WEBVTT 1 00:00:07.500 --> 00:00:10.300 Hello and welcome to the second film which is devoted to 2 00:00:10.300 --> 00:00:13.800 Rio Tinto and the relationship between market 3 00:00:13.800 --> 00:00:17.000 value and ESG environment 4 00:00:16.900 --> 00:00:18.600 society and governance. 5 00:00:19.600 --> 00:00:22.500 You remember that Rio Tito is operating in a mining 6 00:00:22.500 --> 00:00:25.700 industry. It's an Anglo Australian company and 7 00:00:25.700 --> 00:00:28.200 what we observed during the first film is that the 8 00:00:28.200 --> 00:00:31.200 capital is performance was justifying a market 9 00:00:31.200 --> 00:00:34.500 to book Enterprise Value divided by 10 00:00:34.500 --> 00:00:37.900 Capital employed of four times. The 11 00:00:37.900 --> 00:00:40.300 cabinet should be worth four times the 12 00:00:40.300 --> 00:00:43.800 amount of money which is invested in the business operations. And 13 00:00:43.800 --> 00:00:46.400 what did we observe the market value 14 00:00:46.400 --> 00:00:49.800 was only representing twice the capital 15 00:00:49.800 --> 00:00:52.300 employed. That's obviously the 16 00:00:52.300 --> 00:00:55.800 consequence of the major credibility gap, which 17 00:00:55.800 --> 00:00:58.600 we try to explain now can the 18 00:00:58.600 --> 00:01:02.000 particular specific ESG profile of 19 00:01:01.700 --> 00:01:04.300 radio Tinto or the 20 00:01:04.300 --> 00:01:07.800 mining industry at large be regarded as 21 00:01:07.800 --> 00:01:10.500 an explanatory factor for this huge 22 00:01:10.500 --> 00:01:13.900 difference between expected value and 23 00:01:13.900 --> 00:01:15.000 actual value. 24 00:01:16.200 --> 00:01:20.100 That's not a small issue. The answer is really a 25 00:01:19.100 --> 00:01:22.800 financial issue because the company's worth 26 00:01:22.800 --> 00:01:25.200 twice should be worth four times the difference between 27 00:01:25.200 --> 00:01:28.700 four and two is two and then the difference represents 28 00:01:28.700 --> 00:01:33.500 twice a capital employed, which is only 110 29 00:01:31.500 --> 00:01:34.400 billion dollars. So 30 00:01:34.400 --> 00:01:37.500 it's absolutely not negligible. We need to Deep dive 31 00:01:37.500 --> 00:01:38.600 into this Gap. 32 00:01:39.600 --> 00:01:43.000 Very interestingly. When did we start observing 33 00:01:42.100 --> 00:01:45.900 the Gap 2017 you remember 34 00:01:45.900 --> 00:01:48.600 that in all my films? I always make the 35 00:01:48.600 --> 00:01:51.700 correlation for industrial firms between the return capital 36 00:01:51.700 --> 00:01:54.200 and the market to book the market to book 37 00:01:54.200 --> 00:01:57.400 measures a relative value creation and in 38 00:01:57.400 --> 00:02:00.500 return Capital the economic performance of the company what 39 00:02:00.500 --> 00:02:03.300 we observe throughout the years of the company is a perfect 40 00:02:03.300 --> 00:02:06.500 consistency between the return capital in the market the 41 00:02:06.500 --> 00:02:09.900 book up to 20 16 2017. There's 42 00:02:09.900 --> 00:02:12.600 a little bit of Gap and the Gap is widening. 