Rio Tinto Group
Q4 2012 Earnings Call Transcript

Published: 15 Feb 2013

[Jan du Plessis:]

Good morning everyone here in London and welcome to those participating via the webcast. Our Chief Executive Sam Walsh is with me here in London and Guy Elliott is presenting from Melbourne. Rio Tinto’s businesses performed well in 2012, generating strong underlying earnings and operating cash flows. However, as foreshadowed a few weeks ago, we also recorded impairments of $14.4 billion, which resulted in the group reporting a net loss in 2012 of $3 billion. These write downs are deeply disappointing. In particular, the substantial impairment of our Mozambique coal business is unacceptable. There clearly is a need for greater discipline – in particular in the way we allocate and manage capital at Rio Tinto. I believe Sam is ideally placed to cast a fresh eye over how we address The challenges and opportunities in the business. He is a highly experienced and capable executive who has already made a significant contribution to Rio Tinto – not only as an executive but as a director of the company. Sam and I – and indeed the whole board are completely aligned on the need to pursue greater value for our shareholders, and we will be working together to achieve this. I can assure you that Sam has hit the ground running, and is already making a tangible difference to the organization. Looking forward, I am optimistic about the outlook for Rio Tinto. We have great assets, attractive near term growth and a positive long term outlook. This gives us confidence in the sustainable cash generating abilities of our business. That is why we have today increased our annual dividend by 15% to $0.0167 per share. That's all from me. Thank you very much, and with that I hand you over to Sam. Sam? Sam Walsh Thank you Jan, and you too for the trust you and the board have placed in me, to lead this company in its pursuit of greater value for our shareholders. It's a trust I feel deeply, which makes me even more conscious with the responsibility that I have taken on. I am setting a clear course, clear objectives and I am determined to deliver them. Let me first recognize my predecessor Tom Albanese, particularly for the support that he had shown me in my new role as Chief Executive. This is a great company. It's got great assets, and I inherit a great team. People that I know well from my 21 years with the company. I am confident in our core strengths and in my ability to lead the team. I am proud of my record, and the success of our iron ore operations. But this is a new challenge. And for those of you who haven’t met me, let me tell you a bit more about me the sort of person I am and how I see my role as Chief Executive. I joined Rio Tinto in 1991, after 20 years in the car industry. I have spent the past eight years as chief executive of iron ore and I have worked in two other product groups, including heading the aluminum division. I am deeply familiar with this company, its strengths and its challenges and its people. And I am committed to making a real difference – building on Rio Tinto’s strong foundations to put it firmly on the path for sustainable, long term success. I personally place the highest importance on integrity, accountability, respect and teamwork. These are values that play a big role in the way I do business, and what I expect from my team. Today, I have strengthened my team, with the appointment of Andrew Harding to run the Iron Ore business, and Jean-Sebastien Jacques who will succeed Andrew as head of the Copper group. Andrew has spent the last three years doing an excellent job running the Copper group. He is now returning to iron ore, where he spent six years earlier in his career, and is very well qualified to take this product group to the next stage of its growth. Jean-Sebastien has made a big impact running Copper’s international operations over the past year, and comes with a strong track record in the both the steel and aluminum industries. Let me be absolutely clear – I will drive an unrelenting focus on pursuing greater value for you, our shareholders. I am asking every employee to run the business as if they owned it and I am determined to make this a more valuable company. Now, let’s move on to one of my overarching priorities, which is safety. We are showing improvement, but quite frankly more needs to be done. It brings me great sadness that there were two fatalities at our managed operations in 2012, and a fatality at our La Granja project in Peru earlier this month. I won’t let up in my constant efforts to improve safety, to reinforce our strong safety culture, and to ensure that every employee and every contractor plays their part in making our workplaces safer. Our core strategy will remain

[Rob Clifford:]

