WEBVTT 1 00:00:07.400 --> 00:00:10.500 Hello and welcome to the first of a series 2 00:00:10.500 --> 00:00:14.400 of two films devoted to large worldwide 3 00:00:13.400 --> 00:00:17.300 leader of the mining industry Rio 4 00:00:16.300 --> 00:00:19.300 Tinto. The first movie is going 5 00:00:19.300 --> 00:00:22.800 to be devoted to market value. We are 6 00:00:22.800 --> 00:00:25.200 going to have a look at this company. We are 7 00:00:25.200 --> 00:00:28.300 going to observe the financial performance of this company and 8 00:00:28.300 --> 00:00:31.800 we are going to ask a question. Why is a stock 9 00:00:31.800 --> 00:00:34.500 price so low as opposed to what it 10 00:00:34.500 --> 00:00:37.300 should be if the company was really bad for its 11 00:00:37.300 --> 00:00:38.100 financial performance. 12 00:00:39.100 --> 00:00:42.500 The second part of the process the second 13 00:00:42.500 --> 00:00:46.000 film is going to be devoted to ESG and I'm 14 00:00:45.100 --> 00:00:48.600 going to tell you that might be that the 15 00:00:48.600 --> 00:00:51.200 track record of Rio Tinto in 16 00:00:51.200 --> 00:00:54.900 terms of ESG performance not reporting but 17 00:00:54.900 --> 00:00:57.900 reality might explain the 18 00:00:57.900 --> 00:01:00.600 very big gap can credibility gap 19 00:01:00.600 --> 00:01:03.700 which is observed at Rio Tinto the financial 20 00:01:03.700 --> 00:01:06.800 performance of the company would suggest and just 21 00:01:06.800 --> 00:01:09.400 defy an Enterprise Value. You remember to price 22 00:01:09.400 --> 00:01:12.900 value is market capitalization market value 23 00:01:12.900 --> 00:01:15.900 of equity plus net Financial day. The Enterprise 24 00:01:15.900 --> 00:01:19.100 Value should be four times minimum. It's 25 00:01:18.100 --> 00:01:21.200 Capital employed we name that the market to 26 00:01:21.200 --> 00:01:24.700 book you remember a surprise value divided by Capital employed. 27 00:01:24.700 --> 00:01:27.100 The price value is the value of business 28 00:01:27.100 --> 00:01:30.700 operations Capital employed is what was invested. And so 29 00:01:30.700 --> 00:01:33.400 if it's for it means that you invest one and 30 00:01:33.400 --> 00:01:37.300 it's worth four. That's a fantastic relative value 31 00:01:36.300 --> 00:01:39.000 creation the ACT. 32 00:01:39.200 --> 00:01:42.700 The market value of the firm represents only an 33 00:01:42.700 --> 00:01:45.600 Enterprise Value which is twice two times 34 00:01:45.600 --> 00:01:48.300 the capital employed and then you ask 35 00:01:48.300 --> 00:01:50.800 about the credibility of the company. 36 00:01:51.500 --> 00:01:54.500 Now we are in a mining industry the mining industry 37 00:01:54.500 --> 00:01:57.700 always have some difficulties with the 38 00:01:57.700 --> 00:02:00.600 e and s of ESG and 39 00:02:00.600 --> 00:02:04.800 there's kind of particle on specific profile ESG 40 00:02:04.800 --> 00:02:08.100 profile of Rio Dental is it 41 00:02:08.100 --> 00:02:11.800 at least part of the explanation of the difference between 42 00:02:11.800 --> 00:02:14.300 what it should be and what it is 43 00:02:14.300 --> 00:02:17.600 the second film will try to provide you at 44 00:02:17.600 --> 00:02:21.300 least part of the answer to this question. But what 45 00:02:20.300 --> 00:02:23.100 is at stake in terms 46 00:02:23.100 --> 00:02:26.900 of financial value today? The value 47 00:02:26.900 --> 00:02:29.600 is twice a capital employed. It might 48 00:02:29.600 --> 00:02:32.400 be four times the difference between four and two 49 00:02:32.400 --> 00:02:35.600 these two and two multiplied by the capital employed 50 00:02:35.600 --> 00:02:38.700 of the company represents 100 and 10 51 00:02:38.700 --> 00:02:40.300 billion US dollars. 52 00:02:40.900 --> 00:02:43.600 So we are going to try to develop a 53 00:02:43.600 --> 00:02:46.600 110 billion dollar question. 54 00:02:47.500 --> 00:02:51.100 Now let's start with the beginning of the company the 55 00:02:50.100 --> 00:02:53.400 difficult start of Rio Tinto. 56 00:02:53.400 --> 00:02:58.100 The company was created in Spain in 1873. 57 00:02:56.100 --> 00:02:59.200 In fact, 58 00:02:59.200 --> 00:03:03.000 it was the acquisition by private interest of a state-owned 59 00:03:02.800 --> 00:03:05.300 copper mine. Thanks to 60 00:03:05.300 --> 00:03:08.700 the acquisition. The company was number one worldwide during 61 00:03:08.700 --> 00:03:09.500 decayed. 62 00:03:10.300 --> 00:03:13.600 At that time some people said that the price was too 63 00:03:13.600 --> 00:03:16.700 low as opposed to the real value of the mind and 64 00:03:16.700 --> 00:03:20.200 addition to that the contractual basis. The 65 00:03:19.200 --> 00:03:22.700 private interests were not supposed to pay any 66 00:03:22.700 --> 00:03:25.300 royalties to the state which is a little 67 00:03:25.300 --> 00:03:28.200 bit. So so now Rio Tinto means the 68 00:03:28.200 --> 00:03:31.300 Red River Why red because of the 69 00:03:31.300 --> 00:03:35.500 consequence of kind of untie mining pollution. 70 00:03:34.500 --> 00:03:39.400 It's already about ecology 1998. 71 00:03:37.400 --> 00:03:40.600 The British part 72 00:03:40.600 --> 00:03:43.600 of the Ross child family is taking control of 73 00:03:43.600 --> 00:03:46.700 this company. The rose child family has always 74 00:03:46.700 --> 00:03:49.000 been interested in equity stakes in 75 00:03:49.200 --> 00:03:53.100 the mining industry. This is part of their strategy, but that 76 00:03:52.100 --> 00:03:56.300 times there are some problems on the mind because 77 00:03:55.300 --> 00:03:58.800 when you extract copper 78 00:03:58.800 --> 00:04:01.100 you have pyrite and you have 79 00:04:01.100 --> 00:04:04.500 to calculate the pirate when it's done open 80 00:04:04.500 --> 00:04:07.300 air you create toxic smoke which our name 81 00:04:07.300 --> 00:04:09.200 Terrace in Spanish. 82 00:04:10.300 --> 00:04:14.700 There will be big fights violence riots demonstration 83 00:04:14.700 --> 00:04:17.700 and intervention of the Army and the 84 00:04:17.700 --> 00:04:18.600 Army is going to shoot. 85 00:04:19.300 --> 00:04:22.700 Nobody knows exactly but according to different sources 86 00:04:22.700 --> 00:04:25.700 about 200 people died out 87 00:04:25.700 --> 00:04:28.800 of this shooting which is absolutely dramatic. 88 00:04:28.800 --> 00:04:31.200 Now, let's leave Cooper for a while 89 00:04:31.200 --> 00:04:34.400 and let's go to aluminum and a little bit of chemistry. 90 00:04:35.300 --> 00:04:39.400 Now we are two years before 1886. There 91 00:04:38.400 --> 00:04:41.900 is a row material which is named bauxite, 92 00:04:41.900 --> 00:04:44.600 which you can find in different locations on 93 00:04:44.600 --> 00:04:45.200 the planet. 