KGB Interview: Rio Tinto's Sam Walsh

Rio Tinto chief executive Sam Walsh tells Business Spectator's Alan Kohler and Robert Gottliebsen:

-- China will drive the aluminium price higher, helping to balance underperforming non-iron ore assets in the next five to 10 years

-- How he’s transformed the company's management culture

-- Why he’s keeping an eye on the books each month rather than each quarter, and is running the whole business for cash, not revenue

-- How technology and innovation, such as big data, are driving efficiencies and keeping it ahead of the competition

-- The 'mine of the future' will need less people and produce more product at lower cost

-- Rio Tinto is at the forefront of automation in mining

-- The company is working with universities and looking at advances in sectors outside mining for technology that can drive future revenue

Robert Gottliebsen: About 80 or 90 per cent of your profit comes from iron ore, but two-thirds of the book value of the assets of the company are in non-iron ore assets. They produce very little profit. Do you think there’s got to be a writedown at some point in time to bring the value of the assets into line with what the profitability is? This is the non-iron ore assets.

Sam Walsh: I understand the comment and we are a diversified company and different parts of our business get their time in the sun at different times. We are very conscious about value of the business and each year our board reviews carrying values and so on and we have taken some heavy writedowns, to pick up on your point. But we also believe, looking at our long-term projections for price, that we’ll see more balance in our portfolio going forward and the chairman alluded to that earlier this week.

RG: The asset menu’s been way out of line with the current market’s bad news in profitability; that is, in non-iron ore assets. It just doesn’t look right.

Sam Walsh: Look, there are people that say that we’re not diversified that we’re overweight in iron ore. Well, the board’s view of that is if that’s the problem, then that’s a good problem to have because we’re doing well.

RG: Yes, but the value of the assets is the problem.

SW: But in terms of carrying value, as I say, we do review those regularly. We certainly review it annually and I think we’ve been very realistic in terms of the approach that we’ve taken there.

RG: So you think there’s going to be a big rise in, say, the aluminium price to justify the current book value?

SW: Yeah. I made comments in the AGM that there’s been a lot of aluminium capacity that’s come on in the west of China as a result of their utilising coal to produce power with power assets that are stranded. There’s basically no network or grid for them to use. Over time -- I’m not saying tomorrow, but over time as China moves to a consumption-led economy, people are going to buy refrigerators and air conditioners and TVs. And guess what? They’re all going to need power.

The power will come from that aluminium, from the power that’s being used to produce aluminium. And you might think, oh, well Sam, what are you talking about? Have a look at Japan. Have a look at what its Ministry of International Trade and Industry did in the 1970s. There are no aluminium smelters in Japan. Why? Well, they’re efficient enough, but they’ve made a strategic decision that it’s better to have that power converted into use by SMEs and by the public rather than by producing metal.

RG: What’s your timeframe for this? Five years? Ten years?

SW: I suspect it will be in that timeframe. It’s not going to happen overnight. But we do have investors on our portfolio who are very optimistic about the future of aluminium and that’s why they’re on our register. Now, if you look at our aluminium business, in 2012 we made $50 million in earnings; last year we made $550m. And I know you’re going to say, well, if you look at return on equity, you’re not there. I know we’re not there, but we’re heading in the right direction. We’re improving our costs. We’re improving our efficiency. And there’ll be a bit of kick-up on the aluminium price over time too.

Alan Kohler: Perhaps I can just get you to talk a little more generally about Rio now. You haven’t been in the job that long. What was wrong with the company when you took it over?

SW: Well, there was nothing wrong with the company.  The company --

AK: Yes there was -- they sacked the CEO. There must have been something wrong with it.

SW: The company had solid foundations, good people, good assets. Yes, the company needs to be led in the right way and headed in the right direction. And certainly in mustering the support of those 66,000 workers we have been able to successfully beat our targets for cost reduction, beat our targets for reducing our evaluation and exploration expenditure, reduce our capital by 26 per cent. All of that’s actually meant that we are a much, much stronger company now than we were a year ago. Now, can you turn around a company in a year? No. But that’s actually good news because it actually means that there’s further opportunity for improvement beyond what we’ve achieved this year or this last year.

AK: Can you give us some specifics about the changes that you’ve made since taking over?

SW: Yes, and this is going to sound incredibly trite -- I’ve refocused the culture of the organisation, so people operate as business owners and you can say, well, what’s the difference between an owner and a manager? Let me assure you, there’s a big difference.

AK: No, I understand the difference. I just wondered how you how you’ve done that in a company?

SW: Well, it’s in terms of the way that we engage with people -- involve people -- in the decisions that we make, asking people directly when they bring forward a project: would you mortgage your house and put the money into this project? And if they hesitate, the project doesn’t go ahead. Spending money as if it’s your own. And you can say, well, it’s pretty trite Sam, but it actually works.

We have a business that has a long tail. It’s like your credit card. You can remember that you bought a new suit or a new dress or a computer or whatever, and you think, well, when the bill comes I’ve got to be mindful of that. What you can’t remember is if you spent $10 on this, $20 dollars on that, $50 dollars on this. When you get the darned bill at the end of the month, all of that long tail adds up to be more than the item that you were worried about.

That’s what it’s like running this business. It’s almost contrary to what business schools teach you. Business schools say, well, if you look at the big things, the little things will look after themselves. They don’t. And I needed to have 60,000 people focussing on what we’re doing. I have made some changes in the way we look at the business.

For example, we now forecast monthly. We used to forecast quarterly. I believe you need to see how the business is travelling. For the accountants of this world, it’s lovely to look backwards and it’s lovely to look for trends or what have you in what happened last month. I can’t do anything about last month -- it’s gone. It’s over. I can do something about this month and next month and the month after. So I’ve got the organisation looking forwards instead of looking back.

