11 September 2013 Asia Pacific/Australia Equity Research Diversified Metals & Mining (Diversified Resources (AU))
Rio Tinto (RIO.L) Rating OUTPERFORM* COMPANY VISIT
Price (09 Sep 13, p) 3,130.50 Target price (p) 3,900.00¹ Market cap. (£mn) 60,385.02 Ramping up earnings / Pilbara Primer Yr avg. mthly trading (pmn) 309,675 Last month's trading (pmn) 231,416 Projected return: ■ Following our recent visit to Rio's Pilbara iron ore operations, we raise Capital gain (%) 24.6 our 2014-15 earnings forecasts 5-6% for the early delivery of iron ore Dividend yield (net %) 3.4 growth tonnes into an unexpectedly strong market. Total return (%) 28.2 52-week price range 3,757.0 - 2,582.0 ■ The trip also reinforced our most recent cut to capex forecasts (Rio Tinto:
* Stock ratings are relative to the relevant country benchmark. Cutting capex forecasts, increasing target price, 19 August 2013) to ¹Target price is for 12 months. $14bn, $11bn and $9bn over 2013-15, respectively, as we saw first-hand Research Analysts how the mine managers are planning a lower capital intensity pathway for James Gurry phase 2 iron ore growth to 360Mtpa. While the mines for 360 are yet to be 44 20 7883 7083 [email protected] approved, we believe Rio's overall aim is to keep capex the same as Martin Kronborg delivered for the 290 project at $140/t (100% level, or $115/t for Rio's share). 61 2 8205 4369 With $5.9bn set aside for 360 infrastructure, this leaves $3.9bn for mine [email protected] development, in line with our recently revised capex forecasts. Paul McTaggart 61 2 8205 4698 ■ Catalysts: Steel production in China remains strong and is picking up in the [email protected] rest of the world. This should continue to support iron ore prices, providing a Michael Shillaker robust near-term environment in which to deliver its growth tonnes. However, 44 20 7888 1344 [email protected] our trip to the Pilbara demonstrated that the aggressive ramp-up, coupled Liam Fitzpatrick with growth from BHP, FMG and others, will test iron ore price strength (CS 44 20 7883 8350 $105/tonne v spot $138/t). We see the Q4 investor seminar (date TBC) as [email protected] the ideal time to announce the revised pathway for 360, which we expect to Justin Teo support our revised lower capex estimates. 61 2 8205 4426 [email protected] ■ Valuation: Our unchanged GBP39/A$73 Rio target prices are set in line with Specialist Sales: James Brady our discounted cash flow (DCF) valuation using a sum-of-the-parts (life of 44 20 7888 4267 [email protected] mine) DCF valuation with a WACC 9% and target gearing of 25%.
Share price performance Financial and valuation metrics
Year 12/12A 12/13E 12/14E 12/15E 3672 Revenue (US$mn) 50,967.0 47,746.5 48,055.6 49,592.6 3172 EBITDA (US$mn) 19,125.0 18,737.8 17,840.2 20,253.0 2672 EBIT (US$mn) 14,684.0 12,214.5 11,252.6 13,603.6 2172 Net income (US$mn) 9,303.0 8,619.9 8,024.9 10,031.8 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 EPS (CS adj.) (USc) 503.11 466.66 434.41 543.05 Price Price relative Change from previous EPS (%) n.a. 0.5 6.0 4.8 The price relative chart measures performance against the Consensus EPS (USc) n.a. 496.40 568.90 645.90 FTSE ALL SHARE INDEX which closed at 3508.02 on EPS growth (%) -62.2 -7.2 -6.9 25.0 09/09/13 P/E (x) 9.8 10.5 11.3 9.1 On 09/09/13 the spot exchange rate was £.85/Eu 1. - Eu .75/US$1 Dividend (USc) 16,700.00 16,700.00 18,370.00 20,207.00 Dividend yield (%) 3.4 3.4 3.7 4.1 Performance Over 1M 3M 12M P/B (x) 2.0 1.9 1.7 1.5 Absolute (%) -1.2 16.4 2.0 Net debt/equity (%) 34.1 36.6 33.8 24.7 Relative (%) -1.3 10.9 -14.0
Source: Company data, ASX, Credit Suisse estimates, * Adj. for goodwill, notional interest and unusual items. Relative P/E against ASX/S&P200 based on pre GW in AUD. Company PE calculation is based on displayed EPS Currency
DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access
11 September 2013
Rio Tinto RIO.L Price (09 Sep 13): 3,130.50p, Rating: OUTPERFORM, Target Price: 3,900.00p Income statement (US$ m) 12/12A 12/13E 12/14E 12/15E Per share data 12/12A 12/13E 12/14E 12/15E Revenue (US$ m) 50,967 47,746 48,056 49,593 No. of shares (wtd avg) 1,849 1,847 1,847 1,847 EBITDA 19,125 18,738 17,840 20,253 CS adj. EPS (US$) 5.03 4.67 4.34 5.43 Depr. & amort. (4,441) (6,523) (6,588) (6,649) Prev. EPS (US$) — 4.64 4.10 5.18 EBIT (US$) 14,684 12,215 11,253 13,604 Dividend (US$) 167.00 167.00 183.70 202.07 Net interest exp. (160) (739) (750) (721) Div yield 3.40 3.40 3.74 4.11 Associates — — — — Dividend payout ratio 33.19 35.79 42.29 37.21 Other adj, (2,505) (353) — — Free cash flow per share (4.38) (0.12) 1.86 4.41 PBT (US$) 12,019 11,122 10,503 12,883 (US$) Income taxes (3,591) (3,360) (3,256) (3,865) Key ratios and 12/12A 12/13E 12/14E 12/15E Profit after tax 8,428 7,762 7,247 9,018 valuation Minorities 14 35 — — Growth(%) Preferred dividends — — — — Sales (15.8) (6.3) 0.6 3.2 Associates & other 861 823 778 1,014 EBIT (40.8) (16.8) (7.9) 20.9 Net profit (US$) 9,303 8,620 8,025 10,032 Net profit (63.9) (7.3) (6.9) 25.0 Other NPAT adjustments (12,293) (2,509) — — EPS (62.2) (7.2) (6.9) 25.0 Reported net income (2,990) 6,111 8,025 10,032 Margins (%) EBITDA margin 37.5 39.2 37.1 40.8 Cash flow (US$) 12/12A 12/13E 12/14E 12/15E EBIT margin 28.8 25.6 23.4 27.4 EBIT 14,684 12,215 11,253 13,604 Pretax margin 23.6 23.3 21.9 26.0 Net interest (837) (974) (750) (721) Net margin 18.3 18.1 16.7 20.2 Cash taxes paid — — — — Valuation metrics (x) Change in working capital (422) 490 778 1,014 EV/sales 2.2 2.4 2.4 2.3 Other cash & non-cash items (4,057) 2,428 3,415 3,661 EV/EBITDA 6.0 6.2 6.5 5.5 Cash flow from operations 9,368 14,158 14,696 17,557 EV/EBIT 7.8 9.5 10.3 8.2 CAPEX (17,458) (14,386) (11,265) (9,418) P/E 9.8 10.5 11.3 9.1 Free cash flow to the firm 6,368 11,158 11,396 13,927 P/B 2.0 1.9 1.7 1.5 Acquisitions — — — — Asset turnover 0.43 0.40 0.39 0.38 Divestments 251 1,630 — — ROE analysis (%) Other investment/(outflows) (967) (313) (400) (400) ROE stated-return on (6.0) 12.9 15.9 17.9 Cash flow from investments (18,174) (13,069) (11,665) (9,818) equityROIC 13.3 10.6 9.1 10.9 Net share issue/(repurchase) (1,471) 70 — — Interest burden 0.82 0.91 0.93 0.95 Dividends paid (3,038) (3,434) (3,085) (3,548) Tax rate 29.9 30.2 31.0 30.0 Issuance (retirement) of debt — — — — Financial leverage 0.58 0.62 0.56 0.50 Other 5,728 480 — — Credit ratios (%) Cash flow from financing 1,219 (2,884) (3,085) (3,548) Net debt/equity 34.1 36.6 33.8 24.7 activitiesEffect of exchange rates 49 (23) — — Net debt/EBITDA 1.0 1.1 1.2 0.9 Changes in Net Cash/Debt (7,538) (1,818) (54) 4,191 Interest coverage ratio 91.8 16.5 15.0 18.9 . Net debt at start 12,134 19,672 21,490 21,544 Change in net debt 7,538 1,818 54 (4,191) Source: Company data, ASX, Credit Suisse estimates, * Adj. for goodwill, Net debt at end 19,672 21,490 21,544 17,352 notional interest and unusual items. Relative P/E against ASX/S&P200 based on pre GW in AUD. Company PE calculation is based on displayed Balance sheet (US$ m) 12/12A 12/13E 12/14E 12/15E EPS Currency Assets Cash and cash equivalents 7,135 8,416 8,362 12,554 Accounts receivable 5,494 6,008 6,008 6,008 Inventory 6,375 6,221 6,221 6,221 Other current assets 1,506 1,942 1,942 1,942 Total current assets 20,510 22,587 22,533 26,725 3672 Total fixed assets 76,985 77,723 82,400 85,169 3172 Intangible assets and goodwill 9,654 9,227 9,227 9,227 Investment securities — — — — 2672 Other assets 11,288 10,127 10,127 10,127 2172 Total assets 118,437 119,664 124,287 131,247 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Liabilities Accounts payable 9,420 8,964 8,964 8,964 Price Price relative Short-term debt 2,101 4,881 4,881 4,881 Other short term liabilities 2,459 3,320 3,003 3,479 The price relative chart measures performance against the FTSE ALL SHARE Total current liabilities 13,980 17,165 16,848 17,324 INDEX which closed at 3507.35 on 09/09/13 Long-term debt 24,706 25,025 25,025 25,025 On 09/09/13 the spot exchange rate was £.85/Eu 1. - Eu .75/US$1 Other liabilities 22,011 18,721 18,721 18,721 Total liabilities 60,697 60,911 60,594 61,070 Shareholders' equity 46,553 47,995 52,935 59,419 Minority interest 11,187 10,758 10,758 10,758 Total equity & liabilities 118,437 119,664 124,287 131,247 Net debt (US$ m) 19,672 21,490 21,544 17,352
Rio Tinto (RIO.L) 2 11 September 2013 Focus charts
Figure 1: Rio share price v iron ore Figure 2: World steel production (Mt monthly)
5,000 200 160,000
4,500 180 140,000 4,000 160 120,000 3,500 140 100,000 3,000 120 80,000 2,500 100 60,000 2,000 80 1,500 60 40,000 1,000 40 20,000
500 20 0
Sep-07 Sep-03 Sep-04 Sep-05 Sep-06 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 0 - 24/03/2010 24/03/2011 24/03/2012 24/03/2013
Rio Plc (LHS) Iron ore (RHS) China steel prod World steel prod
Source: Thomson Reuters Source: Thomson Reuters
Figure 3: Capex forecasts $m Figure 4: Capex guidance $m Capex FY13F FY14F FY15F FY16F FY17F Iron Ore 7,984 6,164 5,621 3,915 3,263 Aluminium 2,170 2,527 1,556 1,555 1,455 Copper 2,422 1,271 1,194 1,243 1,373 Energy 798 539 491 492 492 Diamonds & Minerals 1,007 725 527 522 518 Total capex 14,380 11,226 9,389 7,727 7,102
Source: Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 5: Inventory build since 2011 (Mt) Figure 6: Ramp-up profile 290Mtpa
25,000
20,000
15,000
10,000
5,000
- Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013
Source: Company data, Credit Suisse research Source: Company presentation September 2013
Rio Tinto (RIO.L) 3 11 September 2013 Table of contents
Focus charts 3 Delivering into an unexpectedly strong market 5 360 infrastructure ahead of scheduled and mine pathway decision by year end 6 Growth capex costs to be contained… 7 …but the cost to sustain operations increasing 8 Cost control 8 Witnessing a cultural change 9 Pilbara Primer 11 Pilbara mines 12 Mine path to 290 13 Yandicoogina 15 Hope Downs 4 16 Trucking – the autonomous haulage system (AHS) 18 Rail – the unappreciated link 19 AutoHaul – trains can also be automated 21 Iron ore ports – Rio's unencumbered advantage in the Pilbara 22 Remote Operations Centre 26 Iron Ore marketing – how it works 28
Rio Tinto (RIO.L) 4 11 September 2013
Delivering into an unexpectedly strong market Coinciding with our trip to the Pilbara mine, Rio Tinto commenced the step change in shipments to 290Mtp. It is now guiding to ramp up quicker than we (or the market) had expected with a shipment rate of 270Mtpa by November 2013 and 290mt by May 2014. However Rio even seems to be moving ahead of this official ramp-up target with the company disclosing that it shipped 22.8Mt in August, even though the new Cape Lambert Port was only used for the last few days of the month. Therefore, without weather or other unplanned disruptions, it appears that Rio can easily operate well in excess of 270Mtpa and much closer to its near-term goal of 290Mtpa. We have already seen Rio ship 15Mtpa above its previous 237Mtpa name-plate capacity. With the port now fully operational, rail is the key bottleneck holding Rio back from being fully operational at 290Mtpa. The rail upgrade is scheduled to complete around Q2 2014, but we think Rio is likely to achieve this target ahead of time.
