Rio Tinto 2017 annual results

Rio Tinto announces operating cash generation of $13.9 billion, record full year dividend of $5.2 billion and an additional $1 billion share buy-back

 

7 February 2018

 

Rio Tinto chief executive J-S Jacques said "Today we have announced a strong set of results with operating cash flow of $13.9 billion, a record full year dividend of $5.2 billion and an additional $1 billion share buy-back. This brings total cash returns to shareholders to $9.7 billion declared for 2017.

"The strength of our cash flow is a result of resilient prices during the year coupled with a robust operational performance and a focus on mine to market productivity.

"Our strong balance sheet, world-class assets and disciplined allocation of capital puts us in the unique position of being able to invest in high-value growth through the cycle, and consistently deliver superior cash returns to shareholders."

 

2017 highlights

-    Record full year ordinary dividend announced today of $5.2 billion, equivalent to 290 US cents per share, includes final dividend of $3.2 billion, equivalent to 180 US cents per share.

-    Additional share buy-back of $1.0 billion in Rio Tinto plc shares announced today, to be completed by the end of 2018.

-    Generated operating cash flow of $13.9 billion, underlying EBITDA¹ of $18.6 billion and a ten year record EBITDA margin² of 44 per cent.

-    Delivered underlying earnings of $8.6 billion and net earnings of $8.8 billion.

-    Achieved $0.4 billion of additional free cash flow from mine to market productivity programme³, against a backdrop of rising raw material costs across the industry.  

-    Investing in growth with Silvergrass in production, Amrun and Oyu Tolgoi projects on track.

-    Reshaping the portfolio with $2.7 billion of divestments in 2017.

-    Reduced net debt to $3.8 billion.

 

Year to 31 December	2017	2016	Change
Net cash generated from operating activities (US$ millions)	13,884	8,465	+64%
Underlying EBITDA1 (US$ millions)	18,580	13,510	+38%
Underlying earnings1 (US$ millions)	8,627	5,100	+69%
Net earnings (US$ millions)	8,762	4,617	+90%
Capital expenditure4 (US$ millions)	(4,482)	(3,012)	+49%
Underlying earnings1 per share (US cents)	482.8	283.8	+70%
Basic earnings per share (US cents)	490.4	256.9	+91%
Ordinary dividend per share (US cents)	290.0	170.0	+71%

 

	At 31 Dec 2017	At 31 Dec 2016	Change
Net debt5, 7 (US$ millions)	3,845	9,587	-60%
Net debt to underlying EBITDA6, 8	0.2	0.7
Net gearing ratio7, 8	7%	17%

The financial results are prepared in accordance with IFRS and are unaudited. Footnotes are set out on page 3.

 

Declared cash returns to shareholders of $9.7 billion for 2017

-    $5.2 billion in record dividends for 2017 earnings, equivalent to 290 US cents per share.

·      Includes final dividend of $3.2 billion, equivalent to 180 cents per share, announced today.

-    $2.0 billion in share buy-backs, including additional share buy-back of $1.0 billion announced today.

-    Represents a combined $7.2 billion, or 83 per cent of 2017 underlying earnings.

-    $2.5 billion supplementary share buy-back, returning the Coal & Allied proceeds.

 

Revenues and earnings

-    Consolidated sales revenues of $40.0 billion, $6.2 billion higher than 2016, primarily due to higher average commodity prices.

-    EBITDA margin² of 44 per cent in 2017, compared with 38 per cent in 2016.

-    Underlying earnings of $8.6 billion, 69 per cent higher than 2016, driven by the $4.1 billion (post-tax) impact of higher prices.

-    Effective tax rate on underlying earnings of 28 per cent compared with 22 per cent in 2016 reflecting increased profits in Australia and the impact of a non-cash deferred tax asset write-down relating to Grasberg. The 2016 rate was driven by the recognition of a deferred tax asset in Mongolia.

-    Net earnings of $8.8 billion were $0.1 billion higher than underlying earnings, primarily reflecting
$2.0 billion of gains on disposals of interests in businesses, partly offset by non-cash exchange and derivative losses of $0.8 billion, the $0.4 billion impact of corporate tax rate changes in the US and France, and net impairment charges of $0.5 billion. See table on page 5.

 

Cash flow and balance sheet

Year to 31 December	2017 US$m	2016 US$m
Net cash generated from operating activities	13,884	8,465
Capital expenditure4	(4,482)	(3,012)
Sales of property, plant and equipment	138	354
Free cash flow9	9,540	5,807
Disposals	2,675	761
Dividends paid to equity shareholders	(4,250)	(2,725)
Share buy-back	(2,083)	-
Other	(140)	353
Reduction in net debt	5,742	4,196

-    Generated net cash from operating activities of $13.9 billion, 64 per cent higher than 2016, primarily due to higher prices partly offset by an increase in taxes paid driven by higher profits.

-    Capital expenditure⁴ of $4.5 billion, of which $2.0 billion was sustaining capex.

-    Generated free cash flow⁹ of $9.5 billion.

-    In 2017, the Group commenced a mine to market productivity programme and delivered $0.4 billion of additional free cash flow, as part of its $5.0 billion cumulative target from 2017 to 2021.

-    Continued shaping of the portfolio with the sale of the Coal & Allied thermal coal assets for
$2.69 billion, of which $2.45 billion was paid on completion in September 2017. Second tranche from Lochaber sale of $0.2 billion also received in 2017. Announced binding offer for sale of Aluminium Dunkerque smelter for $500 million on 10 January 2018.

-    Returned $6.3 billion in cash to shareholders in 2017:

§ Dividends paid of $4.2 billion in 2017, comprised of the 2016 final dividend of $2.2 billion and the 2017 interim dividend of $2.0 billion.

§ Bought back $2.1 billion of shares, $1.5 billion on-market in Rio Tinto plc shares and
$0.6 billion off-market in Rio Tinto Limited shares.

-    Further strengthened the balance sheet with a 60 per cent reduction in net debt to $3.8 billion and net gearing ratio of seven per cent. Successfully completed a $2.5 billion (nominal value) bond tender and redemption exercise which reduced gross debt.

 

Growth projects and development

-    Silvergrass iron ore mine in the Pilbara (approved project spend of $338 million) was commissioned in the fourth quarter of 2017: it maintains the Pilbara blend, lowers unit costs and adds 10 million tonnes of annual capacity.

-    Oyu Tolgoi underground copper mine development in Mongolia (approved project spend of
$5.3 billion): first tonnes expected in 2020, with average annual production of 560 thousand tonnes between 2025 and 2030¹⁰.

-    Amrun bauxite project in Queensland (approved project spend of $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/a.

-    AutoHaul^TM project (automation of the Pilbara train system, approved project spend of $940 million) to be completed by the end of 2018.

-    Exploration and evaluation spend of $445 million in 2017, supporting the next wave of growth projects.

 

Guidance

-    Additional cumulative free cash flow of $5.0 billion from 2017 to the end of 2021 from mine to market productivity improvements³, including $0.3 billion in 2018, net of $0.3 billion of cost headwinds. Targeting an annual exit rate from mine to market productivity improvements³ of around $1.5 billion from 2021.

-    Capital expenditure⁴ expected to remain at around $5.5 billion in 2018 and around $6.0 billion in each of 2019 and 2020. Each year includes approximately $2.0 to 2.5 billion of sustaining capex.

