US$ millions) 1,743 2,100 -17%
Net cash generated from operating activities (US$ millions) 1,690 2,005 -16%
Capital expenditure (US$ millions) 358 836 -57%
Iron Ore Company of Canada and Simandou are reported within Energy & Minerals, reflecting management responsibility.
Performance
The Iron Ore group's underlying earnings of $1,743 million in 2016 first half were 17 per cent or
$357 million lower than 2015 first half. This was primarily attributable to lower prices, reflected in the 14 per cent
fall, on average, in the Platts 62 per cent index, which reduced earnings by $744 million. The price impact was partly
offset by higher sales volumes, a weaker Australian dollar, lower energy costs and the realisation of further cost
savings.
Pre-tax cash cost improvements in the Iron Ore group were $138 million in 2016 first half and have now delivered $1,191
million of cumulative savings compared with the 2012 base. This is reflected in a reduction in Pilbara unit cash costs to
$14.30 per tonne in 2016 first half (2015 first half: $16.20 per tonne), attributable to exchange rate movements, increased
volumes, reduced fuel prices, lower selling costs and increased labour productivity. Pilbara operations delivered a free on
board (FOB) EBITDA margin of 58 per cent in 2016 first half, compared with 61 per cent in 2015 first half.
Gross sales revenues for Pilbara operations in 2016 first half of $6,303 million included freight revenue of
$344 million (2015 first half: $372 million).
Net cash generated from operating activities of $1,690 million benefited from strong shipments from the Pilbara, combined
with lower operating costs through realised cost savings initiatives and improved productivity.
Free cash flow of $1,332 million was $163 million higher than 2015 first half, mainly attributable to the 57 per cent
decline in capital expenditure, reflecting the completion of the Pilbara infrastructure expansion in 2015 first half.
Markets
First half sales of 158.9 million tonnes (Rio Tinto share 129.8 million tonnes) were eight per cent higher than the same
period of 2015 with a strong rail performance and no major weather events in contrast to last year. Bulk inventories built
up at the mines during the infrastructure expansion phase were largely exhausted by the end of 2015.
Approximately 21 per cent of sales in 2016 first half were priced with reference to the prior quarter's average index
lagged by one month. (The second quarter reference price for these sales was December 2015 to February 2016 at $39.40 per
dry metric tonne FOB). The remainder was sold either on current quarter average, current month average or on the spot
market. Approximately 61 per cent of 2016 first half sales were made on a cost and freight (CFR) basis, with the remainder
sold FOB.
Achieved average pricing in 2016 first half was $44.50 per wet metric tonne on an FOB basis (2015 first half: $54.40 per
wet metric tonne). This equates to $48.40 per dry metric tonne (2015 first half: $59.10 per dry metric tonne), which
compares with the average FOB Platts price of $48.10 per dry metric tonne for 62 per cent iron Pilbara fines during the
half (2015 first half: $55.30 per dry metric tonne).
Operations
Pilbara operations produced 160.8 million tonnes (Rio Tinto share 131.3 million tonnes) in 2016 first half, ten per cent
higher than the same period of 2015. This performance reflects minimal weather impacts as well as the successful
implementation of operational improvements and the ramp-up of expanded and new mines across the Pilbara.
New projects and growth options
On 2 August 2016, the Group approved $338 million to complete the development of Silvergrass, to maintain the Pilbara blend
and reduce unit costs. The initial phase of the Nammuldi Incremental Tonnes project, NIT1, (with a five million tonne per
annum capacity) commenced production in the fourth quarter of 2015 and the second phase, NIT2, (which will take annual mine
capacity from five to ten million tonnes) is expected to come into production in the fourth quarter of 2016. With this $338
million approval, the road haulage used in the NIT projects will be replaced by a conveyor, which is expected to take
annual mine capacity from 10 to 20 million tonnes1 from the fourth quarter of 2017, with full production in 2018.
Guidance
Rio Tinto's expected Pilbara iron ore shipments in 2016 are around 330 million tonnes (100 per cent basis), subject to
weather conditions. As announced in the First Quarter Operations Review, the delay in AutoHaul means production from the
Pilbara is expected to be between 330 and 340 million tonnes in 2017, subject to final productivity and capital expenditure
plans.
1 This production target was disclosed in a presentation dated 10 May 2016, released to the market. All material
assumptions underpinning that target continue to apply and have not materially changed.
Aluminium
First half 2016 First half 2015 Change
Production (Rio Tinto share)
Bauxite (000 tonnes) 23,160 21,179 +9%
Alumina (000 tonnes) 4,065 3,821 +6%
Aluminium (000 tonnes) 1,797 1,627 +10%
Gross sales revenue (US$ millions) 4,553 5,455 -17%
Underlying EBITDA (US$ millions) 1,076 1,688 -36%
Underlying earnings (US$ millions) 377 793 -52%
Net cash generated from operating activities (US$ millions) 993 1,556 -36%
Capital expenditure - excluding EAUs (US$ millions) 328 912 -64%
The Gove alumina refinery is curtailed and reported separately from Aluminium within Other Operations.
