SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
(Mark One) | ||||
Registration statement pursuant to Section | ||||
or | ||||
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the financial year ended: 31 December | ||||
or | ||||
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the transition period from:________________ to________________ | ||||
or | ||||
Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
Date of event requiring this shell company report ________________ |
Commission file number: 1-10533 | Commission file number: 0-20122 |
Rio Tinto plc | Rio Tinto Limited |
ABN 96 004 458 404 | |
(Exact name of Registrant as specified in its charter) | (Exact name of Registrant as specified in its charter) |
England and Wales | Victoria, Australia |
(Jurisdiction of incorporation or organisation) | (Jurisdiction of incorporation or organisation) |
Level 33, 120 Collins Street | |
London, | Melbourne, Victoria 3000, Australia |
(Address of principal executive offices) | (Address of principal executive offices) |
Roger Dowding, T: +44 (0)20 7781 1623, E: roger.dowding@riotinto.com
(Name, Telephone, E-mail and/or Facsimilie number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act: | |||||||
Title of each class | Name of each exchange | Name of each exchange | Title of each class | ||||
on which registered | on which registered | ||||||
American Depositary Shares* | New York Stock Exchange | None | |||||
Ordinary Shares of 10p each** | New York Stock Exchange |
* | Evidenced by American Depository Receipts. Each American Depository Share Represents four Rio Tinto plc Ordinary Shares of 10p each. |
** | Not for trading, but only in connection with the listing of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission |
Securities registered or to be registered pursuant to Section 12(g) of the Act: | |
Title of each class | Title of each class |
None | Shares |
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: | |
None | None |
Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
Title of each class | Number | Number | Title of each class | Number | Number | Title of each class | ||||||
Ordinary Shares of 10p each | 1,071,488,203 | 456,815,943 | Shares | 1,071,799,661 | 456,815,943 | Shares | ||||||
DLC Dividend Share of 10p | 1 | 1 | DLC Dividend Share | 1 | 1 | DLC Dividend Share | ||||||
Special Voting Share of 10p | 1 | 1 | Special Voting Share | 1 | 1 | Special Voting Share |
Indicate by check mark if the registrants are well-seasonedwell-known seasoned issuers, as defined in rule 405 of the Securities Act.
Yes | No |
If this report is an annual or transition report, indicate by check mark if the registrants are not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.1934.
Yes | No |
Note -– Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrantsregistrants: (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days:
Yes | No |
Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, or non-accelerated filers. See definition of “accelerated“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer | Non-accelerated filer | ||
Indicate by check mark which basis of accounting the registrants have used to prepare the financial statements included in this filing:
US GAAP International Financial Reporting Standards as issued by the International Accounting Standards Board Other
If ‘Other’ has been checked in response to the previous question, indicate by check mark which financial statement item the registrants have elected to follow:
Item 17 | Item 18 | |
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes | No |
EXPLANATORY NOTE
The Rio Tinto Group is a leading international mining group, combining Rio Tinto plc and Rio Tinto Limited in a dual listed companies (‘DLC’) merger which was designed to place the shareholders of both Companies in substantially thesame position as if they held shares in a single enterprise owning all of the assets of both Companies.In previous years, the Form 20-F filed with the United States Securities and Exchange Commission (SEC), containedseparate consolidated financial statements for the Rio Tinto plc and Rio Tinto Limited parts of the Group. These werepresented on the basis of the legal ownership of the various operations within each part of the Group. The separate financial statements for Rio Tinto Limited included, on a consolidated basis, the Group undertakings under its legalownership, and those for Rio Tinto plc included, on a consolidated basis, the Group undertakings under its legal ownership. This presentation of financial information filed with the SEC was on the assumption that the formation ofthe Group through the dual listed companies (DLC) arrangements was not a business combination. The financialstatements filed with the SEC also included supplemental financial information that combined the consolidated financial statements of the Rio Tinto plc and Rio Tinto Limited parts of the Group to present the Rio Tinto Group, withno adjustment for fair values.This combined financial information for the Rio Tinto Group was consistent with the financial statements that were used for the purposes of satisfying the Group's reporting obligations in the United Kingdom and Australia. Thecombined financial statements for the Rio Tinto Group viewed the formation of the DLC as a business combination andaccounted for the transaction as a merger in accordance with UK Financial Reporting Standard No. 6Acquisitions and Mergers(FRS 6). Applying FRS 6, Rio Tinto plc and Rio Tinto Limited were combined and presented as one economicentity with no adjustment for fair values.As permitted under the transitional arrangements set out in IFRS 1 ‘First time adoption of International Financial Reporting Standards’, which sets out the rules for first time adoption of IFRS, the Group did not apply the concepts ofIFRS 3 ‘Business Combinations’ for business combinations prior to the first time application of EU IFRS. Accordingly, the Group is following the same method of accounting for the DLC in its financial statements under EU IFRS as was historically followed under UK GAAP: the Group is presented as one economic entity at historical cost.Subsequent to the formation of the Group, the accounting model used in filings with the SEC for the presentationof financial statements of companies that form DLCs has changed. The formation of a new DLC is now viewed as a business combination. The Group now believes that it would be preferable to treat the formation of the DLC as abusiness combination, with the result that the accounting and reporting of financial statements prepared in accordance with IFRS to the SEC will be consistent with the accounting and reporting in the United Kingdom and Australia.Accordingly, the Group has revised the presentation of its financial statements included in Form 20-F to account for the formation of the DLC as a business combination. As a consequence, separate financial statements for Rio Tinto plc and Rio Tinto Limited will no longer be presented. Instead, the financial statements will deal with the Rio Tinto Group as one combined economic entity. This new presentation is applied retrospectively for all periods presented. The IFRS information presented on this new basis in the 20-F is the same as the combined supplemental information for the Rio Tinto Group that was previously disclosed.Under US GAAP, the Group now accounts for the formation of the DLC using the purchase method. As aconsequence of this treatment, Rio Tinto shareholders' funds under US GAAP at 31 December 2006 are $1,519 million above those under EU IFRS; and US GAAP net earnings for 2006 are $62 million below those under EU IFRS. Furtherinformation on the impact of purchase accounting under US GAAP is shown in note 48 to the 2006 financial statementson pages A-71 to A-72.Rio Tinto plc and Rio Tinto Limited established separate ADR programmes prior to their DLC merger and had maintained both but following a review it was concluded that the Rio Tinto Limited ADR programme should be terminated with effect from 10 April 2006 and a notice of termination was mailed to ADR holders. The Rio Tinto plc ADR programme was not affected by this termination.
Rio Tinto |
RIO TINTO
PART I
Item | Identity of Directors, Senior Management and Advisers | |
Not applicable. | ||
Item2. | Offer Statistics and Expected Timetable | |
Not applicable. | ||
Item | Key Information |
SELECTED FINANCIAL DATA
The selected consolidated financial data on pages 3 to 4below has been derived from the 2006 financial2007 Financial statements of the Rio Tinto Group under Item 18. Financial statements herein, have been restated where appropriate to accord with the current accounting policies and presentations.Group. The selected consolidated financial data should be read in conjunction with, and qualified in their entirety by reference to, the 2006 financial2007 Financial statements and notes thereto.
The 2006 financial2007 Financial statements were prepared in accordance with IFRS as adoptedissued by the European Union, which differs in certain respects from US GAAP. Details of the principal differences between EU IFRS and US GAAP are setout in note 48 to the 2006 financial statements.IASB (IFRS).
RIO TINTO GROUP
Income Statement Data | ||||||
For the years ending 31 December | 2004 | 2005 | 2006 | |||
Amounts in accordance with EU IFRS(a) | US$m | US$m | US$m | |||
Consolidated revenue | 12,954 | 19,033 | 22,465 | |||
Group operating profit (b) | 3,327 | 6,922 | 8,974 | |||
Profit for the year | 3,244 | 5,498 | 7,867 | |||
Group operating profit per share (US cents) | 241.3 | 507.5 | 673.0 | |||
Earnings per share (US cents) | 239.1 | 382.3 | 557.8 | |||
Diluted earnings per share (US cents) | 238.7 | 381.1 | 555.6 | |||
Dividends per share | ||||||||||
2002 | 2003 | 2004 | 2005 | 2006 | ||||||
US cents (c) | ||||||||||
– ordinary dividends | 68.5 | 60.5 | 66.0 | 83.5 | 81.5 | |||||
– special dividend | — | — | — | — | 110.0 | |||||
UK pence (c) | ||||||||||
– ordinary dividends | 46.52 | 37.05 | 36.22 | 45.69 | 44.77 | |||||
– special dividend | — | — | — | — | 61.89 | |||||
Australian cents (c) | ||||||||||
– ordinary dividends | 129.91 | 96.89 | 90.21 | 108.85 | 107.34 | |||||
– special dividend | — | — | — | — | 145.42 | |||||
Weighted average number of shares (millions) | 1,377 | 1,378 | 1,379 | 1,364 | 1,333 |
Amounts in accordance with US GAAP | ||||||||||
2002 | 2003 | 2004 | 2005 | 2006 | ||||||
US$m | US$m | US$m | US$m | US$m | ||||||
Consolidated revenue (g) | 8,719 | 9,545 | 12,081 | 19,343 | 22,781 | |||||
Group operating profit (b) (g) | 657 | 936 | 1,312 | 6,229 | 7,499 | |||||
Net earnings (d) | 514 | 1,750 | 2,738 | 4,874 | 6,649 | |||||
Earnings per share (US cents) | 37.3 | 127.0 | 198.5 | 357.3 | 498.6 | |||||
Diluted earnings per share (US cents) | 37.3 | 126.9 | 198.2 | 356.2 | 496.6 | |||||
Income Statement Data | ||||||||||
For the years ending 31 December | 2004 | 2005 | 2006 | 2007 | ||||||
Amounts in accordance with IFRS(a) | US$m | US$m | US$m | US$m | ||||||
Consolidated revenue | 12,954 | 19,033 | 22,465 | 29,700 | ||||||
Group operating profit (b) | 3,327 | 6,922 | 8,974 | 8,571 | ||||||
Profit for the year | 3,244 | 5,498 | 7,867 | 7,746 | ||||||
Group operating profit per share (US cents) | 241.3 | 507.5 | 673.0 | 666.6 | ||||||
Earnings per share (US cents) | 239.1 | 382.3 | 557.8 | 568.7 | ||||||
Diluted earnings per share (US cents) | 238.7 | 381.1 | 555.6 | 566.3 | ||||||
Dividends per share | 2003 | 2004 | 2005 | 2006 | 2007 | |||||
US cents (c) | ||||||||||
– ordinary dividends | 60.5 | 66.0 | 83.5 | 81.5 | 116.0 | |||||
– special dividend | — | — | — | 110.0 | — | |||||
UK pence (c) | ||||||||||
– ordinary dividends | 37.05 | 36.22 | 45.69 | 44.77 | 58.22 | |||||
– special dividend | — | — | — | 61.89 | — | |||||
Australian cents (c) | ||||||||||
– ordinary dividends | 96.89 | 90.21 | 108.85 | 107.34 | 143.53 | |||||
– special dividend | — | — | — | 145.42 | — | |||||
Weighted average number of shares (millions) | 1,378 | 1,379 | 1,364 | 1,333 | 1,286 | |||||
Balance Sheet Data | ||||||||||
at 31 December | 2004 | 2005 | 2006 | 2007 | ||||||
Amounts in accordance with IFRS(a) | US$m | US$m | US$m | US$m | ||||||
Total assets | 26,308 | 29,803 | 34,494 | 101,391 | ||||||
Share capital / premium | 3,127 | 3,079 | 3,190 | 3,323 | ||||||
Total equity / Net assets | 12,591 | 15,739 | 19,385 | 26,324 | ||||||
Equity attributable to Rio Tinto shareholders | 11,877 | 14,948 | 18,232 | 24,772 | ||||||
Balance Sheet Data | ||||||
at 31 December | 2004 | 2005 | 2006 | |||
Amounts in accordance with EU IFRS(a) | US$m | US$m | US$m | |||
Total assets | 26,308 | 29,803 | 34,494 | |||
Share capital / premium | 3,127 | 3,079 | 3,190 | |||
Total equity / Net assets | 12,591 | 15,739 | 19,385 | |||
Equity attributable to Rio Tinto shareholders | 11,877 | 14,948 | 18,232 | |||
2002 | 2003 | 2004 | 2005 | 2006 | ||||||
Amounts in accordance with US GAAP | US$m | US$m | US$m | US$m | US$m | |||||
Total assets | 24,631 | 29,378 | 32,125 | 34,774 | 37,295 | |||||
Share capital / premium | 2,580 | 2,869 | 3,127 | 3,079 | 3,190 | |||||
Rio Tinto shareholders' funds (d) | 10,968 | 13,727 | 16,122 | 18,677 | 20,791 | |||||
Notes | |
(a) | In accordance with the General Instructions for Form 20-F, Section G, audited information under |
(b) | Operating profit under |
(c) | Dividends presented above are those paid in the year. |
(d) | |
The results for all years relate wholly to continuing operations. | |
As a result of adopting IAS 32, IAS 39 and IFRS 5 on 1 January 2005, the Group changed its method of accounting for financial instruments and non-current assets held for sale. In line with the relevant transitional provisions, the prior period comparatives have not been |
Rio Tinto | 4 |
RISK FACTORS
The following describes some of the risks that could affect Rio Tinto. There may be additional risks unknown to Rio Tinto and other risks, currently believed to be immaterial, could turn out to be material. These risks, whether they materialise individually or simultaneously, could significantly affect the Group’s business and financial results. They should also be considered in connection with any forward looking statements in this document and the cautionary statement on page 7.
Rio Tinto’s overriding corporate objective is to maximise long term shareholder value through responsible and sustainable investment in mining and related assets. The directors recognise that creating shareholder value is the reward for taking and accepting risk.
The directors have established a process for identifying, evaluating and managing the significant risks faced by the Group.
The following page.highlight the Group’s exposure to risk without explaining how these exposures are managed and mitigated or how some risks are also potential opportunities.
Acquisitions
The Group has grown partly through the acquisition of other businesses and most notably through the acquisition of Alcan Inc. for US$38.7 billion during 2007. Business combinations commonly entail a number of risks and Rio Tinto cannot be sure that management will be able to effectively integrate businesses acquired or generate the cost savings and synergies anticipated. Failure to do so could have a material and adverse impact on the Group’s costs, earnings and cash flows. Furthermore, the Group may, under the terms of the acquisition, be liable for the past acts or omissions of the acquired businesses in circumstances where the price paid does not adequately reflect the eventual cost of these liabilities.
Divestments
Following the acquisition of Alcan the Group undertook a strategic review which has highlighted approximately US$30 billion of potential divestments and has announced a target of US$15 billion. The Group intends to explore options for the sale of a shortlist of assets but any sales would be value driven and dependent on price. The amount and timing of sale proceeds that might eventually be realised is subject to considerable uncertainty and the Group cannot anticipate by when and by how much its borrowings might be reduced.
Economic conditions
Commodity prices, and demand for the Group’s products, are cyclical and influenced strongly by world economic growth, particularly that in the US and Asia. The Group’s normal policy is to sell its products at prevailing market prices. Commodity prices can fluctuate widely and could have a material and adverse impact on the Group’s asset values, revenues, earnings and cash flows.
The strong underlying economic conditions and commodity prices have led to a rapid growth in demand for technical skills in mining, metallurgy and geological sciences, and for materials and supplies related to the mining industry, causing skills and materials shortages. The retention of skilled employees, the recruitment of new staff and the purchasing of materials and supplies may lead to increased costs, interruptions to existing operations and to delays in new projects.
Further discussion can be found on page 12,15, Business environment, markets and regulations,regulation, and on page 79,104, commodity prices.
Exchange rates
The Group’s asset values, earnings and cash flows are influenced by a wide variety of currencies due to the geographic diversity of the Group’s sales and areas of operation. The majority of the Group’s sales are denominated in US dollars.Thedollars. The Australian, Canadian, Euro and US dollars are the most important currencies influencing costs. The relative value of currencies canfluctuatecan fluctuate widely and could have a material and adverse impact on the Group’s asset values, costs, earnings and cash flows. Further discussion can be found under Exchange rates, reporting currencies and currency exposure on page 77.102.
AcquisitionsThe Group has grown partly through the acquisition of other businesses. Business combinations commonly entail anumber of risks and Rio Tinto cannot be sure that management will be able effectively to integrate businesses acquiredor generate the cost savings and synergies anticipated. Failure to do so could have a material and adverse impact on the Group’s costs, earnings and cash flows. Furthermore, the Group may, under the terms of the acquisition, be liable forthe past acts or omissions of the acquired businesses in circumstances where the price paid does not adequately reflect the eventual cost of these liabilities.
Exploration and new projects
The Group seeks to identify new mining properties through an active exploration programme. The Group has also undertaken the development or expansion of other major operations. There is no guarantee,however, that such expenditure will be recouped or that existing mineralore reserves will be replaced. Failure to do socouldso could have a material and adverse impact on the Group’s financial results and prospects. In particular, Rio Tinto has commenced or recommenced exploration for and development of new projects in a number of new countries which may increase risksaround land and resource tenure.
The Group develops new mining properties and expands its existing operations as a means of generating shareholder value. IncreasingUnanticipated delays and project execution complications along with increasing regulatory, environmental and social approvals are, however, required which can result insignificantin significant increases in construction costs and/or significant delays in construction. These increases could materially andadverselyand adversely affect the economics of a project and, consequently, the
Rio Tinto 2007 Form 20-F | 5 |
Group’s asset values, costs, earnings and cash flows.
Energy cost and supply
The Group’s operations are energy intensive and, as a result, the Group’s costs and earnings could be adversely affected by rising energy costs or by energy supply interruptions. The following factors could materially adversely affect the Group’s energy position: the unavailability of energy or fuel due to a variety of reasons including fluctuations in climate, significant increases in costs of supplied electricity or fuel, interruptions in energy supply due to equipment failure or other causes, and the inability to extend contracts for the supply of energy on economical terms.
Greenhouse gas emissions
Rio Tinto’s smelting and mineral processing operations are energy intensive and depend heavily on coal, oil, diesel and gas. Increasing regulation of greenhouse gas emissions, including the progressive introduction of carbon emissions trading mechanisms, in numerous jurisdictions in which the Group operates could adversely impact access to, and cost of, the Group’s energy supply. Regulation of greenhouse gas emissions in the jurisdictions of the Group’s major customers could also have an adverse effect on the demand for the Group’s products.
Interest rate fluctuations
Increases in benchmark interest rates will likely increase the interest cost associated with the Group’s debt and will increase the cost of future borrowings, which could harm the Group’s earnings and financial condition.
Ore reserve estimates
There are numerous uncertainties inherent in estimating ore reserves;reserves and assumptions that are valid at the time of estimation may change significantly when new information becomes available.
Changes in the forecast prices of commodities, exchange rates, production costs or recovery rates may change theeconomicthe economic status of reserves and may, ultimately, result in the reserves being restated. Such changes in reserves could impact on depreciation and amortisation rates, asset carrying values, deferred stripping calculations and provisions forclosefor close down, restoration and environmental clean up costs. Further discussion can be found under Ore reserve estimatesreserves on page 82.108.
Political and community
The Group has operations in jurisdictions having varying degrees of political and commercial instability. Political instability can result in civil unrest, expropriation, nationalisation, renegotiation or nullification of existing agreements, mining leases and permits, changes in laws, taxation policies or currency restrictions. Commercial instability caused by bribery and corruption in their various guises can lead to similar consequences. Any of these can have a material adverse effect on the profitability or, in extreme cases, the viability of an operation.
Some of the Group’s current and potential operations are located in or near communities that may now, or in the future, regard such an operation as having a detrimental effect on their economic and social circumstances. Should this
occur, it may have a material adverse impact on the profitability or, in extreme cases, the viability of an operation. In addition, such an event may adversely affect the Group’s ability to enter into new operations in the country.
Defined benefit pension plans
Certain of the Group’s businesses sponsor defined benefit pension plans. If the assets of these pension plans do not achieve expected investment returns for any fiscal year, such deficiency would result in one or more charges against the Group’s earnings. In addition, changing economic conditions, poor pension investment returns or other factors may require the Group to make substantial cash contributions to these pension plans in the future, preventing the use of such cash for other purposes.
Unions and labour disputes
Some of the Group’s employees are represented by labour unions under various collective labour agreements. The Group may not be able to satisfactorily renegotiate its collective labour agreements when they expire. In addition, existing labour agreements may not prevent a strike or work stoppage at its facilities in the future, and any such work stoppage could have a material adverse effect on the Group’s earnings and financial condition.
Technology
The Group has invested in and implemented information system and operational initiatives. Several technical aspects oftheseof these initiatives are still unproven and the eventual operational outcome or viability cannot be assessed with certainty.Accordingly,certainty. Accordingly, the costs and benefits from these initiatives and the consequent effects on the Group’s future earnings and financial results may vary widely from present expectations.
Land and resource tenure
The Group operates in several countries where title to land and rights in respect of land and resources (includingindigenous(including indigenous title) may be unclear and may lead to disputes over resource development. Such disputes could disrupt relevant mining projects and/or impede the Group’s ability to develop new mining properties.
Rio Tinto 2007Form 20-F | 6 |
Health, safety and environment
Rio Tinto operates in an industry that is subject to numerous health, safety and environmental laws and regulations aswellas well as community expectations. Evolving regulatory standards and expectations can result in increased litigation and/orincreasedor increased costs all of which can have a material and adverse effect on earnings and cash flows.
Mining operations
Mining operations are vulnerable to a number of circumstances beyond the Group’s control, including natural disasters and unexpected geological variations and industrial actions.variations. These can affect costs at particular mines for varying periods. Mining, smelting and refining processes also rely on key inputs, for example fuel and electricity.mining inputs. Appropriate insurance can provide protection from some, but not all, of the costs that may arise from unforeseen events. Disruption to the supply of key inputs, or changes in their pricing, may have a material and adverse impact on the Group’s asset values,costs, earnings and cash flows.
Rehabilitation
Costs associated with rehabilitating land disturbed during the mining process and addressing environmental, health andcommunityand community issues are estimated and provided for based on the most current information available. Estimates may, however, be insufficient and/or further issues may be identified. Any underestimated or unidentified rehabilitation costswillcosts will reduce earnings and could materially and adversely affect the Group’s asset values, earnings and cash flows.
Non managed projects and operations
Where projects and operations are controlled and managed by the Group’s partners, the Group may provide expertise and advice, but it cannot guarantee compliance with its standards and objectives. Improper management or ineffectivepolicies,ineffective policies, procedures or controls could not only adversely affect the value of the related non managed projects andoperationsand operations but could also, by association, harm the Group’s other operations and future access to new assets.
Regulation
The group is subject to extensive governmental regulations in all jurisdictions in which it operates. Operations are subject to general and specific regulations governing mining and processing, land tenure and use, environmental regulations (including site specific environmental licences, permits and statutory authorisations), workplace health and safety, trade and export, corporations, competition, access to infrastructure, foreign investment and taxation. Some operations are conducted under specific agreements with respective governments and associated acts of parliament. Changes to any regulation or agreement may have an adverse effect on the profitability and viability of an operation.
CAUTIONARY STATEMENT ABOUT FORWARD LOOKING STATEMENTS
This document contains certain forwardincludes “forward looking statements with respect tostatements” within the financial condition, resultsmeaning of operations and businessSection 27A of the Rio Tinto Group. The words “intend”, “aim”, “project”, “anticipate”, “estimate”, “plan”, “believes”,“expects”, “may”, “should”, “will”, or similar expressions, commonly identify such forward looking statements.ExamplesSecurities Act of forward looking1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this annual report on Form 20-Finclude,document, including, without limitation, those regardingestimated ore reserves, anticipated Rio Tinto’s financial position, business strategy, plans and objectives of management for future operations (including development plans and objectives relating to Rio Tinto’s products, production or construction dates, costs, outputsforecasts and productive lives of assets or similar factors. Forwardreserve positions), are forward looking statements. Such forward looking statements involve known and unknown risks, uncertainties assumptions and other factors set forthwhich may cause the actual results, performance or achievements of Rio Tinto, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.
Such forward looking statements are based on numerous assumptions regarding Rio Tinto’s present and future business strategies and the environment in this document that are beyondwhich Rio Tinto will operate in the Group’s control. For example, future ore reserves will be based in part on market prices that may vary significantly from current levels. These may materially affectfuture. Among the timing and feasibility of particular developments. Otherimportant factors that could affectcause Rio Tinto’s actual results, performance or achievements to differ materially from those in the Group’s resultsforward looking statements include, among others, levels of actual production during any period, levels of demand and market prices, the ability to produce and transport products profitably, demand for our products, the effectimpact of foreign currency exchange rates on market prices and operating costs, operational problems, political uncertainty and economic conditions in relevant areas of the world, the actions of competitors, activities by governmental authorities such as changes in taxation or regulation and political uncertainty.Insuch other risk factors identified in the section entitled, “Risk factors” herein. Forward looking statements should, therefore, be construed in light of these risks, uncertaintiessuch risk factors and assumptions, actual results couldundue reliance should not be materially different from any future results expressed or implied by theseplaced on forward looking statements. These forward looking statements which speak only as atof the date of this report. Exceptasdocument. Rio Tinto expressly disclaims any obligation or undertaking (except as required by applicable regulations or by law, the Group does not undertakeCity Code on Takeovers and Mergers (the “Takeover Code”), the UK Listing Rules, the Disclosure and Transparency Rules of the Financial Services Authority and the Listing Rules of the Australian Securities Exchange) to release publicly any obligationupdates or revisions to publicly update orrevise any forward looking statements, whether as a result of new informationstatement contained herein to reflect any change in Rio Tinto’s expectations with regard thereto or future events. The Group cannot guarantee that its forward looking statements will not differ materially from actual results.any change in events, conditions or circumstances on which any such statement is based.
Rio Tinto |
IMPORTANT INFORMATION
This document contains statements which could be deemed recommendations or solicitations under the US federal securities laws in the context of the pre-conditional offer by BHP Billiton. If BHP Billiton does commence a tender offer within the meaning of Rule 14d-2 under the Securities Exchange Act of 1934, Rio Tinto will file a Solicitation/Recommendation Statement with the SEC on Schedule 14D-9 thereafter and holders of Rio Tinto’s shares and ADRs are advised to read it when it becomes available as it will contain important information. Copies of any such Solicitation/Recommendation Statement and other related documents filed by Rio Tinto will be available free of charge on the SEC’s website at http://www.sec.gov and on Rio Tinto’s website at www.riotinto.com
Rio Tinto 2007 Form 20-F | 8 |
Item 4. | Information on the Company |
INTRODUCTION
Rio Tinto is a leading international mining group whose business is finding, mining and processing the earth’sEarth’s mineral resources. The Group’s interests are diverse both in geography and product. Our activities span the world but we are strongly represented in Australia and North America and we have significant businesses in South America, Asia, Europe and southern Africa. Those businessesBusinesses include open pit and underground mines, mills, refineries and smelters as well as a number of research and service facilities.
The Group combines Rio Tinto plc, registered in England and Wales,which is listed on the London Stock Exchange, and headquartered in the UK;London, and Rio Tinto Limited, incorporated in Victoria, Australia,which is listed on the Australian Securities Exchange and withhas executive offices in Melbourne. The Group consists of wholly and partly owned subsidiaries, jointly controlled assets, jointly controlled entities and associated companies, the principal ones being listed in notes 3537 to 38 to40 of the 2006 financial statements.2007 Financial statements.
On 31 December 2006,2007, Rio Tinto plc had a market capitalisation of £27.8£53.0 billion (US$54 .5105.9 billion) and Rio Tinto Limited had a market capitalisation in publicly held shares of A$21.238.3 billion (US$16.833.5 billion). The combined Group’s market capitalisation in publicly held shares at the end of 20062007 was US$71.3139.4 billion.
Objective, strategy and management structure
Our fundamental objective is to maximise the overall long term value and return to our shareholders. We do this byoperatingby operating responsibly and sustainably in areas of proven expertise such as exploration, project evaluation, mining, smelting and mining,refining where the Group has a competitive advantage.
Our strategy is to maximise net present value by investing in large, long life, cost competitive mines.mines and processing plants. Investmentsare driven by the quality of each opportunity, not by the choice of commodity.
Rio Tinto’s management structure is designed to facilitate a clear focus on the Group’s objective. This structure, reflected in this report, is based on the following principal product and global support groups:
• | Aluminium |
• | Copper |
• | Diamonds and Industrial Minerals |
• | Energy |
• | Iron Ore |
• | Exploration |
• | Technology and Innovation |
• | Business Resources |
The chief executive of each product group reports to the chief executive of Rio Tinto. Diamonds and Industrial Minerals report to the product group heads of Copper and Energy respectively. |
Nomenclature and financial data
Rio Tinto Limited and Rio Tinto plc operate as one business organisation, referred to in this report as Rio Tinto, the Rio Tinto Group or, more simply, the Group. These collective expressions are used for convenience only, since both Companies, and the individual companies in which they directly or indirectly own investments, are separate and distinct legal entities.
“Limited”, “plc”, “Pty”, “Inc”, “Limitada”, or “SA” and similar suffixes have generally been omitted from Group company names, except to distinguish between Rio Tinto plc and Rio Tinto Limited.
Financial data in United States dollars (US$) is derived from, and should be read in conjunction with, the 2006financial2007 Financial statementswhich are in US$. In general, financial data in pounds sterling (£) and Australian dollars (A$) have been translated from the consolidated financial statements and have been provided solely for convenience; exceptionsarise where data, such as directors’ remuneration, can be extracted directly from source records. Certain key information has been provided in all three currencies in the2007 Financial statements.
Rio Tinto Group sales revenue, profit before tax and net earnings and operating assets for 20052006 and 20062007 attributable to the product groups and geographical areas are shown in notes 3031 and 3132 to the 2006 financial statements.In2007 Financial statements. In theOperating and financial reviewreport(OFR), operating assets and sales revenue for 20052006 and 20062007 are consistent withthe financial information by business unit in note 47 to the 2006 financial2007 Financial statements.
The tables on pages 1928 to 2242 show production for 2004,2007, 2006 and 2005 and 2006 and include estimates of proven andprobableand probable ore reserves. Words and phrases, often technical, have been used which have particular meanings; definitions of these terms are in the Glossary on pages 153175 to 155.177. The weights and measures used are mainly metric units;conversions into other units are shown on page 155.177.
History
Rio Tinto’s predecessor companies were formed in 1873 and 1905. The Rio Tinto Company was formed by investors in1873 to mine ancient copper workings at Rio Tinto, near Seville in southern Spain. The Consolidated Zinc Corporation was incorporated in 1905 to treat zinc bearing mine waste at Broken Hill, New South Wales, Australia.
The RTZ Corporation (formerly The Rio Tinto-Zinc Corporation) was formed in 1962 by the merger of The Rio
Rio Tinto 2007 Form 20-F | 9 |
Tinto Company and The Consolidated Zinc Corporation.
CRA Limited (formerly Conzinc Riotinto of Australia Limited) was formed at the same time by a merger of the
Australian interests of The Consolidated Zinc Corporation and The Rio Tinto Company.
Between 1962 and 1995, both RTZ and CRA discovered important mineral deposits, developed major miningprojects and also grew through acquisition.
RTZ and CRA were unified in 1995 through a dual listed companies structure. This means the Group, with its common board of directors, is designed to place the shareholders of both Companies in substantially the same positionas if they held shares in a single enterprise owning all of the assets of both Companies.
In 1997, The RTZ Corporation became Rio Tinto plc and CRA Limited became Rio Tinto Limited, together known as the Rio Tinto Group. SinceOver the 1995 merger,past decade, the Group has continued to invest in developments andacquisitionsand acquisitions in keeping with its strategy.
In 2007, Rio Tinto completed an agreed takeover of the Canadian aluminium producer Alcan Inc. in a US$38.7 billion transaction that transforms the Group’s aluminium product group into a global leader in aluminium.
Contact details
The registered office of Rio Tinto plc is at 6 St James’s5 Aldermanbury Square, London, SW1Y 4LDEC2V 7HR (telephone: +44 20 7930 2399)7781 2000) and the registered office of Rio Tinto Limited is at Level 33, 120 Collins Street, Melbourne, Victoria 3000 (telephone: +61 3 9283 3333). Rio Tinto’s agent for service in the US is Shannon Crompton, secretary of Rio Tinto’s US holding companies, who may be contacted at Rio Tinto Services Inc., 80 State Street, Albany, New York, 12207-2543.
Rio Tinto |
CAPITAL PROJECTS
Rio Tinto is investing heavily in future growth opportunities from the Group’s broad portfolio of assets. Projects havebeenhave been financed out of internally generated funds. Major projects completed andin 2005-2007, together with ongoing projects are summarised below.
Project | Estimated cost | ||
(100% basis) | |||
US$m | |||
Completed in 2005 | |||
Iron ore –HIsmelt® plant (Rio Tinto: 60%) at Kwinana inWestern Australia. | 200 | The | |
Iron ore –Expansion of Yandicoogina mine. | 200 | Expansion completed in the third quarter. | |
Iron ore –Expansion of West | 105 | Project completed in the third quarter. | |
Titanium dioxide– Expansion of upgraded slag plant. | 76 | Commissioning started in first quarter. | |
Copper –Development of the Escondida Norte | 400 | First production occurred in 2005. | |
Iron ore –Expansion of port capacity to 116 | 685 | Focus on production ramp up following completionof construction. | |
Completed in 2006 | |||
Iron ore –Expansion of Hamersley Iron’s (Rio Tinto:100%) Tom Price and Marandoo mines and | 290 | The Marandoo and Nammuldi components arecomplete and Tom Price | |
Iron ore– Expansion by Robe River (Rio Tinto: 53%) | 200 | The project was completed on budget and ahead | |
Copper– Escondida sulphide leach (Rio Tinto: 30%) | 925 | The first cathode production from the | |
Titanium dioxide– | 79 | The project was completed in October three monthsahead of schedule and under budget. | |
Boric acid –Phase 2 of Rio Tinto Minerals boric | 50 | The project was completed on schedule and | |
Coking coal– Hail Creek (Rio Tinto: 82%) Expansion | 223 | The new dragline was commissioned early in thethird quarter of 2006. | |
2007 | |||
Iron ore– Expansion of | 226 | Project completed in March 2007. | |
Iron ore– Brownfields mine expansion of Hamersley’s(Rio Tinto 100%) Yandicoogina mine from 36 milliontonnes per annum to 52 million tonnes per annum. | 530 | First ore was produced in May 2007, with theproject completed at the end of the third quarter of2007 on time and on budget. | |
Iron ore– Expansion of Hamersley’s (Rio Tinto 100%)Dampier port (Phase B) from 116 million tonnes | 803 | This project was | |
Iron ore– Hope Downs development (Rio Tinto share:50% of mine and 100% of infrastructure). Construction of22 million tonnes per annum mine and relatedinfrastructure. | 980 | First production occurred in November 2007, threemonths ahead of schedule. The first train load tookplace in December 2007. | |
Rio Tinto 2007 Form 20-F | 11 |
CAPITAL PROJECTS (continued)
Ongoing | |||
Copper– Kennecott Utah Copper (Rio Tinto 100%) East1 pushback. The project extends the life of the open pit to2017 while retaining options for further underground oropen pit mining thereafter. | 170 | The project was approved in February 2005 andwork on the pushback continues. The pebblecrushing unit was commissioned in the third quarterof 2006. | |
Titanium dioxide– Construction by QMM (Rio | |||
Alumina– Expansion of the Gove Alumina Refinery (RioTinto 100%) from 2.0 to 3.8 million tonnes per annum. | 2,300 | Approved in September 2004, the expansion isexpected to reach full nameplate capacity by the endof 2008. | |
Aluminium– Development of the 370,000 tonne perannum greenfield Sohar smelter in Oman (Rio Tinto20%) | 1,700 | Approved in February 2005, first production isexpected in the third quarter of 2008. | |
Aluminium– Aluminium spent pot lining recycling plantin Quebec (Rio Tinto 100%). | 180 | Approved in September 2006, the plant is expectedto begin pot lining treatment operations in thesecond quarter of 2008. | |
Gold– Development of Cortez Hills (Rio | 504 | Approved in September 2005, the project | |
Approved in December 2005, works are on | |||
Diamonds– Argyle (Rio | Approved in December 2005, the undergrounddevelopment consisting of 34 km of tunnels andexcavations is currently 40% complete.Construction of the major undergroundinfrastructure commenced in February 2008. Fullproduction from the underground | ||
be achieved by December 2010. | |||
Copper– Northparkes (Rio | 160 | Approved in November 2006. Undergrounddevelopment has commenced and is on schedule forMay 2009 production start. | |
Energy– Clermont (Rio | 750 | Approved in January 2007, first shipments | |
Iron ore– Cape Lambert port expansion (Rio Tinto | Approved in January 2007, the project is forecast | ||
Iron ore– Wharf upgrade and shiploader replacement atEast Intercourse Island (Rio Tinto 100%). | 65 | The project is in progress and is expected to becomplete by May 2009. | |
Alumina– Expansion of Yarwun Alumina Refinery from1.4 to 3.4 million tonnes per annum. | 1,800 | Approved in July 2007, the expansion will morethan double annual production at Yarwun and isexpected to come onstream by 2011. | |
Iron ore– Expansion of Hope Downs Stage 2 (Rio Tinto50%) from 22 to 30 million tonnes per annum. | 350 | Approved in August 2007, the expansion will becomplete by early 2009. | |
Rio Tinto 2007 Form 20-F | 12 |
CAPITAL PROJECTS (continued)
Diamonds– Construction at Diavik (Rio Tinto 60%) of an underground mine. | 787 | Capital investment of US$563 million was approved in November 2007 in addition to US$224 million invested in 2006-2007 for the feasibility studies and related capital projects. First production from the underground mine is expected to commence in 2009 | |
Iron ore– Mesa A development (Rio Tinto 53%):construction of a 25 million tonne per annum mine andrelated infrastructure. | 901 | Approved in November 2007, the mine is forecast tobe complete by 2010 with a progressive ramp up to25 million tonnes per annum by 2011. | |
Iron ore– Brockman 4 development (Rio Tinto 100%):construction of a 22 million tonne per annum mine (PhaseA) and related infrastructure. | 1,521 | Approved in November 2007, Phase A of theproject, to 22 million tonnes is forecast to becomplete by 2010, with scope to expand further to36 million tonnes per annum by 2012. | |
Coking coal– extension and expansion of Kestrel mine(Rio Tinto share 80%). | 991 | Approved in December 2007, the investment willextend the life of the mine to 2031 and increaseproduction to an average of 5.7mtpa. | |
Nickel– Development of Eagle nickel mine in Michigan,US. | 300 | Approved in December 2007, this high grade nickeland copper mine is expected to commenceproduction in late 2009, delivering 16,000 tonnes ofnickel per annum over a seven year period. | |
Aluminium– Replacement of overhead cranes andupgrade of crane runways on Lines 1 and 2 at BoyneSmelters (Rio Tinto 59.4%). | 270 | Approved in January 2008, the mobile cranes andassociated runways on reduction Lines 1 and 2 willbe replaced. The project is estimated to becompleted by late 2010. | |
Aluminium– Replacement of Lines 1 and 2 carbon bakefurnace at Boyne Smelters (Rio Tinto 59.4%). | 347 | Approved in January 2008, the carbon bakingfurnace that supplies anodes to Lines 1 and 2 will bereplaced. The project is estimated to be completedby mid 2011. | |
Iron ore– Expansion to increase the production of ironore concentrate by the Iron Ore Company of Canada (RioTinto 58.7%) | 475 | Approved March 2008, the first phase of anexpansion programme intended to increase productioncapacity by 50 per cent to 22 million tonnes perannum by 2011. | |
ACQUISITIONS
Rio Tinto is also investing heavily in future growth opportunities from acquisitions. These opportunities have been financed out of internally generated funds and, in the the case of Alcan Inc., out of a US$40 billion credit facility which was fully underwritten and subsequently syndicated at floating rates of interest.
Asset | Estimated | Status | |
cost | |||
US$m | |||
Acquired in | |||
Iron ore– Hope Downs iron ore assets in | n/a | Rio Tinto reached agreement with | |
Acquired in 2006 | |||
Copper– Ivanhoe Mines (Rio Tinto: 9.9%) | 303 | Agreement to acquire a strategic stake including,upon completion of satisfactory a long | |
Copper– Northern Dynasty Minerals (Rio Tinto: 9.9%) | Increased stake to 19.8% during February 2007 | ||
DIVESTITURES
On the acquisition of Alcan Inc the Group announced an asset divestment target of at least US$10 billion and following the completion of a strategic review, which highlighted approximately US$30 billion of potential divestments, increased this target to at least US$15 billion. Rio Tinto will explore options for the sale of a shortlist of assets. These are all good businesses and any sales will be value driven and dependent on price.
Asset | Estimated | |||
proceeds | ||||
Divested in 2005 | ||||
Iron ore– Labrador Iron Ore Royalty Income | 130 | LIORIF has an interest of 15.1% in, and | ||
Other operations– Lihir Gold (Rio Tinto: 14.5%) | 295 | Rio Tinto relinquished its management | ||
Divested in 2006 | ||||
Aluminium –Eurallumina SpA (Rio Tinto: 56.2%) | n/a | Sold to RUSAL | ||
Diamonds– Ashton Mining of Canada Inc (Rio Tinto:51.7%) | n/a | Sold to Stornaway Diamond Corporation | ||
Divested in 2007 | ||||
Diamonds and Industrial Minerals –Lassing andEnnsdorf | 6 | Rio Tinto Minerals disposed of | ||
Divested in 2008 | ||||
Copper –Greens Creek mine (Rio Tinto: 70%) | 750 | Sale agreed to Hecla Mining Company, the Group’sminority partner. | ||
Copper –Cortez joint venture (Rio Tinto: 40%) | 1,695 | Sold to Barrick Gold Corporation, the Group’spartner, for a cash consideration plus a deferredbonus payment and a contingent royalty interest. | ||
Rio Tinto |
BUSINESS ENVIRONMENTS,ENVIRONMENT, MARKETS AND REGULATIONSREGULATION
Competitive environment
Rio Tinto is a major producer in all the metals and minerals markets in which it operates. It is generally among the top five global producers by volume. It has market shares for different commodities ranging from five per cent to 40 per cent. The competitive arena is spread across the globe.
Most of Rio Tinto’s competitors are private sector companies which are publicly quoted. Several are, like Rio Tinto, diversified in terms of commodity exposure, but others are focused on particular commodity segments. Metal and mineral markets are highly competitive, with few barriers to entry. They can be subject to price declines in real terms reflecting large productivity gains, increasing technical sophistication, better management and advances in information technology.
High quality, and long life mineral resources, the basis of good financial returns, are relatively scarce. Rio Tinto’s ownership of or interest in some of the world’s largest deposits enables it to contribute to long term market growth. World production volumes are likely to grow at least in line with global economic activity. The emergence of China and eventually India as major economies requiring metals and minerals for development could mean even higher market growth.
Economic overview
The world economy grew by 4.95.2 per cent in 20062007 on a purchasing power parity basis. This wasbasis, marking the fourthfifth successive year of global growth in excess of four per cent.
Growth was broad based, but once againThis extended global economic boom has inevitably not been without its stresses and strains. The implications of some of the excesses driven by previous loose monetary conditions and easy credit availability emerged last year. The full implications of the US housing downturn which started in the second half of 2005 began to be felt last year and China provided the bedrock for this expansion. Although thepace of US economic growth progressively slowed over the coursehas led to financial market volatility and asset writedowns by some of the year,major banking institutions. Despite this, the manufacturing sector of the US economy performed well during 2007 and growth across the country averaged 2.2 per cent.
Growth in the rest of the developed world was reasonably supportive for the mining sector. European Union economies, which in general are not subject to same imbalances as the housing market faltered, it still managed to rise by 3.3 per cent over its 2005 level. Chinese growthUS, grew above their long run trend rate for the second year was 10.5 per cent, its biggest annualincrease in over a decade.row. The Japanese economy, whilst volatile and still dependent for growth on external demand, expanded by 1.8 per cent.
The developed world accounts for around half of global metals demand but its importance to commodity markets is much less than it was as recently as the start of this decade. Changes in demand in other regions – most notably in China, but also increasingly in other emerging countries – has become much more important to the mining sector than cyclical fluctuations in consumption in the developed world.
So whilst weaker economic growth in the US, Europe and Japan acted to hold down growth in commodity demand last year, the effect of this was more than offset by accelerating economic activity elsewhere. China has been the principal driver behind this change. Its economy expanded 11.4 per cent last year and apparent copper demand in the country rose 2.4by close to 30 per cent. Aluminium demand was up a remarkable 40 per cent. Other emerging markets also achieved buoyant growth. The Asia region excluding Japan expanded by eight per cent and in Asia as a whole growth was 5.1 per cent.Latin America grew by 4.8five per centcent.
Given that 2007 started with already depleted stocks, and activity picked upwith the mining industry still struggling to add capacity despite increased levels of capital investment, the macroeconomic conditions outlined above were more than sufficient to generate some further increases in Europe, rising by 2.7 per cent on 2005. Despite this sustained rapid globalwhat were already high prices at the start of the year. A number of historic price highs were breached. Slower growth and higher commodityadditions to supply caused some metals prices global inflation remained relativelytame. Central banks have increased interest rates as the balance of inflationary pressure has shifted towards the upside.Even the Japanese Central Bank raised interest rates for the first time since 2001, but this has been a progressive development and both financial and foreign exchange markets have been stable.These strong underlying economic conditions, a general ongoing low level of commodity stock availability and continued delaysto fall back in bringing on new supply contributed to further large increases in commodity prices in the first half of 2006. In the second half of the year, but a number of bulk and energy commodities prices continued their upwards trajectory.
Amongst the base metals, lead, tin and nickel registered the greatest increase in annual average prices in 2007 (up 82 per cent, 59 per cent and 65 per cent year on year respectively). Aluminium and copper saw more modest increases of three per cent and six per cent, respectively. Zinc was the only LME metal to return a 2007 average price lower than in 2006, some general easing in prices was recorded as the pace of demand growth slowed and expectations of faster supply growth filtered through. There are however some important differences between trends inindividual commodities. With few exceptions prices remain well above their historical levels and significantly so inmany cases.Strong growth in Chinese iron ore imports continued into 2006 and the already tight market conditions worsened following heavy rain early ina sharp sell off through the year. After a record price increase of 71.5 per cent during 2005 a further 19 per centwas agreed in 2006. BenchmarkIron ore benchmark prices are set to rise a furtherincreased by 9.5 per cent in 2007.The cash priceApril but with additions to low cost supply still not keeping pace with demand the market has become even more dependent on high cost Indian and Chinese production. As a result of copper reached a record high of almost US$4 per pound in May 2006, but finished the year on a weaker tonethis and over the year averaged US$3.06 per pound.After lagging the other base metals in 2005 the aluminium price rose to an annual average of US$1.16 a pound in 2006, its highest in real terms for 17 years. Whilst the metal was strong,higher freight costs, spot alumina prices fell sharply later in the year as a surge in Chinese refinery production came on the market. After starting the year at US$650 a tonne, spot aluminaended not much above US$200.The volatility seen in metals markets last year was replicated in the energy sector. Spot prices for seaborne thermal coal reached the low US$50s a tonne early in 2006, but were US$10 per tonne off their peak later in the year.The annual average price was similariron ore to that achieved in 2005. After more than doubling in the 2005/6 marketing year,coking coal prices fell slightly in 2006/7 in response to mixed demand in their major markets. Prices for Powder River Basin coal in the US started the year at very high levels and although they ended the year somewhat weaker the annualaverage price was up 25-30 per cent (depending on grade) over 2005 levels. Uranium prices rose sharply during 2006on concerns about low stocks. Spot pricesChina doubled over the course of the year. Benchmark prices are likely to see more of the benefit of these strong market conditions in 2008.
In February 2008, Rio Tinto noted the announced settlements between another iron ore producer and steelmakers, and indicated it would continue to negotiate for a freight premium to reflect Australia’s proximity to Asia and major customers.
Australian thermal coal export prices ended the year on a high note of US$90 per tonne due to tight market conditions resulting from diminishing Chinese exports and infrastructure constraints on supply. The average annual price of US$65 per tonne was one third up on the 2006 level. In contrast, average US coal prices in the Powder River Basin were down some 20 per cent on their 2006 level, reflecting softer demand in the US. The star performer amongst energy prices was uranium, with average reported spot prices doubling year on year. Most trade in uranium takes place on longer contracted terms, and these have begun to reflect stronger market conditions.
Demand for industrial minerals such as borates and titanium minerals continuedhas held up well with prices holding
Rio Tinto 2007 Form 20-F | 15 |
Back to benefit from solid US demandContents
steady. The same applies to the diamond market, where supply trends have been supportive of prices.
One of the beneficiaries of financial uncertainty are often precious metals prices. The average gold price rose 15 per cent in 2007 to US$691 per ounce. Most of this increase took place later in the first halfyear and gold finished 2007 selling at record levels of the year but concerns about the US housing market dampened expectations in the latter part of the year.Diamond prices started the year on a very firm basis but conditions declined, due to monsoon flooding in majorIndian cutting and polishing centres, and increased stockholding costs in the jewellery supply chain.Gold prices have not seen the same degree of escalation as other metals but recorded a strong trend in 2006,averaging over US$600830 per ounce, over the year ascompared to a whole, up 362006 average of around US$602 per cent on 2005.ounce.
Many less widely traded metals have also continued to benefit from firm demand. TheIn particular, the molybdenum price averagedcontinued its remarkable performance, averaging US$2530 per pound in 2006, down on2007, close to its 2005record level but still historically high.in 2005.
Marketing channels
Rio Tinto’s marketing channels are described under ‘Marketing’ on page 66.93.
Governmental regulations
regulation
Rio Tinto is subject to extensive governmental regulationsregulation affecting all aspects of its operations and consistently seekstoseeks to apply best practice in all of its activities. Due to Rio Tinto’s product and geographical spread, there is unlikely to beany single governmental regulation that could have a material effect on the Group’s business.
Rio Tinto’s operations in Australia, New Zealand, and Indonesia are subject to state, provincial and federalregulationsfederal regulations of general application governing mining and processing, land tenure and use, environmental requirements,including site specific environmental licences, permits and statutory authorisations, workplace health and safety, trade and export, corporations, competition, access to infrastructure, foreign investment and taxation. Some operations areconductedare conducted under specific agreements with the respective governments and associated acts of parliament. In addition,Rio Tinto’s uranium operations in the Northern Territory, Australia and Namibia are subject to specific regulation in relation to mining and the export of uranium.
US and Canada based operations are subject to local, state, provincial and national regulations governing land tenure and use, environmental aspects of operations, product and workplace health and safety, trade and exportadministration, corporations, competition, securities and taxation. In relation to hydro-electric power generation in Canada, water rentals and royalties, as well as surplus power sales, are regulated by the Quebec and British Columbia provincial governments.
The South African Mineral and Petroleum Resources Development Act 2002, as read with the Empowerment Charter for the South African Mining Industry, targets the transfer (for fair value) of 26 per cent ownership of existingSouthexisting South African mining assets to historically disadvantaged South Africans (HDSAs) within ten years. Attached to theEmpowermentthe Empowerment Charter is a “scorecard” by which companies will be judged on their progress towards empowerment and the attainment of the target transfer of 26 per cent ownership. The scorecard also provides that in relation to existingminingexisting mining assets, 15 per cent ownership should vest in HDSAs within five years of 1 May 2004. Rio Tinto anticipates thatthethat the government of South Africa will continue working towards the introduction of new royalty payments in respect of mining tenements, expected to become effective during 2009.
Environmental regulation
Rio Tinto measures its performance against environmental regulation referred to in the previous section by rating incidents on a low, moderate, high, or critical scale of likelihood and consequence of impacting the environment. HighandHigh and critical ratings are reported to the Executive committee and the boardCommittee on social and environmental accountability, including progress with remedial actions. Prosecutions and other breaches are also used to gauge RioTinto’s performance.
In 2006,2007, there were nine high or critical environment incidents compared with eight reportablein 2006. These incidents were of a nature to impact the same number as in 2005. Threeenvironment or may have concerned local communities. Of these two impacted air quality, five resulted from water discharge and two were spills. Examples of these incidents resulted in spills which caused minor contamination.Four operations incurred fines in 2006 amounting to US$56,779 (predominantly relating to incidents in 2005) compared with three operations incurring fines of US$67,900 during 2005. The 2006 fines included:include:
• | |
• | Unauthorised discharge of mine water downstream of a dam as a result of poor communications with a contractor at Kestrel, Australia. |
• | Sewage discharged into a holding pond following a blockage in pumps at Weipa, Australia. |
• | Sea water used in cooling was discharged to the ocean at a higher temperature and pH than limits imposed by the |
• | |
• | Diesel leak from below the |
During 2007 three operations incurred fines amounting to US$9,633 (2006: US$56,779).
Further information in respect of the Group’s environmental performance is in the 2006Sustainable development reviewavailableincluded throughout this annual report and on the Rio Tinto website.
Rio Tinto |
GROUP MINES
Mine | Location | Access | Title/lease | |||
CBG Sangaredi | Road | |||||
Ely | Weipa, Queensland,Australia | Road and air | Alcan Queensland Pty. LimitedAgreement Act 1965 expires in 2048with 21 year right of renewal with atwo year notice period | |||
GBC Awaso(80%) | Awaso, Ghana | Road | Lease expires in 2022, renewable in 25 year periods | |||
Gove | Gove, Northern Territory,Australia | Road, air and port | 100% Leasehold (held in trust by theCommonwealth on behalf of theTraditional Owners until end of minelife) | |||
Porto Trombetas (MRN)(12%) | Porto Trombetas, Brazil | Air or port | Mineral rights granted forundetermined period |
Rio Tinto 2007 Form 20-F | 17 |
GROUP MINES(continued)
Mine | History | Type of mine | Power source | |||
RIO TINTO ALCAN | ||||||
CBG Sangaredi(23%) | Bauxite mining commenced in 1973.Shareholders are 51% Halco and49% Guinea. Alcan holds 45% ofHalco since 2004 and off-takes 45%.Current annual capacity is 13 milliontonnes. | Open cut | On site generation (fuel oil) | |||
Ely | Discovered in 1957; 100% secured in1965. In 1997, Ely Bauxite MiningProject Agreement signed with thelocal Aboriginal land owners.Bauxite Mining and ExchangeAgreement signed in 1998 withComalco to allow for extraction ofthe ore by Comalco. Miningcommenced in 2006, first oreextracted in 2007. | Supplied by Weipa | ||||
GBC Awaso(80%) | Bauxite mining commenced in 1940(100% British Aluminium). From1974 to 1997, Ghana held 55%,Alcan 45%; since 1998 Alcan 80%Ghana 20%. Annual capacity is onemillion tonnes, currently limited to750,000 tonnes by rail infrastructure. | Open cut | Electricity grid with on sitegeneration back up | |||
Gove | Bauxite mining commenced in 1970feeding both the Gove refinery andexport market capped at two milliontonnes per annum. Bauxite exportceased in 2006 with feed intended forthe expanded Gove Refinery. Currentproduction capacity about ten milliontonnes per annum with mine lifeestimated to 2025. | Open cut | Central power stationlocated at the Gove refinery | |||
Porto Trombetas (MRN)(12%) | In June 1974, an agreement wassigned between the shareholders ofMineração Rio do Norte S.A,consisting at that time of thefollowing companies: CVRD (41%),Alcan Aluminum Limited (19%),CB-Votorantim (10%), ReynoldsAlumínio do Brasil Ltda (5%), NorskHydro a.s. (5%), Mineração RioXingu Ltda (5%), A/S Aaardal ogSunndal Verk (5%), InstitutoNacional de Industria (5%) and RioTinto Zinc do Brasil Ltda (5%).Mineral extraction commenced inApril 1979. Initial productioncapacity 3.4 million tonnes annually.From October 2003, productioncapacity up to 16.3 million tonnes peryear. Capital structure currently: Vale(40%), BHP-Billiton (14.8%), RioTinto Alcan(12%), CBA (10%),Alcoa/Abalco (18.2%) and Hydro(5%). Production 17.8 million tonnesof wet and dry bauxite annually. | Open cut | On site generation (heavyoil, diesel) | |||
Rio Tinto 2007 Form 20-F | 18 |
GROUP MINES (continued)
Mine | Location | Access | Title/lease | |||
Weipa | Weipa, Queensland,Australia | Road, air and port | Queensland Government lease expiresin 2041 with option of 21 yearextension, then two years’ notice oftermination | |||
COPPER | ||||||
Escondida(30%) | Atacama Desert, Chile | Pipeline and road to | Rights conferred by | |||
Grasberg joint venture(40%) | Papua, Indonesia | Pipeline, road and port | Indonesian Government Contracts | |||
Kennecott Minerals Cortez/Pipeline (40%) (a) | Nevada, US | Road | Patented and unpatented | |||
miningclaims | ||||||
Kennecott Minerals Greens Creek (70%) (b) | Alaska, US | Port | Patented and unpatented | |||
miningclaims | ||||||
Kennecott Utah Copper Bingham Canyon | Near Salt Lake City, Utah, US | Pipeline, road and rail | Owned | |||
Northparkes(80%) | Goonumbla, New | Road and rail | State Government mining lease | |||
Palabora(58%) | Phalaborwa, | Lease from South | ||||
DIAMONDS | ||||||
Argyle Diamonds | Kimberley Ranges, | Road and air | Mining tenement held under | |||
Diavik(60%) | Air, ice road in winter | Mining leases from Canadian | ||||
Murowa(78%) | Zvishavane, Zimbabwe | Road and air | Claims and mining leases | |||
ENERGY | ||||||
Energy Resources ofAustralia(68%) Ranger | Northern Territory, Australia | Road | Leases granted by State | |||
Rio Tinto |
GROUP MINES (continued)
Mine | History | Type of mine | ||||||
Weipa | Bauxite mining commenced in 1961.Major upgrade completed in 1998.Open cut Rio Tinto interest increasedfrom 72.4% to 100% in 2000. In2004 a mine expansion wascompleted that has lifted annualcapacity to 16.5 million tonnes.Mining commenced on the adjacentEly mining lease in 2006, inaccordance with the 1998 agreementwith Alcan. A second shiploader thatincreases the shipping capability ofthe Weipa operation wascommissioned in 2006 | Open pit | On site generation; newpower stationcommissioned in 2006 | |||||
COPPER | ||||||||
Escondida(30%) | Production started in 1990 | Open pit | Supplied from SING | |||||
Grasberg joint venture(40%) | Joint venture interest acquired | Open pit and underground | Long term contract | |||||
Kennecott Minerals Cortez/Pipeline (40%) (a) | Gold production started at Cortez in1969; at Pipeline deposit in | Open pit | Public utility | |||||
Kennecott Minerals Greens Creek (70%) (b) | Redeveloped in 1997 | On site diesel generators | ||||||
Kennecott Utah Copper Bingham Canyon | Interest acquired in | Open pit | On site | |||||
Northparkes(80%) | Open pit | Supplied from State grid | ||||||
Palabora(58%) | Development of 20 year | Underground | Supplied by | |||||
DIAMONDS | ||||||||
Argyle Diamonds | Interest increased from 59.7%following purchase of Ashton | Open pit to undergroundin future | Long term contract | |||||
Diavik(60%) | Deposits discovered | Open pit to | On site diesel generators;installed capacity | |||||
Murowa(78%) | Discovered | Open pit | Supplied by ZESA | |||||
GROUP MINES
ENERGY | ||||||
Energy Resources ofAustralia(68%) Ranger | Mining commenced in 1981. Interestacquired through North in 2000. Lifeof mine extension to 2020 announcedin 2007 | Open pit | On site diesel/steam powergeneration | |||
Rio Tinto 2007Form 20-F | 20 |
GROUP MINES (continued)
Mine | Location | Access | Title/lease | |||
Rio Tinto Coal Australia Bengalla (30%) Blair Athol (71%) Hail Creek (82%) Hunter Valley Kestrel (80%) Mount Thorley Warkworth (42%) | New South Wales and Queensland, Australia | Road, rail, conveyor and port | Leases granted by State | |||
Rio Tinto Energy America Antelope Colowyo (20%) Cordero Rojo Decker (50%) Jacobs Ranch Spring Creek | Wyoming, Montana and Colorado, US | Rail and road | Leases from US and State Governments and private parties, with minimum coal production levels, and adherence to permit requirements and statutes | |||
Rössing Uranium(69%) | Namib Desert, Namibia | Rail, road and port | Federal lease | |||
INDUSTRIAL | ||||||
Rio Tinto | California, US | Road, rail and port | Owned | |||
Rio Tinto | Dampier, Lake MacLeod and Port Hedland, Western Australia | Road and port | ||||
Rio Tinto | Trimouns, France (other smaller operations in Australia, Europe and North America) | Road and rail | Owner of ground (orebody) and long term lease agreement to 2012 | |||
QIT-Fer et Titane | The Saguenay, | Rail and port (St Lawrence River) | Mining covered by two | |||
Richards Bay Minerals | Richards Bay, | Rail, road and port | Long term renewable | |||
IRON ORE | ||||||
Hamersley Iron Brockman Marandoo Mount Tom Price Nammuldi Paraburdoo Yandicoogina Channar (60%) Eastern Range (54%) | Hamersley Ranges, Western Australia | Railway and port (owned by Hamersley Iron and operated by Pilbara Iron) | Agreements for life of mine with Government of | |||
Rio Tinto |
GROUP MINES(continued)
Mine | History | Type of mine | Power source | |||
Rio Tinto Coal Australia Bengalla (30%) Blair Athol (71%) Hail Creek (82%) Hunter Valley Kestrel (80%) Mount Thorley Warkworth (42%) | Peabody Australian interests | Open cut and | State owned grid | |||
Rio Tinto Energy America Antelope Colowyo (20%) Cordero Rojo Decker (50%) Jacobs Ranch Spring Creek | Antelope, Spring Creek, Decker | Open cut | Supplied by IPPs | |||
Rössing Uranium(69%) | Production began in 1978. Life | Open pit | Namibian National Power | |||
INDUSTRIALMINERALS | ||||||
Rio Tinto | Deposit discovered in 1925, | Open pit | On site co-generation units | |||
Rio Tinto | Construction of the Dampier | Solar evaporation | Dampier supply | |||
Rio Tinto Talc | Production started in 1885; | Open pit | Supplied by | |||
QIT-Fer et Titane | Production started in 1950; | Open pit | Long term contract | |||
Richards Bay Minerals (50%) | Production started in 1977; | Beach sand dredging | Contract with | |||
IRON ORE | ||||||
Hamersley Iron Brockman Marandoo Mount Tom Price Nammuldi Paraburdoo Yandicoogina Channar (60%) Eastern Range (54%) | Annual capacity increased to | Open | Supplied through | |||
Rio Tinto 2007 Form 20-F | 22 |
GROUP MINES (continued)
Mine | Location | Access | Title/lease | |||
Hope Downs JointVenture(50% mine, 100%infrastructure) | Pilbara region, WesternAustralia | Railway owned andoperated by Rio Tinto | Agreements for life of mine withGovernment of Western Australia | |||
Iron Ore Company ofCanada(59%) | ||||||
Rio Tinto BrasilCorumbá | Matto Grosso do Sul, Brazil | Road, air and river | Government licence for undeterminedperiod | |||
Robe River IronAssociates (53%)Mesa JWest Angelas | Pilbara region, WesternAustralia | Railway and port (ownedby Robe River andoperated by Pilbara Iron) | Agreements for life of mine withGovernment of Western Australia | |||
Rio Tinto 2007 Form 20-F | 23 |
GROUP MINES (continued)
Mine | History | Type of mine | Power source | |||
Hope Downs JointVenture(50% mine, 100%infrastructure) | Joint venture venture between RioTinto and Hancock Prospecting PtyLimited. Construction of Stage 1 to22 million tonnes per annumcommenced April 2006 and firstproduction occurred November 2007.Stage 2 to 30 million tonnes perannum has been approved and isforecast to be completed by Q1 2009 | Open pit | Supplied through theintegrated Hamersley andRobe power networkoperated by Pilbara Iron | |||
Iron Ore Company ofCanada(59%) | Current operation began in 1962 andhas processed over one billion tonnesof crude ore since. Annual capacitynow 17.5 million tonnes ofconcentrate of which 13.5 milliontonnes can be pelletised Interestacquired in 2000 through Northacquisition | Open pit | Supplied by NewfoundlandHydro under long termcontract | |||
Rio Tinto BrasilCorumbá | Iron ore production started in 1978;interest acquired in 1991 | Open pit | Supplied by ENERSUL | |||
Robe River Iron Associates(53%) Mesa | First shipment in | Open pit | Supplied through | |||
Notes | |
(a) | On 5 March 2008 the Group completed the sale of its interest in the Cortez joint venture to its joint venture partner for a cash consideration of US$1,695 million, a deferred bonus payment in the event of additional reserves and a contingent royalty interest. |
(b) | On 12 February 2008 the Group reached agreement for the sale of Greens Creek to its minority partner for US$750 million. |
Rio Tinto |
GROUP SMELTERS AND REFINERIES
Title/lease | Plant type/product | Capacity as of 31 December 2007 | ||||||||
100% Freehold | Aluminium smelter | 415,000 tonnes per yearaluminium | ||||||||
Alouette(40%) | Sept-Iles, Quebec,Canada | 100% Freehold | Aluminium smelter producingaluminium ingot, sow | 572,000 tonnes per yearaluminium | ||||||
Alucam(46.7%) | Edea, Cameroon | 100% Freehold | Aluminium smelter producingaluminium slab, ingot | 100,000 tonnes per yearaluminium | ||||||
Anglesey(51%) | Anglesey, Wales, UK | 100% Freehold | Aluminium smelter producingaluminium billet, block, sow | 145,000 tonnes per yearaluminium | ||||||
Arvida | Arvida, Quebec,Canada | 100% Freehold | Aluminium smelter producingaluminium billet, molten metal | 166,000 tonnes per yearaluminium | ||||||
Beauharnois | Beauharnois, Quebec,Canada | 100% Freehold | Aluminium smelter producingaluminium ingot foundry | 52,000 tonnes per yearaluminium | ||||||
Becancour(25%) | Becancour, Quebec,Canada | 100% Freehold | Aluminium smelter producingaluminium billet, slab, t-foundry,t-bar | 404,000 tonnes per year aluminium | ||||||
Bell Bay | Bell Bay, | 100% Freehold | Aluminium smelter | 178,000 tonnes per yearaluminium | ||||||
Boyne IslandSmelters(59%) | Boyne Island,Queensland, Australia | 100% Freehold | Aluminium smelter producingaluminium ingot, billet, t-bar | 545,000 tonnes per yearaluminium | ||||||
Dunkerque | Dunkerque, France | 100% Freehold | Aluminium smelter producingaluminium slab, t-foundry, t-bar | 259,000 tonnes per yearaluminium | ||||||
Gardanne | Gardanne, France | 100% Freehold | Refinery producing specialtyaluminas | 635,000 tonnes peryear specialtyaluminas(including 133000 tonnes of smeltergrade aluminas) | ||||||
Gove | Gove, NorthernTerritory, Australia | 100% Leasehold.Commonwealth land held(in trust on behalf ofTraditional Owners).Numerous lots withvarying expiry datesstarting 2011 | Refinery producing alumina | 2,000,000 tonnes per yearalumina | ||||||
La Grande-Baie | Grande-Baie, Quebec,Canada | 100% Freehold | Aluminium smelter producingaluminium slab, sow, moltenmetal | 207,000 tonnes per yearaluminium | ||||||
ISAL | Reykjavik, Iceland | 100% Freehold | Aluminium smelter producingaluminium slab, t-bar | 179,000 tonnes per yearaluminium | ||||||
Kitimat | Kitimat, BritishColumbia, Canada | 100% Freehold | Aluminium smelter producingaluminium billet, slab, ingot | 277,000 tonnes per yearaluminium | ||||||
Laterriere | Laterriere, Quebec,Canada | 100% Freehold | Aluminium smelter producingaluminium slab, t-bar, moltenmetal | 228,000 tonnes per yearaluminium | ||||||
Lochaber | Fort William,Scotland, UK | 100% Freehold | Aluminium smelter producingaluminium slab, t-bar | 43,000 tonnes per yearaluminium | ||||||
Lynemouth | Lynemouth,Northumberland, UK | 100% Freehold | Aluminium smelter producingaluminium slab, t-bar | 178,000 tonnes per yearaluminium | ||||||
Ningxia(50%) | Qingtongxia, China | 100% Freehold | Aluminium smelter producingaluminium ingot | 152,000 tonnes peryear aluminium | ||||||
QueenslandAlumina(80%) | Gladstone,Queensland, Australia | 73.3% Freehold. 26.7% Leasehold (ofwhich more than 80%expires in 2026 and after) | Refinery producing alumina | 3,953,000 tonnes per yearalumina | ||||||
Sao Luis (Alumar)(10%) | Sao Luis, Maranhao,Brazil | 100% Freehold | Refinery producing alumina | 140,000 tonnes peryear(10%) of aluminawhich will increase to350,000 tonnes per yearafter expansion in 2009 | ||||||
St-Jean-de-Maurienne | St-Jean-de-Maurienne,France | 100% Freehold | Aluminium smelter producingaluminium slab, rod | 135,000 tonnes per yearaluminium | ||||||
Rio Tinto 2007 Form 20-F | 25 |
GROUP SMELTERS AND REFINERIES (continued)
Smelter/refinery | Location | Title/lease | Plant type/product | Capacity as of 31 December 2007 | ||||
Sebree | Kentucky, US | 100% Freehold | Aluminium smelter producingaluminium billet, ingot foundry, t-bar | 196,000 tonnes per year aluminium | ||||
100% Freehold | Aluminium smelter | |||||||
SORAL (50%) | Husnes, Norway | 100% Freehold | Aluminium smelter producingaluminium billet | 164,000 tonnes per yearaluminium | ||||
19.6% Freehold. 80.4%Leasehold (expiring in2029 and use of certainCrown land) | Aluminium smelter producingaluminium ingot, billet, t-bar | 352,000 tonnes per yearaluminium | ||||||
Tomago(51.6%) | Tomago, New SouthWales, Australia | Aluminium smelter producingaluminium billet, slab, ingot | 520,000 tonnes per yearaluminium | |||||
Vaudreuil(Jonquiere) | Quebec, Canada | 100% Freehold | Refinery producing alumina | |||||
year alumina | ||||||||
Yarwun | Gladstone,Queensland, Australia | 97% Freehold. 3% Leasehold (expiring in2101 and after) | Refinery producing alumina | 1,400,000 tonnes peryear alumina | ||||
COPPER GROUP | ||||||||
Kennecott UtahCopper | Magna, Salt LakeCity, Utah, US | 100% Freehold | Flash smelting furnace/Flashconvertor furnace copper refinery | 335,000 tonnes per yearrefined copper | ||||
Palabora(58%) | Phalaborwa, SouthAfrica | 100% Freehold | Reverberatory Pierce Smithcopper refinery | 130,000 tonnes per yearrefined copper | ||||
Boron | California, US | 100% Freehold | Borates refinery | 565,000 tonnes per yearboric oxide | ||||
QIT-Fer et TitaneSorel Plant | Sorel-Tracy, Quebec,Canada | 100% Freehold | Ilmenite smelter | 1,100,000 tonnes peryear titanium dioxideslag, 900,000 tonnes peryear iron | ||||
Richards BayMinerals(50%) | Richards Bay, SouthAfrica | 100% Freehold | Ilmenite smelter | 1,060,000 tonnes peryear titanium dioxideslag | ||||
IRON ORE GROUP | ||||||||
HIsmelt®(60%) | Kwinana, WesternAustralia | 100% Leasehold (expiringin 2010 with rights ofrenewal for further 25 yearterms) | HIsmelt®ironmaking plantproducing pig iron | 800,000 tonnes per yearpig iron | ||||
IOC Pellet Plant(59%) | Labrador City,Newfoundland,Canada | 100% Leaseholds (expiringin 2020, 2022 and 2025with rights of renewal forfurther terms of 30 years) | Pellet induration furnacesproducing multiple iron ore pellettypes | 13,500,000 tonnes per year pellet | ||||
Rio Tinto 2007 Form 20-F | 26 |
GROUP POWER PLANTS
Smelter/refinery | Location | Title/lease | Plant type/product | Capacity as of | ||||
31 December 2007 | ||||||||
RIO TINTO ALCAN | ||||||||
Daba Power Plant(21.8%) | Qingtongxia, China | 100% Freehold | Thermal power station | 1,200 megawatts | ||||
Gladstone Power Station(42%) | Gladstone, Queensland,Australia | 100% Freehold | Thermal power station | 1,680 megawatts | ||||
100% Freehold | ||||||||
100% Freehold | ||||||||
420 megawatts | ||||||||
100% | ||||||||
100% Freehold | Hydro-electric power | 2,687 megawatts | ||||||
Vigelands Power Station | Nr Kristiansand, Norway | 100% | ||||||
Rio Tinto |
METALS AND MINERALS PRODUCTION
2004 | 2005 | 2006 | ||||||||||||
Production (a) | Production (a) | Production(a) | ||||||||||||
Rio Tinto | Total | Rio Tinto | Total | Rio Tinto | Total | Rio Tinto | ||||||||
% share (b) | share | share | share | |||||||||||
ALUMINA (’000 tonnes) | ||||||||||||||
Eurallumina (Italy) (c) | — | 1,064 | 597 | 1,070 | 601 | 914 | 513 | |||||||
Queensland Alumina (Australia) | 38.6 | 3,778 | 1,459 | 3,953 | 1,526 | 3,871 | 1,494 | |||||||
Yarwun (Australia) (d) | 100.0 | 175 | 175 | 835 | 835 | 1,240 | 1,240 | |||||||
Rio Tinto total | 2,231 | 2,963 | 3,247 | |||||||||||
ALUMINIUM (refined) (’000 tonnes) | ||||||||||||||
Anglesey (UK) | 51.0 | 144.8 | 73.8 | 143.9 | 73.4 | 143.8 | 73.3 | |||||||
Bell Bay (Australia) | 100.0 | 162.0 | 162.0 | 173.8 | 173.8 | 177.5 | 177.5 | |||||||
Boyne Island (Australia) | 59.4 | 540.5 | 321.2 | 544.9 | 326.2 | 545.1 | 325.0 | |||||||
Tiwai Point (New Zealand) | 79.4 | 350.3 | 279.5 | 351.4 | 280.3 | 337.3 | 268.9 | |||||||
Rio Tinto total | 836.5 | 853.7 | 844.7 | |||||||||||
BAUXITE (’000 tonnes) | ||||||||||||||
Boké (Guinea) (e) | — | 5,773 | 179 | — | — | — | — | |||||||
Weipa (Australia) | 100.0 | 12,649 | 12,649 | 15,474 | 15,474 | 16,139 | 16,139 | |||||||
Rio Tinto total | 12,828 | 15,474 | 16,139 | |||||||||||
BORATES (’000 tonnes)(f) | ||||||||||||||
Rio Tinto Minerals - Boron (US) | 100.0 | 543 | 543 | 540 | 540 | 538 | 538 | |||||||
Rio Tinto Minerals (Argentina) | 100.0 | 22 | 22 | 20 | 20 | 15 | 15 | |||||||
Rio Tinto total | 565 | 560 | 553 | |||||||||||
COAL – HARD COKING (’000 tonnes) | ||||||||||||||
Rio Tinto Coal Australia(g) | ||||||||||||||
Hail Creek Coal (Australia) (h) | 82.0 | 5,104 | 4,633 | 5,900 | 4,838 | 4,544 | 3,726 | |||||||
Kestrel Coal (Australia) | 80.0 | 2,659 | 2,127 | 2,946 | 2,357 | 2,729 | 2,183 | |||||||
Rio Tinto total hard coking coal | 6,760 | 7,195 | 5,909 | |||||||||||
COAL – OTHER* (’000 tonnes) | ||||||||||||||
Rio Tinto Coal Australia(g) | ||||||||||||||
Bengalla (Australia) | 30.3 | 5,312 | 1,609 | 5,965 | 1,806 | 5,544 | 1,679 | |||||||
Blair Athol (Australia) | 71.2 | 12,229 | 8,712 | 10,600 | 7,551 | 10,190 | 7,259 | |||||||
Hunter Valley Operations (Australia) | 75.7 | 13,269 | 10,046 | 12,374 | 9,369 | 12,024 | 9,104 | |||||||
Kestrel Coal (Australia) | 80.0 | 623 | 499 | 774 | 619 | 863 | 691 | |||||||
Mount Thorley Operations (Australia) | 60.6 | 3,548 | 2,149 | 3,962 | 2,400 | 3,895 | 2,359 | |||||||
Tarong Coal (Australia) | 100.0 | 7,004 | 7,004 | 6,470 | 6,470 | 6,979 | 6,979 | |||||||
Warkworth (Australia) | 42.1 | 6,954 | 2,926 | 6,293 | 2,647 | 7,342 | 3,089 | |||||||
Total Australian other coal | 32,943 | 30,863 | 31,159 | |||||||||||
Rio Tinto Energy America(i) | ||||||||||||||
Antelope (US) | 100.0 | 26,928 | 26,928 | 27,174 | 27,174 | 30,749 | 30,749 | |||||||
Colowyo (US) | (j) | 5,788 | 5,788 | 5,325 | 5,325 | 5,754 | 5,754 | |||||||
Cordero Rojo (US) | 100.0 | 35,233 | 35,233 | 34,234 | 34,234 | 36,094 | 36,094 | |||||||
Decker (US) | 50.0 | 7,831 | 3,916 | 6,288 | 3,144 | 6,449 | 3,225 | |||||||
Jacobs Ranch (US) | 100.0 | 34,979 | 34,979 | 33,823 | 33,823 | 36,258 | 36,258 | |||||||
Spring Creek (US) | 100.0 | 10,892 | 10,892 | 11,881 | 11,881 | 13,181 | 13,181 | |||||||
Total US coal | 117,734 | 115,580 | 125,260 | |||||||||||
Rio Tinto total other coal | 150,677 | 146,443 | 156,418 | |||||||||||
2007 | 2006 | 2005 | ||||||||||||
Production (a) | Production (a) | Production (a) | ||||||||||||
Rio Tinto | Total | Rio Tinto | Total | Rio Tinto | Total | Rio Tinto | ||||||||
% share (b) | share | share | share | |||||||||||
ALUMINA (’000 tonnes) | ||||||||||||||
Eurallumina (Italy) (c) | — | — | — | 914 | 513 | 1,070 | 601 | |||||||
Gardanne (France) (d) | 100.0 | 21 | 21 | |||||||||||
Gove (Australia) (d) | 100.0 | 405 | 405 | |||||||||||
Jonquiere (Canada) (d) | 100.0 | 252 | 252 | |||||||||||
Queensland Alumina (Australia) (d) (e) | 80.0 | 3,816 | 1,766 | 3,871 | 1,494 | 3,953 | 1,526 | |||||||
Sao Luis (Alumar) (Brazil) (d) | 10.0 | 288 | 29 | |||||||||||
Yarwun (Australia) (d) (f) | 100.0 | 1,260 | 1,260 | 1,240 | 1,240 | 835 | 835 | |||||||
Speciality Plants (Canada/France/Germany) (d) | 100.0 | 144 | 144 | |||||||||||
Rio Tinto total | 3,877 | 3,247 | 2,963 | |||||||||||
ALUMINIUM (refined) (’000 tonnes) | ||||||||||||||
Alma (Canada) (d) | 100.0 | 80.1 | 80.1 | |||||||||||
Alouette (Sept-Iles) (Canada) (d) | 40.0 | 108.9 | 43.5 | |||||||||||
Alucam (Edea) (Cameroon) (d) | 46.7 | 18.8 | 8.8 | |||||||||||
Anglesey (UK) | 51.0 | 144.7 | 73.3 | 143.8 | 73.3 | 143.9 | 73.4 | |||||||
Arvida (Canada) (d) | 100.0 | 31.8 | 31.8 | |||||||||||
Beauharnois (Canada) (d) | 100.0 | 9.8 | 9.8 | |||||||||||
Becancour (Canada) (d) | 25.1 | 80.1 | 20.1 | |||||||||||
Bell Bay (Australia) | 100.0 | 178.3 | 178.3 | 177.5 | 177.5 | 173.8 | 173.8 | |||||||
Boyne Island (Australia) | 59.4 | 550.3 | 329.6 | 545.1 | 325.0 | 544.9 | 326.2 | |||||||
Dunkerque (France) (d) | 100.0 | 49.5 | 49.5 | |||||||||||
Grande-Baie (Canada) (d) | 100.0 | 39.7 | 39.7 | |||||||||||
ISAL (Reykjavik) (Iceland) (d) | 100.0 | 35.0 | 35.0 | |||||||||||
Kitimat (Canada) (d) | 100.0 | 46.8 | 46.8 | |||||||||||
Lannemezan (France) (d) | 100.0 | 5.0 | 5.0 | |||||||||||
Laterriere (Canada) (d) | 100.0 | 44.0 | 44.0 | |||||||||||
Lochaber (UK) (d) | 100.0 | 8.3 | 8.3 | |||||||||||
Lynemouth (UK) (d) | 100.0 | 33.3 | 33.3 | |||||||||||
Ningxia (Qingtongxia) (China) (d) | 50.0 | 30.9 | 15.5 | |||||||||||
Sebree (USA) (d) | 100.0 | 36.8 | 36.8 | |||||||||||
Shawinigan (Canada) (d) | 100.0 | 18.3 | 18.3 | |||||||||||
SORAL (Husnes) (Norway) (d) | 50.0 | 32.0 | 16.0 | |||||||||||
St-Jean-de Maurienne (France) (d) | 100.0 | 25.2 | 25.2 | |||||||||||
Tiwai Point (New Zealand) | 79.4 | 353.0 | 280.9 | 337.3 | 268.9 | 351.4 | 280.3 | |||||||
Tomago (Australia) (d) | 51.6 | 97.4 | 50.2 | |||||||||||
Rio Tinto total | 1479.7 | 844.7 | 853.7 | |||||||||||
BAUXITE (’000 tonnes) | ||||||||||||||
Awaso (Ghana) (d) (g) | 80.0 | 216 | 173 | |||||||||||
Gove (Australia) (d) | 100.0 | 985 | 985 | |||||||||||
Porto Trombetas (MRN) (Brazil) (d) | 12.0 | 3,392 | 407 | |||||||||||
Sangaredi (Guinea) (d) | (h) | 2,774 | 1,248 | |||||||||||
Weipa (Australia) | 100.0 | 18,209 | 18,209 | 16,319 | 16,319 | 15,604 | 15,604 | |||||||
Rio Tinto total | 21,022 | 16,319 | 15,604 | |||||||||||
BORATES (’000 tonnes) (i) | ||||||||||||||
Rio Tinto Minerals – Boron (US) | 100.0 | 541 | 541 | 538 | 538 | 540 | 540 | |||||||
Rio Tinto Minerals – Argentina (Argentina) | 100.0 | 19 | 19 | 15 | 15 | 20 | 20 | |||||||
Rio Tinto total | 560 | 553 | 560 | |||||||||||
COAL – HARD COKING (’000 tonnes) | ||||||||||||||
Rio Tinto Coal Australia | ||||||||||||||
Hail Creek Coal (Australia) | 82.0 | 5,012 | 4,110 | 4,544 | 3,726 | 5,900 | 4,838 | |||||||
Kestrel Coal (Australia) | 80.0 | 2,586 | 2,069 | 2,729 | 2,183 | 2,946 | 2,357 | |||||||
Rio Tinto total hard coking coal | 6,179 | 5,909 | 7,195 | |||||||||||
Rio Tinto 2007 Form 20-F | 28 |
METALS AND MINERALS PRODUCTION (continued)
2007 | 2006 | 2005 | ||||||||||||
Production (a) | Production (a) | Production (a) | ||||||||||||
Rio Tinto | Total | Rio Tinto | Total | Rio Tinto | Total | Rio Tinto | ||||||||
% share (b) | share | share | share | |||||||||||
COAL – OTHER* (’000 tonnes) | ||||||||||||||
Rio Tinto Coal Australia | ||||||||||||||
Bengalla (Australia) | 30.3 | 5,155 | 1,561 | 5,544 | 1,679 | 5,965 | 1,806 | |||||||
Blair Athol (Australia) | 71.2 | 7,924 | 5,645 | 10,190 | 7,259 | 10,600 | 7,551 | |||||||
Hunter Valley Operations (Australia) | 75.7 | 10,094 | 7,642 | 12,024 | 9,104 | 12,374 | 9,369 | |||||||
Kestrel Coal (Australia) | 80.0 | 1,035 | 828 | 863 | 691 | 774 | 619 | |||||||
Mount Thorley Operations (Australia) | 60.6 | 2,924 | 1,771 | 3,895 | 2,359 | 3,962 | 2,400 | |||||||
Tarong Coal (Australia) | 100.0 | 4,510 | 4,510 | 6,979 | 6,979 | 6,470 | 6,470 | |||||||
Warkworth (Australia) | 42.1 | 5,775 | 2,430 | 7,342 | 3,089 | 6,293 | 2,647 | |||||||
Total Australian other coal | 24,388 | 31,159 | 30,863 | |||||||||||
Rio Tinto Energy America | ||||||||||||||
Antelope (US) | 100.0 | 31,267 | 31,267 | 30,749 | 30,749 | 27,174 | 27,174 | |||||||
Colowyo (US) | (j) | 5,077 | 5,077 | 5,754 | 5,754 | 5,325 | 5,325 | |||||||
Cordero Rojo (US) | 100.0 | 36,712 | 36,712 | 36,094 | 36,094 | 34,234 | 34,234 | |||||||
Decker (US) | 50.0 | 6,340 | 3,170 | 6,449 | 3,225 | 6,288 | 3,144 | |||||||
Jacobs Ranch (US) | 100.0 | 34,565 | 34,565 | 36,258 | 36,258 | 33,823 | 33,823 | |||||||
Spring Creek (US) | 100.0 | 14,291 | 14,291 | 13,181 | 13,181 | 11,881 | 11,881 | |||||||
Total US coal | 125,083 | 125,260 | 115,580 | |||||||||||
Rio Tinto total other coal | 149,471 | 156,419 | 146,443 | |||||||||||
COPPER (mined) (’000 tonnes) | ||||||||||||||
Bingham Canyon (US) | 100.0 | 212.2 | 212.2 | 265.6 | 265.6 | 220.6 | 220.6 | |||||||
Escondida (Chile) | 30.0 | 1,405.5 | 421.6 | 1,313.4 | 394.0 | 1,270.2 | 381.1 | |||||||
Grasberg – Joint Venture (Indonesia) (k) | 40.0 | 569.4 | 28.4 | 115.5 | 46.2 | 273.9 | 109.6 | |||||||
Northparkes (Australia) | 80.0 | 43.1 | 34.5 | 83.3 | 66.6 | 54.0 | 43.2 | |||||||
Palabora (South Africa) (l) | 57.7 | 71.4 | 41.2 | 61.5 | 31.1 | 61.2 | 30.0 | |||||||
Rio Tinto total | 737.9 | 803.5 | 784.4 | |||||||||||
COPPER (refined) (’000 tonnes) | ||||||||||||||
Escondida (Chile) | 30.0 | 238.4 | 71.5 | 134.4 | 40.3 | 143.9 | 43.2 | |||||||
Kennecott Utah Copper (US) | 100.0 | 265.6 | 265.6 | 217.9 | 217.9 | 232.0 | 232.0 | |||||||
Palabora (South Africa) (l) | 57.7 | 91.7 | 52.9 | 81.2 | 40.9 | 80.3 | 39.3 | |||||||
Rio Tinto total | 390.0 | 299.2 | 314.5 | |||||||||||
DIAMONDS (’000 carats) | ||||||||||||||
Argyle (Australia) | 100.0 | 18,744 | 18,744 | 29,078 | 29,078 | 30,476 | 30,476 | |||||||
Diavik (Canada) | 60.0 | 11,943 | 7,166 | 9,829 | 5,897 | 8,272 | 4,963 | |||||||
Murowa (Zimbabwe) | 77.8 | 145 | 113 | 240 | 187 | 251 | 195 | |||||||
Rio Tinto total | 26,023 | 35,162 | 35,635 | |||||||||||
GOLD (mined) (‘000 ounces) | ||||||||||||||
Barneys Canyon (US) | 100.0 | 11 | 11 | 15 | 15 | 16 | 16 | |||||||
Bingham Canyon (US) | 100.0 | 397 | 397 | 523 | 523 | 401 | 401 | |||||||
Cortez/Pipeline (US) (m) | 40.0 | 538 | 215 | 444 | 178 | 904 | 361 | |||||||
Escondida (Chile) | 30.0 | 187 | 56 | 170 | 51 | 183 | 55 | |||||||
Grasberg – Joint Venture (Indonesia) (k) | 40.0 | 2,689 | 423 | 238 | 95 | 1,676 | 670 | |||||||
Greens Creek (US) (m) | 70.3 | 68 | 48 | 63 | 44 | 73 | 51 | |||||||
Kelian (Indonesia) | 90.0 | — | — | — | — | 43 | 38 | |||||||
Lihir (Papua New Guinea) (n) | — | — | — | — | — | 424 | 61 | |||||||
Northparkes (Australia) | 80.0 | 79 | 63 | 95 | 76 | 57 | 46 | |||||||
Rawhide (US) | 51.0 | 19 | 10 | 26 | 13 | 35 | 18 | |||||||
Others | — | 19 | 11 | 18 | 9 | 15 | 7 | |||||||
Rio Tinto total | 1,233 | 1,003 | 1,726 | |||||||||||
GOLD (refined) (’000 ounces) | ||||||||||||||
Kennecott Utah Copper (US) | 100.0 | 523 | 523 | 462 | 462 | 369 | 369 | |||||||
* | Coal – other includes thermal coal, semi-soft coking coal and semi-hard coking coal. |
Rio Tinto |
METALS AND MINERALS PRODUCTION continued(continued)
2004 | 2005 | 2006 | ||||||||||||
Production (a) | Production (a) | Production(a) | ||||||||||||
Rio Tinto | Total | Rio Tinto | Total | Rio Tinto | Total | Rio Tinto | ||||||||
% share (b) | share | share | share | |||||||||||
COPPER (mined) (’000 tonnes) | ||||||||||||||
Bingham Canyon (US) | 100.0 | 263.7 | 263.7 | 220.6 | 220.6 | 265.6 | 265.6 | |||||||
Escondida (Chile) | 30.0 | 1,207.1 | 362.1 | 1,270.2 | 381.1 | 1,313.4 | 394.0 | |||||||
Grasberg – FCX (Indonesia) (k) | — | 396.4 | 5.5 | — | — | — | — | |||||||
Grasberg – Joint Venture (Indonesia) (k) | 40.0 | 120.0 | 48.0 | 273.9 | 109.6 | 115.5 | 46.2 | |||||||
Neves Corvo (Portugal) (l) | — | 46.9 | 23.0 | — | — | — | — | |||||||
Northparkes (Australia) | 80.0 | 30.0 | 24.0 | 54.0 | 43.2 | 83.3 | 66.6 | |||||||
Palabora (South Africa) (m) | 57.7 | 54.4 | 26.8 | 61.2 | 30.0 | 61.5 | 31.1 | |||||||
Rio Tinto total | 753.1 | 784.4 | 803.5 | |||||||||||
COPPER (refined) (’000 tonnes) | ||||||||||||||
Atlantic Copper (Spain) (k) | — | 58.4 | 7.0 | — | — | — | — | |||||||
Escondida (Chile) | 30.0 | 152.1 | 45.6 | 143.9 | 43.2 | 134.4 | 40.3 | |||||||
Kennecott Utah Copper (US) | 100.0 | 246.7 | 246.7 | 232.0 | 232.0 | 217.9 | 217.9 | |||||||
Palabora (South Africa) (m) | 57.7 | 67.5 | 33.2 | 80.3 | 39.3 | 81.2 | 40.9 | |||||||
Rio Tinto total | 332.6 | 314.5 | 299.2 | |||||||||||
DIAMONDS (’000 carats) | ||||||||||||||
Argyle (Australia) | 100.0 | 20,620 | 20,620 | 30,476 | 30,476 | 29,078 | 29,078 | |||||||
Diavik (Canada) | 60.0 | 7,575 | 4,545 | 8,272 | 4,963 | 9,829 | 5,897 | |||||||
Murowa (Zimbabwe) (n) | 77.8 | 47 | 36 | 251 | 195 | 240 | 187 | |||||||
Rio Tinto total | 25,202 | 35,635 | 35,162 | |||||||||||
GOLD (mined) (’000 ounces) | ||||||||||||||
Barneys Canyon (US) | 100.0 | 22 | 22 | 16 | 16 | 15 | 15 | |||||||
Bingham Canyon (US) | 100.0 | 308 | 308 | 401 | 401 | 523 | 523 | |||||||
Cortez/Pipeline (US) | 40.0 | 1,051 | 421 | 904 | 361 | 444 | 178 | |||||||
Escondida (Chile) | 30.0 | 217 | 65 | 183 | 55 | 170 | 51 | |||||||
Grasberg – FCX (Indonesia) (k) | — | 1,377 | 14 | — | — | — | — | |||||||
Grasberg – Joint Venture (Indonesia) (k) | 40.0 | 207 | 83 | 1,676 | 670 | 238 | 95 | |||||||
Greens Creek (US) | 70.3 | 86 | 61 | 73 | 51 | 63 | 44 | |||||||
Kelian (Indonesia) | 90.0 | 328 | 295 | 43 | 38 | — | — | |||||||
Lihir (Papua New Guinea) (o) | — | 599 | 87 | 424 | 61 | — | — | |||||||
Morro do Ouro (Brazil) (p) | — | 188 | 96 | — | — | — | — | |||||||
Northparkes (Australia) | 80.0 | 79 | 63 | 57 | 46 | 95 | 76 | |||||||
Rawhide (US) | 51.0 | 50 | 25 | 35 | 18 | 26 | 13 | |||||||
Rio Tinto Zimbabwe (Zimbabwe) (q) | — | 11 | 6 | — | — | — | — | |||||||
Others | — | 13 | 7 | 15 | 7 | 18 | 9 | |||||||
Rio Tinto total | 1,552 | 1,726 | 1,003 | |||||||||||
GOLD (refined) (’000 ounces) | ||||||||||||||
Kennecott Utah Copper (US) | 100.0 | 300 | 300 | 369 | 369 | 462 | 462 | |||||||
IRON ORE (’000 tonnes) | ||||||||||||||
Channar (Australia) | 60.0 | 9,759 | 5,855 | 8,644 | 5,186 | 9,798 | 5,879 | |||||||
Corumbá (Brazil) | 100.0 | 1,301 | 1,301 | 1,410 | 1,410 | 1,982 | 1,982 | |||||||
Eastern Range (Australia) | (r) | 2,970 | 2,970 | 6,559 | 6,559 | 8,215 | 8,215 | |||||||
Hamersley Iron (Australia) | 100.0 | 65,407 | 65,407 | 74,387 | 74,387 | 79,208 | 79,208 | |||||||
Iron Ore Company of Canada (Canada) | 58.7 | 11,139 | 6,541 | 15,647 | 9,188 | 16,080 | 9,442 | |||||||
Robe River (Australia) | 53.0 | 48,459 | 25,684 | 52,385 | 27,764 | 52,932 | 28,054 | |||||||
Rio Tinto total | 107,757 | 124,494 | 132,780 | |||||||||||
See notes on page 22 |
2007 | 2006 | 2005 | ||||||||||||
Production (a) | Production (a) | Production (a) | ||||||||||||
Rio Tinto | Total | Rio Tinto | Total | Rio Tinto | Total | Rio Tinto | ||||||||
% share (b) | share | share | share | |||||||||||
IRON ORE (’000 tonnes) | ||||||||||||||
Channar (Australia) | 60.0 | 10,549 | 6,330 | 9,798 | 5,879 | 8,644 | 5,186 | |||||||
Corumbá (Brazil) | 100.0 | 1,777 | 1,777 | 1,982 | 1,982 | 1,410 | 1,410 | |||||||
Eastern Range (Australia) | (n) | 6,932 | 6,932 | 8,215 | 8,215 | 6,559 | 6,559 | |||||||
Hamersley Iron (Australia) | 100.0 | 94,567 | 94,567 | 79,208 | 79,208 | 74,387 | 74,387 | |||||||
Hope Downs (Australia) (p) | 50.0 | 64 | 32 | — | — | — | — | |||||||
Iron Ore Company of Canada (Canada) | 58.7 | 13,229 | 7,768 | 16,080 | 9,442 | 15,647 | 9,188 | |||||||
Robe River (Australia) | 53.0 | 51,512 | 27,301 | 52,932 | 28,054 | 52,385 | 27,764 | |||||||
Rio Tinto total | 144,707 | 132,780 | 124,494 | |||||||||||
LEAD (’000 tonnes) | ||||||||||||||
Greens Creek (US) (m) | 70.3 | 17.0 | 11.9 | 16.9 | 11.9 | 16.9 | 11.9 | |||||||
MOLYBDENUM (’000 tonnes) | ||||||||||||||
Bingham Canyon (US) | 100.0 | 14.9 | 14.9 | 16.8 | 16.8 | 15.6 | 15.6 | |||||||
PIG IRON (’000 tonnes) | ||||||||||||||
HIsmelt®(Australia) | 60.0 | 115 | 69 | 89 | 53 | 9 | 5 | |||||||
SALT (’000 tonnes) | ||||||||||||||
Rio Tinto Minerals – salt (Australia) (q) | 68.4 | 7,827 | 5,242 | 8,323 | 5,405 | 8,480 | 5,507 | |||||||
SILVER (mined) (’000 ounces) | ||||||||||||||
Bingham Canyon (US) | 100.0 | 3,487 | 3,487 | 4,214 | 4,214 | 3,958 | 3,958 | |||||||
Escondida (Chile) | 30.0 | 7,870 | 2,361 | 6,646 | 1,994 | 6,565 | 1,970 | |||||||
Grasberg – Joint Venture (Indonesia) (k) | 40.0 | 5,238 | 477 | 1,675 | 670 | 3,410 | 1,364 | |||||||
Greens Creek (US) (m) | 70.3 | 8,646 | 6,075 | 8,866 | 6,230 | 9,664 | 6,791 | |||||||
Others | — | 914 | 602 | 1,345 | 861 | 1,422 | 843 | |||||||
Rio Tinto total | 13,002 | 13,968 | 14,926 | |||||||||||
SILVER (refined) (’000 ounces) | ||||||||||||||
Kennecott Utah Copper (US) | 100.0 | 4,365 | 4,365 | 4,152 | 4,152 | 3,538 | 3,538 | |||||||
TALC (’000 tonnes) | ||||||||||||||
Rio Tinto Minerals – talc | 100.0 | 1,281 | 1,281 | 1,392 | 1,392 | 1,364 | 1,364 | |||||||
(Australia/Europe/North America) (r) | ||||||||||||||
TITANIUM DIOXIDE FEEDSTOCK (’000 tonnes) | ||||||||||||||
Rio Tinto Iron & Titanium | 100.0 | 1,458 | 1,458 | 1,415 | 1,415 | 1,312 | 1,312 | |||||||
(Canada/South Africa) (s) | ||||||||||||||
URANIUM (’000 lbs U3O8)(t) | ||||||||||||||
Energy Resources of Australia (Australia) | 68.4 | 11,713 | 8,011 | 10,370 | 7,092 | 13,013 | 8,900 | |||||||
Rössing (Namibia) | 68.6 | 6,714 | 4,605 | 7,975 | 5,469 | 8,182 | 5,611 | |||||||
Rio Tinto total | 12,616 | 12,561 | 14,511 | |||||||||||
ZINC (mined) (’000 tonnes) | ||||||||||||||
Greens Creek (US) (m) | 70.3 | 50.8 | 35.7 | 47.5 | 33.4 | 52.9 | 37.2 | |||||||
Rio Tinto |
METALS AND MINERALS PRODUCTION continued(continued)
2004 | 2005 | 2006 | ||||||||||||
Production (a) | Production (a) | Production(a) | ||||||||||||
Rio Tinto | Total | Rio Tinto | Total | Rio Tinto | Total | Rio Tinto | ||||||||
% share (b) | share | share | share | |||||||||||
LEAD (’000 tonnes) | ||||||||||||||
Greens Creek (US) | 70.3 | 19.8 | 13.9 | 16.9 | 11.9 | 16.9 | 11.9 | |||||||
Zinkgruvan (Sweden) (s) | — | 11.2 | 11.2 | — | — | — | — | |||||||
Rio Tinto total | 25.1 | 11.9 | 11.9 | |||||||||||
MOLYBDENUM (’000 tonnes) | ||||||||||||||
Bingham Canyon (US) | 100.0 | 6.8 | 6.8 | 15.6 | 15.6 | 16.8 | 16.8 | |||||||
NICKEL (refined) (’000 tonnes) | ||||||||||||||
Empress (Zimbabwe) (q) | — | 2.9 | 1.6 | — | — | — | — | |||||||
PIG IRON (’000 tonnes) | ||||||||||||||
HIsmelt®(Australia) (t) | 60.0 | — | — | 9 | 5 | 89 | 53 | |||||||
SALT (’000 tonnes) | ||||||||||||||
Rio Tinto Minerals - salt (Australia) | 64.9 | 7,380 | 4,792 | 8,480 | 5,507 | 8,323 | 5,405 | |||||||
SILVER (mined) (’000 ounces) | ||||||||||||||
Bingham Canyon (US) | 100.0 | 3,584 | 3,584 | 3,958 | 3,958 | 4,214 | 4,214 | |||||||
Escondida (Chile) | 30.0 | 5,747 | 1,724 | 6,565 | 1,970 | 6,646 | 1,994 | |||||||
Grasberg – FCX (Indonesia) (k) | — | 3,077 | 79 | — | — | — | — | |||||||
Grasberg – Joint Venture (Indonesia) (k) | 40.0 | 1,961 | 784 | 3,410 | 1,364 | 1,675 | 670 | |||||||
Greens Creek (US) | 70.3 | 9,707 | 6,821 | 9,664 | 6,791 | 8,866 | 6,230 | |||||||
Zinkgruvan (Sweden) (s) | — | 651 | 651 | — | — | — | — | |||||||
Others | — | 2,025 | 1,187 | 1,422 | 843 | 1,345 | 861 | |||||||
Rio Tinto total | 14,830 | 14,926 | 13,968 | |||||||||||
SILVER (refined) (’000 ounces) | ||||||||||||||
Kennecott Utah Copper (US) | 100.0 | 3,344 | 3,344 | 3,538 | 3,538 | 4,152 | 4,152 | |||||||
TALC (’000 tonnes) | ||||||||||||||
Rio Tinto Minerals – talc (Australia/Europe/N. America) (u) | 100.0 | 1,444 | 1,443 | 1,364 | 1,364 | 1,392 | 1,392 | |||||||
TIN (tonnes) | ||||||||||||||
Neves Corvo (Portugal) (l) | — | 120 | 59 | — | — | — | — | |||||||
TITANIUM DIOXIDE FEEDSTOCK (‘000 tonnes) | ||||||||||||||
Rio Tinto Iron & Titanium (Canada/South Africa) (v) | 100.0 | 1,192 | 1,192 | 1,312 | 1,312 | 1,415 | 1,415 | |||||||
URANIUM (tonnes U3O8) | ||||||||||||||
Energy Resources of Australia (Australia) | 68.4 | 5,143 | 3,517 | 5,903 | 4,037 | 4,704 | 3,217 | |||||||
Rössing (Namibia) | 68.6 | 3,582 | 2,457 | 3,711 | 2,545 | 3,617 | 2,481 | |||||||
Rio Tinto total | 5,974 | 6,582 | 5,698 | |||||||||||
ZINC (mined) (’000 tonnes) | ||||||||||||||
Greens Creek (US) | 70.3 | 62.7 | 44.1 | 52.9 | 37.2 | 47.5 | 33.4 | |||||||
Zinkgruvan (Sweden) (s) | — | 29.7 | 29.7 | — | — | — | — | |||||||
Rio Tinto total | 73.8 | 37.2 | 33.4 | |||||||||||
See notes on page 22 |
METALS AND MINERALS PRODUCTION continued
Notes | |
(a) | Mine production figures for metals refer to the total quantity of metal produced in concentrates or doré bullion irrespective of whether these products are then refined onsite, except for the data for iron ore and bauxite (beneficiated plus calcined) which represent production of saleable quantities of ore. |
(b) | Rio Tinto percentage share, shown above, is as at the end of |
Rio Tinto share % | |||||||||
Operation | See Note | 2004 | 2005 | 2006 | |||||
Atlantic Copper | (k) | 12.0 | — | — | |||||
Grasberg | (k) | 10.8 | — | — | |||||
Hail Creek | (h) | 90.8 | 82.0 | 82.0 | |||||
Palabora | (m) | 49.2 | 49.0 | 50.5 | |||||
Rio Tinto Share % | |||||||
Operation See note | 2007 | 2006 | 2005 | ||||
Queensland Alumina (e) | 46.3 | 38.6 | 38.6 | ||||
Palabora (l) | 57.7 | 50.5 | 49.0 | ||||
Rio Tinto Minerals – salt (q) | 67.0 | 64.9 | 64.9 | ||||
(c) | Rio Tinto sold its 56.2 per cent share in Eurallumina with an effective date of 31 October 2006 and production data are shown up to that date. |
(d) | Rio Tinto acquired the operating assets of Alcan with effect from 24 October 2007; production is shown as from that date. The Rio Tinto assets and the Alcan assets have been combined under the Rio Tinto Alcan name. |
(e) | Rio Tinto held a 38.6 per cent share in QAL until 24 October 2007; this increased to 80.0 per cent following the Alcan acquisition |
(f) | Yarwun was previously known as Comalco Alumina |
Rio Tinto | |
Rio Tinto has a 22.9 per cent shareholding in the Sangaredi mine but receives 45 per cent of production under the partnership agreement. | |
(i) | Borate quantities are expressed as B2O3. |
(j) | In view of Rio Tinto Energy America’s responsibilities under a management agreement for the operation of the Colowyo mine, all of Colowyo’s output is included in Rio Tinto’s share of production. |
(k) | |
(l) | Rio Tinto’s shareholding in Palabora varied during 2005 and 2006 due to the progressive conversion of debentures into ordinary shares. |
(m) | In February 2008 Rio Tinto reached agreement for the sale of Greens Creek and on 5 March 2008 the Group completed the sale of its |
(n) | |
On 30 November 2005, Rio Tinto sold its 14.5 per cent interest in Lihir Gold; it had agreed in September 2005 to relinquish the management agreement for Lihir. The production data are shown up to 30 September 2005, from which date the Rio Tinto interest in Lihir was held as an investment rather than being equity | |
Rio Tinto’s share of production includes 100 per cent of the production from the Eastern Range | |
Hope Downs started production in the fourth quarter of 2007 | |
(q) | Rio Tinto |
Talc production includes some products derived from purchased ores. | |
Quantities comprise 100 per cent of QIT and 50 per cent of Richards Bay Minerals’ production. | |
(t) | With effect from the second quarter of 2007 Rio Tinto is reporting uranium production as ‘000 lbs U3O8rather than tonnes. |
Rio Tinto |
ORE RESERVES(under (under Industry Guide 7)
Reserves have been prepared in accordance with Industry Guide 7 under the United States Securities Act of 1933 and the following definitions:
• | An ‘Ore Reserve’ means that part of a mineral deposit that can be economically and legally extracted orproduced at the time of the reserves determination. To establish this, studies appropriate to the type of |
• | The term |
• | Ore reserves presented in accordance with SEC Industry Guide 7 do not exceed the quantities that, it |
• | The term |
• | The term |
• | The term |
• | The amount of proven and probable reserves shown below does not necessarily represent the amount of materialcurrently scheduled for extraction, because the amount scheduled for extraction may be derived from a life ofmine plan predicated on prices and other assumptions which are different to those used in the life of mine planprepared in accordance with Industry Guide 7. |
• | The estimated ore reserve figures in the following tables are as of 31 December |
Rio Tinto |
ORE RESERVES (under Industry Guide 7) continued(continued)
Type of | Total ore reserves at end 2006 | |||||||||
mine | Interest | Rio Tinto | ||||||||
(b) | Tonnage | Grade | % | share | ||||||
Recoverable | ||||||||||
mineral | ||||||||||
millions | millions | |||||||||
BAUXITE (d) | of tonnes | %Al2O3 | of tonnes | |||||||
Reserves at operating mine | ||||||||||
Weipa (Australia) | O/P | 1,193 | 53.7 | 100.0 | 1,193 | |||||
Marketable | ||||||||||
product | ||||||||||
millions | millions | |||||||||
BORATES (e) | of tonnes | of tonnes | ||||||||
Reserves at operating mine | ||||||||||
Rio Tinto Minerals - Boron (US) (j) | ||||||||||
– mine | O/P | 19.8 | 100.0 | 19.8 | ||||||
– stockpiles (i) | S/P | 2.1 | 100.0 | 2.1 | ||||||
Rio Tinto total | 21.9 | |||||||||
Coal type | Marketable | Marketable coal quality | ||||||||||||
(g) | reserves | (h) | (h) | |||||||||||
Marketable | ||||||||||||||
Calorific | Sulphur | reserves | ||||||||||||
millions | value | content | millions | |||||||||||
COAL (f) | of tonnes | MJ/kg | % | of tonnes | ||||||||||
Reserves at operating mines | ||||||||||||||
Rio Tinto Energy America(k) | ||||||||||||||
Antelope (US) | O/C | SC | 359 | 20.59 | 0.24 | 100.0 | 359 | |||||||
Colowyo (US) (l) | O/C | SC | 14 | 24.39 | 0.39 | 100.0 | 14 | |||||||
Cordero Rojo (US) | O/C | SC | 285 | 19.59 | 0.31 | 100.0 | 285 | |||||||
Decker (US) | O/C | SC | 18 | 22.10 | 0.38 | 50.0 | 9 | |||||||
Jacobs Ranch (US) | O/C | SC | 418 | 20.35 | 0.43 | 100.0 | 418 | |||||||
Spring Creek (US) | O/C | SC | 199 | 21.75 | 0.33 | 100.0 | 199 | |||||||
Total US coal | 1,283 | |||||||||||||
Rio Tinto Coal Australia | ||||||||||||||
Bengalla (Australia) | O/C | SC | 150 | 28.12 | 0.48 | 30.3 | 45 | |||||||
Blair Athol (Australia) | O/C | SC | 42 | 27.13 | 0.30 | 71.2 | 30 | |||||||
Hail Creek (Australia) | O/C | MC | 179 | 32.20 | 0.35 | 82.0 | 146 | |||||||
Hunter Valley Operations | O/C | SC + MC | 308 | 28.94 | 0.57 | 75.7 | 233 | |||||||
(Australia) | ||||||||||||||
Kestrel (Australia) | U/G | SC + MC | 112 | 32.20 | 0.65 | 80.0 | 90 | |||||||
Mount Thorley Operations | O/C | SC + MC | 23 | 29.48 | 0.46 | 60.6 | 14 | |||||||
(Australia) | ||||||||||||||
Warkworth (Australia) | O/C | SC + MC | 251 | 28.87 | 0.45 | 42.1 | 106 | |||||||
Total Australian coal | 664 | |||||||||||||
Rio Tinto total reserves at operating mines | 1,946 | |||||||||||||
Undeveloped reserves(m) | ||||||||||||||
Rio Tinto Coal Australia | ||||||||||||||
Clermont (Australia) | O/C | SC | 189 | 27.90 | 0.33 | 50.1 | 95 | |||||||
Mount Pleasant (Australia) | O/C | SC | 350 | 26.73 | 0.51 | 75.7 | 265 | |||||||
Rio Tinto total undeveloped reserves | 360 | |||||||||||||
See notes on pages 32 to 33 |
Type | Total ore reserves at end | |||||||||
of | 2007 | |||||||||
mine | ||||||||||
(b) | Tonnage | Grade | Interest | Rio Tinto | ||||||
% | share | |||||||||
Recoverable | ||||||||||
BAUXITE(c) | mineral | |||||||||
millions | millions | |||||||||
of tonnes | %Al2O3 | of tonnes | ||||||||
Reserves at operating mine | ||||||||||
Gove (Australia) (d) | O/P | 143 | 49.2 | 100.0 | 143 | |||||
Porto Trombetas (Brazil) (d) | O/P | 166 | 51.2 | 12.0 | 20 | |||||
Weipa (Australia) (d) | O/P | 1,224 | 53.6 | 100.0 | 1,224 | |||||
Rio Tinto total | 1,387 | |||||||||
Marketable | ||||||||
BORATES(e) | product | |||||||
millions | millions | |||||||
of tonnes | of tonnes | |||||||
Reserves at operating mine | ||||||||
Rio Tinto Minerals - Boron (US) | ||||||||
- mine | O/P | 19.2 | 100.0 | 19.2 | ||||
- stockpiles (f) | S/P | 2.3 | 100.0 | 2.3 | ||||
Rio Tinto total | 21.5 | |||||||
Coal type | Marketable | Marketable coal quality | ||||||||||||
(h) | reserves | (i) | (i) | |||||||||||
Marketable | ||||||||||||||
COAL(g) | Calorific | Sulphur | reserves | |||||||||||
millions | value | content | millions | |||||||||||
of tonnes | MJ/kg | % | of tonnes | |||||||||||
Reserves at operating mines | ||||||||||||||
Rio Tinto Energy America | ||||||||||||||
Antelope (US) | O/C | SC | 325 | 20.59 | 0.24 | 100.0 | 325 | |||||||
Colowyo (US) (j) | O/C | SC | 9 | 24.19 | 0.44 | 100.0 | 9 | |||||||
