This speech was given at the Melbourne Mining Club in London, United Kingdom on July 08, 2010. For more information on Rio Tinto, please go to www.riotinto.com
Thank you for your kind introduction. It is a privilege to be addressing the Melbourne Mining Club here at Lord’s.
As an American, running a company with a strong presence in the two great cricketing nations of England and Australia, I hope you will forgive me for not daring to give you any personal insights into the complex game of cricket.
With a lexicon including terms such as ‘silly mid off’; ‘googly; ‘fine leg’; and ‘ball tampering’ – I think I’d better stick to the language of mining.
What I want to talk about this evening is a different kind of international contest, the face-off between challenge and opportunity in the global mining industry.
I will start in the present and touch on some of the topical issues of the day including the Mineral Resource Rent Tax. Then I’ll move beyond Rio Tinto’s solid Anglo Australian roots and look outwards to the wider world and the global economy; and then cover what a rapidly changing socio-economic landscape means for our industry.
Our current position
So let me start with where we are today and give you a quick update on Rio Tinto and our current position.
At the beginning of the year I said we had seen a recovery from the depth of the global financial crisis but that we could expect more volatility in the global economy. And that’s exactly what we are experiencing today.
The year started strongly but we have seen weaker markets over the past couple of months and nervousness about a possible double-dip recession in OECD countries and concerns about China.
However, for the metals imported by China, demand has kept prices well above historical averages.
While we remain cautious on the outlook, 2010 is shaping up well from Rio Tinto’s perspective. In the first quarter of this year, most of our operations continued to run flat out and we will update the market next week on our second quarter performance.
As I have said over the last few months, growth is firmly back on the agenda in 2010. And if it hadn’t been for the Resource Tax we would have had more to talk about on that front. Inevitably, some of our projects got caught up in the uncertainty. I will cover this in more detail later on.
We have a large range of options for expansion and investment, all vying for capital. These include a number of organic growth opportunities together with other opportunities.
This year we have announced new capital funding for iron ore expansion in Canada and a new nickel mine in the US. We also have attractive iron ore projects in Australia and Guinea, and copper in Mongolia. We also have scope for targeted investment in aluminium and alumina. Overall, our approval agenda is full.
In addition, we kept our exploration running through the tough times and we are well positioned now to ramp up activities.
Those options have been hard-won and that is why I’m going to make sure that Rio Tinto maintains a disciplined approach to capital spending with a rigorous process to prioritising projects.
That brings us neatly on to Australia and how we are looking at our growth options, compared to other countries following the debate around mining taxation.
As you know, the original May proposal for a Super Tax caused a furious national debate in Australia. Rio Tinto and the broader industry chose to take a robust stance in the interests of our shareholders, the Australian economy, and to maintain the investment climate in Australia.
We have been encouraged by the Government’s constructive engagement over the last couple of weeks.
Following this dialogue, last Friday the Government announced that the Super Tax proposal of May will be replaced by a Minerals Resource Rent Tax or MRRT. This is clearly an improvement on the Super Tax, through we remain somewhat cautious.
Our concerns with the original Super Tax centred on ‘retrospective application’ and implications for sovereign risk as well as the competitiveness of Australian mining. We have done the best we could to ensure these core principles were addressed in the new MRRT.
We now have further opportunity to work constructively with the Government to ensure that the tax system continues to encourage investment in Australia. But there is still much work to be done to finalise the details, and this will remain high on my personal agenda.
Some have queried why the MRRT is not comparable to the Petroleum Resource Rent Tax in place for the oil sector in Australia.
The mining and oil and gas industries have many different characteristics, including ownership and marketing arrangements that tend to de-risk oil & gas investments; cost and demand structures that favour oil and gas profitability; and the probability of lower investment hurdle rates for oil and gas.
Any taxation policy must take into account international competitiveness. Excessively high tax rates erode the incentive to invest and encourage capital flows to shift to more attractive tax jurisdictions.
In the original proposal, the Super Tax, was clearly not internationally competitive. It left the Australian mining sector by far the highest taxed mining industry in the world.
The original Super Tax proposal was even more out of step with global taxation benchmarks for the mining industry.
A KPMG study of international taxation arrangements released last month confirmed petroleum is almost always taxed at higher rates than mineral resources.
Based on international benchmarks, a headline tax rate of 40 per cent is competitive for oil in Australia, but not for the mining industry.
Compared to the Super Tax, the MRRT goes a long way towards addressing concerns about international competitiveness but it is important to note that the Government’s new proposal, as it stands, still would leave Australia at the high end of the global taxation scale for the commodities of coal and iron ore.