Rob Clifford, Deutsche Bank. Thanks for the presentation, I have three questions. Firstly can you give some examples of some of the excesses you have seen creeping over the last seven years that you think are easy to tackle? And secondly do you feel or do you see that the board relationship with the executive team will adjust with the changes we have seen over the last couple of months? And thirdly, the changes you're talking about requires some significant cultural change from the last few years. Have you got the skills within the leadership team across the levels to deliver? And specifically the two big divisions energy and aluminum. You talked about the factors well the change is already in - but aluminum has been looking for these changes for some years. How can do they things differently to get the outcome that you require? Guy Elliott I've got the track record of running the largest earning business at Rio Tinto, and many of you have heard me talk about the fact that we have an operation center in the Perth Airport and that optimizes the business in real time. The fact of the matter is that the total business operates in real time making decisions being more nimble, being more focused. This is fundamental to the way that a business runs and I think as businesses get bigger they become less nimble. It's all businesses in a way, it's lucky because I have to be nimble to physically survive. What I'm intending is to overlay the approach we've taken in iron ore to the broader business. It is about cultural change, but it's nothing radical, it's nothing revolutionary. It's a way that businesses evolve and as businesses get larger, sometimes the businesses get slower in terms of how they look at information and how they respond. So are we refocusing the business to pick up? The type of culture that we operated in, in iron ore and taking at across the broader business ensuring that we're more responsive ensuring that we're nimbler in terms of the way that we look at data and the way that we analyze things, ensuring that we make well informed decisions on the basis of data that is responsively generated so that you got clean line of sight so that you can understand all of the issues that are impacting. I mentioned earlier that we're facing more volatile times, well it actually means that you need to change the way that you operate in an environment like that. These are some of the overarching changes but you know I mentioned focus, I mentioned discipline, I mentioned accountability. I mean this is not rocket science, if you get out any management handbook I'm sure it'll make mention of these types of things. But I seriously mean it, I seriously mean this is what you need to run a business in 2013 and to succeed. Businessmen, businesswomen running the business as if you own it, I mean these are the correct characteristics of a business as it's formed it's a characteristics of smaller businesses. Somehow as the business develops it gets a little bit more removed from the sort of things that we're talking about here today. Well I want to inject that straight back into the business, I want to ensure that people within Rio Tinto understand that the prime driver of the business is pursuing greater shareholder value, that's why we're here, the shareholders are the owners of the business, the shareholders have invested in us, they have the confidence in us to deliver this value and I'm committed to creating greater value for our shareholders. It’s just a fundamental of what is the basis of the business. Robert, you mentioned excesses. Look, quite frankly I'm not a bat looking backwards, I mean history is interesting, history does have learnings for the future but I'm more focused on delivery, I'm more focused on the future, I'm more focused at ensuring that this business is run tightly, is responsive, is responding to the marketplace, is reflecting what governments and other stake holders expect of us and most importantly that were delivering value. I think there's huge opportunities within the business, yes I've got to find the key to unlock that, yes it's going to change some of the ways in we do things. But this is not a revolution, in way it’s reinstating a lot of the strength that this company has within the business and when I talk to leadership about the sort of things that are mentioning here today, I feel very comfortable, I get it they understand. They know exactly what I'm talking about. Board relationship - I think we are extremely fortunate with our board. Our directors come from a very diverse background. I'm amazed at times that the commitment and the time that our directors spend in terms of their engagement and involvement in the business and how seriously they take their responsibility. You know I've had the advantage in the past week to be a part of committees that I had seen minutes of and I had seen sort of the output of those committees, but I had not seen a detailed rigor and analysis and what have you that goes on. I don’t believe that there is an issue in relation to relationship between board and management, I just don’t see that - I do see that there were instances of poor judgment by management. I do see that two of my colleagues were separated from the business, I do realize that the board takes their responsibilities very seriously and that's reflected on what we have seen. But it doesn't reflect on the broader relationship. This is a great company. The foundations are very sound, we do have good assets, we do have good people. We actually do also have a good board. And I think in relation to the culture change within the organization, some parts of the organization are already operating in the culture that I'm talking about. I think if there's a significant sort of rethinking in a way about how people within the business operate. Creation of business women and businessmen, business people in terms of their outlook, in terms of all spending money as if they were own acting, as if they own as the business, this is a cultural shift in terms of how a larger organization operates but again let me say, this is not a drastic shift from where we have been, it’s a reorientation, it’s a new way of looking at how people operate but the many of the fundamentals I am talking about you will recognize from the Rio of all, you will recognize that, well yeah Sam is making senses, Sam is talking about the things that help make this company great and I am (inaudible) sure that we have got to focus that we have got the nimbleness that we have talked about, we have got the sense of urgency, most importantly that we have got this focus on shareholder value. I want to convert mining engineers in geologists and accountants and HR specialist, I want to convert them into business women and business men that to me is probably the biggest cultural change but I think it’s something that people will jump for joy. And they will say thanks goodness, we are recognizing what the company needs to do. So perhaps another question here, that was a bit longer than I thought by the way.

