As usual, for those participating online, you can find the dial-in details under the Presentation and Webcast section on our website. Please limit yourself to one question and one follow-up. Finally, before we start, can I draw your attention to our cautionary statement on slide two. Please read this carefully before you read the remainder of the materials. It's now my pleasure to hand over to Rio Tinto CEO Jakob Stausholm. Jakob.
Yeah. Thank you, Menno. Good morning, and good evening to those of you listening in the Far East and Australia. It's a pleasure to present in person for the first time in London for two and a half years. Our world has certainly changed in that time. The short-term outlook remains truly unpredictable, from logistics and supply chain issues, and ongoing COVID impact, to the war in Ukraine, and increasing geopolitical tensions. Lately, heightened inflation in the Western world is putting pressure on real incomes and spending power.
This is forcing governments and central banks to take actions which add to the risk of potential recessions. This clearly impacts us. However, it is worth noting that China isn't experiencing such inflationary pressures, therefore it has more room to maintain a supportive policy stance and introduce additional easing measures to stimulate growth.
The ultimate impact of these measures will be balanced by the effect of the ongoing COVID-19 restrictions. Overall, this could provide the mining industry and Rio Tinto an advantage over other industries, considering China's role in global commodity market demand, and particularly iron ore. For Rio, China accounts for over half of our revenues. We remain convinced that the longer term trends that we highlighted last October remain intact, underpinned by ongoing urbanization and additional demand created by the energy transition. This reinforces our belief that Rio Tinto is a mining company that is uniquely positioned for the future. While it is a time of continuing economic uncertainty, it is also one of opportunity.
We have the portfolio to play a vital role in supplying materials for the energy transition, the ambition to decarbonize our business, and the conviction that we are making the right investments in our culture and our partnership to unlock our full potential. I've always said it will take time to build a stronger Rio Tinto. It does. We are making progress against each of our four objectives, and are seeing the future Rio Tinto emerging. We strengthened our operational performance at a number of sites.
We will now replicate this across the portfolio as we work to restore our DNA of being the best operator. We've done a great deal of work as we initiate our decarbonization journey. We continue to engage externally to rebuild relationships, particularly with traditional owners, but also other stakeholders. This is all done with an absolute determination to achieve impeccable ESG credentials.
We have made notable progress in creating value-adding growth options. From advancing or completing internal projects, to acting with discipline in our choices on M&A, we are demonstrating our ability to excel in development. Finally, we are working on our social license. This will be judged by others, but it clearly requires us to work hard to restore trust, to rebuild relationships, and to make Rio a place people are proud to work for and partner with. We remain totally focused on maintaining our momentum with a consistent, disciplined approach.
This applies to our performance, engagement, growth, decarbonization, and most importantly, our culture. Turning to our first half performance, let's start with safety. We achieved another fatality-free half, building on the prior three years. Safety requires discipline every day, on every site, and on every shift. Seeing our people return home safely each day remain our first priority.
Beyond safety, we delivered good results in market conditions that were robust, albeit below last year's record levels. I'm proud to see the positive momentum from the rollout of the Rio Tinto Safe Production System. We must build on this and replicate the successes across our assets. We are well positioned after a stronger second quarter, particularly from our iron ore operations. Our performance also highlighted a number of areas where we need to improve.
We achieved EBITDA of $15.6 billion, with $4.8 billion of taxes and royalties. We invested $3.1 billion in growth and sustaining CapEx, with free cash flow of $7.1 billion. The return on capital employed was 34%. Once again, our iron ore business is the primary contributor, but each of our product groups achieved double-digit returns.
As a result, we will return $4.3 billion to our shareholders, our second highest interim dividend ever. This 50% payout is in line with our policy and reflects disciplined capital allocation and the strengths of our balance sheet. Looking ahead, while the pricing environment is becoming more challenging, the demand outlook remains positive. Let me now hand over to Peter to take you through the financials in detail. Peter, please.
Thank you, Jakob, and good morning and good evening, everyone. Let's start by taking a look at the numbers. We've announced a solid set of results following robust demand for all our major commodities. Of course, this is set against a context of record prices and results last year. The 10% decline in revenues was driven by prices, primarily iron ore. This was offset in part by aluminum, where we saw strong pricing for the first five months of the year until markets changed in June. While the business remained resilient, cyclical cost inflation accelerated during the half. This led to some margin compression with $15.6 billion in underlying EBITDA and $10.5 billion of cash flow from operations.
Free cash flow of $7.1 billion was after $3.1 billion of capital expenditure and a modest outflow in working capital, reflecting elevated prices for raw materials in aluminum inventory. Underlying earnings of $8.6 billion gave rise to a return on capital of 34% and led to us declaring an interim dividend of $4.3 billion, a 50% payout. Higher rates of inflation increased closure liabilities, resulting in a $400 million pre-tax non-cash charge to underlying earnings. We expect a similar impact in the second half under our existing policy if current rates of inflation persist. We were very glad to reach a settlement with the Australian Taxation Office on all tax issues stretching back over the last 12 years.
The settlement had a limited impact on our half year results, but we will pay just over AUD 600 million in the second half of the year. Importantly, the settlement gives us certainty on our transfer pricing arrangements between Australia and Singapore for the next five years. There were no material unusual items in the first half, so net earnings were very similar to underlying earnings. Let's now look at our key markets. Iron ore prices dropped 24% from the record highs we enjoyed in 2021 first half. In a context of continued softness in the Chinese property market and COVID restrictions, steel demand remained relatively robust. Prices were supported by weaker supply, with flat production from the majors and disruption to some other sources of supply, in particular from Russia and Ukraine.
There was also disruption in the aluminum market, mainly from high energy prices, which impacted supply from late 2021 and resulted in very low physical stocks. This pushed prices up 37% on average, although new capacity in China, coupled with lower consumer sentiment elsewhere, have reduced prices in the second quarter. The copper price has also been quite volatile. After a record first quarter, uncertainty in the global economy has weighed on prospects. A long position of just over 1,000,000 tons in the copper market fully unwound in the second quarter. Let's now take a closer look at the key drivers of EBITDA. As ever, commodity prices were the biggest movement, lowering EBITDA by $3.4 billion in aggregate.