-    Effective tax rate on underlying earnings of approximately 30 per cent expected in 2018.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

¹ Underlying EBITDA and earnings are key financial performance indicators which management use internally to assess performance. They are 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 EBITDA and earnings are defined on page 15. Underlying earnings is reconciled to net earnings on page 49.

² EBITDA margin is defined as Group underlying EBITDA divided by Product Group total revenues as per the Financial Information by Business Unit on page 13 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.

³ Mine to market productivity improvements refer to the additional free cash flow generated from post-tax operating cash cost improvements and post-tax volume gains from productivity programmes. This financial performance indicator is used by management internally to assess performance, and therefore is considered relevant to users of the accounts

⁴ Capital expenditure is presented gross, before taking into account any cash inflows from disposals of property, plant and equipment.

⁵ Net debt is defined and reconciled to the balance sheet on page 42.

⁶ Net debt to underlying EBITDA is defined as the period end net debt divided by the previous 12 months' underlying EBITDA.

⁷ Net gearing ratio is defined as net debt divided by the sum of net debt and total equity at each period end.

⁸ These financial performance indicators are those which management use internally to assess performance, and therefore are considered relevant to users of the accounts.

⁹ 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 and is therefore considered relevant to users of the accounts.

¹⁰ 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.

 

Underlying EBITDA and underlying earnings by product group

Year to 31 December	2017 US$m	2016 US$m	Change US$m	Change %
Underlying EBITDA1
Iron Ore	11,520	8,526	2,994	+35%
Aluminium	3,423	2,472	951	+38%
Copper & Diamonds	1,904	1,387	517	+37%
Energy & Minerals	2,803	1,806	997	+55%
Other operations	(116)	(95)	(21)	-22%
Product Group Total	19,534	14,096	5,438	+39%
Other items Exploration and evaluation	(736) (218)	(411) (175)	(325) (43)	-79% -25%
	18,580	13,510	5,070	+38%
Underlying earnings
Iron Ore	6,692	4,611	2,081	+45%
Aluminium	1,583	947	636	+67%
Copper & Diamonds	263	(18)	281	n/a
Energy & Minerals	1,242	612	630	+103%
Other operations	(138)	(88)	(50)	-57%
Product Group Total	9,642	6,064	3,578	+59%
Other items Exploration and evaluation Net interest	(483) (178) (354)	(241) (147) (576)	(242) (31) 222	-100% -21% +39%
	8,627	5,100	3,527	+69%

 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 13 for further detail and a reconciliation to profit on ordinary activities before finance items and tax.

 

Central office costs, central Growth & Innovation costs and other central items are reported in Other items. The increased loss in Other items includes restructuring, project and other one-off costs of
$177 million (pre-tax) in 2017. It also reflects an increase in Information System & Technology spend and further investment in the Commercial Centre in Singapore and capability to support the Group's mine to market productivity programme.

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 to 31 December	2017 US$m	2016 US$m
Underlying earnings	8,627	5,100
Items excluded from underlying earnings
Impairment charges	(481)	(183)
Net gains on disposal of interests in businesses	2,022	382
Exchange and derivative (losses) / gains on US dollar net debt and intragroup balances and derivatives not qualifying for hedge accounting	(810)	536
Changes in corporate tax rates in the US and France	(439)	-
Rio Tinto Kennecott insurance claim	45	-
Adjustment to deferred tax relating to expected divestments	(202)	-
Onerous port and rail contracts	-	(329)
Restructuring costs including global headcount reduction	-	(177)
Increased closure provision for legacy operations	-	(282)
Tax provisions	-	(380)
Other excluded items	-	(50)
Net earnings	8,762	4,617

 

Explanation of excluded items is given on page 8. A detailed reconciliation from underlying earnings to net earnings, which includes pre-tax amounts plus additional explanatory notes, is given on pages 49 to 51.

 

 

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
2016	5,100	4,617
Prices	4,107
Exchange rates	(294)
Volumes	114
General inflation	(240)
Energy	(125)
Operating cash cost improvements (pre-tax $533 million)	373
One-off items	(257)
Tax / non-cash / interest / other	(151)
Total changes in underlying earnings	3,527	3,527
Increase in net impairment charges		(298)
Movement in gains/losses on consolidation and disposal of interests in businesses		1,640
Movement in exchange differences and gains/losses on debt		(1,346)
Changes in corporate tax rates in the US and France		(439)
Receipt of Rio Tinto Kennecott insurance claim		45
Adjustment to deferred tax relating to expected divestments		(202)
Onerous port and rail contract charges in 2016		329
Restructuring costs including global headcount reductions in 2016		177
Increased closure provision for legacy operations in 2016		282
Tax provisions in 2016		380
Other		50
2017	8,627	8,762

 

Prices

The effect of all price movements on the Group's commodities in 2017 was to increase underlying earnings by $4,107 million compared with 2016. A table of prices and exchange rates is included on page 48.

The Platts price for 62 per cent iron Pilbara fines was 20 per cent higher on average compared with 2016. Realised hard coking coal prices were 42 per cent higher on average compared with 2016 and realised thermal coal prices averaged 32 per cent higher.

Earnings and cash flows were also boosted by higher average prices for copper and aluminium which were up 27 per cent and 23 per cent respectively, year on year.

 

Exchange rates

Compared with 2016, the US dollar, on average, weakened by one per cent against the Canadian dollar, weakened by four per cent against the Australian dollar and by ten per cent against the South African rand. The effect of all currency movements was to decrease underlying earnings relative to 2016 by
$294 million.

 

Volumes

Movements in sales volumes increased earnings by $114 million compared with 2016. The main contributors were higher iron ore shipments from the Pilbara, a 20 per cent increase in titanium dioxide slag feedstock sales volumes and a six per cent rise in bauxite sales.

 

Energy

Higher input energy prices during the year reduced underlying earnings by $125 million compared with 2016 in part related to oil, where the average price rose approximately 23 per cent, averaging $54 per barrel during 2017.

 

Cash costs, exploration and evaluation

Rio Tinto continued to realise considerable savings from its cost reduction programme, delivering $0.6 billion pre-tax (underlying earnings impact of $0.4 billion) comprised of operating cash cost improvements* ($533 million pre-tax) and reductions in exploration and evaluation cash expenditure ($48 million pre-tax) in 2017, meeting its $2.0 billion target over 2016 and 2017 six months earlier than scheduled. The Group has now achieved $8.3 billion pre-tax ($5.9 billion post-tax) in total operating cash cost improvements and reductions in exploration and evaluation expenditure compared with the 2012 base. These savings were achieved against a backdrop of rising raw materials costs, in particular for the Aluminium industry.

The Group continued to optimise its expenditure on exploration and evaluation, progressing the highest value projects.

 

One-off items

Group one-off items of $257 million included in underlying earnings primarily relate to the impact of the strike at Escondida in the first half of 2017 which resulted in lower volumes and higher unit costs compared with 2016. In addition there was a deferred tax asset write-down at Grasberg. These were partly offset by receipt of the final insurance settlement relating to the Manefay slide at Kennecott in 2013.

 

Tax / non-cash / interest / other

The 2017 effective corporate income tax rate on underlying earnings, excluding equity accounted units, was 28 per cent compared with 22 per cent in 2016. The higher tax rate in 2017 primarily reflected increased profit in Australia and the impact of a deferred tax asset write-down relating to Grasberg while the lower rate in 2016 was due to the recognition of a deferred tax asset in Mongolia. The effective tax rate on underlying earnings in Australia remained at 30 per cent. The Group expects an effective tax rate on underlying earnings of approximately 30 per cent in 2018.