[Rob Clifford:]

May be just two quick questions. the first of all, when do you think Rio will be in a position to stop properly considering returning cash to shareholders. In terms of what debt level do you feel comfortable with your single A rating, if investments accelerate that process, will the board consider bringing forward some cash returns. And secondly just in terms of management change, Guy was planning to retire at the end of the this year, you can revisit that plant to ensure continuity of that. Sam Walsh Let me start with the second question first and then Guy and in fact if I could get you to respond on the cash return to shareholders. Yes, we have announced quite some time ago the Guy will be retiring at the end of the year. he will be staying on board through 2013 and we have always indicated that the time that we bring on his successor that she/he will move into that role of course supported by Guy in terms of all the handover but that we will retain Guy experienced in expertise through the end of the year and that is very-very important to us. In relation to considering cash returns, Guy why don’t you pick up on that question?

[Guy Elliott:]

Thanks well (inaudible) I mean when are we going to stop probably returning cash to shareholders and I think we all return here to show right now, I mean we had a 34% increase in the dividend. Last year and here we have a 15% increase in the dividend, so that is properly return in cash to share holder but I know what you mean. You mean when we might have another buyback program. Now we have been very willing to end our buyback programs as we demonstrated in the period 2004, 05, 06 and then again more recently in the period 2011, 12 when we return $7 billion through buybacks. I think we are serious though about our single A rating. And I think that if taking into account the level of capital that we expect to spent this year, there is no immediate likelihood that we would return a cash to shareholders through buybacks. You mentioned disposals and it is true as Tom said that we are looking at further disposals than the ones that we have announced depending upon how many of those are accomplished when there accomplishment how much we get for them. I suppose it’s possible that the balance sheet could return to a point where that question became relevant but I would not encourage you to expect that this year. However we are serious as we have demonstrated in the past about the idea of returning cash to shareholders if that makes sense. And we have said by the way both today and in previous announcements that we are measuring our investments against that sort of approach so we are looking at our investments against the alternative of returning cash to shareholders. Although that's not an immediate prospect for the reasons that I have said. (Inaudible) commented that you generate shareholder value in a range of ways I mean certainly returns is part of it but delivering real value increase for the business that also is an incredibly important part of delivering this increase in shareholder value. Do you have another question here in the room?

[James Gurry:]

There's a lot focus on the areas of the business where we've invested a lot of capital, but there's not much returns. But at the moment I think it's all about iron ore, can you talk a little bit more about the iron ore, the pace of ramp up in your expansion in the Pilbara, and how you see the iron ore market over the next year and perhaps 3 to 5 years? And just further to that, can you just outline given your in-depth knowledge of Simandou and IOC - can you just outline your long term vision for those two projects and where they sit?

[Guy Elliott:]

