Rio Tinto 2016 full year results

Rio Tinto announces cash generation of $8.5 billion and $3.6 billion of shareholder returns

 

8 February 2017

 

Rio Tinto chief executive J-S Jacques said: "Today's results show we have kept our commitment to maximise cash and productivity from our world-class assets, delivering $3.6 billion in shareholder returns while maintaining a robust balance sheet.  At the same time, we strengthened the portfolio and advanced our high-value growth projects as we look to the future.

"We enter 2017 in good shape. Our team will deliver $5 billion of extra free cash flow over the next five years from our productivity programme. Our value over volume approach, coupled with a robust balance sheet and world-class assets, places us in a strong position to deliver superior shareholder returns through the cycle."

2016 highlights

-    Generated strong operating cash flow of $8.5 billion and underlying earnings of $5.1 billion.

-    Achieved $1.6 billion of pre-tax sustainable operating cash cost improvements.¹

-    Investing in three major growth projects in bauxite, copper and iron ore.

-    Optimising the portfolio with disposals of $1.3 billion announced or completed in 2016 and up to
$2.45 billion announced to date in 2017.

-    Strengthened the balance sheet further with net debt reduced to $9.6 billion.

-    Returning cash to shareholders with $3.6 billion announced with respect to 2016:

§ full year dividend of 170 US cents per share, equivalent to $3.1 billion.

§ share buy-back of $0.5 billion in Rio Tinto plc shares over the course of 2017.

§ in total, represents 70 per cent of 2016 underlying earnings.

 

Year to 31 December	2016	2015	Change
Net cash generated from operating activities (US$ millions)	8,465	9,383	-10%
Underlying earnings2 (US$ millions)	5,100	4,540	+12%
Net earnings / (loss) (US$ millions)	4,617	(866)	n/a
Capital expenditure3 (US$ millions)	(3,012)	(4,685)	-36%
Underlying earnings per share (US cents)	283.8	248.8	+14%
Basic earnings / (loss) per share (US cents)	256.9	(47.5)	n/a
Ordinary dividend per share (US cents)	170.0	215.0	-21%

 

At 31 December	2016	2015	Change
Net debt4, 6 (US$ millions)	9,587	13,783	-30%
Gearing ratio5, 6	17%	24%

The financial results are prepared in accordance with IFRS and are unaudited.

¹ Operating cash cost improvements represent the difference between the current and prior year full cash cost of sales per unit based on the prior year volume sold.

²Underlying earnings is a key financial performance indicator which management uses internally to assess performance. It is presented here to provide greater understanding of the underlying business performance of the Group's operations. Net and underlying earnings relate to profit attributable to the owners of Rio Tinto. Underlying earnings is defined and reconciled to net earnings on page 46.

³Capital expenditure is presented gross, before taking into account any disposals of property, plant and equipment.

⁴Net debt is defined and reconciled to the balance sheet on page 40.

⁵Gearing ratio is defined as net debt divided by the sum of net debt and total equity at each period end.

⁶These financial performance indicators are those which management use internally to assess performance, and therefore are considered relevant to users of the accounts.

 

Continued focus on generating cash

Revenues and earnings

-    Consolidated sales revenues of $33.8 billion, $1.0 billion lower than last year, primarily due to lower average commodity prices, and lower market premia for aluminium.

-    EBITDA¹ margin of 38 per cent in 2016, compared with 34 per cent in 2015, reflecting the positive impact of the cash cost improvements.

-    Underlying earnings of $5.1 billion, $0.6 billion higher than 2015, with cash cost improvements of
$1.2 billion (post-tax) more than offsetting the $0.5 billion (post-tax) impact of lower prices.

-    Underlying earnings per share of 283.8 US cents compared with 248.8 US cents in 2015.

-    Net earnings of $4.6 billion were $0.5 billion lower than underlying earnings reflecting net gains on disposals of businesses of $0.4 billion, non-cash exchange rate and derivative gains of $0.5 billion, offset by impairments of $0.2 billion, additional closure provisions for legacy operations of $0.3 billion, an onerous contract provision of $0.3 billion, a tax provision of $0.4 billion and restructuring costs of $0.2 billion.

 

Cash flow and balance sheet

-    Generated net cash from operating activities of $8.5 billion, ten per cent lower year-on-year, primarily due to working capital movements and an increase in interest paid to $1.3 billion, of which
$0.5 billion related to early redemption costs associated with the bond purchase programmes.

-    Paid taxes and royalties of $4 billion in 2016 of which approximately $3 billion was paid in Australia.

-    Capital expenditure of $3.0 billion, of which $1.7 billion was sustaining capex.

-    Generated free cash flow² of $5.8 billion which included $0.3 billion of sales of property, plant and equipment. In addition, the Group received $0.8 billion in net proceeds from disposals in 2016, with up to $2.6 billion expected in 2017, including the Coal & Allied transaction for up to $2.45 billion.

-    Further strengthened the balance sheet with a 30 per cent reduction in net debt to $9.6 billion and gearing ratio of 17 per cent.

 

Growth projects

-    Silvergrass iron ore development in the Pilbara announced on 2 August 2016 for $338 million, to maintain the Pilbara blend and lower unit costs, adding 10 million tonnes of annual capacity with commissioning in the second half of 2017.

-    Oyu Tolgoi underground copper mine development in Mongolia announced on 6 May 2016 for
$5.3 billion: first tonnes expected in 2020, with average production of 560 thousand tonnes between 2025 and 2030³.

-    Amrun bauxite project in Queensland, announced on 27 November 2015 for $1.9 billion, remains on track, with production and shipping expected to commence in the first half of 2019, increasing bauxite exports by around 10 Mt/a⁴.

 

 

 

 

 

 

 

 

¹ EBITDA margin is defined as Group underlying EBITDA divided by Product Group total revenues as per the Financial Information by Business Unit on page 11 where it is reconciled to profit on ordinary activities before finance items and taxation and consolidated sales revenue. This financial metric is used by management internally to assess performance, and therefore is considered relevant to users of the accounts.

² Free cash flow is defined as Net cash generated from operating activities less Purchases of property, plant and equipment (PP&E) plus Sales of PP&E. It is a key financial indicator which management uses internally to assess performance.

³ This production target was disclosed in a release to the market on 6 May 2016. All material assumptions underpinning that target continue to apply and have not materially changed.

⁴ This production target was disclosed in a release to the market on 27 November 2015. All material assumptions underpinning that target continue to apply and have not materially changed.

Capital returns

-    Paid dividends of $2.7 billion in 2016, comprising 2015 final dividend of $1.9 billion and 2016 interim dividend of $0.8 billion.

-    Announced total dividends for 2016 of 170 US cents per share, equivalent to $3.1 billion, well in excess of the previously indicated 110 US cents per share minimum: of this total, the interim dividend of 45 US cents per share ($0.8 billion) was paid in September 2016 and the final dividend of 125 US cents per share ($2.3 billion) will be paid in April 2017.

-    Announced share buy-back totalling $0.5 billion in Rio Tinto plc shares, bringing total shareholder returns for 2016 to $3.6 billion, representing 70 per cent of underlying earnings.

 

Guidance

-    Operating cash cost improvements (including exploration and evaluation savings) of $2.0 billion (pre-tax) over 2016 and 2017, in line with previous guidance.

-    Additional free cash flow of $5.0 billion by the end of 2021 from productivity improvements.

-    Capital expenditure expected to be around $5.0 billion in 2017 and around $5.5 billion in each of 2018 and 2019. Each year includes around $2.0 billion of sustaining capex.

-    Gearing ratio of 20 to 30 per cent through the cycle.

-    Effective tax rate on underlying earnings of approximately 27 to 30 per cent expected in 2017.

-    Production guidance is unchanged from the Fourth Quarter Operations Review.