The Group interest charge (net of tax and non-controlling interests) of $354 million was $222 million lower than 2016 due to the lower level of net debt and an increase in capitalised interest. The interest charge included $180 million of early redemption costs from bond purchases in 2017 when the Group successfully completed a $2.5 billion bond tender and redemption exercise which reduced gross debt. In 2016, similar exercises reduced gross debt by $7.5 billion, with early redemption costs of $237 million. Since the start of 2016, the Group has reduced the nominal value of outstanding bonds from approximately $21 billion to around $9.5 billion.

 

 

 

 

 

^* 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. This financial performance indicator is used by management internally to assess performance and therefore is considered relevant to users of the accounts.

Items excluded from underlying earnings

Impairment charges of $481 million (post-tax) were recognised in 2017, relating primarily to the carrying values of the Roughrider uranium deposit in Canada, the Rössing uranium mine in Namibia and the Argyle diamond mine in Australia. Roughrider's recoverable amount was determined to be nil following a decision in the first half of 2017 to cease further expenditure on the project. Rössing was impaired due to oversupply in the uranium market resulting in structural changes to forecast prices, while the impairment at Argyle was attributable to lower production volumes, a smaller than expected contribution from productivity improvements and lower realised prices.

Net gains on disposal of interests in businesses of $2,022 million primarily related to the sale of the Coal & Allied thermal coal business which completed on 1 September 2017.

Non-cash exchange and derivative losses in 2017 of $810 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 losses were in contrast to net exchange and derivative gains in 2016 of $536 million, giving rise to a negative period-on-period movement of $1,346 million. The exchange losses are largely offset by currency translation gains 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.

Deferred tax assets have been remeasured to reflect lower corporate income tax rates in the US and France as a results of tax legislation changes. Deferred tax assets have also been derecognised as a result of revised profit forecasts in France due to expected divestments.

In 2017, the Group received the final settlement on the insurance claims related to the 2013 pit-wall slide at Rio Tinto Kennecott of $233 million pre-tax or $146 million post-tax. Part of the settlement ($45 million post-tax) has been excluded from underlying earnings in line with the treatment of associated costs incurred from 2013 to 2015.

The 2016 gains on disposal of businesses related primarily to the sale of the Group's 40 per cent interest in the Bengalla thermal coal joint venture and the sale of the Lochaber aluminium assets. In 2016, the Group recognised an onerous contract provision for $329 million (post-tax) relating to infrastructure capacity requirements in Queensland Australia. The Group also incurred $177 million (post-tax) of restructuring costs associated with its cost reduction programme. The $282 million (post-tax) increase in the closure provision in 2016 related to the Gove alumina refinery in Northern Territory, Australia where operations were curtailed in May 2014.

The 2016 tax provision included amounts provided for tax matters for which the timing of resolution and potential economic outflow remain uncertain.

 

Cash flow

Net cash generated from operating activities of $13.9 billion was 64 per cent higher than 2016 driven by higher commodity prices and cash cost improvements, partly offset by higher tax payments from increased underlying profits.

Purchases of property, plant and equipment and intangible assets were $4.5 billion in 2017, a rise of 49 per cent compared with 2016. Major capital projects in 2017 included the development of the Oyu Tolgoi underground copper mine in Mongolia, construction of key infrastructure at the Amrun bauxite project in Queensland and completion of the Silvergrass iron ore mine in the Pilbara.

In 2017, the Group generated $9.5 billion of free cash flow, 64 per cent higher than 2017. This included $0.4 billion of productivity gains from the mine to market productivity programme which was implemented in 2017, targeting the delivery of $5.0 billion of additional free cash flow from 2017 to 2021.

Dividends paid in 2017 of $4.2 billion reflected the 2016 final dividend, paid in April 2017, and the 2017 interim dividend paid in September 2017. Share repurchases totalled $2.1 billion comprised of the $1.5 billion on-market buy-back in Rio Tinto plc shares and the $0.6 billion (A$750 million) off-market buy-back in Rio Tinto Limited shares.

 

Balance sheet

Net debt (see page 42) reduced to $3.8 billion at 31 December 2017, a decrease of $5.8 billion. Taking into account the $1.9 billion outstanding on the $2.5 billion share buy-back announced in September 2017, and an A$1.6 billion tax payment (equivalent to $1.2 billion) on 2017 profits due in the first half of 2018, net debt at 31 December 2017 would have been $7.0 billion.

Net debt to EBITDA improved from 0.7 times at 31 December 2016 to 0.2 times at 31 December 2017. Net debt to total capital (net gearing ratio) declined to seven per cent at 31 December 2017 (31 December 2016: 17 per cent) and interest cover was 14 times (2016: seven times).

Total financing liabilities at 31 December 2017 were $15.4 billion (refer to page 42). At 31 December 2017, approximately 80 per cent of Rio Tinto's total borrowings were at floating interest rates, the weighted average cost of total borrowings was approximately 4.2 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 2017, the Group repaid $2.8 billion of borrowings, including successfully completing $2.5 billion (nominal value) bond lender and redemption exercise which reduced overall gross debt. Cash and cash equivalents plus other short-term cash investments at 31 December 2017 were $11.5 billion (31 December 2016: $8.4 billion).

 

Profit 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 2017 totalled $8,762 million (2016: $4,617 million). The Group recorded a profit in 2017 of $8,851 million (2016: $4,776 million) of which a profit of $89 million (2016: $159 million) was attributable to non-controlling interests.

 

 

Shareholder returns

At the end of each financial period, the board determines 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 be 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.

Given the strength of 2017 results, with continued investment in value-accretive growth and the significant reduction in net debt, the board determined that the dividend pay-out for 2017 should be at the top of the range at 60 per cent of underlying earnings, with a further $2 billion share buy-back for 2017.

 

	US$ billion	US cents per share
Ordinary dividend per share
Interim dividend, paid in September 2017	2.0	110.00
Final dividend, announced today, to be paid in April 2018	3.2	180.00
2017 full year dividend	5.2	290.00
Share buy-backs
Announced in August 2017, completed in December 2017	1.0
Announced today, to be completed by the end of 2018	1.0
Total share buy-backs declared for 2017	2.0
Combined total represents 83% of 2017 underlying earnings	7.2
Supplementary share buy-back, returning the Coal & Allied proceeds
Off-market buy-back in Rio Tinto Limited, completed in November 2017	0.6
On-market buy-back in Rio Tinto plc to be completed by the end of 2018	1.9
	2.5
Total cash returns to shareholders declared for 2017	9.7

 

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 6 February 2018 (the latest practicable date prior to the declaration of the dividend).

 

Ordinary dividend per share	2017	2016
Rio Tinto Group
Interim (US cents)	110.00	45.00
Final (US cents)	180.00	125.00
Full year dividend (US cents)	290.00	170.00
Rio Tinto plc
Interim (UK pence)	83.13	33.80
Final (UK pence)	129.43	100.56
Full year dividend (UK pence)	212.56	134.36
Rio Tinto Limited
Interim (Australian cents)	137.72	59.13
Final (Australian cents)	228.53	163.62
Full year dividend (Australian cents)	366.25	222.75

 

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 12 April 2018 to holders of ordinary shares and ADRs on the register at the close of business on 2 March 2018. The ex-dividend date for Rio Tinto Limited, Rio Tinto plc and Rio Tinto plc ADR shareholders will be 1 March 2018.

