Rio Tinto Group

Tell me about it. You missed a great trip. Everybody switch their phone to silent, please, just in case. OK. Can we kick it off? Good morning and good evening, everybody, and welcome to Rio Tinto's half-year results. It's very good to be with you again today after seeing many of you about two weeks ago in Ulaanbaatar and at our Oyo Tolgoi site, of which you see a great picture here. We will follow totally normal proceedings today. Jacob and Peter will take you through introductionary remarks, and we will follow that with a question-and-answer session. Please limit yourself to one question and one follow-up so we can cover as many people as possible that are attending today. For those in the room, there is no emergency drill planned. If you hear a fire alarm, please leave by the fire exits at the front and at the back of the room and follow the instructions from the fire marshals. Jacob, over to you.

Well, thank you, Menno. Good morning and good evening to those of you in the East. It's a pleasure to be with you in London once again, with Peter on my side. Before I start, I'd like to acknowledge and pay my respect to all traditional owners and First Nations people that host our operations around the world. This year, as many of you know, our company has been celebrating its 150 years anniversary. We have been taking this opportunity to reflect on who we are, the moments from our history we should learn and grow from, but also what we do really well. Consistent, progress, innovation where it matters, world-class assets and people, a meaningful commitment to our shareholders through our balanced approach to capital allocation. This is the story we are working hard to continue. In February, I told you our focus was about building an even stronger Rio Tinto by investing in the health of our business and shaping our portfolio for the future. We're still doing just that. We're laying the foundations for our longer-term success by making astute decisions that are getting the best out of our assets. And while we continue to operate against the challenging backdrop, time and time again, we're proving our resilience. Once again, our results in the first half of 2023 demonstrate our fundamental financial strengths. However, with a new feature this half, growth. We have achieved solid underlying earnings of 5.7 billion, free cash flow of 3.8 billion, a return on capital employed of 20%, and an uplift in production of 5%. We are profitable and growing. As a result, we will return 2.9 billion to our shareholders. This 50% payout is in line with our policy and again reflects disciplined capital allocation and an unchanged net debt of around 4 billion. We are executing our strategy with confidence, we have a clear pathway, and we are now building momentum along this pathway. Let me give you a taste of the ways we are investing in the health of our business and shaping our portfolio for the future in the first half. Part of this is creating a safe environment. Safety is and always will be our top priority. We are right now investigating two significant process instability incidents at our iron and titanium complex at Sorel, which did not result in any injuries or exposures. Our Kennecott smelter experienced a loss of containment of furnace gas during maintenance work for the shutdown, which led to the exposure of multiple people who were treated and cleared. These incidents show that we can never be complacent when it comes to safety. We are determined to take the learnings from these incidents to continue to improve our risk management. Still, we continue to see results as we roll out our safe production system, driving us towards our objective of becoming the best operator and improving the health of our assets. This is delivering real results in the Pilbara. We recognize there is a lot more to do, but we are focused on driving this improvement across our global portfolio. Meanwhile, we continue to put significant time and effort into building a thriving culture and implementing the learnings from the Everyday Respect report. Our commitment to culture change extends to how we engage with societies around us. We are making progress on strengthening our social license with the communities in which we operate. For example, the approach we are taking at the Western Range project, our first co-designed iron ore mine. So far, our cooperative approach has deepened our relationships with the traditional owners, the Inawonga people. We have also made progress to shape our portfolio this half. Let me offer you eight examples. First, earlier this month, we took a large group of international investors and analysts to visit our Ertolgoy underground copper mine, where we now have achieved first sustainable production. Second, our investment of nearly half a billion dollars to expand underground operation at Kennecott in Utah is projected to deliver around 250,000 tons of additionally mined copper over the next decade, alongside open-court operations. Third, we announced the joint venture with First Quantum to unlock La Graña in Peru, one of the largest undeveloped copper projects in the world. Fourth, in aluminum, we are expanding the AP60 smelter. This is amongst the lowest carbon technology commercially available today and the first investment in a new smelter in the Western world since we rebuilt the Kitimat smelter more than a decade ago. Fifth, last week we entered into an agreement to form a joint venture, Metalco, that will position us to be a leader in providing recycled aluminum in the North American market. Sixth, We have taken steps to advance Simundu, a world-class high-grade iron ore deposit that has tremendous potential for us, our customers, and the people of Guinea. We have, in parallel, made further progress on the ground, including to strengthen the local team. Seventh, we started construction on our western range iron ore project. And eighth, at Sorel, we started production from our blue smelting demonstration plants. It all comes back to our purpose, finding better ways to provide the materials the world needs. Peter and I will come back to some of these later. As we build momentum through 2023 with a clear pathway to meeting our strategic objectives, we're in a strong position to deliver value to our shareholders. Let me now hand over to Peter to take you through the financials for the first half. Thank you.