Iron ore was -$5.7 billion, partly offset by higher realized pricing for aluminum to the tune of $1.9 billion. As you would expect, we are not immune to inflation, reflected on the left of this chart, with PPI, rising energy costs, largely attributed to diesel and higher market-linked prices for raw materials in aluminum all having an impact. In aggregate, these factors lowered EBITDA by $1.5 billion. If we look to the right of this chart, you can see the other impacts were relatively well contained, demonstrating the resilience of our operations. Sales volumes were reasonably flat overall, even though Kitimat was only operating at 25% of capacity, and we expect it to gradually recover over the second half.
Higher iron ore sales from our port-side operations in China were an important contributor, with inventory reduced by just under 5 million tons this half. We did incur additional costs at Kitimat and Boyne as we recovered from disruption. We also increased our resourcing in our iron ore business to support the ramp-up of Gudai-Darri and investment in the pit and health and system reliability. The impact of other cost increases overall was relatively muted, reflecting disciplined cost control across the business.
Looking forward, a stronger US dollar represents a decent tailwind to help offset further cost inflation in the second half. Now on to our productivity drive, which is gathering momentum. We continue to successfully roll out the Rio Tinto Safe Production System and have 15 deployments at 11 sites compared to five sites at the start of the year. Each deployment addresses a different bottleneck.
For example, at IOC and Kennecott, we focused on the concentrator and at West Angelas on the drill fleet. We are seeing real sustainable improvements in operating performance, as well as in safety and employee engagement. To give you an indication, in the half, there has been a 9% year-on-year improvement in average operating times across processing plants and drills at deployment sites versus the same period of 2021. Our focus is to scale it up to a multi-year program covering all assets across the group, and we are on track to meet our 2022 target of 30 deployments at 15 sites, and we'll build on that in 2023.
Let's now look at each division, starting with iron ore. Shipments were 2% lower due to COVID-19 disruptions and much higher than average rainfall in late May. However, we saw a notable recovery in second quarter production, supported by our focus on mine pit health and Gudai-Darri's commissioning in June. We did have higher levels of SP10 following delays in mine development sequence, which fed through to average realized price. Our unit cost for the half at $21.20 per ton before COVID-related costs of $0.60 per ton were just above full-year guidance, driven by the lower volumes and higher input prices.
The team continued to progress new ways of working with traditional owner groups. In May, the PKKP Aboriginal Corporation entered into a co-management heads of agreement with us. This is an important step towards rebuilding our relationship with the PKKP people and sets out how we will work in partnership on a co-management approach to mining activities on PKKP country.
Following an agreement with the Yinhawangka People Aboriginal Corporation on a new co-designed management plan earlier this year, we have received WA Environmental Protection Authority support for the development of Western Range, a significant milestone for the project. Overall, financials were strong, with operating cash flow of $8.5 billion and free cash flow of $7 billion. We are advancing the studies on the new replacement mines that we first mentioned at our investor seminar last year. Sustaining CapEx remains an important focus, unchanged at around $1.5 billion per year. Meanwhile, our energy transition program is gathering momentum with a proposed 100-MW solar farm near Karratha, forming part of our 1-GW renewable energy plan to replace gas. Planning is ongoing, and we continue to engage with the WA government, traditional owners, and other stakeholders.
Moving on to aluminum, where we beat financial records with EBITDA of $2.9 billion. We benefited from higher market and product premiums, in addition to the strong pricing environment for primary metal and alumina, at least for the first five months of the year. This was partly offset by higher input costs for key materials such as caustic soda, coke, pitch, and anodes, leading to an increase in cash costs. We generated $2.1 billion in operating cash flow, reflective of the higher EBITDA, net of a $500 million working capital build. Free cash flow increased by 65% to $1.5 billion. Now, we did have some operational challenges in the half. Kitimat ran at less than a quarter of capacity following strike action last year.
A controlled restart took place at the end of the second quarter, with ramp-up progressing over the year subject to plant stability. We also had some disruption at Boyne, where we have now stabilized production, and the cells that were taken offline will be ramped up over the next 12 months. Given this cost inflation, we have provided additional sensitivities for aluminum raw materials. Now, I'm not gonna run through all the detail, but would point out the time lags for the various price rises, in particular for caustic, where we are now experiencing the full impact at our refineries. Energy prices are clearly an important component of our aluminum cost base. We do have some exposure to spot thermal coal prices. For the Boyne Smelter, it is 50%, and for the Yarwun Refinery, it is around one-third.
However, all our Canadian smelters are hydro-powered at very competitive rates, and this remains a key source of competitive advantage for us. On to copper. At $1.5 billion, underlying EBITDA was down 27% due to lower sales volumes with COVID-19 and other labor constraints impacting performance at the Kennecott Smelter. Lower by-product sales volumes, particularly gold at Oyu Tolgoi, as anticipated, also contributed. C1 unit costs were significantly higher at $1.48 per pound, driven by lower by-product credits and cost inflation. The team at Oyu Tolgoi reached some really important milestones this half. Of course, there was the agreement in January, which meant underground mining could commence, leading to the first and second drawbells being fired at Hugo North in June.
This excellent progress means that the undercut progression remains on track to achieve sustainable production from Panel Zero in the first half of 2023. We also completed a reforecast in the total project estimate to $7.06 billion. The $300 million increase against the 2020 definitive estimate is largely due to COVID-19. Quite an achievement given the disruptions over the past two years. Turning to minerals. We benefited from strong market conditions for titanium dioxide, borates, and diamonds, partially offset by the weaker iron ore market. Underlying EBITDA of $1.3 billion was 10% lower, primarily due to higher cash costs and energy price rises. Production performance was generally better than the first half of 2021, but there is certainly room for improvement. Importantly, we're moving ahead with our growth agenda, completing the acquisition of Rincon Lithium in March.