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 20 March 2018 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 5 April 2018. 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 20 March 2018. 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

Rio Tinto continues its full cooperation with the investigations by authorities in the United States, United Kingdom and Australia into the $10.5 million aggregate payments to a consultant providing advisory services on the Simandou project.

On October 17 2017, the U.S. Securities and Exchange Commission filed a civil complaint in the U.S. District Court for the Southern District of New York, alleging violations of the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws against Rio Tinto, a former CEO, Tom Albanese, and a former CFO, Guy Elliott. The complaint seeks an injunction, civil monetary penalties, and disgorgement of any ill-gotten gains, against Rio Tinto. The complaint's allegations relate to Rio Tinto's disclosures and financial reporting for its former coal operations in Mozambique. Rio Tinto denies these allegations and will defend itself vigorously.

At the same time, Rio Tinto reached a settlement with the United Kingdom's Financial Conduct Authority (FCA) in relation to the timing of the impairment of these Mozambique coal operations, and agreed to pay a financial penalty (determined primarily by reference to its market capitalisation) of £27,385,400
($36.4 million). The FCA made no findings of fraud, or of any systemic or widespread failure by Rio Tinto. The Australian Securities and Investments Commission is also reviewing the Mozambique coal asset impairment.

The outcome of these matters, and associated class actions which have been commenced on behalf of securities holders, is subject to significant uncertainties at this time, but they could ultimately expose the Group to material financial cost.

 

 

 

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
		2017 US$m	2016 US$m		2017 US$m			2016 US$m		2017 US$m		2016 US$m
Iron Ore
Pilbara	(d)	18,143	14,530		11,383			8,558		6,576		4,662
Evaluation projects/other		108	75		137			(32)		116		(51)
Total Iron Ore		18,251	14,605		11,520			8,526		6,692		4,611
Aluminium	(e)
Bauxite		2,019	1,913		804			848		463		493
Alumina		2,661	2,118		454			27		180		(121)
Intrasegment		(790)	(786)		(25)			-		(17)		-
Bauxite & Alumina		3,890	3,245		1,233			875		626		372
Primary Metal		5,808	4,913		1,762			1,258		778		402
Pacific Aluminium		2,305	1,971		453			264		176		62
Intersegment & Other		(2,321)	(1,822)		(19)			(50)		(12)		(13)
Integrated Operations		9,682	8,307		3,429			2,347		1,568		823
Other Product Group Items		1,214	1,075		(132)			(42)		(100)		(30)
Product group operations		10,896	9,382		3,297			2,305		1,468		793
Evaluation projects/other		109	76		126			167		115		154
Total Aluminium		11,005	9,458		3,423			2,472		1,583		947
Copper & Diamonds
Rio Tinto Kennecott	100.0	1,352	1,243		539			126		78		(228)
Escondida	30.0	1,811	1,465		1,030			793		325		270
Grasberg joint venture	(f)	33	-		(3)			(17)		(169)		(64)
Oyu Tolgoi & Turquoise Hill	(g)	940	1,203		256			436		36		52
Diamonds	(h)	706	613		287			239		92		47
Product group operations		4,842	4,524		2,109			1,577		362		77
Evaluation projects/other		-	-		(205)			(190)		(99)		(95)
Total Copper & Diamonds		4,842	4,524		1,904			1,387		263		(18)
Energy & Minerals
Rio Tinto Coal Australia	(i)	2,829	2,634		1,223			893		716		382
Iron Ore Company of Canada	58.7	1,867	1,324		770			335		235		64
Rio Tinto Iron & Titanium	(j)	1,763	1,419		546			370		201		86
Rio Tinto Minerals	100.0	630	620		244			213		126		117
Dampier Salt	68.4	215	259		27			74		3		25
Uranium	(k)	417	456		15			54		(26)		10
Product group operations		7,721	6,712		2,825			1,939		1,255		684
Simandou iron ore project	(l)	-	-		(13)			(102)		(6)		(47)
Evaluation projects/other		43	22		(9)			(31)		(7)		(25)
Total Energy & Minerals		7,764	6,734		2,803			1,806		1,242		612
Other Operations	(m)	10	8		(116)			(95)		(138)		(88)
Intersegment transactions		(15)	(11)		-			-		-		-
Product Group Total		41,857	35,318		19,534			14,096		9,642		6,064
Other items	(n)				(736)			(411)		(483)		(241)
Exploration and evaluation					(218)			(175)		(178)		(147)
Net interest										(354)		(576)
Underlying EBITDA/earnings					18,580			13,510		8,627		5,100
Items excluded from underlying EBITDA/earnings		10	18		1,912			(687)		135		(483)
EBITDA/net earnings					20,492			12,823		8,762		4,617
Reconciliation to Group income statement Share of equity accounted unit sales and intra-subsidiary/equity accounted units sales		(1,837)	(1,555)
Depreciation & amortisation in subsidiaries excluding capitalised depreciation					(4,302)			(4,691)
Impairment charges					(796)			(249)
Depreciation & amortisation in equity accounted units					(648)			(526)
Taxation and finance items in equity accounted units					(272)			(241)
Consolidated sales revenue / profit on ordinary activities before finance items and taxation		40,030	33,781		14,474			7,116

 

 

 

 

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
			2017 US$m	2016 US$m		2017 US$m	2016 US$m		2017 US$m	2016 US$m
Iron Ore
Pilbara		(d)	1,201	868		1,645	1,645		16,535	16,357
Evaluation projects/other			-	-		-	-		2	2
Total Iron Ore			1,201	868		1,645	1,645		16,537	16,359
Aluminium		(e)
Bauxite			825	343		123	110		1,897	1,278
Alumina			108	87		209	206		2,733	2,588
Intrasegment			-	-		-	-		(18)	-
Bauxite & Alumina			933	430		332	316		4,612	3,866
Primary Metal			389	394		665	716		9,946	10,701
Pacific Aluminium			109	91		196	193		1,016	1,044
Intersegment & Other			5	1		6	25		772	171
Total Aluminium			1,436	916		1,199	1,250		16,346	15,782
Copper & Diamonds
Rio Tinto Kennecott		100.0	249	333		422	530		1,936	2,189
Escondida		30.0	248	517		507	364		3,369	3,565
Grasberg joint venture		(f)	138	174		42	89		1,137	1,151
Oyu Tolgoi & Turquoise Hill		(g)	901	322		344	450		4,725	3,804
Diamonds		(h)	85	97		132	164		441	655
Product group operations			1,621	1,443		1,447	1,597		11,608	11,364
Evaluation projects/other			1	(2)		5	4		135	166
Total Copper & Diamonds			1,622	1,441		1,452	1,601		11,743	11,530
Energy & Minerals
Rio Tinto Coal Australia		(i)/(q)	84	(107)		152	297		1,040	1,807
Iron Ore Company of Canada		58.7	202	75		157	151		988	1,018
Rio Tinto Iron & Titanium		(j)	119	97		219	189		3,881	3,662
Rio Tinto Minerals		100.0	28	31		65	53		523	508
Dampier Salt		68.4	13	11		22	23		150	146
Uranium		(k)	21	30		37	25		(327)	(143)
Product group operations			467	137		652	738		6,255	6,998
Simandou iron ore project		(l)	-	-		-	-		17	13
Evaluation projects/other			-	4		-	1		41	38
Total Energy & Minerals			467	141		652	739		6,313	7,049
Other Operations		(m)	(35)	(11)		32	34		(328)	203
Product Group Total			4,691	3,355		4,980	5,269		50,611	50,923
Intersegment transactions									206	142
Net assets/(liabilities) of disposal groups held for sale		(r)							370	(7)
Other items		(n)	70	(46)		42	51		(2,631)	(2,181)
Less: equity accounted units (EAU)			(417)	(651)		(647)	(526)
Total			4,344	2,658		4,375	4,794		48,556	48,877
Add back: Proceeds from sale of property, plant and equipment and intangibles			138	354
Total capital expenditure per cash flow statement			4,482	3,012
Less: Net debt									(3,845)	(9,587)
Equity attributable to owners of Rio Tinto									44,711	39,290

 

 

 

 

 

 

Notes to financial information by business unit

 

Business units are classified according to the Group's management structure. Certain comparative amounts have been reallocated to appropriately represent changes in management responsibility.