Performance
The Aluminium group had a strong first half operationally, with higher production in all three products compared with 2015
first half. Several sites achieved production records, including Yarwun for alumina, Gove and CBG for bauxite and Kitimat
for aluminium.
The group's underlying earnings of $377 million decreased 52 per cent compared with 2015 first half, due to a decline in
prices, which lowered earnings by $656 million, and an increase in depreciation expense following the commissioning of the
modernised Kitimat smelter. Despite the weaker pricing environment, the Aluminium group increased its free cash flow
generation to $660 million (first half 2015: $646 million), through a combination of strong volumes, cash cost and working
capital improvements and reduced capital expenditure, following the completion of the Kitimat smelter expansion. The
product group's relentless focus on cost reduction efforts and productivity improvement initiatives and a strong
operational performance, partly mitigated this price impact and generated an EBITDA margin from integrated operations of 25
per cent (2015 first half: 35 per cent).
Pre-tax cash cost improvements in the Aluminium group were $223 million in 2016 first half and the group has now delivered
$1,355 million of cumulative savings compared with the 2012 base.
Markets
The 2016 first half cash LME aluminium price averaged $1,544 per tonne, a decrease of 13 per cent on 2015 first half.
Market premia in all regions fell from their record highs in early 2015. In the US, the Mid-West market premium averaged
$181 per tonne in 2016 first half, compared with an average $395 per tonne in 2015 first half, a 54 per cent decrease.
Overall, the group achieved an average realised aluminium price of $1,805 per tonne in 2016 first half (2015 first half:
$2,292 per tonne). This includes premia for value-added products (VAP), which represented 53 per cent of primary metal
produced in 2016 first half and generated attractive product premia averaging $226 per tonne of VAP sold (2015 first half:
$259 per tonne) on top of the physical market premia.
Rio Tinto's share of third party bauxite sales in 2016 first half increased by five per cent to 13.9 million tonnes (2015
first half: 13.2 million tonnes). Bauxite prices decreased during this period due to increased bauxite supply and lower
freight rates.
Operations
Bauxite delivered strong production in 2016 first half, up nine per cent compared with 2015 first half, with Weipa, Gove
and CBG all reaching new production records for the half. The higher volumes, combined with cash cost reductions, absorbed
67 per cent of the bauxite price decline and led to the bauxite business recording a 48 per cent FOB EBITDA margin in 2016
first half. Bauxite underlying earnings declined 11 per cent to $243 million in 2016 first half.
Gross sales revenues for bauxite in 2016 first half decreased five per cent to $962 million and included freight revenues
of $93 million (2015 first half: $93 million).
Alumina production increased by six per cent compared with 2015 first half. Yarwun achieved record production as process
improvement initiatives were completed. The transformation of the Alumina business gathered pace during 2016 first half,
and resulted in the Alumina business significantly reducing its cash costs. Alumina managed to offset 53 per cent of the
price decrease it incurred during 2016 first half through enhanced volumes and reduced cash costs. Overall, the Alumina
business recorded a loss of $83 million, compared with a loss of $52 million in 2015 first half.
First half aluminium production of 1.8 million tonnes was ten per cent higher than 2015 first half, with the modernised and
expanded Kitimat smelter delivering its first full quarter at nameplate capacity. The Primary Metal business managed to
offset 28 per cent of the price decrease it incurred during 2016 first half through enhanced volumes and reduced cash
costs. Primary Metal earnings (Canada, Europe, Middle East) declined by 65 per cent to $107 million, while earnings from
Pacific Aluminium (Australia, New Zealand) decreased by 81 per cent to $29 million.
New projects and growth options
The expanded Kitimat smelter commenced production in June 2015, reached nameplate capacity of 420 thousand tonnes per annum
in March 2016 and is driving its production costs down into the first decile of the industry cost curve.
On 27 November 2015, the Group approved the $1.9 billion Amrun (South of Embley) bauxite mine and associated processing and
port facilities on the Cape York Peninsula in north Queensland. The planned initial annual output of 22.8 million tonnes a
year1 is expected to replace production from the depleting East Weipa mine and increase annual bauxite exports from Cape
York by around 10 million tonnes. Production and shipping are expected to commence in the first half of 2019.
2016 production guidance
Rio Tinto's expected share of production is 45 million tonnes of bauxite, 7.8 million tonnes of alumina and 3.6 million
tonnes of aluminium.
1 Refer to the statements related to this production target on page 2.
Copper & Diamonds
First half 2016 First half 2015 Change
Production (Rio Tinto share)
Mined copper (000 tonnes) 282.3 278.4 +1%
Refined copper (000 tonnes) 101.4 128.0 -21%
Diamonds (000 carats) 8,959 8,774 +2%
Gross sales revenue (US$ millions) 2,453 3,263 -25%
Underlying EBITDA (US$ millions) 655 1,335 -51%
Underlying (loss) / earnings (US$ millions) (67) 393 -117%
Net cash generated from operating activities (US$ millions)1 447 867 -48%
Capital expenditure - excluding EAUs (US$ millions) 446 426 +5%
1 Net cash generated from operating activities excludes the operating cash flows from equity accounted units (mainly
Escondida)
but includes dividends from equity accounted units.