Just yesterday, the board approved $190 million for a funding of a small startup plant and early works infrastructure to support a full-scale operation. On to capital allocation. Now, we've been showing this slide for nearly a decade now, and it's important to stress that our disciplined approach is unchanged and that we intend to maintain it throughout the cycle. We still expect a disciplined increase in our capital expenditure over the coming years, but we have slightly reduced our 2022 guidance from $8 billion to around $7.5 billion due to a stronger US dollar and rephasing of decarbonization and development projects. Our best estimate for 2023 and 2024 remains between $9 billion and $10 billion, which includes the ambition to invest up to $3 billion each year in growth.
This is highly dependent on the timing of commitments as we prove up the value of investment opportunities. If we cannot develop value-accretive options, we will follow our capital allocation framework. It is to be noted that Simandou is included in our capital guidance, and if we reach agreement to commit to the project with our JV partners, the government of Guinea and WCS on the infrastructure pathway. Our best estimate of investment to decarbonize the business remains at $7.5 billion until 2030, including around $1.5 billion over the next three years, which will be back-end dated. Sustaining capital remains at $3.5 billion a year, subject to inflationary pressures, while annual replacement capital is also unchanged at $2 billion-$3 billion. Let's now take a look at the balance sheet.
We maintained our net cash position just at the end of June. This is impressive given that we paid $7.6 billion in dividends and acquired Rincon for $825 million. As I've said before, it is just a snapshot in time. We would expect to move into a modest net debt position for the second half of the year based on current prices as capital expenditure gathers momentum. We will maintain our financial strength. It is essential as it allows us to reinvest for growth, accelerate our own decarbonization, and continue to pay attractive dividends. Finally, on to the dividend. We have declared a 50% payout for the interim, and this equates to $4.3 billion. This is in line with our policy and is our second-largest interim payment in history.
As ever, the balance of the dividend will be weighted towards the final at our full year results in February, when the board will take full account of the outlook for major commodities and the long-term growth prospects of the business. It goes without saying that we remain firmly committed to capital discipline and our shareholder returns policy. With that, let me pass back to Jakob.
Yeah, thank you, Peter. There is a wise saying I have shared before, "Culture eats strategy for breakfast." This is really true. Since I became chief executive, I've spent significant time on this journey. This is also true for the leaders and the teams I'm spending time with as I visit different Rio operations. We needed a reset, putting respect for people, communities, and land at the heart of our contribution, and we needed to listen.
This started with strengthening relationships with the traditional owners and indigenous people of the lands on which we operate. With our communities, customers, suppliers, and host governments, we're also implementing the recommendations of the Everyday Respect report and are identifying what more we can do. We've also set new values and are now embedding them. I believe we're making real progress. Ultimately, though, it will be judged by others.
This is about making Rio Tinto more safe, inclusive, and respectful, and putting people at the heart of our organization. Earlier this year, I met representatives from all the traditional owners of the land on which our iron ore operations are located. It is by hearing and responding to their concerns that we will build stronger long-term relationships.
It is particularly pleasing to reach co-management heads of agreements with the PKKP and Yinhawangka people. On EIA, we continue to work with the board to ensure that EIA has the means to complete rehabilitation of the Ranger mine to a standard that will establish an environment similar to the adjacent Kakadu National Park. Through the Rio Tinto Safe Production System, we are harnessing the skills and talent of our 49,000 people, taking their insights and ideas and empower them to achieve consistent operational excellence.
This will unlock real and sustainable improvements. As Peter said, this has already delivered 9% improvement in processing plants and drill rigs where we have implemented the system. Clearly, though, we're not yet firing on all cylinders, but we are making genuine and consistent progress. Last year, we set an ambitious new strategy and climate targets. The first step to meeting these is developing the mindset, unleashing our capabilities, and challenging all our employees to think differently as we decarbonize our business. Execution and investment will follow. As we have said in the past, reducing our emissions will take time, and they have remained flat so far this year. We cannot achieve our ambitions alone. Partnerships with government, suppliers, communities, and other stakeholders are critical here.
Under our chief scientist and through the commercial group, we are progressing projects and partnerships that will enable us to deliver tangible results in the long term. A strong and evolving portfolio of projects is delivering progress on the technology front. For example, our first load of rock transported by electric haul truck in a trial at Kennecott. We are advancing renewable energy projects with detailed planning on initial wind and solar installations for our 1 GW microgrid in the Pilbara. Proposals are also being reviewed to support the repowering of our Queensland aluminum assets. We're studying high-potential areas for nature-based climate solutions through the conservation, restoration, and regeneration of land on or near our assets. We continue to build a stronger innovation ecosystem through strategic investments in technology startup.
For example, Electric Hydrogen, who are pursuing low-cost green hydrogen, and partnerships with like, our MoU with Salzgitter on carbon-free steel making. On the commercial front, I'm particularly excited by the recently announced MoU with Ford, which covers lithium, aluminum, and copper. This partnership is a perfect example of how the energy transition presents an extraordinary opportunity for Rio.
All the commodities we produce are needed today. Looking to the future, the demand will grow, driven by the energy transition and ongoing urbanization. In 2021, in my first set of results as chief executive, I committed to taking the important decisions on projects and invest in materials essential to the energy transition. I'm proud that we have progressed our growth agenda during the first half. We expect the Oyu Tolgoi underground to reach sustainable production in the first half of 2023.
I recently spent a week in Mongolia for the Naadam celebration. It was wonderful to learn more about the incredible culture and history of Mongolia and to meet so many stakeholders. The work Bold and the team are doing is making a big difference. It was humbling to see for myself how much the relationship has improved. We are also advancing the Rincon Lithium project in Argentina with $190 million funding approval. This is to develop a plant capacity for smaller start-up and early works to support a full-scale operations.
In parallel, we are engaging with the communities, the province of Salta, and the government of Argentina. Two of our North American assets are producing critical minerals for the first time, extracting from existing waste streams. At Sorel in Canada, we have innovated to become the first North American producer of scandium oxide.
