Hello, thank you so much for joining us for this interactive shareholder event. My name is Natalie Worley, and I look after investor relations here in Australia. I'm here with Rio Tinto CEO, Jean-Sébastien Jacques. Before we go to your questions, J-S is going to briefly update you on the half-year financial results that we announced last week. Thanks, J-S.
Thank you, Natalie. Hello, thank you for joining us. I really look forward to this conversation with you, our shareholders. Sharing our strong results and the superior returns this has enabled us to deliver. Perhaps most importantly for Rio Tinto, it's an opportunity to hear directly from you. Let me start by saying that our strategy is working. We have real momentum, and I'm absolutely delighted to report that we continue to deliver on our promises. We maximize cash generation and deliver strong earnings and margins. We have worked hard on strengthening our portfolio, and this continued with $5 billion of announced divestments. We are also looking to the future and invested $1.4 billion in high-return growth, including our driverless trains in W.A., Western Australia, the Amrun bauxite mine in Queensland, and the Oyu Tolgoi copper and gold mine in Mongolia.
We are also working hard to get more from our existing assets, and we generated around $300 million of free cash flow through our productivity program, which is set to deliver an additional $1.5 billion of free cash flow per year by 2021. Most importantly, we announced cash returns to you, our shareholders, of $7.2 billion. Our aim at Rio Tinto is simple: to continue to deliver superior returns over the short, medium, and long term. Before I go on, let me provide a brief overview of Australia's importance to Rio Tinto. We have been part of Australians' life for more than 100 years, since the Consolidated Zinc Corporation was founded in 1905 in Broken Hill, New South Wales. We first listed on the ASX, Australian Securities Exchange, in 1962. Australia is home to around half of our global assets.
We produce iron ore, bauxite, alumina, aluminum, diamonds, and salt from more than 30 operating sites and processing plants around the country. We have offices in Melbourne, Perth, and Brisbane. Last but not least, we directly employ more than 22,000 people and work with almost 9,000 different Australian suppliers. We are proud to have you, our 160,000 shareholders in Rio Tinto Limited, as part of this company, your company. Turning back to those shareholder returns, your returns. Something that is not negotiable for us is a very disciplined approach to how we allocate capital. In the first half of 2018, we returned $4.7 billion to shareholders. We also declare an interim dividend of $2.2 billion to be paid in September, and we have also allocated an additional $1 billion towards our existing share buyback program. All shareholders will enjoy the uplift in earnings per share this delivers.
In addition to this, in the second half of this year, we are expecting to receive $5 billion of proceeds from asset sales pre-tax. This includes proceeds from divestment of our coking coal assets and the proceeds from the ISAL and Dunkirk aluminum smelters in Europe. It is the board's decision that these disposal proceeds, net of tax around $1 billion, will be returned to our shareholders. The decision about the form and timing of these returns will be taken at a later stage. We are proud of these results and the returns we are able to make to you, our shareholders. I can assure you that complacency will not kick in at Rio Tinto. We are concerned about the return of inflation, which is impacting the entire industry, putting margins under pressure.
Resource nationalism is not a new feature of the mining industry. There is no doubt that many stakeholders want a greater share of the wealth created by minerals development. There is also an increasing emphasis on how we operate and our impact on the world around us. This is why we believe our license to operate is a make or break for the industry. Ongoing threats to global trade also remain a concern. History shows fair trade and open markets are the best drivers of growth and prosperity. In these uncertain times, resilience is absolutely key. We are so focused on four key drivers. One, driving performance. Our productivity drive will build up to generate $1.5 billion of additional free cash flow per annum from 2021. Two, we are actively shaping our portfolio. Three, growing in a very focused way.
Our current organic pipeline will deliver an average of 2% per annum over the next five years. Last but not least, four, maintaining a strong balance sheet. This is how we will continue to deliver superior returns for you, our shareholders, in the short, medium, and long term. With that, I would now like to hear from you.
Great. Thank you. Thank you, J-S. We have received some questions already. If you would like to ask a question live, please just click the Submit a Question button on your screen.
Do we have a question?
Well, you've talked about the results, but one of the most common questions that we have is around the outlook for the business, including with respect to China and global trade.
Okay. Very good question. Let me step back to set the scene. For the mining industry, including Rio Tinto, there are two main drivers. One is about what we describe as GDP growth, the economic environment. The second one is about trade. Let me take them in turn. When I look at all our key countries where we operate, where we sell our products, it could be China, Japan, Korea, Canada, U.S.A., the economic activity is very strong as we are having this conversation. GDP growth is very good. No real concern from that perspective. However, back to my introduction, in relation to trade, there could be some concerns. Before I say a few words about trade is why trade is so important for us. 90% of our product move from one country to another. You can understand why trade is so important.