Performance
Despite the challenging market environment, the Copper & Diamonds group was free cash flow neutral during the half, and
recorded an underlying loss of $67 million.
The decline in earnings, compared with $393 million in 2015 first half, was principally driven by the $236 million impact
of lower prices and $114 million of non-cash asset write-downs, following the conclusion of the review of the asset
portfolio at Rio Tinto Kennecott. Operationally, lower sales volumes for copper, gold and molybdenum were partly offset by
further cost savings at Kennecott and Oyu Tolgoi and an improved operational performance in Diamonds.
During the period, an agreement was reached for the sale of undeveloped land in the community of Daybreak, located five
miles to the west of the Kennecott mine. The sale transaction was completed on 16 July 2016 and the net proceeds have been
subsequently received. As at 30 June 2016, the land was classified an asset held for sale and revalued to fair value.
Over $140 million of pre-tax cash cost improvements were achieved by Rio Tinto managed operations during the first half.
This was fully offset by the lower volumes at Escondida in conjunction with the operation's programme to release working
capital with the processing of lower grade stockpiles. Despite this programme creating value, it resulted in higher unit
cash costs which are reflected in the results. Hence the net pre-tax cash cost improvements for the group were minimal in
2016 first half. Pre-tax cash cost savings delivered across the Copper & Diamonds group since 2012 totalled $999 million.
The free cash flow during the half is net of investments in development capital and exploration and evaluation spend of
$370 million across the business.
Markets
Average copper prices declined 21 per cent to 213 cents per pound and gold increased one per cent to $1,221 per ounce.
In 2016 first half, the US consumer market was steady, however demand from India and China continued to be slower due to
local market factors. Industry rough diamond prices varied across product segments.
The total impact of price changes on the Copper & Diamonds group, including the effects of provisional pricing movements,
resulted in a decrease in underlying earnings of $236 million compared with 2015 first half.
At 30 June 2016, the Group had an estimated 189 million pounds of copper sales that were provisionally priced at US 214
cents per pound. The final price of these sales will be determined during the second half of 2016. This compared with 252
million pounds of open shipments at 31 December 2015, provisionally priced at US 217 cents per pound.
Operations - Copper
Mined copper production was one per cent higher than 2015 first half, as a result of increased output at Kennecott and Oyu
Tolgoi, and a contribution from Grasberg, largely offset by a decrease in production at Escondida. Lower mined gold
production was driven by lower grades at Oyu Tolgoi and reduced mine throughput at Kennecott, partly offset by a
contribution from Grasberg. Refined copper and gold production at Kennecott was lower than 2015 first half, when volumes
were boosted by a drawdown in inventory.
Mined copper production at Kennecott for the first half was significantly higher than the same period of 2015 as mining
progresses through areas of higher copper grades. The focus continued on the de-weighting and de-watering of the east wall
of Bingham Canyon and the development of the south wall pushback. Refined copper and gold production at Kennecott were 36
per cent and 43 per cent lower, respectively, compared with 2015 first half, when a drawdown in inventory occurred.
Kennecott continues to toll third party concentrate to optimise smelter utilisation, with 199 thousand tonnes received for
processing in the first half of 2016. Tolled copper concentrate, which is smelted and returned to customers, is excluded
from reported production figures.
Mined copper production at Escondida in the first half was 23 per cent lower than the same period of 2015, primarily due to
lower copper grades, partly offset by higher throughput from the new concentrator.
At Oyu Tolgoi, mined copper production was 23 per cent higher than 2015 first half, attributable to higher grades and
throughput, along with productivity improvements.
On 19 July 2016, Rio Tinto reported its share of Grasberg's production for the half of 17.1 thousand tonnes of mined copper
and 29.4 thousand ounces of mined gold, in line with Freeport's publicly stated guidance at the time.
On 30 June 2016, Rio Tinto announced that it had transferred its 53.8 per cent shareholding in Bougainville Copper Limited
to an independent trustee, to be distributed between the Autonomous Bougainville Government for the benefit of all the
Panguna landowners and the people of Bougainville, and the Independent State of Papua New Guinea.
Operations - Diamonds
Diamonds production was two per cent higher than 2015 first half, with higher volumes at Argyle from the continued ramp-up
of production from the underground mine offsetting lower carats recovered at Diavik, reflecting lower grades.
New projects and growth options
On 6 May 2016, Rio Tinto, the Government of Mongolia and Turquoise Hill Resources announced the approval of the $5.3
billion development of the Oyu Tolgoi underground mine. Project activities have started, with the engineering, procurement
and construction management (EPCM) agreement awarded and mobilisation in progress. Following approval of the project, over
$4 billion of project financing has been drawn down, and represents one of the largest project financing facilities in the
industry.