It is critical for lightweighting aluminum for the aerospace industry. At Kennecott in Utah, we have become one of only two U.S. producers of tellurium used in solar panels. We are ramping up at Gudai-Darri in Western Australia to support output of Pilbara Blend, a product that remains essential to the transition.
In May, the board visited and saw for itself the great work of the team to achieve first production. We are now focused on the next phase of replacement mines for the Pilbara, including approvals for the Western Range project. At Simandou, our negotiation teams are right now in Guinea working with our joint venture partners in SimFer, WCS, and the government of Guinea towards incorporating the infrastructure joint venture. This will be an important first step, and there's more to do to bring this significant project to life.
We remain committed to delivering Simandou in accordance with international ESG standards, ensuring that the project results in sustainable benefits to Guinea and its people, along with our shareholders and customers. In conclusion, I'm proud we are making steady progress against our four objectives. Remember, this is a multi-year journey, but we have the right foundations and pathways to make Rio Tinto stronger. Most importantly, we have great people. They are the key to our future success, and we will continue investing in them and in our culture. We have an outstanding portfolio of long life assets and the expertise to play a leading role in delivering vital commodities for a low carbon future. Our balance sheet remains strong, providing both protection and optionality. We will continue to challenge ourselves to innovate and think differently.
Looking ahead, mining is crucial to the world, and we are uniquely positioned to invest and grow in the commodities needed for the energy transition, to accelerate the decarbonization of our portfolio, and to continue to pay attractive dividends. Thank you. We're now happy to take questions, Peter and I. Should we start here in the room?
Great. A couple of things before we kick off. Roberto, operator, can you please explain to people online the procedure? Here in the room, please introduce yourself, your name and the institution you work for the benefit of others who may not know. Please limit yourself to one question and one follow-up. We'll do two here, two online, and we'll keep switching. Given that there are more people online, we may take three or four online before we come back here. Liam, you wanna kick it off?
Good morning. Liam Fitzpatrick from Deutsche Bank. I'll follow the rules, Menno. One question to start with on Simandou. It seems like we're getting successive delays. Can you give a bit more color on what's causing it? Any insights on the sticking points, and are you still committed to participating?
Look, this is a massive project, and you have to align quite a few stakeholders. Several joint venture partners from China, ourself, and the government of Guinea. Not an easy negotiation, but it's actually gone pretty fast, and it's my assessment that we're doing very, very well on it. I'd much rather have tension when you negotiate and then really agree on things, so when you get into execution, you don't suddenly realize, "No, I don't like this." I think that's exactly what is happening now. The government of Guinea have hired really good advisors, have gone through it very, very thoroughly, and of course raised some issues. Bold and the whole team is right now in Conakry, and I'm very optimistic.
I mean, ultimately, you only have an agreement when you have ink on the paper, but it's actually progressing very well.
If I could follow up slightly, maybe it's on the iron ore market. You're now in a position to lift volumes with Gudai-Darri, but you've also given quite a cautious outlook. Would you be comfortable keeping volumes around current levels for the foreseeable future until there's a visible recovery in the market?
Well, right now, we're simply sticking to our guidance, and if you calculate backwards, you will see that that will require more production in the second half than in the first half. We feel comfortable about that as we are ramping up Gudai-Darri. Obviously we will always look at the market conditions, but there is demand for our iron ore.
Richard.
Yeah. Good morning, Richard Hatch, Berenberg. Two questions. First one on ERA. You, you've talked a little bit about it this morning. Just on the numbers that I can put together, it looks like the rehab's AUD 1.6 billion-AUD 2.2 billion. It was nearly AUD 1 billion. You own 86% of the company. It's got about AUD 800 million-AUD 900 million of funding. How should we think about the cash that goes into ERA and over what kind of time period? Because clearly nobody's gonna come in and buy it, so you've got to fund it. How do we think about that?
Look, we're totally committed to make sure that the rehab will happen and work hand in hand with the traditional owners, the Mirarr people. Ultimately, you're asking a question that you actually have to ask to the board of ERA because it's a publicly quoted company. Obviously, we are a big shareholder and we are just working with the board to try to figure out how can we most efficiently funnel in money to do the rehab. We also have to be respectful of the remaining shareholders who also has to contribute, of course. That's the dialogue we are going again. There should be no doubt about the stance or view we stand behind. This will be a rehab to the highest standards.
Thanks. The follow-up is just on the dividend. I mean, you've paid above your 40%-60% range over the last few years, given the fact that you've made so much cash. I mean, with CapEx increasing, and perhaps the outlook being a little bit more uncertain, is it just prudent to assume that over sort of 2023-2024, all things known, that you really sort of revert back to the range, which is 40%-60%, which I see is basically your last point on the last slide. Is that a sensible way to look at it? You know, 40%-60% and don't expect to pay above that.
What do you think, Peter?
Well, Richard, I think the key is that we're paying out on a very consistent basis for the interim. I mean, 50%. I mean, if you look at the first half of last year at this stage, I think the iron ore price was double where it is today. I mean, we are in a different context, and we're just paying out and putting the decision really at the end of the year when we'll have the full information at the end of the year as to the performance, and the board will take a view of the outlook. I think we're just being very consistent with what we've done in the past and following through with that. Just expect us to be consistent.
Roberto, can we please have the first question from the line, please?
Yes, we are now taking the next question. If you wish to ask a question, please press star one and one. The next question from Paul Young. Please go ahead.
Yes, thank you. Morning, Jakob and Peter. First question is around the spend profile. Pretty challenging backdrop at the moment. Hard to complete projects. You only spent $3.1 billion in the first half. That implies, based on the new guidance, a $9 billion run rate of spend in the second half. Peter, is that actually achievable?