94 00:04:46.200 --> 00:04:48.500 And in both sides you have alumina. 95 00:04:49.100 --> 00:04:52.600 When you dissolve the alumina you 96 00:04:52.600 --> 00:04:55.700 get which is a l to 97 00:04:55.700 --> 00:04:59.100 3 a combination of aluminum metal 98 00:04:58.100 --> 00:05:02.000 and oxygen you get aluminum 99 00:05:01.300 --> 00:05:04.000 on one side oxygen on the 100 00:05:04.200 --> 00:05:04.500 other side. 101 00:05:05.600 --> 00:05:08.500 Aluminum is positive 3 plus you 102 00:05:08.500 --> 00:05:12.000 combine that with electrolysis with three 103 00:05:11.500 --> 00:05:15.600 electrons. Each one is minus 3 104 00:05:14.600 --> 00:05:17.700 minus plus three pluses 105 00:05:17.700 --> 00:05:20.300 gives you aluminum metal forget about 106 00:05:20.300 --> 00:05:23.400 the process itself. What is interesting is 107 00:05:23.400 --> 00:05:26.200 that it was discovered by two people at the 108 00:05:26.200 --> 00:05:29.900 same time in 1986 a French person Paul AO 109 00:05:29.900 --> 00:05:33.100 and an American person Charles Martin Hall 110 00:05:33.900 --> 00:05:37.000 So the same Europe the discoveries 111 00:05:36.300 --> 00:05:39.300 is process the develop the process 112 00:05:39.300 --> 00:05:42.400 and what is quite funny if that 113 00:05:42.400 --> 00:05:45.800 they were born both of them in 1863 and they 114 00:05:45.800 --> 00:05:49.700 passed away both of them in 1914. This 115 00:05:48.700 --> 00:05:51.600 is why they were named the twins 116 00:05:51.600 --> 00:05:52.700 of aluminum. 117 00:05:53.500 --> 00:05:57.900 Two consequences of this process massive CO2 118 00:05:57.900 --> 00:06:00.500 emissions in 1886. It 119 00:06:00.500 --> 00:06:03.500 was not really an issue today. It is an issue, 120 00:06:03.500 --> 00:06:06.600 but at that time there was a problem which is still a 121 00:06:06.600 --> 00:06:09.100 problem today high energy consumption. 122 00:06:09.800 --> 00:06:12.800 Energy is one of the reasons why showing again 123 00:06:12.800 --> 00:06:15.400 in the province of Quebec was selected as 124 00:06:15.400 --> 00:06:18.700 a side to produce aluminum because it's 125 00:06:18.700 --> 00:06:21.200 close to the Maurice River. We are 126 00:06:21.200 --> 00:06:24.400 close to the more he see and there you 127 00:06:24.400 --> 00:06:28.800 have production of electricity hydroelectricity. So 128 00:06:28.800 --> 00:06:31.700 you have the power and then you can start 129 00:06:31.700 --> 00:06:35.400 with the electrolysis in 1902. 130 00:06:34.400 --> 00:06:37.400 The test is a success. It 131 00:06:37.400 --> 00:06:41.000 becomes a subsiderate the name of the company is Northern 132 00:06:40.700 --> 00:06:43.500 Aluminum Company and it 133 00:06:43.500 --> 00:06:47.600 is a subsidiary of a company's name is Pittsburgh reduction company 134 00:06:47.600 --> 00:06:50.300 and Pittsburgh reduction company later on 135 00:06:50.300 --> 00:06:53.200 will be Alcoa. So at the 136 00:06:53.200 --> 00:06:56.800 very beginning producing aluminum in Canada comes from 137 00:06:56.800 --> 00:06:58.500 Alcoa in the United States. 138 00:06:59.700 --> 00:07:02.300 But you remember at the beginning of the 20th century. 139 00:07:02.300 --> 00:07:05.200 There are many concerns about the size of 140 00:07:05.200 --> 00:07:08.600 companies and antitrust issues. 141 00:07:08.600 --> 00:07:11.100 This is why plenty of companies where fragmented 142 00:07:11.900 --> 00:07:14.600 In 1911 a standard oil 143 00:07:14.600 --> 00:07:17.200 will be transformed into standard of New Jersey of 144 00:07:17.200 --> 00:07:21.100 California for high on so forth in 1928 145 00:07:20.100 --> 00:07:23.400 alcoaised fragmented because it's 146 00:07:23.400 --> 00:07:27.000 too big and so the Canadian operations are 147 00:07:26.200 --> 00:07:29.600 going to become independent under the 148 00:07:29.600 --> 00:07:32.400 name of aluminum company of Canada. 149 00:07:33.400 --> 00:07:37.000 Aluminum Canada. This is why 1966 the 150 00:07:36.300 --> 00:07:39.700 company becomes and can Al 151 00:07:39.700 --> 00:07:42.400 can as in dependent operation is going 152 00:07:42.400 --> 00:07:45.700 to start growing because there is a demand for this 153 00:07:45.700 --> 00:07:48.600 product. We are going first to grow through organic growth 154 00:07:48.600 --> 00:07:52.000 Capital expenditures production capacity binding 155 00:07:51.600 --> 00:07:53.300 mining resources. 156 00:07:54.300 --> 00:07:57.900 Then once all going to grows is completed, they 157 00:07:57.900 --> 00:08:00.200 start getting to external growths and in 158 00:08:00.200 --> 00:08:01.100 1999. 159 00:08:01.900 --> 00:08:04.500 I can tries to merge with our group 160 00:08:04.500 --> 00:08:07.900 in Switzerland and pechina in France. The 161 00:08:07.900 --> 00:08:10.300 European commission is going to say no you are 162 00:08:10.300 --> 00:08:13.600 too big. So what's going to happen as it failed 163 00:08:13.600 --> 00:08:16.400 as a merger, it will be a success as an acquisition 164 00:08:16.400 --> 00:08:19.600 process in 2000. I can 165 00:08:19.600 --> 00:08:23.000 buys a group to Swiss operations and in 2003 166 00:08:22.700 --> 00:08:25.600 the bypassione the French operations. 167 00:08:26.400 --> 00:08:30.200 Almost the same result in terms of Consolidated turnover 168 00:08:29.200 --> 00:08:32.600 a little bit different in terms of balance sheet 169 00:08:32.600 --> 00:08:35.600 revenues are going to move from 9 to 170 00:08:35.600 --> 00:08:39.000 12 and then from 12 to 25 billion 171 00:08:38.600 --> 00:08:41.400 dollars. So it's a complete change 172 00:08:41.400 --> 00:08:44.100 in the order of magnitude in the size of 173 00:08:44.100 --> 00:08:47.600 the corporation. But when you make a quizzicians you increase 174 00:08:47.600 --> 00:08:50.300 debt in the balance sheet and at the 175 00:08:50.300 --> 00:08:53.400 end of 2006, there are six billion dollars 176 00:08:53.400 --> 00:08:56.700 of that in the balance sheet of the company with all 177 00:08:56.700 --> 00:08:59.700 a 11 billion dollars a faculty. We already discuss 178 00:08:59.700 --> 00:09:02.600 that issue several times in different films, but 179 00:09:02.600 --> 00:09:05.300 when you have too much that the balance sheet you create some 180 00:09:05.300 --> 00:09:08.100 vulnerability you are fragile and you 181 00:09:08.100 --> 00:09:13.800 are the perfect Target for takeover May 2007. Alcoa 182 00:09:12.800 --> 00:09:16.200 proposes 33 billion 183 00:09:15.200 --> 00:09:18.200 dollars to bring alkan back 184 00:09:18.200 --> 00:09:21.700 home. Okay to bring the Canadian operations back 185 00:09:21.700 --> 00:09:23.500 to the US operations. 