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 operation 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).

i)   On 1 September, 2017, Rio Tinto disposed of its 100 per cent shareholding in Coal & Allied Industries Limited to Yancoal Australia Limited.

As at 31 December 2016, this included 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 held a 67.6 per cent, 80 per cent and 55.6 per cent interest respectively, with management rights, in Hunter Valley Operations, Mount Thorley and Warkworth. 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.

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 85 per cent interest in Simfer S.A. the company that manages the Simandou project in Guinea. The Group therefore has a 45.05 per cent indirect interest in Simfer S.A. These entities are consolidated as subsidiaries and together referred to as the Simandou iron ore project.

 

Notes to financial information by business unit (continued)

 

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

n)  Central office costs, central Growth & Innovation costs and other central items are reported in Other items. The loss in Other items includes restructuring, project and other one-off costs of $177 million (pre-tax) in 2017.  The increased loss also reflects an increase in Information System & Technology spend and further investment in the Commercial Centre in Singapore and capability to support the Group's mine to market productivity programme.

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 2017 comprise of Rio Tinto's interest in the Dunkerque aluminium smelter and certain other separate assets.

Assets and liabilities held for sale at 31 December 2016 comprised of Rio Tinto's interests in the Blair Athol coal project and certain other separate assets.

 

Review of operations

Iron Ore

	2017	2016	Change
Pilbara production (million tonnes - Rio Tinto share)	271.3	270.7	-
Pilbara production (million tonnes - 100%)	329.8	329.5	-
Pilbara shipments (million tonnes - Rio Tinto share)	272.0	268.9	+1%
Pilbara shipments (million tonnes - 100%)	330.1	327.6	+1%
Gross sales revenue (US$ millions)	18,251	14,605	+25%
Underlying EBITDA (US$ millions)	11,520	8,526	+35%
Pilbara underlying FOB EBITDA margin*	68%	63%
Underlying earnings (US$ millions)	6,692	4,611	+45%
Net cash generated from operating activities (US$ millions)	8,466	5,959	+42%
Capital expenditure (US$ millions)	(1,201)	(868)	+38%
Free cash flow (US$ millions)	7,265	5,091	+43%

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

* The Pilbara underlying FOB EBITDA margin is defined as Pilbara underlying EBITDA divided by Pilbara revenues, excluding freight revenue.

 

Performance

The Iron Ore group's underlying EBITDA of $11,520 million and underlying earnings of $6,692 million in 2017 were 35 per cent and 45 per cent higher, respectively, than 2016. The group benefited from higher prices, reflected in the 20 per cent rise, on average, in the Platts 62 per cent index, further cash cost savings and productivity improvements.  

Pre-tax cash cost improvements in the Iron Ore group were $341 million in 2017 and have now delivered $1.7 billion of cumulative savings compared with the 2012 base. These savings are reflected in a further reduction in Pilbara unit cash costs to $13.4 per tonne in 2017 (2016: $13.7 per tonne). Increased productivity, lower headcount and a reduction in consumables contributed to this positive trend and offset the impact of slightly higher energy costs and a stronger Australian dollar. Pilbara operations delivered a free on board (FOB) EBITDA margin of 68 per cent in 2017, compared with 63 per cent in 2016.

Gross sales revenues for Pilbara operations in 2017 of $18,143 million included freight revenue of $1,464 million (2016: $886 million).

Net cash generated from operating activities of $8,466 million benefited from higher prices and lower operating costs through the continued realisation of cost savings initiatives and improved productivity. These positive trends fed through to free cash flow of $7,265 million, which was $2,174 million higher than 2016, more than offsetting the 38 per cent rise in capital expenditure, partly attributable to the construction of Silvergrass which was commissioned in the fourth quarter.

 

Markets

Sales of 330.1 million tonnes (Rio Tinto share 272.0 million tonnes) were one per cent higher than 2016 sales, reflecting ongoing productivity improvements being made to the rail network, along with increased flexibility across the infrastructure system.

Approximately 67 per cent of sales in 2017 were priced with reference to the current month average, 17 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 fixed terms on the spot market. Approximately 67 per cent of 2017 sales were made on a cost and freight (CFR) basis, with the remainder sold free on board (FOB).

Achieved average pricing in 2017 was $59.6 per wet metric tonne on an FOB basis (2016: $49.3 per wet metric tonne). This equates to $64.8 per dry metric tonne (2016: $53.6 per dry metric tonne), which compares with the average FOB Platts price of $64.1 per dry metric tonne for 62 per cent iron Pilbara fines (2016: $53.6 per dry metric tonne).

 

Operations

Pilbara operations produced 329.8 million tonnes (Rio Tinto share 271.3 million tonnes) in 2017, in line with 2016: a stronger performance in the second half offset the impacts of adverse weather conditions in the first quarter and accelerated rail maintenance in the second quarter. In addition there was a planned two week shutdown at Hope Downs 4 in December 2017, in line with the focus on value over volume.

 

New projects and growth options

Commissioning of the Silvergrass conveyor system is complete and the plant had processed around two million tonnes by the end of 2017. Production ramp-up will continue in 2018.

The automation of the Pilbara train system (AutoHaul^TM) continues to make strong progress with greater than 60 per cent of all train kilometres now completed in autonomous mode with a driver on board for supervision. The project is on schedule to be completed by the end of 2018.

The Koodaideri project feasibility study was approved for $30.9 million in May 2017. The feasibility study will focus on obtaining necessary consent and permits and increasing orebody knowledge.

 

2018 shipments guidance

Rio Tinto's Pilbara shipments in 2018 are expected to be between 330 and 340 million tonnes (100 per cent basis). This is subject to market conditions and any weather constraints, and partly reflects continued rail maintenance required in 2018.

 

Aluminium

	2017	2016	Change
Production (Rio Tinto share)
Bauxite (000 tonnes)	50,796	47,703	+6%
Alumina (000 tonnes)	8,131	8,192	-1%
Aluminium (000 tonnes)	3,551	3,600	-1%
Gross sales revenue (US$ millions)	11,005	9,458	+16%
Underlying EBITDA (US$ millions)	3,423	2,472	+38%
Underlying EBITDA margin (integrated operations)	35%	28%
Underlying earnings (US$ millions)	1,583	947	+67%
Net cash generated from operating activities (US$ millions)	2,648	2,278	+16%
Capital expenditure - excluding EAUs (US$ millions)	(1,269)	(795)	+60%
Free cash flow (US$ millions)	1,380	1,471	-6%

To allow production numbers to be compared on a like-for-like basis, production from asset divestments completed in 2016 have been excluded from the Rio Tinto share of production data but assets sold in 2017 remain in the comparative.