What I'd say is, I think that the, you know, most of that, sort of, you know, the second half is always stronger than the first half in spend. That's that profile as being pretty consistent year-on-year is the first point that I'd make about the $3.1 billion we spent. I think the second thing is, I think the sustaining capital we're spending at pretty consistent levels now year-on-year. We've I think built up that $3.5 billion is where we're at. Most of the kind of lower level of spend was in just rephasing of some of the development spend that we had and also the profile of decarbonization spend, which was a bit slower this year. As I said, will sort of be more back-ended.
I honestly don't read into the $3.1 billion. I think a reprofiling. We're still in that $9-$10 billion range going forward. I think you've got a bit of benefit there, tailwind from exchange, but you've also, you know, got other pressures in the system. That's our view. We'll give better guidance at the end of the year when we've got full information. As I did say, you know, Simandou is in that guidance and exactly the timing of when things move forward is gonna be important to that spend profile as well.
I mean, Paul, if I should just add one thing. I've just spent a week in Mongolia. Look, first half we actually had a lot of COVID restrictions in a number of places, and suddenly when I was there, the COVID restriction was away and suddenly you can just get an awful lot more done. Have that in mind when you look at the numbers as well.
Okay. Thanks, Jakob. The follow-up question is on the performance of the Pilbara. This seems like you are starting to to turn the corner. You could be completing all those project ties and, you know, Gudai-Darri is ramping up. That'll give you some breathing space in 2023 before, you know, the next set of, you know, half a dozen or so replacement mines are required. The question is actually on Gudai-Darri. I noticed that, you know, it's been a long time in the making, this mine, but you don't talk about phase two anymore. That seems to be, you know, probably the highest returning project you'd have in the Pilbara. Can you talk about, you know, the timing of Gudai-Darri phase two?
I know you're gonna say that we need to ramp up phase one first, but, you know, I think that'll happen, you know, fairly quickly into the second half, first half of next year. What about phase two? Can you talk through that? Thanks.
Yeah. Yeah, Peter, by all means. I would like to see phase two as well.
Absolutely. Well, you're exactly right. I mean, the focus is on phase one in ramp up. I mean, the ramp up profile we're sort of looking at is pretty similar to other mines we've had in the Pilbara in the past. We need to move through that, get the Pilbara up, get Gudai-Darri up to 43 million tons of the first phase. In parallel, you know, studies starting on next phase two. No change there, if you like, to the profile that we're working on.
Okay. Thank you.
Next question, Roberto, please.
Thank you for your question. We're going now to take our next question. Please stand by. The next question from the line of Alain Gabriel from Morgan Stanley. Please go ahead.
Yes. Good morning, gentlemen. My question, my first question is on the M&A strategy, and broadly speaking, on the lithium strategy. Can you expand on the comments you made on M&A? And do you have an increasing appetite for larger deals, or are you still happy with your $1 billion-$2 billion smaller acquisitions in lithium? That's the first part of the question. Thanks.
Yeah, no, thank you. It's a very good question. We have a very strong balance sheet, so we have the optionality to do many things. I tend to focus actually less on that side and more about the organization and the strengths of the organization. I'm very keen on keeping our engineers very busy, but I'm also very keen on not overstretching them, and I think it's great that we have taken on Rincon. I'm very, very keen on trying to figure out what it would take to find a path forward for the Jadar project as well. There's just the limits on how many new projects we should undertake.
It's a little bit that mindset I have, and therefore I'm not too excited about doing too many things on the M&A front. We're looking at it. We have the optionality and, you know, as you have seen for a couple of months, asset prices are going down, and then of course it becomes more attractive. Key for us starts with some very basic things. Do we have the capacity to execute the things? What are we adding? Why are we the best owner of the asset? Then the second part of it is, of course, try to not hit it at the top of the cycle.
Thank you. Following up on the M&A as well, the acquisition process of Turquoise Hill appears to have exceeded the usual three to four months for the independent evaluators to express a view. Are there any deadlines or milestones that you are working with at the moment? By when should we expect a breakthrough there? Thank you.
TRQ, we put a lot of effort into thinking through and offering the shareholders a fully priced proposal. The board looked at it seriously and said, "This is a very serious offer," and kicked off the Canadian process. It's a very rigorous process. To be quite frank, I haven't spent five minutes looking at the valuation since then, because I wanna be respectful to that process. The independent committee of the TRQ board will come back to us, and I'll listen very carefully to it. I reckon that the market has changed, that copper assets are now trading perhaps 40% lower than before, and therefore our alternative set, our set of alternatives are different. Strategically, I still think it's the right thing to simplify TRQ. But quite frankly, let's let them finalize the process.
I understand, we're getting close to that, and then, we'll have a fresh look at what is in the interest of you shareholders.
Let's come back to the room.
Thank you.
Danielle?
Thank you. It's Danielle Chigumira from Credit Suisse. Just a question on the decarbonization spend. The $1.5 billion over the next three years seems to be a bit more back-end weighted now. Can you talk a bit about your ability to spend that? Also any commentary around whether the cost, as in dollar per ton of carbon reduced, has changed since you outlined the initial strategy last year?
Thanks, Danielle. I mean, I think the key is that we set out, when we set out the sort of targets, the 15% absolute reduction by 2025 and then 50% by 2030, since then we've done an awful lot to build the foundations of how we will get there. Building up the right capability within the organization, really building up sort of some of the studies that are needed. 'Cause these projects are kind of really at the heart of a lot of our businesses where we need to change things. It's not something from day one you need to do. You need to actually go through the right studies and the right engineering to come up with these solutions.
I think that's the sort of sense I have now is that we are building those foundations, and we'll start in as we get into later this year into 2023 and 2024, really building out up those projects and sort of fully implementing them. That's why more back-ended of the $1.5. I think in terms of price, I think we're just working through that. I wouldn't change where we're at in terms of the sort of spend profile. We're working through all of that and you know. At the moment, I think we're pretty fine with that guidance.
Great. Thank you. Just the follow-up is on the co-management agreement with the PKKP. What does that mean on an operational basis? Does it mean changing mine plans? Does it mean things take longer to implement? How should we think about that?