I would comment that the business is broader than iron ore and as I mentioned in relation to Yarwun 2 coal, Oyu Tolgoi, I mean we have a range of projects that are in the portfolio. And we are diversified importantly and different parts our business go through different parts of the cycle and they have their time in the sun. In relation to iron ore I mentioned Chinese GDP growth, increase in growth to 8% this year. I mean that's an important indicator, also in January I made comments about the fact that we're expecting volatility in iron ore prices. We had seen a ramp up of prices surrounding potential weather effects in the Pilbara, in fact elsewhere in iron ore production. Also we had seen destocking, we've not seen that restocking take part at the pace that we expected. The iron ore stocks at the major Chinese ports is hovering around $70 million tones. It used to be around $95 million to $100 million. So there is restocking that's required, but we're seeing continuing investment in urbanization, we expect that will flow to industrialization sort of during that 3 to 5 year period that we met. We're also seeing in India, we have seen still capacity there come on and we've not seen commensurate increase in iron ore mining. That's been as a result of a number of factors that are relating to land access relating to infrastructure and relating to power. And these are issues that are slowing down expansion of iron ore and India has made the decision to address the clear reduce their exports of iron ore. So those things are helping produce an iron ore market that's a bit stronger. Iron ore prices are currently $115 (inaudible), will prices remain at that level. I suspect not, but I think that they'll remain relatively robust particularly when I look back and think that I can remember when prices were 25 bucks a ton, it's certainly, I think it's a good outlook for iron ore notwithstanding the fact that we'll expect volatility during 2013, notwithstanding the fact that we expected iron ore prices will come back a bit. I think in relation to Simandou, there are two critical issues for Simandou and firstly I should say that Allen and his team are doing a great job there in terms of taking the project forward. We are however waiting for the framework agreement to be put in place, we're expecting at the end of last year and Allen and his team are working with the government of Guinea in terms of taking that forward. That is like a state agreement, it's like an investment agreement, this is needed to be the fundamental underpinning of that project and the investments there and co parties understand that, they're complex but that needs to be put in place and the second is the funding of the government of Guinea's share in the project, and again a lot of work is being done there, but we need to see that funding and that financing put in place actually to move the project to the next stage. We’re continuing with work on the ground but we're very focused as are our shareholders, government of Guinea, Chalco and International Finance Corporation in terms of getting those two building blocks for the project put in place. IOC has brought on its concentrated expansion project 1, it's working through the second phase of that, step 2 concentrated expansion project 2, they've had a difficult year in relation to those projects and in terms of weather events and we’re working with the IOC team in terms of what more we can do in relation to that business in terms of generating value for shareholders. But let me come back to the fact that we are a diversified, we are a portfolio company, iron ore's important and it's got its time in the sun today but we're very encouraged by the work that's happening in other areas. So perhaps it's time to move to the phones and if we could take a question from the phone line.

[Operator:]

Our first question comes from Clarke Wilkins of Citi. Please go ahead, your line is open.

[Clarke Wilkins:]

Just a question I suppose iron ore and also just on return. When you look - you are a diversified company but at the moment the vast majority of earnings comes from iron ore and we saw a lot of volatility in the iron ore market last year. Is there anything you can do with second largest, maybe going to the biggest producer, to smooth out the volatility in terms of pricing at least etcetera or with the sort of transition thing, spot prices we basically stop with this volatility and could we expect similar episode in the second half of the year? The second question just, you talked about you know sort of credit display on investments etcetera, does that require sort of higher returns on some of the projects like Simandou to justify the investment given some of these projects get into increasingly risky countries?

[Guy Elliott:]

Firstly Clarke on your question about volatility - because I think the entire industry would prefer a scenario where we had reduced volatility but the old days are passed. We won't see a return to annual prices and quite frankly both customers and iron ore producers are moving to even more frequent pricing reviews, whether it be monthly or in fact daily. This is no different to what we see with other traded commodities, no different to aluminum and copper. It reflects to an extent, the vagaries of whether that I've just mentioned, it reflects seasonal factors, it reflects holiday seasons, it reflects a whole raft of issues. But we need to sit back and we need to look at overall at the trends that we see with iron ore. And importantly this urbanization, industrialization that I talked about is going to continue, certainly in China, but then we'll see the benefit of this slowing forward in terms of India, Indonesia, Vietnam, Philippines, Thailand, Malaysia. We're seeing it in South America, we're seeing it in Eastern Europe and if I want to really stretch your imagination it'll happen in Africa too, we're seeing growth there and we'll see a time there are actually more people than they are in China, there is already a billion people in Africa. All of these are building blocks, the building blocks of developing economies and we are fortunate to be in a position where we are providing the fundamental to provide these buildings blocks. I think in relation to the right of return for projects, as Guy mentioned we fit our (inaudible) capital last year, just over $17 billion of capital this year from the charts, it saying that we are projecting 13, there are some unapproved projects there that (inaudible) some of the growth but that depends on the market, it depends on a range of factors but we have seen the peak. Now, importantly if you forward, ensuring that we invest in the projects that are well above the rate of return, well above an highly competitive all of the turn, this is physical important to us and that’s the way that will evaluate projects. I should also mention that we have revised the way, that systems operating into projects review, we are reinforcing the disciplines in our decision making there to ensure that we are making the best decisions. Ensuring that we have got rigorous analysis ensuring that we review the sensitivities that you would expect that ensuring that it’s very rigorous to (inaudible) as these projects go forward. This will ensure that the projects are actually get to be reviewed by the investment committee and the board, the projects with the highest rate of return. So that’s another question from the front line.