Thank you, Jakob. Good morning and good evening, everyone. We've announced a robust set of results. We entered 2023 with some good operational momentum, with five consecutive quarters of improvement in our Pilbara operations, the start of underground production at Oyu Tolgoi, and our Kitimat aluminium smelter ramping up towards full capacity. There was some moderation in headline inflation, but it does remain a drag on earnings. Lower prices and cost increases resulted in underlying EBITDA declining 25% to $11.7 billion. Cash flow from operations of $7 billion included a build in working capital, which I will explain later. Free cash flow of $3.8 billion was after $3 billion of capital expenditure. Following $3.7 billion of dividends paid, we ended June with net debt of $4.4 billion, virtually unchanged from the end of last year. With a 20% return on capital and underlying earnings of $5.7 billion, we have declared an interim ordinary dividend of $2.9 billion, representing a 50% payout in line with our practice. We did take an impairment of $800 million after tax on our Gladstone alumina refineries. These refineries account for more than half of our Scope 1 CO2 emissions in Australia. The impairment test was triggered by regulation requiring heavy industrial carbon emitters to purchase carbon credits. But it also reflects the very difficult market conditions that these assets face, compounded by operational challenges and our improved understanding of the investment needed for decarbonisation. But please remember, these refineries are a key part of our integrated aluminium operations and provide security of supply to our smelting business. Now let's look at the market context. As ever, movements in commodity prices were the most significant driver of our financials. First half demand was relatively soft and supply constraints eased, leading to materially lower prices year on year, but a modest rebound from the lows of last year's second half. The Plat 62% iron ore index dropped 14%, LME copper declined 10% and LME aluminium was down 24% compared with the first half of 2022. The price declines are clearly reflected in the charts, but I would just highlight that our average realised iron ore price relative to the index improved further due to narrowing relativities for lower grade products. We are beginning to see the impact of the energy transition. For example, newer applications like solar panels added about 1% growth to global aluminium demand. But overall, the aluminium segment was soft. Copper prices also trended down in line with sentiment as China's recovery seemed to lose steam and the market moved to a short position for the first time in 12 months. I'd like to take a minute to provide additional context on commodity prices. It can be useful to look at them from a longer-term perspective, removing the noise of short-term volatility and factoring in the impact of elevated inflation we've recently experienced. This chart shows rolling 12-month average prices for iron ore, aluminium and copper starting from January 2010 and rebased to 2023 real terms. We've indexed these and show the average of the 13 years as 100. The chart shows that prices have now been declining for over a year as the period of commodity-intensive growth and supply bottlenecks faded. Over the last few years, cost pressures across the industry have lifted and steepened cost curves, providing price support. Consequently, in nominal terms, prices may appear elevated, but in real terms, they're actually trading below the average since 2010. More recently, falling costs in some commodities are starting to flow through to lower commodity pricing, in particular aluminium. Turning now to the EBITDA movement. In aggregate, commodity prices lowered EBITDA by $3.3 billion. Iron ore was negative $1.6 billion, with aluminium down $1.4 billion and copper prices down $200 million. Let me make a few points on inflation. This is still having a significant impact on earnings, although cost increases are slowing from the nadir of last year's second half. We've not yet seen softer markets translate into lower input costs, but we would expect to see this in the second half of the year. While the Brent oil price is down, again due to contract lags, we won't see the benefits until the second half. Similarly, the lower market linked prices for raw materials in our aluminium business take longer to pass through, mainly due to us holding three to four months of inventories through the value chain. There was positive momentum at some of our operations. We benefited from increased iron ore sales and higher volumes of aluminium from Kitimat, albeit a lower proportion of value added products. We continue to experience tightness in our key labour markets in Western Australia, Quebec and Utah, which raised costs above general inflation. We also experienced temporary operational issues at Kennecott and IOC, which had negative impacts on EBITDA. Finally, we incurred higher evaluation costs as activities on the ground accelerated, in particular in Guinea, but also in Argentina, where we continue to expense the Rincon project. While it is a peak year for E&E, given the Simundu project, it is important to have a strong pipeline of options for the future. Turning now to our cash generation. This half, there are a number of factors impacting conversion of EBITDA to cash. Some are one-offs and some are seasonal. Importantly, this is not a step increase and there will always be ebb and flow over periods. An increase in working capital of $900 million, reflecting a build in run-of-mine ore in the Pilbara and seasonally higher spares and stores, including the Dyavik winter road. Payables were also lower due to the timing of spend and normal volatility in amounts due to JV partners and employees. We would expect some of this outflow to reverse in the second half. Operating cash flow was also impacted by dividends from Escondida. These are not always aligned with EBITDA, in particular given that Escondida is moving into a period of substantial reinvestment. Onto product group performance. Our iron ore business continues to perform well. Guadalajara reached nameplate capacity in the second quarter, and we now expect four year shipments to be in the upper half of our 320 to 335 million tonne guidance range. Aluminium had a better half operationally, with volumes of metal up 9% due to the recovery at Kitimat. This is now at 90% of capacity and remains on track to reach nameplate later this year. The 24% drop in LME prices meant that EBITDA margins halved compared with last year's first half, but there was a modest recovery from the second half. Looking ahead, we are materially strengthening our aluminium business in North America for the next cycle, not just with Kitamet. We have approved our first investment in smelting for over a decade with the expansion of AP60, replacing the old Arvida smelter. We've also approved the addition of 30,000 tonnes of new recycling capacity at Arvida. And at Alma, we're increasing capacity of low-carbon, high-value billets by 200,000 tonnes. And just last Friday, we announced we were entering into the 50% joint venture with Metalco, meaning we will manage the sales and marketing of up to 900,000 tonnes of additional recycled product across our key North American market. Clearly the highlight for copper was first sustainable production from Oyotogo underground. We've invested significantly in Mongolia, not least with last year's acquisition of TRQ, and we're now set to reap the benefits over the next five years. Kennecott and Escondida had some operational challenges in the half, both planned and unexpected, with Escondida experiencing geotechnical instability in the open pit and unplanned maintenance at the concentrator. We recognise we need to lift performance at Kennecott. We're investing in the open pit and underground to extend the life of the operation and uplift capacity. We're also rebuilding the smelter, a one in 10 year event, to achieve its full potential. In fact, we've extended the refurbishment to include a full rebuild of the flash converting furnace, which should provide further asset stability and process safety management. In minerals, at IOC we saw improved performance at the mining concentrator in the first five months, but this was more than offset by the loss of almost a month's production in June due to forest fires, while iron entertainment and boron suffered some market weakness. Let me now explain the Rincon lithium capital increase. This has risen to $335 million for the 3,000 tonne per annum starter plant. In 2022, we took the decision to proceed quickly to accelerate market entry. Since then, further studies have led to an extended schedule. We added to scope, for example, to drive column performance in our DLE technology, and we added a waste storage facility. We still think the commitment to the starter plant was the right decision. The learnings and design improvements will be carried over to the full-scale project. Early works such as the Airstrip and Phase 1 construction camp are already complete, on time and on budget, and capital intensity for the full-scale project is in line with current brine projects in Argentina. It is slightly higher than some recent hard rock projects, but we would expect the investment in DLE to lead to lower OPEX and higher recoveries. Returning to our Pilbara business, our first half performance sustained the strong momentum from the second half of last year. With Gududari now at full tilt and the current wave of replacement mines like Rove Valley in production, we've improved the health of the system by offsetting depletion, reducing volatility and lifting mine capacity. The systematic approach of our safe production system is now yielding clear results from full deployments last year at both Tom Price and Brockman 4. We remain on track to meet our target with a 5 million tonne uplift this year in production. The 7% uplift in half-year production, a weaker Australian dollar and a moderation in inflation have resulted in unit costs declining modestly to $21 per tonne. Our SP10 product will remain an integral part of the mix. It was 10% in the first half, and with higher anticipated production in the second, we expect an increase in the proportion of SP10 due to some constraints accessing higher-grade material. Gooda Diary has mitigated this to an extent, but still needs partners to maintain the Pilbara blend. We will need to invest in new replacement mines with an ongoing focus on asset integrity and operational discipline. And we're working closely with local communities, traditional owners and governments to progress approvals for our next tranche of projects. Turning now to Woi Tolgoi. With just over $14 billion of invested capital, I am now looking forward to seeing the returns. As the underground ramps up, it will become the world's fourth largest copper mine by 2030, with considerable gold revenues, supporting our ambition to produce 1 million tonnes of mined copper within five years. With $1.4 billion of growth capital remaining and sustaining capital of $300 to $400 million over the next decade, we're set to deliver significant returns and free cash flow from this Tier 1 multi-decadal asset. Moving on to capital allocation. We'll continue to invest through the cycle, balancing returns to shareholders with reinvestment for growth and de-risking future cash flows. Sustaining capital, high returning replacement projects and investment in decarbonisation remain our first priority for capital allocation. This is followed by ordinary dividends within our well-established returns policy. We'll then test investment in compelling growth against debt management and future cash returns to shareholders, further cash returns to shareholders. Last year, we saw a shift to growth with our first forays into M&A in over a decade. But as I have mentioned before, it is not a predetermined budget. If value-adding projects are not ready, then the funds will go back into the capital allocation wheel. Let's now take a look at our capital expenditure profile in more detail. We see capex rising up to $10 billion in each of the next two years. We've been steadily increasing the capital allocated to essential capex as we focus on the health of our business to support our best operator objective. Today, this stands at around $3.5 billion for sustaining capital and $2 to $3 billion for replacement. set to rise next year following approval of AP60, which replaces the old Arvida smelter, but also gives us additional low-carbon metal. Spend on decarbonisation projects will also increase, albeit from a low base. It totalled just under 200 million for the half, split 50-50 between OPEX and CAPEX. Turning to growth capex. Over the last five years, this has been all about Oyo Togoi. The spend is largely complete with the underground mindset to ramp up over the next five years. With Oyo Togoi spend coming to an end from 2025, we'll start to see our share of Simundu ramping up. Other projects in the pipeline will also start to come through from this point. While Simundu is not a committed investment, it is important to give a transparent view given we are well advanced in negotiations with our partners. The level of spend over the period shown is fully dependent on the timing of sanction following completion of final studies. Finally, the dividend. In line with our usual practice, we have declared a 50% payout for the interim. This equates to $2.9 billion. Going forward, we will continue to review whether additional returns are appropriate in line with our policy of supplementing the ordinary dividend in periods of strong earnings and cash generations. We have remained very consistent with our shareholder returns policy, which has now been in place for seven years. The dividend remains a core part of our equity story, which we see as paramount for maintaining discipline. Our financial strength means that we can accelerate our decarbonisation, reinvest for growth and continue to pay attractive dividends through the cycle. With that, let me hand back to Jakob.