Cordero Rojo (US) | O/C | SC | 241 | 19.54 | 0.30 | 100.0 | 241 | |||||||
Decker (US) | O/C | SC | 12 | 22.10 | 0.39 | 50.0 | 6 | |||||||
Jacobs Ranch (US) | O/C | SC | 383 | 20.35 | 0.43 | 100.0 | 383 | |||||||
Spring Creek (US) (k) | O/C | SC | 295 | 21.75 | 0.33 | 100.0 | 295 | |||||||
Total US coal | 1,259 | |||||||||||||
Rio Tinto Coal Australia | ||||||||||||||
Bengalla (Australia) | O/C | SC | 137 | 28.21 | 0.47 | 30.3 | 42 | |||||||
Blair Athol (Australia) | O/C | SC | 37 | 26.91 | 0.30 | 71.2 | 26 | |||||||
Hail Creek (Australia) | O/C | MC | 174 | 32.20 | 0.35 | 82.0 | 142 | |||||||
Hunter Valley Operations | O/C | SC + MC | 298 | 28.90 | 0.58 | 75.7 | 226 | |||||||
(Australia) | ||||||||||||||
Kestrel (Australia) (l) | U/G | SC + MC | 136 | 31.60 | 0.59 | 80.0 | 109 | |||||||
Mount Thorley Operations | O/C | SC + MC | 23 | 29.48 | 0.46 | 60.6 | 14 | |||||||
(Australia) | ||||||||||||||
Warkworth (Australia) | O/C | SC + MC | 242 | 28.87 | 0.45 | 42.1 | 102 | |||||||
Total Australian coal | 661 | |||||||||||||
Rio Tinto total reserves at operating mines | 1,920 | |||||||||||||
Undeveloped reserves(m) | ||||||||||||||
Rio Tinto Coal Australia | ||||||||||||||
Clermont (Australia) | O/C | SC | 189 | 27.90 | 0.33 | 50.1 | 95 | |||||||
Mount Pleasant (Australia) | O/C | SC | 350 | 26.73 | 0.51 | 75.7 | 265 | |||||||
Rio Tinto total undeveloped reserves | 360 | |||||||||||||
Rio Tinto |
ORE RESERVES (under Industry Guide 7) continued(continued)
Total ore reserves | Average | |||||||||||
Type of | at end 2006 | mill | ||||||||||
mine | recovery | Interest | Rio Tinto | |||||||||
(b) | Tonnage | Grade | % | % | share | |||||||
Recoverable | ||||||||||||
metal | ||||||||||||
millions | millions | |||||||||||
COPPER | of tonnes | %Cu | of tonnes | |||||||||
Reserves at operating mines | ||||||||||||
Bingham Canyon (US) | ||||||||||||
– mine | O/P | 604 | 0.54 | 86 | 100.0 | 2.802 | ||||||
– stockpiles (i) | S/P | 37 | 0.33 | 86 | 100.0 | 0.107 | ||||||
Escondida (Chile) (n) | ||||||||||||
– sulphide mine | O/P | 1,360 | 1.06 | 85 | 30.0 | 3.681 | ||||||
– sulphide leach mine | O/P | 1,412 | 0.51 | 34 | 30.0 | 0.744 | ||||||
– oxide mine | O/P | 21 | 0.74 | 75 | 30.0 | 0.035 | ||||||
– sulphide stockpiles (i) | S/P | 17 | 1.23 | 85 | 30.0 | 0.053 | ||||||
– sulphide leach stockpiles (i) | S/P | 131 | 0.49 | 34 | 30.0 | 0.067 | ||||||
– oxide stockpiles (i) | S/P | 57 | 0.67 | 75 | 30.0 | 0.086 | ||||||
Escondida Norte (Chile) (n) | ||||||||||||
– sulphide mine | O/P | 455 | 1.40 | 85 | 30.0 | 1.621 | ||||||
– sulphide leach mine | O/P | 604 | 0.60 | 34 | 30.0 | 0.371 | ||||||
– oxide mine | O/P | 22 | 1.55 | 75 | 30.0 | 0.076 | ||||||
– sulphide stockpiles (i) | S/P | 0.1 | 4.07 | 85 | 30.0 | 0.001 | ||||||
– sulphide leach stockpiles (i) | S/P | 1.5 | 0.52 | 34 | 30.0 | 0.001 | ||||||
– oxide stockpiles (i) | S/P | 3.3 | 0.96 | 75 | 30.0 | 0.007 | ||||||
Grasberg (Indonesia) | O/P + U/G | 2,813 | 1.04 | 88 | (o) | 7.584 | ||||||
Northparkes (Australia) | ||||||||||||
– mine | U/G | 46 | 1.06 | 91 | 80.0 | 0.355 | ||||||
– stockpiles (i) | S/P | 3.8 | 0.67 | 85 | 80.0 | 0.017 | ||||||
Palabora (South Africa) (p) | ||||||||||||
– mine | U/G | 118 | 0.64 | 88 | 57.7 | 0.381 | ||||||
Rio Tinto total | 17.989 | |||||||||||
Recoverable | ||||||||||||
diamonds | ||||||||||||
millions | carats | millions | ||||||||||
DIAMONDS (d) | of tonnes | per tonne | of carats | |||||||||
Reserves at operating mines | ||||||||||||
Argyle (Australia) | ||||||||||||
– AK1 pipe mine (q) | O/P + U/G | 102 | 2.1 | 100.0 | 215.5 | |||||||
– AK1 pipe stockpiles (i) | S/P | 3.9 | 1.3 | 100.0 | 5.0 | |||||||
Diavik (Canada) (r) | O/P + U/G | 25 | 3.3 | 60.0 | 49.0 | |||||||
Murowa (Zimbabwe) | ||||||||||||
– mine | O/P | 22 | 0.7 | 77.8 | 11.8 | |||||||
– stockpiles (i) | S/P | 0.1 | 1.2 | 77.8 | 0.1 | |||||||
Rio Tinto total | 281.5 | |||||||||||
Recoverable | ||||||||||||
metal | ||||||||||||
millions | grammes | millions | ||||||||||
GOLD | of tonnes | per tonne | of ounces | |||||||||
Reserves at operating mines | ||||||||||||
Bingham Canyon (US) | ||||||||||||
– mine | O/P | 604 | 0.31 | 64 | 100.0 | 3.882 | ||||||
– stockpiles (i) | S/P | 37 | 0.20 | 64 | 100.0 | 0.151 | ||||||
Cortez/Pipeline (US) (s) | ||||||||||||
– mine | O/P | 125 | 1.83 | 73 | 40.0 | 2.131 | ||||||
– stockpiles (i) | S/P | 1.1 | 4.30 | 86 | 40.0 | 0.052 | ||||||
Grasberg (Indonesia) | O/P + U/G | 2,813 | 0.90 | 69 | (o) | 13.751 | ||||||
Greens Creek (US) | U/G | 7.0 | 3.86 | 69 | 70.3 | 0.417 | ||||||
Northparkes (Australia) | ||||||||||||
– mine | U/G | 46 | 0.46 | 74 | 80.0 | 0.407 | ||||||
– stockpiles (i) | S/P | 3.8 | 0.58 | 76 | 80.0 | 0.043 | ||||||
Rio Tinto total | 20.834 | |||||||||||
See notes on pages 32 to 33 |
Type of | Total ore reserves at end 2007 | Average | ||||||||||
mine | mill | |||||||||||
(b) | Tonnage | Grade | recovery | Interest | Rio Tinto | |||||||
% | % | share | ||||||||||
Recoverable | ||||||||||||
COPPER | metal | |||||||||||
millions | millions | |||||||||||
of tonnes | %Cu | of tonnes | ||||||||||
Reserves at operating mines | ||||||||||||
Bingham Canyon (US) | ||||||||||||
– mine | O/P | 563 | 0.52 | 86 | 100.0 | 2.539 | ||||||
– stockpiles (f) | S/P | 49 | 0.33 | 86 | 100.0 | 0.141 | ||||||
Escondida (Chile) (n) | ||||||||||||
– sulphide mine | O/P | 1,690 | 1.14 | 86 | 30.0 | 4.959 | ||||||
– sulphide leach mine | O/P | 2,217 | 0.53 | 32 | 30.0 | 1.123 | ||||||
– oxide mine | O/P | 46 | 1.12 | 68 | 30.0 | 0.104 | ||||||
– sulphide stockpiles (f) | S/P | 14 | 1.24 | 86 | 30.0 | 0.044 | ||||||
– sulphide leach stockpiles (f) | S/P | 182 | 0.75 | 32 | 30.0 | 0.129 | ||||||
– oxide stockpiles (f) | S/P | 112 | 0.78 | 68 | 30.0 | 0.176 | ||||||
Grasberg (Indonesia) | O/P + U/G | 2,712 | 1.04 | 88 | (o) | 7.388 | ||||||
Northparkes (Australia) | ||||||||||||
– mine | U/G | 47 | 0.97 | 89 | 80.0 | 0.325 | ||||||
– stockpiles (f) | S/P | 0.7 | 0.69 | 85 | 80.0 | 0.003 | ||||||
Palabora (South Africa) | U/G | 104 | 0.62 | 88 | 57.7 | 0.327 | ||||||
Rio Tinto total reserves at operating mines | 17.258 | |||||||||||
Undeveloped reserves (m) | ||||||||||||
Eagle (US) (p) | U/G | 3.2 | 3.04 | 95 | 100.0 | 0.092 | ||||||
Oyo Tolgoi (Mongolia) (q) | O/P | 930 | 0.50 | 87 | 9.9 | 0.399 | ||||||
Rio Tinto total undeveloped reserves | 0.491 | |||||||||||
Recoverable | ||||||||||||
DIAMONDS(c) | diamonds | |||||||||||
millions | carats | millions | ||||||||||
of tonnes | per tonne | of carats | ||||||||||
Reserves at operating mines | ||||||||||||
Argyle (Australia) | ||||||||||||
– AK1 pipe mine | O/P + U/G | 89 | 2.2 | 100.0 | 192.3 | |||||||
– AK1 pipe stockpiles (f) | S/P | 5.2 | 1.0 | 100.0 | 5.2 | |||||||
Diavik (Canada) | O/P + U/G | 22 | 3.5 | 60.0 | 46.2 | |||||||
Murowa (Zimbabwe) | ||||||||||||
– mine | O/P | 21 | 0.7 | 77.8 | 11.5 | |||||||
– stockpiles (f) | S/P | 0.2 | 0.5 | 77.8 | 0.1 | |||||||
Rio Tinto total | 255.4 | |||||||||||
Recoverable | ||||||||||||
GOLD | metal | |||||||||||
millions | grammes | millions | ||||||||||
of tonnes | per tonne | of ounces | ||||||||||
Reserves at operating mines | ||||||||||||
Bingham Canyon (US) | ||||||||||||
– mine | O/P | 563 | 0.30 | 65 | 100.0 | 3.567 | ||||||
– stockpiles (f) | S/P | 49 | 0.18 | 65 | 100.0 | 0.183 | ||||||
Cortez/Pipeline (US) (r) | ||||||||||||
– mine | O/P + U/G | 129 | 2.70 | 81 | 40.0 | 3.629 | ||||||
– stockpiles (f) | S/P | 1.6 | 4.47 | 86 | 40.0 | 0.080 | ||||||
Grasberg (Indonesia) | O/P + U/G | 2,712 | 0.90 | 69 | (o) | 13.672 | ||||||
Greens Creek (US) (s) | U/G | 7.7 | 3.68 | 68 | 70.3 | 0.437 | ||||||
Northparkes (Australia) | ||||||||||||
– mine | U/G | 47 | 0.40 | 73 | 80.0 | 0.357 | ||||||
– stockpiles (f) | S/P | 0.7 | 0.58 | 76 | 80.0 | 0.008 | ||||||
Rio Tinto total reserves at operating mines | 21.932 | |||||||||||
Rio Tinto |
ORE RESERVES (under Industry Guide 7) continued(continued)
Total ore reserves | Average | |||||||||||
Type of | at end 2006 | mill | ||||||||||
mine | recovery | Interest | Rio Tinto | |||||||||
(b) | Tonnage | Grade | % | % | share | |||||||
Marketable | ||||||||||||
product | ||||||||||||
millions | millions | |||||||||||
IRON ORE (d) | of tonnes | %Fe | of tonnes | |||||||||
Reserves at operating mines | ||||||||||||
and mines under construction | ||||||||||||
Channar (Australia) | ||||||||||||
– Brockman Ore | O/P | 100 | 63.5 | 60.0 | 60 | |||||||
Corumbá (Brazil) | ||||||||||||
– mine | O/P | 213 | 67.2 | 100.0 | 213 | |||||||
– stockpiles (i) | S/P | 1 | 66.7 | 100.0 | 1 | |||||||
Eastern Range (Australia) | ||||||||||||
– Brockman Ore | O/P | 91 | 62.9 | 54.0 | 49 | |||||||
Hope Downs (Australia) (t) | ||||||||||||
– Marra Mamba Ore | O/P | 344 | 61.6 | 50.0 | 172 | |||||||
Hamersley (Australia) | ||||||||||||
– Brockman 2 (Brockman Ore) | O/P | 30 | 62.6 | 100.0 | 30 | |||||||
– Brockman 4 (Brockman Ore) | O/P | 449 | 62.2 | 100.0 | 449 | |||||||
– Marandoo (Marra Mamba Ore) | O/P | 67 | 61.6 | 100.0 | 67 | |||||||
– Mt Tom Price (Brockman Ore) | ||||||||||||
– mine | O/P | 109 | 64.6 | 100.0 | 109 | |||||||
– stockpiles (i) | S/P | 17 | 64.5 | 100.0 | 17 | |||||||
– Mt Tom Price (Marra Mamba Ore)(u) | O/P | 35 | 61.2 | 100.0 | 35 | |||||||
– Paraburdoo (Brockman Ore) | O/P | 12 | 63.6 | 100.0 | 12 | |||||||
– Paraburdoo (Marra Mamba Ore) | O/P | 0.5 | 63.2 | 100.0 | 0.5 | |||||||
– Nammuldi (Marra Mamba Ore) | O/P | 31 | 61.4 | 100.0 | 31 | |||||||
– Yandicoogina (Pisolite Ore HG) | ||||||||||||
– mine | O/P | 327 | 58.7 | 100.0 | 327 | |||||||
– stockpiles (i) | S/P | 1.5 | 58.1 | 100.0 | 1 | |||||||
– Yandicoogina (Process Product) | ||||||||||||
– mine | O/P | 109 | 58.4 | 100.0 | 109 | |||||||
Iron Ore Company of Canada | O/P | 416 | 65.0 | 58.7 | 244 | |||||||
(Canada) | ||||||||||||
Robe River (Australia) | ||||||||||||
– Pannawonica (Pisolite Ore) | ||||||||||||
– mine | O/P | 327 | 57.2 | 53.0 | 174 | |||||||
– stockpiles (i) | S/P | 17 | 56.9 | 53.0 | 9 | |||||||
– West Angelas (Marra Mamba Ore) | ||||||||||||
– mine | O/P | 403 | 61.9 | 53.0 | 213 | |||||||
– stockpiles (i) | S/P | 6 | 59.3 | 53.0 | 3 | |||||||
Rio Tinto total | 2,326 | |||||||||||
Recoverable | ||||||||||||
metal | ||||||||||||
millions | millions | |||||||||||
LEAD | of tonnes | %Pb | of tonnes | |||||||||
Reserves at operating mine | ||||||||||||
Greens Creek (US) | U/G | 7.0 | 3.98 | 67 | 70.3 | 0.131 | ||||||
Recoverable | ||||||||||||
metal | ||||||||||||
millions | millions | |||||||||||
MOLYBDENUM | of tonnes | %Mo | of tonnes | |||||||||
Reserves at operating mine | ||||||||||||
Bingham Canyon (US) | ||||||||||||
– mine | O/P | 604 | 0.047 | 61 | 100.0 | 0.175 | ||||||
– stockpiles (i) | S/P | 37 | 0.032 | 61 | 100.0 | 0.007 | ||||||
Rio Tinto total | 0.183 | |||||||||||
See notes on pages 32 to 33 |
Type of | Total ore reserves at end 2007 | Average | ||||||||||
mine | mill | |||||||||||
(b) | Tonnage | Grade | recovery | Interest | Rio Tinto | |||||||
% | % | share | ||||||||||
Recoverable | ||||||||||||
GOLD | metal | |||||||||||
millions | grammes | millions | ||||||||||
of tonnes | per tonne | of ounces | ||||||||||
Undeveloped reserves(m) | ||||||||||||
Oyo Tolgoi (Mongolia) (q) | O/P | 930 | 0.36 | 71 | 9.9 | 0.753 | ||||||
Marketable | ||||||||||||
IRON ORE(c) | product | |||||||||||
millions | millions | |||||||||||
of tonnes | %Fe | of tonnes | ||||||||||
Reserves at operating mines | ||||||||||||
and mines under construction | ||||||||||||
Channar (Australia) | ||||||||||||
– Brockman Ore | O/P | 106 | 63.4 | 60.0 | 64 | |||||||
Corumbá (Brazil) | ||||||||||||
– mine | O/P | 209 | 67.0 | 100.0 | 209 | |||||||
– stockpiles (f) | S/P | 1 | 66.3 | 100.0 | 1 | |||||||
Eastern Range (Australia) | ||||||||||||
– Brockman Ore (t) | O/P | 111 | 63.2 | 54.0 | 60 | |||||||
Hamersley (Australia) | ||||||||||||
– Brockman 2 (Brockman Ore) | O/P | 25 | 62.7 | 100.0 | 25 | |||||||
– Brockman 4 (Brockman Ore) | O/P | 570 | 62.3 | 100.0 | 570 | |||||||
– Marandoo (Marra Mamba Ore) | O/P | 50 | 61.7 | 100.0 | 50 | |||||||
– Mt Tom Price (Brockman Ore) | ||||||||||||
– mine | O/P | 104 | 64.4 | 100.0 | 104 | |||||||
– stockpiles (f) | S/P | 21 | 64.5 | 100.0 | 21 | |||||||
– Mt Tom Price (Marra Mamba Ore) | O/P | 33 | 61.2 | 100.0 | 33 | |||||||
– Paraburdoo (Brockman Ore) (u) | O/P | 28 | 63.9 | 100.0 | 28 | |||||||
– Paraburdoo (Marra Mamba Ore) (u) | O/P | 0.8 | 63.3 | 100.0 | 0.8 | |||||||
– Nammuldi (Marra Mamba Ore) | O/P | 30 | 61.2 | 100.0 | 30 | |||||||
– Yandicoogina (Pisolite Ore HG) (v) | ||||||||||||
– mine | O/P | 271 | 58.7 | 100.0 | 271 | |||||||
– stockpiles (f) | S/P | 5 | 58.5 | 100.0 | 5 | |||||||
– Yandicoogina (Process Product) | ||||||||||||
– mine | O/P | 119 | 58.5 | 100.0 | 119 | |||||||
Hope Downs (Australia) | ||||||||||||
– Marra Mamba Ore | O/P | 344 | 61.4 | 50.0 | 172 | |||||||
Iron Ore Company of Canada (w) | ||||||||||||
(Canada) | O/P | 538 | 65.0 | 58.7 | 316 | |||||||
Robe River (Australia) | ||||||||||||
– Pannawonica (Pisolite Ore) | ||||||||||||
– mine | O/P | 288 | 57.2 | 53.0 | 153 | |||||||
– stockpiles (f) | S/P | 16 | 56.9 | 53.0 | 9 | |||||||
– West Angelas (Marra Mamba Ore) | ||||||||||||
– mine | O/P | 385 | 61.8 | 53.0 | 204 | |||||||
– stockpiles (f) | S/P | 6 | 59.3 | 53.0 | 3 | |||||||
Rio Tinto total | 2,449 | |||||||||||
Recoverable | ||||||||||||
LEAD | metal | |||||||||||
millions | millions | |||||||||||
of tonnes | %Pb | of tonnes | ||||||||||
Reserves at operating mine | ||||||||||||
Greens Creek (US) (s) | U/G | 7.7 | 3.79 | 66 | 70.3 | 0.136 | ||||||
Rio Tinto |
ORE RESERVES (under Industry Guide 7) continued(continued)
Total ore reserves | Average | |||||||||||
Type of | at end 2006 | mill | ||||||||||
mine | recovery | Interest | Rio Tinto | |||||||||
(b) | Tonnage | Grade | % | % | share | |||||||
Recoverable | ||||||||||||
metal | ||||||||||||
millions | grammes | millions | ||||||||||
SILVER | of tonnes | per tonne | of ounces | |||||||||
Reserves at operating mines | ||||||||||||
Bingham Canyon (US) | ||||||||||||
– mine | O/P | 604 | 2.52 | 77 | 100.0 | 37.699 | ||||||
– stockpiles (i) | S/P | 37 | 1.69 | 77 | 100.0 | 1.558 | ||||||
Grasberg (Indonesia) | O/P + U/G | 2,813 | 4.16 | 64 | (o) | 73.722 | ||||||
Greens Creek (US) | U/G | 7.0 | 494.46 | 72 | 70.3 | 56.206 | ||||||
Rio Tinto total | 169.185 | |||||||||||
Marketable | ||||||||||||
product | ||||||||||||
millions | millions | |||||||||||
TALC (e) | of tonnes | of tonnes | ||||||||||
Reserves at operating mines | ||||||||||||
Rio Tinto Minerals – talc (v) | ||||||||||||
Europe/N America/Australia) | O/P + U/G | 28.8 | 100.0 | 28.8 | ||||||||
Marketable | ||||||||||||
product | ||||||||||||
TITANIUM DIOXIDE | millions | millions | ||||||||||
FEEDSTOCK(e) | of tonnes | of tonnes | ||||||||||
Reserves at operating mines | ||||||||||||
QIT (Canada) (w) | O/P | 52.7 | 100.0 | 52.7 | ||||||||
QMM (Madagascar) | D/O | 12.4 | 80.0 | 9.9 | ||||||||
RBM (South Africa) | D/O | 24.9 | 50.0 | 12.5 | ||||||||
Rio Tinto total | 75.0 | |||||||||||
Recoverable | ||||||||||||
metal | ||||||||||||
millions | millions | |||||||||||
URANIUM | of tonnes | %U308 | of tonnes | |||||||||
Reserves at operating mines | ||||||||||||
Energy Resources of Australia | ||||||||||||
(Australia) | ||||||||||||
– Ranger #3 mine | O/P | 9.6 | 0.241 | 89 | 68.4 | 0.0141 | ||||||
– Ranger #3 stockpiles (i) (x) | S/P | 25.9 | 0.107 | 86 | 68.4 | 0.0163 | ||||||
Rössing (Namibia) | ||||||||||||
– mine | O/P | 17.7 | 0.038 | 85 | 68.6 | 0.0039 | ||||||
– stockpiles (i) | S/P | 2.3 | 0.015 | 85 | 68.6 | 0.0002 | ||||||
Rio Tinto total | 0.0345 | |||||||||||
Recoverable | ||||||||||||
metal | ||||||||||||
millions | millions | |||||||||||
ZINC | of tonnes | %Zn | of tonnes | |||||||||
Reserves at operating mine | ||||||||||||
Greens Creek (US) | U/G | 7.0 | 10.39 | 77 | 70.3 | 0.390 | ||||||
See notes on pages 32 to 33 |
Type of | Total ore reserves at end 2007 | Average | ||||||||||
mine | mill | |||||||||||
(b) | Tonnage | Grade | recovery | Interest | Rio Tinto | |||||||
% | % | share | ||||||||||
Recoverable | ||||||||||||
MOLYBDENUM | metal | |||||||||||
millions | millions | |||||||||||
of tonnes | %Mo | of tonnes | ||||||||||
Reserves at operating mine | ||||||||||||
Bingham Canyon (US) (x) | ||||||||||||
– mine | O/P | 563 | 0.047 | 62 | 100.0 | 0.166 | ||||||
– stockpiles (f) | S/P | 49 | 0.020 | 62 | 100.0 | 0.006 | ||||||
Rio Tinto total | 0.172 | |||||||||||
Recoverable | ||||||||||||
NICKEL | metal | |||||||||||
millions | millions | |||||||||||
of tonnes | %Ni | of tonnes | ||||||||||
Undeveloped reserves (m) | ||||||||||||
Eagle (US) (p) | U/G | 3.2 | 3.89 | 84 | 100.0 | 0.105 | ||||||
Recoverable | ||||||||||||
SILVER | metal | |||||||||||
millions | grammes | millions | ||||||||||
of tonnes | per tonne | of ounces | ||||||||||
Reserves at operating mines | ||||||||||||
Bingham Canyon (US) | ||||||||||||
– mine | O/P | 563 | 2.42 | 77 | 100.0 | 33.533 | ||||||
– stockpiles (f) | S/P | 49 | 1.56 | 77 | 100.0 | 1.881 | ||||||
Grasberg (Indonesia) | O/P + U/G | 2,712 | 4.11 | 68 | (o) | 77.186 | ||||||
Greens Creek (US) (s) | U/G | 7.7 | 471 | 72 | 70.3 | 58.378 | ||||||
Rio Tinto total | 170.978 | |||||||||||
Marketable | ||||||||
TALC(e) | product | |||||||
millions | millions | |||||||
of tonnes | of tonnes | |||||||
Reserves at operating mines | ||||||||
Rio Tinto Minerals – talc (y) | ||||||||
Europe/N America/Australia) | O/P + U/G | 33.5 | 100.0 | 33.5 | ||||
Marketable | ||||||||
TITANIUM DIOXIDE | product | |||||||
FEEDSTOCK(e) | millions | millions | ||||||
of tonnes | of tonnes | |||||||
Reserves at operating mines | ||||||||
QIT (Canada) | O/P | 53.5 | 100.0 | 53.5 | ||||
RBM (South Africa) | D/O | 24.2 | 50.0 | 12.1 | ||||
Rio Tinto total reserves at operating mines | 65.5 | |||||||
Undeveloped reserves (m) | ||||||||
QMM (Madagascar) | D/O | 12.4 | 80.0 | 9.9 | ||||
Rio Tinto |
ORE RESERVES (under Industry Guide 7) continued(continued)
Proven ore reserves | Probable ore reserves | |||||||||||||
at end 2006 | at end 2006 | |||||||||||||
Type of | ||||||||||||||
mine | Drill hole | Drill hole | ||||||||||||
(b) | Tonnage | Grade | spacing (c) | Tonnage | Grade | spacing (c) | ||||||||
millions | millions | |||||||||||||
BAUXITE (d) | of tonnes | %Al2O3 | of tonnes | %Al2O3 | ||||||||||
Reserves at operating mine | ||||||||||||||
Weipa (Australia) | O/P | 119 | 53.8 | 76m x 76m | 1,074 | 53.7 | 400m x 800m | |||||||
(or better) | ||||||||||||||
millions | millions | |||||||||||||
BORATES (e) | of tonnes | of tonnes | ||||||||||||
Reserves at operating mine | ||||||||||||||
Rio Tinto Minerals - Boron (US) (j) | ||||||||||||||
– mine | O/P | 14.8 | 61m x 61m | 5.0 | 61m x 61m | |||||||||
– stockpiles (i) | S/P | 0.1 | 2.0 | |||||||||||
% Yield to | Marketable Reserves | |||||||||||||
Recoverable | give | |||||||||||||
reserves | marketable | Drill hole | Drill hole | |||||||||||
total | reserves | Proven | spacing (c) | Probable | spacing (c) | |||||||||
millions | millions | millions | ||||||||||||
COAL (f) | of tonnes | of tonnes | of tonnes | |||||||||||
Reserves at operating mines | ||||||||||||||
Rio Tinto Energy America(k) | ||||||||||||||
Antelope (US) | O/C | 359 | 100 | 359 | 350m | |||||||||
Colowyo (US) (l) | O/C | 14 | 100 | 14 | 250m | 0.1 | 365m | |||||||
Cordero Rojo (US) | O/C | 285 | 100 | 281 | 250m | 4.4 | 375m | |||||||
Decker (US) | O/C | 18 | 100 | 18 | 250m | |||||||||
Jacobs Ranch (US) | O/C | 418 | 100 | 413 | 300m | 4.3 | 300m | |||||||
Spring Creek (US) | O/C | 199 | 100 | 199 | 250m | |||||||||
Rio Tinto Coal Australia | ||||||||||||||
Bengalla (Australia) | O/C | 193 | 77 | 92 | 350m | 58 | 500m | |||||||
Blair Athol (Australia) | O/C | 45 | 92 | 42 | 150m | |||||||||
Hail Creek (Australia) | O/C | 267 | 67 | 105 | 300m | 73 | 400m | |||||||
Hunter Valley Operations (Australia) | O/C | 453 | 68 | 245 | 300m | 63 | 500m | |||||||
Kestrel (Australia) | U/G | 140 | 80 | 49 | 500m | 63 | 1,000m | |||||||
Mount Thorley Operations (Australia) | O/C | 35 | 66 | 20 | 125m | 2.5 | 500m | |||||||
Warkworth (Australia) | O/C | 392 | 64 | 151 | 450m | 100 | 1,000m | |||||||
Undeveloped reserves(m) | ||||||||||||||
Rio Tinto Coal Australia | ||||||||||||||
Clermont (Australia) | O/C | 197 | 96 | 185 | 220m | 4 | 150m to 300m | |||||||
Mount Pleasant (Australia) | O/C | 459 | 76 | 350 | 125m to 500m | |||||||||
See notes on pages 32 to 33 |
Total ore reserves | ||||||||||||
Type of | at end 2007 | Average | ||||||||||
mine | mill | |||||||||||
(b) | Tonnage | Grade | recovery | Interest | Rio Tinto share | |||||||
% | % | |||||||||||
Recoverable | ||||||||||||
URANIUM | metal | |||||||||||
millions | millions | |||||||||||
of tonnes | %U308 | of tonnes | ||||||||||
Reserves at operating mines | ||||||||||||
Energy Resources of Australia | ||||||||||||
(Australia) | ||||||||||||
– Ranger #3 mine | O/P | 11.8 | 0.220 | 88.5 | 68.4 | 0.0157 | ||||||
– Ranger #3 stockpiles (f) | S/P | 20.3 | 0.107 | 86.0 | 68.4 | 0.0140 | ||||||
Rössing (Namibia) (z) | ||||||||||||
– mine | O/P | 148.4 | 0.037 | 85 | 68.6 | 0.0318 | ||||||
– stockpiles (f) | S/P | 1.8 | 0.038 | 85 | 68.6 | 0.0004 | ||||||
Rio Tinto total | 0.0618 | |||||||||||
Recoverable | ||||||||||||
ZINC | metal | |||||||||||
millions | millions | |||||||||||
of tonnes | %Zn | of tonnes | ||||||||||
Reserves at operating mine | ||||||||||||
Greens Creek (US) (s) | U/G | 7.7 | 10.18 | 76 | 70.3 | 0.419 | ||||||
Rio Tinto |
ORE RESERVES (under Industry Guide 7) continued(continued)
Proven ore reserves | Probable ore reserves | |||||||||||||
Type of | at end 2006 | at end 2006 | ||||||||||||
mine | ||||||||||||||
(b) | Tonnage | Grade | Drill hole | Tonnage | Grade | Drill hole | ||||||||
spacing (c) | spacing (c) | |||||||||||||
COPPER | millions | millions | ||||||||||||
of tonnes | %Cu | of tonnes | %Cu | |||||||||||
Reserves at operating mines | ||||||||||||||
Bingham Canyon (US) | ||||||||||||||
– mine | O/P | 325 | 0.59 | 90m | 279 | 0.48 | 110m | |||||||
– stockpiles (i) | S/P | 12 | 0.35 | 25 | 0.32 | |||||||||
Escondida (Chile) (n) | ||||||||||||||
– sulphide mine | O/P | 516 | 1.17 | 60m x 60m | 844 | 1.00 | 100m x 100m | |||||||
– sulphide leach mine | O/P | 421 | 0.51 | 60m x 60m | 992 | 0.51 | 105m x 105m | |||||||
– oxide mine | O/P | 6 | 0.74 | 45m x 45m | 15 | 0.74 | 50m x 50m | |||||||
– sulphide stockpiles (i) | S/P | 17 | 1.23 | |||||||||||
– sulphide leach stockpiles (i) | S/P | 131 | 0.49 | |||||||||||
– oxide stockpiles (i) | S/P | 57 | 0.67 | |||||||||||
Escondida Norte (Chile) (n) | ||||||||||||||
– sulphide mine | O/P | 138 | 1.53 | 60m x 60m | 318 | 1.34 | 100m x 100m | |||||||
– sulphide leach mine | O/P | 57 | 0.53 | 60m x 60m | 548 | 0.61 | 105m x 105m | |||||||
– oxide mine | O/P | 2.8 | 1.97 | 45m x 45m | 19 | 1.49 | 50m x 50m | |||||||
– sulphide stockpiles (i) | S/P | 0.1 | 4.07 | |||||||||||
– sulphide leach stockpiles (i) | S/P | 1.5 | 0.52 | |||||||||||
– oxide stockpiles (i) | S/P | 3.3 | 0.96 | |||||||||||
Grasberg (Indonesia) | O/P + U/G | 809 | 1.08 | 13m to 40m | 2,004 | 1.02 | 42m to 100m | |||||||
Northparkes (Australia) | ||||||||||||||
– mine | U/G | 46 | 1.06 | 40 x 40 x 80m | ||||||||||
– stockpiles (i) | S/P | 3.8 | 0.67 | |||||||||||
Palabora (South Africa) (p) | ||||||||||||||
– mine | U/G | 118 | 0.64 | 76m | ||||||||||
DIAMONDS (d) | millions | carats | millions | carats | ||||||||||
of tonnes | per tonne | of tonnes | per tonne | |||||||||||
Reserves at operating mines | ||||||||||||||
Argyle (Australia) | ||||||||||||||
– AK1 pipe mine (q) | O/P + U/G | 27 | 1.4 | 50m x 50m | 75.0 | 2.4 | 50m x 50m | |||||||
– AK1 pipe stockpiles (i) | S/P | 0.9 | 2.8 | 3.0 | 0.8 | |||||||||
Diavik (Canada) (r) | O/P + U/G | 12 | 3.4 | 27m to 30m | 13 | 3.2 | 30m to 34m | |||||||
Murowa (Zimbabwe) | O/P | |||||||||||||
– mine | O/P | 22 | 0.7 | 25m | ||||||||||
– stockpiles (i) | S/P | 0.1 | 1.2 | |||||||||||
GOLD | millions | grammes | millions | grammes | ||||||||||
of tonnes | per tonne | of tonnes | per tonne | |||||||||||
Reserves at operating mines | ||||||||||||||
Bingham Canyon (US) | ||||||||||||||
– mine | O/P | 325 | 0.34 | 90m | 279 | 0.28 | 110m | |||||||
– stockpiles (i) | S/P | 12 | 0.20 | 25 | 0.20 | |||||||||
Cortez/Pipeline (US) (s) | ||||||||||||||
– mine | O/P | 52 | 2.05 | 27m to 30m | 73 | 1.67 | 48m | |||||||
– stockpiles (i) | S/P | 1.1 | 4.30 | |||||||||||
Grasberg (Indonesia) | O/P + U/G | 809 | 1.03 | 13m to 40m | 2,004 | 0.85 | 42m to 100m | |||||||
Greens Creek (US) | U/G | 7.0 | 3.86 | 30m | ||||||||||
Northparkes (Australia) | ||||||||||||||
– mine | O/P | 46 | 0.46 | 40 x 40 x 80m | ||||||||||
– stockpiles (i) | S/P | 3.8 | 0.58 | |||||||||||
See notes on pages 32 to 33 |
Type of | Proven ore reserves at end 2007 | Probable ore reserves at end 2007 | ||||||||||||
mine | ||||||||||||||
(b) | Tonnage | Grade | Drill hole | Tonnage | Grade | Drill hole | ||||||||
Spacing(aa) | Spacing(aa) | |||||||||||||
BAUXITE(c) | millions | millions | ||||||||||||
of tonnes | %Al2O3 | of tonnes | %Al2O3 | |||||||||||
Reserves at operating mine | ||||||||||||||
Gove (Australia) (d) | O/P | 78 | 49.4 | 50m x 50m to | 65 | 49.0 | 100m x 100m to | |||||||
50m x 100m | 200m x 200m | |||||||||||||
Porto Trombetas (Brazil) (d) | O/P | 149 | 51.3 | 200m x 200m | 18 | 50.1 | 400m x 400m | |||||||
Weipa (Australia) (d) | O/P | 149 | 53.2 | 76m x 76m | 1,074 | 53.7 | 400m x 800m or | |||||||
better | ||||||||||||||
BORATES(e) | millions | millions | ||||||||||||
of tonnes | of tonnes | |||||||||||||
Reserves at operating mine | ||||||||||||||
Rio Tinto Minerals - Boron (US) (j) | ||||||||||||||
– mine | O/P | 14.3 | 61m x 61m | 4.9 | 61m x 61m | |||||||||
– stockpiles (f) | S/P | 0.1 | 2.2 | |||||||||||
Marketable Reserves | ||||||||||||||
Recoverable | % Yield to | |||||||||||||
reserves | give | Proven | Drill hole | Probable | Drill hole | |||||||||
total | marketable | spacing(aa) | spacing(aa) | |||||||||||
reserves | ||||||||||||||
COAL(g) | millions | millions | millions | |||||||||||
of tonnes | of tonnes | of tonnes | ||||||||||||
Reserves at operating mines | ||||||||||||||
Rio Tinto Energy America | ||||||||||||||
Antelope (US) | O/C | 325 | 100 | 325 | 350m | |||||||||
Colowyo (US) (j) | O/C | 9 | 100 | 9 | 150m | |||||||||
Cordero Rojo (US) | O/C | 241 | 100 | 241 | 250m | |||||||||
Decker (US) | O/C | 12 | 100 | 12 | 250m | |||||||||
Jacobs Ranch (US) | O/C | 383 | 100 | 379 | 300m | 4 | 300m | |||||||
Spring Creek (US) (k) | O/C | 295 | 100 | 295 | 250m | |||||||||
Rio Tinto Coal Australia | ||||||||||||||
Bengalla (Australia) | O/C | 182 | 75 | 75 | 350m | 62 | 500m | |||||||
Blair Athol (Australia) | O/C | 42 | 89 | 37 | 150m | |||||||||
Hail Creek (Australia) | O/C | 258 | 67 | 100 | 300m | 73 | 400m | |||||||
Hunter Valley Operations (Australia) | O/C | 440 | 68 | 235 | 300m | 63 | 500m | |||||||
Kestrel (Australia) (l) | U/G | 163 | 83 | 53 | 500m | 83 | 1000m | |||||||
Mount Thorley Operations (Australia) | O/C | 36 | 66 | 21 | 125m | 2 | 500m | |||||||
Warkworth (Australia) | O/C | 379 | 64 | 142 | 450m | 100 | 1000m | |||||||
Undeveloped reserves(m) | ||||||||||||||
Rio Tinto Coal Australia | ||||||||||||||
Clermont (Australia) | O/C | 197 | 96 | 185 | 220m | 4 | 150m to 300m | |||||||
Mount Pleasant (Australia) | O/C | 459 | 76 | 350 | 125m to 500m | |||||||||
Rio Tinto |
ORE RESERVES (under Industry Guide 7) continued(continued)
Proven ore reserves | Probable ore reserves | |||||||||||||
Type of | at end 2006 | at end 2006 | ||||||||||||
mine | ||||||||||||||
(b) | Tonnage | Grade | Drill hole | Tonnage | Grade | Drill hole | ||||||||
spacing (c) | spacing (c) | |||||||||||||
IRON ORE (d) | millions | millions | ||||||||||||
of tonnes | %Fe | of tonnes | %Fe | |||||||||||
Reserves at operating mines | ||||||||||||||
and mines under construction | ||||||||||||||
Channar (Australia) | ||||||||||||||
– Brockman Ore | O/P | 87 | 63.5 | 60m x 60m | 13 | 63.6 | max 120m | |||||||
Corumbá (Brazil) | ||||||||||||||
– mine | O/P | 108 | 67.2 | 100m x 100m | 106 | 67.2 | 200m x 400m | |||||||
– stockpiles (i) | S/P | 1 | 66.7 | |||||||||||
Eastern Range (Australia) | ||||||||||||||
– Brockman Ore | O/P | 66 | 63.0 | 60m x 60m | 25 | 62.8 | max 120m | |||||||
Hope Downs (Australia) (t) | ||||||||||||||
– Marra Mamba Ore | O/P | 66 | 61.3 | 100m x 50m | 279 | 61.7 | 200m x 50m | |||||||
Hamersley (Australia) | ||||||||||||||
– Brockman 2 (Brockman Ore) | O/P | 19 | 62.6 | 50m x 50m | 11.0 | 62.6 | max 100m | |||||||
– Brockman 4 (Brockman Ore) | O/P | 115 | 62.6 | 50m x 50m | 334 | 62.1 | 200m x 100m | |||||||
– Marandoo (Marra Mamba Ore) | O/P | 65 | 61.7 | 75m x 75m | 2.0 | 60.7 | max 150m | |||||||
– Mt Tom Price (Brockman Ore) | ||||||||||||||
– mine | O/P | 72 | 64.4 | 30m x 30m | 37 | 64.9 | 60m x 30m | |||||||
– stockpiles (i) | S/P | 17 | 64.5 | |||||||||||
– Mt Tom Price (Marra Mamba Ore)(u) | O/P | 35 | 61.2 | 60m x 30m | ||||||||||
– Paraburdoo (Brockman Ore) | O/P | 8 | 63.6 | 30m x 30m | 4.1 | 63.6 | 60m x 30m | |||||||
– Paraburdoo (Marra Mamba Ore) | O/P | 0.5 | 63.2 | 60m x 60m | ||||||||||
– Nammuldi (Marra Mamba Ore) | O/P | 3.9 | 62.0 | 60m x 60m | 27 | 61.3 | 120m x 120m | |||||||
– Yandicoogina (Pisolite Ore HG) | ||||||||||||||
– mine | O/P | 327 | 58.7 | 50m x 50m | ||||||||||
– stockpiles (i) | S/P | 1.5 | 58.1 | |||||||||||
– Yandicoogina (Process Product) | ||||||||||||||
– mine | O/P | 109 | 58.4 | 50m x 50m | ||||||||||
Iron Ore Company of Canada | ||||||||||||||
(Canada) | O/P | 345 | 65.0 | 122m x 61m | 70 | 65.0 | 122m x 122m | |||||||
Robe River (Australia) | ||||||||||||||
– Pannawonica (Pisolite Ore) | ||||||||||||||
– mine | O/P | 289 | 57.3 | max 70m x 70m | 38 | 57.0 | max 100m x 100m | |||||||
– stockpiles (i) | S/P | 17 | 56.9 | |||||||||||
– West Angelas (Marra Mamba Ore) | ||||||||||||||
– mine | O/P | 178 | 62.2 | 25m x 25m | 225 | 61.6 | max 200m x 50m | |||||||
– stockpiles (i) | S/P | 0.7 | 59.7 | 5 | 59.3 | |||||||||
LEAD | millions | millions | ||||||||||||
of tonnes | %Pb | of tonnes | %Pb | |||||||||||
Reserves at operating mine | ||||||||||||||
Greens Creek (US) | U/G | 7.0 | 3.98 | 30m | ||||||||||
MOLYBDENUM | millions | millions | ||||||||||||
of tonnes | %Mo | of tonnes | %Mo | |||||||||||
Reserves at operating mine | ||||||||||||||
Bingham Canyon (US) | ||||||||||||||
– mine | O/P | 325 | 0.047 | 90m | 279 | 0.047 | 110m | |||||||
– stockpiles (i) | S/P | 12.1 | 0.028 | 25 | 0.034 | |||||||||
See notes on pages 32 to 33 |
Type of | Proven ore reserves at end 2007 | Probable ore reserves at end 2007 | ||||||||||||
mine | ||||||||||||||
(b) | Tonnage | Grade | Drill hole | Tonnage | Grade | Drill hole | ||||||||
spacing(aa) | spacing(aa) | |||||||||||||
COPPER | millions | millions | ||||||||||||
of tonnes | %Cu | of tonnes | %Cu | |||||||||||
Reserves at operating mines | ||||||||||||||
Bingham Canyon (US) | ||||||||||||||
– mine | O/P | 318 | 0.57 | 90m | 245 | 0.47 | 110m | |||||||
– stockpiles (f) | S/P | 19 | 0.32 | 30 | 0.34 | |||||||||
Escondida (Chile) (n) | ||||||||||||||
– sulphide mine | O/P | 612 | 1.24 | 55m x 55m | 1,078 | 1.08 | 80m x 80m | |||||||
– sulphide leach mine | O/P | 514 | 0.51 | 55m x 55m | 1,703 | 0.54 | 100m x 100m | |||||||
– oxide mine | O/P | 46 | 1.12 | 50m x 50m | ||||||||||
– sulphide stockpiles (f) | S/P | 14 | 1.24 | |||||||||||
– sulphide leach stockpiles (f) | S/P | 182 | 0.75 | |||||||||||
– oxide stockpiles (f) | S/P | 112 | 0.78 | |||||||||||
Grasberg (Indonesia) | O/P + U/G | 771 | 1.10 | 13m to 40m | 1,941 | 1.01 | 42m to 100m | |||||||
Northparkes (Australia) | ||||||||||||||
– mine | U/G | 47 | 0.97 | 40 x 40 x 80m | ||||||||||
– stockpiles (f) | S/P | 0.7 | 0.69 | |||||||||||
Palabora (South Africa) | U/G | 104 | 0.62 | 76m | ||||||||||
Undeveloped reserves (m) | ||||||||||||||
Eagle (US) (p) | U/G | 3.2 | 3.04 | 25m | ||||||||||
Oyo Tolgoi (Mongolia) (q) | O/P | 127 | 0.58 | 50m | 803 | 0.48 | 70m | |||||||
DIAMONDS(c) | millions | carats | millions | carats | ||||||||||
of tonnes | per tonne | of tonnes | per tonne | |||||||||||
Reserves at operating mines | ||||||||||||||
Argyle (Australia) | ||||||||||||||
– AK1 pipe mine | O/P + U/G | 19 | 1.2 | 50m x 50m | 70 | 2.4 | 50m x 50m | |||||||
– AK1 pipe stockpiles (f) | S/P | 0.4 | 2.6 | 4.7 | 0.9 | |||||||||
Diavik (Canada) | O/P + U/G | 9.0 | 3.4 | 27m to 34m | 13 | 3.6 | 30m to 34m | |||||||
Murowa (Zimbabwe) | ||||||||||||||
– mine | O/P | 21 | 0.7 | 25m | ||||||||||
– stockpiles (f) | S/P | 0.2 | 0.5 | |||||||||||
GOLD | millions | grammes | millions | grammes | ||||||||||
of tonnes | per tonne | of tonnes | per tonne | |||||||||||
Reserves at operating mines | ||||||||||||||
Bingham Canyon (US) | ||||||||||||||
– mine | O/P | 318 | 0.33 | 90m | 245 | 0.27 | 110m | |||||||
– stockpiles (f) | S/P | 19 | 0.18 | 30 | 0.18 | |||||||||
Cortez/Pipeline (US) (r) | ||||||||||||||
– mine | O/P + U/G | 12 | 4.34 | 27m to 30m | 116 | 2.53 | 48m | |||||||
– stockpiles (f) | S/P | 1.6 | 4.47 | |||||||||||
Grasberg (Indonesia) | O/P + U/G | 771 | 1.09 | 13m to 40m | 1,941 | 0.82 | 42m to 100m | |||||||
Greens Creek (US) (s) | U/G | 7.7 | 3.68 | 30m | ||||||||||
Northparkes (Australia) | ||||||||||||||
– mine | U/G | 47 | 0.40 | 40 x 40 x 80m | ||||||||||
– stockpiles (f) | S/P | 0.7 | 0.58 | |||||||||||
Undeveloped reserves (m) | ||||||||||||||
Oyo Tolgoi (Mongolia) (q) | O/P | 127 | 0.93 | 50m | 803 | 0.27 | 70m | |||||||
Rio Tinto |
ORE RESERVES (under Industry Guide 7) continued(continued)
Proven ore reserves | Probable ore reserves | |||||||||||||
Type of | at end 2006 | at end 2006 | ||||||||||||
mine | ||||||||||||||
(b) | Tonnage | Grade | Drill hole | Tonnage | Grade | Drill hole | ||||||||
spacing (c) | spacing (c) | |||||||||||||
SILVER | millions | grammes | millions | grammes | ||||||||||
of tonnes | per tonne | of tonnes | per tonne | |||||||||||
Reserves at operating mines | ||||||||||||||
Bingham Canyon (US) | ||||||||||||||
– mine | O/P | 325 | 2.74 | 90m | 279 | 2.25 | 110m | |||||||
– stockpiles (i) | S/P | 12.1 | 1.75 | 25 | 1.66 | |||||||||
Grasberg (Indonesia) | O/P + U/G | 809 | 4.23 | 13m to 40m | 2,004 | 4.13 | 42m to 100m | |||||||
Greens Creek (US) | U/G | 7.0 | 494.46 | 30m | ||||||||||
TALC (e) | millions | millions | ||||||||||||
of tonnes | of tonnes | |||||||||||||
Reserves at operating mines | ||||||||||||||
Rio Tinto Minerals – talc (v) | ||||||||||||||
(Europe/North America/Australia) | O/P + U/G | 21.6 | 10m to 60m | 7.2 | 15m to 100m | |||||||||
TITANIUM DIOXIDE | millions | millions | ||||||||||||
FEEDSTOCK(e) | of tonnes | of tonnes | ||||||||||||
Reserves at operating mines | ||||||||||||||
QIT (Canada) (w) | O/P | 29.2 | <60m x 60m | 23.5 | >60m x 60m | |||||||||
QMM (Madagascar) | D/O | 12.0 | 200m x 100m | 0.4 | 400m x 200m | |||||||||
RBM (South Africa) | D/O | 6.3 | 50m x 50m | 18.6 | 800m x 100m | |||||||||
URANIUM | millions | millions | ||||||||||||
of tonnes | %U308 | of tonnes | %U308 | |||||||||||
Reserves at operating mines | ||||||||||||||
Energy Resources of Australia | ||||||||||||||
(Australia) | ||||||||||||||
– Ranger #3 mine | O/P | 4.9 | 0.24 | 25m | 4.8 | 0.24 | 50m | |||||||
– Ranger #3 stockpiles (i) (x) | S/P | 25.9 | 0.11 | |||||||||||
Rössing (Namibia) | ||||||||||||||
– mine | O/P | 0.8 | 0.036 | 20m | 16.9 | 0.038 | 60m | |||||||
– stockpiles (i) | S/P | 2.3 | 0.015 | |||||||||||
ZINC | millions | millions | ||||||||||||
of tonnes | %Zn | of tonnes | %Zn | |||||||||||
Reserves at operating mine | ||||||||||||||
Greens Creek (US) | U/G | 7.0 | 10.39 | 30m | ||||||||||
See notes on pages 32 to 33 |
Proven ore reserves | Probable ore reserves | |||||||||||||
Type of | at end 2007 | at end 2007 | ||||||||||||
mine | ||||||||||||||
(b) | Tonnage | Grade | Drill hole | Tonnage | Grade | Drill hole | ||||||||
spacing(aa) | spacing(aa) | |||||||||||||
IRON ORE(c) | millions | millions | ||||||||||||
of tonnes | %Fe | of tonnes | %Fe | |||||||||||
Reserves at operating mines | ||||||||||||||
and mines under construction | ||||||||||||||
Channar (Australia) | ||||||||||||||
– Brockman Ore | O/P | 89 | 63.4 | 60m x 60m | 18 | 63.3 | Max 120m | |||||||
Corumbá (Brazil) | ||||||||||||||
– mine | O/P | 102 | 66.9 | 100m x 100m | 107 | 67.0 | 200m x 400m | |||||||
– stockpiles (f) | S/P | 1 | 66.3 | |||||||||||
Eastern Range (Australia) | ||||||||||||||
– Brockman Ore (t) | O/P | 81 | 63.2 | 60m x 60m | 30 | 63.2 | Max 120m | |||||||
Hamersley (Australia) | ||||||||||||||
– Brockman 2 (Brockman Ore) | O/P | 18 | 62.7 | 50m x 50m | 8 | 62.6 | Max 100m | |||||||
– Brockman 4 (Brockman Ore) | O/P | 336 | 62.4 | 50m x 50m | 233 | 62.1 | 200m x 100m | |||||||
– Marandoo (Marra Mamba Ore) | O/P | 48 | 61.7 | 75m x 75m | 2 | 60.7 | Max 150m | |||||||
– Mt Tom Price (Brockman Ore) | ||||||||||||||
– mine | O/P | 59 | 64.2 | 30m x 30m | 46 | 64.7 | 60m x 30m | |||||||
– stockpiles (f) | S/P | 21 | 64.5 | |||||||||||
- Mt Tom Price (Marra Mamba Ore) | O/P | 33 | 61.2 | 60m x 30m | ||||||||||
– Paraburdoo (Brockman Ore) (u) | O/P | 23 | 64.0 | 30m x 30m | 6 | 63.4 | 60m x 30m | |||||||
– Paraburdoo (Marra Mamba Ore) (u) | O/P | 0.8 | 63.3 | 60m x 60m | ||||||||||
– Nammuldi (Marra Mamba Ore) | O/P | 25 | 61.5 | 60m x 60m | 5 | 59.7 | 120m x 120m | |||||||
– Yandicoogina (Pisolite Ore HG) | ||||||||||||||
(v) | ||||||||||||||
– mine | O/P | 271 | 58.7 | 50m x 50m | ||||||||||
– stockpiles (f) | S/P | 5 | 58.5 | |||||||||||
– Yandicoogina (Process Product) | ||||||||||||||
– mine | O/P | 119 | 58.5 | 50m x 50m | ||||||||||
Hope Downs (Australia) | ||||||||||||||
– Marra Mamba Ore | O/P | 32 | 61.9 | 100m x 50m | 312 | 61.4 | 200m x 50m | |||||||
Iron Ore Company of Canada (w) | ||||||||||||||
(Canada) | O/P | 406 | 65.0 | 122m x 61m | 131 | 65.0 | 122m x 122m | |||||||
Robe River (Australia) | ||||||||||||||
– Pannawonica (Pisolite Ore) | ||||||||||||||
– mine | O/P | 262 | 57.3 | Max 70m x 70m | 27 | 56.4 | Max 100m x 100m | |||||||
– stockpiles (f) | S/P | 2 | 57.0 | 13 | 56.9 | |||||||||
– West Angelas (Marra Mamba Ore) | ||||||||||||||
– mine | O/P | 196 | 62.1 | 25m x 25m | 190 | 61.6 | Max 200m x 50m | |||||||
– stockpiles (f) | S/P | 6 | 59.3 | |||||||||||
LEAD | millions | millions | ||||||||||||
of tonnes | %Pb | of tonnes | %Pb | |||||||||||
Reserves at operating mine | ||||||||||||||
Greens Creek (US) (s) | U/G | 7.7 | 3.79 | 30m | ||||||||||
MOLYBDENUM | millions | millions | ||||||||||||
of tonnes | %Mo | of tonnes | %Mo | |||||||||||
Reserves at operating mine | ||||||||||||||
Bingham Canyon (US) (x) | ||||||||||||||
– mine | O/P | 318 | 0.049 | 90 | m | 245 | 0.045 | 110m | ||||||
– stockpiles (f) | S/P | 19 | 0.022 | 30 | 0.018 | |||||||||
NICKEL | millions | millions | ||||||||||||
of tonnes | %Ni | of tonnes | ||||||||||||
Undeveloped reserves (m) | %Ni | |||||||||||||
Eagle (US) (p) | U/G | 3.2 | 3.89 | 25m | ||||||||||
Rio Tinto |
ORE RESERVES (under Industry Guide 7) continued(continued)
Proven ore reserves | Probable ore reserves | |||||||||||||
Type of | at end 2007 | at end 2007 | ||||||||||||
mine | ||||||||||||||
(b) | Tonnage | Grade | Drill hole | Tonnage | Grade | Drill hole | ||||||||
spacing(aa) | spacing(aa) | |||||||||||||
SILVER | millions | grammes | millions | grammes | ||||||||||
of tonnes | per tonne | of tonnes | per tonne | |||||||||||
Reserves at operating mines | ||||||||||||||
Bingham Canyon (US) | ||||||||||||||
– mine | O/P | 318 | 2.59 | 90m | 245 | 2.19 | 110m | |||||||
– stockpiles (f) | S/P | 19 | 1.51 | 30 | 1.58 | |||||||||
Grasberg (Indonesia) | O/P + U/G | 771 | 4.31 | 13m to 40m | 1,941 | 4.03 | 42m to 100m | |||||||
Greens Creek (US) (s) | U/G | 7.7 | 471 | 30m | ||||||||||
TALC(e) | millions | millions | ||||||||||||
of tonnes | of tonnes | |||||||||||||
Reserves at operating mines | ||||||||||||||
Rio Tinto Minerals - talc (y) | O/P + U/G | 25.7 | 10m to 60m | 7.8 | 15m to 100m | |||||||||
(Europe/N.America/Australia) | ||||||||||||||
TITANIUM DIOXIDE | millions | millions | ||||||||||||
FEEDSTOCK(e) | of tonnes | of tonnes | ||||||||||||
Reserves at operating mines | ||||||||||||||
QIT (Canada) (w) | O/P | 30.0 | <60m x 60m | 23.5 | >60m x 60m | |||||||||
RBM (South Africa) | D/O | 5.6 | 50m x 50m | 18.6 | 800m x 100m | |||||||||
Undeveloped reserves (m) | ||||||||||||||
QMM (Madagascar) | D/O | 12.0 | 200m x 100m | 0.4 | 400m x 200m | |||||||||
URANIUM | millions | millions | ||||||||||||
of tonnes | %U308 | of tonnes | %U308 | |||||||||||
Reserves at operating mines | ||||||||||||||
Energy Resources of Australia | ||||||||||||||
(Australia) | ||||||||||||||
– Ranger #3 mine | O/P | 4.8 | 0.224 | 25m | 6.9 | 0.217 | 50m | |||||||
– Ranger #3 stockpiles (f) | S/P | 20.3 | 0.107 | |||||||||||
Rössing (Namibia) (z) | ||||||||||||||
– mine | O/P | 17.8 | 0.051 | 20m x 20m | 130.6 | 0.035 | 60m | |||||||
– stockpiles (f) | S/P | 1.8 | 0.038 | |||||||||||
ZINC | millions | millions | ||||||||||||
of tonnes | %Zn | of tonnes | %Zn | |||||||||||
Reserves at operating mine | ||||||||||||||
Greens Creek (US) (s) | U/G | 7.7 | 10.18 | 30m | ||||||||||
Rio Tinto 2007Form 20-F | 41 |
ORE RESERVES (under Industry Guide 7) (continued)
Notes | ||
(a) | Commodity prices (based on a three year average historical price to 30 June | |
Ore reserves | Unit | US$ | ||
pound | 1.02 | |||
Copper | pound | 2.31 | ||
Gold | ounce | 529 | ||
Iron ore | ||||
Australian benchmark (fines) | dmtu** | |||
Atlantic benchmark (fines) | dmtu** | |||
pound | ||||
pound | ||||
ounce | ||||
pound | ||||
1.05 |
* = non managed operations | ||
** = dry metric tonne unit | ||
Prices for all other commodities are determined by individual contract negotiation. The reported reserves for these commodities have been tested to confirm that they could be economically extracted using a combination of existing contract prices until expiry and thereafter three year historical prices. | ||
(b) | Type of mine: O/P = open pit, O/C = open cut, U/G = underground, D/O = dredging operation, S/P = stockpile. | |
(c) | ||
Reserves of iron ore, bauxite (as alumina) and diamonds are shown as recoverable reserves of saleable product after accounting for all mining and processing losses. Mill recoveries are therefore not shown. | ||
(d) | Rio Tinto acquired the operating assets of Alcan with effect from 24 October 2007. The Rio Tinto assets and the Alcan assets have been combined under the Rio Tinto Alcan name and reserves are presented here for the first time. The Weipa deposit now includes the reserve for Ely as this deposit is contiguous with Weipa. | |
(e) | Reserves of industrial minerals are expressed in terms of marketable product, i.e. after all mining and processing losses. In the case of borates, the saleable product is B2O3. | |
(f) | Stockpile components of reserves are shown for all operations. | |
(g) | Coal reserves are shown as both recoverable and marketable. The yield factors shown reflect the impact of further processing, where necessary, to provide marketable coal. All reserves at operating mines are assigned, all undeveloped reserves are unassigned. By “assigned” and “unassigned,” we mean the following: assigned reserves means coal which has been committed by the coal company to operating mine shafts, mining equipment, and plant facilities, and all coal which has been leased by the company to others; unassigned reserves represent coal which has not been committed, and which would require new mineshafts, mining equipment, or plant facilities before operations could begin in the property. | |
Coal type: SC = steam/thermal coal; MC = metallurgical/coking coal. | ||
Analyses of coal from the US were undertaken according to "American Standard Testing Methods" (ASTM) on an "As Received" moisture basis whereas the coals from Australia have been analysed on an "Air Dried" moisture basis according to Australian Standards (AS). MJ/kg = megajoules per kilogramme. 1 MJ/kg = 430.2 Btu/lb. | ||
(j) | ||
Rio Tinto Energy America has a partnership interest in the Colowyo mine but, as it is responsible under a management agreement for the operation of the mine, all of Colowyo's reserves are included in Rio Tinto's share shown above. |
ORE RESERVES (under Industry Guide 7) continued
(l) | Approval of the Kestrel mine extension resulted in an increase in reserves by upgrading of mineralised material from the Kestrel West area. |
(m) | The term 'undeveloped reserves' is used here to describe material that is economically viable on the basis of technical and economic studies but for which construction and commissioning have yet to commence. |
(n) | Reporting for Escondida and Escondida Norte is combined for 2007. The increase in reserves |
(o) | Under the terms of a joint venture agreement between Rio Tinto and |
(p) | |
(q) | |
(r) | The increase in grade at Cortez is due to the addition of higher grade material from mineralised material together with production depletion of lower grade material. On 5 March 2008 the Group completed the sale of its interest in the Cortez joint venture to its partner. |
(s) | In February 2008 Rio Tinto entered into an agreement to sell its interest in Greens Creek. |
(t) | Life of mine studies at Eastern Range resulted in development of new pit designs that in turn increased the reserves. |
(u) | |
(v) | |
(w) | |
(x) | |
(y) | The increase in |
(z) | Economic and technical studies at Rossing resulted in revisions of pit shape thus increasing reserves. |
(aa) | Drill hole spacings are either average distances, a specified grid distance (a regular pattern of drill holes - the distance between the drill holes along the two axes of the grid will be |
Rio Tinto |
LOCATION OF GROUP OPERATIONS
Note
Wholly owned unless stated otherwise
43 | |
LOCATION OF GROUP OPERATIONS (continued)
Aluminium | ||
Operating assets | US$43,846 million | |
Sales revenue | US$7,309 million | |
Underlying earnings | US$1,097million |
Rio Tinto’s Aluminium product group is the wholly owned, integrated aluminium subsidiary, Rio Tinto Alcan, which owns and manages operations predominately located in Canada and Australia, with other significant interests in the UK, France, New Zealand, Brazil, Guinea, China, Iceland, Ghana, Norway and the US. The group is currently organised into four business units – Bauxite & Alumina, Primary Metal, Engineered Products and Packaging. Rio Tinto announced in 2007 the intention to divest both the Engineered Products and Packaging business units. Sites relating to these businesses are not shown.
Aluminium | ||
Operating sites | ||
1 | Alma | |
20 | Alouette (40%) | |
7 | Alucam (Edea) (47%) | |
2 | Anglesey Aluminium (51%) | |
Arvida | ||
9 | Awaso (80%) | |
1 | Beauharnois | |
1 | Becancour (25%) | |
3 | Bell Bay | |
Boyne Island (59%) | ||
Dunkerque | ||
8 | ||
10 | Gove alumina refinery | |
11 | Gove bauxite mine | |
1 | Grande-Baie | |
12 | ISAL | |
1 | Jonquiere | |
13 | Kitimat | |
1 | Laterriere | |
14 | Lochaber | |
15 | Lynemouth | |
17 | Ningxia (50%) | |
16 | Porto Trombetas (MRN) (12%) | |
4 | Queensland Alumina Limited (80%) | |
18 | Sao Luis (Alumar) (10%) | |
19 | Sebree | |
1 | Shawinigan | |
21 | SORAL (50%) | |
22 | St-Jean-de-Maurienne | |
23 | Tiwai Point (79%) | |
Tomago (52%) | ||
25 | Weipa | |
Yarwun |
Copper | |
US$4,118 million | |
Sales revenue | US$8,501 million |
Underlying earnings | US$3,479 million |
The Copper group comprises Kennecott Utah Copper and Kennecott Minerals in the US, and interests in the copper mines of Escondida in Chile, Grasberg in Indonesia, Northparkes in Australia, Palabora in South Africa. Projects under evaluation include the Resolution, Pebble and Eagle projects in the US, Oyu Tolgoi in Mongolia, La Granja in Peru and Sulawesi in Indonesia.
Copper and gold | |
Operating sites | |
26 | Bougainville (not operating) (54%) |
27 | Cortez/Pipeline (40% - sale completed on 5 March 2008) |
28 | Escondida (30%) |
29 | Grasberg joint venture (40%) |
30 | Kennecott Utah Copper |
31 | Northparkes (80%) |
32 | Palabora (58%) |
33 | Rawhide (51%) |
Projects | |
34 | La Granja |
35 | Oyu Tolgoi (10%) |
36 | Pebble (10%) |
37 | Resolution (55%) |
Nickel | |
Projects | |
38 | Eagle |
39 | Sulawesi |
Zinc, lead, silver | |
Operating sites | |
40 | Greens Creek (70% - sale agreed during February 2008) |
Rio Tinto 2007 Form 20-F | 44 |
LOCATION OF GROUP OPERATIONS (continued)
Diamonds and Industrial Minerals | |
Operating assets | |
Sales revenue | US$3,921 million |
Underlying earnings | US$488 million |
The Diamond and Industrial Minerals group comprises Rio Tinto’s diamond interests in the Diavik mine in Canada, the Argyle mine in Australia, and the Murowa mine in Zimbabwe, served by diamond sales offices in Belgium and India. Rio Tinto’s industrial minerals businesses comprise Rio Tinto Minerals, made up of borate and talc operations in the US, South America, Europe and Australia, and salt in Australia, as well as Rio Tinto Iron & Titanium interests in North America, South Africa and Madagascar.
Diamonds | ||
Operating sites | ||
41 | Argyle | |
42 | Diavik (60%) | |
43 | Murowa (78%) | |
Operating sites | ||
Boron | ||
Coudekerque Plant | ||
Tincalayu | ||
Wilmington Plant | ||
Potash | ||
Projects | ||
48 | Rio Colorado Potash | |
Operating sites | ||
49 | Dampier (68%) | |
50 | Lake MacLeod (68%) | |
49 | Port Hedland (68%) | |
Talc | ||
Operating sites (only major sites are shown) | ||
51 | Ludlow | |
52 | Talc de Luzenac | |
53 | Three Springs | |
54 | Yellowstone | |
Titanium dioxide feedstock | ||
Operating sites | ||
55 | QIT-Fer et Titane Lac Allard | |
56 | QIT-Fer et Titane Sorel Plant | |
57 | Richards Bay Minerals (50%) | |
Projects | ||
58 | QIT Madagascar Minerals (80%) |
Energy | |
Operating assets | US$3,399 million |
Sales revenue | US$4,621 million |
Underlying earnings | US$484 million |
The Energy group is represented in coal by Rio Tinto Coal Australia and Coal & Allied in Australia and by Rio Tinto Energy America in the US. It also includes uranium interests in Energy Resources of Australia and the Rössing Uranium mine in Namibia.
Coal | ||
Operating sites | ||
Antelope | ||
Bengalla (30%) | ||
Blair Athol (71%) | ||
Colowyo (20%) | ||
Cordero Rojo | ||
Decker (50%) | ||
Hail Creek (82%) | ||
Hunter Valley Operations (76%) | ||
Jacobs Ranch | ||
Kestrel (80%) | ||
Mt Thorley Operations (61%) | ||
Spring Creek | ||
Warkworth (42%) | ||
Projects | ||
Clermont (50%) | ||
Mt Pleasant (76%) |
Operating sites | |||
Projects | |||
69 | Kintyre | ||
70 | Sweetwater |
Rio Tinto 2007 Form 20-F | 45 |
LOCATION OF GROUP OPERATIONS (continued)
Iron Ore | ||
Operating assets | ||
US$2,651million |
The Iron Ore group’s interests comprise Hamersley Iron and Robe River in Australia, Iron Ore Company of Canada, the Corumbá mine in Brazil and the Simandou, Guinea, and Orissa, India, projects. The group includes the HIsmelt® direct iron making plant in Australia.
Corumbá | ||||
Hamersley Iron mines: | ||||
Brockman Channar (60%) | ||||
Eastern Range (54%) | ||||
Hope Downs (50% joint venture) | ||||
Marandoo | ||||
Mt Tom Price | ||||
Nammuldi | ||||
Paraburdoo | ||||
Yandicoogina | ||||
HIsmelt®(60%) | ||||
Iron Ore Company of Canada (59%) | ||||
72 | Robe River mines: (53%) | |||
IOC Pellet Plant (59%) | ||||
Orissa (51%) | ||||
Simandou (95%) | ||||
Exploration
The Exploration group is organised into five geographically based teams in North America, South America, Australasia, Asia and Africa/Europe and a sixth project generation team that searches the world for new opportunities and provides specialised geological, geophysical and commercial expertise to the regional teams. The Asia team was formed in 2006, reflecting a significant expansion in exploration effort in Russia, Mongolia and the Former Soviet Union.
Technology and Innovation
Technology and Innovation, previously Operational and Technical Excellence, has bases in Australia, Canada, the UK and the US. Its role is to identify and promote best operational technology practice across the Group and to pursue step change innovation of strategic importance to orebodies of the future.
Rio Tinto |
Item 4A. | Unresolved Staff Comments |
As far as Rio Tinto is aware there are no unresolved written comments from the SEC staff regarding its periodic reportsunderreports under the Exchange Act received more than 180 days before 31 December 2006.2007.
Item 5. | Operating and Financial Review and Prospects |
This Item contains forward looking statements and attention is drawn to the Cautionary statement on page 7.
This Item includes a discussion of the main factors affecting the Group’s “Profit for the year”, as measured in accordance with International Financial Reporting Standards In this report, the sales revenue of the parent companies and their subsidiaries is referred to as ‘Consolidated sales revenue’. Rio Tinto also reports a sales revenue measure that includes its share of jointly controlled entities and associates, which is referred to as ‘Gross sales revenue’. This latter measure is considered informative because a significant part of the Group's business is conducted through operations that are subject to equity accounting. |
This Item is comprised of the following: | |
• | Chairman’s |
• | Interview with the chief executive providing a high level review of the Group’s operations |
• | Group financial performance |
• | Operating reviews for each of the principal product groups and global support groups |
• | Financial review of the Group |
CHAIRMAN’S MESSAGEChairman’s statement
We2007 was another record year for Rio Tinto characterised by continuing strong demand and prices for our metals and minerals, a change in chief executive and the transformational acquisition of Alcan. Once again Rio Tinto’s consistent strategy, focused on value creation and business excellence, delivered significant returns for our shareholders and major benefits to the countries and communities in which we operate.
The purchase of Alcan, announced in July and completed in October created a world leader in aluminium. Alongside this major acquisition we continued to experience strong global demandinvest heavily in our existing business with a programme totalling US$5.0 billion, further strengthening our platform for future production and high prices across our product groupsearnings growth. The Alcan acquisition, and the many other initiatives which the new executive team launched in 20062007, further demonstrated the strength and are pleaseddepth of Rio Tinto’s managerial capability to report a third successive year of record earnings. This performance reflects the underlying quality of the Rio Tintoportfolio, which has proved robust across the economic cycle.I have warned in previous messages about the risk of complacency that can flow from a period of strong markets and sustained success. We remain alertdeliver value to this and recognize the long term cyclical nature of our industry. In responsewe continue to focus on rigorous investment discipline, operational excellence and pursuing all opportunities to enhancethe underlying performance of our business.shareholders.
Results and dividends
The Group’s underlying earnings in 20062007 were a record US$7,3387,443 million, US$2,383 million or 48one per cent above 2005. Netearnings2006. Net earnings were US$7,4387,312 million compared with US$5,2157,438 million in 2005.2006. Cash flow from operations increased 3615 percent to [US$10,923]*a record US$12,569 million.
The final dividendtotal dividends declared for 20062007 of 64136 US cents per share bringsrepresent an increase of 31 per cent over the total for 2006 to 104 US cents, anincrease of 30 per cent.dividends. We have a long standing policycommitted to further increases in the dividends of progressive dividend deliveryat least 20 per cent in each of 2008 and maintaining it remains apriority. In addition,2009. This underpins our strong operational cash flows have enabled us to return US$2.4 billion to shareholders through the buyback of shares and the payment of US$1.5 billion special dividend. We have recently announced, subject tomarket conditions, our intention to return a further US$3 billion to be completed by the end of 2007, while still retaining the financial flexibility to take up growth opportunities as they arise.Our main priority for the use of cash generated continues to be profitable investmentconfidence in the growth of thebusiness with particular emphasis on our portfoliobusiness and is a strong signal of economically robust projects. our belief in the strength of future demand and prices. We have always said that our priority for excess capital after meeting our investment in profitable growth is the ordinary dividend, and we are pleased to reinforce this commitment to our shareholders.
Our growth potential is further evidenced by our planned capital investment grew fromexpenditure in 2008 and 2009 of US$2.59 billion in 2005each year, including the commitments we have made to US$3.9 billioncompleting Rio Tinto Alcan’s growth projects. This indicative programme will, of course, be subject to rigorous appraisal of each investment.
Strategy
Our acquisition of Alcan was fully consistent with our long standing strategy. We remain focused on large, long life, low cost resources capable of delivering superior returns across the economic cycle. Alcan’s extensive global asset base has among the lowest cost aluminium smelters in 2006. Our pipeline of project opportunitiesthe world and is an industry leader in production technology and self generated energy, particularly hydro-electricity. This will see this grow to aroundUS$5 billionbe important in 2007.a carbon constrained world.
Rio Tinto |
StrategyOur strategy remains to focus on large, long life, low cost ore bodies capable of delivering superior returns across theeconomic cycle. Creating value for shareholders is ourRio Tinto’s primary objective and will remain so. We are fortunatethe addition of Alcan enables us to have a geographical portfolio weighted towards large, maturecapture value from growing aluminium demand alongside our established leadership positions in iron ore and growing economies. However, we recognise that pursuit offuture value growth will see us operating in a wider range of countries than in the past. Recent projects and investmentsin Russia, Madagascar, Peru and Mongolia are evidence of this.We are also focused on driving productivity and performance improvements across all our primary businessprocesses, thereby adding to the resilience of our portfolios in more challenging markets. We made significant progresstowards that objective in 2006.copper.
Sustainable developmentRio TintoA successful business is in aone that is sustainable. It is one that maintains long term capital intensive business and our investments typically have life spansprofitability by pursuing value creating projects which recognise the importance of 30 years or more and are often in remote locations. Without economic and social stability we cannot deliver economic returns to our host governments, local communities and our shareholders. We therefore remain committed to the principles of sustainable development, which is fully reflected in all aspects of our business. It facilitates access to new opportunities, improves business performance and inspires our own people, who fully share this commitment.As we move into new geographical areas, meeting economic,good social and environmental challenges simultaneously will beoutcomes. Moreover, I believe making our business sustainable is about recognising and managing the full spectrum of risk, thereby making the best opportunities available to us.
The value of this approach was demonstrated in the agreed transaction to acquire Alcan. Our positive reputation for social and environmental responsibility was welcomed by the Alcan board and led to the Government of Quebec readily agreeing to Rio Tinto continuing Alcan’s commitments to social and economic development in Quebec.
For our part we recognised the strategic advantage of expanding our position in aluminium, a recyclable metal which, in the case of Rio Tinto Alcan, is produced with a high proportion of hydro-generated electricity.
Our joint venture with BP to seek cleaner uses of coal through production of hydrogen energy coupled with storage of carbon dioxide underground reflects similar thinking. Our reputation supports our position as the developer of choice in Guinea where we are investing to develop a major iron ore project.
We were accepted into theFTSE4Goodindex in the UK after its policy committee decided to include companies involved in the production of uranium. Rio Tinto has maintained membership of theDow Jones Sustainability Worldindex since its inception in 1999 and has been an increasingly critical featureactive member of our business. I am pleased that our way of doingthe World Business Council for Sustainable Development and the International Council on Mining and Metals (ICMM), whose members are committed to superior business has received positive recognition and support from our various stakeholderspractices in these environments.sustainable development.
New chief executive
Board and management developmentsWe have announced thatAs you know, Tom Albanese will succeedsucceeded Leigh Clifford as chief executive on 1in May 2007. We thank Leigh for his many years of service to Rio Tinto, and its predecessor companies, including the last seven as chief executive. He contributed much to creating Rio Tinto’s platform for the future and we owe him a lot. As his successor, Tom has a long and proven track record in Rio Tinto and has made a very strong start in his first year as chief executive.
Following the acquisition of Alcan we were pleased to welcome Yves Fortier and Paul Tellier to the board as non executive directors, and Dick Evans, chief exective of Rio Tinto Alcan, as an outstandingexecutive director.
Yves joins theNominations committeeand theCommittee on social and environmental accountability. Paul joins theAudit committeeand theRemuneration committee. This strong representation from Canada will provide important continuity in the integration of Alcan and brings valuable new perspectives to the board.
As announced at the 2007 annual general meetings, Sir Richard Sykes, currently the senior non executive director, will retire at the conclusion of the 2008 annual general meetings after ten years on the board. Richard has made a highly valued contribution to Rio Tinto over the period based on his prior experience of leading a major global company and across the technology field. We thank him for almost 37 years. His seven yearsthat. Andrew Gould, currently chairman of theAudit committee, will become the senior non executive director on Sir Richard’s retirement and will become chairman of theRemuneration committee. Sir David Clementi will replace Andrew as chief executive have seen significantgrowthchairman of theAudit committee. These changes will take effect at the conclusion of the 2008 annual general meetings.
Ill health led to the resignation of Ashton Calvert from the board in November and we were deeply saddened to hear of his death shortly afterwards. Ashton joined the board in 2005 following a long and distinguished career in the profitabilityAustralian foreign service. He made a major contribution to Rio Tinto and provided valuable insights across a range of major strategic issues, notably in relation to our businesses in Australia and Asia. He was a wonderful colleague.
Forward outlook
We are seeing a dramatic change in the world’s centres of economic power, with rapid growth, urbanisation and industrialisation in many parts of the developing world. We expect a large part of the world’s population – billions of people – to move through increasingly metal intensive phases of economic development. This will transform our industry and underpin future growth in markets.
Commodity markets appear to be entering the fifth straight year of growth with mineral and metal prices at levels well above their long term average. Projections for Rio Tinto’s main product groups – iron ore, aluminium and copper – suggest that demand could potentially triple over the next 25 years.
While it is premature to say that the current price cycle has peaked, we are mindful of short term risks associated with the expected slowdown in the US economy. However, the US is now somewhat less important in world commodity demand than it was five years ago. Our analysis suggests a sharp slowdown in the US would have only a modest impact on growth in China and India.
In the short term, with low commodity stocks and a likely continuation of supply side challenges, we expect solid global economic growth, led by China, to support strong increases in demand for most metals and minerals during 2008 and 2009.
Approach from BHP Billiton
In November Rio Tinto received an unsolicited approach from BHP Billiton proposing a combination of the companies. This was fully considered by the board and rejected on the basis that it significantly undervalued Rio Tinto’s assets and
Rio Tinto 2007 Form 20-F | 48 |
future prospects.
On 6 February 2008, BHP Billiton announced pre-conditional takeover offers for Rio Tinto of 3.4 BHP Billiton shares for each Rio Tinto share. The board gave this careful consideration and concluded that the offers still significantly undervalue Rio Tinto. The board unanimously rejected the pre-conditional offers as not being in the best interests of Rio Tinto shareholders.
The offers, while improved, still fail to recognise the underlying value of Rio Tinto’s high quality assets and prospects. Our plans are unchanged and will remain so unless a proposal is made that fully reflects the business and major enhancements invalue of Rio Tinto. Meanwhile we will forge ahead with our operational performance. We thankstated strategy.
him for all heOur people
As I hope this message has donedemonstrated, 2007 was an important year for Rio Tinto and, wish him well for the future.Tom brings a broad based experience of the mining industry developed in a sequence of challenging roles in Rio Tinto. He has been a key player infollowing a number of important initiatives over recent years and in shaping our strategicdirection. We have plans in place for a smooth handover from Leigh to Tom andsignificant developments, I believe the boardGroup is confident that, under hisleadership, Rio Tinto will continueeven more strongly positioned to deliver profitable growth and increased value for shareholders.
Board developmentsMichael Fitzpatrick joined the board in June 2006 after a successful period in investment fund management. He brings along experience of entrepreneurial activity to the board and is a valuable addition to our Australian representation. Weare fortunate to have an experienced and diverse board which provides strong support and constructive challenge to ourexecutive team.
Forward outlookThe global economy remains resilientshareholders in the face of a range of politicalfuture. Managing major strategic initiatives places strong demands on management and economic risks. We expect a continuation of positive economic growth in 2007 in most of the major economies. China’s strong, growing demand for metals and minerals, which has been a key driver of market strength, seems set to continue.On the supply side, a number of constraints, ranging from shortages of key consumables, like truck tyres andexplosives, to the tight supply of skilled technical managers and tradesmen,they have limited the growth of new productioncapacity. Stocks of most products have remained low, resulting in tight markets. This has reinforced the strength of the current cycle and we expect prices in 2007 to continue at levels significantly above the long term trend.
Our peopleDespite the benefit ofresponded with great resilience. In strong markets 2006 was very challenging in operational terms. We have faced daily pressures inmeetingmeeting the requirementsdemands of our customers, and developing new projects within tight timetables and budgets.budgets, places considerable pressure on every individual in the Rio Tinto organisation. Our recordresults would not have been possible withoutrecord results in 2007 are very much a product of the commitment, dedication and hard work of all our global workforce. Once again, onpeople across the world. On behalf of the board and you, our shareholders, I thank them for all they have achieveddone to deliver success in an excellent year forRio Tinto.another record year.
Paul SkinnerChairman
5 March 200823 February 2007
INTERVIEW WITH THE CHIEF EXECUTIVE
How would you describe the past year?Underlying earningsIt would be a bit of an understatement to say it’s been exciting. We announced the Alcan deal in 2006 were a record US$7.3 billion. Not only were prices for metalsJuly. We successfully closed it, as we said we would, in October. The integration with Alcan is going well and minerals higher, but wewere able to make the most of the situation with increased production at many of our operations – maximising deliveryinto strong markets. With our strong balance sheet we are in a positionlooking forward to invest heavily in growthreaping synergies of US$940 million per annum by the end of 2009. The acquisition of Alcan is just the beginning. In May and to return capital to shareholders. Through our business improvement programme,Improving performance together(IPT),June, we are seeinga significant change in the way business units cooperate and share best practice. IPT resulted in substantial additionalcash flow in 2006 and should deliver very large value enhancements in the future. Health, safety and environment indicators generally showed steady improvement, but unfortunately the year was marred by three fatalities at Rio Tintomanaged operations.
Why are markets this good?Economic growth and development around the world, particularly in China and India, mean an increased need for minerals. The mining industry is struggling to keep pace with demand. There is normally a quicker supply response when demand rises. However, because of previous under investment in exploration, the next generation of large world class deposits is only now being identified and evaluated. These deposits are often in remote locations, present new technical challenges and will take some years to come into production. The delivery times forannounced major items of equipment have also significantly increased. While we believe a new higher base level of prices has developed for most commodities, this is mirrored by higher operating and development costs.
Rio Tinto’s volume growth has typically been six to seven per cent a year – where to now?We concentrate on what we do best, which is mining – the first stage of the supply chain. Rio Tinto operates or shares in some of the largest deposits in the world. That is partly why we are enjoying financial success at a time of strongprices, although all our product groups generate strong cash flow at all points of the cycle. Large long life deposits alsogive us the opportunity to increase production in line with demand, a great advantage in the current environment. Ours is a simple strategy and it works. While most of our existing assets are in OECD countries, we are responding to new opportunities in the developing world – Peru, Guinea and Indonesia to name a few – and in countries that are only now opening up to mining investment, like Madagascar, Russia and Mongolia.We are always alert to merger and acquisition opportunities, but growth is often ab out choosing between buyingand building. When you build a new project you should know what you’re getting if you execute the project well, butwhen you buy you may find not all the assets are jewels. The key is to make value creating decisions – not just increase volume. We are willing to make the big bets, as we haveexpansion plans in iron ore and copper, but the key factoruranium, and we followed this with further expansion announcements in the execution ofour strategy is discipline: disciplinefourth quarter. We predict rapid expansion in analysisiron ore and discipline in execution.strong prospects across our portfolio of assets.
How are you respondingI deeply regret that four people lost their lives at operations we manage. I am pleased to cost pressures?We work very hard to manage costs related to operational inputs, supplies, wages, energy and higher material coststhrough the excellent work of our global procurement team and our strong supplier relationships. However, the prices of many key inputs, including labour, have risen sharply in recent times. Of course our exploration and project evaluationcosts feeding our development pipeline aresee a continued reduction in the nature oflost time injury frequency rate and the all injury frequency rate.
What is the plan?
Rio Tinto is all about value, and 2008 heralds a greatly expanded development pipeline. Major investments in growth projects made or approved in 2007 total US$46 billion. This includes the future.
Can you sayacquisition of Alcan Inc. for US$38 billion, and, on a little more on theImproving performance togetherinitiative?We need to permanently change the way we run our individual operations, replicating best performance across everything we do –project analysis, project development, mine planning, mining, processing and marketing. We are aglobal Group and we need to work across functions and international borders to solve problems together instead ofbusinesses going it alone. By creating a standard operating model with common systems, standards and metrics we will ensure that we capture the best ways100 per cent basis, construction of operating and reproducing these across the Group. The substantial additionalcash flow we achieved in 2006 is the start to adding considerable value to the Group over time.
You spent about US$4 billion intwo new capital in 2006. How are the major projects going?Overall, our new projects are coming along well. Our iron ore expansion projects in Western Australia remain ourbiggest current capital investment. The challenge of operating and expanding ten mines three ports and more than 1,600km of rail line in the Pilbara at a time of buoyant market conditions should not be underestimated. WithAustralia for US$2.42 billion, the underground development of the Diavik diamond mine in Canada (US$563 million) bringing totalexpenditure of US$3 billion, by the end of 2007 our port and rail infrastructure will be capable of handling up to 195 million tonnes of iron ore annually. The recently announced expansion of Cape Lambert port, at a cost of US$860 million, will further expand capacity to 220 million tonnes. The Yandicoogina mine will expand to 52 million tonnes a year investment in the same period andunderground mine to US$787 million, the Hope Downs project will start production in 2008 with output of 22 million tonnes, risingexpansion to 30 million tonnes in stage two. From negotiationper year of the agreement on Hope Downs iron ore project (US$350 million), the Yarwun alumina refinery expansion to first deliveries will be only three years.Our ilmenite project3.4 million tonnes per year (US$1.8 billion), the Cape Lambert port expansion to 80 million tonnes per year (US$860 million), the US$991 million investment in Madagascar is on schedule,the extension of the Kestrel coal mine and construction of basic infrastructure by local contractors is under way. The port contract has been awarded, enabling us to finalise a definitive cost estimate of US$850300 million for the totalEagle nickel project includingin the buildingUS.
To feed a metal hungry world we have the people, execution capability and resources to deliver these projects better than anyone else.
Is this fast growth profile a departure from your strategy?
I am a strong believer in our core values and our strategy, which is to invest in large, cost efficient, long life assets and to leverage these with the people, capital, and technologies to create enduring value for our shareholders. There has never been a time when a development pipeline like ours is worth as much as it is today. Our plans are all aligned with our strategy. What has changed is the market environment, which is the strongest it has been in a generation. Our proven strategy positions us to meet the challenges that this level of additional processing capacitydemand imposes. We intend to stick to our mantra around value, but we’ll need to do this smarter, we’ll need to do this faster and we’ll need to do this better than anyone else. We’ll be doing this by bringing on more projects, which we can develop at a faster pace, which can be sold at higher prices. This is what we’ve been doing this year, and this is what I intend to continue to do into the future.
One thing that we must take account of in Canada. First productionapplying our strategy going forward is scheduled for2008, whenthat the world is rapidly changing and we believe there willhave to change with it. The world’s best orebodies include many beyond our Australia and North America heartlands, so we cannot afford to ignore more challenging parts of the world. While being sensitive to government and stakeholder expectations, we have to be growing demand forcapable of operating where the high quality ilmenite that Madagascar will produce for 40 years.world’s leading orebodies are located. We are also in the midst of a period of unprecedented industry change. We should not assume our asset and business mix is static. We should continue to be alert to value adding investments and portfolio changes where we see opportunity, and where we can deliver competitive value in line with our strategy.
Rio Tinto | 49 |
How long will the current market environment last?
Over the past five years we have watched the growth of China and its impact on our business with an initial measure of optimism and healthy scepticism to now what I would best describe as very high expectations based on real facts. Markets appear to be entering the fifth straight year of demand strength with virtually all minerals and metals prices at levels significantly above their long term historical trends. We are continuing to see a fundamental shift in the global economy towards fast and resource intensive growth as countries like China and India continue to industrialise, urbanise and expand their per capita GDP, and I would expect these conditions to continue for some time, perhaps for several decades. With this strong demand, supply growth continues to be constrained, held back by literally decades of underinvestment in people, in exploration and in mines and infrastructure. While this bodes well for the future, it is of absolute importance that our mines and businesses stay globally competitive and sufficiently robust to weather any possible downturns.
But what about the slowdown in the US?
I think we should be insulated from the effects of a major US slowdown. While many of our markets, like North American copper, aluminium and industrial minerals, depend on important sectors like US housing, our overall business is increasingly focused on global demand trends. Clearly China, and to a lesser extent India, has become extremely important to these global trends, and this will be even more so in the future based on strong demographic and economic growth prospects. The importance of the US has declined substantially relative to that of China since 2000. Specific examples include seaborne iron ore, where the US is a negligible market participant, or copper and aluminium, where China now consumes more than twice as much as the US. The key issue for the health of commodity markets over the medium term is the magnitude of any negative spillover effect from a slowing US economy on economic activity in the rest of the world and China in particular. We don’t think a recession in the US will have a significant effect on demand for steel, copper and aluminium in China. If there is a recession in the US, the impact on growth in Chinese GDP is expected to be one per cent or less. This would still leave scope for Chinese growth at levels of ten per cent. For India, the impact of any further US slowdown would likely be smaller because of India’s more limited exposure to world trade.
How do you describe Rio Tinto’s performance in 2007?
Rio Tinto set new annual records for production of iron ore, bauxite, alumina, aluminium, refined copper and refined gold. Production is running at full tilt and accelerated in the second half. Our excellent production results show the momentum in our business and the volume growth that is the fruit of our investments over recent years. With significant expansions on track in iron ore and in aluminium, as well as the contribution of the Alcan acquisition which creates the world’s leading aluminium producer, 2008 is expected to see an acceleration of this growth.
What are the highlights of your growth plan?
One driver is iron ore, where we have developed a conceptual pathway to more than triple our production capacity to more than 600 million tonnes per annum (Mt/a), primarily from expansions of up to 420 Mt/a from the Pilbara and 170 Mt/a from Simandou in Guinea. At Simandou, feasibility studies are likely to be completed by 2010 for first production to start in 2013 at a rate of 70 Mt/a. Additional phases of development are being considered to increase production in 50 Mt/a increments to 170 Mt/a.
Rio Tinto has 1.9 billion tonnes of ore reserves and further iron ore mineralisation in the Pilbara. Exploration is targeting to increase the mineralisation inventory. Exploration drilling at Simandou has also been active with more than 35,000 metres undertaken in 2007. At Simandou we are targeting to add iron ore mineralisation to Rio Tinto’s inventory.
The targeted mineralisation in both the Pilbara and Simandou areas is based on an assessment of tenure areas using surface mapping, drilling results and other information. Technical and economic studies are not complete to enable classification as ore reserves, but results so far provide an indication of just how much potential we have in these areas.
In aluminium, Rio Tinto Alcan is the global leader in bauxite production and aluminium smelting with low cost capacity derived from a unique combination of sustainable hydropower and industry leading technology. With the commissioning of the Gove expansion and the expansion at the Yarwun refinery in Australia under way, we are also on a path to become the world leader in alumina production, doubling capacity by 2015. The integration with Alcan is expected to yield US$940 million per year in operating synergies by 2009, US$340 million per year more than was estimated at mid year. We have a range of smelter upgrades in Quebec and British Columbia planned, in addition to greenfield projects in Oman, Malaysia, Saudi Arabia, Abu Dhabi and South Africa, plus other projects just entering the development process. Global aluminium demand is growing strongly. Global consumption grew by more than ten per cent in 2007, with Chinese growth at 38 per cent. Besides strong Chinese consumption, increased marginal costs of Chinese supply will continue to support this business. However, we will need to be particularly mindful of the impact of a strong Canadian dollar on this business.
In copper, Rio Tinto’s most profitable producer, Bingham Canyon in Utah, offers opportunities for growth, could operate until 2036, and hosts a newly discovered world class molybdenum deposit underneath the current open pit. New porphyry mineralisation has also been discovered below the pit walls and there are more exploration targets within three to four kilometres of the open pit. I am especially proud of everything the team at Kennecott Copper has done, from
Rio Tinto 2007 Form 20-F | 50 |
difficult days just a few years ago, to its current success and its promising outlook. Exploration and evaluation at La Granja in Peru has increased the extent of mineralised material several times since Rio Tinto acquired the property in late 2005. This makes it potentially the largest undeveloped copper project in South America with a possible production rate of up to 500,000 tonnes of copper a year by 2014.
Rio Tinto has a stake in three more of the largest undeveloped copper projects in the world. At Oyu Tolgoi in Mongolia we are targeting to produce up to 440,000 tonnes of copper per year with valuable gold by-products and at Resolution in the US we are targeting an operation of up to 500,000 tonnes per year for 40 years or more.
Exploration, southwest of Oyu Tolgoi, has been very promising with a new discovery called Heruga. We also have a 19.8 per cent interest in the Canadian company that controls the Pebble copper-gold deposit in Alaska, still in the early stages of planning. We are reentering the nickel market with two significant projects – Eagle in Michigan and Sulawesi in Indonesia – that could make us one of the top nickel producers globally. We announced the go-ahead for Eagle a few months ago. First production is scheduled to begin in late 2009.
The current uranium market outlook is very positive, with prices close to record highs, and Rio Tinto is in an excellent position to sustain higher levels of production going forward. With spot prices having risen sixfold since 2004, we have a window of opportunity to lock in higher contract prices over the next several years. We are already the second largest uranium producer in the world and we have identified significant opportunities to expand our business at Energy Resources of Australia and at Rössing.
In coal, our reserve position is one of the largest in Australia, but performance has been hampered by a lack of infrastructure, the result of a legacy of uncoordinated responses by miners, rail carriers and ports. We hope to see the new government in Australia begin to address this national issue as a matter of the greatest urgency. As infrastructure challenges in New South Wales and Queensland are alleviated and we overcome weather related disruptions, we will enjoy significant brownfield and greenfield expansion capabilities from thermal coal mines such as Clermont and Mount Pleasant and our coking coal mines at Hail Creek and Kestrel. Recently we reaffirmed our commitment to the Australian coal sector with an investment to extend and expand Kestrel. Meanwhile, we continue to explore for coal throughout the world.
Turning to industrial minerals, we have some exciting growth prospects here as well. We are now beginning to see increasing Chinese demand for titanium dioxide feedstock, as we have been foreshadowing for the past several years. China is estimated to have made up 17 per cent of global titanium dioxide feedstock demand in 2007, and this is growing rapidly. Our mineral sands project in Madagascar is proceeding well. The 750,000 tonnes per year operation is due to come on stream at the end of 2008, producing some of the highest grade titanium dioxide in ilmenite in the world. We’ve increased our feasibility expenditure on the Potasio Rio Colorado potash project which remains subject to final permitting and approval by the board.
In diamonds, we are making better progress with the Argyle underground development and the Diavik underground project we announced late last year will extend the mine life beyond 2020. Diavik is without doubt the most profitable diamond mine in Canada.
What are your project priorities?
We are focusing on the commodities closely linked to the metals, minerals, and energy intensive stage of development of the world’s growth economies. Our capital expenditure in 2008 and 2009 is expected to be US$9 billion in each year, primarily on projects in iron ore, copper and aluminium. As I outlined above, we have every reason to have confidence in demand growth in these key areas. For example, China’s steel production is now five times more than the amount produced in the US. China is building from scratch a city the size of Brisbane every month. That takes a lot of steel from iron ore, as well as copper, for electrification, aluminium and other metals and minerals. Last year, China consumed over 30 per cent of the world’s aluminium and its annual rate of consumption grew at 38 per cent.
What are you doing about rising production costs?
We are a global company and we are applying advantages of scale and breadth to improve efficiencies and create value. Working through ourOne Rio Tintoconcept we continue to improve, with greater cohesion and collaboration, as a single operating organisation. We expect to achieve considerable savings by operating common systems across our diverse businesses to leverage off the critical mass of the whole. This proved successful when applied to our safety systems, how we run procurement, and in implementing our business improvement programmeImproving performance together(IPT). In the two years of the IPT programme it yielded more than US$800 million of extra value and I fully expect this to continue to grow underOne Rio Tinto. We have a target to reduce corporate function costs by US$500 million before 2010. Every effort is being made to capture the benefits of global standardisation and the transfer of best practice between our operations. Our rapid integration of Alcan, with higher than originally targeted synergies, is a great example of these new systems at work.
I envisage thatOne Rio Tintowill also allow us to be better positioned to introduce innovative technologies across the Group. We are by our nature a capital and process intensive industry, and we are repositioning ourselves from being a fast follower to a targeted innovator of technology in areas where we can make a difference. An example is our goal of developing a fully automated iron ore mine in the Pilbara within the next five years.
Our 2007 second half results show that we are doing better than most in stemming the effects of industry inflation.
Rio Tinto 2007 Form 20-F | 51 |
Where are new opportunities coming from?
In exploration, we believe we’ve had an unrivalled company track record in discovery among the major mining companies. Many of our major value adding projects are the result of exploration successes, which means they were acquired at a very competitive initial investment. For example, La Granja in Peru was acquired for US$22 million plus a minimum investment of US$60 million and has the potential to become one of the world’s largest copper producers. We’ve maintained our commitment to exploration over the years and the consistency of expenditure and activity over the cycle has produced extraordinary results. Looking ahead, our exploration portfolio is an exciting multi-commodity mix of brownfield and greenfield opportunities ranging from iron ore in the Pilbara to bauxite prospects in Brazil, potash in Canada and coking coal in Mongolia. We have an exceptional set of assets and growth opportunities, both in established projects and exploration prospects. We have well trained and motivated people throughout our organisation. And we have a great track record for management delivery in safety, in daily operations and in the execution of our capital projects. We face the future with confidence.
Any reflections on the future?
I’ve inherited a great business and a great organisation. Our primary objective is the creation of further value for our shareholders in a market environment that is nothing short of spectacular. Rio Tinto, with its 135 year heritage of assets, its strong organisation, people and prospects, is well positioned to capitalise on the terrific opportunities available at this point in the market cycle. We cannot rest on our laurels though, and the fast pace of events in 2007 should be seen as a guide to how we have to look to the future, being ever more competitive in an ever more dynamic world. The modernisation of our head office, introduction of our new Rio Tinto brand, and the development of new global systems under a unifiedOne Rio Tintois all evidence of this vision. I’m very excited about the way things are going and our plans for value creation for the shareholders of Rio Tinto.
In closing, I would like to express my thanks and appreciation to all Rio Tinto people around the world for their strong support and dedication at this time.
Tom AlbaneseChief executive
5 March 2008
Group financial performance
The Group uses a number of key performance indicators (‘KPI’s) to monitor financial performance. These are summarised below and discussed later in this report.
KPI | Description | 2007 | 2006 | 2005 | |||
US$m | US$m | US$m | |||||
Underlying earnings | Underlying earnings is the key financial performance indicator which management use internally to assess performance. It is presented here as an additional measure of earnings to provide greater understanding of the underlying business performance of the Group’s operations. Items excluded from net earnings to arrive at underlying earnings are explained in note 2 to the2007 Financial statements. The Group’s underlying earnings for the past three years are discussed below. | 7,443 | 7,338 | 4,955 | |||
Gearing (net debt to total capital) | The Group’s total capital is defined as Rio Tinto’s shareholders’ funds plus net debt and outside equity shareholders’ interests. The Group’s approach to capital management is discussed in the Liquidity and capital resources section on page 100. | 63 | % | 11 | % | 8 | % |
Capital investment | Continuing investment in value adding growth projects. The Group’s capital projects are listed on pages 11 to 13. | ||||||
Total shareholder return (‘TSR’) | Total shareholder return measures the Group’s performance in terms of generating shareholder wealth through dividends and the share price. The Group’s TSR performance compared to the FTSE 100 index, the ASX All Ordinaries index and the HSBC Global Mining Index is shown on page 128. The relationship between TSR and executive remuneration is also discussed on page 122. | 91.8 | % | 7.6 | % | 78.4 | % |
Acquisition of Alcan
During 2007, the Rio Tinto Group acquired 100 per cent of the issued share capital of Alcan Inc. The total cost of acquisition amounted to US$38.7 billion, including fees. Alcan’s results are included within the Group’s results from 24 October 2007.
Alcan Inc. is the parent company of an international group of companies involved in bauxite mining, alumina refining, aluminium smelting, engineered products, flexible and specialty packaging, as well as related research and development.
The Group has decided to dispose of Alcan Packaging, which is presented in the balance sheet in the lines: ‘Assets held for sale’ and ‘Liabilities of disposal groups held for sale’. Therefore, the income and cash flow statements
Rio Tinto 2007 Form 20-F |
Development continuesfor the year exclude amounts relating to Alcan Packaging. Following a company wide strategic review of the combined Rio Tinto and Alcan assets, on 26 November 2007 the intention to divest the Engineered Products business was also announced.
Net earnings and underlying earnings
Both net earnings and underlying earnings deal with amounts attributable to equity shareholders of Rio Tinto. However, IFRS requires that the profit for the period reported in the income statement should also include earnings attributable to outside shareholders in subsidiaries. The profit for the period is reconciled to net earnings and to underlying earnings as follows:
2007 | 2006 | 2005 | ||||
US$m | US$m | US$m | ||||
Profit for the year | 7,746 | 7,867 | 5,498 | |||
Less: attributable to outside equity shareholders | (434 | ) | (429 | ) | (283 | ) |
Attributable to equity shareholders of Rio Tinto (net earnings) | 7,312 | 7,438 | 5,215 | |||
Less: exclusions from underlying earnings | 131 | (100 | ) | (260 | ) | |
Underlying earnings attributable to shareholders of Rio Tinto | 7,443 | 7,338 | 4,955 | |||
2007 financial performance compared with 2006
Net earnings of US$7,312 million in 2007 were US$126 million below 2006, a decrease of two per cent. Underlying earnings of US$7,443 million were US$105 million above 2006, an increase of one per cent. Underlying earnings per share increased by five per cent and net earnings per share increased by two per cent in 2007 reflecting the lower number of shares resulting from the share buyback programme in the first half of the year. The principal factors explaining the changes in underlying earnings are shown in the table below.
Changes in underlying earnings 2006 – 2007 | US$m | ||
2006 Underlying earnings | 7,338 | ||
Effect of changes in: | |||
Prices | 1,364 | ||
Exchange rates | (403 | ) | |
Volumes | 516 | ||
General inflation | (218 | ) | |
Cash costs | (442 | ) | |
Non-cash costs | (201 | ) | |
Exploration, evaluation and technology costs | (309 | ) | |
Tax/other | (202 | ) | |
2007 Underlying earnings | 7,443 | ||
The effect of price movements on all major commodities was to increase earnings by US$1,364 million. Prices for the major products remained strong throughout the year and were higher overall than those experienced in 2006: average copper prices were six per cent higher whilst average aluminium prices were three per cent higher. The strength of the global iron ore market was reflected in the 9.5 per cent increase in the benchmark price, mainly effective from 1 April 2007. The seaborne thermal and coking coal markets were also strong and strengthened further in the second half.
Molybdenum prices averaged US$30/lb throughout 2007, an increase of 20 per cent compared with the prioryear.
There was significant movement in the US dollar in 2007 relative to the currencies in which Rio Tinto incurs the majority of its costs. The Australian dollar was 11 per cent stronger, the Canadian dollar was six per cent stronger and the South African rand four per cent weaker. The effect of all currency movements was to decrease underlying earnings relative to 2006 by US$403 million.
Higher sales volumes predominantly from growth projects increased underlying earnings by US$516 million compared with 2006. The ramp up of new projects in iron ore (including the Yandicoogina and brownfields expansions), higher volumes of copper in concentrate at Escondida from improved grades, higher refined copper sales from the Kennecott Utah Copper (‘KUC’) smelter operating at close to capacity and higher diamond grades at Diavik were the main contributors.
The Group continued to invest further in the future development of the business with an increased charge to underlying earnings of US$309 million from exploration, evaluation and technology costs. Higher freight and demurrage costs and increased energy costs reduced underlying earnings by US$163 million and US$82 million, respectively. Significant shipping congestion at the port of Newcastle affected coal sales with a resulting impact on costs at Rio Tinto Coal Australia, through higher demurrage and a higher unit cost of sale. General inflation and mining inflation increased costs by US$218 million and US$140 million respectively as higher contractor, maintenance and input costs were experienced throughout the Group, notably in the iron ore and copper operations, as industry supply constraints persisted.
An increase in non cash costs reduced 2007 earnings by US$201 million compared with 2006, following the
Rio Tinto 2007 Form 20-F | 53 |
completion of several large capital investment projects.
The effective tax rate on underlying earnings, excluding equity accounted units, was 25.7 per cent compared with 24.2 per cent in 2006. The tax charge in 2007 was reduced by US$392 million as a result of the impact of the reduction in the Canadian tax rate enacted in December 2007 on deferred tax provisions. The 2006 tax rate benefited from US$335 million of US Alternative Minimum Tax credits, which were recognised on the balance sheet as a result of improved prospects for recovery of these from future taxable earnings from the Group’s US operations, as well as the utilisation of US$140 million of previously unrecognised tax assets.
Alcan’s contribution to underlying earnings for the nine weeks to 31 December 2007 was US$424 million, including a benefit relating to the change in the Canadian tax rate as described above. Exploration divestments increased 2007 underlying earnings by US$139 million relative to 2006. A higher interest charge from an increase in net debt following the Alcan acquisition reduced earnings by US$248 million relative to 2006. These variances and the tax variances referred to above are included within the US$202 million adverse variance for ‘Tax/other’.
2006 financial performance compared with 2005
Net earnings of US$7,438 million in 2006 were US$2,223 million above 2005, an increase of 43 per cent. Underlying earnings of US$7,338 million were US$2,383 million above 2005, an increase of 48 per cent. Underlying earnings per share, which increased by 52 per cent, also reflected the lower number of shares resulting from the share buyback programme. The principal factors explaining the changes in underlying earnings are shown in the table below.
US$m | |||
2005 Underlying earnings | 4,955 | ||
Effect of changes in: | |||
Prices | 3,068 | ||
Exchange rates | (35 | ) | |
General inflation | (174 | ) | |
Volumes | (135 | ) | |
Cash costs | (629 | ) | |
Non cash costs | (66 | ) | |
Exploration, evaluation and technology costs | (46 | ) | |
Tax/other | 400 | ||
2006 Underlying earnings | 7,338 | ||
The effect of price movements on all major commodities was to increase earnings by US$3,068 million. Prices for the major products remained strong throughout the year and were considerably higher than those experienced in 2005: average copper prices were 84 per cent higher whilst average aluminium prices were 35 per cent higher. The strength of the global iron ore market was reflected in the 19 per cent increase in the benchmark price, mainly effective from 1 April 2006. The seaborne thermal coal market was also strong, although it weakened in the second half.
Molybdenum prices averaged US$25/lb throughout 2006, a decline of 20 per cent compared with the prior year.
The net effect of changes in average levels of exchange rates against the US dollar for those currencies influencing the Group’s costs was to reduce underlying earnings relative to 2005 by US$35 million.
Lower sales volumes decreased underlying earnings by US$135 million compared with 2005. As anticipated, significantly reduced volumes from lower grades at Grasberg impacted earnings by US$355 million year on year. This more than offset higher volumes at other operations. The ramp up of new projects in iron ore (including the Yandicoogina and brownfields expansions), higher copper in concentrate volumes from improved grades and throughput at Northparkes, higher ore grades and the commencement of sulphide leach production at Escondida, along with higher molybdenum and gold production at KUC, were the main contributors. Record volumes of thermal coal sales at Rio Tinto Energy America and alumina at Yarwun, also contributed to higher volumes. Lower sales volumes were recorded at Argyle Diamondwith a build up of diamond inventories due to softer market conditions, at Kennecott Minerals from lower grades at Cortez, and at Hail Creek from lower coking coal volumes in response to lower customer demand.
Excluding the effects of general inflation, higher costs reduced earnings by US$741 million, of which US$77 million was the result of higher energy costs. Ongoing acute shortages in the mining industry, in particular in the Pilbara, continued to put pressure on costs. Costs at KUC were affected by an extended, scheduled smelter maintenance shutdown whilst Escondida experienced higher wages, following the strike in August. Significant shipping congestion at the port of Newcastle affected coal sales in the second half of the year with a resulting impact on costs at Rio Tinto Coal Australia, through higher demurrage and a higher unit cost of sale.
The effective tax rate on underlying earnings, excluding equity accounted units, was 24.2 per cent compared with 29.2 per cent in 2005, following the recognition of US$335 million of US Alternative Minimum Tax (AMT) credits expected to be utilised in future years. This reflected improved projections of long term taxable earnings from the Group’s US operations. Additionally, the high levels of profit generated by the Group’s US operations in 2006 resulted in the realisation of US$140 million of previously unrecognised deferred tax assets in the year. Deferred tax provisions decreased by US$46 million as a result of a reduction in Canadian tax rates. These favourable tax variances are included within the favourable variance of US$400 million for ‘Tax/other’.
Rio Tinto 2007 Form 20-F | 54 |
Exclusions in arriving at underlying earnings 2005–2007
Earnings contributions from Group businesses and business segments are based on underlying earnings. Amounts excluded from net earnings in arriving at underlying earnings are summarised in the discussion of year on year results below.
2007 | 2006 | 2005 | ||||
US$m | US$m | US$m | ||||
Profit less losses on disposal of interests in businesses | 1 | 3 | 311 | |||
Impairment reversals less (charges) | (113 | ) | 44 | 4 | ||
Exchange gains/(losses) on US$ net debt and intragroup balances (including those relating to equity accounted units) | 156 | (14 | ) | (99 | ) | |
Gains/(losses) on currency and interest rate derivatives not qualifying for hedge accounting | ||||||
(including those relating to equity accounted units) | 34 | 30 | (40 | ) | ||
Other exclusions | (209 | ) | 37 | 84 | ||
Total excluded in arriving at underlying earnings | (131 | ) | 100 | 260 | ||
In 2007 an impairment charge of US$328 million after tax was recognised at Argyle following a decline in value as a result of large increases in the estimated capital costs of the underground project. This was partly offset by the reversal of the residues of the impairments of Tarong Coal and Palabora.
Other exclusions from underlying earnings in 2007, a charge of US$209 million, mainly comprised non-recurring consequences of the Alcan acquisition, including integration costs. Of this total, US$146 million resulted from the sale of Alcan inventories that were revalued based on selling prices at the date of acquisition.
Net earnings in 2006 included net impairment reversals totalling US$44 million. Impairments were reversed at KUC and IOC which more than offset impairment charges at Argyle and Tarong Coal.
Exchange gains and losses on US dollar net debt and intragroup balances that are recorded in the Group’s income statement, together with gains and losses on currency and interest rate derivative contracts that do not qualify as hedges under IFRS are excluded from underlying earnings. In 2007, these items produced a gain of US$190 million (2006: a gain of US$16 million) reflecting the weakening of the US dollar against the Australian and Canadian dollars. In 2005 these items represented a loss of US$139 million.
In 2005, gains from disposals of interests in businesses amounted to US$311 million, relating mainly to the sale of Rio Tinto’s interests in the Labrador Iron Ore Royalty Income Fund and in Lihir Gold.
The effective tax rate on net earnings in 2007, excluding equity accounted units was 25.3 per cent compared with 26.8 per cent in 2006. The reduction in the Canadian tax rate reduced the 2007 effective tax rate and the recognition of US deferred tax assets lowered the effective tax rate in 2006. There were significant untaxed gains in 2005 which lowered the effective tax rate and the tax benefits referred to above reduced the tax rate for 2006.
Group financial results by product group
The table below summarises the Group’s underlying earnings by product group for each of the three years to 2007. These are discussed on pages 56 to 98.
2007 | 2006 | 2005 | ||||
US$m | US$m | US$m | ||||
Iron Ore | 2,651 | 2,251 | 1,722 | |||
Energy | 484 | 706 | 730 | |||
Aluminium | 1,097 | 746 | 392 | |||
Copper | 3,479 | 3,538 | 1,987 | |||
Diamonds and Industrial Minerals | 488 | 406 | 438 | |||
Other operations | 15 | 33 | 40 | |||
Other items | (526 | ) | (241 | ) | (186 | ) |
Exploration and evaluation | 20 | (84 | ) | (124 | ) | |
Net interest | (265 | ) | (17 | ) | (44 | ) |
Group underlying earnings | 7,443 | 7,338 | 4,955 | |||
Exclusions from underlying earnings | (131 | ) | 100 | 260 | ||
Net Earnings | 7,312 | 7,438 | 5,215 | |||
Trend information
The demand for the Group’s products is closely aligned with changes in global Gross Domestic Product. Changes in the GDP of developing countries are expected to have a greater impact on materials such as iron ore and coal that can be used to improve infrastructure, whereas changes in the GDP of developed countries are expected to have a greater impact on industrial minerals that have many applications in consumer products. Copper is used in a wide range of applications from infrastructure to consumer electronics and demand for it has tended to grow in line with or slightly faster than global GDP. Trends in production of the Group’s minerals and metals, gross sales revenue and underlying earnings are set out in thisOperating and financial review and prospects.