186 00:09:24.300 --> 00:09:27.800 And Tim does not want and there are some difficulties 187 00:09:27.800 --> 00:09:30.500 between the US and the Canadian government at that 188 00:09:30.500 --> 00:09:33.300 time. So they are going to try to fight again that 189 00:09:33.300 --> 00:09:37.900 they are going to first briefly. Consider a Pac-Man. Pac-Man 190 00:09:36.900 --> 00:09:39.900 is a process which consists 191 00:09:39.900 --> 00:09:42.100 in you try to buy me I try to 192 00:09:42.100 --> 00:09:46.200 buy you and maybe you remember this fantastic game 193 00:09:45.200 --> 00:09:48.700 back in the 80s of Bendix, which 194 00:09:48.700 --> 00:09:51.600 tried to take over Martin Marietta Martin 195 00:09:51.600 --> 00:09:54.800 Marietta bald bandique shares at a 196 00:09:54.800 --> 00:09:57.600 certain point Bendix had more than 60% of 197 00:09:57.600 --> 00:10:00.500 Martin Marietta and Martin Marietta had 198 00:10:00.500 --> 00:10:03.200 more than 50% of bending shares 199 00:10:03.200 --> 00:10:07.100 you imagine the board meeting and the shareholders meeting quite Lively 200 00:10:06.100 --> 00:10:09.700 now, they decide not to try Pac-Man. 201 00:10:09.700 --> 00:10:12.800 It seems that BHP walls 202 00:10:12.800 --> 00:10:15.700 Mall as approached. It failed now 203 00:10:15.700 --> 00:10:19.000 radio tento is proposing a solution. We 204 00:10:18.200 --> 00:10:22.300 are not American. We are Anglo Australian 205 00:10:21.300 --> 00:10:24.000 and we propose 38 206 00:10:24.300 --> 00:10:27.500 Million dollars cash. So five billion more 207 00:10:27.500 --> 00:10:31.400 than alcohol says, okay stop it. So riotinto 208 00:10:30.400 --> 00:10:33.700 is going to buy for 38 209 00:10:33.700 --> 00:10:36.400 billion dollars cash Al can 210 00:10:36.400 --> 00:10:39.000 and it's going to almost double itself. 211 00:10:39.700 --> 00:10:42.200 There are two periods in the life of 212 00:10:42.200 --> 00:10:45.600 royalty into if you look at the last 20 years the first 213 00:10:45.600 --> 00:10:48.500 period is to bring the company from 10 to 30 214 00:10:48.500 --> 00:10:51.300 billion dollars through Acquisitions and so on so first 215 00:10:51.300 --> 00:10:54.400 and then the acquisition of alkan is an increase 216 00:10:54.400 --> 00:10:57.600 in the revenues by 80 percent moving from 217 00:10:57.600 --> 00:11:00.900 30 to almost 55 and 218 00:11:00.900 --> 00:11:03.400 then 55 is going to be 60 and then it's 219 00:11:03.400 --> 00:11:06.200 going to go down because of the price of the row match 220 00:11:06.200 --> 00:11:10.500 Aerials. And then today it's more than 60 billion 67 221 00:11:09.500 --> 00:11:11.700 billion range. 222 00:11:12.400 --> 00:11:15.600 When you look at devotion of the revenues, 223 00:11:15.600 --> 00:11:18.200 it's very much driven by the price at which 224 00:11:18.200 --> 00:11:22.000 you are selling your raw materials. If you take iron ore price 225 00:11:21.600 --> 00:11:24.300 index. What do You observe a beginning of 226 00:11:24.300 --> 00:11:27.100 the 2000 quite low then there is an increase 227 00:11:27.100 --> 00:11:31.000 skyrocketing with a maximum in January 228 00:11:30.300 --> 00:11:33.900 2008 and then sub Prime 229 00:11:33.900 --> 00:11:36.300 crisis drop in the selling 230 00:11:36.300 --> 00:11:39.700 price. Why because there is a macroeconomy crisis and 231 00:11:39.700 --> 00:11:42.100 then it goes up and then it goes down and then it 232 00:11:42.100 --> 00:11:45.300 goes up again and today it's a little bit down but you 233 00:11:45.300 --> 00:11:48.400 understand that these prices are extremely volatile which 234 00:11:48.400 --> 00:11:52.000 might suggests at the business is very risky will have 235 00:11:51.100 --> 00:11:54.200 a different opinion a few minutes. This is about 236 00:11:54.200 --> 00:11:57.100 iron or if you look at aluminum, it's quite the same 237 00:11:57.100 --> 00:12:01.700 quite low very high in 2008 collapses 238 00:12:00.700 --> 00:12:03.700 because of prime and then volatility 239 00:12:03.700 --> 00:12:05.400 then and then down, 240 00:12:06.300 --> 00:12:09.600 That's quite interesting to observe the evolution because at 241 00:12:09.600 --> 00:12:12.500 the end of the time it explains very much the evolution 242 00:12:12.500 --> 00:12:15.300 of the revenues of Rio Tinto. 243 00:12:15.900 --> 00:12:18.900 But if we back in 2007 the 244 00:12:18.900 --> 00:12:21.500 company's acquiring alkan and is introducing 245 00:12:21.500 --> 00:12:24.900 30 billion dollars of death and the balance 246 00:12:24.900 --> 00:12:28.600 Aid which is not that small then surprise surprise 247 00:12:27.600 --> 00:12:30.700 means at the revenues are down, but 248 00:12:30.700 --> 00:12:31.700 the debt is here. 249 00:12:32.500 --> 00:12:36.300 In 2007 the epidier represents 250 00:12:35.300 --> 00:12:38.800 more than 35% of revenues 251 00:12:38.800 --> 00:12:41.400 as a company's generating profits why because of 252 00:12:41.400 --> 00:12:44.300 the level of the prices in the raw material, but the 253 00:12:44.300 --> 00:12:47.700 net financial debt represents four times, 254 00:12:47.700 --> 00:12:49.900 he be there which itself is very high. 255 00:12:51.300 --> 00:12:54.500 You understand that there is a needs you because as a consequence of prime 256 00:12:54.500 --> 00:12:58.000 crisis a company that is going to be unsustainable. 257 00:12:59.300 --> 00:13:03.500 When you have such a problem, sometimes you receive helps from 258 00:13:03.500 --> 00:13:06.700 France. BHP is going to offer a merger 259 00:13:06.700 --> 00:13:09.600 a 66 billion dollar merger, 260 00:13:09.600 --> 00:13:12.500 which is going to be rejected by Rio Tinto. 261 00:13:12.500 --> 00:13:15.400 But if you reject your offer, you don't solve the 262 00:13:15.400 --> 00:13:17.400 issue to solve the issue. What's going to happen? 263 00:13:18.100 --> 00:13:22.000 The company is going to strengthen this balance sheet with two steps. 