Figure 7: Key new information Information Summary Key implication Aggressive ramp up 290 Shipping from new Cape Lambert Port B has commenced and Operationally positive but likely to test strength of 60% of ramp up to be achieved in coming 3 months (270Mtpa iron ore price, especially in Q2 2014 once by Nov, 290Mtpa by May). weather has cleared. 290 fully delivered by Q2 2014 Q4 the final consists (train sets) to be delivered and by early System bottleneck transferred from rail to mines. 2014 rail duplication (Emu to Cape Lambert) to be complete, Mine development becomes the key to unlocking taking rail + port capacity to 290Mtpa+ more growth tonnes. Q3 likely to be strong qtr (to be reported 15-Oct) August shipments 22.8Mt Already shipping above 270Mtpa and upside to 2013 guidance (265Mt at 100%) and CS forecasts (267Mt 100%). 290 being delivered under budget Remaining budgeted capex for 290 is $1.8bn, with the Growth projects likely to be delivered below Nammuldi mine the majority at $1.1bn. budget guidance. 360 is on the way… Infrastructure likely to be ready ahead of expectations (50mtpa We struggle to envisage a scenario that leaves by 4Q14, 70mtpa by 1Q14 to complete 360Mtpa) infrastructure underutilised and if the market is strong Rio has the option to fast track delivery.
Source: Company data, Credit Suisse estimates Once rail upgrade is delivered the bottleneck in Rio's Pilbara production should be transferred to the mines: With the Nammuldi mine to be operational by Q3 2014, near- term shipments at 290Mtpa should be achieved by drawing down stockpiles (21mt on our estimates) and from the new Hope Downs 4 mine. Earnings upgrades on faster ramp-up Our earnings changes of 6% and 5%, respectively, for 2014E and 2015E, account for the accelerated ramp-up to 290Mtpa. Our target price and valuation remain unchanged.
Figure 8: Earnings revisions FY13F FY14F FY15F Old New Ch % Old New Ch % Old New Ch % EBITDA ($mn) 18,679 18,738 0.3% 17,182 17,840 3.8% 19,621 20,253 3.2% EBIT ($mn) 12,156 12,215 0.5% 10,596 11,253 6.2% 12,975 13,604 4.8% Underlying NPAT ($mn) 8,580 8,620 0.5% 7,568 8,025 6.0% 9,577 10,032 4.8% Reported NPAT ($mn) 6,071 6,111 0.7% 7,568 8,025 6.0% 9,577 10,032 4.8% EPS (¢) 464 467 0.5% 410 434 6.0% 518 543 4.8% Operating cashflow 14,100 14,158 0.4% 14,133 14,696 4.0% 17,099 17,557 2.7% Capex total -14,380 -14,386 0.0% -11,226 -11,265 0.3% -9,389 -9,418 0.3% FCF -280 -228 -181% 2,907 3,431 18.0% 7,710 8,139 5.6% Source: Company data, Credit Suisse estimates
Rio Tinto (RIO.L) 5 11 September 2013
Figure 9: Revised Pilbara iron ore production forecasts Figure 10: 360 development options now span the entire (half-year annualised, Mtpa) spectrum from 'do nothing' to fast tracking production
350
300
250
200
150
1H13 1H20F 1H10 2H10 1H11 2H11 1H12 2H12 2H13F 1H14F 2H14F 1H15F 2H15F 1H16F 2H16F 1H17F 2H17F 1H18F 2H18F 1H19F 2H19F 2H20F
New Old
Source: Company data, Credit Suisse estimates from 2H 2013 Source: Company presentation
Figure 11: Pilbara iron ore production forecasts (Mt) (100% level) 2013 2014 2015 2016 2017 2018 2019 2020 New 250,828 282,500 302,500 325,000 345,000 360,000 360,000 360,000 Old 248,828 275,000 295,000 315,000 335,000 355,000 360,000 360,000 Source: Credit Suisse estimates 360 infrastructure ahead of scheduled and mine pathway decision by year end 360 is on the way: infrastructure for the 360 project is likely to be ready ahead of guidance (50mtpa by Q4 2014 with first shiploader and car dumper, 70mtpa by Q1 2014). Of the total $5.9bn committed to 360 infrastructure, only $1.9bn remains to be spent ($1.5bn is related to the port). Mines pathway to be decided by year end: A decision on developing the associated mines is scheduled for end-2013, but we struggle to envisage a scenario that leaves the new infrastructure idle. We expect approval of the 21mtpa Silvergrass mine (about two years construction time and only a short distance from the existing Brockman), with productivity gains and brownfield expansions to deliver another 40-50mtpa over time. At a lower capex cost: Rio appears to be targeting an overall capex cost of $140/t (100% level), in line with what it achieved for the 290 project, but we expect this to only be confirmed once the mine pathway is decided. This level of capex intensity is well below the initial guidance of $155/tonne provided in June 2012, despite the persistently high AUD. Development options for the mines to support 360 now span the entire spectrum, with the fastest possible and highest capex route, in our view, to be at 360 in H2 2016 (developing Koodaideri and Silvergrass simultaneously). The slowest possible route we see is a ticking up from 290 to 300 over the years through process improvement – the cheapest but also lowest value-add option in our view. 360 approval no rubber stamp Rio is keen to emphasise that 360 capex mine approval is not going to be a rubber stamp by the board. The possible options all need to be first supported by the strengthened (post Mozambique coal review) Technical Group, as well as being subject to an Economic Review. While it will only be confirmed in Q4 this year, it
Rio Tinto (RIO.L) 6 11 September 2013 seems to us that the available capex on offer from group level to the iron ore division to complete 360 have been cut in line with a more austere environment, and the measures used to assess a project have been adjusted… This suggests that the payback period is being given far more priority as Rio ranks its options for 360. Not surprisingly, the new context is less overall capex spend and the company appears keen to bring forward the period in which it can afford to return cash to shareholders. Therefore, in our view, the most appropriate measure of this is the payback period, ie, how soon does each 360 option start returning cash to the group? Our analysis (previously presented in Rio Tinto: Cutting capex forecasts, increasing target price, 19 August 2013) shows that the hybrid solution of one new mining complex plus brownfield expansions is likely to deliver a relatively quick payback plus high IRR (53%) and NPV ($13.7bn) outcomes on a $90/t long-term iron ore price.
Figure 12: Our summary of 360 options Capex by PayBack Estimated Potential iron Option Comment end 2015 IRR NPV Period ore price impact 2 new mining complexes plus processing for Signficant and more Previous base Case Upto $5bn 48% $16bn 3.4 70mtpa capacity within 2-3 years. immediate Leave infrastructure underutilized and vulnerable to being accessed by peers. Peers Total Project Deferral Save $4-5bn. N/A ($16bn) N/A Minimal but unlikely also likely to step into the breach and capture value left on the table.
A signficantly slower ramp up to 360mtpa. Brownfield/debottleneck only Cost at around $25-$30/t of capacity compared Save $2-3bn. 100%+ $5.8bn 2.6 Gradual to greenfield ($130/t+).
1 new mining complex plus brownfields. Fast Hybrid Solution track initial tonnes and then carry out $3.25bn 53% $13.7bn 3.0 Moderate (CS base case) brownfields expansions over a number of years. Source: Credit Suisse estimates We therefore model the hybrid solution. This will see Silvergrass 21Mtpa greenfield mine being developed (as opposed to Koodaideri, which is larger but requires a 100km+ rail link making it far more capital intensive). To achieve the 70Mtpa required to fill 360, debottlenecking (10Mtpa) and brownfield (at least 15Mtpa) expansions are to make up the difference.
Figure 13: How to fill 360 without two greenfield mines… Mtpa Required tonnes for 360Mtpa 70 ...Silvergrass 21 ...Debottleneck from current system 10 ...Identified brownfield 15 Total expansions identified to date 46 Remainder to be filled by other brownfield expansions 24 Source: Company presentation and Credit Suisse estimates In Rio's words, it has only "scratched the surface" on the brownfield potential to bring additional tonnes to market from the existing mines. For the past 3-4 years the bottleneck and therefore all management attention has focused on maximising port and rail throughput and far less attention has been paid to testing the true output potential of the mines. We now see this as the focus of the current studies underway within the division and to be revealed (and approved) in Q4 this year as the new pathway to 360Mtpa. Growth capex costs to be contained… Capex costs are under budget, with the 290 project to be delivered at less than $140 per tonne at 100% and at a cost to Rio of $115, well below the guidance of mid $150s and mid-$130s. The re-engineering of the project to remove BS4 to save over $1bn has again been revised so that Rio's expected saving is now over $1.5bn. Further to this we see Rio spending less than the $1.8bn remaining for the 290 project.
Rio Tinto (RIO.L) 7 11 September 2013
Overall capex cost for 360 remains uncertain until the pathway is decided. The aim, in our view, is to keep capex levels at around the same level as delivered for the 290 project at $140/t at a 100% level ($115/t Rio share). With $5.9bn set aside for the infrastructure component, that leaves $3.9bn for mine development ($140/t * 70mt - $5.9bn), or about $57/t. If Rio can achieve the target 10mtpa creep at low cost, the mine development cost can go up to $65/t, in line with development cost to 290.
Figure 14: CS capex forecasts for Rio Tinto (includes growth and sustaining) Capex FY13F FY14F FY15F FY16F FY17F Iron Ore 7,984 6,164 5,621 3,915 3,263 Aluminium 2,170 2,527 1,556 1,555 1,455 Copper 2,422 1,271 1,194 1,243 1,373 Energy 798 539 491 492 492 Diamonds & Minerals 1,007 725 527 522 518 Total capex 14,380 11,226 9,389 7,727 7,102 Source: Credit Suisse estimates …but the cost to sustain operations increasing
■ Sustaining capex will be higher (CS assumes $6/t or $2.2bn per year at 360) as 50- 60Mtpa of new mine capacity will be required every five years. Rio has guided to 50- 60Mt of new mine capacity every five years to sustain its Pilbara operations. The next decision on sustaining mines is due in Q1 2014, for the approval of sustaining mines WTS(iii) and WA-Dep B, which together total 35-40Mtpa.
■ New ore bodies will not be the same quality as existing operations (the best mines are developed first) and more than 100mtpa will be mined below the water table (~30mt currently), which will require adjustment to the existing facilities and will mean higher cost mining (all else being unchanged). The share of more valuable lump tonnes is also likely to be marginally down (currently 30%). Cost control
■ Cost remains the focus, with Rio targeting $35.5/t all-in Pilbara iron ore cash costs by 2020 (from $47/t in 2012) CS sits at $39/t long term on a $90/t iron ore price and 0.85 FX rate AUD:USD). The cut from current cost levels is due to lower royalty payments (as iron ore prices come down), a weaker AUD, automated operations and scale benefits. That said, we find productivity measures from small incremental improvements across the business are impressive. The new driverless autonomous haulage system (AHS) trucks (63 by end-2014) and trains (implemented from 2015) should also play a major role, with ~30% in savings compared to manually-operated equipment.