At Escondida, the new concentrator (OGP1, a 152 thousand tonne per day concentrator) has been commissioned and continues to
ramp up to nameplate capacity. On 30 June 2016, the Escondida Owners Council approved the Los Colorados Extension project
for $180 million (100 per cent basis). First production is expected in the first half of 2017, adding incremental annual
capacity of approximately 200 thousand tonnes of copper in the near term.
2016 production guidance
Following Freeport's announcement of its revised 2016 production guidance for Grasberg, Rio Tinto now expects its share of
mined copper production in 2016 to be between 545 and 595 thousand tonnes. Expectations for refined copper production are
unchanged at 220 to 250 thousand tonnes. Diamond production for 2016 is expected to be between 18 and 21 million carats.
Energy & Minerals
First half 2016 First half 2015 Change
Production (Rio Tinto share)
Hard coking coal (000 tonnes) 3,780 4,103 -8%
Semi-soft coking coal (000 tonnes) 2,067 1,922 +8%
Thermal coal (000 tonnes) 8,654 8,837 -2%
Iron ore pellets and concentrates (000 tonnes) 4,993 4,726 +6%
Titanium dioxide (000 tonnes) 481 624 -23%
Borates (000 tonnes) 250 253 -1%
Salt (000 tonnes) 2,555 2,611 -2%
Uranium (000 lbs) 3,020 2,141 +41%
Gross sales revenue (US$ millions) 2,960 3,524 -16%
Underlying EBITDA (US$ millions) 531 620 -14%
Underlying earnings (US$ millions) 82 74 +11%
Underlying earnings pre-Simandou (US$ millions) 124 92 +35%
Net cash generated from operating activities (US$ millions) 469 676 -31%
Capital expenditure (US$ millions) 134 263 -49%
Iron Ore Company of Canada and Simandou are reported within Energy & Minerals, reflecting management responsibility.
Performance
The Energy & Minerals group's underlying earnings of $82 million, which were 11 per cent higher than 2015 first half,
benefited from further cash cost improvements and weaker exchange rates, partly offset by lower prices, while sales volumes
were generally flat. Excluding the impact of the Simandou costs associated with completing the bankable feasibility study,
Energy & Minerals earnings were 35 per cent higher at $124 million.
Pre-tax cash cost improvements in the Energy & Minerals group were $152 million in 2016 first half and the group has now
delivered $1,215 million of cumulative savings compared with the 2012 base.
Net cash generated from operating activities of $469 million was 31 per cent lower than 2015 first half due to lower
prices, higher tax payments and the expensing of all Simandou study costs, partly mitigated by cost improvements and
further reductions in working capital.
Free cash flow during the half was $332 million, $77 million lower than 2015 first half, reflecting lower operating cash
flow partly offset by reduced capital expenditure, which declined by $129 million, or 49 per cent, to $134 million with
continued capital discipline across the product group. From the start of 2016, all Simandou study costs are being
expensed.
Markets
Thermal and hard coking coal prices declined in 2016 first half, averaging $51 and $84 per tonne, respectively.
Thermal coal revenues of $611 million in 2016 first half (2015 first half: $769 million) represented 3.8 per cent of the
Rio Tinto Group total (2015 first half: 4.3 per cent).
Titanium dioxide feedstock demand remained subdued throughout 2016 first half as the industry continued to absorb excess
inventories, although there is positive demand growth for specific grades. The market for zircon has recently stabilised
following an initial period of weak demand in China.
Demand for borates has remained stable globally, with robust demand in the Americas and India partly offset by weaker
growth in China and weather-related demand constraints in south-east Asia.
The uranium market continues to suffer from high inventory levels throughout the supply chain, with soft prices declining
during 2016 first half and remaining under pressure.
Operations - Energy
Hard coking coal production for 2016 first half was eight per cent lower than 2015 first half primarily due to the timing
of the longwall changeover at Kestrel.
Semi-soft coking coal production reflects the Coal & Allied restructure in early 2016 and mine production sequencing at
Hunter Valley Operations and Mount Thorley Warkworth, resulting in eight per cent higher production for the first half of
2016 than the first half of 2015.
Thermal coal production for the first half was broadly in line with the same period last year.
Despite lower prices, all coal operations were free cash flow positive in 2016 first half.
Uranium production was 41 per cent higher than 2015 first half, with higher mill throughput and mill recoveries at Energy
Resources of Australia and a stronger half at Rössing following a fire in the final product recovery plant in 2015 first
half.
On 30 September 2015, Rio Tinto reached a binding agreement for the sale of its interest in the Bengalla Joint Venture to
New Hope Corporation Limited. The sale completed on 1 March 2016 for $617 million.
On 27 January 2016, Rio Tinto announced that it had reached a binding agreement for the sale of its Mount Pleasant thermal
coal assets to MACH Energy Australia Pty Ltd for $224 million plus royalties. The conditions precedent of the sale have
been met and the sale is expected to close in the third quarter of 2016.
