Hello everybody, welcome to Rio Tinto's 2020 interim results presentation and Q&A session. We will start this session by playing pre-recorded presentations from our CEO, Jean-Sébastien Jacques from Australia and CFO Jakob Stausholm from Europe. This will take just over 30 minutes. Immediately following this, we will hold a live Q&A session for 45 minutes hosted by JS, Jakob, Steve McIntosh, Head of Growth and Innovation, and Arnaud Soirat, Head of Copper and Diamonds. You can find the dial-in numbers to participate in the live Q&A session on our website under the presentations section.
Welcome to our first half results presentation. Jakob and I have recorded our presentations, but we'll switch to live streaming for Q&A when Arnaud and Steve will join Jakob and myself. Before we talk about our performance, let's start with an overview of how we see the world. We are in unprecedented times. These times require unprecedented actions. There is absolutely no doubt that during this global health pandemic, our industry has been hit by supply and demand shocks on a scale never seen before. No one has remained untouched on either personal or business level. I am proud of how the team has risen to the challenge to keep our people and communities safe and healthy, to keep serving our customers, and to strengthen our financial performance in a highly volatile market. It is about resilience. It is about adaptation. It is about partnership.
Against this backdrop, we have delivered a strong and resilient set of results. Rio Tinto generated underlying EBITDA of $9.6 billion with a margin of 47%, the same as last year. Our return on capital employed is also high at 21%. Our free cash flow was $2.8 billion, impacted by the final payment of $1 billion in Australian income tax in June 2020, with respect to 2019 profits. Our balance sheet remains strong, with $4.8 billion in net debt at the end of the half. We also continue to invest in growth, investing $2.7 billion in our world-class assets, and we returned $3.8 billion of cash to our shareholders, taking our total returns to shareholders over the last four and a half years to $38 billion, including the first half dividend of $2.5 billion. This supports our TSR or Total Shareholder Return of 27%.
Our commitment is to deliver superior shareholder value through the cycle, and we have consistently achieved this year after year. As we do this, we also continue to provide wider economic benefits to society at a time when it's needed. In this half, we paid $2.7 billion in corporate taxes and $1.2 billion in royalties. Strong operational performance underpinning strong financial performance, as does our commitment to sustainability. Of course, not everything has gone well in this half. We are very sorry for the pain we have caused the Puutu Kunti Kurrama and Pinikura people as a result of the destructions of two rock shelters at the Juukan Gorge in the Pilbara. I've had the chance to talk to the PKKP direct to hear from their board and restate my personal apologies.
I've also reiterated our absolute commitment to understand and learn so we can make sure that the destruction of site of national significance, like the Juukan rock shelters, never occurs again. I've also connected with traditional owner groups across Australia, and I've spent time on country with the traditional owners groups in the Cape around our Amrun operation in Weipa. As border restrictions ease, I will continue to spend time on country with as many traditional owners as possible. These engagements have provided me with really important opportunities to reflect and hear more from our partners. It is absolutely clear we must learn from what happened at Juukan. Our immediate focus is our partnership with the PKKP. With this in mind, we have already agreed some action with them to further protect heritage sites on their country, and we are working on further strengthening our relationship.
I will appear at the parliamentary inquiry next week to share more on the circumstances around Juukan, our learnings to date, and our views on potential legislative reform measures. Alongside this, we will support and contribute to the planned review of the Heritage Act in W.A., Western Australia. The Rio Tinto Board is also conducting a review aimed at improving our heritage processes in iron ore. I'm absolutely determined that we all work together as an industry, as governments, and with traditional owners to strike the right balance to enable the development of resources as we protect heritage for current and future generations of Australians. Let me finish this section with an update on safety and health. Our performance has been very strong despite the numerous challenges of coping with COVID, and we have improved our AFR to 0.37 for the first six months of this year.
We had to implement new controls and procedures and use technology in different ways to protect our people and keep our community safe. Let me give you an example. We are using virtual reality glasses at the Oyu Tolgoi underground project so that all teams can inspect the work outside from their homes. The focus on mental health is even more essential in this environment, and we are supporting the well-being of our teams. We have introduced LinkedIn Learning, with more than 8,000 employees now enrolled. It is absolutely vital we continue to care for our employees and communities. As you can see, we once again deliver strong operating cash flows of $5.6 billion with a 47% underlying EBITDA margin and a return on capital employed of 21%. We spent $2.7 billion on sustaining our world-class operations and growing the business for the future.
We increased leverage on the balance sheet by $1.2 billion in the half, as we paid out $3.6 billion in dividends and completed the final $200 million in our buyback program. This program, you may remember, started with a $500 million buyback in 2017. We have now completed a total of $9 billion in buybacks. Today, we announced an interim dividend of $2.5 billion, representing 53% of underlying earnings, which is in line with our shareholder return policy. We have one of the strongest balance sheets in the sector. This provide us with resilience and agility, which is absolutely vital in an increasingly complex world. We are well-positioned for ongoing success. Now, over to you, Jakob.
Thank you, J-S. Good morning and good afternoon, everyone. Let me start with the market. The main market for our high-quality iron ore is China, which, compared to the broader global economy, has recovered exceedingly well. China's steel production and demand for iron ore in 2019 was strong, and this has continued despite disruptions in the first quarter. In 2020, crude steel production has again exceeded the 1 billion ton annualized run rate, and June production was a new all-time high record. This means that China effectively absorbed the additional iron ore diverted from weaker steel markets in Europe and Asia. Far this year, supply has been constrained as it was in 2019. These factors led to high iron ore prices similar to the same period in 2019. Whilst our iron ore business has benefited from robust demand and resilient prices, other commodities have seen more volatility.