At this point in time, when I look at the order books that we have, either in the U.S., Canada, China, Japan, and so on and so forth, there are no issues whatsoever. The demand for high-quality product is very strong. All in all, am I overly concerned? The answer is no. However, we fully acknowledge that there is uncertainty, and that's why the resilience, building a resilient business is so important. What the team is working very hard day in and day out is making sure we have a very good cost position. We have some very good product, high-quality product, like our Pilbara Blend in the Pilbara for the iron ore market in China. It's about having the strong relationship with our customers globally. Last but not least, maintaining a strong balance sheet. We can only work on what we can work.
We can focus only on what we can control. As I say, cost, quality of our product, quality of the relationship with our customers, and the balance sheet. If we get this right, you are in a very good position because no matter what the market conditions are, we will continue to be profitable, we will continue to make cash, to generate our own cash. We will continue to be more profitable than our peers. As a result, we will continue to deliver on our commitment, which is to deliver superior return to our shareholders, you, our shareholders, in the short, medium, and long term. What we have achieved in the first half of this year is a very good example.
$7.2 billion of cash return to our shareholders for the first six months of this year, which comes in addition to the $10 billion of return that we disclose, we declare in February of this year on the back of the strong performance of last year. Our commitment to you shareholders is very clear, which is to deliver superior return in the short, medium, and long term, whatever the market conditions are. That's what we've done in the first six months. That's what we'll be doing going forward.
Okay, thanks. The next question is a combination of a few questions. The question is, we've been doing a lot of divestments recently, which you've spoken about. Will you still be able to continue to grow?
Yeah.
Are we looking at M&A?
All right, the question about M&A. On the M&A, our position is very clear and simple, is to say we have a watching brief in the M&A space. We are looking at multiple opportunities. However, we will pursue M&A only if it creates value for our shareholders. This really is full of missed opportunities in terms of M&A, where lots of value has been destroyed. We are very conscious of this one, and therefore, our threshold on M&A is very strong. As I mentioned, we have looked at some opportunities recently, but at this point in time, nothing really excite us. However, you never know. Maybe one day we'll find one which creates a lot of value because of synergies on how we can optimize the asset and so on and so forth. Today, no obvious options available to us.
Having said that, I think it's important to understand that we have nevertheless plenty of opportunities to grow. We don't need M&A to grow for the sake of it. As I mentioned in my remarks, we continue to invest in the iron ore business, our world-class iron ore business in the Pilbara in W.A. We are investing, as we speak, in Amrun, which is a very large bauxite project in Queensland, which I will visit in the coming two weeks with the Premier of Queensland. We continue to invest in our copper and gold project, Oyu Tolgoi, in Mongolia, which will be a mine that produce lot of copper, lots of gold for the next 100 years. As I said, watching brief on the M&A with a very high threshold. Nothing really exciting at this point in time.
At the same time, we continue to grow through our projects.
Okay, great. Thanks. The next one's actually, in a way related, and it's around iron ore, and the question is, "Are you too dependent on iron ore?
All right, it's a question about diversification, I guess. Let me start by saying that Rio Tinto, which has been around for 146 years now, is a global diversified mining company. We believe in diversification. All the commodities have their time under the sun. However, we will not diversify for the sake of it. As I mentioned earlier today, one of the fundamental principle of strategy is about having a portfolio of world-class assets. When we allocate our capital in a very disciplined way, the money goes to the best project, no matter what commodities they are in. In a sense of, yes, for sure, if you ask me where the company could be in 10 years down the road, having a higher level of diversification, having iron ore, but copper, but aluminum, bauxite, and potentially other commodities, would be a great thing.
At the same time, don't be surprised if the share of the iron ore business in 5 or 10 years down the road is exactly the same as it is today. That brings me to the second point, which is our world-class iron ore business is really world-class. Look, in the first half of this year, we delivered 67% EBITDA margin. This business has consistently delivered EBITDA margin above 50% for the last 20 years. This is a fantastic asset that we will continue to develop, and there is nothing wrong with having lots of iron ore in our portfolio at this point in time. To wrap it up, yes, we believe in diversification. However, we will not diversify for the sake of it.
For us, it's really about the quality of the asset, the quality of the project, to make sure that we continue to be profitable, more profitable than our peers, so we can continue to invest for long term and reward our shareholders as per our commitment, which is, I've already said twice today, deliver superior value in the short, medium, and long term.
