Rio Tinto: supplying raw materials for the world

Rio Tinto survives commodity crash by aligning business and operating model to focus on low-cost mineral production

Rio Tinto is a major international metals & mining firm which owns & operates over sixty mines and refineries on six continents. It is dual-listed on London and Australian exchanges with a total market capitalization of $79bn1, making it the second largest mining organization in the world. In 2014, it achieved revenues of US$47.7bn with net earnings of $6.5bn and a 39% EBITDA margin2.

 

When I worked for Rio Tinto, I remember a staff session where our GM finished his presentation and asked the employees, “What are we here for? What’s the site’s objective?” A few hands creeped up and someone answered confidently, “To mine coal.” The GM smiled and said “No,” and paused for a moment. “We’re here to make money, which we do by selling coal. Specifically, we make money by selling coal for more than it costs us to mine, process, and ship it.” This simple business model applies to all commodities in Rio Tinto’s portfolio.

At a strategic level, the organization targets large, long-life mineral deposits with the potential to, after development, operate at the bottom of the supply curve and achieve profits through all phases of the commodity cycle. These assets are often extremely capital intensive and bear substantial development challenges. Establishing large mines in remote locations and operating them at a very low cost is extremely difficult; many of Rio Tinto’s competitors focus on easy-entry projects which are often either short-lived or have high production costs and do not survive dramatic price cycles.

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At a high level, Rio Tinto’s operating model creates value by locating economically attractive mineral deposits (exploration), developing the deposits into working mines (development), extracting materials from the ground (mining), processing them into saleable products (refining), and transporting them to customers (shipment).

I believe that Rio Tinto is an example of an effective alignment of business and operating models. The firm has several core competencies and applies these skills broadly across its existing assets and in developing and acquiring new ones. Some of these competencies form distinct competitive advantages for the organization.

Rio Tinto is able to execute projects that many other firms are not because of their project development expertise, access to capital, and operating reputation. For example, they opened the Oyu Tolgoi project – a world-class copper-gold deposit – in central Mongolia. The firm had to overcome significant challenges of building infrastructure to a remote location and working with a government with little experience in mining or major foreign investment. The project is the single largest foreign investment the nation has ever seen and is expected to contribute to 30% of the nation’s GDP and employ a 90% Mongolian workforce3.

Rio Tinto also invests heavily in R&D and applies leading technology. One Western Australian Iron Ore mine has a fully autonomous haul truck fleet – the only one in the world currently rivaling human performance4. The entire Iron Ore business’ rail, port, and infrastructure systems – in addition to many mine functions – are controlled from a centralized operations center over 1.000 miles away5. These investments improve operational efficiencies and provide substantial labor cost reduction opportunities, particularly as the technologies mature.

Rio Tinto also carries a wealth of technical and operational knowledge for running mine and processing assets. Technical services groups focus on mine design & planning, environmental management, and geotechnical assessments. Operational teams apply best-practice techniques to lead and manage their teams. Though all sites are run independently, their performance is benchmarked across the organization and several centralized teams support and coach the sites in implementing best-practice knowledge.

Finally, central teams leverage Rio Tinto’s scale to develop preferred partnerships with equipment OEMs and other suppliers. These relationships often yield lower pricing for the group, but can also lead to technology and services tailored to Rio Tinto’s needs.

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Rio Tinto’s operating model has generated numerous competitive advantages which allow it to develop challenging, but high-value, projects and operate them effectively. While the recent drop in commodity prices has not left the organization unscathed, it has performed notably stronger than its competitors and avoided job reductions facing many other firms1, 6. I believe that this is a direct result of the firm aligning its operating model with its business model of producing commodities at low prices from large-scale assets on the bottom of the supply curve.

Sources

1  Lanton, Mark. “Rio Tinto closes gap on BHP Billiton in biggest miner race.” The Australian, Dec 7 2015. Accessed Dec 7 2015.  http://www.theaustralian.com.au/business/mining-energy/rio-tinto-closes-gap-on-bhp-billiton-in-biggest-miner-race/news-story/ac291ef249c31c5b189af26baccbbfd1

2  Rio Tinto. “Rio Tinto 2014 Annual report.” Accessed Dec 7 2015. http://www.riotinto.com/documents/RT_Annual_report_2014.pdf

3  Kohn, Michael. “Rio, Mongolia agree to restart Oyu Tolgoi Development.” May 18, 2015. Accessed Dec 9 2015. http://www.bloomberg.com/news/articles/2015-05-18/rio-mongolia-agree-to-restart-oyu-tolgoi-development

4  Diss, Kathryn. “Driverless trucks move all iron ore at Rio Tinto’s Pilbara mines, in world first.” Oct 18 2015. Accessed 10 Dec 2015. http://www.abc.net.au/news/2015-10-18/rio-tinto-opens-worlds-first-automated-mine/6863814

5  Mills, Michael. “Rio Tinto opens automated Pilbara Operations Centre.” 28 June 2010. Accessed Dec 11 2015. http://www.australianmining.com.au/news/rio-tinto-opens-automated-pilbara-operations-centr

6  Reuters. “Anglo American to cut 53,000 jobs amid commodity rout.” July 24 2015. Accessed 11 Dec 2015. http://fortune.com/2015/07/24/anglo-american-to-cut-53000-jobs-amid-commodity-rout/

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3 thoughts on “Rio Tinto: supplying raw materials for the world

  1. Alek,

    I wonder if the other key capability that Rio may possess is actually M&A? Key to the success of major mining companies is their ability to achieve scale and acquire assets through effective bidding strategy and integration capabilities. Then all the points you mention above come into play to operate the assets most effectively.

  2. Good call, James. They definitely have an active M&A group that helps them maximize existing assets that others have developed. They also often buy undeveloped-but-proven deposits that exploration firms have discovered.

  3. Very interesting. I wonder what advantage Rio Tinto has enabling it open the Oyu Tolgoi mine at today’s slumping Cu and Au prices.

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