In aluminium, the impact of COVID-19 has reduced prices as demand has significantly shrunk, particularly from the automotive sector. Copper, often named Dr. Copper, initially followed the decline in the world economy. Later in the half, it recovered strongly, and this has continued with prices now around $290 per pound. This is partly due to supply disruption and has been amplified by investor positioning. Lower titanium slag demand was offset by supply disruptions, leading to positive prices. In the first half, the world experienced unprecedented conditions stemming from the pandemic. Against that backdrop, as J-S has already told you, we have today announced a set of very strong financials. First half 2019 represented a five-year high, and as you can see, this half we have performed close to those levels.
Copper equivalent volumes were flat year-on-year, in the second quarter, we actually grew by 1% compared to the same quarter last year. Hence, the slightly lower revenue was wholly due to prices. Profitability remained very strong. The return on capital employed of 21% and underlying earnings of $4.8 billion are at similar levels to first half 2019. Net earnings reflected excluded items of $1.5 billion, most notably impairments in aluminium and diamonds. Given the market conditions, we have prudently assessed and impaired Diavik, NZAS, Bell Bay, Boyne , and ISAL by, in total, $1 billion after tax. Our balance sheet remained very strong with stable, low net debt. Given our profitability and balance sheet strengths, the board was able to declare an interim dividend of $2.5 billion, which will be paid in September. Let me now analyze our underlying EBITDA and free cash flow in more detail.
As I've said, we have had negative commodity prices. This impacted EBITDA by $0.6 billion. The strong dollar somewhat offset the weaker prices with a positive impact of $0.3 billion. As you can see, excluding the impact of prices and exchange rates, EBITDA has been very stable. Cash costs for the group have increased slightly, in part due to costs associated with COVID-19. The impact of the earthquake at our Kennecott operations and the earlier-than-planned pot relining at Kitimat are the main items in the one-off and other category. On the surface, our cash conversion looks weak in the first half as underlying earnings of $4.8 billion turned into free cash flow of $2.8 billion, much lower than the cash conversion in the first half last year. This is due to firstly, the investment depreciation ratio, which went up in the first half.
This is in line with our capital guidance and explains $0.4 billion. Secondly, despite the tough economic environment, we managed to improve working capital by $0.3 billion. Thirdly, the net dividend income ratio from joint ventures went down, resulting in a negative impact of $0.4 billion. Fourth, we paid more tax than we expensed due to timing of payments. Finally, timing differences on provisions had an impact of $0.2 billion. The vast majority of the variances are temporary. Now turning to product groups. What happened at Juukan Gorge was a sad low point. I deeply regret this, and you have my full commitment to working with my colleagues to learn the lessons, and ensure that the destruction of sites of national significance, such as the Juukan Rock Shelter, never occurs again. Throughout the first half of the year, the Pilbara continued to operate with strong safety performance.
Productivity on site has been impressive, in part benefiting from lower maintenance activities. We moved 8% more material and mining operations performed well to plan. This is reflected in the 3% higher production. In the second quarter, our Pilbara operations shipped at an annualized rate of 347 million tons. We are therefore confident that we will be able to meet our 2020 guidance. There has also been an improved share of our high-quality Pilbara Blend products. Our port side trading business allowed access to a broader range of customers, meeting the needs of our markets and supporting strong pricing outcomes. Operating costs have remained flat at $14.50 per ton. To keep our people and communities safe, we have incurred one-off unplanned COVID-19 related costs. For the full year, we estimate these costs will amount to $0.50 per ton.
Despite these additional costs, a higher work index at our mines, and the increased portion of below-water table mining, we continue to target unit cost of $14-$15 per ton. The strong operational performance and continued robust pricing have resulted in revenue and EBITDA increasing by 2%. We are ramping up our investments in sustaining and growth projects, despite some disruptions to these in the first half. The Koodaideri phase I and the Robe replacement projects continue to target production ramp-up in early 2022, and first ore in 2021, respectively. The aluminium industry faced fundamental challenges coming into 2020, and the COVID-19 pandemic has made this worse. The team has risen to the challenge and has safely maintained production and adjusted the product mix to better match demand. Bauxite production grew by 8% following the ramp-up of Amrun in 2019, and third-party shipments increased by 10%.
Production in alumina and aluminum were fairly stable, despite pot relining at Kitimat and reduced production at ISAL and NZAS. EBITDA was 18% lower than last year, reflecting the $0.5 billion price impact, which was partly offset by $0.2 billion of cost and volume improvements. 3% return on capital employed reflects the toughest market for the industry since 2015. Despite this, the business generated free cash flow of $0.6 billion due to the relentless focus on cost, strict capital usage, and tight working capital management. Our business remains the most profitable in the industry. We are taking action to address less competitive assets, as you will have seen from our releases on ISAL and NZAS. Earlier this year, we said that 2020 would be a transitional year for the copper business with lower grades and by-products from Kennecott and Oyu Tolgoi.
This has happened in the first half. We are still on track to see improvements in 2021. The earthquake at Kennecott had an additional impact and resulted in 43% lower refined copper production. The shutdown and repair of the smelter has concluded, and we are now focusing on the safe restart of the smelter. Copper prices were down during the quarter. However, they are now at a 2-year high. Diamonds have been severely impacted by COVID-19, leading to less contribution from this business. We continue to plan for the closure of Argyle before the end of the year. In the first half, we made significant progress on our growth projects. Despite COVID-19 restrictions, the mine design for Oyu Tolgoi underground has been finalized according to the timeline laid out a year ago. We have also made great progress on Winu, where we now have disclosed the resource estimate.