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

 

Performance

The Aluminium group's underlying EBITDA of $3,423 million and underlying earnings of $1,583 million increased by 38 per cent and 67 per cent, respectively. The improved pricing environment was partially offset by a strengthening of the Australian and Canadian dollars, as well as by increases in the prices of raw materials - most notably caustic soda, petroleum coke and tar pitch - relating mainly to the same underlying drivers supporting the higher aluminium and alumina prices. Volume creep, cost improvements and value-added product initiatives executed by the product group over the course of 2017 totalled $198 million, and more than offset the negative impact of the raw material input costs, which were $149 million higher than 2016. These initiatives resulted in a sector-leading performance with a rise in the EBITDA margin from integrated operations to 35 per cent.

The Aluminium group has now delivered $1.6 billion of cash cost improvements compared with the 2012 base.

Net cash flow from operating activities increased by 16 per cent with capital expenditure rising by 60 per cent as construction at Amrun accelerated in 2017. This led to a six per cent decline in free cash flow generation with the higher capex partly offset by the strong EBITDA performance.

 

Markets

The 2017 cash LME aluminium price averaged $1,969 per tonne, an increase of 23 per cent on 2016.  Market premia increased in all regions: in the US, the mid-West market premium averaged $199 per tonne in 2017, compared with an average of $169 per tonne in 2016, an 18 per cent rise. 

Overall, the group achieved an average realised aluminium price of $2,231 per tonne in 2017 (2016: $1,849 per tonne). This includes premia for value-added products (VAP), which represented 57 per cent of primary metal sold in 2017 (2016: 54 per cent) and generated attractive product premia averaging $221 per tonne of VAP sold (2016: $223 per tonne) on top of the physical market premia.

The strong bauxite production performance, combined with robust demand from China, enabled the group to increase its share of third party bauxite shipments by ten per cent to 32.3 million tonnes (2016: 29.3 million tonnes). 

 

Operations

Central to the aluminium group's performance has been the continuous drive to creep the capacity of its assets through productivity at minimal cost, to enhance margin, while always maintaining a focus on value over volume. Bauxite production increased six per cent, with Gove 23 per cent higher and Weipa up five per cent, reflecting the successful execution of this strategy. This enabled the group to ship 32 million tonnes of bauxite to third parties in 2017, a ten per cent increase compared with 2016, further reinforcing Rio Tinto's position as the global leader in the seaborne bauxite trade.

Gross sales revenues for bauxite in 2017 increased six per cent to $2,019 million and included freight revenues of $266 million (2016: $202 million).

Alumina production for 2017 was in line with 2016, with a strong performance at Yarwun partially offset by lower production at the Queensland Alumina refinery due to major maintenance. There was a continued focus on productivity enhancements throughout the operations. These actions, together with higher realised prices, led the Alumina business to achieve EBITDA of $454 million.

Aluminium production of 3.6 million tonnes in 2017 was one per cent lower than 2016. Higher than average production creep of one per cent achieved at the group's wholly-owned Canadian smelters was offset by a curtailment at the Boyne smelter in Australia, prompted by higher power prices, as well as by a production incident at the non-managed Sohar smelter in Oman. Primary Aluminium earnings of $954 million were 106 per cent higher than 2016.

On 10 January 2018, Rio Tinto announced it had received a binding offer for the sale of the Aluminium Dunkerque smelter in France for $500 million, subject to final adjustments. The sale is expected to complete in the second quarter of 2018, subject to satisfactory completion of consultations with key stakeholders.

 

New projects and growth options

The $1.9 billion Amrun bauxite project on the Cape York Peninsula in north Queensland is advancing to plan. All wharf modules are now installed and the process plant beneficiation modules and transfer tower are in location. Upcoming activities include completion of the stacker, reclaimer assembly and ship loader assembly. The project remains on schedule for first shipment in the first half of 2019.

The $0.7 billion¹ bauxite project to expand the production capacity of the Compagnie des Bauxites de Guinée (CBG) to 18.5 million tonnes per annum¹ remains on schedule with first shipment from the expansion project expected in the fourth quarter of 2018.   

 

2018 production guidance

Rio Tinto's share of production in 2018 is expected to be between 49 and 51 million tonnes of bauxite, 8.0 to 8.2 million tonnes of alumina and 3.5 to 3.7 million tonnes of aluminium (guidance to be adjusted following completion of the sale of the Aluminium Dunkerque smelter).

 

¹ 100 per cent basis. Rio Tinto's share of capex and production is 45 per cent.

 

Copper & Diamonds

	2017	2016	Change
Production (Rio Tinto share)
Mined copper (000 tonnes)	478.1	523.3	-9%
Refined copper (000 tonnes)	197.2	250.1	-21%
Diamonds (000 carats)	21,627	17,953	+20%
Gross sales revenue (US$ millions)	4,842	4,524	+7%
Underlying EBITDA (US$ millions)	1,904	1,387	+37%
Underlying EBITDA margin	39%	31%
Underlying earnings / (loss) (US$ millions)	263	(18)	n/a
Net cash generated from operating activities (US$ millions)1	1,695	977	+73%
Capital expenditure - excluding EAUs (US$ millions)	(1,374)	(924)	+49%
Free cash flow (US$ millions)	319	69	+362%

¹ Net cash generated from operating activities excludes the operating cash flows of equity accounted units (Escondida) but includes dividends from the equity accounted units.

 

Performance

The Copper & Diamonds group recorded underlying EBITDA of $1,904 million, 37 per cent higher than 2016, and underlying earnings of $263 million, compared to a loss of $18 million in 2016. Higher prices, continued success with cash cost reductions and the final insurance settlement ($101 million post-tax, with an additional $45 million recognised in net earnings) relating to the Manefay slide at Kennecott in 2013 more than offset the one-off impacts of the Escondida strike ($176 million) and a deferred tax asset write-down at Grasberg ($144 million).

The group delivered free cash flow of $319 million (inclusive of dividends received from Escondida) despite a 49 per cent increase in capital expenditure as activity ramped up at the Oyu Tolgoi Underground Project. All managed operations were free cash flow positive in 2017, with the exception of Oyu Tolgoi due to investment in the Underground Project.

The group achieved $160 million of pre-tax cash cost improvements during 2017, bringing total savings delivered across the Copper & Diamonds group since 2012 to $1.4 billion.

 

Markets

Average LME copper prices increased 27 per cent to 281 cents per pound and the gold price increased one per cent to $1,257 per ounce compared with 2016.

Rough diamond demand was solid in 2017: factories in India increased manufacturing capacity as the market normalised following Indian banknote reform in 2016, and the outlook in key emerging markets improved. This resulted in sustained re-stocking activity throughout the pipeline for most of the year.

The total impact of price changes on the Copper & Diamonds group, including the effects of provisional pricing movements, resulted in an increase in underlying earnings of $480 million compared with 2016.

At 31 December 2017, the Group had an estimated 250 million pounds of copper sales that were provisionally priced at 304 cents per pound. The final price of these sales will be determined during the first half of 2018. This compares with 235 million pounds of open shipments at 31 December 2016, provisionally priced at 250 cents per pound.