43 00:02:13.600 --> 00:02:17.500 But the return capital is very interesting Indie 44 00:02:16.500 --> 00:02:19.600 gear. It's not the performance the 45 00:02:19.600 --> 00:02:22.000 financial performance of a company consists in 46 00:02:22.400 --> 00:02:25.200 confronting the return capital of the tax and the way 47 00:02:25.200 --> 00:02:29.000 that average cost of capital and there's a very interesting Financial 48 00:02:28.600 --> 00:02:32.200 indicator which consists in confronting these 49 00:02:31.200 --> 00:02:34.500 two calculating the return Capital after tax 50 00:02:34.500 --> 00:02:37.400 divided by the work to measure 51 00:02:37.400 --> 00:02:40.900 something which might be the theoretical Market to 52 00:02:40.900 --> 00:02:43.200 book assuming there's no growth in the free cash 53 00:02:43.200 --> 00:02:43.300 flow. 54 00:02:43.800 --> 00:02:46.500 Then if you look at the financial performance, this 55 00:02:46.500 --> 00:02:49.300 is what your Market to book should be. And then we confront 56 00:02:49.300 --> 00:02:52.000 that with what the market to book actually is. 57 00:02:52.700 --> 00:02:56.500 We have exactly the same conclusion perfect consistency 58 00:02:55.500 --> 00:02:58.800 up to 2016 a gap 59 00:02:58.800 --> 00:03:01.500 starting in 2017. And the Gap 60 00:03:01.500 --> 00:03:04.800 is widening from 2017 on of 61 00:03:04.800 --> 00:03:08.700 course. We can't find an explanation for 2021 at 62 00:03:08.700 --> 00:03:11.700 that time exceptional row materials prices. 63 00:03:12.500 --> 00:03:15.300 So you could argue that investors considers that it's 64 00:03:15.300 --> 00:03:16.700 exceptional not sustainable. 65 00:03:17.500 --> 00:03:22.500 It declines 2021. It does not explain 2018-2019 and 66 00:03:22.500 --> 00:03:23.200 2020. 67 00:03:24.200 --> 00:03:27.300 Now we have to look at the ESG track record of 68 00:03:27.300 --> 00:03:30.200 Rio Tinto e and s first and then a little 69 00:03:30.200 --> 00:03:33.700 bit later G. What about environment you remember 70 00:03:33.700 --> 00:03:36.600 the first thing I was mentioning it difficult start 71 00:03:36.600 --> 00:03:40.100 in Spain with toxic smokes at that 72 00:03:39.100 --> 00:03:41.200 time the company communicated. 73 00:03:42.100 --> 00:03:45.700 This is the inevitable consequences of technical progress. 74 00:03:45.700 --> 00:03:47.900 Are you against progress? No? 75 00:03:48.500 --> 00:03:52.300 As well probably a confusion between tactical progress 76 00:03:51.300 --> 00:03:54.300 and societal progress, but that 77 00:03:54.300 --> 00:03:58.000 has a story later on even mouth in 78 00:03:57.200 --> 00:04:01.000 the six days much Beyond acceptable 79 00:04:00.400 --> 00:04:03.800 lead content. It's about pollution. It's 80 00:04:03.800 --> 00:04:06.700 about health. It's about safety the very 81 00:04:06.700 --> 00:04:09.500 well known Kruger National Park in South Africa. There's 82 00:04:09.500 --> 00:04:12.100 close to the park. There is a corporate mine which 83 00:04:12.100 --> 00:04:16.400 is named parabaro, which is very likely producing 84 00:04:15.400 --> 00:04:18.800 some contamination of Flora and 85 00:04:18.800 --> 00:04:21.800 Fauna. Let's move on with the list acquisition in 86 00:04:21.800 --> 00:04:24.800 1989 of Kenneth copper 87 00:04:24.800 --> 00:04:27.500 copper mining huge difficulties with 88 00:04:27.500 --> 00:04:31.100 a flammable mining site in Wisconsin, Utah and 89 00:04:30.100 --> 00:04:34.500 a grand water contamination huge 90 00:04:33.500 --> 00:04:36.900 right on biodiversity in 91 00:04:36.900 --> 00:04:39.200 Madagascar, etc. Etc. Etc. 92 00:04:39.200 --> 00:04:42.100 The list is very long. That's for eel. Let's move 93 00:04:42.100 --> 00:04:43.100 to a society. 