allan kohler talks to rio,s tom albanese

from yesterday inside business .
Allan kohler talks to Rio,s tom albanese
link below for live interview or read script below.
http://www.abc.net.au/insidebusiness/

ALAN KOHLER, PRESENTER: Over the past two years the giant miner Rio Tinto has dug itself out of an almighty hole and this week it repaid the investors who tipped in $15 billion to rescue it not so long ago.

With its debt now almost wiped out, and soaring commodity prices and demand delivering a record $14 billion profit, Rio Tinto is now back in growth mode.

I spoke to Rio's chief Tom Albanese in London about his plans.

Well Tom Albanese, you've announced a big increase in profit and an even bigger increase in dividends, and a share buyback - $5 billion - but the stock price went down, the market seemed to be underwhelmed.

So did you wonder what you've got to do to get the stock price to go up?

TOM ALBANESE, CEO, RIO TINTO: Not really. I mean, if you have look over a longer period of time.

Certainly I think there was a bit of buy into the rumour sell into the news. We had a very strong week of performance and I think, you know, we have sort of softness in the broader market right now.

So I think, as I've been meeting with people, meeting with shareholders, meeting with analysts, I think many of them have come and said 'Boy we weren't expecting capital return. We were pleasantly surprised'.

ALAN KOHLER: In fact your balance sheet's very strong. Your gearing is going to be left at around about the same level, is that correct?

TOM ALBANESE: Well I think from our perspective we've talked about, you know a pretty good set of current economic conditions. I think, you know, GDP at 4 to 5 per cent this year -higher than we would've expected - good long term picture, but there's enough uncertainty out there, there's enough risk of volatility out there.

Most people I've been talking to are saying it's not a bad time to keep a strong balance sheet.

ALAN KOHLER: How do you feel about the balance of your portfolio overall now? I mean, obviously you had a big go at aluminium a couple of years ago, didn't really work out. But now two-thirds of your profits come from iron ore.

Do you feel overweight in iron ore?

TOM ALBANESE: Well I think first of all, on aluminium, you know, it's been challenging over the past couple of years but a $1.3 billion year on year improvement in profits in aluminium certainly was helpful in terms of our overall 2010 performance.

We've had very strong iron ore pricing and actually we've had record production. So we've had a very good year in the iron ore business.

But we shouldn't forget about the important contribution we've seen from copper, from coal, and the other parts of the business. And that's been really the beauty of a diversified model, is that some years again, frankly some metals are doing really well, but others might not be doing so well.

I don't think that too many people accurately can predict 10 years ahead which are the strong ones and which aren't the strong ones. But having a diversified portfolio of first tier assets in each of the sectors we're in is a really good strategy.

ALAN KOHLER: Yes, but you're nowhere near as diversified as you used to be. I mean, some of the analysts I've spoken to have talk about you as a 'pure play' iron ore company.

TOM ALBANESE: Well, I think again this has been a very good year for the iron ore business but we do make profits in other parts of the business.

I'd like to continue to grow the iron ore business - particularly the Pilbara which is such an important part of Rio Tinto but also an important part of the Australian economy that we want to see it continue to grow. But you know certainly if we can find the right opportunities in other parts of the business I really want to push them too.

ALAN KOHLER: Well just looking at iron ore. The iron ore price, obviously, is at an historic high, which is why you're making so much money. What's your outlook for that?

TOM ALBANESE: I'd say that iron ore pricing today is higher than I would have anticipated say 12 months ago. We have seen volatility. Even over the past 12 months we've seen quite a bit of volatility. So we shouldn't preclude that volatility from taking place as we go forward.

Realistically, if we look over the next year or two it's hard to find big new areas of supply globally, particularly in 2011. But as 2013, 2014, 2015 start winding in, you're going to see a lot of new iron ore coming in the market and it's probably going to put the market closer in balance than we would see right now.

I mean, right now as we speak today the conditions are very tight with certainly a demand that's continuing to be well in excess of what the supply is.

ALAN KOHLER: Well what do you think is the long-term equilibrium price for iron ore?

TOM ALBANESE: That's at least a $64 million question. I think in general we would say that the markets when they come into equilibrium will lead to some softness in those markets longer term. We certainly invest on that basis.

I think anyone that's investing on the basis of today's prices are likely to be disappointed down the road.

The question really will be over the next, say five years, the next 10 years, what will be the global steel demand and how will that translate into iron ore production. But I think realistically we can expect a reversion from current levels.

ALAN KOHLER: But you are quite confident about the copper price, according to your statements this week. Are you saying ... Are you the most optimistic about copper do you think?