So, what does this mean for our capital spending in Australia? Following the announcement of the proposed Super Tax in May, every project review drastically slowed as we analysed the potential worst-case impacts.
This week, I have now asked my team to review projects against this more positive backdrop. As I’ve said, I do want to invest in Australia and recent events remove the great uncertainty which had been holding us back. And I am keen to get projects moving again.
But of course our Australian projects will always have to compete for capital with our other investment opportunities across the globe.
Before I leave this topic, I want to touch on the risk of the Australian approach being considered by other jurisdictions. I would advise policy makers to think carefully about country specific factors at play; the impact of decisions on international competitiveness; and appropriate compensation for the risks assumed.
Other considerations include the balance between the host countries’ need to attract investment capital, and the desire to share in the fruits of the investment.
Whether these tax concepts will spread elsewhere, especially in developing countries, will depend on the particular circumstances of the investment opportunity.
While it maybe appropriate in Australia it may not necessarily suit a developing country. An emerging economy might see greater advantage in levying production royalties that provide an earlier and more stable revenue stream, in contrast to a resource profits or rent tax.
Policymakers around the world can learn a lesson when considering a new tax to plug a revenue gap, or play to local politics. And that’s the importance of fully considering the broader economic consequences and continued investment impacts. Such decisions must be made taking in a wide range of views, in a spirit of consultation and engagement.
Ivory towers without windows don’t work.
I would like to close this section by dispelling the myth that resources are finite, a notion some policymakers sometimes like to promote.
Resources will only become finite if limits are placed on exploration because a country has suddenly become less attractive for investment.
This demonstrates that to hold back investment in exploration by reducing expenditure will slow a mining economy. Similarly, if the return on capital is better elsewhere there will be a relative dearth of capital to maintain growth.
Conversely, mining projects take on a longer life, and are more expandable if capital is available. Think how construction of one iron ore mine, Tom Price, and its attendant transport infrastructure, formed the basis, back in the 1960s, not only of Rio Tinto’s vast and profitable business in the Pilbara, but laid the foundations for other entrepreneurs to contribute to the local economy.
I would like to shift perspective now and concentrate on the issues facing the industry over the longer term.
Let’s start with the short term horizon. The International Monetary Fund predicts global growth of nearly 4.6 per cent this year, falling to 4.3 per cent in 2011, with Chinese GDP expected to grow at 10.5 per cent this year and 9.6 per cent in 2011. Growth at these levels would have positive implication for metals and minerals markets. As I said earlier, it is clear that economic conditions on a global scale remain volatile.
Asian countries are contending with inflationary risks arising from substantial stimulus packages that were put in place last year. In particular, China’s efforts to prevent overheating will have some negative effects on our markets.
At the same time, the recent sovereign debt crisis in Europe and its potential for contagion into financial markets around the world illustrates the imbalance and risk of ongoing disruption to global economic activity.
Looking beyond the near term to 2015, I believe two key themes will dominate the global economic environment. First, I’m sure you all know that prospects remain strong for increasing prosperity in developing countries such as China and India. This is the engine of industrialisation and urbanisation which drives robust commodity demand growth.
Second, it is clear that substantial economic imbalances do persist in both developed and developing countries and these will need to be resolved. In particular, developed countries will be under pressure to reduce public and private debt while China is expected to begin a move toward reduced dependence on exports and investment in order to fuel economic growth.
This combination of factors suggests a higher than average growth setting for our markets. But it will be characterised by elevated volatility and scope for discontinuities – making a pattern we call the ‘saw-tooth’ economy.
Our strategic focus on large, long-life, low-cost assets – those that remain profitable through all parts of the economic cycle – will serve us well in an increasingly volatile world.
Looking out even further, I believe there will be a continued shift of wealth and economic power from west to east. All this brings particular challenges and opportunities for the mining sector. Access to resources occupies an increasingly strategic position in the thinking of governments and other external stakeholders.
We must be prepared to confront issues I’ve discussed already, such as the perception that resource rents are not being properly shared. We must also consider how we will deal with developing countries’ pressure to access resources, as their economic influence grows; and the role of resource projects in countries beset by poor governance.
As an industry we must focus on the widening skills gap in our sector; and consider the complex sustainable development challenges in a global, interconnected world, demanding greater transparency and openness.
I would like to touch on the latter two points in some detail.