Operations - Iron Ore Company of Canada (IOC)
IOC achieved first half of production of 8.5 million tonnes of concentrate and pellets (Rio Tinto share 5.0 million
tonnes), a six per cent increase over the first half of 2015. This improvement was driven by increased asset reliability
and performance. The improvement in production boosted first half sales by 17 per cent over last year's levels, to 8.6
million tonnes (Rio Tinto share 5.0 million tonnes).
Operations - Minerals
Titanium dioxide slag production in the half was 23 per cent lower than in the first half of 2015. Rio Tinto Iron &
Titanium continues to optimise production in line with demand, with two of nine furnaces at Rio Tinto Fer et Titane and one
of four furnaces at Richards Bay Minerals (RBM) currently idled.
Borates and salt production were broadly in line with 2015 first half.
New projects and growth options
Work continues on the feasibility study for the Zulti South development at RBM, which is one of the best undeveloped assets
in the mineral sands industry.
The Jadar project in Serbia is a potentially world-class lithium-borate deposit discovered by Rio Tinto in 2004. Findings
so far are encouraging and pre-feasibility assessments are ongoing to confirm the economic business case.
Simfer (owned 42.7 per cent by Rio Tinto) completed the integrated Bankable Feasibility Study for the mine, rail and port
and infrastructure elements of the Simandou iron ore project in May 2016 on time and as required by the Investment
Framework. Extensive engagement with potential infrastructure investors has taken place, but deteriorating market
conditions have had a negative impact on investors' appetite for the project and have prevented Simfer from assembling a
funding consortium. The group is working with its partners to restructure the project so as to facilitate access to
infrastructure funding from China.
2016 production guidance
In 2016, Rio Tinto's share of production is expected to be 17 to 18 million tonnes of thermal coal, 3.3 to 3.9 million
tonnes of semi-soft coking coal, seven to eight million tonnes of hard coking coal, 12 million tonnes of iron ore pellets
and concentrates (equivalent to 20 million tonnes on a 100 per cent basis), one million tonnes of titanium dioxide slag,
0.5 million tonnes of boric oxide equivalent and five to six million pounds of uranium.
Other Operations
First half 2016 First half 2015
Gross sales revenue (US$ millions) - 10
Underlying EBITDA (US$ millions) (12) (14)
Underlying loss (US$ millions) (32) (20)
Capital expenditure (US$ millions) 1 (15)
The Gove alumina refinery is reported in Other Operations. The curtailment of production was completed on 28 May 2014.
Other items
First half 2016 First half 2015
Underlying EBITDA (US$ millions) (255) (266)
Underlying loss (US$ millions) (159) (215)
Capital expenditure (US$ millions) (60) 31
Central office costs, central Growth & Innovation costs and other central items are reported in Other items. The decline in
the underlying loss in 2016 first half compared with 2015 first half was largely due to lower costs for pensions, share
options and captive insurance. In 2016 first half, the Group divested some corporate office buildings which gave rise to a
net $60 million inflow.
Central exploration
First half 2016 First half 2015
US$ millions
Post-tax charge (53) (56)
Central exploration expenditure in 2016 first half (post divestments and tax) resulted in a charge to underlying earnings
of $53 million, broadly in line with 2015 first half.
Price & exchange rate sensitivities
The following sensitivities give the estimated effect on underlying earnings assuming that each individual price or
exchange rate moved in isolation. The relationship between currencies and commodity prices is a complex one and movements
in exchange rates can affect 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.
Average published price/exchange rate for 2016 first half $ million impact on full year 2016 underlying earningsof a 10% change in prices/exchange rates
Aluminium $1,544/t 450
Copper 213c/lb 204
Gold $1,221/oz 36
Iron ore (62% Fe FOB) $48/dmt 761
Coking coal (benchmark) $84/t 58
Thermal coal (average spot) $51/t 78
Australian dollar against the US dollar 0.73 638
Canadian dollar against the US dollar 0.75 217
Oil $40/bbl 49
DIRECTORS' REPORT
for the half year ended 30 June 2016
Review of operations and important events
A detailed review of the Group's operations, the results of those operations during the half year ended 30 June 2016 and
likely future developments are given on pages 1 to 23. Important events that have occurred during the period and up until
the date of this report are set out below.
On 27 January 2016, Rio Tinto announced that it had reached a binding agreement for the sale of its Mount Pleasant thermal
coal assets to MACH Energy Australia Pty Ltd for US$224 million plus royalties.
On 1 March 2016, the Group announced that it had completed the sale of its 40 per cent interest in the Bengalla coal Joint
Venture in Australia to New Hope Corporation Limited for US$616.7 million.
On 17 March 2016, the Group announced that Rio Tinto chief executive Sam Walsh would retire from the business on 1 July
2016 and would be succeeded by Copper & Coal chief executive Jean-Sébastien Jacques. Jean-Sébastien joined the board and
became deputy chief executive with effect from the same date.