  

 

 

 

Underlying EBITDA and underlying earnings by product group

	2016 US$m	20152 US$m	Change US$m	Change %
Underlying EBITDA1
Iron Ore	8,526	7,675	851	+11%
Aluminium	2,472	2,742	(270)	-10%
Copper & Diamonds	1,387	1,833	(446)	-24%
Energy & Minerals	1,803	1,235	568	+46%
Other operations	(92)	(81)	(11)	-14%
Product Group Total	14,096	13,404	692	+5%
Other central items Exploration and evaluation	(411) (175)	(546) (237)	135 62	+25% +26%
	13,510	12,621	889	+7%
Underlying earnings
Iron Ore	4,611	3,940	671	+17%
Aluminium	947	1,118	(171)	-15%
Copper & Diamonds	(18)	370	(388)	-105%
Energy & Minerals	610	175	435	+249%
Other operations	(86)	(88)	2	+2%
Product Group Total	6,064	5,515	549	+10%
Other central items Exploration and evaluation Net interest3	(241) (147) (576)	(375) (211) (389)	134 64 (187)	+36% +30% -48%
	5,100	4,540	560	+12%

[1] Underlying EBITDA is a key financial indicator which management uses internally to assess performance. It excludes the same items that are excluded in arriving at underlying earnings. See page 11 for further detail and a reconciliation to profit on ordinary activities before finance items and tax.

² 2015 numbers have been recast to reflect the new product group structure.

³ 2016 net interest includes $237 million (post-tax) of early redemption costs associated with the three bond purchase programmes.

 

Net earnings and underlying earnings

In order to provide additional insight into the performance of its business, Rio Tinto reports underlying earnings. The differences between underlying earnings and net earnings are set out in the following table (all numbers are after tax and exclude non-controlling interests).

Year ended 31 December	2016 US$m	2015 US$m
Underlying earnings	5,100	4,540
Items excluded from underlying earnings
Impairment charges	(183)	(1,802)
Net gains on disposal of interests in businesses	382	48
Exchange and derivative gains / (losses) on US dollar net debt and intragroup balances and derivatives not qualifying for hedge accounting	536	(3,282)
Onerous port and rail contracts	(329)	-
Restructuring costs including global headcount reduction	(177)	(258)
Increased closure provision for legacy operations	(282)	(233)
Tax provision	(380)	-
Recognition of deferred tax assets relating to planned divestments	-	234
Other excluded items	(50)	(113)
Net earnings / (loss)	4,617	(866)

 

Explanation of excluded items is given on pages 7 to 8. A detailed reconciliation from underlying earnings to net earnings, which includes pre-tax amounts plus additional explanatory notes, are given on pages 46 and 47.

 

 

Commentary on the Group financial results

The principal factors explaining the movements in underlying and net earnings are set out in the table below (all numbers are after tax and non-controlling interests).

	Underlying earnings US$m	Net earnings US$m
2015	4,540	(866)
Prices	(460)
Exchange rates	49
Volumes	19
General inflation	(158)
Energy	25
Lower cash costs (pre-tax $1,539 million)	1,124
Lower exploration and evaluation costs	97
Tax / non-cash / interest / other	(136)
Total changes in underlying earnings	560	560
Decrease in net impairment charges		1,619
Movement in gains on consolidation and disposal of interests in businesses		334
Movement in exchange differences and gains/losses on debt		3,818
Onerous port and rail contracts		(329)
Lower restructuring costs including global headcount reductions		81
Increase in closure provision for legacy operations		(49)
Tax provision		(380)
Absence of recognition of deferred tax assets		(234)
Other movements		63
2016	5,100	4,617

 

Prices

Most commodity prices increased for the first time in a number years in the second half of 2016, despite numerous political and macro shocks to the global economy.

The Platts price for 62 per cent iron Pilbara fines was six per cent higher on average compared with 2015. Iron ore prices started 2016 at $43 per dry metric tonne cost and freight (CFR) and ended the year around $80 per tonne. Contestable iron ore demand increased by 60 million tonnes to 1.8 billion, helping absorb new supply. This was underpinned by Chinese steel demand as China's government expanded lending, eased monetary policy and supported the property sector. China also eliminated inefficient steelmaking capacity, supporting steel prices and profitability.

Hard coking coal benchmark prices were 12 per cent higher on average compared with 2015 and thermal coal spot prices averaged seven per cent higher. Hard coking coal prices almost quadrupled to $310 per tonne from January to November 2016. Strong Chinese steel demand contributed to the spike, but the main driver was China's supply curtailment through the implementation of the "276 Directive", restricting coal mines to operating 276 days of the year. The thermal coal market was also affected, with prices doubling to $110 per tonne free on board (FOB) Newcastle. The directive was relaxed in the second half of 2016 and prices have since moderated.

These commodity price gains were more than offset by lower average prices for copper and aluminium which were down 11 and three per cent respectively year-on-year, and a significant drop in market premia for aluminium in all regions, which fell from their record highs in early 2015.

Copper prices dipped below $2 per pound in early 2016 before rising 25 per cent by year-end. Over one million tonnes of new mine supply entered the market, and was accommodated through demand growth, lower scrap availability and mine curtailments.

Aluminium prices started 2016 below $1,500 per tonne and ended the year 20 per cent higher. Margins remained under pressure, however, as energy and alumina costs offset the price increase. The alumina price rallied from less than $200 per tonne to $350 per tonne as refinery curtailments caught up with the ten per cent cutback of global smelting capacity announced in 2015. Bauxite prices did not match these increases, with the average Chinese import price falling moderately to just under $50 per tonne as new supply from Guinea, Australia and Brazil replaced volumes lost to Malaysia's export ban.

The effect of all price movements on the Group's commodities in 2016 was to decrease underlying earnings by $460 million compared with 2015. A table of prices and exchange rates is included on page 45.

 

Exchange rates

Compared with 2015, the US dollar, on average, strengthened by three per cent against the Canadian dollar, by one per cent against the Australian dollar and by 14 per cent against the South African rand. The effect of all currency movements was to increase underlying earnings relative to 2015 by $49 million.

 

Volumes

Movements in sales volumes increased earnings by $19 million compared with 2015. There were volume gains in iron ore, following the increase in capacity at the Pilbara ports and mines, in bauxite, from increased production at all four mines, and in aluminium following record production at ten smelters. These were mostly outweighed by lower sales volumes in copper, gold and molybdenum.

 

Energy

Lower input energy prices during the year improved underlying earnings by $25 million compared with 2015 in part related to oil, where the price fell approximately 16 per cent year-on-year, averaging $44 per barrel during 2016.

 

Cash costs, exploration and evaluation

Rio Tinto continued to realise considerable savings from its cost reduction programme, delivering
$1.6 billion pre-tax ($1.2 billion post tax) in operating cash cost savings and reductions in exploration and evaluation expenditure in 2016. The Group has now achieved $7.8 billion pre-tax ($5.5 billion post-tax) in total operating cash cost improvements and reductions in exploration and evaluation expenditure compared with the 2012 base.

The Group continued to optimise its expenditure on exploration and evaluation, progressing the highest value projects. In 2016, approximately 41 per cent of this expenditure was incurred by central exploration, 25 per cent by Copper & Diamonds, 25 per cent by Energy & Minerals and the remainder by Aluminium and Iron Ore.

 

Tax / non-cash / interest / other

The 2016 effective corporate income tax rate on underlying earnings, excluding equity accounted units, was 22 per cent compared with 27 per cent in 2015. The lower effective tax rate in 2016 was due to the recognition of a deferred tax asset in Mongolia. Excluding this item, the effective tax rate in 2016 was 26 per cent. The effective tax rate in Australia remained at 30 per cent. The Group expects an effective tax rate on underlying earnings of approximately 27 to 30 per cent in 2017.

The Group interest charge (net of tax) of $576 million increased by $187 million compared with 2015, following completion of some major capital projects in 2015 (interest is capitalised during the construction period of a project) and $237 million of early redemption costs from bond purchases in 2016. In 2016, $111 million of interest was capitalised, compared with $254 million in 2015. In 2016, the Group successfully completed three bond purchase programmes totalling $7.5 billion and repaid $1.5 billion of maturing bonds, reducing gross debt by $9.0 billion (nominal value).

 

Items excluded from underlying earnings

Impairment charges in 2016 of $183 million primarily related to the Argyle diamond mine in Western Australia.

Net gains on disposal of $382 million mainly related to the sale of Rio Tinto's 40 per cent interest in the Bengalla coal Joint Venture and the sale of the Lochaber aluminium assets.