First, let’s talk on skills and the licence to operate
Our growth agenda presents a complex set of challenges as we expand in both our traditional and non-traditional geographies. Expansion in some traditional operations will become more difficult due to the reduced labour pool and greater competition.
One of our ongoing challenges in the industry is to attract skilled people, especially in the engineering and scientific disciplines. Our requirements exceed the number of people graduating from mining schools in OECD countries. This sector-wide problem intensifies the competition for good people.
It is also worth noting that required skills in the industry are changing, the times of simply digging up dirt are far behind us, our industry demands a broad spectrum of skills, to support the business, and ensure we are safe, responsible, ethical, and sustainable.
The direction we are taking is to expand our leadership capabilities by increasing the diversity of our workforce.
Our teams need to become more multi-ethnic and multi-cultural to reflect our customer base and the advance of our geographic footprint. Besides playing catch-up on the skills gap, this will help us develop a capacity to operate in less familiar and challenging parts of the world.
In major project countries such as Madagascar, Mongolia and Guinea we increasingly seek to hire rising local talent, expose them to our leading practices, and by doing so develop future leaders.
Rio Tinto is already a leader in sustainable development. Our strong reputation in this area gives Governments confidence that we will develop resources in a way that will benefit their economies and communities, as well as protect their environments.
Beyond the continued and sustained focus on safety leadership, our sustainable development agenda has previously focused on the immediate environment and community. We will continue the focus in these key areas with leading practices.
In terms of environment, there are three inter-related areas where we can make the biggest difference: carbon, water and biodiversity.
Our focus is in these three areas for two reasons. First, we do have a significant footprint in each of these areas. Second, these three areas are where the potential environmental impacts go beyond local stakeholders and communities, and can even have global impacts, like in the case of carbon. I believe prioritising efforts in these areas will ultimately be a strategic differentiator as we continue to grow our businesses.
Views differ across the world on climate change, although we accept the science and are concerned about the potential impacts. Climate change and carbon remain major risk discontinuities that we need to better understand and deal with.
While progress towards a global climate change agreement has been slow, we expect a gradual firming of the scientific evidence which will eventually flow through to global action by 2020. In the meantime, a fragmented world of sub-optimal carbon policies is likely, with the use of a mixture of regulation and market mechanisms.
In the absence of a global carbon solution, the principal objective of any individual country should be to reduce its global carbon emissions by encouraging conservation; and by creating a market for carbon, whilst not reducing economic growth, or exporting carbon-emitting industries to other jurisdictions. We are committed to working with host governments to develop legislation and measures to reduce carbon emissions.
But let’s remind ourselves that ultimately the policies and practices of India, China and the US will be the most important drivers of success, or failure, in this key area.
Our internal response is to continue our focus on reducing the energy intensity of our existing operations through energy efficiency and the progressive introduction of new technology. Planning of our new projects must ensure that our energy footprint is minimal from the start. These actions will increase the long term resilience of the business to uncertain energy and carbon markets.
We have a global policy on water management to make optimum use of this precious resource. For biodiversity we have the goal of achieving a net positive impact at all of our operations.
We will continue an emphasis on our established track record in building innovative and respectful relations with the communities where we operate.
The path ahead
In closing, I described early in my address the changing global economy and the challenges being thrown up. These are challenges for Australia, for Rio Tinto and the world at large.
The path ahead will be dominated by strong growth, and trends that will be hard to predict. There will be a secular rise from China, and the emerging economies, punctuated by higher volatility triggered by structural dislocations in the OECD countries. This volatility won’t be like the old business cycle, but more like what we have all experienced, over the last two years.
Increasingly, governments will be asking the questions they asked of the oil industry in the 1970s. They will want to increase their revenue share. They will want to have more control of who develops their natural resources. And this resource nationalism could, by itself, limit the supply response to stronger demand.
Australia will be no different to other countries trying to ride the tide in this uncertain world. But it has distinct advantages, through a tremendous natural resources bases and its people.
We in Rio Tinto will keep the faith in Australia. We have operated there for more than 100 years. It’s where almost half of our worldwide gross assets reside. Over the past decade, we have reinvested all of our Australian profits back into Australia.
I believe the leaders of the mining sector in the longer term will not just be those with brilliant geologists and top-class engineers, but those who understand that a diverse talent pool will be needed to navigate the issues I have described. And that relationships with all stakeholders, especially governments, are just as important as being able to find and extract minerals.
The companies that do this will turn challenges and complexity into a source of competitive advantage. And I intend to make sure Rio Tinto will be one of those companies.
Thank you for your attention and I’d be happy to take questions.