Rio upbeat on outlook after cost-cutting puts giant 'back on track'

Rio Tinto chief executive Sam Walsh confirmed the resources company will be well placed to deliver strong returns to shareholders in the coming years after exceeding its cost cutting targets and confirming capital investment will nearly halve in two years to about $US8 billion.

Speaking at Rio’s investor seminar on Tuesday in Sydney, Mr Walsh said management was “getting the business on track” by cutting debt, lowering operating costs, selling non-core assets and slashing future capital expenditure. He also ruled out acquisitions in the near term.

“I am committed to delivering shareholder value and clearly if you do the numbers, it indicates that we will be in a good position to make shareholder returns,” he said.

“Exactly how that pans is a board decision rather than management decision.”

Rio’s capital expenditure was forecast to drop 20 per cent on the prior year’s spend to $US14 billion in 2013. It is predicted to fall to $US11 billion in 2014 and further still to about $US8 billion in 2015.

The second largest resources company in the world confirmed it had improved operating cash costs by $US1.8 billion in the 10 months to October and remains on track to deliver the $US2 billion target this calendar year.

Rio’s exploration and evaluation investment budget had been cut by $US800 million in the 10 months this year, which exceeds its target of $US750 million.

Mr Walsh labelled the group’s net debt position, which was $US22.1 billion at June 30, 2013, as “a bit heavy” and would seek to cut that figure to the “mid-teens” in the “next few years”.

It is all part of Rio’s efforts to regain shareholder confidence after surprising the market with a $US14 billion write-down associated with its aluminium and coal acquisitions in January this year, Mr Walsh said. “Quite frankly, we lost our way in relation to shareholder value. We made a couple of bad transactions... I have to regain shareholder confidence, I have got to deliver results.’’

Citi analyst Clarke Wilkins said the seminar showed a continued return to “Old Rio” with a focus on delivering projects, increasing productivity, reducing capital expenditure and cutting debt to sustainable levels to allow increased returns to shareholders.

Rio shares closed half a per cent down or 36¢ to $65.49 a share on Tuesday while the broader market also finished in the red.

Cutting debt and a tight capital expenditure strategy comes amid an uncertain outlook for major world economies.

“We continue to see market fragility and volatility,’’ Mr Walsh in a separate statement on Tuesday. ‘‘The impacts of decisions like quantitative easing and austerity programs are still washing through markets around the world. But it is a mixed story because, despite this uncertainty, we are also seeing modest economic recovery.

“In China, the decisions from the government’s Third Plenary Session last month reflect an ambitious yet pragmatic approach to continued reform and confirmed our expectation of gradual change which reduces the likelihood of a sudden downturn.”

Rio also announced its “four and two” strategy regarding its copper portfolio. The company said the copper industry fundamentals are strong, notwithstanding some “short-term volatility”.

Following the sale of a number of copper assets in 2013 including Northparkes, Rio said it was working towards developing a tier one copper portfolio that included four long life mines. Kennecott Utah Copper and its stakes in Escondida, and separately, Oyu Tolgoi and Grasberg form the entire portfolio. The company would also take a “phased approach” to two greenfield projects - La Granja and Resolution Copper.

Rio Tinto’s chief executive of copper Jean-Sebastien Jacques said the priority would be on lowering the portfolio’s costs to a top quartile level through cost reductions and technology and productivity improvements.

Mr Jacques said Rio’s ongoing negotiation with the Mongolian government over permit approvals, financing and feasibility to develop the massive underground portion of the mine had “positive momentum”.

“This is not a walk in the park, there are serious issues being discussed but the momentum is positive. We are confident we will get to the right outcome in the end,” he said. Rio last week announced its strategy to reach an annual run rate of 360 million tonnes possibly beyond 2017. Mine production is expected to hit more than 330 million tonnes in 2015 as a result of brownfield developments.