Thank you, Peter. Since I became chief executive, we have been putting together the puzzle pieces of our strategy. When we introduced our purpose of finding better ways last year, we completed the picture. Our values of care, courage and curiosity are guiding us through a period of culture change. Real change takes time, but there has already been a notable shift in the way we work. Wherever I go in our business, whichever asset I visit, I see how a more inclusive approach is beginning to pay off. Empowering our people to build a thriving culture underpins the performance of our business. Our financials are resilient, even in a softening market, and through our purpose and our four objectives, we have a pathway to build an even stronger Rio Tinto for the long term. We're gathering momentum as we travel down that path. Our Pilbara iron ore business has been consistently improving its performance over the past five quarters. We upgraded our shipment forecast to the upper half of our guidance in the second quarter. This is the first time we have done so in five years. And a 7% production uplift this half reflects the benefits of an open, inclusive, and value-based performance culture, the finalization and ramp-up of projects, and the implementation of the safe production system. We have more to do to prove that we can achieve excellence across our portfolio. And it will take time before we see the full benefit. But we are already seeing positive results from the safe production system wherever it has been implemented. Everywhere we take the safe production system, we see an improvement in employee engagement and resulting better performance. This gives us confidence that we can roll it out across our whole business. There will be serious operational improvements from this. With system health in a better shape, we are already focusing on operating efficiency and working extensively on the mid- to long-term pathway for our Western Australian iron ore system. For those of you who can join us at the investor site visit, you will hear more about that in October. I also wanted to spend a little time talking about Oya Tolgoi. Some of you may have joined our recent trip there. If you did, I hope you will agree. with me that this is just an amazing site and one of the safest and most modern mines in the world. I think our Tolgoi shows our four objectives and actions. It already had a proven track record for a decade. With first sustainable production from the underground and the infrastructure delivery ramping up on schedule, we have entered a new era. And we have a strong pipeline of options available to grow, sustain, and improve. Oya Tolkoi shows us as best operators. It shows how we are excelling in development with impeccable ESG performance. It is also an exceptional example of our cultural engagement and social license. I spent time with the Prime Minister again in Ulaanbaatar, and we discussed the bright future of Mongolia. I also met with local herders and community leaders from the town of Kanboks, where we are partnering for long-term sustainable development, supported by our Oya Tolgoi Catalyst Fund. Our transformed relationship with the Mongolian government and the people of Mongolia is creating serious momentum, and that momentum is reflected in our workforce. When I spoke to our people there, I could tell they really believed in the project and what it signifies for them, for Mongolia, and for Rio Tinto. Together, by putting our four objectives in action, we are confidently shaping Royal Tolgoi to become the world's fourth largest copper mine by 2030, with many decades of operations to come. I also wanted to share a brilliant example of our purpose in action. For this, I'll look closer at another material the world needs for the energy transition, aluminum. We're finding better ways to provide it. I was in the second day in Canada last month to announce the most significant investment in our aluminum business for more than a decade, $1.1 billion to expand our state-of-the-art AP60 smelter at Complex Young Care. This expansion will provide an essential bridge to meet our customers' urgent and growing demand while we work towards the deployment of ELISIS, the zero-carbon smelting technology that will revolutionize the industry over time. At our Alma smelter, we have also begun construction to increase capacity to cast low-carbon, high-value aluminum billets. and I am excited about the development we are making beyond primary aluminium. Last week we announced our agreement with the Giampaolo Group, one of North America's largest fully integrated metal management businesses, to acquire a 50% stake in the metallico business. This joint venture will really launch us into supplying recycled aluminum in the North American market with a leading position through assets with 900,000 tons of capacity and demand forecast to grow significantly over the next five years. This will be complemented by the new recycling facility we have commissioned at Arvida. This is what we mean when we say we are finding better ways to provide the materials the world needs. Which brings me to decarbonisation. As you know, climate change is at the heart of our strategy. The copper, aluminium, iron ore and minerals we produce will all make the shift to net zero possible. As will green steel. We remain committed to pursuing our pathway to a 50% reduction in Scope 1 and 2 emissions by 2030, as well as our ongoing investment in scaling up breakthrough technologies to support our pathway to net zero by 2050. Let me give you a flavor of how we are taking practical steps to decarbonize our global portfolio as part of our long-term strategy. In April, we started a demonstration plan to test our blue smelting technology at Sorel Trachy. We have since produced the first material from the plant. Blue smelting could generate 95% less greenhouse gas emission than the current production process. It would mean titanium dioxide, steel and metal powders, all made with a significantly lower carbon footprint. In California, our boron operation has become the first open-pit mine in the whole world to run its fleet of heavy machinery entirely on renewable diesel. It shows what we can achieve when we collaborate with external partners, in this case the state of California, to reach our climate goals. That's also why we signed a memorandum of understanding with China, the largest steelmaker in the world. But we have also been clear that the challenge of decarbonization is deeply complex and that our progress is very much intertwined with that of the societies we are part of. The activity and investment in decarbonization projects across our global portfolio continues to accelerate. However, the physical delivery of emission abatement has not progressed as fast as we would have liked. While we expect to have made financial commitments to industrial abatement projects totaling more than 15% of group emissions by 2025, there will be a lack to the renewables, diesel replacement and process heat abatement this delivers. As a result, we do not expect to achieve our targeted 15% reduction in scope 1 and 2 emissions until after 2025, unless we buy credits. We know the challenge is immense for all of us in our industry and across our value chains. But there's no doubt that the measures we are taking will open new and exciting doors as we continue our decarbonization journey. While decarbonisation is a challenge, it yields plenty of opportunities. Let's look briefly at what it means for demand for some of the metals we produce. For example, the use of aluminium in solar panels. An estimated 12 tonnes of aluminium is needed for each megawatt of power from a solar panel. As you can see, the trajectory of demand from the solar sector is compelling, particularly in China. Moving next to EVs, which are important for copper demand, EV sales growth has been underpinned by supportive government policies across the globe, including China, the US and Europe. And we expect the exciting trajectory for EV demand to continue with more support from governments as they look to deliver their decarbonisation objectives. These outlooks are super exciting for Rio Tinto, given the opportunity we have to grow both aluminium and copper production. So we have a clear pathway to success. We are following our objectives and our strategy, and we are gathering momentum as we travel along that pathway. It's all about building a stronger Rio Tinto for all our stakeholders, including our shareholders. Our financials are robust. They're driven by the quality of our assets, our great people, and our balance sheet. I have to admit that we don't have everything right yet, but we are constantly learning. And that learning is helping us move forward. The work we will continue to do throughout 2023 will deliver future growth, value and growth. This all adds up to a healthier portfolio that we can grow profitable and which allows us to pay attractive and increasing dividends to our shareholders. The pieces are in place for our long-term success. The pathway is clear and we are determined to deliver. Thank you.