[Operator:]

Our next question comes from the line of Lyndon Fagan of JPMorgan. Please go ahead.

[Lyndon Fagan:]

Sam, a lot of the issues that you have talked about trying to resolve the product M&I, I am just wondering if you all prepared to rule out for the M&I for the foreseeable future that was the first question, and then in terms of (inaudible) I guess you are talking about an underground that could cost up $5 billion. I am just wondering if you have sufficient confidence in geopolitical situation at the moment to actually we're going ahead with that project, thanks. Okay firstly in relation to M&A I sure will indicate to you that I am not spending anytime looking at that potential acquisition. I have learnt in my career you can never say never but it’s not on my writer screen. My writer screen is focusing on delivering the projects that we have got on the pipeline ensuring that future investments in our organic growth are the best possible projects ensuring we delivering on commitments in relation to cost improvement productivity improvement, the way that we are physically operating our business. As I said, the foundation (inaudible) is a great company. These are fundamental things in relation to how our business should be operated. In relation to (NYSE

[Operator:]

Our next question comes from Peter O'Connor of Merrill Lynch. Please go ahead sir.

[Peter O'Connor:]

Two questions - Pacific Aluminum, can you give some update about the mechanisms that you're looking at to divest or move that asset and what timeframe we should expect? Secondly, I'm mindful that when you used words, you used them very carefully - you're significant in your release regarding asset filed this year. How do I understand the term significant, is that 1 to 5, doing five, doing or more. How do I read that? And lastly with regards to the Australian political landscape and doing business in Australia, how are you seeing that evolve this year given recent political channel potential political changes and particularly with your comments about MRRT etcetera. How do you feel landscape going forward?

[Sam Walsh:]

Perhaps if I move backwards through those three questions. Peter, thank you very much for your congratulations. If I can move backwards through those three questions and guy if I could signal to you that I'd like you to cover the issue of (inaudible). Look I was trying political landscape, are in politics is politics and you know I think a week a long time in politics. Well seven months is an even longer time and we have seen the crawling of election for September 14. I'm not sure that will see a lot of joy rations between now and September 14. Importantly we work with governments all around the world and we respect the government, we got a good relationship. Like if I would have actually just focus on the Gove refinery just for a moment, I think the support that we have seen from the federal government and the northern territory government in relation to those negotiations. I think it's been first class, I mean clearly a very complex and difficult issue for both governments in terms of taking forward and clearly for us. Moving to a more competitive source of energy for that refinery, absolutely essential. Yes we did take a tough stance in relation to that and yes if we didn’t get gas we would have in fact multiplied that plant, but through a process of very healthy engagement working with both governments we've moved to a situation where not only for the people of Nhulunbuy and the Northern Territory in Australia but also for Rio Tinto, we've got the best possible outcome. We'll have an asset of Pac-Al that is an integrated aluminum business - bauxite, alumina and aluminum, that's important to maximize the value of the sale, but importantly the gas will enable us to move that operation into the low area of the second quartile. That is physically important. In relation to asset sales, I'm sorry to disappoint you Peter but I'm not going to get into any details here except to assure you that we refocus on delivering value. There are assets that we're looking at for divestment that are not core assets they're underperforming assets, but delivery of value here is a very important issue. I guess my focus here is to ensure that we're putting in the same sort of priority and focus on this that we are elsewhere in the business and clearly the team there has done a lot of good work, we've seen over 20 projects divested generating $12 billion of value. So, that team has shown that they've got the capabilities of delivering value and I'll look forward to the work that they generate during this year. I think in relation to divestment of Pac-Al, I wonder if you could walk us through the number of potential scenarios we are looking at there. Well first of all let me say Peter that the readiness of this business for sale is very well advanced. The separation has all been carried out, we've been running it as you know under Sandeep Biswas for just over a year now. And I must say the team has done an excellent job in preparing this business for sale in terms of cost, in terms of culture and in all sorts of other terms, you may have read that we’ve appointed an advisory board, Sam has talked about what we’ve done at Gove, but all of these things are positive for the future value of this business. The approaches that we might take to sell it are the same as we have always said, namely that we might sell it to a trade buyer as a whole. We might break it up, we might IPO it or we might spin it to our shareholders. And all of those options are bring run concurrently and I think that I'm not going to say which of them we're likely to follow. And not am I going to say when, for exactly the reason that Sam just gave, which is that while we do want to move this business along, and we want to do that before too long. We are driven by value and we are going to want the best value outcome that we can find from each of the different options that we're looking at. So that's what we're examining, but what I would say is that the separation and the readiness of this business for sale is now well advanced, particularly with the Gove solutions, which of course has got to be finalized and we're going to get all those agreements actually ironed out. Thank you.