Thanks, J-S . You've actually already touched on this one in your last answer, but Ian asks a question that we do commonly get. Ian asks, "In terms of battery minerals, are there any other minerals, other than lithium, which people know that we're looking at, that Rio Tinto is actively pursuing?
Yeah, we're looking at a few minerals in relation to batteries. Let me step back. First of all, as a company, we believe in climate change, and we believe in the electrical vehicle revolution. All right. What we want is to position ourselves in the best possible way. Today, we already have a strong position through aluminum and through copper. However, we don't have lots of exposure to the battery market at this point in time. We're looking at a project, a large project called Jadar in Serbia in relation to lithium. We're looking at potentially other commodities, including cobalt and a few others. At this point in time, the only thing I can say is we want to position your company in the best possible way for long term. We believe in climate change. We believe in electrical vehicles.
We are looking at multiple options, that's the only thing I can say at this point in time.
Okay. We've probably got time for a couple more questions.
Okay. No worries.
This one is around mining automation.
Rio Tinto's been a leader in mining automation. Can you tell us what you're doing? Should we be worried about the mining jobs of the future?
All right. Very good question. Let me step back by saying what is very important is to make sure that our asset in Australia, for example, or outside Australia, in Canada or the U.S.A. as an example, they need to remain competitive in the context of a global industry. Right? All competitors, no matter where they are, in Brazil, in Africa, in China, so on and so forth, are moving fast. They are investing a lot of money in order to improve their cost position. We need to do the same. All right? New technology, automation, digital, artificial intelligence, will be very important for us to unlock some of the value that we have within the company. Now, in order for us to be able to do it, we're going to need new jobs. New jobs will be created.
We're going to need, as an example, different type of engineers. We need to find those people. Different jobs, new job for sure. At the same time, it's not always easy to find those jobs in the market wherever we operate. That's why we've started, to give you an example, to work very closely with some universities, some schools, and the best example is the partnership we have with TAFE in Australia, in Perth, in W.A., to make sure that we, over time, are able to build the skills that we need for the future. That's one part of the answer. Automation will create new jobs that we don't necessarily have in our system today. On the other side, it's fair to say that automation, new technology, could have an impact on jobs in terms of job reduction.
Therefore, we are working very closely with the local committees, with the state and the federal government, to make sure that there are programs in place to retrain those people, to make sure they have the right skill set for them, if they don't have a job at Rio Tinto, are able to find a job elsewhere. For us, automation is about ensuring that we continue to be competitive in the global landscape because we want to remain one of the most profitable company in order to, as I said several times, is to continue to deliver on our commitment to our shareholders.
At the same time, is we need to work very closely with the government, the communities, the university, to make sure that on one side we have the skills that we need, and the other side is we retrain and reskill the people that could be impacted by the introduction of new technology and automation. That's what I can say at this point in time.
Okay. The next one is around what's important to you and your priorities. You've been in the role for two years now, if I've got that right. What are your priorities and how have they changed?
Well, at the end of the day, nothing has changed for the last two years. Our commitment to our shareholders are very clear: creating value short, medium, and long term. Now, the way to do it has not changed. It's really about the quality of our portfolio, having world-class assets in our portfolio. The way we run those assets, the quality of the performance, it's about making sure we have the right people, the right capabilities, the right engineers, back to the discussion we just had earlier. It's not only about the engineers, it's about the commercial, it's about many different functions. It's about making sure we have the right engagement with our communities to secure our license to operate in the short, but in the long term as well.
Maintaining the strength of our balance sheet because in a very uncertain environment, resilience is absolutely key, and we believe, I believe that the resilience will come from the quality of our assets like our iron ore business in the Pilbara or bauxite business in Queensland or aluminum business in Canada. It's about having the best people in the industry, making sure they are absolutely passionate and proud of what they're doing, and that is the case today at Rio Tinto. It's really about making sure we extract every piece of value from our system, and we know we still have some opportunities in terms of latent capacity. Making sure that our host communities sees us as a good neighbor and welcome us. At the same time, $5.2 billion of net debt at the end of June, which is very strong by any kind of standard.
I believe the ingredients are very clear, and I'm absolutely confident, as we've just done the first half of this year with $7.2 billion, or last year with nearly $10 billion, we will continue to deliver on our commitment to our shareholders, which is to create value in the short, medium, and long term.
Thanks. Next, coal. We've talked about the divestments in the last half and the divestments of the coking coal assets are the final divestments of Rio Tinto's coal portfolio. The question is, has this been done at the right time, and what's driven it?