Yes. This is very close to my heart, and we use it now everywhere, but it's actually a word that was very well invented by PKKP. It's more than a year ago I started that discussion. I think it's a mindset of thinking about that we are guests on their country and really that we just do things together. There's something about signing agreements, but it's actually much more about what is happening in the field. In fact, what we also learn is we can do much better progress on things when we go hand in hand, so to say. You have representatives from traditional owners with yourself when you're out in the field, et cetera. We have actually operated very well like that.
We've just never called it like that at our bauxite operations at Weipa in Queensland. We clearly had to improve our practices in Western Australia. Under that banner, we're changing everything. I can tell you, take a project like Gudai-Darri, we have changed the mine plan significantly by really listening carefully to the traditional owners. I also since now I had the opportunity to meet all the traditional owners, that there is a different sentiment. I think people start seeing that we are listening and we are adjusting. Our people have never been this busy before because we are changing the mine plans a lot. When we get them right, it's sustainable because everybody wants to see it happening, then it's actually for mutual benefit.
It's not just theory on paper, it's practice. It's how our engineers are working day in and day out.
Jatinder .
Thank you. Good morning, Jatinder Goel from BNP Paribas Exane. Question on capital allocation relating to your comments. Jakob, you mentioned asset prices have come down. Does that make buy versus build more favorable towards buying? Because, with asset prices wherever you can transact versus, CapEx inflation and the execution challenges that the entire industry is facing. But tying to that, most of your future projects are also strategic than rather optional. Can you do both a sizable M&A, plus continue with your organic growth as well?
Yeah. I mean, all else equal, you're right. But I think I look at it also slightly different. We have so much already in the cupboard, and that's what we're actually trying to progress. You've seen us really pushing Oyu Tolgoi forward, and right now, as I said, the team is down in Conakry, and I wanna see Simandou progressing. It comes down to we only have the capacity to do so many things. If we can progress all else equal, the cheapest thing is to progress what you already have in the cupboard. We are looking at the markets, and yes, it's been better priced now, but who knows? It's not for us to call when the trough is. You only know that afterwards.
Thank you. Just another follow-up on capital allocation. Was net cash balance sheet not strong enough to top up dividend with this, especially when if you wanted to stick to 50% payout? Then tied to that, you've been constrained from buybacks because of Chinalco shareholding, but that wasn't really a challenge where share price was. Now do you feel you need to find a solution, and is there any discussion with Australian regulators or Chinalco to solve it? Maybe Chinalco can participate proportionately, and you can still kick off with buybacks.
Thanks very much. I think in terms of the balance sheet, yes, we had net cash, but relatively small net cash. I always think of it kind of them making a commitment of $4.3 billion, which as we said, is our second largest interim dividend. That has to be sort of factored in. That's really in terms of balance sheet. As we said, we're just being very consistent on the dividend. 50% is our sort of, you know, normal level. It's where we place the ordinary dividend at the half of the year, putting the big decision to the end of the year when we've got full information. That's on the first bit.
In terms of buybacks, yes, we've still got the same situation in terms of constraints on buybacks. At the moment, no sort of change to that.
Roberto, can we get another question from the line, please?
Yes. We are going now to take our next question. Please stand by. The next question from Hayden Bairstow. Please go ahead.
Good morning, guys. Just to, I guess, follow up with some of the questions previously, just around your comments on Simandou and the potential timing of that. Just looking at the aspirational CapEx for the next 2023, 2024 of sort of $1.5 billion a year. If you're committed to Simandou, would that sort of remove any further options in terms of your capital allocation if you've got the commitments you've already got in the rest of the business? Or is there still gonna be scope for other potential new projects to come in?
Hayden, thanks very much. I mean, when we talk about the $3 billion, we've talked about the rundown as to, you know, what we would be willing to sort of commit on around growth. There's been a number of options we've been sort of working on in parallel. Simandou is clearly a big component of that, and I said there's absolutely room within the spend profile to accommodate what we see as potential spend on Simandou to the extent we do sort of land on all the agreements. Would there be room? It depends. As we said, with the number of options that we're working on.
Yes, we have some flexibility to accommodate, but it really just depends on timing and exactly when we land the sort of studies on other options.
Thanks, Hayden.
A follow-up to that would be just on capital allocation between the Pilbara and Simandou. I mean, assuming it is approved and goes ahead, I mean, do you really start then assessing Pilbara expansion or Pilbara life extension options as opposed to expansions versus more investment in Guinea pushing Simandou harder?
Look, so far, I think, we have two major iron ore assets, IOC and the Pilbara. It has been sound to look at projects standalone in each of the assets. At some stage, I hope we'll have three assets with Simandou as well. We'll of course look at it in an integrated way. My starting point is just the global seaborne iron ore market is 1.9 trillion tons. It's from that point of view, I think you have to be careful of saying you get a little bit here, you have to be careful there. Right now, there has been for a number of years a very good balance between supply and demand.
We need to be sure that our wonderful assets in Western Australia are up to snuff, that we are doing the rebuild over time so that we don't get behind the curve while we are also developing Simandou. It's also very important to remember that it's two different qualities. The quality of Simandou is the highest quality you can have. It's the only basically comparable to what has been produced in the northern part of Brazil. So you're playing to different markets. You get opportunity, optionality in terms of how you can blend things, et cetera. So I actually see that the asset will strengthen the competitiveness of our Pilbara assets.
Roberto, next question, please.
You are taking now the next question. Please stand by. The next question for Robert Stein. Please go ahead. Your line is open.
Hi. Thanks for the update. Just a quick question on relationships with China with the new SOE being set up called the China Mineral Resources Group. I'm just wondering how that's going to impact how you think about marketing for your Pilbara business as well as negotiation with the joint venture partners on Simandou. Arguably now they come under one banner, and so will have a much more united approach, and so I'm just wondering how you're preparing your business for that change in market power.