 

Operations - Copper

Mined copper production was nine per cent lower than 2016, mainly due to the impact of the strike at Escondida in the first quarter of 2017. Mined copper production at Kennecott reflected lower grades partially offset by higher mill throughput while production from the Oyu Tolgoi open pit reduced as anticipated due to lower head grades, as phases 2 and 3, which were sources of higher grade, were fully depleted by the end of 2016.

In January and February 2017, the Indonesian government 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 Freeport Indonesia's ("PT-FI") operating rights, including its right to continue to export concentrate without restriction, and, as a result, had a significant impact on Rio Tinto's share of production in 2017. Rio Tinto's full participation beyond 2021 is likely to be delayed due to the application of force majeure provisions in the joint venture agreement between Rio Tinto and PT-FI.

In March 2017, the Indonesian government amended the regulations and issued a permit to PT-FI that allowed concentrate exports to resume in April 2017. PT-FI is applying for an extension of its export permit, which currently expires on 16 February 2018.

Approximately 5.7 thousand tonnes of copper and no gold production in 2017 has been attributed to Rio Tinto.

 

Operations - Diamonds

Diamond production was 20 per cent higher than 2016 with higher carat production at Argyle due to the additional processing of higher grade alluvial tailings, and an increase in carats recovered at Diavik due to higher recovered grades.

 

New projects and growth options

New contractors continue to mobilise at the Oyu Tolgoi Underground Project with the total project workforce at over 6,600 at the end of 2017, 89 per cent of whom are Mongolian nationals. Lateral development is on plan, the sinking of Shaft 2 is complete and completion of Shaft 5 sinking is expected by the end of first quarter of 2018. Six accommodation buildings in the Oyut II camp are now complete. An annual project review was completed in the fourth quarter, and construction of the first drawbell is expected in mid-2020.

Commissioning of the  Los Colorados Extension project began in the second half of 2017, delivering incremental annual capacity of approximately 200 thousand tonnes of copper (100 per cent basis) at full capacity.

In December 2017, Rio Tinto approved a $368 million commitment (Rio Tinto share 55 per cent or $202 million) to further advance the Resolution Copper project in the United States. The funding will improve infrastructure and facilitate mine planning as part of the pre-feasibility study.

Development of the A21 pipe at Diavik remains on schedule and within budget.

 

Impairment

A post-tax impairment charge of $138 million was recognised at Argyle attributable to lower production volumes, a smaller than expected contribution from productivity improvements and lower realised prices.

 

2018 production guidance

Rio Tinto's expected share of mined copper production for 2018 is expected to be between 510 and 610 thousand tonnes. Refined copper production is expected to be between 225 to 265 thousand tonnes.

Diamond production guidance for 2018 is between 17 and 20 million carats.

 

Energy & Minerals

	2017	2016	Change
Production (Rio Tinto share)
Hard coking coal (000 tonnes)	7,704	8,141	-5%
Semi-soft coking coal (000 tonnes)	2,020	4,102	-51%
Thermal coal (000 tonnes)	13,933	16,727	-17%
Iron ore pellets and concentrates (000 tonnes)	11,166	10,661	+5%
Titanium dioxide slag (000 tonnes)	1,315	1,048	+25%
Borates (000 tonnes)	517	503	+3%
Salt (000 tonnes)	5,090	5,180	-2%
Uranium (000 lbs)	6,650	6,342	+5%
Gross sales revenue (US$ millions)	7,764	6,734	+15%
Underlying EBITDA (US$ millions)	2,803	1,806	+55%
Underlying EBITDA margin	36%	27%
Underlying earnings (US$ millions)	1,242	612	+103%
Net cash generated from operating activities (US$ millions)	1,939	1,370	+42%
Capital expenditure (US$ millions)	(467)	(141)	+231%
Free cash flow (US$ millions)	1,467	1,232	+19%

To allow production numbers to be compared on a like-for-like basis, production from asset divestments completed in 2016 have been excluded from the Rio Tinto share of production data but assets sold in 2017 remain in the comparative.

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

 

Performance

Underlying EBITDA for the Energy & Minerals group was $2,803 million, 55 per cent higher than 2016, while underlying earnings at $1,242 million were more than double the level of 2016. The group benefited from higher prices, primarily coal, iron ore and the majority of products at Rio Tinto Iron & Titanium, along with higher volumes and cash cost improvements across many of the operations. These more than offset stronger local currencies and the impact of Cyclone Debbie which affected coal production in early 2017. Coal & Allied's thermal coal operations are included up to their sale on 1 September 2017: the 2016 comparative therefore includes an additional four months of Coal & Allied earnings, equivalent to $109 million.

Pre-tax cash cost improvements in the Energy & Minerals group were $116 million in 2017: the product group has now delivered $1.5 billion of cumulative savings compared with the 2012 base.

Gross sales revenues for the product group in 2017 of $7,764 million were 15 per cent higher than 2016 as a result of higher prices and higher sales volumes across most products with the exception of coal which was impacted by the cyclone and the disposal of Coal & Allied.

Net cash generated from operating activities of $1,939 million was 42 per cent higher than 2016, benefiting from higher prices and further cost improvements. The 2016 comparative included cash flows generated from Coal & Allied for the last four months of $136 million. The increase in capital expenditure included the development of the Wabush 3 open pit mine at Iron Ore Company of Canada. 2016 capital expenditure was presented net of the $192 million proceeds from the sale of the Mount Pleasant thermal coal assets. The resulting free cash flow achieved during the year of $1,467 million was 19 per cent higher than in 2016.

Markets

Gross sales revenues for Rio Tinto Coal Australia in 2017 of $2,829 million (2016: $2,634 million) were seven per cent higher than 2016, despite the sale of Coal & Allied in September 2017. The group achieved hard coking coal prices of $169 per tonne, on average, in 2017 on an FOB basis (2016: $119 per tonne). Average prices realised for thermal coal were $78 per tonne on an FOB basis in 2017 (2016: $60 per tonne).

Market conditions for titanium dioxide continued to improve in 2017, with strengthening pigment prices supported by low inventory and tight supply. Consequently, feedstock demand has improved year-on-year. Improved conditions have also been evident in the zircon market.

Borates demand growth was primarily driven by the agriculture and construction sectors in 2017. Offtake across most regions held firm, although borates demand in China was impacted by environmental-related shutdowns during the third quarter.

The uranium market remained oversupplied in 2017, with many market players along the value chain reporting excess inventories. The spot price fell from $26 per pound in the first quarter to below $21 per pound for much of the year until capacity curtailment announcements boosted spot prices as the year drew to a close. Adverse policy shifts in South Korea and Japan, as well as an increasingly competitive energy market in the US, have dampened the expected demand growth in these markets.

 

Operations - Energy

Hard coking coal production in 2017 was five per cent lower than 2016 due to the impact of Cyclone Debbie in the first quarter of 2017.

As announced on 1 September 2017, Rio Tinto completed the sale of Coal & Allied to Yancoal Australia for total consideration of $2.69 billion, which included Coal & Allied's interests in the Hunter Valley Operations, Mount Thorley and Warkworth mines. The sale, coupled with mine production sequencing changes at Hunter Valley Operations and Mount Thorley Warkworth, resulted in semi-soft coking coal and thermal coal production being lower than 2016 by 51 per cent and 17 per cent respectively.

Uranium production was five per cent higher than 2016, reflecting lower production at Energy Resources of Australia as the operations continued to process existing stockpiles, which was more than offset by higher production at Rössing due to higher grades.

