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Homework answers / question archive / CASE STUDY EXTRACT FROM THE ANNUAL REPORT 2018, RIO TINTO PLC (Mining sector) Chief Executive's Review (extracts) Around the world, geopolitical uncertainty and its economic and social implications are challenging long-held traditions
Chief Executive's Review (extracts)
Around the world, geopolitical uncertainty and its economic and social implications are
challenging long-held traditions. Our industry is also evolving, as changes in technology add to
both the opportunity and challenge before us. At Rio Tinto, our absolute focus on safety,
performance, portfolio, partners and people is why I am confident we will continue to meet
challenges, leverage opportunities - and pioneer human progress.
This year, we start by remembering Francis Lalancette, Muzi Patrick Nhlenyama and Daniel
Patterson - our colleagues who went to work but did not return home. Like all of us at Rio Tinto,
I am deeply saddened by their tragic deaths and the irreplaceable loss to their families, friends and
colleagues. We must do better on safety. Nothing is more important and I can assure you we are
fully focused on this across our entire business.
We also remember the tragedy in Brumadinho, in Brazil, in early 2019. Our thoughts remain with
the many who lost their lives or are still missing, and their families and communities. Our industry
must do better.
At Rio Tinto, we have had a global tailings standard since 2015, and three levels of governance:
asset-level, which includes reviewing facility design and operational controls; assurance of
compliance with the standard through business conformance audits and technical reviews; and a
programme of independent external audits. We continually assess ways to further strengthen these
processes - work that will receive additional focus in 2019.
2018 marked another solid year for our company: we declared $13.5 billion (US dollars) of cash
returns to shareholders - the highest in Rio Tinto history. We also delivered on a number of our
strategic priorities - strengthening our portfolio, advancing our growth options and divesting assets
for value, while maintaining balance sheet strength and building critical capabilities.
In a relatively stable pricing environment, we delivered $40.5 billion in consolidated sales revenue,
$18.1 billion of underlying EBITDA, and an EBITDA margin of 42%. This year, we made a
significant investment in capabilities and technology to unlock future productivity, which we
expect to ramp-up and deliver an incremental $0.6 billion in free cash flow in 2019. We remain on
track to deliver $1.5 billion a year in additional free cash flow from productivity improvements
Operating cash flow for the year was $11.8 billion, and we ended the year once again with a strong
balance sheet, reducing net debt by $4.1 billion and ending the year with net cash of $0.3 billion.
With expected outflows in 2019, including a $4.0 billion special dividend to our shareholders, our
net debt is expected to rise in the first half of the year. These results are in part due to our
company's solid operational performance, in particular at our copper assets, which delivered a
33% year-on-year increase in mined production. Iron ore shipments and production also rose,
while bauxite and aluminium were slightly lower. We are also making our business safer and more
efficient. In 2018, for the first time, our driverless trains - up to 2.4 kilometres in length - delivered
iron ore from our mines in the Pilbara, to our port in Cape Lambert, in Western Australia. With
the programme fully implemented by the end of 2018, we have now completed more than 1.6
million kilometres in driverless mode.
We continued to significantly reshape our portfolio in 2018, with the sale of our interests in the
Hail Creek and Kestrel coal mines and the Valeria and Winchester South coal development
projects in Australia, marking the end of our coking coal activities. We divested other assets,including our stake in the Grasberg copper mine in Indonesia and the Dunkerque aluminium
smelter in France. We also took steps to divest our interests in the Rössing Uranium business in
Namibia. We are returning $7.2 billion to shareholders from the proceeds of sales completed in
Indeed, over the past three years, we have significantly reshaped our portfolio, realising $12 billion
in sales proceeds, pre-tax. However, this has not come at the expense of growth: with a smaller
but higher-quality asset base, we grew production by just under 3% year-on-year on a copper-
equivalent basis. Many of these disposals have also changed our exposure to environmental, social
and governance risks, differentiating our portfolio from those of our industry peers.
We also invested in high-quality growth. In December 2018, we shipped our first tonnes of bauxite
from our Amrun mine in Queensland, Australia - six weeks ahead of schedule.