■ The Pilbara iron ore division has focused on volume growth at the expense of cost control up until 12 months ago and a big focus on our visit was to demonstrate efforts to rein in costs. Opex unit cost (ex. freight, royalties) was $23.1 in 1H, 6% lower than the same time last year on contractor savings and other initiatives. Rio is guiding for this to fall again in 2H on a weakened AUD, a significant volume effect from the 30Mtpa ramp-up over the next few months and more productivity initiatives.
Rio Tinto (RIO.L) 8 11 September 2013
Figure 15: RIO IO cost curve, 2020 Figure 16: CS IO cost curve, 2016
Source: Company data, Credit Suisse estimates Source: Iron Ore Cost Curves - Global Update and a Closer Look at China, 21-Aug-2013 Witnessing a cultural change We saw evidence of a cultural change at Rio and the CFO's visit a few months ahead of ours seems to have made a difference. Employees are encouraged to suggest improvements and managers' KPI targets are linked to the company's operational performance. There is now a daily value-chasing meeting at the mines, weekly on a broader mine-operating level and a monthly system alignment (including infrastructure). While we had only four days of handpicked meetings, we got the sense that employees were on board with the revised philosophy (growth and cost control) and that morale was relatively high. Rio was keen to stress that there is no easily obtainable gain in the iron ore business and that future savings will come from hundreds of incremental improvements. One way to think of Rio's operation is as one exceptionally large manufacturing line, where an improvement in one bottlenecked area can speed up (increase capacity) the whole operation. The idea behind the Operations Centre in Perth is to have a centralised location to monitor and control the entire system. Some of the better examples of incremental improvements include increasing the ore tonnage per train wagon (from 105t in 2008 to 120t in 2013) and adding two wagons to the trains. From 2008, that meant 260 fewer train trips were required and rail capacity increased by more than 15mtpa (further improvement is unlikely as the weight capacity has ben reached for bridges and length at sidings). At Hope Downs 4, the usage of AHS trucks means Rio can get by with 19 trucks (from 22) on reduced cycle times.
Figure 17: Consists length and tonnes per car Figure 18: Pooled fleet payload
Source: Company data Source: Company data
Rio Tinto (RIO.L) 9 11 September 2013
At Cape Lambert, surge bins were added between the reclaimer and shiploader to reduce any impact from maintenance, delays or movements. This increased capacity by 5mtpa and raised overall capacity from 225mtpa to 230mtpa. Another improvement mentioned was reducing the cycle time on positioning wagons in the car dumper to 78 seconds (from 86 seconds), adding 3mtpa capacity to the 50mtpa spec car dumper. In terms of general maintenance, with 325 trucks, 48 2.5km-long train sets, 14 mines, 2 major ports and 100s of kilometres of conveyer belts, reducing maintenance time and costs is paramount.
Rio Tinto (RIO.L) 10 11 September 2013
Pilbara Primer
■ Iron ore mines, including Yandicoogina (largest) and Hope Downs 4 (newest)
■ The unqiue Autonomous Haulage System (AHS) driving efficiencies at site
■ The Pilbara rail system including the move to driverless trains
■ Port assets – the key to Rio's unencumbered iron ore growth
■ Remote Operations Centre – data-rich environment delivering better management
■ Iron ore marketing – how Rio takes its product to market
Figure 19: Rio Tinto's Pilbara iron ore system
Source: Company presentation
Figure 20: Rio iron ore products
Source: Company presentation
Rio Tinto (RIO.L) 11 11 September 2013
Pilbara mines Rio Tinto operates a series of 14 mines in the Pilbara region through its various operating and JV companies. By being in the controlling position for all its Pilbara assets, Rio is able to manage each individual asset as part of a larger Pilbara system.
Figure 21: Rio Tinto Pilbara iron ore mine summary Remaining 2012 2012 Reserves Reserve Water Capacity Production Processing Start ops (mt) life (yrs) Ore Type Lump % table Hammersley - Six Wholly Owned (100%) Tom Price 30.0 Concentrator 1966 67 2.2 Marra Mamba 27% Brockman 2 9.0 Dry plant 1992 67 7.5 Brockman 32% Below Brockman 4 22.0 Dry plant 2010 561 14.0 Brockman 62% Above Marandoo 15.0 Wet Plant 1994 211 14.1 Marra Mamba 40% Below Nammuldi 7.0 Wet Plant 1992 258 12.9 Marra Mamba 41% Below Western Turner Syncline 9.0 Tom Price 2010 440 48.9 48% Yandicoogina 53.7 Wet Plant 1998 499 9.3 Yandicoogina fines 0% Paraburdoo 2.4 Wet Plant 1972 12 5.0 Brockman 29% TOTAL 148.1 126.6 2,115 14 26% Hammersley - other Channar (60% Rio, 40% Sinosteel) 11.0 6.6 Paraburdoo 1990 71 6.5 Brockman 55% Both Eastern Range (54% Rio, 46% Baosteel) 10.0 9.3 Crushers then 2004 47 4.7 Brockman 37% Paraburdoo Robe River JV (Rio 53%, Mitsui 33%, Nippon 10.5%, Sumitomo 3.5%). Mesa A 25.0 None 2010 143 5.7 Pisolite 0% Mesa J 7.0 None 1992 21 3.0 Pisolite 0% Below West Angelas 29.5 On site 2002 274 9.3 Marra Mamba 55% Below TOTAL 32.7 Hope Downs (50% with Hancock Prospecting) Hope Downs 1 31.0 Crushing plant 2007 256 8 Marra Mamba 41% Below Hope Downs 4 15.0 Dry & Wet 2013 342 23 Brockman 40% Below TOTAL 15.4 Greenfield growth options Silvergrass (100% Rio) 21.0 On site 327 16 Marra Mamba 40% Below Koodaideri (100% Rio) 36.0 On site 762 21 37% Above TOTAL 333.6 190.6 Source: Company data, Credit Suisse estimates for reserve life and lump % Growth between 2005 and 2012 averaged 13.5mtpa or just under a 7% CAGR. The growth was predominantly delivered from Rio's six wholly-owned mines (Tom Price, Brockman, Marandoo, Nammuldi, Paraburdoo and Yandi) and from the Hope Downs JV, a 50% JV with Hancock Prospecting (unlisted).
Figure 22: Production growth By Mine 300
250
200
150
100
50
- FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13F Six wholly owned mines Robe River (53%) Hope Downs (50%) Channar (60%) Eastern Range (54%)
Source: Company data, Credit Suisse estimates
Rio Tinto (RIO.L) 12 11 September 2013
Mine path to 290 The bulk of the mines that support 290mtpa (WTS, B4(ii), Nammuldi BWT) are 100%- owned. However, this does not mean that Rio's equity share of tonnes will go up considerably: Its most recent mine, Hope Downs 4, was classified as sustaining (partially replacing Tom Price) but its 15mtpa are just as relevant as any growth mine in our view. We expect Rio's equity share of Pilbara tonnes to stay around the 80% level. Bringing on Hope Downs 4 now allows Rio to achieve the 290mtpa production run rate in Q2, even though it does not expect Nammuldi to be completed before Q3 2014. In addition, Rio will be drawing down stockpiles to assist with shipments, allowing for a rapid increase in the near term – the company expects to ship 270mt annualised by November (vs. 237mtpa capacity pre 290), ramping up to 290mtpa by May 2014. Inventory at the end of June was 21mtpa (the majority had already drawn down in August as Rio recovered from the unscheduled conveyer belt maintenance in July, costing ~2mt shipments). Two-thirds of the total inventory lies at mine sites and a third at port. With rail shipment to port being the only and relatively easy aspect of delivering these tonnes to market (ship loader is now commissioned), we see few obstacles in Rio fast tracking the majority of the jump to 290 over the next four months.
Figure 23: Shipments Figure 24: Mine production
Source: Company Presentation Source: Company Presentation For a while now, Rio has guided to year-end approval for the 360 pathway. Options will be taken to the board for its decision. These range from an aggressive 'two greenfield mines' upfront, followed by debottlenecking/brownfield options to incrementally expand beyond 360, to no major developments and raising production gradually as experience leads to gradual incremental increases. Rio guided to potential for 10mtpa of "system stretch" (creep) and a further 15mtpa from various mines, although it noted that these were examples only, implying more brownfield expansions were possible. Greenfield options The greenfield options Silvergrass and Koodaideri are still being worked through at the EIS level. Both mines are 100% owned by Rio, with reserve lives of more than 15 years (lowering sustaining capex requirements). Development would likely take at least two years for either and as such would not be ready in time for the completed infrastructure in early 2015.
Rio Tinto (RIO.L) 13 11 September 2013
We believe Silvergrass (21mt) is likely to be developed first as it is located only a few kilometres from Nammuldi BWT. Although Silvergrass will be mined below the water table, Nammuldi is being built with a wet plant that can be expanded. Koodaideri is a larger development (36mt+) but it will require new processing plants and a 150km+ rail link (~$5m per km on average). Although it is only 30km from Yandicoogina, the path goes through a mountain range and there is no easy path to those facilities. Capex to 360 The overall capex cost of 360 is likely to remain uncertain until the pathway is decided upon but in our view the overall aim seems to be to keep the capex cost at around the same level as delivered for the 290 project at $140 per tonne at the 100% level. This implies a total spend of $19.6bn from 220mt, some $1.4bn below the original guidance. This below-guidance number equates to the savings achieved by not using the BS4(iii) concentrator that was to cost $1.8bn, but which has been replaced by stretching existing and new mines for a total cost of only $1.3bn. Low-cost debottlenecking from 220- 237mtpa also contributed. Setting aside $5.9bn for the infrastructure component leaves $3.9bn for mine development ($140/t * 70mt - $5.9bn), or about $57/t. If Rio can achieve the target 10mtpa creep at a low cost, the mine development cost can go up to $65/t, which should be more achievable than other projects (BHP's Jimblebar is an exception, with a $340m capex spend on FX and with infrastructure specced for 55mtpa, ahead of the initial 35mtpa mine development).
Figure 25: Pilbara capex overview Capital Intensity per annual tonne Project First Capex Project name Project Owner Capacity Total ($/t) Mine Port Rail Other production US$m Mtpa Sino Iron (magnetite) CITIC 2013 28 9,000 321 Karara (magnetite) Gindalbie 2013 10 3,000 300 160 20 27 50 West Pilbara Iron Ore Project Aquila 2017 30 7,400 247 50 67 67 23 Roy Hill Hancock Prospecting 2016 55 9,500 173 Chistester 55 to 95mtpa Fortescue Metals Group 2012 40 4,100 103 48 30 25 Solomon 60mtpa Fortescue Metals Group 2013 60 5,900 98 58 20 20 Pilbara 290Mt expansion Rio Tinto 2013 60 9,800 163 60 62 23 18 Pilbara 360mt expansion Rio Tinto 2015 70 9,900 141 57 56 13 16 Inner Harbour (183-220mt) BHP Billiton 2013 37 6,540 177 98 78 Inner Harbour (220-240mt) BHP Billiton 2016 20 2,000 100 50 25 25 Average 182
Infrastructure only South West Creek NWIOA 2014 50 2,614 52 52 Oakajee OP&R 2016 45 6,000 133 79 54 CLN 150 (port & rail) Vale 2015 40 4,400 110 5,900 Completed RPG3 (112-129) BHP Billiton 2009 17 1,300 76 RPG4 (129-155) BHP Billiton 2010 26 2,146 83 RGP5 (155-183) BHP Billiton 2013 28 ?? ?? Chichester 55mtpa Fortescue Metals Group 2008 55 4,000 73 Utah Point (port) Port Hedland Port Authority 2010 17 225 13 13 Hope Downs 2 Rio Tinto 2009 8 350 44 Brockman 4 Rio Tinto 2010 22 1,521 69 MESA A Rio Tinto 2011 25 901 36 Average 56 Source: Company data, Credit Suisse estimates for capital intensity
The overall aim for Rio Tinto, in our view, appears to be to always have the industry's next best expansion option. This strategy should preserve its competitive advantage (low cost and scale) while helping to maintain its overall market share.
