If you could turn your phones down so that we can't hear them, that would be great. Just in terms of safety, there are no practice alarms this morning. It's a voice-activated alarm. It will tell you any issues that there are. The nearest fire exit is back through the door you've just come, which takes you out on London Wall, the muster point is to the left on Throgmorton Avenue. Obviously, we would be here if anything does happen. With that, I will hand over to Jacques.
Thank you, John. Good morning, all. I'm absolutely delighted to share our 2018 results with you today. A special welcome to you, Jakob, on your first Rio Tinto results day. It's absolutely great to have you as part of the team today. You made the right choice, I can tell you. 2018 was another very successful year for Rio Tinto and for our shareholders. A year we significantly moved our strategy forward. A year we delivered strong financial results. A year we strengthened our balance sheet. A year we created significant value, delivering the biggest cash return to our shareholders in Rio's history of $13.5 billion. I'm absolutely proud of what the team has delivered. In the year, we also invested in our future, in high-value growth, and in our operations and capabilities to drive even greater productivity.
In summary, we generated $18.1 billion of EBITDA, with a strong margin of 42%, we delivered cash of $11.8 billion from our operations. We achieved $8.6 billion in asset sales, the divestment of coal and Grasberg, adding to our sustainability credentials. Today, we are the only large mining company with no coal or oil and gas in our portfolio. We also invested $5.4 billion in our world-class portfolio, which generated a return on capital employed of 19%. AutoHaul is now running. We have progressed Oyu Tolgoi and Amrun, we found a promising new copper mineralisation at Winu in Australia. More on that later on. Our value over volume strategy is working, especially in uncertain times with trade wars, political tensions, and market volatility an ongoing feature. Despite this turmoil, in 2018, once again, we delivered on our promises. Let me turn to safety and sustainability.
Before I talk about Rio, I would like to acknowledge the sad loss of life at Minas Gerais in Brazil. This is an absolute tragedy and also a dark moment for the entire industry. It's the responsibility of everyone in this industry to do better. At Rio Tinto, across 32 operations, we have 110 facilities and 36 that are no longer active. We take management of all of them very, very seriously. Since 2015, we have had a global tailing standard, which is regularly reviewed. These standards applies to every Rio Tinto site worldwide. There are three levels of protection and assurance we apply to all of our tailing facilities. All of them are subject to independent review at least once every two years. The first level is at the asset itself, which includes reviewing effective facility design and ensuring we have effective operational controls.
The second level of protection to the Rio Tinto standard is through business conformance audits and technical reviews, supported by our Surface Mining Center of Excellence. The third level includes an external audit program. If you like more detail, they are available on our website, including our standards and our guidance notes. After a tragedy like this, we ask ourselves if there are more we can do. We are reviewing our approach again, and we are assessing ways to make our 3 levels of protection even stronger. We will also play our part in any industry response, including supporting an independent review. Turning to Rio Tinto. As I've said many times before, safety comes first. There is nothing more important. Sadly, we lost three colleagues last year, which is an absolute tragedy for their families and their friends.
Their loss is also our loss and is deeply felt by absolutely everyone in the Rio family. Even though our AFR is improving over time, as you can see in the chart, we must do better on safety. There is nothing more important, and the team is focused on it every day, every shift. Sustainability is absolutely vital in the 21st century, where we must be part of the solution. In 2018, we progressed our sustainability agenda. For example, today, we publish our first climate change report which outlines the risks and opportunities to our business in a transition to a low-carbon future. The materials we produce are essential to this transition, from the aluminum in your phone, cars, and in airplanes to the iron ore in the buildings we see every day.
We continue to take steps to reduce emissions from our own footprint as we innovate with customers to develop greener products. Like what we are doing with our anode technology partnership for aluminum with Alcoa and supported by Apple. With a portfolio free of coal and oil and gas, we are well-positioned to thrive in a world that values sustainability more and more. Before Jakob shares more details on the 2018 financials, let's reflect on our progress over the last three years. There is absolutely no doubt we have a stronger, more resilient, high-value portfolio. As you can see from the chart, we have delivered $12 billion in asset sales over the last three years. Also in the last three years, we have grown the company by 1.4% annually, and we have improved our return on capital employed by 10 points.
Our three-year story is not just one of strong financial and portfolio performance. It's also a story of consistent capital allocation. We generated over $46 billion of cash over the three-year period. Two-thirds of it, or $34 billion, came from cash from operations. On the back of this, we paid $20 billion and declared a further $9 billion to our shareholders. That is equivalent to over 50% of our market cap at the beginning of 2016. We have reduced our net debt by $14 billion. Our balance sheet is strong, and our operational cash flows are strong, which means we are well positioned to, number 1, make further significant returns to you, our shareholders, with or without divestment, and number 2, to continue to invest in the business. We have delivered on our promises, we know there is more to do.
On this note, over to you, Jakob, for more details on the financials. I'll come back for the outlook.
Thank you, J.S. Ladies and gentlemen, I'm truly excited of having joined Rio Tinto, a company with such a great history and so many achievements. I firmly believe that the best is yet to come, and I'm looking forward to be part of this next chapter of this terrific business. I moved to London and joined Rio Tinto in September. I decided to spend my first few months visiting our assets, meeting our people and customers. This has given me a wonderful insight into both our strengths and our opportunities. I've seen great people, great assets, and deep operational and technical capabilities. A very powerful combination. Let me share with you how I see us performing, starting with our markets. The world entered 2018 in good macroeconomic conditions. However, the year turned out to be one of significant geopolitical turmoil.
We experienced price volatility, in aggregate, actually, average prices were fairly stable compared to 2017. The iron ore price was supported by robust demand from both inside and outside of China. China's steel production reached a record level of 930 million tons last year. We saw particularly strong demand in China for higher quality iron ore, such as ours, driven by environmental policy and steel sector reforms. Global seaborne supply was essentially flat year-on-year as producers experienced higher levels of disruptions than we have seen for a number of years. In total, around 40 million tons. Still, we saw stable iron ore pricing 4% lower than in 2017. Turning to aluminum, the fundamentals for our business are strong. We saw growth in demand of around 4%. Supply was well below that.
The market was affected by significant amounts of uncertainty, partly from trade tariffs and partly from the impact of U.S. sanctions. Overall, prices were 7% higher than in 2017. In copper, we experienced good price conditions in the first half of the year, a weakening price environment in the second half as supply outgrew demand. This was mainly because the major copper-producing assets generated a better output than what we have seen for many years. Unlike iron ore, there barely were any significant supply disruptions, 3% against the historical average of 5%. Despite that second half, on average, copper prices were 6% higher in 2018 than in 2017. In summary, a quite benign pricing environment in 2018. Turning to our results. We delivered, as J.S. already have said, a strong EBITDA at the same high level as in 2017.