264 00:13:21.600 --> 00:13:25.200 The first one is welcoming China alko 265 00:13:24.200 --> 00:13:27.500 on board two ways 266 00:13:27.500 --> 00:13:30.500 to do it. First China alko is going to directly invest 267 00:13:30.500 --> 00:13:33.600 in joint ventures. They are going to inject 12 268 00:13:33.600 --> 00:13:36.900 billion plus dollars in the refinancing of 269 00:13:36.900 --> 00:13:39.300 joint ventures. This morning is going to be used in 270 00:13:39.300 --> 00:13:43.200 order to reduce the gearing the in-depthness. So 271 00:13:42.200 --> 00:13:45.700 don't step China alko is going to invest in 272 00:13:45.700 --> 00:13:48.900 subordinated convertible bonds issued by 273 00:13:48.900 --> 00:13:51.600 Rio Tinto for a little bit more than seven 274 00:13:51.600 --> 00:13:55.000 billion dollars subordinated against 275 00:13:54.300 --> 00:13:58.000 the senior debt convertible convertible 276 00:13:57.400 --> 00:14:01.200 into stocks into shares and the 277 00:14:00.200 --> 00:14:03.700 interesting characteristics of these 278 00:14:03.700 --> 00:14:06.800 issue. It's a 16 year 279 00:14:06.800 --> 00:14:09.800 old duration, which is absolutely huge 280 00:14:09.800 --> 00:14:12.800 trench a trunch be convertible 281 00:14:12.800 --> 00:14:15.800 at 45 60 dollars. 282 00:14:15.800 --> 00:14:17.700 Today's stock price is 70 283 00:14:18.100 --> 00:14:21.500 No problem, and the coupon is absolutely significant 284 00:14:21.500 --> 00:14:24.400 for one location. It's 9% for 285 00:14:24.400 --> 00:14:27.100 the other locations 9.5% So very high 286 00:14:27.100 --> 00:14:27.700 coupon. 287 00:14:28.200 --> 00:14:31.500 Now if you take 12 points I'm saying plus seven point something. 288 00:14:31.500 --> 00:14:34.700 It's 19.5. It does not pay the 289 00:14:34.700 --> 00:14:38.100 38. So one thing is going to be necessary in 290 00:14:37.100 --> 00:14:40.100 addition to that. It will be a right issue which 291 00:14:40.100 --> 00:14:43.500 is going to take place in July 2009. It's all 292 00:14:43.500 --> 00:14:46.700 malls 15 billion dollars. The financing is closed and 293 00:14:46.700 --> 00:14:48.000 the company can move on. 294 00:14:48.900 --> 00:14:51.900 But you understand that there where difficult moments 295 00:14:51.900 --> 00:14:54.200 because of the gearing if you 296 00:14:54.200 --> 00:14:57.700 look at the evolution of the financial structure of the company, you 297 00:14:57.700 --> 00:15:00.900 can calculate the gearing Bulgarian dead 298 00:15:00.900 --> 00:15:04.000 divided by book Equity Market Geary that 299 00:15:03.600 --> 00:15:06.500 divided by market value of fact Equity 300 00:15:06.500 --> 00:15:09.400 lot but not least. You can calculate the leverage which 301 00:15:09.400 --> 00:15:12.600 is how many years of a bit a dash take 302 00:15:12.600 --> 00:15:14.400 to repair the net financial debt. 303 00:15:15.300 --> 00:15:18.600 It's very interesting to observe that the company today as 304 00:15:18.600 --> 00:15:21.500 an extremely conservative balance. It's no debt. 305 00:15:22.300 --> 00:15:25.200 And the situation today is a consequence of a 306 00:15:25.200 --> 00:15:27.800 trend which started about 10 years ago. 307 00:15:28.900 --> 00:15:31.800 The gearing is trattospheric in 308 00:15:31.800 --> 00:15:33.000 2007. 309 00:15:33.800 --> 00:15:36.300 At the end of 2007 the net 310 00:15:36.300 --> 00:15:39.900 dad to be that is I repeat four 311 00:15:39.900 --> 00:15:42.700 times dead divided by Equity Book 312 00:15:42.700 --> 00:15:46.500 value. It's 1.6 1.7 times. 313 00:15:47.200 --> 00:15:50.200 And the consequence of the restructuring of the 314 00:15:50.200 --> 00:15:53.000 Dead the reduction in the debt is going to 315 00:15:53.200 --> 00:15:56.400 be good news. We get back to a normal level 316 00:15:56.400 --> 00:15:59.900 and we are out of potential problems for 317 00:15:59.900 --> 00:16:00.500 the company. 318 00:16:01.400 --> 00:16:04.400 That's quite an interesting Financial strategy. What is 319 00:16:04.400 --> 00:16:07.600 a consequence of this process on the portfolio 320 00:16:07.600 --> 00:16:10.400 of shareholders of the company the companies 321 00:16:10.400 --> 00:16:13.400 do all listed company. It's listed in London 322 00:16:13.400 --> 00:16:16.400 with ADR in New York and in Sydney, 323 00:16:16.400 --> 00:16:19.500 Australia and you okay. The main 324 00:16:19.500 --> 00:16:20.900 shareholder is China called. 325 00:16:21.500 --> 00:16:24.400 with 14% of the shares 326 00:16:25.300 --> 00:16:28.800 Second is Black Rock black rocks are 327 00:16:28.800 --> 00:16:31.800 very well. Known investment fund ways 9% 328 00:16:31.800 --> 00:16:35.400 directly and a little bit more indirectly. We 329 00:16:34.400 --> 00:16:37.300 are going to discuss the presence of 330 00:16:37.300 --> 00:16:41.000 Black Rock and it's impact on the governance in 331 00:16:40.200 --> 00:16:43.500 the second film. Now you remember that I mentioned 332 00:16:43.500 --> 00:16:46.100 the financial performance of the company we have 333 00:16:46.100 --> 00:16:49.100 to do a little bit of financial analysis in order to 334 00:16:49.100 --> 00:16:52.800 assess the level of performance and where the performance 335 00:16:52.800 --> 00:16:53.500 comes from. 336 00:16:54.500 --> 00:16:57.400 There are some business segments. Each of them 337 00:16:57.400 --> 00:17:01.600 is generating its own level of commercial profitability return 338 00:17:01.600 --> 00:17:02.300 on sales. 339 00:17:02.900 --> 00:17:05.600 This is about return on says I'm not returning Capital. 340 00:17:05.600 --> 00:17:08.300 So we have to complement with assets turnover with the 341 00:17:08.300 --> 00:17:11.600 assets turnover. We have to discuss working capital requirement and 342 00:17:11.600 --> 00:17:14.400 the cash conversion cycle. And we also have to discuss 343 00:17:14.400 --> 00:17:17.600 the capital expenditures industrial 344 00:17:17.600 --> 00:17:19.100 strategy of the company. 345 00:17:20.300 --> 00:17:23.700 Once we have the assets turnover on the return sales, we can calculate the 346 00:17:23.700 --> 00:17:26.400 return capital and try to find a correlation 347 00:17:26.400 --> 00:17:28.800 with the market to book I mentioned earlier. 