THE KGB INTERROGATION: Tom Albanese, chief executive of Rio Tinto
Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz interview Rio Tinto's CEO as he launches his defence against the BHP Billiton takeover play.
Alan Kohler: Tom, do you think that on the right terms it's a good idea to put Rio Tinto and BHP together?
Tom Albanese: Alan, this is all about value, and its value for Rio Tinto shareholders. It's really about maximizing that value to Rio Tinto shareholders, and I'd say that the proposal that BHP has given us, which we rejected... it was rejected on the basis of value, because we just don't think it comes even close to what I see as being the value that Rio Tinto is now, and can and keep delivering to Rio Tinto shareholders.
AK: But do you agree with the fundamental proposition that it's a good idea to put them together?
TA: I think that ... I'm very comfortable in saying that I think BHP needs Rio Tinto more than we need BHP Billiton, and that has to be something that has to be taken into account in any value consideration. And I think if you look at the optionality of our businesses, the quality of our assets, the growth pipelines, particularly in the areas of iron ore, aluminum and copper, there's just no comparison. And what I'd say is that ... you know, I was asked the question earlier today, "Just give us a ball park of what that would be?", and I said, "Well it's not even in the same ball park - you've got to go across the road; maybe even across two roads to find the right ball park to get to that point of value to Rio Tinto shareholders."
Robert Gottliebsen: Tom, on my rough sums, you currently provide about 41% or 42% of the group earnings, and BHP 58-59%. Now, to justify a lot more of the pie, you must lift your earnings much faster than BHP over the next 3-5 years. How can you do that? Because BHP also has a wonderful pipeline.
TA: Well, I figure Bob, if you were to take the numbers that we both put out, and they're all ... you know, again we have lots of numbers that we put out in the market. Let's just say for instance, test them against a variety of ranges of consensus prices, that you will see that the numbers actually change quite a bit. But I would also emphasize that ultimately that value is not necessarily based on just this year's earnings ratios. It's got to be done on the basis of a net present value ratio.
RG: So what area are you talking about? Are you talking about iron ore, are you talking about copper? What is going to bridge this gap? Which particular minerals?
TA: Well, I think again we have to look at the relative mineral positions. We have to look at what people ... we have our own internal forecasts that we use, but we also test this against what we call 'consensus'. If you look at where some of the primary earners are in each of the respective businesses, then you sort of test that against where people think prices are going to go, and there are ... you know, for example, two of the big businesses on the BHP side, if you look at where consensus would be on prices for those. Let's just say for instance, nickel or oil or gas, they're actually looking for a significant shift in those markets from where they are today, and that certainly would have an outlook when you test against what I'd call ... say a future net income multiple. I also want to say, you've got to test it against the variety of expansion opportunities, and considerable potential in each of the businesses. I think iron ore is a great example. If you look at the ratios of who's producing what in iron ore, and who has the opportunity to produce even more in iron ore going forward, it's not even close between Rio Tinto and BHP Billiton.
RG: So you think iron ore and copper in Rio Tinto is better than the nicklel and petroleum in BHP?
TA: I also think the aluminium business is very good. You know, we have what I call are some stellar synergy numbers (with Alcan), and I think we can actually do even better on those synergy numbers as we go forward. I think that we have ... again, if you look at the forward curve on the aluminium business, it's actually gone up 20%, say in 2012 time horizon from when we announced the deal in July. If you look ... just quickly step back to iron ore again, just a quick reminder that in 1999, BHP Billiton actually produced more iron ore than Rio Tinto. Now I've heard people saying, "Well, Rio Tinto didn't see this fast enough; BHP did." Well it just so happens that we grew our iron ore business at about a 15% annualized growth rate between 1999 and 2007, where their numbers are probably closer to 6.5 - 7.0%.
Stephen Bartholomeusz: Tom, speaking of stellar synergies. If we go back to our starting point which is to talk about the appeal or otherwise of a merger with BHP - if one got the relativities right, aren't there massive synergies from the complementary nature of the asset bases, that are only available if a transaction occurs?
TA: Well I think that Stephen it's important to recognize where those synergies come from and then which shareholder gets the value from those synergies. I think ... you know, again, if you look at the first, second and third argument that BHP has pitched in terms of where synergies come from, it's the iron ore business, and whether you look at the forward growth, where you look at what we're looking at, whether you look at the infrastructure quality, vis-a-vis BHP's, whether you look at tenement positions, vis-a-vis BHP, whether you look at the fact that we're drilling 500,000 metres of drilling year on year ... ask them how much they're drilling. Our ability to make new discoveries on our ground, turn that into mineralization, turn that into resources, upgrade it to reserves, and ultimately get it on a ship, it's unsurpassed compared to BHP Billiton, and that's about relative synergies, and then the question becomes, 'How does the Rio Tinto shareholder best capture that?' This is not about industrial logic; this is all about Rio Tinto value.