In November, we announced the development of the $2.6 billion Koodaideri iron ore project - our
most technologically advanced mine - in the Pilbara, Western Australia. The world-class
underground copper project at Oyu Tolgoi, in Mongolia, also progressed, including the signing of
the Power Source Framework Agreement. The detailed engineering design work and overall
construction is mostly on track, but more detailed geotechnical information and difficult ground
conditions have required a review of the mine design. This, combined with fit-out and
commissioning challenges with the main production shaft, is ultimately expected to result in a
further revised ramp-up schedule to sustainable first production (beyond the nine-month delay
indicated in October 2018). Detailed design work is underway to estimate the impact these issues
will have on cost and schedule.
Our focus on partnership continued and intensified in 2018, with the launch of a collaboration to
further develop greenhouse-gas-emissions-free aluminium smelting technology: our Elysis joint
venture with Alcoa is supported by Apple and the governments of Canada and Quebec. We also
announced that we would provide Aluminium Stewardship Initiative (ASI)-certified responsible
aluminium to Nespresso - Rio Tinto is the first company to have its metal certified by the ASI.
We continued to strengthen our partnership with China, and our Chinese customers. In June, we
ran the first of five learning programs in Perth, Australia, with China's State-Owned Assets
Supervisions and Administration Commission (SASAC), which supervises and manages state-
owned assets. In Western Australia, where automation may have a disruptive impact on ourcommunities, we launched a partnership with the government of Western Australia and South
Metropolitan TAFE (Technical and Further Education) to develop the first nationally-recognized
courses in automation. This partnership aims to train and certify people in new skills, making them
easily transferable - so that people can follow opportunity wherever they find it.
And in Canada, the home of our aluminium business, we strengthened our partnership with the
provincial government and renewed the Quebec Agreement, a framework for further investment
in our aluminium business in the province.
We know we can be part of the solution on sustainability issues, which today are becoming more
complex and intensifying the challenge before us. In 2018, we developed an integrated approach
to sustainability, linked to the United Nations' Sustainable Development Goals, which we
introduced to investors and civil society groups in the latter half of the year.
Rio Tinto has been recognized as a leader in transparent tax reporting. We were the first in the
industry to disclose our payments to governments, and we have been reporting on our taxes and
royalties paid, and our economic contribution, in increasing detail since 2010. Our 2018 Taxes
paid report, which details this contribution, will be published in April 2019. Also, in 2019, we
released our first report in line with the recommendations of the Task Force on Climate-related
Financial Disclosures. This articulates our climate-related risks and opportunities, including those
related to a 2°C climate change scenario.
As I travelled around the world this year, visiting our assets and offices, what energised me most
was our people, their ideas, their enthusiasm for our business and the commitment they have to
making Rio Tinto a safer, more productive and more responsible company. Our success this year
is due to their hard work and dedication, and I thank them for all they do, every day - at every
asset, and in every office.
In 2018, we focused on building our technical and leadership capabilities to equip our people and
our company for continued success. A new program - RioExcel - lets technical specialists build a
career as experts in their respective fields, from geology to process engineering to asset
management. We also established three centers of excellence - underground mining, surface
mining and processing - that bring together the company's foremost technical experts to partner
with our assets, mitigate risk and deliver value.Our aspiration is to continue to pioneer our industry, with a culture that welcomes and nurtures
new ideas and higher performance. Cultures that do this are also, by definition, inclusive and
diverse. We are working to bring more women into our business. In 2018, 36% of our graduate
intake were women; we aim to make this 50%. We also have a target to improve the proportion of
women in senior management by 2% every year.
A look ahead
As we look to the future, we see markets remaining volatile, with some risk of a trade war and a
deceleration in economic activity. At Rio Tinto, we will continue our strong focus on value over
volume, growth and mine-to-market productivity. Partnership and sustainability must remain
important priorities. We will continue to make every effort to keep our people safe, healthy, and
equipped to meet the challenges of the coming years. With a world-class portfolio, a strong balance
sheet and people who I am convinced are some of the best in the business, we are well positioned
to withstand these challenges - and to create new opportunities. We will continue to drive
productivity and aim to deliver superior value as we produce the materials essential to human
27 February 2019
Complete Annual Report 2018 for Rio Tinto PLC available at: www.riotinto.com
1. The amount of capacity an organization will have depends on its view of current and future
demand. It is when its view of future demand is different from current demand that this
issue becomes important. What are the implications of this statement for managing supply
in the case study organization? [25 marks]
2. Analyze the importance of planning and control with regard to the case study organization
in view of the observation that the degree of uncertainty in demand affects the balance
between planning and control. The greater the uncertainty the more difficult it is to plan,
and so greater emphasis must be placed on control. [25 marks]
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