Rio Tinto 2007 Form 20-F | 55 |
Aluminium group
Mined | Rio Tinto share | |
Weipa bauxite | million tonnes | |
2003 | 12.1 | |
2004 | 12.8 | |
2005 | 15.6 | |
2006 | 16.3 | |
2007 | 21.0 | |
Production | Rio Tinto share | |
Alumina | ‘000 tonnes | |
2003 | 2,014 | |
2004 | 2,231 | |
2005 | 2,963 | |
2006 | 3,247 | |
2007 | 3,877 | |
Aluminium | ‘000 tonnes | |
2003 | 817 | |
2004 | 837 | |
2005 | 854 | |
2006 | 845 | |
2007 | 1,480 | |
Underlying earnings contribution* | US$m | |
2004 | 331 | |
2005 | 392 | |
2006 | 746 | |
2007 | 1,097 | |
Changes in underlying earnings 2005 - 2007 | US$m | |
2005 Underlying earnings | 392 | |
Effect of changes in: | ||
Prices and exchange rates | 454 | |
General inflation | (36 | ) |
Volumes | 8 | |
Costs | (65 | ) |
Tax and other | (7 | ) |
2006 Underlying earnings | 746 | |
Effect of changes in: | ||
Prices and exchange rates | (12 | ) |
General inflation | (37 | ) |
Volumes | 11 | |
Costs | (36 | ) |
Tax and other | 425 | |
2007 Underlying earnings | 1,097 | |
* | A reconciliation of the net earnings with underlying earnings for 2007, 2006 and 2005 as determined under IFRS is set out on page 53. |
STRATEGIC OVERVIEW
Alcan Inc. (Alcan) joined the Rio Tinto Group on 23 October 2007. The total cost of the acquisition amounted to US$38.7 billion, including fees. The expanded aluminium product group, formed by the combination of Alcan and Rio Tinto’s existing aluminium assets, was renamed Rio Tinto Alcan (RTA).
RTA comprises closely integrated, high quality bauxite, alumina and aluminium businesses with a broad global reach. The business is founded on large reserves of the mineral bauxite, which is refined into the intermediate product alumina, before being smelted into aluminium metal. RTA is a world leader in the production of bauxite and aluminium, with a defined pathway to becoming the largest producer of alumina through the commissioning of the Gove refinery expansion and current expansion of the Yarwun refinery, both in Australia.
RTA is an industry leader in technology which, combined with an ownership position in clean hydro-electric generating capacity of 3,689 megawatts (MW), provides a significant, sustainable competitive advantage of increasing value in a carbon constrained world. The combined group has one of the industry’s most extensive bauxite mine, alumina refinery and aluminium smelter development portfolios, comprising 16 major projects in 13 countries.
Rio Tinto 2007 Form 20-F | 56 |
RTA’s strategy is to maximise shareholder return whilst achieving excellence in health, safety and environmental performance; maximising value generated from existing assets; and optimising and opportunistically growing the bauxite, alumina and aluminium businesses. RTA uses its dedicated business improvement programme, called Lean Six Sigma, to improve operations, process stability and eliminate waste.
RTA is currently organised into four business units – Bauxite & Alumina, Primary Metal, Engineered Products and Packaging. In the announcement of Rio Tinto’s offer for Alcan in July 2007, it was disclosed that it had been agreed with Alcan that the Packaging business would be divested. The Packaging business has therefore been classified as an Asset held for sale and its results for the period since acquisition have not been included in the earnings of the Rio Tinto Group.
RTA’s financial results include Alcan businesses from 24 October 2007. On this basis, in 2007 RTA contributed 22 per cent of Rio Tinto’s gross sales revenue and 15 per cent of its underlying earnings. As at 31 December 2007, RTA accounted for 63 per cent of Rio Tinto’s operating assets.
At year end, RTA employed 71,600 people of whom 67,000 joined the group with Alcan. About 25,000 employees are employed in the Bauxite & Alumina and Primary Metal business units and approximately 45,000 employees in the Engineered Products and Packaging businesses.
Dick Evans, chief executive, Rio Tinto Alcan, is based in Montreal, Canada.
DIVESTMENTS
As part of Rio Tinto’s offer for Alcan on 12 July 2007, it was announced that the Packaging business would be divested. Following a company wide strategic review of the combined Rio Tinto and Alcan assets, on 26 November 2007 the intention to divest the Engineered Products business was also announced.
INTEGRATION OF ALCAN
Rio Tinto’s offer for Alcan on 12 July 2007 aimed at after tax synergies of US$600 million per annum by the end of 2009. Within the parameters of relevant takeover regulations, intensive and cooperative integration efforts were made between 12 July and 23 November 2007 which resulted in an increase in the targeted after tax synergies to US$940 million per annum by the end of 2009. A rigorous and comprehensive integration plan is being progressively executed and is overseen by an Integration Steering Committee and an Integration Management Office.
SAFETY
All injury frequency rate | per 200,000 hours | |
2003 | 1.43 | |
2004 | 1.48 | |
2005 | 1.37 | |
2006 | 1.40 | |
2007 | 1.02 | |
An important factor in Rio Tinto’s acquisition of Alcan was alignment across both businesses on the importance of safety. While philosophies were similar, Alcan’s definitions were different to those used by Rio Tinto and hence 2007 performance is not comparable. Moving forward, former Alcan operations will adopt Rio Tinto definitions and consolidated data will be presented from 2008. The safety results are based on data from the former Rio Tinto Aluminium business; data from former Alcan businesses are not included.
Regrettably a metal merchant was fatally injured at an Engineered Products operation in December. Alcan’s Recordable Case Rate at the end of 2007 represented a 28 per cent reduction over 2006 and an 84 per cent reduction compared to 2001. This performance was 23 per cent better than Alcan’s target for the period. The Lost Time Injury Illness Rate also declined by 26 per cent but remained eight per cent short of the 2007 target.
Some notable examples of Alcan’s success in reducing these rates include controlling hazardous energy sources from upstream operations and development and roll out of large scale man machine interface programmes in downstream operations.
The former Rio Tinto Aluminium business recorded its best ever safety performance in 2007. The All Injury Frequency Rate improved by 26 per cent over 2006 and the number of Lost Time Injuries reduced by 30 per cent compared to the previous year. During the year New Zealand Aluminium Smelters was awarded the Rio Tinto Chief Executive’s Safety Award and Weipa received the award for the Most Improved Site. In 2007, the Safety Leadership Development Programme was introduced across the business and implementation of the Health, Safety and Environment Quality Management System continued.
Rio Tinto 2007 Form 20-F | 57 |
GREENHOUSE GAS EMISSIONS
The former Rio Tinto Aluminium sites have approached meeting greenhouse gas (GHG) and energy targets by planning improvements in the key metrics of net carbon ratio, anode effects, power efficiency and fuel use. Projects are undertaken to improve overall site performance, including cost and production, in addition to supporting GHG and energy targets. There are a considerable number of individual projects being undertaken through the business improvement system, each supported by a detailed plan of activities to bridge the gap between current and targeted performance.
To track and encourage focus on target performance, Rio Tinto Aluminium for several years produced and distributed to its management team quarterly tracking of target performance at all sites. Comparing 2007 actual performance with the 2008 targets shows Anglesey is meeting both energy and GHG target performance, Weipa is meeting energy targets and so is Boyne Island Smelters. Other sites are currently not meeting 2008 targets.
Alcan’s total greenhouse gas emissions were 27.8 million tonnes of CO2 equivalent in 2007, calculated on an equity share basis, representing a four per cent improvement in on site greenhouse gas emissions per tonne of product over a 2005 baseline as a result of efficiency improvements, retrofitting best in class technology and shutdown of some underperforming operations. It is anticipated that the contribution of Alcan will be lower when reported under Rio Tinto greenhouse gas accounting rules. The new RTA is expected to make up about two thirds of Rio Tinto’s gas emissions in the future.
The expanded RTA group will prepare and present revised plans, incorporating activities and costing, for all assets. The group will combine the best ideas from both Rio Tinto and Alcan and enjoy the benefit of a high percentage of low GHG intensity power sourced from hydro-electricity.
FINANCIAL PERFORMANCE
2007 compared with 2006
In 2007, RTA’s contribution to the Group’s underlying earnings was US$1,097 million, an increase of 47 per cent. The higher contribution was due mainly to the one off impact of the reduction in the Canadian tax rates attributable to the Alcan businesses, but also benefited from higher aluminium prices. The average aluminium price in 2007 was US$2,646 per tonne compared with US$2,557 per tonne in 2006. The performance excludes results from the Packaging business as it is classified as a discontinued operation.
2006 compared with 2005
In 2006, the former Rio Tinto Aluminium’s contribution to the Group’s underlying earnings was US$746 million, an increase of 90 per cent. Higher aluminium prices resulted in earnings increasing by US$451 million, with the average aluminium price in 2006 at US$2,557 per tonne compared with US$1,896 per tonne in 2005.
BAUXITE & ALUMINA OPERATIONS
Bauxite | |
Bauxite production capacity more than doubled during the year, with the group’s wholly owned bauxite mine at Weipa (Australia) being joined by Alcan’s four operating bauxite mines from around the world (Australia, Brazil, Ghana and Guinea). At year end, RTA’s bauxite production capacity was the largest in the industry, at 34.4 million tonnes per annum, up from 16.5 million tonnes in 2006. | |
The RTA bauxite business benefits from the following: | |
• | The largest reserves and mineralisation inventory in the industry which should ensure sufficient bauxite supply to sustain the group’s long term growth strategy. |
• | Regional concentration of reserves (Weipa, Ely, Gove) which should provide the basis for optimisation opportunities going forward. |
• | Scope for expansion of annual production which should underpin expected future alumina production growth. |
• | Interests in three of the four largest mines in the world (Weipa, Porto Trombetas and Sangaredi), located in the top three bauxite reserve countries (Australia, Brazil and Guinea). |
• | Annual production capacity that not only supports internal alumina production, but allows significant sales to third parties. |
The Weipa mine located on Cape York, Australia contains reserves of 1,224 million tonnes and additional mineralisation. It has an annual production capacity of 18.2 million tonnes and is by far the largest bauxite mine in the group. In 2007 the mine increased its production capacity by 1.7 million tonnes from 16.5 million tonnes as the result of commissioning of a second shiploader in late 2006. Alcan’s Ely mining lease is situated adjacent to Weipa and is included in the reserve figures for Weipa. Bauxite from Weipa is either shipped to Gladstone for processing at the group’s wholly owned Yarwun refinery and 80 per cent owned Queensland Alumina Limited (QAL) refinery or sold to third parties.
Rio Tinto 2007 Form 20-F | 58 |
RTA’s other Australian mine, at Gove contains reserves of 143 million tonnes and additional mineralisation. It has an annual production capacity of 6.9 million tonnes and is co-located with the Group’s Gove alumina refinery in the Northern Territory, Australia. Output from the mine is consumed mainly by the refinery, although some amounts are sold to third parties.
RTA owns 12.0 per cent of the Porto Trombetas mine in Brazil. Its share of reserves is 20 million tonnes and share of additional mineralisation, constituting a share of annual production capacity of 2.1 million tonnes. Across the Atlantic, RTA owns 22.9 per cent of the Sangaredi mine in Guinea and 80 per cent of the Awaso mine in Ghana, constituting shares of annual production capacity of 6.2 million tonnes and 1 million tonnes respectively. The reserve positions of these African mines are currently under review.
Alumina | |
The addition of Alcan’s assets during 2007 boosted RTA’s total alumina production capacity almost threefold, from 3.2 million tonnes per annum in 2006 to 8.3 million tonnes at the end of 2007. In addition to increasing smelter grade alumina refining capacity, the Alcan assets included specialty alumina production capacity of 740,000 tonnes per annum. Specialty alumina represents a range of products that is used extensively in a wide range of industrial and consumer applications. | |
The combination of Rio Tinto and Alcan has created an alumina business which is balanced in terms of internal alumina demands from the Primary Metal aluminium business. This is important as a balanced or long net alumina position prevents the group from being negatively exposed to periodic alumina price spikes. | |
Additional advantages of the RTA alumina business include: | |
• | Demonstrated technological capability backed by a strong research and development team. |
• | Ownership of the Gove, Yarwun and QAL alumina refineries located in north eastern Australia, which along withthe Weipa and Gove bauxite mines offer significant scope for optimisation as experience, best practices andsupply chain benefits are shared. |
• | A modern set of assets with expansion optionality. |
• | Deployment of the latest technology in significant expansions at Gove and Yarwun. |
The Gove refinery is a wholly owned two million tonnes per annum plant which is in the final stages of a 1.8 million tonnes per annum expansion. It is expected to take overall capacity to 3.8 million tonnes per annum by the end of 2008. The refinery is located next to the Gove bauxite mine. Associated infrastructure includes a deep water port, township and oil fired power station. Following completion of the expansion, the Gove refinery is expected to operate in the second quartile of the industry cash cost curve. Alternative energy sources are currently being evaluated for use at Gove, which could result in a significant further reduction in cash operating costs.
The wholly owned Yarwun refinery, located in Gladstone, Australia, has current nameplate capacity of 1.4 million tonnes per annum. On 3 July 2007, Rio Tinto Aluminium announced an expansion of the Yarwun refinery to increase capacity to 3.4 million tonnes per annum. First shipments are expected in the second half of 2010. An important feature is the inclusion of a gas fired cogeneration facility. Gas will become the primary fuel source, demonstrating RTA’s ongoing commitment to reducing greenhouse gas emissions and improving energy efficiency. There remains potential for the refinery to be ultimately expanded to over four million tonnes per annum. Following completion of the proposed Yarwun expansion, the refinery is expected to operate in the second quartile of the industry cash cost curve.
The combination of Rio Tinto and Alcan has resulted in an 80 per cent interest in QAL, an increase from 38.6 per cent at the end of 2006. QAL, also located in Gladstone, Australia, is one of the world’s largest alumina refineries, with a capacity of just under four million tonnes per annum. QAL operates in the second quartile of the industry cash cost curve and has opportunities for further development.
Outside Australia, RTA wholly owns the 1.3 million tonne per annum Jonquière refinery in Quebec, Canada and the Gardanne refinery in France, which produces mainly specialty alumina, but also has capacity to produce 150,000 tonnes of smelter grade alumina per annum. Both refineries are placed in the fourth quartile of the industry cash cost curve. Other wholly owned refinery operations relate to specialty alumina, in which four smaller plants combine with Gardanne and part of Jonquière to provide around 740,000 tonnes of annual production capacity.
RTA owns a ten per cent share of the Sao Luis (also known as Alumar) refinery in Brazil, which has a current capacity of 1.5 million tonnes per annum. The refinery is currently undergoing a 2.1 million tonnes per annum expansion, of which RTA’s contribution is expected to be approximately US$200 million and which is expected to be completed during 2009. Once completed, the refinery is expected to operate in the first quartile of the industry cash cost curve.
2007 operating performance
Bauxite production during 2007 included output from Alcan’s bauxite mines from 24 October 2007. Accordingly, total production for 2007 of 21 million tonnes exceeded 2006 production by 29 per cent.
Production of bauxite at Weipa reached record levels in 2007, at 18.2 million tonnes (beneficiated and calcined), 12 per cent higher than in 2006. Increased capacity from the commissioning of the second shiploader in late 2006 was
Rio Tinto 2007 Form 20-F | 59 |
the major contributor to Weipa’s improved production capability. Adverse weather conditions that impacted production in early 2006 did not occur in 2007. Weipa bauxite shipments rose by 15 per cent, to 18.2 million tonnes.
Rio Tinto Aluminium advised its calcined bauxite customers in December 2006 that it would withdraw from the production of calcined bauxite by 2008 after 40 years of providing this product to the abrasives and oil and gas exploration industries. Calcined bauxite represents about one per cent of Weipa’s total bauxite production.
To meet the increased transport needs for bauxite and alumina, Rio Tinto has committed US$210 million to the purchase of five new post Panamax bulk ore carriers to be used on the Weipa to Gladstone run and for international trade. These ships are being built in Japan. The first ship, “Wakamatha” was delivered in the third quarter of 2007. In 2007, Weipa’s improved safety performance was recognised with a Chief Executive’s Safety Award.
As is the case with bauxite production, 2007 alumina production included the output of Alcan’s alumina refineries from 24 October 2007. Smelter grade alumina production for 2007 was therefore 15 per cent higher than in 2006 at 3.73 million tonnes. The addition of Alcan’s specialty alumina business during 2007 provided 144,000 tonnes of production from 24 October 2007.
The Yarwun refinery produced at higher levels than 2006 being the first full year of operation since the plant ramped up to nameplate capacity.
On 31 October 2007, RTA announced that it had reached an agreement with Norsk Hydro ASA to expand its alumina supply to Hydro Aluminium from 500,000 tonnes of alumina per annum to 900,000 tonnes from 2011 to the end of the contract. Under a 20 year contract signed in 2003 with Norsk Hydro, RTA is committed to supplying Hydro Aluminium with 500,000 tonnes of alumina per annum from 2006 until 2030. The new contract underpins RTA’s decision to expand the Yarwun alumina refinery and is consistent with its strategy of maximising the value of RTA’s world class bauxite deposits at Weipa.
PRIMARY METAL OPERATIONS
The addition of Alcan aluminium smelters to the Rio Tinto Group created the world’s premier primary aluminium producer, with year end capacity of 4.1 million tonnes per annum representing nearly five times the group’s 2006 production capacity of 853,700 tonnes.
The transformation of this business during 2007 was significant. Aside from the enormous increase in primary aluminium smelting capacity, the business added one partly owned and 11 wholly owned power facilities, boosting owned electricity generation capacity by 620 per cent to twice the industry average. In addition, a range of businesses related to aluminium smelting (including technology sales and service, engineering services, smelting equipment sales and smelting consumables production) were added.
Smelting facilities | |
As of 31 December 2007 the business unit comprised 25 smelters in 11 countries, the vast majority of which are located in OECD countries. The former Rio Tinto Aluminium consisted of interests in four smelters in three countries. | |
As with any commodity business, the position on the global cash cost curve is important in determining the relative profitability of operations within the industry. In this regard, RTA enjoys an excellent position, with the world’s largest share of first quartile production capacity and an overall average position at the low end of the second quartile. This position is particularly noteworthy given the number of RTA facilities and the enormous scale of total production capacity. The RTA smelting system has around half of its capacity located in the first quartile of the industry cash cost curve, with another third in the second quartile. Only one fifth of RTA’s current smelting capacity lies in the higher cost part of the industry cash cost curve. This is expected to prove increasingly valuable as the industry’s average cash costs rise as expected, influenced by factors such as rising energy costs, potential Chinese currency revaluations and possible greenhouse gas emission costs. | |
Key reasons for RTA’s excellent position on the global aluminium cash cost curve include: | |
• | Ownership and utilisation of industry leading AP series pre-bake cell technology, one of the most efficientaluminium smelting technologies in the world from an energy and operating cost perspective. |
• | Ownership of around half of the smelting group’s electricity generation needs, compared to an industry averageof around 30 per cent. |
• | The existence of a modern smelter fleet, with over 70 per cent of overall smelting capacity being less than 30years old, a significantly greater proportion than the industry average. |
• | Operational expertise, as demonstrated during the period since 2001 by both improving safety trends and anability to extract on average 1.1 per cent per annum production capacity improvement, compared to an industryaverage over the same period of 0.5 per cent. |
The group’s largest concentration of smelting assets is located in Canada. RTA has ownership interests in nine smelters in Canada, seven of which are wholly owned and all but one of which are located in the Province of Quebec. Total annual production capacity in Canada, resulting from the acquisition of Alcan, is 1.77 million tonnes as at 31 December 2007. All of this capacity is powered by clean, renewable hydro-electricity, the majority of which is self owned.
In the Oceania region, RTA has ownership interests in four smelters, three in Australia and one in New Zealand. The Bell Bay smelter in Australia is wholly owned, while ownership interests range from 52 to 79 per cent in respect of
Rio Tinto 2007 Form 20-F | 60 |
the other three facilities. The total annual attributable production capacity in this region is 1.06 million tonnes as at 31 December 2007, an increase of 37 per cent over the prior year mainly due to the addition of a 51.6 per cent interest in Australia’s Tomago smelter as a result of the combination with Alcan.
RTA also has a substantial presence in Europe with ownership interests in eight smelters, principally in France and the UK. The annual production capacity at the end of 2007 was one million tonnes, an increase of over 1,200 per cent due to the combination with Alcan. Two of the smelters in the UK totalling 221,000 tonnes of annual capacity are powered by wholly owned electricity generation facilities. The Lannemezan smelter in France, which had a capacity of 25,000 tonnes as at 31 December 2007, will be closed during the first half of 2008.
In addition to Canada, Oceania and Europe, RTA wholly owns one smelter in the United States, which, together with interests in smelters in Cameroon and China, represents annual production capacity of 324,000 tonnes as at the end of 2007. Alcan Ningxia Aluminum Company Limited (Ningxia), in which RTA holds a 50 per cent stake in the pre-bake Line 3, is one of the lowest cost aluminium producers in China. Further, the group retains a 20 per cent stake in the 350,000 tonne per annum Sohar smelter in Oman, which is on track to be commissioned during 2008. The smelter will utilise RTA’s AP35 technology which, together with RTA operational expertise, will contribute toward the expected position of the smelter in the first quartile of the industry cash cost curve.
Power facilities
Given the long term nature of a smelter investment, and the fact that electricity costs usually represent around one quarter of industry average smelting cash costs, a secure, long life and competitively priced electricity supply is of vital importance in the aluminium smelting industry. In this respect, RTA is very favourably positioned. As at 31 December 2007, RTA owns electricity generating capacity of 5,076 MW, up from 706 MW at the end of 2006. The group owns generation capacity sufficient to meet around half of its electricity needs, a proportion far above the industry average, while long term power purchase contracts account for a further 46 per cent. An additional advantage is that 75 per cent of the total RTA electricity supply is non fossil fuel based hydropower and nuclear power.
As with the aluminium smelters, the significant majority of RTA’s power facilities are located in Canada. Six separate wholly owned power stations located on the Peribonka and Saguenay rivers in Quebec comprise a generation capacity of 2,687 MW. The water management system for these power stations, with their associated dams, reservoirs and catchment areas, covers an area of 73,800 square kilometres. The group’s wholly owned Kemano power station in British Columbia has capacity of 896 MW and primarily supplies electricity to the wholly owned Kitimat smelter. It is noteworthy that the group’s Canadian self owned hydropower assets are the result of construction efforts that took place over a period of 50 years, and that such assets would be extremely difficult and costly to replicate today.
The group owns a 42 per cent share of the coal fired Gladstone Power Station (GPS) in Australia, used to supply the Boyne Island smelter. The GPS interest held by RTA has a capacity of 706 MW.
In China, RTA owns nearly 22 per cent of the Daba power station, a facility which provides electricity to the Ningxia smelter. The group’s share of generating capacity from this coal fired plant is 261 MW.
In Europe, the group wholly owns four power stations, three in the UK totalling 500 MW of capacity and one in Norway of 26 MW. Of the total of 526 MW of European generating capacity, 420 MW is coal fired while the remainder is hydro powered.
Technology | |
The combination of Rio Tinto and Alcan creates an excellent opportunity to exercise undisputed industry leadership in technology. RTA’s technology strategy is to: | |
• | lead through benchmark performance in all aspects of current operations; |
• | maintain and enhance RTA’s industry-leading position with respect to the AP technologies; and |
• | develop new breakthrough, high value future options focusing on significant reductions in energy andenvironmental impact. |
During 2007, design and engineering work continued on schedule in respect of the AP50 pilot plant in Quebec, expected to cost around US$550 million and have a nameplate capacity of 60,000 tonnes per annum. The plant is expected to serve as the basis for commercialisation of the AP50 technology, which incorporates unique design features that make it a superior platform for the fullest exploitation of a suite of breakthrough technologies currently under development.
An innovative portfolio of breakthrough technologies is being pursued with the overall goal of lowering unit energy consumption by up to 20 per cent while reducing and eventually eliminating GHG and other emissions. RTA is focused on step changes in energy consumption, environmental impact and full economic cost, in order to maintain and extend RTA’s position as industry technology leader, thereby supporting a key corporate objective of sustainable growth.
RTA also sells technology to third parties. In addition to being a viable business, this product offering has the benefit of enhancing RTA’s appeal as the joint venture partner of choice, given the combination of technological and management skills the group is able to offer. This aspect of the RTA business may prove increasingly valuable in accessing growth options in the future, as the supply side of the industry trends away from the developed world due to diminishing availability of competitively priced, secure power.
Rio Tinto 2007 Form 20-F | 61 |
Other businesses
RTA’s Primary Metal business unit participates in a number of other businesses related to the smelting of primary metal. These include the production and sale of cathode blocks, anodes, aluminium fluoride and calcined coke, the provision of engineering services and sale of smelting equipment, as well as the sale of electricity where generation is surplus to production needs. These businesses are relatively small compared to the smelting and power operations. During the first half of 2007, they comprised less than ten per cent of Primary Metal’s revenues. The various businesses have a presence in most regions of the world, with particular emphasis in North America and Europe.
2007 operating performance
In 2007, RTA produced 1.5 million tonnes of primary aluminium, up 75 per cent from 2006 levels due to the addition of Alcan aluminium production from 24 October 2007.
In respect of the four smelters owned by Rio Tinto Aluminium prior to the Alcan acquisition, RTA’s share of aluminium production of 862,000 tonnes was above 2006 production levels of 845,000 tonnes. Much of this improvement was attributable to Tiwai Point, (New Zealand Aluminium Smelters) where production was not hampered by the low lake levels that had been experienced in 2006.
During 2007, RTA smelters continued to produce close to capacity, with the exception of Edea (Cameroon) which operated at levels of around 85 per cent due to power constraints.
On 1 October, NZAS and Meridian Energy Limited signed an 18 year electricity price agreement for 572 MW of continuous consumption at the smelter. The agreement runs from 1 January 2013 to 31 December 2030. The new agreement provides NZAS with the basis for a secure and reliable power supply to meet the smelter’s operational requirements during this period. The smelter already has the lowest level of GHG emissions of any smelter of similar technology worldwide and this contract will maintain that position. In November 2007, the smelter received a gold award from the New Zealand Business Excellence Foundation.
Weipa(Rio Tinto: 100 per cent)
A 3.5 million tonne per annum expansion of the group’s Weipa bauxite mine is currently under way. The expansion is scheduled to be completed by late 2009 and is expected to cost around US$30 million. The expansion is expected to further leverage the world class Weipa bauxite deposit.
Gove(Rio Tinto: 100 per cent)
As of the date of Rio Tinto’s acquisition of Alcan, a 1.8 million tonnes per annum expansion of the Gove alumina refinery in Australia was nearing completion, with certain components of the expansion already commissioned and being brought into production. The expansion cost is US$2.3 billion, and is expected to bring the Gove refinery to a total capacity of 3.8 million tonnes per annum, making it one of the largest refineries in the world. Nameplate capacity is expected to be reached by the end of 2008. Following completion of the expansion, the Gove refinery is expected to operate in the second quartile of the industry cash cost curve.
Yarwun(Rio Tinto: 100 per cent)
On 3 July 2007, Rio Tinto approved an expansion of the Yarwun alumina refinery in Gladstone, Queensland in order to more than double annual production, increasing output by two million tonnes. First shipments are expected in the second half of 2010. The expansion is expected to cost around US$1.8 billion. Work commenced on the expansion in the third quarter and is expected to take about three years to complete. First shipments are expected in the second half of 2010. All government approvals have been granted. Once completed, the refinery is expected to be positioned in the second quartile of the industry cost curve.
Sao Luis (Alumar)(Rio Tinto: ten per cent)
A 2.1 million tonnes per annum expansion of the Alumar refinery in Brazil (Rio Tinto share 210,000 tonnes) is under way and progress on construction is approximately 35 per cent advanced as at 31 December 2007. The project will cost an estimated US$200 million (Rio Tinto’s share). Alumar is expected to be positioned in the first quartile of the industry operating cost curve once construction is completed.
Guinea(Rio Tinto: 50 per cent)
A 1.6 million tonnes per annum greenfield alumina refinery project in Guinea is being evaluated in partnership with Alcoa Inc. The project is currently at the pre feasibility stage and it is expected that the sponsors will make a decision in the first half of 2008 with regard to undertaking detailed feasibility studies. It is expected that the refinery would be positioned in the first quartile of the industry cost curve.
Ghana(Rio Tinto: 51 per cent)
A 1.5 million tonnes per annum greenfield alumina refinery project is under consideration in partnership with the Government of Ghana. The project is currently at the conceptual study stage and it is expected that the sponsors will
Rio Tinto 2007 Form 20-F | 62 |
make a decision in the first half of 2008 with regard to undertaking a pre feasibility study. It is expected that the refinery would be positioned in the first quartile of the industry cost curve.
Madagascar(Rio Tinto: 51 per cent)
A 1.6 million tonnes per annum greenfield alumina refinery and associated bauxite mine is being considered in partnership with a Malagasy company. The project is currently at the conceptual study stage and it is expected that the sponsors will make a decision in the first half of 2008 with regard to undertaking a pre feasibility study. It is expected that the refinery would be positioned in the first quartile of the industry cost curve.
Sohar(Rio Tinto: 20 per cent)
In 2007, construction advanced on time and on budget at the 350,000 tonnes per annum smelter at Sohar, Oman. When complete, the 350,000 tonne potline would be the world’s largest both in terms of capacity and overall length, utilising the world’s most advanced commercial technology, the RTA owned AP35 smelting technology. The smelter is expected to produce aluminium ingot for export commencing in the first half of 2008. Once operational, the smelter is expected to be positioned in the first quartile of the industry cost curve. A second potline of similar size is currently the subject of discussions among the joint venture partners. Under the original agreement between the partners, RTA has the right to take up to 60 per cent of this second potline.
Hydropower(Rio Tinto: 100 per cent)
On 26 April 2007, the former Alcan announced the investment of US$130 million in a new, power efficient hydro generator to be installed at the group’s Shipshaw power facility in Quebec, Canada. The new generator will optimise the performance of the facility and improve the efficiency with which the water flow is utilised. In addition, on 30 January 2008, the group announced an investment of US$90 million in its Lochaber, Scotland hydro-electric facilities, designed to ensure the future of smelting in the Highlands of Scotland for many years to come. The project, which will see the installation of new hydro-electric turbo generators, is expected to commence in 2009 and be completed by 2012.
Spent pot lining facility(Rio Tinto: 100 per cent)
RTA is building a US$180 million aluminium spent pot lining recycling plant in Quebec’s Saguenay-Lac-Saint-Jean region of Canada. This unique industrial scale pilot plant is expected to have a capacity of approximately 80,000 tonnes to recycle spent pot lining using Alcan’s proprietry technology. Spent pot lining is the residual material generated in the de-lining of pots following the aluminium smelting electrolysis process. The spent pot lining is composed of carbon and various inert elements and is typically pre-treated and land filled under strict precautions. Through this new process, all of the spent pot lining will be recycable, providing the global aluminium industry with a sustainable re-usable solution for spent pot lining by-products. The plant’s technology was developed at RTA’s Arvida Research and Development Centre and is expected to begin pot lining treatment operations in 2008.
Kitimat(Rio Tinto: 100 per cent)
In 2006, Alcan announced its intention to modernise the existing Kitimat smelter, replacing the current Soderberg technology with industry leading AP35+ prebake technology and increasing smelter capacity to 400,000 tonnes per annum. The facility will take advantage of the RTA owned Kemano hydro-electric facility, with a capacity of 896 MW, and access to the Pacific Rim in terms of raw materials and metal markets, while reducing the environmental footprint of the existing plant by 40 per cent by reducing GHG generation by around 500,000 tonnes per annum. Total investment in respect of the project is expected to be around US$2 billion. On 30 January 2008, the third and final condition for proceeding to board approval of the project was completed with clearance from the British Columbia Utilities Commission in respect of BC Hydro’s 2007 Energy Purchase Agreement with RTA. The other two hurdles were the securing of an acceptable labour agreement for construction and start up and assurances on environmental permitting issues. Advanced feasibility studies have been completed and the project is expected to be submitted for approval during 2008, on which basis first metal can be expected in 2011. When completed, the smelter is expected to be positioned in the first quartile of the industry cost curve.
Quebec(Rio Tinto: 100 per cent)
In December 2006, the former Alcan announced a plan to build a US$550 million pilot plant at its Complexe Jonquière site in Quebec, Canada to develop the company’s proprietary AP50 smelting technology. The pilot plant is expected to produce approximately 60,000 tonnes of aluminium per annum and will be the platform for future generations of AP50 technology. The first of its kind, the plant is the start of a planned ten year US$1.8 billion investment programme in Quebec’s Saguenay–Lac-Saint-Jean region, involving up to an additional 390,000 tonnes annually of new smelting capacity by 2015. The new AP50 pilot facility will be the cornerstone of an industrial strategy developed by RTA with the support of the Government of Quebec. Engineering and feasibility studies are advancing as are site preparation activities, and initial approval is expected around the middle of 2008. When completed, the smelter is expected to be
Rio Tinto 2007 Form 20-F | 63 |
Coega(Rio Tinto: 80 per cent)
Feasibility studies have been substantially completed in respect of the construction of a 720,000 tonnes per annum smelter at Coega, Eastern Cape Province, South Africa. Although an energy contract with the South African utility, ESKOM was signed in November 2006, ongoing discussions are reviewing the terms of the project to align its timing with the availability of secure power generation capacity from ESKOM. When completed, the smelter is expected to be positioned in the first quartile of the industry cost curve.
Saudi Arabia(Rio Tinto: 49 per cent)
In 2007, a heads of agreement was signed with Ma’aden (the Saudi Arabian Mining Company) to investigate the development of a bauxite mine at Az Zabirah, and construction of a power plant, alumina refinery and aluminium smelter complex at Ras Az Zawr, on the Gulf Coast of Saudi Arabia. Under the agreement, RTA is expected to take a 49 per cent interest in the project, with Ma’aden owning the remainder. Pre feasibility work is scheduled to be completed in 2008. The proposed aluminium smelter is planned to have a capacity of 720,000 tonnes per annum and if completed, is expected to be positioned in the first quartile of the industry cost curve. The proposed alumina refinery would have a capacity of 1.6 million tonnes per annum and if completed, is expected to be positioned in the second quartile of the industry cost curve. Most of the smelter output, at least initially, is planned for export.
Sarawak(Rio Tinto: 60 per cent)
On 7 August 2007, Rio Tinto and Cahya Mata Sarawak Berhad signed a heads of agreement for the proposed development of a smelter in the State of Sarawak, Malaysia. Under the signing of the heads of agreement, detailed feasibility studies on the design, engineering, construction, commissioning and operation of a smelter with an initial capacity of 550,000 tonnes are being undertaken. The smelter is expected to have the capability to be expanded to 1.5 million tonnes per annum. It is proposed that electricity for the smelter may come from the Bakun hydro-electric dam, which is currently under construction. If completed, the smelter is expected to be positioned in the first quartile of the industry cost curve.
Abu Dhabi(Rio Tinto: 50 per cent)
Discussions are continuing with General Holding Corporation of Abu Dhabi for a development that could result in a smelter with a first stage production capacity of 720,000 tonnes of metal per annum. Abu Dhabi Aluminium Company (Adalco) has been formed to manage the joint venture. If completed, the smelter is expected to be positioned in the first quartile of the industry cost curve.
Iceland(Rio Tinto: 100 per cent)
During 2007, the community near RTA’s ISAL smelter expressed dissatisfaction with a proposed expansion and modernisation of the facilities, by narrowly rejecting a town planning referendum which included the matter. RTA is continuing to assess options for the possible expansion of its smelting activities in Iceland.
Cameroon(Rio Tinto: 46.7 per cent)
A potential upgrade and expansion of the Alucam smelter by 200,000 tonnes per annum, together with the construction of a new 330 MW hydro-electric power station, is being contemplated. Pre-feasibility studies have been completed and environmental authorisations have been obtained. RTA and the Government of Cameroon committed on 29 November 2007 to additional access to water resources to facilitate the launch of technical and pre-feasibility studies for a new greenfield smelter with potential capacity of 400,000 tonnes per annum. If completed, these smelter projects are expected to be positioned in the first quartile of the industry cost curve.
ENGINEERED PRODUCTS
RTA’s Engineered Products business unit is a portfolio of inter connected aluminium and non aluminium businesses providing innovative, high value added solutions to meet the diverse needs of its global customer base. In particular, the business is the premier supplier of high value added aluminium products to the world’s leading aircraft manufacturers. In Europe, it also produces large profile extrusions for the transportation industry and is a top supplier of beverage can stock. The business is the North American leader in aluminium wire and cable, and a world leader in composite products with a unique portfolio of brands and product solutions. As at 31 December 2007, the business unit comprised 95 operating and sales sites in 34 countries and regions around the world. The unit is organised into seven sub business units; Aerospace, Transport and Industry (ATI), Cable, Extruded Products, Composites, Specialty Sheet, Engineered and Automotive Solutions (EAS) and the Alcan International Network (AIN).
On 8 November 2007, RTA announced the sale of the non aerospace portion of its service centre operations in Europe, Alcan Service Centres (ASC), to Amari Metals. The transaction was completed on 4 January 2008. Rio Tinto announced on 26 November 2007 the intention to explore options for the divestment of the remainder of the Engineered Products business unit. Although Engineered Products is a market leader in many of its largest businesses, and has
Rio Tinto 2007 Form 20-F | 64 |
recently experienced strong growth, the business unit does not fit within Rio Tinto’s overall corporate strategy.
PACKAGING
RTA’s Packaging business unit enjoys market leading positions in each of the four packaging segments in which it operates; Food Flexible, Pharmaceutical and Medical, Beauty and Personal Care, and Tobacco. It is one of the few participants in its product markets with a truly global reach having executed considerable expansion into emerging countries and regions over the last few years. The business delivers innovative packaging solutions using plastics, engineered films, aluminium, paper, paperboard and glass to customers worldwide. As at 31 December 2007, the business unit comprised 129 operating sites in 31 countries and regions around the world. The potential divestment of the Packaging business unit was being explored by Alcan during the first half of 2007 and was confirmed in the announcement by Rio Tinto of an agreed bid for Alcan on 12 July, 2007. The sale process for the Packaging business unit is ongoing.
Rio Tinto 2007 Form 20-F | 65 |
Copper group
Mined | Rio Tinto share | |
Copper | ‘000 tonnes | |
2003 | 867 | |
2004 | 753 | |
2005 | 784 | |
2006 | 803 | |
2007 | 738 | |
Gold | ‘000 ounces | |
2003 | 2,731 | |
2004 | 1,552 | |
2005 | 1,726 | |
2006 | 1,003 | |
2007 | 1,233 | |
Refined | Rio Tinto share | |
Copper | ‘000 tonnes | |
2003 | 349 | |
2004 | 333 | |
2005 | 314 | |
2006 | 299 | |
2007 | 390 | |
Underlying earnings contribution* | US$m | |
2004 | 860 | |
2005 | 1,987 | |
2006 | 3,538 | |
2007 | 3,479 | |
Changes in underlying earnings 2005 - 2007 | US$m | |
2005 Underlying earnings | 1,987 | |
Effect of changes in: | ||
Prices and exchange rates | 1,707 | |
General inflation | (28 | ) |
Volumes | (179 | ) |
Costs | (196 | ) |
Tax and other | 247 | |
2006 Underlying earnings | 3,538 | |
Effect of changes in: | ||
Prices and exchange rates | 388 | |
General inflation | (37 | ) |
Volumes | 309 | |
Costs | (230 | ) |
Tax and other | (489 | ) |
2007 Underlying earnings | 3,479 | |
* | A reconciliation of the net earnings with underlying earnings for 2007, 2006 and 2005 as determined under IFRS is set out on page 53. |
STRATEGIC OVERVIEW
Rio Tinto’s Copper portfolio comprises a diverse mix of operations and projects along the development pipeline. During 2007 the focus on copper and molybdenum was supplemented by nickel.
The Copper group comprises Kennecott Utah Copper in the US and interests in the producing copper mines of Escondida in Chile, Grasberg in Indonesia, Northparkes in Australia and Palabora in South Africa. The group has management responsibility for Kennecott Minerals Company in the US and includes interests in undeveloped world class copper orebodies at La Granja in Peru, Oyu Tolgoi in Mongolia and Resolution in the US. Nickel projects in Indonesia and the US offer a pathway to becoming a top tier global nickel producer.
As one of the world’s leading copper businesses, Rio Tinto’s pipeline of projects position the Group to become the world’s leading base metal producer by value creation. Recent exploration at the La Granja project in Peru has highlighted the potential for doubling forecast production to in excess of 500,000 tonnes per annum. Development work on Oyu Tolgoi is progressing well with significant further exploration potential in Mongolia. Average production is projected to be 440,000 tonnes per annum of copper and 320,000 ounces per annum of gold over the life of the mine.
Rio Tinto 2007 Form 20-F | 66 |
Rio Tinto has a 9.9 per cent interest in the Pebble copper-gold-molybdenum project in Alaska managed by the Northern Dynasty Minerals/Anglo American joint venture. Rio Tinto continues to be involved and monitor progress.
There are significant extension options in copper, gold and molybdenum at Kennecott Utah Copper and upside on the Resolution project, both in the US. In addition to these world class projects, the group is developing the E48 underground deposit at Northparkes. At Palabora, studies are progressing to evaluate an extension to the existing underground block cave lift, to explore the option of developing a second lift and to review options for enhancing revenue from magnetite stockpiles, a form of iron ore produced as a by-product of copper concentration.
Historically, the Copper group built the majority of its portfolio through acquisitions (Kennecott) or joint ventures (Escondida, Grasberg) followed by expansions. The current pipeline of projects represents a transition with a greater proportion of opportunities created through exploration and acquisitions at an early stage of development. The Copper group’s long term development plans are not confined to its principal product. Rio Tinto has a number of nickel development opportunities which are currently being evaluated. At the small, high grade Eagle nickel deposit (Rio Tinto: 100 per cent) in Michigan in the US, feasibility studies were completed during 2007 and the decision to construct the underground mine was made in November 2007. In Indonesia, positive progress was made with the government on a Contract of Work for the Sulawesi Nickel project.
A Copper Projects team was formed in 2007 to manage the planning, development and related technology aspects of the portfolio of major projects, namely La Granja, Oyu Tolgoi, Resolution Copper, Keystone at Kennecott Utah Copper and Sulawesi Nickel. The team will collaborate with the Technology and Innovation group to focus on block cave design (with project work at Palabora), rapid construction (at Diavik), copper leaching (at La Granja) and nickel/cobalt recoveries (trials in Australia). With the significant ramp up of activities at each project site, there has been an elevated focus on safety systems especially in the area of contractor management.
Oyu Tolgoi, Resolution Copper and Kennecott Utah Copper’s Bingham Canyon are amenable to being mined using the underground block caving technique. Unlike an open pit mine, which involves extensive removal of the surface waste rock to access the orebody, the block cave method accesses the orebody from underneath through a series of deep shafts and tunnels. These shafts and tunnels generate minimal waste rock. The block caving technique is currently being used at both Palabora and Northparkes. La Granja will rely on innovative leaching technology which will be about three times higher than their average level through the 1990s and well above levels achieved in the early part of this decade. Copper stocks have been at critically low levels since a surge of consumption in 2004 depleted available inventories. Since then, supply has been constrained while underlying demand has strengthened with Chinese economic growth. Prices could remain near current levels as long as production growth continues to lag the underlying demand trend. Strong Chinese demand growth is expected in 2008 while on the supply side issues include the likelihood of ongoing disruptions and possible constraints on the availability of sulphuric acid affecting solvent extraction and electro-winning (SxEw) operations. The importance of investment funds in exchange traded commodity markets means that large price movements could take place on the back of commodity specific speculative shifts or broader shifts in investor sentiment, well in advance of any fundamental change in physical markets. Looking to the long run, strong demand growth prospects are based on the expected resource intensive development of economies such as China and associated investment in power distribution networks and other infrastructure. On balance, there has been a structural shift in copper costs supporting the expectation of significantly higher long run prices than would be implied by historical trends.
Rio Tinto announced in November 2007 that it would explore options for the sale of a shortlist of assets, including three businesses from the Copper product group – Greens Creek (zinc, lead, silver) (Rio Tinto: 70 per cent), Cortez/Pipeline (gold)(Rio Tinto: 40 per cent) and Northparkes (copper, gold)(Rio Tinto: 80 per cent). These are all good businesses and any sales will be value driven and dependent on price. On 12 February 2008 the Group reached agreement for the sale of the Greens Creek interest for US$750 million. On 5 March 2008 the Group completed the sale of its interest in the Cortez gold mine for US$1,695 million, a deferred bonus payment and a contingent royalty.
At 31 December 2007, the Copper group, which also produces gold and molybdenum as significant co-products, accounted for six per cent of the Group’s operating assets and in 2007 contributed approximately 25 per cent of Rio Tinto’s gross sales revenue, of which 72 per cent was from copper, 12 per cent from molybdenum and the remainder mostly from gold. It accounted for 47 per cent of underlying earnings in 2007.
Bret Clayton, chief executive, Copper, is based in London.
SAFETY
All injury frequency rate | per 200,000 hours |
2003 | 1.72 |
2004 | 1.25 |
2005 | 1.64 |
2006 | 1.47 |
2007 | 1.28 |
In 2007 there was one fatality at Resolution Copper and four fatalities at non managed operations (three at Grasberg and one at Escondida). For Copper group managed operations, the all injury frequency rate (AIFR) was 1.27 compared to
Rio Tinto 2007 Form 20-F | 67 |
1.47 for 2006. There were notable improvements in AIFR at Kennecott Minerals (3.68 to 1.84) and Palabora (1.08 to 0.60) .
On 10 March 2008 a helicopter under charter to the La Granja copper project in Peru went missing while two pilots were ferrying eight passengers from the La Granja camp to Chiclayo. Wreckage was observed from the air and it was subsequently found that all ten occupants of the helicopter had perished. Rio Tinto is providing support and counselling to the families and colleagues of those involved.
GREENHOUSE GAS EMISSIONS
Kennecott Utah Copper (KUC) currently has 49 projects that will reduce greenhouse gas (GHG) emissions, including reduction of diesel consumption by haul trucks and increasing throughput at the pebble crusher. The challenge in 2008 will be to achieve GHG reductions per unit of copper produced.
Palabora is expecting a reduction of 13.3 per cent which is below the targeted reduction of 19.8 per cent. The reason is the switch, made for economic reasons, from processing purchased concentrates to processing Palabora owned low grade surface stockpiles. This results in higher energy use and a reduction in production.
Given the energy limitations in South Africa, Palabora continues to implement energy efficiency measures while maintaining operational flexibility. Northparkes in Australia has set reduction targets although GHG emissions per unit of copper will increase due to the early cessation of the E26 underground phase and processing of harder ore.
FINANCIAL PERFORMANCE
2007 compared with 2006
The Copper group’s contribution to 2007 underlying earnings was US$3,479 million, similar to 2006 record earnings. Higher prices and volumes offset higher costs and the absence of 2006 tax benefits. The average price of copper was 324 US cents per pound during 2007, six per cent higher than in 2006. The average gold price of US$691 per ounce increased by 15 per cent. The average price of molybdenum was US$29.92 per pound compared with US$24.60 per pound in 2006. Higher volumes were achieved across all operations except Northparkes, with the largest increases at Escondida due to a full year’s sulphide leach production, and at KUC due to the absence of the 2006 smelter shutdown. Higher operational costs were due to increased truck numbers resulting from longer haul profiles at KUC, increased diesel power costs due to natural gas restrictions at Escondida and the premature shutdown of Lift 2 at Northparkes. Evaluation projects also impacted cash costs due to higher spending at Resolution, La Granja, the Keystone project at KUC and the share of spending on the Oyu Tolgoi project.
KUC’s contribution to underlying earnings of US$1,649 million was US$161 million lower than 2006, primarily through the absence of the US$289 million tax credit recognised in the prior year, a higher tax rate due to the shift from the Alternative Minimum Tax accounting basis in the US group and increased depreciation following the impairment reversal during 2006. As well as increased prices, offsetting these decreases in earnings were higher refined copper and gold volumes as smelter performance improved following the extended shutdown in late 2006 as well as a reduction in the environmental liability following a re-assessment of the acid plume clean-up rate.
Rio Tinto’s share of underlying earnings from Escondida was US$1,525 million, an increase of US$275 million from the prior year. This was achieved through higher prices and increased copper volumes as a result of the continued ramp up of the sulphide leach plant and a higher ore grade which more than compensated for higher energy and material costs.
The Grasberg joint venture contributed US$159 million to underlying earnings, US$37 million above 2006. This was due to significant increases in gold volumes due to improved grade offset by a fall in copper volumes as grade and mill throughput both fell.
Palabora’s 2007 earnings of US$58 million were US$6 million above the prior year, as increasing volumes achieved through improved underground production and ore grade and also higher copper rod premiums all benefited earnings.
Northparkes contributed US$137 million to underlying earnings, a fall of US$92 million from 2006. Performance was dominated by the premature shutdown of the Lift 2 underground area during the first half of the year, resulting in the processing of low grade open pit stockpiles and increased costs.
Kennecott Minerals earnings of US$106 million were US$1 million above the prior year, with higher prices and increased gold volumes from Cortez offset by the absence of the US$14 million tax credit from the prior year and the resulting higher effective tax rate in 2007.
The impact on earnings of expenditure on evaluation projects was US$155 million in 2007, an increase of US$125 million from the prior year as activities increased on a number of projects. Activities included pre-feasibility studies at Resolution Copper and La Granja and early construction work at Oyu Tolgoi in anticipation of the signing of an Investment Agreement with the Mongolian government.
Rio Tinto 2007 Form 20-F | 68 |
2006 compared with 2005
The Copper group’s contribution to underlying earnings was US$3,538 million, US$1,551 million higher than in 2005. The average price of copper was 306 US cents per pound during 2006, 84 per cent higher than in 2005. The average gold price of US$602 per ounce increased by 36 per cent. The average price of molybdenum was US$24.60 per pound compared with US$30.70 per pound in 2005.
KUC’s earnings of US$1,810 million were US$767 million higher than in 2005, with the operation benefiting from higher prices and volumes and a tax credit of US$289 million following recognition of deferred tax assets. Record molybdenum production was achieved during the year, offsetting the impact of lower refined copper production due to a scheduled smelter shutdown in the second half of 2006. An increase in the group’s long term copper price assumption triggered an assessment of the amount of recoverable copper at KUC. As a result, impairments recorded in 2001 and 2002 were reversed in 2006.
Rio Tinto’s share of earnings from Escondida increased by US$648 million to US$1,250 million. Higher prices and the commencement of sulphide leaching counterbalanced higher mining costs and input prices.
The Grasberg joint venture contributed US$122 million to underlying earnings, US$110 million below 2005. Lower grades of copper, gold and silver, the result of mine sequencing, led to significantly lower production of all three metals.
Palabora’s 2006 earnings of US$52 million were US$33 million above the prior year, benefiting from higher copper prices and sales volumes and the sale of some smelter stocks.
Northparkes’ earnings of US$229 million represents a US$172 million increase from 2005. In addition to higher prices, better grades, increased throughput and improved recoveries all contributed to a 54 per cent increase in production of copper contained in concentrates.
Kennecott Minerals’ 2006 earnings of US$105 million were US$32 million above 2005. The effect of higher gold and zinc prices and the recognition of a US$14 million deferred tax asset were offset by higher costs and lower sales volumes from Cortez, due to lower grades.
Kennecott Utah Copper(Rio Tinto: 100 per cent)
Kennecott Utah Copper (KUC) operates the Bingham Canyon mine, Copperton concentrator and Garfield smelter and refinery complex, near Salt Lake City, US. KUC is a polymetallic mine, producing copper, gold, molybdenum and silver. As the second largest copper producer in the US, KUC supplies more than 13 per cent of the nation’s annual refined copper requirements and it employs approximately 1,800 people.
KUC joined the Climate Registry, a voluntary reporting system for greenhouse gas emissions. KUC will continue to report publicly on greenhouse gas emissions associated with the operations.
2007 operating performance
KUC has been operating for over 100 years, was Rio Tinto’s most profitable mine in 2007 and has extensive optionality for future development. KUC is well positioned on the industry cost curve, benefiting from significant co-product revenues from gold and molybdenum. It continues to demonstrate operating flexibility by delivering high volumes of molybdenum during a continuing period of exceptionally high prices. Building on the foundation of Rio Tinto’sImproving performance together(IPT) methodology, KUC continued to improve its knowledge of molybdenum mineralisation in the orebody to optimise production. The bulk flotation upgrade at the concentrator started in 2007 with an expected capital cost of US$88 million. The project, scheduled for completion in June 2008, is expected to increase recovery by around two per cent and increase concentrate grade by four per cent.
KUC continues to be one of the most favourable brownfield environments of all Rio Tinto’s mines and retains significant options for further mine life extensions. Over the past two years brownfield exploration has uncovered a world class molybdenum deposit sitting underneath the Bingham open pit, additional porphyry mineralistion below the southern pit wall at depth and multiple targets with further potential both in the immediate three to four kilometre wide orbit of the Bingham pit and within 20 kilometres in the Oquirrh Range.
The Keystone project continues to evaluate pit expansion options while concurrently establishing underground access, through the dewatering and rehabilitation of an existing mine shaft to provide access for an underground drilling programme. Additional option analysis to accelerate the underground schedule through shaft and level access design will be conducted in 2008. Current open pit options indicate that there is good opportunity to expand mining in the southern area of the pit. Current ore reserves will support open pit operations until 2019 and this could be extended to 2036 through a combination of underground and open pit options.
KUC is progressing with a feasibility study to advance the molybdenum autoclave process (MAP), which will convert molybdenum concentrates into final saleable products. KUC currently produces a high grade molybdenum concentrate that is shipped to a third party roaster for conversion to metallurgical grade molybdenum products. The proposal is to produce enhanced chemical grade products on a brownfield site west of the smelter. The main economic drivers for the project are attracting a chemical grade premium with contract floor pricing and higher molybdenum recoveries. A decision whether or not to proceed with construction will be made in the first quarter of 2008, with operations commencing in the first quarter of 2010. The estimated capital cost to construct the facility is US$169
Rio Tinto 2007 Form 20-F | 69 |
million with an additional US$106 million to expand the plant in 2014 to match a predicted increase in mined molybdenum production.
Principal operating statistics at KUC 2005-2007
2007 | 2006 | 2005 | ||||
Rock mined (’000 tonnes) | 142,297 | 145,343 | 140,906 | |||
Ore milled (’000 tonnes) | 47,525 | 47,857 | 46,664 | |||
Head grades: | ||||||
Copper (%) | 0.53 | 0.63 | 0.53 | |||
Gold (g/t) | 0.38 | 0.49 | 0.37 | |||
Silver (g/t) | 3.00 | 3.50 | 3.23 | |||
Molybdenum (%) | 0.050 | 0.057 | 0.058 | |||
Copper concentrates produced (’000 tonnes) | 889 | 1,019 | 881 | |||
Production of metals in copper concentrates | ||||||
Copper (’000 tonnes) | 212.2 | 265.6 | 220.6 | |||
Gold (’000 ounces) | 397 | 523 | 401 | |||
Silver (’000 ounces) | 3,487 | 4,214 | 3,958 | |||
Molybdenum concentrates produced (’000 tonnes) | 26.6 | 30.2 | 29.5 | |||
Contained molybdenum (’000 tonnes) | 14.9 | 16.8 | 15.6 | |||
Concentrate smelted on site (’000 tonnes) | 1,103 | 918 | 1,042 | |||
Production of refined metals | ||||||
Copper (’000 tonnes) | 265.6 | 217.9 | 232.0 | |||
Gold (’000 ounces) | 523 | 462 | 369 | |||
Silver (’000 ounces) | 4,365 | 4,152 | 3,538 | |||
Grasberg joint venture(Rio Tinto: 40 per cent)
Grasberg, located in the province of Papua in Indonesia, is one of the world’s largest copper and gold mines in terms of reserves and production. It is owned and operated by Freeport Indonesia (PTFI), the principal and 91 per cent owned subsidiary of the US based Freeport-McMoRan Copper & Gold Inc. (FCX). The Government of Indonesia owns the remaining nine per cent of PTFI. The joint venture gives Rio Tinto a 40 per cent share of production above specific levels until 2021 and 40 per cent of all production after 2021, as well as representation on operating and technical committees.
The joint venture operates under an agreement with the Government of Indonesia, which allows the joint venture to conduct exploration, mining and production activities in a 10,000 hectare area (Block A). Exploration activities are conducted in an approximate 200,000 hectare area (Block B). All of the proved and probable mineral reserves and current mining operations are located in Block A. Rio Tinto and PTFI also have joint ventures in other entities which have exploration rights in areas covering 690,000 hectares in addition to Blocks A and B. Rio Tinto has the right to 40 per cent of the exploration potential in all areas outside of Block A.
In meeting the mine’s social obligations to local communities, at least one per cent of Grasberg’s net sales revenues are committed to support village based programmes. In addition, two trust funds were established in 2001 in recognition of the traditional land rights of the local Amungme and Komoro tribes. In 2007, PTFI contributed US$48 million (net of Rio Tinto portion) and Rio Tinto US$4.5 million in total to the funds.
As a result of training and educational programmes, Papuans represented more than a quarter of PTFI’s approximately 10,776 strong workforce by the end of 2007.
2007 operating performance
In mid 2007, the Deep Ore Zone expansion to 50,000 tonnes per day was completed, and a further expansion to 80,000 tonnes per day is under way. Ninety per cent of the tunnelling on the Common Infrastructure Project was completed, which will provide access to large undeveloped orebodies through a tunnel system 400 metres below existing workings. Feasibility studies for Grasberg block cave operations are well advanced and mine development activities will commence in the first half of 2008. The Big Gossan development will reach full production rates by the end of 2010. The high pressure grinding rolls project which involves new energy saving technology for treating ore in the mill was completed during 2007.
Rio Tinto’s share of metal is 40 per cent of the production in excess of a level specified in the joint venture agreement (the Product Schedule). This means that Rio Tinto’s share is leveraged to relatively small variations in total production. Rio Tinto’s 2007 share of production showed considerable variation from 2006 – volumes of payable copper decreased to 60 million pounds in 2007 from 99 million pounds in 2006, offset by an increase in the volume of payable gold from 94,000 ounces in 2006 to 411,000 ounces in 2007. The sequencing in mining areas with varying ore grades causes fluctuations in the timing of ore production, resulting in varying annual production of copper and gold. This continuing variation in production will continue year on year. It is expected that in the first half of 2008 mining will be in a relatively low grade section of the Grasberg open pit.
The current mine plan reflects a transition from the Grasberg open pit to the Grasberg underground block cave orebody in mid 2015. PTFI, as manager, continually analyses its longer range mine plans to assess the optimal design of
Rio Tinto 2007 Form 20-F | 70 |
the Grasberg open pit and the timing of development of the Grasberg underground block cave orebody. The review in 2006 resulted in changes to the expected final Grasberg open pit design which will result in a section of high grade ore previously expected to be mined in the open pit to be mined in Grasberg’s underground block cave operations.
Principal operating statistics for PTFI 2005-2007
2007 | 2006 | 2005 | ||||
Ore milled (’000 tonnes) | 77,593 | 83,716 | 78,907 | |||
Head grades: | ||||||
Copper (%) | 0.82 | 0.85 | 1.13 | |||
Gold (g/t) | 1.24 | 0.85 | 1.65 | |||
Silver (g/t) | 3.53 | 3.84 | 4.88 | |||
Production of metals in concentrates | ||||||
Copper (’000 tonnes) | 569.4 | 610.8 | 793.9 | |||
Gold (’000 ounces) | 2,689 | 1,880 | 3,546 | |||
Silver (’000 ounces) | 5,238 | 5,609 | 7,531 | |||
Escondida(Rio Tinto: 30 per cent)
The low cost Escondida copper mine in Chile’s Atacama Desert, is the largest copper mine in the world in terms of annual production, and has a mine life expected to exceed 30 years. It accounts for approximately eight per cent of world primary copper production. BHP Billiton owns 57.5 per cent of Escondida and is the operator and product sales agent.
The Escondida district hosts two of the largest porphyry copper deposit systems in the world – Escondida and Escondida Norte, located five kilometres from Escondida. A sulphide leach project was completed during 2006 and continued to ramp up during 2007. Escondida employs approximately 2,900 people. Options for future growth at Escondida continue to be evaluated jointly. These include increasing throughput by adding new facilities such as a concentrator to the two existing ones, optimising mining rates through coordinating mine plans with adjacent pits and identifying new ore sources through exploration. A brownfields exploration programme has been in place since 2005, with encouraging results.
The energy situation in northern Chile is tight and vulnerable to rationing. Diesel power has replaced natural gas and the future energy matrix is likely to shift towards coal and liquefied natural gas (LNG). Escondida is supporting the development of a LNG plant which should provide additional power and reliability to the system. In the longer term, Escondida will secure power through the construction of a coal fired power station which will be operational by 2011.
2007 operating performance
Escondida’s copper concentrate production was 11 per cent higher than 2006 due to higher grades and throughput. Refined copper production was 77 per cent higher than 2006 due to a full year of sulphide leach production which commenced in June 2006.
Principal operating statistics at Escondida 2005-2007
2007 | 2006 | 2005 | ||||
Rock mined (’000 tonnes) | 345,377 | 338,583 | 359,569 | |||
Ore milled (’000 tonnes) | 90,697 | 84,158 | 86,054 | |||
Head grade: | ||||||
Copper (%) | 1.64 | 1.59 | 1.53 | |||
Production of metals in concentrates | ||||||
Copper (’000 tonnes) | 1,247 | 1,122 | 1,127 | |||
Gold (’000 ounces) | 187 | 170 | 183 | |||
Silver (’000 ounces) | 7,870 | 6,646 | 6,565 | |||
Copper cathode (’000 tonnes) | 238.4 | 134.4 | 143.9 | |||
Palabora(Rio Tinto: 57.7 per cent)
Palabora Mining Company (Palabora) is a publicly listed company on the Johannesburg Stock Exchange and operates a mine and smelter complex in South Africa. Palabora developed a US$465 million block cave underground mine with a planned production rate of at least 32,000 tonnes of ore per day. Approximately 678,900 tonnes of copper are expected to be produced over the remaining life of the mine.
Palabora supplies most of South Africa’s copper needs and exports the balance. It employs approximately 2,050 people. For the first time, three year wage agreements were entered into with organised labour until the end of February 2011.
Palabora is progressing arrangements to meet the requirements of legislation governing broad based economic empowerment in the South African mining industry.
Rio Tinto 2007 Form 20-F | 71 |
2007 operating performance
Underground production increased as a result of improved block caving conditions, procedures and equipment availability. Ore milled increased mainly due to higher underground production and the processing of Palabora marginal and oxide ore surface stock piles. Concentrate tonnage was 15 per cent greater than 2006 due to reclaimed low grade concentrate during the first quarter of 2007 and higher milled tonnage. Smelter production also increased on the prior year due to the absence of the 2006 smelter shutdown. Magnetite production in 2007 was up 16 per cent year on year, in line with Palabora’s plans to meet offtake agreements.
Principal operating statistics at Palabora 2005-2007
2007 | 2006 | 2005 | ||||
Ore milled (’000 tonnes) | 12,915 | 10,730 | 9,536 | |||
Head grade: | ||||||
Copper (%) | 0.70 | 0.71 | 0.72 | |||
Copper concentrates produced (’000 tonnes) | 239.2 | 208.9 | 197.1 | |||
Contained copper (’000 tonnes) | 71.4 | 61.5 | 61.2 | |||
New concentrates smelted on site (’000 tonnes) | 295.8 | 288.5 | 304.4 | |||
Refined copper produced (’000 tonnes) | 91.7 | 81.2 | 80.3 | |||
Magnetite concentrate ('000 tonnes) | 1,306 | 1,127 | 888 | |||
Northparkes(Rio Tinto: 80 per cent)
Rio Tinto’s interest in the Northparkes copper-gold mine in central New South Wales, Australia, resulted from the acquisition of North Ltd. Northparkes is a joint venture with the Sumitomo Group (20 per cent).
Following an initial open pit operation at Northparkes, underground block cave mining has been undertaken since 1997. In November 2006, the joint venture partners approved the development of the E48 block cave project, which is expected to cost US$160 million (Rio Tinto share: US$127 million) and extend the mine’s life until 2016. Northparkes employs approximately 220 people.
2007 operating performance
Production was constrained by early closure of the E26 Lift 2 due to the ingress of clay at the underground drawpoints. Ore was and will continue to be sourced from stockpiles, the E22 open pit and the Lift 2 North block cave until production commences from the E48 block cave in 2009.
Principal operating statistics at Northparkes 2005-2007
2007 | 2006 | 2005 | ||||
Ore milled (’000 tonnes) | 5,297 | 5,789 | 5,453 | |||
Head grade: | ||||||
Copper (%) | 0.91 | 1.53 | 1.12 | |||
Gold (g/t) | 0.62 | 0.64 | 0.46 | |||
Production of contained metals | ||||||
Copper (’000 tonnes) | 43.1 | 83.3 | 54.0 | |||
Gold (’000 ounces) | 78.8 | 94.7 | 57.0 | |||
Kennecott Minerals(Rio Tinto: 100 per cent)
Kennecott Minerals in the US managed the Greens Creek mine (Rio Tinto: 70 per cent) on Admiralty Island in Alaska which produces silver, zinc, lead and gold and the Rawhide mine (Rio Tinto: 51 per cent) in Nevada which produces gold and silver by leaching since mining operations ceased in 2002. Reclamation work is well advanced. Kennecott Minerals also owned the group’s interest in the Cortez joint venture (Rio Tinto: 40 per cent), also in Nevada.
Kennecott Minerals has a successful record in mine closure, having demonstrated responsible post mining use of land at Flambeau, Wisconsin, where the mine became a nature park, and at Ridgeway in South Carolina, now a wetland for ecological studies.
Rio Tinto announced in November 2007 that it would explore options for the sale of a shortlist of assets including the Greens Creek mine and the Cortez joint venture. On 12 February 2008 the Group reached agreement for the sale of Greens Creek to its minority partner for US$750 million. On 5 March 2008 the Group completed the sale of its interest in the Cortez joint venture to its partner for a cash consideration of US$1,695 million, a deferred bonus payment in the event of additional reserves and a contingent royalty interest.
Kennecott Minerals employed approximately 250 people, excluding employees of non managed operations.
2007 operating performance
Net earnings of US$106 million matched 2006 earnings, with prices for gold, silver, zinc and lead remaining strong. At Greens Creek, production increased over 2006 due to the completion of the major rehabilitation programme at the mine. Cortez gold production remains constrained as mining moves into the final lower grade stages of the Pipeline orebody. 2007 production was, however, 21 per cent higher than 2006 due to increased leach ore tonnes.
Rio Tinto 2007 Form 20-F | 72 |
Resolution(Rio Tinto: 55 per cent)
The Resolution Copper project is located in the historic Pioneer Mining District three miles east of Superior, Arizona. Exploration from 2001 to 2003 indicated a large, world class copper resource more than 2,000 metres (7,000 feet) below surface. The project team is currently working through a pre-feasibility study, including dewatering the former Magma mine and sinking an exploratory shaft to 2,000 metres below the surface, as well as preparing numerous studies to evaluate the technical, legal and environmental issues and to prepare the mining plan.
The key issue facing the project is progress on the passage of a land exchange bill through the US Congress to exchange 1,300 hectares of federal land above the Resolution deposit for over 2,000 hectares of land with high conservation value spread throughout Arizona. In July 2007, land exchange bills were reintroduced into the US Senate and House, followed by a House hearing in November. The next steps include mark up of the bill in the House and a hearing in the Senate which is likely to take place in the first half of 2008.
Oyu Tolgoi(Rio Tinto: 9.9 per cent interest in Ivanhoe Mines)
In October 2006 Rio Tinto purchased a stake of just under ten per cent in Ivanhoe Mines of Canada in order to jointly develop the Oyu Tolgoi copper-gold resource in Mongolia’s south Gobi region. Rio Tinto has the ability progressively to increase its stake to 43 per cent over the next four years at pre-determined prices. This phased, risk managed entry into an outstanding resource secures a valuable share of a potential average production rate of 440,000 tonnes of copper per year with significant gold by-products.
There is extensive exploration potential in Mongolia, including ground controlled by Entrée Gold around Oyu Tolgoi. Rio Tinto is the largest single shareholder in Entrée Gold and, with Ivanhoe, owns a total equity interest of 30.6 per cent. Ivanhoe has an option for up to an 80 per cent interest in the Entrée ground over the north and south extensions of the Oyu Tolgoi trend. Exploration on the Entrée Gold joint venture by Ivanhoe has recently delineated a continuous molybdenum-rich copper and gold mineralisation up to 400 metres wide along a 1,100 metre strike length. Overall, the Oyu Tolgoi mineralised trend now has a strike length of over 20 kilometres.
Rio Tinto is actively engaged and working with the Mongolian Government to progress settlement of a long term investment agreement.
Entrée Gold(Rio Tinto: 16 per cent)
In June 2005 Rio Tinto acquired a 9.9 per cent stake via private placement in Entrée Gold Inc, a Canadian junior mining company. Entrée Gold's main asset includes three claims that surround the Ivanhoe Mines Oyu Tolgoi project in Mongolia. Rio Tinto's entry into Entrée Gold was due primarily to the prospectivity of the land package, including high grade copper and gold intercepts in their tenement already under agreement to Ivanhoe adjacent to the Oyu Tolgoi lease. Recent drilling by Ivanhoe identified significant high grade intercepts of porphyry mineralisation on the Heruga concession adjacent to the Oyu Tolgoi project. As part of the initial entry into Entrée Gold, Rio Tinto secured a further 6.3 million A and B class warrants which were due to expire by the end of June 2007. On the 28th June, Rio Tinto exercised these warrants at a cost of US$16.9 million which took Rio Tinto's direct equity in Entrée Gold to approximately 16 per cent. The combined Rio Tinto and Ivanhoe equity position is now over 30 per cent.
La Granja(Rio Tinto: 100 per cent)
La Granja in the Cajamarca region of northern Peru is a copper project in the pre-feasibility phase. Rio Tinto acquired the project in December 2005 for US$22 million plus a minimum investment of US$60 million, through a public bidding process carried out by the Peruvian Government.
As of December 2007, 41 kilometres of drilling had been completed which led to discovery of four additional porphyries in the vicinity, as well as further exploration potential. Drilling results suggest that the main areas have a targeted mineralisation at a copper equivalent average grade of about 0.5 per cent. Initial investigations indicate two to four times more mineralised material than was reported by previous owners, making La Granja the largest undeveloped copper project in Latin America. It has the potential to be a very large, long life operation. First production could occur in 2014.
Instead of looking at La Granja as a conventional milling operation producing concentrates for export, the pre-feasibility study is aimed at demonstrating the possibility of recovering copper metal using leaching of copper from whole ore, with solvent extraction and electrowinning.
There are many stakeholders with an interest in the project due to the potential positive impact on the local and national economy. At the same time, local communities have high expectations of Rio Tinto’s presence in the area, where basic skills of literacy and numeracy and basic infrastructure and services are lacking. Rio Tinto is working in a participatory manner with local communities to help them develop and improve their quality of life with the engagement of local, regional and national authorities.
Pebble(Rio Tinto: 19.8 per cent interest in Northern Dynasty Minerals)
Rio Tinto acquired a 9.9 per cent interest in Northern Dynasty Minerals during the year and increased its interest to 19.8 per cent during February 2007. Northern Dynasty Minerals is advancing the Pebble copper-gold-molybdenum deposit in south western Alaska, which includes an orebody amenable to block caving. In July 2007, Anglo American agreed to
Rio Tinto 2007 Form 20-F | 73 |
invest US$1.4 billion in stages to earn a 50 per cent stake in the project.
The project comprises two orebodies, Pebble East and Pebble West. Drilling has shown Pebble East to be deep and higher grade, suggesting an attractive underground mining option with a smaller environmental footprint than the Pebble West deposit which would entail open pit mining. Rio Tinto will not support development unless it is conducted in a way that protects fish, wildlife and the environment.
Sulawesi Nickel(Rio Tinto: 100 per cent)
The Sulawesi Nickel project is situated on the island of Sulawesi in Indonesia and is the result of the discovery by Rio Tinto Exploration in 2000 of a world class laterite deposit. Because of the nature of the deposit, mining is planned to be a shallow open cut process with continuous rehabilitation. Initial production is planned at a rate of about 46,000 tonnes of nickel per annum, with potential to increase to about 100,000 tonnes. The project will involve the construction of an access highway and a new seaport on the east coast of Sulawesi.
Upon completion of the negotiation of a Contract of Work (CoW) with the Government and ratification of the agreement by the Indonesian Parliament, it is intended to start a pre-feasibility study into development.
Eagle(Rio Tinto: 100 per cent)
Late in 2007 Rio Tinto approved the development of the eagle nickel high grade underground mine in Michigan, US, which is scheduled to begin operation in 2009. There are six further adjacent prospects which may give the potential to extend the current mine life beyond 30 years at the current planned production rates. Deeper drilling under and adjacent to the Eagle deposit reinforced the potential for further economic nickel mineralisation outside the current mine plan. There are similarities to other world class magmatic nickel-sulphide deposits. Rio Tinto has an extensive land position in the Eagle district which is extremely prospective, including a 30 kilometre identified trend containing multiple target intrusions.
Rio Tinto 2007 Form 20-F | 74 |
Diamonds and Industrial Minerals group
Mined | Rio Tinto share | |
Diamonds | ‘000 carats | |
2003 | 33,272 | |
2004 | 25,202 | |
2005 | 35,635 | |
2006 | 35,162 | |
2007 | 26,023 | |
Underlying earnings contribution* | US$m | |
2004 | 431 | |
2005 | 438 | |
2006 | 406 | |
2007 | 488 | |
Changes in underlying earnings 2005 – 2007 | US$m | |
2005 Underlying earnings | 438 | |
Effect of changes in: | ||
Prices and exchange rates | 46 | |
General inflation | (26 | ) |
Volumes | (97 | ) |
Costs | (22 | ) |
Tax and other | 67 | |
2006 Underlying earnings | 406 | |
Effect of changes in: | ||
Prices and exchange rates | (20 | ) |
General inflation | (39 | ) |
Volumes | 58 | |
Costs | 53 | |
Tax and other | 30 | |
2007 Underlying earnings | 488 | |
* | A reconciliation of the net earnings with underlying earnings for 2007, 2006 and 2005 as determined under IFRS is set out on page 53. |
STRATEGIC OVERVIEW
From 1 June 2007 the number of product groups in which Rio Tinto is organised was reduced by combining the Industrial Minerals group with the Diamonds group to form Diamonds and Industrial Minerals. The structuring better reflects the size of the Diamonds and Industrial Minerals businesses in the context of the broader Rio Tinto. Diamonds and Industrial Minerals report to the product group heads of Copper and Energy respectively.
Diamonds comprises Rio Tinto’s 60 per cent interest in the Diavik Diamonds mine located in the Northwest Territories of Canada, the wholly owned Argyle mine in Western Australia, DiavikRio Tinto’s 78 per cent interest in the Murowa mine in Zimbabwe and diamond sales and representative offices in Antwerp, Belgium and Mumbai, India.
Within the global diamond industry, Rio Tinto Diamonds is well positioned as a leading supplier to the market with a clear focus on the upstream portion of the value chain. The group’s differentiated approach to marketing has enabled it to capture higher prices.
The group’s strategy is to compete in the diamond business and strive to build further value through operational excellence and continued development of new and existing resources. The focus is on the mining, recovery and sale of rough natural diamonds. In keeping with Rio Tinto’s values, the group is a leading proponent of a number of programmes and partnerships that help improve social and environmental standards of partners, suppliers and customers.
Rio Tinto sells diamonds from all three operations through its marketing arm according to a strict chain of custody process ensuring all products are segregated according to mine source.
The Industrial Minerals part of the group is made up of Rio Tinto Minerals (RTM), a global leader in borates, talc and salt supply and science, and Rio Tinto Iron & Titanium (RTIT), a major producer of titanium dioxide feedstock. Industrial minerals markets include automotive, construction, telecommunications, agriculture and consumer products industries. Market differentiation depends on technical and marketing expertise and the group maintains R&D facilities in Europe, Canada and Cortezthe US to develop new products and support customers.
The Industrial Minerals strategy is to create value by directing resources toward high value growth sectors in Nevada,mature and emerging markets. To support this, the group focuses on meeting customers’ needs for consistent quality, on time delivery and responsiveness; setting and meeting aggressive business improvement targets; expanding high grade titanium dioxide feedstock capacity; and establishing stock points to supply demand growth in emerging economies.
Rio Tinto 2007 Form 20-F | 75 |
The Industrial Minerals operating strategy is market driven and focuses on optimising volumes and product mix.
Business improvement targets set in 2004 have largely been met resulting in the lowering of the sustainable cost base of Industrial Minerals. As part of a business optimisation exercise two talc operations were sold and two more were decommissioned in 2007. The Canadian RTIT metal powders plant has been integrated into the other RTIT operations to improve operating synergies. Operational excellence programmes continue to deliver improvements through systematically eliminating waste, reducing process variability, and engaging and empowering the workforce.
Commercial and operating excellence is the foundation for growth, with acquisitions of sufficient scale serving to complement the existing portfolio. Greenfields projects are under way in potash and soda ash. RTIT is operating its assets at maximum capacity while maximising returns from co-products. Volume growth in the high grade titanium dioxide feedstock market will be underpinned by the commissioning and expansion of the Madagascar deposit.
During 2007 negotiations at Richards Bay Minerals (RBM) were progressed to an advanced stage to divest 26 per cent of the business to historically disadvantaged groups as doespart of the extensionlegal requirement in South Africa to convert mineral rights. Rio Tinto marginally increased its share in its salt operations by buying out minority shareholders. At the end of 2007 a Group wide review of assets was conducted to determine the long term value of retaining these assets within Rio Tinto. Based on the outcome of this review the RTM borates and talc businesses are being considered for divestment.
At 31 December 2007, Diamonds and Industrial Minerals accounted for seven per cent of the Group’s operating assets and contributed approximately 12 per cent of Rio Tinto’s gross turnover and seven per cent of underlying earnings in 2007. Approximately 8,000 people were employed in 2007.
Andrew Mackenzie was appointed chief executive, Diamonds and Industrial Minerals on 1 June. In November he left the Group. Responsibility for the Industrial Minerals portfolio was assumed by Preston Chiaro, chief executive, Energy, while Bret Clayton, chief executive, Copper, is responsible for Diamonds.
SAFETY
All injury frequency rate | per 200,000 hours |
2003 | 1.89 |
2004 | 1.67 |
2005 | 1.45 |
2006 | 0.91 |
2007 | 1.07 |
GREENHOUSE GAS EMISSIONS
Greenhouse gas (GHG) emissions per tonne of product are decreasing at both Diavik and Argyle diamond mines. Both sites are evaluating and implementing projects to further reduce emissions. At Argyle these projects are focused on inreasing the proportion of hydro-electric power, which already meets the majority of power requirements.
The majority of RTM’s GHG emissions are from the Boron California facility where an energy management plan has been introduced. There are currently 24 energy management projects that are being progressed, and emissions per tonne of product are decreasing. During 2007 RTIT sites undertook audits to identify opportunities for GHG and energy reduction.
FINANCIAL PERFORMANCE
2007 compared with 2006
Diamonds contributed US$280 million to Rio Tinto’s underlying earnings in 2007, an increase of US$69 million over 2006. Sales revenue for 2007 was US$1,020 million, US$182 million higher than in 2006. Increased volumes from Diavik, a reduction in stocks at Argyle and tax credits in Australia and Canada contributed to earnings. An impairment charge of US$328 million after tax was taken at Argyle, reflecting industry cost pressures and the difficult ground conditions encountered in the underground project.
The rough diamond market recovered during 2007 as excess pipeline inventory was consumed after weakness in the latter half of 2006. The polished diamond market was steady, but the weakness of the US economy is expected to curtail demand in the lower end of the market.
Industrial Minerals’ net earnings were US$248 million, an improvement of two per cent on 2006. Net earnings from RTM decreased eight per cent to US$84 million while revenue grew five per cent. Earnings were negatively
Rio Tinto 2007 Form 20-F | 76 |
affected by a tax charge related to the borates business, and the impact of cyclones in Western Australia on salt volumes.
RTIT recorded earnings of US$164 million, up from US$152 million in 2006. Revenue increased by 15 per cent due to an increase in sales to emerging markets and strong co-product prices. The effect of the strong Canadian dollar and rising input costs continued to put pressure on earnings from RTIT’s wholly-owned QIT-Fer et Titane (QIT) business.
2006 compared with 2005
Diamonds contributed US$211 million to underlying earnings in 2006, a decrease of US$75 million from 2005. Reduced 2006 earnings are mainly a result of the weakened second half market.
Diamonds’ turnover for 2006 was US$838 million, US$238 million lower than in 2005 driven primarily by a downturn in the rough diamond market in the second half of 2006. This resulted in lower prices for most product types with Rio Tinto Diamonds stocking some lower quality product to be sold in 2007.
Diamond production remained at similar levels to 2005 across all operations. Argyle produced 29.1 million carats in 2006, approximately 1.4 million carats less than in 2005. This was in line with expectations of a decreasing diamond production profile as the open pit winds down and underground production ramps up over the next five years. Diavik produced 5.9 million carats in 2006, 0.9 million carats more than in 2005. Murowa produced 0.2 million carats in 2006, slightly less than in 2005.
The rough diamond market started strong in the first half of 2006 but deteriorated into the second half. Year end prices closed at similar levels to the start of 2006. A number of factors influenced this mid year correction, including a congested processing pipeline, tight manufacturing and trading liquidity and storms that caused flooding in India’s major cutting center, Surat, which forced the shutdown of many cutting and manufacturing centres for several weeks.
Polished diamond prices remained constant through 2006 with reasonable demand experienced for most products, particularly for larger better quality white diamonds.
During 2006 Rio Tinto’s shares in Ashton Mining of Canada were taken up by Stornoway Diamonds under its takeover bid for Ashton. In exchange for the shares in Ashton, Rio Tinto received cash totaling approximately C$29.6 million and 25.6 million Stornoway common shares.
Industrial Minerals’ contribution to 2006 underlying earnings was US$243 million, a 30 per cent improvement on 2005.
Rio Tinto Minerals earnings at US$91 million were 54 per cent improved on 2005. The absence in 2006 of the 2005 Rio Tinto Minerals restructure provision and modest revenue increases, combined with strong cost performance, despite upward pressure from cyclones in Western Australia and labour markets, contributed to this result.
Rio Tinto Iron & Titanium earnings at US$152 million were 19 per cent higher than in 2005. Good price performance across all products, combined with favourable volume trends, strict cost control at RBM, and beneficial Canadian tax changes offset increased costs in the Canadian operations and the impact of the strong Canadian dollar.
Argyle(Rio Tinto: 100 per cent)
Rio Tinto owns and operates the Argyle diamond mine in Western Australia. Production from Argyle’s AK1 open pit mine is expected to continue through 2008, when the mine will transition to underground operations which are expected to extend the life of the mine to about 2018.
2007 operating performance
Due to lower grades, diamonds recovered decreased to 18.7 million carats in 2007 from 29.1 million carats in 2006 despite a two per cent increase in the volume of ore treated. Mine productivity was lower due to mining at lower elevations in the pit. Improvement programmes are in place to mitigate the cost pressures brought about by the resources boom in Western Australia.
Diavik Diamonds(Rio Tinto: 60 per cent)
Rio Tinto operates the Diavik Diamond Mine, located 300 kilometres north east of Yellowknife, Northwest Territories. It is an unincorporated joint venture between Rio Tinto and Harry Winston Diamond Corporation (formerly Aber Diamonds). Operations began in 2003 with mining of the A154 kimberlite pipes. In 2007 a second dike was completed to enable development of an open pit to mine on the A418 pipe. Open pit mining is expected to cease in 2012, at which time Diavik will become an all underground mine. Diavik’s total mine life remains within the 16 to 22 years projected in the original feasibility study of 1999.
2007 operating performance
Volumes of ore mined and processed were similar to 2006, however increased grades meant that Rio Tinto’s share of diamonds recovered increased to 7.2 million carats in 2007 from 5.9 million carats in 2006. The availability of the winter road was much improved from the previous year and supply of materials did not negatively affect operations.
Rio Tinto 2007 Form 20-F | 77 |
Murowa(Rio Tinto: 77.8 per cent)
Production at Murowa commenced in late 2004 after US$11 million was spent on constructing a 200,000 tonnes per year plant and supporting infrastructure. Chain of custody safeguards put in place at the commencement of production have performed without incident.
2007 operating performance
The effects of power disruptions and lower feed head grades meant that Rio Tinto’s share of diamonds recovered decreased to 0.11 million carats from 0.19 million carats in 2006. Operating conditions in the country remained challenging with hyperinflation and commodity shortages.
RTM comprises borates, talc and salt mines, refineries, and shipping and packing facilities on five continents. Global headquarters are located in Denver, Colorado.
Borates– More than one million tonnes of refined borates are produced at Boron Operations, the organisation’s principal borate mining and refining operation in California’s Mojave Desert. Borates are essential to plants and part of a healthy diet for people. They are also key ingredients in hundreds of products essential to an acceptable standard of living, chief among them: insulation fibreglass, textile fibreglass, and heat resistant glass (44 per cent of world demand); ceramic and enamel frits and glazes (13 per cent); detergents, soaps and personal care products (six per cent); agricultural micro-nutrients (seven per cent); and other uses including wood preservatives and flame retardants (30 per cent).
Talc– RTM operates talc mines – including the world’s largest, in southwest France – and processing facilities in Austria, Australia, Belgium, Canada, France, Italy, Japan, Mexico, Spain and the US. Talcs enhance performance in countless applications, including paper, paints, polymers, automotive mouldings, ceramics, personal care products and pharmaceuticals. This multiplicity demands an in depth understanding not only of talc’s properties and functions but also of its full range of applications and user industries.
Salt(Rio Tinto: 68.4 per cent) – RTM manages three salt operations located in Western Australia. It produces industrial salt by solar evaporation at its Dampier, Port Hedland and Lake MacLeod operations, where it also mines gypsum. Customers are located in Asia and the Middle East. The majority are chemical companies who use salt as feedstock for the production of chlorine and caustic soda (together known as chlor-alkali production). Products are also used as food salt and for general purposes including road de-icing.
2007 operating performance
Borates– Production volumes were up one per cent at 560,000 tonnes of boric oxide, and sales volumes declined slightly from 2006. North American markets continued to be affected by a sluggish housing industry in 2007 but were offset by strong growth in Asian markets and steady performance in European markets.
Talc– Talc output decreased by eight per cent to 1,281,000 tonnes as smaller operations were closed and marginal sales were discontinued. Sales volumes decreased slightly. Strong polymer and coating sales in Europe offset volume declines in North America driven by the housing and automotive sector slowdown.
Salt(Rio Tinto: 68.4 per cent) – The residual effects of the cyclones in Western Australia led to a three per cent decline in salt volumes to 5.2 million tonnes (Rio Tinto share). The recovery effort is expected to take until the fourth quarter of 2008, with full capacity likely in 2010. A 500,000 tonnes per annum capacity expansion at Lake MacLeod has been completed.
RIO TINTO IRON & TITANIUM OPERATIONS
Quebec Iron & Titanium
Richards Bay Minerals(Rio Tinto: 50 per cent)
Rio Tinto Iron & Titanium (RTIT) comprises the wholly owned Quebec Iron & Titanium (QIT) in Quebec, Canada and the 50 per cent interest in Richards Bay Minerals (RBM) in KwaZulu-Natal, South Africa. Both produce titanium dioxide feedstock used by customers to manufacture pigments for paints and surface coatings, plastics and paper, as well as iron and zircon co-products. RBM is progressing arrangements to meet the requirements of legislation governing broad based economic empowerment in the South African mining industry.
QIT’s proprietary process technology enables it to supply both the sulphate and chloride pigment manufacturing methods. QIT has the capacity to produce 375,000 tonnes of upgraded slag (UGS) per annum and is currently improving its smelter facility to smelt ilmenite from the Madagascar project into high grade slag. Identified mineralisation will sustain more than 20 years operation at current production rates if converted to ore reserves.
RBM’s ilmenite has a low alkali content which makes its feedstock suitable for the chloride pigment process. RBM has the capacity to produce one million tonnes of feedstock annually.
RTIT is headquartered in the UK.
Rio Tinto 2007 Form 20-F | 78 |
2007 operating performance
Titanium dioxide pigment is the principal end use market for feedstocks manufactured by RTIT.
Titanium dioxide feedstock output remained steady from 2006 to 2007 with both smelters operating at full capacity. Prices of chloride feedstock remained flat with the market going into oversupply. The production of UGS increased by five per cent to take advantage of the increasing demand for high grade feedstock. Sales of feedstock into the sulphate market increased to meet demand from Asia. Prices for iron co-products remained strong during the year.
DIAMONDS AND INDUSTRIAL MINERALS GROUP PROJECTS
Diavik underground(Rio Tinto: 60 per cent)
Following the completion of the feasibility study in 2007 approval was given to proceed with underground mining of the A154N, A154S and A418 kimberlites. Additional funding of US$563 million was approved, bringing the total investment in the underground mine to US$787 million. Under the current life of mine plan, diamond production from underground would begin in 2009 and continue beyond 2020.
To support underground mining, Diavik must construct new surface works including a crusher and paste backfill plant, expand its water treatment and power generating plants, and construct ancillary facilities including fuel and cement storage, and additional accommodation facilities.
About 20 kilometres of tunnels will be constructed to bring underground mining into production. The capital investment of US$563 million will be spent over the next two years, adding to the US$224 million invested in 2006-2007 for the underground feasibility studies and related capital projects.
The study into the A21 kimberlite concluded that this should not be included in reserves at this point and further project development will be conducted in 2008.
Murowa(Rio Tinto: 77.8 per cent)
The feasibility study into expanding the capacity of Murowa mining and processing operations was completed during 2007. A decision to proceed will depend on resolving security of tenure.
Argyle underground(Rio Tinto: 100 per cent)
Rio Tinto approved the development of an underground block cave mine under the AK1 open pit in late 2005. It also approved an open pit cutback on the Northern Bowl to facilitate the transition from open pit to underground mining. The cost estimate for the project was revised to US$1.5 billion due to the overheated Western Australian mining and construction industry and challenging ground conditions. However, efforts continue to recover value, and some improvement on the revised cost estimate may be possible following more rapid underground development rates in the second half. First production from the underground operation is expected in 2009.
QIT Madagascar Minerals(Rio Tinto 80 per cent)
The project was approved in 2005 and comprises a mineral sand mine and separation plant, and port facilities in southern Madagascar as well as an upgrade of QIT’s ilmenite smelting facilities in Canada. The Government of Madagascar contributed US$35m to the establishment of the port as part of its Growth Poles project funded by the World Bank. The project has maintained its schedule, however cost inflation and foreign exchange effects have increased the cost estimate to US$1.0 billion. Nevertheless, increased product selling prices have meant that the project value has been maintained. First production is expected at the end of 2008.
The mine will be a key initial customer of the deep sea multi-use public port at Ehoala, providing the base load to help establish the port. Over time, it is expected the port will make an important contribution to economic development of the region.
RTIT will manage the port operations. At the end of the life of the mine, the port will fall under the responsibility and control of the Government of Madagascar.
Extensive engagement and consultation with the Government of Madagascar and local people and leaders has taken place over many years. The World Bank is involved in a development role and non government organisations, including the Royal Botanic Gardens, Kew and Missouri Botanical Gardens, have been involved in planning environmental and conservation strategies.
Potasio Rio Colorado S.A. (Rio Tinto 100 per cent)
The Rio Colorado potash project in Argentina lies 1,000 kilometres south west of Buenos Aires. Potash is used principally as an agricultural fertiliser. Evaluation of the project began in late 2003, and has included a two year large scale trial of solution mining. This ran successfully from late 2004. During 2007 the feasibility study was completed. Development of the project depends on finalising permits and other agreements as well as approval by the board of Rio Tinto. Subject to this, first production could occur in 2011. Installed capacity will be 2.9 million tonnes per year. The scale and quality of the resource provide potential for expansion.
Rio Tinto 2007 Form 20-F | 79 |
Kazan trona(Rio Tinto 100 per cent)
The Kazan trona project is located 35 kilometres northwest of Ankara in Turkey. Rio Tinto is conducting pre-feasibility studies and, upon expected approval in 2008, will move into large scale solution mining trials. Trona is converted to soda ash, or sodium carbonate, by dissolving ore and recrystallizing the soda ash. Soda ash is one of oldest known and largest volume inorganic chemicals, used primarily in the glass, chemicals, soap and detergent, and pulp and paper industries. Kazan trona is expected to be a more environmentally sustainable commodity to meet rising global demand than chemical synthesis.
Rio Tinto 2007 Form 20-F | 80 |
Energy group
Mined | Rio Tinto share | |
Coal | million tonnes | |
2003 | 148.8 | |
2004 | 157.4 | |
2005 | 153.6 | |
2006 | 162.3 | |
2007 | 155.6 | |
Uranium | ‘000 pounds | |
2003 | 11,372 | |
2004 | 13,170 | |
2005 | 14,511 | |
2006 | 12,561 | |
2007 | 12,616 | |
Underlying earnings contribution* | US$m | |
2004 | 431 | |
2005 | 730 | |
2006 | 706 | |
2007 | 484 | |
Changes in underlying earnings 2005 – 2007 | US$m | |
2005 Underlying earnings | 730 | |
Effect of changes in: | ||
Prices and exchange rates | 199 | |
General inflation | (50 | ) |
Volumes | (13 | ) |
Costs | (211 | ) |
Tax and other | 51 | |
2006 Underlying earnings | 706 | |
Effect of changes in: | ||
Prices and exchange rates | 102 | |
General inflation | (51 | ) |
Volumes | 6 | |
Costs | (251 | ) |
Tax and other | (28 | ) |
2007 Underlying earnings | 484 | |
* | A reconciliation of the net earnings with underlying earnings for 2007, 2006 and 2005 as determined under IFRS is set out on page 53. |
STRATEGIC OVERVIEW
The Energy group comprises thermal coal, coking coal and uranium operations. Coal interests located in Australia and the US supply internationally traded and US and Australian domestic markets. Rio Tinto Uranium supplies uranium oxide produced at its majority owned mines in Australia and Namibia to electric power utilities worldwide. Rio Tinto Uranium is currently the world’s second largest uranium supplier.
The group strategy aims to harness and focus resources to deliver world class performance in operations, sustainable development and value creation. The strategy is focused on positioning the group as the world’s value leader in mineable energy.
The group’s reserve position in thermal and coking coal is sufficient to underpin significant greenfield and brownfield expansions.
In 2007 the Energy group undertook a review of its asset portfolio which highlighted opportunities in the current market to divest assets. Options to divest Rio Tinto Energy America (RTEA) and the Kintyre, Australia, and Sweetwater, US, uranium projects are currently being explored.
A key part of the group’s strategy is to ensure that the group is a leading advocate of, and investor in, the sustainable future uses of coal and uranium. In 2007 the group continued to dedicate resources and investment funds to the development of clean coal technology through the FutureGen project in the US, COAL21 in Australia and in numerous low emission coal research organisations in the US and Australia.
In 2007 Hydrogen Energy was launched, a 50:50 joint venture with BP which will develop low carbon energy projects around the world. Hydrogen Energy will position Rio Tinto Energy to profit from the advent of a global low carbon energy future and initiate the development of a broader risk management strategy for climate change regulation while providing a meaningful offer on climate change and product stewardship.
Rio Tinto 2007 Form 20-F | 81 |
The group’s strategic intent is to build through Hydrogen Energy a low carbon energy business primarily reliant on coal that will ultimately leverage Rio Tinto’s capabilities in identifying, acquiring and operating large long life coal assets. Gasification opens new and larger markets for coal and the aim is to maximise returns across the emerging coal gasification value chain. Early positioning will convey an important element of competitive advantage. A key to unlocking value will be to proactively shape government policy to support and enable initial projects.
Hydrogen Energy will initially focus on the production of hydrogen for power generation using fossil fuels feedstocks and carbon capture and storage technology to produce new large scale supplies of clean electricity. Hydrogen Energy has announced initiation of studies for possible projects in California, Western Australia, and Abu Dhabi.
The Rössing Uranium life of mine extension project in Namibia continues. With the substantial recovery of uranium prices in recent years, Rössing is well positioned to expand and further extend the life of its operations. This will enable the company to continue to be a leading contributor to the Namibian economy, as it has been for the past 30 years.
At Energy Resources of Australia’s (ERA) Ranger mine, a number of opportunities for further low cost brownfield expansion are under consideration. ERA also owns the Jabiluka deposit, the second largest undeveloped uranium deposit in the world. In addition to the significant and sustainable operating assets at Rössing and ERA, Rio Tinto has increased its uranium exploration activity around the world. With a global nuclear power renaissance now under way, driven in large part by the need for large baseload electricity generation that does not emit greenhouse gases, Rio Tinto intends to maintain and enhance its position as one of the world’s leading uranium suppliers to power this growth.
At 31 December 2007, the Energy group accounted for 4.9 per cent of Group operating assets and, in 2007, contributed 13.8 per cent of Rio Tinto’s gross sales revenue and 6.5 per cent of underlying earnings.
Preston Chiaro, chief executive, Energy and Industrial Minerals, is based in London.
SAFETY
All injury frequency rate | per 200,000 hours |
2003 | 2.35 |
2004 | 2.02 |
2005 | 1.31 |
2006 | 0.89 |
2007 | 0.89 |
Safety performance and awareness continued to be a major focus of all operations. Energy Resources of Australia achieved significant improvements in safety performance. The lost time injury rate fell by 74 per cent and the all injury rate by 46 per cent. The injury severity rate, a measure of the seriousness of injuries, also decreased by a factor of over three. At Rio Tinto Energy America the severity index improved to approximately half of the severity index in 2006. At Rio Tinto Coal Australia’s (RTCA) Kestrel mine the lost time injury rate fell by 57 per cent and the all injury rate by 60 per cent. Two Energy group operations were winners of the Chief Executive’s Safety Awards, Hunter Valley Operations and the Antelope mine in Namibia. Earlierthe US.
GREENHOUSE GAS EMISSIONS
A greenhouse gas (GHG) performance review was submitted by each business unit as part of a planning process. This included a discussion on targets and performance and a list of proposed and implemented projects noting project progress, savings, costs and NPV (net present value).
Energy Resources of Australia is expected to exceed its targeted GHG reductions. Rio Tinto Energy America is slightly above target and Rio Tinto Coal Australia emissions per tonne have increased. Both RTEA and RTCA have a number of NPV positive optimisations and diesel reduction projects being researched or implemented. With a life of mine extension under way, Rössing Uranium has set a revised target. A number of optimisation projects have been identified.
The Energy group is also focussing on long term emissions reductions through the Hydrogen Energy joint venture. The plan identifies significant expenditure in terms of operating and capital costs for Hydrogen Energy in 2008 and 2009.
2007 compared with 2006
The Energy group’s 2007 contribution to underlying earnings was US$484 million, US$222 million less than in 2006.
Coal chain infrastructure bottlenecks and allocation cutbacks in Australia resulted in ongoing and significant
Rio Tinto 2007 Form 20-F | 82 |
production cutbacks and much higher demurrage costs. It is anticipated that production in Australia will not return to full capacity until 2010 when infrastructure bottlenecks are expected to be cleared. Port allocation arrangement negotiations were continuing at year end.
The results also reflected the softening of coking coal prices although there were increases in thermal coal prices and the stronger uranium oxide market. The weakening of the US dollar against the Australian dollar reduced earnings at Australian operations. For all operations, rising fuel prices and the tightness of the labour supply market continued to place pressure on operating results.
Despite lower volumes of uranium sold, higher market prices and the expiration of older contracts containing price caps contributed to a 69 per cent increase in uranium revenues in 2007 compared to 2006.
At Rössing Uranium, results were affected by reduced production volumes due to grade and plant performance and increased operating costs associated with development projects to increase capacity in the future. At ERA results were affected by production losses associated with severe rain and flooding of the pit.
The strong upward momentum that characterised the uranium market in the past three years continued for the first half of 2007, as demand remained robust in the wake of supply disruptions that affected a number of projects worldwide. However, unlike previous years, 2007 saw a fundamental change in market behaviour as the spot price became de-linked from the long term market due to the increasing influence of speculators in the commodity. Historically, the spot market has traded at a nominal discount to the term market, but last year saw substantial volatility in spot prices.
The long term uranium price, at which Rio Tinto sells most of its material, exhibited strong growth in the early part of the year, rising to a high of US$95 per pound in May, an increase of 27 per cent over December 2006. Thereafter, the long term price remained at US$95 as utility purchasing activity continued at moderately high levels.
2006 compared with 2005
The Energy group’s contribution to underlying earnings was US$706 million, US$24 million lower than in 2005.
Results benefited from a sustained increase in the price received for thermal coal. Capacity problems in the coal supply chain in the Hunter Valley region of New South Wales impeded production from Coal & Allied operations. Drought in parts of Queensland and New South Wales also affected production levels. Operations focused on producing high margin products and optimising the coal supply chain. Increases in the cost of basic materials, fuel, explosives and labour were not fully offset by production growth, resulting in a rise in the cost per unit of production across all operations.
Although spot prices for uranium rose dramatically during the first part of the year, this had little effect on Rio Tinto’s long term contract portfolio. Uranium oxide is typically sold under long term contracts, with pricing determined both by fixed prices negotiated several years in advance, and by market prices at time of delivery. Therefore, the rise in the spot price of uranium oxide during the period was not fully reflected in the year’s earnings, but the rise in long term prices did contribute to the improved results. Moreover, for both mines, legacy contracts at low prices are being replaced with new long term contracts that provide floor price protection at levels far above market prices at the beginning of this decade.
Rio Tinto Energy America(Rio Tinto: 100 per cent)
Rio Tinto Energy America wholly owns and operates four open cut coal mines in the Powder River Basin of Montana and Wyoming, US, and has a 50 per cent interest in, but does not operate, the Decker mine in Montana. RTEA also manages the group’s interest in Colowyo Coal in Colorado, US. In total it employs approximately 2,300 people.
The second largest US coal producer, RTEA sells its ultra low sulphur coal to electricity generators predominantly in mid western and southern states.
In April, RTEA bid and won access to approximately 98 million tonnes of additional coal reserves for its Spring Creek Mine in Montana. In June, RTEA bid and won access to additional mineralisation for the Colowyo Mine in Colorado. The acquisitions will extend the operating lives of the respective mines.
Rio Tinto has announced that it is exploring options to sell RTEA.
2007 operating performance
RTEA’s 2007 contribution to underlying earnings was US$132 million, US$45 million lower than in 2006. Results reflected steadily increasing US coal prices throughout 2007, more than offset by a higher effective tax rate in 2007.
RTEA’s 2007 sales were 128.3 million tonnes (excludes brokered sales), a decrease of 222,000 tonnes from 2006. Further increases were limited as customers had built higher levels of coal stockpiles in 2006. Earnings were reduced by a higher effective tax rate than in 2006. In 2007 the effective rate was 35 per cent as all prior year weloss carry forwards had been applied. Adjusting to comparable tax rates, the 2007 result was better than 2006, largely driven by improved contract prices.
Antelope mine production of 31.3 million tonnes set a new record for annual production and sales, above the 2006 record of 30.7 million tonnes. Colowyo mine production of 5.1 million tonnes decreased by 700,000 tonnes.
Rio Tinto 2007 Form 20-F | 83 |
Cordero Rojo mine production of 36.7 million tonnes increased by 600,000 tonnes. Jacobs Ranch mine production of 34.6 million tonnes decreased by 1.7 million tonnes. Spring Creek mine production of 14.3 million tonnes set a new record for annual production and sales above the 2006 record of 13.2 million tonnes.
Consistent with the worldwide mining industry, RTEA experienced an increase in the input prices of materials and supplies in 2007 resulting in higher variable costs of mining. Diesel prices in 2007 increased by more than 15 per cent relative to 2006. Labour costs increased significantly reflecting the competitive regional labour shortage and steadily increasing healthcare costs. Tyre costs increased with the worldwide shortage of large mining equipment tyres. At the same time, strip ratios increase as reserves get deeper, resulting in the requirement to move increasing volumes of overburden.
RTEA is a member of the FutureGen Alliance, which seeks to construct the world’s first coal fuelled “zero emissions” power plant. The project achieved a major milestone with a site in Illinois selected for development. Construction was planned to commence upon completion of the permitting process, however this is now in doubt with the US Department of Energy announcing a restructure of the FutureGen project in January 2008.
Rio Tinto Coal Australia(Rio Tinto: 100 per cent)
Rio Tinto Coal Australia manages the group’s Australian coal interests. These include, in Queensland: the Blair Athol (Rio Tinto: 71 per cent), Kestrel (Rio Tinto: 80 per cent), Tarong (Rio Tinto: 100 per cent) and Hail Creek (Rio Tinto: 82 per cent) coal mines and the Clermont deposit (Rio Tinto: 50 per cent).
RTCA also provides management services to Coal & Allied Industries (Coal & Allied) for operation of its four mines located within the Hunter Valley in New South Wales. Coal & Allied (Rio Tinto: 75.7 per cent) is publicly listed on the Australian Securities Exchange and had a market capitalisation of A$6.5 billion (US$5.7 billion) at 31 December 2007. Coal & Allied wholly owns Hunter Valley Operations, has an 80 per cent interest in Mount Thorley Operations, a 55.6 per cent interest in the contiguous Warkworth mine, and a 40 per cent interest in the Bengalla mine which abuts its wholly owned Mount Pleasant development project. Coal & Allied also has a 37 per cent interest in Port Waratah Coal Services coal loading terminal.
Production from the Tarong mine is sold exclusively to Tarong Energy Corporation (TEC), an adjacent state owned power utility. In October 2007 the sale of the Tarong mine to TEC was announced thedevelopmentwith the sale to take effect from 31 January 2008.
Blair Athol produces thermal coal and sells principally to the Japanese market generally on annual agreements. Kestrel and Hail Creek sell mainly metallurgical coal to customers in Japan, south east Asia, Europe and Central America, generally on annual agreements.
Coal & Allied produces thermal and semi soft coal. Most of its thermal coal is sold under contracts to electrical or industrial customers in Japan, Korea and elsewhere in Asia. The balance is sold in Europe and Australia. Coal & Allied’s semi soft coal is exported to steel producing customers in Asia and Europe under a combination of long term contracts and spot business.
RTCA and Coal & Allied collectively employ approximately 2,500 people.
2007 operating performance
RTCA’s 2007 contribution to underlying earnings was US$246 million, US$244 million lower than in 2006. There was an increase in thermal coal prices but this was offset by production cutbacks necessitated by shipping bottlenecks and the continued weakening of the US dollar against the Australian dollar. Rising fuel prices and the tightness of the labour supply market continued to place pressure on operating results.
A tax benefit of US$29 million was received on the release of a tax provision that was no longer required.
As the majority of costs are fixed with only consumables such as fuel, tyres and explosives being variable, reduced port capacities had a direct and negative impact on underlying earnings.
Inadequate capacity of coal chain infrastructure in both the Hunter Valley and Queensland operations was a significant contributor to less than satisfactory results for RTCA. Significant production cutbacks of 14 per cent from 2006 levels were necessary, resulting in equipment and contract employees being idled. It is anticipated that production will not return to full capacity until 2010 when infrastructure bottlenecks are expected to be cleared.
RTCA operations declaredforce majeureunder its sales contracts on two occasions during 2007; in June as a result of severe weather conditions in the Hunter Valley and in November as a result of announced first quarter 2008 allocation cutbacks at the Dalrymple Bay port facilities in Queensland.
Total production at Blair Athol decreased from 10.2 million tonnes to 7.9 million tonnes primarily as a result of limited port capacity. Kestrel’s production increased by 0.8 per cent to 3.6 million tonnes. Hail Creek production was five million tonnes, an increase of ten per cent. At Tarong, production decreased by 35 per cent in line with lower demand from Tarong Energy Corporation.
Energy Resources of Australia(Rio Tinto: 68.4 per cent)
Energy Resources of Australia Ltd (ERA) is a publicly listed company and had a market capitalisation of A$3.7 billion (US$3.3 billion) at 31 December 2007. ERA employs 420 people, an increase from 385 at the end of 2006.
Since 1980 ERA has mined ore and produced uranium oxide at its Ranger open pit mine, 250 kilometres east of Darwin in Australia’s Northern Territory. ERA also has title to the adjacent Jabiluka mineral lease, which in 2003 was put on long term care and maintenance. Ranger and Jabiluka are surrounded by, but remain separate from, the World
Rio Tinto 2007 Form 20-F | 84 |
Heritage listed Kakadu National Park, and especially stringent environmental requirements and governmental oversight apply.
ERA is a large uranium producer, with considerable operational experience and a well established market position. The Ranger mine is the second largest uranium mine in the world and ERA is the fourth largest producer. ERA’s strategy is focused on creating the most value from the mineralisation available on existing lease areas. In line with the Energy group’s strategy of seeking additional production volumes and long term expansions to supply the current favourable market environment, ERA put significant effort into achieving growth through capitalising on opportunities for expansion and extension of production including, an extension of the existing Ranger mine, and installation of additional processing equipment to treat low grade and lateritic ore.
2007 operating performance
ERA’s 2007 full year earnings rose by 124 per cent to US$38 million in comparison with 2006 earnings of US$17 million. This was driven by a rise in the average realised price of uranium oxide from US$18.36 per pound to US$25.06 per pound despite sales being lower at 11.7 million pounds compared to the 2006 volume of 12.7 million pounds. The 2007 sales figures include no borrowed material.
Production of uranium oxide in 2007 was 11.7 million pounds, approximately 13 per cent higher than in 2006.
The favourable production result was significant given a severe rain event associated with a tropical low pressure system, resulting in nearly 850 millimetres of rain falling over the Ranger operation in seven days in February 2007. This resulted in flooding of the Ranger open pit, restricting access to high grade ore, forcing a processing plant shutdown and a declaration offorce majeureon sales contracts in March 2007. In the third quarter of 2007 access to high grade ore was again possible through the implementation of various water disposal measures.
Recovery work was successful in allowing production to return to normal levels in 2008 with no adverse environmental consequences. All sales commitments were met in 2007 andforce majeurewas lifted in January 2008. Further work is under way to reduce the impact of future weather events on the mine’s performance.
In September ERA announced an extension of the Ranger mine at a capital cost A$57 million, which added 10.7 million pounds of additional reserves, and extended the mine life from 2008 to 2012. Expenditure of A$10 million was also approved to examine options to further extend the mine and increase production from the processing plant.
Exploration and evaluation activity increased in 2007 with ERA spending US$11.8 million compared to US$6 million in 2006. Exploration and evaluation focused on near mine extensions to the Ranger orebody.
ERA continued to work with the Mirarr, traditional owners of the mining lease. The Mirarr commenced delivery of a cultural awareness programme to all new ERA employees and advised ERA on the establishment of traditional fire management practices on the Ranger lease. Increasing indigenous employment is a significant focus including the provision of training and employment opportunities. The year saw the number of indigenous employees increase to 65, or 16 per cent of the workforce. Improving on this will continue to be a focus for 2008.
Rössing Uranium(Rio Tinto: 68.6 per cent)
Rössing Uranium Limited produces and exports uranium oxide from Namibia to power utilities globally. Rössing continues to play a major role in the Namibian economy, both in terms of GDP contribution as well as education, employment and training.
Rössing currently employs approximately 1,175 people. Following the life of mine extension project approved in 2005, capital equipment acquisitions for the new mining area are in place and planning work for further extension continues. In 2007 production volumes of 6.7 million pounds were constrained as a result of having limited access to ore sources. The phase one pit is in its last two years of life. Mining and processing volumes, however, have been good and the mine is positioned for higher volumes in 2008 and beyond.
The year was one of consolidation and preparation for future growth and sustainable production. Truck and loading fleets doubled and over 300 people were recruited and trained. The current approved life of mine extensions will take the mine life to 2016 and further potential opportunities exist to extend both the mine life and production volumes depending on the long term price outlook and costs of production. Activities will continue to focus on continuous net present value (NPV) growth, improving margins and creation of options from known reserves and potentially economic mineralisation.
2007 operating performance
Earnings increased to US$95 million from US$27 million in 2006 due to higher market prices for uranium oxide.
Operating costs increased to US$38 per pound of uranium oxide production from US$22 per pound in 2006 as a result of lower production volumes, outsourcing of waste stripping as well as exploration activities that are not yet adding to production volumes. Costs were also affected by ore grades and higher than planned diesel and other operating costs.
All new primary production equipment is now fully commissioned to bring the fleet complement to 24 haul trucks from 16 at the beginning of the year, and six loading units compared to four previously. Initiatives are under way to improve the performance of the milling process.
Lower than planned leach extraction in 2007 was due to the average ore type which impacted on process controls. In 2008 there will be a focus on maintaining stability in the process and improving the head grade by applying a better blending strategy.
Rio Tinto 2007 Form 20-F | 85 |
Rössing continues to put significant effort and management focus on safety. The goal is to eliminate all injuries from the workplace and to have an embedded safety culture and systems that identify and rectify potential safety hazards.
ENERGY GROUP PROJECTSEnergy Resources of Australia(Rio Tinto: 68.4 per cent)
In September 2007 ERA announced an extension to the Ranger open pit at a capital cost of A$57 million to extend mining until 2012. The pushback, when combined with optimisation of the existing pit, added an additional 10.7 million pounds of contained uranium oxide to reserves. The majority of the additional production from the extension is expected to occur in 2011.
ERA has also approved expenditure of A$10 million for a pre-feasibility study to examine options to further expand the mine and increase production from the processing plant. The study commenced in the third quarter of 2007 and will continue into 2008.
ERA’s other capital expansion projects to process laterite ore and radiometrically sort low grade ores are well advanced with both projects scheduled for commissioning in the second quarter of 2008. The laterite processing plant will contribute approximately 0.88 million pounds per annum of uranium oxide to production from 2008 through to 2014. The radiometric sorter will upgrade lower grade ore and allow an additional 2.4 million pounds of uranium oxide to be produced over a five year period from 2008 to the end of 2013.
Exploration continued throughout the year including for the first time drilling through the wet season. Activity focused on further defining the down dip extension of the Ranger orebody, as well as understanding and defining the uranium mineralisation to support the pre-feasibility study on further expansion of the mine.
Rössing Uranium(Rio Tinto: 68.6 per cent)
After years of working below capacity during a period of low uranium prices, in December 2005 approval was granted to restore annual production capacity to 8.8 million pounds per annum and extend the life of the operation until at least 2016. Total incremental and sustaining capital cost of the expansion is US$112 million.
In 2007, delays were experienced with the start of construction projects due to slow contractor tender submissions. Recruitment of staff has been slow due to skills shortages in southern Africa. Work is now progressing well.