Rio Tinto (RIO.L) 14 11 September 2013
Yandicoogina Yandi is Rio's largest mine, producing close to 55mt in 2012 (ahead of the 52mtpa capacity guidance). The mine area consists of three pits: Junction Central, Junction South East and the new Junction South West. Junction South East is the only pit in the world that is fully autonomous, with 13 AHS trucks at Yandi (5-6 more on the way). The Hamersley Iron Yandi (HIY) product is 58.5% Fe and 9% moisture. The product is popular in the JKT countries owing to its low contaminants: 0.05% phosphor, 4.6% silica and 1.5% alumina (mostly washed out with the clay when processed through a wet plant). While there is potential for minor lump production, Rio only produces fines from the Yandi mine (lowering costs). Operations The ore is processed through two dry plants (24mtpa and 16mtpa) and a single wet plant at 12mtpa. A maze of conveyer belts (spanning 52km) connects the mines, processing plants and the load-out facility, which comprises two loops, two reclaimers, two train loaders and one stacker. Yandi has its own conveyer belt factory as individual belts need to be replaced every five years. Rail has been the key bottleneck at Yandi because of which Rio has had to slow production growth momentum. One improvement Rio provided was the increase in ore tonnes per car from 105t to 115t in 2009, and from 115t to 120t in 2012, requiring 260 fewer trains trips per year (a 15mtpa capacity increase for the 15t capacity increase). The stacker is the other key bottleneck as there is only one 9,500tph stacker servicing all three mine areas – surge bins will be added (allowing operations to continue while any part of the ore feed is temporarily down) and a new stacker is being put in place for late 2014.
Figure 26: Yandi Overview
Source: Company data, Credit Suisse estimates
Expanding from 52mtpa to 56mtpa capacity (and likely beyond) Yandi is being expanded to a nameplate capacity of 56mtpa (by Q1 2015), with a mine life to 2021. Management indicated that Yandi would likely be able to achieve 60mtpa in quick order and holds plenty of resources for further expansion (homogeneous ore body that does not require continuous reserve upgrading). The 360 development presentation also included Yandi as having potential for a 7mtpa brownfield expansion.
Rio Tinto (RIO.L) 15 11 September 2013
The committed investment for the current expansion is $1.7bn ($1.4bn remaining as at 30 June 2013) and comprises a new wet plant at Junction SE, a new dry plant at the SW Junction (both due Q1 2015) and a new stacker (due Q4 2014) for the stockpiles. While the new plants do not bring much additional capacity, they are necessary as existing mine areas are being depleted – at Junction SE Rio will go below the water table, necessitating a wet plant. At Junction SW, it will install a sizer and convey the crushed ore to the existing 24mtpa dry plant at Junction Central.
Hope Downs 4 Hope Downs 4 is the second of six Hope Downs ore bodies to be developed. It is officially labelled a sustaining mine (as Tom Price falls away) but is likely part of the ramp-up to 290mtpa until Nammuldi is ready in Q3 2014. All the six HD ore bodies are part of the 50/50 JV with Hancock, although Rio is the operator (and takes a fee for infrastructure use). Rio expects to produce 6mtpa ROM in 2013 and 16.6Mt from 2014, for a 15mtpa saleable product. The production split will average 41% lump and 59% fines (8% waste). Current reserves are for 16 years. While HD1 was Marra Mamba iron formation and is a dry mine, HD4 is Brockman Iron formation (high phosphorous) with 80% of mining below the water table. Both mines are within the group of nine mines used to create the Pilbara blend product. Given that the mined ore is mostly below the water table and will go through a wet plant, the ore goes to the stockpile with 15% moisture. This is reduced to 11% over two days in the stockpiles (11% limit for transport) and 8% on the way to the port. At the port it is blended into the final Pilbara Blend product with 5-6% moisture. Figure 27: Hope Down overview
Source: Company presentation
Capex and capacity The Hope Downs 4 mine was developed at a relatively expensive A$1.514bn (US$1.4bn, $93/t), ex. 50km rail, mining fleet (including 19 AHS enabled trucks) and accommodation (central location share with HD1). This makes it a fairly expensive mine, but processing facilities are modular and can be expanded, providing an option to bring in surrounding Hope Downs resources. Construction started in August 2011 and pre-development in August 2010, both of which give an indication of the potential lead time of new greenfield mines (we understand from Rio that both Koodaideri and Silvergrass are in pre- development phases).
Rio Tinto (RIO.L) 16 11 September 2013
The train loader facilities are oversized and could handle closer to 30mtpa, almost double the planned capacity. The current system constraint is rail; so being able to load a train quickly helps debottleneck the entire system. Hope Downs 4 will load two trains per day with a target load-out rate of 210 minutes. The key capacity constraints at the mine are the stackers and stockyard (900kt). To increase capacity beyond 15Mt by 2-3mt would just need an increase in the stacker size. An increase of 5-6Mt would require major plant modifications. Operations Hope Downs will have a total of 19 trucks, down from the original plan for 22, with savings coming as a result of AHS. The current plan is for 12 AHS trucks and 7 manned trucks, but all trucks are dual system and so can be run either as AHS or as manual. Pits are shut down during the rains but there are 6-7 weeks worth of raw ore stockpiles and all other infrastructure can keep operating. Current staffing levels are close to 1,500 but this will reduce to 670 once the mine is fully operational. The mine operates on an 8 days on/6 days off, 7 nights on/7 nights off roster. This is more generous than most of the company's other operations, but Rio believes that for example, two weeks on and one week off leads to a higher staff turnover. As noted in the cost section, staff training and a shared culture are key to Rio's productivity programme.
Figure 28: Mine overview
Remaining Lump 237 Forecast Reserves share of Capacity Capacity Processing Start ops (mt) Ore Type tonnes Hammersley - Six Wholly Owned (100%) Tom Price 30.0 0.0 Concentrator 1966 67 Marra Mamba 8.0 Brockman 2 9.0 9.0 Dry plant 1992 67 Brockman 2.9 Brockman 4 22.0 40.0 Dry plant 2010 561 Brockman 13.6 Marandoo 15.0 15.0 Wet Plant 1994 211 Marra Mamba 6.0 Nammuldi 0.0 16.0 Wet Plant 1992 258 Marra Mamba 2.9 Western Turner Syncline 0.0 20.0 Tom Price 2010 440 4.3 Yandicoogina (100%) Yandicoogina 52.0 60.0 Wet Plant 1998 499 Yandicoogina fines 0.0 Greater Paraburdoo Paraburdoo (100%) 2.4 2.4 Wet Plant 1972 12 Brockman 0.7 Channar (60%) 11.0 11.0 Paraburdoo 1990 71 Brockman 6.0 Eastern Range (54%) 10.0 10.0 Crushers then Paraburdoo 2004 47 Brockman 3.7 Robe River JV (53%) Mesa A 25.0 25.0 None 2010 143 Pisolite Mesa J 7.0 7.0 None 1992 21 Pisolite West Angelas 29.5 29.5 Dry plant 2002 274 Marra Mamba 16.2 Hope Downs (50%) Hope Downs 1 31.0 31.0 Crushing plant 2007 256 Marra Mamba 12.8 Hope Downs 4 0.0 15.0 Dry & Wet 2013 342 Brockman 6.0 Expansions mj Silvergrass 0.0 21.0 Wet Plant 327 Marra Mamba 4.8 Koodaideri 0.0 36.0 Dry Plant 762 3.2 Source: Company data
Rio Tinto (RIO.L) 17 11 September 2013
Trucking – the autonomous haulage system (AHS) The AHS system is part of Rio's Mine of the Future programme, which plans to automate a significant portion of the operations across Rio's mines (and trains by mid-2014). The trucks are driverless and function independently, although they are all monitored from the Operations Centre in Perth. The cost of a truck is $4-5m, with a ~$500k cost for enabling the AHS system. AHS trucks are in operation at West Angelas, Yandicoogina, Nammuldi and Hope Downs 4. Approximately a third of the cost base is labour and productivity from this labour will be a key focus for Rio Tinto and also Australia as a whole. Real benefits are likely to come as volumes ramp up and Rio automates much of its transport system.
Figure 29: Labour share vs. production – too soon to reduce? RIO FMG Iron Ore Division CY09 CY10 CY11 CY12 Iron ore production (mt) (100% basis) 217 239 245 253 …% growth in IO production 10% 2% 4% Iron ore employees 11,375 12,399 13,629 13,522 …% growth in IO employees 9% 10% -1% Iron ore production / employees (mt) 19.1 19.3 17.9 18.7 Source: Company data, Credit Suisse estimates By end-2013, Rio will have a total of 326 trucks, with 61 AHS-capable and 30 operating in AHS mode (9.2% of the fleet). By end-2014, the fleet is to grow to 365 trucks with 79 AHS- capable and 63 operating in AHS mode, or 17% of fleet. All new trucks bought are likely to be AHS-enabled (but not all mines lend themselves to automation, eg, small operations or mines with too much clay). Rio has in effect locked up the Komatsu production line and it is likely to be years before a competitor is able to buy AHS-capable vehicles (from Komatsu) and begin to test the system. Even if trucks were purchased elsewhere, it would likely take years to learn what Rio has achieved thus far. We see the advantages of the AHS as: (1) Capex saving, trucks required for Yandi were cut from 22 to 19 as a result of AHS (better cycle times) (2) Cost saving: Labour saving with no drivers and fewer support staff per truck. Fuel usage is also likely to be left. The net effect is 30%. (3) Up to 17% saving on maintenance (tyre life and better data generation to understand when maintenance is needed) (4) Competitive advantage to peers, with Rio the only company implementing such a system. Thus far it has had a head start on delivering enhanced consistent operational improvement.
Rio Tinto (RIO.L) 18 11 September 2013
Rail – the unappreciated link The historical but not future bottleneck By deliberate design the historical bottleneck or capacity limitation in the Rio Tinto Pilbara system is the rail network. It is therefore subject to significant expansion not only for the 290 and 360 projects, but also when these works are complete when it should be capable of carrying nearly 550Mtpa. Rail system to operate at 290tpa by Q2 2014 or earlier The rail system increase to cater for a capacity of 290mtpa is due to be completed by Q4 2013 with the commissioning of the full 42 consists – the set of locomotives and ore cars used as one unit – (+6 Robe). After this the duplication of the rail track between Emu and Cape Lambert is to be completed in early Q1 2014 and the rail system is likely to be operating at the expanded 290Mtpa rate by Q2 2014. However, as we have seen with many other parts of the Pilbara iron ore system, we believe this target can be achieved 3-4 months earlier. Growth to 360… From 173 locomotives supporting capacity of 290mtpa, with the step-up to 360 (and above) another 10 locomotives will be added (183 in total). The purchase of the new locomotives has been approved (we assume each costs around $6m). The maintenance yard is already of sufficient size to service a fleet of 200 locomotives, but it needs to be modernised, which should be done over 2014-15. While difficult to verify, we believe each locomotive costs around $6m to purchase. All of Rio's locomotives are from US company GE with model versions Dash 8 and 9. UGL is the representative rail system contractor company for GE in Australia. Upon arrival in Australia each new locomotive is subject to significant upgrades to its signalling and cooling system to be compatible with Pilbara conditions. In addition to the locomotives (3 per consist), 236 wagons are needed to haul the ore at about $170k each. This brings the total costs to around $55-60m per consist. By early 2015, when the old 32mtpa car dumper is replaced at Cape Lambert (single- to twin-car dumper), the 6 Robe consists (163 wagons) will also be replaced by the standard Pooled Fleet type to match the new dumper. …and further growth potential thereafter… The Rio Tinto Rail team appears to have a target that gives plenty of scope for more than 360mtpa (over 500mtpa but not accounting for weather or other interruptions) without any new rail and potentially without more fleet.