Yeah. No, thank you. Look, I think we need to step back and figure out what is facts and what is rumors. I mean, we all know that there was an inaugural meeting of this entity the day before yesterday with senior representation in China. How they will act in the market is rumors, and I don't wanna speculate on that. I have no particular concern. We have worked for the last 50 years successfully with China for the benefit of Rio Tinto, and I believe we have also been helpful in China developing its steel industry. I'm very confident that will continue.
Just to follow up, does a change in how the sort of market's structured in that format give you an added impetus to invest in your business in Australia and Simandou and the like to grow volumes where you arguably will have them taken off of you if you don't? Is that a way? Is that a change in how the strategy works here?
Well, certainly, we have not changed a single decision within Rio Tinto based upon the market rumors about this. No, I cannot see that linkage.
Next question, Roberto, please.
Thank you for your question. We are taking now the next question. Please stand by. The next question from Lyndon Fagan from JP Morgan. Please go ahead.
Thanks very much. Just in regards to the decarbonization CapEx of $7.5 billion out to 2030, I guess it's now been some time since that was first announced. I'm wondering if you're able to share the potential returns on that number. I guess BHP's talked about the $4 billion spend with a negative $0.5 Billion NPV. Is there an equivalent number we can think about for Rio's spend? I guess the next question I had was related to slide 40. I was just interested to see the idea of using civil-sized trucks in iron ore. I'm wondering if you can maybe talk a bit more about this slide and when this project might be rolled out and I guess when we might be able to see zero-emission mining trucks within the Rio business. Thanks.
Well, that's a wonderful question that I happily pass on to Peter because I also like to know exactly the profitability. I will say one thing. What has changed since last year is that the price of gas have gone up, the price of oil have gone up, and therefore, all else equal, the economics of renewable becomes better. Peter.
I think I'd just really go back to what I said, you know, at the seminar. At a reasonably modest carbon price, we see this as value accretive. But I think you have to stand back and just talk really about sort of the de-risking of the business and the cash flows through effectively taking down the carbon intensity of our business. That's what this is all about, is actually, you know, really making our business with a 50% absolute reduction much more resilient in the face of change and decarbonization than before. Actually making the business ready for the opportunity as well. Because I think a lot of the conversation tends to go around the cost of decarbonization.
When we look at our portfolio, we actually see more opportunity because fundamentally, you know, the world of decarbonization, we're gonna need more of pretty much all the products we produce. You know, we've got to see this in the round. We're both, I think, making our business much more resilient through the work we're doing and setting ourselves the targets we are about Scope one and two, but also positioning the business to take advantage of changing market. Very big change for the world. Thanks for the question. In terms of the trucks, I mean, it's gonna take a, you know, a bit of time.
I mean, we are now doing the work to really sort of understand, you know, how do you get to sort of trucks. It will take time. We're in an R&D stage working with OEMs around this. It will take time.
Next question, please, Roberto.
We are now taking our next question. Please stand by. The next question from Myles Allsop from UBS.
Great. Thank you. Just first of all, maybe on the balance sheet. Peter, you mentioned that we will see net cash move to net debt in the second half of the year. Could you give us a sense where you think, you know, net debt should ideally sit? Is it in that $5 billion, $10 billion, $15 billion range? You talk, you know, around a strong balance sheet, but what does that mean in terms of absolute levels of net debt? First question.
Myles, I think, you know, I'm not gonna put numbers on it 'cause it changes through the cycle. I mean, actually sort of committing to targets on net debt, I think when prices are moving as much as they are, as we said, iron ore price this time last year was over $200 a ton. It's half of that now. To actually set targets and manage that is too hard. What we're saying is that fundamentally, we believe that a really strong balance sheet is the way that you have real flexibility and strategic options, and you can really act and drive the business consistently throughout the cycle. Will it be in net cash or, probably that's not gonna be normal.
Will we, you know, run the net debt at a very sort of a strong balance sheet. That's the way we think is the right way to run a balance sheet in this industry.
Okay. Maybe just on to CapEx as well, because I think, you know, it's a little bit concerning when we look at the cycle, look where commodity prices are, obviously look at the uncertainty around China, and then, you know, we still hear that you're looking to increase CapEx by sort of potentially over $2 billion year-on-year in 2029. Obviously, that will have quite meaningful kind of implications for the amount of cash that can be returned to shareholders. You know, how much flexibility do you see within your CapEx overall? You know, normally in a down cycle, we see sustaining CapEx come down. We see kind of growth projects kind of sort of moderate and so on. You know, how should we think about your CapEx in this cycle?
Is it gonna be more kind of resilient as you invest through the cycle and that impacts cash returns? Or will there be more flex in it than it looks like in your charts?
Allow me to open up here on the CFO question. Look, this is actually really fundamental. If we start adjusting our CapEx program because we think there is a recession the next six months, we have lost it. We are in for the long haul here. In fact, if you really think about it, the best thing is to invest when you have a recession, because that's where you can buy services cheap. We are absolutely convinced that we have the right investment profile going forward. Whether there's gonna be tailwind or headwind, it should not affect the things. Obviously, sometimes things becomes a little bit more expensive when you get inflation, and we need to manage that very carefully. We fundamentally wanna carry out the activities that we have planned to do.
Myles, I'd add, I mean, it all ties to having a strong balance sheet 'cause that enables us to be that consistent investor. At the end of the day, we want to have that level of sustaining capital in our business that keeps the integrity and the productive capacity of the assets through the cycle. We need to be investing in our development assets into replacement assets in that range that we talk again to keep our cash flow sort of strong throughout the cycle in the long term. Because we do see, you know, positive markets for the future, we wanna take advantage where we have those value accretive growth options to actually bring them forward, and we just wanna be consistent through the cycle.
Take one in the room, and we'll go back to the line because I have quite a few online. Anybody? Yeah, please.
Thank you. Alexander Pearce at BMO. It's encouraging to see some improvement at IOC in the quarter. Can you remind us what the remaining bottlenecks are at that project and so we can get a sense of when potentially you could be up to the full capacity there? Is it a case that you need to put this HBI investment in place to actually get to that full capacity?