Rio Tinto Coal Australia Clermont(Rio Tinto: 50.1 per cent)
Rio Tinto and its joint venture partners approved investment of US$750 million for the development of the Clermont thermal coal mine in central Queensland, situated 15 kilometres south east of the Blair Athol mine. Clermont is expected to become Australia’s largest thermal coal producer when it reaches full capacity, which is scheduled for 2013. The mine will be brought into production to replace Blair Athol, due to close in 2015, and we completed significant investmentwill use Blair Athols’ existing infrastructure and market position. To date construction has progressed to expandcapacity at the Weipa bauxite mineplan with boxcut production to commence in Queensland.mid 2008 and first coal production expected in 2010.
What about new opportunities?
Rio Tinto Coal Australia KestrelWe have acquired interests in three promising copper projects: La Granja in Peru,(Rio Tinto: 80 per cent)
Rio Tinto and its joint venture partners approved investment of US$991 million for the Pebble project in Alaska and OyuTolgoi (Turquoise Hill) in Mongolia which, together with Resolution Copperextension of the Kestrel mine. This represents a 20 year investment in the US, give usBowen Basin of Queensland to help meet Asian demand for metallurgical coal. First coal production from the extension is forecast for 2012 when the existing mine ceases production.
Coal & Allied Mount Pleasant(Rio Tinto: 75.7 per cent)
In 2006, Coal & Allied started a feasibility study on the Mount Pleasant coal mine project located adjacent to the Bengalla coal mine near Muswellbrook in the Hunter Valley, New South Wales. With continued uncertainty surrounding coal chain infrastructure in the Hunter Valley, further study is required before the feasibility study can be finalised.
Coal & Allied Lower Hunter Land(Rio Tinto: 75.7 per cent)
In 2006 Coal and Allied signed a memorandum of understanding with the New South Wales Government to facilitate the provision of extensive land conservation corridors in the Lower Hunter via the transfer of 80 per cent of the Company’s post mining land holdings. The remaining 20 per cent is being considered for land development. Extensive community consultation continued through 2007 with various options considered. Feasibility studies will be conducted in 2008 to finalise these options.
Rio Tinto Energy America(Rio Tinto: 100 per cent)
During 2007 RTEA commenced construction of the Jacobs Ranch overland conveyor and in pit crusher project. This will reduce emissions and operating costs in addition to providing latent capacity for expansion (from around 38 million tonnes to around 45 million tonnes per annum). Commissioning is on schedule for completion in 2008. At Antelope and Spring Creek recent expansion projects were completed in 2007 and production is ramping up to meet market demand.
Rio Tinto 2007 Form 20-F | 86 |
Iron Ore group
Production | Rio Tinto share | |
million tonnes | ||
2003 | 102.6 | |
2004 | 107.8 | |
2005 | 124.5 | |
2006 | 132.8 | |
2007 | 144.7 | |
Underlying earnings contribution* | US$m | |
2004 | 565 | |
2005 | 1,703 | |
2006 | 2,251 | |
2007 | 2,651 | |
Changes in underlying earnings 2005 – 2007 | US$m | |
2005 Underlying earnings | 1,703 | |
Effect of changes in: | ||
Prices and exchange rates | 616 | |
General inflation | (25 | ) |
Volumes | 156 | |
Costs | (229 | ) |
Tax and other | 30 | |
2006 Underlying earnings | 2,251 | |
Effect of changes in: | ||
Prices and exchange rates | 537 | |
General inflation | (43 | ) |
Volumes | 136 | |
Costs | (255 | ) |
Tax and other | 25 | |
2007 Underlying earnings | 2,651 | |
* | A reconciliation of the net earnings with underlying earnings for 2007, 2006 and 2005 as determined under IFRS is set out on page 53. |
STRATEGIC OVERVIEW
Rio Tinto’s Iron Ore group conforms with the larger Group’s overall strategy of pursuing the world’s best natural resources, wherever they are located, using the best technologies, and operating them safely. RTIO seeks to do this by being faster and better at producing iron ore, supported by an interestunmatched capacity and capability to develop key infrastructure.
RTIO is geographically well placed to take advantage of the exceptionally strong market conditions and outlook in four world class undeveloped copper mineral deposits. The investmentAsia, with a massive mineralisation inventory base close to an integrated production platform in Mongolia representsthe Pilbara of Western Australia. This enables a phased, risk managed entry into apotentially outstanding resource. La Granja has been givenrapid expansion of production in the go ahead for a US$95 million pre-feasibility study.We are encouraged by the exploration potential on ERA leasesshort and medium term. RTIO’s large mineralisation position in Australia and the expansion possibilities at Rössing Uranium in Namibia. These,Guinea, west Africa, together with an established project execution capability, provides potential for a global iron ore production capacity of more than 600 million tonnes per annum.
As new competitors and constraints emerge, RTIO’s strategy to meet the potentialindustry challenges is focused on achieving “industry leadership” in global iron ore. The strategy is centred on rapidly expanding the business, both globally and in the Pilbara, and delivering maximum value from RTIO’s operations by developing a world class production platform.
RTIO’s portfolio of Kintyreoperations is international, including Australia, Canada and Brazil, a major development project in Guinea at Simandou, and the Orissa project in India. It also includes the HIsmelt® plant in Australia, which applies revolutionary technology to convert iron ore fines with significant impurities into high quality pig iron.
RTIO Asia was established in Singapore in November 2007 to provide an integrated sales, marketing, distribution and logistics service for Hamersley Iron products in the Asia Pacific. It aims to maximise Hamersley’s share of forecast growth in the region.
At 31 December 2007, the Iron Ore group accounted for 13 per cent of Rio Tinto’s operating assets, and in 2007 contributed 26 per cent of the Group’s gross sales revenue and 36 per cent of underlying earnings.
At year end 2007 RTIO employed 6,520 people in Western Australia and Sweetwater8,630 worldwide. In a highly contested market, the recruitment effort was exceptional, with 1,951 new starters in Wyoming, US, mean we are well placed2007.
Environmental initiatives included development of a strategic approach to extend uranium reserveswater for the Pilbara, to ensure long term security of supply at the ports and in the management of dewatering discharge associated with the increasing requirement for below water table mining across the Pilbara, and recognising the importance of this issue for traditional
Rio Tinto 2007 Form 20-F | 87 |
land owners of the region.
A major milestone was reached with the completion of the Phase B upgrade of the port of Dampier, now ramping up towards its new capacity of 140 million tonnes per annum (Mt/a). Work has commenced on the Cape Lambert upgrade to 80 Mt/a from 55 Mt/a, which is expected to be completed in early 2009. Two new mines were approved for development – Brockman 4 (22 Mt/a) and Mesa A/Warramboo (25 Mt/a) – at a combined total cost of US$2.4 billion, of which Rio Tinto’s share is US$2.0 billion. Both mines will replace tonnages from deposits nearing the end of their mine life.
Rio Tinto’s 50:50 joint venture with Hancock Prospecting is progressing well. In November, Hope Downs 1 (22 Mt/a), began production – a full quarter ahead of schedule, and the stage 2 expansion to 30 Mt/a has been brought forward one year, with production planned to commence at the start of 2009. In December approval was given for a US$71.4 million feasibility study into the development of a Hope Downs 4 mine (15-20 Mt/a).
RTIO’s growth strategy has seen more than US$7 billion committed to port, rail, power and mine assets since 2003, resulting in a world class, integrated iron ore network. A feasibility study into expanding Pilbara capacity to 320 Mt/a by 2012 is well advanced and a decision will be made in early 2009. Cape Lambert has been identified as the preferred site for port expansion.
In late November 2007 Rio Tinto senior management outlined an aggressive expansion programme designed to capitalise on RTIO’s global spread of assets and markets. This included a conceptual framework towards establishing a Pilbara production capacity of 420 Mt/a and an expansion at Simandou in Guinea of up to 170 Mt/a.
During the year, RTIO was inducted into the Australian Export Hall of Fame, was twice honoured at the Australian Business Arts Foundation awards and won a 2007 Water Award for its re-injection project at Yandicoogina.
Sam Walsh, chief executive Iron Ore, is based in Perth, Western Australia.
SAFETY
All injury frequency rate | per 200,000 hours | |
2003 | 2.19 | |
2004 | 1.79 | |
2005 | 1.48 | |
2006 | 1.24 | |
2007 | 0.92 | |
Iron Ore Company of Canada’s safety performance continued to improve in 2007 with a 59 per cent reduction in the lost time injury frequency rate to 0.29. The Corumbá mine in Brazil again won the Chief Executive’s Safety Award. Work progressed on a number of safety initiatives across operations, particularly focused on issues surrounding contractor management, vehicle safety and implementing proactive measures to prevent the risk of injury. Cyclone preparation measures in the Pilbara employee accommodations were reviewed, focusing on standardised safety measures. Overall, the group’s all injury frequency rate was 0.92 (1.24 in 2006) and the lost time injury frequency rate 0.38 (0.59) .
GREENHOUSE GAS EMISSIONS
The 2008–2009 greenhouse gas (GHG) plan notes an increased focus on energy reduction through the appointment of an energy specialist in late 2007 and the conduct of further energy reviews. A feasibility study is being conducted to examine the possible replacement of power stations to reduce GHG emissions and mitigate current potential environment risk.
A number of additional activities aimed at reducing energy use and GHG emissions are also under way including replacing heavy mobile equipment and locomotives. Dash 7 and Dash 8 locomotives are being replaced by new generation GE EVO locomotives. The RTIO technology group is also examining hybrid locos in collaboration with General Electric, liquid natural gas replacement for diesel trucks and locomotives, rail electrification, and closed cycle power generation for existing open cycle power units. Rio Tinto has approved new gas fired power generation in the Pilbara as a step towards lower emissions electricity.
FINANCIAL PERFORMANCE
2007 compared with 2006
RTIO’s contribution to 2007 underlying earnings was US$2,651 million, US$400 million higher than in 2006.
Demand for iron ore remained extremely strong across the product range throughout 2007, driven by the continuing robust growth in global steel demand and production, significantly exceeding seaborne suppliers’ capacity to match. Total Chinese iron ore imports rose from 326 million tonnes to 383 million tonnes, accounting for more than 90 per cent of world growth. Hamersley Iron and Robe River in Australia operated at record or near future.record levels of
Rio Tinto 2007 Form 20-F | 88 |
production in 2007.
In December RTIO announced plans to sell up to 15 million tonnes of iron ore on the spot market in 2008, taking advantage of the large gap between annual (benchmark) and short term prices while continuing to meet longer term contractual commitments.
2006 compared with 2005
RTIO’s contribution to 2006 underlying earnings was US$2,251 million, US$548 million higher than in 2005.
Demand for iron ore continued to be extremely strong across the product range throughout 2006, driven by continued growth in global steel demand and production. Total Chinese iron ore imports rose from 275 million tonnes to 326 million tonnes. Hamersley Iron, Robe River, Iron Ore Company of Canada and Corumbá in Brazil all operated at record or near record levels of production in 2006.
For the contract year commencing April 2006 RTIO reached agreement with customers on price increases of 19 per cent for all products following on from the previous agreement of a 71.5 per cent increase. In December 2006, prices for the 2007 contract year were agreed with Baosteel of China, for a 9.5 per cent increase to the benchmark price. Similar price increase agreements were subsequently reached with other steelmakers.
Hamersley Iron(Rio Tinto: 100 per cent)
Hamersley Iron operates nine mines in Western Australia, including three mines in joint ventures, about 700 kilometres of dedicated railway, and port and infrastructure facilities located at Dampier. These assets are run as a single operation managed and maintained by Pilbara Iron.
The final phase in ramping up Pilbara infrastructure to 220 million tonnes of annual capacity is well under way. Dampier port’s two terminals now account for a combined capacity of 140 Mt/a. With the completion of Junction South East, Yandicoogina mine capacity has been expanded to 52 Mt/a, and brownfield mine expansions at Marandoo, Nammuldi and Mount Tom Price have been completed.
The new Hope Downs mine, owned in 50:50 joint venture with Hope Downs Iron Ore Pty Ltd (owned by Hancock Prospecting Pty Ltd), but managed by RTIO, began production in November, a full quarter ahead of schedule, and the first train was loaded in mid December.
Approval was granted for the US$1.52 billion Brockman 4 mine, 60 kilometres north west of Tom Price, which is expected to begin ramp up in 2010 to 22 Mt/a. The mine will be connected to the main network via a 35 kilometre rail spur, and the design allows for an additional 14 Mt/a expansion.
Work is progressing on a number of options for new mine development as part of the feasibility study to reach 320 Mt/a capacity. A decision is expected in early 2009. Work also continued on pre-development studies for new mines.
2007 operating performance
Hamersley Iron’s total production in 2007 was 112.1 million tonnes, 14.9 million tonnes more than the 97.2 million tonnes in 2006. This result was notable for being achieved amid significant expansion work across several sites.
Shutdowns and flooding from two cyclones early in the year hindered operations significantly, although tie down procedures performed well. Several derailments also impacted operations significantly, resulting in an estimated 1.39 million lost saleable ore tonnage. Remedial action was undertaken on high risk sections and a rerailing project was approved which will eventually see 45 per cent of the network replaced.
Reinvestment in additional yard capacity, locomotives and rolling stock has been implemented to improve efficiency and remove bottleneck issues associated with limited rail capacity.
The Pilbara Blend product was successfully introduced mid year, winning widespread customer acceptance and at 100 per cent of the reference price. Pilbara Blend will comprise 15 per cent of the world’s seaborne iron ore trade.
Shipments by Hamersley Iron totalled 109.5 million tonnes, including sales through joint ventures. Shipments to China also reached a new record level at 59.6 million tonnes, confirming China’s place as the single largest, and fastest growing, destination for Hamersley’s iron ore.
Hamersley’s total shipments of iron ore to major markets (million tonnes)
2007 | 2006 | 2005 | ||||
China | 59.6 | 52.9 | 49.5 | |||
Japan | 30.0 | 27.4 | 24.5 | |||
Other Asia | 18.3 | 15.8 | 14.1 | |||
Europe | 0.7 | 2.0 | 2.0 | |||
108.5 | 98.1 | 90.1 | ||||
Note | ||||||
This table includes 100 per cent of all shipments through joint ventures. |
Rio Tinto 2007 Form 20-F | 89 |
Robe River Iron Associates(Rio Tinto: 53 per cent)
Robe River Iron Associates (Robe) is an unincorporated joint venture in which Mitsui (33 per cent), Nippon Steel (10.5 per cent) and Sumitomo Metal Industries (3.5 per cent) retain interests. Robe River is the world’s fourth largest seaborne trader in iron ore.
Robe River operates two open pit mining operations in Western Australia. Mesa J is located in the Robe Valley, north of the town of Pannawonica. The mine produces Robe River fines and lump, which are pisolitic iron ore products. The West Angelas mine, opened in 2002, is located approximately 100 kilometres west of the town of Newman. The mine produces West Angelas fines and lump and Marra Mamba iron ore products which were successfully incorporated into the Pilbara Blend during the year.
Expansion of mine, rail and port operations has continued, with the upgrade of Cape Lambert port from 55 Mt/a to a rated capacity of 80 Mt/a proceeding on schedule. The port has also been nominated as the preferred site for subsequent expansion as part of the upgrade of Pilbara capacity to 320 Mt/a, subject to an ongoing feasibility study.
In November, Rio Tinto and the joint venture partners approved development of the US$901 million (Rio Tinto share US$478 million) Mesa A/Warramboo mine in the western end of the Robe Valley. This followed a lengthy, ultimately successful, process to gain environmental approval. The new mine’s annual production will be 20 Mt/a, increasing to 25 Mt/a by 2011, and will be replacement tonnage as Mesa J’s mine life approaches its end.
Robe River primarily exports under medium and long term supply contracts with major integrated steel mill customers in Japan, China, Europe, South Korea and Taiwan.
2007 operating performance
The effect of cyclones slowed production early in the year at Robe River’s Pannawonica and West Angelas mines, as did a serious derailment which required significant track repairs. A two week shutdown of the Cape Lambert dumper also affected production, as did delays in commissioning a conveyor system at West Angelas.
Robe River’s total production in 2007 was 51.5 million tonnes, comprising 25.5 million tonnes from Mesa J, and 26.0 million tonnes from West Angelas. Sales were 25.9 million tonnes of Mesa J and 25.6 million tonnes of West Angelas products.
Sales growth, based on increased production from West Angelas, was again fuelled by the growth in the Chinese market, where Robe River achieved record total sales of 52.0 million tonnes. Japan remains Robe River’s largest single market, with total shipments in 2007 of 22.6 million tonnes.
Robe’s total shipments of iron ore to major markets (million tonnes)
2007 | 2006 | 2005 | ||||
China | 21.0 | 18.5 | 17.5 | |||
Japan | 22.6 | 24.7 | 26.1 | |||
Other Asia | 2.9 | 2.7 | 1.7 | |||
Europe | 5.5 | 6.1 | 7.3 | |||
52.0 | 52.0 | 52.6 | ||||
Iron Ore Company of Canada(Rio Tinto: 58.7 per cent)
RTIO operates Iron Ore Company of Canada (IOC) on behalf of shareholders Mitsubishi (26.2 per cent) and the Labrador Iron Ore Royalty Income Fund (15.1 per cent).
IOC is Canada’s largest iron ore pellet producer. It operates an open pit mine, concentrator and pellet plant at Labrador City, Newfoundland and Labrador, together with a 418 kilometre railway to its port facilities in Sept-Îles, Quebec. IOC has large quantities of ore reserves with low levels of contaminants.
Products are transported on IOC’s railway to Sept-Îles on the St Lawrence Seaway. The port is ice free all year and handles both ocean going ore carriers and Lakers, providing competitive access to all seaborne pellet markets and to the North American Great Lakes region. IOC exports its concentrate and pellet products to major North American, European and Asian steel makers.
IOC employs approximately 2,000 people and recruited 170 people during the year to offset an increase in retirements and to meet greater production needs.
2007 operating performance
The demand for IOC’s products strengthened further in 2007 with concentrate prices increasing by ten per cent and pellet prices by five per cent over last year’s benchmark prices.
Total saleable production was 13.2 million tonnes, down from 16.1 million tonnes in 2006. The variation was primarily due to a seven week labour strike. Pellet production was 11.3 million tonnes (12.7 million tonnes in 2006) with saleable concentrate being 1.9 million tonnes (3.4 million tonnes in 2006). Lower production levels coupled with higher oil prices put pressure on 2007 unit costs.
A labour strike in March/April occurred when negotiations broke down over the new collective agreement to replace the one that expired in February 2007. The strike ended following agreement of a new five year collective agreement.
In August, IOC announced the approval of US$57 million to expand annual concentrate production capacity to 18.4 Mt/a by mid-2008 and to conduct a feasibility study to further expand to 21 Mt/a.
Rio Tinto 2007 Form 20-F | 90 |
In March 2008 IOC announced the approval of US$475 million to increase annual concentrate production by some 40 per cent, or seven Mt/a, to 25 Mt/a and annual pellet production by ten per cent, or 1.5 Mt/a, to 14.5 Mt/a over the next five years.
IOC’s total shipments of iron ore to major markets (million tonnes)
2007 | 2006 | 2005 | ||||
Europe | 5.210 | 5.7 | 6.8 | |||
Asia Pacific | 3.777 | 5.4 | 3.4 | |||
North America | 4.155 | 4.8 | 4.8 | |||
13.142 | 15.9 | 15.0 | ||||
Mineração Corumbaense Reunida (Corumbá)(Rio Tinto: 100 per cent)
Corumbá produced 1.8 million tonnes of lump iron ore in 2007 and sold 1.1 million tonnes to South American, Asian and European customers. Sales were lower in 2007 due to strong competition for barging freight, barge unloading delays at Argentine ports and abnormally low river levels during the last quarter.
Rio Tinto approved investments in additional barging capacity, port improvements and an ore dryer to develop the market for Corumbá lump in direct reduction processes, all of which will come on line during 2008. The feasibility study to expand mine production and transport logistics to ten Mt/a is nearing completion, as the next step towards production of 20 Mt/a. Negotiations continued with prospective investors regarding a steel making project at Corumbá that would consume local iron ore.
Corumbá has more than 200 million tonnes of reserves, and additional mineralisation. There are approximately 650 employees.
HIsmelt®(Rio Tinto: 60 per cent)
The HIsmelt®iron making project at Kwinana in Western Australia is a joint venture between Rio Tinto (60 per cent interest through its subsidiary, HIsmelt Corporation), US steelmaker Nucor Corporation (25 per cent), Mitsubishi Corporation (ten per cent), and Chinese steelmaker Shougang Corporation (five per cent). The project produced 115,000 tonnes of pig iron and achieved a number of production records in 2007, its second year of ramp up as it builds towards a planned capacity of 800,000 tonnes per annum. The project was visited by Chinese president Hu Jintao in September 2007.
IRON ORE GROUP PROJECTS
Hamersley Iron(Rio Tinto: 100 per cent)
Upgrade to 220 Mt/a
RTIO is on schedule to have 220 Mt/a installed capacity in the Pilbara by the end of 2008, achieving a doubling of capacity since the beginning of the decade. The second stage of the Pilbara Expansion is well advanced with a further upgrade of Dampier Port, Yandicoogina mine expansion and Hope Downs stage 1 development now completed. The initial upgrade of Cape Lambert Port will complete the major infrastructure upgrades for this phase. Additional mine capacity at Hope Downs stage 2 to 30 Mt/a will match the capacities of mine, rail and port facilities at 220 Mt/a.
Pilbara 320/420 Mt/a
A suite of mine and infrastructure projects for the expansion of Pilbara capacity to 320 Mt/a is under study. The studies include a variety of greenfield and brownfield mine options across the Pilbara, expansions to both rail and port and supporting infrastructure, designed to bring the Pilbara capacity firstly to 320 Mt/a and then 420 Mt/a. The studies also contemplate the use of new technologies including a Perth based Remote Operations Centre, and a range of automation options. Underlying this work is an aggressive resource evaluation and definition programme, designed to ensure that the available mineralisation is delineated and developed with optimal sequencing and timing. More than 400,000 metres of exploration drilling was completed during 2007 and a further 500,000 metres is planned for 2008.
Robe River Iron Associates(Rio Tinto: 53 per cent)
Mesa A
The US$901 million Mesa A/Waramboo mine development is required to sustain production of Robe Valley pisolite, which would otherwise decline with the run down of the Mesa J mineralisation. Pending finalisation of plans for the proposed rail spur to the existing line, transition work will begin shortly. Production at Mesa A is expected to commence in the first quarter of 2010, starting at 20 Mt/a, increasing to a 25 Mt/a rate from 2011.
Cape Lambert port
The first upgrade of Cape Lambert (from 55 Mt/a to 80 Mt/a) is well under way. A construction camp for 600 people has been established, and works are continuing according to plan with marine piling and bulk earthworks well
Rio Tinto 2007 Form 20-F | 91 |
advanced. The project scope includes extension of the wharf and upgrading of shiploading facilities to accommodate four capsize vessels simultaneously as well as upgrades to the stockyard with the addition of a new reclaimer. The project is scheduled for completion at the end of 2008 with progressive ramp up during the first half of 2009.
The 320/420 project
Cape Lambert is also the preferred site for expansion of Pilbara port facilities to 320 Mt/a, and conceptually to 420 Mt/a. Under the early planning for the 320 Mt/a, this would involve construction of a new terminal (Cape Lambert West) capable of berthing four capsize ships. That terminal would be extended to accommodate a further four berths according to the 420 Mt/a concept. Early planning has also identified the area to the west of the existing rail line for both stockpiles under both 320 and 420 Mt/a upgrade scenarios. This expansion plan carries the added benefit of not adding to Rio Tinto’s footprint in the area.
Simandou(Rio Tinto: 95 per cent)
The Simandou project in eastern Guinea, west Africa, is of great strategic significance for Rio Tinto. It is a greenfield discovery situated in one of the best undeveloped major iron ore provinces in the world. A prefeasibility study is studying the mining and transport options needed to bring Simandou into production as quickly as possible, with an initial capacity of 70 million tonnes per annum. The deposit has great potential in exploration opportunities across the project area. Total drilling of 50,000 metres was undertaken at the Pic de Fon and Oueleba sites in 2007, with an equivalent amount expected in 2008. Simandou has significant brownfield growth capacity, and conceptual development plans are already under way on expanding capacity towards 170 million tonnes per annum. These studies are scheduled for completion in 2010.
The International Finance Corporation (the private sector arm of the World Bank Group) retains a five per cent stake in the project and is working with Rio Tinto to develop it in an environmentally and socially sustainable way.
The project currently employs 375 Rio Tinto staff operating from offices in Conakry and Kerouane, and construction camps at Canga East and Oueleba in the Mining Concession. The total workforce, including contractors, is greater than 700.
Orissa, India(Rio Tinto: 51 per cent)
Orissa is one of the key iron ore regions of the world. RTIO has a joint venture interest in Rio Tinto Orissa Mining with the state owned Orissa Mining Corporation. The joint venture holds rights to iron ore leases in Orissa, which it is seeking to develop. Although progress has been slow, Rio Tinto remains keen to participate in the development of the Indian iron ore sector through its joint venture. A project team has been established and is working to expedite the development of operations in India.
Rio Tinto has identified India as among the most likely economies to follow east Asia’s development of a greater intensity of steel use. India’s economy is expected to maintain its present growth rate, thus providing support for an expanding domestic steel industry. Rio Tinto has continued discussions with major domestic steel companies.
Rio Tinto 2007 Form 20-F | 92 |
Other operations
Kennecott Land(Rio Tinto: 100 per cent)
Kennecott Land was established in 2001 to capture value from the non mining land and water rights assets of Kennecott Utah Copper. Kennecott Land’s holdings are around 53 per cent of the remaining undeveloped land in Utah’s Salt Lake Valley. Approximately 16,000 hectares of the 37,200 hectares owned is developable land and is all within 20 miles (32km) of downtown Salt Lake City.
The initial Daybreak community encompasses 1,800 hectares and is entitled to develop approximately 20,000 residential units and nine million square feet of commercial space. Kennecott Land develops the required infrastructure and prepares the land for sale to home builders. The project is well advanced, with over 1,650 home sales completed since opening in June 2004. At full build out, the community will house 40,000 to 50,000 residents. Revenues in 2007 were US$48 million.
Kennecott Land is in the process of studying development opportunities for the remaining landholdings. Development potential is approximately 163,000 residential units and 58 million square feet of commercial space. Securing entitlement is a long term public process that will culminate in a plan being submitted for approval by the Salt Lake County Council in the next few years.
Sari Gunay(Rio Tinto: 70 per cent)
In November 2007, Rio Tinto signed a final and binding sale agreement to divest the whole of its interest in the Sari Gunay gold project in western Iran. On the completion of this transaction, which is expected in mid 2008, Rio Tinto intends to close its office in Iran and will cease to have any interests in Iran.
MARKETING
Marketing and sales of the Group’s various metal and mineral products are handled either by the specific business concerned, or in some cases are undertaken at a product group level.
Rio Tinto has numerous marketing channels, which include electronic marketplaces, with differing characteristics and pricing mechanisms depending on the nature of the commodity and markets being served. Rio Tinto’s businesses contract their metal and mineral production direct with end users under both short and long term supply contracts. Long term contracts typically specify annual volume commitments and an agreed mechanism for determining prices at prevailing market prices. For example, businesses producing non ferrous metals and minerals reference their sales prices to the London Metal Exchange (LME) or other metal exchanges such as the Commodity Exchange Inc (Comex) in New York.
In 2007, Rio Tinto continued to focus on improvements in its marketing capability, with a small central marketing team based in London and Australia working collaboratively with business based sales and marketing teams to disseminate leading marketing practices across the Group. The team supports the Group’s businesses by helping to identify analytical tools, approaches and strategic frameworks to help identify the value to Rio Tinto of meeting customers’ needs.
MARINE
Ocean freight
Ocean freight is an important part of Rio Tinto’s marketing. It is managed by Rio Tinto Marine, with a head office in Melbourne, to provide Rio Tinto with a comprehensive capability in all aspects of marine transportation, global freight markets and the international regulatory environment. In 2007, Rio Tinto Marine handled over 78 million tonnes of dry bulk cargo, a 13 per cent increase on 2006 volumes transported.
Rio Tinto Marine leverages the Group’s substantial cargo base to obtain a low cost mix of short, medium and long term freight cover. It seeks to create value by improving the competitive position of the Group’s products through freight optimisation, and does not seek to trade freight as a stand alone activity. Rio Tinto Marine sets and maintains the Group’s HSE and vessel assurance standards for freight and is one of three equal shareholders in Rightship, a ship vetting specialist, promoting safety and efficiency in the global maritime industry.
During 2007 Rio Tinto Marine took possession of the first of five new bulk carriers, the RTM Wakmatha. These vessels will be used principally for carrying bauxite from Rio Tinto Alcan’s mine at Weipa, Queensland, to Gladstone for processing. In addition, an order has been placed for the construction of three 250,000 deadweight tonne ore carriers to transport iron ore from Rio Tinto’s operations in Western Australia to customers in China and elsewhere. These ore carriers will be delivered from late 2012 to help Rio Tinto build on its natural freight advantage in Asian exports.
Freight market
Sea freight rates reached unprecedented levels in all segments during 2007. Strong demand for commodities, combined with supply constraints and port congestion, resulted in increased long haul trade and reduced fleet availability.
Rio Tinto 2007 Form 20-F | 93 |
The Baltic Dry Index (BDI), an index of dry bulk shipping rates, more than doubled in 2007, increasing 110 per cent during the year. The Capesize vessel segment had the greatest upward impact on the BDI, with average daily freight prices increasing by 132 per cent during 2007, closing at US$157,128 per day with a November peak at US$194,115 per day. The Panamax, Supramax and Handysize indices also increased substantially, each registering gains of 93 to 95 per cent during 2007.
With spot markets at record highs, charterers turned to the period market to cover cargoes, pushing timecharter rates higher and increasing opportunistic re-let activity. Shipyard order books swelled in the second and third quarters of 2007, resulting in a large tranche of new vessel capacity for delivery from late 2009 through 2011. Long lead times for new vessels has seen large premiums paid for second hand vessels in all segments.
Rio Tinto 2007 Form 20-F | 94 |
Exploration group
STRATEGIC OVERVIEW
The purpose of exploration is to increase the value of the Group by discovering or acquiring resources that can augment future cash flows.
Adding value to a Group the size of Rio Tinto effectively means that exploration programmes must regularly return what others might call “company maker” discoveries. These are the largest and highest quality mineral deposits that the natural world has to offer, called Tier 1 resources.
Exploration involves the identification, prioritisation and testing of geological targets. As less than 0.1 per cent of targets will actually deliver a discovery, a continuous flow of opportunities is required. Exploration success in Rio Tinto is defined as the discovery of a deposit that warrants detailed economic evaluation. Handover of the deposit to a product group evaluation team marks the end of the exploration phase.
Greenfield exploration, which aims to establish new mineral businesses, involves geographic or commodity diversification away from existing Rio Tinto operations. Accountability for greenfield work lies with Rio Tinto Exploration (RTX).
RTX is organised into regional multi-commodity teams. This gives the group local presence, an in depth understanding of the operating environment and a holistic view of geological terrains. At the same time, programmes are prioritised on a global basis so that only the best opportunities are pursued.
There are currently five of these regional teams, which are supplemented by the Project Generation Group (PGG). PGG provides specialist commercial, technical and generative assistance and also co-ordinates all RTX research and development activities.
At the end of 2007, RTX was actively exploring in 30 countries and assessing opportunities in a further 20 for a broad range of commodities including bauxite, copper, coking coal, iron ore, industrial minerals, diamonds, nickel and uranium. RTX employs about 250 geoscientists around the world and has a total complement of approximately 950 people.
Brownfield exploration is directed at sustaining or expanding the value of existing Rio Tinto business units. Given that resources are the lifeblood of every mining operation, this is an essential business activity. Accountability for brownfield programmes lies with the business units, with RTX providing technical assistance.
The brownfield environment provides the easiest opportunity for creating value through exploration. The reasons for this are clear – Rio Tinto controls highly prospective title around its existing operations and infrastructure, and economic thresholds are lower than in a greenfield setting. Moreover, Tier 1 resources – the giants of the mineral deposit world – tend to be found in clusters.
SAFETY
All injury frequency rate | per 200,000 hours |
2003 | 1.30 |
2004 | 0.95 |
2005 | 0.55 |
2006 | 0.88 |
2007 | 1.10 |
Two greenfield discoveries, the Chapudi thermal coal deposit in South Africa and the Kintyre uranium deposit in Western Australia, were transferred from RTX to product group evaluation teams. Kintyre is now being offered for sale. One Tier 1 brownfield discovery, the Caliwingina North channel iron deposit, was transferred to Pilbara Iron.
Order of magnitude studies continued at the Bunder project (diamonds, India) and commenced at the Chilubane and Mutamba (ilmenite, Mozambique), Jarandol and Jadar (borates, Serbia) deposits. All are scheduled for completion in early to mid 2008. Negotiations continued with the Government of Indonesia on the Contract of Work for the Sulawesi nickel project.
Significant progress at early stage RTX projects in Australia (zircon), Brazil (bauxite), Canada (potash), Colombia (bauxite) and the US (nickel) is expected to lead to commencement of new order of magnitude studies in the second half of 2008. Several other projects are showing early signs of encouragement and could be fast tracked into this stage.
Exploration by the La Granja (Peru) evaluation team returned significant encouragement with the discovery of four new bodies of porphyry copper mineralisation. At the Bingham Canyon (US) copper mine, a substantial molybdenum deposit was identified located beneath the copper orebody. Adding to this discovery, which is still being delineated by deep drilling, was the recognition of new porphyry copper mineralisation beneath the southern pit wall. These two new zones of mineralisation point to further discovery potential.
Rio Tinto 2007 Form 20-F | 95 |
On Freeport Block A in West Papua (Indonesia), drilling encountered a new zone of copper-gold skarn mineralisation at the Gap target located between the Grasberg and Ertsberg intrusions. Delineation drilling will be conducted from an exploration drift in 2008.
On the Heruga concession of Entrée Gold near Oyu Tolgoi (Mongolia), operator Ivanhoe Mines announced discovery of the Heruga porphyry copper-gold deposit. Drill intersections included 454 metres at 0.50 per cent copper, 1.43 grams per tonne of gold, and 0.02 per cent molybdenum.
Near the Eagle deposit (US), drilling by the evaluation team intersected high grade nickel-copper sulphide mineralisation at three satellite prospects. Delineation drilling is planned for 2008.
At Energy Resources of Australia, the exploration and evaluation programme focused on infill drilling to support the previously announced mine extension, as well as the prefeasibility study into a further mine expansion. In 2008, attention will return to defining the Ranger 3 Deeps deposit.
2007 compared with 2006
“Exploration” expenditures reported by Rio Tinto include exploration and evaluation spends in both the greenfield and brownfield environments. Expenditure on brownfield projects reported separately in thisAnnual reportby each of the Rio Tinto product groups is included in this summary.
Net cash expenditure on exploration in 2007 was US$576 million, an increase of US$231 million over 2006. This primarily reflects the large number of high quality projects in the exploration and evaluation pipeline, net of US$197 million cash proceeds from the sale of the Peñasquito royalty, shares in Anatolia Minerals, the Southdown iron ore deposit and various other interests during 2007. The pre-tax charge to underlying earnings of US$321 million is net of US$253 million of total proceeds from the divestments mentioned above.
2006 compared with 2005
Net cash expenditure on exploration in 2006 was US$345 million, a US$81 million increase over 2005, reflecting an increase in the number of high quality projects in the exploration and evaluation pipeline, net of US$23 million cash proceeds from the sale of various interests, including Ashton Canada shares. The pre tax charge to underlying earnings in 2006 was US$237 million net of US$46 million of total proceeds from divestments.
Discoveries(Projects transferred to product group evaluation teams) | ||
Year | Tier 1 discoveries | Tier 2 discoveries |
2000 | Potasio Rio Colorado (potash) | Kazan (trona) |
2001 | — | — |
2002 | Resolution (copper) | — |
2003 | — | Sari Gunay (gold) |
2004 | Simandou (iron ore) | Eagle (nickel) |
2005 | La Granja (copper) | Rio Grande (borates) |
Caliwingina (iron ore) | four Pilbara deposits (iron ore) | |
2006 | — | — |
2007 | Caliwingina North (iron ore) | Chapudi (coal) |
Kintyre (uranium) | ||
Notes | |
Tier 1discoveries: Large, high quality deposits — the 20 per cent of deposits contributing 80 per cent of global production. | |
Tier 2 discoveries: Smaller or lower quality deposits — the 80 per cent of deposits contributing 20 per cent of global production. |
Rio Tinto 2007 Form 20-F | 96 |
The Technology and Innovation group (T&I) had its origin in the combination of the Operational and Technical Excellence (OTX) organisation and the Group’sImproving performance togetherbusiness improvement work in the areas of mining, processing, asset management and strategic production planning.
T&I’s focus is to be a partner in value delivery with Rio Tinto businesses by:
• | supporting implementation of leading practice and high value projects; |
• | developing and implementing strategic innovation technologies; and |
• | evaluating the technical risk of major capital and growth projects. |
The group comprises a core team of technology professionals and a number of technology centres that develop leading practice and drive sustainable improvement in the areas of health, safety and environment (HSE), mining, processing, asset management, strategic production planning, and project development and evaluation. Key elements are common and visible measures of operational effectiveness, the improvement of analytical tools and enhanced functional development of staff capability.
A further centre focuses on step change innovation to confer competitive advantage in development of orebodies likely to be available to Rio Tinto in the future.
The total staff in T&I at year end was 387, compared with 368 at year end 2006. The increase was due to the higher level of growth activity characterising the resource sector.
Health, Safety and Environment
The HSE Centre ensures that strategies and standards are in place to minimise HSE risk and drive performance. Activities support their implementation in the businesses and report results and performance trends to the board.
Specific activities during 2007 included embedding the environmental standards and metrics within business units, to complement the health and safety standards. The safety strategy was reviewed to concentrate on safety leadership, culture and measurement, and recognition of performance. This places Rio Tinto as an industry leader in terms of performance in these areas. Implementing the product stewardship strategy via business systems has benefited market access and competitive advantage. Continued development of the HSEQ management systems and the integration of the Alcan business were also priorities for HSE.
Innovation
The Innovation Centre is designed to drive step change innovation for Rio Tinto in the five to ten year time frame. The relevant technologies are in mining, processing and energy.
The activities in 2007 continued to focus on the block cave mining method of particular relevance to the large copper orebodies currently under development, remote monitoring in underground mining, in pit material sizing and conveying, data fusion in surface mining, process advances in ore sorting and comminution and modelling of heap leaching processes to enhance metal extraction.
A significant commitment by Rio Tinto to automation has culminated in a strategic partnership with the Australian Centre for Field Robotics (ACFR) at the University of Sydney. This exclusive partnership leverages an early mover advantage with Komatsu on driverless haul trucks and is a natural extension of other activity which is expected to see the first fully integrated, autonomous mine in operation in the Pilbara in 2010.
Mining
The Mining Technology Centre addresses the core mine production processes. Specific activities in this area during 2007 focused on continuing to establish and disseminate leading practice in orebody knowledge, payload management in surface mining and reconciliation processes across the operations. Attention was also given to further improving Rio Tinto’s technical capability in rapid underground development and block cave design.
Processing
The Processing Technology Centre focuses on core metallurgical capability and delivery of processing operations. Specific activities in this area during 2007 focused on the implementation of a structured methodology designed to identify specific points of loss (throughput, recovery, and grade), understanding underlying causes behind the losses, and the development of projects to reduce or eliminate those losses across the Group’s processing operations. A key enabling activity around the use of Processing Global Metrics for fixed plants was introduced.
Asset Management
The Asset Management Centre focuses on the effective choice and deployment of the Group’s asset base in mining and processing. Activities in 2007 focused on the continued reliability and performance of physical assets across the Group, including the implementation of standards and internal “league tables” for maintenance of heavy mobile equipment
Rio Tinto 2007 Form 20-F | 97 |
such as trucks and shovels. This led to continued significant improvement in areas such as tyre life (a further five per cent added to the success of previous years), truck utilisation and economic extension of engine and component life. The centre also extended the range of its influence in 2007 to the reliability and performance of fixed plant assets across the Group.
Strategic Production Planning
The Strategic Production Planning Centre focuses mainly on a Group wide methodology to ensure orebodies are developed in the optimum sequence for the generation of maximum value. Specific attention is directed to the enhancement of the functional skill of planning staff and to regular review of the life of mine plans for all the Group’s mining operations.
Project Development and Evaluation
The Project Development and Evaluation Centre is the proponent of standards and guidelines for all aspects of capital projects, from pre-feasibility through to execution and commissioning. This covers major projects as well as minor projects implemented within business units. It holds a body of expertise to ensure the lessons from previous project developments are a resource to the project directors for the next generation of development.
Evaluation staff are deliberately excluded from involvement in the formulation of major investment proposals, and the Evaluation team provides independent review and advice on the adequacy of risk identification and mitigation at key points in the approvals process. The team is also responsible for overseeing reserve estimation corporate governance within the Group.
Energy and climate change
The Group Chief Scientist monitors emerging global technology trends and identifies opportunities which could significantly enhance the Group’s operations. Particular attention is given towards technologies with the potential for step change reductions in the Group’s energy and greenhouse gas footprint. The Group Chief Scientist also assists product groups in positioning new and existing operations for reduced energy consumption, greenhouse gas emissions and energy costs.
Production Technology Services
Production Technology Services is the core team of technology professionals deployed across five global offices who provide the breadth of experience and multi disciplinary approach to support existing business activity and pursuit of new, profitable growth. They are deployed at the request of business units and the technology centres within T&I. Their offices are in Melbourne, Brisbane, Perth, Salt Lake City and Montreal. In addition, we havesome staff reside in London to be readily accessible to the UK headquarters.
2007 compared with 2006
The charge against net earnings for the T&I group was US$78 million, compared with US$50 million in 2006. The increase was due to the higher level of activity, reflected also by higher staff numbers, and the continued development and deployment of leading operational practice across the Group.
2006 compared with 2005
The charge against net earnings for the group was US$50 million, compared with US$41 million in 2005. The increase was due to the greater level of activity, reflected also in the addition of staff.
Rio Tinto 2007 Form 20-F | 98 |
Financial review
Cash flow
2007 compared with 2006
Cash flow from operations, including dividends from equity accounted units, was a record US$12,569 million, 15 per cent higher than in 2006 due to the effect of higher earnings and favourable working capital movements.
Tax paid for 2007 increased to US$3,421 million, US$622 million higher than for 2006 largely due to the delayed tax effect of the increased earnings in 2006 compared to 2005 and tax paid by Alcan. Net interest paid of US$489 million for 2007 was US$361million higher than 2006, arising mostly from Alcan acquisition debt arrangement costs and interest paid on the Alcan debt.
The Group invested at record levels, in particular in expansion projects. Expenditure on property, plant and equipment and intangible assets was US$4,968 million in 2007, an extensive global exploration programme, spending a totalincrease of US$345980 million over 2006. This included the completion of the second phase of the Dampier port and Yandicoogina iron ore mine expansions, as well as construction of the Hope Downs iron ore mine in Western Australia, the expansion of the Yarwun alumina refinery, the A418 dike construction at the Diavik diamond mine and the Madagascar ilmenite mine. The Group’s ongoing and recently approved capital projects, which will impact future year’s cash flows are on pages 12 to 13.
The net cash cost of acquisitions in 2007 was US$37,526 million, which was net of US$13 million related to disposals. Almost all of the acquisition cost related to Alcan. The acquisition was financed by US$38 billion of syndicated bank loans. Acquisitions less disposals were US$279 million in 2006 and we continuemainly relating to evaluate numerous development opportunities, oftenthe acquisition of an initial stake in Ivanhoe Mines.
Dividends paid in 2007 of US$1,507 million were US$1,066 million lower than dividends paid in 2006 which included a special dividend of US$1.5 billion. The share buy back programme was discontinued after the announcement of the Alcan acquisition on 12 July 2007: returns to shareholders from the on-market buy back of Rio Tinto plc shares in 2007 totalled US$1,611 million (net of US$13 million proceeds from the exercise of options), compared with others.US$2,339 million in 2006.
Much is being made2006 compared with 2005
Cash flow from operations, including dividends from equity accounted units, was US$10,923 million, 36 per cent higher than in 2005. The increase was mainly due to increased profits. There was a cash outflow on working capital in both years reflecting higher receivables across all product groups due to higher metal prices and sales volumes. The cash outflow on inventory was US$454 million in 2006 compared to US$249 million in 2005, partly due to increased operating activity and production costs.
Expenditure on property, plant and equipment and intangible assets was US$3,988 million in 2006, an increase of a skills shortage. What is your view?Technical skills in mining, metallurgyUS$1,434 million over 2005. This included the second phase of the Dampier port and geological sciences are in short supply and there is strong competition for recent graduates, experienced engineers and artisansYandicoogina iron ore mine expansions, as well as supervisors.construction of the Hope Downs iron ore mine in Western Australia, the A418 dike construction at the Diavik diamond mine, the Madagascar ilmenite mine and the capacity increases at Rio Tinto Energy America.
Tax paid in 2006 increased to US$2,799 million, US$1,782 million higher than in 2005. The increase reflected higher profits including the lag effect of tax payments on higher profits from 2005.
Acquisitions less disposals were US$279 million in 2006 mainly relating to the acquisition of an initial stake in Ivanhoe Mines. In 2005, there were net proceeds of disposal arising mainly from the sale of the Group’s interest in Lihir.
Dividends paid in 2006 of US$2,573 million were US$1,432 million higher than dividends paid in 2005. These included the special dividend totalling US$1.5 billion which was paid to shareholders in April 2006. Capital management activity also included the on market buyback of Rio Tinto plc shares in 2006, comprising US$2,299 million from the 2006–2007 programme and US$95 million in January from the 2005–2006 programme (before deducting US$24 million proceeds from the exercise of options). In 2005 an off market buyback of Rio Tinto Limited shares returned US$774 million to shareholders and an on market buyback of Rio Tinto plc shares returned US$103 million.
Balance sheet
Rio Tinto commissioned expert valuation consultants to advise on the fair values of Alcan’s assets. As required under International Financial Reporting Standards (IFRS), the tangible and intangible assets of the acquired business have been uplifted to fair value. The residue of the purchase price not allocated to specific assets and liabilities has been attributed to goodwill. The provisional values incorporated in the2007 Financial statementswill be subject to revision within 12 months of the date of acquisition as permitted by the relevant accounting standard, IFRS 3. Details of the Alcan assets acquired are included in note 41 to the2007 Financial statements.
The completion of the Alcan acquisition was financed under a US$40 billion syndicated bank loan at floating interest rates of which US$38 billion was drawn down. This, together with the debt held by Alcan on acquisition, resulted in an increase in net debt of US$42.8 billion to US$45.2 billion at 31 December 2007 of which US$8.1 billion is classified as short term borrowings. The US$40 billion loan is split into four facilities with final maturities ranging up to five years. Facilities A and B of this acquisition related debt are subject to mandatory prepayment to the extent of the net proceeds from disposals of assets and from the raising of funds through capital markets, under specific thresholds
Rio Tinto 2007 Form 20-F | 99 |
and conditions. Debt to total capital rose to 63 per cent and interest cover was 20 times. In addition, the Group’s share of the third party net debt of equity accounted units totalled US$0.7 billion at 31 December 2007. US$0.3 billion of this debt is with recourse to the Rio Tinto Group.
Goodwill arising from the Alcan acquisition relating to subsidiaries was US$14.5 billion and that relating to equity accounted units was US$2.8 billion. The future economic benefits represented by the goodwill include those associated with synergies, future development and expansion projects and the assembled workforce. The Group has decided to dispose of Alcan Packaging, which is presented in the balance sheet in the lines: ‘Assets held for sale’ and ‘Liabilities of disposal groups held for sale’.
Net assets attributable to Rio Tinto shareholders increased by US$6.5 billion. The increase reflected profit after tax attributable to Rio Tinto shareholders of US$7.3 billion less returns to shareholders of US$2.8 billion comprising US$1.5 billion of dividends and US$1.3 billion of share buybacks. In addition, there was a positive currency translation effect of US$1.9 billion as the Australian dollar, the Canadian dollar and the Euro all strengthened against the US dollar.
Financial risk management
The Group’s policies with regard to financial risk management are clearly defined and consistently applied. They are a fundamental part of the Group’s long term strategy covering areas such as foreign exchange risk, interest rate risk, commodity price risk, credit risk and liquidity risk and capital management. From 1 January 2008, Rio Tinto Alcan has adopted the Rio Tinto Group policy on trading and hedging. The acquisition of Alcan impacted the Group’s market risk exposures, in particular, increasing the Group’s exposure to changes in interest rates and the aluminium price.
The Group’s business is finding, mining and processing mineral resources, and not trading. Generally, the Group only sells commodities it has produced but may purchase commodities to satisfy customer contracts from time to time and to balance the loading on production facilities. In the long term, natural hedges operate in a number of ways to help protect and stabilise earnings and cash flow.
The Group has a diverse portfolio of commodities and markets, which have varying responses to the economic cycle. The relationship between commodity prices and the currencies of most of the countries in which the Group operates provides further natural protection in the long term. In addition, the Group’s policy of borrowing at floating US dollar interest rates helps to counteract the effect of economic and commodity price cycles. These natural hedges significantly reduce the necessity for using derivatives or other forms of synthetic hedging. Such hedging is therefore undertaken to a strictly limited degree, as described in the sections on currency, interest rate, commodity price exposure and treasury management below.
The Group’s2007 Financial statementsand disclosures show the full extent of its financial commitments including debt.
The risk factors to which the Group is subject that are thought to be of particular importance are summarised on pages 5 to 7.
The effectiveness of internal control procedures continues to be a high priority in the Rio Tinto Group. The Boards’ statement on internal control is included under Corporate governance on page 150.
Liquidity and capital resources
The Group’s total capital is defined as Rio Tinto’s shareholders’ funds plus amounts attributable to outside equity shareholders plus net debt. The Group’s over-riding objectives when managing capital are to safeguard the business as a going concern; to maximise returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure in order to reduce the cost of capital.
The unified credit status of the Group is maintained through cross guarantees whereby contractual obligations of Rio Tinto plc and Rio Tinto Limited are automatically guaranteed by the other. Rio Tinto plc and Rio Tinto Limited continue to maintain solid investment grade credit ratings from Moody’s and Standard and Poor’s, despite the credit rating downgrade announced on completion of the Alcan acquisition. These ratings continue to provide access to global debt capital markets in significant depth. Credit ratings are not a recommendation to purchase, hold or sell securities, and are subject to revision or withdrawal at any time by the ratings organisation.
Rio Tinto does not have a target debt/equity ratio, but has a policy of maintaining a flexible financing structure so as to be able to take advantage of new investment opportunities that may arise. Following the acquisition of Alcan, the Group has publicly stated an objective to reduce its debt to equity ratio from current levels through a targeted asset divestment programme and through operating cash flows to a level consistent with a ‘single-A’ credit rating. This policy is balanced against the desire to ensure efficiency in the debt/equity structure of the Rio Tinto balance sheet in the longer term through pro-active capital management programmes.
On 12 February 2008 the Group announced the sale of its interest in the Greens Creek mine for US$750 million. On 5 March 2008 the Group completed the sale of its interest in the Cortez joint venture to its partner for a cash consideration of US$1,695 million plus deferred and contingent consideration.
The Group maintains backup liquidity for its commercial paper programme and other debt maturing within 12 months by way of bank standby credit facilities, which totalled US$3.7 billion (undrawn) at 31 December 2007. The Group’s committed bank standby facilities contain no financial undertakings relating to interest cover and are not
Rio Tinto 2007Form 20-F | 100 |
affected to any material extent (other than an increase in interest margin) by a reduction in the Group’s credit rating. The main covenant in the Rio Tinto group relates to a financial covenant over Corporate debt drawn under the Syndicated Acquisition Facility, for which a compliance certificate must be produced attesting a certain ratio of Net Borrowings to EBITDA. There are no covenants relating to corporate debt which are under negotiation at present. The Group’s policy is to centralise debt and surplus cash balances wherever possible.
As at 31 December 2007, the Group had contractual cash obligations arising in the ordinary course of business as follows:
Contractual cash obligations | ||||||||||
Less than 1 | Between 1 | Between 3 | After 5 | |||||||
Total | year | and 3 years | and 5 years | years | ||||||
US$ m | US$ m | US$ m | US$ m | US$ m | ||||||
Expenditure commitments in relation to: | ||||||||||
Operating leases | 1,782 | 283 | 517 | 468 | 514 | |||||
Other (mainly capital commitments) | 3,978 | 3,113 | 801 | 64 | — | |||||
Long term debt and other financial obligations | ||||||||||
Debt (a) | 47,019 | 8,263 | 21,069 | 13,335 | 4,352 | |||||
Interest payments (b) | 9,238 | 2,310 | 3,184 | 1,660 | 2,084 | |||||
Unconditional purchase obligations (c) | 7,271 | 1,525 | 1,571 | 1,079 | 3,096 | |||||
Other (mainly trade creditors) | 7,295 | 6,144 | 639 | 363 | 149 | |||||
Total | 76,583 | 21,638 | 27,781 | 16,969 | 10,195 | |||||
Notes | |
(a) | Debt obligations include bank borrowings repayable on demand. |
(b) | Interest payments have been projected using the interest rate applicable at 31 December, 2007, including the impact of interest rate swap agreements where appropriate. Much of the debt is subject to variable interest rates. Future interest payments are subject, therefore, to change in line with market rates. |
(c) | Unconditional purchase obligations relate to commitments to make payments in the future for fixed or minimum quantities of goods or services at fixed or minimum prices. The future payment commitments have not been discounted and mainly relate to commitments under ‘take or pay’ power and freight contracts. They exclude unconditional purchase obligations of jointly controlled entities apart from those relating to the Group’s tolling arrangements. |
Information regarding the Group’s pension commitments and funding arrangements is provided in the Post retirement benefits section of this Financial review and in note 49 to the 2007Fnancial statements. The level of contributions to funded pension plans is determined according to the relevant legislation in each jurisdiction in which the Group operates. In some countries there are statutory minimum funding requirements while in others the Group has developed its own policies, sometimes in agreement with the local trustee bodies. The size and timing of contributions will usually depend upon the performance of investment markets. Depending on the country and plan in question the funding level will be monitored quarterly, bi-annually or annually and the contribution amount amended appropriately. Consequently it is not possible to predict with any certainty the amounts that might become payable in 2009 onwards. The impact on cash flow in 2007 of the Group’s pension plans, being the employer contributions to defined benefit and defined contribution pension plans, was US$246 million. In addition there were contributions of US$30 million in respect of unfunded healthcare schemes. Contributions to pension plans for 2008 are estimated to be around US$220 million higher than for 2007. This is predominantly due to the inclusion of the Alcan plans for the full year, although it is also partly due to changes in funding rules in the US. Healthcare plans are unfunded and contributions for future years will be equal to benefit payments and therefore cannot be predetermined.
Information regarding the Group’s close down and restoration obligations is provided in the relevant section of this review and in note 27 to the2007 Financial statements. Close down and restoration costs are a normal consequence of mining, and the majority of close down and restoration expenditure is incurred at the end of the relevant operation. Generally, the Group’s close down and restoration obligations to remediate in the long term are not fixed as to amount and timing and are not therefore included in the above table.
On the basis of the levels of obligations described above, the unused capacity under the Group’s commercial paper and European Medium Term Notes programmes, the Group’s anticipated ability to access debt and equity capital markets in the future and the level of anticipated free cash flow, the Group believes that it has sufficient short and long term sources of funding available to meet its working capital requirements.
Dividends and capital management
Rio Tinto’s progressive dividend policy aims to increase the US dollar value of dividends over time, without cutting them in economic downturns.
Dividends paid on Rio Tinto plc and Rio Tinto Limited shares are equalised on a net cash basis; that is without taking into account any associated tax credits. Dividends are determined in US dollars. Rio Tinto plc dividends are declared and paid in pounds sterling and Rio Tinto Limited dividends are declared and paid in Australian dollars, converted at exchange rates applicable to the US dollar two days prior to the announcement of dividends. Holders of American Depositary Receipts (ADRs) receive a US dollar dividend at the rate declared. Changes in exchange rates
Rio Tinto 2007Form 20-F | 101 |
could result in a reduced sterling or Australian dollar dividend in a year in which the US dollar value is maintained or increased. The interim dividend for each year in US dollar terms will be equivalent to 50 per cent of the total US dollar dividends declared in respect of the previous year.
The Group announced a re-basing of its ordinary dividend in February 2007, increasing the full year ordinary dividend in respect of 2006 by 30 per cent to 104 US cents. The 2007 full year ordinary dividend represents a 31 per cent increase on 2006. In addition, the Group has announced an intention to increase its annual dividend by at least 20 per cent in each of 2008 and 2009.
Final 2007 dividends to Rio Tinto Limited shareholders will be fully franked. The board expects Rio Tinto Limited to be in a position to pay fully franked dividends for the reasonably foreseeable future.
On 2 February 2006 the Group announced a US$4 billion capital management programme which was subsequently increased to US$7 billion in October 2006. The capital return was comprised of a US$1.5 billion special dividend (US$1.10 per share) paid in April 2006 which was paid concurrently with the 2005 final ordinary dividend, but did not form part of the Group’s progressive ordinary dividend policy, and an initial US$2.5 billion share buyback programme (increased to US$5.5 billion) to be completed over the remaining period to the end of 2007. The programme was suspended on 12 July 2007 at the time the Alcan offer was announced, by which time US$3.9 billion had been completed under the US$7 billion capital management programme, bringing the total cash returned to shareholders under announced capital management programmes since 2005 to US$6.4 billion.
Treasury management and financial instruments
Treasury operates as a service to the business of the Rio Tinto Group and not as a profit centre. Strict limits on the size and type of transaction permitted are laid down by the Rio Tinto board and are subject to rigorous internal controls.
Rio Tinto does not acquire or issue derivative financial instruments for trading or speculative purposes; nor does it believe that it has exposure to such trading or speculative holdings through its investments in joint ventures and associates. Derivatives are used to separate funding and cash management decisions from currency exposure and interest rate management. The Group uses interest rate and cross currency interest rate swaps in conjunction with longer term funds raised in the capital markets to achieve a predominantly floating rate obligation which is consistent with the Group’s interest and exchange rate policies, primarily US dollar LIBOR. No material exposure is considered to exist by virtue of the possible non performance of the counterparties to financial instruments held by the Group.
Derivative contracts are carried at fair value based on published price quotations for the period for which a liquid active market exists. Beyond this period, Rio Tinto’s own assumptions are used.
Off balance sheet arrangements
In the ordinary course of business, to manage the Group’s operations and financing, Rio Tinto enters into certain performance guarantees and commitments for capital and other expenditure.
The aggregate amount of indemnities and other performance guarantees, on which no material loss is expected, including those related to joint ventures and associates, was US$739 million at 31 December 2007.
Other commitments include capital expenditure, operating leases and unconditional purchase obligations as set out in the table of contractual cash obligations, included in the liquidity and capital resources section above.
Exchange rates, reporting currencies and currency exposure
Rio Tinto’s shareholders’ equity, earnings and cash flows are influenced by a wide variety of currencies due to the geographic diversity of the Group’s sales and the countries in which it operates. The US dollar, however, is the currency in which the great majority of the Group’s sales are denominated. Operating costs are influenced by the currencies of those countries where the Group’s mines and processing plants are located and also by those currencies in which the costs of imported equipment and services are determined. The Australian and Canadian dollars and the Euro are the most important currencies (apart from the US dollar) influencing costs. In any particular year, currency fluctuations may have a significant impact on Rio Tinto’s financial results. A weakening of the US dollar against the currencies in which the Group’s costs are determined has an adverse effect on Rio Tinto’s underlying earnings.
The following sensitivities give the estimated effect on underlying earnings assuming that each exchange rate moved in isolation. The relationship between currencies and commodity prices is a complex one and movements in exchange rates can cause movements in commodity prices and vice versa. Where the functional currency of an operation is that of a country for which production of commodities is an important feature of the economy, such as the Australian dollar, there is a certain degree of natural protection against cyclical fluctuations in the long term, in that the currency tends to be weak, reducing costs in US dollar terms, when commodity prices are low, and vice versa.
The exchange rate sensitivities quoted below include the effect on operating costs of movements in exchange rates but exclude the effect of the revaluation of foreign currency financial assets and liabilities. They should therefore be used with care.
Rio Tinto 2007Form 20-F | 102 |
Effect on net and | ||||
underlying earnings | ||||
Average | of 10% change in | |||
exchange rate | full year average | |||
for 2007 | +/- US$m | |||
Australian dollar (a) | 84 US cents | 494 | ||
Canadian dollar (a) | 93 US cents | 203 | ||
Euro | 137 US cents | 65 | ||
Chilean peso | $1 = 523 pesos | 12 | ||
New Zealand dollar | 73 US cents | 17 | ||
South African rand | 14 US cents | 55 | ||
UK sterling | 200 US cents | 24 | ||
(a) | The sensitivities in the 2007 column are based on 2007 prices, costs and volumes and assume that all other variables remain constant, except that a full years’ volumes are included for Alcan where indicated. |
Given the dominant role of the US currency in the Group’s affairs, the US dollar is the currency in which financial results are presented both internally and externally. It is also the most appropriate currency for borrowing and holding surplus cash, although a portion of surplus cash may also be held in other currencies, most notably Australian dollars, Canadian dollars and the Euro. This cash is held in order to meet short term operational and capital commitments and, for the Australian dollar, dividend payments. The Group finances its operations primarily in US dollars, either directly or using cross currency interest rate swaps. A substantial part of the Group’s US dollar debt is located in subsidiaries having a US functional currency.
However, Icertain US dollar debt and other financial assets and liabilities including intragroup balances are not held in the functional currency of the relevant subsidiary. This results in an accounting exposure to exchange gains and losses as the financial assets and liabilities are translated into the functional currency of the subsidiary that accounts for those assets and liabilities. These exchange gains and losses are recorded in the Group’s income statement except to the extent that they can be taken to equity under the Group’s accounting policy which is explained in note 1 of the2007 Financial statements. Gains and losses on US dollar net debt and on intragroup balances are excluded from underlying earnings. Other exchange gains and losses are included in underlying earnings.
The Group does not generally believe wethat active currency hedging of transactions would provide long term benefits to shareholders. Currency protection measures may be deemed appropriate in specific commercial circumstances and are subject to strict limits laid down by the Rio Tinto board, typically hedging of capital expenditure and other significant financial items such as tax and dividends. There is a legacy of currency forward contracts used to hedge operating cash flow exposures which were acquired with Alcan and the North companies. Details of currency derivatives held at 31 December 2007 are set out in note 34 to the2007 Financial statements.
The sensitivities below give the estimated effect on underlying earnings, net earnings and equity of a ten per cent change in the full year closing US dollar exchange rate, assuming that each exchange rate moved in isolation. The sensitivities are based on financial assets and liabilities held at 31 December 2007, where balances are not denominated in the functional currency of the subsidiary. A strengthening of the US dollar would result in exchange gains based on financial assets and financial liabilities held at 31 December 2007. These balances will not remain constant throughout 2008, however, and therefore these numbers should be used with care.
Effect on | Of which | Effect of | ||||||
net | amount | items | ||||||
earnings of | impacting | impacting | ||||||
Closing | 10% | underlying | directly on | |||||
exchange rate | change | earnings | equity | |||||
US cents | US$m | US$m | US$m | |||||
Functional currency of business unit: | ||||||||
Australian dollar | 88 | 204 | 99 | (20 | ) | |||
Canadian dollar | 101 | (3 | ) | 53 | — | |||
South African rand | 15 | 14 | 12 | (4 | ) | |||
Euro | 147 | 33 | 14 | 149 | ||||
New Zealand dollar | 78 | (9 | ) | 3 | — | |||
(a) | The sensitivities show the net sensitivity of US dollar exposures in Australian dollar functional currency companies, for example, and Australian dollar exposures in US dollar functional currency companies. |
(b) | The sensitivities indicate the effect of a ten per cent strengthening of the US dollar against each currency. |
The Group has changed its disclosure of market risk sensitive instruments from a tabular basis to a sensitivity analysis basis for consistency with the requirements of IFRS 7, the international accounting standard on financial instrument disclosure which the Group has adopted in its financial statements this year.
Sensitivities as at 31 December 2006 were as shown below.
Rio Tinto 2007 Form 20-F | 103 |
Of which | ||||||||
amount | Effect of items | |||||||
Effect on net | impacting | impacting | ||||||
Closing | earnings of 10% | underlying | directly on | |||||
exchange rate | change | earnings | equity | |||||
US cents | US$m | US$m | US$m | |||||
Functional currency of business unit: | ||||||||
Australian dollar | 79 | 37 | 56 | (30 | ) | |||
Canadian dollar | 86 | (29 | ) | 12 | - | |||
South African rand | 14 | (6 | ) | 5 | - | |||
New Zealand dollar | 71 | (15 | ) | 3 | - | |||
In addition, some US dollar functional currency companies are exposed to exchange movements on local currency deferred tax balances. The only material exposure is to the Canadian dollar and a ten per cent strengthening of the US dollar would reduce underlying earnings based on 2007 balances by US$96 million. This would offset the US$53 million gain shown above. There was no similar exposure at 31 December 2006.
The functional currency of many operations within the Rio Tinto Group is the local currency in the country of operation. Alcan’s aluminium and alumina producing operations use a US dollar functional currency including those in Canada and Australia. Foreign currency gains or losses arising on translation to US dollars of the net assets of non US functional currency operations are taken to equity and, with effect from 1 January 2004, recorded in a currency translation reserve. A weakening of the US dollar would have a positive effect on equity. The approximate translation effects on the Group’s net assets of ten per cent movements from the year end exchange rates are as follows:
2007 | ||||
Effect on net assets | ||||
Closing | of 10% change in | |||
exchange rate | closing rate | |||
US cents | +/- US$m | |||
Australian dollar | 88 | 1,583 | ||
Euro | 147 | 568 | ||
Canadian dollar | 101 | 255 | ||
These net assets will not remain constant, however, and therefore these numbers should be used with care.
Interest rates
Rio Tinto’s interest rate management policy is generally to borrow and invest at floating interest rates. This approach is based on the historical correlation between interest rates and commodity prices. In some circumstances, an element of fixed rate funding may be considered appropriate. Rio Tinto hedges interest rate and currency risk on most of its foreign currency borrowings by entering into cross currency interest rate swaps in order to convert fixed rate foreign currency borrowings to floating rate US dollar borrowings. At the end of 2007, US$4.9 billion (2006: US$1.2 billion) of the Group’s debt was at fixed rates after taking into account interest rate swaps and finance leases. Based on the Group’s net debt at 31 December 2007, the effect on the Group’s net earnings of a half percentage point increase in US dollar LIBOR interest rates with all other variables held constant, would be a reduction of US$158 million (2006: US$3 million). These balances will not remain constant throughout 2008, however, and therefore these numbers should be used with care.
Commodity prices
The Group’s normal policy is to sell its products at prevailing market prices. Exceptions to this rule are subject to strict limits laid down by the Rio Tinto Board and to rigid internal controls. Rio Tinto’s exposure to commodity prices is diversified by virtue of its broad commodity spread and the Group does not generally believe commodity price hedging would provide long term benefit to shareholders. The Group may hedge certain commitments with some of its customers or suppliers. Details of commodity derivatives held at 31 December 2007 are set out in note 34 to the2007 Financial statements. The forward contracts to sell copper were entered into as a condition of the refinancing of Palabora in 2005. The aluminium forward contracts and embedded derivatives were acquired with Alcan.
Metals such as copper and aluminium are generally sold under contract, often long term, at prices determined by reference to prevailing market prices on terminal markets, such as the London Metal Exchange and COMEX in New York, usually at the time of delivery. Prices fluctuate widely in response to changing levels of supply and demand but, in the long run, prices are related to the marginal cost of supply. Gold is also priced in an active market in which prices respond to daily changes in quantities offered and sought. Newly mined gold is only one source of supply; investment and disinvestment can be important elements of supply and demand. Contract prices for many other natural resource products including iron ore and coal are generally agreed annually or for longer periods with customers, although volume commitments vary by product.
Certain products, predominantly copper concentrate, are ‘provisionally priced’, ie the selling price is subject to final adjustment at the end of a period normally ranging from 30 to 180 days after delivery to the customer, based on the market price at the relevant quotation point stipulated in the contract. Revenue on provisionally priced sales is
Rio Tinto 2007 Form 20-F | 104 |
recognised based on estimates of fair value of the consideration receivable based on forward market prices. At each reporting date provisionally priced metal is marked to market based on the forward selling price for the period stipulated in the contract. For this purpose, the selling price can be measured reliably for those products, such as copper, for which there exists an active and freely traded commodity market such as the London Metal Exchange and the value of product sold by the Group is directly linked to the form in which it is traded on that market. At the end of 2007 the Group had 270 million pounds of copper sales (2006: 324 million pounds) that were provisionally priced at 304 US cents per pound (2006: 287 US cents per pound). The final price of these sales will be determined in 2008. The impact on earnings of a ten per cent change in the price of copper for the provisionally priced sales would be US$58 million (2006: US$66 million).
Approximately 53 per cent of Rio Tinto’s 2007 net earnings from operating businesses came from products whose prices were terminal market related and the remainder came from products priced by direct negotiation.
The Group continued to achieve high prices for its products in 2007, and its assessment of the economic and demand outlook remains very positive, despite recent unsettled conditions in the financial markets. The strong increases seen in global minerals demand are driven by demographic and economic fundamentals in fast growing countries like China and India, whose large populations continue to urbanise. These long term trends are driven by domestic developments in those countries, and are therefore insulated to a significant extent from any potential near term weakness in western economies.
The approximate effect on the Group’s underlying and net earnings of a ten per cent change from the full year average market price in 2007 for the following products would be:
Effect on underlying | ||||||
and net earnings of | ||||||
Average | US$ 10% change in | |||||
market price | full year average | |||||
Unit | for 2007 | +/- US$m | ||||
Copper | pound | 3.24 | 360 | |||
Aluminium (a) | pound | 1.20 | 678 | |||
Gold | ounce | 691 | 64 | |||
Molybdenum | pound | 30 | 69 | |||
Iron ore | dmtu | n/a | 457 | |||
(a) | The above sensitivities are based on 2007 volumes except that a full year impact from Alcan has been included where indicated. |
The sensitivities give the estimated impact on net earnings of changes in prices assuming that all other variables remain constant. These should be used with care. As noted previously, the relationship between currencies and commodity prices is a complex one and changes in exchange rates can influence commodity prices and vice versa.
The table below summarises the impact of changes in the market price on the following commodity derivatives including those aluminium and option contracts embedded in electricity purchase contracts outstanding at 31 December 2007. The impact is expressed in terms of the resulting change in the Group’s net earnings for the year or, where applicable, the change in equity. The sensitivities are based on the assumption that the market price increases by ten per cent with all other variables held constant. The Group’s ‘own use contracts’ are excluded from the sensitivity analysis below as they are outside the scope of IAS 39. Own use contracts are contracts to buy or sell non financial items that can be net settled but were entered into and continue to be held for the purpose of the receipt or delivery of the non financial item in accordance with the business unit’s expected purchase, sale or usage requirements.
These sensitivities should be used with care. The relationship between currencies and commodity prices is a complex one and changes in exchange rates can influence commodity prices and vice versa.
Effect of items | ||||
impacting directly | ||||
Effect on underlying | on Rio Tinto share | |||
and net earnings of | of equity of 10% | |||
10% increase from | increase from | |||
year end price | year end price | |||
US$m | US$m | |||
Copper | — | 40 | ||
Coal | — | 25 | ||
Aluminium | 41 | 50 | ||
41 | 115 | |||
Rio Tinto 2007 Form 20-F | 105 |
Sensitivities as at 31 December 2006 were as shown below:
Effect on underlying | Effect of items | |||
and net earnings of | impacting directly | |||
10% increase from | on Rio Tinto share | |||
year end price | of equity of 10% | |||
increase from | ||||
year end price | ||||
US$m | US$m | |||
Copper | — | 49 | ||
Coal | — | 20 | ||
— | 69 | |||
Sales revenue
The table below shows published ‘benchmark’ prices for Rio Tinto’s commodities for the last three years where these are publicly available, and where there is a reasonable degree of correlation between the benchmark and Rio Tinto’s realised prices. The prices set out in the table are the averages for each of the calendar years, 2005, 2006 and 2007. The Group’s sales revenue will not necessarily move in line with these benchmarks for a number of reasons which are discussed below.
2007 | 2006 | 2005 | ||||||
Commodity | Source | Unit | US$ | US$ | US$ | |||
Aluminium | LME | pound | 1.20 | 1.16 | 0.86 | |||
Copper | LME | pound | 3.24 | 3.06 | 1.66 | |||
Gold | LBMA | ounce | 691 | 602 | 444 | |||
Iron ore | Australian benchmark (fines) (a) | dmtu (b) | 0.79 | 0.71 | 0.55 | |||
Molybdenum | Metals Week: quote for dealer oxide price | pound | 30 | 25 | 31 | |||
Notes | |
(a) | average for the calendar year |
(b) | dry metric tonne unit |
The discussion of revenues below relates to the Group’s gross revenue from sales of commodities, including its share of the revenue of equity accounted units, as included in the Financial Information by Business Unit in the2007 Financial statements.
The sales revenues of the Iron Ore group increased by 27 per cent in 2007 compared with 2006. There was a 9.5 per cent increase in the benchmark price, mainly effective from 1 April 2007 which resulted in an 11 per cent increase in the average Australian iron ore fines benchmark for the calendar year. Sales achieved the benchmark price throughout the year. The price outlook for the 2008 contract year remains very positive, with spot prices in China substantially above prevailing contract prices. In addition to higher prices, sales revenues at Hamersley Iron were higher from record production following completion of the second phase of the Dampier port upgrade and the Tom Price brownfield and Yandicoogina JSE mine expansions.
At IOC, volumes were lower as a result of a seven week strike in the first and second quarters of the year and this was only partly mitigated by higher prices.
The Australian iron ore fines benchmark increased by 19 per cent in April 2006. This together with higher volumes at Hamersley contributed to an increase in the Group’s iron ore revenue of 26 per cent in 2006 against 2005.
A significant proportion of Rio Tinto’s coal production is sold under long term contracts. In Australia, the prices applying to sales under the long term contracts are generally renegotiated annually; but prices are fixed at different times of the year and on a variety of bases. For these reasons, average realised prices will not necessarily reflect the movements in any of the publicly quoted benchmarks. Moreover, there are significant product specification differences between mines. Sales volumes will vary during the year and the timing of shipments will also result in differences between average realised prices and benchmark prices.
Asian seaborne thermal coal prices continued to rise sharply throughout 2007 mainly due to supply disruptions from key producing countries. Issues relating to infrastructure controlled by external parties are likely to maintain market tightness for the foreseeable future. Published thermal coal benchmarks in Australia improved by 33 per cent in the calendar year whilst coking coal benchmarks decreased by 13 per cent.
Revenues of the Group’s Australian coal operations decreased by three per cent in 2007 with lower thermal coal sales largely attributable to infrastructure constraints and a severe weather event. In general, production at the Australian coal mines continued to be constrained by rail and port constraints in Queensland and New South Wales and reduced tonnage of rail and port allotments in Queensland, which curtailed mined production, despite the generally favourable market conditions.
Revenues of the Group’s Australian coal operations increased by two per cent in 2006. There was a sustained increase in the received price for thermal coal. This benefit was largely offset by lower coking coal sales because of market weakness and the delay in thermal coal shipments arising from congestion at Newcastle. Published market indications for Australian thermal coal showed a slight increase in thermal coal prices in 2006 and a seven per cent increase in the coking coal benchmark price.
Rio Tinto 2007 Form 20-F | 106 |
In the US, published market indications of spot prices for Wyoming Powder River Basin thermal coal 8800 BTU (0.80 sulphur) show a decrease of around 20 per cent for the average spot price in 2007 compared with 2006. However, Rio Tinto Energy America’s revenues increased by nine per cent in 2007 with improved realised prices. Rio Tinto Energy America has long term contracts and this increased revenue was primarily a result of the replacement of below market legacy contracts with new contracts at current market pricing in 2006 and earlier years. Revenues increased by 19 per cent in 2006 against 2005, with higher realised prices for Powder River Basin coal and increased volumes. Despite increased volatility in the spot market and a marginal decline in long term sales volumes the market sentiment for uranium remained positive through 2007. Supply from a number of producers fell short of expectations in 2007 while the outlook for demand increased as new-build programmes gathered pace, particularly in China. Higher utilisation rates were also experienced in the nuclear industry. These factors have contributed to tighter markets and an improvement in the longer term outlook for uranium demand.
Large swings in the spot price, driven by speculative behaviour by hedge funds and investors, created a degree of uncertainty in the uranium market. The resultant effect was a de-linking of the spot and long term prices and a reduction in contracting as fuel buyers monitored movements in the market. Despite this, long term prices grew strongly in the early part of the year and remained firm thereafter. Information included in the RWE NUKEM Inc. Price Bulletin indicated price increases of 99 per cent in 2007 and 71 per cent in 2006 for uranium oxide. The large increases reported in the Price Bulletin are not fully reflected in the revenues for the period because uranium oxide is typically sold on long term contracts with pricing determined for several years beyond the commencement of the contracts.
The Group’s uranium revenue increased by 69 per cent in 2007 and 27 per cent in 2006 as a result of higher prices with Rössing, in particular, benefiting from positive market conditions and improved pricing. Prices at ERA continued to benefit from the gradual replacement of legacy contracts with newer contracts written in an environment of higher prices.
The average aluminium price of 120 US cents per pound was three per cent above the 2006 average price. Global demand growth for 2007 is expected to exceed ten per cent. Rising LME inventories towards the end of 2007 and strong growth in global output pushed aluminium prices lower in the second half of the year. The Group anticipates strong demand and growing supply constraints in China.
The Aluminium group’s sales revenues are from aluminium and related products such as alumina and bauxite. Alcan’s sales revenue for the two months from acquisition, which includes revenue from Engineered Products, was US$3,798 million. Rio Tinto Aluminium’s sales revenue increased by one per cent in 2007 reflecting higher volume and price for bauxite and aluminium and lower volume and price for alumina. Revenue increased by 27 per cent in 2006. Average aluminium prices quoted on the LME increased by 35 per cent against 2005 but achieved spot alumina prices were lower than in 2005.
The Copper group also produces gold and molybdenum as significant co-products. The average copper price of 324 US cents per pound was six per cent above the 2006 average price. The gold price averaged US$691 per ounce, an increase of 15 per cent on the prior year, whilst the average molybdenum price was US$30 per pound, an increase of 20 per cent compared with 2006. Total Copper Group sales revenues in 2007 increased by 20 per cent over 2006. Copper revenues increased by 17 per cent reflecting higher volumes at KUC and Escondida as well as higher prices. Gold revenue increased by 69 per cent with higher volumes at Kennecott Minerals and the Grasberg joint venture. Molybdenum revenue was nine per cent higher than in 2006 with lower volumes as a result of lower ore grade and higher limestone levels in the orebody partly offsetting the improved prices.
The total Copper group sales revenues in 2006 increased by 46 per cent over 2005. Copper revenues increased by 77 per cent, broadly in line with the 84 per cent increase in the LME price. Lower grades and therefore volumes at Freeport more than offset the higher volumes at the other copper operations. A 22 per cent decrease in gold revenue was also attributable to lower grades at Freeport which outweighed the effect of the 36 per cent increase in the gold price. Molybdenum revenue was only six per cent down on 2005 with record production at KUC offsetting much of the effect of the 20 per cent fall in price.
Industrial Minerals sales are made under contract at negotiated prices. Revenue from industrial minerals increased by 11 per cent in 2007 and five per cent in 2006. This was mainly attributable to higher sales volumes of titanium dioxide chloride feedstock.
Diamonds prices realised by Rio Tinto depend on the size and quality of the diamonds in the product mix. Diamond sales revenue increased by 22 per cent in 2007 against 2006 with higher sales volumes and polished pink tender prices at Argyle, and higher volumes at Diavik. The tight supply outlook for rough diamonds is expected to support demand in 2008, especially for better placedthan most. Global graduate recruitmentquality rough diamonds produced by Diavik. The 22 per cent decrease in Diamond Group revenue in 2006 against 2005 was almost wholly attributable to the softer markets experienced by Argyle which resulted in surplus rough diamonds being held in inventory at the end of the year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Dual listed company reporting
As explained in detail in the Outline of dual listed companies’ structure and basis of financial statements in the2007 Financial statements, the consolidated financial statements of the Rio Tinto Group deal with the results, assets and liabilities of both of the dual listed companies, Rio Tinto plc and Rio Tinto Limited, and their subsidiaries. In other
Rio Tinto 2007 Form 20-F | 107 |
words, Rio Tinto plc and Rio Tinto Limited are viewed as a single parent company with their respective shareholders being the shareholders in that single company.
The US dollar is the presentation currency used in these financial statements, as it most reliably reflects the Group’s global business performance.
Ore reserve estimates
Rio Tinto estimates its ore reserves and mineral resources based on information compiled by Competent Persons as defined in accordance with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves of December 2004 (the JORC code). Where relevant, the IFRS financial statements are based on the reserves, and in some cases mineral resources, determined under the JORC code.
For the purposes of this combined Annual report on Form 20-F estimates of ore reserves have been computed in accordance with the SEC’s Industry Guide 7, rather than in accordance with the JORC code, and are shown on pages 32 to 42. Ore reserves presented in accordance with SEC Industry Guide 7 do not exceed the quantities that, it is estimated, could be extracted economically if future prices were to be in line with the average of historical prices for the three years to 30 June 2007, or contracted prices where applicable. For this purpose, contracted prices are applied only to future sales volumes for which the price is predetermined by an existing contract; and the average of historical prices is applied to expected sales volumes in excess of such amounts. Moreover, reported ore reserve estimates have not been increased above the levels expected to be economic based on Rio Tinto's own long term price assumptions. Therefore, a reduction in commodity prices from the three year average historical price levels would not necessarily give rise to a reduction in reported ore reserves.
There are numerous uncertainties inherent in estimating ore reserves and assumptions that are valid at the time of estimation may change significantly when new information becomes available.
Changes in the forecast prices of commodities, exchange rates, production costs or recovery rates may change the economic status of reserves and may, ultimately, result in the reserves being restated. Such changes in reserves could impact on depreciation and amortisation rates, asset carrying values, deferred stripping calculations and provisions for close down, restoration and environmental clean up costs.
Acquisition accounting
On the acquisition of a subsidiary, the purchase method of accounting is used whereby the purchase consideration is allocated to the identifiable assets, liabilities and contingent liabilities (identifiable net assets) on the basis of fair value at the date of acquisition.
Rio Tinto acquired Alcan Inc during the year. The Group commissioned valuation consultants to advise on the fair values and asset lives of Alcan’s assets. The residue of the purchase price not allocated to specific assets and liabilities has been attributed to goodwill. The provisional values and asset lives incorporated in the2007 Financial statementswill be subject to revision within 12 months of the date of acquisition as permitted by IFRS 3 ‘Business Combinations’.
Asset carrying values
Events or changes in circumstances can give rise to significant impairment charges or reversals of impairment provisions in a particular year. In 2007, the Group’s results included net impairment charges of US$58 million (US$113 million after tax and outside shareholders interests). An impairment charge was recognised at Argyle, which was partially offset by impairment reversals at Palabora and Tarong Coal. In 2006, the Group’s results included net impairment reversals of US$396 million (US$44 million after tax and outside shareholders interests). Impairments were reversed at KUC and IOC, which more than offset impairment charges at Argyle and Tarong Coal. There were no significant impairment charges or reversals in 2005.
When such events or changes in circumstances impact on a particular asset or cash generating unit, its carrying value is assessed by reference to its recoverable amount being the higher of fair value less costs to sell and value in use (being the net present value of expected future cash flows of the relevant cash generating unit). The best evidence of an asset’s fair value is its value obtained from an active market or binding sale agreement. Where neither exists, fair value less costs to sell is based on the best information available to reflect the amount the Group could receive for the cash generating unit in an arm’s length transaction. In most cases this is estimated using a discounted cash flow analysis. The cash flows used in these analyses are particularly sensitive to changes in two parameters: exchange rates and commodity selling prices. The great majority of the Group’s sales are based on prices denominated in US dollars. To the extent that the currencies of countries in which the Group produces commodities strengthen against the US dollar without commodity price offset, cash flows and, therefore, net present values are reduced. Management considers that over the long term, there is a tendency for movements in commodity prices to compensate to some extent for movements in the value of the US dollar (and vice versa). But such compensating changes are not synchronised and do not fully offset each other and over the last few years favourable changes in commodity prices have generally exceeded shifts in exchange rates. Comparing average exchange rates in 2007 against those in 2004, the Australian dollar strengthened by 14 per cent against the US dollar, the Canadian dollar strengthened by 21 percent and the South African rand weakened by eight per cent. In the same period, commodity prices rose substantially: for example, copper prices increased by 149 per cent, aluminium by 54 per cent and gold by 69 per cent.
Reviews of carrying values relate to cash generating units which, in accordance with IAS 36 “Impairment of
Rio Tinto 2007 Form 20-F | 108 |
Assets”, are identified by dividing an entity into as many largely independent cash generating streams as is reasonably practicable. In some cases the business units within the product groups consist of several operations with independent cash generating streams, which therefore constitute separate cash generating units.
The cash flow forecasts are based on best estimates of expected future revenues and costs. These may include net cash flows expected to be realised from extraction, processing and sale of mineralised material that does not currently qualify for inclusion in proved or probable ore reserves. Such non reserve material is included where there is a high prioritydegree of confidence in its economic extraction. This expectation is usually based on preliminary drilling and wesampling of areas of mineralisation that are doing wellcontiguous with existing reserves. Typically, the additional evaluation to achieve reserve status for such material has not yet been done because this would involve incurring costs earlier than is required for the efficient planning and operation of the mine.
The expected future cash flows of cash generating units reflect long term mine plans which are based on detailed research, analysis and iterative modelling to optimise the level of return from investment, output and sequence of extraction. The plan takes account of all relevant characteristics of the orebody, including waste to ore ratios, ore grades, haul distances, chemical and metallurgical properties of the ore impacting on process recoveries and capacities of processing equipment that can be used. The mine plan is therefore the basis for forecasting production output in attracting good quality people. Weare seeneach future year and for forecasting production costs.
Rio Tinto’s cash flow forecasts are based on assessments of expected long term commodity prices, which for most commodities are derived from an analysis of the marginal costs of the producers of the relevant commodities. These assessments often differ from current price levels and are updated periodically.
In some cases, prices applying to some part of the future sales volumes of a cash generating unit are predetermined by existing sales contracts. The effects of such contracts are taken into account in forecasting future cash flows.
Cost levels incorporated in the cash flow forecasts are based on the current long term mine plan for the cash generating unit. For value in use calculations used in impairment reviews, recent cost levels are considered, together with expected changes in costs that are compatible with the current condition of the business and which meet the requirements of IAS 36. IAS 36 includes a number of restrictions on the future cash flows that can be recognised in value in use calculations in respect of future restructurings and improvement related capital expenditure.
The useful lives of the major assets of a cash generating unit are usually dependent on the life of the orebody to which they relate. Thus the lives of mining properties, and associated smelters, concentrators and other long lived processing equipment generally relate to the expected life of the orebody. The life of the orebody, in turn, is estimated on the basis of the long term mine plan.
Forecast cash flows are discounted to present values using Rio Tinto’s weighted average cost of capital with appropriate adjustment for the risks associated with the relevant cash flows, to the extent that such risks are not reflected in the forecast cash flows. For final feasibility studies and ore reserve estimation, internal hurdle rates are used which are generally higher than the weighted average cost of capital.
Value in use and ore reserve estimates are based on the exchange rates current at the time of the evaluation. In final feasibility studies and estimates of fair value, a forecast of the long term exchange rate is made having regard to spot exchange rates, historical data and external forecasts.
Forecast cash flows for ore reserve estimation for JORC purposes and for impairment testing are based on Rio Tinto’s long term price forecasts.
All goodwill and intangible assets that are not yet ready for use or have an indefinite life are tested annually for impairment regardless of whether there has been any change in events or circumstances.
Close down, restoration and clean up obligations
Provision is made for environmental remediation costs when the related environmental disturbance occurs, based on the net present value of estimated future costs.
Close down and restoration costs are a normal consequence of mining, and the majority of close down and restoration expenditure is incurred at the end of the life of the mine. The costs are estimated on the basis of a closure plan. The cost estimates are calculated annually during the life of the operation to reflect known developments, eg updated cost estimates and revisions to the estimated lives of operations, and are subject to formal review at regular intervals. Although the ultimate cost to be incurred is uncertain, the Group’s businesses estimate their respective costs based on feasibility and engineering studies using current restoration standards and techniques. The initial closure provisions together with changes, other than those arising from the unwind of the discount applied in establishing the net present value of the provision, are capitalised within property, plant and equipment and depreciated over the lives of the assets to which they relate.
Clean up costs result from environmental damage that was not a necessary consequence of mining, including remediation, compensation and penalties. These costs are charged to the income statement. Provisions are recognised at the time the damage, remediation process and estimated remediation costs become known. Remediation procedures may commence soon after this point in time but may continue for many years depending on the nature of the disturbance and the remediation techniques.
As noted above, the ultimate cost of environmental disturbance is uncertain and cost estimates can vary in response to many factors including changes to the relevant legal requirements, the emergence of new restoration techniques or experience at other mine sites. The expected timing of expenditure can also change, for example in
Rio Tinto 2007 Form 20-F | 109 |
response to changes in ore reserves or production rates. As a result there could be significant adjustments to the provision for close down and restoration and environmental clean up, which would affect future financial results.
Overburden removal costs
In open pit mining operations, it is necessary to remove overburden and other barren waste materials to access ore from which minerals can economically be extracted. The process of mining overburden and waste materials is referred to as stripping. During the development of a mine, before production commences, it is generally accepted that stripping costs are capitalised as part of the investment in construction of the mine.
Where a mine operates several open pits that are regarded as separate operations for the purpose of mine planning, stripping costs are accounted for separately by reference to the ore from each separate pit. If, however, the pits are highly integrated for the purpose of mine planning, the second and subsequent pits are regarded as extensions of the first pit in accounting for stripping costs. In such cases, the initial stripping of the second and subsequent pits is considered to be production phase stripping relating to the combined operation.
Stripping of waste materials continues during the production stage of the mine or pit. Some mining companies expense these production stage stripping costs as incurred, while others defer such stripping costs. In operations that experience material fluctuations in the ratio of waste materials to ore or contained minerals on a year to year basis over the life of the mine or pit, deferral of stripping costs reduces the volatility of the cost of stripping expensed in individual reporting periods. Those mining companies that expense stripping costs as incurred will therefore report greater volatility in the results of their operations from period to period.
Rio Tinto defers production stage stripping costs for those operations where this is the most appropriate basis for matching costs with the related economic benefits and the effect is material. Stripping costs incurred in the period are deferred to the extent that the current period ratio exceeds the life of mine or pit ratio. Such deferred costs are then charged against reported profits to the extent that, in subsequent periods, the ratio falls short of the life of mine or pit ratio. The life of mine or pit ratio is based on the proved and probable reserves of the mine or pit and is obtained by dividing the tonnage of waste mined either by the quantity of ore mined or by the quantity of minerals contained in the ore. In some operations, the quantity of ore is a more practical basis for matching costs with the related economic benefits where there are important co-products or where the grade of the ore is relatively stable from year to year.
The life of mine or pit waste-to-ore ratio is a function of an individual mine’s pit design and therefore changes to that design will generally result in changes to the ratio. Changes in other technical or economic parameters that impact on reserves will also have an impact on the life of mine or pit ratio even if they do not affect the pit design. Changes to the life of mine or pit ratio are accounted for prospectively.
In the production stage of some operations, further development of the mine requires a phase of unusually high overburden removal activity that is similar in nature to preproduction mine development. The costs of such unusually high overburden removal activity are deferred and charged against reported profits in subsequent periods on a units of production basis. This accounting treatment is consistent with that for stripping costs incurred during the development phase of a mine or pit, before production commences.
Deferred stripping costs are included in property, plant and equipment or in investment in equity accounted units, as appropriate. These form part of the total investment in the relevant cash generating unit, which is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable. Amortisation of deferred stripping costs is included in operating costs or in the Group’s share of the results of its jointly controlled entities and associates as appropriate.
During 2007, production stage stripping costs incurred by subsidiaries and equity accounted operations were US$56 million higher than the amounts charged against pre tax profit (2006: production stage costs exceeded the amounts charged against pre-tax profit by US$20 million). In addition, US$117 million of deferred stripping was written off in 2007 as part of the Argyle impairment and there were net impairment reversals of US$36 million affecting deferred stripping in 2006. The net book value carried forward in property, plant and equipment and in investments in jointly controlled entities and associates at 31 December 2007 was US$884 million (2006: US$929 million).
Information about the stripping ratios of the business units, including equity accounted units, that account for the majority of the deferred stripping balance at 31 December 2007, along with the year in which deferred stripping is expected to be fully amortised, is set out in the following table:
Actual stripping ratio for year | Life of mine stripping ratio | |||||||||||
2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||
Kennecott Utah Copper (2019) (a) (b) | 1.99 | 2.04 | 2.02 | 1.32 | 1.36 | 1.51 | ||||||
Grasberg Joint Venture (2015) (a) | 3.47 | 3.01 | 3.12 | 3.05 | 2.63 | 2.43 | ||||||
Diavik (2008) (c) | 0.42 | 0.89 | 1.21 | 0.91 | 0.96 | 0.91 | ||||||
Escondida (2040) (d) | 0.07 | 0.08 | 0.09 | 0.10 | 0.12 | 0.12 | ||||||
Notes | |
(a) | Stripping ratios shown are waste to ore. |
(b) | Kennecott’s life of mine stripping ratio decreased in 2006 as the latest mine plan included higher metals prices, which made previously uneconomic material (waste) economic to mine as ore. |
(c) | Diavik’s stripping ratio is disclosed as bench cubic metre per carat. The fall in actual ratio arises as the end of the pipe life nears. |
(d) | Escondida’s stripping ratio is based on waste tonnes to pounds of copper mined. |
Rio Tinto 2007 Form 20-F | 110 |
Borax capitalised stripping costs as part of a distinct period of new development during the production stage of the mine. Capitalisation stopped in 2004. The capitalised costs will be fully amortised in 2034.
Functional currency
The determination of functional currency affects the carrying value of non current assets included in the balance sheet and, as a consequence, the amortisation of those assets included in the income statement. It also impacts exchange gains and losses included in the income statement.
The functional currency for each entity in the Group, and for jointly controlled entities and associates, is the currency of the primary economic environment in which it operates. For many of Rio Tinto’s entities, this is the currency of the country in which each operates. Alcan’s aluminium and alumina producing operations use a US dollar functional currency including those in Canada and Australia. Transactions denominated in currencies other than the functional currency are converted to the functional currency at the exchange rate ruling at the date of the transaction unless hedge accounting applies. Monetary assets and liabilities denominated in foreign currencies are retranslated at year end exchange rates.
The US dollar is the currency in which the Group’s Financial statements are presented, as it most reliably reflects the global business performance of the Group as a whole.
On consolidation, income statement items are translated into US dollars at average rates of exchange. Balance sheet items are translated into US dollars at year end exchange rates. Exchange differences on the translation of the net assets of entities with functional currencies other than the US dollar, and any offsetting exchange differences on net debt hedging those net assets, are recognised directly in the foreign currency translation reserve.
Exchange gains and losses which arise on balances between Group entities are taken to the foreign currency translation reserve where the intra group balance is, in substance, part of the Group’s net investment in the entity.
The balance of the foreign currency translation reserve relating to an operation that is disposed of is transferred to the income statement at the time of the disposal.
The Group finances its operations primarily in US dollars but part of the Group’s US dollar debt is located in subsidiaries having functional currencies other than the US dollar. Except as noted above, exchange gains and losses relating to such US dollar debt are charged or credited to the Group’s income statement in the year in which they arise. This means that the impact of financing in US dollars on the Group’s income statement is dependent on the functional currency of the particular subsidiary where the debt is located. With the above exceptions, and except for derivative contracts which qualify as cash flow hedges, exchange differences are charged or credited to the income statement in the year in which they arise.
Deferred tax on fair value adjustments
On transition to IFRS with effect from 1 January 2004, deferred tax was provided in respect of fair value adjustments on acquisitions in previous years. No other adjustments were made to the assets and liabilities recognised in such prior year acquisitions and, accordingly, shareholders’ funds were reduced by US$720 million on transition to IFRS primarily as a result of deferred tax on fair value adjustments to mining rights. In general, these mining rights are not eligible for income tax allowances. In such cases, the provision for deferred tax was based on the difference between their carrying value and their nil income tax base. The existence of a tax base for capital gains tax purposes was not taken into account in determining the deferred tax provision relating to such mineral rights because it is expected that the carrying amount will be recovered primarily through use and not from the disposal of the mineral rights. Also, the Group is only entitled to a deduction for capital gains tax purposes if the mineral rights are sold or formally relinquished.
For acquisitions after 1 January 2004 provision for such deferred tax on acquisition results in a corresponding increase in the amounts attributed to acquired assets and/or goodwill under IFRS.
Post retirement benefits
The difference between the fair value of the plan assets (if any) of post retirement plans and the present value of the plan obligations is recognised as an organisation that can provide exciting international experience, good trainingasset or liability on the balance sheet. The Group has adopted the option under IAS 19 to record actuarial gains and lots of opportunity. We are also being more creative in retaining the skills and experience of stafflosses directly in the later stagesStatement of their career. AllRecognised Income and Expense.
The most significant assumptions used in accounting for post retirement plans are the long term rate of return on plan assets, the discount rate and the mortality assumptions.
The long term rate of return on plan assets is used to calculate interest income on pension assets, which is credited to the Group’s income statement. The discount rate is used to determine the net present value of future liabilities and each year the unwinding of the discount on those liabilities is charged to the Group’s income statement. The mortality assumption is used to project the future stream of benefit payments, which is then discounted to arrive at the net present value of liabilities.
Valuations are carried out using the projected unit method.
The expected rate of return on pension plan assets is determined as management’s best estimate of the long term return on the major asset classes, ie equity, debt, property and other, weighted by the actual allocation of assets among the categories at the measurement date. The expected rate of return is calculated using geometric averaging.
The sources used to determine management’s best estimate of long term returns are numerous and include country specific bond yields, which may be derived from the market using local bond indices or by analysis of the local bond market, and country specific inflation and investment market expectations derived from market data and analysts’
Rio Tinto 2007 Form 20-F | 111 |
or governments’ expectations as applicable.
In particular, the Group estimates long term expected returns on equity based on the economic outlook, analysts’ views and those of other market commentators. This is the most subjective of the assumptions used and it is reviewed regularly to ensure that said ,I thinkit remains consistent with best practice.
The discount rate used in determining the mining industryservice cost and interest cost charged to income is the market yield at the start of the year on high quality corporate bonds. For countries where there is no deep market in such bonds the yield on Government bonds is used. For determining the present value of obligations shown on the balance sheet, market yields at the balance sheet date are used.
Details of the key assumptions are set out in note 49 to the2007 Financial statements.
For 2007 the charge against income for post retirement benefits net of tax and minorities was US$168 million. This charge included both pension and post retirement healthcare benefits. The charge is net of the expected return on assets which was US$371 million after tax and minorities.
In calculating the 2007 expense the average future increase in compensation levels was assumed to be 4.7 per cent and this will decrease to 3.7 per cent for 2008 reflecting the increased weighting of lower inflation countries following the Alcan acquisition. The average discount rate used for the Group’s plans in 2007 was 5.4 per cent and the average discount rate used in 2008 will be 5.6 per cent reflecting the weighted average level of discount rates following the Alcan acquisition.
The average expected long term rate of return on assets used to determine 2007 pension cost was 6.9 per cent. This will decrease to 6.4 per cent for 2008. This reduction results mainly from a lower allocation to equities as a whole needsresult of the Alcan acquisition.
Based on the known changes in assumptions noted above and other expected circumstances, the impact of post retirement costs on the Group’s IFRS net earnings in 2008 would be expected to sell itselfincrease by some US$198 million to US$366 million. The main reason for this increase is the inclusion of the Alcan pension expense for the full year. The actual charge may be impacted by other factors that cannot be predicted, such as the effect of changes in benefits and exchange rates.
The table below sets out the potential change in the Group’s 2007 net earnings (after tax and outside interests) that would result from hypothetical changes to post retirement assumptions and estimates. The sensitivities are viewed for each assumption in isolation although a change in one assumption is likely to result in some offset elsewhere.
IFRS | ||
US$m | ||
Sensitivity of Group’s 2007 net earnings to changes in: | ||
Expected return on assets | ||
– increase of 1 percentage point | 39 | |
– decrease of 1 percentage point | (39 | ) |
Discount rate | ||
– increase of 0.5 percentage points | 7 | |
– decrease of 0.5 percentage points | (6 | ) |
Salary increases | ||
– increase of 0.5 percentage points | (6 | ) |
– decrease of 0.5 percentage points | 6 | |
Demographic – allowance for additional future mortality improvements | ||
– participants assumed to be one year older | 7 | |
– participants assumed to be one year younger | (7 | ) |
Temporary differences related to closure costs and finance leases
Under the ‘initial recognition’ rules in paragraphs 15 and 24 of IAS 12 ‘Income Taxes’, deferred tax is not provided on the initial recognition of an asset or liability in a transaction that does not affect accounting profit or taxable profit and is not a business combination.
The Group’s interpretation of these initial recognition rules has the result that no deferred tax asset is provided on the recognition of a provision for close down and restoration costs and the related asset, or on recognition of assets held under finance leases and the associated lease liability, except where these are recognised as a consequence of business combinations.
On creation of a closure provision, for instance, there is no effect on accounting or taxable profit because the cost is capitalised. As a result, the initial recognition rules would appear to prevent the recognition of a deferred tax asset in respect of the provision and of a deferred tax liability in respect of the related capitalised amount.
The temporary differences will reverse in future periods as the closure asset is depreciated and when tax deductible payments are made that are charged against the provision. Paragraph 22 of IAS 12 extends the initial recognition rules to the reversal of temporary differences on assets and liabilities to which the initial recognition rules
Rio Tinto 2007 Form 20-F | 112 |
apply. Therefore, deferred tax is not recognised on the changes in the carrying amount of the asset which result from depreciation or from the changes in the provision resulting from expenditure. When tax relief on expenditure is received this will be credited to the income statement as part of the current tax charge. The unwind of the discount applied in establishing the present value of the closure costs does affect accounting profit. Therefore, this unwinding of discount results in the recognition of deferred tax assets.
The application of this initial recognition exemption has given rise to diversity in practice: some companies do provide for deferred tax on closure cost provisions and the related capitalised amounts. Deferred tax accounting on initial recognition is currently the subject of an IASB/FASB convergence project which may at some future time require the Group to change this aspect of its deferred tax accounting policy.
If the Group were to provide for deferred tax on closure costs and finance leases under IFRS the benefit to underlying and net earnings would have been US$21 million (2006: US$9 million) and to equity would have been US$185 million (2006: US$127 million).
US deferred tax potentially recoverable
The Group’s US tax group has alternative minimum tax credits and temporary differences that have the potential to reduce tax charges in future years. These ‘possible tax assets’ totalled US$182 million at 31 December 2007 (2006: US$162 million). Of these, US$119 million were recognised as deferred tax assets (2006: US$97 million), leaving US$63 million (2006: US$65 million) unrecognised, as recovery was not considered probable.
During 2006, updated projections of future taxable profits for the operations that form part of Rio Tinto’s US tax group resulted in the recognition of previously unrecognised possible tax assets of US$335 million. Recoveries are dependent on future commodity prices, costs, financing arrangements and business developments in future years.
During 2007, principally as a result of high commodity prices, US$170 million of these possible tax assets were utilised (2006: US$140 million).
Exploration
Under the Group’s accounting policy, exploration and evaluation expenditure is not capitalised until the point is reached at which there is a high degree of confidence in the project’s viability and it is considered probable that future economic benefits will flow to the Group.
The carrying values of exploration and evaluation assets are reviewed twice per annum by management and the results of these reviews are reported to theAudit committee. There may be only mineralised material to form a basis for the impairment review. The review is based on a status report regarding the Group’s intentions for development of the undeveloped property. In some cases, the undeveloped properties are regarded as successors to orebodies currently in production and will therefore benefit from existing infrastructure and equipment.
Contingencies
Disclosure is made of material contingent liabilities unless the possibility of any loss arising is considered remote. Contingencies are disclosed in note 35 to the2007 Financial statements.
Underlying earnings
The Group presents “Underlying earnings” as an attractive employer more effectively. We need toconsider changesadditional measure to provide greater understanding of the underlying business performance of its operations. The adjustments made to net earnings to arrive at underlying earnings are explained above in the section on underlying earnings.
Rio Tinto 2007 Form 20-F | 113 |
Item 6. | Directors, Senior Management and Employees |
Chairman and executive directors | ||||
Audit | Remuneration | Nominations | Committee on social | |
committee | committee | committee | and environmental | |
accountability | ||||
Chairman | ||||
Paul Skinner | • | |||
Chief executive | ||||
Tom Albanese | ||||
Finance director | ||||
Guy Elliott | ||||
Executive director | ||||
Dick Evans | ||||
Non executive directors | ||||
Sir David Clementi * | • | • | ||
Vivienne Cox * | • | |||
Sir Rod Eddington * | • | • | ||
Michael Fitzpatrick * | • | • | ||
Yves Fortier * | • | • | ||
Richard Goodmanson * | • | • | ||
Andrew Gould * | • | • | ||
Lord Kerr of Kinlochard * | • | • | ||
David Mayhew | • | |||
Sir Richard Sykes * | • | • | ||
Paul Tellier * | • | • | ||
* Independent |
CHAIRMAN
Paul SkinnerBA (Hons) (Law), DpBA (Business Administration), age 63
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2001, he was appointed chairman of the Group in 2003. Paul was last re-elected by shareholders in 2005 and stands for re-election in 2008. He is chairman of the Nominations committee (note c).
Skills and experience:Paul graduated in law from Cambridge University and in business administration from Manchester Business School. He was previously a managing director of The “Shell” Transport and Trading Company plc and group managing director of The Royal Dutch/Shell Group of Companies, for whom he had worked since 1966. During his career structureshe worked in all Shell’s main businesses, including senior appointments in the UK, Greece, Nigeria, New Zealand and Norway. He was CEO of its global Oil Products business from 1999 to retain staff2003.
External appointments (current and recent):
Director of Standard Chartered plc since 2003
Director of the Tetra Laval Group since 2005
Director of L’Air Liquide SA since 2006
Chairman of the International Chamber of Commerce (UK) since 2005
Non executive member of the Defence Board of the UK Ministry of Defence since 2006
Member of the board of INSEAD business school since 1999
Director of The “Shell” Transport and Trading Company plc from 2000 to 2003
CHIEF EXECUTIVE
Tom AlbaneseBS (Mineral Economics), MS (Mining Engineering), age 50
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since March 2006. Tom was elected by offering greater flexibilityshareholders in 2006 and stands for re-election in 2008.
Skills and experience:Tom joined Rio Tinto in 1993 on Rio Tinto’s acquisition of Nerco and held a series of management positions before being appointed chief executive of the Industrial Minerals group in 2000, after which he became chief executive of the Copper group and head of Exploration in 2004. He took over as chief executive from
Rio Tinto 2007 Form 20-F | 114 |
Back to identify “adventurous” peopleContents
Leigh Clifford with effect from May 2007.
External appointments (current and recent):
Director of Ivanhoe Mines Limited from 2006 to 2007
Director of Palabora Mining Company from 2004 to 2006
Member of the Executive Committee of the International Copper Association from 2004 to 2006
Guy ElliottMA (Oxon), MBA (INSEAD), age 52
Appointment and election:Finance director of Rio Tinto plc and Rio Tinto Limited since 2002. Guy was last re-elected by shareholders in 2007.
Skills and experience:Guy joined the Group in 1980 after gaining an MBA having previously been in investment banking. He has subsequently held a variety of commercial and management positions, including head of Business Evaluation and president of Rio Tinto Brasil.
External appointments (current and recent):
Non executive director and member of the Audit committee of Cadbury Schweppes plc, since 2007
Dick EvansBS (Industrial Engineering) (Oregon State University), MS Management (Stanford Graduate School of Business), age 60
Appointments and election:Director of Rio Tinto plc and Rio Tinto Limited effective 25 October 2007. Dick will stand for election by shareholders at the recruitment stage.2008 annual general meetings.
Skills and experience:Dick Evans joined Rio Tinto following the acquisition of Alcan Inc where he had held several senior management positions including executive vice president and had been president and chief executive officer of Alcan from 2006 to 2007. Prior to Alcan, he has held senior management positions with Kaiser Aluminum & Chemical Corporation.
External appointments (current and recent):
Director of AbitibiBowater Inc. since 2003
Director of the International Aluminium Institute since 2001
Sir David ClementiMA, MBA, FCA, age 59
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2003. Sir David was last re-elected by shareholders in 2006 (notes a, b and e).
Skills and experience:Sir David is chairman of Prudential plc, prior to which he was Deputy Governor of the Bank of England. His earlier career was with Kleinwort Benson where he spent 22 years, holding various positions including chief executive and vice chairman. A graduate of Oxford University and a qualified chartered accountant, Sir David also holds an MBA from Harvard Business School.
External appointments (current and recent):
Chairman of Prudential plc since 2002
Member of the Financial Reporting Council between 2003 and 2007
Any reflections on your handover to Tom Albanese?
Vivienne CoxI am fortunate to have worked forMA (Oxon), MBA (INSEAD), age 48
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2005. Vivienne was elected by shareholders in 2005 and stands for almost 37 years. Itre-election in 2008. (notes a and e).
Skills and experience:Vivienne is currently executive vice president of BP p.l.c. for Alternative Energy. She is a member of the BP group chief executive’s committee. She holds degrees in chemistry from Oxford University and in business administration from INSEAD. During her career in BP she has given meworked in chemicals, exploration, finance, and refining and marketing.
External appointments (current and recent):
Director of Eurotunnel plc between 2002 and 2004
Sir Rod EddingtonB Eng, M Eng (University of Western Australia), D Phil (Oxon), age 58
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2005. Sir Rod was elected by shareholders in 2006 (notes c, d and e).
Skills and experience:Sir Rod was chief executive of British Airways Plc until the end of September 2005. Prior to his role with British Airways, Sir Rod was Managing Director of Cathay Pacific Airways from 1992 until 1996 and Executive Chairman of Ansett Airlines from 1997 until 2000.
Rio Tinto 2007 Form 20-F | 115 |
External appointments (current and recent):
Director of News Corporation plc since 1999
Director of John Swire & Son Pty Limited since 1997
Non executive chairman of JPMorgan Australia and New Zealand since 2006
Director of CLP Holdings since 2006
Director of Allco Finance Group Limited since 2006
Chief executive British Airways Plc from 2000 until 2005
Chairman of the EU/Hong Kong Business Co-operation Committee of the Hong Kong Trade Development Council from 2002 until 2006
Michael FitzpatrickB Eng (University of Western Australia), BA (Oxon), age 55
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2006. Michael was elected by shareholders in 2007 (notes a, diverseb and interestinge).
Skills and experience:Michael sold his interest in, and ceased to be a director of, Hastings Funds Management Ltd during 2006, the pioneering infrastructure asset management company which he founded in 1994. He is chairman of the Victorian Funds Management Corporation, which manages funds on behalf of the State of Victoria, and of Treasury Group Limited, an incubator of fund management companies. He is chairman of the Australian Football League, having previously played the game professionally, and is a former chairman of the Australian Sports Commission.
External appointments (current and recent):
Chairman of the Victorian Funds Management Corporation since 2006
Chairman of Treasury Group Limited since 2005
Managing director of Hastings Funds Management Ltd from 1994 to 2006
Director of Pacific Hydro Limited from 1996 to 2004
Director of Australian Infrastructure Fund Limited from 1994 to 2005
Director of the Walter & Eliza Hall Institute of Medical Research since 2001
Yves FortierCC, OQ, QC, LLD, Av Em, age 72
Appointments and election:Director of Rio Tinto plc and Rio Tinto Limited effective 25 October 2007. Yves will stand for election at the 2008 annual general meetings (notes c, d and e).
Skills and experience:Yves Fortier was Ambassador and Permanent Representative of Canada to the United Nations from 1988 to 1992. He is chairman and a senior partner of the law firm Ogilvy Renault and was chairman of Alcan from 2002 until 2007.
External appointments (current and recent):
Chairman of Ogilvy Renault since 1992
Chairman and director of Alcan Inc. from 2002 until 2007
Director of NOVA Chemicals Corporation since 1998
Governor of Hudson’s Bay Company from 1998 to 2006
Director of Royal Bank of Canada from 1992 to 2005
Director of Novtel corporation from 1992 to 2005
Trustee of the International Accounting Standards Committee from 2000 to 2006
Richard GoodmansonMBA, BEc and BCom, B Eng (Civil), age 60
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2004. He was elected by shareholders in 2005 and stands for re-election in 2008. Richard is chairman of the Committee on social and environmental accountability (notes b, d and e).
Skills and experience:Richard is executive vice president and chief operating officer of DuPont. During his career duringwhich I have methe has worked at senior levels for McKinsey & Co, PepsiCo and worked with many different people who form this great team that is Rio Tinto. In Tom Albanese we haveAmerica West Airlines, where he was president and CEO. He joined DuPont in early 1999 and in his current position has responsibility for a very able, experiencednumber of the global functions, and committed individual to continue Rio Tinto’s success. I would like to take this opportunity of wishing him well, and to thank all my colleagues around the world for the strong support they have given menon US operations of DuPont, with particular focus on growth in emerging markets.
External appointments (current and recent):
Executive vice president and chief operating officer of DuPont since 1999
Chairman of the United Way of Delaware since 2006 (director since 2002)
Director of the Boise Cascade Corporation between 2000 and 2004
Andrew GouldBA, FCA, age 61
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2002. Andrew was last re-elected by shareholders in 2006. He is also chairman of the Audit committee (notes a, b and e).