J-S will shortly talk about both of those important and exciting projects. Our energy and minerals business has been impacted by restrictions in Canada and South Africa, where the situation remains challenging. You can see this impact in the slightly lower production of titanium slag. This has been partly offset by higher prices this half. Production at IOC has recovered well, the business has optimized the product mix, allowing shipments to be diverted to Asian mills, has also taken advantage of port site blending in China to produce the products that the customer needs. Despite the challenges stemming primarily from COVID-19 and community unrest during the first half, energy and minerals recorded a very decent 12% return on capital employed. At the Jadar project, we have completed pre-feasibility, we have now approved funding for the feasibility study.
While Rio Tinto continues to adapt to an extremely unpredictable external backdrop, there's one thing that does not change, and that is our capital allocation framework. We continue to invest in safely managing our assets and improving their performance. This means that sufficient spending on sustaining CapEx is always the first priority. The next priority is allocating capital to our shareholders through our ordinary dividend. We carefully consider allocating to growth opportunities, balance sheet strengths, and further shareholder returns. Our investment decisions are carried out with incredible rigor. I believe that this is in the best assurance to our shareholders that we will only invest in opportunities that create value, even more so during turbulent times. Growth for us is all about value generation and returns for our shareholders. It's not about volume. It's about building sustainable cash flow.
We have, over the last few years, consistently talked about a disciplined ramp-up of our capital investments, and that is exactly what we have done. In the first half, CapEx of $2.7 billion was 13% higher than the same period in 2019, despite setback due to COVID-19. The rate of expenditure is lower than we had originally anticipated, the amount of capital we expect to spend this year is now around $6 billion. There has been no cancellations of projects, We are now expecting that due to the revised phasing of work, that we will spend approximately $7 billion in both 2021 and 2022. The total expenditure over the three-year period, 2020 to 2022, is unchanged at $20 billion.
The capital component of $1 billion spent in climate abatement projects during the next five years is also included, though this expenditure extends past the end of the guidance period. We are now anticipating that we will spend somewhat more on sustaining capital. This is vital for the health of our assets, and we are already seeing, in the second quarter, early signs of the return from increasing sustaining CapEx in the Pilbara. Our balance sheet remained very strong. Net debt was steady at $4.8 billion. We also have high liquidity of over $16 billion and a long date of finance portfolio with an average maturity of liabilities of 10 years. We're very comfortable with the strengths of our balance sheet. During uncertain times, this provides resilience, ensures we are able to continue to invest in our business to provide superior return to our shareholders, and create optionality.
The shareholder return policy is to pay out 40% - 60% of underlying earnings through the cycle. As you can see, over the last four years, we have consistently exceeded our policy. The interim dividend has consistently had a payout ratio of around 50%. Today, we announced an interim dividend of $2.5 billion, the same as last year's record interim dividend, reflecting a payout ratio of 53%. The dividend per share is equal to $1.55, which is up 3% due to the completion of the share buyback program. Let me take a step back before handing back to J-S. The results that we have delivered show that Rio Tinto is a strong and very resilient company. While there has been some disruption, the overall operational and financial results have been excellent and gives us confidence of delivering production and cost guidance for the year.
The second half is off to a good start, and whilst we are still experiencing price volatility, currently prices are higher than the average of the first half. Our portfolio of long life, competitive, and sustainable assets continue to deliver strong profitability and robust cash flow to all our stakeholders. We will continue to invest in our business and make significant contributions to communities and host governments. Our operational and financial performance, along with our strong balance sheet, allows us to maintain consistent and superior returns to shareholders. We are well-positioned against an increasing complex and volatile world, and our strengths and resilience should serve us well for the future. Thank you, and back to you, J-S.
Thank you, Jakob. In 2020 so far, we have seen unprecedented changes in our daily lives, with things once thought impossible becoming our new normal, such as home working and severe travel restrictions to name but two. It is clear that COVID will be with us for some time, and we need to learn to live with it. It's difficult to predict with absolute certainty the shape of the recovery. Looking at the data so far, we see an infrastructure-led V-shaped recovery in China. In other major economies like the U.S. and Europe, the recovery is much more tentative. Big questions remain over the trajectory of consumer spending globally in the face of significant levels of unemployment. As we look ahead, there's a wide variety of possible outcomes. As the unprecedented fiscal support from government matches unprecedented impacts to supply and demand.
There are a number of uncertainties to consider, such as the rate of reopening across countries, the effectiveness of the stimulus measures, and of course, the risk of a second, third wave of the virus occurring until a vaccine becomes available. Alongside these challenges, there will also be opportunities. The question is this: how will Rio Tinto continue to compete and win in this new world? At Rio, we remain committed to our four-piece strategy, performance, people, portfolio, and partnerships. We are developing action plans with three key outcomes in mind. One, how to enhance resilience. Two, how to ensure our business adapts quickly. Three, how to strengthen partnership. All with the aim to deliver shareholder value in the short, medium, and long term. I will talk to all three in summary.
Enhancing resilience for us is really about resilience of performance from safety to free cash flow. Strengthening our partnerships and quickly adapting will be key to any transformation effort. Each of our asset and commercial teams are stress testing their businesses against these three dimensions for both current and future performance, as well as new opportunities. Resilience is key. I will cover this in more detail. As recent events have shown, we need to expect and prepare for the unexpected. I do not see this changing in the decade ahead. To outperform, companies must be resilient. Enhancing resilience is what we at Rio have been focusing on for a number of years because it also creates optionality. You can expect the same discipline from us in the future. Let me give you some examples of what I mean. We have strengthened our balance sheet.