 

Operations - Iron Ore Company of Canada (IOC)

Rio Tinto's share of IOC pellet and concentrate production of 11.2 million tonnes was five per cent higher than 2016, with pellet demand continuing to be strong and product mix being optimised to meet customer demand. The development of the Wabush 3 open pit mine, approved in the first quarter of 2017, is progressing as planned and is expected to be in production in the second half of 2018.

 

Operations - Minerals

Titanium dioxide slag production was 25 per cent higher than 2016, reflecting higher market demand.

The respective movements in the production of borates and salt were driven by market demand and the impact of adverse weather at Dampier Salt in the first half of 2017.

 

New projects and growth options

The Group has significant optionality in titanium dioxide feedstocks, subject to market conditions. One of nine furnaces at Rio Tinto Fer et Titane remains idle, along with one of four furnaces at Richards Bay Minerals (RBM). The focus remains on maximising the productivity of the furnaces currently in operation, and a decision to re-start idle furnaces will be based on maximising value over volume.

Work continued on the feasibility study for the Zulti South mine expansion at RBM in South Africa, which has the potential to maintain RBM's low-cost smelting capacity and zircon production. The project remains one of the best undeveloped mineral sand deposits in the industry, given its large ilmenite resource with high rutile and zircon content in the overall mineral suite.

The Jadar project in Serbia is a lithium-borate deposit discovered by Rio Tinto in 2004. Findings so far are encouraging, and prefeasibility assessments are ongoing to establish the economic business case for the project and to advance its environmental and socioeconomic impact assessments. On 24 July 2017, Rio Tinto signed a Memorandum of Understanding with the Government of Serbia to form a joint working group to progress the study and permitting phase of the project.

Rio Tinto and Chinalco continue to hold discussions following the signing of a non-binding agreement on 28 October 2016 for Rio Tinto to sell its entire stake in the Simandou project in Guinea to Chinalco. The Heads of Agreement (HOA) sets out the proposed principal terms of the sale with the aim of signing a binding agreement.

 

Impairments

Rössing was impaired by $177 million (post-tax) due to oversupply in the uranium market resulting in structural changes to forecast prices.

 

2018 production guidance

Guidance for Rio Tinto's expected share of 2018 production is 7.5 to 8.5 million tonnes of hard coking coal, 3.8 to 4.5 million tonnes of thermal coal, 11.5 to 12.5 million tonnes of iron ore pellets and concentrates, 0.5 million tonnes of boric oxide equivalent production, 1.2 to 1.4 million tonnes of titanium dioxide slag, and 6.2 to 7.2 million pounds of uranium.

 

Other Operations

	2017	2016
Underlying EBITDA (US$ millions)	(116)	(95)
Underlying loss (US$ millions)	(138)	(88)
Capital expenditure (US$ millions)	35	11

 

Other operations relates to the Group's shipping operations and its legacy sites including the Gove alumina refinery, where production was curtailed on 28 May 2014.

A post-tax impairment charge of $257 million was recognised relating to the Roughrider uranium deposit in Canada. Roughrider's recoverable amount was determined to be nil following a decision in the first half of 2017 to cease further expenditure on the project.

 

Other items

	2017	2016
Underlying EBITDA (US$ millions)	(736)	(411)
Underlying loss (US$ millions)	(483)	(241)
Capital expenditure (US$ millions)	(70)	46

 

Central office costs, central Growth & Innovation costs and other central items are reported in Other items. The increased loss in Other items includes restructuring, project and other one-off costs of $177 million (pre-tax) in 2017. It also reflects an increase in Information System & Technology spend and further investment in the Commercial Centre in Singapore and capability to support the Group's mine to market productivity programme.

 

 

Exploration & evaluation

	2017	2016
Central exploration post-tax charge (US$ millions)	(178)	(147)

 

Central exploration & evaluation expenditure in 2017 (post divestments and tax) resulted in a charge to underlying earnings of $178 million.

The pre-tax exploration & evaluation spend across the Group totalled $445 million in 2017. This included evaluation spend of $227 million in the Product Groups, mostly in Copper.

Rio Tinto has a strong portfolio of projects with activity in 16 countries across some eight commodities in Australia, Chile, Kazakhstan, Mongolia, Papua New Guinea, Peru, Serbia, United States and Zambia.  Mine-lease exploration continued at a number of Rio Tinto managed businesses including Pilbara Iron, Richards Bay Minerals, Oyu Tolgoi and Weipa. The exploration expenditure was primarily focused on copper.

 

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 2017	$ million impact on full year 2017 underlying earnings of a 10% change in prices/exchange rates
Aluminium	$1,969/t	592
Copper	281c/lb	242
Gold	$1,257/oz	30
Iron ore (62% Fe FOB)	$64.1/dmt	1,037
Hard coking coal (realised)	$169/t	69
Australian dollar against the US dollar	0.77	674
Canadian dollar against the US dollar	0.77	160
Oil (Brent)	$54/bbl	54

 

 

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% unless otherwise stated)	Approved capital remaining to be spent from 1 January 2018	Status/Milestones
Completed in 2017
Investment in the Silvergrass iron ore mine in the Pilbara, Australia, to maintain the Pilbara blend.	$0.3bn	$0.05bn	The $338m expansion is expected to add 10 million tonnes of annual capacity. Commissioning was completed in the fourth quarter of 2017.
Construction of a desalination facility to ensure continued water supply and sustain operations at Escondida (Rio Tinto 30%), Chile.	$1.0bn (RT share)	-	Approved in July 2013, the project provides a long-term sustainable supply of water for the operations. The project reached completion on budget in December 2017.
Remediation of the east wall at Rio Tinto Kennecott, US.	$0.3bn	-	Following the pit wall slide in 2013, mine operations focused on remediation from the slide and the east wall of Bingham Canyon, including significant de-weighting and de-watering activities.
Ongoing and approved
Copper & Diamonds
Project funding for Grasberg, Indonesia, from March 2017 to December 2017.	$0.1bn (RT share)	-	Approval in 2017 to continue investment in 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.
Investment to extend mine life at Rio Tinto Kennecott, US, beyond 2019.	$0.7bn	$0.4bn	Funding for the continuation of open pit mining via the push back of the south wall: the project largely consists of simple mine stripping activities.
Development of A21 pipe at the Diavik Diamond Mine in Canada (Rio Tinto 60%).	$0.2bn (RT share)	$0.02bn (RT      share)	Approved in November 2014, the development of the A21 pipe is expected to sustain production levels. Dike construction and de-watering are complete. 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	$4.3bn	The project was approved in May 2016.  An annual project review was completed in the fourth quarter of 2017 and construction of the first drawbell is expected in mid-2020. Lateral development is on plan, Shaft 2 sinking is complete and Shaft 5 sinking is expected to be complete by the end of first quarter of 2018.
Aluminium
Investment in the Amrun bauxite mine on the Cape York Peninsula in north Queensland, Australia, with a planned initial output of 22.8 million tonnes a year.	$1.9bn	$1.1bn	Approved in December 2015, the project is advancing to plan. 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 capacity from 14.5 to 18.5 million tonnes a year. Rio Tinto's share of capex is $0.3bn.	$0.7bn	$0.3bn	Approved in 2016. Financing completed in November 2016. First incremental shipment expected in the fourth quarter of 2018.

 

 

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 Guidance 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.

 

 

LEI: 213800YOEO5OQ72G2R82

Classification: 1.1. Annual financial and audit reports

Contacts

 

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