Skills and experience:Andrew is chairman and chief executive officer of Schlumberger Limited, where he has held a succession of financial and operational management positions, including that of executive vice president of Schlumberger Oilfield Services and president and chief operating officer of Schlumberger Limited. He has worked in Asia, Europe and the US. He joined Schlumberger in 1975. He holds a degree in economic history from Cardiff University and qualified as a chartered accountant with Ernst & Young.
External appointments (current and recent):
Rio Tinto 2007 Form 20-F | 116 |
Chairman and Chief Executive Officer of Schlumberger Limited since 2003
Member of the Advisory Board of the King Fahd University of Petroleum and Minerals in Dhahran, Saudi Arabia since 2007
Member of the commercialization advisory board of Imperial College of Science Technology and Medicine, London since 2002
Member of the UK Prime Minister’s Council of Science and Technology from 2004 to 2007
Lord Kerr of KinlochardGCMG, MA, age 66
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2003. He was re-elected by shareholders in 2007 (notes a, d and e).
Skills and experience:An Oxford graduate, Lord Kerr was in the many roles over my career.UK Diplomatic Service for 36 years and headed it from 1997 to 2002 as Permanent Under Secretary at the Foreign Office. On a secondment to the UK Treasury he was principal private secretary to two Chancellors of the Exchequer. His foreign service included periods in the Soviet Union and Pakistan, and as Ambassador to the European Union (1990 to 1995), and the US (1995 to 1997). He has been an independent member of the House of Lords since 2004.
External appointments (current and recent):
Deputy Chairman of Royal Dutch Shell plc since 2005
Director of The Scottish American Investment Trust plc since 2002
Advisory Board member, Scottish Power (Iberdrola) since 2007
Director of The “Shell” Transport and Trading Company plc from 2002 to 2005
Chairman of the Court and Council of Imperial College, London since 2005
Trustee of the Rhodes Trust since 1997, The National Gallery since 2002, and the Carnegie Trust for the Universities of Scotland since 2005
David Mayhewage 67
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2000. He was last re-elected by shareholders in 2006 (note c).
Skills and experience:David joined Cazenove in 1969 from Panmure Gordon. In 1972 he became the firm’s dealing partner and was subsequently responsible for the Institutional Broking Department. From 1986 until 2001 he was the partner in charge of the firm’s Capital Markets Department. He became Chairman of Cazenove on incorporation in 2001 and Chairman of JPMorgan Cazenove in 2005.
External appointments (current and recent):
Chairman of Cazenove Group Limited (formerly Cazenove Group plc) since 2001
Chairman of Cazenove Capital Holdings Limited since 2005
Sir Richard SykesBSc (Microbiology), PhD (Microbial Biochemistry), DSc, Kt, FRS, FMedSci, age 65
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 1997. Sir Richard was appointed the senior non executive director in 2005 and is chairman of the Remuneration committee. Sir Richard was re-elected for a further one year term of office in 2007 and will retire at the conclusion of the annual general meetings in 2008 (notes b, c and e).
Skills and experience:After reading microbiology at the University of London, Sir Richard obtained doctorates in microbial chemistry and in science from the University of Bristol and the University of London respectively. A former chairman of GlaxoSmithKline plc Sir Richard is a Fellow of the Royal Society. He is currently Rector of Imperial College London.
External appointments (current and recent):
Director of Eurasian Natural Resources Corporation plc since 2007
Director of Lonza Group Limited since 2003, Deputy Chairman since 2005
Chairman of the Healthcare Advisory Group (Apax Partners Limited) since 2002
Chairman of Metabometrix Ltd since 2004
Chairman of Merlion Pharmaceuticals Pte Limited since 2005
Chairman of OmniCyte Ltd since 2006
Chairman of Circassia Ltd since 2007
Director of Abraxis BioScience Inc from 2006 to 2007
Director of Bio*One Capital Pte Ltd since 2003
Rector of Imperial College London since 2001
Chairman of GlaxoSmithKline plc between 2000 and 2002
Trustee of the Natural History Museum, London between 1996 and 2005 and of the Royal Botanic Gardens, Kew between 2003 and 2005
Paul Tellierage 68
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited effective October 2007. Paul will stand for election at the 2008 annual general meetings (notes a, b and e).
Skills and Experience:Paul was Clerk of the Privy Council Office and Secretary to the Cabinet of the Government of Canada from 1985 to 1992 and was president and chief executive officer of the Canadian National Railway Company
Rio Tinto 2007 Form 20-F | 117 |
from 1992 to 2002. Until 2004, he was president and chief executive officer of Bombardier Inc.
External appointments (Current and recent):
Director of Bell Canada since 1996. Director of BCE Inc since 1999.
Member of the Advisory Board of General Motors of Canada since 2005.
Trustee, International Accounting Standards Foundation since 2007.
Co-chair of the Prime Minister of Canada’s Advisory Committee on the Renewal of the Public Service since 2006.
President and Chief Executive Officer of Bombardier Inc. from 2003 to 2004. Non executive Director of Alcan Inc. from 1998 to 2007.
Director of McCain Foods since 1996.
Notes | |
(a) | Audit committee |
(Sir David Clementi, Vivienne Cox, Michael Fitzpatrick, Andrew Gould, Lord Kerr and Paul Tellier) | |
(b) | Remuneration committee |
(Sir David Clementi, Michael Fitzpatrick, Richard Goodmanson, Andrew Gould, Sir Richard Sykes and Paul Tellier) | |
(c) | Nominations committee |
(Sir Rod Eddington, Yves Fortier, David Mayhew, Paul Skinner and Sir Richard Sykes) | |
(d) | Committee on social and environmental accountability |
(Sir Rod Eddington, Yves Fortier, Richard Goodmanson and Lord Kerr) | |
(e) | Independent |
(Sir David Clementi, Vivienne Cox, Sir Rod Eddington, Michael Fitzpatrick, Yves Fortier, Richard Goodmanson, Andrew Gould, Lord Kerr, Sir Richard Sykes and Paul Tellier) |
DIRECTORS WHO LEFT THE GROUP DURING 2007
Leigh CliffordRio Tinto Coal Australia Clermont Chief executive(Rio Tinto: 50.1 per cent)23 FebruaryRio Tinto and its joint venture partners approved investment of US$750 million for the development of the Clermont thermal coal mine in central Queensland, situated 15 kilometres south east of the Blair Athol mine. Clermont is expected to become Australia’s largest thermal coal producer when it reaches full capacity, which is scheduled for 2013. The mine will be brought into production to replace Blair Athol, due to close in 2015, and will use Blair Athols’ existing infrastructure and market position. To date construction has progressed to plan with boxcut production to commence in mid 2008 and first coal production expected in 2010.
Rio Tinto Coal Australia Kestrel(Rio Tinto: 80 per cent)
Rio Tinto and its joint venture partners approved investment of US$991 million for the extension of the Kestrel mine. This represents a 20 year investment in the Bowen Basin of Queensland to help meet Asian demand for metallurgical coal. First coal production from the extension is forecast for 2012 when the existing mine ceases production.
Coal & Allied Mount Pleasant(Rio Tinto: 75.7 per cent)
In 2006, Coal & Allied started a feasibility study on the Mount Pleasant coal mine project located adjacent to the Bengalla coal mine near Muswellbrook in the Hunter Valley, New South Wales. With continued uncertainty surrounding coal chain infrastructure in the Hunter Valley, further study is required before the feasibility study can be finalised.
Coal & Allied Lower Hunter Land(Rio Tinto: 75.7 per cent)
In 2006 Coal and Allied signed a memorandum of understanding with the New South Wales Government to facilitate the provision of extensive land conservation corridors in the Lower Hunter via the transfer of 80 per cent of the Company’s post mining land holdings. The remaining 20 per cent is being considered for land development. Extensive community consultation continued through 2007 with various options considered. Feasibility studies will be conducted in 2008 to finalise these options.
Rio Tinto Energy America(Rio Tinto: 100 per cent)
During 2007 RTEA commenced construction of the Jacobs Ranch overland conveyor and in pit crusher project. This will reduce emissions and operating costs in addition to providing latent capacity for expansion (from around 38 million tonnes to around 45 million tonnes per annum). Commissioning is on schedule for completion in 2008. At Antelope and Spring Creek recent expansion projects were completed in 2007 and production is ramping up to meet market demand.
Rio Tinto |
GROUP FINANCIAL PERFORMANCE
Underlying earnings is the key financial performance indicator which management use internally to assess performance. It is presented here as an additional measure of earnings to provide greater understanding of the underlying businessperformance of the Group’s operations. The categories of items excluded from net earnings to arrive at underlyingearnings are explained in note 2 to the 2006 financial statementstogether with information on a minor change in the definition of underlying earnings.Both net earnings and underlying earnings deal with amounts attributable to equity shareholders of Rio Tinto.However, EU IFRS requires that the profit for the period reported in the income statement should also include earnings attributable to outside shareholders in subsidiaries. The profit for the period is reconciled to net earnings and tounderlying earnings as follows:
2006 | 2005 | 2004 | ||||
US$m | US$m | US$m | ||||
Profit for the year | 7,867 | 5,498 | 3,244 | |||
Less: attributable to outside equity shareholders | (429 | ) | (283 | ) | 53 | |
Attributable to equity shareholders of Rio Tinto (net earnings) | 7,438 | 5,215 | 3,297 | |||
Less: exclusions from underlying earnings | (100 | ) | (260 | ) | (1,025 | ) |
Underlying earnings attributable to shareholders of Rio Tinto | 7,338 | 4,955 | 2,272 | |||
Amounts attributable to outside equity shareholders increased in 2006 largely because of improved results at Palaboraand the reversal of impairment at IOC. Amounts attributable to outside equity shareholders increased in 2005 because of improved results at Robe River, IOC, Coal & Allied, Rio Tinto Iron & Titanium and Palabora. In addition, in 2004outside equity shareholders’ interests included a US$129 million charge for impairments.Earnings contributions from Group businesses and business segments are based on underlying earnings. Amounts excluded from net earnings in arriving at underlying earnings are summarised in the following table and discussed further below.
2006 | 2005 | 2004 | ||||
US$m | US$m | US$m | ||||
Profit less losses on disposal of interests in businesses | 3 | 311 | 1,175 | |||
Impairment reversals less charges | 44 | 4 | (321 | ) | ||
Adjustment to environmental remediation provision | 37 | 84 | — | |||
Exchange gains/(losses) on external net debt and intragroup balances (including those relating to equity accounted units) | (14 | ) | (99 | ) | 159 | |
Gains/(losses) on currency and interest rate derivatives not qualifying for hedge | ||||||
accounting (including those relating to equity accounted units) | 30 | (40 | ) | 12 | ||
Total excluded in arriving at underlying earnings | 100 | 260 | 1,025 | |||
2006 compared with 2005Net earnings of US$7,438 million in 2006 were US$2,223 million above 2005, an increase of 43 per cent. Underlyingearnings of US$7,338 million were US$2,383 million above 2005, an increase of 48 per cent. Underlying earnings pershare, which increased by 52 per cent, also reflected the lower number of shares resulting from the share buyback programme. The principal factors explaining the changes in underlying earnings are shown in the table above.
Changes in underlying earningsThe effect of price movements on all major commodities was to increase underlying earnings by US$3,068 million.Prices for the major products remained strong throughout the year and were considerably higher than those experiencedin 2005: average copper prices were 84 per cent higher whilst average aluminium prices were 35 per cent higher. The strength of the global iron ore market was reflected in the 19 per cent increase in the benchmark price, mainly effectivefrom 1 April 2006. The seaborne thermal coal market was also strong, although it weakened in the second half.Molybdenum prices averaged US$25/lb throughout 2006, a decline of 20 per cent compared with the prior year.The net effect of changes in average levels of exchange rates against the US dollar for those currencies influencing the Group’s costs was to reduce underlying earnings relative to 2005 by US$35 million.Lower sales volumes decreased underlying earnings by US$135 million compared with 2005. As anticipated, significantly reduced volumes from lower grades at Grasberg impacted earnings by US$355 million year on year. Thismore than offset higher volumes at other operations. The ramp up of new projects in iron ore (including the Yandicoogina and brownfields expansions), higher copper in concentrate volumes from improved grades andthroughput at Northparkes, higher ore grades and the commencement of sulphide leach production at Escondida, alongwith higher molybdenum and gold production at Kennecott Utah Copper (KUC), were the main contributors. Record volumes of thermal coal sales at Rio Tinto Energy America and alumina at Yarwun (formerly Comalco AluminaRefinery), also contributed to higher volumes. Lower sales volumes were recorded at Argyle with a build up ofdiamond inventories due to softer market conditions, at Kennecott Minerals from lower grades at Cortez, and at Hail Creek from lower coking coal volumes in response to lower customer demand.Excluding the effects of general inflation, higher costs reduced underlying earnings by US$741 million, of whichUS$77 million was the result of higher energy costs. Ongoing acute shortages in the mining industry, in particular in the Pilbara, have continued to put pressure on costs. Costs at KUC were affected by an extended, scheduled smeltermaintenance shutdown whilst Escondida experienced higher wages, following the strike in August. Significant shippingcongestion at the port of Newcastle affected coal sales in the second half of the year with a resulting impact on costs at Rio Tinto Coal Australia, through higher demurrage and a higher unit cost of sale.The effective tax rate on underlying earnings, excluding equity accounted units, was 24.2 per cent compared with 29.2 per cent in 2005, following the recognition of US$335 million of US Alternative Minimum Tax (AMT) credits now expected to be utilised in future years. This reflected improved projections of long term taxable earnings from our US operations. Additionally, the high levels of profit generated by the Group’s US operations in 2006 resulted in the realisation of US$140 million of previously unrecognised deferred tax assets in the year. Deferred tax provisions decreased by US$46 million as a result of a reduction in Canadian tax rates. These favourable tax variances are includedwithin the favourable variance of US$400 million for ‘Tax and other items’.
Exclusions in arriving at underlying earningsIn 2006 a US$3 million gain was realised from disposals of interests in non core businesses, compared with gains from disposals of US$311 million in 2005. In 2005, the gains related mainly to the sale of Rio Tinto’s interests in the Labrador Iron Ore Royalty Income Fund and in Lihir Gold.Net earnings in 2006 included net impairment reversals totalling US$44 million. Impairments were reversed atKUC and IOC which more than offset impairment charges at Argyle and Tarong Coal. The valuation of the Argyleunderground project is being kept under review, given the continuing pressure on mine development costs resultingfrom acute shortages in the mining industry and more challenging mining conditions than expected. In addition, net earnings in 2006 include a reduction of US$37 million (2005: US$84 million) in an environmental remediationprovision at KUC, reversing an exceptional charge taken up in 2002 (which was excluded from adjusted earnings in thatyear).Exchange gains and losses on external net debt and intragroup balances that are recorded in the US dollar incomestatement, together with gains and losses on currency and interest rate derivative contracts that do not qualify as hedges under EU IFRS, are excluded from underlying earnings. In 2006, these items represented a gain of US$16 million (2005: a loss of US$139 million).The effective tax rate on net earnings, excluding equity accounted units was 26.8 per cent compared with 27.8 per cent in 2005. There were significant untaxed gains in 2005 which lowered the effective tax rate and the tax benefits referred to above reduced the tax rate for 2006.group
2005 financial results compared with 2004Net earnings of US$5,215 million in 2005 were US$1,918 million above 2004, an increase of 58 per cent. Underlyingearnings of US$4,955 million were US$2,683 million above 2004, an increase of 118 per cent. The increase of 120 per cent in underlying earnings per share also reflected the lower number of shares resulting from the share buybackprogramme. The principal factors explaining the changes in underlying earnings are shown in the table above.
Changes in underlying earningsThe effect of price movements on all major commodities was to increase earnings by US$2,374 million. Prices for the major products remained strong throughout the year and were appreciably higher than those experienced in 2004: average copper prices were 28 per cent higher whilst average aluminium prices were ten per cent higher. The strength of the global iron ore market was reflected in the 71.5 per cent increase in the benchmark price, mainly effective from 1 April 2005. The seaborne thermal and coking coal markets were also strong.
Molybdenum prices, which had generally been below US$5 per pound over the previous ten years, averaged over US$30 per pound during 2005, although they did soften towards the end of that year.The US dollar was generally weaker than in 2004 relative to the currencies in which the Group incurs themajority of its costs. The average levels of the Australian and Canadian dollars strengthened against the US dollar by four per cent and eight per cent, respectively. The effect of this, together with other currency movements, was to reduceunderlying earnings relative to 2004 by US$123 million.Over 40 per cent of the underlying earnings increase year on year came from higher sales volumes, resulting in a favourable variance of US$1,140 million compared with 2004. The West Angelas and Yandicoogina mine expansions(to 36 million tonnes per annum) were completed in 2005 whilst strong operational performance led to majorproduction gains at many operations including IOC and Argyle. The improvement over 2004 also reflected the following adverse influences on that earlier year: the Grasberg slippage, the ten week strike at IOC and the effects ofCyclone Monty at Hamersley Iron and Robe River. To take advantage of the strong market for molybdenum, the mine sequencing at KUC was optimised to maximise molybdenum production. This, together with modifications to themolybdenum circuit at the concentrator, boosted production volumes by 130 per cent.Excluding the effects of inflation, higher costs reduced earnings by US$598 million. Of this, US$130 million was due to higher energy costs and US$46 million was attributable to increased exploration expenditure from brownfieldexploration and further evaluation work. More generally, costs were influenced by the strong price environment beingenjoyed by the mining industry. This led to rising mining input costs caused by supply constraints for skilled labour, steel, tyres, explosives, freight and other mining related goods and services. Costs at KUC were affected by a scheduled17 day smelter maintenance shutdown in the first half of 2005 whilst continued port congestion at Dalrymple Bay,Queensland, fed through to higher demurrage charges.Higher non cash costs reflected increased depreciation at KUC following the changes in the mine plan at the endof 2004. Increases in closure cost provisions resulted in higher depreciation charges on the amounts capitalised. One-offcosts included restructuring costs of US$30 million relating to the formation of the Rio Tinto Minerals organisation.The effective tax rate on underlying earnings, excluding equity accounted units, was 29.2 per cent compared with27.1 per cent in 2004 because of higher rates on increased profits in Canada and Indonesia and higher withholdingtaxes.In total “Tax and other items” improved by US$31 million. Within that total, the net after tax interest expense ofUS$44 million was US$25 million lower than in 2004 due to lower levels of net debt. Also within “Tax and other items”, 2004 underlying earnings included contributions totalling US$88 million from the operations of businesses that were sold during that year. Earnings in 2005 benefited from an improvement in the net impact of insurance items,including lower claims on the captive insurers due to the absence of cyclone related damages experienced in 2004.
Exclusions in arriving at underlying earningsIn 2005 the net profit on the disposal of interests in businesses was US$311 million relating mainly to the sale of Rio Tinto’s interests in the Labrador Iron Ore Royalty Income Fund and in Lihir Gold. Disposals in 2004, principally the holding in Freeport-McMoRan Copper & Gold, resulted in gains of US$1,175 million.Net earnings in 2005 include a reduction of US$84 million in an environmental remediation provision atKennecott Utah Copper, reversing part of an exceptional charge taken up in 2002 (which was excluded from adjustedearnings in that year). Net earnings in 2004 included an impairment charge of US$160 million relating to the Colowyocoal operation and of US$161 million for the write down of Palabora’s copper assets.Exchange gains and losses on external net debt and intragroup balances that are recorded in the US dollar incomestatement, together with gains and losses on currency and interest rate derivative contracts that do not qualify as hedgesunder EU IFRS, are excluded from underlying earnings. In 2005, these items represented a loss of US$139 million (2004: a gain of US$171 million).The effective tax rate on net earnings, excluding equity accounted units was 27.8 per cent compared with 18.5per cent in 2004. There were very significant untaxed gains in 2004 which lowered the effective tax rate. There was a smaller amount of untaxed gains in 2005 which, together with the adverse 2005 tax effects referred to above, resultedin a higher effective tax rate.
Group financial results by product groupThe table below summarises the Group’s underlying earnings by product group for each of the three years to 2006.
2006 | 2005 | 2004 | ||||
US$m | US$m | US$m | ||||
Iron Ore | 2,279 | 1,722 | 565 | |||
Energy | 711 | 733 | 431 | |||
Industrial Minerals | 243 | 187 | 243 | |||
Aluminium | 746 | 392 | 331 | |||
Copper | 3,562 | 2,020 | 860 | |||
Diamonds | 205 | 281 | 188 | |||
Other operations | 33 | 40 | 25 | |||
Exploration and evaluation | (163 | ) | (174 | ) | (128 | ) |
Other items | (261 | ) | (202 | ) | (174 | ) |
Net interest | (17 | ) | (44 | ) | (69 | ) |
Group underlying earnings | 7,338 | 4,955 | 2,272 | |||
Exclusions from underlying earnings | 100 | 260 | 1,025 | |||
Net earnings | 7,438 | 5,215 | 3,297 | |||
Trend informationThe demand for the Group’s products is closely aligned with changes in global GDP. Changes in the GDP of developing countries are expected to have greater impact on materials such as iron ore and coal that can be used toimprove infrastructure whereas changes in the GDP of developed countries are expected to have greater impact onindustrial minerals that have many applications in consumer products. Copper is used in a wide range of applications from infrastructure to consumer electronics and demand for it has tended to grow in line with or slightly faster than global GDP. Trends in production of the Group’s minerals and metals, gross sales revenue and underlying earnings are set out in thisOperating and financial review.
IRON ORE GROUP
Production | Rio Tinto share | Rio Tinto share | ||
million tonnes | million tonnes | |||
2002 | 91.0 | |||
2003 | 102.6 | 102.6 | ||
2004 | 107.8 | 107.8 | ||
2005 | 124.5 | 124.5 | ||
2006 | 132.8 | 132.8 | ||
2007 | 144.7 | |||
Underlying earnings contribution* | US$m | US$m | ||
2004 | 565 | 565 | ||
2005 | 1,722 | 1,703 | ||
2006 | 2,279 | 2,251 | ||
2007 | 2,651 | |||
Changes in underlying earnings 2004 - 2006 | US$m | |||
2004 Underlying earnings | 565 | |||
Effect of changes in: | ||||
Prices and exchange rates | 968 | |||
General inflation | (18 | ) | ||
Volumes | 270 | |||
Costs | (51 | ) | ||
Tax and other | (12 | ) | ||
Changes in underlying earnings 2005 – 2007 | US$m | |||
2005 Underlying earnings | 1,722 | 1,703 | ||
Effect of changes in: | ||||
Prices and exchange rates | 616 | 616 | ||
General inflation | (25 | ) | (25 | ) |
Volumes | 156 | 156 | ||
Costs | (220 | ) | (229 | ) |
Tax and other | 30 | 30 | ||
2006 Underlying earnings | 2,279 | 2,251 | ||
Effect of changes in: | ||||
Prices and exchange rates | 537 | |||
General inflation | (43 | ) | ||
Volumes | 136 | |||
Costs | (255 | ) | ||
Tax and other | 25 | |||
2007 Underlying earnings | 2,651 | |||
* | A reconciliation of the net earnings with underlying earnings for |
STRATEGIC OVERVIEW
Rio Tinto’s Iron Ore group (RTIO) comprisesconforms with the larger Group’s overall strategy of pursuing the world’s best natural resources, wherever they are located, using the best technologies, and operating them safely. RTIO seeks to do this by being faster and better at producing iron ore, supported by an unmatched capacity and capability to develop key infrastructure.
RTIO is geographically well placed to take advantage of the exceptionally strong market conditions and outlook in Asia, with a massive mineralisation inventory base close to an integrated production platform in the Pilbara of Western Australia. This enables a rapid expansion of production in the short and medium term. RTIO’s large mineralisation position in Australia and Guinea, west Africa, together with an established project execution capability, provides potential for a global iron ore production capacity of more than 600 million tonnes per annum.
As new competitors and constraints emerge, RTIO’s strategy to meet the industry challenges is focused on achieving “industry leadership” in global iron ore. The strategy is centred on rapidly expanding the business, both globally and in the Pilbara, and delivering maximum value from RTIO’s operations inby developing a world class production platform.
RTIO’s portfolio of operations is international, including Australia, Canada and Brazil, anda major development projectsproject in Guinea (west Africa)at Simandou, and the Orissa project in India. The portfolioIt also includes a HIsmelt®the HIsmelt® plant in Australia, which is aapplies revolutionary process that convertstechnology to convert iron ore fines with significant impurities into high quality pig iron.
RTIO Asia was established in Singapore in November 2007 to provide an integrated sales, marketing, distribution and logistics service for Hamersley Iron products in the Asia Pacific. It aims to maximise Hamersley’s share of forecast growth in the region.
At 31 December 2006,2007, the iron oreIron Ore group accounted for 3213 per cent of Rio Tinto’s operating assets, and in 20062007 contributed 2726 per cent of the Group’s gross sales revenue and 3136 per cent of underlying earnings.
At year end 2007 RTIO employs 4,800employed 6,520 people in Western Australia and approximately 7,0008,630 worldwide. RTIO recruited strongly during the year and inIn a highly contested market, the recruitment market in Western Australia hired 1,400effort was exceptional, with 1,951 new starters in addition2007.
Environmental initiatives included development of a strategic approach to making a large numberwater for the Pilbara, to ensure long term security of internal transfers, secondmentssupply at the ports and promotions.in the management of dewatering discharge associated with the increasing requirement for below water table mining across the Pilbara, and recognising the importance of this issue for traditional
Rio Tinto 2007 Form 20-F | 87 |
land owners of the region.
A major milestone was reached with the completion of the Phase B upgrade of the port of Dampier, now ramping up towards its new capacity of 140 million tonnes per annum (Mt/a). Work progressed on a number of safety and environmental initiatives, and particularly focusedhas commenced on the issues surrounding contractor managementCape Lambert upgrade to 80 Mt/a from 55 Mt/a, which is expected to be completed in early 2009. Two new mines were approved for development – Brockman 4 (22 Mt/a) and Mesa A/Warramboo (25 Mt/a) – at a combined total cost of US$2.4 billion, of which Rio Tinto’s share is US$2.0 billion. Both mines will replace tonnages from deposits nearing the end of their mine life.
Rio Tinto’s 50:50 joint venture with Hancock Prospecting is progressing well. In November, Hope Downs 1 (22 Mt/a), began production – a full quarter ahead of schedule, and the operationstage 2 expansion to 30 Mt/a has been brought forward one year, with production planned to commence at the start of heavy mobile equipment.Final steps were taken2009. In December approval was given for a US$71.4 million feasibility study into the next stagedevelopment of the group’s expansion, with infrastructure now in place or approved to handle up to 220 million tonnes of iron ore exports annually. Thea Hope Downs 4 mine (15-20 Mt/a).
RTIO’s growth strategy has seen approximatelymore than US$57 billion committed to port, rail, power and mine assets since 2003, resulting in a world class, integrated iron ore networkablenetwork. A feasibility study into expanding Pilbara capacity to 320 Mt/a by 2012 is well advanced and a decision will be made in early 2009. Cape Lambert has been identified as the preferred site for port expansion.
In late November 2007 Rio Tinto senior management outlined an aggressive expansion programme designed to capitalise on continued strong demand internationally.In April 2006, RTIO’s 50:50 joint venture with Hancock Prospectingglobal spread of assets and markets. This included a conceptual framework towards establishing a Pilbara production capacity of 420 Mt/a and an expansion at Simandou in Guinea of up to 170 Mt/a.
During the year, RTIO was inducted into the Australian Export Hall of Fame, was twice honoured at the Australian Business Arts Foundation awards and won a 2007 Water Award for the development of the Hope Downsits re-injection project was ratified following State Government approval. Construction of the US$980 million, 22 million tonnes perat Yandicoogina.annum stage one Hope Downs mine has started, with production expected to commence in early 2008.
Sam Walsh, chief executive Iron Ore, is based in Perth, Western Australia.
SAFETY
All injury frequency rate | per 200,000 hours | |
2003 | 2.19 | |
2004 | 1.79 | |
2005 | 1.48 | |
2006 | 1.24 | |
2007 | 0.92 | |
Iron Ore Company of Canada’s safety performance continued to improve in 2007 with a 59 per cent reduction in the lost time injury frequency rate to 0.29. The Corumbá mine in Brazil again won the Chief Executive’s Safety Award. Work progressed on a number of safety initiatives across operations, particularly focused on issues surrounding contractor management, vehicle safety and implementing proactive measures to prevent the risk of injury. Cyclone preparation measures in the Pilbara employee accommodations were reviewed, focusing on standardised safety measures. Overall, the group’s all injury frequency rate was 0.92 (1.24 in 2006) and the lost time injury frequency rate 0.38 (0.59) .
Financial performanceGREENHOUSE GAS EMISSIONS
The 2008–2009 greenhouse gas (GHG) plan notes an increased focus on energy reduction through the appointment of an energy specialist in late 2007 and the conduct of further energy reviews. A feasibility study is being conducted to examine the possible replacement of power stations to reduce GHG emissions and mitigate current potential environment risk.
A number of additional activities aimed at reducing energy use and GHG emissions are also under way including replacing heavy mobile equipment and locomotives. Dash 7 and Dash 8 locomotives are being replaced by new generation GE EVO locomotives. The RTIO technology group is also examining hybrid locos in collaboration with General Electric, liquid natural gas replacement for diesel trucks and locomotives, rail electrification, and closed cycle power generation for existing open cycle power units. Rio Tinto has approved new gas fired power generation in the Pilbara as a step towards lower emissions electricity.
2006FINANCIAL PERFORMANCE
2007 compared with 20052006
RTIO’s contribution to 20062007 underlying earnings was US$2,2792,651 million, US$557400 million higher than in 2005.2006.
Demand for iron ore remained extremely strong across the product range throughout 2006,2007, driven by the continuing robust growth in global steel demand and production, significantly exceeding seaborne suppliers’ capacity to match. Total Chinese iron ore imports rose from 326 million tonnes to 383 million tonnes, accounting for more than 90 per cent of world growth. Hamersley Iron and Robe River in Australia operated at record or near record levels of
Rio Tinto 2007 Form 20-F | 88 |
production in 2007.
In December RTIO announced plans to sell up to 15 million tonnes of iron ore on the spot market in 2008, taking advantage of the large gap between annual (benchmark) and short term prices while continuing to meet longer term contractual commitments.
2006 compared with 2005
RTIO’s contribution to 2006 underlying earnings was US$2,251 million, US$548 million higher than in 2005.
Demand for iron ore continued to be extremely strong across the product range throughout 2006, driven by continued growth in global steel demand and production. Total Chinese iron ore imports rose from 275 million tonnes to 326 million tonnes. Hamersley Iron, Robe River, Iron Ore Company of Canada and Corumbá in Brazil all operated at record or near record levels of production in 2006.
For the contract year commencing April 2006 RTIO reached agreement with customers on price increases of19of 19 per cent for all products following on from the previous agreement of a 71.5 per cent increase. In December 2006,prices for the 2007 contract year were agreed with Baosteel of China, for a 9.5 per cent increase to the benchmark price.Similarprice. Similar price increase agreements were subsequently reached with other steelmakers.
2005 compared with 2004RTIO’s contribution to 2005 underlying earnings was US$1,722 million, US$1,157 million higher than in 2004. Demand for iron ore continued to be extremely strong across the product range throughout 2005, driven by continued strong growth in global steel production and improvements in steel demand. Chinese iron ore imports rose 30 per cent year on year, and Hamersley Iron, Robe River, IOC and Corumbá all achieved record production in 2005.
OperationsOPERATIONS
Hamersley Iron(Rio Tinto: 100 per cent)
Hamersley Iron operates eightnine mines in Western Australia, including twothree mines in joint ventures, 630about 700 kilometres of dedicated railway, and port and infrastructure facilities located at Dampier. These assets are run as a single operation managed and maintained by Pilbara Iron.
The firstfinal phase of major expansions to thein ramping up Pilbara infrastructure (including expanding Dampier port to 116220 million tonnes per annum and Yandicoogina mine to 36 million tonnes per annum, and brownfields mine expansion) is now fully operational and the second phaseof annual capacity is well under wayway. Dampier port’s two terminals now account for a combined capacity of 140 Mt/a. With the completion of Junction South East, Yandicoogina mine capacity has been expanded to 52 Mt/a, and tracking onbrownfield mine expansions at Marandoo, Nammuldi and Mount Tom Price have been completed.
The new Hope Downs mine, owned in 50:50 joint venture with Hope Downs Iron Ore Pty Ltd (owned by Hancock Prospecting Pty Ltd), but managed by RTIO, began production in November, a full quarter ahead of schedule, and on budget.the first train was loaded in mid December.
Approval was granted for the US$1.52 billion Brockman 4 mine, 60 kilometres north west of Tom Price, which is expected to begin ramp up in 2010 to 22 Mt/a. The Marandoo mine was expandedwill be connected to the main network via a 35 kilometre rail spur, and the design allows for an additional 14 Mt/a expansion.
Work is progressing on a number of options for new Nammuldi mine was completed in the second quarterdevelopment as part of the year.Hamersley Iron’s Yandicoogina minefeasibility study to reach 320 Mt/a capacity. A decision is being expanded from 36 million tonnes per annum to 52 million tonnes and the scheduled completion has been accelerated to the end of the third quarterexpected in 2007.early 2009. Work also continued on pre-development studies for new mines.
20062007 operating performance
Hamersley Iron’s total production in 20062007 was 97.2112.1 million tonnes, 7.614.9 million tonnes more than the 89.697.2 million tonnes in 2005, notwithstanding the volume of2006. This result was notable for being achieved amid significant expansion work under way across the business. Rio Tinto’s share of this production was 93.3 million tonnes.several sites.
Flooding caused by a succession of fiveShutdowns and flooding from two cyclones early in the year hindered operations significantly. Production increases throughsignificantly, although tie down procedures performed well. Several derailments also impacted operations significantly, resulting in an estimated 1.39 million lost saleable ore tonnage. Remedial action was undertaken on high risk sections and a rerailing project was approved which will eventually see 45 per cent of the network replaced.
Reinvestment in additional yard capacity, locomotives and rolling stock has been implemented to improve efficiency and remove bottleneck issues associated with limited rail capacity.
The Pilbara Blend product was successfully introduced mid year, sought to recover fromwinning widespread customer acceptance and at 100 per cent of the early setbacks and meet increased capacity targets.reference price. Pilbara Blend will comprise 15 per cent of the world’s seaborne iron ore trade.
Shipments by Hamersley Iron totalled 98.1109.5 million tonnes, including sales through joint ventures. Hamersley Iron’s shipmentsShipments to China also reached a new record level at 52.959.6 million tonnes, securingconfirming China’s place as the single largest, and fastest growing, destination for Hamersley’s iron ore.
Hamersley’s total shipments of iron ore to major markets (million tonnes) Production from all mines was stretched to achieve these levels, placing cost and other operating stresses on theHamersley Iron system. Ongoing labour shortages in a competitive market and materials pressures such as tyreshortages also provided significant challenges to meeting production targets.
2007 | 2006 | 2005 | ||||
China | 59.6 | 52.9 | 49.5 | |||
Japan | 30.0 | 27.4 | 24.5 | |||
Other Asia | 18.3 | 15.8 | 14.1 | |||
Europe | 0.7 | 2.0 | 2.0 | |||
108.5 | 98.1 | 90.1 | ||||
Note | ||||||
This table includes 100 per cent of all shipments through joint ventures. |
Rio Tinto 2007 | ||
Robe River Iron Associates(Rio Tinto: 53 per cent)
Robe River Iron Associates (Robe) is an unincorporated joint venture in which Mitsui (33 per cent), Nippon Steel (10.5 per cent) and Sumitomo Metal Industries (3.5 per cent) also haveretain interests. Robe River is the world’s fourth largestseaborne trader in iron ore.
Robe River operates two open pit mining operations in Western Australia. Mesa J is located in the Robe Valley,north of the town of Pannawonica. The mine produces Robe River fines and lump, which are pisolitic iron ore products.Theproducts. The West Angelas mine, opened in 2002, is located approximately 100 kilometres west of the town of Newman. The mine produces West Angelas fines and lump which areand Marra Mamba iron ore products. Preparations are under wayfor these products to contribute towhich were successfully incorporated into the Pilbara Blend fromduring the third quarter 2007, when RTIO’s product range will besimplified from nine products to five.year.
Expansion of mine, rail and port operations has continued. As a resultcontinued, with the upgrade of the 2005 expansion of the West Angelasmine, which took production capacity to 25 million tonnes per annum, Robe River’s overall production capacityincreased to a nominal 57 million tonnes per year.The expansion of the dedicated rail system, operated by Pilbara Iron, was completed during the year, ahead ofschedule. Completion of the northern section of the Pilbara Iron main line meant that almost 100 kilometres of track and associated interconnection and infrastructure such as signalling and communications is now duplicated. This provides
significantly greater flexibility, and hence improvements to capacity, in delivering ore to Robe River’s deepwater port facilities at Cape Lambert.The expansion of the Cape Lambert port facility from 55 million tonnesMt/a to a rated capacity of 80 Mt/a proceeding on schedule. The port has also been nominated as the preferred site for subsequent expansion as part of the upgrade of Pilbara capacity to 320 Mt/a, subject to an ongoing feasibility study.
In November, Rio Tinto and the joint venture partners approved development of the US$901 million tonnesper annum was recently approved.(Rio Tinto share US$478 million) Mesa A/Warramboo mine in the western end of the Robe Valley. This isfollowed a significant project, comprising lengthy, ultimately successful, process to gain environmental approval. The new mine’s annual production will be 20 Mt/a, number of major initiatives, including increasing to 25 Mt/a new product reclaimerby 2011, and an extended wharf.will be replacement tonnage as Mesa J’s mine life approaches its end.
Robe River primarily exports under medium and long term supply contracts with major integrated steel millcustomersmill customers in Japan, China, Europe, South Korea and Taiwan.
20062007 operating performanceCyclonesThe effect of cyclones slowed production early in the year at Robe River’s Pannawonica and West Angelas mines, and hinderedoperations well intoas did a serious derailment which required significant track repairs. A two week shutdown of the second quarter.Cape Lambert dumper also affected production, as did delays in commissioning a conveyor system at West Angelas.
Robe River’s total production in 20062007 was 52.951.5 million tonnes, comprising 29.325.5 million tonnes from Mesa J, and 23.726.0 million tonnes from West Angelas. Sales were 29.125.9 million tonnes of Mesa J and 23.325.6 million tonnes of West Angelas products.
Sales growth, based on increased production from West Angelas, was again fuelled by the growth in the Chinese market, where Robe River achieved record total sales of 18.552.0 million tonnes. However, Japan remains Robe River’s largest single market, with total shipments in 20062007 of 24.722.6 million tonnes.
A new mining strategy at West Angelas has resulted in an improved product, with less grade variation. This improved performance is expectedRobe’s total shipments of iron ore to continue through the transition to the Pilbara Blend.major markets (million tonnes)
2007 | 2006 | 2005 | ||||
China | 21.0 | 18.5 | 17.5 | |||
Japan | 22.6 | 24.7 | 26.1 | |||
Other Asia | 2.9 | 2.7 | 1.7 | |||
Europe | 5.5 | 6.1 | 7.3 | |||
52.0 | 52.0 | 52.6 | ||||
Iron Ore Company of Canada(Rio Tinto: 58.7 per cent)
RTIO operates Iron Ore Company of Canada (IOC) on behalf of shareholders Mitsubishi (26.2 per cent) and the Labrador Iron Ore Royalty Income Fund (15.1 per cent).
IOC is Canada’s largest iron ore pellet producer. It operates anopenan open pit mine, concentrator and pellet plant at Labrador City, Newfoundland and Labrador, together with a 418kilometre railway to its port facilities in Sept-Îles, Quebec. IOC has large quantities of ore reserves with low levels of contaminants.
Products are transported on IOC’s railway to Sept-Îles.les on the St Lawrence Seaway. The port is openice free all year and handles both ocean going ore carriers of up to 255,000 tonnes and providesLakers, providing competitive access to all seaborne pellet markets and to the North American Great Lakesregion. IOC exports its concentrate and pellet products to major North American, European and Asian steel makers.
IOC employs approximately 1,9002,000 people and recruited 250170 people during the year to offset an increase in retirements and to meet greater production needs.
20062007 operating performanceWhileThe demand for IOC’s products strengthened further in 2007 with concentrate prices continued to rise, showing a 17.3increasing by ten per cent increase, the pellet premium retreated from the record high of the previous year, resulting inand pellet prices softening by 3.5 per cent. Pellets account for 80five per cent of IOC’s production.over last year’s benchmark prices.
Total saleable production was 13.2 million tonnes, down from 16.1 million tonnes (compared with 15.6in 2006. The variation was primarily due to a seven week labour strike. Pellet production was 11.3 million tonnes (12.7 million tonnes in 2005) following astrong recovery from weather related production losses in the first quarter. The total was made up of 12.72006) with saleable concentrate being 1.9 million tonnesof pellet production (13.3 (3.4 million tonnes in 2005) and 3.4 million tonnes of saleable concentrate2006). Lower production (2.3 million tonnes in 2005).Higherlevels coupled with higher oil prices and efforts to recover first quarter production losses put pressure on 2007 unit costs.
A project toincreaselabour strike in March/April occurred when negotiations broke down over the new collective agreement to replace the one that expired in February 2007. The strike ended following agreement of a new five year collective agreement.
In August, IOC announced the approval of US$57 million to expand annual concentrate production capacity to 17.5 million tonnes was largely completed18.4 Mt/a by the year end,mid-2008 and plans forto conduct a feasibility study to further expansion are currently under consideration. IOC commenced negotiation of a new collective agreement in thefourth quarter of 2006, and following a five-week labour dispute, a new five-year collective agreement was concluded in the second quarter of 2007.expand to 21 Mt/a.
Rio Tinto |
In March 2008 IOC announced the approval of US$475 million to increase annual concentrate production by some 40 per cent, or seven Mt/a, to 25 Mt/a and annual pellet production by ten per cent, or 1.5 Mt/a, to 14.5 Mt/a over the next five years.
IOC’s total shipments of iron ore to major markets (million tonnes)
2007 | 2006 | 2005 | ||||
Europe | 5.210 | 5.7 | 6.8 | |||
Asia Pacific | 3.777 | 5.4 | 3.4 | |||
North America | 4.155 | 4.8 | 4.8 | |||
13.142 | 15.9 | 15.0 | ||||
Mineração Corumbaense Reunida (Corumbá)(Rio Tinto: 100 per cent)
Corumbá produced a record two1.8 million tonnes of lump iron ore in 20062007 and sold 1.81.1 million tonnes which was bargedalong the Paraguay River for export to South American, Asian and European customers. Sales were lower in 2007 due to strong competition for barging freight, barge unloading delays at Argentine ports and abnormally low river levels during the last quarter.
Rio Tinto approved investments in additional barging capacity, port improvements and an ore dryer to develop the market for Corumbá lump in direct reduction processes, all of which will come on line during 2008. The feasibility study to expand mine production and transport logistics to ten Mt/a is nearing completion, as the next step towards production of expandingproduction at the mine in stages to 15 million tonnes per annum is under study. Logistic options are being considered for expanded export sales and for supplies to20 Mt/a. Negotiations continued with prospective investors regarding a proposed steel making project at Corumbá, which is being promoted byRio Tinto. that would consume local iron ore.
Corumbá has overmore than 200 million tonnes of reserves, and over 400 million tonnes of additional mineralisedmaterial.mineralisation. There are approximately 500650 employees.
HIsmelt®(Rio Tinto: 60 per cent)
The HIsmelt®iron making project at Kwinana in Western Australia is a joint venture between Rio Tinto (60 per centinterestcent interest through its subsidiary, HIsmelt®Corporation), US steelmaker Nucor Corporation (25 per cent), Mitsubishi Corporation (10(ten per cent), and Chinese steelmaker Shougang Corporation (five per cent). The project has so farreceived supportproduced 115,000 tonnes of A$80 million from the Australian federal government.The HIsmelt®process is a direct iron smelting technology developed largely by Rio Tinto that converts iron ore fines into high quality pig iron (96 per cent iron content) without the useand achieved a number of coke ovens and sinter plants. Notably, thetechnology allows efficient processing of ore fines with higher levels of impurities.In 2006 the Hlsmelt®plant moved into the firstproduction records in 2007, its second year of a three-year ramp up to its full production rateas it builds towards a planned capacity of 800,000 tonnes per annum. Since start up,The project was visited by Chinese president Hu Jintao in September 2007.
IRON ORE GROUP PROJECTS
Hamersley Iron(Rio Tinto: 100 per cent)
Upgrade to 220 Mt/a
RTIO is on schedule to have 220 Mt/a installed capacity in the facility has produced 98,000 tonnesPilbara by the end of pig iron and has made three shipments2008, achieving a doubling ofproduct.HIsmelt®has approximately 130 employees.In 2006 capacity since the HIsmelt®facility hosted visits from senior representativesbeginning of the Chinese government,decade. The second stage of the Pilbara Expansion is well advanced with a further upgrade of Dampier Port, Yandicoogina mine expansion and Hope Downs stage 1 development now completed. The initial upgrade of Cape Lambert Port will complete the major infrastructure upgrades for this phase. Additional mine capacity at Hope Downs stage 2 to 30 Mt/a will match the capacities of mine, rail and port facilities at 220 Mt/a.
Pilbara 320/420 Mt/a
A suite of mine and infrastructure projects for the expansion of Pilbara capacity to 320 Mt/a is under study. The studies include a variety of greenfield and brownfield mine options across the Pilbara, expansions to both rail and port and supporting infrastructure, designed to bring the Pilbara capacity firstly to 320 Mt/a and then 420 Mt/a. The studies also contemplate the use of new technologies including a Perth based Remote Operations Centre, and a range of automation options. Underlying this work is an aggressive resource evaluation and definition programme, designed to ensure that the available mineralisation is delineated and developed with optimal sequencing and timing. More than 400,000 metres of exploration drilling was completed during 2007 and a further 500,000 metres is planned for 2008.
Robe River Iron Associates(Rio Tinto: 53 per cent)
Mesa A
The US$901 million Mesa A/Waramboo mine development is required to sustain production of Robe Valley pisolite, which would otherwise decline with the run down of the Mesa J mineralisation. Pending finalisation of plans for the proposed rail spur to the existing line, transition work will begin shortly. Production at Mesa A is expected to commence in the first quarter of 2010, starting at 20 Mt/a, increasing to a 25 Mt/a rate from 2011.
Cape Lambert port
The first upgrade of Cape Lambert (from 55 Mt/a to 80 Mt/a) is well under way. A construction camp for 600 people has been established, and works are continuing according to plan with marine piling and bulk earthworks well
Rio Tinto 2007 Form 20-F | 91 |
advanced. The project scope includes extension of the wharf and upgrading of shiploading facilities to accommodate four capsize vessels simultaneously as well as asignificant numberupgrades to the stockyard with the addition of international steel companies. HIsmelt®Corporation continues to promotea new reclaimer. The project is scheduled for completion at the technology globallyand expects interest to increase as theend of 2008 with progressive ramp up phase progresses. In November, Australian stateduring the first half of 2009.
The 320/420 project
Cape Lambert is also the preferred site for expansion of Pilbara port facilities to 320 Mt/a, and federal ministers attended conceptually to 420 Mt/a. Under the early planning for the 320 Mt/a, special ceremony at Kwinanathis would involve construction of a new terminal (Cape Lambert West) capable of berthing four capsize ships. That terminal would be extended to recogniseaccommodate a further four berths according to the opening420 Mt/a concept. Early planning has also identified the area to the west of the world’s first commercial HIsmelt®plant.existing rail line for both stockpiles under both 320 and 420 Mt/a upgrade scenarios. This expansion plan carries the added benefit of not adding to Rio Tinto’s footprint in the area.
Simandou(Rio Tinto: 95 per cent)
The Simandou project in eastern Guinea, west Africa, is of great strategic significance for Rio Tinto. It is a greenfield discovery situated in one of the best undeveloped major iron ore provinces in the world. A prefeasibility study is studying the mining and transport options needed to bring Simandou into production as quickly as possible, with an initial capacity of 70 million tonnes per annum. The deposit has great potential in exploration opportunities across the project area. Total drilling of 50,000 metres was undertaken at the Pic de Fon and Oueleba sites in 2007, with an equivalent amount expected in 2008. Simandou has significant brownfield growth capacity, and conceptual development plans are already under way on expanding capacity towards 170 million tonnes per annum. These studies are scheduled for completion in 2010.
The International Finance Corporation (the private sector arm of the World Bank Group) retains a five per cent stake in the project and is working with Rio Tinto to develop it in an environmentally and socially sustainable way.
The project currently employs 375 Rio Tinto staff operating from offices in Conakry and Kerouane, and construction camps at Canga East and Oueleba in the Mining Concession. The total workforce, including contractors, is greater than 700.
Projects
Orissa, India(Rio Tinto: 51 per cent)
Orissa is one of the key iron ore regions of the world. RTIO has a joint venture interest in Rio Tinto Orissa Mining withthewith the state owned Orissa Mining Corporation. The joint venture holds rights to iron ore leases in Orissa, which it is seeking to develop. Although progress has been slow, Rio Tinto isremains keen to participate in the development of the Indian iron ore sector through its jointventure. A project team has been established and is working to expedite the development of operations in India.
Rio Tinto has identified India as among the most likely economies to follow east Asia’s development of a greater intensity of steel use. India’s economy is expected to maintain its present growth sorate, thus providing support for an expanding domestic steel industry, andindustry. Rio Tinto has continued discussions have continued with major domestic steel companies.
Simandou, Guinea(Rio Tinto: 95 per cent)The Simandou project in eastern Guinea, west Africa, is a Rio Tinto greenfields discovery with potentially significantquantities of high grade iron ore. Simandou moved from Rio Tinto Exploration to full project status as part of RTIO in October 2004. A prefeasibility study is assessing the mining and transport options needed to bring Simandou intoproduction as quickly as possible. The International Finance Corporation (the private sector arm of the World BankGroup) took a five per cent stake in the project in August 2006 and is working with Rio Tinto to develop the project in an environmentally and socially sustainable way. To date Rio Tinto has spent more than US$50 million on the project.
Rio Tinto |
ENERGY GROUP | ||
Mined | Rio Tinto share | |
Coal | million tonnes | |
2002 | 149.1 | |
2003 | 148.8 | |
2004 | 157.4 | |
2005 | 153.6 | |
2006 | 162.3 | |
Underlying earnings contribution* | US$m | |
2004 | 431 | |
2005 | 733 | |
2006 | 711 | |
The Energy group comprises thermal coal and coking coal operations and uranium. Coal interests are located in Australia and the US. They supply internationally traded and US and Australian domestic markets. The energy portfolioalso includes Rössing Uranium in Namibia and Energy Resources of Australia which supply uranium oxide forelectricity generation globally.The group has consolidated its asset holdings, branding and product stewardship with the creation of Rio Tinto Coal Australia, Rio Tinto Energy America and Rio Tinto Uranium. An overarching group strategy was needed toharness and focus resources to deliver a world class performance in operations, sustainable development and value creation.In 2006 the Energy group undertook a review of its strategy and asset portfolio. The review highlighted theimportance of the Japanese and US markets to the business and the role of China in providing depth in demand whilst increasing the potential volatility. The strategy is focused on becoming the world’s leader in mineable energy.A key part of the strategy is to ensure that the group is a leading advocate of, and investor in, the sustainablefuture uses of coal and uranium. In 2006 the group dedicated resources and investment funds to the FutureGen project in the US, COAL21 in Australia and the International Energy Agency Clean Coal Centre.In uranium, both ERA’s Ranger mine in Australia and the Rössing Uranium mine in Namibia represent low cost brownfield expansion opportunities. Rio Tinto also holds other attractive undeveloped uranium deposits, including Kintyre in Western Australia, and we are currently assessing the viability of restarting the Sweetwater uranium mill and adjacent uranium mine in Wyoming, US.At 31 December 2006, the Energy group accounted for 13 per cent of Group operating assets and, in 2006, contributed 17 per cent of Rio Tinto’s gross sales revenue and ten per cent of underlying earnings.Preston Chiaro, chief executive Energy, is based in London.
Financial performance2006 compared with 2005The Energy group’s 2006 contribution to underlying earnings was US$711 million, US$22 million lower than in 2005.Results benefited from a sustained increase in the price received for thermal coal during 2006. Problems in thecoal supply chain in the Hunter Valley region of New South Wales impeded production from Coal & Allied operations. Drought in parts of Queensland and New South Wales has begun to affect production levels. Operations focused on producing high margin products and optimising the coal supply chain. Increases in the cost of basic materials, fuel,
explosives and labour were not fully offset by production growth, resulting in a rise in the cost per unit of production across all operations.Our uranium businesses continue to provide options and opportunities in the reinvigorated international uraniummarket. The focus of the uranium operations is to seek additional production volumes and long term expansions to sell into the current favourable price environment. Spot prices for uranium oxide strengthened considerably during theperiod, increasing from US$36.38 at the beginning of the year to close at US$72 in December. Uranium oxide istypically sold on long term contracts, with pricing determined several years in advance. The significant rise in the spot price of uranium oxide during the period is therefore not fully reflected in the current earnings. The effects of the 2006pricing levels will flow through to earnings in future years. Our uranium businesses are contracted and priced to 98 percent in 2007 and 88 per cent in 2008.
2005 compared with 2004The Energy group’s 2005 contribution to underlying earnings was US$733 million, US$302 million higher than in2004.A significant increase in the price received for both thermal and coking coal during 2005 was a key factor in this improvement. Third party infrastructure issues continued to impede production growth in all of the coal operations.Operational emphasis shifted to high margin products and to facilitating the further expansion of the Hail Creek mineinto a strong market for coking coal. The inability to reap the required economies of scale and an increase in the price of fuel and explosives resulted in a rise in the unit cost of production across the group.Spot prices for uranium oxide strengthened considerably during 2005, increasing from US$20.43 at thebeginning of the year to close at US$36.38 in December. The significant rise in the spot price of uranium oxide during the period was not fully reflected in the year’s earnings.
OperationsRio Tinto Energy America(Rio Tinto: 100 per cent)Rio Tinto Energy America (RTEA, formerly known as Kennecott Energy) wholly owns and operates four open cut coalmines in the Powder River Basin of Montana and Wyoming, US, and has a 50 per cent interest in, but does not operate,the Decker mine in Montana. RTEA also manages the group’s interest in Colowyo Coal in Colorado, US. In total it employs approximately 2,300 people.One of the largest US producers, RTEA sells its ultra low sulphur coal to electricity generators predominantly in mid western and southern states. Sales are made under multiple year contracts and on a spot basis for one year or less.The domestic US market for low sulphur coal continues to grow due to its competitive cost per delivered energy unit and restrictions on sulphur emissions by utilities. The strong demand for low cost and low sulphur western coal is expected to continue and grow with the announcement of numerous new coal fired generation projects and increased utilisation of existing coal generation capacity in the US.
2006 operating performanceRTEA’s attributable production of 125 million tonnes of coal was eight per cent higher than in 2005, with productionincreasing at all of the mines. Expansions at Antelope and Spring Creek increased output to record levels. The new dragline commissioned at Jacob’s Ranch during the year enabled a new production record to be set. Underlyingearnings of US$177 million were 31 per cent higher than the US$135 million recorded in 2005. This increase was attributable to overall production increases and a higher sales price realisation, somewhat offset by a higher effective tax rate and increased operational costs, particularly the cost of diesel, explosives, tyres and labour.Spot prices were volatile during the period. The spot price for 8800 BTU (0.80 sulphur) moved from US$23 a tonne in December 2005 to US$9 in December 2006 for delivery the following year.A fatality occurred at the Spring Creek mine in November 2006.
Rio Tinto Coal Australia(Rio Tinto: 100 per cent)Rio Tinto Coal Australia (RTCA) manages the group’s Australian coal interests. These include, in Queensland; the Blair Athol (Rio Tinto: 71 per cent), Kestrel (Rio Tinto: 80 per cent), Tarong (Rio Tinto: 100 per cent) and Hail Creek(Rio Tinto: 82 per cent) coal mines and the Clermont deposit (Rio Tinto: 50 per cent).RTCA also provides management services to Coal & Allied Industries (Coal & Allied) for operation of its four mines located within the Hunter Valley in New South Wales. Coal & Allied (Rio Tinto: 75.7 per cent) is publicly listedon the Australian Securities Exchange and had a market capitalisation of A$6.5 billion (US$ 4.9 billion) at 31 December2006. Coal & Allied wholly owns Hunter Valley Operations, has an 80 per cent interest in Mount Thorley Operations and a 55.6 per cent interest in the contiguous Warkworth mine, and a 40 per cent interest in the Bengalla mine which abuts its wholly owned Mount Pleasant development project. Coal & Allied also has a 37 per cent interest in Port Waratah Coal Services coal loading terminal.Production from the Tarong mine is sold exclusively to Tarong Energy Corporation, an adjacent state owned power utility. A ten year contract for up to 7.5 million tonnes annually expires at the end of 2010.Kestrel and Hail Creek sell mainly metallurgical coal to customers in Japan, south east Asia, Europe and Central
America, generally on annual agreements.Coal & Allied produces thermal and semi soft coal. Most of its thermal coal is sold under contracts to electricalor industrial customers in Japan, Korea and elsewhere in Asia. The balance is sold in Europe and Australia. Coal & Allied’s semi soft coal is exported to steel producing customers in Asia and Europe under a combination of long term contracts and spot business. In May 2007 Coal & Allied announced production cutbacks of approximately 20% at its Hunter Valley mines following notice of reductions in its port and rail allocations for the remainder of the year. In June 2007 Coal & Allied declared force majeure on a number of its sales contracts as a result of the severeweather conditions encountered at the Port of Newcastle and in the Hunter Valley region of New South Wales. RTCA and Coal & Allied collectively employ approximately 2,500 people.
2006 operating performanceRTCA and Coal & Allied’s combined underlying earnings of US$490 million in 2006 were 14 per cent below the 2005result because of coal supply chain bottlenecks and increased operating costs. At all operations other than Tarong, sales were constrained by inability of the infrastructure to handle producer demand. Blair Athol and Hail Creek shipments were both affected by infrastructure constraints at the Dalrymple BayCoal Terminal, while Coal & Allied mines were similarly affected at Port Waratah in New castle because of constraints in the volume of material that could be railed to the port. Total production at Blair Athol decreased from 10.6 million tonnes to 10.2 million tonnes primarily as a result of limited port capacity. Kestrel’s production fell three per cent to 3.6 million tonnes in 2006; this included 2.7 million tonnes of coking coal. At Tarong, production increased by eight per cent to 7.0 million tonnes in line with demand from Tarong Energy Corporation. Hail Creek production was 4.5 million tonnes, a reduction of 23 per cent. At Hunter Valley Operations, total production decreased from 12.4 million tonnes to 12.0 million tonnes. The integrated Mount Thorley Warkworth operations increased production by ten per cent to 11.2 million tonnes. At Bengalla, production decreased seven per cent from 6.0 million tonnes to 5.5 million tonnes.Safety performance and awareness continue to be the major focus of all operations managed by RTCA.
Rössing Uranium(Rio Tinto: 68.6 per cent)Rössing produces and exports uranium oxide from Namibia to European, US and Asia Pacific electricity producers. In June, Rössing celebrated its thirtieth anniversary of uranium oxide production. 2006 also marked the first year of production of the life of mine extension. Rössing employs approximately 900 people.
2006 operating performanceIn 2006, total production of uranium oxide decreased slightly to 3,617 tonnes. The higher market prices for uranium oxide are beginning to flow through into underlying earnings. However, the higher realised prices were partially offset by an increase in cash costs and higher taxation levels, resulting in a US$27million underlying earnings contribution in2006. Rössing continues to put a significant effort and management focus on safety. The goal is to eliminate all injuriesfrom the workplace and to have an embedded safety culture and systems that identify and rectify potential safety incidents.
Energy Resources of Australia(Rio Tinto: 68.4 per cent)Energy Resources of Australia Ltd (ERA) is publicly listed and had a market capitalisation of A$4.0 billion (US$3.0 billion) at 31 December 2006. ERA employs approximately 400 people, with 13 per cent of the operational workforce being represented by Aboriginal people.ERA produces uranium oxide at the Ranger open pit mine, 260 kilometres east of Darwin in the NorthernTerritory. ERA also has title to the nearby Jabiluka mineral lease, which in 2003 was put on long term care and maintenance. Ranger has a 5,500 tonnes per year nameplate capacity and started production in 1981. ERA’s operations, including Jabiluka, are surrounded by, but remain separate from, the World Heritage listed Kakadu National Park, andespecially stringent environmental requirements and governmental oversight apply.
2006 operating performanceTotal uranium oxide production of 4,704 tonnes was significantly below the 5,903 tonnes produced in 2005 owing to the effects of a tropical cyclone and a failure in the acid plant. Stronger prices were partially offset by the higher cost of consumables and resulted in underlying earnings of US$17 million. During the year, ERA embarked upon an extensiveexploration and development programme to identify new reserves and increase the mine life of existing reserves.
ProjectsOther operations
Rössing UraniumKennecott Land(Rio Tinto: 68.6100 per cent)
Kennecott Land was established in 2001 to capture value from the non mining land and water rights assets of Kennecott Utah Copper. Kennecott Land’s holdings are around 53 per cent of the remaining undeveloped land in Utah’s Salt Lake Valley. Approximately 16,000 hectares of the 37,200 hectares owned is developable land and is all within 20 miles (32km) of downtown Salt Lake City.
The initial Daybreak community encompasses 1,800 hectares and is entitled to develop approximately 20,000 residential units and nine million square feet of commercial space. Kennecott Land develops the required infrastructure and prepares the land for sale to home builders. The project is well advanced, with over 1,650 home sales completed since opening in June 2004. At full build out, the community will house 40,000 to 50,000 residents. Revenues in 2007 were US$48 million.
Kennecott Land is in the process of studying development opportunities for the remaining landholdings. Development potential is approximately 163,000 residential units and 58 million square feet of commercial space. Securing entitlement is a long term public process that will culminate in a plan being submitted for approval by the Salt Lake County Council in the next few years.
Sari Gunay(Rio Tinto: 70 per cent)
In November 2007, Rio Tinto signed a final and binding sale agreement to divest the whole of its interest in the Sari Gunay gold project in western Iran. On the completion of this transaction, which is expected in mid 2008, Rio Tinto intends to close its office in Iran and will cease to have any interests in Iran.
MARKETING
Marketing and sales of the Group’s various metal and mineral products are handled either by the specific business concerned, or in some cases are undertaken at a product group level.
Rio Tinto has numerous marketing channels, which include electronic marketplaces, with differing characteristics and pricing mechanisms depending on the nature of the commodity and markets being served. Rio Tinto’s businesses contract their metal and mineral production direct with end users under both short and long term supply contracts. Long term contracts typically specify annual volume commitments and an agreed mechanism for determining prices at prevailing market prices. For example, businesses producing non ferrous metals and minerals reference their sales prices to the London Metal Exchange (LME) or other metal exchanges such as the Commodity Exchange Inc (Comex) in New York.
In 2007, Rio Tinto continued to focus on improvements in its marketing capability, with a small central marketing team based in London and Australia working collaboratively with business based sales and marketing teams to disseminate leading marketing practices across the Group. The team supports the Group’s businesses by helping to identify analytical tools, approaches and strategic frameworks to help identify the value to Rio Tinto of meeting customers’ needs.
MARINE
Ocean freight
Ocean freight is an important part of Rio Tinto’s marketing. It is managed by Rio Tinto Marine, with a head office in Melbourne, to provide Rio Tinto with a comprehensive capability in all aspects of marine transportation, global freight markets and the international regulatory environment. In 2007, Rio Tinto Marine handled over 78 million tonnes of dry bulk cargo, a 13 per cent increase on 2006 volumes transported.
Rio Tinto Marine leverages the Group’s substantial cargo base to obtain a low cost mix of short, medium and long term freight cover. It seeks to create value by improving the competitive position of the Group’s products through freight optimisation, and does not seek to trade freight as a stand alone activity. Rio Tinto Marine sets and maintains the Group’s HSE and vessel assurance standards for freight and is one of three equal shareholders in Rightship, a ship vetting specialist, promoting safety and efficiency in the global maritime industry.
During 2007 Rio Tinto Marine took possession of the first of five new bulk carriers, the RTM Wakmatha. These vessels will be used principally for carrying bauxite from Rio Tinto Alcan’s mine at Weipa, Queensland, to Gladstone for processing. In addition, an order has been placed for the construction of three 250,000 deadweight tonne ore carriers to transport iron ore from Rio Tinto’s operations in Western Australia to customers in China and elsewhere. These ore carriers will be delivered from late 2012 to help Rio Tinto build on its natural freight advantage in Asian exports.
Freight market
Sea freight rates reached unprecedented levels in all segments during 2007. Strong demand for commodities, combined with supply constraints and port congestion, resulted in increased long haul trade and reduced fleet availability.
Rio Tinto 2007 Form 20-F | 93 |
The Baltic Dry Index (BDI), an index of dry bulk shipping rates, more than doubled in 2007, increasing 110 per cent during the year. The Capesize vessel segment had the greatest upward impact on the BDI, with average daily freight prices increasing by 132 per cent during 2007, closing at US$157,128 per day with a November peak at US$194,115 per day. The Panamax, Supramax and Handysize indices also increased substantially, each registering gains of 93 to 95 per cent during 2007.
With spot markets at record highs, charterers turned to the period market to cover cargoes, pushing timecharter rates higher and increasing opportunistic re-let activity. Shipyard order books swelled in the second and third quarters of 2007, resulting in a large tranche of new vessel capacity for delivery from late 2009 through 2011. Long lead times for new vessels has seen large premiums paid for second hand vessels in all segments.
Rio Tinto 2007 Form 20-F | 94 |
Exploration group
STRATEGIC OVERVIEW
The purpose of exploration is to increase the value of the Group by discovering or acquiring resources that can augment future cash flows.
Adding value to a Group the size of Rio Tinto effectively means that exploration programmes must regularly return what others might call “company maker” discoveries. These are the largest and highest quality mineral deposits that the natural world has to offer, called Tier 1 resources.
Exploration involves the identification, prioritisation and testing of geological targets. As less than 0.1 per cent of targets will actually deliver a discovery, a continuous flow of opportunities is required. Exploration success in Rio Tinto is defined as the discovery of a deposit that warrants detailed economic evaluation. Handover of the deposit to a product group evaluation team marks the end of the exploration phase.
Greenfield exploration, which aims to establish new mineral businesses, involves geographic or commodity diversification away from existing Rio Tinto operations. Accountability for greenfield work lies with Rio Tinto Exploration (RTX).
RTX is organised into regional multi-commodity teams. This gives the group local presence, an in depth understanding of the operating environment and a holistic view of geological terrains. At the same time, programmes are prioritised on a global basis so that only the best opportunities are pursued.
There are currently five of these regional teams, which are supplemented by the Project Generation Group (PGG). PGG provides specialist commercial, technical and generative assistance and also co-ordinates all RTX research and development activities.
At the end of 2007, RTX was actively exploring in 30 countries and assessing opportunities in a further 20 for a broad range of commodities including bauxite, copper, coking coal, iron ore, industrial minerals, diamonds, nickel and uranium. RTX employs about 250 geoscientists around the world and has a total complement of approximately 950 people.
Brownfield exploration is directed at sustaining or expanding the value of existing Rio Tinto business units. Given that resources are the lifeblood of every mining operation, this is an essential business activity. Accountability for brownfield programmes lies with the business units, with RTX providing technical assistance.
The brownfield environment provides the easiest opportunity for creating value through exploration. The reasons for this are clear – Rio Tinto controls highly prospective title around its existing operations and infrastructure, and economic thresholds are lower than in a greenfield setting. Moreover, Tier 1 resources – the giants of the mineral deposit world – tend to be found in clusters.
SAFETY
All injury frequency rate | per 200,000 hours |
2003 | 1.30 |
2004 | 0.95 |
2005 | 0.55 |
2006 | 0.88 |
2007 | 1.10 |
Two greenfield discoveries, the Chapudi thermal coal deposit in South Africa and the Kintyre uranium deposit in Western Australia, were transferred from RTX to product group evaluation teams. Kintyre is now being offered for sale. One Tier 1 brownfield discovery, the Caliwingina North channel iron deposit, was transferred to Pilbara Iron.
Order of magnitude studies continued at the Bunder project (diamonds, India) and commenced at the Chilubane and Mutamba (ilmenite, Mozambique), Jarandol and Jadar (borates, Serbia) deposits. All are scheduled for completion in early to mid 2008. Negotiations continued with the Government of Indonesia on the Contract of Work for the Sulawesi nickel project.
Significant progress at early stage RTX projects in Australia (zircon), Brazil (bauxite), Canada (potash), Colombia (bauxite) and the US (nickel) is expected to lead to commencement of new order of magnitude studies in the second half of 2008. Several other projects are showing early signs of encouragement and could be fast tracked into this stage.
Exploration by the La Granja (Peru) evaluation team returned significant encouragement with the discovery of four new bodies of porphyry copper mineralisation. At the Bingham Canyon (US) copper mine, a substantial molybdenum deposit was identified located beneath the copper orebody. Adding to this discovery, which is still being delineated by deep drilling, was the recognition of new porphyry copper mineralisation beneath the southern pit wall. These two new zones of mineralisation point to further discovery potential.
Rio Tinto 2007 Form 20-F | 95 |
On Freeport Block A in West Papua (Indonesia), drilling encountered a new zone of copper-gold skarn mineralisation at the Gap target located between the Grasberg and Ertsberg intrusions. Delineation drilling will be conducted from an exploration drift in 2008.
On the Heruga concession of Entrée Gold near Oyu Tolgoi (Mongolia), operator Ivanhoe Mines announced discovery of the Heruga porphyry copper-gold deposit. Drill intersections included 454 metres at 0.50 per cent copper, 1.43 grams per tonne of gold, and 0.02 per cent molybdenum.
Near the Eagle deposit (US), drilling by the evaluation team intersected high grade nickel-copper sulphide mineralisation at three satellite prospects. Delineation drilling is planned for 2008.
At Energy Resources of Australia, the exploration and evaluation programme focused on infill drilling to support the previously announced mine extension, as well as the prefeasibility study into a further mine expansion. In 2008, attention will return to defining the Ranger 3 Deeps deposit.
2007 compared with 2006
“Exploration” expenditures reported by Rio Tinto include exploration and evaluation spends in both the greenfield and brownfield environments. Expenditure on brownfield projects reported separately in thisAnnual reportby each of the Rio Tinto product groups is included in this summary.
Net cash expenditure on exploration in 2007 was US$576 million, an increase of US$231 million over 2006. This primarily reflects the large number of high quality projects in the exploration and evaluation pipeline, net of US$197 million cash proceeds from the sale of the Peñasquito royalty, shares in Anatolia Minerals, the Southdown iron ore deposit and various other interests during 2007. The pre-tax charge to underlying earnings of US$321 million is net of US$253 million of total proceeds from the divestments mentioned above.
2006 compared with 2005
Net cash expenditure on exploration in 2006 was US$345 million, a US$81 million increase over 2005, reflecting an increase in the number of high quality projects in the exploration and evaluation pipeline, net of US$23 million cash proceeds from the sale of various interests, including Ashton Canada shares. The pre tax charge to underlying earnings in 2006 was US$237 million net of US$46 million of total proceeds from divestments.
Discoveries(Projects transferred to product group evaluation teams) | ||
Year | Tier 1 discoveries | Tier 2 discoveries |
2000 | Potasio Rio Colorado (potash) | Kazan (trona) |
2001 | — | — |
2002 | Resolution (copper) | — |
2003 | — | Sari Gunay (gold) |
2004 | Simandou (iron ore) | Eagle (nickel) |
2005 | La Granja (copper) | Rio Grande (borates) |
Caliwingina (iron ore) | four Pilbara deposits (iron ore) | |
2006 | — | — |
2007 | Caliwingina North (iron ore) | Chapudi (coal) |
Kintyre (uranium) | ||
Notes | |
Tier 1discoveries: Large, high quality deposits — the 20 per cent of deposits contributing 80 per cent of global production. | |
Tier 2 discoveries: Smaller or lower quality deposits — the 80 per cent of deposits contributing 20 per cent of global production. |
Rio Tinto 2007 Form 20-F | 96 |
The Technology and Innovation group (T&I) had its origin in the combination of the Operational and Technical Excellence (OTX) organisation and the Group’sImproving performance togetherbusiness improvement work in the areas of mining, processing, asset management and strategic production planning.
T&I’s focus is to be a partner in value delivery with Rio Tinto businesses by:
• | supporting implementation of leading practice and high value projects; |
• | developing and implementing strategic innovation technologies; and |
• | evaluating the technical risk of major capital and growth projects. |
The group comprises a core team of technology professionals and a number of technology centres that develop leading practice and drive sustainable improvement in the areas of health, safety and environment (HSE), mining, processing, asset management, strategic production planning, and project development and evaluation. Key elements are common and visible measures of operational effectiveness, the improvement of analytical tools and enhanced functional development of staff capability.
A further centre focuses on step change innovation to confer competitive advantage in development of orebodies likely to be available to Rio Tinto in the future.
The total staff in T&I at year end was 387, compared with 368 at year end 2006. The increase was due to the higher level of growth activity characterising the resource sector.
Health, Safety and Environment
The HSE Centre ensures that strategies and standards are in place to minimise HSE risk and drive performance. Activities support their implementation in the businesses and report results and performance trends to the board.
Specific activities during 2007 included embedding the environmental standards and metrics within business units, to complement the health and safety standards. The safety strategy was reviewed to concentrate on safety leadership, culture and measurement, and recognition of performance. This places Rio Tinto as an industry leader in terms of performance in these areas. Implementing the product stewardship strategy via business systems has benefited market access and competitive advantage. Continued development of the HSEQ management systems and the integration of the Alcan business were also priorities for HSE.
Innovation
The Innovation Centre is designed to drive step change innovation for Rio Tinto in the five to ten year time frame. The relevant technologies are in mining, processing and energy.
The activities in 2007 continued to focus on the block cave mining method of particular relevance to the large copper orebodies currently under development, remote monitoring in underground mining, in pit material sizing and conveying, data fusion in surface mining, process advances in ore sorting and comminution and modelling of heap leaching processes to enhance metal extraction.
A significant commitment by Rio Tinto to automation has culminated in a strategic partnership with the Australian Centre for Field Robotics (ACFR) at the University of Sydney. This exclusive partnership leverages an early mover advantage with Komatsu on driverless haul trucks and is a natural extension of other activity which is expected to see the first fully integrated, autonomous mine in operation in the Pilbara in 2010.
Mining
The Mining Technology Centre addresses the core mine production processes. Specific activities in this area during 2007 focused on continuing to establish and disseminate leading practice in orebody knowledge, payload management in surface mining and reconciliation processes across the operations. Attention was also given to further improving Rio Tinto’s technical capability in rapid underground development and block cave design.
Processing
The Processing Technology Centre focuses on core metallurgical capability and delivery of processing operations. Specific activities in this area during 2007 focused on the implementation of a structured methodology designed to identify specific points of loss (throughput, recovery, and grade), understanding underlying causes behind the losses, and the development of projects to reduce or eliminate those losses across the Group’s processing operations. A key enabling activity around the use of Processing Global Metrics for fixed plants was introduced.
Asset Management
The Asset Management Centre focuses on the effective choice and deployment of the Group’s asset base in mining and processing. Activities in 2007 focused on the continued reliability and performance of physical assets across the Group, including the implementation of standards and internal “league tables” for maintenance of heavy mobile equipment
Rio Tinto 2007 Form 20-F | 97 |
such as trucks and shovels. This led to continued significant improvement in areas such as tyre life (a further five per cent added to the success of previous years), truck utilisation and economic extension of engine and component life. The centre also extended the range of its influence in 2007 to the reliability and performance of fixed plant assets across the Group.
Strategic Production Planning
The Strategic Production Planning Centre focuses mainly on a Group wide methodology to ensure orebodies are developed in the optimum sequence for the generation of maximum value. Specific attention is directed to the enhancement of the functional skill of planning staff and to regular review of the life of mine plans for all the Group’s mining operations.
Project Development and Evaluation
The Project Development and Evaluation Centre is the proponent of standards and guidelines for all aspects of capital projects, from pre-feasibility through to execution and commissioning. This covers major projects as well as minor projects implemented within business units. It holds a body of expertise to ensure the lessons from previous project developments are a resource to the project directors for the next generation of development.
Evaluation staff are deliberately excluded from involvement in the formulation of major investment proposals, and the Evaluation team provides independent review and advice on the adequacy of risk identification and mitigation at key points in the approvals process. The team is also responsible for overseeing reserve estimation corporate governance within the Group.
Energy and climate change
The Group Chief Scientist monitors emerging global technology trends and identifies opportunities which could significantly enhance the Group’s operations. Particular attention is given towards technologies with the potential for step change reductions in the Group’s energy and greenhouse gas footprint. The Group Chief Scientist also assists product groups in positioning new and existing operations for reduced energy consumption, greenhouse gas emissions and energy costs.
Production Technology Services
Production Technology Services is the core team of technology professionals deployed across five global offices who provide the breadth of experience and multi disciplinary approach to support existing business activity and pursuit of new, profitable growth. They are deployed at the request of business units and the technology centres within T&I. Their offices are in Melbourne, Brisbane, Perth, Salt Lake City and Montreal. In addition, some staff reside in London to be readily accessible to the UK headquarters.
2007 compared with 2006
The charge against net earnings for the T&I group was US$78 million, compared with US$50 million in 2006. The increase was due to the higher level of activity, reflected also by higher staff numbers, and the continued development and deployment of leading operational practice across the Group.
2006 compared with 2005
The charge against net earnings for the group was US$50 million, compared with US$41 million in 2005. The increase was due to the greater level of activity, reflected also in the addition of staff.
Rio Tinto 2007 Form 20-F | 98 |
Financial review
Cash flow
2007 compared with 2006
Cash flow from operations, including dividends from equity accounted units, was a record US$12,569 million, 15 per cent higher than in 2006 due to the effect of higher earnings and favourable working capital movements.
Tax paid for 2007 increased to US$3,421 million, US$622 million higher than for 2006 largely due to the delayed tax effect of the increased earnings in 2006 compared to 2005 and tax paid by Alcan. Net interest paid of US$489 million for 2007 was US$361million higher than 2006, arising mostly from Alcan acquisition debt arrangement costs and interest paid on the Alcan debt.
The Group invested at record levels, in particular in expansion projects. Expenditure on property, plant and equipment and intangible assets was US$4,968 million in 2007, an increase of US$980 million over 2006. This included the completion of the second phase of the Dampier port and Yandicoogina iron ore mine expansions, as well as construction of the Hope Downs iron ore mine in Western Australia, the expansion of the Yarwun alumina refinery, the A418 dike construction at the Diavik diamond mine and the Madagascar ilmenite mine. The Group’s ongoing and recently approved capital projects, which will impact future year’s cash flows are on pages 12 to 13.
The net cash cost of acquisitions in 2007 was US$37,526 million, which was net of US$13 million related to disposals. Almost all of the acquisition cost related to Alcan. The acquisition was financed by US$38 billion of syndicated bank loans. Acquisitions less disposals were US$279 million in 2006 mainly relating to the acquisition of an initial stake in Ivanhoe Mines.
Dividends paid in 2007 of US$1,507 million were US$1,066 million lower than dividends paid in 2006 which included a special dividend of US$1.5 billion. The share buy back programme was discontinued after the announcement of the Alcan acquisition on 12 July 2007: returns to shareholders from the on-market buy back of Rio Tinto plc shares in 2007 totalled US$1,611 million (net of US$13 million proceeds from the exercise of options), compared with US$2,339 million in 2006.
2006 compared with 2005
Cash flow from operations, including dividends from equity accounted units, was US$10,923 million, 36 per cent higher than in 2005. The increase was mainly due to increased profits. There was a cash outflow on working capital in both years reflecting higher receivables across all product groups due to higher metal prices and sales volumes. The cash outflow on inventory was US$454 million in 2006 compared to US$249 million in 2005, partly due to increased operating activity and production costs.
Expenditure on property, plant and equipment and intangible assets was US$3,988 million in 2006, an increase of US$1,434 million over 2005. This included the second phase of the Dampier port and Yandicoogina iron ore mine expansions, as well as construction of the Hope Downs iron ore mine in Western Australia, the A418 dike construction at the Diavik diamond mine, the Madagascar ilmenite mine and the capacity increases at Rio Tinto Energy America.
Tax paid in 2006 increased to US$2,799 million, US$1,782 million higher than in 2005. The increase reflected higher profits including the lag effect of tax payments on higher profits from 2005.
Acquisitions less disposals were US$279 million in 2006 mainly relating to the acquisition of an initial stake in Ivanhoe Mines. In 2005, there were net proceeds of disposal arising mainly from the sale of the Group’s interest in Lihir.
Dividends paid in 2006 of US$2,573 million were US$1,432 million higher than dividends paid in 2005. These included the special dividend totalling US$1.5 billion which was paid to shareholders in April 2006. Capital management activity also included the on market buyback of Rio Tinto plc shares in 2006, comprising US$2,299 million from the 2006–2007 programme and US$95 million in January from the 2005–2006 programme (before deducting US$24 million proceeds from the exercise of options). In 2005 an off market buyback of Rio Tinto Limited shares returned US$774 million to shareholders and an on market buyback of Rio Tinto plc shares returned US$103 million.
Balance sheet
Rio Tinto commissioned expert valuation consultants to advise on the fair values of Alcan’s assets. As required under International Financial Reporting Standards (IFRS), the tangible and intangible assets of the acquired business have been uplifted to fair value. The residue of the purchase price not allocated to specific assets and liabilities has been attributed to goodwill. The provisional values incorporated in the2007 Financial statementswill be subject to revision within 12 months of the date of acquisition as permitted by the relevant accounting standard, IFRS 3. Details of the Alcan assets acquired are included in note 41 to the2007 Financial statements.
The completion of the Alcan acquisition was financed under a US$40 billion syndicated bank loan at floating interest rates of which US$38 billion was drawn down. This, together with the debt held by Alcan on acquisition, resulted in an increase in net debt of US$42.8 billion to US$45.2 billion at 31 December 2007 of which US$8.1 billion is classified as short term borrowings. The US$40 billion loan is split into four facilities with final maturities ranging up to five years. Facilities A and B of this acquisition related debt are subject to mandatory prepayment to the extent of the net proceeds from disposals of assets and from the raising of funds through capital markets, under specific thresholds
Rio Tinto 2007 Form 20-F | 99 |
and conditions. Debt to total capital rose to 63 per cent and interest cover was 20 times. In addition, the Group’s share of the third party net debt of equity accounted units totalled US$0.7 billion at 31 December 2007. US$0.3 billion of this debt is with recourse to the Rio Tinto Group.
Goodwill arising from the Alcan acquisition relating to subsidiaries was US$14.5 billion and that relating to equity accounted units was US$2.8 billion. The future economic benefits represented by the goodwill include those associated with synergies, future development and expansion projects and the assembled workforce. The Group has decided to dispose of Alcan Packaging, which is presented in the balance sheet in the lines: ‘Assets held for sale’ and ‘Liabilities of disposal groups held for sale’.
Net assets attributable to Rio Tinto shareholders increased by US$6.5 billion. The increase reflected profit after tax attributable to Rio Tinto shareholders of US$7.3 billion less returns to shareholders of US$2.8 billion comprising US$1.5 billion of dividends and US$1.3 billion of share buybacks. In addition, there was a positive currency translation effect of US$1.9 billion as the Australian dollar, the Canadian dollar and the Euro all strengthened against the US dollar.
Financial risk management
The Group’s policies with regard to financial risk management are clearly defined and consistently applied. They are a fundamental part of the Group’s long term strategy covering areas such as foreign exchange risk, interest rate risk, commodity price risk, credit risk and liquidity risk and capital management. From 1 January 2008, Rio Tinto Alcan has adopted the Rio Tinto Group policy on trading and hedging. The acquisition of Alcan impacted the Group’s market risk exposures, in particular, increasing the Group’s exposure to changes in interest rates and the aluminium price.
The Group’s business is finding, mining and processing mineral resources, and not trading. Generally, the Group only sells commodities it has produced but may purchase commodities to satisfy customer contracts from time to time and to balance the loading on production facilities. In the long term, natural hedges operate in a number of ways to help protect and stabilise earnings and cash flow.
The Group has a diverse portfolio of commodities and markets, which have varying responses to the economic cycle. The relationship between commodity prices and the currencies of most of the countries in which the Group operates provides further natural protection in the long term. In addition, the Group’s policy of borrowing at floating US dollar interest rates helps to counteract the effect of economic and commodity price cycles. These natural hedges significantly reduce the necessity for using derivatives or other forms of synthetic hedging. Such hedging is therefore undertaken to a strictly limited degree, as described in the sections on currency, interest rate, commodity price exposure and treasury management below.
The Group’s2007 Financial statementsand disclosures show the full extent of its financial commitments including debt.
The risk factors to which the Group is subject that are thought to be of particular importance are summarised on pages 5 to 7.
The effectiveness of internal control procedures continues to be a high priority in the Rio Tinto Group. The Boards’ statement on internal control is included under Corporate governance on page 150.
Liquidity and capital resources
The Group’s total capital is defined as Rio Tinto’s shareholders’ funds plus amounts attributable to outside equity shareholders plus net debt. The Group’s over-riding objectives when managing capital are to safeguard the business as a going concern; to maximise returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure in order to reduce the cost of capital.
The unified credit status of the Group is maintained through cross guarantees whereby contractual obligations of Rio Tinto plc and Rio Tinto Limited are automatically guaranteed by the other. Rio Tinto plc and Rio Tinto Limited continue to maintain solid investment grade credit ratings from Moody’s and Standard and Poor’s, despite the credit rating downgrade announced on completion of the Alcan acquisition. These ratings continue to provide access to global debt capital markets in significant depth. Credit ratings are not a recommendation to purchase, hold or sell securities, and are subject to revision or withdrawal at any time by the ratings organisation.
Rio Tinto does not have a target debt/equity ratio, but has a policy of maintaining a flexible financing structure so as to be able to take advantage of new investment opportunities that may arise. Following the acquisition of Alcan, the Group has publicly stated an objective to reduce its debt to equity ratio from current levels through a targeted asset divestment programme and through operating cash flows to a level consistent with a ‘single-A’ credit rating. This policy is balanced against the desire to ensure efficiency in the debt/equity structure of the Rio Tinto balance sheet in the longer term through pro-active capital management programmes.
On 12 February 2008 the Group announced the sale of its interest in the Greens Creek mine for US$750 million. On 5 March 2008 the Group completed the sale of its interest in the Cortez joint venture to its partner for a cash consideration of US$1,695 million plus deferred and contingent consideration.
The Group maintains backup liquidity for its commercial paper programme and other debt maturing within 12 months by way of bank standby credit facilities, which totalled US$3.7 billion (undrawn) at 31 December 2007. The Group’s committed bank standby facilities contain no financial undertakings relating to interest cover and are not
Rio Tinto 2007Form 20-F | 100 |
affected to any material extent (other than an increase in interest margin) by a reduction in the Group’s credit rating. The main covenant in the Rio Tinto group relates to a financial covenant over Corporate debt drawn under the Syndicated Acquisition Facility, for which a compliance certificate must be produced attesting a certain ratio of Net Borrowings to EBITDA. There are no covenants relating to corporate debt which are under negotiation at present. The Group’s policy is to centralise debt and surplus cash balances wherever possible.
As at 31 December 2007, the Group had contractual cash obligations arising in the ordinary course of business as follows:
Contractual cash obligations | ||||||||||
Less than 1 | Between 1 | Between 3 | After 5 | |||||||
Total | year | and 3 years | and 5 years | years | ||||||
US$ m | US$ m | US$ m | US$ m | US$ m | ||||||
Expenditure commitments in relation to: | ||||||||||
Operating leases | 1,782 | 283 | 517 | 468 | 514 | |||||
Other (mainly capital commitments) | 3,978 | 3,113 | 801 | 64 | — | |||||
Long term debt and other financial obligations | ||||||||||
Debt (a) | 47,019 | 8,263 | 21,069 | 13,335 | 4,352 | |||||
Interest payments (b) | 9,238 | 2,310 | 3,184 | 1,660 | 2,084 | |||||
Unconditional purchase obligations (c) | 7,271 | 1,525 | 1,571 | 1,079 | 3,096 | |||||
Other (mainly trade creditors) | 7,295 | 6,144 | 639 | 363 | 149 | |||||
Total | 76,583 | 21,638 | 27,781 | 16,969 | 10,195 | |||||
Notes | |
(a) | Debt obligations include bank borrowings repayable on demand. |
(b) | Interest payments have been projected using the interest rate applicable at 31 December, 2007, including the impact of interest rate swap agreements where appropriate. Much of the debt is subject to variable interest rates. Future interest payments are subject, therefore, to change in line with market rates. |
(c) | Unconditional purchase obligations relate to commitments to make payments in the future for fixed or minimum quantities of goods or services at fixed or minimum prices. The future payment commitments have not been discounted and mainly relate to commitments under ‘take or pay’ power and freight contracts. They exclude unconditional purchase obligations of jointly controlled entities apart from those relating to the Group’s tolling arrangements. |
Information regarding the Group’s pension commitments and funding arrangements is provided in the Post retirement benefits section of this Financial review and in note 49 to the 2007Fnancial statements. The level of contributions to funded pension plans is determined according to the relevant legislation in each jurisdiction in which the Group operates. In some countries there are statutory minimum funding requirements while in others the Group has developed its own policies, sometimes in agreement with the local trustee bodies. The size and timing of contributions will usually depend upon the performance of investment markets. Depending on the country and plan in question the funding level will be monitored quarterly, bi-annually or annually and the contribution amount amended appropriately. Consequently it is not possible to predict with any certainty the amounts that might become payable in 2009 onwards. The impact on cash flow in 2007 of the Group’s pension plans, being the employer contributions to defined benefit and defined contribution pension plans, was US$246 million. In addition there were contributions of US$30 million in respect of unfunded healthcare schemes. Contributions to pension plans for 2008 are estimated to be around US$220 million higher than for 2007. This is predominantly due to the inclusion of the Alcan plans for the full year, although it is also partly due to changes in funding rules in the US. Healthcare plans are unfunded and contributions for future years will be equal to benefit payments and therefore cannot be predetermined.
Information regarding the Group’s close down and restoration obligations is provided in the relevant section of this review and in note 27 to the2007 Financial statements. Close down and restoration costs are a normal consequence of mining, and the majority of close down and restoration expenditure is incurred at the end of the relevant operation. Generally, the Group’s close down and restoration obligations to remediate in the long term are not fixed as to amount and timing and are not therefore included in the above table.
On the basis of the levels of obligations described above, the unused capacity under the Group’s commercial paper and European Medium Term Notes programmes, the Group’s anticipated ability to access debt and equity capital markets in the future and the level of anticipated free cash flow, the Group believes that it has sufficient short and long term sources of funding available to meet its working capital requirements.
Dividends and capital management
Rio Tinto’s progressive dividend policy aims to increase the US dollar value of dividends over time, without cutting them in economic downturns.
Dividends paid on Rio Tinto plc and Rio Tinto Limited shares are equalised on a net cash basis; that is without taking into account any associated tax credits. Dividends are determined in US dollars. Rio Tinto plc dividends are declared and paid in pounds sterling and Rio Tinto Limited dividends are declared and paid in Australian dollars, converted at exchange rates applicable to the US dollar two days prior to the announcement of dividends. Holders of American Depositary Receipts (ADRs) receive a US dollar dividend at the rate declared. Changes in exchange rates
Rio Tinto 2007Form 20-F | 101 |
could result in a reduced sterling or Australian dollar dividend in a year in which the US dollar value is maintained or increased. The interim dividend for each year in US dollar terms will be equivalent to 50 per cent of the total US dollar dividends declared in respect of the previous year.
The Group announced a re-basing of its ordinary dividend in February 2007, increasing the full year ordinary dividend in respect of 2006 by 30 per cent to 104 US cents. The 2007 full year ordinary dividend represents a 31 per cent increase on 2006. In addition, the Group has announced an intention to increase its annual dividend by at least 20 per cent in each of 2008 and 2009.
Final 2007 dividends to Rio Tinto Limited shareholders will be fully franked. The board expects Rio Tinto Limited to be in a position to pay fully franked dividends for the reasonably foreseeable future.
On 2 February 2006 the Group announced a US$4 billion capital management programme which was subsequently increased to US$7 billion in October 2006. The capital return was comprised of a US$1.5 billion special dividend (US$1.10 per share) paid in April 2006 which was paid concurrently with the 2005 final ordinary dividend, but did not form part of the Group’s progressive ordinary dividend policy, and an initial US$2.5 billion share buyback programme (increased to US$5.5 billion) to be completed over the remaining period to the end of 2007. The programme was suspended on 12 July 2007 at the time the Alcan offer was announced, by which time US$3.9 billion had been completed under the US$7 billion capital management programme, bringing the total cash returned to shareholders under announced capital management programmes since 2005 to US$6.4 billion.
Treasury management and financial instruments
Treasury operates as a service to the business of the Rio Tinto Group and not as a profit centre. Strict limits on the size and type of transaction permitted are laid down by the Rio Tinto board and are subject to rigorous internal controls.
Rio Tinto does not acquire or issue derivative financial instruments for trading or speculative purposes; nor does it believe that it has exposure to such trading or speculative holdings through its investments in joint ventures and associates. Derivatives are used to separate funding and cash management decisions from currency exposure and interest rate management. The Group uses interest rate and cross currency interest rate swaps in conjunction with longer term funds raised in the capital markets to achieve a predominantly floating rate obligation which is consistent with the Group’s interest and exchange rate policies, primarily US dollar LIBOR. No material exposure is considered to exist by virtue of the possible non performance of the counterparties to financial instruments held by the Group.
Derivative contracts are carried at fair value based on published price quotations for the period for which a liquid active market exists. Beyond this period, Rio Tinto’s own assumptions are used.
Off balance sheet arrangements
In the ordinary course of business, to manage the Group’s operations and financing, Rio Tinto enters into certain performance guarantees and commitments for capital and other expenditure.
The aggregate amount of indemnities and other performance guarantees, on which no material loss is expected, including those related to joint ventures and associates, was US$739 million at 31 December 2007.
Other commitments include capital expenditure, operating leases and unconditional purchase obligations as set out in the table of contractual cash obligations, included in the liquidity and capital resources section above.
Exchange rates, reporting currencies and currency exposure
Rio Tinto’s shareholders’ equity, earnings and cash flows are influenced by a wide variety of currencies due to the geographic diversity of the Group’s sales and the countries in which it operates. The US dollar, however, is the currency in which the great majority of the Group’s sales are denominated. Operating costs are influenced by the currencies of those countries where the Group’s mines and processing plants are located and also by those currencies in which the costs of imported equipment and services are determined. The Australian and Canadian dollars and the Euro are the most important currencies (apart from the US dollar) influencing costs. In any particular year, currency fluctuations may have a significant impact on Rio Tinto’s financial results. A weakening of the US dollar against the currencies in which the Group’s costs are determined has an adverse effect on Rio Tinto’s underlying earnings.
The following sensitivities give the estimated effect on underlying earnings assuming that each exchange rate moved in isolation. The relationship between currencies and commodity prices is a complex one and movements in exchange rates can cause movements in commodity prices and vice versa. Where the functional currency of an operation is that of a country for which production of commodities is an important feature of the economy, such as the Australian dollar, there is a certain degree of natural protection against cyclical fluctuations in the long term, in that the currency tends to be weak, reducing costs in US dollar terms, when commodity prices are low, and vice versa.
The exchange rate sensitivities quoted below include the effect on operating costs of movements in exchange rates but exclude the effect of the revaluation of foreign currency financial assets and liabilities. They should therefore be used with care.
Rio Tinto 2007Form 20-F | 102 |
Effect on net and | ||||
underlying earnings | ||||
Average | of 10% change in | |||
exchange rate | full year average | |||
for 2007 | +/- US$m | |||
Australian dollar (a) | 84 US cents | 494 | ||
Canadian dollar (a) | 93 US cents | 203 | ||
Euro | 137 US cents | 65 | ||
Chilean peso | $1 = 523 pesos | 12 | ||
New Zealand dollar | 73 US cents | 17 | ||
South African rand | 14 US cents | 55 | ||
UK sterling | 200 US cents | 24 | ||
(a) | The sensitivities in the 2007 column are based on 2007 prices, costs and volumes and assume that all other variables remain constant, except that a full years’ volumes are included for Alcan where indicated. |
Given the dominant role of the US currency in the Group’s affairs, the US dollar is the currency in which financial results are presented both internally and externally. It is also the most appropriate currency for borrowing and holding surplus cash, although a portion of surplus cash may also be held in other currencies, most notably Australian dollars, Canadian dollars and the Euro. This cash is held in order to meet short term operational and capital commitments and, for the Australian dollar, dividend payments. The Group finances its operations primarily in US dollars, either directly or using cross currency interest rate swaps. A substantial part of the Group’s US dollar debt is located in subsidiaries having a US functional currency.
However, certain US dollar debt and other financial assets and liabilities including intragroup balances are not held in the functional currency of the relevant subsidiary. This results in an accounting exposure to exchange gains and losses as the financial assets and liabilities are translated into the functional currency of the subsidiary that accounts for those assets and liabilities. These exchange gains and losses are recorded in the Group’s income statement except to the extent that they can be taken to equity under the Group’s accounting policy which is explained in note 1 of the2007 Financial statements. Gains and losses on US dollar net debt and on intragroup balances are excluded from underlying earnings. Other exchange gains and losses are included in underlying earnings.
The Group does not generally believe that active currency hedging of transactions would provide long term benefits to shareholders. Currency protection measures may be deemed appropriate in specific commercial circumstances and are subject to strict limits laid down by the Rio Tinto board, typically hedging of capital expenditure and other significant financial items such as tax and dividends. There is a legacy of currency forward contracts used to hedge operating cash flow exposures which were acquired with Alcan and the North companies. Details of currency derivatives held at 31 December 2007 are set out in note 34 to the2007 Financial statements.
The sensitivities below give the estimated effect on underlying earnings, net earnings and equity of a ten per cent change in the full year closing US dollar exchange rate, assuming that each exchange rate moved in isolation. The sensitivities are based on financial assets and liabilities held at 31 December 2007, where balances are not denominated in the functional currency of the subsidiary. A strengthening of the US dollar would result in exchange gains based on financial assets and financial liabilities held at 31 December 2007. These balances will not remain constant throughout 2008, however, and therefore these numbers should be used with care.
Effect on | Of which | Effect of | ||||||
net | amount | items | ||||||
earnings of | impacting | impacting | ||||||
Closing | 10% | underlying | directly on | |||||
exchange rate | change | earnings | equity | |||||
US cents | US$m | US$m | US$m | |||||
Functional currency of business unit: | ||||||||
Australian dollar | 88 | 204 | 99 | (20 | ) | |||
Canadian dollar | 101 | (3 | ) | 53 | — | |||
South African rand | 15 | 14 | 12 | (4 | ) | |||
Euro | 147 | 33 | 14 | 149 | ||||
New Zealand dollar | 78 | (9 | ) | 3 | — | |||
(a) | The sensitivities show the net sensitivity of US dollar exposures in Australian dollar functional currency companies, for example, and Australian dollar exposures in US dollar functional currency companies. |
(b) | The sensitivities indicate the effect of a ten per cent strengthening of the US dollar against each currency. |
The Group has changed its disclosure of market risk sensitive instruments from a tabular basis to a sensitivity analysis basis for consistency with the requirements of IFRS 7, the international accounting standard on financial instrument disclosure which the Group has adopted in its financial statements this year.
Sensitivities as at 31 December 2006 were as shown below.
Rio Tinto 2007 Form 20-F | 103 |
Of which | ||||||||
amount | Effect of items | |||||||
Effect on net | impacting | impacting | ||||||
Closing | earnings of 10% | underlying | directly on | |||||
exchange rate | change | earnings | equity | |||||
US cents | US$m | US$m | US$m | |||||
Functional currency of business unit: | ||||||||
Australian dollar | 79 | 37 | 56 | (30 | ) | |||
Canadian dollar | 86 | (29 | ) | 12 | - | |||
South African rand | 14 | (6 | ) | 5 | - | |||
New Zealand dollar | 71 | (15 | ) | 3 | - | |||
In addition, some US dollar functional currency companies are exposed to exchange movements on local currency deferred tax balances. The only material exposure is to the Canadian dollar and a ten per cent strengthening of the US dollar would reduce underlying earnings based on 2007 balances by US$96 million. This would offset the US$53 million gain shown above. There was no similar exposure at 31 December 2006.
The functional currency of many operations within the Rio Tinto Group is the local currency in the country of operation. Alcan’s aluminium and alumina producing operations use a US dollar functional currency including those in Canada and Australia. Foreign currency gains or losses arising on translation to US dollars of the net assets of non US functional currency operations are taken to equity and, with effect from 1 January 2004, recorded in a currency translation reserve. A weakening of the US dollar would have a positive effect on equity. The approximate translation effects on the Group’s net assets of ten per cent movements from the year end exchange rates are as follows:
2007 | ||||
Effect on net assets | ||||
Closing | of 10% change in | |||
exchange rate | closing rate | |||
US cents | +/- US$m | |||
Australian dollar | 88 | 1,583 | ||
Euro | 147 | 568 | ||
Canadian dollar | 101 | 255 | ||
These net assets will not remain constant, however, and therefore these numbers should be used with care.
Interest rates
Rio Tinto’s interest rate management policy is generally to borrow and invest at floating interest rates. This approach is based on the historical correlation between interest rates and commodity prices. In some circumstances, an element of fixed rate funding may be considered appropriate. Rio Tinto hedges interest rate and currency risk on most of its foreign currency borrowings by entering into cross currency interest rate swaps in order to convert fixed rate foreign currency borrowings to floating rate US dollar borrowings. At the end of 2007, US$4.9 billion (2006: US$1.2 billion) of the Group’s debt was at fixed rates after taking into account interest rate swaps and finance leases. Based on the Group’s net debt at 31 December 2007, the effect on the Group’s net earnings of a half percentage point increase in US dollar LIBOR interest rates with all other variables held constant, would be a reduction of US$158 million (2006: US$3 million). These balances will not remain constant throughout 2008, however, and therefore these numbers should be used with care.
Commodity prices
The Group’s normal policy is to sell its products at prevailing market prices. Exceptions to this rule are subject to strict limits laid down by the Rio Tinto Board and to rigid internal controls. Rio Tinto’s exposure to commodity prices is diversified by virtue of its broad commodity spread and the Group does not generally believe commodity price hedging would provide long term benefit to shareholders. The Group may hedge certain commitments with some of its customers or suppliers. Details of commodity derivatives held at 31 December 2007 are set out in note 34 to the2007 Financial statements. The forward contracts to sell copper were entered into as a condition of the refinancing of Palabora in 2005. The aluminium forward contracts and embedded derivatives were acquired with Alcan.
Metals such as copper and aluminium are generally sold under contract, often long term, at prices determined by reference to prevailing market prices on terminal markets, such as the London Metal Exchange and COMEX in New York, usually at the time of delivery. Prices fluctuate widely in response to changing levels of supply and demand but, in the long run, prices are related to the marginal cost of supply. Gold is also priced in an active market in which prices respond to daily changes in quantities offered and sought. Newly mined gold is only one source of supply; investment and disinvestment can be important elements of supply and demand. Contract prices for many other natural resource products including iron ore and coal are generally agreed annually or for longer periods with customers, although volume commitments vary by product.
Certain products, predominantly copper concentrate, are ‘provisionally priced’, ie the selling price is subject to final adjustment at the end of a period normally ranging from 30 to 180 days after delivery to the customer, based on the market price at the relevant quotation point stipulated in the contract. Revenue on provisionally priced sales is
Rio Tinto 2007 Form 20-F | 104 |
recognised based on estimates of fair value of the consideration receivable based on forward market prices. At each reporting date provisionally priced metal is marked to market based on the forward selling price for the period stipulated in the contract. For this purpose, the selling price can be measured reliably for those products, such as copper, for which there exists an active and freely traded commodity market such as the London Metal Exchange and the value of product sold by the Group is directly linked to the form in which it is traded on that market. At the end of 2007 the Group had 270 million pounds of copper sales (2006: 324 million pounds) that were provisionally priced at 304 US cents per pound (2006: 287 US cents per pound). The final price of these sales will be determined in 2008. The impact on earnings of a ten per cent change in the price of copper for the provisionally priced sales would be US$58 million (2006: US$66 million).
Approximately 53 per cent of Rio Tinto’s 2007 net earnings from operating businesses came from products whose prices were terminal market related and the remainder came from products priced by direct negotiation.
The Group continued to achieve high prices for its products in 2007, and its assessment of the economic and demand outlook remains very positive, despite recent unsettled conditions in the financial markets. The strong increases seen in global minerals demand are driven by demographic and economic fundamentals in fast growing countries like China and India, whose large populations continue to urbanise. These long term trends are driven by domestic developments in those countries, and are therefore insulated to a significant extent from any potential near term weakness in western economies.
The approximate effect on the Group’s underlying and net earnings of a ten per cent change from the full year average market price in 2007 for the following products would be:
Effect on underlying | ||||||
and net earnings of | ||||||
Average | US$ 10% change in | |||||
market price | full year average | |||||
Unit | for 2007 | +/- US$m | ||||
Copper | pound | 3.24 | 360 | |||
Aluminium (a) | pound | 1.20 | 678 | |||
Gold | ounce | 691 | 64 | |||
Molybdenum | pound | 30 | 69 | |||
Iron ore | dmtu | n/a | 457 | |||
(a) | The above sensitivities are based on 2007 volumes except that a full year impact from Alcan has been included where indicated. |
The sensitivities give the estimated impact on net earnings of changes in prices assuming that all other variables remain constant. These should be used with care. As noted previously, the relationship between currencies and commodity prices is a complex one and changes in exchange rates can influence commodity prices and vice versa.
The table below summarises the impact of changes in the market price on the following commodity derivatives including those aluminium and option contracts embedded in electricity purchase contracts outstanding at 31 December 2007. The impact is expressed in terms of the resulting change in the Group’s net earnings for the year or, where applicable, the change in equity. The sensitivities are based on the assumption that the market price increases by ten per cent with all other variables held constant. The Group’s ‘own use contracts’ are excluded from the sensitivity analysis below as they are outside the scope of IAS 39. Own use contracts are contracts to buy or sell non financial items that can be net settled but were entered into and continue to be held for the purpose of the receipt or delivery of the non financial item in accordance with the business unit’s expected purchase, sale or usage requirements.
These sensitivities should be used with care. The relationship between currencies and commodity prices is a complex one and changes in exchange rates can influence commodity prices and vice versa.
Effect of items | ||||
impacting directly | ||||
Effect on underlying | on Rio Tinto share | |||
and net earnings of | of equity of 10% | |||
10% increase from | increase from | |||
year end price | year end price | |||
US$m | US$m | |||
Copper | — | 40 | ||
Coal | — | 25 | ||
Aluminium | 41 | 50 | ||
41 | 115 | |||
Rio Tinto 2007 Form 20-F | 105 |
Sensitivities as at 31 December 2006 were as shown below:
Effect on underlying | Effect of items | |||
and net earnings of | impacting directly | |||
10% increase from | on Rio Tinto share | |||
year end price | of equity of 10% | |||
increase from | ||||
year end price | ||||
US$m | US$m | |||
Copper | — | 49 | ||
Coal | — | 20 | ||
— | 69 | |||
Sales revenue
The table below shows published ‘benchmark’ prices for Rio Tinto’s commodities for the last three years where these are publicly available, and where there is a reasonable degree of correlation between the benchmark and Rio Tinto’s realised prices. The prices set out in the table are the averages for each of the calendar years, 2005, approval2006 and 2007. The Group’s sales revenue will not necessarily move in line with these benchmarks for a number of reasons which are discussed below.
2007 | 2006 | 2005 | ||||||
Commodity | Source | Unit | US$ | US$ | US$ | |||
Aluminium | LME | pound | 1.20 | 1.16 | 0.86 | |||
Copper | LME | pound | 3.24 | 3.06 | 1.66 | |||
Gold | LBMA | ounce | 691 | 602 | 444 | |||
Iron ore | Australian benchmark (fines) (a) | dmtu (b) | 0.79 | 0.71 | 0.55 | |||
Molybdenum | Metals Week: quote for dealer oxide price | pound | 30 | 25 | 31 | |||
Notes | |
(a) | average for the calendar year |
(b) | dry metric tonne unit |
The discussion of revenues below relates to the Group’s gross revenue from sales of commodities, including its share of the revenue of equity accounted units, as included in the Financial Information by Business Unit in the2007 Financial statements.
The sales revenues of the Iron Ore group increased by 27 per cent in 2007 compared with 2006. There was granteda 9.5 per cent increase in the benchmark price, mainly effective from 1 April 2007 which resulted in an 11 per cent increase in the average Australian iron ore fines benchmark for the calendar year. Sales achieved the benchmark price throughout the year. The price outlook for the 2008 contract year remains very positive, with spot prices in China substantially above prevailing contract prices. In addition to extendhigher prices, sales revenues at Hamersley Iron were higher from record production following completion of the second phase of the Dampier port upgrade and the Tom Price brownfield and Yandicoogina JSE mine expansions.
At IOC, volumes were lower as a result of a seven week strike in the first and second quarters of the year and this was only partly mitigated by higher prices.
The Australian iron ore fines benchmark increased by 19 per cent in April 2006. This together with higher volumes at Hamersley contributed to an increase in the Group’s iron ore revenue of 26 per cent in 2006 against 2005.
A significant proportion of Rio Tinto’s coal production is sold under long term contracts. In Australia, the prices applying to sales under the long term contracts are generally renegotiated annually; but prices are fixed at different times of the year and on a variety of bases. For these reasons, average realised prices will not necessarily reflect the movements in any of the publicly quoted benchmarks. Moreover, there are significant product specification differences between mines. Sales volumes will vary during the year and the timing of shipments will also result in differences between average realised prices and benchmark prices.
Asian seaborne thermal coal prices continued to rise sharply throughout 2007 mainly due to supply disruptions from key producing countries. Issues relating to infrastructure controlled by external parties are likely to maintain market tightness for the foreseeable future. Published thermal coal benchmarks in Australia improved by 33 per cent in the calendar year whilst coking coal benchmarks decreased by 13 per cent.
Revenues of the Group’s Australian coal operations decreased by three per cent in 2007 with lower thermal coal sales largely attributable to infrastructure constraints and a severe weather event. In general, production at the Australian coal mines continued to be constrained by rail and port constraints in Queensland and New South Wales and reduced tonnage of rail and port allotments in Queensland, which curtailed mined production, despite the generally favourable market conditions.
Revenues of the Group’s Australian coal operations increased by two per cent in 2006. There was a sustained increase in the received price for thermal coal. This benefit was largely offset by lower coking coal sales because of market weakness and the delay in thermal coal shipments arising from congestion at Newcastle. Published market indications for Australian thermal coal showed a slight increase in thermal coal prices in 2006 and a seven per cent increase in the coking coal benchmark price.
Rio Tinto 2007 Form 20-F | 106 |
In the US, published market indications of spot prices for Wyoming Powder River Basin thermal coal 8800 BTU (0.80 sulphur) show a decrease of around 20 per cent for the average spot price in 2007 compared with 2006. However, Rio Tinto Energy America’s revenues increased by nine per cent in 2007 with improved realised prices. Rio Tinto Energy America has long term contracts and this increased revenue was primarily a result of the replacement of below market legacy contracts with new contracts at current market pricing in 2006 and earlier years. Revenues increased by 19 per cent in 2006 against 2005, with higher realised prices for Powder River Basin coal and increased volumes. Despite increased volatility in the spot market and a marginal decline in long term sales volumes the market sentiment for uranium remained positive through 2007. Supply from a number of producers fell short of expectations in 2007 while the outlook for demand increased as new-build programmes gathered pace, particularly in China. Higher utilisation rates were also experienced in the nuclear industry. These factors have contributed to tighter markets and an improvement in the longer term outlook for uranium demand.
Large swings in the spot price, driven by speculative behaviour by hedge funds and investors, created a degree of uncertainty in the uranium market. The resultant effect was a de-linking of the spot and long term prices and a reduction in contracting as fuel buyers monitored movements in the market. Despite this, long term prices grew strongly in the early part of the year and remained firm thereafter. Information included in the RWE NUKEM Inc. Price Bulletin indicated price increases of 99 per cent in 2007 and 71 per cent in 2006 for uranium oxide. The large increases reported in the Price Bulletin are not fully reflected in the revenues for the period because uranium oxide is typically sold on long term contracts with pricing determined for several years beyond the commencement of the contracts.
The Group’s uranium revenue increased by 69 per cent in 2007 and 27 per cent in 2006 as a result of higher prices with Rössing, in particular, benefiting from positive market conditions and improved pricing. Prices at ERA continued to benefit from the gradual replacement of legacy contracts with newer contracts written in an environment of higher prices.
The average aluminium price of 120 US cents per pound was three per cent above the 2006 average price. Global demand growth for 2007 is expected to exceed ten per cent. Rising LME inventories towards the end of 2007 and strong growth in global output pushed aluminium prices lower in the second half of the year. The Group anticipates strong demand and growing supply constraints in China.
The Aluminium group’s sales revenues are from aluminium and related products such as alumina and bauxite. Alcan’s sales revenue for the two months from acquisition, which includes revenue from Engineered Products, was US$3,798 million. Rio Tinto Aluminium’s sales revenue increased by one per cent in 2007 reflecting higher volume and price for bauxite and aluminium and lower volume and price for alumina. Revenue increased by 27 per cent in 2006. Average aluminium prices quoted on the LME increased by 35 per cent against 2005 but achieved spot alumina prices were lower than in 2005.
The Copper group also produces gold and molybdenum as significant co-products. The average copper price of 324 US cents per pound was six per cent above the 2006 average price. The gold price averaged US$691 per ounce, an increase of 15 per cent on the prior year, whilst the average molybdenum price was US$30 per pound, an increase of 20 per cent compared with 2006. Total Copper Group sales revenues in 2007 increased by 20 per cent over 2006. Copper revenues increased by 17 per cent reflecting higher volumes at KUC and Escondida as well as higher prices. Gold revenue increased by 69 per cent with higher volumes at Kennecott Minerals and the Grasberg joint venture. Molybdenum revenue was nine per cent higher than in 2006 with lower volumes as a result of lower ore grade and higher limestone levels in the orebody partly offsetting the improved prices.