Our net debt has moved from $13.8 billion to $4.8 billion over the last four and a half years. We have improved the discipline of our capital allocation process. We have also simplified the portfolio, divesting $12 billion of non-core assets. Together, these moves mean we are well-positioned to withstand shocks and move on opportunities. Resilience also comes from having a clear strategy and a deep knowledge of our customers and market. At Rio, we remain committed to our value over volume strategy to drive performance, productivity, and free cash flow per share. In the current environment, understanding the market and being able to respond is essential. Let me give you an example. At IOC, we changed the product mix to meet the demands of our customer in just five days. To create further resilience, we are also enhancing our understanding and management of hazards and critical risk.
Safety is non-negotiable for us. It is a core value, and we are doubling down on our efforts to keep our people safe. Finally, resilience for our industry increasingly means managing sustainability issues very well. At Rio, all of our operations have climate dimensions built into their operational and strategy plans. We are also focused on enhancing our relationship with host governments and communities and employees. These relationships have been critical in recent times and have allowed us to adapt quickly to COVID. As you have heard me say before, this aspect is a make or break for our business. In a world where digital technology and new skills will be needed, our employees remain key to our success. We have invested in enhancing their technical and commercial capabilities.
As we look ahead, employee and leadership diversity will also underpin our performance in addition to partnership, which will be key to how we transform ourselves. What about our portfolio of the future? In the first half of 2020, we have made good progress on growth opportunities. Our exploration and evaluation team remain well-funded and equipped to pursue opportunities through the cycle. We have progressed a number of joint ventures, and this early exploration work is onshoring a solid pipeline of opportunities is emerging, like Winu in the Paterson region. The project teams have also done a great job to overcome the various obstacles thrown at them as a result of COVID-19. There are progress of major investment project like replacement mines in Pilbara, Oyu Tolgoi Underground, and the Kennecott pushback. On partnerships, we have been able to continue to work with our partners at Simandou to optimize the project.
The scope of work has been prepared to enable selected China-based design institutes to update the infrastructure elements of the projects. At Oyu Tolgoi, we finished the initial phase of our mine redesign work, which brings greater certainty on schedule and budget. We will operate panel 1 and 2 independently, and further work is taking place to optimize the design. The goal is to make the most of this design feature to recover as much mineralization as possible. The definitive estimate will be delivered by the end of this year, as we have said. First off, from the underground is expected between October 2022 and 2023. We are pleased with the progress at Oyu Tolgoi. At Winu, we have announced a maiden resource of half a billion tonnes at 0.45% copper equivalent.
As we have said before, we are looking for an entirely different and more agile development pathway at Winu to accelerate things. To do this, we are continuing our studies for a small open pit operation, which could be scaled up over time. This approach allows us to provide quicker cash flow to shareholders, communities, and government. We continue to see broader development opportunities in the Paterson region. The mineralization we found 2 kilometers east of Winu serves to reinforce this belief. In closing, our five-year story is not just one of strong financial and portfolio performance, it is also a story of consistent capital allocation. Our business generated over $67 billion over a five-year period. More than three-quarters, or $55 billion of this, came from cash from operations. On the back of this, we paid $24 billion in dividends, including the 2020 interim.
Paid an initial $14 billion via buybacks and special dividends, returning a total of $38 billion to our shareholders. That is equivalent to over 72% of our market cap at the beginning of 2016. We have reduced our net debt by $9 billion, and we have invested $21 billion in growth and in sustaining our world-class assets. In extraordinary times, we have shown our strength and our resilience, and we have a solid base for future investment and returns. Rio Tinto, like most companies, is entering a new era. We will continue to adapt to make the most of the opportunities this presents. What will not change is our focus on delivering value to our shareholders and our commitment to deliver value to society in the process. Now, let's turn to questions.
Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star and one on your telephone and wait for your name to be taken by an operator. If you wish to cancel your request, please press the hash key. Once again, if you wish to ask a question, please press star and one.
Good evening and good morning, everyone. It's Menno here, Head of Investor Relations. Thank you for joining this live Q&A session of Rio Tinto's 2020 interim results. I'm joined here this morning/this evening by our CEO, Jean-Sébastien Jacques, our CFO, Jakob Stausholm, our Head of Copper and Diamonds, Arnaud Soirat, and the Head of Growth and Innovation, Steve McIntosh. Please limit yourself to one question and one follow-up so that we can give everybody a chance to ask a question. With that, operator, please, can you select the first question?
Sure. First question comes to the line of Paul Young from Goldman Sachs. Your line is open. Please ask your question.
Hi, J-S and team. J-S, question on Simandou. Restarting the study work, it's a pretty big deal for the iron ore market. It's pretty clear that the northern block will be developed in the next five years or so. There are huge savings to be gained by Rio Tinto by working with the Chinese consortium in the north. Are you going to look into a joint venture on the infrastructure?
All right, Paul. Good evening first. Good to hear your voice. On Simandou, first of all, let me step back. In all our models, and I guess yours as well, nowadays, is Simandou will take place. All right. Simandou will take place with or without the involvement of Rio Tinto. That's the first point. The second point is, there's been lots of activity, and you mentioned it, recently in relation to block 1 and 2. From what we can see is the Chinese are pretty active in order to see if there is a pathway to develop those 2 blocks. We at Rio, the way we're looking at it is to say with our partners, the Baowu, the Chinalco is where it is to better understand the value of the option. If you step back, Simandou is a large infrastructure project.
If you think about all the progress that has been made in the last few years in relation to.
Bauxite in Guinea, we're looking at trans-shipment and so on and so forth. I think the time has come, if you think about the activity I just mentioned in relation to Block 1 and 2, and the fact that there are potentially new logistical routes, is to look again at what the economics could look like. Back to your specific question is, if you think through the lens of a large infrastructure project, then the scale does matter. I think it will be important for all of us to look at options, only in relation to Block 3 and 4, but we have to look as well at options that involve all the blocks, 1, 2, 3, 4. That's the work that will be carried. From our perspective, it's important to understand the value of the option.