Non-cash exchange and derivative gains in 2016 of $536 million arose primarily on US dollar debt in non-US dollar functional currency Group companies, intragroup balances, and on the revaluation of certain derivatives which do not qualify for hedge accounting. These exchange gains in 2016 were in contrast to net exchange losses in 2015 of $3,282 million, giving rise to a positive period-on-period movement of $3,818 million. The exchange gains are largely offset by currency translation losses recognised in equity and the quantum of US dollar debt, which will be repaid from US dollar sales receipts and US dollar divestment proceeds, is therefore largely unaffected.

A review of the infrastructure capacity requirements in Queensland, Australia, confirmed that it is no longer likely that Rio Tinto will utilise the Abbot Point Coal Terminal and associated rail infrastructure capacity contracted under take-or-pay arrangements. On 31 October 2016, agreement was reached with Adani, the owner of the port, to relinquish that capacity. Accordingly, an onerous contract provision has been recognised based on the net present value of expected future cash flows discounted at a post-tax real rate of two per cent, resulting in a post-tax onerous contract charge of $329 million.

In 2016, the Group incurred $177 million of restructuring costs associated with its cost reduction programme, compared with $258 million in 2015.

The $282 million increase in the closure provision related to the Gove alumina refinery in Northern Territory, Australia where operations were curtailed in May 2014.

The tax provision includes amounts provided for tax matters for which the timing of resolution and potential economic outflow are uncertain. Specifically, the Group is currently in discussions with the Australian Taxation Office (ATO) in relation to certain transactions between Rio Tinto entities based in Australia and the Group's commercial centre in Singapore for the period since 2009. From 2010 to 2016, Rio Tinto paid $37 billion in taxes and royalties in Australia. These matters were raised by Rio Tinto with the ATO through advance ruling requests or are under discussions pursuant to our co-operative compliance agreement.  

In 2015, impairment charges of $1,802 million (post-tax) were recognised, including a $1,118 million (post-tax) impairment of the Simandou iron ore project in Guinea, $262 million relating to Energy Resources of Australia (ERA) and $199 million relating to the Roughrider uranium project in Canada.

In 2015, the Group recorded a post-tax charge of $233 million for the remediation of legacy properties, including the Holden mine in Washington State. 

 

Cash flow

Net cash generated from operating activities of $8.5 billion was ten per cent lower than 2015. 2015 cash flows benefited from a significant working capital reduction. 2016 saw a rebound in receivables, driven by higher prices. In addition, there was an increase in interest paid to $1.3 billion, of which $0.5 billion related to early redemption costs associated with the bond purchase programmes. These were partly offset by cash cost improvements and lower tax payments, in line with lower underlying profits.

Purchases of property, plant and equipment and intangible assets were $3.0 billion in 2016, a decline of 36 per cent compared with 2015. Some major capital projects were completed in 2015, including expansion of the Pilbara iron ore infrastructure and the modernisation and expansion of the Kitimat aluminium smelter. Major capital projects in 2016 included the development of the Oyu Tolgoi copper/gold underground mine in Mongolia, construction of key infrastructure at the Amrun bauxite project in Queensland and development of the Silvergrass iron ore mine in the Pilbara.

Dividends paid in 2016 of $2.7 billion reflected the final 2015 dividend paid in April 2016 and the 2016 interim dividend paid in September 2016.

In 2016, net proceeds from the disposal of subsidiaries, joint ventures and associates of $0.8 billion related primarily to amounts received following the disposal of the Group's 40 per cent interest in the Bengalla coal Joint Venture and the first tranche from the sale of the Lochaber aluminium assets. In addition, the Group realised $0.3 billion from the sale of property, plant and equipment, which included the Mount Pleasant thermal coal assets in New South Wales, undeveloped land in Utah and some office buildings in North America.

 

Balance sheet

Net debt (see page 40) decreased from $13.8 billion at 31 December 2015 to $9.6 billion at 31 December 2016. Net debt to total capital (gearing ratio) declined to 17 per cent at 31 December 2016 (31 December 2015: 24 per cent) and interest cover was seven times, unchanged from 2015.

Adjusted total borrowings at 31 December 2016 were $18.0 billion (refer to page 40). At 31 December 2016, approximately 80 per cent of Rio Tinto's total borrowings were at floating interest rates, the weighted average cost of total borrowings was approximately 4.0 per cent and the weighted average maturity was around ten years. The maximum amount, within non-current borrowings, maturing in any one calendar year was $1.7 billion, which matures in 2025.

In 2016, the Group repaid $9.4 billion of borrowings, including $9.0 billion of bonds, and drew down $4.4 billion of funds, mainly from the Oyu Tolgoi project financing. Cash and cash equivalents plus other short-term cash investments at 31 December 2016 were $8.4 billion (31 December 2015: $9.4 billion).

 

Profit / loss for the year

Net earnings and underlying earnings refer to amounts attributable to the owners of Rio Tinto. The net profit attributable to the owners of Rio Tinto in 2016 totalled $4,617 million (2015: net loss of $866 million). The Group recorded a profit in 2016 of $4,776 million (2015: loss of $1,719 million) of which a profit of $159 million (2015: loss of $853 million) was attributable to non-controlling interests.

 

Dividends

In February 2016, the board announced a new dividend policy. At the end of each financial period, the board will determine an appropriate total level of ordinary dividend per share, taking into account the results for the financial year, the outlook for our major commodities, the board's view of the long-term growth prospects of the business and the Company's objective of maintaining a strong balance sheet. The intention is that the balance between the interim and final dividend is weighted to the final dividend.

The board expects total cash returns to shareholders over the longer term to be in a range of 40 to 60 per cent of underlying earnings in aggregate through the cycle.

The board is committed to maintaining an appropriate balance between cash returns to shareholders and investment in the business, with the intention of maximising shareholder value.

Acknowledging the cyclical nature of the industry, in periods of strong earnings and cash generation, it is the board's intention to supplement the ordinary dividends with additional returns to shareholders.

Dividends are determined in US dollars. Rio Tinto plc dividends are declared and paid in pounds sterling and Rio Tinto Limited dividends are declared and paid in Australian dollars, converted at exchange rates applicable on 7 February 2017 (the latest practicable date prior to the declaration of the dividend).

 

Ordinary dividend per share	2016	2015
Rio Tinto Group
Interim (US cents)	45.00	107.50
Final (US cents)	125.00	107.50
Total dividend (US cents)	170.00	215.00
Rio Tinto plc
Interim (UK pence)	33.80	68.92
Final (UK pence)	100.56	74.21
Total dividend (UK pence)	134.36	143.13
Rio Tinto Limited
Interim (Australian cents)	59.13	144.91
Final (Australian cents)	163.62	151.89
Total dividend (Australian cents)	222.75	296.80

 

Rio Tinto Limited shareholders will be paid dividends which are fully franked. The board expects Rio Tinto Limited to be in a position to pay fully franked dividends for the foreseeable future.

Dividends will be paid on 6 April 2017 to holders of ordinary shares and ADRs on the register at the close of business on 24 February 2017. The ex-dividend date for Rio Tinto Limited and Rio Tinto plc holders will be 23 February 2017 and the ex-dividend date for Rio Tinto plc ADR shareholders will be 22 February 2017.

Rio Tinto plc shareholders may elect to receive their dividend in Australian dollars, and Rio Tinto Limited shareholders may elect to receive their dividend in pounds sterling. Currency conversions will be determined by reference to the exchange rates applicable to pounds sterling and Australian dollars five business days prior to the dividend payment date. Currency elections must be registered by 16 March 2017 for Rio Tinto plc and Rio Tinto Limited shareholders.

ADR holders receive dividends in US dollars, which will be converted from pounds sterling by reference to the exchange rate applicable on 30 March 2017. This is likely to differ from the US dollar determining rate due to currency fluctuations.

As usual, Rio Tinto will operate its Dividend Reinvestment Plans, details of which can be obtained from the Rio Tinto website (www.riotinto.com). The last date for receipt of the election notice for the Dividend Reinvestment Plans for Rio Tinto plc and Rio Tinto Limited shareholders is 16 March 2017. Purchases under the Dividend Reinvestment Plan are made on or as soon as practicable after the dividend payment date and at prevailing market prices. There is no discount available.