Great. Thank you, Peter. Thank you, Jacob. Let's start with Q&A. We'll do it as usual. We'll take two in the room and two online. I think there's quite a lot of demand, so please be patient. We know you're there, and we'll do our best to really get to you. So let's start with two in the room. Liam, you're sitting here in front of me, and then Tyler after you later.

Good morning. Liam Fitzpatrick from Deutsche Bank. First question on – only question, really, on Simundu. It seems like you're finally getting close. So could you outline what the key outstanding issues are before you and the partners can move forward? And then as a follow-up, just on the CapEx, it's obviously a very big project with lots of layers of partners. So can you shed some light on how you're going to – account for it and guide on it from a capital point of view. Thank you.

Do you want to start with that? On the second bit? Yeah. Yeah. So then what we're showing is just our share of the capex for the project. That's how we'll put through guidance going forward. I mean, clearly we're still in the midst of negotiations and moving the project forward, so we're not showing what the whole piece looks like. We've just got to respect the fact that we're still in that period of working that through with the government and with various partners. But what we've shown is what we think is our spend, just so you have a sense over the next few years of what Simundu means in terms of our total capital. So that's how we push through it. But effectively, it's the Rio Tinto share of the capital that we will be showing and that 500. So effectively, in the second half of the year, we expect to reach that point at which we will start capitalizing, that we will have confidence to go forward as the negotiations move forward. That's why the 500 is there. But, you know, it may move around negotiations. It will take as long as it takes to get right.