TOM ALBANESE: Ten years ago if you were to ask anyone in the minerals sector what were the metals you were most pessimistic about -10 years ago - people were the most pessimistic uniformly about iron ore, coking coal and copper.

Look at how things have changed over a 10 year period of time.

So while I would say today I'm quite optimistic about copper, at some point in time the higher copper prices stay for a longer period of time, the more new supply will be induced. That's just the nature of markets, the nature of supply and demand.

So I think we will see a continued period of strong copper pricing, largely because many of the large mines, including our own, are seeing declining grades, deepening pits. But you will see new mines like our own in Oyu Tolgoi in Mongolia.

We're working on several new projects around the world and I know, certainly our competitors are working on their own projects. So we will see new copper supply coming in and that will begin again balancing out with demand.

ALAN KOHLER: Well, in that case - I mean, Oyu Tolgoi looks like the best prospect in copper. And why not just buy the rest of it instead of arguing with your partner, Ivanhoe? Why not just buy them?

TOM ALBANESE: Well, again in Ivanhoe we did come to an agreement with Ivanhoe in December, which basically we provided Ivanhoe with a pathway of financing and Ivanhoe has given us essentially the management of the construction, but also the operation of the business.

So I think we've each sort of settled differences, we've attained objectives, we have a pathway to 49 per cent on the project. And again, we, working side by side with Ivanhoe, will work to bring Oyu Tolgoi into production.

And again what I want to do there is again bring in the production, we want to manage that, but again we want to do so in a way which also delivers value to Rio Tinto shareholders.

ALAN KOHLER: Yes, but what I'm asking is whether, given your optimism about copper, 49 per cent of that is enough?

TOM ALBANESE: I think, again, we will look at it on a value basis and I'd say that given where we are right now, that the arrangement and the agreement we've made with Ivanhoe in December gives us a pathway to build the mine and to operate the mine. And that again meets our needs and probably meets Ivanhoe's needs.

ALAN KOHLER: Well, in general, where would you like to see Rio Tinto's portfolio expand? You've obviously got your bid for Riversdale, which is the metallurgical coal business in Mozambique, but what else would you like to do?

TOM ALBANESE: Well, I think first of all, of the $12 billion or so of new approvals that we've announced over the past 12 months, $9 billion of those have been in Australia. And of that 9 billion, 8 billion was just in the Pilbara.

So two thirds of the investments that we've announced and decisions we've made over the past year have been associated with the Pilbara. So I'd say expanding our Pilbara operations by over 50 per cent over the next five years would be my number one growth priority.

Probably the second priority - as you've already referred to - would be bringing up the copper business. I think Oyu Tolgoi is part of it, but again I think we have additional opportunities in South America and North America that I also want to pursue and in New South Wales.

I think you know, looking at opportunities which we're working on now to expand and extend the life of North Parks I see as an important part of it, but probably not as important as some of our other big copper projects.

I think on coal, I would like to see opportunities to build upon our New South Wales and Queensland operations. But I see opportunities to supplement that. Again, if the right conditions all take place, with the possibility of a coking coal opportunity in Mozambique, which is the Riversdale bid, which we've extended that bid this week to about early March.

I think I'd like to look at uranium, I'd like to look at diamonds. But I'd say on balance, I think we have a pretty good portfolio in virtually all of our businesses where we can be expanding those businesses.

ALAN KOHLER: So are there any products that you're not in that you'd like to get into? I mean I'm thinking about potash, which BHP bid for that big Canadian potash business but underpaid, failed. What about you?

TOM ALBANESE: I'd certainly- We've been in potash ourselves. I was the one that got us into the Argentinean potash in 2001-2002.

By the way, that was right in the middle of the Argentinean financial crisis so it's important to recognise that these economies can sort of go through different phases as they go through.

So I do like potash. We did sell the Argentinean asset during the financial crisis. But I've told our geologists, if we find the right opportunity let's get into it.

But frankly, on potash and many of the new things, I'd rather look at them from more of an exploration perspective. Find some new resource and look at developing on a green field basis.

I'd say on the sort of the M and A space, in terms of - as I scan the landscape - I'd be more narrowly focused on the smaller type things that really would be more of a bolt-on to the existing businesses of Rio Tinto.

I think we can certainly satisfy our growth objectives by focusing first and foremost on organic opportunities within the existing suite of Rio Tinto businesses.

ALAN KOHLER: So no big takeovers?

TOM ALBANESE: No, I think we'll focus on again the smaller ones that could be bolted-on or complement our existing businesses. If we have them, great. If we don't have them, fine. We'll just keep working on our existing Rio Tinto businesses.

ALAN KOHLER: Thanks very much for joining us, Tom Albanese.

TOM ALBANESE: Good to talk to you too.