Not only on the project, on a stand-alone basis, but to understand is, what could be the value of Simandou to complement our product offering, complement the iron ore we sell from IOC as an example, or complement the product that we are selling out of the Pilbara. It is fair to say that in relation to China, the demand for high-quality iron ore will continue to increase going forward. I think that's one of the main reasons why Simandou will take place with or without Rio Tinto, developed by the Chinese. Therefore, it's important for us to understand what is the value of the project itself on its own right, but to understand as well what could be the benefit for us if we were to complement what we are doing in relation to IOC or in relation to Pilbara.
To cut a long story short is, we are looking at all options in relation to the economics. Once we have visibility over the economics, then there can be a conversation, in relation to what is the right equity structure to unlock the value of this deposit. It is still a long way down the road, Paul. Does that make any sense, Paul?
No, it makes complete sense, J-S. One quick follow-up in that case, under the value over volume strategy.
Yeah.
You mentioned about the value in new supply from the Pilbara. What does this mean for Pilbara volumes if you bring Simandou online? Could you let Yandi deplete? Could you let Hope Downs deplete, let the low-grade deposits deplete?
For the time being, the way I look at it is, I look at it from the customer's standpoint, okay? I look at what are the requirements coming from the Chinese or the Japanese and the Koreans, because that's primarily our market here, and try to see how we position ourselves in the best possible way. Look what we've done this year. We've done some things that we had never done before. We have blended some product of IOC with some product from the Pilbara. We did blend, sorry, some product from the Pilbara with some high-grade concentrate from, domestic high-grade concentrate from China. What is important for us is to make sure that we have the best product offering, in relation to our Chinese, Japanese, and Korean customer, to name but a few.
Back to what I said in the previous question is, let's look at the merit of Simandou on its own right, and then we can have a conversation around how we can complement what we are offering both out of IOC or out of the Pilbara. As I said, early days. I'm sure we'll continue this conversation, Paul.
Yep. Thanks, J-S. Great.
Thanks. Thanks, Paul.
Next question please, operator.
Next question comes from the line of Jason Fairclough from Bank of America. Please ask your question.
Yep. Good evening, J-S, thanks for taking these calls from us. Still on iron ore, now more on the Pilbara. There is this general view that the iron ore business has been undercapitalized. You're now in the process of recapitalizing it. Where do you think you are on that journey, how long is it before the business is really back to an appropriate steady state level of capitalization?
Thank you, Jason. Good to hear your voice today. You know as much as I do, Jason, between 2003 and 2012, the oil industry went through an absolutely massive capital investment cycle. In the subsequent year, the level of the requirements in terms of sustaining CapEx did reduce. We are entering a new phase. I think we've given some guidance here about the level of sustaining CapEx that will be required. The other piece which is important is, we should step back and don't forget that, when you move 1 million ton of iron ore every day, depletion is becoming a reality. The truth of the matter is we will have to invest in a significant way. We've given you guidance for the next three years and so on and so forth.
In the context of Pilbara, you've got the sustaining element, you have the replacement CapEx or what other industry call development CapEx. We're going to have to continue to invest a lot of money just to stand still. We've given you guidance. We are pretty comfortable overall at the group level where we are for the next three years. Do I believe it will creep even further from there? I don't think so. Take this guidance as a good proxy for the future, Jason.
Okay. Thanks very much.
Yeah.
Next question please, operator.
The next question comes from the line of Lyndon Fagan from JPMorgan. Please ask your question.
Thanks very much. Look, the first question is just on the Juukan Gorge issue. I'm just wondering if you could help us understand how many other similar sites sit within the Pilbara that you may need to mine around in future years, depending on what comes about from these various reviews. Just trying to get a bit of a sense of what that could mean for product quality and the like. The next question is just around Pacific Aluminium. Are you able to help us understand the closure cost of Tiwai and, given the impairments, whether there's a review imminent for some of the other smelters? Thanks.
Yeah, no worries. Jakob, you want to start with PacAl, the impairment process we've been through, and so on and so forth, and I'll pick up the Juukan question after?
Thank you. We obviously have always taken a very conservative view on our aluminium business. We have talked about that before. Right now, with the COVID-19, it's been another pressure point for the aluminium industry. It should come as no surprise that the two industries that has been seen impairments is diamonds and aluminium. We basically have written down Bell Bay, Tiwai Point, ISAL to practically zero. We're still working hard on our estimate for closure to Tiwai, but I think we have appropriately provided for it.
Okay. Thank you, Jakob. I'll pick up the Juukan question. The first point I want to make is we are really sorry for what happened. That's clearly not the intent to create such an issue and we are absolutely, and I am absolutely determined to understand what happened, to get to the bottom of it in order to make sure it doesn't happen again. There is a lot of work being carried out, but we have already taken some actions. In particular, we have introduced additional screening. We are reviewing all of Section 18. We have put a very clear process in order to identify the sites which are high risk and change the delegation of authority. For the high risk, there is a subset of the ExCo chaired by myself, for obvious reasons, to decide what we do.
We've been managing those heritage sites pretty well for a long period of time, okay? Having said that, we fully acknowledge that something wrong went there and we will learn from it. We have put additional measures in place, and where we are today is we can reconfirm the guidance for this year. We will have to modify some of the mining plan. The team is on the case, is working on it. What I can say today is we can reconfirm the guidance for this year. We will provide you, as every year, a guidance in November, December for next year. Rest assured that we've put additional measure to make sure that it doesn't happen again. For this year, there is no impact on the guidance whatsoever. That's where we are at this point in time.
Thanks.
Next question please, operator.
Next question comes from the line of Myles Allsop from UBS. Your line is open to start your question.