And where are we on negotiations? We have a big team in Conakry right now. I spoke to Bolt this morning. He's down there. My sense is that we actually solved, basically, all the big issues. But it's a big set of agreements that has to work for the government of Guinea and for the partners for 30 years out. And we have to get that right. And it's been a big challenge for everyone. We are four partners, and we are one government, and such negotiations are complex. So I think the fundamentals we have actually agreed on, and you can see some of your analysts are looking at satellites, et cetera. There is a lot of satellite photos. There is a lot of progress happening, and we are progressing in parallel with the negotiations, but we have to take the time to build the trust and build the shared understanding of what we are trying to achieve. Obviously, we need to agree final things around cost and schedule, and as soon as we agree with that, we will disclose it to you. But right now, we need to sign a few foundational agreements with the government, and we're getting very close to that. I'm quite optimistic about it, but I just learned that it's very difficult to lay out a very precise schedule. You probably shouldn't be too concerned about it because quite a lot is happening in parallel. Having said that, obviously we feel we also don't like to spend too much money before there's clarity and we can finally sanction the project with our board. Thank you.

Tyler? So one question and one follow-up, please.

Okay. Yeah. Okay, well, I'll do my one question then. Just on the Metallico JV, so you've ventured into this joint venture. How much profitability do you expect this to bring into the company? And then do you see any synergies over time with the rest of your aluminium business? How can you just explain your recycling strategy a bit more?

Yeah, I absolutely do on the second part. It's very difficult for me to answer the first because we have announced the deal, but we haven't closed the deal. It's subject to obviously competition, authority clearance, and it's a joint venture with a private company who's not used to a lot of disclosures, and therefore it's very limited what we can say. But I think conceptually what you should think about is that we have the Western world's largest aluminum business, and and they have capacity of 900,000 tons of aluminum. And for us, I just think, if you think about what we are trying to achieve in terms of our purpose, in terms of reducing our carbon footprint and reducing our impact on nature, We want to support recyclability. We can't really support recyclability in iron ore because we're not in steelmaking. But Rio is different than most mining companies because we have quite a lot of manufacturing. And where we have manufacturing, we should try to see is there a business opportunity also for recyclability. Where we have the biggest opportunity is obviously in steelmaking. in aluminum, but we also have copper smelters, processing plants in titanium, et cetera. So there are other business opportunities, but at the starting point is already today there's a big secondary market in North America, and here's an opportunity to provide a better value proposition to our customers today. by combining forces. I also like the joint venture structure is that it plays to each other's strengths. The John Powell Group knows a lot about the collection of scrap, etc., which we have no competences in, but we are going to market the product so we can each provide the value into the joint venture. I can't say anything about the profitability at this stage, unfortunately.

That's great. Thanks, Ray.

Thanks.

Great. Thanks, Tyler. Let's go to the lines, please. Operator, can you get the first question, please?

Thank you. We're now going to open the question and answer session from the phone lines. To register for question, please press star 1 and 1 on your telephone and wait for your name to be announced. Once again, it's star 1 and 1 on your telephone and wait for your name to be announced. We are now going to proceed with our first question. And the questions come from the line of Paul Young from Goldman Sachs. Please ask your question.

Good morning, Jakob and Peter. Jakob, can I ask about the other half of the $2 billion or so investments you've announced in aluminium during the half, and that's the AP60 smelter. I'm just looking at the capital intensity of the smelter, which is about $7,000 a tonne or so. That's a lot better than Kinemat, which was about $10,000 a tonne or so. That was probably the high watermark. on capital intensity in the Western world. I'm just curious, around the $1.1 billion investment, does this incorporate benefits of using Chinese EPCM firms, which I know you've been talking about for the last two or three years, and does this represent a possible larger push into growing green aluminium in Canada? Thanks.

Yeah, you're absolutely right. The challenge we have in the Western world is that we barely have built any aluminum smelters for two decades, actually. And last time we built one, we had a cost overrun. So we are very, very focused on not repeating that mistake. And therefore, we are looking towards where most aluminum smelters have been built in China and getting help from them. It's going to be primarily with local smelters. the local workforce in the second day to execute the project. But we are absolutely looking into getting help from the Chinese contractors who are building all the aluminum smelters. And we have a fairly good feel for the capital intensity and that we can deliver against that. And you combine that with... with attractive energy, renewable firm power in Canada and support from the government. And then suddenly the smelter actually makes economic sense for us. But you're absolutely right. You're pointing towards... a difficult past. We just have to get this right with the capital intensity on the aluminium smelters. We all know that. That is our top priority. And so far, I certainly have a good feeling about the project.

Paul, any follow-up?

No, sorry. Thanks, Jakob. I guess the next question is, if this is successful, the follow-up is, What's the largest strategy here? Is it rolling onto another smelter using allicis? I guess what's the broader strategy if this is successful?

Good question. I mean, ultimately, we cannot do things that doesn't add value to the shareholders. But the reality is there's a lot of demand growth for aluminum. The last, just going through the math, since the turn of the century, aluminum has constantly been growing in the world by 5%. That means that the market for aluminum is today three times bigger than it was in year 2000. And particularly in the Western world, there has been a declining amount of aluminium smelters and production capacity. So I do think that there is opportunities, but you need to crack a few things. Firm, competitively priced renewable power combined with control over your capital intensity. And if you can get that equation up and running, then I can see us further expanding, and we would love to further expand in Europe. particularly in Canada, where there is excessive energy available.

Thank you. Operator, next question, please.

We are now going to proceed with the next question. And the questions come from the line of Rahul Anand from Morgan Stanley. Please ask your question.

Morning, Jacob, Peter, and team. Thanks for the opportunity. Look, I just wanted to touch upon the $800 million write-down. My understanding was that the safeguard mechanism only related to Scope 1 emissions and not Scope 2. And, you know, just wanted to understand, you know, what are the main reasons for this write-down and, you know, how can we compare that to the rest of the industry, really? Because I'm aware that as we progress to 2030, the targets will be heavily based on industry emissions rather than your own. Thanks.