On 15 April 2016, the Group announced that Rio Tinto and Sinosteel Corporation had extended their historic Channar Mining
Joint Venture in Australia's Pilbara region. The Channar joint venture extension, together with a separate agreement for
Rio Tinto to supply iron ore from the Pilbara, will enable sales of up to 70 million tonnes of iron ore to Sinosteel
Corporation over the next five years. This extension will see 30 million tonnes of iron ore supplied into the joint
venture, with Sinosteel making a one-off payment of US$45 million to Rio Tinto and providing additional production
royalties linked to the iron ore price. In a separate agreement, Rio Tinto will sell up to 40 million tonnes of iron ore to
Sinosteel between 2016 and 2021.
On 21 April 2016, the Group announced a proposed transaction, using its strong liquidity position, to reduce gross debt
through the early repayment of some near term maturing debt, by commencing cash tender offers to purchase $1.5 billion of
its 2017 and 2018 notes.
On 27 April 2016, the Group announced that it had progressed plans to reduce gross debt through the early repayment of some
near term maturing debt, pricing its Any and All Offer. The total consideration payable in connection with the Any and All
Offer by Rio Tinto pursuant to the Offer to Purchase dated 21 April 2016 was set at $1,006.91 for the 2.000 per cent Notes
due 2017 and at $1,005.85 for the 1.625 per cent Notes due 2017, in each case per $1,000 principal amount of notes.
On 28 April 2016, the Group announced that under its plan to reduce gross debt through the early repayment of some near
term maturing debt, it had accepted for purchase a total of $1.359 billion in debt pursuant to its Any and All Offer, which
commenced on 21 April 2016 and expired on 27 April 2016. $339 million in aggregate principal amount of its 2.000 per cent
Notes due 2017 would be purchased at a price of $1,006.91 per $1,000 principal amount of notes. $1.020 billion in aggregate
principal amount of its 1.625 per cent Notes due 2017 would be purchased at a price of $1,005.85 per $1,000 principal
amount of notes.
On 5 May 2016, the Group announced that under its plan to reduce gross debt through the early repayment of some near term
maturing debt, it had accepted for purchase a total of $141 million of debt under its Dutch Auction Offer.
On 6 May 2016, the Group announced that Rio Tinto and its partners, the Government of Mongolia and Turquoise Hill
Resources, had approved the next stage in the development of the world-class Oyu Tolgoi copper and gold mine in Mongolia.
The development of the underground mine will start in mid-2016 following the approval of a $5.3 billion investment by the
partners and the recent granting of all necessary permits. First production from the underground, which has an average
copper grade of 1.66 per cent, more than three times higher than the open pit, is expected in 2020. When the underground is
fully ramped up in 2027, Oyu Tolgoi is expected to produce more than 500,000 tonnes of copper a year, compared with current
annual production of 175,000-200,000 tonnes. The mine also benefits from significant gold by-products, with an average gold
grade of 0.35 grams per tonne.
On 24 May 2016, the Group announced that it had appointed Stephen McIntosh as the acting Group executive, Technology &
Innovation to succeed Greg Lilleyman, who left the company after 25 years of service. Stephen has been with Rio Tinto for
almost 30 years working on projects in more than 45 countries spanning the A-Z of minerals and metals. Most recently, he
was head of Exploration, leading a 450-strong global team of employees operating in 20 countries.
On 7 June 2016, the Group announced a proposed transaction, continuing to use its strong liquidity position, to reduce
gross debt, by commencing cash tender offers to purchase up to $3 billion of its 2018, 2020, 2021 and 2022 US
dollar-denominated notes.
On 13 June 2016, the Group announced that it had progressed plans to reduce gross debt as part of its ongoing capital
management, by pricing its Any and All Offer announced on 7 June 2016. The total consideration payable in connection with
the Any and All Offer pursuant to the Offer to Purchase dated 7 June 2016 was set at $1,108.33 for the 6.500 per cent Notes
due 2018 and at $1,024.36 for the 2.250 per cent Notes due 2018, in each case per $1,000 principal amount of notes.
On 14 June 2016, the Group announced that under its plan to reduce gross debt as part of its ongoing capital management, it
had accepted for purchase a total of $1.747 billion in debt pursuant to the Any and All Offer, which commenced on 7 June
2016 and expired on 13 June 2016. $943 million in aggregate principal amount of 6.500 per cent Notes due 2018 would be
purchased at a price of $1,108.33 per $1,000 principal amount of notes. $804 million in aggregate principal amount of 2.250
per cent Notes due 2018 would be purchased at a price of $1,024.36 per $1,000 principal amount of notes.
On 21 June 2016, the Group announced that under its plan to reduce gross debt as part of its ongoing capital management, it
had accepted for purchase a total of $1.252 billion of debt under its Maximum Tender Offer and $1.748 billion under its Any
and All Offer. Both offers commenced on 7 June 2016 and are part of Rio Tinto's ongoing capital management. The final
aggregate principal amount of Securities purchased under the Any and All Offer that expired on 13 June 2016 was $1.748
billion, including the notes purchased under the guaranteed delivery procedures described in the Offer to Purchase.