The total Copper group sales revenues in 2006 increased by 46 per cent over 2005. Copper revenues increased by 77 per cent, broadly in line with the 84 per cent increase in the LME price. Lower grades and therefore volumes at Freeport more than offset the higher volumes at the other copper operations. A 22 per cent decrease in gold revenue was also attributable to lower grades at Freeport which outweighed the effect of the 36 per cent increase in the gold price. Molybdenum revenue was only six per cent down on 2005 with record production at KUC offsetting much of the effect of the 20 per cent fall in price.
Industrial Minerals sales are made under contract at negotiated prices. Revenue from industrial minerals increased by 11 per cent in 2007 and five per cent in 2006. This was mainly attributable to higher sales volumes of titanium dioxide chloride feedstock.
Diamonds prices realised by Rio Tinto depend on the size and quality of the diamonds in the product mix. Diamond sales revenue increased by 22 per cent in 2007 against 2006 with higher sales volumes and polished pink tender prices at Argyle, and higher volumes at Diavik. The tight supply outlook for rough diamonds is expected to support demand in 2008, especially for better quality rough diamonds produced by Diavik. The 22 per cent decrease in Diamond Group revenue in 2006 against 2005 was almost wholly attributable to the softer markets experienced by Argyle which resulted in surplus rough diamonds being held in inventory at the end of the year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Dual listed company reporting
As explained in detail in the Outline of dual listed companies’ structure and basis of financial statements in the2007 Financial statements, the consolidated financial statements of the Rio Tinto Group deal with the results, assets and liabilities of both of the dual listed companies, Rio Tinto plc and Rio Tinto Limited, and their subsidiaries. In other
Rio Tinto 2007 Form 20-F | 107 |
words, Rio Tinto plc and Rio Tinto Limited are viewed as a single parent company with their respective shareholders being the shareholders in that single company.
The US dollar is the presentation currency used in these financial statements, as it most reliably reflects the Group’s global business performance.
Ore reserve estimates
Rio Tinto estimates its ore reserves and mineral resources based on information compiled by Competent Persons as defined in accordance with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves of December 2004 (the JORC code). Where relevant, the IFRS financial statements are based on the reserves, and in some cases mineral resources, determined under the JORC code.
For the purposes of this combined Annual report on Form 20-F estimates of ore reserves have been computed in accordance with the SEC’s Industry Guide 7, rather than in accordance with the JORC code, and are shown on pages 32 to 42. Ore reserves presented in accordance with SEC Industry Guide 7 do not exceed the quantities that, it is estimated, could be extracted economically if future prices were to be in line with the average of historical prices for the three years to 30 June 2007, or contracted prices where applicable. For this purpose, contracted prices are applied only to future sales volumes for which the price is predetermined by an existing contract; and the average of historical prices is applied to expected sales volumes in excess of such amounts. Moreover, reported ore reserve estimates have not been increased above the levels expected to be economic based on Rio Tinto's own long term price assumptions. Therefore, a reduction in commodity prices from the three year average historical price levels would not necessarily give rise to a reduction in reported ore reserves.
There are numerous uncertainties inherent in estimating ore reserves and assumptions that are valid at the time of estimation may change significantly when new information becomes available.
Changes in the forecast prices of commodities, exchange rates, production costs or recovery rates may change the economic status of reserves and may, ultimately, result in the reserves being restated. Such changes in reserves could impact on depreciation and amortisation rates, asset carrying values, deferred stripping calculations and provisions for close down, restoration and environmental clean up costs.
Acquisition accounting
On the acquisition of a subsidiary, the purchase method of accounting is used whereby the purchase consideration is allocated to the identifiable assets, liabilities and contingent liabilities (identifiable net assets) on the basis of fair value at the date of acquisition.
Rio Tinto acquired Alcan Inc during the year. The Group commissioned valuation consultants to advise on the fair values and asset lives of Alcan’s assets. The residue of the purchase price not allocated to specific assets and liabilities has been attributed to goodwill. The provisional values and asset lives incorporated in the2007 Financial statementswill be subject to revision within 12 months of the date of acquisition as permitted by IFRS 3 ‘Business Combinations’.
Asset carrying values
Events or changes in circumstances can give rise to significant impairment charges or reversals of impairment provisions in a particular year. In 2007, the Group’s results included net impairment charges of US$58 million (US$113 million after tax and outside shareholders interests). An impairment charge was recognised at Argyle, which was partially offset by impairment reversals at Palabora and Tarong Coal. In 2006, the Group’s results included net impairment reversals of US$396 million (US$44 million after tax and outside shareholders interests). Impairments were reversed at KUC and IOC, which more than offset impairment charges at Argyle and Tarong Coal. There were no significant impairment charges or reversals in 2005.
When such events or changes in circumstances impact on a particular asset or cash generating unit, its carrying value is assessed by reference to its recoverable amount being the higher of fair value less costs to sell and value in use (being the net present value of expected future cash flows of the relevant cash generating unit). The best evidence of an asset’s fair value is its value obtained from an active market or binding sale agreement. Where neither exists, fair value less costs to sell is based on the best information available to reflect the amount the Group could receive for the cash generating unit in an arm’s length transaction. In most cases this is estimated using a discounted cash flow analysis. The cash flows used in these analyses are particularly sensitive to changes in two parameters: exchange rates and commodity selling prices. The great majority of the Group’s sales are based on prices denominated in US dollars. To the extent that the currencies of countries in which the Group produces commodities strengthen against the US dollar without commodity price offset, cash flows and, therefore, net present values are reduced. Management considers that over the long term, there is a tendency for movements in commodity prices to compensate to some extent for movements in the value of the US dollar (and vice versa). But such compensating changes are not synchronised and do not fully offset each other and over the last few years favourable changes in commodity prices have generally exceeded shifts in exchange rates. Comparing average exchange rates in 2007 against those in 2004, the Australian dollar strengthened by 14 per cent against the US dollar, the Canadian dollar strengthened by 21 percent and the South African rand weakened by eight per cent. In the same period, commodity prices rose substantially: for example, copper prices increased by 149 per cent, aluminium by 54 per cent and gold by 69 per cent.
Reviews of carrying values relate to cash generating units which, in accordance with IAS 36 “Impairment of
Rio Tinto 2007 Form 20-F | 108 |
Assets”, are identified by dividing an entity into as many largely independent cash generating streams as is reasonably practicable. In some cases the business units within the product groups consist of several operations with independent cash generating streams, which therefore constitute separate cash generating units.
The cash flow forecasts are based on best estimates of expected future revenues and costs. These may include net cash flows expected to be realised from extraction, processing and sale of mineralised material that does not currently qualify for inclusion in proved or probable ore reserves. Such non reserve material is included where there is a high degree of confidence in its economic extraction. This expectation is usually based on preliminary drilling and sampling of areas of mineralisation that are contiguous with existing reserves. Typically, the additional evaluation to achieve reserve status for such material has not yet been done because this would involve incurring costs earlier than is required for the efficient planning and operation of the mine.
The expected future cash flows of cash generating units reflect long term mine plans which are based on detailed research, analysis and iterative modelling to optimise the level of return from investment, output and sequence of extraction. The plan takes account of all relevant characteristics of the orebody, including waste to ore ratios, ore grades, haul distances, chemical and metallurgical properties of the ore impacting on process recoveries and capacities of processing equipment that can be used. The mine plan is therefore the basis for forecasting production output in each future year and for forecasting production costs.
Rio Tinto’s cash flow forecasts are based on assessments of expected long term commodity prices, which for most commodities are derived from an analysis of the marginal costs of the producers of the relevant commodities. These assessments often differ from current price levels and are updated periodically.
In some cases, prices applying to some part of the future sales volumes of a cash generating unit are predetermined by existing sales contracts. The effects of such contracts are taken into account in forecasting future cash flows.
Cost levels incorporated in the cash flow forecasts are based on the current long term mine plan for the cash generating unit. For value in use calculations used in impairment reviews, recent cost levels are considered, together with expected changes in costs that are compatible with the current condition of the business and which meet the requirements of IAS 36. IAS 36 includes a number of restrictions on the future cash flows that can be recognised in value in use calculations in respect of future restructurings and improvement related capital expenditure.
The useful lives of the major assets of a cash generating unit are usually dependent on the life of the orebody to which they relate. Thus the lives of mining properties, and associated smelters, concentrators and other long lived processing equipment generally relate to the expected life of the orebody. The life of the orebody, in turn, is estimated on the basis of the long term mine plan.
Forecast cash flows are discounted to present values using Rio Tinto’s weighted average cost of capital with appropriate adjustment for the risks associated with the relevant cash flows, to the extent that such risks are not reflected in the forecast cash flows. For final feasibility studies and ore reserve estimation, internal hurdle rates are used which are generally higher than the weighted average cost of capital.
Value in use and ore reserve estimates are based on the exchange rates current at the time of the evaluation. In final feasibility studies and estimates of fair value, a forecast of the long term exchange rate is made having regard to spot exchange rates, historical data and external forecasts.
Forecast cash flows for ore reserve estimation for JORC purposes and for impairment testing are based on Rio Tinto’s long term price forecasts.
All goodwill and intangible assets that are not yet ready for use or have an indefinite life are tested annually for impairment regardless of whether there has been any change in events or circumstances.
Close down, restoration and clean up obligations
Provision is made for environmental remediation costs when the related environmental disturbance occurs, based on the net present value of estimated future costs.
Close down and restoration costs are a normal consequence of mining, and the majority of close down and restoration expenditure is incurred at the end of the life of the mine. The costs are estimated on the basis of a closure plan. The cost estimates are calculated annually during the life of the operation to reflect known developments, eg updated cost estimates and revisions to the estimated lives of operations, and are subject to formal review at regular intervals. Although the ultimate cost to be incurred is uncertain, the Group’s businesses estimate their respective costs based on feasibility and engineering studies using current restoration standards and techniques. The initial closure provisions together with changes, other than those arising from the unwind of the discount applied in establishing the net present value of the provision, are capitalised within property, plant and equipment and depreciated over the lives of the assets to which they relate.
Clean up costs result from environmental damage that was not a necessary consequence of mining, including remediation, compensation and penalties. These costs are charged to the income statement. Provisions are recognised at the time the damage, remediation process and estimated remediation costs become known. Remediation procedures may commence soon after this point in time but may continue for many years depending on the nature of the disturbance and the remediation techniques.
As noted above, the ultimate cost of environmental disturbance is uncertain and cost estimates can vary in response to many factors including changes to the relevant legal requirements, the emergence of new restoration techniques or experience at other mine sites. The expected timing of expenditure can also change, for example in
Rio Tinto 2007 Form 20-F | 109 |
response to changes in ore reserves or production rates. As a result there could be significant adjustments to the provision for close down and restoration and environmental clean up, which would affect future financial results.
Overburden removal costs
In open pit mining operations, it is necessary to remove overburden and other barren waste materials to access ore from which minerals can economically be extracted. The process of mining overburden and waste materials is referred to as stripping. During the development of a mine, before production commences, it is generally accepted that stripping costs are capitalised as part of the investment in construction of the mine.
Where a mine operates several open pits that are regarded as separate operations for the purpose of mine planning, stripping costs are accounted for separately by reference to the ore from each separate pit. If, however, the pits are highly integrated for the purpose of mine planning, the second and subsequent pits are regarded as extensions of the first pit in accounting for stripping costs. In such cases, the initial stripping of the second and subsequent pits is considered to be production phase stripping relating to the combined operation.
Stripping of waste materials continues during the production stage of the mine or pit. Some mining companies expense these production stage stripping costs as incurred, while others defer such stripping costs. In operations that experience material fluctuations in the ratio of waste materials to ore or contained minerals on a year to year basis over the life of the mine or pit, deferral of stripping costs reduces the volatility of the cost of stripping expensed in individual reporting periods. Those mining companies that expense stripping costs as incurred will therefore report greater volatility in the results of their operations from period to period.
Rio Tinto defers production stage stripping costs for those operations where this is the most appropriate basis for matching costs with the related economic benefits and the effect is material. Stripping costs incurred in the period are deferred to the extent that the current period ratio exceeds the life of mine or pit ratio. Such deferred costs are then charged against reported profits to the extent that, in subsequent periods, the ratio falls short of the life of mine or pit ratio. The life of mine or pit ratio is based on the proved and probable reserves of the mine or pit and is obtained by dividing the tonnage of waste mined either by the quantity of ore mined or by the quantity of minerals contained in the ore. In some operations, the quantity of ore is a more practical basis for matching costs with the related economic benefits where there are important co-products or where the grade of the ore is relatively stable from year to year.
The life of mine or pit waste-to-ore ratio is a function of an individual mine’s pit design and therefore changes to that design will generally result in changes to the ratio. Changes in other technical or economic parameters that impact on reserves will also have an impact on the life of mine or pit ratio even if they do not affect the pit design. Changes to the life of mine or pit ratio are accounted for prospectively.
In the production stage of some operations, further development of the mine requires a phase of unusually high overburden removal activity that is similar in nature to preproduction mine development. The costs of such unusually high overburden removal activity are deferred and charged against reported profits in subsequent periods on a units of production basis. This accounting treatment is consistent with that for stripping costs incurred during the development phase of a mine or pit, before production commences.
Deferred stripping costs are included in property, plant and equipment or in investment in equity accounted units, as appropriate. These form part of the total investment in the relevant cash generating unit, which is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable. Amortisation of deferred stripping costs is included in operating costs or in the Group’s share of the results of its jointly controlled entities and associates as appropriate.
During 2007, production stage stripping costs incurred by subsidiaries and equity accounted operations were US$56 million higher than the amounts charged against pre tax profit (2006: production stage costs exceeded the amounts charged against pre-tax profit by US$20 million). In addition, US$117 million of deferred stripping was written off in 2007 as part of the Argyle impairment and there were net impairment reversals of US$36 million affecting deferred stripping in 2006. The net book value carried forward in property, plant and equipment and in investments in jointly controlled entities and associates at 31 December 2007 was US$884 million (2006: US$929 million).
Information about the stripping ratios of the business units, including equity accounted units, that account for the majority of the deferred stripping balance at 31 December 2007, along with the year in which deferred stripping is expected to be fully amortised, is set out in the following table:
Actual stripping ratio for year | Life of mine stripping ratio | |||||||||||
2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||
Kennecott Utah Copper (2019) (a) (b) | 1.99 | 2.04 | 2.02 | 1.32 | 1.36 | 1.51 | ||||||
Grasberg Joint Venture (2015) (a) | 3.47 | 3.01 | 3.12 | 3.05 | 2.63 | 2.43 | ||||||
Diavik (2008) (c) | 0.42 | 0.89 | 1.21 | 0.91 | 0.96 | 0.91 | ||||||
Escondida (2040) (d) | 0.07 | 0.08 | 0.09 | 0.10 | 0.12 | 0.12 | ||||||
Notes | |
(a) | Stripping ratios shown are waste to ore. |
(b) | Kennecott’s life of mine stripping ratio decreased in 2006 as the latest mine plan included higher metals prices, which made previously uneconomic material (waste) economic to mine as ore. |
(c) | Diavik’s stripping ratio is disclosed as bench cubic metre per carat. The fall in actual ratio arises as the end of the pipe life nears. |
(d) | Escondida’s stripping ratio is based on waste tonnes to pounds of copper mined. |
Rio Tinto 2007 Form 20-F | 110 |
Borax capitalised stripping costs as part of a distinct period of new development during the production stage of the mine. Capitalisation stopped in 2004. The capitalised costs will be fully amortised in 2034.
Functional currency
The determination of functional currency affects the carrying value of non current assets included in the balance sheet and, as a consequence, the amortisation of those assets included in the income statement. It also impacts exchange gains and losses included in the income statement.
The functional currency for each entity in the Group, and for jointly controlled entities and associates, is the currency of the primary economic environment in which it operates. For many of Rio Tinto’s entities, this is the currency of the country in which each operates. Alcan’s aluminium and alumina producing operations use a US dollar functional currency including those in Canada and Australia. Transactions denominated in currencies other than the functional currency are converted to the functional currency at the exchange rate ruling at the date of the transaction unless hedge accounting applies. Monetary assets and liabilities denominated in foreign currencies are retranslated at year end exchange rates.
The US dollar is the currency in which the Group’s Financial statements are presented, as it most reliably reflects the global business performance of the Group as a whole.
On consolidation, income statement items are translated into US dollars at average rates of exchange. Balance sheet items are translated into US dollars at year end exchange rates. Exchange differences on the translation of the net assets of entities with functional currencies other than the US dollar, and any offsetting exchange differences on net debt hedging those net assets, are recognised directly in the foreign currency translation reserve.
Exchange gains and losses which arise on balances between Group entities are taken to the foreign currency translation reserve where the intra group balance is, in substance, part of the Group’s net investment in the entity.
The balance of the foreign currency translation reserve relating to an operation that is disposed of is transferred to the income statement at the time of the disposal.
The Group finances its operations primarily in US dollars but part of the Group’s US dollar debt is located in subsidiaries having functional currencies other than the US dollar. Except as noted above, exchange gains and losses relating to such US dollar debt are charged or credited to the Group’s income statement in the year in which they arise. This means that the impact of financing in US dollars on the Group’s income statement is dependent on the functional currency of the particular subsidiary where the debt is located. With the above exceptions, and except for derivative contracts which qualify as cash flow hedges, exchange differences are charged or credited to the income statement in the year in which they arise.
Deferred tax on fair value adjustments
On transition to IFRS with effect from 1 January 2004, deferred tax was provided in respect of fair value adjustments on acquisitions in previous years. No other adjustments were made to the assets and liabilities recognised in such prior year acquisitions and, accordingly, shareholders’ funds were reduced by US$720 million on transition to IFRS primarily as a result of deferred tax on fair value adjustments to mining rights. In general, these mining rights are not eligible for income tax allowances. In such cases, the provision for deferred tax was based on the difference between their carrying value and their nil income tax base. The existence of a tax base for capital gains tax purposes was not taken into account in determining the deferred tax provision relating to such mineral rights because it is expected that the carrying amount will be recovered primarily through use and not from the disposal of the mineral rights. Also, the Group is only entitled to a deduction for capital gains tax purposes if the mineral rights are sold or formally relinquished.
For acquisitions after 1 January 2004 provision for such deferred tax on acquisition results in a corresponding increase in the amounts attributed to acquired assets and/or goodwill under IFRS.
Post retirement benefits
The difference between the fair value of the plan assets (if any) of post retirement plans and the present value of the plan obligations is recognised as an asset or liability on the balance sheet. The Group has adopted the option under IAS 19 to record actuarial gains and losses directly in the Statement of Recognised Income and Expense.
The most significant assumptions used in accounting for post retirement plans are the long term rate of return on plan assets, the discount rate and the mortality assumptions.
The long term rate of return on plan assets is used to calculate interest income on pension assets, which is credited to the Group’s income statement. The discount rate is used to determine the net present value of future liabilities and each year the unwinding of the discount on those liabilities is charged to the Group’s income statement. The mortality assumption is used to project the future stream of benefit payments, which is then discounted to arrive at the net present value of liabilities.
Valuations are carried out using the projected unit method.
The expected rate of return on pension plan assets is determined as management’s best estimate of the long term return on the major asset classes, ie equity, debt, property and other, weighted by the actual allocation of assets among the categories at the measurement date. The expected rate of return is calculated using geometric averaging.
The sources used to determine management’s best estimate of long term returns are numerous and include country specific bond yields, which may be derived from the market using local bond indices or by analysis of the local bond market, and country specific inflation and investment market expectations derived from market data and analysts’
Rio Tinto 2007 Form 20-F | 111 |
or governments’ expectations as applicable.
In particular, the Group estimates long term expected returns on equity based on the economic outlook, analysts’ views and those of other market commentators. This is the most subjective of the assumptions used and it is reviewed regularly to ensure that it remains consistent with best practice.
The discount rate used in determining the service cost and interest cost charged to income is the market yield at the start of the year on high quality corporate bonds. For countries where there is no deep market in such bonds the yield on Government bonds is used. For determining the present value of obligations shown on the balance sheet, market yields at the balance sheet date are used.
Details of the key assumptions are set out in note 49 to the2007 Financial statements.
For 2007 the charge against income for post retirement benefits net of tax and minorities was US$168 million. This charge included both pension and post retirement healthcare benefits. The charge is net of the expected return on assets which was US$371 million after tax and minorities.
In calculating the 2007 expense the average future increase in compensation levels was assumed to be 4.7 per cent and this will decrease to 3.7 per cent for 2008 reflecting the increased weighting of lower inflation countries following the Alcan acquisition. The average discount rate used for the Group’s plans in 2007 was 5.4 per cent and the average discount rate used in 2008 will be 5.6 per cent reflecting the weighted average level of discount rates following the Alcan acquisition.
The average expected long term rate of return on assets used to determine 2007 pension cost was 6.9 per cent. This will decrease to 6.4 per cent for 2008. This reduction results mainly from a lower allocation to equities as a result of the Alcan acquisition.
Based on the known changes in assumptions noted above and other expected circumstances, the impact of post retirement costs on the Group’s IFRS net earnings in 2008 would be expected to increase by some US$198 million to US$366 million. The main reason for this increase is the inclusion of the Alcan pension expense for the full year. The actual charge may be impacted by other factors that cannot be predicted, such as the effect of changes in benefits and exchange rates.
The table below sets out the potential change in the Group’s 2007 net earnings (after tax and outside interests) that would result from hypothetical changes to post retirement assumptions and estimates. The sensitivities are viewed for each assumption in isolation although a change in one assumption is likely to result in some offset elsewhere.
IFRS | ||
US$m | ||
Sensitivity of Group’s 2007 net earnings to changes in: | ||
Expected return on assets | ||
– increase of 1 percentage point | 39 | |
– decrease of 1 percentage point | (39 | ) |
Discount rate | ||
– increase of 0.5 percentage points | 7 | |
– decrease of 0.5 percentage points | (6 | ) |
Salary increases | ||
– increase of 0.5 percentage points | (6 | ) |
– decrease of 0.5 percentage points | 6 | |
Demographic – allowance for additional future mortality improvements | ||
– participants assumed to be one year older | 7 | |
– participants assumed to be one year younger | (7 | ) |
Temporary differences related to closure costs and finance leases
Under the ‘initial recognition’ rules in paragraphs 15 and 24 of IAS 12 ‘Income Taxes’, deferred tax is not provided on the initial recognition of an asset or liability in a transaction that does not affect accounting profit or taxable profit and is not a business combination.
The Group’s interpretation of these initial recognition rules has the result that no deferred tax asset is provided on the recognition of a provision for close down and restoration costs and the related asset, or on recognition of assets held under finance leases and the associated lease liability, except where these are recognised as a consequence of business combinations.
On creation of a closure provision, for instance, there is no effect on accounting or taxable profit because the cost is capitalised. As a result, the initial recognition rules would appear to prevent the recognition of a deferred tax asset in respect of the provision and of a deferred tax liability in respect of the related capitalised amount.
The temporary differences will reverse in future periods as the closure asset is depreciated and when tax deductible payments are made that are charged against the provision. Paragraph 22 of IAS 12 extends the initial recognition rules to the reversal of temporary differences on assets and liabilities to which the initial recognition rules
Rio Tinto 2007 Form 20-F | 112 |
apply. Therefore, deferred tax is not recognised on the changes in the carrying amount of the asset which result from depreciation or from the changes in the provision resulting from expenditure. When tax relief on expenditure is received this will be credited to the income statement as part of the current tax charge. The unwind of the discount applied in establishing the present value of the closure costs does affect accounting profit. Therefore, this unwinding of discount results in the recognition of deferred tax assets.
The application of this initial recognition exemption has given rise to diversity in practice: some companies do provide for deferred tax on closure cost provisions and the related capitalised amounts. Deferred tax accounting on initial recognition is currently the subject of an IASB/FASB convergence project which may at some future time require the Group to change this aspect of its deferred tax accounting policy.
If the Group were to provide for deferred tax on closure costs and finance leases under IFRS the benefit to underlying and net earnings would have been US$21 million (2006: US$9 million) and to equity would have been US$185 million (2006: US$127 million).
US deferred tax potentially recoverable
The Group’s US tax group has alternative minimum tax credits and temporary differences that have the potential to reduce tax charges in future years. These ‘possible tax assets’ totalled US$182 million at 31 December 2007 (2006: US$162 million). Of these, US$119 million were recognised as deferred tax assets (2006: US$97 million), leaving US$63 million (2006: US$65 million) unrecognised, as recovery was not considered probable.
During 2006, updated projections of future taxable profits for the operations that form part of Rio Tinto’s US tax group resulted in the recognition of previously unrecognised possible tax assets of US$335 million. Recoveries are dependent on future commodity prices, costs, financing arrangements and business developments in future years.
During 2007, principally as a result of high commodity prices, US$170 million of these possible tax assets were utilised (2006: US$140 million).
Exploration
Under the Group’s accounting policy, exploration and evaluation expenditure is not capitalised until the point is reached at least 2016which there is a high degree of confidence in the project’s viability and restore annual production capacityit is considered probable that future economic benefits will flow to 4,000 tonnesthe Group.
The carrying values of exploration and evaluation assets are reviewed twice per annum atby management and the results of these reviews are reported to theAudit committee. There may be only mineralised material to form a total incrementalbasis for the impairment review. The review is based on a status report regarding the Group’s intentions for development of the undeveloped property. In some cases, the undeveloped properties are regarded as successors to orebodies currently in production and sustaining capital cost of US$112 million.will therefore benefit from existing infrastructure and equipment.
Energy ResourcesContingencies
Disclosure is made of Australiamaterial contingent liabilities unless the possibility of any loss arising is considered remote. Contingencies are disclosed in note 35 to the2007 Financial statements.
Underlying earnings
The Group presents “Underlying earnings” as an additional measure to provide greater understanding of the underlying business performance of its operations. The adjustments made to net earnings to arrive at underlying earnings are explained above in the section on underlying earnings.
Rio Tinto 2007 Form 20-F | 113 |
Item 6. | Directors, Senior Management and Employees |
Chairman and executive directors | ||||
Audit | Remuneration | Nominations | Committee on social | |
committee | committee | committee | and environmental | |
accountability | ||||
Chairman | ||||
Paul Skinner | • | |||
Chief executive | ||||
Tom Albanese | ||||
Finance director | ||||
Guy Elliott | ||||
Executive director | ||||
Dick Evans | ||||
Non executive directors | ||||
Sir David Clementi * | • | • | ||
Vivienne Cox * | • | |||
Sir Rod Eddington * | • | • | ||
Michael Fitzpatrick * | • | • | ||
Yves Fortier * | • | • | ||
Richard Goodmanson * | • | • | ||
Andrew Gould * | • | • | ||
Lord Kerr of Kinlochard * | • | • | ||
David Mayhew | • | |||
Sir Richard Sykes * | • | • | ||
Paul Tellier * | • | • | ||
* Independent |
CHAIRMAN
Paul SkinnerBA (Hons) (Law), DpBA (Business Administration), age 63
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2001, he was appointed chairman of the Group in 2003. Paul was last re-elected by shareholders in 2005 and stands for re-election in 2008. He is chairman of the Nominations committee (note c).
Skills and experience:Paul graduated in law from Cambridge University and in business administration from Manchester Business School. He was previously a managing director of The “Shell” Transport and Trading Company plc and group managing director of The Royal Dutch/Shell Group of Companies, for whom he had worked since 1966. During his career he worked in all Shell’s main businesses, including senior appointments in the UK, Greece, Nigeria, New Zealand and Norway. He was CEO of its global Oil Products business from 1999 to 2003.
External appointments (current and recent):
Director of Standard Chartered plc since 2003
Director of the Tetra Laval Group since 2005
Director of L’Air Liquide SA since 2006
Chairman of the International Chamber of Commerce (UK) since 2005
Non executive member of the Defence Board of the UK Ministry of Defence since 2006
Member of the board of INSEAD business school since 1999
Director of The “Shell” Transport and Trading Company plc from 2000 to 2003
CHIEF EXECUTIVE
Tom AlbaneseBS (Mineral Economics), MS (Mining Engineering), age 50
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since March 2006. Tom was elected by shareholders in 2006 and stands for re-election in 2008.
Skills and experience:Tom joined Rio Tinto in 1993 on Rio Tinto’s acquisition of Nerco and held a series of management positions before being appointed chief executive of the Industrial Minerals group in 2000, after which he became chief executive of the Copper group and head of Exploration in 2004. He took over as chief executive from
Rio Tinto 2007 Form 20-F | 114 |
Leigh Clifford with effect from May 2007.
External appointments (current and recent):
Director of Ivanhoe Mines Limited from 2006 to 2007
Director of Palabora Mining Company from 2004 to 2006
Member of the Executive Committee of the International Copper Association from 2004 to 2006
Guy Elliott(MA (Oxon), MBA (INSEAD), age 52
Appointment and election:Finance director of Rio Tinto: 68.4 per cent)Tinto plc and Rio Tinto Limited since 2002. Guy was last re-elected by shareholders in 2007.
Skills and experience:Guy joined the Group in 1980 after gaining an MBA having previously been in investment banking. He has subsequently held a variety of commercial and management positions, including head of Business Evaluation and president of Rio Tinto Brasil.
External appointments (current and recent):
Non executive director and member of the Audit committee of Cadbury Schweppes plc, since 2007
Dick EvansBS (Industrial Engineering) (Oregon State University), MS Management (Stanford Graduate School of Business), age 60
Appointments and election:Director of Rio Tinto plc and Rio Tinto Limited effective 25 October 2007. Dick will stand for election by shareholders at the 2008 annual general meetings.
Skills and experience:Dick Evans joined Rio Tinto following the acquisition of Alcan Inc where he had held several senior management positions including executive vice president and had been president and chief executive officer of Alcan from 2006 to 2007. Prior to Alcan, he has held senior management positions with Kaiser Aluminum & Chemical Corporation.
External appointments (current and recent):
Director of AbitibiBowater Inc. since 2003
Director of the International Aluminium Institute since 2001
Sir David ClementiMA, MBA, FCA, age 59ERA
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2003. Sir David was last re-elected by shareholders in 2006 (notes a, b and e).
Skills and experience:Sir David is spending A$27.6 millionchairman of Prudential plc, prior to which he was Deputy Governor of the Bank of England. His earlier career was with Kleinwort Benson where he spent 22 years, holding various positions including chief executive and vice chairman. A graduate of Oxford University and a qualified chartered accountant, Sir David also holds an MBA from Harvard Business School.
External appointments (current and recent):
Chairman of Prudential plc since 2002
Member of the Financial Reporting Council between 2003 and 2007
Vivienne CoxMA (Oxon), MBA (INSEAD), age 48
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2005. Vivienne was elected by shareholders in 2005 and stands for re-election in 2008. (notes a and e).
Skills and experience:Vivienne is currently executive vice president of BP p.l.c. for Alternative Energy. She is a member of the BP group chief executive’s committee. She holds degrees in chemistry from Oxford University and in business administration from INSEAD. During her career in BP she has worked in chemicals, exploration, finance, and refining and marketing.
External appointments (current and recent):
Director of Eurotunnel plc between 2002 and 2004
Sir Rod EddingtonB Eng, M Eng (University of Western Australia), D Phil (Oxon), age 58
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2005. Sir Rod was elected by shareholders in 2006 (notes c, d and e).
Skills and experience:Sir Rod was chief executive of British Airways Plc until the end of September 2005. Prior to his role with British Airways, Sir Rod was Managing Director of Cathay Pacific Airways from 1992 until 1996 and Executive Chairman of Ansett Airlines from 1997 until 2000.
Rio Tinto 2007 Form 20-F | 115 |
External appointments (current and recent):
Director of News Corporation plc since 1999
Director of John Swire & Son Pty Limited since 1997
Non executive chairman of JPMorgan Australia and New Zealand since 2006
Director of CLP Holdings since 2006
Director of Allco Finance Group Limited since 2006
Chief executive British Airways Plc from 2000 until 2005
Chairman of the EU/Hong Kong Business Co-operation Committee of the Hong Kong Trade Development Council from 2002 until 2006
Michael FitzpatrickB Eng (University of Western Australia), BA (Oxon), age 55
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2006. Michael was elected by shareholders in 2007 (notes a, b and e).
Skills and experience:Michael sold his interest in, and ceased to constructbe a plantdirector of, Hastings Funds Management Ltd during 2006, the pioneering infrastructure asset management company which he founded in 1994. He is chairman of the Victorian Funds Management Corporation, which manages funds on behalf of the State of Victoria, and of Treasury Group Limited, an incubator of fund management companies. He is chairman of the Australian Football League, having previously played the game professionally, and is a former chairman of the Australian Sports Commission.
External appointments (current and recent):
Chairman of the Victorian Funds Management Corporation since 2006
Chairman of Treasury Group Limited since 2005
Managing director of Hastings Funds Management Ltd from 1994 to 2006
Director of Pacific Hydro Limited from 1996 to 2004
Director of Australian Infrastructure Fund Limited from 1994 to 2005
Director of the Walter & Eliza Hall Institute of Medical Research since 2001
Yves FortierCC, OQ, QC, LLD, Av Em, age 72
Appointments and election:Director of Rio Tinto plc and Rio Tinto Limited effective 25 October 2007. Yves will stand for election at the Ranger mine2008 annual general meetings (notes c, d and e).
Skills and experience:Yves Fortier was Ambassador and Permanent Representative of Canada to process lateritic ore,the United Nations from 1988 to 1992. He is chairman and a material containing a high proportion of clay minerals. The laterite processing plant will contribute approximately 400 tonnes per annum of uranium oxide to ERA’s production from 2008 through to 2014. Constructionsenior partner of the plant will commencelaw firm Ogilvy Renault and was chairman of Alcan from 2002 until 2007.
External appointments (current and recent):
Chairman of Ogilvy Renault since 1992
Chairman and director of Alcan Inc. from 2002 until 2007
Director of NOVA Chemicals Corporation since 1998
Governor of Hudson’s Bay Company from 1998 to 2006
Director of Royal Bank of Canada from 1992 to 2005
Director of Novtel corporation from 1992 to 2005
Trustee of the International Accounting Standards Committee from 2000 to 2006
Richard GoodmansonMBA, BEc and BCom, B Eng (Civil), age 60
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2004. He was elected by shareholders in April2005 and stands for re-election in 2008. Richard is chairman of the Committee on social and environmental accountability (notes b, d and e).
Skills and experience:Richard is executive vice president and chief operating officer of DuPont. During his career he has worked at senior levels for McKinsey & Co, PepsiCo and America West Airlines, where he was president and CEO. He joined DuPont in early 1999 and in his current position has responsibility for a number of the global functions, and for the non US operations of DuPont, with particular focus on growth in emerging markets.
External appointments (current and recent):
Executive vice president and chief operating officer of DuPont since 1999
Chairman of the United Way of Delaware since 2006 (director since 2002)
Director of the Boise Cascade Corporation between 2000 and 2004
Andrew GouldBA, FCA, age 61
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2002. Andrew was last re-elected by shareholders in 2006. He is also chairman of the Audit committee (notes a, b and e).
Skills and experience:Andrew is chairman and chief executive officer of Schlumberger Limited, where he has held a succession of financial and operational management positions, including that of executive vice president of Schlumberger Oilfield Services and president and chief operating officer of Schlumberger Limited. He has worked in Asia, Europe and the US. He joined Schlumberger in 1975. He holds a degree in economic history from Cardiff University and qualified as a chartered accountant with Ernst & Young.
External appointments (current and recent):
Rio Tinto 2007 Form 20-F | 116 |
Chairman and Chief Executive Officer of Schlumberger Limited since 2003
Member of the Advisory Board of the King Fahd University of Petroleum and Minerals in Dhahran, Saudi Arabia since 2007 with
Member of the first lateritic ore scheduled for processingcommercialization advisory board of Imperial College of Science Technology and Medicine, London since 2002
Member of the UK Prime Minister’s Council of Science and Technology from 2004 to 2007
Lord Kerr of KinlochardGCMG, MA, age 66
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2003. He was re-elected by shareholders in 2007 (notes a, d and e).
Skills and experience:An Oxford graduate, Lord Kerr was in the first quarterUK Diplomatic Service for 36 years and headed it from 1997 to 2002 as Permanent Under Secretary at the Foreign Office. On a secondment to the UK Treasury he was principal private secretary to two Chancellors of 2008.the Exchequer. His foreign service included periods in the Soviet Union and Pakistan, and as Ambassador to the European Union (1990 to 1995), and the US (1995 to 1997). He has been an independent member of the House of Lords since 2004.
External appointments (current and recent):
Deputy Chairman of Royal Dutch Shell plc since 2005
Director of The Scottish American Investment Trust plc since 2002
Advisory Board member, Scottish Power (Iberdrola) since 2007
Director of The “Shell” Transport and Trading Company plc from 2002 to 2005
Chairman of the Court and Council of Imperial College, London since 2005
Trustee of the Rhodes Trust since 1997, The National Gallery since 2002, and the Carnegie Trust for the Universities of Scotland since 2005
David Mayhewage 67
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2000. He was last re-elected by shareholders in 2006 (note c).
Skills and experience:David joined Cazenove in 1969 from Panmure Gordon. In 1972 he became the firm’s dealing partner and was subsequently responsible for the Institutional Broking Department. From 1986 until 2001 he was the partner in charge of the firm’s Capital Markets Department. He became Chairman of Cazenove on incorporation in 2001 and Chairman of JPMorgan Cazenove in 2005.
External appointments (current and recent):
Chairman of Cazenove Group Limited (formerly Cazenove Group plc) since 2001
Chairman of Cazenove Capital Holdings Limited since 2005
Sir Richard SykesBSc (Microbiology), PhD (Microbial Biochemistry), DSc, Kt, FRS, FMedSci, age 65
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 1997. Sir Richard was appointed the senior non executive director in 2005 and is chairman of the Remuneration committee. Sir Richard was re-elected for a further one year term of office in 2007 and will retire at the conclusion of the annual general meetings in 2008 (notes b, c and e).
Skills and experience:After reading microbiology at the University of London, Sir Richard obtained doctorates in microbial chemistry and in science from the University of Bristol and the University of London respectively. A former chairman of GlaxoSmithKline plc Sir Richard is a Fellow of the Royal Society. He is currently Rector of Imperial College London.
External appointments (current and recent):
Director of Eurasian Natural Resources Corporation plc since 2007
Director of Lonza Group Limited since 2003, Deputy Chairman since 2005
Chairman of the Healthcare Advisory Group (Apax Partners Limited) since 2002
Chairman of Metabometrix Ltd since 2004
Chairman of Merlion Pharmaceuticals Pte Limited since 2005
Chairman of OmniCyte Ltd since 2006
Chairman of Circassia Ltd since 2007
Director of Abraxis BioScience Inc from 2006 to 2007
Director of Bio*One Capital Pte Ltd since 2003
Rector of Imperial College London since 2001
Chairman of GlaxoSmithKline plc between 2000 and 2002
Trustee of the Natural History Museum, London between 1996 and 2005 and of the Royal Botanic Gardens, Kew between 2003 and 2005
Paul Tellierage 68
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited effective October 2007. Paul will stand for election at the 2008 annual general meetings (notes a, b and e).
Skills and Experience:Paul was Clerk of the Privy Council Office and Secretary to the Cabinet of the Government of Canada from 1985 to 1992 and was president and chief executive officer of the Canadian National Railway Company
Rio Tinto 2007 Form 20-F | 117 |
from 1992 to 2002. Until 2004, he was president and chief executive officer of Bombardier Inc.
External appointments (Current and recent):
Director of Bell Canada since 1996. Director of BCE Inc since 1999.
Member of the Advisory Board of General Motors of Canada since 2005.
Trustee, International Accounting Standards Foundation since 2007.
Co-chair of the Prime Minister of Canada’s Advisory Committee on the Renewal of the Public Service since 2006.
President and Chief Executive Officer of Bombardier Inc. from 2003 to 2004. Non executive Director of Alcan Inc. from 1998 to 2007.
Director of McCain Foods since 1996.
Notes | |
(a) | Audit committee |
(Sir David Clementi, Vivienne Cox, Michael Fitzpatrick, Andrew Gould, Lord Kerr and Paul Tellier) | |
(b) | Remuneration committee |
(Sir David Clementi, Michael Fitzpatrick, Richard Goodmanson, Andrew Gould, Sir Richard Sykes and Paul Tellier) | |
(c) | Nominations committee |
(Sir Rod Eddington, Yves Fortier, David Mayhew, Paul Skinner and Sir Richard Sykes) | |
(d) | Committee on social and environmental accountability |
(Sir Rod Eddington, Yves Fortier, Richard Goodmanson and Lord Kerr) | |
(e) | Independent |
(Sir David Clementi, Vivienne Cox, Sir Rod Eddington, Michael Fitzpatrick, Yves Fortier, Richard Goodmanson, Andrew Gould, Lord Kerr, Sir Richard Sykes and Paul Tellier) |
DIRECTORS WHO LEFT THE GROUP DURING 2007
Rio Tinto Coal Australia ClermontQIT Madagascar Minerals(Rio Tinto: 50.1Tinto 80 per cent)Rio TintoThe project was approved in 2005 and comprises a mineral sand mine and separation plant, and port facilities in southern Madagascar as well as an upgrade of QIT’s ilmenite smelting facilities in Canada. The Government of Madagascar contributed US$35m to the establishment of the port as part of its joint venture partners approved investmentGrowth Poles project funded by the World Bank. The project has maintained its schedule, however cost inflation and foreign exchange effects have increased the cost estimate to US$1.0 billion. Nevertheless, increased product selling prices have meant that the project value has been maintained. First production is expected at the end of US$750 million for2008.
The mine will be a key initial customer of the deep sea multi-use public port at Ehoala, providing the base load to help establish the port. Over time, it is expected the port will make an important contribution to economic development of the Clermont thermal coalregion.
RTIT will manage the port operations. At the end of the life of the mine, the port will fall under the responsibility and control of the Government of Madagascar.
Extensive engagement and consultation with the Government of Madagascar and local people and leaders has taken place over many years. The World Bank is involved in central Queensland, situated 15a development role and non government organisations, including the Royal Botanic Gardens, Kew and Missouri Botanical Gardens, have been involved in planning environmental and conservation strategies.
Potasio Rio Colorado S.A. (Rio Tinto 100 per cent)
The Rio Colorado potash project in Argentina lies 1,000 kilometres south eastwest of Buenos Aires. Potash is used principally as an agricultural fertiliser. Evaluation of the Blair Athol Mine. Clermontproject began in late 2003, and has included a two year large scale trial of solution mining. This ran successfully from late 2004. During 2007 the feasibility study was completed. Development of the project depends on finalising permits and other agreements as well as approval by the board of Rio Tinto. Subject to this, first production could occur in 2011. Installed capacity will be 2.9 million tonnes per year. The scale and quality of the resource provide potential for expansion.
Rio Tinto 2007 Form 20-F | 79 |
Kazan trona(Rio Tinto 100 per cent)
The Kazan trona project is located 35 kilometres northwest of Ankara in Turkey. Rio Tinto is conducting pre-feasibility studies and, upon expected approval in 2008, will move into large scale solution mining trials. Trona is converted to become Australia’ssoda ash, or sodium carbonate, by dissolving ore and recrystallizing the soda ash. Soda ash is one of oldest known and largest thermal coal producer when it reaches full capacity, which is scheduled for 2013. The minevolume inorganic chemicals, used primarily in the glass, chemicals, soap and detergent, and pulp and paper industries. Kazan trona is expected to be brought into productiona more environmentally sustainable commodity to replace Blair Athol, duemeet rising global demand than chemical synthesis.
Rio Tinto 2007 Form 20-F | 80 |
Energy group
Mined | Rio Tinto share | |
Coal | million tonnes | |
2003 | 148.8 | |
2004 | 157.4 | |
2005 | 153.6 | |
2006 | 162.3 | |
2007 | 155.6 | |
Uranium | ‘000 pounds | |
2003 | 11,372 | |
2004 | 13,170 | |
2005 | 14,511 | |
2006 | 12,561 | |
2007 | 12,616 | |
Underlying earnings contribution* | US$m | |
2004 | 431 | |
2005 | 730 | |
2006 | 706 | |
2007 | 484 | |
Changes in underlying earnings 2005 – 2007 | US$m | |
2005 Underlying earnings | 730 | |
Effect of changes in: | ||
Prices and exchange rates | 199 | |
General inflation | (50 | ) |
Volumes | (13 | ) |
Costs | (211 | ) |
Tax and other | 51 | |
2006 Underlying earnings | 706 | |
Effect of changes in: | ||
Prices and exchange rates | 102 | |
General inflation | (51 | ) |
Volumes | 6 | |
Costs | (251 | ) |
Tax and other | (28 | ) |
2007 Underlying earnings | 484 | |
* | A reconciliation of the net earnings with underlying earnings for 2007, 2006 and 2005 as determined under IFRS is set out on page 53. |
STRATEGIC OVERVIEW
The Energy group comprises thermal coal, coking coal and uranium operations. Coal & Allied Mount Pleasant(interests located in Australia and the US supply internationally traded and US and Australian domestic markets. Rio Tinto: 75.7 per cent)Tinto Uranium supplies uranium oxide produced at its majority owned mines in Australia and Namibia to electric power utilities worldwide. Rio Tinto Uranium is currently the world’s second largest uranium supplier.
The group strategy aims to harness and focus resources to deliver world class performance in operations, sustainable development and value creation. The strategy is focused on positioning the group as the world’s value leader in mineable energy.
The group’s reserve position in thermal and coking coal is sufficient to underpin significant greenfield and brownfield expansions.
In 2006, Coal & Allied started2007 the Energy group undertook a feasibility study onreview of its asset portfolio which highlighted opportunities in the Mount Pleasantcurrent market to divest assets. Options to divest Rio Tinto Energy America (RTEA) and the Kintyre, Australia, and Sweetwater, US, uranium projects are currently being explored.
A key part of the group’s strategy is to ensure that the group is a leading advocate of, and investor in, the sustainable future uses of coal mine project located adjacentand uranium. In 2007 the group continued to dedicate resources and investment funds to the Bengalla mine near Muswellbrookdevelopment of clean coal technology through the FutureGen project in the Hunter Valley, New South Wales. The study is expected to take about 12 months to completeUS, COAL21 in Australia and will include extensive community consultation.
Hydrogen Energy(Rio Tinto: 50.0 per cent)in numerous low emission coal research organisations in the US and Australia.
In May 2007 Rio Tinto and BP announced the formation of a new jointly owned company, Hydrogen Energy was launched, a 50:50 joint venture with BP which wouldwill develop decarbonisedlow carbon energy projects around the world. Hydrogen Energy will position Rio Tinto Energy to profit from the advent of a global low carbon energy future and initiate the development of a broader risk management strategy for climate change regulation while providing a meaningful offer on climate change and product stewardship.
Rio Tinto 2007 Form 20-F | 81 |
The venture wouldgroup’s strategic intent is to build through Hydrogen Energy a low carbon energy business primarily reliant on coal that will ultimately leverage Rio Tinto’s capabilities in identifying, acquiring and operating large long life coal assets. Gasification opens new and larger markets for coal and the aim is to maximise returns across the emerging coal gasification value chain. Early positioning will convey an important element of competitive advantage. A key to unlocking value will be to proactively shape government policy to support and enable initial projects.
Hydrogen Energy will initially focus on the production of hydrogen fuelledfor power generation using fossil fuels feedstocks and carbon capture and storage technology to produce new large scale supplies of clean electricity. Hydrogen Energy has announced initiation of studies for possible projects in California, Western Australia, and Abu Dhabi.
The first newRössing Uranium life of mine extension project wouldin Namibia continues. With the substantial recovery of uranium prices in recent years, Rössing is well positioned to expand and further extend the life of its operations. This will enable the company to continue to be a leading contributor to the Namibian economy, as it has been for the potential developmentpast 30 years.
At Energy Resources of Australia’s (ERA) Ranger mine, a number of opportunities for further low cost brownfield expansion are under consideration. ERA also owns the Jabiluka deposit, the second largest undeveloped uranium deposit in the world. In addition to the significant and sustainable operating assets at Rössing and ERA, Rio Tinto has increased its uranium exploration activity around the world. With a global nuclear power renaissance now under way, driven in large part by the need for large baseload electricity generation that does not emit greenhouse gases, Rio Tinto intends to maintain and enhance its position as one of the world’s leading uranium suppliers to power this growth.
At 31 December 2007, the Energy group accounted for 4.9 per cent of Group operating assets and, in 2007, contributed 13.8 per cent of Rio Tinto’s gross sales revenue and 6.5 per cent of underlying earnings.
Preston Chiaro, chief executive, Energy and Industrial Minerals, is based in London.
SAFETY
All injury frequency rate | per 200,000 hours |
2003 | 2.35 |
2004 | 2.02 |
2005 | 1.31 |
2006 | 0.89 |
2007 | 0.89 |
Safety performance and awareness continued to be a major focus of all operations. Energy Resources of Australia achieved significant improvements in safety performance. The lost time injury rate fell by 74 per cent and the all injury rate by 46 per cent. The injury severity rate, a measure of the seriousness of injuries, also decreased by a factor of over three. At Rio Tinto Energy America the severity index improved to approximately half of the severity index in 2006. At Rio Tinto Coal Australia’s (RTCA) Kestrel mine the lost time injury rate fell by 57 per cent and the all injury rate by 60 per cent. Two Energy group operations were winners of the Chief Executive’s Safety Awards, Hunter Valley Operations and the Antelope mine in the US.
GREENHOUSE GAS EMISSIONS
A greenhouse gas (GHG) performance review was submitted by each business unit as part of a planning process. This included a discussion on targets and performance and a list of proposed and implemented projects noting project progress, savings, costs and NPV (net present value).
Energy Resources of Australia is expected to exceed its targeted GHG reductions. Rio Tinto Energy America is slightly above target and Rio Tinto Coal Australia emissions per tonne have increased. Both RTEA and RTCA have a number of NPV positive optimisations and diesel reduction projects being researched or implemented. With a life of mine extension under way, Rössing Uranium has set a revised target. A number of optimisation projects have been identified.
The Energy group is also focussing on long term emissions reductions through the Hydrogen Energy joint venture. The plan identifies significant expenditure in terms of operating and capital costs for Hydrogen Energy in 2008 and 2009.
2007 compared with 2006
The Energy group’s 2007 contribution to underlying earnings was US$1,500484 million, coal fired power generation project at KwinanaUS$222 million less than in Western Australia. This project would be subject to the successful outcome of detailed engineering2006.
Coal chain infrastructure bottlenecks and commercial studiesallocation cutbacks in Australia resulted in ongoing and to government policy to make it commercially viable.significant
Rio Tinto |
INDUSTRIAL MINERALS GROUPproduction cutbacks and much higher demurrage costs. It is anticipated that production in Australia will not return to full capacity until 2010 when infrastructure bottlenecks are expected to be cleared. Port allocation arrangement negotiations were continuing at year end.
Production | Rio Tinto share | |
Borates | ‘000 tonnes B2O3 | |
2002 | 528 | |
2003 | 559 | |
2004 | 565 | |
2005 | 560 | |
2006 | 553 | |
Titanium dioxide | ‘000 tonnes | |
2002 | 1,274 | |
2003 | 1,192 | |
2004 | 1,192 | |
2005 | 1,312 | |
2006 | 1,415 | |
Underlying earnings contribution* | US$m | |
2004 | 243 | |
2005 | 187 | |
2006 | 243 | |
Rio Tinto’s Industrial Minerals group comprisesThe results also reflected the softening of coking coal prices although there were increases in thermal coal prices and the stronger uranium oxide market. The weakening of the US dollar against the Australian dollar reduced earnings at Australian operations. For all operations, rising fuel prices and the tightness of the labour supply market continued to place pressure on operating results.
Despite lower volumes of uranium sold, higher market prices and the expiration of older contracts containing price caps contributed to a 69 per cent increase in uranium revenues in 2007 compared to 2006.
At Rössing Uranium, results were affected by reduced production volumes due to grade and plant performance and increased operating costs associated with development projects to increase capacity in the future. At ERA results were affected by production losses associated with severe rain and flooding of the pit.
The strong upward momentum that characterised the uranium market in the past three years continued for the first half of 2007, as demand remained robust in the wake of supply disruptions that affected a number of projects worldwide. However, unlike previous years, 2007 saw a fundamental change in market behaviour as the spot price became de-linked from the long term market due to the increasing influence of speculators in the commodity. Historically, the spot market has traded at a nominal discount to the term market, but last year saw substantial volatility in spot prices.
The long term uranium price, at which Rio Tinto Minerals, which produces borates, talc and salt, and Rio Tinto Iron & Titanium, a major producersells most of titanium dioxide feedstock. Rio Tinto is a global leaderits material, exhibited strong growth in the supply and scienceearly part of these products. There are more than 200 industrial minerals and markets are often diverse, highly technical and require unique marketing and sales expertise. At 31 December 2006, Industrial Minerals accounted for 13the year, rising to a high of US$95 per pound in May, an increase of 27 per cent ofover December 2006. Thereafter, the Group’s operating assets and in 2006 contributed approximately ten per cent of Rio Tinto’s gross sales revenue and three per cent of underlying earnings.Approximately 7,000 people were employed in 2006. The Industrial minerals group was combined with the Diamonds group with effect from 1 June 2007, to form theDiamonds and Minerals group. Andrew Mackenzie, chief executive Diamonds and Minerals and formerly chief executive Industrial minerals, is based in London.long term price remained at US$95 as utility purchasing activity continued at moderately high levels.
Financial performance
2006 compared with 2005Industrial Minerals’The Energy group’s contribution to 2006 underlying earnings was US$243706 million, US$24 million lower than in 2005.
Results benefited from a 30sustained increase in the price received for thermal coal. Capacity problems in the coal supply chain in the Hunter Valley region of New South Wales impeded production from Coal & Allied operations. Drought in parts of Queensland and New South Wales also affected production levels. Operations focused on producing high margin products and optimising the coal supply chain. Increases in the cost of basic materials, fuel, explosives and labour were not fully offset by production growth, resulting in a rise in the cost per unit of production across all operations.
Although spot prices for uranium rose dramatically during the first part of the year, this had little effect on Rio Tinto’s long term contract portfolio. Uranium oxide is typically sold under long term contracts, with pricing determined both by fixed prices negotiated several years in advance, and by market prices at time of delivery. Therefore, the rise in the spot price of uranium oxide during the period was not fully reflected in the year’s earnings, but the rise in long term prices did contribute to the improved results. Moreover, for both mines, legacy contracts at low prices are being replaced with new long term contracts that provide floor price protection at levels far above market prices at the beginning of this decade.
Rio Tinto Energy America(Rio Tinto: 100 per cent)
Rio Tinto Energy America wholly owns and operates four open cut coal mines in the Powder River Basin of Montana and Wyoming, US, and has a 50 per cent improvement on 2005.interest in, but does not operate, the Decker mine in Montana. RTEA also manages the group’s interest in Colowyo Coal in Colorado, US. In total it employs approximately 2,300 people.
The second largest US coal producer, RTEA sells its ultra low sulphur coal to electricity generators predominantly in mid western and southern states.
In April, RTEA bid and won access to approximately 98 million tonnes of additional coal reserves for its Spring Creek Mine in Montana. In June, RTEA bid and won access to additional mineralisation for the Colowyo Mine in Colorado. The acquisitions will extend the operating lives of the respective mines.
Rio Tinto Minerals’has announced that it is exploring options to sell RTEA.
2007 operating performance
RTEA’s 2007 contribution to underlying earnings atwas US$91132 million, US$45 million lower than in 2006. Results reflected steadily increasing US coal prices throughout 2007, more than offset by a higher effective tax rate in 2007.
RTEA’s 2007 sales were 54128.3 million tonnes (excludes brokered sales), a decrease of 222,000 tonnes from 2006. Further increases were limited as customers had built higher levels of coal stockpiles in 2006. Earnings were reduced by a higher effective tax rate than in 2006. In 2007 the effective rate was 35 per cent higheras all prior year loss carry forwards had been applied. Adjusting to comparable tax rates, the 2007 result was better than in 2005. Despiteupward cost pressure caused2006, largely driven by cyclonesimproved contract prices.
Antelope mine production of 31.3 million tonnes set a new record for annual production and labour markets in Western Australia,sales, above the absence in 2006 record of the 2005 Rio Tinto Minerals restructure provision, coupled with modest revenue increases, led to this improved result. Rio Tinto Iron & Titanium underlying earnings, at US$15230.7 million were 19 per cent higher than in 2005. Goodprice performance across all products, combined with favourable volume trends, strict cost control at Richards Bay Minerals and beneficial Canadian tax changes, offset increased costs in the Canadian operations and the impacttonnes. Colowyo mine production of the strong Canadian dollar.5.1 million tonnes decreased by 700,000 tonnes.
Rio Tinto |
Cordero Rojo mine production of 36.7 million tonnes increased by 600,000 tonnes. Jacobs Ranch mine production of 34.6 million tonnes decreased by 1.7 million tonnes. Spring Creek mine production of 14.3 million tonnes set a new record for annual production and sales above the 2006 record of 13.2 million tonnes.2005 comparedConsistent with 2004Industrial Minerals’ contribution to the Group’s 2005 underlying earnings was US$187 million, 23worldwide mining industry, RTEA experienced an increase in the input prices of materials and supplies in 2007 resulting in higher variable costs of mining. Diesel prices in 2007 increased by more than 15 per cent lower thanin 2004,relative to 2006. Labour costs increased significantly reflecting significant one offthe competitive regional labour shortage and steadily increasing healthcare costs. Tyre costs increased with the worldwide shortage of US$42 million after tax, including provision for restructuring in relation tolarge mining equipment tyres. At the formation of Rio Tinto Minerals. There were also increased energy and distribution costs at all business units. Dampier Salt and Rio Tinto Iron & Titanium incurred high initial operating costs for the commissioning of a newplant and for the upgraded titanium slag (UGS) expansion. Rio Tinto Iron & Titanium also incurred a tax expense of US$13 millionsame time, strip ratios increase as reserves get deeper, resulting from a change in the tax rate for QIT-Fer et Titane in Quebec.requirement to move increasing volumes of overburden.
Rio Tinto Borax’s underlying earnings, at US$48 million, were 48 per cent lower thanRTEA is a member of the FutureGen Alliance, which seeks to construct the world’s first coal fuelled “zero emissions” power plant. The project achieved a major milestone with a site in 2004. The boratesbusinessIllinois selected for development. Construction was affected by lower sales volumes and higher energy and distribution costs. Rio Tinto Borax also incurredplanned to commence upon completion of the permitting process, however this is now in doubt with the US Department of Energy announcing a one off restructuring costrestructure of US$12 million after taxthe FutureGen project in relation to the formation of Rio Tinto Mineral. Rio Tinto Iron & Titanium’s underlying earnings, at US$128 million, were ten per cent higher than in 2004. Strong price performance across all products, combined with increased volumes and strict cost performance at Richards Bay Minerals led to this strong result.
OperationsJanuary 2008.
Rio Tinto Minerals
Coal AustraliaDuring 2006, three of (Rio Tinto’s Industrial Minerals businesses – Borax, Luzenac and Dampier Salt – combined theirTinto: 100 per cent)management to form a new and more efficient organisation called Rio Tinto Minerals. Rio Tinto Minerals’ global presence includesCoal Australia manages the group’s Australian coal interests. These include, in Queensland: the Blair Athol (Rio Tinto: 71 per cent), Kestrel (Rio Tinto: 80 per cent), Tarong (Rio Tinto: 100 per cent) and Hail Creek (Rio Tinto: 82 per cent) coal mines and refineries, shipping facilities, refiningthe Clermont deposit (Rio Tinto: 50 per cent).
RTCA also provides management services to Coal & Allied Industries (Coal & Allied) for operation of its four mines located within the Hunter Valley in New South Wales. Coal & Allied (Rio Tinto: 75.7 per cent) is publicly listed on the Australian Securities Exchange and packing facilitieshad a market capitalisation of A$6.5 billion (US$5.7 billion) at 31 December 2007. Coal & Allied wholly owns Hunter Valley Operations, has an 80 per cent interest in Mount Thorley Operations, a 55.6 per cent interest in the contiguous Warkworth mine, and salesa 40 per cent interest in the Bengalla mine which abuts its wholly owned Mount Pleasant development project. Coal & Allied also has a 37 per cent interest in Port Waratah Coal Services coal loading terminal.
Production from the Tarong mine is sold exclusively to Tarong Energy Corporation (TEC), an adjacent state owned power utility. In October 2007 the sale of the Tarong mine to TEC was announced with the sale to take effect from 31 January 2008.
Blair Athol produces thermal coal and technical facilities throughoutsells principally to the Americas, AsiaJapanese market generally on annual agreements. Kestrel and Europe. The company serves 2,500Hail Creek sell mainly metallurgical coal to customers in approximately 100 countries. The global operational headquarters havebeen relocated to Denver, Colorado,Japan, south east Asia, Europe and the global commercial headquarters are in Chiswick, London.Central America, generally on annual agreements.Borates– More than one million tonnes of refined borates are produced at the principal borate miningCoal & Allied produces thermal and refining operation, Boron, in California’s Mojave Desert. Borates are essential to plants and are part of a healthy diet for people. They are also key ingredients in hundreds of modern products, chief among them: insulation fibreglass, textile fibreglass and heat resistant glass (44 per cent of world demand); ceramic and enamel frits and glazes (13 per cent); detergents, soaps and personal care products (six per cent); agricultural micronutrients (seven per cent); and other usesincluding wood preservatives and flame retardants (30 per cent).Talc– Rio Tinto Minerals operates talc mines, including the world’s largest (in south west France), and processingfacilities in Australia, Austria, Belgium, Canada, France, Italy, Japan, Mexico, Spain, the UK and the US. Talcs enhance performance in countless applications, including paper, paints, putties, roofing materials, plastics, automotive parts, ceramics, foundry, rubber goods, personal care products, agriculture, food, pharmaceuticals, soap, cosmetics, and pesticides. This multiplicity demands an in depth understanding not only of talc’s properties and functions but alsosemi soft coal. Most of its full range of applicationsthermal coal is sold under contracts to electrical or industrial customers in Japan, Korea and user industries.Salt– Rio Tinto Minerals manages Dampier Salt’s (Rio Tinto: 64.9 per cent) three salt operations locatedelsewhere in WesternAsia. The balance is sold in Europe and Australia. It produces industrial salt by solar evaporation at Dampier, Port Hedland and Lake MacLeod, where it alsomines gypsum. Dampier Salt’sCoal & Allied’s semi soft coal is exported to steel producing customers are located in Asia and the Middle East . The majority are chemical companies which use salt as basic feed for the productionEurope under a combination of chlorinelong term contracts and caustic soda (together known as chlor-alkali production). Dampier Salt’s product is also used as food saltspot business.
RTCA and for general purposes, including road de-icing.Coal & Allied collectively employ approximately 2,500 people.
20062007 operating performance
RTCA’s 2007 contribution to underlying earnings was US$246 million, US$244 million lower than in 2006. There was an increase in thermal coal prices but this was offset by production cutbacks necessitated by shipping bottlenecks and the continued weakening of the US dollar against the Australian dollar. Rising fuel prices and the tightness of the labour supply market continued to place pressure on operating results.InA tax benefit of US$29 million was received on the release of a tax provision that was no longer required.
As the majority of costs are fixed with only consumables such as fuel, tyres and explosives being variable, reduced port capacities had a direct and negative impact on underlying earnings.
Inadequate capacity of coal chain infrastructure in both the Hunter Valley and Queensland operations was a significant contributor to less than satisfactory results for RTCA. Significant production cutbacks of 14 per cent from 2006 Rio Tinto Minerals streamlinedlevels were necessary, resulting in equipment and contract employees being idled. It is anticipated that production will not return to full capacity until 2010 when infrastructure bottlenecks are expected to be cleared.
RTCA operations declaredforce majeureunder its sales and administrative function, reducing staff by 20 per cent and closing three laboratories and three offices. There are plans to closecontracts on two more. In its operations, Rio Tinto Minerals divested several less profitable product lines and operational sites, built boric acid capacity, approved new salt capacity, andimproved plant efficiency, mine planning and energy use. In the marketplace, North America remains the most profitable region for Rio Tinto Minerals’ products. Developing economies suchoccasions during 2007; in June as China, eastern Europe and India hold promise becausea result of their rising living standards and the demand for higher quality raw materials.Borates– Production volumes were down one per cent, at 553,000 tonnes, but sales volumes remained consistent with 2005’s total. Asia continued to drive growthsevere weather conditions in the borate market, though there were pocketsHunter Valley and in November as a result of growthannounced first quarter 2008 allocation cutbacks at the Dalrymple Bay port facilities in Russia andQueensland.eastern Europe. In North America, stagnation in the housing market signals a possible decline in demandTotal production at Blair Athol decreased from insulations and wood preservatives customers, but this is likely to be offset by retrofit and remodeling trends. Rio Tinto Minerals expanded its boric acid capacity by a further 56,00010.2 million tonnes to supply market growth. The project was completed on time and under budget and is meeting planned throughput.Talc– Talc7.9 million tonnes primarily as a result of limited port capacity. Kestrel’s production volumes increased two per cent, while sales volumes remained at the same level as 2005,reflecting stable markets with growth in the polymer, paint and technical ceramics sector offsetting declines in paper.Salt– Five cyclones in Western Australia during 2006 adversely affected salt operations, reducing production by almost two0.8 per cent to 8.33.6 million tonnes. Hail Creek production was five million tonnes, (Rio Tinto share: 5.4 million tonnes). Sales volumesan increase of ten per cent. At Tarong, production decreased by five35 per cent.cent in line with lower demand from Tarong Energy Corporation.
Energy Resources of Australia(Rio Tinto: 68.4 per cent)Despite this, supply reliabilityEnergy Resources of Australia Ltd (ERA) is a publicly listed company and excellent customer relations were maintained. Repairshad a market capitalisation of A$3.7 billion (US$3.3 billion) at 31 December 2007. ERA employs 420 people, an increase from 385 at the end of 2006.
Since 1980 ERA has mined ore and produced uranium oxide at its Ranger open pit mine, 250 kilometres east of Darwin in Australia’s Northern Territory. ERA also has title to the adjacent Jabiluka mineral lease, which in 2003 was put on long term care and maintenance. Ranger and Jabiluka are well under way. The residual impact of dilutionsurrounded by, but remain separate from, the record rains will be felt for the next two years. At Lake MacLeod, a 26 per cent capacity increase was approved by all shareholders.World
Rio Tinto |
Heritage listed Kakadu National Park, and especially stringent environmental requirements and governmental oversight apply.
ERA is a large uranium producer, with considerable operational experience and a well established market position. The Ranger mine is the second largest uranium mine in the world and ERA is the fourth largest producer. ERA’s strategy is focused on creating the most value from the mineralisation available on existing lease areas. In line with the Energy group’s strategy of seeking additional production volumes and long term expansions to supply the current favourable market environment, ERA put significant effort into achieving growth through capitalising on opportunities for expansion and extension of production including, an extension of the existing Ranger mine, and installation of additional processing equipment to treat low grade and lateritic ore.
2007 operating performance
ERA’s 2007 full year earnings rose by 124 per cent to US$38 million in comparison with 2006 earnings of US$17 million. This was driven by a rise in the average realised price of uranium oxide from US$18.36 per pound to US$25.06 per pound despite sales being lower at 11.7 million pounds compared to the 2006 volume of 12.7 million pounds. The 2007 sales figures include no borrowed material.
Production of uranium oxide in 2007 was 11.7 million pounds, approximately 13 per cent higher than in 2006.
The favourable production result was significant given a severe rain event associated with a tropical low pressure system, resulting in nearly 850 millimetres of rain falling over the Ranger operation in seven days in February 2007. This resulted in flooding of the Ranger open pit, restricting access to high grade ore, forcing a processing plant shutdown and a declaration offorce majeureon sales contracts in March 2007. In the third quarter of 2007 access to high grade ore was again possible through the implementation of various water disposal measures.
Recovery work was successful in allowing production to return to normal levels in 2008 with no adverse environmental consequences. All sales commitments were met in 2007 andforce majeurewas lifted in January 2008. Further work is under way to reduce the impact of future weather events on the mine’s performance.
In September ERA announced an extension of the Ranger mine at a capital cost A$57 million, which added 10.7 million pounds of additional reserves, and extended the mine life from 2008 to 2012. Expenditure of A$10 million was also approved to examine options to further extend the mine and increase production from the processing plant.
Exploration and evaluation activity increased in 2007 with ERA spending US$11.8 million compared to US$6 million in 2006. Exploration and evaluation focused on near mine extensions to the Ranger orebody.
ERA continued to work with the Mirarr, traditional owners of the mining lease. The Mirarr commenced delivery of a cultural awareness programme to all new ERA employees and advised ERA on the establishment of traditional fire management practices on the Ranger lease. Increasing indigenous employment is a significant focus including the provision of training and employment opportunities. The year saw the number of indigenous employees increase to 65, or 16 per cent of the workforce. Improving on this will continue to be a focus for 2008.
Rio Tinto Iron & Titanium
Rössing Uranium(Rio Tinto Iron & Titanium (RIT) comprisesTinto: 68.6 per cent)
Rössing Uranium Limited produces and exports uranium oxide from Namibia to power utilities globally. Rössing continues to play a major role in the wholly owned QIT-Fer et Titane (QIT)Namibian economy, both in Quebec, Canadaterms of GDP contribution as well as education, employment and training.
Rössing currently employs approximately 1,175 people. Following the life of mine extension project approved in 2005, capital equipment acquisitions for the new mining area are in place and planning work for further extension continues. In 2007 production volumes of 6.7 million pounds were constrained as a result of having limited access to ore sources. The phase one pit is in its last two years of life. Mining and processing volumes, however, have been good and the 50per cent interestmine is positioned for higher volumes in Richards Bay Minerals (RBM) in KwaZulu-Natal, South Africa. Both operations produce titanium dioxide feedstock used as pigment by manufacturers2008 and beyond.
The year was one of paintsconsolidation and surface coatings, plasticspreparation for future growth and paper. Coproducts include high purity ironsustainable production. Truck and zircon. QIT’s proprietary process technology enables itloading fleets doubled and over 300 people were recruited and trained. The current approved life of mine extensions will take the mine life to supply2016 and further potential opportunities exist to extend both the sulphatemine life and chloride pigment manufacturingproduction volumes depending on the long term price outlook and costs of production. Activities will continue to focus on continuous net present value (NPV) growth, improving margins and creation of options from known reserves and potentially economic mineralisation.
2007 operating performancemethods. Its upgraded slag (UGS)
Earnings increased to US$95 million from US$27 million in 2006 due to higher market prices for uranium oxide.
Operating costs increased to US$38 per pound of uranium oxide production from US$22 per pound in 2006 as a result of lower production volumes, outsourcing of waste stripping as well as exploration activities that are not yet adding to production volumes. Costs were also affected by ore grades and higher than planned diesel and other operating costs.
All new primary production equipment is now fully commissioned to bring the fleet complement to 24 haul trucks from 16 at the beginning of the year, and six loading units compared to four previously. Initiatives are under way to improve the performance of the milling process.
Lower than planned leach extraction in 2007 was due to the average ore type which impacted on process controls. In 2008 there will be a focus on maintaining stability in the process and improving the head grade by applying a better blending strategy.
Rio Tinto 2007 Form 20-F | 85 |
Rössing continues to put significant effort and management focus on safety. The goal is to eliminate all injuries from the workplace and to have an embedded safety culture and systems that identify and rectify potential safety hazards.
ENERGY GROUP PROJECTSEnergy Resources of Australia(Rio Tinto: 68.4 per cent)
In September 2007 ERA announced an extension to the Ranger open pit at a capital cost of A$57 million to extend mining until 2012. The pushback, when combined with optimisation of the existing pit, added an additional 10.7 million pounds of contained uranium oxide to reserves. The majority of the additional production from the extension is expected to occur in 2011.
ERA has also approved expenditure of A$10 million for a pre-feasibility study to examine options to further expand the mine and increase production from the processing plant. The study commenced in the third quarter of 2007 and will continue into 2008.
ERA’s other capital expansion projects to process laterite ore and radiometrically sort low grade ores are well advanced with both projects scheduled for commissioning in the second quarter of 2008. The laterite processing plant supplies the growing chloride sector and is designed for expansion, in line with demand, up to a capacity of 600,000 tonnes per year. During 2006, RIT expanded its UGS plant to 375,000 tonneswill contribute approximately 0.88 million pounds per annum three months ahead of schedule. RBM’s ilmenite hasuranium oxide to production from 2008 through to 2014. The radiometric sorter will upgrade lower grade ore and allow an additional 2.4 million pounds of uranium oxide to be produced over a low alkali content, which makes its feedstock suitablefive year period from 2008 to the end of 2013.
Exploration continued throughout the year including for the chloride pigment process. RBM hasfirst time drilling through the wet season. Activity focused on further defining the down dip extension of the Ranger orebody, as well as understanding and defining the uranium mineralisation to support the pre-feasibility study on further expansion of the mine.
Rössing Uranium(Rio Tinto: 68.6 per cent)
After years of working below capacity during a period of low uranium prices, in December 2005 approval was granted to restore annual production capacity to produce one8.8 million tonnespounds per annum and extend the life of feedstock annually.the operation until at least 2016. Total incremental and sustaining capital cost of the expansion is US$112 million.
In 2007, delays were experienced with the start of construction projects due to slow contractor tender submissions. Recruitment of staff has been slow due to skills shortages in southern Africa. Work is now progressing well.
2006 operating performanceRIT increased production across all of its products in 2006, with a ten per cent increase in UGS as expanded capacity was brought on-line. RBM operated at full capacity and saw an eleven per cent increase in titanium dioxide (TiO2)feedstock production. Strong market performance led to strong financial performance as TiO2 pigment producers reported an increase in sales volumes of five per cent on average during 2006, after a decrease in 2005 of 0.5 per cent. Market conditions remain tight for chloride feedstock, as chloride pigment plants continue to run at high utilisation rates. Demand for high-grade TiO2 feedstock, such as QIT’s UGS, remains strong. Market conditions for iron and steel co-products also remain strong. Zircon prices continued to increase throughout 2006, as demand was effectively constrained by available supply. The offices of RIT were relocated from Montreal to the UK during 2006.
Projects
QIT Madagascar MineralsOyu Tolgoi(Rio Tinto: 809.9 per cent)
cent interest in Ivanhoe Mines)
In 2005October 2006 Rio Tinto announced the approvalpurchased a stake of the Madagascar titanium dioxide project. RIT manages the project, in which an agency of the Government of Madagascar has a 20 per cent interest. The project comprises a mineral sands operation and port in Madagascar and an upgrade of Rio Tinto’s ilmenitefacilities in Canada. First production from the operation in the Fort-Dauphin region of Madagascar is expected in late 2008 and the initial capacity will be 750,000 tonnes of ilmenite per year. During 2006 the definitive cost estimate of the project was finalised. The cost increased by just under ten per cent in Ivanhoe Mines of Canada in order to US$850 million. The cost inflation was mainly caused by higher materials costs and foreign exchange pressures but increased production capacity and logistics will ensurejointly develop the project value is unchanged. The ilmenite will be smelted atOyu Tolgoi copper-gold resource in Mongolia’s south Gobi region. Rio Tinto’s facilities at Sorel in Quebec. This will require an upgrade of storage and handling facilities as well as their associated ancillary services. With a grade of 60Tinto has the ability progressively to increase its stake to 43 per cent titanium dioxide,over theMadagascar orebody next four years at pre-determined prices. This phased, risk managed entry into an outstanding resource secures a valuable share of a potential average production rate of 440,000 tonnes of copper per year with significant gold by-products.
There is extensive exploration potential in Mongolia, including ground controlled by Entrée Gold around Oyu Tolgoi. Rio Tinto is the world’s largest known undeveloped high grade ilmenite deposit. Itsingle shareholder in Entrée Gold and, with Ivanhoe, owns a total equity interest of 30.6 per cent. Ivanhoe has an expected mine life of 40 years and will supply a new, high quality chloride slag with 91option for up to an 80 per cent titanium dioxide contentinterest in the Entrée ground over the north and south extensions of the Oyu Tolgoi trend. Exploration on the Entrée Gold joint venture by Ivanhoe has recently delineated a continuous molybdenum-rich copper and gold mineralisation up to meet400 metres wide along a 1,100 metre strike length. Overall, the Oyu Tolgoi mineralised trend now has a strike length of over 20 kilometres.
Rio Tinto is actively engaged and working with the Mongolian Government to progress settlement of a long term demand for titanium dioxide by the pigment industry. A deep sea multi-use public port at Ehoala, near the town of Fort-Dauphin, is an important component of theproject. The mine will be the key initial customer, providing the base load to help establish the port. Over time, it is expected the port will make an important contribution to the economic development of the region. The Government of Madagascar contributed US$35 million to the establishment of the port, as part of its GrowthPoles Project funded by the World Bank. RIT will manage the port operations.investment agreement.
Potasio Entrée Gold(Rio Colorado S.A.Tinto: 16 per cent)
In June 2005 Rio Tinto acquired a 9.9 per cent stake via private placement in Entrée Gold Inc, a Canadian junior mining company. Entrée Gold's main asset includes three claims that surround the Ivanhoe Mines Oyu Tolgoi project in Mongolia. Rio Tinto's entry into Entrée Gold was due primarily to the prospectivity of the land package, including high grade copper and gold intercepts in their tenement already under agreement to Ivanhoe adjacent to the Oyu Tolgoi lease. Recent drilling by Ivanhoe identified significant high grade intercepts of porphyry mineralisation on the Heruga concession adjacent to the Oyu Tolgoi project. As part of the initial entry into Entrée Gold, Rio Tinto secured a further 6.3 million A and B class warrants which were due to expire by the end of June 2007. On the 28th June, Rio Tinto exercised these warrants at a cost of US$16.9 million which took Rio Tinto's direct equity in Entrée Gold to approximately 16 per cent. The combined Rio Tinto and Ivanhoe equity position is now over 30 per cent.
La Granja(Rio Tinto: 100 per cent)The Rio Colorado potashLa Granja in the Cajamarca region of northern Peru is a copper project in Argentina lies 1,000 km south west of Buenos Aires. Evaluation ofthe pre-feasibility phase. Rio Tinto acquired the project began in late 2003, andDecember 2005 for US$22 million plus a minimum investment of US$60 million, through a public bidding process carried out by the Peruvian Government.
As of December 2007, 41 kilometres of drilling had been completed which led to discovery of four additional porphyries in the vicinity, as well as further exploration potential. Drilling results suggest that the main areas have a targeted mineralisation at a copper equivalent average grade of about 0.5 per cent. Initial investigations indicate two to four times more mineralised material than was reported by previous owners, making La Granja the largest undeveloped copper project in Latin America. It has the potential to be a very large, scale triallong life operation. First production could occur in 2014.
Instead of solution mining oflooking at La Granja as a conventional milling operation producing concentrates for export, the potash has run successfully from late 2004. Currently a feasibilitypre-feasibility study is under wayaimed at demonstrating the possibility of recovering copper metal using leaching of copper from whole ore, with solvent extraction and assuming favourable progress, will be completed in 2007. A positive development decision in 2007 could see first production from the mine in 2010 and production volumeselectrowinning.
There are many stakeholders with an interest in the rangeproject due to the potential positive impact on the local and national economy. At the same time, local communities have high expectations of 1.6Rio Tinto’s presence in the area, where basic skills of literacy and numeracy and basic infrastructure and services are lacking. Rio Tinto is working in a participatory manner with local communities to 2.4 million tonneshelp them develop and improve their quality of life with the engagement of local, regional and national authorities.
Pebble(Rio Tinto: 19.8 per year.cent interest in Northern Dynasty Minerals)
Rio Tinto acquired a 9.9 per cent interest in Northern Dynasty Minerals during the year and increased its interest to 19.8 per cent during February 2007. Northern Dynasty Minerals is advancing the Pebble copper-gold-molybdenum deposit in south western Alaska, which includes an orebody amenable to block caving. In July 2007, Anglo American agreed to
Rio Tinto |
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ALUMINIUM GROUPinvest US$1.4 billion in stages to earn a 50 per cent stake in the project.
The project comprises two orebodies, Pebble East and Pebble West. Drilling has shown Pebble East to be deep and higher grade, suggesting an attractive underground mining option with a smaller environmental footprint than the Pebble West deposit which would entail open pit mining. Rio Tinto will not support development unless it is conducted in a way that protects fish, wildlife and the environment.
Mined | Rio Tinto share | |
Weipa bauxite | million tonnes | |
2002 | 11.2 | |
2003 | 11.9 | |
2004 | 12.6 | |
2005 | 15.5 | |
2006 | 16.1 | |
Production | Rio Tinto share | |
Alumina | ‘000 tonnes | |
2002 | 1,947 | |
2003 | 2,014 | |
2004 | 2,231 | |
2005 | 2,963 | |
2006 | 3,247 | |
Aluminium | ‘000 tonnes | |
2002 | 794 | |
2003 | 817 | |
2004 | 837 | |
2005 | 854 | |
2006 | 845 | |
Underlying earnings contribution* | US$m | |
2004 | 331 | |
2005 | 392 | |
2006 | 746 | |
Sulawesi Nickel(Rio Tinto: 100 per cent)
The Sulawesi Nickel project is situated on the island of Sulawesi in Indonesia and is the result of the discovery by Rio Tinto Exploration in 2000 of a world class laterite deposit. Because of the nature of the deposit, mining is planned to be a shallow open cut process with continuous rehabilitation. Initial production is planned at a rate of about 46,000 tonnes of nickel per annum, with potential to increase to about 100,000 tonnes. The project will involve the construction of an access highway and a new seaport on the east coast of Sulawesi.
Upon completion of the negotiation of a Contract of Work (CoW) with the Government and ratification of the agreement by the Indonesian Parliament, it is intended to start a pre-feasibility study into development.
Eagle(Rio Tinto: 100 per cent)
Late in 2007 Rio Tinto approved the development of the eagle nickel high grade underground mine in Michigan, US, which is scheduled to begin operation in 2009. There are six further adjacent prospects which may give the potential to extend the current mine life beyond 30 years at the current planned production rates. Deeper drilling under and adjacent to the Eagle deposit reinforced the potential for further economic nickel mineralisation outside the current mine plan. There are similarities to other world class magmatic nickel-sulphide deposits. Rio Tinto has an extensive land position in the Eagle district which is extremely prospective, including a 30 kilometre identified trend containing multiple target intrusions.
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Diamonds and Industrial Minerals group
Mined | Rio Tinto share | |
Diamonds | ‘000 carats | |
2003 | 33,272 | |
2004 | 25,202 | |
2005 | 35,635 | |
2006 | 35,162 | |
2007 | 26,023 | |
Underlying earnings contribution* | US$m | |
2004 | 431 | |
2005 | 438 | |
2006 | 406 | |
2007 | 488 | |
Changes in underlying earnings 2005 – 2007 | US$m | |
2005 Underlying earnings | 438 | |
Effect of changes in: | ||
Prices and exchange rates | 46 | |
General inflation | (26 | ) |
Volumes | (97 | ) |
Costs | (22 | ) |
Tax and other | 67 | |
2006 Underlying earnings | 406 | |
Effect of changes in: | ||
Prices and exchange rates | (20 | ) |
General inflation | (39 | ) |
Volumes | 58 | |
Costs | 53 | |
Tax and other | 30 | |
2007 Underlying earnings | 488 | |
* | A reconciliation of the net earnings with underlying earnings for |
STRATEGIC OVERVIEW
From 1 June 2007 the number of product groups in which Rio Tinto Aluminium is an integratedorganised was reduced by combining the Industrial Minerals group with the Diamonds group to form Diamonds and Industrial Minerals. The structuring better reflects the size of the Diamonds and Industrial Minerals businesses in the context of the broader Rio Tinto. Diamonds and Industrial Minerals report to the product group with operationsheads of Copper and Energy respectively.
Diamonds comprises Rio Tinto’s 60 per cent interest in the Diavik Diamonds mine located in the Northwest Territories of Canada, the wholly owned Argyle mine in Western Australia, New ZealandRio Tinto’s 78 per cent interest in the Murowa mine in Zimbabwe and diamond sales and representative offices in Antwerp, Belgium and Mumbai, India.
Within the UK. The Comalco name was replaced byglobal diamond industry, Rio Tinto Aluminium in November 2006Diamonds is well positioned as a leading supplier to take advantagethe market with a clear focus on the upstream portion of the Rio Tinto global brand and reputation.value chain. The group’s differentiated approach to marketing has enabled it to capture higher prices.
The Aluminium group’s strategy is to maximise shareholder return by committingcompete in the diamond business and strive to build further value through operational excellence in health, safetyand continued development of new and existing resources. The focus is on the mining, recovery and sale of rough natural diamonds. In keeping with Rio Tinto’s values, the group is a leading proponent of a number of programmes and partnerships that help improve social and environmental performance; maximising value generated from existing assets;standards of partners, suppliers and optimising and opportunisticallycustomers.growing the bauxite, alumina and aluminium portfolio. Rio Tinto Aluminium uses its dedicated business improvement programme, called Lean Six Sigma, to solve operational problems, improve process stability and eliminate waste.The Aluminium group has two operating business units – Mining and Refining, and Smelting. At 31 December2006, the group accounted for 17 per cent of Rio Tinto’s operating assets and in 2006 contributed 14 per cent of the Group’s gross sales revenue and ten per cent of its underlying earnings.
Rio Tinto Aluminium employs about 4,300 people. Oscar Groeneveld, chief executive Aluminium,sells diamonds from all three operations through its marketing arm according to a strict chain of custody process ensuring all products are segregated according to mine source.
The Industrial Minerals part of the group is basedmade up of Rio Tinto Minerals (RTM), a global leader in borates, talc and salt supply and science, and Rio Tinto Iron & Titanium (RTIT), a major producer of titanium dioxide feedstock. Industrial minerals markets include automotive, construction, telecommunications, agriculture and consumer products industries. Market differentiation depends on technical and marketing expertise and the group maintains R&D facilities in Europe, Canada and the US to develop new products and support customers.
The Industrial Minerals strategy is to create value by directing resources toward high value growth sectors in mature and emerging markets. To support this, the group focuses on meeting customers’ needs for consistent quality, on time delivery and responsiveness; setting and meeting aggressive business improvement targets; expanding high grade titanium dioxide feedstock capacity; and establishing stock points to supply demand growth in emerging economies.Brisbane, Australia.
Rio Tinto | 75 |
The Industrial Minerals operating strategy is market driven and focuses on optimising volumes and product mix.
Business improvement targets set in 2004 have largely been met resulting in the lowering of the sustainable cost base of Industrial Minerals. As part of a business optimisation exercise two talc operations were sold and two more were decommissioned in 2007. The Canadian RTIT metal powders plant has been integrated into the other RTIT operations to improve operating synergies. Operational excellence programmes continue to deliver improvements through systematically eliminating waste, reducing process variability, and engaging and empowering the workforce.
Commercial and operating excellence is the foundation for growth, with acquisitions of sufficient scale serving to complement the existing portfolio. Greenfields projects are under way in potash and soda ash. RTIT is operating its assets at maximum capacity while maximising returns from co-products. Volume growth in the high grade titanium dioxide feedstock market will be underpinned by the commissioning and expansion of the Madagascar deposit.
During 2007 negotiations at Richards Bay Minerals (RBM) were progressed to an advanced stage to divest 26 per cent of the business to historically disadvantaged groups as part of the legal requirement in South Africa to convert mineral rights. Rio Tinto marginally increased its share in its salt operations by buying out minority shareholders. At the end of 2007 a Group wide review of assets was conducted to determine the long term value of retaining these assets within Rio Tinto. Based on the outcome of this review the RTM borates and talc businesses are being considered for divestment.
At 31 December 2007, Diamonds and Industrial Minerals accounted for seven per cent of the Group’s operating assets and contributed approximately 12 per cent of Rio Tinto’s gross turnover and seven per cent of underlying earnings in 2007. Approximately 8,000 people were employed in 2007.
Andrew Mackenzie was appointed chief executive, Diamonds and Industrial Minerals on 1 June. In November he left the Group. Responsibility for the Industrial Minerals portfolio was assumed by Preston Chiaro, chief executive, Energy, while Bret Clayton, chief executive, Copper, is responsible for Diamonds.
SAFETY
All injury frequency rate | per 200,000 hours |
2003 | 1.89 |
2004 | 1.67 |
2005 | 1.45 |
2006 | 0.91 |
2007 | 1.07 |
GREENHOUSE GAS EMISSIONS
Greenhouse gas (GHG) emissions per tonne of product are decreasing at both Diavik and Argyle diamond mines. Both sites are evaluating and implementing projects to further reduce emissions. At Argyle these projects are focused on inreasing the proportion of hydro-electric power, which already meets the majority of power requirements.
The majority of RTM’s GHG emissions are from the Boron California facility where an energy management plan has been introduced. There are currently 24 energy management projects that are being progressed, and emissions per tonne of product are decreasing. During 2007 RTIT sites undertook audits to identify opportunities for GHG and energy reduction.
FINANCIAL PERFORMANCE
2007 compared with 2006
Diamonds contributed US$280 million to Rio Tinto’s underlying earnings in 2007, an increase of US$69 million over 2006. Sales revenue for 2007 was US$1,020 million, US$182 million higher than in 2006. Increased volumes from Diavik, a reduction in stocks at Argyle and tax credits in Australia and Canada contributed to earnings. An impairment charge of US$328 million after tax was taken at Argyle, reflecting industry cost pressures and the difficult ground conditions encountered in the underground project.
The rough diamond market recovered during 2007 as excess pipeline inventory was consumed after weakness in the latter half of 2006. The polished diamond market was steady, but the weakness of the US economy is expected to curtail demand in the lower end of the market.
Industrial Minerals’ net earnings were US$248 million, an improvement of two per cent on 2006. Net earnings from RTM decreased eight per cent to US$84 million while revenue grew five per cent. Earnings were negatively
Rio Tinto 2007 Form 20-F |
Financial performanceaffected by a tax charge related to the borates business, and the impact of cyclones in Western Australia on salt volumes.
RTIT recorded earnings of US$164 million, up from US$152 million in 2006. Revenue increased by 15 per cent due to an increase in sales to emerging markets and strong co-product prices. The effect of the strong Canadian dollar and rising input costs continued to put pressure on earnings from RTIT’s wholly-owned QIT-Fer et Titane (QIT) business.
2006 compared with 2005InDiamonds contributed US$211 million to underlying earnings in 2006, a decrease of US$75 million from 2005. Reduced 2006 earnings are mainly a result of the weakened second half market.
Diamonds’ turnover for 2006 was US$838 million, US$238 million lower than in 2005 driven primarily by a downturn in the rough diamond market in the second half of 2006. This resulted in lower prices for most product types with Rio Tinto Diamonds stocking some lower quality product to be sold in 2007.
Diamond production remained at similar levels to 2005 across all operations. Argyle produced 29.1 million carats in 2006, approximately 1.4 million carats less than in 2005. This was in line with expectations of a decreasing diamond production profile as the open pit winds down and underground production ramps up over the next five years. Diavik produced 5.9 million carats in 2006, 0.9 million carats more than in 2005. Murowa produced 0.2 million carats in 2006, slightly less than in 2005.
The rough diamond market started strong in the first half of 2006 but deteriorated into the second half. Year end prices closed at similar levels to the start of 2006. A number of factors influenced this mid year correction, including a congested processing pipeline, tight manufacturing and trading liquidity and storms that caused flooding in India’s major cutting center, Surat, which forced the shutdown of many cutting and manufacturing centres for several weeks.
Polished diamond prices remained constant through 2006 with reasonable demand experienced for most products, particularly for larger better quality white diamonds.
During 2006 Rio Tinto’s shares in Ashton Mining of Canada were taken up by Stornoway Diamonds under its takeover bid for Ashton. In exchange for the shares in Ashton, Rio Tinto Aluminium’sreceived cash totaling approximately C$29.6 million and 25.6 million Stornoway common shares.
Industrial Minerals’ contribution to the Group’s2006 underlying earnings was US$746243 million, an increase of 90a 30 per cent. Higher aluminium prices resulted incent improvement on 2005.
Rio Tinto Minerals earnings increasing byat US$45191 million with the average aluminium pricewere 54 per cent improved on 2005. The absence in 2006 at 116 US cents per pound compared with 86 US cents in 2005.
of the 2005 compared with 2004
Rio Tinto Aluminium’s contributionMinerals restructure provision and modest revenue increases, combined with strong cost performance, despite upward pressure from cyclones in Western Australia and labour markets, contributed to underlying earnings in 2005 was US$392 million, an increase of 18 per cent. The average aluminium price in 2005 was 86 US cents per pound compared with 78 US cents in 2004 and this led to an increase in earnings of US$106 million. However, the effect of the weakening US currency reduced Aluminium’s earnings by US$34 million.
Operations
Mining and refiningresult.
Rio Tinto Aluminium has a large, wholly owned bauxite mineIron & Titanium earnings at Weipa on Cape York Peninsula, Queensland. AUS$150152 million expansion in 2004 increased capacity to 16.5 million tonnes per year. This expansion, when combined with recent infrastructure investment, provides the foundation for Weipa to increase annual production to 25 million tonnes.As at 31 December 2006, mineable reserves of bauxite at Weipa were 1,193 million tonnes. Approximately 90 per cent of the bauxite from Weipa was shipped to alumina refineries at Gladstone, Queensland, and Sardinia, Italy in2006.In 2006, Weipa’s safety performance was recognised when it received the Minerals Council of Australia’s National Minerals Industry Safety and Health Excellence Award (the MINEX Award).Rio Tinto Aluminium owns the Yarwun alumina refinery (formerly Comalco Alumina Refinery) and 38.6 percent of Queensland Alumina in Gladstone. Rio Tinto Aluminium sold its 56.2 per cent interest in the Eurallumina refinery in Sardinia, Italy. The sale was effective in October and was in line with Rio Tinto’s strategy of selling non core assets.The Yarwun alumina refinery reached and exceeded nameplate capacity of 1.4 million tonnes per annum in the fourth quarter of 2006, in line with the original development schedule. A two million tonne per annum expansion is under study. There is potential for total capacity to be expanded to over four million tonnes. Most of the refinery’scurrent output goes into Rio Tinto Aluminium smelters; the balance is placed in the traded alumina market. The refinery adds value to the Weipa bauxite deposit and strengthens both Rio Tinto Aluminium’s and Australia’s positions in the world alumina market.Rio Tinto Aluminium is continuing to pursue new market opportunities for bauxite and alumina, including participation in China’s growing alumina market.
2006 operating performanceBauxite production at Weipa reached record levels in 2006, at 16.1 million tonnes, four19 per cent higher than in 2005. This increase was a resultGood price performance across all products, combined with favourable volume trends, strict cost control at RBM, and beneficial Canadian tax changes offset increased costs in the Canadian operations and the impact of the ongoing ramp up of project NeWeipa, which led to increased production from both theEast Weipa and Andoom mines. Weipa bauxite shipments rose by six per cent, to 15.9 million tonnes. Rio Tinto Aluminium advised its calcined bauxite customers in December 2006 that it would withdraw from the production of calcined bauxite by 2008 after 40 years of providing this product to the abrasives and oil and gas exploration industries. Calcined bauxite represents about one per cent of Weipa’s total bauxite production.Rio Tinto’s share of alumina production for 2006 was ten per cent higher than in 2005. This increase was theresult of the ramp up at the Yarwun alumina refinery, which produced 1.2 million tonnes, about 400,000 tonnes more than in 2005. Production at Queensland Alumina Limited and Eurallumina (until its sale effective in October) was similar to 2005 levels.strong Canadian dollar.
SmeltingRIO TINTO DIAMONDS OPERATIONSRio Tinto Aluminium’s primary aluminium is produced by smelters at Boyne Island (59.4 per cent) near Gladstone, Bell Bay (100 per cent) in Tasmania, Tiwai Point (79.4 per cent) in New Zealand and Anglesey Aluminium (51 per cent) in Wales, UK. Rio Tinto Aluminium also maintains a 42.1 per cent interest in the Gladstone Power Station.During the year, Rio Tinto Aluminium participated in the Minding the Carbon Store project and, through it, will generate carbon credits for up to one million tonnes of greenhouse gas emissions. This represents about ten per cent ofRio Tinto Aluminium’s total emissions, including the emissions from purchased electricity and forms part of Rio Tinto Aluminium’s climate change strategy.Rio Tinto Aluminium continued to invest in the development of drained cathode cell technology in 2006. Thisnew smelter technology has the potential to save ten to 15 per cent of the electricity currently used at Rio Tinto Aluminium smelters. Rio Tinto Aluminium Technology is currently undertaking a demonstration project of the new technology at Bell Bay.
Rio Tinto Aluminium is exploring opportunities for developing its smelting business. In addition to work being undertaken in the Middle East, it has expressed a strong interest to the Sarawak state and federal governments inMalaysia to build an aluminium smelter based on hydro electricity.
2006 operating performanceRio Tinto Aluminium’s share of aluminium production from its four smelters, at 845,000 tonnes, was slightly below2005 production levels because of reduced hydro-electricity generation in New Zealand after low inflows. Attributable metal shipments for 2006 were 850,000 tonnes, a decrease of 9,000 tonnes. They went primarily to Japan, Korea, Australia, South East Asia and Europe.Rio Tinto Aluminium smelters continued to produce at or close to capacity in 2006. Production at Bell Bay,Anglesey Aluminium and Boyne Smelters was consistent with 2005 levels.
Projects
WeipaArgyle(Rio Tinto: 100 per cent)In 2006, Rio Tinto Aluminium commissionedowns and operates the Argyle diamond mine in Western Australia. Production from Argyle’s AK1 open pit mine is expected to continue through 2008, when the mine will transition to underground operations which are expected to extend the life of the mine to about 2018.
2007 operating performance
Due to lower grades, diamonds recovered decreased to 18.7 million carats in 2007 from 29.1 million carats in 2006 despite a new US$40 million 26 megawatt power station. The new power station services the mining operation and surrounding communities. A US$60 million second shiploader was commissionedtwo per cent increase in the fourth quartervolume of ore treated. Mine productivity was lower due to ensure reliability of bauxite supply to customers.To meet the needs of increased trade of bauxite and alumina, Rio Tinto Marine committed US$120 million to the purchase of three new post Panamax bulk ore carriers to be used primarily on the Weipa to Gladstone run. The first ship will be deliveredmining at lower elevations in the third quarter of 2007.pit. Improvement programmes are in place to mitigate the cost pressures brought about by the resources boom in Western Australia.
YarwunDiavik Diamonds(Rio Tinto: 10060 per cent)
Rio Tinto Aluminium continues to studyoperates the expansionDiavik Diamond Mine, located 300 kilometres north east of Yellowknife, Northwest Territories. It is an unincorporated joint venture between Rio Tinto and Harry Winston Diamond Corporation (formerly Aber Diamonds). Operations began in 2003 with mining of the Yarwun alumina refinery, formerly Comalco AluminaRefinery,A154 kimberlite pipes. In 2007 a second dike was completed to enable development of an open pit to mine on the A418 pipe. Open pit mining is expected to cease in Gladstone2012, at which time Diavik will become an all underground mine. Diavik’s total mine life remains within the 16 to meet22 years projected in the growing needsoriginal feasibility study of its own smelters and to supply growing demand, particularly from China and the Middle East.1999.
Abu Dhabi aluminium smelter(Rio Tinto: 50 per cent)2007 operating performanceInVolumes of ore mined and processed were similar to 2006, however increased grades meant that Rio Tinto Aluminium signed a preliminary agreement with General Holding CorporationTinto’s share of Abu Dhabidiamonds recovered increased to undertake a feasibility study into construction7.2 million carats in 2007 from 5.9 million carats in 2006. The availability of an aluminium smelter in the United Arab Emirates.Development could result in a smelter with a first stage production capacitywinter road was much improved from the previous year and supply of 550,000 tonnes of metal per year.A company, Abu Dhabi Aluminium Company (Adalco) has been formed to manage the joint venture. With its abundant gas resources, the Middle East is fast becoming a key region in the global aluminium industry.materials did not negatively affect operations.
Rio Tinto |
COPPER GROUPMurowa(Rio Tinto: 77.8 per cent)
Production at Murowa commenced in late 2004 after US$11 million was spent on constructing a 200,000 tonnes per year plant and supporting infrastructure. Chain of custody safeguards put in place at the commencement of production have performed without incident.
Mined | Rio Tinto share | |
Copper | ‘000 tonnes | |
2002 | 887 | |
2003 | 867 | |
2004 | 753 | |
2005 | 784 | |
2006 | 803 | |
Gold | ‘000 ounces | |
2002 | 3,135 | |
2003 | 2,731 | |
2004 | 1,552 | |
2005 | 1,726 | |
2006 | 1,003 | |
Refined | Rio Tinto share | |
Copper | ‘000 tonnes | |
2002 | 417 | |
2003 | 349 | |
2004 | 333 | |
2005 | 314 | |
2006 | 299 | |
Underlying earnings contribution* | US$m | |
2004 | 860 | |
2005 | 2,020 | |
2006 | 3,562 | |
2007 operating performance
The effects of power disruptions and lower feed head grades meant that Rio Tinto’s Copper group comprises Kennecott Utah Coppershare of diamonds recovered decreased to 0.11 million carats from 0.19 million carats in 2006. Operating conditions in the UScountry remained challenging with hyperinflation and interestscommodity shortages.
RTM comprises borates, talc and salt mines, refineries, and shipping and packing facilities on five continents. Global headquarters are located in Denver, Colorado.
Borates– More than one million tonnes of refined borates are produced at Boron Operations, the organisation’s principal borate mining and refining operation in California’s Mojave Desert. Borates are essential to plants and part of a healthy diet for people. They are also key ingredients in hundreds of products essential to an acceptable standard of living, chief among them: insulation fibreglass, textile fibreglass, and heat resistant glass (44 per cent of world demand); ceramic and enamel frits and glazes (13 per cent); detergents, soaps and personal care products (six per cent); agricultural micro-nutrients (seven per cent); and other uses including wood preservatives and flame retardants (30 per cent).
Talc– RTM operates talc mines – including the world’s largest, in southwest France – and processing facilities in Austria, Australia, Belgium, Canada, France, Italy, Japan, Mexico, Spain and the US. Talcs enhance performance in countless applications, including paper, paints, polymers, automotive mouldings, ceramics, personal care products and pharmaceuticals. This multiplicity demands an in depth understanding not only of talc’s properties and functions but also of its full range of applications and user industries.
Salt(Rio Tinto: 68.4 per cent) – RTM manages three salt operations located in Western Australia. It produces industrial salt by solar evaporation at its Dampier, Port Hedland and Lake MacLeod operations, where it also mines gypsum. Customers are located in Asia and the Middle East. The majority are chemical companies who use salt as feedstock for the production of chlorine and caustic soda (together known as chlor-alkali production). Products are also used as food salt and for general purposes including road de-icing.
2007 operating performance
Borates– Production volumes were up one per cent at 560,000 tonnes of boric oxide, and sales volumes declined slightly from 2006. North American markets continued to be affected by a sluggish housing industry in 2007 but were offset by strong growth in Asian markets and steady performance in European markets.
Talc– Talc output decreased by eight per cent to 1,281,000 tonnes as smaller operations were closed and marginal sales were discontinued. Sales volumes decreased slightly. Strong polymer and coating sales in Europe offset volume declines in North America driven by the housing and automotive sector slowdown.
Salt(Rio Tinto: 68.4 per cent) – The residual effects of the cyclones in Western Australia led to a three per cent decline in salt volumes to 5.2 million tonnes (Rio Tinto share). The recovery effort is expected to take until the fourth quarter of 2008, with full capacity likely in 2010. A 500,000 tonnes per annum capacity expansion at Lake MacLeod has been completed.
RIO TINTO IRON & TITANIUM OPERATIONS
Quebec Iron & Titanium
Richards Bay Minerals(Rio Tinto: 50 per cent)
Rio Tinto Iron & Titanium (RTIT) comprises the wholly owned Quebec Iron & Titanium (QIT) in Quebec, Canada and the 50 per cent interest in Richards Bay Minerals (RBM) in KwaZulu-Natal, South Africa. Both produce titanium dioxide feedstock used by customers to manufacture pigments for paints and surface coatings, plastics and paper, as well as iron and zircon co-products. RBM is progressing arrangements to meet the requirements of legislation governing broad based economic empowerment in the copper minesSouth African mining industry.
QIT’s proprietary process technology enables it to supply both the sulphate and chloride pigment manufacturing methods. QIT has the capacity to produce 375,000 tonnes of Escondida in Chile, Grasberg in Indonesia, Northparkes in Australia, Palabora in South Africa,upgraded slag (UGS) per annum and is currently improving its smelter facility to smelt ilmenite from the Resolution CopperMadagascar project into high grade slag. Identified mineralisation will sustain more than 20 years operation at current production rates if converted to ore reserves.
RBM’s ilmenite has a low alkali content which makes its feedstock suitable for the chloride pigment process. RBM has the capacity to produce one million tonnes of feedstock annually.
RTIT is headquartered in the US. The group also has management responsibility for Kennecott Minerals Company in the US. Since the beginning of 2006, the group acquired the La Granja project in Peru and took an ownership stake in Ivanhoe Mines and Northern Dynasty Minerals which have the Oyu Tolgoi and Pebble deposits in Mongolia and the US respectively.Historically, the Copper group built the majority of its portfolio through acquisitions (Kennecott) or jointventures (Escondida, Grasberg) followed by expansions. The current pipeline of projects (Oyu Tolgoi, Resolution, La Granja and Pebble) represents a transition with a greater proportion of opportunities created through exploration and acquisitions at an early stage of development. In addition to the Copper group’s interests in these four world class deposits, the group is developing the E48 underground deposit at Northparkes and undertaking a prefeasibility study at Kennecott Utah Copper to extend the mine’s life, either through a further pushback of the open pit or a transition to underground mining.The Copper group’s long term development plans are not just confined to its principal product. Rio Tinto has a number of nickel development opportunities which are currently being evaluated. At the small, high grade Eagle nickeldeposit (Rio Tinto: 100 per cent) in Michigan in the US, feasibility studies have been undertaken and a decision on developing the deposit is expected in 2007.At 31 December 2006, the Copper group, which also produces gold and molybdenum as significant coproducts,UK.
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accounted2007 operating performance
Titanium dioxide pigment is the principal end use market for 16feedstocks manufactured by RTIT.
Titanium dioxide feedstock output remained steady from 2006 to 2007 with both smelters operating at full capacity. Prices of chloride feedstock remained flat with the market going into oversupply. The production of UGS increased by five per cent to take advantage of the Group’s operating assets and in 2006 contributed approximately 28 per centincreasing demand for high grade feedstock. Sales of Rio Tinto’s gross sales revenue, of which 74 per cent wasfeedstock into the sulphate market increased to meet demand from copper, 13 per cent from molybdenum andAsia. Prices for iron co-products remained strong during the remainder mostly from gold. It accounted for 49 per cent of underlying earnings in 2006. Bret Clayton succeeded Tom Albanese as chief executive Copper, and is based in London.year.
Financial performance
2006 compared with 2005The Copper group’s contribution to underlying earnings was US$3,562 million, US$1,542 million higher than in 2005.The average price of copper was 306 US cents per pound during 2006, 84 per cent higher than in 2005. The average gold price of US$602 per ounce increased by 36 per cent. The average price of molybdenum was US$24.60 per pound compared with US$30.70 per pound in 2005.Kennecott Utah Copper’s contribution to underlying earnings of US$1,804 million was US$767 million higher than in 2005, with the operation benefiting from higher prices and volumes and a tax credit of US$289 million following recognition of deferred tax assets. Record molybdenum production was achieved during the year, offsetting the impact of lower refined copper production due to a scheduled smelter shutdown in the second half of 2006. An increase in the group’s long term copper price assumption triggered an assessment of the amount of recoverable copper at Kennecott Utah Copper. As a result, the impairment made in 2001 and 2002 was reversed in 2006.Rio Tinto’s share of underlying earnings from Escondida increased by US$648 million to US$1,250 million. Higher prices and the commencement of sulphide leaching counterbalanced higher mining costs and input prices. The Grasberg joint venture contributed US$122 million to underlying earnings, US$110 million below 2005. Lower grades of copper, gold and silver, the result of mine sequencing, led to significantly lower production of all three metals.Palabora’s 2006 earnings of US$52 million were US$33 million above the prior year, benefiting from higher copper prices and sales volumes and the sale of some smelter stocks.Northparkes’ contribution to underlying earnings of US$229 million represents a US$172 million increase from 2005. In addition to higher prices, better grades, increased throughput and improved recoveries all contributed to a 54per cent increase in production of copper contained in concentrates.Kennecott Minerals’ 2006 earnings of US$105 million were US$32 million above 2005. The effect of higher gold and zinc prices and the recognition of a US$14 million deferred tax asset were offs et by higher costs and lowersales volumes from Cortez, due to lower grades.
2005 compared with 2004The Copper group’s contribution to underlying earnings was US$2,020 million, US$1,160 million higher than in 2004. The average price of copper was 166 US cents per pound compared with 130 US cents in 2004. The average price ofmolybdenum was US$30.70 per pound compared with US$14.60 in 2004. The average gold price of US$444 per ounce increased by nine per cent.Kennecott Utah Copper’s contribution to underlying earnings was US$1,037 million, compared with US$311million in 2004. Molybdenum production increased significantly as a result of the refocusing of the mine plan in response to significantly higher molybdenum prices.Rio Tinto’s share of underlying earnings from Escondida increased by US$196 million to US$602 million.Mined production of copper was up five per cent.The underlying earnings contribution from the Grasberg joint venture increased by US$200 million to US$232 million chiefly as a result of the continuation of full production after the material slippage in October 2003.Palabora recorded a profit of US$19 million in 2005, helped by improved performance of undergroundproduction. Northparkes’ copper production was 80 per cent above the previous year due to the successful ramp up of Lift 2. Kennecott Minerals lower sales volumes were due to lower grades at Cortez.
OperationsDIAMONDS AND INDUSTRIAL MINERALS GROUP PROJECTS
Kennecott Utah CopperDiavik underground(Rio Tinto: 60 per cent)
Following the completion of the feasibility study in 2007 approval was given to proceed with underground mining of the A154N, A154S and A418 kimberlites. Additional funding of US$563 million was approved, bringing the total investment in the underground mine to US$787 million. Under the current life of mine plan, diamond production from underground would begin in 2009 and continue beyond 2020.
To support underground mining, Diavik must construct new surface works including a crusher and paste backfill plant, expand its water treatment and power generating plants, and construct ancillary facilities including fuel and cement storage, and additional accommodation facilities.
About 20 kilometres of tunnels will be constructed to bring underground mining into production. The capital investment of US$563 million will be spent over the next two years, adding to the US$224 million invested in 2006-2007 for the underground feasibility studies and related capital projects.
The study into the A21 kimberlite concluded that this should not be included in reserves at this point and further project development will be conducted in 2008.
Murowa(Rio Tinto: 77.8 per cent)
The feasibility study into expanding the capacity of Murowa mining and processing operations was completed during 2007. A decision to proceed will depend on resolving security of tenure.
Argyle underground(Rio Tinto: 100 per cent)Kennecott Utah Copper (KUC) operates the Bingham Canyon mine, Copperton concentrator and Garfield smelter andrefinery complex, near Salt Lake City, US. KUC is a polymetallic mine, producing copper, gold, molybdenum and silver. As the second largest copper producer in the US, KUC supplies more than 17 per cent of the nation’s annual refined copper requirements and it employs approximately 1,700 people.
2006 operating performanceKUC continued to demonstrate operating flexibility by delivering record molybdenum production during a period ofexceptionally high prices. Employing Rio Tinto’sImproving performance together(IPT) methodology, KUC substantially improved its knowledge of molybdenum mineralisation in the orebody to optimise molybdenumproduction, which was eight per cent higher than 2005.In July, a pebble crushing facility was commissioned at the concentrator. Final modifications to this circuit will
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be completed in 2007, leading to a projected increase in plant throughput of approximately 18 per cent. A capital investment of US$82 million was approved in October, to expand and modernise the bulk flotation circuit at theconcentrator. This project is expected to increase recoveries of copper, molybdenum and gold and improve concentrategrade, thereby benefiting smelter throughput rates. The scheduled completion of this pr oject is mid 2008 with full production benefits realised by 2009.The Garfield smelter was shut down in September for planned maintenance work and was re-commissioned inearly November. The interruption reduced refined copper production by six per cent, compared with 2005. Smelter throughput rates following the shutdown are exceeding initial expectations.Current ore reserves will support open pit operations until 2019. Prefeasibility studies continued during the yearto evaluate alternatives for extending the mine’s life beyond 2019. The alternatives include additional open pit pushbacks and/or underground mining options. KUC intends to dewater and rehabilitate an existing mine shaft in 2007to provide access for an underground drilling programme to augment these studies.
Principal operating statistics at KUC 2004-2006
2004 | 2005 | 2006 | ||||
Rock mined (’000 tonnes) | 129,196 | 140,906 | 145,343 | |||
Ore milled (’000 tonnes) | 45,712 | 46,664 | 47,857 | |||
Head grades: | ||||||
Copper (%) | 0.63 | 0.53 | 0.63 | |||
Gold (g/t) | 0.29 | 0.37 | 0.49 | |||
Silver (g/t) | 3.04 | 3.23 | 3.50 | |||
Molybdenum (%) | 0.033 | 0.058 | 0.057 | |||
Copper concentrates produced (’000 tonnes) | 1,106 | 881 | 1,019 | |||
Production of metals in copper concentrates | ||||||
Copper (’000 tonnes) | 263.7 | 220.6 | 265.6 | |||
Gold (’000 ounces) | 308 | 401 | 523 | |||
Silver (’000 ounces) | 3,584 | 3,958 | 4,214 | |||
Molybdenum concentrates produced (’000 tonnes) | 12.9 | 29.5 | 30.2 | |||
Contained molybdenum (’000 tonnes) | 6.8 | 15.6 | 16.8 | |||
Concentrate smelted on site (’000 tonnes) | 1,098 | 1,042 | 918 | |||
Production of refined metals | ||||||
Copper (’000 tonnes) | 246.7 | 232.0 | 217.9 | |||
Gold (’000 ounces) | 300 | 369 | 462 | |||
Silver (’000 ounces) | 3,344 | 3,538 | 4,152 | |||
Grasberg joint venture(Rio Tinto: 40 per cent)Grasberg, in Papua, Indonesia, is one of the world’s largest copper and gold mines in terms of reserves and production.It is owned and operated by Freeport Indonesia (PTFI), the principal and 91 per cent owned subsidiary of the US based Freeport-McMoRan Copper & Gold Inc. (FCX).In meeting the mine’s social obligations to local communities, at least one per cent of Grasberg’s net salesrevenues are committed to support village based programmes. In addition, two trust funds were established in 2001 in recognition of the traditional land rights of the local Amungme and Komoro tribes. In 2006, PTFI contributed US$43.9million (net of Rio Tinto portion) and Rio Tinto US$3.6 million in total to the funds. As a result of training and educational programmes, Papuans represented more than a quarter of PTFI’s approximately 9,000 strong workforce by the end of 2006.
