Rio Tinto CEO Jean-Sébastien Jacques recently hosted an analyst briefing in London, where he stressed that management focus was on growing cash flow, with volume growth being only one way to achieve that objective.
In fact, Jacques highlighted that operational productivity was likely to be the main driver of cash flow growth over the next few years. He noted that taking average Pilbara iron ore truck utilisation from its current 60% to 75% (its current best iron ore mine performance) would result in an additional 500 million tonnes per annum material movement at limited additional cost.
Regarding M&A, the Rio Tinto boss noted opportunities were increasing – as long as you were a seller. Jacques said the commodity downturn that reached its nadir in early 2016 was not long or deep enough to allow Rio Tinto to take advantage of it to acquire attractive assets at competitive prices. However, he noted the opposite side of the coin was that Rio Tinto’s business development teams were busy looking at opportunities to further refine the portfolio given the market has improved for sellers.
Rio Tinto is still somewhat cautious on aluminium industry reform in China. Nonetheless, Jacques sounded a confident tone on Chinese capacity growth moderating. Jacques noted, for example, that the environmental impact of aluminium smelting is as connected to anode baking (consumable for the smelting process) than the smelting itself. Hence, it is possible to significantly reduce the environmental impact by moving anode baking processes away from population centres without necessarily shutting smelters down. However, he also noted Rio Tinto expects the pace of China capacity growth to slow, with evidence already emerging of that trend.
Rio Tinto’s balance sheet, asset quality and operating model are clear, sustainable competitive advantages that justify its premium rating, while potential upside to aluminium prices means scope for consensus upgrades.