 

Regulatory matters

On 9 November 2016, Rio Tinto announced that, following an investigation supported by external counsel, it had notified the relevant authorities in the United States, United Kingdom and Australia and provided them with information concerning contractual payments totalling $10.5 million made to a consultant providing advisory services on the Simandou project in Guinea. Rio Tinto is fully cooperating with each of the relevant authorities.

On 1 December 2016, Rio Tinto confirmed that it was cooperating with relevant authorities (including the U.S. Securities and Exchange Commission) in connection with an investigation into the impairment included in the Company's accounts in 2012 in respect of Rio Tinto Coal Mozambique.

The outcome on the Group of these regulatory investigations, and any associated litigation, is subject to a number of significant uncertainties at the present time. They could ultimately expose the Group to material financial cost. The Rio Tinto Board has established a dedicated Board Committee to keep these matters under review as they progress.

 

Rio Tinto financial information by business unit

	Rio Tinto interest %	Gross revenue (a)					EBITDA (b)				Net earnings (c)
		for the year ended 31 December					for the year ended 31 December				for the year ended 31 December
		2016 US$m	2015 US$m		2016 US$m			2015 US$m		2016 US$m		2015 US$m
Iron Ore
Pilbara	(d)	14,530	13,886		8,558			7,730		4,662		4,013
Evaluation projects/other		75	66		(32)			(55)		(51)		(73)
Total Iron Ore		14,605	13,952		8,526			7,675		4,611		3,940
Aluminium	(e)
Bauxite		1,913	2,057		848			937		493		542
Alumina		2,118	2,145		27			(47)		(121)		(187)
Intrasegment		(786)	(849)		-			-		-		-
Bauxite & Alumina		3,245	3,353		875			890		372		355
Primary Metal		4,913	4,931		1,258			1,245		402		446
Pacific Aluminium		1,971	2,254		264			408		62		147
Intersegment & Other		(1,822)	(1,876)		(50)			132		(13)		92
Integrated Operations		8,307	8,662		2,347			2,675		823		1,040
Other Product Group Items		1,075	1,374		(42)			(76)		(30)		(50)
Product group operations		9,382	10,036		2,305			2,599		793		990
Evaluation projects/other		76	81		167			143		154		128
Total Aluminium		9,458	10,117		2,472			2,742		947		1,118
Copper & Diamonds
Rio Tinto Kennecott	100.0	1,243	1,403		126			437		(228)		44
Escondida	30.0	1,465	1,855		793			760		270		281
Grasberg joint venture	(f)	-	-		(17)			(17)		(64)		(34)
Oyu Tolgoi & Turquoise Hill	(g)	1,203	1,636		436			501		52		57
Diamonds	(h)	613	698		239			293		47		79
Product group operations		4,524	5,592		1,577			1,974		77		427
Evaluation projects/other		-	-		(190)			(141)		(95)		(57)
Total Copper & Diamonds		4,524	5,592		1,387			1,833		(18)		370
Energy & Minerals
Rio Tinto Coal Australia	(i)	2,634	2,757		893			497		382		48
Iron Ore Company of Canada	58.7	1,324	1,353		335			197		64		12
Rio Tinto Iron & Titanium	(j)	1,419	1,571		370			435		86		116
Rio Tinto Minerals	100.0	620	624		213			178		117		103
Dampier Salt	68.4	259	306		74			71		25		24
Uranium	(k)	456	474		54			1		10		(42)
Product group operations		6,712	7,085		1,939			1,379		684		261
Simandou iron ore project	(l)	-	-		(102)			(87)		(47)		(41)
Evaluation projects/other	(m)	22	55		(34)			(57)		(27)		(45)
Total Energy & Minerals		6,734	7,140		1,803			1,235		610		175
Other Operations	(n)	-	13		(92)			(81)		(86)		(88)
Intersegment transactions		(3)	(29)		-			-		-		-
Product Group Total		35,318	36,785		14,096			13,404		6,064		5,515
Other items					(411)			(546)		(241)		(375)
Exploration and evaluation					(175)			(237)		(147)		(211)
Net interest										(576)		(389)
Underlying EBITDA/earnings					13,510			12,621		5,100		4,540
Items excluded from underlying EBITDA/earnings		18	(1)		(687)			(563)		(483)		(5,406)
EBITDA/net earnings					12,823			12,058		4,617		(866)
Reconciliation to Group income statement Share of equity accounted unit sales and intra-subsidiary/equity accounted units sales		(1,555)	(1,955)
Depreciation & amortisation in subsidiaries excluding capitalised depreciation					(4,691)			(4,553)
Impairment charges					(249)			(2,791)
Depreciation & amortisation in equity accounted units					(526)			(462)
Taxation and finance items in equity accounted units					(241)			(276)
Consolidated sales revenue / Profit on ordinary activities before finance items and taxation		33,781	34,829		7,116			3,976

 

 

 

 

Rio Tinto financial information by business unit (continued)

		Rio Tinto interest %	Capital expenditure (o)			Depreciation & amortisation			Operating assets (p)
			for the year ended 31 December			for the year ended 31 December			as at 31 December
			2016 US$m	2015 US$m		2016 US$m	2015 US$m		2016 US$m	2015 US$m
Iron Ore
Pilbara		(d)	868	1,608		1,645	1,744		16,337	16,848
Evaluation projects/other			-	-		-	-		2	2
Total Iron Ore			868	1,608		1,645	1,744		16,339	16,850
Aluminium		(e)
Bauxite			343	159		110	112		1,278	1,050
Alumina			87	158		206	207		2,588	2,698
Bauxite & Alumina			430	317		316	319		3,866	3,748
Primary Metal			394	1,249		716	629		10,701	10,326
Pacific Aluminium			91	126		193	212		1,044	1,198
Intersegment & Other			1	(10)		25	12		171	677
Total Aluminium			916	1,682		1,250	1,172		15,782	15,949
Copper & Diamonds
Rio Tinto Kennecott		100.0	333	408		530	344		2,190	2,442
Escondida		30.0	517	770		364	293		3,565	3,485
Grasberg joint venture		(f)	174	179		89	43		1,151	1,016
Oyu Tolgoi & Turquoise Hill		(g)	322	92		450	416		3,804	3,597
Diamonds		(h)	97	124		164	159		655	857
Product group operations			1,443	1,573		1,597	1,255		11,365	11,397
Evaluation projects/other			(2)	3		4	6		166	155
Total Copper & Diamonds			1,441	1,576		1,601	1,261		11,531	11,552
Energy & Minerals
Rio Tinto Coal Australia		(i)/(q)	(107)	108		297	336		1,807	2,137
Iron Ore Company of Canada		58.7	75	118		151	162		1,018	1,155
Rio Tinto Iron & Titanium		(j)	97	150		189	194		3,662	3,554
Rio Tinto Minerals		100.0	31	28		53	45		508	585
Dampier Salt		68.4	11	14		23	22		146	140
Uranium		(k)	30	39		25	65		(143)	(216)
Product group operations			137	457		738	824		6,998	7,355
Simandou iron ore project		(l)	-	91		-	1		13	(10)
Evaluation projects/other		(m)	4	4		1	5		272	276
Total Energy & Minerals			141	552		739	830		7,283	7,621
Other Operations		(n)	(11)	(36)		34	32		227	(14)
Product Group Total			3,355	5,382		5,269	5,039		51,162	51,958
Intersegment transactions									142	242
Net assets of disposal groups held for sale		(r)							(7)	182
Other items			(46)	65		51	68		(2,420)	(1,250)
Less: equity accounted units (EAU)			(651)	(859)		(526)	(462)
Total			2,658	4,588		4,794	4,645		48,877	51,132
Add back: Proceeds from sale of property, plant and equipment and intangibles			354	97
Total capital expenditure per cash flow statement			3,012	4,685
Less: Net debt									(9,587)	(13,783)
Equity attributable to owners of Rio Tinto									39,290	37,349

 

 

 

 

 

 

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 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, 50 per cent holding of Hope Downs Joint Venture and 65 per cent holding of Robe River Iron Associates. The Group's net beneficial interest in Robe River Iron Associates is 53 per cent as 30 per cent is held through a 60 per cent owned subsidiary and 35 per cent is held through a 100 per cent owned subsidiary.