SB: Yes, but if one accepts all that Tom, presumably you've got to have a conversation in which you persuade BHP that what they have come up with isn't appropriate. Why not engage and have that conversation, and see where it goes?
TA: I mean, I'd say that ... yeah, we got the proposal, we rejected it on value, and because it's not even close, we are very happy to continue to run our business again for the purpose of maximizing value to Rio Tinto shareholders.
RG: If I made it 50/50; BHP and Rio, would that be close?
TA: I wouldn't want to speculate.
RG: Would I be somewhere near it?
TA: I wouldn't want to speculate.
AK: But do you regard yourself as being in a negotiation, Tom?
TA: I see myself as running a very great business, I'm proud to be running a very great business, delivering that value to shareholders, and as long as the Board sees that what we're doing is the best delivery mode for that value to shareholders, then I'll keep doing it.
AK: But in this process that you're engaged in today, and presumably over the next few days, you're actually selling the company ... you know, selling the merits of the company, the value of it. And you're now uncovering more value with projections of increasing production, increases in synergies, and increases in asset sales, so you're not just running the company, you're actually promoting its value in relation to BHP.
TA: I guess what I would say first of all that this has not been a two week old epiphany. I think that if you look at what I've been saying, to each of you as a matter of fact, over the past six months, and also back around ... you know, discussions I've had back around with you before that point, I am a firm believer of the fact that we can be rebalancing, what I'd say is that delivery message, so that we can be more aligning our promise with our delivery. I think that it's fair to say that we've been ... we've kept our growth prospects under somewhat of a cloak of conservatism in the past. We've been delivering on the ground, but we haven't actually been talking about that in advance, and I do believe that people look at the world and ... China's and India's role in that, and we have to be more proactive, and certainly ever since May I've been doing just that, and this is just a continuation of what I've been doing which is a combination of running the business, but making sure the shareholders and potential shareholders of Rio Tinto know what we're thinking about.
AK: Can you put your hand on your heart and say that you would have put up the dividend by 30% this year and 20% next year and 20% the year after, if BHP hadn't made its proposal?
TA: Well we certainly recognize that with the strong share price move ... even the strong share price move before the past few weeks, that we had moved from one where we were returning capital quite nicely with ordinary dividends, to one where we had a fairly low dividend. So this is something that we certainly saw of value. We don't want to speculate on the "but for” case, because that's hard to do. But as you know, I certainly have consistently said that after we look at the investment in our business, the next use of our capital, next use of our balance sheet, is for the return via the ordinary dividend.
SB: Tom, you've said that you spent six months out there flogging the Rio story to us and to brokers. Which bit of it didn't they get, relative to the relative valuation of BHP?
TA: Well, I think that progressively they've been picking up on the message quite nicely. I mean, I think if you look at the fact that people generally recognize that we had a very clear, a very credible path to 320 million tonnes per year. Simandou (the West African iron ore deposit) was not just a dream or glimmer in the eye, but it was a very real project, a resolution certainly has been talked about, or Oyu Tolgoi (the Mongolian copper deposit) has been talked about, and certainly there's an opportunity to get Alcan behind us - that was important. I think those all had been progressively getting recognized. And if you remember, even before the past few weeks, we've had a nice uplift in our overall share price performance. I think it was important for us to get the Alcan deal complete, to get the uncertainly associated with whether that was going to be a successful close or not, I believe we've done just that. So, I've been actually quite pleased with our share price performance, and getting the story out. Again though, having this approach for six months is different than say having ... communicating that approach for say a few years. But I do think that we're still in a position that we are under-appreciated in the market, where I think that, if you look on an MPV basis, it may be the other way around for others.
RG: Tom, if BHP sold petroleum, would you be happier bringing the two groups together?
TA: I have my own personal views of the petroleum. I think you have to ask BHP, Marius or team, what their views of petroleum are. Just a little bit of personal flavour. Back in I guess the mid to late 80s, I spent three years with both the joint office of an oil and gas and minerals subsidiary, and we were in moderate depth water at the time in the Gulf. We thought it was deep at the time, but the pace of having to drill, the pace of having to re-invest capital in the Gulf ... let's say highly pressurized reservoirs, with fairly short reserve production ratios, means you're always ploughing money back just to keep your production on an even keel. And that's a business which has got a totally different culture to what I'd call the 'mining business', where you've got ... you know, things take longer to develop, but you have much, much longer reserve production ratios.
AK: Do you think that Rio Tinto is as valuable as BHP?