Figure 30: Rail system growth to 290mtpa Figure 31: Rail duplication EMU to Cape Lambert
Source: Company presentation Source: Company presentation
Rio Tinto (RIO.L) 19 11 September 2013
Rail network Rio's Pilbara rail system consists of 1,500km of rail track and network running between its 14 mines and 2 port areas. Train loco and car system Each rail consist is made up of: . Three locomotives (but not all three locomotives are needed for the whole journey providing the ability to switch out locomotives for more efficient fleet use) . 236 ore cars . a brake compressor car (an air compressor on wheels that helps slow down or stop the consist) . One train driver who is swapped out during each journey (to be partially replaced through Rio's new AHS). Each consist carries approximately 27kt of ore and is 2.27km long. The sheer weight of this ore puts significant pressure on the consist making control difficult; therefore there is a need for an expert train driver in control of each consist. In total Rio has 10,000 wagons or rail cars that carry the iron ore. Although it appears to be a very large network, Rio's Pilbara Rail operation is not a significant player on a global scale; there are numerous systems in the US and elsewhere that operate up to 1,600 locomotives. The journey from mine to port Each journey from mine to port and back is a 36-hour round trip on average, and each locomotive can do up to three trips without refuelling (each locomotive has a 20k litre fuel tank). The actual journey times vary as Rio's 14 Pilbara mines are different distances from port. The most heavy part of the haul and journey is when the consists are loaded with ore and it is an uphill journey halfway to port, this is when the three locomotives are all needed. For the rest of the largely downhill journey to port, one locomotive is dropped from the consist. Interaction with the public in general is a key risk as the rail track intersects with public roads at points along the rail line and therefore company and wider community safety is paramount. Safety is also monitored and regulated by the Australian rail safety authorities. Rio has experienced three minor derailments this year but only required a crane correction to put the train cars back on track.
Maintenance facilities in need of repair (upgrade) Rio's locomotive and car maintenance workshop facilities are by its own admission in need of an upgrade. We understand from Rio that management in the first week of September signed a contract with a Melbourne-based company to conduct this upgrade, which will involve installing an automated repair tooling and other more modern work facilities. The target for the maintenance team is to have 95%+ availability for each locomotive and no more than 12 locomotives out at one time (7% of the fleet of 173). Each ore car wagon has eight bearings and these are the key risk to a train system and require careful maintenance management. Therefore, the bearing integrity tests conducted within the maintenance workshop are critical to keeping the trains on the system and the ore delivered to port. For locomotive servicing there is a 90-minute cycle time in and out of the maintenance yard including refuelling every 36 hours (this is called trip servicing). For the actual mechanical servicing that takes place every four months, this can be done at the mines or on location elsewhere in the Pilbara rail system.
Rio Tinto (RIO.L) 20 11 September 2013
AutoHaul – trains can also be automated With the growth of iron ore production, this has put significant pressure on recruitment of the limited supply of qualified train drivers in Australia (and elsewhere). For this reason and the associated high cost of each driver, Rio has been working on an AutoHaul driverless train system as part of its $518m Mine of the Future programme. The benefits of the AutoHaul system include:
■ (Virtually) the most skilled driver on each train all of the time
■ Avoiding safety issues caused by driver fatigue or human error
■ Consists will not have to stop mid-journey for driver changeover
■ Lowers labour and other associated costs;
■ As Rio grows production from 290 to 360 and increases the number of locomotives within its system from 173 to 183, AutoHaul will avoid the cost of having to find and employ any new drivers;
■ Lowers the potential for interruptions from workforce industrial action. Stage one of AutoHaul is scheduled for completion by July 2014, which will see fully autonomous driverless heavy haul trains run from Rosella to the Ports at Cape Lambert and Dampier. The complete AutoHaul system is to be operational by Q2 2015. With the implementation of AutoHaul the company can start to progressively reduce its train driver workforce from mid-2014. Providing the programme is a complete success, Rio should be able to achieve peak driver efficiency by end-2015/2016. Wage pressure to be alleviated through AutoHaul Controlling 27,000 tonnes of iron ore on rail is not an easy task and requires expert train drivers. The current industry average appears to be that each driver's salary is around A$240k per year with another 20% additional for costs such as employee insurance, superannuation, travel and other. Fortescue Metals appears to have set the high wage benchmark in the Pilbara, but the company does not pay for flights for its drivers. Rio Tinto and BHP pay for flights for their drivers in and out of the Pilbara. Wages also vary by shift type ('three weeks on, two weeks off' is higher paid than the shorter but more common 'two weeks on, two weeks off') and also drivers (and other workers) are paid a premium if they choose to live (with their families) in the Pilbara at one of the Rio Tinto-sponsored townships (eg, Warwick). In the Pilbara, Rio employs 340-350 drivers to support the 173 locomotives it operates. They work a 12-hour shift and the train is stopped to swap the driver mid-journey. Given the average round trip from mine to port is 36 hours; the train is stopped three times to swap drivers. To ensure driver alertness, drivers must communicate with the control centre by pressing an alert button every 60 seconds.
Figure 32: Our estimate of the potential of the AutoHaul programme Stage 290 360 without 360 with Saving AutoHaul AutoHaul Drivers 173 183 85 -54% Timeline Q3 2013 2015 End 2015 Cost per driver $/yr 240 240 240 On cost 20% 20% 20% Total cost each driver $/yr 288 288 288 System total cost per year for drivers $m 49,824 52,704 24,480 28,224 Source: Credit Suisse estimates
Rio Tinto (RIO.L) 21 11 September 2013
Iron ore ports – Rio's unencumbered advantage in the Pilbara Rio Tinto has two port areas with three (now four with 290Mtpa) terminals. Of Rio's four terminals, Parker Point and East Intercourse Island are located at Dampier to the west of the township of Karratha, while at Cape Lambert they are to the east. Expansion tonnes to 290 and to 360 will all go through Cape Lambert (CLA is the old 87mtpa area, CLB the new). Port assets to 290 include: 6 car dumpers (includes 1 at CLB) 11 berths (includes 2 new at CLB) 6 ship loaders (includes 1 at CLB) For 360, the 290 wharf will be extended by 40m, adding two new berths and a shiploader. One new 53mtpa car dumper is being installed to service the new shiploader while another 53mtpa car dumper will replace the existing 40-year-old 32mtpa dumper, increasing CLA's capacity to 105mtpa+ (from the current 87mtpa). Port process overview
■ Iron ore arrives at port by rail
■ It is then unloaded by car dumpers onto a conveyor
■ The conveyor transports the ore to a stacker machine that stacks the ore on to inventory piles in the stockyards
■ When ready for shipment the ore is collected from the stockpile by a reclaimer that places the ore onto a conveyor that runs out to the port terminal
■ At the end of the conveyor a shiploader places the ore on to the ship
■ Once the ship is loaded and ready for departure it sails out of Port on a high tide Fuel shipments to support Rio's mines and rail operations are delivered through the Dampier ports, there are no fuel deliveries to Cape Lambert. Rio's ports are not able to take ValeMax size ships as they have not been designed for such capacity.
Car dumpers – the key to managing stockpiles to ensure smooth ship loading Car dumpers pick up the rail cars, rotate them and dump the containing ore onto a conveyor ready for stacking. The rail cars remain attached to the consist as rotary joiners join each wagon. A car positioner positions consists (now without locomotives) to line up each car (or pair of cars) with the car dumper, one at a time ready for dumping. The car positioner does the hardest work, as it must move the whole consist each time. Car dumpers are integral to the process and can be a true bottleneck—much time is spent perfecting the process to ensure port operations run as smoothly as possible given that car-dumping times and performance determine the stockyard levels which in turn determine how quickly the shiploader can operate. The car dumpers are a contained system to ensure minimal dust and product escape from the car-dumping process, especially relevant when dumping super-fine iron ore from the rail cars. The dust is gathered through an exhaust and fed back into the stockpiles. The new car dumpers have a removable roof that slides off for viewing inspection and easier access for maintenance. Every eight weeks the car dumper is taken down for 36 hours to replace the bin liners, rubber belts, bulldozer track and other maintenance.
Rio Tinto (RIO.L) 22 11 September 2013
Car dumpers are an integral part of the Pilbara growth project. The new car dumper 5 at CLB is a dual-car dumper enabling the higher capacity to 290Mtpa. The original car dumper 1 at CLA will be replaced for the increase to 360; it is over 40 years old and therefore in need of replacement. Replacing the original car dumper should remove many of the issues associated with using decade-old equipment. Port inventory stockpiles Stockpiles are the key to a successful ship-loading system and across the ports at the ship-loading rate of 290mtpa we believe the minimum stockpile level is approximately 4mt across the three ports. In the first week of September 2013, the Cape Lambert Port system had 1.5mt, down from 3mt at end-June, leaving at least 2.5mt at Dampier Port. The stockpiles sag when the port receives particularly heavy rainfall and the moisture content also builds within the product; the latter must be carefully managed and controlled to ensure the shipped products still meet the moisture and other product specifications. Stackers are used to stack the ore onto the stockpile and reclaimers are used to retrieve the ore ready to convey it out to the terminal and shiploader. Stackers and reclaimers do not share any rails or conveyors; so they can run simultaneously and independently. Shiploading There are two berths for each shiploader at each port terminal except at EII, which has a layby berth. Schedules are restricted because loaded ships can only sail out of port on a high tide. The key to a successful ship-loading system is to have large stockpiles to ensure there is no time lost due to insufficient product stored at port ready for loading or time lost switching between the different iron ore products. It takes five minutes for the shiploader to swing from one end to the other and if necessary two shiploaders can be positioned to load the one ship to fast-track loading. This is most commonly used if there is an approaching storm and a ship needs to be loaded and sailed out of the port before the storm arrives. CLA cannot add additional shiploaders or stackers. CLB can add another belt and replicate it again if it wanted to go above 360. A remotely-controlled system except for ship loading. All stackers, reclaimers, car dumpers, etc. are remotely controlled from the central control room. The shiploaders need a driver because all ships tend to be different and there is a risk of the shiploader and ship clashing. Different products for different ports. Rio's Pilbara blend product is shipped from Dampier port terminals as well as the new Cape Lambert Port B. The Robe Valley and Yandi Fines product is shipped from Cape Lambert Port A. The history of ports is tied up with Rio's previous M&A. The Dampier port has always been part of Rio Tinto and was first developed in the 1960s with its JV partners. The Robe River JV including the Cape Lambert port came to Rio with the acquisition of North Limited in 2002. The latter acquisition also included Iron Ore Company of Canada (IOC) assets. Until the commissioning of CLB, Cape Lambert port exclusively shipped Robe River product but with the addition of CLB, the Cape Lambert Port system owned by the Robe River JV will ship Pilbara blend ore on behalf of Rio's other mines for the first time. Expansion focused on Cape Lambert. The growth in shipping capacity is focused for Phase 1 290mtpa on Cape Lambert Port B (CLB) and then for Phase 2 to 360mtpa on a doubling of the new capacity at CLB and an increase at the existing Cape Lambert Port A (CLA). Cape Lambert A is restricted in capacity at both the stackers and reclaimers, as well as the 40-year-old car dumper that will be swapped out for a new higher-capacity car dumper.
Rio Tinto (RIO.L) 23 11 September 2013
Figure 33: Port capacity (tpa) Capacities (mtpa) Previous Pilbara Growth Phase 1 Pilbara Growth Phase 2 Status Capacity since Approved, built and in Infrastructure approved Q1 2013 ramp up and being built Dampier: Parker Point 102 102 102 Dampier: East Intercourse Island 50 50 50 Cape Lambert A (CLA) 85 85 106 Cape Lambert B (CLB) - 53 102 TOTAL SHIPPING CAPACITY 237 290 360 Source: Company data, Credit Suisse research Weather allowance in name-plate capacity. Included in the nameplate shipping capacity is the fact that on average 10 shipping days per year (nearly 3% of the year) are lost due to cyclone activity. During a cyclone it is the mooring of ships that is the first activity to be affected by high swells rather than an impact on the ports themselves. Dual port synergies. Rio has the ability to switch ships between its Dampier and Cape Lambert Port areas. In addition to this it is only an hour's drive (80km by road but closer as the crow flies) between the Dampier and Cape Lambert ports, enabling Rio to share equipment and employee teams across the operations. Sole user status means more easily controlled and expanded. One of the key factors to Rio Tinto's growth in the Pilbara is that its ports are not shared with other users and are also more easily expandable than Port Hedland, the other major port in western Australia that is shared between BHP, FMG and others. A 2-3-month lead time on shipments. The iron ore marketing team based in Singapore manages the ship queue with a lead time of approximately 2-3 months ahead of shipment when it will know the demand for each particular product and therefore the required shipments. Workforce at port: Total permanent staff numbers are 1,150 currently at 290mtpa and are likely to increase by another 300 when the expansion to 360 comes online. An additional 1,200 staff are on site as part of the temporary construction workforce for 360.