94 00:04:44.800 --> 00:04:47.600 Permanent constant violations of labor laws 95 00:04:47.600 --> 00:04:50.500 in 2022. The capital is suing a 96 00:04:50.500 --> 00:04:54.000 report which confesses gender 97 00:04:53.200 --> 00:04:57.000 and racial discrimination and harassment 98 00:04:56.300 --> 00:05:00.200 they are very violent labor 99 00:04:59.200 --> 00:05:02.300 disputes. And sometimes the capital is 100 00:05:02.300 --> 00:05:06.000 accused of corporating was governance which are less and 101 00:05:05.200 --> 00:05:08.500 acceptable in terms of Human Rights and so 102 00:05:08.500 --> 00:05:11.600 on so forth last but not least the capital 103 00:05:11.600 --> 00:05:14.200 is showing little respect for local communities. 104 00:05:15.100 --> 00:05:18.200 A very good and recent example is back in 105 00:05:18.200 --> 00:05:22.000 2020. We are in Western Australia the 106 00:05:21.600 --> 00:05:24.600 Duke and Gorge. It's an Aboriginal 107 00:05:24.600 --> 00:05:27.000 site which demonstrate the presence of 108 00:05:27.400 --> 00:05:30.800 human beings the last 46,000 years 109 00:05:30.800 --> 00:05:33.300 and it's a sacred site for the local community. 110 00:05:34.300 --> 00:05:37.800 But the CEO says you know what underneath 111 00:05:37.800 --> 00:05:40.700 we have 100 answer 35 112 00:05:40.700 --> 00:05:44.400 million dollars worth of iron ore for 113 00:05:43.400 --> 00:05:46.900 a few Stone. We are not going to sacrify that 114 00:05:46.900 --> 00:05:49.400 because the one Harrison 35 million dollars 115 00:05:49.400 --> 00:05:52.600 are going to create 70% of it down 116 00:05:52.600 --> 00:05:55.400 and they'd be that represents seven times the capital 117 00:05:55.400 --> 00:05:58.300 expenditures for the company. We're not going to sacrifice that 118 00:05:58.300 --> 00:06:01.100 so let's explode the mine and dig the iron 119 00:06:01.100 --> 00:06:01.600 ore. 120 00:06:02.600 --> 00:06:05.600 There's a price to pay for that at that 121 00:06:05.600 --> 00:06:08.300 time. The Norwegian Sovereign fun said I'm 122 00:06:08.300 --> 00:06:11.400 going to sell my state because it's really all for 123 00:06:11.400 --> 00:06:14.300 inside. The CEO is out an additional to 124 00:06:14.300 --> 00:06:17.500 senior executives are out. That's it. And now 125 00:06:17.500 --> 00:06:19.800 there's a long list of penalties paid by the company. 126 00:06:20.800 --> 00:06:23.700 27 points per million pounds in 2017 127 00:06:23.700 --> 00:06:26.300 because of financial conduct also 128 00:06:26.300 --> 00:06:29.300 Richie difficulties Kenny cut 129 00:06:29.300 --> 00:06:33.100 copper a terrible one 1989 20 130 00:06:32.100 --> 00:06:36.400 million dollars the same one in 2007 an 131 00:06:35.400 --> 00:06:38.500 additional 15 plus 5 million 132 00:06:38.500 --> 00:06:41.500 dollars, etc. Etc. And again the 133 00:06:41.500 --> 00:06:42.700 list is long but 134 00:06:43.600 --> 00:06:46.500 Are the figures big enough to really change 135 00:06:46.500 --> 00:06:47.900 the behavior of the company? 136 00:06:48.400 --> 00:06:50.600 Of course, they are alternative path. 137 00:06:51.300 --> 00:06:55.100 Rio Tinto in Canada, for example history, it's aluminum 138 00:06:54.100 --> 00:06:57.500 with alkan and its iron always 139 00:06:57.500 --> 00:07:00.600 iron ore of Canada the Canadian operations of 140 00:07:00.600 --> 00:07:03.400 a company had a terrible reputation and they decided 141 00:07:03.400 --> 00:07:06.400 to change the behavior even though they are 142 00:07:06.400 --> 00:07:09.800 some problems still remaining moving from 143 00:07:09.800 --> 00:07:12.200 terrible reputation to cooperation with 144 00:07:12.200 --> 00:07:15.800 people and good citizenship. Very simply in 145 00:07:15.800 --> 00:07:18.600 December 2022. The cabin 146 00:07:18.600 --> 00:07:21.200 is silent major all tall a long term one 147 00:07:21.200 --> 00:07:22.400 more than 50 years. 