TA: Umm ... I like Rio Tinto more than I like BHP, but then I'm just biased.
AK: Thank you very much Tom.
TA: OK, thanks guys.
Tom Albanese: Alan, this is all about value, and its value for Rio Tinto shareholders. It's really about maximizing that value to Rio Tinto shareholders, and I'd say that the proposal that BHP has given us, which we rejected... it was rejected on the basis of value, because we just don't think it comes even close to what I see as being the value that Rio Tinto is now, and can and keep delivering to Rio Tinto shareholders.
AK: But do you agree with the fundamental proposition that it's a good idea to put them together?
TA: I think that ... I'm very comfortable in saying that I think BHP needs Rio Tinto more than we need BHP Billiton, and that has to be something that has to be taken into account in any value consideration. And I think if you look at the optionality of our businesses, the quality of our assets, the growth pipelines, particularly in the areas of iron ore, aluminum and copper, there's just no comparison. And what I'd say is that ... you know, I was asked the question earlier today, "Just give us a ball park of what that would be?", and I said, "Well it's not even in the same ball park - you've got to go across the road; maybe even across two roads to find the right ball park to get to that point of value to Rio Tinto shareholders."
Robert Gottliebsen: Tom, on my rough sums, you currently provide about 41% or 42% of the group earnings, and BHP 58-59%. Now, to justify a lot more of the pie, you must lift your earnings much faster than BHP over the next 3-5 years. How can you do that? Because BHP also has a wonderful pipeline.
TA: Well, I figure Bob, if you were to take the numbers that we both put out, and they're all ... you know, again we have lots of numbers that we put out in the market. Let's just say for instance, test them against a variety of ranges of consensus prices, that you will see that the numbers actually change quite a bit. But I would also emphasize that ultimately that value is not necessarily based on just this year's earnings ratios. It's got to be done on the basis of a net present value ratio.
RG: So what area are you talking about? Are you talking about iron ore, are you talking about copper? What is going to bridge this gap? Which particular minerals?
TA: Well, I think again we have to look at the relative mineral positions. We have to look at what people ... we have our own internal forecasts that we use, but we also test this against what we call 'consensus'. If you look at where some of the primary earners are in each of the respective businesses, then you sort of test that against where people think prices are going to go, and there are ... you know, for example, two of the big businesses on the BHP side, if you look at where consensus would be on prices for those. Let's just say for instance, nickel or oil or gas, they're actually looking for a significant shift in those markets from where they are today, and that certainly would have an outlook when you test against what I'd call ... say a future net income multiple. I also want to say, you've got to test it against the variety of expansion opportunities, and considerable potential in each of the businesses. I think iron ore is a great example. If you look at the ratios of who's producing what in iron ore, and who has the opportunity to produce even more in iron ore going forward, it's not even close between Rio Tinto and BHP Billiton.
RG: So you think iron ore and copper in Rio Tinto is better than the nicklel and petroleum in BHP?
TA: I also think the aluminium business is very good. You know, we have what I call are some stellar synergy numbers (with Alcan), and I think we can actually do even better on those synergy numbers as we go forward. I think that we have ... again, if you look at the forward curve on the aluminium business, it's actually gone up 20%, say in 2012 time horizon from when we announced the deal in July. If you look ... just quickly step back to iron ore again, just a quick reminder that in 1999, BHP Billiton actually produced more iron ore than Rio Tinto. Now I've heard people saying, "Well, Rio Tinto didn't see this fast enough; BHP did." Well it just so happens that we grew our iron ore business at about a 15% annualized growth rate between 1999 and 2007, where their numbers are probably closer to 6.5 - 7.0%.
Stephen Bartholomeusz: Tom, speaking of stellar synergies. If we go back to our starting point which is to talk about the appeal or otherwise of a merger with BHP - if one got the relativities right, aren't there massive synergies from the complementary nature of the asset bases, that are only available if a transaction occurs?
TA: Well I think that Stephen it's important to recognize where those synergies come from and then which shareholder gets the value from those synergies. I think ... you know, again, if you look at the first, second and third argument that BHP has pitched in terms of where synergies come from, it's the iron ore business, and whether you look at the forward growth, where you look at what we're looking at, whether you look at the infrastructure quality, vis-a-vis BHP's, whether you look at tenement positions, vis-a-vis BHP, whether you look at the fact that we're drilling 500,000 metres of drilling year on year ... ask them how much they're drilling. Our ability to make new discoveries on our ground, turn that into mineralization, turn that into resources, upgrade it to reserves, and ultimately get it on a ship, it's unsurpassed compared to BHP Billiton, and that's about relative synergies, and then the question becomes, 'How does the Rio Tinto shareholder best capture that?' This is not about industrial logic; this is all about Rio Tinto value.