Great. Thank you. Are you concerned that there could be some sort of windfall tax in the second half? Obviously, governments have been paying out lots of money and you've been making lots of money in iron ore, and there's been some sort of speculation in the media that we could see some sort of super profit tax. I mean, how big a risk do you think that is as we look over the next six to 12 months?
Yeah. Thank you, Myles. From a tax standpoint is we shouldn't forget that, in the first half of this year, we paid $2.7 billion in corporate taxes and $1.2 billion of royalties. That's the first point. Yes, we're making a lot of money, but as and when we make a lot of money, we pay a lot of taxes as well. This point is fully recognized in all the discussion we are having, and I guess your question is primarily around Australia. In all our discussion, we have either at the federal or the state level. They know very well that the best way for Australia to get out of the COVID-19 crisis, and the government has been very clear about it, is about investment.
At this point in time, as we are having the concession, including with the treasurer again this week, is all the indication is for the government to support us to invest more, and I'm sure they will be very happy to see that we have invested even more than last year. For sure, no room for complacency, but at this point in time, I've got no indication that there could be an increase in taxation or royalties. However, that is as of today. What I've learned in the last six months with COVID-19 is expect the unexpectable. At this point in time, there is no indication whatsoever on this topic. That's the first one. The second point is, and it's not only about Australia, it's across all countries, is the mining industry is being assessed or considered by the relevant government as a national insurance industry.
Remember, we continue to employ a lot of people. In the context of Rio Tinto, as we are having this concession, we have more than 500 vacancies, right? We still recruiting people. We keep people employed. We pay taxes. We buy lots of product from our suppliers and so on and so forth. We are contributing to the society in general. No room for complacency, but at this point in time, I don't have any indication of additional taxation in the context of Australia. Every day is a new day, to be honest.
Okay. Thanks.
Your next question comes from the line of Alain Gabriel from Morgan Stanley. Your line is open. Please ask your question.
Yes. Hi, Jean. My question is around net debt and how you think about leverage. You have refrained in the past from committing to rigid targets. How or has the pandemic affected how you think about adequate leverage ratios? In other words, would it prompt you to become even more conservative with your internal leverage target as compared to six or 12 months ago? Thank you.
Jakob, that's definitely a question for you.
Thank you. Look, there's a lot of things that we haven't been able to predict. A lot of unforeseen things have happened. We have had absolutely no change in our capital allocation policy nor in our views on net debt. As you can see, we have a stable, even slightly declining when you look at the pro forma net debt development here in the first half. In fact, we have the lowest pro forma net debt in 12 years. Quite frankly, we feel very comfortable about that given the uncertainty in the world right now. It's not that we are afraid of using the balance sheet, but we just only want to use it if we are convinced that it can create real value.
Thank you.
All right. Let's move on.
Your next question comes from the line of Liam Fitzpatrick from Deutsche Bank. Your line is open. Please ask your question.
Thank you. Just changing tack a bit onto Scope 3 emissions. You've made your position clear that you can't commit to emissions you don't control. Do you plan to disclose more on your downstream investments, and over what sort of time frame can we expect to hear more on that? Linked to that, longer term, do you ultimately expect to have to invest materially more in downstream technology and R&D? Thank you.
Okay. That's a very good question. I think what you said, our position on Scope 3 is clear. Now, we are committed to be part of the solution. That's why, among other things, we have put in place the partnership with Baowu in China last year. We are very conscious that we will have to disclose more about those activities, the work is on the way. That's one point. The second point is, as you remember, when we disclose our target Scope 1, 2, and 3, we committed to dollar billion in the next five years. If I step back, the situation is the following. Remember, we are two targets or two milestones. Let me put it this way. One is in the next 10 years, the other one is by 2050.
We believe that in the next 10 years, we should be able to meet the target we have set for ourselves by using the existing technology. If there are development much faster in terms of new technology, then that would be great. What is clear in our mind is if we want to meet our 2050 target, that will happen only if, and only if, there are some technology breakthrough, because otherwise you simply cannot get there. In that context, the name of the game is going to be about partnership. It will be partnership in order to improve our own footprint, Scope 1 and 2, but it's going to be partnership about improving the Scope 3, which is the emission generated by the customer or the customer of our customer. To answer your question is, partnership is the name of the game.
The second point is we are absolutely clear that we need to invest more money in technology, and we are already doing some things. I can only repeat so many times, we are committed to be part of the solution, and I fully accept that we are going to have to disclose to provide the market with more visibility on some of the work that is being carried out in that space. Bear with us. It's coming. What is important is to show tangible examples of what we are doing and not only a nice slide and so on and so forth. The work is taking place. Does that make any sense?
Yeah, that's very clear. In terms of timing, could we expect or could we see something later this year? Is it more likely in 2021?
Yeah. Every year we have to disclose more. One of the questions I've not discussed with Jakob and Menno yet is, should we have an investor day this year? Because of COVID and so on and so forth. Let's say that in the next 12 months is we will have an investor day, and clearly climate change sustainability will be a key feature of it. We will disclose more, because we have nothing to hide. The only caveat I have in my mind, to be honest, is sometimes some of the work we're doing with our partners are confidential, and therefore we are slightly constrained about what we can say. A good example is the all development of new aluminium technology with our peers of Alcoa and Apple is there are some constraints on what we can disclose, to be honest.
We'll find a way to provide to the market more visibility about the real action that we are taking place in that space, because as I said, we want to be part of the solution, and partnership with our customers is absolutely essential. That's where we are.
Got it. Thank you.
No worries.
Next question comes from the line of Glyn Lawcock from UBS. Your line is open. Please ask your question.