On 21 June 2016, the Group announced that it had priced the Maximum Tender Offer under its plan to reduce gross debt by $3
billion. The Maximum Tender Total Consideration payable in connection with the Maximum Tender Offer was set at $1,069.72
for its 3.500 per cent Notes due 2020, $1,094.06 for its 4.125 per cent Notes due 2021 and $1,078.46 for its 3.750 per cent
Notes due 2021. The Maximum Tender Offer Total Consideration payable was set at $1,046.94 for its 3.500 per cent Notes due
2022 and $1,016.14 for its 2.875 per cent Notes due 2022, in each case per $1,000 principal amount of notes.
On 21 June 2016, the Group announced that it would strengthen its organisational structure to continue to drive performance
under its new chief executive Jean-Sébastien Jacques. From 2 July 2016, Rio Tinto's product group structure was adjusted to
better align the Group's assets with the business strategy to help drive further efficiencies and optimise performance. The
Group's world-class assets have been placed firmly at the centre of the business, supported by efficient and agile global
functions.
Under the new arrangements, Rio Tinto's organisational structure includes four product groups -
Aluminium
,
Copper & Diamonds
,
Energy & Minerals
and
Iron Ore
. These groups are complemented by a newly shaped
Growth & Innovation
group, which focuses on future assets and technical support.
Under the new structure:
·
Aluminium
retains its focus on safety, cash and value creation from its high-quality bauxite, alumina and aluminium businesses.
Alfredo Barrios would remain as chief executive, based in Montreal.
·
Iron Ore
is exclusively focused on the Group's world-class iron ore operations in Western Australia. Chris Salisbury, previously
acting Copper & Coal chief executive, became Iron Ore chief executive based in Perth.
·
Copper & Diamonds
combines our two marketing-led businesses into a single product group, which helps us maximise our technical underground
mining expertise. Arnaud Soirat joined the Executive Committee as Copper & Diamonds chief executive. Arnaud, previously
Aluminium Primary Metal president and chief executive officer, with more than 24 years of industry experience across three
continents, is based in London.
·
Energy & Minerals
re-shaped Alan Davies' portfolio, bringing together Rio Tinto's coal, uranium, salt, borates and titanium dioxide
businesses, as well as the Iron Ore Company of Canada. Alan, previously Diamonds & Minerals chief executive, remains based
in London.
·
Growth & Innovation
provides strategic leadership and technical expertise for the end-to-end delivery and management of growth from exploration
to projects. Stephen McIntosh, previously acting Technology & Innovation Group executive, takes up the role of Growth &
Innovation Group executive, based in Brisbane.
In addition, reflecting the Group's increased focus on health and safety, accountability for safety as a discrete unit sits
with an Executive Committee member for the first time.
Joanne Farrell, previously the global head of Health, Safety, Environment and Communities takes on the role of Group
executive, Health, Safety & Environment based in Perth. Joanne, who has more than 35 years' experience in the mining
sector, also became managing director of Australia.
Andrew Harding, previously Iron Ore chief executive, left the business with effect from 1 July 2016.
On 30 June 2016, the Group announced that it had transferred its 53.8 per cent shareholding in Bougainville Copper Limited
(BCL) to an independent trustee. Equity Trustees Limited would manage the distribution of these shares between the
Autonomous Bougainville Government (ABG) for the benefit of all the Panguna landowners and the people of Bougainville, and
the Independent State of Papua New Guinea (PNG). Under the trust deed, the ABG would have the opportunity to receive 68 per
cent of Rio Tinto's shareholding (which equates to 36.4 per cent of BCL's shares) from the independent trustee for no
consideration and PNG would be entitled to the remaining 32 per cent (which equates to 17.4 per cent of BCL's shares). The
ABG and PNG would both hold an equal share in BCL of 36.4 per cent if the transfers are completed. This ensures both
parties are equally involved in any consideration and decision-making around the future of the Panguna mine.
On 2 August 2016, the Group announced the approval of the development of the Silvergrass iron ore mine to maintain the
Pilbara blend. The Group will invest $338 million to complete the development, adding ten million tonnes of annual
capacity.
Directors
The directors serving on the boards of Rio Tinto plc and Rio Tinto Limited during and since the end of the half year are:
Notes Date of appointment
Chairman
Jan du Plessis (N and R) 1 September 2008
Executive directors
Jean-Sébastien Jacques, chief executive 17 March 2016
Chris Lynch, chief financial officer 1 September 2011
Non-executive directors
John Varley (senior independent director) (A, R and N) 1 September 2011
Robert Brown (A and N) 1 April 2010
Megan Clark (N, R and S) 20 November 2014
Ann Godbehere (A and N) 9 February 2010
Anne Lauvergeon (N and S) 15 March 2014
Michael L'Estrange (N and S) 1 September 2014
Paul Tellier (A, R and N) 25 October 2007
Simon Thompson (N and S) 1 April 2014
Richard Goodmanson and Sam Walsh stepped down from the board on 5 May 2016 and 1 July 2016, having been directors since
December 2004 and June 2009 respectively. Chris Lynch was appointed to the board as a non-executive director on 1 September