Yes. The logic behind the divestment of the coal business, and you've got thermal coal on one side and coking coal on the other side, was a decision about portfolio. Okay? Strategy is about making some choices. What we have decided is to invest in the best projects in the most attractive commodities. At this point in time, although we have a strong balance sheet, as I mentioned, $5.2 billion of net debt at the end of June, as a company, we decided to invest in iron ore. We have decided to invest in copper, in aluminum, in bauxite, and potentially some specialty initiatives in relation to electrical vehicle and so on and so forth. As soon as you've said that and you say, "Hold on.
Some of the assets, like some of the aluminum smelter in Europe or some of our coal asset in Canada are not going to attract some capital because the money will go elsewhere, it's our duty to find a new home for those assets for the benefit of the employees, the customer, and the communities. That is the logic behind. It's a decision about portfolio, about capital allocation. We said it many times that for us it's about disciplined capital allocation. We've made some choices in terms of portfolio, and therefore, as a result, we decided to exit those assets. Which are very good asset, and they've done a very good job for us, and I'm very proud of them, and I'm sure they will have a great future under the new ownership. That's what it is about.
It's about portfolio allocation to make sure we deliver on our strategy, which is to build, over time, a portfolio of world-class assets. We can't invest in everything. We have to make some choices. We have made some choices. I believe we did extract a very good value for those assets because they are very good assets.
Thanks. Another question here. There's been a lot of commentary around company tax reform here in Australia.
Where does Rio Tinto sit on this topic?
Our position is very clear. It's not only for the benefit of Rio Tinto. I think we take the bigger picture or bigger view on this one. If you cut the corporate tax rate, that will generate more investment across different sectors. It will generate or improve productivity. It'll create new jobs, different jobs, and so on and so forth. What this corporate tax rate is about is really about the future. It's about creating new opportunities, new investment, new jobs and so on, new technologies. That's what it is about. As far as Rio is concerned, we have been very clear from day one. We have been very vocal. We believe it's important that any government push in that regard. At the end of the day, what you want is Australia to be competitive in the global landscape.
Today, when you look at the effective tax rate in Australia and you compare it to other regions, it's not at the top of the league table. It used to be there, but it's no longer the case. Let's see what happens in the coming weeks and days. I think the vote is pretty soon.
Okay. I think we've got time for one more question.
No problem.
Finally, we have talked about growth and the near-term growth projects that we're working on. What's the CapEx guidance for the next couple of years, and also what projects sit beyond that?
All right. The CapEx, we have been very clear, for 2019 it's around $6 billion. The guidance for 2020 is $6.5 billion. We give only a three-year guidance. Beyond that is we have a pretty healthy portfolio of exploration projects. We spend around $200 million every year on exploration. I won't say too much about it, and the reason being is I'm always very cautious. I don't want my competitors to know what we are doing in that space. We are very active in the exploration space. We look at it in Australia, we look at it in North America and South America as we speak. It's no secret that we are looking at copper opportunities. Not only copper, we're looking at other specialties, but I don't want to say much more at this point in time.
We're doing lots of work in exploration. After that, we mentioned already the Jadar project in lithium in Serbia that we are currently assessing. That's one of those. The other one I could mention is a project, it's a copper project, by the way, in partnership with BHP called Resolution in Arizona in the U.S., which could be a very large underground copper mine in the U.S. The permitting process has started a few years ago, going pretty well, but you know the permitting in the U.S. takes a lot of time. It's very slow. We still have a few years ahead of us before we know if we proceed with this project.
All in all, I just want you, our shareholders, to be reassured that we have growth options above and beyond what we discussed today about Oyu Tolgoi, Amrun, and a few others. We are trying to build a very healthy pipeline, hence my comments about the exploration and a few other bits and pieces. I will leave it here for the time being, as soon as we've got some positive piece of news, as you can imagine, we'll come back to the market.
Okay, maybe a few comments to wrap up the session. Thanks to everyone for joining us.
That's the first time we've done it as far as Rio is concerned. I'm really impressed by the questions we had today. Very good questions. For us, if I summarize it's very simple. We have only one commitment to you, our shareholders, which is to generate superior returns in the short, medium, and long term. We've done it in the first six months of this year, $7.2 billion U.S. dollars for six months. We delivered $10 billion last year on the back of a very strong 2017 year. That's where we are. We are very clear, our commitment is clear, what you should expect is us to continue to deliver on our commitment. On this note, I'll look forward to our next conversation in six months, I guess, for the full-year results. Thank you very much