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)   Through a joint venture agreement with Freeport-McMoRan Inc. (Freeport), Rio Tinto is entitled to 40 per cent of material mined above an agreed threshold 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), where TRQ's principal asset is its 66 per cent investment in Oyu Tolgoi LLC, which owns the Oyu Tolgoi copper-gold mine. 

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 31 December 2016, includes Rio Tinto's 100 per cent shareholding in Coal & Allied Industries Limited and its wholly-owned subsidiaries.   Rio Tinto as a 100 per cent owner of Coal & Allied holds a 67.6 per cent, 80 per cent and 55.6 per cent respectively, with management rights, in Hunter Valley Operations, Mount Thorley and Warkworth.

As at 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 31 December 2015) to holding a direct 32.4 per cent stake in the Hunter Valley Operations.

On 1 March 2016, Coal & Allied disposed of its 40 per cent interest in Bengalla Joint Venture and on 5 August 2016, Coal & Allied disposed of its 100 per cent interest in the Mount Pleasant project.  Both were included up until their respective disposal dates.

On 24 January 2017, Rio Tinto announced it had reached a binding agreement for the sale of its 100 per cent shareholding in Coal & Allied Industries Limited to Yancoal Australia Limited. 

The transaction is subject to certain conditions precedent being satisfied, including approvals from the Australian Government, Chinese regulatory agencies and the New South Wales Government.

Notes to financial information by business unit (continued)

As a result of the shareholding levels of various Chinese state-owned entities in each of Yankuang, Yanzhou and Chinalco (Aluminium Corporation of China), and Chinalco being a 10.1 per cent shareholder in the Rio Tinto Group, Yancoal Australia is considered to be a related party of Rio Tinto for the purposes of the UK Listing Rules and the ASX Listing Rules. Accordingly, approval is also required from a majority of independent Rio Tinto shareholders (that is, not including Chinalco and any other entities considered to be associates of Chinalco under the UK Listing Rules).

Subject to all approvals and other conditions precedent being satisfied, it is expected that the transaction will complete in the second half of 2017.

j)   Includes Rio Tinto's interests in Rio Tinto Fer et Titane (100 per cent), QIT Madagascar Minerals (QMM, 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 80.75 per cent interest in Simfer S.A. the company that operates the Simandou mining project in Guinea. The Group therefore has a 42.8 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) On 2 September 2016, Rio Tinto disposed of its interest in Zululand Anthracite Colliery (ZAC), which was previously reported within Coal Evaluation projects/other.

n)  Other Operations include Rio Tinto's 100 per cent interest in the Gove alumina refinery and Rio Tinto Marine.

o)  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.

p)  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).

q)  Capital expenditure in 2016 for Rio Tinto Coal Australia includes net proceeds of US$192 million for the disposal of 100 per cent interest in the Mount Pleasant thermal coal project to MACH Energy Australia Pty Ltd on 5 August 2016. 

r)   Assets and liabilities held for sale at 31 December 2016 comprise Rio Tinto's interests in the Blair Athol coal project and certain assets related to cancelled projects at Rio Tinto Kennecott.  

Assets and liabilities held for sale at 31 December 2015 comprised Rio Tinto's interests in the Blair Athol coal project, Carbone Savoie (disposed of on 31 March 2016), Bengalla (disposed of on 1 March 2016), and Molybdenum Autoclave Process assets.

Review of operations

Iron Ore

	2016	2015	Change
Pilbara production (million tonnes - Rio Tinto share)	270.7	252.7	+7%
Pilbara production (million tonnes - 100%)	329.5	309.9	+6%
Pilbara shipments (million tonnes - Rio Tinto share)	268.9	260.3	+3%
Pilbara shipments (million tonnes - 100%)	327.6	318.5	+3%
Gross sales revenue (US$ millions)	14,605	13,952	+5%
Underlying EBITDA (US$ millions)	8,526	7,675	+11%
Underlying earnings (US$ millions)	4,611	3,940	+17%
Net cash generated from operating activities (US$ millions)	5,644	5,844	-3%
Capital expenditure (US$ millions)	(868)	(1,608)	-46%
Free cash flow (US$ millions)	4,776	4,236	+13%

Iron Ore Company of Canada and Simandou are reported within Energy & Minerals, reflecting management responsibility.

 

Performance

The Iron Ore group's underlying earnings of $4,611 million in 2016 were 17 per cent or $671 million higher than 2015. The group benefited from higher prices, reflected in the six per cent rise, on average, in the Platts 62 per cent index, higher sales volumes, the realisation of further cost savings and lower non-cash costs.  

Pre-tax cash cost improvements in the Iron Ore group were $315 million in 2016 and have now delivered $1.4 billion of cumulative savings compared with the 2012 base. This is reflected in a reduction in Pilbara unit cash costs to $13.7 per tonne in 2016 (2015: $14.9 per tonne). Higher volumes, reduced fuel prices, lower selling costs and increased productivity also contributed to the positive trend. Pilbara operations delivered a free on board (FOB) EBITDA margin of 63 per cent in 2016, compared with 60 per cent in 2015.

Gross sales revenues for Pilbara operations in 2016 of $14,605 million included freight revenue of
$886 million (2015: $918 million).

Net cash generated from operating activities of $5,644 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 $4,776 million was $540 million higher than 2015, attributable to the improvement in operating cash flow from higher prices and enhanced cost savings, coupled with the 46 per cent decline in capital expenditure following completion of the Pilbara infrastructure expansion in 2015.

 

Markets

Sales of 327.6 million tonnes (Rio Tinto share 268.9 million tonnes) in 2016 were three per cent higher than 2015, attributable to the newly expanded infrastructure and minimal disruption from weather events.

Approximately 64 per cent of sales in 2016 were priced with reference to the current month average, 20 per cent with reference to the prior quarter's average index lagged by one month, five per cent with reference to the current quarter average and 11 per cent were sold on the spot market. Approximately 62 per cent of 2016 sales were made on a cost and freight (CFR) basis, with the remainder sold free on board (FOB).

Achieved average pricing in 2016 was $49.3 per wet metric tonne on an FOB basis (2015: $48.4 per wet metric tonne). This equates to $53.6 per dry metric tonne (2015: $52.6 per dry metric tonne), which compares with the average FOB Platts price of $53.6 per dry metric tonne for 62 per cent iron Pilbara fines (2015: $50.4 per dry metric tonne).

 

Operations

Pilbara operations produced 329.5 million tonnes (Rio Tinto share 270.7 million tonnes) in 2016, six per cent higher than in 2015, attributable to the ramp-up of expanded mines, operational productivity improvements and minimal disruption from weather events.

 

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, (taking annual mine capacity from five to ten million tonnes) was delivered in October 2016. With the $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 tonnes from the second half of 2017, with full production expected in 2018.

The AutoHaul® project will continue to progress during 2017 with extensive running of trains in automated mode, but with a driver remaining on board until all safety and reliability systems are thoroughly demonstrated.

 

2017 shipments guidance

Rio Tinto's Pilbara shipments in 2017 are expected to be between 330 and 340 million tonnes (100 per cent basis), subject to weather conditions.

 

 

Aluminium

	2016	2015	Change
Production (Rio Tinto share)
Bauxite (000 tonnes)	47,703	43,677	+9%
Alumina (000 tonnes)	8,192	7,788	+5%
Aluminium (000 tonnes)	3,646	3,322	+10%
Gross sales revenue (US$ millions)	9,458	10,117	-7%
Underlying EBITDA (US$ millions)	2,472	2,742	-10%
Underlying earnings (US$ millions)	947	1,118	-15%
Net cash generated from operating activities (US$ millions)	2,074	2,413	-14%
Capital expenditure - excluding EAUs (US$ millions)	(795)	(1,601)	-50%
Free cash flow (US$ millions)	1,267	817	+55%

The Gove alumina refinery is curtailed and reported separately from Aluminium within Other Operations.