2011: he became an executive director on
18 April 2013.
Notes
(A) Audit committee
(R) Remuneration committee
(N) Nominations committee
(S) Sustainability committee
Dividend
A 2015 final dividend was paid on 7 April 2016 to holders of Rio Tinto plc and Rio Tinto Limited ordinary shares and Rio
Tinto plc ADR holders. The 2015 final dividend, equivalent to 107.5 US cents per share, was determined by the board on 11
February 2016. Rio Tinto plc shareholders received 74.21 pence per share and Rio Tinto Limited shareholders received 151.89
Australian cents per share, based on the applicable exchange rates on 9 February 2016. Rio Tinto plc ADR holders received
106.66 US cents per ADR, based on the exchange rate on 31 March 2016 to convert from pounds sterling to US dollars.
The 2016 interim dividend, equivalent to 45.00 US cents per share, will be paid on 22 September 2016 to holders of Ordinary
shares and ADRs. Rio Tinto plc shareholders will receive 33.80 pence per share and Rio Tinto Limited shareholders will
receive 59.13 Australian cents per share based on the applicable exchange rates on 1 August 2016. ADR holders receive
dividends in US dollars, which will be converted from pounds sterling by reference to the exchange rate applicable on 15
September 2016. The dividend will apply to Rio Tinto plc and ADR holders and to Rio Tinto Limited shareholders on the
register at the close of business on 12 August 2016.
Principal risks and uncertainties
The principal risks and uncertainties that could materially affect Rio Tinto's results and operations are set out on pages
16 to 21 of the 2015 Annual report and are listed under the risk factor headings below. The Group's view of its principal
risks and uncertainties for the remaining six months of the financial year remains substantially unchanged. There may be
additional risks unknown to Rio Tinto and other risks, currently believed to be immaterial, which could turn out to be
material. These risks, whether they materialise individually or simultaneously, could significantly affect the Group's
business and financial results.
(i) Financial Risks
Market risks:
Commodity prices, driven by demand and supply for the Group's products, vary outside of expectations over time. Exchange
rate variations and geopolitical issues may offset or exacerbate this risk.
China's development pathway could impact demand for the Group's products outside of expectations.
Financial risks:
External events and internal discipline may impact Group liquidity.
Strategic risks:
Rio Tinto's ability to secure planned value by successfully executing divestments and acquisitions may vary.
The Group's ability to develop new projects successfully may vary.
(ii) Operational Risks
HSEC risk:
Our operations and projects are inherently hazardous with the potential to cause illness or injury, damage to the
environment, disruption to a community or a threat to personal security.
Resource risks:
The success of the Group's exploration activity may vary. In addition, estimates of ore reserves are based on uncertain
assumptions that, if changed, could result in the need to restate ore reserves.
Operations, projects and people risks:
Commercial excellence is derived from high operational and human productivity. Productivity is driven by optimization of
the balance of people, process and systems.
(iii) Compliance Risks
Stakeholder risks:
Strategic partnerships and third parties influence the Group's supply, operations and reputation. The Group's ability to
control the actions of these parties varies.
The Group's operations are located across a number of jurisdictions, which exposes the Group to a wide range of economic,
political and regulatory risks.
Governance risks:
The Group's reputation and regulatory licences are dependent upon appropriate business conduct and are threatened by a
public allegation or regulatory investigation.
Corporate governance
The directors of Rio Tinto believe that highest standards of corporate governance are essential to its pursuit of greater
shareholder value and have continued to apply the standards discussed under 'Corporate governance' on pages 55 to 66 of the
2015 Annual report which is available on the Rio Tinto Group website www.riotinto.com.
Publication of half year results
In accordance with the UK Financial Conduct Authority's Disclosure Guidance & Transparency Rules and the Australian
Securities Exchange Listing Rules, the half year results will be made public and are available on the Rio Tinto Group
website.
Auditor's independence declaration
PricewaterhouseCoopers, the auditors of Rio Tinto Limited, have provided the auditor's independence declaration as required
under section 307C of the Corporations Act 2001 in Australia. This has been reproduced on page 56 and forms part of this
report.
The Directors' report is made in accordance with a resolution of the board.
Jan du Plessis
Chairman
3 August 2016
Capital projects
Rio Tinto has a programme of high-quality projects delivering industry-leading returns across a broad range of
commodities.
Ongoing and approved
Copper & Diamonds
Construction of a desalination facility to ensure continued water supply and sustain operations at Escondida (Rio Tinto 30%), Chile. $1.0bn(RT share) $0.2bn(RTshare) Approved in July 2013, the project is designed to provide a long-term sustainable supply of water for the operations. It remains on schedule and on budget and is 93 per cent complete, with commissioning scheduled in 2017.
Grasberg project funding for 2012 to 2016. $0.9bn(RT share) $0.1bn(RTshare) Investment to continue the pre-production construction of the Grasberg Block Cave, the Deep Mill Level Zone underground mines, and the associated common infrastructure. Rio Tinto's final share of capital expenditure will be influenced in part by its share of production over the 2012 to 2016 period.
Remediation of the east wall at Rio Tinto Kennecott, US. $0.3bn $0.1bn Following the pit wall slide in
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