[Sam Walsh:]

Thanks Guy and thank Peter for your question Let's move back to the room in London and we've got a question over here.

[Menno Sanderse:]

Coming back on the cultural change Sam, the financial industry has gone for a very similar process in the last three years, and the only thing that seem to work is a change in incentive and a change in discount rates and cost of equity. Are you implementing things like that in the company, changing management incentives, changing discount rates, are you increasing discount rates on projects to accelerate this cultural change. And secondly on the volume side, volumes are clearly a negative contributor to the business this year. There is clearly a bit of a tension there between depletion and negative volumes and on the other hand capital discipline actually the business wants to grow, therefore more eager to approve new projects. On the other hand you want to just slow down and only go for the best. How do you deal with that? Thank you. Sam Walsh I think in relation to your first question about incentives and discount rates, certainly in terms of our establishment of short and long term incentives for the business is something that we give a lot of thought to. We are considering some changes in relation to how that operates, it's not totally reinventing it, but insuring that it relates to the sort of focus that I've been talking about here, reflecting the priorities of the business, particularly in relation to cost reduction and to focus there. In relation to discount rates, I mean something that we continue to evaluate and it something that’s important in terms of how we look at projects but equally so the assumptions that we have in relation to forward commodity processing and exchange rates that’s equally important and the sensitivities that we put through projects ensuring that they reflect realistically the potential outcomes that you could have in the projects could phase. And rather and taking sort of stock standard sensitivities, looking at the cases that could actually represent movements we are seeking in relation to various inputs and outputs for the projects. Volumes are important to have business, they are important to any business but giving the tradeoff run between value and volume, is an important issue and importantly on focusing on every part of that business in relation to how they contributing to our earnings and how they are contributing to our cash generation. The business is seeing an increase focus on granularity in terms of how we are physically operating and we (inaudible) is not being generated. I mentioned before the volatility and I agree that if the (inaudible) less volatile, that will be wonderful thing but unfortunately I don’t drive that but it is important that as we move the business forward, the nimbleness and the responsive (inaudible) that have talked about that were affecting that in terms of how we are physically running the business. Annual plans and annual reviews are an important, they provide the foundation (inaudible) operating. But if the circumstances change then you need to physically respond to those and it is not adequate to say well in October last year, that this what we have planned but the rules changed completely in the meantime. It can be by the way, it can be positive changes or in fact it can be negative changes and you need to take stock and you need to take advantage of both. So we are not an organization as committed to volume for volume sake. We are an organization as committed to value and we are committed to delivering shareholder value and that needs to take into account, the very trades of that I have been talking about in terms of many moving parts in terms of the world economy and that effects on different commodities and different ways. Perhaps another question here in the room we have a gentleman here who has been very patient.

[Menno Sanderse:]

It's (Frazier Jameson) from JP Morgan, really a question around the cost saving targets and first part of which is could you just confirm that $5 billion number is not reliant on disposals to be reached? The second part, could you just remind us about the existing targets that are already fitting into that, I think we've got $1.6 billion of EBITDA improvement in aluminum of which both 50% is cost related. Could you just remind us what else is in there and then the third part is just drawing Guy's comments on an absolute and productivity driven cost. If we look at the pie chart, is it reasonable to say aluminum and energy divisions not growing nor schedule to grow much over the next couple of years therefore we should think of those cost savings in absolute terrains and the central cause whereas iron ore and copper obviously you are going to get the benefit of higher volumes so therefore they are more productivity and fixed cost leverage related.