SB: Yes, but if one accepts all that Tom, presumably you've got to have a conversation in which you persuade BHP that what they have come up with isn't appropriate. Why not engage and have that conversation, and see where it goes?
TA: I mean, I'd say that ... yeah, we got the proposal, we rejected it on value, and because it's not even close, we are very happy to continue to run our business again for the purpose of maximizing value to Rio Tinto shareholders.
RG: If I made it 50/50; BHP and Rio, would that be close?
TA: I wouldn't want to speculate.
RG: Would I be somewhere near it?
TA: I wouldn't want to speculate.
AK: But do you regard yourself as being in a negotiation, Tom?
TA: I see myself as running a very great business, I'm proud to be running a very great business, delivering that value to shareholders, and as long as the Board sees that what we're doing is the best delivery mode for that value to shareholders, then I'll keep doing it.
AK: But in this process that you're engaged in today, and presumably over the next few days, you're actually selling the company ... you know, selling the merits of the company, the value of it. And you're now uncovering more value with projections of increasing production, increases in synergies, and increases in asset sales, so you're not just running the company, you're actually promoting its value in relation to BHP.
TA: I guess what I would say first of all that this has not been a two week old epiphany. I think that if you look at what I've been saying, to each of you as a matter of fact, over the past six months, and also back around ... you know, discussions I've had back around with you before that point, I am a firm believer of the fact that we can be rebalancing, what I'd say is that delivery message, so that we can be more aligning our promise with our delivery. I think that it's fair to say that we've been ... we've kept our growth prospects under somewhat of a cloak of conservatism in the past. We've been delivering on the ground, but we haven't actually been talking about that in advance, and I do believe that people look at the world and ... China's and India's role in that, and we have to be more proactive, and certainly ever since May I've been doing just that, and this is just a continuation of what I've been doing which is a combination of running the business, but making sure the shareholders and potential shareholders of Rio Tinto know what we're thinking about.
AK: Can you put your hand on your heart and say that you would have put up the dividend by 30% this year and 20% next year and 20% the year after, if BHP hadn't made its proposal?
TA: Well we certainly recognize that with the strong share price move ... even the strong share price move before the past few weeks, that we had moved from one where we were returning capital quite nicely with ordinary dividends, to one where we had a fairly low dividend. So this is something that we certainly saw of value. We don't want to speculate on the "but for” case, because that's hard to do. But as you know, I certainly have consistently said that after we look at the investment in our business, the next use of our capital, next use of our balance sheet, is for the return via the ordinary dividend.
SB: Tom, you've said that you spent six months out there flogging the Rio story to us and to brokers. Which bit of it didn't they get, relative to the relative valuation of BHP?
TA: Well, I think that progressively they've been picking up on the message quite nicely. I mean, I think if you look at the fact that people generally recognize that we had a very clear, a very credible path to 320 million tonnes per year. Simandou (the West African iron ore deposit) was not just a dream or glimmer in the eye, but it was a very real project, a resolution certainly has been talked about, or Oyu Tolgoi (the Mongolian copper deposit) has been talked about, and certainly there's an opportunity to get Alcan behind us - that was important. I think those all had been progressively getting recognized. And if you remember, even before the past few weeks, we've had a nice uplift in our overall share price performance. I think it was important for us to get the Alcan deal complete, to get the uncertainly associated with whether that was going to be a successful close or not, I believe we've done just that. So, I've been actually quite pleased with our share price performance, and getting the story out. Again though, having this approach for six months is different than say having ... communicating that approach for say a few years. But I do think that we're still in a position that we are under-appreciated in the market, where I think that, if you look on an MPV basis, it may be the other way around for others.
RG: Tom, if BHP sold petroleum, would you be happier bringing the two groups together?
TA: I have my own personal views of the petroleum. I think you have to ask BHP, Marius or team, what their views of petroleum are. Just a little bit of personal flavour. Back in I guess the mid to late 80s, I spent three years with both the joint office of an oil and gas and minerals subsidiary, and we were in moderate depth water at the time in the Gulf. We thought it was deep at the time, but the pace of having to drill, the pace of having to re-invest capital in the Gulf ... let's say highly pressurized reservoirs, with fairly short reserve production ratios, means you're always ploughing money back just to keep your production on an even keel. And that's a business which has got a totally different culture to what I'd call the 'mining business', where you've got ... you know, things take longer to develop, but you have much, much longer reserve production ratios.
AK: Do you think that Rio Tinto is as valuable as BHP?
TA: Umm ... I like Rio Tinto more than I like BHP, but then I'm just biased.
AK: Thank you very much Tom.
TA: OK, thanks guys.
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