Oh, good evening, J-S. J-S, I just wanted to talk a little bit about how Oyu Tolgoi going. No one's brought it up yet, and I know it's not an easy one. There's a lot of moving parts. I wanted to focus more on the estimates you've got exclude COVID-19, and I know you said obviously we're probably going to have to learn to live with it.
Just wondering, what sort of slippage is it causing? If COVID-19 was to miraculously disappear tomorrow, could you get it within the timeline? I'm just trying to understand how much that's adding to the timeline. I guess we've got Steve on the line. Thanks.
Yeah. Thank you for the question. I'll turn maybe to Arnaud first and then Steve. Let me give you one simple example of what happened this week. I'm very proud of what the team has achieved. This week is the first time we were able, or last week, I'm lost in the days now. It's the first time for maybe four or five months, we were able to send a plane with some of our colleagues back into Mongolia. What people need to understand is, that's why I've got the utmost respect for the people who have raised their hands to be on this plane. They will have to spend five weeks of quarantine in Mongolia before they can do some work. That is a very practical consequence of what COVID means in the context of a project like Oyu Tolgoi. Five weeks of quarantine.
We can't send a family. We're going to have to send our colleague for a long period of time and so on and so forth. That's the condition in which we operate and so on and so on. There are some very good stories around how we can use remote technologies and so on and so forth. Maybe on this note, Steve, you want to go first, or Arnaud, you want to go first? Whoever.
Maybe Arnaud first.
Okay.
Okay.
Arnaud.
Thank you. I'll let Steve comment on the project and which is the specific question. I will just add to J-S's comments that at OT, as in all of our other operations, a lot of good work has been done to protect our own trades from COVID, and also to contribute to the wellbeing of the communities where we operate. In his video, J-S mentioned a lot of innovations that we have put in place with remote access of experts from all over the world to be able to carry some complex technical/maintenance activities in the operations and in the project as well with our local workforce. We are definitely inventing new ways of operating. COVID is a challenge, but it's also full of opportunities, and we are trying to seize those opportunities. Steve, if you'd like to make some comments on the project itself.
Great. Thanks, Arnaud and J-S. Glyn, look, it's a good question. As you said, it's not one that we can easily answer as we sit here. As you know, we're working towards the definitive estimate at this time. We now have the final detailed mine designs for Panel 0. Those are being flowed into the full assessment of the definitive estimate. What is happening is that the underground development is going extremely well. We're still achieving record rates in the mine footprints for the development. What we've said in this release is that it's the material handling system and the ancillary equipment that's being impacted by the COVID-19 delays. They manifest in a couple of different ways because we also have to adhere to social distancing rules on site according to the government's regulations. It caps us in terms of head count.
What we're doing at this time, we had to reduce some of our manning levels for the underground construction workforce. We're now trying to bring those back up. We are reassigning some of the head counts and capability out of the mine development team back into the construction packages. At the moment, we're running at about 40% of planned rates in the material handling construction. We're just making the changes as we speak, and we're hoping to bring that back up to higher levels. The other reason why it's complex is because we have now switched from the original panel cave plans to block caves. Actually, it gives us some advantages, because it means that we can isolate the components required to deliver Panel 0 initially. Some parts we can actually go faster in fact.
We can only do that once we have all of the final designs and we've done the definitive estimate work to understand where all the parts now flow. It will then take a potential while until we come up with a framework for how we measure the COVID impacts and how we then think about those on a go-forward basis. As we sit here today, we'll probably be in a much better position to talk to that in the latter part of the year.
Steve, just as a quick follow-up.
Thank you. Oh, yeah.
Sorry, just as a quick follow-up. Sorry.
Yeah. Go ahead.
For ev-- Is the-
No, no worries. Go ahead.
Sorry. Sorry, J-S. Just as a quick follow-up. Essentially, it's the people cost all the money there, the fixed cost. Is it fair to say every year is about $half to three-quarters of a billion in just salary costs for the workers?
Isn't it Steve that.
Look, sorry. I'm not sure. Glyn, not really, because we actually have very high levels of local workers, much higher than was originally planned. Yes, obviously there's a cost. There's an overhead cost and the cost of keeping the workforce going in the project. Substantially, we also still have the critical elements that are required to go into the material handling systems, and then the requirements to complete the shaft, so the shaft sinking and the fit-out components. Again, it's not that straightforward because we've actually seen a lot of people leave the project as well during this time.
Again, I think by the time we get to the end of the year, when we're able to talk about the definitive estimate and the go-forward piece, we'll be able to talk to the impacts of those rates and the overheads and the fixed costs.
Thank you, Steve. Sorry, I had a technical issue. Can you hear me now?
Yes, yes.
Can you hear me? Okay, sorry guys. Anyway, I'm back. Sorry. Can we carry on?
Next question, please, operator.
Your next question comes from the line of Tyler Broda from RBC. Your line is open. Please ask your question.
Great. Thanks very much. As J-S, as you said, COVID's going to be with us for a long time. I appreciate it's still early, but with the resiliency and productivity and cost control that you showed in the first half, are there any general positive trends or benefits you've uncovered from having to approach the operations in a different way? I guess conversely, when you look out 12 months, what would be the longer-term issues that leave you concerned here?
No, that's a very good question. We have experienced, first of all, let's be clear, COVID is an absolute human tragedy, right. We shouldn't forget that. There are some benefits, or we did manage to benefit from it. One of the benefits of it is really we are rethinking some of our business model. Well, I mean, I'll give you a few example of it. We are clearer about what we need on site to be able to run them. We find out that we don't need to have as many people as we need to, we used to run the site and so on and so forth. Now, this was enabled by technology, to a large extent. I think that's one of the benefits we want to lock in in the future.