Rio Tinto (RIO.L) 24 11 September 2013
Figure 34: Staff numbers at Rio's ports are to increase by 26% Capacity Port Employees Employees per tonne of capacity
290 1150 3.97
70 300 4.29
360 1450 4.03
Change 26% 2%
Source: Company data New Cape Lambert Port B. The new 50mtpa Cape Lambert Port B facility is delivering the 290mtpa growth tonnes to market over the next four months. Progress is ahead of schedule with three ships having sailed from the new port – the fourth was in the process of loading on 4 September. With the fast load out at the port the inventories at Cape Lambert port are now 1.5mt in yard, from 3mt at end-June 2013. An aggressive ramp-up of new tonnes to market. After the slow Q2 with the conveyor belt failure that saw stocks build at port as loading was prevented, performance has bounced back with 22.8Mt loaded in August. This was one of the best months and drew down some of the inventory build that occurred when the conveyor belt failed in July.. Already well on the way to 290mtpa, and probably more. With this achievement in August, Rio Tinto Iron Ore is demonstrating it can ship at a rate of at least 276mtpa, well above the existing old capacity of 237Mt and above the previous quarterly record 252mtpa in Q3 2012. Rio is therefore well on its way to the new 290mtpa name-plate shipping capacity, which according to company guidance is only expected to be reached by Q1 2014.
Figure 35: Production has been above shipments each Figure 36: Inventory build since 2011 can be used to quarter since 2011 (bar one period Q4 2012) steadily increase shipments as new mines come into (iron ore '000t) production… ('000t) 70,000 25,000
60,000 20,000 50,000
40,000 15,000
30,000
10,000 20,000
10,000 5,000 - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Production Shipments 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research Key issues to watch for – how the below-water-table-ore flows through the port system. Now that the new shiploader rates are being achieved, the team is focused on future issues, the key being ore body changeover which we see as the major challenge in the years ahead as mining falls below the water table making ore handling more difficult. The existing port equipment must be adapted to handle the wet ore.
Rio Tinto (RIO.L) 25 11 September 2013
Remote Operations Centre Rio Tinto was the first mover in creating a Remote Operations Centre (ROC) to not only oversee but control its vast Pilbara operations, which are increasingly being automated via the "unmanning" of the various pieces of major equipment. The centre is located next to the Perth Airport, not necessarily because of ease of transport links but rather owing to the added reliability of power and communications. The whole idea of the ROC seems to be to create a data-rich environment in which Rio can control its complex Pilbara operations, the complexity of which is greater than its peers, which have either fewer mines and/or whose mines are not spread out over as wide an area as Rio's. The aim of the OC is process improvement. At this point the OC's main aim seems to be to minimise the 1% issues that can cause loss of productivity or efficiency within the whole of the Pilbara system. With the OC now set up and running, the team is aiming for continued improvement through the whole of the Pilbara system. We expect the improvement to be achieved through creep rather than sudden step change but in our view management believes it is only scratching the surface when it comes to the potential that could be achieved in the years ahead through the use of the OC. Real-time monitoring of the mine controllers and standardising processes such as mine shutdown have been reported benefits of the OC as each mine is managed from a desktop POD situated only metres from each other rather than thousands of kilometres away. Maintenance and reliability have also been a key focusof the OC leading to cost avoidance (reported at $8m achieved YTD by Sept-2013). How it works Mine PODs (for the 11 major mining operations), as well as each major piece of infrastructure (water plant, power plant, etc) are managed remotely by controllers sitting in the OC. The overall picture of the Pilbara system is presented on two scoreboards, one for the mine and port process and another for the railway system. The OC is increasingly able to control all aspects as it is now only the ship loader that is fully manned and all other major pieces of equipment are (or plan to be) remote controlled.
Figure 37: OC scoreboard: critical path – from ship queue back to mine Critical path Summary Major equipment Unmanned? Ship queue Management of customer ship queue with efficiency Ships Manned by non Rio Tinto targets and demurrage key areas. The dual-berth workers strategy means the OC can control the berthing on one ship while another is being loaded. Ship loading While 2 berths for each shiploader if necessary OC Ship-loader Manned due to need to can direct 2 shiploaders to one ship to expedite manage interaction with ship loading, especially in the case of approaching cyclones. Port Stocks Inventory management and product blending key but Stacker and Unmanned also ensuring port stocks do not fall below the critical reclaimer 4mt level. Train Dumping Dumper performance critical in whole port chain. Car dumper Unmanned Train Loading At mine site Train loader Unmanned Railed Quality Management of different iron ore products on rail and how these will be dumped at port Salable Ore Product Fe %, silica %, phosphate %, moisture % Quality SOP Stocks at mine Critical to monitor risk of full or empty Plant SOP Digger and quality product Digger and haul AutoHaul means increasingly trucks. unmanned Source: Company data and Credit Suisse research
Rio Tinto (RIO.L) 26 11 September 2013
The rail system inclusive of its separate track sections and stages is managed separately from the Critical Pathway. The main goal of the OC in relation to the rail system is track optimisation. However, rail flow has always been managed remotely so the transition to the OC would not have been particularly difficult. The key benefit has probably been its centralisation along with the mines, and port controllers only metres away have introduced the ability to align track, mine and port maintenance all at once. The electronic monitoring now installed on train locomotives also feeds back wear and tear information helping to get ahead of or prevent maintenance requirements. The centre is staffed by 200 controllers and 200 other technical staff. Only minimal staff increases (controllers) will be needed as the company grows out to 360mtpa. Most of the staff at the operations centre work three days/three nights and then have six days off, however some do work a two-day, two-night shift. Although Rio only reports a 3% staff turnover at the OC, we expect this may increase as BHP's and Fortescue's remote operations centres become operational. The obvious benefit of the OC is that critical key staff can now more easily live in Perth and not out at the remote mine sites away from family. Examples of OC benefits to date (source Rio Tinto):
■ No in-loading tonnes from the rail system were lost on the conveyor belt failure in June 2013 at Cape Lambert. This saw port stocks build up by 2mt and maintenance shutdowns brought forward.
■ When the Fortescue bridge was flooded, the OC was able to map the tonnes through the rail system and adjust the flow/pace of production at mine and port.
■ For its growth projects the OC has been used to ensure that each section of the Pilbara system is ready to run and ramp up as quickly as possible once the key bottleneck pieces within the construction phase are complete.
■ If the train driver does not stop, the emergency brakes will be applied from the OC (it was not clear if this has or has not yet been applied).
■ Increased mine production through better standardising of truck park-up practices, as well as improved mine plant performance through transfer of learnings across the room rather than across thousands of kilometres.
Figure 38: OC Integrated management of whole of Pilbara Figure 39: Data rich environment resembles an system… investment bank trading floor rather than mine site…
Source: Company presentation Source: Company presentation
Rio Tinto (RIO.L) 27 11 September 2013
Iron Ore marketing – how it works Warwick Smith MD of sales/marketing . Rio has, like most of us, been surprised at the strength of iron ore prices so far in 2013. . The marketing team is based in Singapore with offices also in Perth and Shanghai. Volatility higher now that India out of the market. With the transition to spot market since the financial crisis of 2008-09, iron ore has transitioned from being priced once on annual contracts to being one of the most volatile commodities traded today (if not the most volatile). The volatility of IO prices is now greater given that India – which used to provide a price buffer from the effects of Australia and Brazil supply seasonality in Q1/Q4 – has made an almost complete exit from the market. This has rendered prices far more sensitive to these and any other disruptions, as we have seen this year with the unseasonal heavy rain in May/June and the conveyor belt outage in late June. Iron ore lead indicators. As the second-largest producer Rio believes it has the best possible information about the iron ore market and especially the opaque Chinese side of the equation, but the key stats Rio's marketing team watches daily are the same we use. . Rebar spot price Shanghai (RMB/tonne), . Rebar forward prices (RMB/tonne), . HRC spot prices (RMB/tonne), . Chinese Crude Steel Production (mtpa rate), . Chinese Mill and Trader steel stock levels (days of consumption), . Chinese port stockpiles (mt). Mill and Trader stock levels as measured in days of consumption appear to be a more valuable lead indicator than port stocks. Figure 40: Chinese Mill and Trader Steel Stocks Figure 41: China steel prices and forwards
Source: Company presentation Source: Company presentation Chinese domestic iron ore grade remains cloudy The team also uses China imports, crude steel production and stocks at port (all seen as reliable data points) to estimate China domestic iron ore grades, as do some of the largest Chinese steel mills. In our view,
Rio Tinto (RIO.L) 28 11 September 2013 the data are less than accurate but appear to be the best everyone has to go by. Rio supplements this information with its use of survey data sourced from Chinese firms on the ground that visit iron ore mines and integrated steel operations. This means Rio keeps a sufficient distance from information that could potentially be considered commercial and/or a state secret in China (however, Rio must also ensure that the information it receives is as accurate as possible). Price-reactive nature of Chinese domestic production. The price-reactive nature of Chinese domestic production is significant and is probably being under-estimated by some market watchers. Significant cutbacks in domestic iron ore production were witnessed in China in not only 2012 when the slowdown in steel production was a rate of 70mtpa within months, but also in previous years of price declines. Of total Chinese iron ore production, Rio Tinto sees 70% of it being generated from privately-owned small mills and 30% at larger mostly SOE production often integrated with large steel mills. The latter are likely to be far more sticky and continue to produce when iron ore prices fall, whereas the small privately-owned iron ore mines opportunistically produce when it is economical. China's east coast is where it's at – Rio highlighted limitations to inland steel production in China being critical factors, such as scarce water supply. It is therefore likely that the east coast with easy access to imported iron ore may remain the key driver of Chinese steel production growth and volumes in the years ahead.
Figure 42: China private cost curve Figure 43: Forecast steel production in China
Source: Company presentation Source: Company presentation The return of India to the export market is likely to be limited Rio believes that India will return to the seaborne iron ore market but not in 2013, more likely in early 2014, and contributing around 20mtpa to global seaborne supply, mostly from Goa. This is well below the previous 100mtpa India used to contribute to the market. In the long term, Rio believes India will be a net importer of iron ore, but it is difficult to forecast when this will happen noting that India tends to be reactive rather than proactive when it comes to these big changes in industry. India's own growth in steel production is likely to be very strong (50mt within five years) but not all new mills will be supplied by domestic iron ore leading to additional seaborne iron ore demand. Troubled history with largest customer. It was evident that the marketing division, and the company itself, has been somewhat successful in restoring its relationship with China after the significant events in 2010 when four members of the marketing team found
Rio Tinto (RIO.L) 29 11 September 2013 themselves in jail in China. This signalled the low point in relations with Rio's biggest customer (and largest shareholder) and saw Rio close its China marketing offices and relocate the team to Singapore, where all the major Chinese steel mills, Japanese steel mills (which are also Rio's production JV partners) and all the global commodity trading houses (US, Swiss, Japanese) as well as the iron ore producers have a presence. It could be said that owing to this history Rio values its customer relationships, and those in China, even more highly than its peers. We believe this could therefore lead to more customer-friendly and less aggressive commercial practices than some of its peers. Rio's own electronic iron ore tendering system How it works. The company usually gets ~20 bids for each tender, which is usually open from 6pm to 1.30pm the next day. Rio restricts participation to a relatively long list of pre- approved counterparties including not only major customers but also traders. After each day Rio's marketing team provides the pricing results from its spot sales system to Platts for inclusion in index calculations. Why. Governance (noting the sales representative issues Rio Tinto has had in China) and efficiency (and we assume easier customer relationships) drove the move from face-to- face negations to Rio developing its own electronic spot price tender system. Occasionally, the company has used the public platforms but expressed a general dissatisfaction with this. Rio believes it achieves a more favourable outcome for its specifically marketed and branded tonnes using its own system. It saw the public systems and the resulting price index levels overly influenced by Indian iron ore supply, which is lower quality than its own product and used to be the only iron ore sold at spot. Four pricing methods are available to Rio customers . Spot price (buyer wins a tender) . Quarter actual index price . Monthly average index price . Quarter lagged index price
Figure 44: Pricing method split Figure 45: Pilbara blend the key product for China
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse research More tonnes to China = pricing more in line with index. With the growth in tonnes for the 290 and eventually the 360 project, Rio expects to see an increase in tonnes sold at spot (from 12% to 17%) and monthly pricing (45% to 49%) by 2014 and further in the years ahead. However, Rio's long-term Chinese customers, who account for the majority of spot sales, have a choice to change pricing formulas each financial year as they wish and we would expect them to change when pricing turns down in their favour (ie, go to quarter lagged when it suits them). This could result in Rio not achieving the best possible price outcomes in any particular year.