Yeah, look, IOC is close to my heart as a business. I think it's a wonderful asset, but we have probably run it pretty tight for many years, and it needs a little bit of care. Second quarter has been really encouraging. In fact, we had a couple of really good months in April and May. But then we had a longer shutdown in June, and therefore on average is kind of a little bit of an improvement. I'm very encouraged both with the new CEO and the management team there and how they're going about it.
It will come back to full capacity, but I don't wanna predict the time of it because when you're dealing with aged mining assets, there is no linear development. There might be a few setbacks on the way, but they're doing the right things right now. I think it's pretty good. Yeah.
Back online, please. Roberto, another question.
We are taking now the next question. Please stand by. The next question for Amos Fletcher from Barclays. Please go ahead.
Yeah, morning, Jakob and Peter. I just wanted to ask a question about your growth options at Jadar and Winu. You seem to be continuing your strategy of saying relatively little about what's actually happening on the ground there. I was just wondering, can you give us some more detailed comments on project progress? What are the board's internal deadlines and expectations for the next key stage gates, et cetera? Thank you.
No, thanks very much. I mean, I think the focus is very much and should be on traditional owner engagement and on the approvals process. Those processes are underway and will take the time they take to get right. That's why we're not putting time frames against it because I think that would actually, you know, those processes are just ones we need to go at the right pace and move forward. That's where Winu stands. Thanks for the question.
Next question, Roberto, please.
Next question, please stand by. We're now taking our next question. It's for the line of Tyler Broda. Please go ahead.
Great. Thanks very much, and thanks for the call. I just wanted to touch on the MOU with Ford. You know, clearly auto companies are moving closer to the miners with the shifts in batteries and some of the evolutions there. I just wonder if you could walk through a bit on this MOU, sort of what it means right now, where you could see it going. Then I guess on a wider basis, you know, sort of how do you see things evolve from Rio's positioning on, you know, providing offtake? Do you get premiums for these products? How do you see this evolving over time? Thank you.
Yeah, no, thank you. It is very important. It's by definition, still just an MOU, so a lot of things needs to be sorted going forward. What you see, and I have over the last three months, met most of the automaker CEOs, and there's a very, very changed mindset. Because what you see now is that EVs is happening now and it's an irreversible process. Because in the beginning, you know, people are afraid of investing in the new EV platforms, but now all the automakers have done it, and they really have to scale that up. Suddenly they're all realizing that some of the bottlenecks are actually in the materials. That's the one dimension. The other thing is they're making commitments about that their products will have less CO2 in them.
For both reasons, we become very, very relevant. We become relevant in terms of that we will be able to produce lithium, I hope one day in Europe. We are producing in the U.S., we will be producing in Argentina, but we're also very relevant that we are producing some of the lowest CO2 aluminum in the world. It's a different kind of partnership with end customers that we can start forming compared to a history of very much commodity trade from our side. It's the world is changing in the commercial landscape, and I find it very exciting. Thank you.
One more question, Roberto. Next one, please.
We are now taking our next question. Please stand by. The question from the line of Glyn Lawcock. Please go ahead.
Good morning, Jakob. I was wondering if you could just drill down a little bit on traditional owner engagement. Just wondering if you could give me some concrete evidence of progress. I note in the presentation you mentioned Western Range and some of movement there. I mean, have we got to a point where that Western Range is approved, or is it still just progress? I guess it goes to Amos's question too on Winu where Peter said engagement will take time.
But you've been saying that for a while now, and I just wonder if you could give me some concrete evidence anywhere where you actually are making progress. In answering that as well, I think six months ago, you made the comment, approach an appropriate remedy for destruction of Juukan Gorge is substantially progressed. Are we getting close to a remedy? Is that gonna be a dollar figure? If you can, you give me any sense what that might be. Thanks.
Of course, we as a company, we like to be very logical and set a timeline, et cetera. It doesn't work like that. You cannot impose a timeline of recovery with another party. What I would focus on is you're asking for data point, is just to see how the relationship have changed from visit to visit. It's of course not me who are making the difference, but when I meet people and they appear differently, it's because our people have done a super job. For example, I have been several times to Gudai-Darri and we were struggling to have the right engagement there. When we went there as a whole board two months ago, we had the most beautiful session with the traditional owners. And that's what I've seen as well.
PKKP is difficult. Not difficult. They have amazing people, but they have just gone through so much pain, and you just have to recognize that. It is real. I was not at the signing ceremony. Our chairman was there, and it was a very emotional event. On Western Range, yes, we are working hand in hand. We are very aligned with the Yinhawangka people on how the mine plan should look like for the Western Range. From every new trip I take to Western Australia, I get new data points that things are absolutely heading in the right direction. You can ask, should it gone faster or slower? I actually think it's happening as fast as it can happen. You cannot expect that such things are just changing from one day to another.
Great. One final question. Roberto, last one, please, before we wrap it up.
Our last question, please stand by, is from the line of Lachlan Shaw from UBS.
Yeah, good morning, Jakob and Peter. Just to follow up Glyn's question there. Turning that around on traditional owner engagement, how much time do you think, we're talking with these projects, how much time is involved? How much longer are these projects taking to get through, these additional processes now?
How long do they take? Look, yeah. I don't know whether it takes that much longer. I think we always have to fight bottlenecks within ourselves. I think it's more work to do mine plans.
Mm-hmm.
That's for sure. You will have bottlenecks within your own company. You will have bottlenecks in terms of capacity of participation from the traditional owners. You also have bottlenecks in state governments to get approvals, et cetera. We have always had that in a way. I think the trick is to not see them going longer. Time will tell, but what I see is that we are progressing, for example, the Western Range. I'm actually very impressed. We have, quite frankly, been a bit slow on Western Range for many years, and now lately we have really progressed it fast. I think that is actually telling it's not about slowing down things to work with the traditional owners. It's actually there you can find solutions and move forward.
Yeah. Okay. Thank you very much, everybody, for listening and thank you for coming here in London, and see you next time. Bye-bye.