 

Performance

The Aluminium group had a strong operational performance, with higher production achieved in all three products compared with 2015. Annual production records were set at several sites, including Weipa and Gove for bauxite, Yarwun, Jonquière and São Luis for alumina, and ten smelters, including Kitimat, for aluminium.

The group's underlying earnings of $947 million decreased 15 per cent compared with 2015, primarily driven by a decline in prices and in particular market premia, which, together, lowered earnings by
$507 million. However, through higher than targeted cash cost reductions, productivity improvements and volume increases the group was able to partly offset this impact and generated an EBITDA margin from integrated operations of 28 per cent (2015: 31 per cent).

Free cash flow generation increased by 55 per cent to $1,267 million. This was due to resilient EBITDA performance despite the weak market environment, together with further working capital improvements and reduced capital expenditure, following the completion of the Kitimat smelter expansion in 2015.

Pre-tax cash cost improvements in the Aluminium group were $481 million in 2016, exceeding the $300 million target by more than 50 per cent. The group has now delivered $1.6 billion of cumulative savings compared with the 2012 base.

 

Markets

The 2016 cash LME aluminium price averaged $1,605 per tonne, a decrease of three per cent on 2015.  Market premia in all regions fell from their record highs in early 2015.  In the US, the Mid-West market premium averaged $162 per tonne in 2016, compared with an average $271 per tonne in 2015, a 40 per cent decrease. 

Overall, the group achieved an average realised aluminium price of $1,849 per tonne in 2016 (2015: $2,058 per tonne). This includes premia for value-added products (VAP), which represented 54 per cent of primary metal produced in 2016 and generated attractive product premia averaging $223 per tonne of VAP sold (2015: $251 per tonne) on top of the physical market premia.

The strong production performance and healthy demand from China enabled the group to increase its share of third party bauxite shipments by ten per cent to 29.3 million tonnes (2015: 26.6 million tonnes). Bauxite prices decreased during the year in line with the weaker aluminium market environment.

 

Operations

Bauxite production of 47.7 million tonnes was nine per cent higher than 2015. Annual production records were achieved at both Weipa and Gove, with both operations benefiting from increased plant throughput through productivity initiatives. These higher volumes, together with a continued focus on cash cost reductions, absorbed 74 per cent of the bauxite price decline and led to a 50 per cent FOB EBITDA margin for the bauxite business in 2016, broadly unchanged from 2015. Bauxite underlying earnings declined nine per cent to $493 million in 2016.

Gross sales revenues for bauxite in 2016 decreased seven per cent to $1,913 million and included freight revenues of $202 million (2015: $205 million).

Alumina production increased five per cent compared with 2015, primarily due to operational improvements driving record production at the Yarwun refinery, with the Jonquière and São Luis refineries also achieving annual records. The transformation of the Alumina business gathered momentum during 2016, and resulted in the Alumina business significantly reducing its cash costs and delivering positive EBITDA and free cash flow despite the price decrease. Overall, the Alumina business recorded a loss of $121 million, compared with a loss of $187 million in 2015.

Aluminium production was ten per cent higher than 2015, due largely to Kitimat, which produced at nameplate capacity for a third consecutive quarter. Record annual production was achieved at ten smelters. The Primary Metal business (Canada, Europe, Middle East) managed to entirely offset the price decrease incurred during 2016 through enhanced volumes and reduced cash costs. Primary Metal earnings declined by ten per cent to $402 million, while earnings from Pacific Aluminium (Australia, New Zealand) decreased by 58 per cent to $62 million.

On 23 November 2016, Rio Tinto announced it had reached an agreement to sell its assets at Lochaber, Scotland to SIMEC for consideration totalling $410 million (£330 million). The sale was finalised on 16 December 2016.

 

New projects and growth options

The expanded Kitimat smelter reached nameplate capacity of 420 thousand tonnes per annum in April 2016, driving its production costs down into the first decile of the industry cost curve.

The $1.9 billion Amrun bauxite project on the Cape York Peninsula in north Queensland is progressing to schedule in both engineering and construction. All major contracts have been committed as planned. Site establishment continues with the construction accommodation village operational to 470 beds. The 40 kilometre main access road was completed in December 2016, with the river terminals expected to be operational in the first quarter of 2017. 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.

The $0.7 billion² bauxite project to expand the production of the Compagnie des Bauxites de Guinée (CBG) to 18.5 million tonnes per annum² met all approval conditions for execution in November 2016. The first shipment from the expansion project is expected in June 2018. The expansion is currently in the early phases of execution.

 

2017 production guidance

Rio Tinto's expected share of production is 48 to 50 million tonnes of bauxite, 8.0 to 8.2 million tonnes of alumina and 3.5 to 3.7 million tonnes of aluminium.

 

¹ Refer to the statements related to this production target on page 2.

² 100 per cent basis. Rio Tinto's share of capex is 45 per cent.

 

Copper & Diamonds

	2016	2015	Change
Production (Rio Tinto share)
Mined copper (000 tonnes)	523.3	504.4	+4%
Refined copper (000 tonnes)	250.1	213.0	+17%
Diamonds (000 carats)	17,953	17,316	+4%
Gross sales revenue (US$ millions)	4,524	5,592	-19%
Underlying EBITDA (US$ millions)	1,387	1,833	-24%
Underlying (loss) / earnings (US$ millions)	(18)	370	-105%
Net cash generated from operating activities (US$ millions)1	987	1,575	-37%
Capital expenditure - excluding EAUs (US$ millions)	(924)	(806)	+15%
Free cash flow (US$ millions)	78	791	-90%

To allow production numbers to be compared on a like-for-like basis, production from asset divestments completed in 2015 have been excluded from the Rio Tinto share of production data but assets sold in 2016 remain in the comparative.

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

The Copper & Diamonds group recorded an underlying loss of $18 million and delivered free cash flow of $78 million, with all managed operations making a positive free cash flow contribution. This was net of investment in development capital and exploration and evaluation spend of more than $900 million across the business and proceeds from asset sales of around $100 million, including the sale of undeveloped land in the community of Daybreak near the Kennecott mine which completed in July 2016.

The decline in earnings compared with 2015 was principally driven by lower prices and includes
$114 million of one-off non-cash asset write-downs which concludes the asset portfolio review at Rio Tinto Kennecott. Operationally, there were lower sales volumes of copper, gold and molybdenum, which were partially offset by further cost savings at Kennecott, Oyu Tolgoi and improved operational performance in Diamonds.

The group achieved $278 million of pre-tax cash cost improvements during 2016, bringing total savings delivered across the Copper & Diamonds group since 2012 to $1.3 billion.

 

Markets

Average LME copper prices declined 11 per cent to 221 cents per pound and gold increased eight per cent to $1,250 per ounce.

Overall demand for rough diamonds recovered in 2016 from a cyclical downturn in the previous year, varying significantly 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 $79 million compared with 2015.

At 31 December 2016, the Group had an estimated 235 million pounds of copper sales that were provisionally priced at 250 cents per pound. The final price of these sales will be determined during the first half of 2017. This compares with 252 million pounds of open shipments at 31 December 2015, provisionally priced at 217 cents per pound.

 

Operations - Copper

Mined copper production was four per cent higher than in 2015, primarily attributable to an increase at Kennecott, as mining progressed through an area of higher grades. This was partly offset by lower volume at Escondida, due to lower grades and slightly reduced mill throughput. Mined copper production at Oyu Tolgoi was in line with 2015, as the impact of lower grades was offset by higher throughput, a new record for the mill. Copper production at Grasberg was below the agreed threshold and accordingly, Rio Tinto's share of joint venture production for 2016 was revised in the fourth quarter to zero.

Kennecott continues to toll third party concentrate to optimise smelter utilisation, with 315 thousand tonnes received for processing in 2016. Tolled copper concentrate, which is smelted and returned to customers, is excluded from reported production figures.

 

Operations - Diamonds

Diamonds production was four per cent higher than in 2015 at both mines. Argyle benefited from the ramp-up of the underground mine, with higher ore throughput partially offset by a lower recovered grade.

Higher carats were produced at Diavik due to higher ore throughput which offset lower grades.