You can see we got some limited help from prices and exchange rates in 2018, but the most significant contributor to our performance was our own effort. We continued to grow our company. The volumes and product mix added $0.9 billion. Energy prices went up significantly last year, and raw materials prices went up even higher, particularly for aluminum. Because of our growth, we could absorb these cost headwinds to deliver strong and consistent earnings. Excluding our coal assets, we generated EBITDA of $17.2 billion at a margin of 41%. Strong EBITDA turns into strong underlying earnings of $8.8 billion after primarily deducting depreciation and tax. Our IFRS net earnings was $13.6 billion, equivalent to 30% return on capital employed. That, of course, also includes profits from our divestments. Our effective tax rate of our underlying result was 29%, in line with our earlier guidance of 30%.
Let me dive a little deeper into our business results, starting with iron ore. This is by any standard, an extraordinary business, truly world-class. The business maintained stable, high profit levels during 2018 with strong EBITDA margins. Our high-quality product attracted even higher price premiums than before. Despite the inflationary environment, we managed to keep unit costs flat during the year. I want to do something we haven't done before, and that is to give you guidance for 2019, not just the volumes, but also of unit costs. We are doubling down on costs, I should remind you that we are obviously still focusing on optimizing the total EBITDA margin, which is already very strong at 68%. Our improvements in productivity mean that we have the ability to increase production by up to 2% in 2019.
The level between last year's production of 338 million tons and 350 million tons. We will continue to exercise with vigor our value or volume strategy. We expect a flat to a small increase in unit costs in 2019 due to the combination of, on one side, inflationary pressure and higher maintenance costs offset by greater productivity. We are also continuing to face pressure from steeper hauls and longer haul distances. Our guidance for unit cost is between $13 and $14 per ton. For our world-class assets to continue to deliver at their full potential, we must invest in them. This means investing both in sustaining CapEx and replacement projects, such as the recently approved $2.6 billion Koodaideri project, which will add 43 million tons capacity in phase 1 and open up a whole new prosperous area in the Pilbara. To aluminum.
Despite higher prices and stable operations, the performance of our aluminum business was squeezed by inflation in raw materials and energy costs of $0.5 billion. We also had the impact from our legacy contracts of another $0.45 billion. External events such as China's environmental policy changes and restructuring of the aluminum industry resulted in a reduction in supply. The potential for trade tariffs and proposed sanctions created considerable uncertainty and unusual price movements. Despite all of this, we have some of the best aluminum assets in the industry and the most integrated ones with bauxite mines, refineries, and smelters. This is reflected in our industry-leading EBITDA margin. In 2018, we actually strengthened our aluminum portfolio. We made great progress at Amrun. Project six weeks ahead of schedule and below budget. We also divested Dunkerque and land at Kitimat at attractive prices.
Our focus in 2019 will be on delivering additional free cash flow from improved productivity. In copper and diamonds, I would say we are not only back on track, but in 2018, we delivered a truly strong operational performance. We have three world-class assets, and they're all producing well. Escondida improved its performance. Kennecott made significant progress on productivity. Productivity from our open pits production from Oyu Tolgoi is simply the pacesetter in our whole portfolio. The outlook for 2019 is production of 550,000-600,000 tons of mined copper. The top of the range is similar to 2018 when you exclude the divested Grasberg asset. The reason for the lower guidance is because we do expect to see a lower grade at the open pit at Oyu Tolgoi and at Kennecott. We also further strengthened our portfolio in copper and diamonds.
We completed the sale of Grasberg just before year-end, I can say now that we are very satisfied with the outcome. We believe we have captured the full value of that transaction. During 2018, we made good progress on our underground project at Oyu Tolgoi, we closed 2018 by meeting our commitment to agree a power solution for the mine, which we are now progressing. As we learn more about the rock mass around and under the ore body, we continue to encounter geotech challenges. This is a complex project, we have indicated a further delay to the main production shaft, we will continue to assess the mine plan and design.
In general, copper is not just well-performing, it also has got exciting growth opportunities such as Oyu Tolgoi, Resolution in Arizona, and our exploration program. Energy and Minerals had a disappointing production in 2018, partly due to the strike at IOC and production disruptions in our titanium business. While 2018 was an operational challenging year for Energy and Minerals, we remain convinced about the potential of this business, which is reflected in our higher 2019 guidance. Despite the disruption, we remain profitable. Our E&M group went through significant changes in 2018. We divested our remaining Australian coal assets for over $4 billion. Let me just repeat what Jay has said. For the first time in 60 years, we are not taking coal out of the ground. We are the only major miner no longer involved in extracting fossil fuels.
We also agreed to sell our share of our uranium business in Namibia. With these divestments, we will now have a more simplified business with really high-quality assets. This year, we expect to be back on track with a strong focus on safety and operational performance at all our sites, hence improving productivity and production. Which leads me nicely to talk about our productivity across Rio Tinto. It is an area of key focus for us in 2019, I will personally work closely with the business to drive our performance in this area. We remain committed to generating $1.5 billion of additional free cash flow each year from 2021. We have done a lot of work on setting up ourselves for improved productivity performance. As we look back at our 2018 performance, it is clear that we did not progress as much as we wanted.
There were areas of success, we have made some improvements, such as building stronger technical teams, we still have too much variability in our business. We experience cost headwinds, especially related to raw materials. I say this having visited many of our assets, we all remain convinced that our targets are achievable, we already have plans on the way to step up our productivity effort. The guidance I can provide you with today is that we will increase the run rate by $600 million in 2019, bringing the total run rate to $1 billion. Only safety is more important to us. One of the things that has impressed me about Rio Tinto is the high degree of discipline in this capital allocation. Our framework has served the company well and will continue to do so.
I'll keep this focus and enhance it wherever I can. Rio has developed an impressive portfolio of world-class assets. It is our prime responsibility to safely manage these assets and improve their performance through operational excellence and spending sufficient sustaining CapEx. The first thing, suspend our cash from operation on the sustaining CapEx. The next priority is our shareholders through our ordinary dividend. We carefully consider growth opportunities and balance sheet strengths before determining further return to our shareholders. We are in a great position with a very strong balance sheet and a business with a strong cash generation. Our investment decisions are independent of this. They're carried out with much rigor and discipline to ensure that value is created.
Due to strong cash flow and the $8.6 billion of cash received from divestments, primarily coal assets and Grasberg, our balance sheet moved to a net cash of $0.3 billion at the end of 2018. We should acknowledge that some cash has already been allocated, from the beginning of January 2019, we recognized an additional $1.2 billion on net debt related to operating leases with the changes to IFRS 16. The pro forma net debt is around $8 billion. This is still a low level, that has been recognized only three weeks ago when Moody's upgraded us to A2. That complements our A rating from Standard & Poor's. We are very comfortable with having such a strong balance sheet. We don't have a specific target for our debt level.
