Rio ‘well placed’ after cost cuts

Rio Tinto chief executive Sam Walsh has confirmed the group will be well placed to deliver strong returns to shareholders in coming years after exceeding its cost-cutting targets.

Capital investment will nearly halve in two years to about $US8 billion ($8.76 billion).

Speaking at Rio’s investor seminar on Tuesday in Sydney, Mr Walsh said the 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 is forecast to drop 20 per cent from the previous year’s levels to $US14 billion this year. It is expected to fall to $US11 billion next year, and further still to approximately $US8 billion in 2015.

The company said it had improved operating cash costs by $US1.8 billion in the 10 months to October and remained 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 said the group’s net debt position, at $US22.1 billion on June 30, was “a bit heavy” and the company 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, he said.

“Quite frankly, we lost our way in relation to shareholder value,’’ he said. ‘‘We made a couple of bad transactions ... I have to regain shareholder confidence, I have got to deliver results.

“The proof is in the pudding but I am putting the building blocks in place to deliver those results and those earnings. I am going back to things we do well, investment decisions, and the investment committee and the way we allocate capital.”

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’s shares closed 0.5 per cent down, or 36¢, at $65.49. The broader market also ended lower.

The plans to cut debt and tighten spending come amid an uncertain outlook for major world economies. “We continue to see market fragility and volatility,’’ Mr Walsh said. ‘‘The impacts of decisions like quantitative easing and austerity programmes 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.’’