Rio Tinto (RIO.L) 30 11 September 2013
Although the lump premium over fines has fallen in recent years, Rio expects lump to have healthy levels of demand in the years ahead as some sinter and pellet plants may be forced to close on environmental grounds. With monthly pricing shipments sold to customers and provisionally priced at the time of transaction, at the conclusion of the month an adjustment is made by either party depending on the difference between the provisional price and the actual index price over that month. This sometimes results in Rio having to make adjustments with customers. Rio (and all iron ore suppliers) gets paid on contained Fe units, not a dollar per iron ore tonne, which is the commonly used price measure. When calculating Rio's realised price, adjustments are therefore needed for: − moisture content − actual grade versus Index specified 62% − pricing method used
Figure 46: Rio iron ore products
Source: Company data
Rio Tinto (RIO.L) 31 11 September 2013
Figure 47: Rio financial summary Market data RIO (Total) plc Ltd NPV USD $/sh A$/sh GB/sh Ticker $US RIO.L RIO.AX Total Aluminium 12,320 6.7 7.9 4.2 Share prices (local) (GB£ / A$) 31.3 62.9 Iron ore 94,397 51.1 60.0 32.5 Share price $US equivalent 51.3 49.2 58.2 Copper 24,063 13.0 15.2 8.3 plc / Ltd Premium/(discount) -16% 18% Minerals (and Diamonds) 8,072 4.4 5.1 2.8 Market cap (US$'mn) 94,763 69,382 25,381 Energy 7,832 4.2 4.5 2.7 Market cap (%) 100% 73% 27% Total operations 146,684 79.4 92.7 50.6 Market cap (local) (GB£ / A$) (million) 44,187 27,403 Net debt and other 28,050 15.2 17.9 9.7 Shares on issue (mn) 1,847 1,412 436 Net valuation 118,634 64.2 74.9 40.9 Shares (%) 100% 76% 24% Shares on issue / FX 1,847 0.93 1.57 Enterprise value (EV) ($US'mn) 122,813 F'cast-> Commodity assumptions FY12 FY13F FY14F FY15F FY16F FY17F FY18F FY19F Iron Ore - Fines CFR China (62%) 127.8 119.5 96.3 90.0 90.0 90.0 90.9 92.4 Iron Ore - Lump CFR China (64%) 135.3 128.2 104.6 98.2 98.2 98.2 99.1 100.6 Iron ore Pellets (US$/t) 182.3 166.7 140.1 130.8 130.8 130.8 131.6 133.8 Freight cost Aust-China $/t 8.8 8.1 10.0 10.0 10.0 10.0 10.0 10.0 Hard Coking Coal (US$/t) FOB Queensland 210.0 158.5 162.5 173.0 180.0 185.0 184.2 182.9 Semi soft coking coal (US$/t) FOB Queensland 178.7 130.8 138.0 147.5 153.4 157.7 156.2 153.9 Thermal coal (US$/t) FOB Newcastle 114.5 100.0 95.0 102.5 105.0 105.0 105.4 106.1 Aluminium (US$/lb) 0.92 - 0.85 - 0.84 - 0.91 - 0.95 - 1.00 - 1.01 - 1.03 - Alumina (US$/t) 319.0 337.5 350.0 360.0 400.0 400.0 404.1 410.7 Alumina (contract linkage) (US$/t) 317.7 313.0 295.7 316.0 332.0 348.0 356.7 364.2 Copper (US$/lb) 3.62 3.28 2.82 3.06 3.29 3.52 3.48 3.43 Nickel (US$/lb) 7.96 6.93 6.92 7.71 8.16 9.07 9.17 9.31 Uranium ($/lb) 48.8 42.7 53.9 65.0 70.0 65.0 65.7 66.7 Titanium slag SA to US Chlor (FOB) 86% 1,687.5 - 1,025.0 - 1,100.0 - 975.0 - 850.0 - 825.0 - 824.7 - 824.2 - Rutile bulk from Australia FOB 2,404.8 1,275.0 1,425.0 1,300.0 1,100.0 1,075.0 1,075.9 1,077.4 Titanium slag UGS (FOB) 95% 2,350.0 325.0 1,375.0 1,250.0 1,050.0 1,025.0 1,026.8 1,029.6 Zircon bulk from Australia FOB 2,172.8 1,280.0 1,600.0 1,650.0 1,650.0 1,625.0 1,624.8 1,624.6 TiO2 basket price 1,782.7 824.3 1,125.8 1,019.5 893.5 868.8 868.1 867.0 AUD:USD 1.04 - 0.97 - 0.89 - 0.86 - 0.85 - 0.85 - 0.85 - 0.85 - CAD:USD 1.00 1.00 0.97 0.95 0.95 0.95 0.94 0.93 Production schedule (attributable) FY12 FY13F FY14F FY15F FY16F FY17F FY18F FY19F Pilbara production 100% 239,381 250,828 282,500 302,500 325,000 345,000 360,000 360,000 Global iron ore production at 100% 253,452 266,732 303,500 324,500 347,000 367,000 387,000 407,000 Titanium dioxide feedstock ('000 tonnes) 1,595 1,738 1,800 1,900 1,900 1,900 1,900 1,900 Uranium ('000 lbs) 9,760 9,241 7,595 8,058 6,836 6,836 6,836 6,836 Gold - mined ('000 ozs) 296 391 846 1,008 947 803 814 1,528 Gold - refined ('000 ozs) 279 266 388 453 453 453 453 453 Molybdenum ('000 tonnes) 9 13 20 20 20 20 20 20 Salt ('000 tonnes) 6,833 6,755 7,000 7,000 7,000 7,000 7,000 7,000 Silver - mined ('000 ozs) 3,658 4,312 5,235 5,941 6,106 6,369 6,728 9,211 Nickel - mined ('000 tonnes) - - 17 20 20 20 20 20 Revenue, mt Fe - IO equivalent 467 478 505 539 558 579 599 635 Growth - IO equivalent 1% 2% 6% 7% 4% 4% 3% 6%
P&L ($US'mn) FY12 FY13F FY14F FY15F FY16F FY17F FY18F FY19F Revenue 50,967 47,746 48,056 49,593 51,643 54,055 55,714 58,927 Expenses 31,842 29,009 30,215 29,340 29,774 30,381 30,995 32,313 EBITDA 19,125 18,738 17,840 20,253 21,869 23,674 24,718 26,614 Depreciation & amortisation 4,441 6,523 6,588 6,649 6,838 6,791 6,850 6,942 EBIT 14,684 12,215 11,253 13,604 15,031 16,882 17,869 19,672 Net interest + other 2,665 1,092 750 721 636 357 10 -412 Profit before tax 12,019 11,122 10,503 12,883 14,395 16,526 17,859 20,084 Associates after tax 861 823 778 1,014 1,043 953 971 1,065 Tax -3,591 -3,360 -3,256 -3,865 -4,318 -4,958 -5,358 -6,025 OEI 14 35 ------Underlying NPAT 9,303 8,620 8,025 10,032 11,119 12,521 13,472 15,124 Net significant items (post tax) -12,293 -2,509 ------Reported NPAT -2,990 6,111 8,025 10,032 11,119 12,521 13,472 15,124 EPS - basic (underlying) (US cents) 503 467 434 543 602 678 729 819 DPS (US cents) 167 167 184 202 222 245 269 296 Payout ratio 33% 36% 42% 37% 37% 36% 37% 36% Business unit earnings (post tax pre interest) FY12 FY13F FY14F FY15F FY16F FY17F FY18F FY19F Iron Ore 9,242 8,394 6,638 6,563 7,217 7,807 8,458 9,127 Aluminium 3 -92 -68 538 745 1,531 1,749 1,896 Copper 1,092 900 1,190 1,589 1,739 1,728 1,744 2,254 Energy 283 -94 78 490 596 615 617 620 Minerals (and Diamonds) 119 387 667 1,013 862 834 837 840 Other (interest, exploration, other ops) -1,436 -875 -481 -161 -40 7 67 386 Underlying NPAT 9,303 8,620 8,025 10,032 11,119 12,521 13,472 15,124 Iron Ore 86% 88% 78% 64% 65% 62% 63% 62% Aluminium 0% -1% -1% 5% 7% 12% 13% 13% Copper 10% 9% 14% 16% 16% 14% 13% 15% Energy 3% -1% 1% 5% 5% 5% 5% 4% Minerals (and Diamonds) 1% 4% 8% 10% 8% 7% 6% 6% Underlying NPAT 100% 100% 100% 100% 100% 100% 100% 100%
Source: Company data, Credit Suisse estimates ….priced as at close 9 September 2013
Rio Tinto (RIO.L) 32 11 September 2013
Figure 48: Rio financial summary Cashflows ($US'mn) FY12 FY13F FY14F FY15F FY16F FY17F FY18F FY19F Operating cashflows 9,368 14,158 14,696 17,557 18,561 20,068 21,112 22,995 Capex - sustaining -3,000 -3,000 -3,300 -3,630 -3,775 -3,926 -4,083 -4,247 FCF- pre growth capex 6,368 11,158 11,396 13,927 14,786 16,141 17,029 18,748 Capex - growth -14,458 -11,386 -7,965 -5,788 -3,965 -3,158 -1,646 -1,449 Free cash flow after all capex -8,090 -228 3,431 8,139 10,821 12,983 15,383 17,299 Total capex spend -17,458 -14,386 -11,265 -9,418 -7,740 -7,085 -5,729 -5,696 Exploration and other -716 1,317 -400 -400 -400 -400 -600 -600 Share buy-back -1,471 ------Dividend payments -3,038 -3,434 -3,085 -3,548 -3,903 -4,293 -4,722 -5,194 Other cashflows 10,834 3,512 -0 -0 - - - 0 Net increase in cash -2,481 1,167 -54 4,191 6,519 8,290 10,061 11,504 Cash at end of period 7,222 8,416 8,362 12,554 19,072 27,362 37,423 48,928 Net debt #N/A 19,233 #N/A 21,050 #N/A 21,104 #N/A 16,912 10,394 2,104 -7,957 -19,462 Balance Sheet ($US'm) FY12 FY13F FY14F FY15F FY16F FY17F FY18F FY19F Cash 7,135 8,416 8,362 12,554 19,072 27,362 37,423 48,928 Receivables 5,341 5,812 5,812 5,812 5,812 5,812 5,812 5,812 Inventories 6,375 6,221 6,221 6,221 6,221 6,221 6,221 6,221 Plant & equipment 76,985 77,723 82,400 85,169 86,071 86,364 85,243 83,998 Deferred tax assets 3,476 2,701 2,701 2,701 2,701 2,701 2,701 2,701 Intangibles 9,654 9,227 9,227 9,227 9,227 9,227 9,227 9,227 Other assets 9,471 9,564 9,564 9,564 9,564 9,564 9,564 9,564 Assets 118,437 119,664 124,287 131,247 138,668 147,251 156,192 166,450 Payables 9,420 8,964 8,964 8,964 8,964 8,964 8,964 8,964 Provisions 17,394 14,769 14,769 14,769 14,769 14,769 14,769 14,769 Tax liabilities 823 1,834 1,517 1,993 2,197 2,553 2,743 3,072 Borrowings 26,904 29,906 29,906 29,906 29,906 29,906 29,906 29,906 Other liabilities 6,156 5,438 5,438 5,438 5,438 5,438 5,438 5,438 Liabilities 60,697 - 60,911 - 60,594 - 61,070 - 61,274 - 61,630 - 61,820 - 62,149 - Net Assets 57,740 58,753 63,693 70,177 77,393 85,621 94,371 104,301 Valuation metrics (31-DecYE) FY12 FY13F FY14F FY15F FY16F FY17F FY18F FY19F Underlying earnings (US$bn) 9,303 8,620 8,025 10,032 11,119 12,521 13,472 15,124 Diluted average shares 1,849 1,847 1,847 1,847 1,847 1,847 1,847 1,847 Underlying EPS - diluted (US cents) 503 467 434 543 602 678 729 819 Reported EPS - diluted (US cents) -162 331 434 543 602 678 729 819 EPS growth -35% -7% -7% 25% 11% 13% 8% 12% Cash EPS 78 684 791 903 972 1,045 1,100 1,194 PE - ltd (CS FX Forward Curve) 13.0x 13.0x 12.8x 10.0x 8.9x 7.9x 7.3x 6.5x Share price / cash EPS - plc 62.6x 7.2x 6.2x 5.4x 5.1x 4.7x 4.5x 4.1x Share price / cash EPS - Ltd 74.2x 8.5x 7.4x 6.4x 6.0x 5.6x 5.3x 4.9x DPS, ordinary (USD) 167.0 167.0 183.7 202.1 222.3 244.5 269.0 295.9 DPS growth 15.2% 0.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Div Yield Plc 3.4% 3.4% 3.7% 4.1% 4.5% 5.0% 5.5% 6.0% Div Yield Ltd 2.9% 2.9% 3.2% 3.5% 3.8% 4.2% 4.6% 5.1% Price / cash earnings Ltd 74.2x 8.5x 7.4x 6.4x 6.0x 5.6x 5.3x 4.9x Cash PE - ltd (CS FX Forward Curve) 83.0x 8.9x 7.1x 6.0x 5.5x 5.1x 4.9x 4.5x ROE 15.9% 14.7% 13.1% 15.0% 15.1% 15.4% 15.0% 15.2% ROIC 13.4% 10.7% 9.2% 10.9% 12.0% 13.5% 14.5% 16.2% Gearing and debt metrics FY12 FY13F FY14F FY15F FY16F FY17F FY18F FY19F Net Debt (net cash) 19,233 21,050 21,104 16,912 10,394 2,104 -7,957 -19,462 Net Debt / (Net Debt + Equity) (%) 26% 27% 25% 20% 12% 3% -9% -22% Net Debt / Equity (%) 34% 37% 34% 25% 14% 3% -8% -18% Interest cover (x) (EBIT) 91.8x 16.5x 15.0x 18.9x 23.6x 47.3x 1860.9x -47.8x Net debt / EBITDA 1.0x 1.1x 1.2x 0.8x 0.5x 0.1x -0.3x -0.7x FCF / debt -30% -1% 11% 27% 36% 43% 51% 58% Margins FY12 FY13F FY14F FY15F FY16F FY17F FY18F FY19F EBITDA margin 38% 39% 37% 41% 42% 44% 44% 45% EBIT margin 29% 26% 23% 27% 29% 31% 32% 33% NPAT margin 18% 18% 17% 20% 22% 23% 24% 26% Income tax rate 30% 30% 31% 30% 30% 30% 30% 30%