348 00:17:29.800 --> 00:17:32.200 But there is a second step in this kind 349 00:17:32.200 --> 00:17:35.800 of correlation and confrontation, which is about calculate 350 00:17:35.800 --> 00:17:38.900 the market to book which the capital should 351 00:17:38.900 --> 00:17:41.500 achieve. Theoretically if there was 352 00:17:41.500 --> 00:17:44.300 no growth in the free cash flow and compare that 353 00:17:44.300 --> 00:17:47.500 with the actual Market book, which you can observe on a 354 00:17:47.500 --> 00:17:50.500 stock market. What does a different business segments at 355 00:17:50.500 --> 00:17:53.500 Rio Tinto the big one is iron ore? 356 00:17:53.900 --> 00:17:56.900 Followed by predominantly aluminum 357 00:17:56.900 --> 00:17:59.700 copper and minerals and 358 00:17:59.700 --> 00:18:02.100 so on so forth including diamonds and so on. 359 00:18:02.900 --> 00:18:06.200 What is very interesting in 2009 iron 360 00:18:05.200 --> 00:18:08.800 ore and aluminum and copper they 361 00:18:08.800 --> 00:18:11.300 represent roughly 30% and the 362 00:18:11.300 --> 00:18:14.100 rest is minerals plus others, but something is going to 363 00:18:14.100 --> 00:18:17.100 happen in 2010 iron ore is 364 00:18:17.100 --> 00:18:20.500 going to become the leader in the team and he's 365 00:18:20.500 --> 00:18:23.700 going to rain Force its leadership throughout the years. So 366 00:18:23.700 --> 00:18:26.300 it's no more 30% to date 367 00:18:26.300 --> 00:18:29.500 60% So almost two thirds of revenues come 368 00:18:29.500 --> 00:18:32.700 from Iron Ore which will have very big 369 00:18:32.700 --> 00:18:34.500 impact in the second film. 370 00:18:35.600 --> 00:18:38.600 What about aluminum and copper it goes 371 00:18:38.600 --> 00:18:41.400 down relatively in absolute 372 00:18:41.400 --> 00:18:44.700 term not so much. But basically when one segment 373 00:18:44.700 --> 00:18:47.200 represents 60% the others are represent 374 00:18:47.200 --> 00:18:50.300 10 to 20 percent and then the 375 00:18:50.300 --> 00:18:54.100 way it works. So iron ore is definitely the Blockbuster at 376 00:18:53.100 --> 00:18:56.300 Rio Tinto. What about the commercial 377 00:18:56.300 --> 00:18:59.200 profitability a bit dark guarantee? It 378 00:18:59.200 --> 00:19:02.900 does so excluding non-recurant items riotin toy 379 00:19:02.900 --> 00:19:05.600 the company we generate 60 to 70 billion 380 00:19:05.600 --> 00:19:08.800 dollars of Revenue with a fantastic level 381 00:19:08.800 --> 00:19:10.400 of commercial profitability. 382 00:19:11.500 --> 00:19:15.500 It to revenues represents more than 55% 383 00:19:14.500 --> 00:19:17.900 of revenues, which is absolutely outstanding. 384 00:19:17.900 --> 00:19:20.700 Of course, it's not the rose. It's another Ross 385 00:19:20.700 --> 00:19:23.300 but it's very significant contributor to 386 00:19:23.300 --> 00:19:24.200 the economic performance. 387 00:19:25.900 --> 00:19:28.300 Interestingly when you build a pnl you move from a bit 388 00:19:28.300 --> 00:19:31.600 down to a bit the differences da and 389 00:19:31.600 --> 00:19:34.900 dies depreciation and amortization of tangible 390 00:19:34.900 --> 00:19:36.600 and intangible assets. 391 00:19:37.300 --> 00:19:40.600 So that is a consequence of capital expenditures, of 392 00:19:40.600 --> 00:19:43.800 course a bit down a bit moving parallel that's 393 00:19:43.800 --> 00:19:46.400 obvious. But what is interesting is 394 00:19:46.400 --> 00:19:49.100 to measure the Gap the difference and the difference 395 00:19:49.100 --> 00:19:52.600 is 10 to 15% depending on 396 00:19:52.600 --> 00:19:52.900 the year. 397 00:19:53.900 --> 00:19:56.200 Which is a consequence of capex in the 398 00:19:56.200 --> 00:20:00.100 past. So as this figure is quite significant, it demonstrates 399 00:19:59.100 --> 00:20:02.500 that it is a consequence of massive Capital 400 00:20:02.500 --> 00:20:05.500 expenditures investment big impact on the assets 401 00:20:05.500 --> 00:20:06.000 turnover. 402 00:20:07.200 --> 00:20:10.300 Now if we go back to a video for a while, what 403 00:20:10.300 --> 00:20:13.600 do we observe? We observe that for iron or 404 00:20:13.600 --> 00:20:16.500 its absolutely huge which is 405 00:20:16.500 --> 00:20:19.500 70% So iron always 406 00:20:19.500 --> 00:20:22.700 normally generating 60% to revenues but 407 00:20:22.700 --> 00:20:26.000 70% of it too revenues. 408 00:20:25.900 --> 00:20:27.300 That's huge. 409 00:20:28.300 --> 00:20:32.500 And we observe also that the ability of aluminum and 410 00:20:32.500 --> 00:20:35.700 copper and others was a 411 00:20:35.700 --> 00:20:39.800 little bit low compared to Iron Ore 412 00:20:38.800 --> 00:20:41.900 10 to 20 percent and gradually it's 413 00:20:41.900 --> 00:20:44.700 getting up and today. It's plus minus 414 00:20:44.700 --> 00:20:47.500 40% the double the 415 00:20:47.700 --> 00:20:49.500 Eternal sales for these segments. 416 00:20:50.600 --> 00:20:53.200 But what is also very interesting is to 417 00:20:53.200 --> 00:20:56.200 move from ibeda to a bit? We have the 418 00:20:56.200 --> 00:20:59.800 Precision and amortization for this business segments. 419 00:20:59.800 --> 00:21:02.500 And when we try to find a low point 420 00:21:02.500 --> 00:21:05.800 of EB to revenues, it's quite interesting. Of 421 00:21:05.800 --> 00:21:08.000 course, it happens, but never at the same 422 00:21:08.000 --> 00:21:08.200 time. 423 00:21:09.200 --> 00:21:12.900 If you look at iron all the low point was 40% Wow 424 00:21:12.900 --> 00:21:16.400 in 2015, so huge 425 00:21:15.400 --> 00:21:19.200 commercial profitability and quite 426 00:21:18.200 --> 00:21:22.100 stable. Oh sometimes aluminum. 427 00:21:21.100 --> 00:21:24.500 It's plus sometimes it's down it became 428 00:21:24.500 --> 00:21:27.500 negative in 2008, but the good news is when 429 00:21:27.500 --> 00:21:30.700 it was negative. It was very positive for copper 430 00:21:30.700 --> 00:21:33.600 and four minerals and for iron ore 431 00:21:33.600 --> 00:21:36.500 so no problem now for minerals, it 432 00:21:36.500 --> 00:21:40.100 went negative in 2011, but before 433 00:21:39.100 --> 00:21:42.300 Cooper and aluminum, and I 434 00:21:42.300 --> 00:21:45.700 don't know it was strongly positive for Cooper it 435 00:21:45.700 --> 00:21:48.700 went negative in 2016, but it was compensated by 436 00:21:48.700 --> 00:21:51.700 the nice commercial profitability generated by 437 00:21:51.700 --> 00:21:55.000 the other business segments. Why do you conclude out of observing 438 00:21:54.300 --> 00:21:57.800 this kind of utilization diversification of 439 00:21:57.300 --> 00:22:00.400 Eternal sales at the 440 00:22:00.400 --> 00:22:04.100 group level? Hi commercial profitability huge commercial 441 00:22:03.100 --> 00:22:06.600 property for iron ore but 442 00:22:06.600 --> 00:22:09.100 also very interesting portfolio effect. 443 00:22:09.600 --> 00:22:12.700 Fluctuations are compensating each other. This is 444 00:22:12.700 --> 00:22:15.500 why as far as a group is concerned. There's very limited 445 00:22:15.500 --> 00:22:16.900 operating risk. 446 00:22:17.600 --> 00:22:20.400 Low, operating race means you have a high 447 00:22:20.400 --> 00:22:23.100 debt capacity, which is definitely not a strategy 448 00:22:23.100 --> 00:22:27.800 of freyotinto, but low operating risk limited operating 449 00:22:27.800 --> 00:22:31.100 risk means low sensitivity to macroeconomic 450 00:22:30.100 --> 00:22:33.600 conditions. This is a beta this is a systematic risk 451 00:22:33.600 --> 00:22:36.200 coefficient. Remember that we'll need that in a few minutes. 