Our strong balance sheet gives us resilience and flexibility, the optionality to invest in great opportunities for our business to help us through the cycle and ideally, to enable us to act in a countercyclical way. Moving on to investments. It's all about discipline. We invested below depreciation in 2016, particularly in iron ore, where significant expansions were finished in 2015. We are now seeing investments rising above the depreciation and are developing an asset base for future shareholder returns. Existing guidance is retained for 2019 and 2020. We are providing new guidance for 2021 at the level of $6.5 billion. Each year includes sustained CapEx of around $2 billion-$2.5 billion, consistent with previous guidance. Our investment program, combined with our productivity drive, will enable us to deliver on average 2% annual growth over the medium term.
Taking a step back, both Rio Tinto and the whole industry have learned and adjusted. In 2012, the industry and Rio Tinto were investing three to four times the level of depreciation and had high levels of debt. Over the past three years, investments have been disciplined at the same level as depreciation, and the industry has repaired their balance sheets. Rio Tinto has led the way, and this has put us into a great shape to seize opportunities that we believe will add value. Of course, we will only do so in a very disciplined manner, not forgetting the lessons from the past. Finally, as the last part of my presentation today, let me cover shareholder returns, which I truly believe is a great story for Rio Tinto shareholders. The board has decided to declare an all-time high $13.5 billion in cash return to shareholders by 2018.
This was, of course, only possible due to the combination of 19% return on capital employed, successful divestments, and a strong balance sheet. Today, we are announcing a final dividend of $1.80 per share, corresponding to a full-year dividend of $3.07 per share. The final dividend will be paid in April, fully franked for Australian shareholders. The dividend, along with a $1 billion buyback we announced in August, brings total returns to shareholders from operational earnings of $6.3 billion or 72% of underlying earnings. In December, we completed the sales of Dunkerque and Grasberg, and today we announced the return of these $4 billion of net proceeds in form of special dividend of $2.43 per share. This will also be paid in April and is again fully franked for Australian shareholders. The board has decided on a special dividend for several reasons.
Given the size of the proceeds, it enables us to return the cash immediately to shareholders and will make good use of franking credits. In addition, we have carried out significant share buybacks recently, which has resulted in further concentration to our share register. In particular, as Shining Prospect, our biggest shareholder and a subsidiary of Chinalco, has not sold any of its share in Rio Tinto and now has a holding of just over 14%, close to the 15% threshold agreed with the Australian government at the time of its original investment. A special dividend will enable a quick return of funds without creating any imbalances between the two lines of stock or further concentration in the register. To sum up, 2018 has been a year of significant strategic progress. A combination of growing profitable business and successful divestments led to the highest ever cash return to shareholders.
There have been headwinds and operational challenges. No doubt we will face more challenges this year. We have a world-class portfolio, great people, and we all remain focused on safety and productivity. The discipline that has been a feature of Rio Tinto's recent performance is here to stay. Time to look ahead. Over to you, Jacques.
Thank you, Jakob. Let's now focus on the year ahead. Starting with some thoughts on the macro environment. There are two key drivers of the mining industry, GDP growth and trade. Global economic growth appears to be slowing across all geographies. In China, our key market, as expected, growth is slowing. We're still around 6.6% in 2018. The Chinese government has announced stimulus measures to maintain growth that should have a positive impact during the year. On trade, the risk of a trade war is still there. As I've said before, I'm the optimist in the room, and I really believe that common sense will prevail at some stage. What this means for our key products is the following. A positive outlook for iron ore on the back of supply disruptions and environmental policies in China.
An ongoing price-cost squeeze environment to remain across the aluminum industry, and volatility continuing in copper on the back of trade war concerns. However, we remain absolutely bullish about copper and aluminum in the medium and long term. In such an environment, Rio will continue to focus on what we can control. Safety, our number one priority, the quality of our product and the relationship with our customers, the productivity of our operations, the disciplined allocation of capital to the best opportunities, and maintaining a strong balance sheet. Turning to our value over volume strategy. It's about portfolio, performance, people, partners. Portfolio is about world-class assets. Here, we will focus on delivering an average of 2% growth per annum over the next five years. Performance is about operating and commercial excellence. We will focus first and foremost on safety.
We will drive greater productivity and exit 2019 with a $1 billion run rate from our productivity program. This is an additional $600 million of free cash flow. We will make sure the benefits of our commercialization are fully realized. People is about developing industry-leading capabilities. We will focus on building our technical skills and engaging with our workforce. Partners is about long-term relationships. It's about sustainability with strong focus on engaging host governments, communities, and employees with our ESG agenda, including climate change. Before I close, let me cover one of our priorities in more details, growth. As you've heard, we have been investing in our existing business, and we have exciting growth projects already underway in iron ore, in copper, and in bauxite. We are progressing all the options.
For example, on Resolution, our copper project in Arizona, we are spending $368 million on infrastructure as we progress the permitting process. We are on track to complete the EIS in 2020. In exploration, which is the upstream part of our pipeline, we have over 50 projects underway with activity in over eight commodities and 16 countries. We plan to spend around $250 million in exploration this year only. Copper remains the bulk of our exploration spend, and we have a number of exciting opportunities. One of them is Winu, mentioned earlier. It is early days, and we have more work to do, but the initial results from the first phase of drilling are pretty encouraging. We did just disclose the results of the first 24 drill holes that you can see on this slide. As you can see, there is copper, there is gold, there is silver.
I'm really looking forward to the second phase, and we will keep you updated. In closing, we are in great shape after another strong year of performance by our teams around the world. We have more to do. In 2019, we will focus on improving safety. This is our number 1 priority. We will deliver strong Tier 1 cash flows from our Mine-to-Market Productivity Program. We will deliver strong growth. We will continue to build a 21st century mining company that people want to work for and partners want to work with. We will do all this and maintain our discipline and balance sheet strength. Our recent track record speaks for itself. With $29 billion return being returned to our shareholders over 3 years, including $13.5 billion declared for 2018 only. We have a world-class portfolio, well-positioned for a low-carbon future.
We have the strongest balance sheets in the sector, we are progressing exciting growth options. We will continue to deliver on our promises day in and day out. On this note, we're going to open the Q&A session. We'll start with a few questions. Okay, Paul, you are in the back. You were the first one, go for it, my friend.
Sorry about that.
No. Wait for the mic, Paul.
I'm sorry. Overly eager.
No, I can see that.
Further elaboration on the OT rescheduling, if you could. What exactly are you experiencing? When do you think you'll be in a position to know what that review, sort of the conclusions of that review? The second question was to Jakob's point about being able to act counter-cyclically and having the balance sheet. Clearly, that depends on where you think you are in the cycle. Perhaps a bit of elaboration on where he thinks the industry is with respect to that. Thanks very much.
Floor is yours. It's your first day, Jakob, go for the second question and deal with the first one after.