148 00:07:23.200 --> 00:07:27.400 Between Rio Tinto and the First Nations locally in 149 00:07:26.400 --> 00:07:29.500 Eno the name is I don't 150 00:07:29.500 --> 00:07:33.000 want to pronounce because I don't want to make it wrong. But the translation 151 00:07:32.300 --> 00:07:35.700 into English is the wind is turning the wind 152 00:07:35.700 --> 00:07:39.500 is turning is at tomorrow. It's going to be different from yesterday at 153 00:07:38.500 --> 00:07:40.100 least hopefully. 154 00:07:41.100 --> 00:07:44.100 Rialto is probably not the worst in class. There's a 155 00:07:44.100 --> 00:07:47.300 company in Brazil, which is unfortunately well known and whose name 156 00:07:47.300 --> 00:07:51.200 is Valley Valley experienced to disasters quite 157 00:07:50.200 --> 00:07:53.400 similar disasters in only three 158 00:07:53.400 --> 00:07:57.500 years. The last one is absolutely awful. He's brumadinho. 159 00:07:56.500 --> 00:07:59.600 It's a collapse of tellings. Damn. 160 00:08:00.200 --> 00:08:03.300 Took place in 2019. You know that 161 00:08:03.300 --> 00:08:06.400 when you have an open mind, you put the tailing somewhere 162 00:08:06.400 --> 00:08:09.200 you create a dam and you hope that the dam does not 163 00:08:09.200 --> 00:08:12.100 collapse which it did the canteen was 164 00:08:12.100 --> 00:08:15.300 just underneath and people were taking their lash when 165 00:08:15.300 --> 00:08:19.400 it happened 270 people died and 166 00:08:18.400 --> 00:08:21.300 it's a consequence of yours and 167 00:08:21.300 --> 00:08:25.500 yours of yours of safety rules easing you 168 00:08:25.500 --> 00:08:28.400 invest and spend less unless unsafe tea and 169 00:08:28.400 --> 00:08:31.600 a consequence of that is at 270 people are going 170 00:08:31.600 --> 00:08:34.400 to lose their lives and it's tragic for their families as 171 00:08:34.400 --> 00:08:37.300 well. The economist qualified that as 172 00:08:37.300 --> 00:08:40.600 a raptured capitalism let loose 173 00:08:41.500 --> 00:08:44.300 Of course after that you set an action plan 174 00:08:44.300 --> 00:08:47.800 using the CEO you attack a few others. We 175 00:08:47.800 --> 00:08:50.500 are going to pay the fine. We are going to pay the penalty and 176 00:08:50.500 --> 00:08:53.300 then you start communicating. We are going to be great guys. 177 00:08:53.300 --> 00:08:56.700 Now your point independent directors, 178 00:08:56.700 --> 00:08:59.600 you create a group work some group works 179 00:08:59.600 --> 00:09:02.800 and so on so forth you sponsor ngos, 180 00:09:02.800 --> 00:09:05.300 you provide financial support you try to improve 181 00:09:05.300 --> 00:09:08.700 your ESG already, etc, etc. Right, but if 182 00:09:08.700 --> 00:09:10.900 you don't change your campaign, it's worth nothing. 183 00:09:11.700 --> 00:09:14.600 You have to change a company. You have to change the mindset the 184 00:09:14.600 --> 00:09:17.600 mentality of the company the values the 185 00:09:17.600 --> 00:09:20.200 weather company is deciding is taking 186 00:09:20.200 --> 00:09:22.000 its decisions a processes. 