452 00:22:37.200 --> 00:22:40.600 Nazis was for Eternal says let's have a look at assets turnover 453 00:22:40.600 --> 00:22:44.400 assets on over the combination of working capital requirement cash 454 00:22:43.400 --> 00:22:46.700 conversion cycle and capex strategy. 455 00:22:47.300 --> 00:22:50.500 As far as the cash conversion cycle is concerned. It was 456 00:22:50.500 --> 00:22:53.500 three months of revenues something 457 00:22:53.500 --> 00:22:56.600 like 20 years ago and today it's one month of revenues. 458 00:22:57.300 --> 00:23:00.400 So it went down little bit it's management. 459 00:23:00.400 --> 00:23:03.200 It's productivity and it's also the 460 00:23:03.200 --> 00:23:06.400 consequence of growth. There's an exceptional 461 00:23:06.400 --> 00:23:09.400 you're in 2007. Why because when 462 00:23:09.400 --> 00:23:12.500 they buy Alcan at the end of the year, they 463 00:23:12.500 --> 00:23:15.200 have one half percent of the balance sheet of alkan. But 464 00:23:15.200 --> 00:23:18.300 in the piano just have part of the revenues of 465 00:23:18.300 --> 00:23:21.100 Arkansas. So technically it goes up. It does not 466 00:23:21.100 --> 00:23:24.200 means that there is an explosion in the inventory. It means that 467 00:23:24.200 --> 00:23:27.700 it's just bookkeeping accounting and calculation. There's 468 00:23:27.700 --> 00:23:30.300 a trend it's down and today the working capital 469 00:23:30.300 --> 00:23:33.100 requirement is very limited in the 470 00:23:33.100 --> 00:23:33.900 balance sheet. 471 00:23:34.800 --> 00:23:37.300 Not property plant and equipment 472 00:23:37.300 --> 00:23:41.300 and so on so forth, which is very big why because the 473 00:23:40.300 --> 00:23:44.200 capital is investing a very significant percentage of 474 00:23:44.200 --> 00:23:47.700 its revenues each and every year 10 to 20 percent If 475 00:23:47.700 --> 00:23:50.700 You observe throughout the years, what is the consequence 476 00:23:50.700 --> 00:23:53.200 in the PNR you remember it'd be 477 00:23:53.200 --> 00:23:56.200 die minus a bit. The difference is 10 to 15 478 00:23:56.200 --> 00:24:00.400 percent consequence of capex 10 to 20 percent. Absolutely 479 00:23:59.400 --> 00:24:02.200 consistent. Now, this is the first 480 00:24:02.200 --> 00:24:05.700 metrics I wanted to show you about the capex strategies the 481 00:24:05.700 --> 00:24:08.800 second one which I very much appreciate when 482 00:24:08.800 --> 00:24:11.700 I look at the company is a investment 483 00:24:11.700 --> 00:24:14.500 intensity capex divided by depreciation. 484 00:24:15.300 --> 00:24:18.700 Depreciation amortization is a consequence of capex 485 00:24:18.700 --> 00:24:22.100 yesterday. If you divide capex today by average 486 00:24:21.100 --> 00:24:24.300 capex yesterday when it's more than 487 00:24:24.300 --> 00:24:27.500 one it means that you invest more today than you were investing yesterday. 488 00:24:28.400 --> 00:24:31.900 And what is very interesting that except one year 489 00:24:31.900 --> 00:24:34.800 which is 2016 the company's 490 00:24:34.800 --> 00:24:37.700 investing significantly more than its depreciation. 491 00:24:37.700 --> 00:24:40.400 So the company is reinforcing and 492 00:24:40.400 --> 00:24:43.600 rainforcing its capex strategy. Now, the third 493 00:24:43.600 --> 00:24:46.500 indicator in terms of capex strategy is about 494 00:24:46.500 --> 00:24:49.300 financing the capex. You remember the free cash 495 00:24:49.300 --> 00:24:52.700 flow formula it be done minus Delta 496 00:24:52.700 --> 00:24:56.400 working capital requirement, which is negligible minus capex 497 00:24:56.400 --> 00:25:00.400 minus taxes. Do you generate enough to finance 498 00:24:59.400 --> 00:25:02.400 your capex? So you calculate it 499 00:25:02.400 --> 00:25:05.200 be that divided by capex and if it's more 500 00:25:05.200 --> 00:25:09.000 than one it means that you have to invest your Bida into 501 00:25:08.200 --> 00:25:11.600 your capex and the way it works. Why do 502 00:25:11.600 --> 00:25:14.100 You observe is each and every year 503 00:25:14.100 --> 00:25:17.100 excluding 2012 where a bit and 504 00:25:17.100 --> 00:25:20.800 capex are absolutely matching it be significantly more 505 00:25:20.800 --> 00:25:23.400 than capex. So the company's generating 506 00:25:23.400 --> 00:25:25.900 a free cash flow to the firm, which is very positive. 507 00:25:26.900 --> 00:25:29.300 And he's paying a dividend and he's buying back 508 00:25:29.300 --> 00:25:32.900 his shares and it's reducing is adaptedness. Either 509 00:25:32.900 --> 00:25:35.600 way. It works very consistent. Now, this 510 00:25:35.600 --> 00:25:38.300 is capex for the group. What about capex for the 511 00:25:38.300 --> 00:25:38.600 segments? 512 00:25:39.200 --> 00:25:43.300 We have the information starting in 2008. There 513 00:25:42.300 --> 00:25:45.600 are two segments on which I would like to insist a 514 00:25:45.600 --> 00:25:46.700 little bit iron ore. 515 00:25:47.100 --> 00:25:48.200 and aluminum 516 00:25:48.800 --> 00:25:51.500 What is very interesting when you calculate a bitter 517 00:25:51.500 --> 00:25:55.000 divided by capex you divide a profit 518 00:25:54.500 --> 00:25:56.200 by an investment? 519 00:25:57.200 --> 00:26:01.100 Then philosophy as a rose a my friends roses how 520 00:26:00.100 --> 00:26:03.500 much you are divided by how much you invested throughout 521 00:26:03.500 --> 00:26:07.700 the years. It'd be that is how much you earn before depreciation 522 00:26:06.700 --> 00:26:09.400 in capex is how mature 523 00:26:09.400 --> 00:26:12.400 investing before you depreciate but it's 524 00:26:12.400 --> 00:26:16.000 capex of the year. It's not Capital employed accumulated throughout 525 00:26:15.100 --> 00:26:18.100 the years basically is the same feel as a fee. 526 00:26:18.100 --> 00:26:21.200 So when he beat that on capex is very 527 00:26:21.200 --> 00:26:21.700 high. 528 00:26:22.600 --> 00:26:25.400 It's very likely that the Rosa is going to be very 529 00:26:25.400 --> 00:26:26.100 high as well. 530 00:26:27.300 --> 00:26:31.200 Look at it be done capex for aluminum. It's quite 531 00:26:30.200 --> 00:26:33.400 significant and during this last 532 00:26:33.400 --> 00:26:37.100 year. It was about two. It's more than two in 2021. 533 00:26:36.100 --> 00:26:40.900 So the company is Comfortably financing. 