Excellent. Thanks. Look, I was trying to say it in a fairly humble way because obviously you only know afterwards whether you are acting counter-cyclical. I think it's fair to say that the last couple of years has been good years, and in that period of time, we have not overspent on CapEx, and we have divested assets at good values. At least in that perspective, we have actually acted counter-cyclical. Time will tell whether we can continue to do so. I don't dare to tell you where we are in the cycle, but the last three years has been pretty good, yeah.
Okay. On the first question, Paul, on Oyu Tolgoi. Where we are in the project today, remember, five years to build the infrastructure, seven years to ramp it up. We are mining in the ore body as we speak. The quantum of geotech data that we have access to is very significant. We need to go through a process of updating the model to make sure that the infrastructure is in the right location on the back of the geotech data that we have. It is absolutely a normal process. It will take a few months to do so. I mean, the good piece of news is we know that the cave is going to cave. Okay? It's always a good starting point in a block cave to know that the cave is going to cave. It is going to cave, right?
The question is not to cave too quickly. It will take a few months, and we'll provide you an update by the time we are at the mid-year on total cost. That's where we are. We are updating the geotech model, but we thought it was important to inform the market accordingly. Jason? Then after, we take a couple of questions, David, from-- We've got the Aussies.
It's Jason Fairclough, Bank of America Merrill Lynch. Just a couple super quick ones. First, on the Mine- to -Market. You talked about how you're achieving cost savings, but then they're getting chewed up with inflation. It does seem that you're now guiding towards higher costs. Should we actually think about seeing that $1.5 billion on the bottom line? Is it now the case where we're kind of running to standstill when it comes to costs?
Look, we experienced inflationary pressure last year. I think it is slightly different what we are going to experience this year. Last year, we saw very significant increases in energy costs and in raw materials prices. We hope to see less of that this year, but there are inflationary pressures, particularly in the areas where we operate in Western Australia and Quebec, et cetera. On the other hand, I think it is a fairly bold target we have set ourselves on improving the run rate of the Mine- to -Market by $600 million this year. We will fight against the inflation and hopefully do better than the cost pressure. Time will tell where the inflation will end up. Okay. Should we see $1.5 billion in the bottom line?
Yes.
Yes. He says yes. Okay. Thank you.
Is there a question from the? I will come back. We will take Oz.
Thank you. Your first question comes from the line of Paul Young of Goldman Sachs. Please go ahead.
Yeah. Hi, JS and Jakob. Great result. The strategy is working. Two questions from me. First of all, JS, Pilbara, looking at all the supply side issues in Brazil at the moment, it appears that you're the only mining company that can really materially increase volumes over the next five years. You've got 400 million tons of card-driving capacity and I think 450 of core capacity. You're creeping your shipments by 10 million tons possibly in 2019. While maintaining the value over volume approach and with the AutoHaul fully operational and Koodaideri coming online, what do you think you can creep your volumes to beyond the 350? The second question is probably more for Jakob on the CapEx profile. Jakob, just noticing that there's a big step up in development CapEx, the purple bar in 2021.
Correct me if I'm wrong, OT should only be about $1.5 billion of that purple component. Just wondering how much is in there for Jadar and Resolution. Thanks.
Thank you, Paul. I'll take the first question, that we're pretty lucky today because we've got Simon Trott, our Chief Commercial Officer. What are you going to do to extract more value from the market online? Oh, Simon. The floor is yours. Thanks for coming, by the way.
Thank you, JS. Good morning to all. Firstly, obviously an incredible tragedy in Brazil, an incredible human tragedy. It reminds us all of, I guess, the gravity of our roles at an industry level. Obviously, the market, you have seen a reaction to the events in Brazil. The guidance we've given today, 338 to 350. We continue to work really closely with our customers to make sure they're supplied with the products that they need for their business and the quality of products that they need. We'll continue to look for opportunities with our customers, in partnership with our customers. The guidance at the moment, 338 to 350, and absolutely a focus on value over volume, and that EBITDA margin.
Thank you, Simon. Do you have a question on CapEx?
Yes, we are trying to progress Resolution and Jadar as fast as possible, but that's not the reason. I mean, we announced late last year, the Koodaideri project. That's one of the biggest reasons why you see an increase. That's a project that we can actually push forward very fast. Thank you, Paul.
Jakob, if you can still hear me, just to clarify that I thought Koodaideri was included in the sustaining component. I'm just wondering about that big step up in the purple component in 2021.
No, it's a replacement. What do you call replacement growth CapEx.
Okay. All right. Listen, maybe I'll pass. I'll come back via IR. Thanks.
I'm sure, Paul, you'll come back and I'll see you next week in Oz anyway. Any other question from Oz?
Your next question comes from the line of James Gurry of Deutsche Bank. Please go ahead.
Thanks for taking my question. Maybe just to follow up on what Paul's saying there. With OT, I think you've pushed out the time to steady state by at least six months. You're going to go away and review things now. What's the chance that the $5.3 billion CapEx really moves up significantly? I thought the process was probably to go from OT over to Resolution, with things as they stand at the moment. Is that probably still a sequence that you can do or would you look to do potentially both at the same time?
Yeah. Okay. The question about OT and Resolution doesn't change whatsoever. In that sense, as you know, we have a pipeline of options around copper. The primary focus is OT at this point in time. You've got, as you mentioned, Resolution, and we are progressing the infrastructure and progressing the permitting process, and we should have the EIS sometime next year. In addition to that is including what we discussed today about the potential options we have in WA called Winu, which is early days and so on and so forth. We will optimize the pipeline. We are pretty bullish about copper, as you know. The question is more about delivering the right level of growth and meet the market requirement from that perspective. On the Oyu Tolgoi deal, the team is doing the work.
Remember, there are two or three important components when you look at where you're going, which is really worthless. One is the element around the infrastructure, and the bulk of it is being built and so on, and most of the orders have been placed and so on and so forth. The final cost estimate will be prepared, and we're supposed to be prepared this year, we'll have a better sense. Let's see what comes out of it. The second element is really about building the mine, the infrastructure, the draw point , the extraction drives, and so on and so forth. That's clearly on the back of the information we have in terms of geotech that we need to look at where do you put the infrastructure. Where do you put the extraction drives?
Depending on where the faults are, where do you put the air ventilation? Where do you put the ore passes and so on and so forth, in order to make sure that as and when you initiate the cave, then you have the right ground conditions and so on and so forth. The work is on the way. Anyone who's got any block cave technology or experience should know that it happens pretty often. When you have the geotech issue, you have to upgrade the model, and that's what the team is doing. As I said, sometime during the year, we looked at the market accordingly. As I said when I started, the cave is going to cave. If I go back to the U.K.
Yeah. Can I just follow up with a question around IOC? There's a lot of focus on the Pilbara with iron ore and crit capacity.