AK: How far forward are you forecasting?

SW: Well, clearly we have a five-year plan, and it’s broken down by years, but I’ve been focussing the business very much on the here and now because I want people to make a difference, to make the decisions and those decisions will roll forward into these later years.

RG: You’re watching your figures every month?

SW: Yes.

RG: To say costs have gone up, or something’s gone wrong, I can fix it for next month.

SW: Yes, exactly. I’ve got an example where in the very first month I discovered a building inventory for zircon and rutile and I sat down with the team and said, what are we doing here? Are we building Mount Everest or are we running a business? And they go, well, this is the plan. And I said, hang on, wait a minute -- you’ve got large stocks of zircon, what are you going to do with it? What’s going to change? So we actually slowed our zircon production. And guess what -- it’s paid off.

It was a good thing to physically do and we’ve received the benefit of it. I’m running the business for cash. Previously we were running the business for earnings. You might say that’s a bit radical, but it’s not radical. It’s how I was running iron ore and as you both pointed out, iron ore has pretty good earnings, it’s a pretty good business. But running cash means that you actually optimise the business, not only in terms of revenue and cost but also in terms of your development capital, your sustaining capital, your working capital.

AK: Is it possible to run the whole business for cash?

SW: I am doing exactly that.

AK: Do the others do that?

RG: Is BHP doing it? Is Vale doing it?

SW: I don’t know what they do. I suspect they don’t. But importantly, that’s how I’m physically running the business.

RG: So do you think there are major increased efficiencies that you can achieve in, say, coal or aluminium or the other parts of the group, other than the iron ore?

SW: There are incremental improvements you can make and we’re doing that right now. But to answer your question, I believe that technology and innovation is going to be the way that you achieve that. We are introducing automated trucks. We have the largest fleet of automated trucks. We have 53 in the Pilbara.

RG: This is in iron ore?

SW: Yeah, in iron ore. But we can migrate that to other mines.

RG: And will you?

SW: We will, yes. We’re automating our trains in the Pilbara. We have a remote operation centre -- absolutely stunning. If you’ve not seen it, you need to go and have a look at it. We’re automating our drill rigs. We’re looking at dry ore sorting; big data. Five years ago people had no idea what big data was about. Today we’re actually using it to analyse the data from our process plants all round the world. We’re comparing plant to plant, we’re comparing the same plant against what previous performance was. We’re looking for aberrations, we’re looking for issues where efficiency has dropped.

The other day we picked up that a pump had actually been switched off in Mongolia. We picked it up from the centre in Brisbane and those guys told the people in Mongolia, hey, you just lost a pump. You better go and have a look at what’s gone on. Now, you could say that’s a small issue. We improved our cash generation -- $80m last year -- through the operating of that centre.

Now we have ‘the mine of the future’ and it’s a term that we’ve used to describe all these things that will actually give the quantum leap in performance and productivity. I’m the only person in the company that doesn’t know what it means. Now, you can say, well, what do you mean Sam? You’ve just described it. I haven’t described it -- I don’t know what we’re going to be doing in the future. I do know it’ll be very different to what we’re doing now.

RG: You won’t have 60,000 people.

SW: Well, I probably won’t. I don’t know -- I may grow the business at the same time as I improve it.

RG: You might, but let’s assume that the mine of the future is not going to require anywhere near the amount of people the current mine does.

SW: It’ll certainly require less people, you’re right, but you’ve also got to recognise that young people -- and not just in Australia, all round the world -- want to live in capital cities. They don’t want to go off and live in the middle of a remote area where God has decided to put a deposit. So we’ve got to be realistic. We’ve got to recognise that the world is changing and we need to change to meet that head on.

RG: So if you could go forward five, 10 years to the mine of the future, it’s going to produce commodities or minerals at a far lower cost than the current mine.

SW: Yes, yes, yes, yes, yes, yes.

RG: And actually produce more of it as well.

SW: Yes.

RG: So, that means the prices may actually come down.

SW: Prices may come down if our competitors are able to follow us.

RG: Are they? Are they doing it?

AK:  He’s hoping they don’t.

SW: As you know, developing technology is not easy. It’s not the idea, it’s the actual implementation. And yes, we do have competitors trying to follow us. They don’t get what we’re doing; they don’t understand it. They’re not having the success that --

RG: Does BHP understand it?

SW: I don’t think they do, to be quite honest. I don’t think they do.

RG: Vale, do they understand it?

SW: Well, Vale’s got their own plans. I don’t know directly what they’re doing in terms of operation centre or automated equipment or what have you. I do know that they’ve got some very heady targets. And they’re very impressive competitors, don’t get me wrong. But the particular tack that we’re taking, it’s hard. It’s difficult.

AK: Would you say that you’re at the forefront of mine automation in the world -- and this is not just in iron ore, across all mining?

SW: Yes. Yes, I would, absolutely. We are no longer looking at the mining industry for the next steps forward. We’re looking at aerospace. We’re looking at oil and gas. We’re looking at some parts of manufacturing. We’re even looking at agriculture. You know, technology for sorting millions of items an hour. It’s going to come from agriculture, food products. It’s not going to come from mining. So we need to draw on that. We’re working with five universities round the world on different aspects of how we’ll improve the business. But as I said, I don’t want to limit the thinking there by saying this is what mine of the future means.

RG: Which universities are you working with?

SW: In Australia we’re working with University of Queensland, University of New South Wales and University of Western Australia. And we’ve got different programs operating at each.

AK: We’ll have to leave it there, Sam. Thanks very much.

RG: Thanks.

SW: No, thank you, Bob. Thanks Alan.

RG: That was fascinating, thank you.

AK: Well, it’s a good story.