534 00:26:39.900 --> 00:26:42.400 It's Capital expenditures in 535 00:26:42.400 --> 00:26:45.900 aluminum by The Profit generated by the segment. But 536 00:26:45.900 --> 00:26:48.900 as far as iron ore is concerned, it's much 537 00:26:48.900 --> 00:26:52.100 more. The capital is generating eight times 538 00:26:51.100 --> 00:26:55.500 the capex in terms of Abida and 539 00:26:54.500 --> 00:26:58.000 the consequence will be announced standing 540 00:26:57.400 --> 00:27:00.300 return on Capital will discuss that in 541 00:27:00.300 --> 00:27:00.600 a minute. 542 00:27:01.500 --> 00:27:04.700 Now we have discussed capex and working capital requirement. 543 00:27:04.700 --> 00:27:07.600 The consequence is assets turnover years 544 00:27:07.600 --> 00:27:10.300 ago. It was one a few years ago. It was 545 00:27:10.300 --> 00:27:13.100 0.6. This is a consequence of a company 546 00:27:13.100 --> 00:27:16.800 which is very Capital intensive and why because the 547 00:27:16.800 --> 00:27:19.900 company is investing a lot in capital expenditures. 548 00:27:19.900 --> 00:27:22.600 You remember working capital requirement is 549 00:27:22.600 --> 00:27:23.400 not very significant. 550 00:27:24.400 --> 00:27:27.900 Now once you have the return sales and the assets turnover, 551 00:27:27.900 --> 00:27:30.700 you're multiply one by the other to get 552 00:27:30.700 --> 00:27:31.900 the return capital. 553 00:27:32.800 --> 00:27:35.600 The return Capital as always been quite 554 00:27:35.600 --> 00:27:38.400 comfortable in the company, but it's 555 00:27:38.400 --> 00:27:41.500 skyrocketing today. Why because the return sales is 556 00:27:41.500 --> 00:27:45.000 almost 50% 49.5 which 557 00:27:44.100 --> 00:27:47.600 is an outstanding return sales. You multiply 558 00:27:47.600 --> 00:27:51.000 that by and I said to an over which is quite low 559 00:27:50.500 --> 00:27:53.600 and compensated By the Fantastic commercial 560 00:27:53.600 --> 00:27:56.500 profitability, but with an asset turnover of 561 00:27:56.500 --> 00:27:59.400 1.15, which means that if you have invested one or 562 00:27:59.400 --> 00:28:02.400 in your business operations, you generate annual revenues of 563 00:28:02.400 --> 00:28:03.300 1.15. 564 00:28:04.800 --> 00:28:09.000 One multiplied by that gives you 56% of 565 00:28:08.500 --> 00:28:12.200 return Capital before tax. It's absolutely 566 00:28:11.200 --> 00:28:14.400 fantastic. And so in a 567 00:28:14.400 --> 00:28:17.700 capital intensive industry, this company is extremely 568 00:28:17.700 --> 00:28:20.700 profitable. The company does not disclose the 569 00:28:20.700 --> 00:28:24.000 capital employed by business segment, but the 570 00:28:23.300 --> 00:28:26.400 disclose in the annual report 2021 the 571 00:28:26.400 --> 00:28:29.700 return Capital employed after tax. So 572 00:28:29.700 --> 00:28:32.500 the road same multiplied by one minus tax rate to 573 00:28:32.500 --> 00:28:35.300 make it simple for each and every business segment. 574 00:28:36.400 --> 00:28:39.300 You remember it's 56% for 575 00:28:39.300 --> 00:28:42.200 the group after tax. It's 40% But what 576 00:28:42.200 --> 00:28:44.000 about the different business segments? 577 00:28:44.900 --> 00:28:47.600 You remember iron ore fantastic return on 578 00:28:47.600 --> 00:28:47.900 sales? 579 00:28:48.700 --> 00:28:51.500 Return capital is great 100% of 580 00:28:51.500 --> 00:28:54.800 the tax. It means that the net operating profit after 581 00:28:54.800 --> 00:28:57.300 tax each and every year matches with the 582 00:28:57.300 --> 00:29:01.500 accumulator investment in business operations. It's outstanding 583 00:29:00.500 --> 00:29:03.100 performance. What about 584 00:29:03.100 --> 00:29:06.600 aluminum and copper and Minerals Well, after 585 00:29:06.600 --> 00:29:10.200 tax is 14 16 21 percent by 586 00:29:09.200 --> 00:29:12.200 far it passes away to the average cost of 587 00:29:12.200 --> 00:29:15.200 capital you remember it's a real see after tax. 588 00:29:15.200 --> 00:29:18.900 So this businesses are very profitable iron or 589 00:29:18.900 --> 00:29:21.700 is outstandingly profitable which will 590 00:29:21.700 --> 00:29:24.300 have a huge impact in the second field 591 00:29:24.300 --> 00:29:27.200 not to conclude this first film. Let's get 592 00:29:27.200 --> 00:29:30.800 to the question. What is the performance we calculated very 593 00:29:30.800 --> 00:29:31.000 high. 594 00:29:31.800 --> 00:29:34.300 What is a market to book? What is the stock 595 00:29:34.300 --> 00:29:38.200 market credibility Market to book Enterprise Value divided 596 00:29:37.200 --> 00:29:41.300 by a capital employer. Very traditional Enterprise 597 00:29:40.300 --> 00:29:43.300 Value is Market caplessnet financial 598 00:29:43.300 --> 00:29:46.200 debt, and there is a link between performance and 599 00:29:46.200 --> 00:29:49.400 values. This is what Financial series says and 600 00:29:49.400 --> 00:29:52.200 it works quite well. So Market to book is a 601 00:29:52.200 --> 00:29:55.300 relative value creation value creation. Of course when 602 00:29:55.300 --> 00:29:58.800 it is more than one we can measure return Capital 603 00:29:58.800 --> 00:30:01.600 we calculate and we try to find a correlation 604 00:30:01.600 --> 00:30:02.500 between these two. 605 00:30:03.300 --> 00:30:06.900 But there is something also very interesting which is let's calculate 606 00:30:06.900 --> 00:30:09.400 the market to book as if there 607 00:30:09.400 --> 00:30:13.200 was no gross in a free cash flow a financial formula 608 00:30:12.200 --> 00:30:15.100 says it's a rosary after tax, which we 609 00:30:15.100 --> 00:30:18.200 already calculated divided by the work which we 610 00:30:18.200 --> 00:30:21.300 are going to calculate then when you confront the market 611 00:30:21.300 --> 00:30:24.300 to book no growth and the actual Market book is 612 00:30:24.300 --> 00:30:27.300 there is a gap. There's a question. Let's start with a 613 00:30:27.300 --> 00:30:30.900 simple correlation between Rosa and Maraca to book it works 614 00:30:30.900 --> 00:30:33.900 very well at 2016. We 615 00:30:33.900 --> 00:30:36.000 observe that is about the same trend. Of course, 616 00:30:36.500 --> 00:30:39.600 they are small differences from one year to the other but at 617 00:30:39.600 --> 00:30:42.600 the end of the day, there is a strong correlation I have to do 2016 618 00:30:42.600 --> 00:30:46.700 and the correlation stops in 2017 because 619 00:30:45.700 --> 00:30:48.900 the market to book is going to gradually 620 00:30:48.900 --> 00:30:52.700 in smoothly go up to get to when 621 00:30:51.700 --> 00:30:54.200 they return capital is 622 00:30:54.200 --> 00:30:58.700 going to go up very much to get to 56% before 623 00:30:58.700 --> 00:30:59.100 tax. 624 00:30:59.900 --> 00:31:02.600 And you