No, thanks very much for the question. So, I mean, for the Illumina refineries, the emissions are scope one. So that's, you know, half of our scope one emissions within Australia, putting it in context. That was the trigger. But when we look at the write-down then, I mean, I think what we've seen is the industry structure around Illumina really get pretty tough. And so when we do the evaluation, there's a trigger, and then what does the business really look like? It's a tough business. That business has had some challenges, and we do need to put capital into those refineries around decarbonization and other environmental matters. So that's what's really driven when we take it in the round, the valuation. I mean, the important point is that they just do remain critical in terms of our overall system, as I said, for getting the bauxite through to the smelters. So they're a critical part of the system, but we have had to take those right downs given that evaluation and that outlook.

You've also highlighted the decarbonisation efforts potentially being stalled. If I stick to the original aluminium business, Obviously, Pacal, you're looking to switch to renewables and be able to reduce your emissions there. Any updates there at all in terms of progress?

Yeah, look, you're absolutely right. The problem is that... At least for the shorter-term period, the scope one is fairly given on the smelter because it's the carbon anode in the catalytic process. Now, we think we have a – we know we have a solution, but it's not a solution that can be implemented, you know, tomorrow of illicits. So that's a given one, and that's regarding the safeguard mechanism. But the problem is completely different. The problem is that 70% of the utensils scope one and two emissions stems from aluminum, and 50% of the total emissions is actually from percal and is mainly scope two emissions because we buy electricity from the grid, and the grid comes from its coal-fired power. And that needs to change. If we should meet our objectives of 2030 of having half our emissions, we have to solve the PACAL. But that is also in the nation's interest because the government of Australia have got ambitious targets to reduce the overall CO2 emission of the country. So I think we are very aligned. We just need to find a solution. And this is really large scale. It's kind of like people told me here. What we are looking at in terms of solar and wind is like 12 times bigger than any other renewable energy park in Australia. So it's not something you just solve from one day to another, but I'm just very committed to give it everything because this is one of the biggest markets. industrial assets in Australia, and it is actually a business that can underwrite a lot of renewable energy. But if you can't get firm renewable energy at a competitive price, it's going to be impossible for us to manufacture and export aluminium out of Australia. So that's a kind of a very different topic than the safeguard mechanism. Over time, with Ilysis, we'll solve the safeguard mechanism of cost. The problem we have short term is, of course, you add cost to a business where we're actually not really making money. And that's why Peter comes to me and say, I need to impair the asset.

Thank you. I appreciate the complexity. Thanks for the call. I'll pass it on. Richard and then Alain.

Otherwise, too much more to sell in a row.

Good morning. Richard Hatch from Berenberg. Thanks very much for your time. Just a couple of questions on the assets. First one on Kennecott. You've talked about how you're looking to improve Kennecott. If I look at the costs in the first half, you're sort of annualising at about $1.4 billion. Previously, you've annualized at about 1 to 1.1. So clearly there's an uplifting cost there. Can you perhaps just talk us through that? And then with the underground, what does that cost base go to? And where's the opportunity in terms of margin expansion?

Yeah, I mean, Peter, you can expand on it. But I just have to say, I mean, they just didn't have a good performance this year because the real big issue. And I was there. I've been there several times. I mean. was we just got the safe production system working at the concentrator. And then we had the breakdown of the conveyor belt to the concentrator. And this is the problem with Ketakot. It's an amazing asset if each part works, because it's one big flow here. And right now, of course, we have an extended shutdown of the smelter. It's the biggest rebuild in a decade. So it's just not been a good run. But I'm absolutely convinced that we are doing the right things for the long term. So this is an example of where I actually have a good stomach feeling of it will perform well in the future. But this year, I just have to lie flat down and saying we haven't had good performance from Kennecott.

Yeah, I mean, Richard, I think you're still carrying elevated costs, you know, from diesel inputs. I mean, it's a heavy diesel side and also it's tight on labor. So you've got that sort of piece in the bedded in it. But most of the increase is actually to do with the fact that On the one hand, we've had the smelter rebuild, so that's additional OPEX costs, and we had some disruptions on the mine as well through the conveyor failure we had. So a lot of that is temporary, but there's a tranche there that is to do with that labor cost. The key point on diesel and other factors in our business is that we didn't really see in the first half of the year, but we will start to see those come to in the second. And I think I just want to emphasise that, that while you've seen Brent come down 25% in the first half of this year, first half of last year, you're probably not going to see that that translate into real cost reduction until the second half. And there's going to be some regional factors as well that moderate that. So I would expect some underlying reduction. There's some cost pressures there. And there's temporary factors that will come out as we restabilise the operations.

Thanks. Appreciate the colour. Second follow-up with the follow-ups on IOC. Another one that's been a bit of a challenge operationally. We talked about it before, how you're trying your best to try and improve it. Can you get to that 19 million tonne target? And again, costs seem to have blown out there first half. Appreciate there's a wildfire impact, but what's going on with that asset and how are you turning it around?

I mean on IOC it is mostly a volume issue because we lost due to the forest fires we effectively were stacked out. We lost a complete month of production in June. So actually it was performing through the mine and concentrated we've seen better performance. We've actually had the safe production system go through the concentrator already. We've really seen an improvement in performance. But it's really been the fact that we lost volume in June that drives sort of fixed cost inefficiencies across the operation. So I actually think we are seeing some underlying improvement. I mean, unfortunately, it's kind of two steps forward, sometimes one back with IOC. But we are making progress, I think, in terms of getting a more stable operation and moving that forward. I mean, unfortunately, forest fires, that's something we just couldn't do anything about.

You can't control that, but... But you're pointing towards something important, and that is in many of our assets, not oil talk, but in many of our assets, and IOC in particular, we have too many equipment failures. And it's not – I mean, it's easy to say maintenance debt, but we just need to find a way where we have less equipment failures because it just destroys the flow of what we are trying to do with safe production system. It's all the right things, but if you – Turn up to work early in the morning and you've got these equipment failures. That's going to be your priority number one, two, and three, and four. It means that you can't do the improvements you want to do. And that is, in a nutshell, I really feel for them. I think it's a great team. We have our IOC. We will overcome it, but it's hard to go through. Thanks, Vitor. Thanks a lot.