Valuation metrics FY12 FY13F FY14F FY15F FY16F FY17F FY18F FY19F PER weighted average 10.2x 11.0x 11.8x 9.4x 8.5x 7.6x 7.0x 6.3x NPAT growth (%) -151% -304% 31% 25% 11% 13% 8% 12% EV (floating) (US$mn) 114,532 116,253 116,307 112,116 105,597 97,307 87,246 75,742 NTA per share (US$) 26.0 26.8 29.5 33.0 36.9 41.4 46.1 51.5 ROTE (%) 30% 31% 28% 29% 28% 27% 25% 24% P / NTA (x) 2.2x 2.2x 2.0x 1.8x 1.6x 1.4x 1.3x 1.1x FCF/sh -sustaining CAPEX (US$) 3.45 6.04 6.17 7.54 8.00 8.74 9.22 10.15 FCF/sh - total CAPEX -4.38 -0.12 1.86 4.41 5.86 7.03 8.33 9.36 Source: Company data, Credit Suisse estimates
Rio Tinto (RIO.L) 33 11 September 2013
Companies Mentioned (Price as of 09-Sep-2013) BHP Billiton (BLT.L, 1907.0p) BHP Billiton (BHP.AX, A$35.64) Fortescue Metals Group Ltd (FMG.AX, A$4.45) Rio Tinto (RIO.AX, A$61.95, OUTPERFORM, TP A$73.0) Rio Tinto (RIO.L, 3130.5p, OUTPERFORM, TP 3900.0p)
Disclosure Appendix
Important Global Disclosures James Gurry, Michael Shillaker, Paul McTaggart and Liam Fitzpatrick each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for BHP Billiton (BLT.L)
BLT.L Closing Price Target Price Date (p) (p) Rating 20-Oct-10 2192.50 2500.00 N 07-Jan-11 2492.50 3000.00 10-Mar-11 2300.00 3150.00 11-Apr-11 2631.50 3300.00 O 02-Aug-11 2214.50 3160.00 N 04-Oct-11 1667.00 2800.00 O 13-Apr-12 1889.00 2460.00 11-Jul-12 1811.00 2100.00 N 07-Jan-13 2169.00 2400.00 03-Apr-13 1900.00 2250.00 NEUTRAL OUTPERFORM 25-Jun-13 1689.50 2100.00 17-Jul-13 1868.00 2250.00 18-Jul-13 1881.00 2100.00 30-Jul-13 1880.00 2250.00 * Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for BHP Billiton (BHP.AX)
BHP.AX Closing Price Target Price Date (A$) (A$) Rating 21-Oct-10 41.22 47.50 N 11-Jan-11 44.61 52.50 10-Mar-11 44.63 55.00 13-Apr-11 48.58 58.00 O 03-Aug-11 40.15 47.00 N 04-Oct-11 33.86 45.00 O 11-Jul-12 31.05 35.00 N 01-Nov-12 33.82 36.00 07-Jan-13 37.81 40.00 03-Apr-13 32.23 35.00 NEUTRAL OUTPERFORM 25-Jun-13 30.81 34.00 26-Aug-13 35.58 38.00 * Asterisk signifies initiation or assumption of coverage.
Rio Tinto (RIO.L) 34 11 September 2013
3-Year Price and Rating History for Fortescue Metals Group Ltd (FMG.AX)
FMG.AX Closing Price Target Price Date (A$) (A$) Rating 23-Oct-10 6.39 5.80 U 08-Jan-11 6.57 7.50 N 11-May-11 6.49 * 13-Jul-11 6.38 7.50 O 05-Oct-11 4.25 7.80 23-Nov-11 4.60 7.00 17-Jan-12 4.80 7.80 15-Feb-12 5.53 7.50 22-Mar-12 6.08 7.80
16-Jul-12 4.64 7.20 UNDERPERFORM 17-Jul-12 4.54 7.00 NEUTRAL OUTPERFORM 18-Sep-12 3.50 R REST RICT ED 17-Oct-12 4.07 4.50 O 07-Jan-13 4.89 5.50 N 24-Jan-13 4.63 5.50 O 20-Feb-13 4.92 5.50 N 07-Mar-13 4.40 6.00 O 03-Apr-13 3.67 5.00 23-Jul-13 3.62 5.50 16-Aug-13 4.03 6.00 * Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for Rio Tinto (RIO.AX)
RIO.AX Closing Price Target Price Date (A$) (A$) Rating 21-Oct-10 81.75 100.00 O 11-Jan-11 84.12 110.00 12-Apr-11 87.00 112.00 04-Oct-11 59.00 100.00 30-Nov-11 62.95 90.00 11-Jul-12 55.65 70.00 12-Oct-12 56.40 65.00 02-Dec-12 58.75 70.00 07-Jan-13 67.40 75.00 03-Apr-13 55.38 70.00 OUTPERFORM 25-Jun-13 50.24 68.00 18-Aug-13 60.08 73.00 * Asterisk signifies initiation or assumption of coverage.
Rio Tinto (RIO.L) 35 11 September 2013
3-Year Price and Rating History for Rio Tinto (RIO.L)
RIO.L Closing Price Target Price Date (p) (p) Rating 20-Oct-10 4056.00 5000.00 O 07-Jan-11 4426.50 6000.00 04-Oct-11 2712.50 5500.00 14-Oct-11 3345.50 8505.99 30-Nov-11 3339.00 5000.00 17-Jan-12 3694.00 5000.00 O 13-Apr-12 3446.00 4650.00 11-Jul-12 3033.00 3800.00 12-Oct-12 3022.00 3500.00 02-Dec-12 3093.50 3700.00 OUTPERFORM 07-Jan-13 3574.50 4000.00 03-Apr-13 3024.50 3800.00 25-Jun-13 2649.00 3600.00 18-Aug-13 3104.50 3900.00 * Asterisk signifies initiation or assumption of coverage. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Rio Tinto (RIO.L) 36 11 September 2013
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 42% (55% banking clients) Neutral/Hold* 40% (49% banking clients) Underperform/Sell* 15% (40% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Price Target: (12 months) for Rio Tinto (RIO.AX) Method: Our 12 month target price for Rio Tinto of A$73/GBP39 is set in line with our DCF (discounted cash flow) valuation. Our sum of the parts (life of mine) discounted cash flow valuation uses a weighted average cost of capital 9%, target level of gearing 25%, and incorporates our assessment of new mining taxes likely to be introduced in Australia.
Risk: Risks that could impede achievement of our target prices of A$73/GBP39 for Rio Tinto include: commodity price risk, mining production risk and project execution risk (capex costs, forex, etc). Country risk is also a factor for Rio Tinto, especially in non-OECD countries where its does business, including Mongolia and Guinea.
Price Target: (12 months) for Rio Tinto (RIO.L) Method: Our 12 month target price for Rio Tinto of A$73/GBP39 is set in line with our DCF (discounted cash flow) valuation. Our sum of the parts (life of mine) discounted cash flow valuation uses a weighted average cost of capital 9%, target level of gearing 25%, and incorporates our assessment of new mining taxes likely to be introduced in Australia.
Risk: Risks that could impede achievement of our target prices of A$73/GBP39 for Rio Tinto include: commodity price risk, mining production risk and project execution risk (capex costs, forex, etc). Country risk is also a factor for Rio Tinto, especially in non-OECD countries where its does business, including Mongolia and Guinea.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names The subject company (RIO.AX, RIO.L, BLT.L, BHP.AX, FMG.AX) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (RIO.AX, RIO.L, FMG.AX) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (RIO.L) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (RIO.AX, RIO.L) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (RIO.AX, RIO.L, FMG.AX) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (RIO.AX, RIO.L, BLT.L, BHP.AX, FMG.AX) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (RIO.L) within the past 12 months As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (RIO.AX). Credit Suisse has a material conflict of interest with the subject company (RIO.AX) . Credit Suisse is acting as advisor to Imerys on the proposed acquisition of the Luzenac Talc Group from Rio Tinto.
Rio Tinto (RIO.L) 37 11 September 2013
Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (RIO.AX, RIO.L, BLT.L, BHP.AX, FMG.AX) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (RIO.L). The following disclosed European company/ies have estimates that comply with IFRS: (RIO.AX, RIO.L, BLT.L). As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Equities (Australia) Limited ...... Paul McTaggart ; Martin Kronborg ; Justin Teo Credit Suisse Securities (Europe) Limited...... James Gurry ; Michael Shillaker ; Liam Fitzpatrick
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.
Rio Tinto (RIO.L) 38 11 September 2013
References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. CS may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. CS may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment. Additional information is, subject to duties of confidentiality, available on request. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority ("PRA") and regulated by the Financial Conduct Authority ("FCA") and the PRA. This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, having registered address at 990 Abdulrahim Place, 27 Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the PRA and regulated by the FCA and the PRA or in respect of which the protections of the PRA and FCA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2013 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.
XX5914EU.doc Rio Tinto (RIO.L) 39