2006 operating performanceRio Tinto’s share of metal production is dependent on the metal strip, which determines the allocation of volumesbetween the joint venture partners. Owing to lower grades, Rio Tinto’s share of production from the Grasberg mine wasconstrained in 2006 and owing to adjustments to the mine schedule, will continue to show significant variation year to year. After 2021, Rio Tinto shares 40 per cent of total production as the metal strip ceases.PTFI, as manager, recently completed an analysis of its longer range mine plans to assess the optimal design of the Grasberg open pit and the timing of development of the Grasberg underground block cave ore body. The revisedlong range plan includes changes to the expected final Grasberg open pit design which will result in a section of highgrade ore previously expected to be mined in the open pit to be mined in the Grasberg underground block cave mine. The revised mine plan reflects a transition from the Grasberg open pit to the Grasberg underground block cave ore bodyin mid 2015. The mine plan revisions alter the timing of metal production in the period of 2015 and beyond but do nothave a significant effect on ultimate recoverable reserves.
Principal operating statistics for PTFI 2004-2006
2004 | 2005 | 2006 | ||||
Ore milled (’000 tonnes) | 67,750 | 78,907 | 83,716 | |||
Head grades: | ||||||
Copper (%) | 0.87 | 1.13 | 0.85 | |||
Gold (g/t) | 0.88 | 1.65 | 0.85 | |||
Silver (g/t) | 3.85 | 4.88 | 3.84 | |||
Production of metals in concentrates | ||||||
Copper (’000 tonnes) | 516.4 | 793.9 | 610.8 | |||
Gold (’000 ounces) | 1,584 | 3,546 | 1,880 | |||
Silver (’000 ounces) | 5,037 | 7,531 | 5,609 | |||
Escondida(Rio Tinto: 30 per cent)The low cost Escondida copper mine in Chile is one of the largest copper mines in the world in terms of annualproduction, and has a mine life expected to exceed 30 years. It accounts for approximately eight per cent of worldprimary copper production. BHP Billiton owns 57.5 per cent of Escondida and is the operator and product sales agent. The Escondida district hosts two of the largest porphyry copper deposit systems in the world – Escondida andEscondida Norte, located five kilometres from Escondida. A sulphide leach project was complete d during the year withthe first cathode being produced in June. During August, operations were affected by strike action over wage negotiations. Operations resumed in September after a new three year contract was settled.Escondida employs approximately 2,900 people.
2006 operating performanceEscondida’s mined copper production was three per cent higher than in 2005, with higher grades and the commencement of sulphide leaching more than offsetting the effects of the strike action. Cathode production was seven per cent lower than in 2005 due to lower grade oxide ore.
Principal operating statistics at Escondida 2004-2006
2004 | 2005 | 2006 | ||||
Rock mined (’000 tonnes) | 377,356 | 359,569 | 338,583 | |||
Ore milled (’000 tonnes) | 82,378 | 86,054 | 84,158 | |||
Head grade: | ||||||
Copper (%) | 1.51 | 1.53 | 1.59 | |||
Production of metals in concentrates | ||||||
Copper (’000 tonnes) | 1,046 | 1,127 | 1,122 | |||
Gold (’000 ounces) | 217 | 183 | 170 | |||
Silver (’000 ounces) | 5,747 | 6,565 | 6,646 | |||
Copper cathode (’000 tonnes) | 152.1 | 143.9 | 134.4 | |||
Palabora(Rio Tinto: 57.7 per cent)Palabora Mining Company (Palabora) is a publicly listed company on the Johannesburg Stock Exchange and operates a mine and smelter complex in South Africa.Palabora developed a US$465 million underground mine with a current planned production rate of at least32,000 tonnes of ore per day. Approximately 663,500 tonnes of copper are expected to be produced over the remaining life of the mine.Palabora supplies most of South Africa’s copper needs and exports the balance. It employs approximately 2,000people and labour agreements are negotiated annually.
2006 operating performancePalabora recorded a net profit of US$52 million in 2006, US$33 million higher than 2005. Underground production for the year averaged 30,200 tonnes per day, which is ten per cent higher than 2005.Production rates peaked in the last week of December at 36,562 tonnes per day. The average annual production fell short of the planned target of 32,000 tonnes per day as a result of breakdown and maintenance problems. Theaverage ore grade was 0.71 per cent compared with 0.72 per cent in 2005. During the first quarter of 2006, Palabora’s reverberatory furnace, which has been in operation for over 40 years, was subjected to its eighth rebuild, the last having occurred in 2000. A ten per cent increase in capacity is expected from the rebuild, taking the overall operational capacity to 110,000 tonnes per annum.As part of the decision to build the magnetite business using current production, Palabora entered into a supply contract with Minmetals for the supply of two million tonnes of magnetite concentrate per annum starting in October2006.As a result of mine production shortfalls and lower grades, concentrate production was supplemented by purchases of concentrate material to optimise smelter throughput. Palabora will continue to purchase concentrates to
supplement the smelter as capacity exceeds the mine output.Vermiculite revenue of US$40 million increased by five per cent on 2005. Production in 2006 was down by sixper cent compared with 2005, and the strong market demand for the coarser grades continuesto exceed production in all market segments.Palabora’s lending facilities and hedge contracts, which were finalised in September 2005 as part of a refinancingproject, were closely monitored during 2006. Forward pricing contracts, representing 62.5 per cent of the budgetedunderground production up to 2008, and 30 per cent up to 2013, are in place.
Principal operating statistics at Palabora 2004-2006
2004 | 2005 | 2006 | ||||
Ore milled (’000 tonnes) | 8,657 | 9,536 | 10,730 | |||
Head grade: | ||||||
Copper (%) | 0.74 | 0.72 | 0.71 | |||
Copper concentrates produced (’000 tonnes) | 187.7 | 197.1 | 208.9 | |||
Contained copper (’000 tonnes) | 54.4 | 61.2 | 61.5 | |||
New concentrates smelted on site (’000 tonnes) | 253.4 | 304.4 | 288.5 | |||
Refined copper produced (’000 tonnes) | 67.5 | 80.3 | 81.2 | |||
Northparkes(Rio Tinto: 80 per cent)Rio Tinto’s interest in the Northparkes copper-gold mine in central New South Wales, Australia, resulted from the acquisition of North Ltd. Northparkes is a joint venture with the Sumitomo Group (20 per cent).Following an initial open pit operation at Northparkes, underground block cave mining has been undertaken since 1997. In November 2006, the joint venture partners approved the development of the E48an underground block cave project, which is expectedmine under the AK1 open pit in late 2005. It also approved an open pit cutback on the Northern Bowl to facilitate the transition from open pit to underground mining. The cost US$160 million (Rio Tinto share: US$127 million) and extend the mine’s life until 2016. The project is a state of the art development incorporating experience and know how from the previous two block cave projects. The E48 block cave will progressively replace the current block cave from 2009, and output from E48 will beprocessed in the existing concentrator and transported by rail to Port Kemblaestimate for export.The copper concentrate produced is shipped under long term contracts that provide for periodic negotiation ofcertain charges, as well as spot sales, to smelters in Japan (74 per cent), China (13 per cent), and India (13 per cent).Northparkes employs approximately 220 people.
2006 operating performanceNorthparkes achieved a solid performance during 2006, with production of concentrate up 40 per cent from 2005 due to increased grades, milling rates and recoveries.
Principal operating statistics at Northparkes 2004-2006
2004 | 2005 | 2006 | ||||
Ore milled (’000 tonnes) | 5,008 | 5,453 | 5,789 | |||
Head grade: | ||||||
Copper (%) | 0.79 | 1.12 | 1.53 | |||
Gold (g/t) | 0.66 | 0.46 | 0.64 | |||
Production of contained metals | ||||||
Copper (’000 tonnes) | 30.0 | 54.0 | 83.3 | |||
Gold (’000 ounces) | 79.4 | 57.0 | 94.7 | |||
Kennecott Minerals(Rio Tinto: 100 per cent)Kennecott Minerals in the US manages the Greens Creek mine (Rio Tinto: 70 per cent) on Admiralty Island in Alaska which produces silver, zinc, lead and gold. The Rawhide mine (Rio Tinto: 51 per cent) in Nevada produces gold andsilver by leaching since mining operations ceased in 2002. Reclamation work is well advanced. Kennecott Minerals alsoowns the group’s interest in the Cortez joint venture (Rio Tinto: 40 per cent), also in Nevada.Kennecott Minerals employs approximately 322 people, excluding employees of non managed operations.
2006 operating performanceUnderlying earnings of US$105 million were US$32 million higher than 2005 underlying earnings, reflecting the strongprice environment for gold, silver, zinc and lead.At Greens Creek, production was affected by a major rehabilitation programme at the mine. Mill throughput isexpected to increase in 2007 following the substantial completion of the project in 2006.In 2006 there was a dramatic but expected decline in Cortez productionrevised to US$1.5 billion due to the move intooverheated Western Australian mining and construction industry and challenging ground conditions. However, efforts continue to recover value, and some improvement on the final lower grade stages ofrevised cost estimate may be possible following more rapid underground development rates in the Pipeline orebody. Whilesecond half. First production from the underground operation is expected to increase in 2007, it will remain below the levelsexperienced when mining the best Pipeline ore zones. Production is expected to increase in 2009 when production fromCortez Hills is planned to commence.2009.
Projects
Resolution(Rio Tinto: 55 per cent)The Resolution project is situated in Arizona, US, in the area of the depleted Magma (Superior) copper mine. The project team is currently working through a prefeasibility study, including a proposed land exchange, an environmental impact study, further deposit definition drilling and the sinking of two shafts to gain access to the mineralisation. Expenditure to the end of feasibility in 2011, if approved, is expected to be approximately US$700 million, with total capital to initiate production forecast to be about US$2.5 billion. While there are technical challenges with regard to depth and rock temperature, we believe that Resolution could become a leading global copper producer over several decades.The Act supporting a land exchange programme was introduced in the Senate and House of Representatives during 2006, but the timing did not allow the Act to progress to point of Presidential signature. It will be re-introduced in both Houses in early 2007.
Oyu Tolgoi(Rio Tinto: 9.9 per cent stakeinterest in Ivanhoe Mines)
In October 2006 Rio Tinto purchased a stake of just under ten per cent in Ivanhoe Mines of Canada in order to jointly develop the Oyu Tolgoi copper-gold resource in Mongolia’s south Gobi region. Rio Tinto has the ability progressively to increase its stake to 43 per cent over the next four years at pre-determined prices. This phased, risk managed entry into an outstanding resource secures a valuable share of a potential average production rate of 440,000 tonnes of copper per year with significant gold by-products.
There is extensive exploration potential in Mongolia, including ground controlled by Entrée Gold around Oyu Tolgoi. Rio Tinto is the largest single shareholder in Entrée Gold and, with Ivanhoe, owns a total equity interest of 30.6 per cent. Ivanhoe has an option for up to an 80 per cent interest in the Entrée ground over the north and south extensions of the Oyu Tolgoi trend. Exploration on the Entrée Gold joint venture by Ivanhoe has recently delineated a continuous molybdenum-rich copper and gold mineralisation up to 400 metres wide along a 1,100 metre strike length. Overall, the Oyu Tolgoi mineralised trend now has a strike length of over 20 kilometres.
Rio Tinto is actively engaged and working with the Mongolian Government to progress settlement of a long term investment agreement.
Entrée Gold(Rio Tinto: 16 per cent)
In June 2005 Rio Tinto acquired a 9.9 per cent holding ofstake via private placement in Entrée Gold Inc, a Canadian junior mining company. Entrée Gold's main asset includes three claims that surround the Ivanhoe Mines in order to jointly develop and operate Ivanhoe’s Oyu Tolgoi copper-gold complexproject in Mongolia’s South Gobi region.Mongolia. Rio Tinto's entry into Entrée Gold was due primarily to the prospectivity of the land package, including high grade copper and gold intercepts in their tenement already under agreement to Ivanhoe adjacent to the Oyu Tolgoi lease. Recent drilling by Ivanhoe identified significant high grade intercepts of porphyry mineralisation on the Heruga concession adjacent to the Oyu Tolgoi project. As part of the initial entry into Entrée Gold, Rio Tinto secured a further 6.3 million A joint Ivanhoe-Rio Tinto technical committee will engineer, construct and operate the project.SubjectB class warrants which were due to reaching a satisfactory long term investment agreement with the Mongolian government, an open pit mine is expected to be in operationexpire by the end of June 2007. On the decade followed by an underground mine several years later. Rio Tinto’s holding in Ivanhoe Mines is expected to rise to 19.9 per cent upon completion of the long term investment agreement. The Group has an option to increase its stake in due course to 33.35 per cent, and potentially take it up to 40 per cent via open market transactions.As part of the investment arrangements, Ivanhoe Mines has agreed with28th June, Rio Tinto exercised these warrants at a cost of US$16.9 million which took Rio Tinto's direct equity in Entrée Gold to divest its joint venture interest in the Myanmar Copper Project located in the Union of Myanmar, together with any other rights, interests orinvestments relating to the country. Pending their sale, the Myanmar based assets have, in accordance with the terms of the agreement betweenapproximately 16 per cent. The combined Rio Tinto and Ivanhoe Mines, been transferred to an independent third party trust, the solepurpose of whichequity position is to sell the assets. Ivanhoe Mines has no interest in the trust, other than as an unsecured creditorunder a promissory note issued by trust on the transfer of the Myanmar based assets (which is to be repaid once the assets are sold).now over 30 per cent.
La Granja(Rio Tinto: 100 per cent)Rio Tinto won the state privatisation tender for the La Granja copper project, located in the Cajamarca region of northern Peru. The bid comprised staged payments toPeru is a copper project in the pre-feasibility phase. Rio Tinto acquired the project in December 2005 for US$22 million plus a minimum investment of US$60 million, through a public bidding process carried out by the Peruvian governmentGovernment.
As of US$22 million and US$60 million ininvestmentDecember 2007, 41 kilometres of drilling had been completed which led to discovery of four additional porphyries in the vicinity, as well as further exploration and feasibility work. In late 2006, Rio Tinto approved expenditure uppotential. Drilling results suggest that the main areas have a targeted mineralisation at a copper equivalent average grade of about 0.5 per cent. Initial investigations indicate two to US$95 million, mostof which is expectedfour times more mineralised material than was reported by previous owners, making La Granja the largest undeveloped copper project in Latin America. It has the potential to be spent over 2007–2009. The La Granja project is technically challenging and has modest copper grades. However, the deposit contains significant mineralisation of more than two billion tonnes.a very large, long life operation. First production could occur in 2014.
Instead of looking at La Granja as a conventional milling operation producing concentrates for export, theprefeasibilitythe pre-feasibility study is aimed at demonstrating the possibility of recovering copper metal using bioleachingleaching of copper from whole ore, with solvent extraction and electrowinning.
There are many stakeholders with an interest in the project due to the potential positive impact on the local and national economy. At the same time, local communities have high expectations of Rio Tinto’s presence in the area, where basic skills of literacy and numeracy and basic infrastructure and services are lacking. Rio Tinto is working in a participatory manner with local communities to help them develop and improve their quality of life with the engagement of local, regional and national authorities.
Pebble(Rio Tinto: 19.8 per cent stakeinterest in Northern Dynasty Minerals)
Rio Tinto acquired a 9.9 per cent interest in Northern Dynasty Minerals during the year and increased its interest to 19.8per19.8 per cent during February 2007. Northern Dynasty Minerals is advancing the Pebble copper-gold-molybdenum deposit in southwesternsouth western Alaska, which is another world class ore body that isincludes an orebody amenable to block caving. In July 2007, Anglo American agreed to
Rio Tinto 2007 Form 20-F | 73 |
invest US$1.4 billion in stages to earn a 50 per cent stake in the project.
The project comprises two orebodies, Pebble East and Pebble West. Drilling has shown Pebble East to be deep and higher grade, suggesting an attractive underground mining option with a smaller environmental footprint than the Pebble West deposit which would entail open pit mining. Rio Tinto will not support development unless it is conducted in a way that protects fish, wildlife and the environment.
Cortez HillsSulawesi Nickel(Rio Tinto: 40100 per cent)
The Sulawesi Nickel project is situated on the island of Sulawesi in Indonesia and is the result of the discovery by Rio Tinto holdsExploration in 2000 of a 40world class laterite deposit. Because of the nature of the deposit, mining is planned to be a shallow open cut process with continuous rehabilitation. Initial production is planned at a rate of about 46,000 tonnes of nickel per cent interest inannum, with potential to increase to about 100,000 tonnes. The project will involve the Cortez joint venture,construction of an access highway and a new seaport on the east coast of Sulawesi.
Upon completion of the negotiation of a Contract of Work (CoW) with Barrick Gold managing the joint ventureGovernment and holdingratification of the remaining 60 per cent interest. The operationagreement by the Indonesian Parliament, it is located in north-eastern Nevada, US, and contains total proven and probable reserves of 7.5 million ounces; this includes the Cortez Hills deposit discovered in 2003.intended to start a pre-feasibility study into development.
Eagle(Rio Tinto: 100 per cent)The Eagle project is aLate in 2007 Rio Tinto approved the development of the eagle nickel high grade nickel deposit locatedunderground mine in Michigan, US. Kennecott MineralsUS, which is scheduled to begin operation in 2009. There are six further adjacent prospects which may give the potential to extend the current mine life beyond 30 years at the current planned production rates. Deeper drilling under and adjacent to the Eagle deposit reinforced the potential for further economic nickel mineralisation outside the current mine plan. There are similarities to other world class magmatic nickel-sulphide deposits. Rio Tinto has carried out a project feasibility study. Permitting approvals are under way while exploration continuesan extensive land position in the area around Eagle and thewider district. A decision on developing the depositdistrict which is expected in 2007.extremely prospective, including a 30 kilometre identified trend containing multiple target intrusions.
Rio Tinto |
|
DIAMONDS GROUPDiamonds and Industrial Minerals group
Mined | Rio Tinto share | |
Diamonds | ‘000 carats | |
2002 | 33,620 | |
2003 | 33,272 | |
2004 | 25,502 | |
2005 | 35,635 | |
2006 | 35,162 | |
Underlying earnings contribution* | US$m | |
2004 | 188 | |
2005 | 281 | |
2006 | 205 | |
Mined | Rio Tinto share | |
Diamonds | ‘000 carats | |
2003 | 33,272 | |
2004 | 25,202 | |
2005 | 35,635 | |
2006 | 35,162 | |
2007 | 26,023 | |
Underlying earnings contribution* | US$m | |
2004 | 431 | |
2005 | 438 | |
2006 | 406 | |
2007 | 488 | |
Changes in underlying earnings 2005 – 2007 | US$m | |
2005 Underlying earnings | 438 | |
Effect of changes in: | ||
Prices and exchange rates | 46 | |
General inflation | (26 | ) |
Volumes | (97 | ) |
Costs | (22 | ) |
Tax and other | 67 | |
2006 Underlying earnings | 406 | |
Effect of changes in: | ||
Prices and exchange rates | (20 | ) |
General inflation | (39 | ) |
Volumes | 58 | |
Costs | 53 | |
Tax and other | 30 | |
2007 Underlying earnings | 488 | |
* | A reconciliation of the net earnings with underlying earnings for |
TheSTRATEGIC OVERVIEW
From 1 June 2007 the number of product groups in which Rio Tinto is organised was reduced by combining the Industrial Minerals group with the Diamonds group to form Diamonds and Industrial Minerals. The structuring better reflects the size of the Diamonds and Industrial Minerals businesses in the context of the broader Rio Tinto. Diamonds and Industrial Minerals report to the product group heads of Copper and Energy respectively.
Diamonds comprises Rio Tinto’s 60 per cent interest in the Diavik Diamonds mine located in the Northwest Territories of Canada, the wholly owned Argyle mine in Western Australia, Rio Tinto’s 78 per cent interest in theMurowathe Murowa mine in Zimbabwe and diamond sales and representative offices in Antwerp, Belgium and Mumbai, India. It also includes new teams established in 2006 with responsibility for business development, product security and
Within thedevelopment and transfer of best practice across the group.The group has enjoyed strong growth over the past five years as Diavik has been brought to full production and Murowa has been added to the portfolio and as the Argyle product has benefited from improved pricing. Over the pastfive years, sales revenues and underlying earnings have tripled. This has positioned Diamonds as a strong contributor to global diamond industry, Rio Tinto overall.Within the industry, the Diamond groupDiamonds is well positioned as a leading supplier to the market with a clear focusonfocus on the upstream portion of the value chain. Rio Tinto’s exploration programme has been successful in discovering new assets for Diamonds to develop, and aThe group’s differentiated approach to marketing has enabled theit to capture of higher prices.
The group’s strategy is to compete in the diamond business and strive to build further value.value through operational excellence and continued development of new and existing resources. The focus is on the mining,recovery and sale of rough natural diamonds. In keeping with Rio Tinto’s values, the Diamonds group is a leading proponent ofa number of programmes and partnerships that help improve social and environmental standards of partners, suppliers and customers.
Rio Tinto sells diamonds from all three operations through its marketing arm Rio Tinto Diamonds, according toa strict chain of custody process ensuring all products are segregated according to mine source.
The Industrial Minerals part of the group is made up of Rio Tinto Minerals (RTM), a global leader in borates, talc and salt supply and science, and Rio Tinto Iron & Titanium (RTIT), a major producer of titanium dioxide feedstock. Industrial minerals markets include automotive, construction, telecommunications, agriculture and consumer products industries. Market differentiation depends on technical and marketing expertise and the group maintains R&D facilities in Europe, Canada and the US to develop new products and support customers.
The Industrial Minerals strategy is to create value by directing resources toward high value growth sectors in mature and emerging markets. To support this, the group focuses on meeting customers’ needs for consistent quality, on time delivery and responsiveness; setting and meeting aggressive business improvement targets; expanding high grade titanium dioxide feedstock capacity; and establishing stock points to supply demand growth in emerging economies.
Rio Tinto 2007 Form 20-F | 75 |
The Industrial Minerals operating strategy is market driven and focuses on optimising volumes and product mix.
Business improvement targets set in 2004 have largely been met resulting in the lowering of the sustainable cost base of Industrial Minerals. As part of a business optimisation exercise two talc operations were sold and two more were decommissioned in 2007. The Canadian RTIT metal powders plant has been integrated into the other RTIT operations to improve operating synergies. Operational excellence programmes continue to deliver improvements through systematically eliminating waste, reducing process variability, and engaging and empowering the workforce.
Commercial and operating excellence is the foundation for growth, with acquisitions of sufficient scale serving to complement the existing portfolio. Greenfields projects are under way in potash and soda ash. RTIT is operating its assets at maximum capacity while maximising returns from co-products. Volume growth in the high grade titanium dioxide feedstock market will be underpinned by the commissioning and expansion of the Madagascar deposit.
During 2007 negotiations at Richards Bay Minerals (RBM) were progressed to an advanced stage to divest 26 per cent of the business to historically disadvantaged groups as part of the legal requirement in South Africa to convert mineral rights. Rio Tinto marginally increased its share in its salt operations by buying out minority shareholders. At the end of 20062007 a Group wide review of assets was conducted to determine the long term value of retaining these assets within Rio Tinto. Based on the outcome of this review the RTM borates and talc businesses are being considered for divestment.
At 31 December 2007, Diamonds and Industrial Minerals accounted for seven per cent of the Group’s operating assets and contributed approximately 12 per cent of Rio Tinto’s gross turnover and seven per cent of underlying earnings in 2007. Approximately 8,000 people were employed 1,500 people and had 930 contractors.in 2007.
The Diamonds groupAndrew Mackenzie was combined with the Industrial minerals group with effect from 1 June 2007, to form theDiamonds and Minerals group. Keith Johnson, based in London, who had beenappointed chief executive, Diamonds became Group executive Business Resources; and Andrew Mackenzie, based in London, becameIndustrial Minerals on 1 June. In November he left the Group. Responsibility for the Industrial Minerals portfolio was assumed by Preston Chiaro, chief executive, Diamondsand Minerals.Energy, while Bret Clayton, chief executive, Copper, is responsible for Diamonds.
Financial performanceSAFETY
All injury frequency rate | per 200,000 hours |
2003 | 1.89 |
2004 | 1.67 |
2005 | 1.45 |
2006 | 0.91 |
2007 | 1.07 |
GREENHOUSE GAS EMISSIONS
2006Greenhouse gas (GHG) emissions per tonne of product are decreasing at both Diavik and Argyle diamond mines. Both sites are evaluating and implementing projects to further reduce emissions. At Argyle these projects are focused on inreasing the proportion of hydro-electric power, which already meets the majority of power requirements.
The majority of RTM’s GHG emissions are from the Boron California facility where an energy management plan has been introduced. There are currently 24 energy management projects that are being progressed, and emissions per tonne of product are decreasing. During 2007 RTIT sites undertook audits to identify opportunities for GHG and energy reduction.
FINANCIAL PERFORMANCE
2007 compared with 20052006
Diamonds contributed US$205280 million to Rio Tinto’s underlying earnings in 2007, an increase of US$69 million over 2006. Sales revenue for 2007 was US$1,020 million, US$182 million higher than in 2006. Increased volumes from Diavik, a reduction in stocks at Argyle and tax credits in Australia and Canada contributed to earnings. An impairment charge of US$328 million after tax was taken at Argyle, reflecting industry cost pressures and the difficult ground conditions encountered in the underground project.
The rough diamond market recovered during 2007 as excess pipeline inventory was consumed after weakness in the latter half of 2006. The polished diamond market was steady, but the weakness of the US economy is expected to curtail demand in the lower end of the market.
Industrial Minerals’ net earnings were US$248 million, an improvement of two per cent on 2006. Net earnings from RTM decreased eight per cent to US$84 million while revenue grew five per cent. Earnings were negatively
Rio Tinto 2007 Form 20-F | 76 |
affected by a tax charge related to the borates business, and the impact of cyclones in Western Australia on salt volumes.
RTIT recorded earnings of US$164 million, up from US$152 million in 2006. Revenue increased by 15 per cent due to an increase in sales to emerging markets and strong co-product prices. The effect of the strong Canadian dollar and rising input costs continued to put pressure on earnings from RTIT’s wholly-owned QIT-Fer et Titane (QIT) business.
2006 compared with 2005
Diamonds contributed US$211 million to underlying earnings in 2006, a decrease of US$7675 million from 2005. Sales revenueReduced 2006 earnings are mainly a result of the weakened second half market.
Diamonds’ turnover for 2006 was US$838 million, US$238 million lower than in 2005. The lower earnings and sales revenue arose mainly from2005 driven primarily by a downturn in the rough diamond market in the second half of 2006. This resulted in lower
prices for most product types with Rio Tinto Diamonds stocking some lower pricedquality product which willto be sold in future periods.2007.
Diamond production remained at similar levels to 2005 across all operations. Argyle produced 29.1 millioncarats in 2006, approximately 1.4 million carats less than in 2005. This was in line with expectations of a decreasing diamond production profile as the open pit winds down and underground production ramps up over the next five years. Diavik produced 5.9 million carats in 2006, 0.9 million carats more than in 2005. Murowa produced 0.2 million carats in 2006, slightly less than in 2005.
The rough diamond market started strong in the first half of 2006 but deteriorated into the second half. Year endprices closed at similar levels to the start of 2006. A number of factors influenced this mid year correction, including a congested processing pipeline, tight manufacturing and trading liquidity in the manufacturing sector and extensivestorms that caused flooding in India’s major cutting centre,center, Surat, which forced the shutdown of many cutting and manufacturing centres for several weeks.
Polished diamond prices remained constant through 2006 with reasonable demand experienced for most products, particularly for larger better quality white diamonds.
2005 compared with 2004
During 2006 Rio Tinto’s shares in Ashton Mining of Canada were taken up by Stornoway Diamonds contributed US$281millionunder its takeover bid for Ashton. In exchange for the shares in Ashton, Rio Tinto received cash totaling approximately C$29.6 million and 25.6 million Stornoway common shares.
Industrial Minerals’ contribution to 2006 underlying earnings an increasewas US$243 million, a 30 per cent improvement on 2005.
Rio Tinto Minerals earnings at US$91 million were 54 per cent improved on 2005. The absence in 2006 of the 2005 Rio Tinto Minerals restructure provision and modest revenue increases, combined with strong cost performance, despite upward pressure from cyclones in Western Australia and labour markets, contributed to this result.
Rio Tinto Iron & Titanium earnings at US$93152 million from 2004, assisted by astrong diamond marketwere 19 per cent higher than in 2005. Good price performance across all products, combined with favourable volume trends, strict cost control at RBM, and beneficial Canadian tax changes offset increased costs in the Canadian operations and the solid performance by Argyle, Diavik and Murowa. The rough diamond market remained strong for most of 2005 with the Rio Tinto product offering in great demand. Seasonal softening toward the endimpact of the year was mainly due to holidays and festivals in the key customermarkets. Prices for polished diamonds increased in 2005, with the majority of gains made in the first half of the year. Strongest demand was seen in the product types in shortest supply. This included large diamonds greater than two caratsin size with better colour and quality, and the smaller diamond segments.strong Canadian dollar.
Operations
RIO TINTO DIAMONDS OPERATIONS
Argyle Diamonds(Rio Tinto: 100 per cent)
Rio Tinto owns and operates the Argyle diamond mine in Western Australia. Production from Argyle’s AK1 open pit mine is expected to continue until 2012. From 2009through 2008, when the mine is expected to graduallywill transition to underground operations which wouldare expected to extend the life of the mine to about 2018.
20062007 operating performanceDespite tight mining conditionsDue to lower grades, diamonds recovered decreased to 18.7 million carats in the deepening and geotechnically challenging open pit, the operation maintainedproduction and plant throughput in 2006, producing2007 from 29.1 million carats in 2006 compared with 30.5 million caratsdespite a two per cent increase in 2005. Commencingthe volume of ore treated. Mine productivity was lower due to mining at lower elevations in 2006, underground safety performance was separated from that of the open pit section. Althoughpit. Improvement programmes are in place to mitigate the aggregate 2006 safety performance was only slightly better thancost pressures brought about by the resources boom in 2005, the open pit operation achieved exceptional performance with lost time injury frequency rate down by over 300 per cent. Argyle celebrated the signing of a Participation Agreement with neighbouring communities in June 2005 and hasspent the last 18 months implementing the terms of the agreement.Western Australia.
Diavik Diamonds(Rio Tinto: 60 per cent)ConstructionRio Tinto operates the Diavik Diamond Mine, located 300 kilometres north east of Diavik was completedYellowknife, Northwest Territories. It is an unincorporated joint venture between Rio Tinto and Harry Winston Diamond Corporation (formerly Aber Diamonds). Operations began in 2003 with production first commencing in January 2003. Since then the project has exceeded expectations and is now focused on further improving value recovery and business excellence, and planning for the integrationmining of the A154 kimberlite pipes. In 2007 a second dike was completed to enable development of an open pit to mine on the A418 open pit. Safety performance in 2006 was considerably better than 2005, with the lost time injury frequency rate down byalmost half and the all injury rate down by a third. In 2006 total cumulative spending since 2000 on local purchasing with northern Aboriginal businesses surpassed the C$1 billion mark.
2006 operating performanceDiavik produced more carats in 2006 than in any other previous year, thanks to higher ore grade, excellent operationalperformance throughout the year and ore blending strategies employed to maximise process plant throughput. This was achieved during a massive winter road recovery operation. Freight and construction materials scheduledfor trucking to the mine up the 2006 winter road could not be transported on surface due to a shorter season of cold winter conditions necessary for maintenance of the ice road. The recovery operation included the air lifting of fuel, bentonite, explosives and consumables to site.
pipe. Open pit mining is expected to be predominantly from A154cease in 2012, at which time Diavik will become an all underground mine. Diavik’s total mine life remains within the 16 to 22 years projected in the original feasibility study of 1999.
2007 operating performance
Volumes of ore mined and processed were similar to 2006, however increased grades meant that Rio Tinto’s share of diamonds recovered increased to 7.2 million carats in 2007 with some A418 open pit ore commencingfrom 5.9 million carats in 2008.2006. The availability of the winter road was much improved from the previous year and supply of materials did not negatively affect operations.
Rio Tinto |
Murowa(Rio Tinto: 77.8 per cent)
Production at Murowa commenced in late 2004 after US$11 million was spent on constructing a 200,000 tonnes per year plant and supporting infrastructure. Chain of custody safeguards put in place at the commencement of production have performed without incident.
2007 operating performance
The effects of power disruptions and lower feed head grades meant that Rio Tinto’s share of diamonds recovered decreased to 0.11 million carats from 0.19 million carats in 2006. Operating conditions in the country remained challenging with hyperinflation and commodity shortages.
RTM comprises borates, talc and salt mines, refineries, and shipping and packing facilities on five continents. Global headquarters are located in Denver, Colorado.
Borates– More than one million tonnes of refined borates are produced at Boron Operations, the organisation’s principal borate mining and refining operation in California’s Mojave Desert. Borates are essential to plants and part of a healthy diet for people. They are also key ingredients in hundreds of products essential to an acceptable standard of living, chief among them: insulation fibreglass, textile fibreglass, and heat resistant glass (44 per cent of world demand); ceramic and enamel frits and glazes (13 per cent); detergents, soaps and personal care products (six per cent); agricultural micro-nutrients (seven per cent); and other uses including wood preservatives and flame retardants (30 per cent). Murowa’s 2006 safety performance was exceptional with no lost time injuries reportedTalc– RTM operates talc mines – including the world’s largest, in 2006southwest France – and processing facilities in Austria, Australia, Belgium, Canada, France, Italy, Japan, Mexico, Spain and the all injuryfrequency rate downUS. Talcs enhance performance in countless applications, including paper, paints, polymers, automotive mouldings, ceramics, personal care products and pharmaceuticals. This multiplicity demands an in depth understanding not only of talc’s properties and functions but also of its full range of applications and user industries.
Salt(Rio Tinto: 68.4 per cent) – RTM manages three salt operations located in Western Australia. It produces industrial salt by more than 80 per cent.solar evaporation at its Dampier, Port Hedland and Lake MacLeod operations, where it also mines gypsum. Customers are located in Asia and the Middle East. The majority are chemical companies who use salt as feedstock for the production of chlorine and caustic soda (together known as chlor-alkali production). Products are also used as food salt and for general purposes including road de-icing.
20062007 operating performance
Borates– Production volumes were up one per cent at 560,000 tonnes of boric oxide, and sales volumes declined slightly from 2006. North American markets continued to be affected by a sluggish housing industry in 2007 but were offset by strong growth in Asian markets and steady performance in European markets.
Talc– Talc output decreased by eight per cent to 1,281,000 tonnes as smaller operations were closed and marginal sales were discontinued. Sales volumes decreased slightly. Strong polymer and coating sales in Europe offset volume declines in North America driven by the housing and automotive sector slowdown.
Salt(Rio Tinto: 68.4 per cent) – The residual effects of the cyclones in Western Australia led to a three per cent decline in salt volumes to 5.2 million tonnes (Rio Tinto share). The recovery effort is expected to take until the fourth quarter of 2008, with full capacity likely in 2010. A start was made on upgrading the 200,000500,000 tonnes per yearannum capacity expansion at Lake MacLeod has been completed.
RIO TINTO IRON & TITANIUM OPERATIONS
Quebec Iron & Titanium
Richards Bay Minerals(Rio Tinto: 50 per cent)
Rio Tinto Iron & Titanium (RTIT) comprises the wholly owned Quebec Iron & Titanium (QIT) in Quebec, Canada and the 50 per cent interest in Richards Bay Minerals (RBM) in KwaZulu-Natal, South Africa. Both produce titanium dioxide feedstock used by customers to manufacture pigments for paints and surface coatings, plastics and paper, as well as iron and zircon co-products. RBM is progressing arrangements to meet the requirements of legislation governing broad based economic empowerment in the South African mining industry.
QIT’s proprietary process technology enables it to supply both the sulphate and chloride pigment manufacturing methods. QIT has the capacity to produce 375,000 tonnes of upgraded slag (UGS) per annum and is currently improving its smelter facility to smelt ilmenite from the Madagascar project into high grade slag. Identified mineralisation will sustain more than 20 years operation at current production rates if converted to ore reserves.
RBM’s ilmenite has a low alkali content which makes its feedstock suitable for the chloride pigment process. RBM has the capacity to produce one million tonnes of feedstock annually.
RTIT is headquartered in the UK.
Rio Tinto 2007 Form 20-F | 78 |
2007 operating performance
Titanium dioxide pigment is the principal end use market for feedstocks manufactured by RTIT.
Titanium dioxide feedstock output remained steady from 2006 to 2007 with both smelters operating at full capacity. Prices of chloride feedstock remained flat with the market going into oversupply. The production of UGS increased by five per cent to take advantage of the increasing demand for high grade feedstock. Sales of feedstock into the sulphate market increased to meet demand from Asia. Prices for iron co-products remained strong during the year.
DIAMONDS AND INDUSTRIAL MINERALS GROUP PROJECTS
Diavik underground(Rio Tinto: 60 per cent)
Following the completion of the feasibility study in 2007 approval was given to proceed with underground mining of the A154N, A154S and A418 kimberlites. Additional funding of US$563 million was approved, bringing the total investment in the underground mine to US$787 million. Under the current life of mine plan, diamond production from underground would begin in 2009 and continue beyond 2020.
To support underground mining, Diavik must construct new surface works including a crusher and paste backfill plant, expand its water treatment and power generating plants, and construct ancillary facilities including fuel and cement storage, and additional accommodation facilities.
About 20 kilometres of tunnels will be constructed to bring underground mining into production. The capital investment of US$563 million will be spent over the next two years, adding to the US$224 million invested in 2006-2007 for the underground feasibility studies and related capital projects.
The study into the A21 kimberlite concluded that this should not be included in reserves at this point and further project development will be conducted in 2008.
Murowa(Rio Tinto: 77.8 per cent)
The feasibility study into expanding the capacity of Murowa mining and processing plant to increase throughput, improve recoveriesand protect against power outages. The modificationoperations was completed during April 2007 and is expected2007. A decision to give Murowa several more yearsproceed will depend on resolving security of operation. Worsening power outages are impacting production and this situation is not expected to improve until August 2007 when a new generator is expected to be operational.
Projectstenure.
Argyle underground(Rio Tinto: 100 per cent)
Rio Tinto approved the development of an underground block cave mine under the AK1 open pit in late 2005. It also approved an open pit cutback on the Northern Bowl to facilitate the transition from open pit to underground mining. The capital cost estimate for the project was revised to US$1.5 billion due to the overheated Western Australian mining and construction industry and challenging ground conditions. However, efforts continue to recover value, and some improvement on the revised cost estimate may be possible following more rapid underground development rates in the second half. First production from the underground operation is expected in 2009.
QIT Madagascar Minerals(Rio Tinto 80 per cent)
The project was approved in 2005 and comprises a mineral sand mine and separation plant, and port facilities in southern Madagascar as well as an upgrade of QIT’s ilmenite smelting facilities in Canada. The Government of Madagascar contributed US$35m to the establishment of the underground mineport as part of its Growth Poles project funded by the World Bank. The project has maintained its schedule, however cost inflation and foreign exchange effects have increased the cost estimate to US$1.0 billion. Nevertheless, increased product selling prices have meant that the project value has been maintained. First production is expected to be US$760 million, and the cutback US$150 million. Construction started in February 2006. Byat the end of 2006, 10,600 metres of underground development in four main access declines had been completed. In late 2006 the first2008.
The mine will be a key initial customer of the underground declines reacheddeep sea multi-use public port at Ehoala, providing the required depthfor ore extraction. The underground block cave undercutbase load to help establish the port. Over time, it is expected the port will make an important contribution to be initiated on schedule in 2008.
Diavik(Rio Tinto: 60 per cent)In late 2004 the joint venture approved a studyeconomic development of the feasibility of underground mining ofregion.
RTIT will manage the A154N, A154S and A418 kimberlites. This study includes the development of a 3.3 kilometre exploratory decline, at an estimated cost of US$75 million.In 2006 a three phase underground development funding model, totalling some US$265 million, was approved. If underground mining is given the go ahead, the first ore is planned to be extracted in 2008.Meanwhile, a US$190 million project, involving the construction of a dyke round the A418 kimberlite to allow open pit mining beneath the lake bed, is well advanced. The construction and dewatering of the dyke was completed in2006 and pre-stripping began in December. The A418 ore is softer than that of the A154 pipes and will allow ore blending strategies to maintain the high process plant throughput achieved in 2006. The first ore from the A418 open pit is scheduled to be mined in late 2007 and will continue through to 2012. About two kilometres south of the A154 pipes, under the waters of Lac de Gras, is the A21 kimberlite pipe. It does not currently form part of the Diavik ore reserve or mine plan as little is known about the value of the diamonds it holds. A feasibility study into open pit mining, which includes the development of an exploratory decline, is now in hand.port operations. At the end of 2006, the decline had reachedlife of the kimberlite,mine, the port will fall under the responsibility and bulksampling results are expectedcontrol of the Government of Madagascar.
Extensive engagement and consultation with the Government of Madagascar and local people and leaders has taken place over many years. The World Bank is involved in a development role and non government organisations, including the first quarter of 2007. The study is scheduled for completionRoyal Botanic Gardens, Kew and Missouri Botanical Gardens, have been involved in 2007, at which time it will be decided whether the A21 kimberlite should be included in reserves, but ore extraction would not start until 2012.planning environmental and conservation strategies.
MurowaPotasio Rio Colorado S.A(Rio Tinto: 77.8. (Rio Tinto 100 per cent)Murowa commenced studiesThe Rio Colorado potash project in mid 2006Argentina lies 1,000 kilometres south west of Buenos Aires. Potash is used principally as an agricultural fertiliser. Evaluation of the project began in late 2003, and has included a two year large scale trial of solution mining. This ran successfully from late 2004. During 2007 the feasibility study was completed. Development of the project depends on finalising permits and other agreements as well as approval by the board of Rio Tinto. Subject to determine whether to expandthis, first production could occur in 2011. Installed capacity will be 2.9 million tonnes per year. The scale and quality of the mine.resource provide potential for expansion.
Rio Tinto |
OTHER OPERATIONSKazan trona(Rio Tinto 100 per cent)
The Kazan trona project is located 35 kilometres northwest of Ankara in Turkey. Rio Tinto is conducting pre-feasibility studies and, upon expected approval in 2008, will move into large scale solution mining trials. Trona is converted to soda ash, or sodium carbonate, by dissolving ore and recrystallizing the soda ash. Soda ash is one of oldest known and largest volume inorganic chemicals, used primarily in the glass, chemicals, soap and detergent, and pulp and paper industries. Kazan trona is expected to be a more environmentally sustainable commodity to meet rising global demand than chemical synthesis.
Rio Tinto 2007 Form 20-F | 80 |
Energy group
Mined | Rio Tinto share | |
Coal | million tonnes | |
2003 | 148.8 | |
2004 | 157.4 | |
2005 | 153.6 | |
2006 | 162.3 | |
2007 | 155.6 | |
Uranium | ‘000 pounds | |
2003 | 11,372 | |
2004 | 13,170 | |
2005 | 14,511 | |
2006 | 12,561 | |
2007 | 12,616 | |
Underlying earnings contribution* | US$m | |
2004 | 431 | |
2005 | 730 | |
2006 | 706 | |
2007 | 484 | |
Changes in underlying earnings 2005 – 2007 | US$m | |
2005 Underlying earnings | 730 | |
Effect of changes in: | ||
Prices and exchange rates | 199 | |
General inflation | (50 | ) |
Volumes | (13 | ) |
Costs | (211 | ) |
Tax and other | 51 | |
2006 Underlying earnings | 706 | |
Effect of changes in: | ||
Prices and exchange rates | 102 | |
General inflation | (51 | ) |
Volumes | 6 | |
Costs | (251 | ) |
Tax and other | (28 | ) |
2007 Underlying earnings | 484 | |
* | A reconciliation of the net earnings with underlying earnings for 2007, 2006 and 2005 as determined under IFRS is set out on page 53. |
STRATEGIC OVERVIEW
The Energy group comprises thermal coal, coking coal and uranium operations. Coal interests located in Australia and the US supply internationally traded and US and Australian domestic markets. Rio Tinto Uranium supplies uranium oxide produced at its majority owned mines in Australia and Namibia to electric power utilities worldwide. Rio Tinto Uranium is currently the world’s second largest uranium supplier.
The group strategy aims to harness and focus resources to deliver world class performance in operations, sustainable development and value creation. The strategy is focused on positioning the group as the world’s value leader in mineable energy.
The group’s reserve position in thermal and coking coal is sufficient to underpin significant greenfield and brownfield expansions.
In 2007 the Energy group undertook a review of its asset portfolio which highlighted opportunities in the current market to divest assets. Options to divest Rio Tinto Energy America (RTEA) and the Kintyre, Australia, and Sweetwater, US, uranium projects are currently being explored.
A key part of the group’s strategy is to ensure that the group is a leading advocate of, and investor in, the sustainable future uses of coal and uranium. In 2007 the group continued to dedicate resources and investment funds to the development of clean coal technology through the FutureGen project in the US, COAL21 in Australia and in numerous low emission coal research organisations in the US and Australia.
In 2007 Hydrogen Energy was launched, a 50:50 joint venture with BP which will develop low carbon energy projects around the world. Hydrogen Energy will position Rio Tinto Energy to profit from the advent of a global low carbon energy future and initiate the development of a broader risk management strategy for climate change regulation while providing a meaningful offer on climate change and product stewardship.
Rio Tinto 2007 Form 20-F | 81 |
The group’s strategic intent is to build through Hydrogen Energy a low carbon energy business primarily reliant on coal that will ultimately leverage Rio Tinto’s capabilities in identifying, acquiring and operating large long life coal assets. Gasification opens new and larger markets for coal and the aim is to maximise returns across the emerging coal gasification value chain. Early positioning will convey an important element of competitive advantage. A key to unlocking value will be to proactively shape government policy to support and enable initial projects.
Hydrogen Energy will initially focus on the production of hydrogen for power generation using fossil fuels feedstocks and carbon capture and storage technology to produce new large scale supplies of clean electricity. Hydrogen Energy has announced initiation of studies for possible projects in California, Western Australia, and Abu Dhabi.
The Rössing Uranium life of mine extension project in Namibia continues. With the substantial recovery of uranium prices in recent years, Rössing is well positioned to expand and further extend the life of its operations. This will enable the company to continue to be a leading contributor to the Namibian economy, as it has been for the past 30 years.
At Energy Resources of Australia’s (ERA) Ranger mine, a number of opportunities for further low cost brownfield expansion are under consideration. ERA also owns the Jabiluka deposit, the second largest undeveloped uranium deposit in the world. In addition to the significant and sustainable operating assets at Rössing and ERA, Rio Tinto has increased its uranium exploration activity around the world. With a global nuclear power renaissance now under way, driven in large part by the need for large baseload electricity generation that does not emit greenhouse gases, Rio Tinto intends to maintain and enhance its position as one of the world’s leading uranium suppliers to power this growth.
At 31 December 2007, the Energy group accounted for 4.9 per cent of Group operating assets and, in 2007, contributed 13.8 per cent of Rio Tinto’s gross sales revenue and 6.5 per cent of underlying earnings.
Preston Chiaro, chief executive, Energy and Industrial Minerals, is based in London.
SAFETY
All injury frequency rate | per 200,000 hours |
2003 | 2.35 |
2004 | 2.02 |
2005 | 1.31 |
2006 | 0.89 |
2007 | 0.89 |
Safety performance and awareness continued to be a major focus of all operations. Energy Resources of Australia achieved significant improvements in safety performance. The lost time injury rate fell by 74 per cent and the all injury rate by 46 per cent. The injury severity rate, a measure of the seriousness of injuries, also decreased by a factor of over three. At Rio Tinto Energy America the severity index improved to approximately half of the severity index in 2006. At Rio Tinto Coal Australia’s (RTCA) Kestrel mine the lost time injury rate fell by 57 per cent and the all injury rate by 60 per cent. Two Energy group operations were winners of the Chief Executive’s Safety Awards, Hunter Valley Operations and the Antelope mine in the US.
GREENHOUSE GAS EMISSIONS
A greenhouse gas (GHG) performance review was submitted by each business unit as part of a planning process. This included a discussion on targets and performance and a list of proposed and implemented projects noting project progress, savings, costs and NPV (net present value).
Energy Resources of Australia is expected to exceed its targeted GHG reductions. Rio Tinto Energy America is slightly above target and Rio Tinto Coal Australia emissions per tonne have increased. Both RTEA and RTCA have a number of NPV positive optimisations and diesel reduction projects being researched or implemented. With a life of mine extension under way, Rössing Uranium has set a revised target. A number of optimisation projects have been identified.
The Energy group is also focussing on long term emissions reductions through the Hydrogen Energy joint venture. The plan identifies significant expenditure in terms of operating and capital costs for Hydrogen Energy in 2008 and 2009.
2007 compared with 2006
The Energy group’s 2007 contribution to underlying earnings was US$484 million, US$222 million less than in 2006.
Coal chain infrastructure bottlenecks and allocation cutbacks in Australia resulted in ongoing and significant
Rio Tinto 2007 Form 20-F | 82 |
production cutbacks and much higher demurrage costs. It is anticipated that production in Australia will not return to full capacity until 2010 when infrastructure bottlenecks are expected to be cleared. Port allocation arrangement negotiations were continuing at year end.
The results also reflected the softening of coking coal prices although there were increases in thermal coal prices and the stronger uranium oxide market. The weakening of the US dollar against the Australian dollar reduced earnings at Australian operations. For all operations, rising fuel prices and the tightness of the labour supply market continued to place pressure on operating results.
Despite lower volumes of uranium sold, higher market prices and the expiration of older contracts containing price caps contributed to a 69 per cent increase in uranium revenues in 2007 compared to 2006.
At Rössing Uranium, results were affected by reduced production volumes due to grade and plant performance and increased operating costs associated with development projects to increase capacity in the future. At ERA results were affected by production losses associated with severe rain and flooding of the pit.
The strong upward momentum that characterised the uranium market in the past three years continued for the first half of 2007, as demand remained robust in the wake of supply disruptions that affected a number of projects worldwide. However, unlike previous years, 2007 saw a fundamental change in market behaviour as the spot price became de-linked from the long term market due to the increasing influence of speculators in the commodity. Historically, the spot market has traded at a nominal discount to the term market, but last year saw substantial volatility in spot prices.
The long term uranium price, at which Rio Tinto sells most of its material, exhibited strong growth in the early part of the year, rising to a high of US$95 per pound in May, an increase of 27 per cent over December 2006. Thereafter, the long term price remained at US$95 as utility purchasing activity continued at moderately high levels.
2006 compared with 2005
The Energy group’s contribution to underlying earnings was US$706 million, US$24 million lower than in 2005.
Results benefited from a sustained increase in the price received for thermal coal. Capacity problems in the coal supply chain in the Hunter Valley region of New South Wales impeded production from Coal & Allied operations. Drought in parts of Queensland and New South Wales also affected production levels. Operations focused on producing high margin products and optimising the coal supply chain. Increases in the cost of basic materials, fuel, explosives and labour were not fully offset by production growth, resulting in a rise in the cost per unit of production across all operations.
Although spot prices for uranium rose dramatically during the first part of the year, this had little effect on Rio Tinto’s long term contract portfolio. Uranium oxide is typically sold under long term contracts, with pricing determined both by fixed prices negotiated several years in advance, and by market prices at time of delivery. Therefore, the rise in the spot price of uranium oxide during the period was not fully reflected in the year’s earnings, but the rise in long term prices did contribute to the improved results. Moreover, for both mines, legacy contracts at low prices are being replaced with new long term contracts that provide floor price protection at levels far above market prices at the beginning of this decade.
Rio Tinto Energy America(Rio Tinto: 100 per cent)
Rio Tinto Energy America wholly owns and operates four open cut coal mines in the Powder River Basin of Montana and Wyoming, US, and has a 50 per cent interest in, but does not operate, the Decker mine in Montana. RTEA also manages the group’s interest in Colowyo Coal in Colorado, US. In total it employs approximately 2,300 people.
The second largest US coal producer, RTEA sells its ultra low sulphur coal to electricity generators predominantly in mid western and southern states.
In April, RTEA bid and won access to approximately 98 million tonnes of additional coal reserves for its Spring Creek Mine in Montana. In June, RTEA bid and won access to additional mineralisation for the Colowyo Mine in Colorado. The acquisitions will extend the operating lives of the respective mines.
Rio Tinto has announced that it is exploring options to sell RTEA.
2007 operating performance
RTEA’s 2007 contribution to underlying earnings was US$132 million, US$45 million lower than in 2006. Results reflected steadily increasing US coal prices throughout 2007, more than offset by a higher effective tax rate in 2007.
RTEA’s 2007 sales were 128.3 million tonnes (excludes brokered sales), a decrease of 222,000 tonnes from 2006. Further increases were limited as customers had built higher levels of coal stockpiles in 2006. Earnings were reduced by a higher effective tax rate than in 2006. In 2007 the effective rate was 35 per cent as all prior year loss carry forwards had been applied. Adjusting to comparable tax rates, the 2007 result was better than 2006, largely driven by improved contract prices.
Antelope mine production of 31.3 million tonnes set a new record for annual production and sales, above the 2006 record of 30.7 million tonnes. Colowyo mine production of 5.1 million tonnes decreased by 700,000 tonnes.
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Cordero Rojo mine production of 36.7 million tonnes increased by 600,000 tonnes. Jacobs Ranch mine production of 34.6 million tonnes decreased by 1.7 million tonnes. Spring Creek mine production of 14.3 million tonnes set a new record for annual production and sales above the 2006 record of 13.2 million tonnes.
Consistent with the worldwide mining industry, RTEA experienced an increase in the input prices of materials and supplies in 2007 resulting in higher variable costs of mining. Diesel prices in 2007 increased by more than 15 per cent relative to 2006. Labour costs increased significantly reflecting the competitive regional labour shortage and steadily increasing healthcare costs. Tyre costs increased with the worldwide shortage of large mining equipment tyres. At the same time, strip ratios increase as reserves get deeper, resulting in the requirement to move increasing volumes of overburden.
RTEA is a member of the FutureGen Alliance, which seeks to construct the world’s first coal fuelled “zero emissions” power plant. The project achieved a major milestone with a site in Illinois selected for development. Construction was planned to commence upon completion of the permitting process, however this is now in doubt with the US Department of Energy announcing a restructure of the FutureGen project in January 2008.
Rio Tinto Coal Australia(Rio Tinto: 100 per cent)
Rio Tinto Coal Australia manages the group’s Australian coal interests. These include, in Queensland: the Blair Athol (Rio Tinto: 71 per cent), Kestrel (Rio Tinto: 80 per cent), Tarong (Rio Tinto: 100 per cent) and Hail Creek (Rio Tinto: 82 per cent) coal mines and the Clermont deposit (Rio Tinto: 50 per cent).
RTCA also provides management services to Coal & Allied Industries (Coal & Allied) for operation of its four mines located within the Hunter Valley in New South Wales. Coal & Allied (Rio Tinto: 75.7 per cent) is publicly listed on the Australian Securities Exchange and had a market capitalisation of A$6.5 billion (US$5.7 billion) at 31 December 2007. Coal & Allied wholly owns Hunter Valley Operations, has an 80 per cent interest in Mount Thorley Operations, a 55.6 per cent interest in the contiguous Warkworth mine, and a 40 per cent interest in the Bengalla mine which abuts its wholly owned Mount Pleasant development project. Coal & Allied also has a 37 per cent interest in Port Waratah Coal Services coal loading terminal.
Production from the Tarong mine is sold exclusively to Tarong Energy Corporation (TEC), an adjacent state owned power utility. In October 2007 the sale of the Tarong mine to TEC was announced with the sale to take effect from 31 January 2008.
Blair Athol produces thermal coal and sells principally to the Japanese market generally on annual agreements. Kestrel and Hail Creek sell mainly metallurgical coal to customers in Japan, south east Asia, Europe and Central America, generally on annual agreements.
Coal & Allied produces thermal and semi soft coal. Most of its thermal coal is sold under contracts to electrical or industrial customers in Japan, Korea and elsewhere in Asia. The balance is sold in Europe and Australia. Coal & Allied’s semi soft coal is exported to steel producing customers in Asia and Europe under a combination of long term contracts and spot business.
RTCA and Coal & Allied collectively employ approximately 2,500 people.
2007 operating performance
RTCA’s 2007 contribution to underlying earnings was US$246 million, US$244 million lower than in 2006. There was an increase in thermal coal prices but this was offset by production cutbacks necessitated by shipping bottlenecks and the continued weakening of the US dollar against the Australian dollar. Rising fuel prices and the tightness of the labour supply market continued to place pressure on operating results.
A tax benefit of US$29 million was received on the release of a tax provision that was no longer required.
As the majority of costs are fixed with only consumables such as fuel, tyres and explosives being variable, reduced port capacities had a direct and negative impact on underlying earnings.
Inadequate capacity of coal chain infrastructure in both the Hunter Valley and Queensland operations was a significant contributor to less than satisfactory results for RTCA. Significant production cutbacks of 14 per cent from 2006 levels were necessary, resulting in equipment and contract employees being idled. It is anticipated that production will not return to full capacity until 2010 when infrastructure bottlenecks are expected to be cleared.
RTCA operations declaredforce majeureunder its sales contracts on two occasions during 2007; in June as a result of severe weather conditions in the Hunter Valley and in November as a result of announced first quarter 2008 allocation cutbacks at the Dalrymple Bay port facilities in Queensland.
Total production at Blair Athol decreased from 10.2 million tonnes to 7.9 million tonnes primarily as a result of limited port capacity. Kestrel’s production increased by 0.8 per cent to 3.6 million tonnes. Hail Creek production was five million tonnes, an increase of ten per cent. At Tarong, production decreased by 35 per cent in line with lower demand from Tarong Energy Corporation.
Energy Resources of Australia(Rio Tinto: 68.4 per cent)
Energy Resources of Australia Ltd (ERA) is a publicly listed company and had a market capitalisation of A$3.7 billion (US$3.3 billion) at 31 December 2007. ERA employs 420 people, an increase from 385 at the end of 2006.
Since 1980 ERA has mined ore and produced uranium oxide at its Ranger open pit mine, 250 kilometres east of Darwin in Australia’s Northern Territory. ERA also has title to the adjacent Jabiluka mineral lease, which in 2003 was put on long term care and maintenance. Ranger and Jabiluka are surrounded by, but remain separate from, the World
Rio Tinto 2007 Form 20-F | 84 |
Heritage listed Kakadu National Park, and especially stringent environmental requirements and governmental oversight apply.
ERA is a large uranium producer, with considerable operational experience and a well established market position. The Ranger mine is the second largest uranium mine in the world and ERA is the fourth largest producer. ERA’s strategy is focused on creating the most value from the mineralisation available on existing lease areas. In line with the Energy group’s strategy of seeking additional production volumes and long term expansions to supply the current favourable market environment, ERA put significant effort into achieving growth through capitalising on opportunities for expansion and extension of production including, an extension of the existing Ranger mine, and installation of additional processing equipment to treat low grade and lateritic ore.
2007 operating performance
ERA’s 2007 full year earnings rose by 124 per cent to US$38 million in comparison with 2006 earnings of US$17 million. This was driven by a rise in the average realised price of uranium oxide from US$18.36 per pound to US$25.06 per pound despite sales being lower at 11.7 million pounds compared to the 2006 volume of 12.7 million pounds. The 2007 sales figures include no borrowed material.
Production of uranium oxide in 2007 was 11.7 million pounds, approximately 13 per cent higher than in 2006.
The favourable production result was significant given a severe rain event associated with a tropical low pressure system, resulting in nearly 850 millimetres of rain falling over the Ranger operation in seven days in February 2007. This resulted in flooding of the Ranger open pit, restricting access to high grade ore, forcing a processing plant shutdown and a declaration offorce majeureon sales contracts in March 2007. In the third quarter of 2007 access to high grade ore was again possible through the implementation of various water disposal measures.
Recovery work was successful in allowing production to return to normal levels in 2008 with no adverse environmental consequences. All sales commitments were met in 2007 andforce majeurewas lifted in January 2008. Further work is under way to reduce the impact of future weather events on the mine’s performance.
In September ERA announced an extension of the Ranger mine at a capital cost A$57 million, which added 10.7 million pounds of additional reserves, and extended the mine life from 2008 to 2012. Expenditure of A$10 million was also approved to examine options to further extend the mine and increase production from the processing plant.
Exploration and evaluation activity increased in 2007 with ERA spending US$11.8 million compared to US$6 million in 2006. Exploration and evaluation focused on near mine extensions to the Ranger orebody.
ERA continued to work with the Mirarr, traditional owners of the mining lease. The Mirarr commenced delivery of a cultural awareness programme to all new ERA employees and advised ERA on the establishment of traditional fire management practices on the Ranger lease. Increasing indigenous employment is a significant focus including the provision of training and employment opportunities. The year saw the number of indigenous employees increase to 65, or 16 per cent of the workforce. Improving on this will continue to be a focus for 2008.
Rössing Uranium(Rio Tinto: 68.6 per cent)
Rössing Uranium Limited produces and exports uranium oxide from Namibia to power utilities globally. Rössing continues to play a major role in the Namibian economy, both in terms of GDP contribution as well as education, employment and training.
Rössing currently employs approximately 1,175 people. Following the life of mine extension project approved in 2005, capital equipment acquisitions for the new mining area are in place and planning work for further extension continues. In 2007 production volumes of 6.7 million pounds were constrained as a result of having limited access to ore sources. The phase one pit is in its last two years of life. Mining and processing volumes, however, have been good and the mine is positioned for higher volumes in 2008 and beyond.
The year was one of consolidation and preparation for future growth and sustainable production. Truck and loading fleets doubled and over 300 people were recruited and trained. The current approved life of mine extensions will take the mine life to 2016 and further potential opportunities exist to extend both the mine life and production volumes depending on the long term price outlook and costs of production. Activities will continue to focus on continuous net present value (NPV) growth, improving margins and creation of options from known reserves and potentially economic mineralisation.
2007 operating performance
Earnings increased to US$95 million from US$27 million in 2006 due to higher market prices for uranium oxide.
Operating costs increased to US$38 per pound of uranium oxide production from US$22 per pound in 2006 as a result of lower production volumes, outsourcing of waste stripping as well as exploration activities that are not yet adding to production volumes. Costs were also affected by ore grades and higher than planned diesel and other operating costs.
All new primary production equipment is now fully commissioned to bring the fleet complement to 24 haul trucks from 16 at the beginning of the year, and six loading units compared to four previously. Initiatives are under way to improve the performance of the milling process.
Lower than planned leach extraction in 2007 was due to the average ore type which impacted on process controls. In 2008 there will be a focus on maintaining stability in the process and improving the head grade by applying a better blending strategy.
Rio Tinto 2007 Form 20-F | 85 |
Rössing continues to put significant effort and management focus on safety. The goal is to eliminate all injuries from the workplace and to have an embedded safety culture and systems that identify and rectify potential safety hazards.
ENERGY GROUP PROJECTSEnergy Resources of Australia(Rio Tinto: 68.4 per cent)
In September 2007 ERA announced an extension to the Ranger open pit at a capital cost of A$57 million to extend mining until 2012. The pushback, when combined with optimisation of the existing pit, added an additional 10.7 million pounds of contained uranium oxide to reserves. The majority of the additional production from the extension is expected to occur in 2011.
ERA has also approved expenditure of A$10 million for a pre-feasibility study to examine options to further expand the mine and increase production from the processing plant. The study commenced in the third quarter of 2007 and will continue into 2008.
ERA’s other capital expansion projects to process laterite ore and radiometrically sort low grade ores are well advanced with both projects scheduled for commissioning in the second quarter of 2008. The laterite processing plant will contribute approximately 0.88 million pounds per annum of uranium oxide to production from 2008 through to 2014. The radiometric sorter will upgrade lower grade ore and allow an additional 2.4 million pounds of uranium oxide to be produced over a five year period from 2008 to the end of 2013.
Exploration continued throughout the year including for the first time drilling through the wet season. Activity focused on further defining the down dip extension of the Ranger orebody, as well as understanding and defining the uranium mineralisation to support the pre-feasibility study on further expansion of the mine.
Rössing Uranium(Rio Tinto: 68.6 per cent)
After years of working below capacity during a period of low uranium prices, in December 2005 approval was granted to restore annual production capacity to 8.8 million pounds per annum and extend the life of the operation until at least 2016. Total incremental and sustaining capital cost of the expansion is US$112 million.
In 2007, delays were experienced with the start of construction projects due to slow contractor tender submissions. Recruitment of staff has been slow due to skills shortages in southern Africa. Work is now progressing well.
Rio Tinto Coal Australia Clermont(Rio Tinto: 50.1 per cent)
Rio Tinto and its joint venture partners approved investment of US$750 million for the development of the Clermont thermal coal mine in central Queensland, situated 15 kilometres south east of the Blair Athol mine. Clermont is expected to become Australia’s largest thermal coal producer when it reaches full capacity, which is scheduled for 2013. The mine will be brought into production to replace Blair Athol, due to close in 2015, and will use Blair Athols’ existing infrastructure and market position. To date construction has progressed to plan with boxcut production to commence in mid 2008 and first coal production expected in 2010.
Rio Tinto Coal Australia Kestrel(Rio Tinto: 80 per cent)
Rio Tinto and its joint venture partners approved investment of US$991 million for the extension of the Kestrel mine. This represents a 20 year investment in the Bowen Basin of Queensland to help meet Asian demand for metallurgical coal. First coal production from the extension is forecast for 2012 when the existing mine ceases production.
Coal & Allied Mount Pleasant(Rio Tinto: 75.7 per cent)
In 2006, Coal & Allied started a feasibility study on the Mount Pleasant coal mine project located adjacent to the Bengalla coal mine near Muswellbrook in the Hunter Valley, New South Wales. With continued uncertainty surrounding coal chain infrastructure in the Hunter Valley, further study is required before the feasibility study can be finalised.
Coal & Allied Lower Hunter Land(Rio Tinto: 75.7 per cent)
In 2006 Coal and Allied signed a memorandum of understanding with the New South Wales Government to facilitate the provision of extensive land conservation corridors in the Lower Hunter via the transfer of 80 per cent of the Company’s post mining land holdings. The remaining 20 per cent is being considered for land development. Extensive community consultation continued through 2007 with various options considered. Feasibility studies will be conducted in 2008 to finalise these options.
Rio Tinto Energy America(Rio Tinto: 100 per cent)
During 2007 RTEA commenced construction of the Jacobs Ranch overland conveyor and in pit crusher project. This will reduce emissions and operating costs in addition to providing latent capacity for expansion (from around 38 million tonnes to around 45 million tonnes per annum). Commissioning is on schedule for completion in 2008. At Antelope and Spring Creek recent expansion projects were completed in 2007 and production is ramping up to meet market demand.
Rio Tinto 2007 Form 20-F | 86 |
Iron Ore group
Production | Rio Tinto share | |
million tonnes | ||
2003 | 102.6 | |
2004 | 107.8 | |
2005 | 124.5 | |
2006 | 132.8 | |
2007 | 144.7 | |
Underlying earnings contribution* | US$m | |
2004 | 565 | |
2005 | 1,703 | |
2006 | 2,251 | |
2007 | 2,651 | |
Changes in underlying earnings 2005 – 2007 | US$m | |
2005 Underlying earnings | 1,703 | |
Effect of changes in: | ||
Prices and exchange rates | 616 | |
General inflation | (25 | ) |
Volumes | 156 | |
Costs | (229 | ) |
Tax and other | 30 | |
2006 Underlying earnings | 2,251 | |
Effect of changes in: | ||
Prices and exchange rates | 537 | |
General inflation | (43 | ) |
Volumes | 136 | |
Costs | (255 | ) |
Tax and other | 25 | |
2007 Underlying earnings | 2,651 | |
* | A reconciliation of the net earnings with underlying earnings for 2007, 2006 and 2005 as determined under IFRS is set out on page 53. |
STRATEGIC OVERVIEW
Rio Tinto’s Iron Ore group conforms with the larger Group’s overall strategy of pursuing the world’s best natural resources, wherever they are located, using the best technologies, and operating them safely. RTIO seeks to do this by being faster and better at producing iron ore, supported by an unmatched capacity and capability to develop key infrastructure.
RTIO is geographically well placed to take advantage of the exceptionally strong market conditions and outlook in Asia, with a massive mineralisation inventory base close to an integrated production platform in the Pilbara of Western Australia. This enables a rapid expansion of production in the short and medium term. RTIO’s large mineralisation position in Australia and Guinea, west Africa, together with an established project execution capability, provides potential for a global iron ore production capacity of more than 600 million tonnes per annum.
As new competitors and constraints emerge, RTIO’s strategy to meet the industry challenges is focused on achieving “industry leadership” in global iron ore. The strategy is centred on rapidly expanding the business, both globally and in the Pilbara, and delivering maximum value from RTIO’s operations by developing a world class production platform.
RTIO’s portfolio of operations is international, including Australia, Canada and Brazil, a major development project in Guinea at Simandou, and the Orissa project in India. It also includes the HIsmelt® plant in Australia, which applies revolutionary technology to convert iron ore fines with significant impurities into high quality pig iron.
RTIO Asia was established in Singapore in November 2007 to provide an integrated sales, marketing, distribution and logistics service for Hamersley Iron products in the Asia Pacific. It aims to maximise Hamersley’s share of forecast growth in the region.
At 31 December 2007, the Iron Ore group accounted for 13 per cent of Rio Tinto’s operating assets, and in 2007 contributed 26 per cent of the Group’s gross sales revenue and 36 per cent of underlying earnings.
At year end 2007 RTIO employed 6,520 people in Western Australia and 8,630 worldwide. In a highly contested market, the recruitment effort was exceptional, with 1,951 new starters in 2007.
Environmental initiatives included development of a strategic approach to water for the Pilbara, to ensure long term security of supply at the ports and in the management of dewatering discharge associated with the increasing requirement for below water table mining across the Pilbara, and recognising the importance of this issue for traditional
Rio Tinto 2007 Form 20-F | 87 |
land owners of the region.
A major milestone was reached with the completion of the Phase B upgrade of the port of Dampier, now ramping up towards its new capacity of 140 million tonnes per annum (Mt/a). Work has commenced on the Cape Lambert upgrade to 80 Mt/a from 55 Mt/a, which is expected to be completed in early 2009. Two new mines were approved for development – Brockman 4 (22 Mt/a) and Mesa A/Warramboo (25 Mt/a) – at a combined total cost of US$2.4 billion, of which Rio Tinto’s share is US$2.0 billion. Both mines will replace tonnages from deposits nearing the end of their mine life.
Rio Tinto’s 50:50 joint venture with Hancock Prospecting is progressing well. In November, Hope Downs 1 (22 Mt/a), began production – a full quarter ahead of schedule, and the stage 2 expansion to 30 Mt/a has been brought forward one year, with production planned to commence at the start of 2009. In December approval was given for a US$71.4 million feasibility study into the development of a Hope Downs 4 mine (15-20 Mt/a).
RTIO’s growth strategy has seen more than US$7 billion committed to port, rail, power and mine assets since 2003, resulting in a world class, integrated iron ore network. A feasibility study into expanding Pilbara capacity to 320 Mt/a by 2012 is well advanced and a decision will be made in early 2009. Cape Lambert has been identified as the preferred site for port expansion.
In late November 2007 Rio Tinto senior management outlined an aggressive expansion programme designed to capitalise on RTIO’s global spread of assets and markets. This included a conceptual framework towards establishing a Pilbara production capacity of 420 Mt/a and an expansion at Simandou in Guinea of up to 170 Mt/a.
During the year, RTIO was inducted into the Australian Export Hall of Fame, was twice honoured at the Australian Business Arts Foundation awards and won a 2007 Water Award for its re-injection project at Yandicoogina.
Sam Walsh, chief executive Iron Ore, is based in Perth, Western Australia.
SAFETY
All injury frequency rate | per 200,000 hours | |
2003 | 2.19 | |
2004 | 1.79 | |
2005 | 1.48 | |
2006 | 1.24 | |
2007 | 0.92 | |
Iron Ore Company of Canada’s safety performance continued to improve in 2007 with a 59 per cent reduction in the lost time injury frequency rate to 0.29. The Corumbá mine in Brazil again won the Chief Executive’s Safety Award. Work progressed on a number of safety initiatives across operations, particularly focused on issues surrounding contractor management, vehicle safety and implementing proactive measures to prevent the risk of injury. Cyclone preparation measures in the Pilbara employee accommodations were reviewed, focusing on standardised safety measures. Overall, the group’s all injury frequency rate was 0.92 (1.24 in 2006) and the lost time injury frequency rate 0.38 (0.59) .
GREENHOUSE GAS EMISSIONS
The 2008–2009 greenhouse gas (GHG) plan notes an increased focus on energy reduction through the appointment of an energy specialist in late 2007 and the conduct of further energy reviews. A feasibility study is being conducted to examine the possible replacement of power stations to reduce GHG emissions and mitigate current potential environment risk.
A number of additional activities aimed at reducing energy use and GHG emissions are also under way including replacing heavy mobile equipment and locomotives. Dash 7 and Dash 8 locomotives are being replaced by new generation GE EVO locomotives. The RTIO technology group is also examining hybrid locos in collaboration with General Electric, liquid natural gas replacement for diesel trucks and locomotives, rail electrification, and closed cycle power generation for existing open cycle power units. Rio Tinto has approved new gas fired power generation in the Pilbara as a step towards lower emissions electricity.
FINANCIAL PERFORMANCE
2007 compared with 2006
RTIO’s contribution to 2007 underlying earnings was US$2,651 million, US$400 million higher than in 2006.
Demand for iron ore remained extremely strong across the product range throughout 2007, driven by the continuing robust growth in global steel demand and production, significantly exceeding seaborne suppliers’ capacity to match. Total Chinese iron ore imports rose from 326 million tonnes to 383 million tonnes, accounting for more than 90 per cent of world growth. Hamersley Iron and Robe River in Australia operated at record or near record levels of
Rio Tinto 2007 Form 20-F | 88 |
production in 2007.
In December RTIO announced plans to sell up to 15 million tonnes of iron ore on the spot market in 2008, taking advantage of the large gap between annual (benchmark) and short term prices while continuing to meet longer term contractual commitments.
2006 compared with 2005
RTIO’s contribution to 2006 underlying earnings was US$2,251 million, US$548 million higher than in 2005.
Demand for iron ore continued to be extremely strong across the product range throughout 2006, driven by continued growth in global steel demand and production. Total Chinese iron ore imports rose from 275 million tonnes to 326 million tonnes. Hamersley Iron, Robe River, Iron Ore Company of Canada and Corumbá in Brazil all operated at record or near record levels of production in 2006.
For the contract year commencing April 2006 RTIO reached agreement with customers on price increases of 19 per cent for all products following on from the previous agreement of a 71.5 per cent increase. In December 2006, prices for the 2007 contract year were agreed with Baosteel of China, for a 9.5 per cent increase to the benchmark price. Similar price increase agreements were subsequently reached with other steelmakers.
Hamersley Iron(Rio Tinto: 100 per cent)
Hamersley Iron operates nine mines in Western Australia, including three mines in joint ventures, about 700 kilometres of dedicated railway, and port and infrastructure facilities located at Dampier. These assets are run as a single operation managed and maintained by Pilbara Iron.
The final phase in ramping up Pilbara infrastructure to 220 million tonnes of annual capacity is well under way. Dampier port’s two terminals now account for a combined capacity of 140 Mt/a. With the completion of Junction South East, Yandicoogina mine capacity has been expanded to 52 Mt/a, and brownfield mine expansions at Marandoo, Nammuldi and Mount Tom Price have been completed.
The new Hope Downs mine, owned in 50:50 joint venture with Hope Downs Iron Ore Pty Ltd (owned by Hancock Prospecting Pty Ltd), but managed by RTIO, began production in November, a full quarter ahead of schedule, and the first train was loaded in mid December.
Approval was granted for the US$1.52 billion Brockman 4 mine, 60 kilometres north west of Tom Price, which is expected to begin ramp up in 2010 to 22 Mt/a. The mine will be connected to the main network via a 35 kilometre rail spur, and the design allows for an additional 14 Mt/a expansion.
Work is progressing on a number of options for new mine development as part of the feasibility study to reach 320 Mt/a capacity. A decision is expected in early 2009. Work also continued on pre-development studies for new mines.
2007 operating performance
Hamersley Iron’s total production in 2007 was 112.1 million tonnes, 14.9 million tonnes more than the 97.2 million tonnes in 2006. This result was notable for being achieved amid significant expansion work across several sites.
Shutdowns and flooding from two cyclones early in the year hindered operations significantly, although tie down procedures performed well. Several derailments also impacted operations significantly, resulting in an estimated 1.39 million lost saleable ore tonnage. Remedial action was undertaken on high risk sections and a rerailing project was approved which will eventually see 45 per cent of the network replaced.
Reinvestment in additional yard capacity, locomotives and rolling stock has been implemented to improve efficiency and remove bottleneck issues associated with limited rail capacity.
The Pilbara Blend product was successfully introduced mid year, winning widespread customer acceptance and at 100 per cent of the reference price. Pilbara Blend will comprise 15 per cent of the world’s seaborne iron ore trade.
Shipments by Hamersley Iron totalled 109.5 million tonnes, including sales through joint ventures. Shipments to China also reached a new record level at 59.6 million tonnes, confirming China’s place as the single largest, and fastest growing, destination for Hamersley’s iron ore.
Hamersley’s total shipments of iron ore to major markets (million tonnes)
2007 | 2006 | 2005 | ||||
China | 59.6 | 52.9 | 49.5 | |||
Japan | 30.0 | 27.4 | 24.5 | |||
Other Asia | 18.3 | 15.8 | 14.1 | |||
Europe | 0.7 | 2.0 | 2.0 | |||
108.5 | 98.1 | 90.1 | ||||
Note | ||||||
This table includes 100 per cent of all shipments through joint ventures. |
Rio Tinto 2007 Form 20-F | 89 |
Robe River Iron Associates(Rio Tinto: 53 per cent)
Robe River Iron Associates (Robe) is an unincorporated joint venture in which Mitsui (33 per cent), Nippon Steel (10.5 per cent) and Sumitomo Metal Industries (3.5 per cent) retain interests. Robe River is the world’s fourth largest seaborne trader in iron ore.
Robe River operates two open pit mining operations in Western Australia. Mesa J is located in the Robe Valley, north of the town of Pannawonica. The mine produces Robe River fines and lump, which are pisolitic iron ore products. The West Angelas mine, opened in 2002, is located approximately 100 kilometres west of the town of Newman. The mine produces West Angelas fines and lump and Marra Mamba iron ore products which were successfully incorporated into the Pilbara Blend during the year.
Expansion of mine, rail and port operations has continued, with the upgrade of Cape Lambert port from 55 Mt/a to a rated capacity of 80 Mt/a proceeding on schedule. The port has also been nominated as the preferred site for subsequent expansion as part of the upgrade of Pilbara capacity to 320 Mt/a, subject to an ongoing feasibility study.
In November, Rio Tinto and the joint venture partners approved development of the US$901 million (Rio Tinto share US$478 million) Mesa A/Warramboo mine in the western end of the Robe Valley. This followed a lengthy, ultimately successful, process to gain environmental approval. The new mine’s annual production will be 20 Mt/a, increasing to 25 Mt/a by 2011, and will be replacement tonnage as Mesa J’s mine life approaches its end.
Robe River primarily exports under medium and long term supply contracts with major integrated steel mill customers in Japan, China, Europe, South Korea and Taiwan.
2007 operating performance
The effect of cyclones slowed production early in the year at Robe River’s Pannawonica and West Angelas mines, as did a serious derailment which required significant track repairs. A two week shutdown of the Cape Lambert dumper also affected production, as did delays in commissioning a conveyor system at West Angelas.
Robe River’s total production in 2007 was 51.5 million tonnes, comprising 25.5 million tonnes from Mesa J, and 26.0 million tonnes from West Angelas. Sales were 25.9 million tonnes of Mesa J and 25.6 million tonnes of West Angelas products.
Sales growth, based on increased production from West Angelas, was again fuelled by the growth in the Chinese market, where Robe River achieved record total sales of 52.0 million tonnes. Japan remains Robe River’s largest single market, with total shipments in 2007 of 22.6 million tonnes.
Robe’s total shipments of iron ore to major markets (million tonnes)
2007 | 2006 | 2005 | ||||
China | 21.0 | 18.5 | 17.5 | |||
Japan | 22.6 | 24.7 | 26.1 | |||
Other Asia | 2.9 | 2.7 | 1.7 | |||
Europe | 5.5 | 6.1 | 7.3 | |||
52.0 | 52.0 | 52.6 | ||||
Iron Ore Company of Canada(Rio Tinto: 58.7 per cent)
RTIO operates Iron Ore Company of Canada (IOC) on behalf of shareholders Mitsubishi (26.2 per cent) and the Labrador Iron Ore Royalty Income Fund (15.1 per cent).
IOC is Canada’s largest iron ore pellet producer. It operates an open pit mine, concentrator and pellet plant at Labrador City, Newfoundland and Labrador, together with a 418 kilometre railway to its port facilities in Sept-Îles, Quebec. IOC has large quantities of ore reserves with low levels of contaminants.
Products are transported on IOC’s railway to Sept-Îles on the St Lawrence Seaway. The port is ice free all year and handles both ocean going ore carriers and Lakers, providing competitive access to all seaborne pellet markets and to the North American Great Lakes region. IOC exports its concentrate and pellet products to major North American, European and Asian steel makers.
IOC employs approximately 2,000 people and recruited 170 people during the year to offset an increase in retirements and to meet greater production needs.
2007 operating performance
The demand for IOC’s products strengthened further in 2007 with concentrate prices increasing by ten per cent and pellet prices by five per cent over last year’s benchmark prices.
Total saleable production was 13.2 million tonnes, down from 16.1 million tonnes in 2006. The variation was primarily due to a seven week labour strike. Pellet production was 11.3 million tonnes (12.7 million tonnes in 2006) with saleable concentrate being 1.9 million tonnes (3.4 million tonnes in 2006). Lower production levels coupled with higher oil prices put pressure on 2007 unit costs.
A labour strike in March/April occurred when negotiations broke down over the new collective agreement to replace the one that expired in February 2007. The strike ended following agreement of a new five year collective agreement.
In August, IOC announced the approval of US$57 million to expand annual concentrate production capacity to 18.4 Mt/a by mid-2008 and to conduct a feasibility study to further expand to 21 Mt/a.
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In March 2008 IOC announced the approval of US$475 million to increase annual concentrate production by some 40 per cent, or seven Mt/a, to 25 Mt/a and annual pellet production by ten per cent, or 1.5 Mt/a, to 14.5 Mt/a over the next five years.
IOC’s total shipments of iron ore to major markets (million tonnes)
2007 | 2006 | 2005 | ||||
Europe | 5.210 | 5.7 | 6.8 | |||
Asia Pacific | 3.777 | 5.4 | 3.4 | |||
North America | 4.155 | 4.8 | 4.8 | |||
13.142 | 15.9 | 15.0 | ||||
Mineração Corumbaense Reunida (Corumbá)(Rio Tinto: 100 per cent)
Corumbá produced 1.8 million tonnes of lump iron ore in 2007 and sold 1.1 million tonnes to South American, Asian and European customers. Sales were lower in 2007 due to strong competition for barging freight, barge unloading delays at Argentine ports and abnormally low river levels during the last quarter.
Rio Tinto approved investments in additional barging capacity, port improvements and an ore dryer to develop the market for Corumbá lump in direct reduction processes, all of which will come on line during 2008. The feasibility study to expand mine production and transport logistics to ten Mt/a is nearing completion, as the next step towards production of 20 Mt/a. Negotiations continued with prospective investors regarding a steel making project at Corumbá that would consume local iron ore.
Corumbá has more than 200 million tonnes of reserves, and additional mineralisation. There are approximately 650 employees.
HIsmelt®(Rio Tinto: 60 per cent)
The HIsmelt®iron making project at Kwinana in Western Australia is a joint venture between Rio Tinto (60 per cent interest through its subsidiary, HIsmelt Corporation), US steelmaker Nucor Corporation (25 per cent), Mitsubishi Corporation (ten per cent), and Chinese steelmaker Shougang Corporation (five per cent). The project produced 115,000 tonnes of pig iron and achieved a number of production records in 2007, its second year of ramp up as it builds towards a planned capacity of 800,000 tonnes per annum. The project was visited by Chinese president Hu Jintao in September 2007.
IRON ORE GROUP PROJECTS
Hamersley Iron(Rio Tinto: 100 per cent)
Upgrade to 220 Mt/a
RTIO is on schedule to have 220 Mt/a installed capacity in the Pilbara by the end of 2008, achieving a doubling of capacity since the beginning of the decade. The second stage of the Pilbara Expansion is well advanced with a further upgrade of Dampier Port, Yandicoogina mine expansion and Hope Downs stage 1 development now completed. The initial upgrade of Cape Lambert Port will complete the major infrastructure upgrades for this phase. Additional mine capacity at Hope Downs stage 2 to 30 Mt/a will match the capacities of mine, rail and port facilities at 220 Mt/a.
Pilbara 320/420 Mt/a
A suite of mine and infrastructure projects for the expansion of Pilbara capacity to 320 Mt/a is under study. The studies include a variety of greenfield and brownfield mine options across the Pilbara, expansions to both rail and port and supporting infrastructure, designed to bring the Pilbara capacity firstly to 320 Mt/a and then 420 Mt/a. The studies also contemplate the use of new technologies including a Perth based Remote Operations Centre, and a range of automation options. Underlying this work is an aggressive resource evaluation and definition programme, designed to ensure that the available mineralisation is delineated and developed with optimal sequencing and timing. More than 400,000 metres of exploration drilling was completed during 2007 and a further 500,000 metres is planned for 2008.
Robe River Iron Associates(Rio Tinto: 53 per cent)
Mesa A
The US$901 million Mesa A/Waramboo mine development is required to sustain production of Robe Valley pisolite, which would otherwise decline with the run down of the Mesa J mineralisation. Pending finalisation of plans for the proposed rail spur to the existing line, transition work will begin shortly. Production at Mesa A is expected to commence in the first quarter of 2010, starting at 20 Mt/a, increasing to a 25 Mt/a rate from 2011.
Cape Lambert port
The first upgrade of Cape Lambert (from 55 Mt/a to 80 Mt/a) is well under way. A construction camp for 600 people has been established, and works are continuing according to plan with marine piling and bulk earthworks well
Rio Tinto 2007 Form 20-F | 91 |
advanced. The project scope includes extension of the wharf and upgrading of shiploading facilities to accommodate four capsize vessels simultaneously as well as upgrades to the stockyard with the addition of a new reclaimer. The project is scheduled for completion at the end of 2008 with progressive ramp up during the first half of 2009.
The 320/420 project
Cape Lambert is also the preferred site for expansion of Pilbara port facilities to 320 Mt/a, and conceptually to 420 Mt/a. Under the early planning for the 320 Mt/a, this would involve construction of a new terminal (Cape Lambert West) capable of berthing four capsize ships. That terminal would be extended to accommodate a further four berths according to the 420 Mt/a concept. Early planning has also identified the area to the west of the existing rail line for both stockpiles under both 320 and 420 Mt/a upgrade scenarios. This expansion plan carries the added benefit of not adding to Rio Tinto’s footprint in the area.
Simandou(Rio Tinto: 95 per cent)
The Simandou project in eastern Guinea, west Africa, is of great strategic significance for Rio Tinto. It is a greenfield discovery situated in one of the best undeveloped major iron ore provinces in the world. A prefeasibility study is studying the mining and transport options needed to bring Simandou into production as quickly as possible, with an initial capacity of 70 million tonnes per annum. The deposit has great potential in exploration opportunities across the project area. Total drilling of 50,000 metres was undertaken at the Pic de Fon and Oueleba sites in 2007, with an equivalent amount expected in 2008. Simandou has significant brownfield growth capacity, and conceptual development plans are already under way on expanding capacity towards 170 million tonnes per annum. These studies are scheduled for completion in 2010.
The International Finance Corporation (the private sector arm of the World Bank Group) retains a five per cent stake in the project and is working with Rio Tinto to develop it in an environmentally and socially sustainable way.
The project currently employs 375 Rio Tinto staff operating from offices in Conakry and Kerouane, and construction camps at Canga East and Oueleba in the Mining Concession. The total workforce, including contractors, is greater than 700.
Orissa, India(Rio Tinto: 51 per cent)
Orissa is one of the key iron ore regions of the world. RTIO has a joint venture interest in Rio Tinto Orissa Mining with the state owned Orissa Mining Corporation. The joint venture holds rights to iron ore leases in Orissa, which it is seeking to develop. Although progress has been slow, Rio Tinto remains keen to participate in the development of the Indian iron ore sector through its joint venture. A project team has been established and is working to expedite the development of operations in India.
Rio Tinto has identified India as among the most likely economies to follow east Asia’s development of a greater intensity of steel use. India’s economy is expected to maintain its present growth rate, thus providing support for an expanding domestic steel industry. Rio Tinto has continued discussions with major domestic steel companies.
Rio Tinto 2007 Form 20-F | 92 |
Other operations
Kennecott Land(Rio Tinto: 100 per cent)
Kennecott Land was established in 2001 to capture value from the non mining land and water rights assets of Kennecott Utah Copper. Kennecott Land’s holdings are around 53 per cent of the remaining undeveloped land in Utah’s Salt Lake Valley. Approximately 16,000 hectares of the 37,200 hectares owned is developable land and is all within 20 miles (32km) of downtown Salt Lake City.
The initial Daybreak community encompasses 1,800 hectares and is entitled to develop nearly 14,000approximately 20,000 residential units and nine million square feet of commercial space. Kennecott Land develops the required infrastructure and prepares the land for sale to home builders. The project is well advanced, with over 1,2001,650 home sales completed since opening in June 2004. At full build out, the community will house 30,00040,000 to 40,00050,000 residents. Revenues in 20062007 were US$6048 million.
Kennecott Land is in the process of securingstudying development rights from Salt Lake Countyopportunities for the remaining landholdings. Current developmentDevelopment potential for this land is in excess of 150,000approximately 163,000 residential units and 5058 million square feet of commercial space. Securing entitlement is a long term public process that will culminate in a plan being submitted for approval by the Salt Lake County Council in the next one to twofew years.
Sari Gunay(Rio Tinto: 70 per cent)
In November 2007, Rio Tinto has carried out explorationsigned a final and project evaluationbinding sale agreement to divest the whole of its interest in Iran since 2000. Preliminary results from the Sari Gunay gold project in Western Iran have indicatedwestern Iran. On the potential for a medium sized low grade oxide resource. Following successful geostatistical and infill drilling programmecompletion of this transaction, which is expected in 2004, a feasibility study, including further evaluation drilling and metallurgical testwork, has been completed.mid 2008, Rio Tinto is currently evaluatingintends to close its options for Sari Gunay.office in Iran and will cease to have any interests in Iran.
MARKETING
Marketing and sales of the Group’s various metal and mineral products are handled either by the specific business concerned, or in some cases are undertaken at a product group level.In 2006, Rio Tinto established a small central marketing team based in London to develop and share leading marketing practices across the Group. The team supports the Group’s businesses by helping to identify new ways of adding value in meeting customers’ needs.
Rio Tinto has numerous marketing channels, which include electronic market places,marketplaces, with differingcharacteristics and pricing mechanisms depending on the nature of the commodity and markets being served.
Rio Tinto’s businesses contract their metal and mineral production direct with end users under both short andlong term supply contracts. Long term contracts typically specify annual volume commitments and an agreed mechanism for determining prices at prevailing market prices. For example, businesses producing non ferrous metals and minerals reference their sales prices to the London Metal Exchange (LME) or other metal exchanges such as the Commodity Exchange Inc (Comex) in New York.
In 2007, Rio Tinto continued to focus on improvements in its marketing capability, with a small central marketing team based in London and Australia working collaboratively with business based sales and marketing teams to disseminate leading marketing practices across the Group. The team supports the Group’s businesses by helping to identify analytical tools, approaches and strategic frameworks to help identify the value to Rio Tinto of meeting customers’ needs.
MARINE
Ocean freight
Ocean freight has becomeis an important part of Rio Tinto’s marketing. It is managed by Rio Tinto Marine, which isbasedwith a head office in Melbourne.Melbourne, to provide Rio Tinto with a comprehensive capability in all aspects of marine transportation, global freight markets and the international regulatory environment. In 2006,2007, Rio Tinto Marine handled 70over 78 million tonnes of dry bulk cargo, a significant13 per cent increase on the 51 million tonnes transported in 2005.2006 volumes transported.
Rio Tinto Marine leverages the Group’s substantial cargo base to obtain a low cost mix of short, medium andlong term freight cover. It seeks to create enterprise value from its freight by creatingimproving the competitive advantage forposition of the Group’s products rather than by trading freight.
through freight optimisation, and does not seek to trade freight as a stand alone activity. Rio Tinto Marine sets and maintains the Group’s HSE and vessel assurance standards for freight and is one ofthree equal shareholders in Rightship, a ship vetting specialist, promoting safety and efficiency in the global maritime industry.
During 2007 Rio Tinto Marine took possession of the first of five new bulk carriers, the RTM Wakmatha. These vessels will be used principally for carrying bauxite from Rio Tinto Alcan’s mine at Weipa, Queensland, to Gladstone for processing. In addition, an order has been placed for the construction of three 250,000 deadweight tonne ore carriers to transport iron ore from Rio Tinto’s operations in Western Australia to customers in China and elsewhere. These ore carriers will be delivered from late 2012 to help Rio Tinto build on its natural freight advantage in Asian exports.
Freight market
Sea freight rates reached unprecedented levels in all segments during 2007. Strong demand for commodities, combined with supply constraints and port congestion, resulted in increased long haul trade and reduced fleet availability.
Rio Tinto |
EXPLORATION GROUPThe Baltic Dry Index (BDI), an index of dry bulk shipping rates, more than doubled in 2007, increasing 110 per cent during the year. The Capesize vessel segment had the greatest upward impact on the BDI, with average daily freight prices increasing by 132 per cent during 2007, closing at US$157,128 per day with a November peak at US$194,115 per day. The Panamax, Supramax and Handysize indices also increased substantially, each registering gains of 93 to 95 per cent during 2007.
With spot markets at record highs, charterers turned to the period market to cover cargoes, pushing timecharter rates higher and increasing opportunistic re-let activity. Shipyard order books swelled in the second and third quarters of 2007, resulting in a large tranche of new vessel capacity for delivery from late 2009 through 2011. Long lead times for new vessels has seen large premiums paid for second hand vessels in all segments.
Rio Tinto 2007 Form 20-F | 94 |
Exploration group
STRATEGIC OVERVIEW
The purpose of exploration is to increase the value of the Group by discovering or acquiring resources that can augment future cash flows.
Adding value to a Group the size of Rio Tinto effectively means that exploration programmes must regularly return what others might call “company maker” discoveries. These are the largest and highest quality mineral deposits that the natural world has to offer, called Tier 1 resources.
Exploration involves the identification, prioritisation and testing of geological targets. As less than 0.1 per cent of targets will actually deliver a discovery, a continuous flow of opportunities is required. Exploration success in Rio Tinto is defined as the discovery of a deposit that warrants detailed economic evaluation. Handover of the deposit to a product group evaluation team marks the end of the exploration phase.
Greenfield exploration, which aims to establish new mineral businesses, involves geographic or commodity diversification away from existing Rio Tinto operations. Accountability for greenfield work lies with Rio Tinto Exploration seeks to discover or identify mineral deposits that will contribute to the growth of the Rio Tinto Group. The discovery of new deposits is essential to replace reserves as they are mined, to provide new opportunities for growth, and to help meet the increasing global demand for minerals and metals.(RTX). The Exploration group is opportunistic in approach and its resources are deployed on projects that show the best chance of delivering a world class deposit to Rio Tinto. Exploration maintains close dialogue with product groups toensure that strategies and project portfolios are closely aligned. Mineral exploration is a high risk activity. Rio Tinto’s statistics show that an average of only one in 350 mineral prospects that are drill tested result in a mine for the Group. Rio Tinto believes in having a critical mass of projects,selected through a rigorous process of prioritisation. The Exploration group RTX is organised into five geographically-based teamsregional multi-commodity teams. This gives the group local presence, an in North America, South America, Australasia, Asia and Africa/Europedepth understanding of the operating environment and a sixth project generation teamholistic view of geological terrains. At the same time, programmes are prioritised on a global basis so that searchesonly the world for newbest opportunitiesand provides specialised geological, geophysical and commercial expertise to the regional teams. The Asia team was formed in 2006, reflecting a significant expansion in exploration effort in Russia, Mongolia and the FSU. Industrial minerals exploration, previously a separate team, has been integrated into the are pursued.
There are currently five of these regional teams, which are supplemented by the Project Generation Group (PGG). PGG provides specialist commercial, technical and project generation.generative assistance and also co-ordinates all RTX research and development activities.
At the end of 2006, Rio Tinto2007, RTX was actively exploring in over 3530 countries and assessing opportunities in a further 20 for a broad range of commodities including bauxite, copper, coking coal, iron ore, industrial minerals, diamonds, nickel industrial minerals, bauxite, uranium, iron ore and coal. Explorationuranium. RTX employs about 180250 geoscientists around the world and has a total complement of approximately 900950 people. Eric Finlayson was appointed head Brownfield exploration is directed at sustaining or expanding the value of Exploration, based in London, from January 2007, succeeding TomAlbanese, director, Group Resources, who became chief executive ofexisting Rio Tinto from May 2007.business units. Given that resources are the lifeblood of every mining operation, this is an essential business activity. Accountability for brownfield programmes lies with the business units, with RTX providing technical assistance.
The brownfield environment provides the easiest opportunity for creating value through exploration. The reasons for this are clear – Rio Tinto controls highly prospective title around its existing operations and infrastructure, and economic thresholds are lower than in a greenfield setting. Moreover, Tier 1 resources – the giants of the mineral deposit world – tend to be found in clusters.
Financial performanceSAFETY
All injury frequency rate | per 200,000 hours |
2003 | 1.30 |
2004 | 0.95 |
2005 | 0.55 |
2006 | 0.88 |
2007 | 1.10 |
Two greenfield discoveries, the Chapudi thermal coal deposit in South Africa and the Kintyre uranium deposit in Western Australia, were transferred from RTX to product group evaluation teams. Kintyre is now being offered for sale. One Tier 1 brownfield discovery, the Caliwingina North channel iron deposit, was transferred to Pilbara Iron.
Order of magnitude studies continued at the Bunder project (diamonds, India) and commenced at the Chilubane and Mutamba (ilmenite, Mozambique), Jarandol and Jadar (borates, Serbia) deposits. All are scheduled for completion in early to mid 2008. Negotiations continued with the Government of Indonesia on the Contract of Work for the Sulawesi nickel project.
Significant progress at early stage RTX projects in Australia (zircon), Brazil (bauxite), Canada (potash), Colombia (bauxite) and the US (nickel) is expected to lead to commencement of new order of magnitude studies in the second half of 2008. Several other projects are showing early signs of encouragement and could be fast tracked into this stage.
Exploration by the La Granja (Peru) evaluation team returned significant encouragement with the discovery of four new bodies of porphyry copper mineralisation. At the Bingham Canyon (US) copper mine, a substantial molybdenum deposit was identified located beneath the copper orebody. Adding to this discovery, which is still being delineated by deep drilling, was the recognition of new porphyry copper mineralisation beneath the southern pit wall. These two new zones of mineralisation point to further discovery potential.
Rio Tinto 2007 Form 20-F | 95 |
On Freeport Block A in West Papua (Indonesia), drilling encountered a new zone of copper-gold skarn mineralisation at the Gap target located between the Grasberg and Ertsberg intrusions. Delineation drilling will be conducted from an exploration drift in 2008.
On the Heruga concession of Entrée Gold near Oyu Tolgoi (Mongolia), operator Ivanhoe Mines announced discovery of the Heruga porphyry copper-gold deposit. Drill intersections included 454 metres at 0.50 per cent copper, 1.43 grams per tonne of gold, and 0.02 per cent molybdenum.
Near the Eagle deposit (US), drilling by the evaluation team intersected high grade nickel-copper sulphide mineralisation at three satellite prospects. Delineation drilling is planned for 2008.
At Energy Resources of Australia, the exploration and evaluation programme focused on infill drilling to support the previously announced mine extension, as well as the prefeasibility study into a further mine expansion. In 2008, attention will return to defining the Ranger 3 Deeps deposit.
2007 compared with 2006
“Exploration” expenditures reported by Rio Tinto include exploration and evaluation spends in both the greenfield and brownfield environments. Expenditure on brownfield projects reported separately in thisAnnual reportby each of the Rio Tinto product groups is included in this summary.
Net cash expenditure on exploration in 2007 was US$576 million, an increase of US$231 million over 2006. This primarily reflects the large number of high quality projects in the exploration and evaluation pipeline, net of US$197 million cash proceeds from the sale of the Peñasquito royalty, shares in Anatolia Minerals, the Southdown iron ore deposit and various other interests during 2007. The pre-tax charge to underlying earnings of US$321 million is net of US$253 million of total proceeds from the divestments mentioned above.
2006 compared with 2005CashNet cash expenditure on exploration in 2006 was US$345 million, an increase ofa US$81 million increase over 2005, reflecting anincrease in contractor costs, the high quality of projects in the Exploration pipeline and acceleration of evaluation on significant projects. The pre-tax charge to underlying earnings was US$237 million, due to the sale of Ashton Mining of Canada shares and various other interests during 2006.
2005 compared with 2004Cash expenditure on exploration in 2005 was US$264 million and the pre-tax charge to underlying earnings was US$250 million, a US$60 million increase over 2004, reflecting a further increase in iron ore exploration in Western Australia, the growthnumber of high quality projects in the Explorationexploration and evaluation pipeline, and accelerationnet of evaluation on significant projects by product groups duringUS$23 million cash proceeds from the year.
Operations
2006 operating performanceSince 2001 six projects have moved from Explorationsale of various interests, including Ashton Canada shares. The pre tax charge to the next stage of project evaluation including Resolution (copper, US), Potasio Rio Colorado (potash, Argentina) and Simandou (iron ore, Guinea). Last year, five iron ore deposits in the Pilbara were transferred to the product group evaluation team.Rio Tinto also conducts near mine exploration around a number of operations. Where additional mineralisationhas supplemented reserves or new mineralisation has been discovered this has been reported by the relevant product group. Explorationunderlying earnings in 2006 focused on advancing the most promising targets across the spectrumwas US$237 million net of grassroots and nearmine programmes. Encouraging results were obtainedUS$46 million of total proceeds from a number of locations. Order of magnitude studies are in progress at the Chapudi project (coal, South Africa) and the Bunder project(diamonds, India).Negotiations continue on a Contract of Work for the La Sampala project (nickel, Indonesia) with the Government of Indonesia.During 2007 projects in Mozambique and Serbia (industrial minerals), Brazil (bauxite), Colombia (coal), and theUS (coal and nickel) are expected to commence order of magnitude studies to assess their economic potential for advancement to pre-feasibility study. Diamond exploration continues, focused in Canada, southern Africa, Mauritania, Brazil and India. Workcommenced in Mali. A number of kimberlite pipes were discovered and follow up test work is in progress to assess economic potential.Copper exploration continued in Turkey, Kazakhstan, Peru, Chile, Argentina, Mexico and the US and in Russia under the RioNor joint venture with Norilsk Nickel. Drilling encountered significant copper mineralisation in Chile, Kazahkstan and the US, warranting further follow up drill testing.Exploration focus on the bulk commodities, iron ore, coal and bauxite continued in 2006. Drilling progressed on bauxite projects in Brazil. Thermal and coking coal projects were drill tested in the US, Canada, southern Africa,divestments.
Discoveries(Projects transferred to product group evaluation teams) | ||
Year | Tier 1 discoveries | Tier 2 discoveries |
2000 | Potasio Rio Colorado (potash) | Kazan (trona) |
2001 | — | — |
2002 | Resolution (copper) | — |
2003 | — | Sari Gunay (gold) |
2004 | Simandou (iron ore) | Eagle (nickel) |
2005 | La Granja (copper) | Rio Grande (borates) |
Caliwingina (iron ore) | four Pilbara deposits (iron ore) | |
2006 | — | — |
2007 | Caliwingina North (iron ore) | Chapudi (coal) |
Kintyre (uranium) | ||
Notes | |
Tier 1discoveries: Large, high quality deposits — the 20 per cent of deposits contributing 80 per cent of global production. | |
Tier 2 discoveries: Smaller or lower quality deposits — the 80 per cent of deposits contributing 20 per cent of global production. |
Rio Tinto |
Colombia and Mongolia. Results in all countries are encouraging and work is continuing in 2007. Iron ore exploration continued in west Africa and further iron ore deposits in the Pilbara in Australia have been handed over to the iron ore product group in 2007. Industrial minerals exploration was active in many parts of the world including southern Africa, Europe and South America. Following the successful tender for the Jarandol concession (borates, Serbia), drilling has commenced. Brownfields exploration support continued at several Rio Tinto operations and product group projects, including Diavik, Argyle, Kennecott Utah Copper, Eagle, Energy Resources of Australia, La Granja, Pilbara Iron, Greens Creek and Rössing. Exploration also provided expertise to the brownfields programmes at the Grasberg and Cortez joint ventures. In December the Exploration group’s ISO14001 environmental management system certification was extended to cover the new Asia region and the project generation team.
TECHNOLOGY AND INNOVATION
The Technology and Innovation group formerly(T&I) had its origin in the combination of the Operational and Technical Excellence was formed during 2006 by bringing together the Technology group(OTX) organisation and the Group’sImproving performance togetherbusiness improvement workin the areas of mining, processing, asset management and asset management.strategic production planning.Technology and Innovation providesT&I’s focus is to be a central body of expertise for supporting the business units to embed operational best practice and is the vehicle through which technology innovations are driven and technical talent ispartner in value delivery with Rio Tinto businesses by:developed.
• | supporting implementation of leading practice and high value projects; |
• | developing and implementing strategic innovation technologies; and |
• | evaluating the technical risk of major capital and growth projects. |
The group comprises a core team of technology professionals and a number of Centres of Excellence whichtechnology centres that develop leading practice and drive sustainable performanceimprovement in the areas of health, safety and environment (HSE), mining, processing, assets integrity,asset management, strategic production planning, and project development and evaluation, and strategicplanning.evaluation. Key elements are standardisationcommon and visible measures of core processes to make them leading practice,operational effectiveness, the improvement ofanalytical tools the introduction of common, transparent metrics and data to measure performance, and enhanced functional training and capability development of staff.staff capability.
A further Centre of Excellencecentre focuses on majorstep change innovation to confer competitive advantage in development of orebodies likely to be requiredavailable to developRio Tinto in the orebodies of thefuture.
The total staff in Technology and InnovationT&I at year end was 368,387, compared with 343 in 2005.368 at year end 2006. The increase wasdue to the higher level of growth activity resulting fromcharacterising the current climate of growth in the industry.
resource sector.
Operations
Health, Safety and Environment
The HSE Centre of Excellence ensures that strategies and standards are in place to minimise HSE risk and driveperformance. Activities support their implementation in the businesses and report results and performance trends to the board.
Specific activities during 20062007 included the embedding of keythe environmental standards and metrics withinbusinesswithin business units, complementingto complement the health and safety standards which placestandards. The safety strategy was reviewed to concentrate on safety leadership, culture and measurement, and recognition of performance. This places Rio Tinto as an industry leader in terms ofperformanceof performance in these areas, and completing development ofareas. Implementing the product stewardship strategy which integrates product stewardship intovia business systems securing bothhas benefited market access and competitive advantage. Continued development of the HSEQ management systems and the integration of the Alcan business were also priorities for HSE.
Innovation
The Innovation Centre of Excellence is designed to drive step change innovation for Rio Tinto focused on ain the five to tenyear timeframe.time frame. The main focus is onrelevant technologies applicable across the Group, particularlyare in mining, processing and energy.
Key innovation programmes were undertakenThe activities in underground and surface mining as well as processing. Specificactivities during 2006 focused2007 continued to focus on the block cave mining method tunnelof particular relevance to the large copper orebodies currently under development, and remote monitoring in underground mining, in pit material sizing and conveying, data fusion in surface mining, and process advances in oresortingore sorting and comminution.
Shared Expertisecomminution and modelling of heap leaching processes to enhance metal extraction.Shared Expertise, A significant commitment by Rio Tinto to automation has culminated in a core group of technical professionals located across five global offices, provides a breadth ofexperience and a multi disciplinary approach in delivering projects to the business units across the Group. This team works instrategic partnership with the operating sitesAustralian Centre for Field Robotics (ACFR) at the University of Sydney. This exclusive partnership leverages an early mover advantage with Komatsu on driverless haul trucks and is a natural extension of other activity which is expected to implement leading practice. It also provides technical support on an ongoing basis as required.see the first fully integrated, autonomous mine in operation in the Pilbara in 2010.
Mining and Processing
The Mining and Processing Centres of Excellence addressTechnology Centre addresses the core mine production processes. Specific activities inthese areasin this area during 20062007 focused on continuing to establish and disseminate leading practice in orebody knowledge, payload management in surface mining and value driven production planningreconciliation processes across the operations. Attention was also given to further improving Rio Tinto’s technical capability in rapid underground development and block cave design.
Assets IntegrityProcessing
The Assets IntegrityProcessing Technology Centre focuses on core metallurgical capability and delivery of Excellence develops world class asset management capabilities to create significant value for Rio Tinto. Activities for 2006processing operations. Specific activities in this area during 2007 focused on the implementation of a structured methodology designed to identify specific points of loss (throughput, recovery, and grade), understanding underlying causes behind the losses, and the development of projects to reduce or eliminate those losses across the Group’s processing operations. A key enabling activity around the use of Processing Global Metrics for fixed plants was introduced.
Asset Management
The Asset Management Centre focuses on the effective choice and deployment of the Group’s asset base in mining and processing. Activities in 2007 focused on the continued reliability and performance of physical assets across the Group, including the implementation of standards and internal league tables“league tables” for maintenance of heavy mobile equipment
Rio Tinto 2007 Form 20-F | 97 |
such as trucks and shovels. This led to continued significant improvement in areas such as tyre life (a further five per cent added to the success of previous years), truck utilisation and prolongingeconomic extension of engine and component life. The centre also extended the range of its influence in 2007 to the reliability and performance of fixed plant assets across the Group.
Strategic Production Planning
The Strategic Production Planning Centre focuses mainly on a Group wide methodology to ensure orebodies are developed in the optimum sequence for the generation of maximum value. Specific attention is directed to the enhancement of the functional skill of planning staff and to regular review of the life of mine plans for all the Group’s mining operations.
Project Development and EvaluationOn 1 March 2007 the Projects Centre of Excellence and the Evaluation team were combined to form a new Centre for Excellence forThe Project Development and Evaluation (PDE). The principal accountabilitiesCentre is the proponent of PDE are to provideindependent advice to thestandards and guidelines for all aspects of capital appraisal and approval process, and on the adequacy of project submissions, fromprefeasibility studiesprojects, from pre-feasibility through to execution and commissioning. This covers major projects as well as minor projects implemented within business units. It holds a body of expertise to ensure the lessons from previous project developments are a resource to the project directors for the next generation of development.
Evaluation staff are deliberately excluded from involvement in the formulation of major investment proposals, and the Evaluation team provides independent review and advice on the adequacy of risk identification and mitigation at key points in the approvals process. The team is also conducts post investment reviews; and ensures thatresponsible for overseeing reserve estimation corporate governance within the substantial experience of the Group in project definition and delivery is reflected in future projects.Group.
Energy and climate change
The Group Chief Scientist monitors emerging global technology trends and identifies opportunities which could significantly enhance the Group’s operations. Particular attention is given towards technologies with the potential for step change reductions in the Group’s energy and greenhouse gas footprint. The Group Chief Scientist also assists product groups in positioning new and existing operations for reduced energy consumption, greenhouse gas emissions and energy costs.
BackProduction Technology Services
Production Technology Services is the core team of technology professionals deployed across five global offices who provide the breadth of experience and multi disciplinary approach to Contentssupport existing business activity and pursuit of new, profitable growth. They are deployed at the request of business units and the technology centres within T&I. Their offices are in Melbourne, Brisbane, Perth, Salt Lake City and Montreal. In addition, some staff reside in London to be readily accessible to the UK headquarters.
Strategic PlanningFINANCIAL PERFORMANCE
2007 compared with 2006
The Strategic Planning Centrecharge against net earnings for the T&I group was US$78 million, compared with US$50 million in 2006. The increase was due to the higher level of Excellence focuses on three separate but related areas. These are value optimisation inthe strategic planning horizon, risk assessmentactivity, reflected also by higher staff numbers, and management,the continued development and business improvement, providing a centre forcoordinatingdeployment of leading operational practice for improvement methodologies across Rio Tinto.the Group.
Financial performance
2006 compared with 2005
The charge against net earnings for the group was US$50 million, compared with US$41 million in 2005. The increase was due to the greater level of activity, reflected also in the addition of staff.
2005 compared with 2004The charge for the Technology group (including Health, Safety and Environment) against net earnings was US$41million, compared with US$35 million in 2004. The increase was due to the great er level of activity in all Technology group units.