187 00:09:23.300 --> 00:09:26.400 Where we stand today the consequence of Decades of 188 00:09:26.400 --> 00:09:29.000 bad behavior. How long is it going to 189 00:09:29.400 --> 00:09:32.500 take to close? The credibility gap decades game. 190 00:09:33.400 --> 00:09:36.100 But now on the picture there should 191 00:09:36.100 --> 00:09:39.800 be some but they're back on stage the shareholders. What 192 00:09:39.800 --> 00:09:42.800 is a real power of shareholders because of 193 00:09:42.800 --> 00:09:45.500 the end of the day, what is the cost for the shareholders 194 00:09:45.500 --> 00:09:48.500 of the fair the penalty which is going to be paid by 195 00:09:48.500 --> 00:09:51.300 ballet is probably seven billion dollars, 196 00:09:51.300 --> 00:09:55.000 at least it's commitment. We are going to see the reality behind 197 00:09:54.300 --> 00:09:57.400 that there is also kind of lots of 198 00:09:57.400 --> 00:10:00.600 credibility with the stock market authorities on a 199 00:10:00.600 --> 00:10:04.100 change Commission in August 2022. Okay, guys, 200 00:10:03.100 --> 00:10:06.800 you many polluted information you 201 00:10:06.800 --> 00:10:09.600 provided through Duluth information you use 202 00:10:09.600 --> 00:10:12.100 that it was wrong what using of course the company said? 203 00:10:12.100 --> 00:10:16.000 Absolutely. No, but Zack he's a serious institution. What 204 00:10:15.200 --> 00:10:18.600 is the impact on the stock price? You remember 205 00:10:18.600 --> 00:10:21.300 radio tento the value of the company should 206 00:10:21.300 --> 00:10:24.300 be four times. It's Capital employees only two times. If 207 00:10:24.300 --> 00:10:27.500 you look at the return Capital employed after tax 208 00:10:27.500 --> 00:10:30.300 of ballet justifies a market the 209 00:10:30.300 --> 00:10:31.700 book of seven to eight. 210 00:10:32.400 --> 00:10:36.400 What is the actual Market to book it's 2.25. 211 00:10:35.400 --> 00:10:38.300 The Enterprise Value is 212 00:10:38.300 --> 00:10:42.000 let's simplify the figures about 90 billion Capital 213 00:10:41.600 --> 00:10:44.700 employed invested capital is about 40 billion 214 00:10:44.700 --> 00:10:48.300 90 divided by 40 is 2.25 but 215 00:10:47.300 --> 00:10:50.500 it should be seven to 216 00:10:50.500 --> 00:10:54.300 eight if you multiply 40 by 7.5 you 217 00:10:53.300 --> 00:10:56.400 get three hundred billion dollars. So 218 00:10:56.400 --> 00:10:59.800 the company says, oh we are worth more than the book values. This 219 00:10:59.800 --> 00:11:02.500 is absolutely wrong. The company should 220 00:11:02.500 --> 00:11:06.000 not be worth a price value 90 but 300 you 221 00:11:05.500 --> 00:11:08.700 understand that there is no opportunity loss of 222 00:11:08.700 --> 00:11:11.500 two hundred and ten billion dollars for 223 00:11:11.500 --> 00:11:14.800 the shareholders which represents 30 times 224 00:11:14.800 --> 00:11:17.400 the penalty which is going to be bad by the 225 00:11:17.400 --> 00:11:19.900 company. It's absolutely huge. 226 00:11:21.300 --> 00:11:23.100 So we know about value. 227 00:11:23.800 --> 00:11:26.800 We know about values. You 228 00:11:26.800 --> 00:11:29.400 understand that this Behavior as a terrible 229 00:11:29.400 --> 00:11:32.200 impact on people. They're losing their life 230 00:11:32.200 --> 00:11:35.100 and the planet and the sustainability of the planet. 