 

Copper & Diamonds portfolio

The simplification of the Copper & Diamonds portfolio and disposal of non-core assets progressed in 2016.

On 30 June 2016, Rio Tinto announced that it had transferred its 53.8 per cent shareholding in Bougainville Copper Limited to independent trustee Equity Trustees Limited, which was subsequently 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.

During the second half of 2016, subsidiary Turquoise Hill Resources progressively disposed of its remaining interest in SouthGobi Resources Ltd.

In August 2016, following a strategic review, Rio Tinto announced it would not proceed with the development of the Bunder diamond project in India. On 7 February 2017, Rio Tinto announced it had decided to gift Bunder to the Government of Madhya Pradesh. Under a Government of Madhya Pradesh order signed in January 2017, the Government will accept ownership and take on responsibility for the Bunder assets.

 

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. Following this approval, over $4 billion of project financing was drawn down, one of the largest project financing facilities in the industry. Contractor mobilisation ramped up during the second half of 2016, with over 2,000 personnel mobilised, 87 per cent of whom are Mongolian nationals. Works on underground mine development, the accommodation camp, conveyor to surface decline, sinking of shaft #2 and shaft #5 and critical facilities continued to progress. The focus is on completing the underground crusher and de-watering system to enable increased lateral development rates.

At Escondida, the new concentrator (OGP1, a 152 thousand tonne per day concentrator) was commissioned and ramped up to nameplate capacity during the second half of 2016. 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 late in the first half of 2017, adding incremental annual capacity of approximately 200 thousand tonnes of copper in the near term.

 

 

2017 production guidance

Rio Tinto's expected share of production is 525 to 665 thousand tonnes of mined copper,
185 to 225 thousand tonnes of refined copper and 19 to 24 million carats of diamonds.

The 2017 production guidance includes an expected share from the Grasberg joint venture, which is operated by PT-Freeport Indonesia (PT-FI), a subsidiary of Freeport-McMoRan Inc. On 12 January 2017, the Government of Indonesia issued new mining regulations to address exports of unrefined metals, including copper concentrates, and other matters related to the mining sector. These regulations impact PT-FI's operating rights, including its right to continue to export concentrate without restriction, and may have a significant impact on Rio Tinto's share of production in 2017. Rio Tinto's participation beyond 2021 may also be affected due to the application of force majeure provisions in the joint venture agreement between Rio Tinto and PT-FI.

PT-FI continues to engage with Indonesian government officials and has advised that if it is prohibited from exporting copper concentrate it would be required to reduce production to match domestic smelting  capacity, resulting in near-term actions to reduce its workforce, significantly reduce costs and suspend future investments on its underground development projects and new smelter. PT-FI has indicated that it will consider legal action to enforce its contractual rights should it fail to reach a mutually satisfactory agreement with the Indonesian government.

Energy & Minerals

	2016	2015	Change
Production (Rio Tinto share)
Hard coking coal (000 tonnes)	8,141	7,859	+4%
Semi-soft coking coal (000 tonnes)	4,102	3,647	+12%
Thermal coal (000 tonnes)	17,254	18,638	-7%
Iron ore pellets and concentrates (000 tonnes)	10,661	10,388	+3%
Titanium dioxide (000 tonnes)	1,048	1,089	-4%
Borates (000 tonnes)	503	476	+6%
Salt (000 tonnes)	5,180	5,539	-6%
Uranium (000 lbs)	6,342	4,907	+29%
Gross sales revenue (US$ millions)	6,734	7,140	-6%
Underlying EBITDA (US$ millions)	1,803	1,235	+46%
Underlying earnings (US$ millions)	610	175	+249%
Net cash generated from operating activities (US$ millions)	1,431	1,482	-3%
Capital expenditure (US$ millions)	(141)	(552)	-74%
Free cash flow (US$ millions)	1,294	925	+40%

Iron Ore Company of Canada and Simandou are reported within Energy & Minerals, reflecting management responsibility.

 

Performance

Underlying earnings for the Energy & Minerals group were $610 million, two and a half times higher than 2015, as it benefited from higher volumes, continued momentum in the cost improvement programme and weaker exchange rates. The group experienced a mixed pricing environment for its products in 2016, with average price rises in iron ore and, in particular, coal offsetting weaker pricing for titanium dioxide feedstocks, zircon, borates and uranium.

Pre-tax cash cost improvements in the Energy & Minerals group were $342 million in 2016: the product group has now delivered $1.4 billion of cumulative savings compared with the 2012 base.

Gross sales revenues for the product group in 2016 of $6,734 million included freight revenue of $320 million (2015: $481 million).

Net cash generated from operating activities of $1,431 million was three per cent lower than 2015 as the benefit of the cost improvements was offset by the absence of the one-off reduction in working capital achieved in 2015. The decline in capital expenditure reflected continued capital discipline across the product group and the net proceeds from the sale of the Mount Pleasant thermal coal assets of $192 million.

Free cash flow was $1,294 million, 40 per cent higher than 2015, reflecting the Mount Pleasant proceeds and the reduction in ongoing capital expenditure.

 

Markets

Coal prices rebounded in the second half of 2016, with benchmark coking coal prices averaging $114 per tonne and spot thermal coal prices averaging $66 per tonne.

Gross sales revenues for Rio Tinto Coal Australia in 2016 of $2,634 million (2015: $2,757 million) included freight revenue of $43 million (2015: $62 million). The group achieved coking coal prices of $152 per tonne, on average, in the second half of 2016 on an FOB basis compared with $79 per tonne in the first half of 2016. Average prices realised for thermal coal were $69 per tonne on an FOB basis in the second half of 2016 compared with $51 per tonne in the first half of 2016.

Thermal coal revenues of $1,101 million in 2016 (2015: $1,456 million) represented 3.1 per cent of the Rio Tinto Group total (2015: 4.0 per cent).

Titanium dioxide feedstock demand remained subdued throughout 2016 as the industry continued to absorb excess inventories, although there are signs of underlying demand improvement for both sulphate and chloride feedstock. 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.

Uranium prices fell through the latter half of 2016, due to lacklustre demand growth and oversupply.  The demand outlook was muted as Japan made slow progress restarting its off-line reactors, additional reactor closures were announced in the US and no new Chinese reactors were approved in 2016. Strong uranium production and surplus secondary material have exacerbated the price weakness and it will likely take some time for the market to rebalance and prices to recover

 

Operations - Energy

Hard coking coal production was four per cent higher in 2016, primarily due to longwall and plant outperformance at Kestrel.

Semi-soft coking coal production was 12 per cent higher than 2015 due to mine production sequencing at Hunter Valley Operations and Mt Thorley Warkworth.

Thermal coal production was seven per cent lower than 2015, with increased tonnage from Hail Creek, Kestrel and Mt Thorley Warkworth partially offsetting lower attributable volumes following the restructure of Coal & Allied and the divestment of Bengalla in early 2016.

On 1 March 2016, Rio Tinto completed the sale of its interest in the Bengalla Joint Venture to New Hope Corporation Limited for $599 million (net of working capital adjustments, transaction costs and cash disposed of in the Joint Venture).

On 5 August 2016, Rio Tinto completed the sale of its Mount Pleasant thermal coal assets to MACH Energy Australia Pty Ltd for $221 million plus royalties, of which $192 million (net of transaction costs) was received during the year.

On 2 September 2016, Rio Tinto completed the sale of its 74 per cent interest in Zululand Anthracite Colliery to Menar Holding.

On 24 January 2017, Rio Tinto announced that it had reached a binding agreement for the sale of its wholly-owned subsidiary Coal & Allied Industries Limited to Yancoal Australia Limited for up to
$2.45 billion. As set out in note (i) on page 14, the transaction is subject to certain conditions precedent being satisfied, including approvals from the Australian Government, Chinese regulatory agencies and the New South Wales Government. Subject to all approvals and other conditions precedent being satisfied, it is expected that the transaction will complete in the second half of 2017.

 

Operations - Iron Ore Company of Canada (IOC)

IOC pellet production of 9.8 million tonnes (Rio Tinto share 5.8 million tonnes) was five per cent higher than 2015, while saleable concentrate production of 8.4 million tonnes (Rio Tinto share 4.9 million tonnes) was in line with 2015 production. The three per cent improvement in total saleable production also resulted in a two per cent rise in sales to 18.3 million tonnes (Rio Tinto share 10.8 million tonnes).