Rio Tinto |
SOCIETY AND ENVIRONMENT
Group employees | ||||||
Approximate average for the year | Subsidiaries and jointly | Equity | Total | |||
controlled assets | accounted units | |||||
2002 | 29,000 | 8,000 | 37,000 | |||
2003 | 29,000 | 7,000 | 36,000 | |||
2004 | 28,000 | 4,000 | 32,000 | |||
2005 | 28,000 | 4,000 | 32,000 | |||
2006 | 31,000 | 4,000 | 35,000 | |||
Principal employee locations 2006 | ||||||
Australia / New Zealand | 14,000 | |||||
North America | 10,000 | |||||
Africa | 5,000 | |||||
Other | 6,000 | |||||
35,000 | ||||||
Rio Tinto is in business to create value by finding and developing world class mineral deposits and operating and eventually closing operations safely, responsibly and efficiently. To do so, the Group takes a disciplined and integrated approach to the economic, social and environmental aspects of all its activities.The approach to achieving this is through implementation of the policies described inThe way we work, Rio Tinto’s statement of business practice, at all levels of the business.The statement was published initially in January 1998 and revised in 2002 and 2003. It is now available in more than 20 languages. It is the result of wide internal consultation and discussion and represents shared values from around the Group.The way we workcommits the Group to transparency consistent with normal commercial confidentiality,corporate accountability and the application of appropriate standards and internal controls. It sets the basis for how Group companies’ employees work and also provides guidance for joint venture partners and others. Every employee isresponsible for implementing the policies in the document.Rio Tinto has adopted the Association of British Insurers’ 2003 disclosure guidelines on social responsibility in preparing this report. Details of the Group’s overall and individual businesses’ social and environmental performance continue to be published on the Rio Tinto website: www.riotinto.com and in theSustainable development review.
Board responsibilitiesThe directors of Rio Tinto, and of Group companies, are responsible for monitoring adherence to the Group policies outlined inThe way we work. Assurance for performance in these areas involves checking, reviewing and reportingeach business’s implementation of the policies, their compliance with regulations and voluntary commitments, and theeffectiveness of management and control systems, while also providing mechanisms for improvement.As discussed in the section onCorporate governanceon page 122, the boards established a process foridentifying, evaluating and managing the significant risks faced by the Group. Directors meet regularly, have regular scheduled discussions on aspects of the Group’s strategy and full and timely access to the information required to discharge their responsibilities fully and effectively.Rio Tinto’sCompliance guidancerequires that the identification of risk be systematic and ongoing. Itrecommends that each Group company undertakes a structured risk profiling exercise to identify, categorise and weigh the risks it faces in the conduct of its business. Each Group company puts systems in place to ensure that risks arereviewed at an appropriate frequency.Total remuneration is related to performance through the use of annual bonuses, long term incentives and stretching targets for personal, financial and safety performance.The board’sCommittee on social and environmental accountabilityreviews the effectiveness of policies andprocedures. The committee comprises four non executive directors. It meets four times annually with the chief executive and heads of Technology, Health, Safety and Environment (HSE), and Communications and ExternalRelations.Reports for the committee summarise significant matters identified through Rio Tinto’s assurance activities.These include reviews every four years of each business to identify and manage strategic risks in relation to health,safety, and the environment; audits against Rio Tinto standards; risk reviews for specific concerns; procedures and systems for reporting critical and significant issues and incidents; completion of annual internal control questionnairesby all Group business leaders covering the full spectrum of business and operational risk; and findings andrecommendations of the independent external assurance and data verification programme. In 2006 a new Corporate Assurance function was established to integrate all assurance activities, including the assurance activities of InternalAudit, HSE, and Communities, into a single assurance process.
Policies, programmes and resultsImplementation of the policies inThe way we workis discussed in the following sections according to each policy area.Known risks arising from social and environmental matters and their management in Group businesses is described in
the relevant Group operations section.In 2006 HSE developed an integrated HSE and Quality Management System. Implementation will commence in2007 and is mandatory for all managed businesses.
SafetyRio Tinto believes that all injuries are preventable and its goal is zero injuries. Wherever we operate, we hold the healthand safety of our employees to be core values. This requires visible leadership and a culture of supportive workplacebehaviour, as well as clear standards, consistent implementation, and the transfer of best practice and improvement throughout the Group.While in 2006 the safety record improved for the seventh consecutive year, there is still some way to go inachieving the goal of zero injuries. In 2006, very regrettably, three employees lost their lives at managed operations. The incidents have been investigated and actions taken to prevent recurrance. The Group has again demonstrated strong improvements in the year end lost time injury frequency rate (LTIFR) at 0.50 (2005: 0.56) and all injury frequency rate (AIFR) at 1.10 (2005: 1.35), reductions of 11 per cent and 18 per cent respectively. Rio Tinto set targets in 2003 for a 50 per cent reduction in LTIFR and AIFR by 2008 – in 2006 we were on trajectory to meet those targets.Fines for infringement of safety regulations involved nine operations, totalling US$34,794 (2005: US$87,600).
Occupational healthOccupational health is a major priority. Rio Tinto is committed to ensuring the good health of its employees and contractors.Our occupational health standards have now been implemented in 96 per cent of our businesses. In 2006 there were 32 new cases of occupational illness per 10,000 employees, a 40 per cent improvement compared with 54 in 2005. The Group has achieved a 69 per cent reduction in the rate of new cases of occupational illness since 2003.The nature of occupational illnesses is changing and we have active programmes in place to manage the emerging issues of stress, fatigue, and age related illnesses such as heart disease and reduced physical capacity. In 2006 we also revised our HIV/AIDS strategy and, whereas in the past our efforts had been concentrated on southern Africa, today our approach is global.In 2004, in order to focus attention on reducing noise induced hearing (NIHL) loss across the Group, a target wasset of a 20 per cent reduction in the rate of exposure (per 10,000 employees) to a noise environment of more than 85decibels (dB) between 2004 and 2008.Implementation of the hearing conservation standard has increased the awareness of NIHL, resulting in anincreased baseline after 2004. The reported rate of exposure to more than 85 dB in 2006 was reduced by 1.0 per cent from 2004.Fines for infringement of occupational health regulations in 2006 involved two operations, totalling US$3,000 (2005: US$58,100).
EnvironmentRespect for the environment is at the heart of Rio Tinto’s approach to sustainable development. Wherever possible Rio Tinto prevents, or otherwise minimises, mitigates and remediates, harmful effects of the Group’s operations on theenvironment. The strategic framework used to improve environmental performance provides a coherent way of assessing and addressing risks to the business.We have devised and implemented a number of practical, core programmes covering the management of water, mineral and non mineral waste, air quality, product stewardship, land stewardship and biodiversity. These programmes involve input from our partners and local communities as well as from experts in these fields.Rio Tinto believes that emissions of greenhouse gases (GHGs) from human activities are contributing to climatechange. Controlling GHG emissions is one of our biggest challenges, and the Group is working to reduce emissionsfrom its processes and in the use of its products. We have five year targets to reduce our GHG emissions by four per cent per tonne of product and improve our energy efficiency by five per cent per tonne of product by 2008, comparedwith a 2003 baseline.In 2006, energy efficiency improved by 2.6 per cent compared with 2003, while GHG efficiency improved by 0.3 per cent. Both areas slipped from 2005 and remain below the trajectory needed to achieve the 2008 targets. Ouremissions efficiency result is affected by both production interruptions and changes in the emissions intensity of purchased electricity. The scheduled maintenance shutdown of the Kennecott Utah copper smelter significantlyimpacted our performance per unit. Without the smelter shutdown our performance would have been one per centbetter.We continued to engage with governments and stakeholders who are also trying to find solutions to climatechange. In order to ensure that Group actions remain effective and that Rio Tinto maintains a leading position in thisarea, in 2006 Rio Tinto embarked on a new three year climate change plan. Changes in emission factors affected performance by a further 0.6 per cent. The improvement in freshwater withdrawal efficiency, at 11.5 per cent compared with 2003, remained on track to achieve the 2008 target of ten per cent.By the end of 2006, 96 per cent of operations had certified ISO 14001 or an equivalent environmental management system (EMS). There were eight significant environmental incidents in 2006, of which three were spills, compared with eight in 2005, of which two were spills. Fines for infringements of environmental regulations involved
four operations and totalled US$56,799 (2005: US$67,900).
Land accessRio Tinto manages 35,000 square kilometres of land, five per cent of which is disturbed for mining purposes. Rio Tintoseeks to ensure the widest possible support for its proposals throughout the life cycle of the Group’s activities by coordinating economic, technical, environmental and social factors in an integrated process.This involves negotiation of mining access agreements with indigenous landowners; responsible landmanagement and rehabilitation; planning for closure; developing and implementing a biodiversity strategy; and forming strategic partnerships with external organisations.
Political involvementRio Tinto does not directly or indirectly participate in party politics nor make payments to political parties or individual politicians.ABusiness integrity guidance, addressing bribery, corruption and political involvement, was issued in 2003 toassist managers in implementing this policy. The guidance covers questions relating to compliance and implementation; gifts and entertainment; the use of agents and intermediaries; and “facilitation” payments.Rio Tinto avoids making facilitation payments anywhere in the world. Bribery in any form is prohibited. Giftsand entertainment are only offered or accepted for conventional social and business purposes and then only at a level appropriate to the circumstances.
CommunitiesRio Tinto sets out to build enduring relationships with its neighbours that are characterised by mutual respect, activepartnership, and long term commitment.Every business unit is required to have rolling five year community plans which are updated annually. In 2004, a series of pilot studies were completed aimed at achieving a deeper level of understanding of the linkages betweenmining activities and the economies in which they take place.All Group businesses produce their own reports for their local communities and other audiences. Community assurance of the quality and content of these reports is increasing. This provides an opportunity for engagement with thecommunity on their views of programmes sponsored by the operations.Businesses managed by Rio Tinto contributed US$96.4 million to community programmes in 2006 (2005: US$93.4 million) calculated on the basis of the London Benchmarking Group model. Of the total contributions, US$29.6 million was community investment and US$32.6 million in direct payments made under legislation or anagreement with a local community.
Human rightsRio Tinto supports human rights consistent with the Universal Declaration of Human Rights and also respects thoserights in conducting the Group’s operations throughout the world.Rio Tinto also supports the UN Secretary General’s Global Compact, the US/UK Voluntary Principles on Security and Human Rights and the Global Sullivan Principles.Rio Tinto’sHuman rights guidanceis designed to assist managers in implementing the Group’s human rights policy in complex local situations. It was revised and republished in 2003. In 2004, a web based training module wasdeveloped to instruct managers on what the policy means in practice and how to respond to difficult situations.
EmploymentRio Tinto recognises that business performance is closely linked to effective people development. It has a long termplan to strengthen approaches to the training and development of leaders in the Group.New talent is essential to our business and Rio Tinto provides attractive career opportunities for outstanding graduates across many disciplines. However, the recent rapid growth in demand for skilled recruits, coupled with areduced flow of qualified candidates from traditional schools, is making competition for human resources very intensewithin the mining industry. Making mining more attractive as a career is therefore crucial for our ability to access new people. We are committed to the training and development of our existing employees.People development in Rio Tinto is focused on ensuring leadership and competence across the Group. In addition to a comprehensive and customised series of leadership development programmes from supervisor through to managing director, Rio Tinto is developing a series of functional development programmes for professionals and practitioners across the Group, such as mining, processing or marketing.Beyond formal programmes we are also developing our own approach to coaching which will further strengthen our people development activities. This plus an increased focus on training and e-learning will be key to Rio Tinto’s people development strategy moving forward. Rio Tinto values diversity because we believe it confers a real business benefit. An international group like ours needs to be able to draw on the broad range of management experience andinsight that can only come from a team of men and women with a diversity of racial and cultural backgrounds.In 2004, we focused on achieving specific diversity related targets important to the future of our organisation. While we continue to work towards these targets, these were reviewed and refined in 2006 to ensure their continuingalignment with our business objectives and needs. Diversity will continue to be an important people developmentagenda for the Group.
Rio Tinto requires safe and effective working relationships in all its operations. Whilst respecting different cultures, traditions and employment practices, common goals are shared, in particular the elimination of workplaceinjuries, and commitment to good corporate values and ethical behaviour. In 2005 and 2006, Group companies, mainly concentrated in Australia and North America, employed approximately 31,000 people and, together with Rio Tinto’s proportionate share of consolidated companies and equityaccounted units, the total was approximately 35,000 (2005: 32,000). Wages and salaries paid in 2006 excluding Rio Tinto’s proportionate share of consolidated companies and equity accounted units, totalled US$2.5 billion (2005: US$2.1 billion).Retirement payments and benefits to dependants are provided in accordance with local conditions and good practice. Rio Tinto encourages the involvement of its employees in the Group’s performance through their participation inan employee share scheme. As stated inThe way we work, the Group recognises the right of employees to choose whether or not they wish to be represented collectively.
Sustainable developmentRio Tinto has made a strategic commitment to sustainable development, in the belief that acting responsibly will resultin long term business benefits such as lowering risks, reducing costs, creating options, and leveraging reputation. It is corporate policy that Group businesses, projects, operations and products should contribute constructively to the global transition to sustainable development. Details of our policy, programmes and results are provided in ourSustainable development review, available on the website.During the course of 2006, our Sustainable Development Leadership Panel (SDLP), composed of senior executives from all six product groups and corporate functions, focused on Rio Tinto’s sustainable development strategy. Input was sought from a wide range of sources, both within Rio Tinto and outside. The panel assessed the current status of sustainable development practice in the Group, decided that Rio Tinto should strive to be the sector leader in its contribution to sustainable development, and defined the areas we need to focus on in order to accomplish that goal.The focus areas include developing a sustainable development culture, similar to that already in place on safety, key performance indicators, effective communication, supply chain management, and taking account of sustainable development in risk management, long term, planning and mines of the future.To help explain the concepts of sustainable development, both to existing employees and newcomers, we introduced training and awareness raising tools throughout the Group. In addition, we are using another, more detailedprogramme for managers, based on the e-learning tool, Chronos, developed by the World Business Council for Sustainable Development and Cambridge University in the UK. By the end of 2006 more than 700 managers had participated in the programme. As a founding member of the International Council on Mining and Metals, Rio Tinto is committed to superior business practices in sustainable development. We have committed to implement the ICMM Sustainable DevelopmentFramework and comply with policy statements of the ICMM Council.
Openness and accountabilityRio Tinto conducts the Group’s affairs in an accountable and transparent manner, reflecting the interests of Rio Tintoshareholders, employees, host communities and customers as well as others affected by the Group’s activities. Policies on transparency, business integrity, corporate governance and internal controls and reporting proceduresare outlined inThe way we work. In 2003, aCompliance guidancewas issued to provide a framework to enable eachGroup business to implement and maintain a best practice compliance programme which should identify and manage risks associated with non compliance with laws, regulations, codes, standards and Rio Tinto policies.
Assurance and verificationTo be accountable and transparent, assurance is provided to the Group and others that Rio Tinto policies are beingimplemented fully and consistently across the Group’s businesses and operations.The overall objective of the external assurance and data verification programme is to provide assurance that the material in theSustainable development reviewis relevant, complete, accurate and responsive, and, in particular, thatRio Tinto’s policies and programmes are reflected in implementation activities at operations. In 2006, Environmental Resources Management (ERM) undertook the external assurance and data verification programme and the results are available in Rio Tinto’sSustainable development review.
CompetitionRio Tinto has adopted a specific antitrust policy requiring all employees to compete fairly and to comply with relevantlaws and regulations. Under the policy, guidance is provided on contacts with competitors and benchmarking as well as implementation of the policy in individual businesses. As integral parts of the policy, all relevant employees receive regular training and are required to certify annually that they are not aware of any antitrust violations. No violations were reported in 2006.
FINANCIAL REVIEWFinancial review
Cash flow
20062007 compared with 20052006
Cash flow from operations, including dividends from equity accounted units, was a record US$12,569 million, 15 per cent higher than in 2006 due to the effect of higher earnings and favourable working capital movements.
Tax paid for 2007 increased to US$3,421 million, US$622 million higher than for 2006 largely due to the delayed tax effect of the increased earnings in 2006 compared to 2005 and tax paid by Alcan. Net interest paid of US$489 million for 2007 was US$361million higher than 2006, arising mostly from Alcan acquisition debt arrangement costs and interest paid on the Alcan debt.
The Group invested at record levels, in particular in expansion projects. Expenditure on property, plant and equipment and intangible assets was US$4,968 million in 2007, an increase of US$980 million over 2006. This included the completion of the second phase of the Dampier port and Yandicoogina iron ore mine expansions, as well as construction of the Hope Downs iron ore mine in Western Australia, the expansion of the Yarwun alumina refinery, the A418 dike construction at the Diavik diamond mine and the Madagascar ilmenite mine. The Group’s ongoing and recently approved capital projects, which will impact future year’s cash flows are on pages 12 to 13.
The net cash cost of acquisitions in 2007 was US$37,526 million, which was net of US$13 million related to disposals. Almost all of the acquisition cost related to Alcan. The acquisition was financed by US$38 billion of syndicated bank loans. Acquisitions less disposals were US$279 million in 2006 mainly relating to the acquisition of an initial stake in Ivanhoe Mines.
Dividends paid in 2007 of US$1,507 million were US$1,066 million lower than dividends paid in 2006 which included a special dividend of US$1.5 billion. The share buy back programme was discontinued after the announcement of the Alcan acquisition on 12 July 2007: returns to shareholders from the on-market buy back of Rio Tinto plc shares in 2007 totalled US$1,611 million (net of US$13 million proceeds from the exercise of options), compared with US$2,339 million in 2006.
2006 compared with 2005
Cash flow from operations, including dividends from equity accounted units, was US$10,923 million, 36 percent higher than in 2005. The increase was mainly due to increased profits. There was a cash outflow on working capital in both years reflecting higher receivables across all product groups due to higher metal prices and sales volumes. The cash outflow on inventory was US$454 million in 2006 compared to US$249 million in 2005, partly due to increased operating activity and production costs. The Group invested at record levels, in particular in expansion projects. Expenditure on property, plant and equipment exploration and other intangible assets was US$3,9923,988 million in 2006, an increase of US$1,4021,434 million over2005. This included the second phase of the Dampier port and Yandicoogina iron ore mine expansions, as well as construction of the Hope Downs iron ore mine in Western Australia, the A418 dykedike construction at the Diavik diamond mine, the Madagascar ilmenite mine and the capacity increases at Rio Tinto Energy America. Capital expenditure is expected to continue at a high level in 2007.
Tax paid in 2006 increased to US$2,799 million, US$1,782 million higher than in 2005. The increase reflectsreflected higher profits including the lag effect of tax payments on higher profits from 2005.
Acquisitions less disposals were US$279 million in 2006 mainly relating to the acquisition of an initial stake inIvanhoe Mines. In 2005, there were net proceeds of disposal of US$321 million arising mainly from the sale of the Group’s interest in Lihir.
Dividends paid in 2006 of US$2,573 million were US$1,432 million higher than dividends paid in 2005. Theseincluded the special dividend totalling US$1.5 billion which was paid to shareholders in April 2006. Capital management activity also included the on market buyback of Rio Tinto plc shares in 2006, comprising US$2,299 million from the 2006/072006–2007 programme and US$95 million in January from the 2005/062005–2006 programme (before deducting US$24 million proceeds from the exercise of options). In 2005 an off market buyback of Rio Tinto Limited shares returned US$774 million to shareholders and an on market buyback of Rio Tinto plc shares returned US$103 million.
Balance sheet2005 compared with 2004Cash flow from operations, including dividends from equity accounted units at US$8,031 million, was 88 per centhigher than in 2004. The increase was mainly dueRio Tinto commissioned expert valuation consultants to increased profits. This was partly offset by an increased cash outflowadvise on workingcapital in 2005 mainly reflecting higher receivables across all product groups due to higher metal prices and sales volumes.Cash flowthe fair values of US$323 million from disposals of interests in businesses in 2005 primarily related toAlcan’s assets. As required under International Financial Reporting Standards (IFRS), the sale of Lihir. In 2004, disposals generated proceeds of over US$1.5 billion. The largest components of this were the sale of shares in FCX and the sale of Rio Tinto’s interest in the Morro do Ouro gold mine in Brazil.Purchase of property, plant and equipmenttangible and intangible assets of US$2,590 million included the major port andrail infrastructure expansion in Western Australia, payments for coal reserves purchased by Rio Tinto Energy America, the expansion of Hail Creek coking coal and initial expenditure on the construction of a new dyke at Diavik. During the year the Group repaid US$893 million of its gross outstanding debt and cash balances increased byapproximately US$2.0 billion. Dividends paid in 2005 of US$1,141 million were US$235 million higher than dividends paid in 2004 following the 20 per cent increase in the dividend declared in respectacquired business have been uplifted to fair value. The residue of the previous year. A capital return programme was commenced under which an off market buy back of Rio Tinto Limited shares was carried out,purchase price not allocated to specific assets and subsequently an on market buy back of Rio Tinto plc shares. Almost two thirdsliabilities has been attributed to goodwill. The provisional values incorporated in the2007 Financial statementswill be subject to revision within 12 months of the US$1.5 billion capital management programme announced on 3 February 2005 had been completeddate of acquisition as permitted by the endrelevant accounting standard, IFRS 3. Details of January 2006.
Balance sheetthe Alcan assets acquired are included in note 41 to the2007 Financial statements.
The balance sheet remained strong duringcompletion of the period, although record capital expenditure andAlcan acquisition was financed under a US$40 billion syndicated bank loan at floating interest rates of which US$38 billion was drawn down. This, together with the increased capitalmanagement activitydebt held by Alcan on acquisition, resulted in an increase in net debt of US$1,124 million42.8 billion to US$2,437 million45.2 billion at 31 December 2006.2007 of which US$8.1 billion is classified as short term borrowings. The US$40 billion loan is split into four facilities with final maturities ranging up to five years. Facilities A and B of this acquisition related debt are subject to mandatory prepayment to the extent of the net proceeds from disposals of assets and from the raising of funds through capital markets, under specific thresholds
Rio Tinto 2007 Form 20-F | 99 |
and conditions. Debt to total capital rose to 1163 per cent butand interest cover strengthened to 89was 20 times. In 2006, net assets increased by US$3,646 million. Outside interests increased by US$362 million mainly due toretained profits at Robe River and IOC. Equity attributable to Rio Tinto shareholders increased by US$3,284 million: as net earnings attributable to Rio Tinto shareholders of US$7,438 million exceeded the combined amounts of share buybacks and dividends paid by US$2,207 million; and there was a positive currency translation effect of US$820 million mainly reflecting the eight per cent strengthening of the Australian dollar. The Group’s borrowings, net of related currency and interest rate swaps, totalled US$3.2 billion at 31 December 2006, of which US$1,143 million will mature in 2007. The majority of the Group’s borrowings relate to amounts issuedunder the Group’s corporate bond and medium term notes programmes totalling approximately US$2.0 billion, of which US$847 million will mature in 2007.
In addition, to the above, the Group’s share of the third party net debt of equity accounted units totalled US$459 million0.7 billion at 31 December 2006. This2007. US$0.3 billion of this debt which is set out in note 15 to the 2006 financial statements, is withoutwith recourse to the Rio Tinto Group.
Back
Goodwill arising from the Alcan acquisition relating to Contentssubsidiaries was US$14.5 billion and that relating to equity accounted units was US$2.8 billion. The future economic benefits represented by the goodwill include those associated with synergies, future development and expansion projects and the assembled workforce. The Group has decided to dispose of Alcan Packaging, which is presented in the balance sheet in the lines: ‘Assets held for sale’ and ‘Liabilities of disposal groups held for sale’.
Net assets attributable to Rio Tinto shareholders increased by US$6.5 billion. The increase reflected profit after tax attributable to Rio Tinto shareholders of US$7.3 billion less returns to shareholders of US$2.8 billion comprising US$1.5 billion of dividends and US$1.3 billion of share buybacks. In addition, there was a positive currency translation effect of US$1.9 billion as the Australian dollar, the Canadian dollar and the Euro all strengthened against the US dollar.
Financial risk management
The Group’s policies with regard to financial risk management are clearly defined and consistently applied. They are afundamental principlepart of the Group’s long term strategy.strategy covering areas such as foreign exchange risk, interest rate risk, commodity price risk, credit risk and liquidity risk and capital management. From 1 January 2008, Rio Tinto Alcan has adopted the Rio Tinto Group policy on trading and hedging. The acquisition of Alcan impacted the Group’s market risk exposures, in particular, increasing the Group’s exposure to changes in interest rates and the aluminium price.
The Group’s business is finding, mining and processing mineral resources, and not trading. TheGenerally, the Group only sells commodities it has produced.produced but may purchase commodities to satisfy customer contracts from time to time and to balance the loading on production facilities. In the long term, natural hedges operate in a number of ways to help protect and stabilise earnings and cash flow.
The Group has adiverse portfolio of commodities and markets, which have varying responses to the economic cycle. The relationship between commodity prices and the currencies of most of the countries in which the Group operates provides further natural protection in the long term. In addition, the Group’s policy of borrowing at floating US dollar interest rates helps to counteract the effect of economic and commodity price cycles. These natural hedges significantly reduce the relevance ofnecessity for using derivatives or other forms of synthetic hedging. Such hedging is therefore undertaken to a strictly limited degree, as described in the sections on currency, interest rate, commodity price exposure and treasury management below.
The Group’s 2006 financial statementsand2007 Financial statementsand disclosures show the full extent of its financial commitmentsincluding debt.
The risk factors to which the Group is subject that are thought to be of particular importance are summarised onpages 5 to 6.7.
The effectiveness of internal control procedures continues to be a high priority in the Rio Tinto Group. The boards’Boards’ statement on internal control is included underCorporate governanceon page 126.150.
Liquidity and capital resources
The Group’s total capital is defined as Rio Tinto’s shareholders’ funds plus amounts attributable to outside equity shareholders plus net debt. The Group’s over-riding objectives when managing capital are to safeguard the business as a going concern; to maximise returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure in order to reduce the cost of capital.
The unified credit status of the Group is maintained through cross guarantees whereby contractual obligations of RioTinto plc and Rio Tinto Limited are automatically guaranteed by the other. Rio Tinto plc and Rio Tinto Limited enjoy strong long and short termcontinue to maintain solid investment grade credit ratings from Moody’s and Standard and Poor’s.Poor’s, despite the credit rating downgrade announced on completion of the Alcan acquisition. These ratings continue to provide financial flexibility and consistent access to global debt via money or capital markets and enable very competitive terms to be obtained. The ratings outlook from both agencies is presently reported as ‘stable’.in significant depth. Credit ratings are not a recommendation to purchase, hold or sell securities, and are subject to revision or withdrawal at any time by the ratings organisation.
Rio Tinto does not have a target debt/equity ratio, but has a policy of maintaining a flexible financing structure so as to be able to take advantage of new investment opportunities that may arise. Following the acquisition of Alcan, the Group has publicly stated an objective to reduce its debt to equity ratio from current levels through a targeted asset divestment programme and through operating cash flows to a level consistent with a ‘single-A’ credit rating. This policy is balanced against the desire to ensure efficiency in the debt/equity structure of the Rio Tinto balance sheet in the longer term through pro-active capital management programmes.
On 12 February 2008 the Group announced the sale of its interest in the Greens Creek mine for US$750 million. On 5 March 2008 the Group completed the sale of its interest in the Cortez joint venture to its partner for a cash consideration of US$1,695 million plus deferred and contingent consideration.
The Group maintains backup liquidity for its commercial paper programme and other debt maturing within 12 months and its commercial paper programmes by way of bank standby credit facilities, which totalled US$2.33.7 billion (undrawn) at 31 December 2006. These2007. The Group’s committed bank standby facilities contain no financial undertakings relating to interest cover and are not
Rio Tinto 2007Form 20-F | 100 |
affected to any material extent (other than an increase in interest margin) by a reduction in the Group’s credit rating. The main covenant in the Rio Tinto group relates to a financial covenant over Corporate debt drawn under the Syndicated Acquisition Facility, for whichwere unused a compliance certificate must be produced attesting a certain ratio of Net Borrowings to EBITDA. There are no covenants relating to corporate debt which are under negotiation at the year end, can be drawn upon at any time on terms extending outpresent. The Group’s policy is to five years.centralise debt and surplus cash balances wherever possible.
As at 31 December 2006,2007, the Group had contractual cash obligations arising in the ordinary course of business asfollows:
Contractual cash obligations | Total | Less than 1 | Between 1 | Between 3 | After 5 | |||||||||||||||
year | and 3 years | and 5 years | years | |||||||||||||||||
US$m | US$m | US$m | US$m | US$m | ||||||||||||||||
Less than 1 | Between 1 | Between 3 | After 5 | |||||||||||||||||
Total | year | and 3 years | and 5 years | years | ||||||||||||||||
US$ m | US$ m | US$ m | US$ m | US$ m | ||||||||||||||||
Expenditure commitments in relation to: | ||||||||||||||||||||
Operating leases | 1,782 | 283 | 517 | 468 | 514 | |||||||||||||||
Other (mainly capital commitments) | 3,978 | 3,113 | 801 | 64 | — | |||||||||||||||
Long term debt and other financial obligations | ||||||||||||||||||||
Debt (a) | 3,179 | 1,157 | 847 | 544 | 631 | 47,019 | 8,263 | 21,069 | 13,335 | 4,352 | ||||||||||
Operating leases | 427 | 62 | 72 | 51 | 242 | |||||||||||||||
Unconditional purchase obligations (b) | 3,600 | 903 | 1,211 | 660 | 826 | |||||||||||||||
Deferred consideration | 179 | 37 | 78 | 29 | 35 | |||||||||||||||
Other (c) | 2,413 | 1,675 | 572 | 129 | 37 | |||||||||||||||
Interest payments (b) | 9,238 | 2,310 | 3,184 | 1,660 | 2,084 | |||||||||||||||
Unconditional purchase obligations (c) | 7,271 | 1,525 | 1,571 | 1,079 | 3,096 | |||||||||||||||
Other (mainly trade creditors) | 7,295 | 6,144 | 639 | 363 | 149 | |||||||||||||||
Total | 9,798 | 3,834 | 2,780 | 1,413 | 1,771 | 76,583 | 21,638 | 27,781 | 16,969 | 10,195 | ||||||||||
Notes | |
(a) | Debt obligations include bank borrowings repayable on |
(b) | Interest payments have been projected using the interest rate applicable at 31 December, 2007, including the impact of |
Unconditional purchase obligations relate to commitments to make payments in the future for fixed or minimum quantities of goods or services at fixed or minimum prices. The future payment commitments have not been discounted and mainly relate to commitments under ‘take or pay’ power and freight contracts. They exclude unconditional purchase obligations of jointly controlled entities apart from those relating to the | |
Information regarding the Group’s pension commitments and funding arrangements is provided in thePost retirement benefitssection of thisFinancial reviewand in note 4649 to the 2006 financial2007Fnancial statements. The level of contributions to funded pension plans is determined according to the relevant legislation in each jurisdiction in which the Group operates. In some countries there are statutory minimum funding requirements while in others the Group has developed its own policies, sometimes in agreement with the local trustee bodies. The size and timing of contributions will usually depend upon the performance of investment markets. Depending on the country and plan in question the funding level will be monitored quarterly, bi-annually or annually and the contribution amount amended appropriately. Consequently it is not possible to predict with any certainty the amounts that might become payable in 2009 onwards. The impact on cash flow in 2007 of the Group’s pension plans, being the employer contributions to defined benefit and defined contribution pension plans, was US$246 million. In addition there were contributions of US$30 million in respect of unfunded healthcare schemes. Contributions to pension plans for 2008 are estimated to be around US$220 million higher than for 2007. This is predominantly due to the inclusion of the Alcan plans for the full year, although it is also partly due to changes in funding rules in the US. Healthcare plans are unfunded and contributions for future years will be equal to benefit payments and therefore cannot be predetermined.
Information regarding the Group’s close down and restoration obligations is provided in the relevant section of this review and in note 27 to the2007 Financial statements. Close down and restoration costs are a normal consequence of mining, and the majority of close down and restoration expenditure is incurred at the end of the relevant operation. Generally, the Group’s close down and restoration obligations to remediate in the long term are not fixed as to amount and timing and are not therefore included in the above table.
On the basis of the levels of obligations described above, the unused capacity under the Group’s commercial paper and European Medium Term Notes programmes, the Group’s anticipated ability to access debt and equity capital markets in the future and the level of anticipated free cash flow, there are reason able grounds to believethe Group believes that the Groupit has sufficient short and long term sources of funding available to meet its liquidityworking capital requirements.The Group’s committed bank standby facilities contain no financial undertakings relating to interest cover. TheGroup has no financial agreements that would be affected to any material extent by a reduction in the Group’s credit rating. There are no covenants relating to corporate debt which are under negotiation at present.The Group’s policy is to centralise debt and surplus cash balances whenever possible.
Dividends and capital management
Rio Tinto’s progressive dividend policy aims to increase the US dollar value of dividends over time, without cutting them in economic downturns.
Dividends paid on Rio Tinto plc and Rio Tinto Limited shares are equalised on a net cash basis; that is without takinginto account any associated tax credits. Dividends are determined in US dollars. Rio Tinto’s progressive dividend policy aims to increase the US dollar value of dividends over time, without cutting them in economic downturns. Rio Tinto plc shareholders receive dividends are declared and paid in pounds sterling and Rio TintoLimited shareholders receive dividends are declared and paid in Australian dollars, which are determined by reference to theconverted at exchange rates applicable to the US dollar two days prior to the announcement of dividends. Holders of American Depositary Receipts (ADRs) receive a US dollar dividend at the rate declared. Changes in exchange rates
Rio Tinto 2007Form 20-F | 101 |
could result in a reduced sterling or Australian dollar dividend in a year in which the US dollar value is maintained or increased. The interim dividend for each year in US dollar terms will be equivalent to 50 per cent of the total US dollar dividends declared in respect of the previous year.
The Group announced a re-basing of its ordinary dividend in February 2007, increasing the full year ordinary dividend in respect of 2006 by 30 per cent to 104 US cents. The 2007 full year ordinary dividend represents a 31 per cent increase on 2006. In Apriladdition, the Group has announced an intention to increase its annual dividend by at least 20 per cent in each of 2008 and 2009.
Final 2007 dividends to Rio Tinto Limited shareholders will be fully franked. The board expects Rio Tinto Limited to be in a position to pay fully franked dividends for the reasonably foreseeable future.
On 2 February 2006 the Group paidannounced a US$4 billion capital management programme which was subsequently increased to US$7 billion in October 2006. The capital return was comprised of a US$1.5 billion special dividend (US$1.10 per share) announced as part of thepaid in April 2006 capital management programme (see below). The special dividendwhich was paid concurrently with the 2005 final ordinary dividend, but did not form part of the Group’s progressive ordinary dividend policy. The Group announced a re-basing of its ordinary dividend in February 2007, increasing the full year ordinarydividend in respect of 2006 by 30 per cent to 104 US cents. An interim dividend of 40 US cents was paid in October 2006policy, and a final dividend for the year of 64 US cents was paid in April 2007.
Capital management programmeOn 2 February 2006 the Group announced a US$4 billion capital management programme, comprising the US$1.5billion special dividend (US$1.10 per share paid in April 2006) referred to above and aan initial US$2.5 billion share buyback programme over two years(increased to the end of 2007. The US$4 billion programme was completed almost a year ahead of schedule in January 2007. On 27 October 2006, the Group announced an increase in the programme by US$3 billion5.5 billion) to US$7 billion, to becompleted over the remaining period to the end of 2007. The additionalprogramme was suspended on 12 July 2007 at the time the Alcan offer was announced, by which time US$3.9 billion had been completed under the US$7 billion capital management programme, bringing the total cash return is planned through the buyback of shares, subject to market conditions. As at 31 December 2006, the cumulative cash returnsreturned to shareholders under the 2005/06 and 2006/07announced capital management programmes amountedsince 2005 to US$4.86.4 billion.
Treasury management and financial instruments
Treasury activities operateoperates as a service to the business of the Rio Tinto Group and not as a profit centre. Strict limits on the size and type of transaction permitted are laid down by the Rio Tinto board and are subject to rigorous internalcontrols. Corporate funding and overall strategic management of Rio Tinto’s balance sheet is handled by the London based Group Treasury.
Rio Tinto does not acquire or issue derivative financial instruments for trading or speculative purposes; nor does it believe that it has exposure to such trading or speculative holdings through its investments in joint ventures and associates. Derivatives are used to separate funding and cash management decisions from currency exposure and interest rate management. The Group uses interest rate and cross currency interest rate swaps in conjunction with longer term funds raised in the capital markets to achieve a predominantly floating rate obligation which is consistent with the Group’s interest and exchange rate policy as described in the section on ‘Interest rates’ below. Currency swaps are used to convert debt or investments into currencies,policies, primarily theUS dollar which are consistent with the Group’s policy on currency exposure management as described inExchange rates, reporting currencies and currency exposurebelow.LIBOR. No material exposure is considered to exist by virtue of the possible non performance of the counterparties to financial instruments held by the Group.The derivative Derivative contracts inare carried at fair value based on published price quotations for the period for which the Group is involveda liquid active market exists. Beyond this period, Rio Tinto’s own assumptions are valued by reference to quoted market prices,quotations from independent financial institutions or by discounting expected cash flows.used.
Off balance sheet arrangements
In the ordinary course of business, to manage the Group’s operations and financing, Rio Tinto enters into certain performance guarantees and commitments for capital and other expenditure.
The aggregate amount of indemnities and other performance guarantees, on which no material loss is expected,including those related to joint ventures and associates, was US$501739 million at 31 December 2006.2007.
Other commitments include contracted capital expenditure, operating leases and unconditional purchaseobligations as set out in the table of contractual cash obligations, included in theLiquidity liquidity and capital resourcessection above.
Exchange rates, reporting currencies and currency exposure
Rio Tinto’s shareholder’sshareholders’ equity, earnings and cash flows are influenced by a wide variety of currencies due to thegeographic diversity of the Group’s sales and the countries in which it operates. The US dollar, however, is the currency in which the great majority of the Group’s sales are denominated. Operating costs are influenced by the currencies of those countries where the Group’s mines and processing plants are located and also by those currencies in which the costs of imported equipment and services are determined. The Australian and Canadian dollars and the Euro are the most important currencies influencing costs, apart(apart from the US dollar.
dollar) influencing costs. In any particular year, currency fluctuations may have a significant impact on Rio Tinto’s financial results. A weakening of the US dollar against the currencies in which the Group’s costs are determined has an adverse effect onRio Tinto’s underlying earnings.
However, this would also result in exchange gains on net debt denominated in US dollars held in non US functional currency operations, which has a positive effect on Rio Tinto’s EU IFRS profit and net earnings. It wouldalso result in exchange gains and losses on intragroup balances denominated in US dollars held by non US functional currency operations. Such gains and losses on US dollar net debt and intragroup balances are excluded from underlying earnings.
The following sensitivities give the estimated effect on underlying earnings of a ten per cent change in the fullyear average exchange rate, assuming that each exchange rate moved in isolation. MovementsThe relationship between currencies and commodity prices is a complex one and movements in exchange rates can cause movements in commodity prices and vice versa. However, the relationship between currencies and commodity prices is a complex one, with varying degrees of correlation depending on the currency in question. Where the functional currency of an operation is that of a country for which production of commodities is an important feature of the economy, such as the Australian dollar, there is a certain degree of natural protection against cyclical fluctuations in the long term, in that the currency tends to be weak, reducing costs in US dollar terms, when commodity prices are low, and vice versa.
The exchange rate sensitivities quoted below include the effect on operating costs of movements in exchangerates but exclude the effect of the revaluation of foreign currency working capital, US dollar net debtfinancial assets and intragroup balances.liabilities. They should therefore be used with care.
102 |
underlying earnings | ||||
Average | ||||
exchange rate | ||||
year average | ||||
for 2007 | +/- US$m | |||
Australian dollar (a) | ||||
Canadian dollar (a) | ||||
Euro | 137 US cents | 65 | ||
Chilean peso | ||||
New Zealand dollar | ||||
South African rand | ||||
UK | ||||
The sensitivities in the 2006 column are based on 2006 prices, costs and volumes and assume that all other variables remain constant. Gains and losses on exchange arising from net monetary assets/(liabilities), other than US dollar net debt and intragroup balances, that are not denominated in the functional currency of the relevant business unit are recorded in theincome statement and are included in underlying earnings. The table below reflects the amounts of assets less liabilities, net of tax and outside interests as at the end of 2006, which expose the Group to such exchange gains and losses. These balances will not remain constant throughout 2007, however, and therefore these numbers should be used with care.
Currency of exposure | 2006 | |||||
US dollar | Other | Total | ||||
US$m | US$m | US$m | ||||
Functional currency of business unit: | ||||||
Australian dollar | 487 | 1 | 488 | |||
Canadian dollar | 86 | 8 | 94 | |||
South African rand | 26 | 5 | 31 | |||
Other currencies | 95 | 19 | 114 | |||
Total | 694 | 33 | 727 | |||
(a) | The sensitivities in the 2007 column are based on 2007 prices, costs and volumes and assume that all other variables remain constant, except that a full years’ volumes are included for Alcan where indicated. |
Given the dominant role of the US currency in the Group’s affairs, the US dollar is the currency in which financial results are presented both internally and externally. It is also the most appropriate currency for borrowing and holding surplus cash, although a portion of surplus cash may also be held in other currencies, most notably Australian dollars, Canadian dollars and the Euro. This cash is held in order to meet short term operational and capital commitments and, for the Australian dollar, dividend payments.
The Group finances its operations primarily in US dollars, either directly or using cross currency swaps, and ainterest rate swaps. A substantial part of the Group’s US dollar debt is located in subsidiaries having a US functional currencies other than the US dollar. Exchange differences on net debt that hedges the net assets of entities with functional currencies other than thecurrency.
However, certain US dollar are dealt with through equity. Alldebt and other exchange differences on net debt are dealt with in the income statement, but those related to US dollar net debt are excluded in arriving at underlying earnings. Exchange gainsfinancial assets and losses which arise on balances between Group entities are taken to equity where that balance is, in substance, part of the Group’s net investment in a subsidiary or equity accounted unit. All other exchange differences onliabilities including intragroup balances are dealt withnot held in the income statement but are excluded from underlying earnings. The table below reflectsfunctional currency of the amounts of net debt and intragroup balances at the end of 2006, net of tax andoutside interests, that expose the Grouprelevant subsidiary. This results in an accounting exposure to exchange gains and losses as the financial assets and liabilities are translated into the functional currency of the subsidiary that would beaccounts for those assets and liabilities. These exchange gains and losses are recorded in the Group’s income statement. Thesestatement except to the extent that they can be taken to equity under the Group’s accounting policy which is explained in note 1 of the2007 Financial statements. Gains and losses on US dollar net debt and on intragroup balances will not remain constant during 2007, however,are excluded from underlying earnings. Other exchange gains and these numbers should therefore be used with care.
Net debt1 | 2006 | Intragroup balances | 2006 | |||||||||
Currency of exposure | Currency of exposure | |||||||||||
US$ | Other | Total | US$ | Other | Total | |||||||
Functional currency of business unit: | US$m | US$m | US$m | US$m | US$m | US$m | ||||||
United States dollar | — | (5 | ) | (5 | ) | — | 2,747 | 2 | 2,747 | |||
Australian dollar | (516 | ) | 6 | (510 | ) | (1,522 | ) | 31 | (1,491 | ) | ||
Canadian dollar | (106 | ) | 1 | (105 | ) | (245 | ) | — | (245 | ) | ||
South African rand | (19 | ) | — | (19 | ) | (38 | ) | (4 | ) | (42 | ) | |
Other currencies | 17 | 4 | 21 | (38 | ) | 20 | (18 | ) | ||||
Total | (624 | ) | 6 | (618 | ) | (1,843 | ) | 2,794 | 951 | |||
losses are included in underlying earnings.
The Group does not generally believe that active currency hedging of transactions would provide long term benefits to shareholders. Currency protection measures may be deemed appropriate in specific commercial circumstances and are subject to strict limits laid down by the Rio Tinto board. Asboard, typically hedging of capital expenditure and other significant financial items such as tax and dividends. There is a legacy of currency forward contracts used to hedge operating cash flow exposures which were acquired with Alcan and the North companies. Details of currency derivatives held at 31 December 2007 are set out in note 3234 to the 20062007 Financial statements.
The sensitivities below give the estimated effect on underlying earnings, net earnings and equity of a ten per cent change in the full year closing US dollar exchange rate, assuming that each exchange rate moved in isolation. The sensitivities are based on financial assets and liabilities held at 31 December 2007, where balances are not denominated in the functional currency of the subsidiary. A strengthening of the US dollar would result in exchange gains based on financial assets and financial liabilities held at 31 December 2007. These balances will not remain constant throughout 2008, however, and therefore these numbers should be used with care.
Effect on | Of which | Effect of | ||||||
net | amount | items | ||||||
earnings of | impacting | impacting | ||||||
Closing | 10% | underlying | directly on | |||||
exchange rate | change | earnings | equity | |||||
US cents | US$m | US$m | US$m | |||||
Functional currency of business unit: | ||||||||
Australian dollar | 88 | 204 | 99 | (20 | ) | |||
Canadian dollar | 101 | (3 | ) | 53 | — | |||
South African rand | 15 | 14 | 12 | (4 | ) | |||
Euro | 147 | 33 | 14 | 149 | ||||
New Zealand dollar | 78 | (9 | ) | 3 | — | |||
(a) | The sensitivities show the net sensitivity of US dollar exposures in Australian dollar functional currency companies, for example, and Australian dollar exposures in US dollar functional currency companies. |
(b) | The sensitivities indicate the effect of a ten per cent strengthening of the US dollar against each currency. |
The Group has changed its disclosure of market risk sensitive instruments from a tabular basis to a sensitivity analysis basis for consistency with the requirements of IFRS 7, the international accounting standard on financial instrument disclosure which the Group has adopted in its financial statements this year.
Sensitivities as at 31 December 2006 there were derivative contractsas shown below.
Rio Tinto 2007 Form 20-F | 103 |
Back to sell US$581 millionContents
Of which | ||||||||
amount | Effect of items | |||||||
Effect on net | impacting | impacting | ||||||
Closing | earnings of 10% | underlying | directly on | |||||
exchange rate | change | earnings | equity | |||||
US cents | US$m | US$m | US$m | |||||
Functional currency of business unit: | ||||||||
Australian dollar | 79 | 37 | 56 | (30 | ) | |||
Canadian dollar | 86 | (29 | ) | 12 | - | |||
South African rand | 14 | (6 | ) | 5 | - | |||
New Zealand dollar | 71 | (15 | ) | 3 | - | |||
In addition, some US dollar functional currency companies are exposed to exchange movements on local currency deferred tax balances. The only material exposure is to the Canadian dollar and buy A$550 million and NZ$520 million in respect of future trading transactions. A significant parta ten per cent strengthening of the above hedge bookUS dollar would reduce underlying earnings based on 2007 balances by US$96 million. This would offset the US$53 million gain shown above. There was acquired with North Limited. North held a substantial hedge book on acquisition which has been retained but is not being renewed as maturities occur.no similar exposure at 31 December 2006.
The functional currency of mostmany operations within the Rio Tinto Group is the local currency in the country of operation. Alcan’s aluminium and alumina producing operations use a US dollar functional currency including those in Canada and Australia. Foreign currency gains or losses arising on translation to US dollars of the net assets of thesenon US functional currency operations are taken to equityand, with effect from 1 January 2004, recorded in a currency translation reserve. A weakening of the US dollar would have a positive effect on equity. The approximate translation effects on the Group’s net assets of ten per cent movements from the year end exchange rates are as follows:
2006 | ||||
Effect on net | ||||
Closing | assets of | |||
exchange | 10% change in | |||
rate | closing rate | |||
US cents | +/- US$m | |||
Australian dollar | 79 | 1,161 | ||
Canadian dollar | 86 | 152 | ||
South African rand | 14 | (4 | ) | |
UK Sterling | 196 | 32 | ||
Other | — | (1 | ) | |
2007 | ||||
Effect on net assets | ||||
Closing | of 10% change in | |||
exchange rate | closing rate | |||
US cents | +/- US$m | |||
Australian dollar | 88 | 1,583 | ||
Euro | 147 | 568 | ||
Canadian dollar | 101 | 255 | ||
These net assets will not remain constant, however, and therefore these numbers should be used with care.
Interest rates
Rio Tinto’s interest rate management policy is generally to borrow and invest cash at floating interest rates. Short term US dollar rates are normally lower than long term rates, resulting in lower interest costs toThis approach is based on the Group. Furthermore, cyclicalmovements ofhistorical correlation between interest rates tend to compensate in the long term, to an extent, for those ofand commodity prices. In some circumstances, an element of fixed rate funding may be considered appropriate. Rio Tinto hedges interest rate and currency risk on most of its foreign currency borrowings by entering into cross currency interest rate swaps in order to convert fixed rate foreign currency borrowings to floating rate US dollar borrowings. At the end of 2006,2007, US$4.9 billion (2006: US$1.2 billionbillion) of the Group’s debt was at fixed rates after taking into account interest rate swaps.swaps and finance leases. Based on the Group’s net debt at 31 December 2006, and with other variables unchanged,2007, the approximate effect on the Group’s net earnings of a onehalf percentage point increase in US dollar LIBOR interest rates with all other variables held constant, would be a reduction of US$6 million.158 million (2006: US$3 million). These balances will not remain constant throughout 2008, however, and therefore these numbers should be used with care.
Commodity prices
The Group’s normal policy is to sell its products at prevailing market prices. Exceptions to this rule are subject to strict limits laid down by the Rio Tinto boardBoard and to rigid internal controls. Rio Tinto’s exposure to commodity prices isdiversified by virtue of its broad commodity spread and the Group does not generally believe commodity price hedging would provide long term benefit to shareholders. The Group may hedge certain commitments with some of its customers or suppliers. Details of commodity derivatives held at 31 December 2007 are set out in note 34 to the2007 Financial statements. The forward contracts to sell 420 million pounds of copper at a fixed rand price per pound were entered into as a condition of the refinancing of Palabora in 2005. The aluminium forward contracts and embedded derivatives were acquired with Alcan.
Metals such as copper and aluminium are generally sold under contract, often long term, at prices determined by reference to prevailing market prices on terminal markets, such as the London Metal Exchange and COMEX in NewYork, usually at the time of delivery. Prices fluctuate widely in response to changing levels of supply and demand but, in the long run, prices are related to the marginal cost of supply. Gold is also pr icedpriced in an active market in which prices respond to daily changes in quantities offered and sought. Newly mined gold is only one source of supply; investment and disinvestment can be important elements of supply and demand. Contract prices for many other natural resource products including iron ore and coal are generally agreed annually or for longer periods with customers, although volume commitments vary by product.
Certain products, predominantly copper concentrate, are ‘provisionally priced’, ie the selling price is subject to final adjustment at the end of a period normally ranging from 30 to 180 days after delivery to the customer, based on the market price at the relevant quotation point stipulated in the contract. Revenue on provisionally priced sales is
Rio Tinto |
recognised based on estimates of fair value of the consideration receivable based on forward market prices. At each reporting date provisionally priced metal is marked to market based on the forward selling price for the period stipulated in the contract. For this purpose, the selling price can be measured reliably for those products, such as copper, for which there exists an active and freely traded commodity market such as the London Metal Exchange and the value of product sold by the Group is directly linked to the form in which it is traded on that market. At the end of 2007 the Group had 270 million pounds of copper sales (2006: 324 million pounds) that were provisionally priced at 304 US cents per pound (2006: 287 US cents per pound). The final price of these sales will be determined in 2008. The impact on earnings of a ten per cent change in the price of copper for the provisionally priced sales would be US$58 million (2006: US$66 million).
Approximately 53 per cent of Rio Tinto’s 20062007 net earnings from operating businesses came from products whose prices were terminal market related and the remainder came from products priced by direct negotiation.Commodity The Group continued to achieve high prices increased rapidlyfor its products in 2007, and its assessment of the economic and demand outlook remains very positive, despite recent unsettled conditions in the financial markets. The strong increases seen in global minerals demand are driven by demographic and economic fundamentals in fast growing countries like China and India, whose large populations continue to urbanise. These long term trends are driven by domestic developments in those countries, and are therefore insulated to a significant extent from any potential near term weakness in western economies.
The approximate effect on the Group’s underlying and net earnings of a ten per cent change from the full year average market price in 2007 for the following products would be:
Effect on underlying | ||||||
and net earnings of | ||||||
Average | US$ 10% change in | |||||
market price | full year average | |||||
Unit | for 2007 | +/- US$m | ||||
Copper | pound | 3.24 | 360 | |||
Aluminium (a) | pound | 1.20 | 678 | |||
Gold | ounce | 691 | 64 | |||
Molybdenum | pound | 30 | 69 | |||
Iron ore | dmtu | n/a | 457 | |||
(a) | The above sensitivities are based on 2007 volumes except that a full year impact from Alcan has been included where indicated. |
The sensitivities give the estimated impact on net earnings of changes in prices assuming that all other variables remain constant. These should be used with care. As noted previously, the relationship between currencies and commodity prices is a complex one and changes in exchange rates can influence commodity prices and vice versa.
The table below summarises the impact of changes in the market price on the following commodity derivatives including those aluminium and option contracts embedded in electricity purchase contracts outstanding at 31 December 2007. The impact is expressed in terms of the resulting change in the Group’s net earnings for the year or, where applicable, the change in equity. The sensitivities are based on the assumption that the market price increases by ten per cent with all other variables held constant. The Group’s ‘own use contracts’ are excluded from the sensitivity analysis below as they are outside the scope of IAS 39. Own use contracts are contracts to buy or sell non financial items that can be net settled but were entered into and continue to be held for the purpose of the receipt or delivery of the non financial item in accordance with the business unit’s expected purchase, sale or usage requirements.
These sensitivities should be used with care. The relationship between currencies and commodity prices is a complex one and changes in exchange rates can influence commodity prices and vice versa.
Effect of items | ||||
impacting directly | ||||
Effect on underlying | on Rio Tinto share | |||
and net earnings of | of equity of 10% | |||
10% increase from | increase from | |||
year end price | year end price | |||
US$m | US$m | |||
Copper | — | 40 | ||
Coal | — | 25 | ||
Aluminium | 41 | 50 | ||
41 | 115 | |||
Rio Tinto 2007 Form 20-F | 105 |
Sensitivities as at 31 December 2006 were as shown below:
Effect on underlying | Effect of items | |||
and net earnings of | impacting directly | |||
10% increase from | on Rio Tinto share | |||
year end price | of equity of 10% | |||
increase from | ||||
year end price | ||||
US$m | US$m | |||
Copper | — | 49 | ||
Coal | — | 20 | ||
— | 69 | |||
Sales revenue
The table below shows published ‘benchmark’ prices for Rio Tinto’s commodities for the last three years where these are publicly available, and where there is a reasonable degree of correlation between the benchmark and Rio Tinto’s realised prices. The prices set out in the table are the averages for each of the calendar years, 2005, 2006 and 2006. Looking to 2007, there are2007. The Group’s sales revenue will not necessarily move in line with these benchmarks for a number of uncertaintiesreasons which are discussed below.
2007 | 2006 | 2005 | ||||||
Commodity | Source | Unit | US$ | US$ | US$ | |||
Aluminium | LME | pound | 1.20 | 1.16 | 0.86 | |||
Copper | LME | pound | 3.24 | 3.06 | 1.66 | |||
Gold | LBMA | ounce | 691 | 602 | 444 | |||
Iron ore | Australian benchmark (fines) (a) | dmtu (b) | 0.79 | 0.71 | 0.55 | |||
Molybdenum | Metals Week: quote for dealer oxide price | pound | 30 | 25 | 31 | |||
Notes | |
(a) | average for the calendar year |
(b) | dry metric tonne unit |
The discussion of revenues below relates to the Group’s gross revenue from sales of commodities, including its share of the revenue of equity accounted units, as included inthe global economy, not leastFinancial Information by Business Unit in the direction2007 Financial statements.
The sales revenues of inflation and interest ratesthe Iron Ore group increased by 27 per cent in major economies.2007 compared with 2006. There was a 9.5 per cent increase in the benchmark price, mainly effective from 1 April 2007 which resulted in an 11 per cent increase in the average Australian iron ore fines benchmark for the calendar year. Sales achieved the benchmark price throughout the year. The Group expects some moderation of global economic growth, although confidence in Japan and Europe is increasing. Growthprice outlook for the 2008 contract year remains very positive, with spot prices in China whichsubstantially above prevailing contract prices. In addition to higher prices, sales revenues at Hamersley Iron were higher from record production following completion of the second phase of the Dampier port upgrade and the Tom Price brownfield and Yandicoogina JSE mine expansions.
At IOC, volumes were lower as a result of a seven week strike in the first and second quarters of the year and this was only partly mitigated by higher prices.
The Australian iron ore fines benchmark increased by 19 per cent in April 2006. This together with higher volumes at Hamersley contributed to an increase in the Group’s iron ore revenue of 26 per cent in 2006 against 2005.
A significant proportion of Rio Tinto’s coal production is criticalsold under long term contracts. In Australia, the prices applying to sales under the demand outlooklong term contracts are generally renegotiated annually; but prices are fixed at different times of the year and on a variety of bases. For these reasons, average realised prices will not necessarily reflect the movements in any of the publicly quoted benchmarks. Moreover, there are significant product specification differences between mines. Sales volumes will vary during the year and the timing of shipments will also result in differences between average realised prices and benchmark prices.
Asian seaborne thermal coal prices continued to rise sharply throughout 2007 mainly due to supply disruptions from key producing countries. Issues relating to infrastructure controlled by external parties are likely to maintain market tightness for manythe foreseeable future. Published thermal coal benchmarks in Australia improved by 33 per cent in the calendar year whilst coking coal benchmarks decreased by 13 per cent.
Revenues of the Group’s products,Australian coal operations decreased by three per cent in 2007 with lower thermal coal sales largely attributable to infrastructure constraints and a severe weather event. In general, production at the Australian coal mines continued to be constrained by rail and port constraints in Queensland and New South Wales and reduced tonnage of rail and port allotments in Queensland, which curtailed mined production, despite the generally favourable market conditions.
Revenues of the Group’s Australian coal operations increased by two per cent in 2006. There was a sustained increase in the received price for thermal coal. This benefit was largely offset by lower coking coal sales because of market weakness and the delay in thermal coal shipments arising from congestion at Newcastle. Published market indications for Australian thermal coal showed a slight increase in thermal coal prices in 2006 and a seven per cent increase in the coking coal benchmark price.
Rio Tinto 2007 Form 20-F | 106 |
In the US, published market indications of spot prices for Wyoming Powder River Basin thermal coal 8800 BTU (0.80 sulphur) show a decrease of around 20 per cent for the average spot price in 2007 compared with 2006. However, Rio Tinto Energy America’s revenues increased by nine per cent in 2007 with improved realised prices. Rio Tinto Energy America has long term contracts and this increased revenue was primarily a result of the replacement of below market legacy contracts with new contracts at current market pricing in 2006 and earlier years. Revenues increased by 19 per cent in 2006 against 2005, with higher realised prices for Powder River Basin coal and increased volumes. Despite increased volatility in the spot market and a marginal decline in long term sales volumes the market sentiment for uranium remained positive through 2007. Supply from a number of producers fell short of expectations in 2007 while the outlook for demand increased as new-build programmes gathered pace, particularly in China. Higher utilisation rates were also experienced in the nuclear industry. These factors have contributed to tighter markets and an improvement in the longer term outlook for uranium demand.
Large swings in the spot price, driven by speculative behaviour by hedge funds and investors, created a degree of uncertainty in the uranium market. The resultant effect was a de-linking of the spot and long term prices and a reduction in contracting as fuel buyers monitored movements in the market. Despite this, long term prices grew strongly in the early part of the year and remained firm thereafter. Information included in the RWE NUKEM Inc. Price Bulletin indicated price increases of 99 per cent in 2007 and 71 per cent in 2006 for uranium oxide. The large increases reported in the Price Bulletin are not fully reflected in the revenues for the period because uranium oxide is typically sold on long term contracts with pricing determined for several years beyond the commencement of the contracts.
The Group’s uranium revenue increased by 69 per cent in 2007 and 27 per cent in 2006 as a result of higher prices with Rössing, in particular, benefiting from positive market conditions and improved pricing. Prices at ERA continued to benefit from the gradual replacement of legacy contracts with newer contracts written in an environment of higher prices.
The average aluminium price of 120 US cents per pound was three per cent above the 2006 average price. Global demand growth for 2007 is expected to remainexceed ten per cent. Rising LME inventories towards the end of 2007 and strong and well balanced.growth in global output pushed aluminium prices lower in the second half of the year. The Group continuesanticipates strong demand and growing supply constraints in China.
The Aluminium group’s sales revenues are from aluminium and related products such as alumina and bauxite. Alcan’s sales revenue for the two months from acquisition, which includes revenue from Engineered Products, was US$3,798 million. Rio Tinto Aluminium’s sales revenue increased by one per cent in 2007 reflecting higher volume and price for bauxite and aluminium and lower volume and price for alumina. Revenue increased by 27 per cent in 2006. Average aluminium prices quoted on the LME increased by 35 per cent against 2005 but achieved spot alumina prices were lower than in 2005.
The Copper group also produces gold and molybdenum as significant co-products. The average copper price of 324 US cents per pound was six per cent above the 2006 average price. The gold price averaged US$691 per ounce, an increase of 15 per cent on the prior year, whilst the average molybdenum price was US$30 per pound, an increase of 20 per cent compared with 2006. Total Copper Group sales revenues in 2007 increased by 20 per cent over 2006. Copper revenues increased by 17 per cent reflecting higher volumes at KUC and Escondida as well as higher prices. Gold revenue increased by 69 per cent with higher volumes at Kennecott Minerals and the Grasberg joint venture. Molybdenum revenue was nine per cent higher than in 2006 with lower volumes as a result of lower ore grade and higher limestone levels in the orebody partly offsetting the improved prices.
The total Copper group sales revenues in 2006 increased by 46 per cent over 2005. Copper revenues increased by 77 per cent, broadly in line with the 84 per cent increase in the LME price. Lower grades and therefore volumes at Freeport more than offset the higher volumes at the other copper operations. A 22 per cent decrease in gold revenue was also attributable to viewlower grades at Freeport which outweighed the overalleffect of the 36 per cent increase in the gold price. Molybdenum revenue was only six per cent down on 2005 with record production at KUC offsetting much of the effect of the 20 per cent fall in price.
Industrial Minerals sales are made under contract at negotiated prices. Revenue from industrial minerals increased by 11 per cent in 2007 and five per cent in 2006. This was mainly attributable to higher sales volumes of titanium dioxide chloride feedstock.
Diamonds prices realised by Rio Tinto depend on the size and quality of the diamonds in the product mix. Diamond sales revenue increased by 22 per cent in 2007 against 2006 with higher sales volumes and polished pink tender prices at Argyle, and higher volumes at Diavik. The tight supply outlook for commodities as positive, with pricesrough diamonds is expected to remain well abovesupport demand in 2008, especially for better quality rough diamonds produced by Diavik. The 22 per cent decrease in Diamond Group revenue in 2006 against 2005 was almost wholly attributable to the softer markets experienced by Argyle which resulted in surplus rough diamonds being held in inventory at the end of the year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Dual listed company reporting
As explained in detail in the Outline of dual listed companies’ structure and basis of financial statements in the2007 Financial statements, the consolidated financial statements of the Rio Tinto Group deal with the results, assets and liabilities of both of the dual listed companies, Rio Tinto plc and Rio Tinto Limited, and their long run averagessubsidiaries. In other
Rio Tinto 2007 Form 20-F | 107 |
words, Rio Tinto plc and Rio Tinto Limited are viewed as a single parent company with their respective shareholders being the shareholders in 2007.that single company.
The US dollar is the presentation currency used in these financial statements, as it most reliably reflects the Group’s global business performance.
Ore reserve estimates
Rio Tinto estimates its ore reserves and mineral resources based on information compiled by Competent Persons as defined in accordance with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves of December 2004 (the JORC code). Where relevant, the IFRS financial statements are based on the reserves, and in some cases mineral resources, determined under the JORC code.
For the purposes of this combined Annual report on Form 20-F estimates of ore reserves have been computed in accordance with the SEC’s Industry Guide 7, rather than in accordance with the JORC code, and are shown on pages 32 to 42. Ore reserves (underpresented in accordance with SEC Industry Guide 7) presented on pages 23 to 337 do not exceed the quantities that, it isestimated, could be extracted economically if future prices were to be in line with the average of historical prices for the three years to 30 June 2006,2007, or contracted prices where applicable. For this purpose, contract edcontracted prices are applied only to future sales volumes for which the price is predetermined by an existing contract; and the average of historical prices is applied to expected sales volumes in excess of such amounts. Moreover, reported ore reserve estimates have not been increased above the levels expected to be economic based on Rio Tinto's own long term price assumptions. Therefore, a reduction in commodity prices from the three year average historical price levels would not necessarily give rise to a reduction in reported ore reserves. The table below shows published ‘benchmark’ prices for Rio Tinto’s commodities for the last three years wherethese are publicly available, and where there is a reasonable degree of correlation between the benchmark and Rio Tinto’s realised prices. The prices set out in the table are the averages for each of the calendar years, 2004, 2005 and 2006. The Group’s revenue will not necessarily move in line with these benchmarks for a number of reasons which are discussed below.
2004 | 2005 | 2006 | |||||||
Commodity | Source | Unit | US$ | US$ | US$ | ||||
Aluminium | LME | pound | 0.78 | 0.86 | 1.16 | ||||
Copper | LME | pound | 1.30 | 1.66 | 3.06 | ||||
Gold | LBMA | ounce | 409 | . | 444 | . | 602 | . | |
Iron ore | Australian benchmark (fines)(a) | dmtu (b) | 0.35 | 0.55 | 0.71 | ||||
Lead | LME | pound | 0.40 | 0.44 | 0.59 | ||||
Molybdenum | Metals Week: quote for dealer oxide price | pound | 16 | . | 31 | . | 25 | . | |
Silver | LBMA | ounce | 6.6 | 7.3 | 11.6 | ||||
Zinc | LME | pound | 0.48 | 0.63 | 1.49 | ||||
The discussion of revenues below relates to the Group’s gross revenue from sales of commodities, including its share of the revenue of equity accounted units, as included in note 47 to the 2006 financial statements. The Australian iron ore fines benchmark increased by 19 per cent in April 2006. The higher prices, combined with higher volumes at Hamersley, contributed to an increase in the Group’s iron ore revenue of 26 per cent. Thebenchmark price increased by 71.5 per cent in April 2005 compared with 2004. This contributed to an increase in the Group’s iron ore revenue of 83 per cent, with the additional benefits of volume increases from the West Angelas and Yandicoogina expansions and the recovery of output at IOC, after a ten week strike in 2004. A significant proportion of Rio Tinto’s coal production is sold under long term contracts. In Australia, the prices applying to sales under the long term contracts are generally renegotiated annually; but prices are fixed at different times of the year and on a variety of bases. For these reasons, average realised prices will not necessarily reflect themovements in any of the publicly quoted benchmarks. Moreover, there are significant product specification differences between mines. Sales volumes will vary during the year and the timing of shipments will also result in differences between average realised prices and benchmark prices. Revenues of the Group’s Australian coal operations increased by two per cent in 2006. There was a sustained increase in the received price for thermal coal. This benefit was largely offset by lower coking coal sales because ofmarket weakness and the delay in thermal coal shipments arising from congestion at Newcastle. Published market indications for Australian thermal coal show a slight increase in thermal coal prices in 2006 on a calendar year basis and a seven per cent increase in the coking coal benchmark price. Revenues from these operations increased by 45 per cent in 2005, benefiting from a significant increase in pricesrealised on sales both of thermal and coking coal yet published market indications for Australian thermal coal showed a reduction of ten per cent in 2005 compared with 2004. The coking coal benchmark price increased by 99 per cent in 2005. In the US, Rio Tinto Energy America’s revenues increased by 19 per cent in 2006, with higher realised prices for Powder River Basin coal and increased volumes. Published market indications of spot prices for Wyoming thermal coalshow an increase of 24 per cent for the average spot price in 2006 compared with 2005. However, spot prices were volatile during the period. Revenues increased by six per cent in 2005, with benefits from higher prices limited by the influence of long term contracts. Published market indications of spot prices for Wyoming thermal coal showed an
increase of 61 per cent in 2005 over 2004.Information included in the RWE NUKEM Inc. Price Bulletin indicated price increases of 71 per cent in 2006and 54 per cent in 2005 for uranium oxide. The Group’s uranium revenue increased by 27 per cent in 2006 and by 23 per cent in 2005 as a result of higher prices. The large increases reported in the Price Bulletin are not fully reflected in the revenues for the period because uranium oxide is typically sold on long term contracts with pricing determined for several years beyond the commencement of the contracts. However, a significant portion of output from Rössing is not under long term contracts and there is therefore more exposure to the spot market from Rössing’s output than from ERA’s. Industrial Minerals sales are made under contract at negotiated prices. Revenue from industrial mineralsincreased by five per cent in 2006 against 2005. This was mainly attributable to improved prices and to stronger demand for titanium dioxide chloride feedstock. Revenue in 2005 was 17 per cent higher than in 2004. This was mainly attributable to strong price performance across all products at Rio Tinto Iron and Titanium and increased volumes, particularly at Richards Bay Minerals. The Aluminium group’s sales revenues are from aluminium, alumina and bauxite. Revenue increased by 27 percent in 2006. Average aluminium prices quoted on the LME increased by 35 per cent in 2006 but achieved spot alumina prices were lower than in 2005. In 2005, revenue increased by 16 per cent while average prices quoted on the LME increased by ten per cent. In addition to these price increases, revenues reflected increased sales volumes, including the ramp up of output from Yarwun, which commenced shipments in November 2004. The Copper group also produces gold and molybdenum as significant by products. Total Copper group salesrevenues in 2006 increased by 46 per cent over 2005. Copper revenues increased by 77 per cent, broadly in line with the 84 per cent increase in the LME price. Lower grades and therefore volumes at Grasberg more than offset the higher volumes at the other copper operations. A 22 per cent decrease in gold revenue was also attributable to lower grades at Grasberg which outweighed the effect of the 36 per cent increase in the gold price. Molybdenum revenue was only six per cent down on 2005 with record production at KUC offsetting much of the effect of the 20 per cent fall in price. In 2005, the Copper group’s revenues were 60 per cent higher than in 2004. Copper revenues increased by 33 per cent while the average LBMA copper price increased by 28 per cent. Revenues benefited both from the increase in prices and from increased volumes, including the effect of a return to full operations at Grasberg after a pit wall slippage in 2003. Gold revenues in 2005 were 69 per cent higher than in 2004 while the average LBMA gold price increased by nine per cent year on year. Revenues benefited from the price increase and also from the very substantial recovery in sales volumes at Grasberg. Average molybdenum prices quoted in Metals Week in 2005 almost doubled from the 2004 level. Sales revenue was over five times higher. In addition to the higher prices, this reflected a major step up in volumes achieved through changes in the mine plan at KUC to maximise molybdenum production in response to the strong market. Whilst the Diamond Trading Company (DTC) reported a two per cent increase in diamond prices in February,market reports indicated that prices were re-adjusted downwards in the second half of the year. While movements in the DTC price are a general indicator of the overall rough diamond market, they do not necessarily correlate closely with prices actually realised by Rio Tinto, which reflect the particular type of diamonds in its diverse product mix. The 22 per cent decrease in Diamond group revenue in 2006 against 2005 was almost wholly attributable to the softer markets experienced by Argyle which resulted in excess of US$100 million of surplus rough diamonds being held in inventory at the end of the year. Diamond revenue increased 45 per cent in 2005 against 2004. There was a six per cent increase in the DTC indicated price for rough diamonds in the year. The majority of the increase in Rio Tinto diamond revenues was attributable to higher volumes and higher prices at Argyle and the commencement of the Murowa operation.Lead, zinc and silver accounted for less than one per cent of revenue in each of the two years to 2006.The approximate effect on the Group’s underlying earnings of a ten per cent change from the full year averagemarket price in 2006 for the following products would be:
Average | Effect on underlying | |||||
market price | earnings of 10% change in | |||||
for 2006 | full year average | |||||
Unit | US$ | +/- US$m | ||||
Copper | Pound | 3.06 | 422 | |||
Aluminium | Pound | 1.16 | 167 | |||
Gold | Ounce | 602 | . | 46 | ||
Molybdenum | Pound | 25 | . | 56 | ||
Iron ore | dmtu | n/a | 367 | |||
The above sensitivities are based on 2006 volumes and give the estimated impact on underlying earnings of changes in prices assuming that all other variables remain constant. These should be used with care. As noted previously, the relationship between currencies and commodity prices is a complex one and changes in exchange rates can influence commodity prices and vice versa.
Critical accounting policies and estimates
Dual listed company reportingIn previous years, the Form 20-F filed with the United States Securities and Exchange Commission (SEC), contained separate consolidated financial statements for the Rio Tinto plc and Rio Tinto Limited parts of the Group. These were presented on the basis of the legal ownership of the various operations within each part of the Group. The separate financial statements for Rio Tinto Limited included, on a consolidated basis, the Group undertakings under its legal ownership, and those for Rio Tinto plc included, on a consolidated basis, the Group undertakings under its legal ownership. This presentation of financial information filed with the SEC was on the assumption that the formation of the Group through the dual listed companies (DLC) arrangements was not a business combination. The financial statements filed with the SEC also included supplemental financial information that combined the consolidated financial statements of the Rio Tinto plc and Rio Tinto Limited parts of the Group to present the Rio Tinto Group, with no adjustment for fair values.This combined financial information for the Rio Tinto Group was consistent with the financial statements that were used for the purposes of satisfying the Group's reporting obligations in the United Kingdom and Australia. The combined financial statements for the Rio Tinto Group viewed the formation of the DLC as a business combination and accounted for the transaction as a merger in accordance with UK Financial Reporting Standard No. 6 Acquisitions and Mergers (‘FRS 6’). Applying FRS 6, Rio Tinto plc and Rio Tinto Limited were combined and presented as one economic entity with no adjustment for fair values.As permitted under the transitional arrangements set out in IFRS 1 ‘First time adoption of International Financial Reporting Standards’, which sets out the rules for first time adoption of IFRS, the Group did not apply the concepts of IFRS 3 ‘Business Combinations’ for business combinations prior to the first time application( of EU IFRS. Accordingly, the Group is following the same method of accounting for the DLC in its financial statements under EU IFRS as was historically followed under UK GAAP: the Group is presented as one economic entity at historical cost.Subsequent to the formation of the Group, the accounting model used in filings with the SEC for the presentation of financial statements of companies that form DLCs has changed. The formation of a new DLC is now viewed as a business combination. The Group now believes that it is preferable to treat the formation of the DLC as a business combination, and as a result, that the accounting and reporting of financial statements prepared in accordance with IFRSto the SEC will be consistent with the accounting and reporting in the United Kingdom and Australia. Accordingly, the Group has revised the presentation of its financial statements included in Form 20-F to account for the formation of the DLC as a business combination. As a consequence, separate financial statements for Rio Tintoplc and Rio Tinto Limited will no longer be presented. Instead, the financial statements will deal with the Rio Tinto Group as one combined economic entity. This new presentation is applied retrospectively for all periods presented. The EU IFRS information presented on this new basis in the 20-F is the same as the combined supplemental information for the Rio Tinto Group that was previously disclosed. Under US GAAP, the Group now accounts for the formation of the DLC using the purchase method. As aconsequence of this treatment, Rio Tinto shareholders' funds under US GAAP at 31 December 2006 are US$1,519 million above those under IFRS; and US GAAP net earnings for 2006 are US$62 million below those under EU IFRS. Further information on the impact of purchase accounting under US GAAP is shown in note 48 to the 2006 financial statements.The 2006Annual report and financial statementssatisfy the obligations of Rio Tinto Limited to prepare consolidated accounts under Australian company law, as amended by an order issued by the Australian Securities andInvestments Commission on 27 January 2006 (as amended on 22 December 2006). The 2006 financial statementsdisclose the effect of the adjustments to consolidated EU IFRS profit, consolidated total recognised income and consolidated shareholders’ funds for the Group that would be required under the version of IFRS that is applicable in Australia (‘Australian IFRS’).The US dollar is the presentation currency used in these financial statements, as it most reliably reflects the Group’s global business performance.
Ore reserve estimatesRio Tinto estimates its ore reserves and mineral resources based on information compiled by Competent Persons asdefined in accordance with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves of December 2004 (‘the JORC code’). The amounts presented under EU and Australian IFRS are based on the reserves, and in some cases mineral resources, determined under the JORC code. For the purposes of the Group’s financial information under US GAAP, ore reserves are computed in accordance with the SEC’s Industry Guide 7 and are shown on pages 23 to 33. Estimates of ore reserves and mineral resources inaccordance with JORC are not shown in this combined annual report on Form 20-F. Ore reserves presented in accordance with SEC Industry Guide 7 do not exceed the quantities that, it is estimated, could be extracted economically if future prices were to be in line with the average of historical prices for the threeyears to 30 June 2006, or contracted prices where applicable. For this purpose, contracted prices are applied only to future sales volumes for which the price is predetermined by an existing contract; an d the average of historical prices is applied to expected sales volumes in excess of such amounts. Moreover, reported ore reserve estimates have not been increased above the levels expected to be economic based on Rio Tinto's own long term price assumptions. Therefore, a
reduction in commodity prices from the three year average historical price levels would not necessarily give rise to a reduction in reported ore reserves.
There are numerous uncertainties inherent in estimating ore reserves and assumptions that are valid at the time ofestimation may change significantly when new information becomes available.
Changes in the forecast prices of commodities, exchange rates, production cost scosts or recovery rates may change theeconomic status of reserves and may, ultimately, result in the reserves being restated. Such changes in reserves could impact on depreciation and amortisation rates, asset carrying values, deferred stripping calculations and provisions for close down, restoration and environmental clean up costs.
Acquisition accounting
On the acquisition of a subsidiary, the purchase method of accounting is used whereby the purchase consideration is allocated to the identifiable assets, liabilities and contingent liabilities (identifiable net assets) on the basis of fair value at the date of acquisition.
Rio Tinto acquired Alcan Inc during the year. The Group commissioned valuation consultants to advise on the fair values and asset lives of Alcan’s assets. The residue of the purchase price not allocated to specific assets and liabilities has been attributed to goodwill. The provisional values and asset lives incorporated in the2007 Financial statementswill be subject to revision within 12 months of the date of acquisition as permitted by IFRS 3 ‘Business Combinations’.
Asset carrying values
Events or changes in circumstances can give rise to significant impairment charges or reversals of impairmentprovisions in a particular year. In 2007, the Group’s results included net impairment charges of US$58 million (US$113 million after tax and outside shareholders interests). An impairment charge was recognised at Argyle, which was partially offset by impairment reversals at Palabora and Tarong Coal. In 2006, the Group’s results included net impairment reversals of US$396 million (US$44 million after tax and outside shareholders interests). Impairments were reversed at KUC and IOC, which more than offset impairment charges at Argyle and Tarong Coal. In 2005, thereThere were no significant impairment charges or reversals. Howeverreversals in 2004, the Group incurred a US$558 million impairment charge, (US$321 million net of tax and outside shareholders’ interests).2005.
When such events or changes in circumstances impact on a particular asset or cash generating unit, its carryingvalue is assessed by reference to its recoverable amount being the higher of fair value less costs to sell and value in use (being the net present value of expected future cash flows of the relevant cash generating unit). The best evidence of an asset’s fair value is its value obtained from an active market or binding sale agreement. Where neither exists, fair value less costs to sell is based on the best information available to reflect the amount the Group could receive for the cash generating unit in an arm’s length transaction. In most cases this is estimated using a discounted cash flow analysis. The cash flows used in these analyses are particularly sensitive to changes in two parameters: exchange rates and commodity selling prices. The great majority of the Group’s sales are based on prices denominated in US dollars. To the extent that the currencies of countries in which the Group produces commodities strengthen against the US dollar without commodity price offset, cash flows and, therefore, net present values are reduced. Management considers that over the long term, there is a tendency for movements in commodity prices to compensate to some extent for movements in the value of the US dollar (and vice versa). But such compensating changes are not synchronised and do not fully offset each other. Recentother and over the last few years favourable changes in commodity prices have generally exceeded adverse shifts in exchange rates. Comparing average exchange rates in 20062007 against those in 2003,2004, the Australian dollar strengthened by 1614 per cent against the USdollar, the Canadian dollar strengthened by 24 per cent21 percent and the South African rand weakened by teneight per cent. OverIn the same period, commodity prices rose substantially: for example, copper prices increased by 281149 per cent, aluminium by 7954 per cent and gold by 6669 per cent.
Reviews of carrying values relate to cash generating units which, in accordance with IAS 36 ‘Impairment“Impairment of Assets’
Rio Tinto 2007 Form 20-F | 108 |
Assets”, are identified by dividing an entity into as many largely independent cash generating streams as is reasonablypracticable. In some cases the business units within the product groups consist of several operations with independent cash generating streams, which therefore constitute separate cash generating units.
The cash flow forecasts are based on best estimates of expected future revenues and costs. These may include net cash flows expected to be realised from extraction, processing and sale of other mineralisationmineralised material that does not currentlyqualify for inclusion in provenproved or probable ore reserves. Such non reserve material is included where there is a high degree of confidence in its economic extraction. This expectation is usually based on preliminary drilling and sampling of areas of mineralisation that are contiguous with existing reserves. Typically, the additional evaluation to achieve reserve status for such material has not yet been done because this would involve incurring costs earlier than is required for the efficient planning and operation of the mine.
The expected future cash flows of cash generating units reflect long term mine plans which are based on detailed research, analysis and iterative modelling to optimise the level of return from investment, output and sequence of extraction. The plan takes account of all relevant characteristics of the orebody, including waste to ore ratios, ore grades, haul distances, chemical and metallurgical properties of the ore impacting on process recoveries and capacities of processing equipment that can be used. The mine plan is therefore the basis for forecasting production output in each future year and for forecasting production costs.
Rio Tinto’s cash flow forecasts are based on assessments of expected long term commodity prices, which for most commodities are derived from an analysis of the marginal costs of the producers of thesethe relevant commodities. These assessments often differ from current price levels and are updated periodically.
In some cases, prices applying to some part of the future sales volumes of a cash generating unit are predetermined by existing sales contracts. The effects of such contracts are taken into account in forecasting future cash flows.
Cost levels incorporated in the cash flow forecasts are based on the current long term mine plan for the cashgenerating unit. For value in use calculations used in impairment reviews, recent cost levels are considered, together with expected changes in costs that are compatible with the current condition of the business and which meet the requirements of IAS 36. IAS 36 includes a number of restrictions on the future cash flows that can be recognised in value in use calculations in respect of future restructurings and improvement related capital expenditure.
The useful lives of the major assets of a cash generating unit are usually dependent on the life of the orebody to which they relate. Thus the lives of mining properties, and associated smelters, concentrators and other long lived processing
equipment generally relate to the expected life of the ore body.orebody. The life of the ore body,orebody, in turn, is estimated on the basis of the long term mine plan.
Forecast cash flows are discounted to present values using Rio Tinto’s weighted aver ageaverage cost of capital with appropriate adjustment for the risks associated with the relevant cash flows, to the extent that such risks are not reflected in the forecast cash flows. For final feasibility studies and ore reserve estimation, internal hurdle rates are used which are generally higher than the weighted average cost of capital.
Final feasibility studies,Value in use and ore reserve estimates and value in use estimates are based on the exchange rates current at the time of the evaluation. In final feasibility studies and estimates of fair value, a forecast of the long term exchange rate is made having regard to spot exchange rates, historical data and external forecasts.
Forecast cash flows for ore reserve estimation for JORC purposes and for impairment testing are based on Rio Tinto’s long term price forecasts. For final feasibility studies these prices and projected costs, are assumed to decline systematically in real terms. For the majority of Rio Tinto’s businesses, both by number and by value, the recoverable amounts are substantially in excess of the carrying value in the balance sheet. For a minority of the businesses the carrying value is close to their recoverable amount, and these are reviewed for impairment where required. The effects of exchange rate and commodity price changes on the values of these units relative to their book values are monitored closely.
All goodwill and intangible assets that are not yet ready for use or have an indefinite life are tested annually for impairment regardless of whether there has been any change in events or circumstances. Under US GAAP, assumptions used in cash flow forecasts are principally the same as those used under EU IFRS, except that the estimated cash flows related to the liability for asset retirement obligations are excluded under US GAAP (and the related liabilities are excluded from the determination of the carrying value of the asset group). Goodwill is tested annually for impairment. Impairment of other intangible assets and of property, plant and equipment is only recognised when the anticipated undiscounted cash flows are insufficient to recover the carrying value of the asset group. Once impairment is determined, an asset is written down to its fair value, which is normally calculated using discounted cash flows, similar to those under EU IFRS and the result is generally similar to that under EU IFRS. It is not possible to reverse impairment charges under US GAAP.
Close down, restoration and clean up obligations
Provision is made for environmental remediation costs when the related environmental disturbance occurs, based on thenet present value of estimated future costs.
Close down and restoration costs are a normal consequence of mining, and the majority of close down and restoration expenditure is incurred at the end of the life of the mine. The costs are estimated on the basis of a closure plan. The cost estimates are calculated annually during the life of the operation to reflect known developments, eg updated cost estimates and revisions to the estimated lives of operations, and are subject to formal review at regular intervals. Although the ultimate cost to be incurred is uncertain, the Group’s businesses estimate their respective costs based on feasibility and engineering studies using current restoration standards and techniques. The initial closure provisionprovisions together with changes, other than those arising from the unwind of the discount applied in establishing the net present value of the provision, are capitalised within property, plant and equipment and depreciated over the lives of the assets to which they relate.
Clean up costs result from environmental damage that was not a necessary consequence of mining, including remediation, compensation and penalties. These costs are charged to the income statement. Provisions are recognised at the time the damage, remediation process and estimated remediation costs become known. Remediation procedures may commence soon after this point in time but canmay continue for many years depending on the nature of the disturbance and the remediation techniques.
As noted above, the ultimate cost of environmental disturbance is uncertain and cost estimates can vary in response to many factors including changes to the relevant legal requirements, the emergence of new restoration techniques or experience at other mine sites. The expected timing of expenditure can also change, for example in
Rio Tinto 2007 Form 20-F | 109 |
response to changes in ore reserves or production rates. As a result there could be significant adjustments to the provision for close down and restoration and environmental clean up, which would affect future financial results.
Overburden removal costs
In open pit mining operations, it is necessary to remove overburden and other barren waste materials to access ore from which minerals can economically be extracted. The process of mining overburden and waste materials is referred to asstripping. During the development of a mine, before production commences, it is generally accepted that stripping costs are capitalised as part of the investment in construction of the mine.
Where a mine operates several open pits that are regarded as separate operations for the purpose of mine planning, stripping costs are accounted for separately by reference to the ore from each separate pit. If, however, the pits are highly integrated for the purpose of mine planning, the second and subsequent pits are regarded as extensions of the first pit in accounting for stripping costs. In such cases, the initial stripping of the second and subsequent pits is considered to be production phase stripping relating to the combined operation.
Stripping of waste materials continues during the production stage of the mine or pit. Some mining companies expense these production stage stripping costs as incurred, while others defer such stripping costs. In operations that experience material fluctuations in the ratio of waste materials to ore or contained minerals on a year to year basis over the life of the mine or pit, deferral of stripping costs reduces the volatility of the cost of stripping expensed in individual
reporting periods. Those mining companies that expense stripping costs as incurred will therefore report greater volatility in the results of their operations from period to period.
Rio Tinto defers production stage stripping costs for those operations where this is the most appropriate basis for matching costs with the related economic benefits and the effect is material. Stripping costs incurred in the period are deferred to the extent that the current period ratio exceeds the life of mine or pit ratio. Such deferred costs are then charged against reported profits to the extent that, in subsequent periods, the ratio falls short of the life of mine or pit ratio. The life of mine or pit ratio is based on the provenproved and probable reserves of the mine or pit and is obtained by dividing the tonnage of waste mined either by the quantity of ore mined or by the quantity of minerals contained in the ore. In some operations, the quantity of ore is a more practical basis for matching costs with the related economic benefits where there are important by productsco-products or where the grade of the ore is relatively stable from year to year.
The life of mine or pit waste-to-ore ratio is a function of thean individual mine’s pit design and therefore changes to that design will generally result in changes to the ratio. Changes in other technical or economic parameters that impact on reserves will also have an impact on the life of mine or pit ratio even if they do not affect the pit design. Changes to the life of mine or pit ratio are accounted for prospectively.
In the production stage of some operations, further development of the mine or pit requires a phase of unusually high overburden removal activity that is similar in nature to preproduction mine development. The costs of such unusually high overburden removal activity are deferred and charged against reported profits in subsequent periods on a units of production basis. This accounting treatment is consistent with that for stripping costs incurred during the development phase of a mine or pit, before production commences.
Deferred stripping costs are included in property, plant and equipment or in investment in equity accounted units, as appropriate. These form part of the total investment in the relevant cash generating unit, which is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable. Amortisation of deferred stripping costs is included in operating costs or in the Group’s share of the results of its jointly controlled entities and associates as appropriate.
During 2006,2007, production stage stripping costs incurred by subsidiaries and equity accounted operations exceededwere US$56 million higher than the amounts charged against pre tax profit which included(2006: production stage costs exceeded the amounts charged against pre-tax profit by US$20 million). In addition, US$117 million of deferred stripping was written off in 2007 as part of the Argyle impairment and there were net impairment reversals of US$36 million by US$56 million (2005: US$93 million).affecting deferred stripping in 2006. The net book value carried forward in property, plant and equipment and in investments in equity accounted unitsjointly controlled entities and associates at 31 December 20062007 was US$929884 million (2005:(2006: US$ 845929 million).
Information about the stripping ratios of the business units, including equity accounted units, that account for the majority of the deferred stripping balance at 31 December 2006,2007, along with the year in which deferred stripping is expected to be fully amortised, is set out in the following table:
Actual stripping ratio for the year | Life of mine stripping ratio | Actual stripping ratio for year | Life of mine stripping ratio | ||||||||||||||||||||||
2004 | 2005 | 2006 | 2004 | 2005 | 2006 | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||||||||
Kennecott Utah Copper (2019) (a) (b) | 1.83 | 2.02 | 2.04 | 1.24 | 1.51 | 1.36 | 1.99 | 2.04 | 2.02 | 1.32 | 1.36 | 1.51 | |||||||||||||
Argyle Diamonds (2009) (a) | 6.70 | 6.60 | 4.00 | 4.91 | 4.40 | 4.40 | |||||||||||||||||||
Grasberg Joint Venture (2015) (a) | 3.39 | 3.12 | 3.01 | 2.43 | 2.43 | 2.63 | 3.47 | 3.01 | 3.12 | 3.05 | 2.63 | 2.43 | |||||||||||||
Diavik (2008) (c) | 1.47 | 1.21 | 0.89 | 0.94 | 0.91 | 0.96 | 0.42 | 0.89 | 1.21 | 0.91 | 0.96 | 0.91 | |||||||||||||
Escondida (2042) (d) | 0.11 | 0.09 | 0.08 | 0.11 | 0.12 | 0.12 | |||||||||||||||||||
Escondida (2040) (d) | 0.07 | 0.08 | 0.09 | 0.10 | 0.12 | 0.12 | |||||||||||||||||||
Notes | |
(a) | |
(b) | Kennecott’s life of mine |
(c) | Diavik’s |
(d) | Escondida’s |
Rio Tinto 2007 Form 20-F | 110 |
Borax capitalised stripping costs as part of a distinct period of new development during the production stage of the mine. Capitalisation stopped in 2004. The capitalised costs will be fully amortised in 2034.
Functional currency
The determination of functional currency affects the carrying value of non current assets included in the balance sheet and, as a consequence, the amortisation of those assets included in the income statement. It also impacts exchange gains and losses included in the income statement.
In 2006,The functional currency for each entity in the Group, adopted EITF Issue No. 04-06 'Accountingand for Stripping Costs Incurred during Productionjointly controlled entities and associates, is the currency of the primary economic environment in which it operates. For many of Rio Tinto’s entities, this is the Mining Industry' ('EITF 04-06') forcurrency of the country in which each operates. Alcan’s aluminium and alumina producing operations use a US GAAP. Under EITF 04-06, stripping costs incurred duringdollar functional currency including those in Canada and Australia. Transactions denominated in currencies other than the production phasefunctional currency are converted to the functional currency at the exchange rate ruling at the date of a surface minethe transaction unless hedge accounting applies. Monetary assets and liabilities denominated in foreign currencies are considered variable production costs that should be recorded directlyretranslated at year end exchange rates.
The US dollar is the currency in which the Group’s Financial statements are presented, as it most reliably reflects the global business performance of the Group as a componentwhole.
On consolidation, income statement items are translated into US dollars at average rates of production cost, except toexchange. Balance sheet items are translated into US dollars at year end exchange rates. Exchange differences on the extent they can be attributed to inventory in accordancetranslation of the net assets of entities with normal inventory valuation principles. As a consequence,functional currencies other than the US dollar, and any offsetting exchange differences on 1 January 2006 a cumulative adjustment of US$651 million (US$415 million net of taxation) attributable to subsidiaries wasdebt hedging those net assets, are recognised directly in US GAAP equity. A further US$94 millionthe foreign currency translation reserve.
Exchange gains and losses which arise on balances between Group entities are taken to the foreign currency translation reserve where the intra group balance is, in substance, part of the Group’s net investment in the entity.
The balance of taxation relatedthe foreign currency translation reserve relating to equity accounted units was recognised directlyan operation that is disposed of is transferred to the income statement at the time of the disposal.
The Group finances its operations primarily in US GAAP equity.dollars but part of the Group’s US dollar debt is located in subsidiaries having functional currencies other than the US dollar. Except as noted above, exchange gains and losses relating to such US dollar debt are charged or credited to the Group’s income statement in the year in which they arise. This means that the impact of financing in US dollars on the Group’s income statement is dependent on the functional currency of the particular subsidiary where the debt is located. With the above exceptions, and except for derivative contracts which qualify as cash flow hedges, exchange differences are charged or credited to the income statement in the year in which they arise.
Deferred tax on mining rights
fair value adjustments
On transition to EU IFRS with effect from 1 January 2004, deferred tax was provided in respect of fair valueadjustments on acquisitions in previous years. No other adjustments were made to the assets and liabilities recognised in such prior year acquisitions and, accordingly, shareholders’ funds were reduced by US$720 million on transition to EU IFRS primarily as a result of deferred tax on fair value adjustments to mining rights. In general, these mining rights are not eligible for income tax allowances. In such cases, the provision for deferred tax was based on the difference between their carrying value and their nil income tax base. The existence of a tax base for capital gains tax purposes
was not taken into account in determining the deferred tax provision relating to such mineral rights because it is expected that the carrying amount will be recovered primarily through use and not from the disposal of the mineral rights. Also, the Group is only entitled to a deduction for capital gains tax purposes if the mineral rights are sold or formally relinquished.
For acquisitions after 1 January 2004 provision for such deferred tax on acquisition results in a corresponding increase in the amounts attributed to acquired assets and/or goodwill under EU IFRS. Under US GAAP, such provisions for deferred tax result in corresponding increases in the amounts attributed to acquired assets and/or goodwill irrespective of the date of acquisition. The different treatment of acquisitions prior to 1 January 2004, results in higher shareholders’ funds under US GAAP.
Post retirement benefitsFor defined benefit post employment plans, the Group has adopted the option under IAS 19 to recognise theThe difference between the fair value of the plan assets (if any) of post retirement plans and the present value of the plan liabilitiesobligations is recognised as an asset or liability on the balance sheet andsheet. The Group has adopted the option under IAS 19 to record actuarial gains and losses directly in the Statement of Recognised Income and Expense.
The most significant assumptions used in accounting for post retirement plans are the long term rate of return on plan assets, the discount rate and the mortality assumptions.
The long term rate of return on plan assets is used to calculate interest income on pension assets, which is credited to the Group’s income statement. The discount rate is used to determine the net present value of future liabilities and each year the unwinding of the discount on those liabilities is charged to the Group’s income statement. The mortality assumption is used to project the future stream of benefit payments, which is then discounted to arrive at the net present value of liabilities.
Valuations are carried out using the projected unit method.
The expected rate of return on pension plan assets is determined as management’s best estimate of the long term return on the major asset classes, ie equity, debt, real estateproperty and other, weighted by the actual allocation of assets among the categories at the measurement date. The expected rate of return is calculated using geometric averaging.
The sources used to determine management’s best estimate of long term returns are numerous and include country specific bond yields, which may be derived from the market using local bond indices or by analysis of the local bond market, and country specific inflation and investment market expectations derived from market data and analysts’
Rio Tinto 2007 Form 20-F | 111 |
or governments’ expectations as applicable.
In particular, the Group estimates long term expected real returns on equity ie returns in excess of inflation, based on the economic outlook, analysts’ views and those of other market commentators. This is the most subjective of the assumptions used and it is reviewed regularly to ensure that it remains consistent with best practice.
The discount rate used in determining the service cost and interest cost charged to income is the market yield at the start of the year on high quality corporate bonds. For countries where there is no deep market in such bonds the yield on Government bonds is used. For determining the present value of obligations shown on the balance sheet, market yields at the balance sheet date are used.
Details of the key assumptions are set out in note 4649 to the 2006 financial2007 Financial statements.
For 20062007 the charge against income for post retirement benefits net of tax and minorities was US$158 million under EU IFRS. Under US GAAP the net cost was US$200168 million. These charges includeThis charge included both pension and post retirement healthcare benefits. The charges arecharge is net of the expected return on assets which (net ofwas US$371 million after tax and minorities) was US$228 million under EU IFRS and US$209 million under US GAAP.minorities.
In calculating the 2006 EU IFRS2007 expense the average future increase in compensation levels was assumed to be 4.7 per cent and the same rate will be used for 2007. For US GAAP, the 2006 average future increase in compensation levels was assumed to be 4.6 per cent and this will remain at 4.6decrease to 3.7 per cent for 2007. For EU IFRS,2008 reflecting the increased weighting of lower inflation countries following the Alcan acquisition. The average discount rate used for the Group’s plans in 20062007 was 5.05.4 per cent and the average discount rate used in 20072008 will be 5.4 per cent. This increase is attributable to higher bond yields across all regions. For US GAAP, the average discount rate used for the Group’s plans in 2006 was 5.25.6 per cent andreflecting the weighted average level of discount rate to be used in 2007 will be 5.4 per cent. This is also due to higher bond yields.rates following the Alcan acquisition.
For both EU IFRS and US GAAP, theThe average expected long term rate of return on assets used to determine 20062007 pension cost was 6.36.9 per cent. This will increasedecrease to 6.96.4 per cent for 2007.2008. This is duereduction results mainly from a lower allocation to an increase in bond yields andequities as a change inresult of the methodology for setting the expected return on equity. Previously, the expected return on equities was set by reference to a fixed margin above inflation. This will be amended for 2007 so that the expected return on equities will be set by adding a risk premium to the yield on government bonds. This methodology is more consistent with that used by other major organisations and is considered to be more theoretically robust.Alcan acquisition.
Based on the known changes in assumptions noted above and other expected circumstances, the impact of post retirement costs on the Group’s EU IFRS net earnings in 20072008 would be expected to decreaseincrease by some US$26198 million to US$132366 million. The impactmain reason for this increase is the inclusion of post-retirement benefits on the Group’s US GAAP net earnings in 2006 would be expected to decrease by some US$28 million to US$172 million.Alcan pension expense for the full year. The actual charge may be impacted by other factors that cannot be predicted, such as the effect of changes in benefits and exchange rates.
The table below sets out the potential change in the Group’s 20062007 net earnings (after tax and outside interests) that would result from hypothetical changes to post retirement assumptions and estimates. The sensitivities are viewed for each assumption in isolation.isolation although a change in one assumption is likely to result in some offset elsewhere.
US$m | ||
Sensitivity of Group’s 2007 net earnings to changes in: | ||
Expected return on assets | ||
– increase of 1 percentage point | 39 | |
– decrease of 1 percentage point | (39 | ) |
Discount rate | ||
– increase of 0.5 percentage points | 7 | |
– decrease of 0.5 percentage points | (6 | ) |
Salary increases | ||
– increase of 0.5 percentage points | (6 | ) |
– decrease of 0.5 percentage points | 6 | |
Demographic – allowance for additional future mortality improvements | ||
– participants assumed to be one year older | 7 | |
– participants assumed to be one year younger | (7 | ) |
EU IFRS | US GAAP | |||
Sensitivity of Group’s 2006 net earnings to changes in: | US$m | US$m | ||
Expected return on assets | ||||
– increase of 1 percentage point | 26 | 24 | ||
– decrease of 1 percentage point | (26 | ) | (24 | ) |
Discount rate | ||||
– increase of 0.5 percentage points | 1 | 8 | ||
– decrease of 0.5 percentage points | (1 | ) | (8 | ) |
Salary increases | ||||
– increase of 0.5 percentage points | (4 | ) | (6 | ) |
– decrease of 0.5 percentage points | 4 | 6 | ||
Demographic – allowance for additional future mortality improvements | ||||
– overall increase of 5% in benefit obligation | (11 | ) | (18 | ) |
– overall decrease of 5% in benefit obligation | 11 | 18 | ||
The figures in the above table only show the impact on underlying and net earnings. Changing the assumptions would also have an impact on the balance sheet.
The impact on cash flow in 2006 of the Group’s pension plans, being the employer contributions to defined benefit and defined contribution pension plans, was US$172 million. In addition there were contributions of US$19 million in respect of unfunded healthcare schemes. Contributions to pension plans for 2007 are estimated to be around US$8m higher than for 2006. Healthcare plans are unfunded and contributions for future years will be equal to benefit payments and therefore cannot be predetermined.
Further information on pensions and other post retirement benefits is given in note 4649 to the 2006 financial statements.
US deferred tax potentially recoverableRio Tinto’s US tax group have Alternative Minimum Tax (AMT) credits and temporary differences, which have thepotential to reduce tax charges in future years. These potential reductions in future tax charges (‘possible tax assets’) totalled US$577 million at 31 December 2005. An asset of US$10 million was recognised in the balance sheet at 31 December 2005 based on utilisation of AMT credits projected for 2006. Principally as a result of current high commodity prices, US$140 million of these possible tax assets were realised in 2006. Updated projections of future taxable profits for the operations that form part of Rio Tinto’s US tax group resulted in the recognition of a further deferred tax asset of US$335 million during 2006. Having taken account of other adjustments this leaves possible tax assets of US$65 million. Recoveries are dependent on future commodity prices, costs, financing arrangements and business developments in future years.
ExplorationDuring the year the Group changed its policy on accounting for exploration and evaluation expenditure. Previously, theGroup capitalised exploration and evaluation expenditure from acquisition of a beneficial interest or option in mineral rights. Full provision was made for impairment unless there was a high degree of confidence in the project’s viability and hence it was considered probable that future economic benefits would flow to the Group. If, as a result of developments in subsequent periods, the expenditure was considered to be recoverable, such provisions were reversed. Under the Group’s revised policy, exploration and evaluation expenditure is not capitalised until the point is reached at which there is a high degree of confidence in the project’s viability and it is considered probable that future economic benefits will flow to the Group. This change was made to improve the alignment of Rio Tinto’s accounting with the way that EU IFRS is being applied generally. Under US GAAP, exploration and evaluation expenditure is expensed as incurred. The carrying values of exploration assets are reviewed twice per annum by management and the results of these reviews are reported to theAudit committee. There may only be mineralised material to form a basis for the impairment review. The review is based on a status report regarding the Group’s intentions for development of the undevelopedproperty. In some cases, the undeveloped properties are regarded as successors to orebodies currently in production and will therefore benefit from existing infrastructure and equipment.
Temporary differences related to closure costs and finance leases
Under the ‘initial recognition’ rules in paragraphs 15 and 24 of IAS 12 ‘Income Taxes’, deferred tax is not provided onthe initial recognition of an asset or liability in a transaction that does not affect accounting profit or taxable profit and is not a business combination.
The Group’s interpretation of these initial recognition rules has the result that no deferred tax asset is provided on the recognition of a provision for close down and restoration costs and the related asset, or on recognition of assets held under finance leases and the associated lease liability, except where these are recognised as a consequence of business combinations.
On creation of thea closure provision, for instance, there is no effect on accounting or taxable profit because the cost is capitalised. As a result, the initial recognition rules would appear to prevent the recognition of a deferred taxasset in respect of the provision and of a deferred tax liability in respect of the related capitalised amount.
The temporary differences will reverse in future periods as the closure asset is depreciated and when tax deductible payments are made that are charged against the provision. Paragraph 22 of IAS 12 extends the initial recognition rules to the reversal of temporary differences on assets and liabilities to which the initial recognition rules
Rio Tinto 2007 Form 20-F | 112 |
apply. Therefore, deferred tax is not recognised on the changes in the carrying amount of the asset which result from depreciation or from the changes in the provision resulting from expenditure. When tax relief on expenditure is received this will be credited to the income statement as part of the current tax charge. The unwind of the discount applied in establishing the present value of the closure costs does affect accounting profit. Therefore, this unwinding of discount results in the recognition of deferred tax assets.
The application of this initial recognition exemption has given rise to diversity in practice: some companies do provide for deferred tax on closure cost provisions and the related capitalised amounts. Deferred tax accounting on initial recognition is currently the subject of an IASB/FASB convergence project which may at some future time require the Group to change this aspect of its deferred tax accounting policy.
If the Group were to provide for deferred tax on closure costs and finance leases under EU IFRS (as is already the case for US GAAP), the impact onbenefit to underlying and net earnings would have been US$21 million (2006: US$9 million) and shareholders’to equity would be as follows:have been US$185 million (2006: US$127 million).
Impact on closing | ||||||||
Impact on net earnings | shareholders’ equity | |||||||
US$m | % | US$m | % | |||||
2006 | 9 | .001 | % | 127 | .007 | % | ||
2005 | 15 | .003 | % | 120 | .008 | % | ||
2004 | 20 | .006 | % | 105 | .008 | % | ||
US deferred tax potentially recoverable
The Group’s US tax group has alternative minimum tax credits and temporary differences that have the potential to reduce tax charges in future years. These ‘possible tax assets’ totalled US$182 million at 31 December 2007 (2006: US$162 million). Of these, US$119 million were recognised as deferred tax assets (2006: US$97 million), leaving US$63 million (2006: US$65 million) unrecognised, as recovery was not considered probable.
During 2006, updated projections of future taxable profits for the operations that form part of Rio Tinto’s US tax group resulted in the recognition of previously unrecognised possible tax assets of US$335 million. Recoveries are dependent on future commodity prices, costs, financing arrangements and business developments in future years.
During 2007, principally as a result of high commodity prices, US$170 million of these possible tax assets were utilised (2006: US$140 million).
Exploration
Under the Group’s accounting policy, exploration and evaluation expenditure is not capitalised until the point is reached at which there is a high degree of confidence in the project’s viability and it is considered probable that future economic benefits will flow to the Group.
The carrying values of exploration and evaluation assets are reviewed twice per annum by management and the results of these reviews are reported to theAudit committee. There may be only mineralised material to form a basis for the impairment review. The review is based on a status report regarding the Group’s intentions for development of the undeveloped property. In some cases, the undeveloped properties are regarded as successors to orebodies currently in production and will therefore benefit from existing infrastructure and equipment.
Contingencies
Disclosure is made of material contingent liabilities unless the possibility of any loss arising is considered remote. Contingencies are disclosed in note 3335 to the 2006 financial statements. These include tax assessments in Australia ofapproximately A$515 million which, based on Counsels’ opinion, the Group expects to be successful in challenging.2007 Financial statements.
Underlying earnings
The Group presents ‘Underlying earnings’“Underlying earnings” as an additional measure to provide greater understanding of the underlyingbusiness performance of its operations. The adjustments made to net earnings to arrive at underlying earnings are explained above in the section on underlying earnings.
Rio Tinto |
Item 6. | Directors, Senior Management and Employees |
Chairman and executive directors | ||||||||
Audit | Remuneration | Nominations | Committee on social | |||||
committee | committee | committee | and environmental | |||||
accountability | ||||||||
Chairman | ||||||||
Paul Skinner | • | |||||||
Chief executive | ||||||||
Tom Albanese | ||||||||
Finance director | ||||||||
Guy Elliott | ||||||||
Executive director | ||||||||
Dick Evans | ||||||||
Non executive directors | ||||||||
Sir David Clementi * | • | • | ||||||
Vivienne Cox * | • | |||||||
Sir Rod Eddington * | • | • | ||||||
Michael Fitzpatrick * | • | • | ||||||
Yves Fortier * | • | |||||||
• | ||||||||
Richard Goodmanson * | • | • | ||||||
Andrew Gould * | • | • | ||||||
Lord Kerr of Kinlochard * | • | • | ||||||
David Mayhew | • | |||||||
Sir Richard Sykes * | • | • | ||||||
• | • | |||||||
* Independent |
CHAIRMAN
Paul SkinnerBA (Hons) (Law), DpBA (Business Administration), age 62.63
Appointment and electionelection::Director of Rio Tinto plc and Rio Tinto Limited since 2001, he was appointed chairman of the Group in November 2003. Paul was last re-elected by shareholders in 2005 and stands for re-election in 2008. He is chairman of the Nominations committee (note b)c).
Skills and experienceexperience::Paul graduated in law from Cambridge University and in business administration from Manchester Business School. He was previously a managing director of The “Shell” Transport and Trading Company plc and group managing director of The Royal Dutch/Shell Group of Companies, for whom he had worked since 1966. During his career he worked in all Shell’s main businesses, including senior appointments in the UK, Greece, Nigeria, New Zealand and Norway. He was CEO of its global Oil Products business from 1999 to 2003.
External appointments (current and recent):Director of The ‘Shell’ Transport and Trading Company plc from 2000 to 2003.
Director of Standard Chartered plc since 2003.2003
Director of the Tetra Laval Group since 2005.2005
Director of L’Air Liquide SA since 2006.2006
Chairman of the International Chamber of Commerce (UK) since 2005.2005
Non executive member of the Defence Management Board of the UK Ministry of Defence since June 2006.2006
Member of the board of INSEAD business school since 1999.1999
Director of The “Shell” Transport and Trading Company plc from 2000 to 2003
CHIEF EXECUTIVE
Tom AlbaneseBS (Mineral Economics), MS (Mining Engineering), age 49.50
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since March 2006. Tom was elected byshareholders in 2006.2006 and stands for re-election in 2008.
Skills and experience:Tom joined Rio Tinto in 1993 on Rio Tinto’s acquisition of Nerco and held a series ofmanagement positions before being appointed chief executive of the Industrial Minerals group in 2000, after which he became chief executive of the Copper group and head of Exploration in 2004. He took over as chief executive from
Rio Tinto 2007 Form 20-F | 114 |
Leigh Clifford with effect from 1 May 2007.
External appointments (current and recent):
Director of Ivanhoe Mines Limited since November 2006.from 2006 to 2007
Director of Palabora Mining Company from 2004 to 2006.2006
Member of the Executive Committee of the International Copper Association from 2004 to 2006.2006
FINANCE DIRECTOR
Guy ElliottMA (Oxon), MBA (INSEAD), age 51.52
Appointment and election:Finance director of Rio Tinto plc and Rio Tinto Limited since 2002. Guy was last re-elected by shareholders in 2007.
Skills and experience:Guy joined the Group in 1980 after gaining an MBA.MBA having previously been in investment banking. He has subsequently held a variety of commercial and management positions, including head of Business Evaluation and president of Rio Tinto Brasil.
External appointments (current and recent):None.
Non executive director and member of the Audit committee of Cadbury Schweppes plc, since 2007
NON EXECUTIVE DIRECTORSDIRECTOR
Ashton CalvertDick EvansAC, BSc (Hons) (Tas)BS (Industrial Engineering) (Oregon State University), DPhil (Oxon)MS Management (Stanford Graduate School of Business), Hon DSc (Tas) age 61.60AppointmentAppointments and election:Director of Rio Tinto plc and Rio Tinto Limited since 2005. Ashton was re-electedeffective 25 October 2007. Dick will stand for election by shareholders in 2007 (notes b, d and e).at the 2008 annual general meetings.
Skills and experience:Ashton retired as secretaryDick Evans joined Rio Tinto following the acquisition of the Department of Foreign Affairs and Trade of the Governmentof Australia in January 2005 after six and a half years in that position. He was educated at the University of Tasmania and, as a Rhodes scholar, also gained a doctorate in mathematics from Oxford University. During his career in the Australian foreign service he held appointments in Washington and, on four occasions, in Tokyo,Alcan Inc where he was ambassador priorhad held several senior management positions including executive vice president and had been president and chief executive officer of Alcan from 2006 to his appointment as secretary. In these and other roles2007. Prior to Alcan, he developed extensive experience of the Asian countries which represent key markets for Rio Tinto.has held senior management positions with Kaiser Aluminum & Chemical Corporation.
External appointments (current and recent):Director of Woodside Petroleum Limited since 2005.Director of The Australian Trade Commission between 1998 and 2005.
Director of The Export Finance and Insurance Corporation between 1998 and 2005.AbitibiBowater Inc. since 2003
Director of The Australian Strategic Policythe International Aluminium Institute betweensince 2001 and 2005.
Sir David ClementiMA, MBA, FCA, age 57.59
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2003. Sir David was last re-elected by shareholders in 2006 (notes a, cb and e).
Skills and experience:Sir David is chairman of Prudential plc, prior to which he was Deputy Governor of the Bank ofEngland. His earlier career was with Kleinwort Benson where he spent 22 years, holding various positions including chief executive and vice chairman. A graduate of Oxford University and a qualified chartered accountant, Sir David also holds an MBA from Harvard Business School.
External appointments (current and recent):
Chairman of Prudential plc since 2002.2002
Member of the Financial Reporting Council since 2003.between 2003 and 2007
Vivienne CoxMA (Oxon), MBA (INSEAD), age 47.48
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2005. Vivienne was elected by shareholders in 2005 and stands for re-election in 2008. (notes a and e).
Skills and experience:Vivienne is currently executive vice president of BP p.l.c. for Gas Power & Renewables.Alternative Energy. She isa member of the BP group chief executive’s committee. She holds degrees in chemistry from Oxford University and in business administration from INSEAD. During her career in BP she has worked in chemicals, exploration, finance, and refining and marketing.
External appointments (current and recent):Non executive Director of Eurotunnel plc between 2002 and 2004.2004
Sir Rod EddingtonB.Eng M.EngB Eng, M Eng (University of Western Australia), D.PhilD Phil (Oxon), age 57.58
Appointment and election:Director of Rio Tinto plc and Rio Tinto Limited since 2005. Sir Rod was elected byshareholders in 2006 (notes b,c, d and e).
Skills and experience:Sir Rod was chief executive of British Airways Plc until the end of September 2005. Prior to hisrole with British Airways, Sir Rod was Managing Director of Cathay Pacific Airways from 1992 until 1996 and Executive Chairman of Ansett Airlines from 1997 until 2000.
Rio Tinto 2007 Form 20-F | 115 |
External appointments (current and recent):