231 00:11:35.800 --> 00:11:38.300 And some companies are mentioning people or planet 232 00:11:38.300 --> 00:11:41.700 and profit. What about profit, you know, very cynical Behavior 233 00:11:41.700 --> 00:11:44.200 might be as long as a benefits of not doing 234 00:11:44.200 --> 00:11:47.300 the job or more than the fights. We're paying. Let's keep 235 00:11:47.300 --> 00:11:51.600 on that's not only cynical that wrong economically 236 00:11:50.600 --> 00:11:53.200 because the profit is 237 00:11:53.200 --> 00:11:54.400 not the p&l. 238 00:11:54.900 --> 00:11:57.200 You remember that the prophet is concept which goes 239 00:11:57.200 --> 00:12:00.700 merge beyond the p&n. It's not profit. It's 240 00:12:00.700 --> 00:12:03.200 performance. And of course it's performance, which is 241 00:12:03.200 --> 00:12:06.700 driving value. But how do you access value? 242 00:12:06.700 --> 00:12:09.400 You remember discounted cash flows and 243 00:12:09.400 --> 00:12:12.400 so on so first so the value is a consequence 244 00:12:12.400 --> 00:12:15.100 of the bit which is transformed into free cash flows after 245 00:12:15.100 --> 00:12:19.000 you took into account Capital expenditures and so on discounted that 246 00:12:18.200 --> 00:12:21.300 the cost of capital and the walk is 247 00:12:21.300 --> 00:12:24.400 very much a consequence of the risk the risk as it is 248 00:12:24.400 --> 00:12:27.400 perceived by the investors today is no 249 00:12:27.400 --> 00:12:30.800 trust there's a huge information asymmetry. There's 250 00:12:30.800 --> 00:12:33.300 plenty of great washing. There's a 251 00:12:33.300 --> 00:12:36.600 risk which is perceived by investors. It's very high and as 252 00:12:36.600 --> 00:12:39.600 a consequence the value is much lower than 253 00:12:39.600 --> 00:12:42.700 what each should be if there is perception walls 254 00:12:42.700 --> 00:12:44.200 reasonably normal. 255 00:12:45.100 --> 00:12:48.500 ESG is obviously a moral obligation. But 256 00:12:48.500 --> 00:12:51.700 ESG is not only immoral obligation. It's 257 00:12:51.700 --> 00:12:54.900 about value creation and a 258 00:12:54.900 --> 00:12:57.700 value creation, which is a growing concern among 259 00:12:57.700 --> 00:13:00.400 investors. This is why you see 260 00:13:00.400 --> 00:13:04.200 the gap which is starting in 2017 and widening 261 00:13:03.200 --> 00:13:05.500 throughout the years. 262 00:13:06.300 --> 00:13:07.800 as a matter of conclusion 263 00:13:08.400 --> 00:13:11.500 communication is nothing you really have 264 00:13:11.500 --> 00:13:15.100 to change the processes of the company mindset 265 00:13:14.100 --> 00:13:16.800 values decisions. 266 00:13:17.900 --> 00:13:21.700 In order to improve the ESG performance 267 00:13:20.700 --> 00:13:23.100 the real one of the 268 00:13:23.100 --> 00:13:26.600 companies on the one which we come in a case and that's 269 00:13:26.600 --> 00:13:30.300 not ESG for the stakeholders. That's ESG 270 00:13:29.300 --> 00:13:33.000 for the shareholders. And for 271 00:13:32.300 --> 00:13:35.800 the stakeholders. It's not ASG shareholders 272 00:13:35.800 --> 00:13:38.800 against stakeholders. There's 273 00:13:38.800 --> 00:13:41.600 a perfect alignment of interest between 274 00:13:41.600 --> 00:13:44.100 these two communities. At least 275 00:13:44.100 --> 00:13:48.000 this is what I try to demonstrate you. This is my deep conviction. 276 00:13:49.200 --> 00:13:49.800 Thank you very much.