Is there any potential, given that IOC supplies into the U.S. market and so does Vale a lot, and it's a pellet and concentrate producer, can you push that even further as you recover from the strike? Or would you see this as a potential opportunity to perhaps exit that asset as you've tried before?
Yeah, I think that's a very good question. The demand for the IOC product is very strong as we speak for the reason you just mentioned. We'll max out the production of IOC. We should see an uplift year-on-year, because as you mentioned, we had the strike last year. We have reached a multi-year agreement. Therefore, we should not have this issue at all this year. We should see an uplift. Which is one of the reasons, back to your question, Jason, about the uplift in terms of Mine- to -Market for this year compared to last year, is there are two elements that people should keep in mind. One is the fact that last year, in the context of in general, we had a series of issues, the strike on IOC, for example.
The second piece is three of our furnaces were down. We're going to restart a couple of them this year. Year-on-year, you have an uplift in terms of volume. The other element, just to build on this point, is last year, we were highly impacted by the cost environment, price-cost squeeze in aluminum, and because of raw material. Today we don't see further increase in terms of raw materials. To your question, Jason, when you look on year-on-year, that gives us some confidence about the $600 million of uplift we should get this year. If we go back to London.
Yeah, morning. It's Manuel at Morgan Stanley. Just on the projects again. If even Rio Tinto cannot deliver all the knowledge and skills on a project like this, does it lead you to review, first of all, greenfield, brownfield projects and Rio Tinto's desire to do them firstly? Secondly, does it lead you to review how much existing assets are worth that may or may not be out there to buy? Copper specifically first.
Our view has not changed. Ideally, if you have two options, one is a brownfield and one is a greenfield, you go always for the brownfield first. There is no change whatsoever. That's the first element. The second element is our strategy has not changed in terms of M&A. Jakob said it. We keep a watching brief on it. If there is a case to look at a transaction, we will look at a transaction, but at the end of the day, it's about creating value for our shareholders and so on and so forth. Today, when I look at our organic pipeline, we will deliver around 2% per annum growth in the next five years, which I think in the context of GDP 2.5%-3%, it's pretty okay.
At the macro level, if you step back, if we grow between two and 2.5 per year, you fundamentally maintain your market share in terms of copper equivalent. There is no change in strategy from that perspective.
Okay. Secondly, on aluminum. Clearly, it looks as for a moment that things were going to improve. It all ended in tears again, and we're back to where the disaster situation that we were in 2016. Now, you've always been a bit skeptical about aluminum, and you said it's going to be medium-term. Has this sudden turn for the worse changed your view again about the optionality in that business?
Want to pick up this one, Jakob?
The aluminum business is right now having a cost squeeze. There's no doubt about that. We do go back to the basics in terms of further production creep, improving the productivity, and really managing the cost very hard. You are absolutely right. The profitability was kind of declining in the second half of the year and has started off on a difficult setting. Aluminum is the product of the future. We really do believe in it longer term, and we have the best portfolio out there. It's a matter right now to take the opportunity and optimize the business we have while we are facing short-term difficult trade conditions.
We'll take another question. Yeah.
It's Myles Allsop, UBS. Maybe sort of a couple of questions, one for JS and one for the new JS.
The damage is done. Go on, Myles.
Going back to iron ore. Are you capped at 350 this year because of AutoHaul? If the market's there, do you think there is potential to go beyond 350? We've now had a month or so since the tragedy. I'm sure you've been running the numbers. What do you think the impact on Brazilian iron ore supply is going to be? Obviously, it's still kind of a moving feast, but what's your initial sense? Maybe for the other J.S., sort of spot-free cash flow, where do you think we're sitting at the moment?
I'll pick up the iron ore one. I'll answer in a slightly different way, Myles. I think it's important to look at the global iron ore market. There will be an industry response. I'll come back to Rio for one minute after. One of the key questions we are watching very carefully with Simon and his team in Shanghai is the response from the domestic iron ore production in China. Remember, the part of the system that was impacted because of this tragedy in Brazil is the low-grade part. It's mainly the low grade and not the high grade. There could be some substitution here. If you go back in time, as you know, was it four or five years ago? There were around 400 million tons of production in China. It did drop to 235, 225 last year. It's winter.
I know that doesn't look like it in London today, but it's winter in China. The old question is going to be coming out of winter, are some of the smaller mines in China going to restart and so on and so forth? I'm not saying it's the best case, but it's easy to see a scenario you have if you start from a baseline of 245 last year, potentially increasing by 25 million tons this year and so on and so forth. That's one element. To answer your question here, it's a difficult one to say what's going to be the net impact in relation to Vale, because there will be a response from the market and so on and so forth. As far as Rio is concerned, I think Simon said it.
We will look at all kind of opportunities to make sure that we can meet the requirements of our customers and so on and so forth. What is important for us is to maintain the quality of our product. Okay? Remember, the Pilbara brand, and we're talking mainly about China here, because that's the bulk of the market for one minute. The Pilbara brand is a reference product in China, and it's a brand, all right? On the back of a system of 16 mines and so on and so forth. The question is not only about the railway, it's about how can you maintain the quality of the brand and so on and so forth, because we extract a premium for this product and so on and so forth.
We just have to be careful about not downgrading the product and creating some issue further down the value chain. For sure, today we say 338 to 350. If we can be at the upper hand of the range, yeah, we'll go for it. Because I think in that context, producing the right product, the right quality with the right grade and extracting the right premium creates value. That's how we're going to do it. We ask our people to say, "Look at your plan, look at your maintenance plan to see what you can do," and so on and so forth. I'm very conscious that we run the Pilbara for the long term, and I don't want to do short-term decision that could cost us a lot, 5 minutes and so on and so forth. It's a big system, you know it.
You've been there. 16 mines, 1,700 kilometers, 4 ports. We move 1 million ton of product every day, right? It's easy to feel good for 5 minutes, but we have a parameter. For sure, we look at all opportunities to extract more value from the market, at the same time, we have to look at it in the context of a multi-year plan and so on and so forth. That's where we are.
Yeah. Sorry, I need to ask you. I heard you saying something about spot free cash flow.
Yeah, if you look at your guidance for 2019, what would you estimate spot free cash flow to be at using prices from today or yesterday?
That's your job and your models. The guidance I can provide you've got your production guidance, you can see right now, you look at last year, we had 19% return on the capital employed. We're coming in with a very strong business. Yes, right now we have seen a hike in the iron ore price. Who knows how long time that will carry through, that's where you have to make some assumptions. Obviously, looking at last year from a strong point, take away the divestments that you kind of deal with on a more ad hoc basis. The underlying business is strong. We're coming strong into the year with the increased prices from iron ore, then I think you'll have to do the exact math yourself.
Let's take a couple of questions from the call, then I'll come back to London, if that's okay.
