Rio Tinto chief executive Sam Walsh says he is still optimistic about long-term demand for the commodities Rio sells. He even thinks the group's wounded aluminium business will one day have its "day in the sun", possibly as China's transformation into a consumer-driven economy sucks electricity away from the Chinese aluminium smelters that are keeping prices low.
Walsh also told those who attended Rio's care investor seminar in Sydney that the shorter term outlook is still one of "fragility and volatility" and it is that outlook that dictates the way Rio will be run next year.
Takeovers are off the agenda, and so are direct shareholder returns above and beyond dividends as the group focuses on boosting its profitability and cutting debt.
The mining group has the ramp-up of the huge Oyu Tolgoi copper mine in Mongolia to look forward to if it controls the politics of the project, and is restoring its Bingham Canyon copper mine in the US to full production after a mine wall slide.
Last Friday's announcement that it would favour the expansion of existing mines over the development of new ones to spend $US3 billion less than expected to expand Pilbara iron ore production from 290 million tonnes a year to 350 million tonnes a year by 2017 was instructive, however. The main game is to rein in balance sheet gearing that in the year to June 30 rose from 26 per cent to 36 per cent as Rio continued to spend on projects.
Capital expenditure that averaged $US14.5 billion for two years left net debt at about $US22 billion on June 30. Chief financial officer Chris Lynch says the aim is to get it down to the mid-teens in billions of dollars, and Rio is pulling several levers.
Capital expenditure is, for example, down from $US17.6 billion to $US14 billion this year, and will fall to $US11 billion and then $US8 billion in 2014 and 2015. Asset disposals total $US3.3 billion this year, operating costs have been shaved by $US2 billion, and exploration spending is down by $US812 million.
Rio can cut its debt quickly because it is weighted heavily to iron ore, its biggest cash and profit generator by far. Its iron ore exposure is, however, also a reason for it to to get shipshape quickly. The task will be more difficult when the iron ore price falls.
Iron ore averaged $US137 a tonne on the open market and accounted for 80 per cent of Rio's $US9.6 billion underlying profit before interest, tax, depreciation and amortisation in the June half. In the December half production will be higher, and predictions of a seasonal drop in prices in the third quarter have been confounded. With less than a month to go, the average price for the half-year is $US133 a tonne.
At these prices Rio is still making super profits out of iron ore. Its cash mining cost in the first half of this year was $US23.10 a tonne, down from $US24.50 a year earlier, and its underlying iron ore earnings of $US4.7 billion equalled 40¢ in the dollar of sales.
Rio's iron ore boss, Andrew Harding said on Tuesday that the new, cheaper iron ore expansion path in the Pilbara would cut the capital cost of expansion from the mid $US150s a tonne to between $US120 and $US130 a tonne. It is expansion that will pay for itself in a year at these prices, in other words - but these prices probably won't last.
Harding said he expected China's steel production would be 7.5 per cent higher this year at about 700 million tonnes, and would rise steadily to about 1 billion tonnes by 2020.
The expansion in iron supply that Rio and the other Pilbara producers are leading exerts downward pressure on the price, as does China's gradual shift to a consumer economy that is less steel and iron ore-intensive than the infrastructure construction cycle that has driven demand so far. Citigroup, for example, sees iron ore below $US100 a tonne by the third quarter of 2015, and at $US90 a tonne through to 2018.
Rio is lifting iron ore production to capitalise on high iron ore prices while they are available, raising additional cash by cutting costs and selling non-core assets, and using the dough it collects to strengthen its balance sheet before the Pilbara boom ends.
It's a strategy that fits these cautious times, one that is likely to continue for another year at least.