understand that there is an increasing gap 625 00:31:02.600 --> 00:31:05.500 between the performance and the stock 626 00:31:05.500 --> 00:31:09.400 price. Of course, these graph is not fully scientific 627 00:31:08.400 --> 00:31:11.200 because it depends very much 628 00:31:11.200 --> 00:31:15.100 on the values you take for the y-axis. Okay. Now 629 00:31:14.100 --> 00:31:17.800 we have to get to a scientific calculation 630 00:31:17.800 --> 00:31:20.800 Market to book no growth. Rosay 631 00:31:20.800 --> 00:31:23.400 divided by what let's calculate the walk. We need 632 00:31:23.400 --> 00:31:26.300 two parameters to calculate the walk the relative 633 00:31:26.300 --> 00:31:29.600 share of 10 on Equity that for equity in 634 00:31:29.600 --> 00:31:32.200 value terms. You remember and the cost of Faculty, 635 00:31:32.200 --> 00:31:35.900 which is the beta first parameter quite simple know that 636 00:31:35.900 --> 00:31:38.100 so if there is no dead, what does it mean 637 00:31:38.100 --> 00:31:41.700 it means that the financial strategies of the company again is quite 638 00:31:41.700 --> 00:31:45.100 conservative fantastic strategic flexibility 639 00:31:44.100 --> 00:31:47.700 and walk is way average cost 640 00:31:47.700 --> 00:31:50.300 of capital. It's close to cost of equity because there's no 641 00:31:50.300 --> 00:31:53.300 debt so cinnamon parent which we need is a beta 642 00:31:53.900 --> 00:31:56.600 you remember the portfolio effect, which I described 643 00:31:56.600 --> 00:31:59.800 fluctuations are more as compensating 644 00:31:59.800 --> 00:32:00.700 each other. 645 00:32:01.400 --> 00:32:04.200 The consequences what the consequence is that in 646 00:32:04.200 --> 00:32:07.300 the past beta was 0.5 and today the beta is 0.5. 647 00:32:07.300 --> 00:32:10.600 There was a period of turbulences as a 648 00:32:10.600 --> 00:32:13.200 consequence of prime crisis, but the long term 649 00:32:13.200 --> 00:32:17.200 enduring bet of the company is 0.5 low 650 00:32:16.200 --> 00:32:19.000 systematic risk. 651 00:32:19.600 --> 00:32:22.800 Now we can calculate the walk which is about 5% We 652 00:32:22.800 --> 00:32:25.400 calculate the row say which we divide by the whack each 653 00:32:25.400 --> 00:32:28.700 and every year and why do we get a perfect 654 00:32:28.700 --> 00:32:32.600 correlation up to 2016 then 655 00:32:31.600 --> 00:32:34.900 starting in 2017 a 656 00:32:34.900 --> 00:32:37.700 gap and the Gap is growing and growing 657 00:32:37.700 --> 00:32:38.900 and growing and growing. 658 00:32:39.700 --> 00:32:42.300 And today the market to book at 659 00:32:42.300 --> 00:32:45.400 no growth should be eight. Why because the 660 00:32:45.400 --> 00:32:49.000 rose say after tax is 40% and the carrot walk 661 00:32:48.300 --> 00:32:51.500 is five for the divided by five is 662 00:32:51.500 --> 00:32:54.100 eight. So the market to book at no 663 00:32:54.100 --> 00:32:57.300 gross would be theoretically eight and it 664 00:32:57.300 --> 00:33:01.000 is actually to that's a gap. Of course, 665 00:33:00.200 --> 00:33:03.200 it can be explained in 2021 by 666 00:33:03.200 --> 00:33:06.400 the exceptional raw materials prices. You 667 00:33:06.400 --> 00:33:08.300 remember the evolution and the volatility. 668 00:33:09.300 --> 00:33:13.000 But you know what in 2016 18 19 669 00:33:12.500 --> 00:33:15.400 and 20 the road materials prices 670 00:33:15.400 --> 00:33:18.400 were quite normal then we 671 00:33:18.400 --> 00:33:22.200 don't have any explanation for the period 2018 to 672 00:33:21.200 --> 00:33:24.300 2020 When You observe 673 00:33:24.300 --> 00:33:27.700 a credibility gap, there might be plenty of different causes. 674 00:33:27.700 --> 00:33:31.000 I personally observed credibility 675 00:33:30.400 --> 00:33:33.900 gap which we're generated by strategic shifts. 676 00:33:34.600 --> 00:33:37.300 Strategic shifts in companies which we are not yet 677 00:33:37.300 --> 00:33:40.600 validated by the market. For example, when Dad on 678 00:33:40.600 --> 00:33:43.400 moved from glass to food the market 679 00:33:43.400 --> 00:33:46.600 said at the very beginning are you sure you can do it and 680 00:33:46.600 --> 00:33:49.300 it took four years so that the market is absolutely 681 00:33:49.300 --> 00:33:52.400 convinced that it was a right strategy for 682 00:33:52.400 --> 00:33:55.300 the company and then the credibility gap was closed. 683 00:33:55.300 --> 00:33:58.100 I also have some companies which were 684 00:33:58.100 --> 00:34:01.600 experiencing financial difficulties and troubled moments. 685 00:34:01.600 --> 00:34:04.200 They are back to profitability and 686 00:34:04.200 --> 00:34:07.700 the markets as we are not sure that these profitability is enduring 687 00:34:07.700 --> 00:34:10.600 is sustainable. Maybe it's getting better 688 00:34:10.600 --> 00:34:13.400 today and was tomorrow you have 689 00:34:13.400 --> 00:34:16.800 not yet demonstrated your ability to generate a ranch 690 00:34:16.800 --> 00:34:19.400 return Capital. Then there's a credibility gap. 691 00:34:19.400 --> 00:34:22.300 Yeah some of the reasons but there is one which I 692 00:34:22.300 --> 00:34:22.900 would like to mention. 693 00:34:23.900 --> 00:34:26.400 Sometimes there is a credibility gap because there 694 00:34:26.400 --> 00:34:29.900 is a growing concern on the investor 695 00:34:29.900 --> 00:34:33.000 side about the weather companies operated 696 00:34:32.700 --> 00:34:36.100 how the weather companies manage 697 00:34:35.100 --> 00:34:38.400 a financial and operating decisions taken 698 00:34:38.400 --> 00:34:42.100 by the company and the associated risks 699 00:34:41.100 --> 00:34:44.100 which are related with the behavior of 700 00:34:44.100 --> 00:34:44.700 the company. 701 00:34:45.500 --> 00:34:48.800 E s g is part of that. So 702 00:34:48.800 --> 00:34:51.600 in the second film, I'm going to describe E 703 00:34:51.600 --> 00:34:53.900 and S and G as a consequence. 704 00:34:54.500 --> 00:34:57.800 Rio Tinto an alkan within Rio 705 00:34:57.800 --> 00:35:01.900 tento and we are going to question some strategic 706 00:35:00.900 --> 00:35:03.800 relevance of the company 707 00:35:03.800 --> 00:35:07.000 in terms of portfolio of activities the 708 00:35:06.400 --> 00:35:09.500 Big E SG cultural gap 709 00:35:09.500 --> 00:35:12.300 between different parts of the company and it's 710 00:35:12.300 --> 00:35:15.200 potential impact on the value, which 711 00:35:15.200 --> 00:35:18.000 is created by ryotinto as a group 712 00:35:18.500 --> 00:35:19.300 for its shareholders. 713 00:35:20.600 --> 00:35:21.200 Thank you very much.