Thank you. The next question comes from the line of Hayden Bairstow from Macquarie. Please flash your question.
Yeah, thanks, Jean. It's just a question on further asset sales. When you had the climate change document you put out today was pretty interesting. With OT obviously being powered by coal, do you feel that the portfolio needs further adjustment as that comes online with a coal-fired power station? Are you sort of happy with the bulk of where you sit now, particularly with those carbon emissions out of IOC and Pacific Aluminium? Thanks.
Yeah, let's be clear. I think the bulk of the divestments are behind us. Now, am I ruling out any further optimization of the margin? Never. Because it's all about value at the end of the day, but the bulk of the divestments are behind us. All right? As I said today, a few things is we are in a good position. We have a strong balance sheet. We have a world-class asset portfolio. We have increased fundamentally our return on capital employed by 10 points and so on and so forth. We don't need further divestment to deliver on our promises, which is superior return to our shareholders in the short, medium, and long term. That is one of the key messages we are conveying here. On the question on OT and the power station, today, a couple of points.
Today, we're buying the electricity from China, in Inner Mongolia, which is coal-fired power. Okay? That's what it is about. That's the first element. The second element is when the investment agreement was put in place in 2009, is one of the clause is about, and you can understand from the government standpoint is, when you're sitting on massive coal field to have a fire power station in one country. Remember, the last fire power station that was built in Mongolia was from memory 50 years ago, okay? By the Russians at that time. You can understand that if you are in this country and you really want to uplift 3 million people out of poverty, at some point in time, you want to have a coal-fired power station in country.
However, what the team is looking at, and the government is supportive, is to have ideally a hybrid solution where we have an element of coal fire in order to deliver a very base load, very low-cost source of power. Remember, the underground is we're going to put people 1,000 meter underground, right? I want to be able to extract those people if there were to be any issues whatsoever. As I said, we'll have a hybrid solution where there will be an element of coal fire and there will be an element of renewables that is being worked out. The government is supportive on this one. In that context is, do I feel uncomfortable where we are? The answer is no. Let's pose another question to the call and then come back.
The next question comes from the line of Lyndon Fagan from JP Morgan. Please go ahead.
Thanks very much. I'll just try again on iron ore. Is your system fully balanced at 360 by the end of this year in terms of mine port and rail, once AutoHaul is fully up and running and running efficiently? I think that's what you said before. Is that still the case? It'd just be good to see whether you could confirm that. The second one is more on the market. If we've just lost 50 million tons out of the market, I think you said 245 was domestic China production from last year. Just wondering how you would see that gap being filled in terms of destocking of inventory, potentially more scrap usage, and whether you had a surplus in your base case, supply-demand model for this year anyway. Thanks.
All right. I think I'm going to have to repeat what I said before. I can't make any comment about how the competitors are going to react, okay? It's clear that, you know it as much as I do, if you look at the current shipment of Vale, they have not dropped in any fashion. Okay? They are going to run the stockpiles as an example. They said in the past, I read the press like you do, that there are some spare capacity as well. I think it's one question you should ask Vale. That's one aspect. The second aspect is there are lots of other players. The one I just highlighted is the Chinese, because it's pretty easy for them to shift from 245 back to, I don't know, 270, 280. We will know the answer only when winter is behind us in China.
All right? That's the only thing I can say. Now, in terms of your question on iron ore is, we had a seminar last year in June where we took some of you on-site, and we were very clear at that point in time that we should be balanced in terms of run rate at the end of this year, around 260. The position has not changed. I can only repeat so many times the same thing here. The guidance for this year is 238-250. For sure, we will look at all opportunities to meet the market requirement. As Simon said, it's important that we don't downgrade the quality of our product and so on and so forth. We explore all opportunities to help our customers, but we're not going to do anything stupid. That's what I'm saying.
If I go back to London.
Yes. Thank you. Sergey Donskoy, Societe Generale. If I may, one follow-up on Pac Al. You have been selling assets or smelters in Europe. Pac Al is still not on this list. Is it some sentimental value or you're just waiting for a better offer or better moment to dispose? Because I think in the second half of last year, really struggled to basically deliver any profits.
I don't know which list you are referring to, you know my policy has never been to comment on any asset for sale. You have a list, I don't have it. If you can give it to me, that would be great. You know I don't make any comment on market speculation. You know that. Okay. Now, if somebody wants to buy Pac Al or any other assets, come and talk to Jakob. He can give you his business card, and if you have the money, the cash, that currency, which are better than others at this point in time, we'll have a conversation. You know the answer on this one. All right. Let's move to the next question.
Thank you.
Hello. Dominic O'Kane, JP Morgan. A question on Internal returns, not capital returns. If we look at the divisions ex iron ore, return on capital last year was sub 10%. You've very helpfully given guidance out to 2023 for the growth and the mines to market. How should we think about return on capital evolving in those divisions? Is a sub 10% return on capital acceptable for those divisions? What is an appropriate hurdle rate?
We try to give guidance on the things that we can control. Of course, a lot of the profitability will depend on the prices. If you look at it, I was talking about aluminum just before. You're right, it's just below a double-digit return on capital employed last year. We have opportunities to further improve it, and we look longer term as having really good demand. If you look at the copper and diamonds business, return is actually quite attractive. Right now there are some projects that are under construction and doesn't produce anything yet. It's less meaningful to look at that. It actually looks pretty attractive, the picture there. The third area, outside iron ore, energy and minerals, I think you have to recognize that it was not the best year last year.
We have guided for higher production this year. Therefore we also expect higher profitability this year. Overall, I remain quite positive about the whole portfolio, not just the high profitability in iron ore.
I'll add to what Jakob said, which is, the question at the end of the day is about portfolio. Do we believe in a diversified portfolio model? The answer is yes. The company has been around for 147 years, right? I'm not saying every committee has had their time under the sun, but pretty close to it. In that context, Jakob is absolutely right. Some of the performance of some of the assets is not there, and therefore we are putting the management under significant pressure to turn them around. However, safety remains priority number one. There will be no shortcut on this one. Here it's a question about long-term, and when we do the strategic review and the attractiveness of a portfolio, we look at long-term fundamentals, we look at long-term returns, and so on and so forth.
Our view on capital employed or expected capital employed in the long term has to be at the right level. Do we believe that our aluminum business, especially in Canada, which is not in the first quarter of the cost curve, but the first decile of the cost curve, and that's even before implementing the inert anode technologies and so on and so forth, have a bright future and be able to create value for shareholders for long term? Absolutely. Do we believe that copper, because of the shortfall in terms of supply in the next 10 years, for all the reasons that we are even experiencing ourselves, it is difficult. The attractiveness of copper is because it's difficult about supply. Do we believe that in the long term, once we've done the investment, should we get the right return on capital employed? The answer is absolutely yes.