Thanks. Alain Gabriel, Morgan Stanley. One question from my side is if you go to slide 10, which is the EBITDA bridge, and you flip it to H1 versus H2, what are the key components that we need to think about? Clearly, Richard touched on a couple of points, but can you give some numbers or put some ranges behind the buckets that we need to think about in terms of profit bridges, H1 versus H2, non-repeatable costs?

Yeah. So I think on cost of what we're seeing, those market factors have lagged in the first half. They'll come through much more in the second half. So you'll start to see the diesel come through. You'll start to see raw materials and aluminium. We sort of had about 100 million benefit in the first half, but that is starting to flow through from the pet coke pitch and caustic coming through the aluminium cost base. That will accelerate maybe further. you know 150 200 million we can already see of benefits in the second half of the year on that alone so there's those factors that that are there there's some factors coming through that that in the first half where we just had contracts that were indexed to to inflation and they came through the second half they'll be with us in in in in the second first half they'll come be with us in the second half uh and then there's tightness in labor markets they're the three buckets that i would say that so we're seeing certainly downward you know, influences from those market factors. We are seeing some lagged inflation factors come through and some ongoing labour market factors that drive costs up. Those are the three buckets.

And including the impact of the fire and the impact of... other one-off items that we've seen?

Well, we'd certainly see. I mean, ISE is getting back up to full operation in July. So we would hope that those sorts of factors don't return. So you've certainly got ISE running at full production. You've certainly got Kitimat now at 90% of production capacity and getting that last 10% through the year. That's a big positive because Kitimat so far hasn't given us too much extra earnings because we've had the costs of sort of ramping up against the additional volume. But as we get in the second half, we start to see those benefits come through. So I think the aluminium business has got some sort of real tailwinds as we go into the second half around raw materials and around volume that will be positive. Kennecott, we've extended the smelter shut in September. But again, starting that up is absolutely critical. That's a key part of second half, getting that right. And we would hope to be back up, ramping up towards full capacity at smelter in the last quarter. So certainly some tailwinds as we go into the second half. Thank you.

Great, thanks. The good news is it's terrible with the wildfires we have around in the world, but we've actually had an awful lot of rain in Canada here in July. No, but this is super important for two reasons. First of all, it stops the wildfire, and secondly, it fills up our dams as well.

Operator, can we go back to the line, please?

So we are going to proceed with the next question on the phone lines. And it's from the line of Lyndon Fagan from JP Morgan. Please ask your question.

Thanks very much. My first question is just back to the Simundu CapEx on slide 16. If I look at the chart, there's about $5.5 billion of spend between 2023 and 2025. Can I confirm that that's Rio's 45% share? And... If it is, it's implying $12 billion over that time. So I was keen to explore that a bit.

That is right. It's our share. Yep. But remembering our share of the mine and the whole infrastructure.

So is that 45% just to confirm?

That is our share. So of the mine, we are effectively 53% owed through our arrangements of the mine. And then of the infrastructure, that would be shared with the sort of one and two sort of consortium 50-50. And our share is 53% of 50, if you like.

And so I guess the other way of asking it, what's the 100% number if that's five and a half?

We don't, because I think, as we said, we're in the midst of negotiations around this, we're not going to give the complete picture, but we wanted to be as transparent as we could be as to what this was of our capital. So I think we've shown that's our share, Rio Tinto's share of the capital for the next two and a half years, and we'll give that fuller picture when we've got those full negotiations clear. I just think that's... We've gone as far as we could, I think, to be as transparent as we possibly can be with you at this moment in time.

Thanks. Okay. I'll ask my follow-up. Just on the aluminium investment, the $1.1 billion for AP60, can I ask the question, why now? We've got the aluminium industry at a cyclical low. Clearly, there's no requirement for additional capacity in the aluminium industry at the moment. Why not defer that spend further? And even if it involves taking capacity offline, why not explore the notion of value over volume in aluminium? We spoke about it for years and years in iron ore, but I guess it's sort of perhaps needed more in aluminium these days.

Yeah, look, the reality is, of course, The supply and demand and the price doesn't matter the next few years when you're constructing an aluminum smelter. What matters is when it's up and running. So it's difficult to say what the market conditions are by then. So you have to think about what is your long-term beliefs in this market. And there is a couple of very good reasons why now. First of all, It is about future-proofing the Western world's largest hub of aluminum smelters, which is in the Saguenay. And we have to start closing down our Aveda smelter. It was built in 1926. And we will have to finalize it before it has 100 years anniversary. So it's actually, in a way, a replacement volume. Secondly, the government was very interested, of course, in protecting the employment in the second year. And that's why they have come in and provided subsidies for this investment. And we have been able to secure very competitively priced firm power. So you take those things and you grab the opportunity when it fits other stakeholders. I think it makes imminent sense to do right now. Thank you. Thanks.

We are going to proceed with the next one on the phone lines. And it's from Hayden Bestow from Macquarie. Please ask your question.

Good morning, guys. Just back on the aluminium and minerals businesses, I guess. I mean, the cash generation is pretty low. The royalties obviously weren't great either. I mean, obviously commodity prices are depressed. But as you go through the whole decarbonisation strategy here, we need to just think about these businesses just not really going to be big cash flow generators for four, five, six years, however long it takes you to go through this decarbonisation process, and outside of copper improving, we're just going to be heavily reliant on what iron ore makes?

I don't think so. We have a very cash-generative aluminum business in Canada. Yes, we are challenged on the Pacific aluminum business in terms of profitability. The profit was around zero for the first half of this year. I reckon that, but... But it just highlights the point of how important it is to find competitively priced energy. And then we have the double challenge of also making sure that it's renewable energy so we can reduce our CO2. But, well, it's just a good challenge for us.