The fact that we had more than 5,000 working from home, and it's not always easy. The working from home, and we shouldn't forget, and I think I made a point in the speech about mental health issues and so on and so forth. Because of COVID-19, because people had to work in a different way, we had to be much more focused on what I would describe the essentials, really the few things that make the business running and so on and so forth. We had to remove some of what people could describe as distractions. As a result, the performance is very strong. Therefore, we need to lock in some of those benefits going forward. Now, there are some elements which are question mark at this point in time, and one of them is clearly around global supply chain.
That's a piece of work that we are currently doing, which is to say, in order to make sure that we have a resilient business model, what do we need to do in terms of supply chain going forward? At some point in time, and we still have some of the issues to some ways, is we buy lots of equipment from China. Today, the issue is not China itself, it's the element, the electronics or whatever that is coming from Europe to be set up installing those equipment in China. We are exposed to global supply chain, and therefore, there are a few questions that we need to ask ourselves is, should we continue this way? Should we do it a different way? Should we build some strategic inventory in some areas, either by ourselves or in partnership with others?
That's one of the questions, and the answer is not clear at this point in time. The other piece is, what is absolutely clear in our mind is part of the reason why we had, like everybody else in the industry and across industry, enter into offshoring contracts was to say that if you have a provider with a service center in India, if the service center collapse in India, then you move to the Philippines. If it collapse in the Philippines, you move to, I don't know, Poland or Mexico and so on and so forth. What we have experienced in the last few months that it doesn't always work this way and so on and so forth.
There are some questions where we're going to have to bring back in the company or bring back at least to do some kind of ensuring in order to make sure that all business is resilient in a very volatile and very uncertain environment. The other areas where we have to do the work, and we're doing it as we speak, is the assumption that we were making even six months ago is that you could move people around all over the world. Today, I can't send any expats in the U.S., for example. I gave you the example about Mongolia a few minutes ago. This whole assumption about the ability to move people on short notice is no longer there.
We need to rethink what do we need on the local basis, what do we need on the regional basis, and what are the real very few job that we need on the global basis using remote technologies and so on and so forth. Your question is absolutely spot on. That's the work that we are currently carrying. We don't have all the answers, but we want to lock in the new culture, the new ways of working, and we clearly want to lock in the performance that we are enjoying today. There are some questions which are totally need to be worked out in the coming months and coming years and so on and so forth. That's where we are at this stage.
That's super helpful, J-S. Thanks a lot.
Next question, please, operator.
Next question comes from the line of Rudi Blatter for Société Générale. Your line is open. Please ask your question.
Oh, yes. Hello, everyone. Thank you very much. I have one follow-up first to questions asked before on Simandou. If I understand correctly, you now are getting down to optimization phase to see how you can bring the parameters of the project to desired levels. How long do you think this will take, this preliminary phase? If you could provide maybe some milestones for a couple years ahead for us to understand how you plan to proceed. My main question is about Winu, if I may, now that it has been officially announced, basically, that you are going ahead. Is it possible to provide some guidance as to what CapEx for this project may be if it's included in your guidance for the next few years? What is the planned throughput of the mill? Thank you much.
Why don't we start with Winu? Come on, Steve, your baby. Tell me. Tell us how healthy is the baby here.
Yes. As we've said previously, J-S, we're very pleased to be able to deliver the maiden resource yesterday. Basically, we'll be on track by the latter part of this year to talk more about timing and schedule and potential costs. We're working through the key elements of the study as we speak. As we said, the aim here is to be very agile and to be very innovative in our approach to bringing Winu forward. To the best of our ability, we're targeting a 2023 commencement of production. We're going through the permitting phase, and we're working through the next phase of the metallurgical results, et cetera. There will be a natural size that will come out of that work, and we're not ready to talk to that at this time.
I think the other part that I'd say is, having declared the initial Winu resource, it just needs to remind everyone that the resource remains open north, south, southeast, and at depth. Within 2 km, we're now starting to see this very high-grade gold-dominated mineralization. A little bit different to Winu itself. This entire area is covered by shallow sand cover that's essentially blind, and so which means we need to just keep drilling. I think as J-S said, on a number of occasions, that the concept of a hub or a system, a hub and spoke or a system here still remains a very viable thesis. We've explored less than 2% of the land holding. We're seeing really encouraging results in some holes that in the very recent times, we've just completed drilling. Really exciting, I think, moment in time here.
Absolutely.
J-S-
Sorry. Yeah, go on.
Just one little comment, because just to complete the answer is to say, clearly we all want to talk about Winu because it's such an exciting project. Back to your question, it is part of our capital guidance. What we do with development projects is that we are risking them in our assessments for the $7 billion and the $7 billion in the coming two years. Thank you.
No, thank you. The question on Simandou is, I'm not going to commit to any milestone, all right. Although we are clear what we want to do, which is really to reassess the infrastructure, I think I've said in the speech, we have already lined up some Chinese design institutes, some Chinese engineering company. One of the question mark I have in the back of my mind is, how much work will be required on the ground, and how much work we will be able to deliver in the coming months because of COVID-19? Moving back to my question about moving people, it's very difficult for us to send people into Guinea as we speak. We will progress it as quickly as we can because we really want to understand the option value here.
I'm not in a position today to give you specific timetable on the milestone. I could tell you 12 months, but I don't think that is appropriate at this point in time.
Understood. Thank you.
All right, Menno?
Okay. Thank you, everybody. With that, we've reached our 45-minute limit. I understand there are a few unanswered questions in the queue. Obviously, we'll be around in the next couple of days to answer, and we'll see several of you on other calls as well. Please don't hesitate to call IR to follow up. J-S, Jakob, Steve, and Arnaud, thank you very much. Everybody, have a good night and a good day. Bye-bye.
Thank you, Menno.
Thank you.
Thank you, everybody. Bye for now. Cheers.