[Tom Albanese:]

Guy sort of gave us certainly a field during his presentation of what was in and what was out. But I think we need to clarify the point you rose, let me assure you disposals are not included in cost reductions but I think in relation to the existing targets and the pie chart Guy could you pick that up for me?

[Guy Elliott:]

Yes, I mean I think we are trying to make high quality sustainable cost reductions here so if we make a disposal which we may to, as we've discussed just now. It will have to be deducted from both the starting point and the end point so we will have to make an adjustment for that. I have given all the conditions that apply to this but to try and answer your questions about existing target, we have existing targets that relate to aluminum as you've said. Actually the $1.6 billion of improvement in EBITDA came from multiple sources. So for example it came from a revenue enhancement through various means of the creep of capacity through getting hard premiums from things of that sort. We have also deferment or more efficient use of capital, we have improvements in working capital as well as cost savings. And so what we've done is subsume the cost savings that were in the $1.6 billion within the $5 billion. But the other improvements, the ones that I've just tried to describe are still underway and being pursued by written to aluminum. On the question of absolute and productivity driven cost, I think that the characterization that you have described is approximately right. I mean we do have the benefits of volume and because this is fundamentally based on a unit cost approach, we have the benefits of volume in those two iron ore and copper divisions as you say. That will depart of the contribution that's being made by those. Also as you say aluminum and energy aren’t really expanding and we're having to look elsewhere. I gave some instances of it, but to give a little bit more color to this we're looking very hard for example at procurement. Can we achieve better deal negotiating hard with those who supply us? Can we really reconstitute the areas on which we spend money. Can we eliminate whole areas of cost as well as reducing the price of the things that we’re buying. We want better visibility and KPIs on all our costs, and on top of that of course there are all the labor productivity benefits that we're looking for. And this applies everywhere, but especially in those two divisions. I touched on off shoring and outsourcing. I think would be important I touched on the salary freeze in energy. I think there are volume increases a little bit in aluminum, particularly in the area of bauxite and alumina. But I don’t think they're going to be quite as marked in their effect as in the iron ore and copper areas of course. And we're looking at organizational design changes in aluminum in various ways. Productivity improvement through the use of technology, that's not confined to aluminum but it is present there. So I think there are multiple sources of all these improvements. It is a very serious commitment that we're making here which provides the discussions that we're having with the product groups about their plans and about their performance every month. And what you can be assured is that we're going to chase this improvement so that we actually can make it a sustainable improvement in the cost base. So that gives a bit more texture to it and when we next get together in August I'm hoping that we will have some flesh to put on these bones. Sam Walsh Thanks very much Guy, I was just been handed a wind up note. So perhaps if I could just take one quick question from the phone and then I'll need to make the hard close of 10

[Operator:]

Our next question comes from Glyn Lawcock of UBS. Please go ahead.

[Glyn Lawcock:]

Good morning Sam. Just wanted to check two things, I'll question you on two issues. Firstly you said government have been stepping in and they're barrier to rebalancing the industry, I think that was your quote. And then you went onto say, we've accepted the government's handout to keep Gove open. I'm just trying to understand how do you justify those two comments, because I think counter ensured it to each other that you've said the industry won't rebalance if we take handouts and you have. And then secondly, just to understand the mineral sands cuts that you've announced today. If you had any feel for - is that just for a year or do you haven’t really thought through this about it. Thanks very much. Sam Walsh Thanks very much Glyn. Look in relation to Gove, there is no government handout. This is physically the government in their own territory making available gas, there is no cost to them. In fact I've got take or pay obligations that will be removed. So there's actually a benefit to the northern territory there, but there are no handouts by government. In relation to mineral sands, that relates to the market dynamics, if it relates to where we currently see processing for industrial minerals is part of what I described in terms of all being responsive to market forces. I think with that if I could thank everybody for your questions, I think we've covered the field pretty well. I certainly look forward to spending more time speaking to investors over the course of the next few days, weeks and months. Today I have set out how I intend to deliver the strategy and my priorities for the year ahead. But if I leave you with just one impression today, just one important message today, I want it to be that I am single-minded, that I am determined to deliver greater value to shareholders. This is what drives me, this is what makes me tick. This is what gives me great satisfaction. This commitment will inform all of my decisions and the actions that we take across the business. Thank you all for being here, thank you for those on the phone line. Thank you very much.