Yeah, just to add to that, I think in the first half, the cash flows weren't as strong. There are several reasons for that. I mean, one, bauxite was highly challenged because we had really, really tough weather in the north of Australia, which really disrupted our operations. So we did not push the volume through that we usually would. We would expect that now we're on a good run into the second half of the year. The Illuma segment was very challenged, as we sort of talked about in the first half. We are seeing sort of the key caustic price sort of come down again, which I think positions us better. And thirdly, I think in the second half of the year, you know, we will have Kitimat really ramping up. That gives us a real tailwind as well as those raw materials. So I think the first half don't see that, Hayden, as probably representative of really the cash generating capacity of that business. It was an unusually low period.

Okay. And then just on the lithium Rincon stuff, I mean, that CapEx, is it really specific to Rincon or does it make you think a bit differently about lithium investments in terms of those assets out there where the capital has been sunk and it hasn't been exposed to all this inflation? Does that sort of change the way you think about operating assets versus sort of longer-term growth options like you've got in the portfolio now?

Hayden, I think the answer there is probably no. When you're talking about Rincon 3000, that startup plant, we took the decision very deliberately to commit to it very early so we could get the learnings. And when we did the studies for a much larger operation, we could incorporate all of that into the learning. So it was taken very early after the acquisition that we did that. The increases in the capital are not so much sort of inflation. They are sort of scope and definition as we've gone through that now, really locked down what that starter plant looks like. So it's not great that a capital has gone up like that, but I think I'd much rather it went up on that initial plant. than when we have to commit to something much bigger as those studies progress. So I think we are really seriously learning about how both the technology works and also operating in that location. So I think we're certainly in a much better place for doing it. But yeah, the capital's up.

Thanks, Hayden. One more question online, please, and then we'll come here.

Okay, we are going to proceed with the next question on the phone lines. And the questions come from the line of Robert Stein from CLSA. Please ask a question.

Hi, team. Thanks for the opportunity and good morning. The Pac-L business, obviously a big energy consumer and with electricity prices and potentially energy scarcity on the east coast of Australia, does that factor into your decision-making around the future of the asset in terms of the broader societal need? given that it is running at a lower margin, is that energy better used in the Australian grid? And secondly, how does Rio Tinto stand to benefit from any type of energy offtake that then gets released back onto the grid in that situation?

It's a very big question, and it's a question I cannot answer. It's a societal question you're asking there, and you should probably ask the Australian government about that. But I will say to you, your question is also a little bit about the chicken or the egg, because, yes, on one hand, you could say it could be used elsewhere. But another way of looking at it is saying, it's only those assets because they are the biggest electricity users in Australia that can actually underwrite renewable energy. If those assets were not there, there would probably not be the market for making large-scale renewable energy. And right now, particularly Queensland, of course, is going through a major transition, an economy that depends very much on two industrial sectors of coal, and aluminum and underwriting renewable energy there could be very beneficial in that transition. But a very good question, a societal question, you probably should ask elsewhere. Thank you.

Rob, I have to cut you short on two questions. I owe you one. We have two more here in the room, or three more here in the room as well. We're nearly up on time. So let's go back in the room. Patrick, Miles, and Danielle, I apologize. You get one question only. And Peter and Jakob, can you please limit your answers?

To the point. Thank you. Thanks. It's Patrick Mann from Bank of America. Just on the – I appreciate it's early days, but the studies into making green iron or low-carbon iron in Australia, would you consider investing downstream to produce some kind of green iron for customers, or would you think more – I think some of your peers or competitors have thought more along sort of joint ventures or collaboration with steelmakers there, and how are you envisioning it? Thanks.

We are open. I mean, we're trying to – we as a miner is, as I said earlier, we're both miners and in processing. We're not steelmakers. We're not really interested in going too much into steelmaking. But, yes, I could easily see us being part of a joint venture that secures the supply of iron ore in terms of the reduction to green iron. So that's certainly something we could participate in, but we definitely need someone who's really, really good manufacturers because if we're trying on our own, I think we have some history around that and other companies as well, and that's not really what we're aiming for. Thank you.

Miles also, UBS. Maybe we haven't talked about the markets. Obviously, the Politburo announcement got everyone a bit excited earlier this week. I mean, are you, as you look and talk to your guys, sort of marketing iron ore, are you raising your expectations for sort of demand for steel and iron ore in the second half and medium term? Do you think, you know, $110 is a sustainable, $115 is a sustainable iron ore price? No.

Thank you. It's beyond my competence.

Short answer. No. Mars, I mean, I think when you look at it, you know, steel demand in China has been pretty flat half year on year so far. I mean, I think... But we're still seeing an extremely soft property market. I think it all depends how that flows through. You're seeing, I think... management of the economy through the government pretty carefully. I think we'll just have to see exactly how they pull various levers on stimulus into the second half to meet their objectives in terms of growth. I think we'll just have to see how that plays out.

I think we still remain cautiously optimistic on the Chinese economy. They have demonstrated again and again if there is a setback, they're able to stimulate the economy and manage the economy in an effective manner. But time will tell. Thanks, Miles. Danielle, last one. Thank you.

Thanks. It's Danielle Chigumira from Credit Suisse. A question on the emissions flight path. So you spoke about not being able to achieve the 2025 initial target. Of the buckets that you identified, which is the biggest culprit? So permission of renewables, diesel replacement, and process heat abatement, which is the biggest culprit? And does it have any implications on meeting the larger 2030 target for emissions reduction?

Well...

It's a bit more complicated than that. Our focus is really about getting everything done in order to achieve 2030. We thought we could get to minus 15, but I will say to you, when we announced those targets, we said we might be using credits. But it's a last resort. So we can still achieve 2025. We're just coming to the conclusion we can't achieve it without credits because certain things take longer. And I tell you there's another reason which is terrible but good. That is this company is suddenly growing faster than we had expected. And when you grow faster and you have an absolute number on CO2, it starts getting difficult for you. So there's numerous factors. But the reality is just I think we have some wonderful breakthroughs in technologies such as, for example, the green smelting that we have the site in California running. But in aggregate, it's just difficult to move these things forward. The Western world is not moving very fast forward on renewable energy. That's just a fact.

Great. Thank you for that. Thank you everybody for coming and thank you those on the line for joining us. Hope to see as many of you as possible in October in the Pilbara and otherwise see you after Christmas. Thank you. Thank you.