 

Operations - Minerals

Titanium dioxide slag production was four per cent lower as Rio Tinto Iron & Titanium continues to optimise production to align to demand and draw down remaining inventories. Two of nine furnaces at Rio Tinto Fer et Titane and one of four furnaces at Richards Bay Minerals (RBM) are currently idled, reflecting lower demand for high grade feedstocks.

The respective movements in the production of borates and salt were driven by market demand.

 

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.

On 28 October 2016, Rio Tinto and Chinalco signed a non-binding agreement to sell Rio Tinto's entire stake in the Simandou project in Guinea to Chinalco.

 

2017 production guidance

In 2017, 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, 7.8 to 8.4 million tonnes of hard coking coal, 11.4 to 12.4 million tonnes of saleable production of iron ore pellets and concentrates, 1.1 to 1.2 million tonnes of titanium dioxide slag, 0.5 million tonnes of boric oxide equivalent and 6.5 to 7.5 million pounds of uranium. Guidance for coal will be updated following completion of the sale of Coal & Allied to Yancoal which is expected to take place in the second half of 2017.

 

 

Other Operations

	2016	2015
Gross sales revenue (US$ millions)	-	13
Underlying EBITDA (US$ millions)	(92)	(81)
Underlying loss (US$ millions)	(86)	(88)
Capital expenditure (US$ millions)	11	36

 

Other operations relates to legacy sites including the Gove alumina refinery, where production was curtailed on 28 May 2014. In 2016, the closure provision relating to the Gove refinery increased by
$282 million: these costs were excluded from underlying earnings.

 

 

Other items

	2016	2015
Underlying EBITDA (US$ millions)	(411)	(546)
Underlying loss (US$ millions)	(241)	(375)
Capital expenditure (US$ millions)	46	(65)

 

Central office costs, central Growth & Innovation costs and other central items are reported in Other items. The decline in the underlying loss in 2016 compared with 2015 was largely due to lower Growth & Innovation costs following the reorganisation in 2016. In 2016, the Group divested some corporate office buildings which, net of corporate capital expenditure, gave rise to a cash inflow of $46 million.

                                                                                                                                            

 

Exploration & evaluation

	2016	2015
Post-tax charge (US$ millions)	(147)	(211)

 

Central exploration & evaluation expenditure in 2016 (post divestments and tax) resulted in a charge to underlying earnings of $147 million. The decline in the 2016 charge compared with 2015 was largely due to lower costs at the La Granja project in Peru.

 

 

 

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	$ million impact on full year 2016 underlying earnings of a 10% change in prices/exchange rates
Aluminium	$1,605/t	469
Copper	221c/lb	238
Gold	$1,250/oz	36
Iron ore (62% Fe FOB)	$53.6/dmt	879
Hard coking coal (benchmark)	$114/t	49
Thermal coal (average spot)	$66/t	81
Australian dollar against the US dollar	0.74	604
Canadian dollar against the US dollar	0.76	229
Oil	$44/bbl	53

 

 

Capital projects

Rio Tinto has a programme of high-quality projects delivering industry-leading returns across a broad range of commodities.

Project (Rio Tinto 100% owned unless otherwise stated)	Total approved capital cost (100%)	Approved capital remaining to be spent from 1 January 2017	Status/Milestones
In production
Investment in Nammuldi Incremental Tonnes (NIT) projects in the Pilbara, to maintain the Pilbara blend.	$0.2bn	-	NIT1, with a five million tonne annual capacity, commenced production in the fourth quarter of 2015. NIT2, which took annual mine capacity from five to ten million tonnes, was delivered in October 2016, six weeks ahead of schedule.
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)	$0.1bn (RT share)	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 99 per cent complete, with commissioning scheduled in 2017.
Grasberg project funding to 2017.	$0.2bn (RT share)	$0.1bn (RT share)	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 period of investment.
Remediation of the east wall at Rio Tinto Kennecott, US.	$0.3bn	-	Following the pit wall slide in 2013, mine operations have focused on remediation from the slide and the east wall of Bingham Canyon, including significant de-weighting and de-watering activities.  There is a small amount of dewatering activity scheduled to be completed in 2017.
Investment to extend mine life at Rio Tinto Kennecott, US beyond 2019.	$0.7bn	$0.6bn	Funding for the continuation of open pit mining via the push back of the south wall has been approved and will largely consist of simple mine stripping activities.
Development of A21 pipe at the Diavik Diamond Mine in Canada (Rio Tinto 60%).	$0.2bn (RT share)	$0.1bn (RT      share)	Approved in November 2014, the development of the A21 pipe is expected to ensure the continuation of existing production levels. First carats are planned for mid-2018.
Development of the Oyu Tolgoi underground mine in Mongolia (Rio Tinto 34%), where average copper grades of 1.66 per cent are more than three times higher than the open pit.	$5.3bn	$5.1bn	Approved in May 2015, first production from the underground is expected in 2020. Contractor mobilisation commenced in the third quarter of 2016. Work on the underground mine development, accommodation camp, conveyor to surface decline, sinking of shaft #2 and shaft #5 and critical facilities are continuing to progress. The focus is on completing the underground crusher and de-watering system to enable increased lateral development rates.
Aluminium
Investment in the Amrun bauxite mine on the Cape York Peninsula in north Queensland with a planned initial output of 22.8 million tonnes a year.1	$1.9bn	$1.7bn	Approved in December 2015, output includes an expected 10 million tonne increase in annual exports with production commencing in the first half of 2019.
Investment in the Compagnie des Bauxites de Guinée (CBG) bauxite mine to expand from 14.5 to 18.5 million tonnes a year. Rio Tinto's share of capex is $0.3bn.	$0.7bn (100%)	$0.6bn (100%)	Approved in 2016. Financing completed in November 2016. First incremental shipment expected in June 2018.
Iron ore
Development of the Silvergrass iron ore mine in the Pilbara, to maintain the Pilbara blend.	$0.3bn	$0.3bn	The $338m approval in August 2016 expected to add 10 million tonnes of annual capacity with commissioning anticipated for the second half of 2017.

 

¹ Refer to the statements related to this production target on page 2.

 

Forward-looking statements

 

This announcement includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included in this announcement, including, without limitation, those regarding Rio Tinto's financial position, business strategy, plans and objectives of management for future operations (including development plans and objectives relating to Rio Tinto's products, production forecasts and reserve and resource positions), are forward-looking statements. The words "intend", "aim", "project", "anticipate", "estimate", "plan", "believes", "expects", "may", "should", "will", "target", "set to" or similar expressions, commonly identify such forward-looking statements.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Rio Tinto, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding Rio Tinto's present and future business strategies and the environment in which Rio Tinto will operate in the future. Among the important factors that could cause Rio Tinto's actual results, performance or achievements to differ materially from those in the forward-looking statements are levels of actual production during any period, levels of demand and market prices, the ability to produce and transport products profitably, the impact of foreign currency exchange rates on market prices and operating costs, operational problems, political uncertainty and economic conditions in relevant areas of the world, the actions of competitors, activities by governmental authorities such as changes in taxation or regulation and such other risk factors identified in Rio Tinto's most recent Annual Report and Accounts in Australia and the United Kingdom and the most recent Annual Report on Form 20-F filed with the United States Securities and Exchange Commission (the "SEC") or Form 6-Ks furnished to, or filed with, the SEC. Forward-looking statements should, therefore, be construed in light of such risk factors and undue reliance should not be placed on forward-looking statements. These forward-looking statements speak only as of the date of this announcement. Rio Tinto expressly disclaims any obligation or undertaking (except as required by applicable law, the UK Listing Rules, the Disclosure and Transparency Rules of the Financial Conduct Authority and the Listing Rules of the Australian Securities Exchange) to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in Rio Tinto's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Nothing in this announcement should be interpreted to mean that future earnings per share of Rio Tinto plc or Rio Tinto Limited will necessarily match or exceed its historical published earnings per share.

 

Contacts

 

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