That's important for us because at the end of the day, if we really want to create value for our shareholders, it's going to be about a positive spread of EVA, therefore return on capital employed is the key driver for us, and so on and so forth. If I can take one question in London, then David, we'll go back to the conference, okay?
Thank you. It's Grant Moors from Macquarie. Just in terms of, as a CEO, looking slightly longer term and filling up your options-
Further down the line, it looks as though you're reverting more to exploration to fill that. The reason I say that is it's the first time I've noted that Rio put drill results in their presentation. Which is good, by the way. Is this the shape of things to come? Is really going back to grassroots, as opposed to looking other means to fill your pipeline?
I think that's a very good question. Maybe we didn't communicate enough about exploration in the past. I take the point. If you look back in the last 10 years, especially after the GFC, we were the only large mining company not to cut, or in a big way, the exploration budget. The challenge with exploration, it takes 20 years, 30 years. It's a long-term investment and so on. Are we looking at all options? The answer is yes, organic and M&A. M&A, we have a watching brief. The truth of the matter is, if you look at the last 20 years, not only in the mining business but in other industries, most of the M&A transactions destroy value.
At the same time, in the context of the mining business, if you don't grow, starting by the replacement, offsetting the depletion, you have a problem. I give you a very simple example. We're moving 1 million tons of iron ore every day. In the next forever, if I put it this way, every two or three years, we have to build a new mine just to stay in iron ore. That is the reality of what we are facing here. We need to grow. Do we have a preference for organic growth? The answer is yes. Maybe you're right, maybe we're going back to grassroots and so on and so forth. I don't know per se. What I'm just saying is, today, when I look at the portfolio of options through our organic growth option, we will deliver around 2% per annum in the next five years.
Do we want to improve, to strengthen the quality of our portfolio? The answer is yes. That's why we're going to spend around $250 million on exploration. We need to have a healthy pipeline of options. Today, what we have, if I step back, we are enjoying decision made by not even my predecessor, not even the predecessor of my predecessor. Decision made 20 years ago, 25 years ago. What we want to make sure is that whoever is running this company in 10 years, 20 years from now, he or she has a healthy pipeline of options. I'm not ruling out M&A. We'll keep a watching brief. We need to push harder on the exploration. Having said that, in the short term, when we talk about growth, we talk about growth of cashflow per share.
The best source of cashflow that we have today in the short term is productivity. We've got $50 billion of invested capital. The productivity program, especially in the context of price squeeze environment that we mentioned, is the best source of additional cashflow per share that we can have. Here it's a multi-leg approach, making sure that we generate the right cash yield from our existing assets, creating the pipeline of growth options, organic growth options, and last but not least, continue to have a watching brief on M&A. If I go back to the control, David, if we can take a couple of those.
The next question comes from the line of Paul McTaggart from Citi. Please go ahead.
Hi, gents. Just a quick question on a couple of the smaller assets. Just on pigment feedstocks, you've obviously got three furnaces offline down at the minute. Pigment prices, feedstock prices improved. What kind of level do you think Do we need more improvement for you to start to bring some of that production back? Just maybe on Simandou, just where to now for that asset? Thank you.
I'm not sure I've heard exactly your question. My understanding of the question you said is about TiO2 and the condition under which we would restart some of the furnaces. That's where we are.
Yes.
The plan is to restart two furnaces this year, and that's totally included in the guidance that Jakob gave out to you. That is the plan at this point in time. On Simandou is, as I said before, it's a topic for discussion between Chinalco, as head of the Chinese consortium, the government of Guinea, and Rio Tinto, and those are our private conversation. It is a complicated topic for all kind of reasons, which are pretty obvious. We will inform the market as and when we make progress about the way forward in relation to Simandou. If we can take another question, David, from Oz.
Next question comes to the line of Carl Parker from CLSA. Please go ahead.
Hi, Jacques and Jakob. Just two from me, please. Just wanted to delve a little further on OT. Given the large footprint of the caves, and ongoing concerns around the ground conditions, should we expect that underground development effort to increase due to the delay? As you said, Jacques, we know that OT caved, but maybe it caved a little bit too well. On the CapEx estimate, which is set back in 2011 of $5.3 billion. That was done at the, I suppose, the peak of the CapEx cycle when the US dollar was much weaker as well. Just wondering how much headroom you had within that guidance. Just finally on the balance sheet, just a conceptual question. Do you believe there's an opportunity cost attached to having too much conservatism built into the balance sheet?
It appears that there's much more flexibility in terms of funding future growth and maintaining that strong credit rating. Thanks.
Jakob, you want to pick up the balance sheet?
Look I think what you heard today is us talking about a very profitable business, a 19% return on capital employed. In that light, trying to be too smart about the financial engineering and gearing up our balance sheets makes absolutely no sense. No, the reality is we're very comfortable with the balance sheet we have. As I said, it gives us flexibility, optionality, and we want to use that. Use it as we talked about, to weather cycles and ideally act counter cyclical. That basically means that we can make the rational investment decision at any moment in time because we have the balance sheet. I think that has a lot of value for Rio Tinto as a company and its shareholders.
I pick up the question on OT is, one of the questions that the team is looking at is on the back of the geotech model, where are we going to initiate the cave? I'll try not to make it too technical here. The idea was you have several panels. The idea was to start at the middle of panel 0 and to go north and south at the same time. Because of the current ground conditions, we may not be able to do that. People are looking at other position on panel 0 to see what is the best way to start the initiation of the cave. We don't know it's going to be north part or the south part of the cave, but that's the kind of question that people have to look at.
As you know, what is really important in terms of profitability for you to go is because it's a world-class resource. It's not too much the CapEx up front. It's really the pace of ramp up and so on, so forth. That is the key source of cash flows and therefore the source of profitability. One of the key questions that people are looking at is where should they put the infrastructure below the extraction drive and where we should initiate the cave and the pace at which we move in order to initiate the cave. Work is underway. By the way, the model will be updated on real-time basis, but we should have a pretty good view on where we are this year. It is normal process.
We are incorporating the geotech as we speak, and we'll have a better answer in the coming months, and we'll come back to the market. Can I go back to one last question on the call and then we go back to London?
Thanks.
Next question comes from line of Glyn Lawcock from UBS. Please go ahead.
Good morning, J.S. Two questions. Firstly, you called out in the presentation the Chinalco holding, it's creeping up towards the government limit. How does that affect your capital decisions in the future? Is it going to become a hurdle or do you initiate discussions with the government over that? The second question is just around your internal reviews on commodities, you've got Simon Trott there. I just thought, what's come of your reviews of certain markets like the EV market and where you think you should be maybe positioning your portfolio for the future? Thanks.
You want to speak about the Chinalco piece?
Yeah.
It doesn't affect our capital decisions at all, I would just call it constant care. We have an agreement between our host government and our biggest shareholder. We are actually not part of that, but we're just taking it into recognition when the board reviews the instrument to which to pay back the shareholders. Right now the answer was a special dividend. Bear in mind, we still have an ongoing share buyback program running for the next 12 months.
Thank you. Simon, on the EV.
Thanks, J.S. and Glyn. Maybe just to answer it in two parts. Commercial we established during 2018, really to make sure that we were fully leveraging and looking into the market around our unique insights across the supply chain. Through 2018, we've been putting that in place. Some examples of the sorts of activities that commercial has been up to, a lot more active book management. We saw some disruptions in the market last year, such as Rusal and Section 232, and really making sure that we were creating options through that environment. Adding optionality to our book, so replacing some of the intermediaries in some of our sales books, like in our copper business. Use of third-party tons. In our logistics business, using third-party tons to reduce the cost of procurement and some of that inbound freight.
In procurement, really focusing on partnerships with suppliers, extending conveyor lives so we can push out maintenance charts. As a commercial group, that's really our focus. Ultimately, commercial's about people and data, and how we work with our customers to deploy those assets. In terms of your specific lens, we work with the other areas within Rio, BD, and Ventures, and we have inputs into that process, and we're obviously very focused on looking for opportunities to continue to take the business forward.
Thank you, Simon. If I go back to London. Thank you, Sydney.
Hi, Sam Catalano from Credit Suisse. Two questions, probably both for Jakob. Firstly, the pace of the existing buyback daily in January over February after share price rise was consistently flat. I imagine that was outsourced during your close period. Would you expect that to change going forward? Second question is, you talked about touring the assets and seeing the strengths and very carefully worded opportunities for Rio. Could you be more specific on some of those opportunities, please?
On the opportunities?
Yeah. You talked about touring the assets and observing opportunities in Rio Tinto.
Thank you very much. Look, the way we look at this is, on the buyback programs, is just carrying them through and not being too smart about the share buyback programs. You're right, the pace is taking off somewhat now. We have $1.1 billion to buy back over the next 12 months, so it's a very doable program. Look, in terms of opportunities across Rio Tinto, what it starts with that you really do see some true excellence in a number of places. I would say the cultural adherence of the company, we are coming from, many years back, from a kind of law holding structure, where you had very separate assets. The model that I very much bought into when I was interviewing and talking to Gabe, is this a much more industrial model, where we run a global organization with technical centers of excellence across the path.
When you then look at the variances that you have in performance, you realize that you have real good opportunities. I don't think I would stand here and mention individual assets for not being effective enough. What is really good is to go around, meet people on the ground, and they can see that exactly the same operation done somewhere else is done at a much higher level, and they can find out what would it take to get there. Actually, I do think it's entirely doable to get to the improved $1.5 billion of improved productivity. It goes across. It is in our mobile assets. What is the effective utilization of our mobile assets? It is about the effective utilization of our processing plants, and it is also other factors in the mine.
Our productivity improvement program is actually wide and deep and has got a lot of potential.
All right. We have time for a couple of questions. If I take Paul, you are already at your time.
Good morning. Richard Hatch from Berenberg. A question on diamonds, the Argyle mine. Can you talk around the financial performance of Argyle, given the weakness of the small stone market and how that's impacting your thoughts on the timeframe for closure for that asset, please? Thanks.
I think we've been very clear. We are on the last leg of Argyle. That has been an absolutely fantastic mine for us. The peak diamonds are there. It will be a true legacy forever, if you could say. Arnaud Soirat, the head of Copper & Diamonds, was there 10 days ago, and he knows that we are, I don't want to say exactly when we're going to close, but it's getting closer and closer, and we have started to engage very closely with our employees, our communities, and the government in W.A. to make sure that everybody understand. I can't tell you if it's three months, six months, 12 months, because that's not relevant, but it's clearly in the next two years max that, seen from today, when we look at the economics, we will have to take a decision to close Argyle.
That has been a very good mine for Rio Tinto for a long time. Back to your question about exploration, I'll continue to put our friends from exploration under massive pressure. If they could find me a nice open pit, shallow in Australia. That is an internal message here, all right? Don't worry for the people in the room. Shallow, world-class with lots of big diamonds, I would be absolutely delighted. It seems that they have found some nice copper and gold and silver somewhere else. The mine is going to close, but we will do it in a respectful way. We're not far away. At this point in time, the mine is safe, and the mine is producing cash, and therefore, we carry on. That's where we are. One last question.
Morning. Jatinder Gul from Exane BNP Paribas. A couple of questions. Good to see the iron ore and the copper cost guidance. Any particular reason that's beholding aluminum business cost guidance? Is that the lack of visibility or the range is too wide, given you are long in both raw materials and you mentioned that the cost pressures are not there? Just wondering, why is it missing? On copper, your volumes are down about 10% in 2019, excluding Grasberg. The cost uplift is not that meaningful. Where is the offsetting factor? The guidance looks quite healthy versus last year. Thank you.
Jakob?
Yes. Sorry.
The guidance you are lacking was not very helpful.
Aluminum bauxite guidance. Any reason for missing that out, given it's an important business and it's been a focus for 2018?
We were trying to find relevant unit cost guidance. The unit cost guidance we are providing you basically covers around 90% of our EBITDA. It was actually one on the edge we decided not to give guidance for bauxite.
Massimo, anything on copper? The year-on-year variance on copper.
On year-on-year? I'm not 100% sure.
Volume guidance is about 10% lower, excluding Grasberg, but the cost guidance is not rising that meaningfully versus 2018 reported copper business cost. Just wondering, where is the offsetting factor to lower grades that you'll be facing this year?
You're questioning me a little bit on this one here.
I used to run copper. I think I still have some knowledge. It's tough to give you a few facts. There are a series of elements on the copper, including the by-product. That's why we give you a C1 cash cost on this one. It's net of the by-product, therefore, you need to go back to each of the mine, not to look at only at copper, but at the gold, the molybdenum, and so on and so forth. It's a slightly more complicated model, if I'm honest. We give you, for the first time, some indication on the direction of travel. The by-product is a key element of the answer that you just asked for. Thank you very much. I think the picture is pretty clear. As I said, we are in good shape.
Strong balance sheet, fantastic asset portfolio, we're not going to become complacent. I hope you have a better sense on what we are focusing. The first element is really on safety. The second element is really about cost and productivity. Making sure we have the right product for our customers. It's a very volatile environment. There are a level of uncertainty, we are in good shape, I hope you've heard it from Jakob himself. The strength of our balance sheet is absolutely essential in a capital-intensive business and in a market context which is volatile and uncertain. That's where we are for today. Thanks a lot. Remember the one key number, $13.5 billion. 13.5 is a good number. Remember $13.5 billion. Highest in 137 years, it comes on the back of last year, $9.7 billion.
Just to help you with numbers and the notes here. On this note, thanks a lot, and we'll talk soon. Bye for now.