12th Apr 2006 11:06
Rio Tinto PLC12 April 2006 Rio Tinto reports on "excellent" year Buoyant conditions in the mining sector in 2005, together with Rio Tinto'sstrategic positioning and strong operating performance, resulted in a secondsuccessive year of record profits, the chairman of Rio Tinto Paul Skinner toldthe annual meeting of shareholders in London today. "We enjoyed strong prices for most of our products and an increase in productionvolumes. In 2005, underlying earnings of just under US$5 billion were 118 percent above 2004. Cash flow was 85 per cent higher at US$8 billion dollars andour regular dividend four per cent higher. "Together with a 20 per cent increase in the regular dividend in 2004, thisrepresents an increase of almost 25 per cent over the last two years. Inaddition, we declared a significant special dividend. "Investment in the growth of the business continued, with capital expenditure arecord US$2.5 billion. This is expected to increase to at least US$3 billion ineach of 2006 and 2007. "The current strength of the Group's cash flow means that, in addition tocomfortably funding current and planned investments, capital can be returned toshareholders without reducing our flexibility to pursue other developmentopportunities which may arise. We remain in a very strong financial position." Rio Tinto chief executive Leigh Clifford said 2005 was an excellent year. "Themining industry is experiencing strong prices across most of our products. "We were able to capitalise on the upswing with a strong operating performancethat maximised production. There was a significant improvement in our safetyrecord for the sixth year in a row. "We approved major projects and concluded a number of well executedtransactions. At the same time, we concentrated on operational and projectdelivery, and achieved record output in many areas. "All product groups except Industrial Minerals, which is in a reorganisation andrenewal phase, increased their underlying earnings." The transcript of both speeches follows: Opening remarks by the Chairman, Paul Skinner Good morning ladies and gentlemen. I am very pleased to welcome you to thisyear's Annual General Meeting. Before we go any further there will be a safety briefing. This is a subject RioTinto takes very seriously and I would ask that you all listen carefully. All of our directors are here this morning and I should like to begin bywelcoming two new colleagues to the board, both of whom are standing forelection today for the first time. Sir Rod Eddington, formerly chief executive of British Airways, was appointed tothe board in September 2005. Tom Albanese, chief executive of Copper andExploration, was appointed a director in March and strengthens the executiverepresentation on the board. Both will add to the overall skill and experience of the Rio Tinto board, whichis a vital underpinning of our high standard of corporate governance.Maintaining a well qualified and effective board is an important priority -particularly for me as chairman. All of your directors retiring by rotation are eligible to stand for re-electionand I'm pleased to say that Sir David Clementi, Leigh Clifford, Andrew Gould andDavid Mayhew all offer themselves for re-election at today's meeting. Before we proceed with the formal part of the agenda, Leigh and I will say a fewwords about Rio Tinto's business, our current projects and operations. In 2005, the buoyant conditions in our sector, together with Rio Tinto'sstrategic positioning and strong operating performance, resulted in a secondsuccessive year of record profits. We enjoyed strong prices for most of our products and an increase in productionvolumes. In 2005, underlying earnings of just under US$5 billion were 118 percent above 2004. Cash flow was 85 per cent higher at US$8 billion and ourregular dividend four per cent higher. Together with a 20 per cent increase in the regular dividend in 2004, thisrepresents an increase of almost 25 per cent over the last two years. Inaddition, we declared a significant special dividend. Investment in the growth of the business continued, with capital expenditure arecord US$2.5 billion. This is expected to increase to at least US$3 billion ineach of 2006 and 2007. The current strength of the Group's cash flow means that, in addition tocomfortably funding current and planned investments, capital can be returned toshareholders without reducing our flexibility to pursue other developmentopportunities which may arise. We remain in a very strong financial position. Capital management Given these strong cash flows, we were able to announce a major capitalmanagement programme totalling US$4 billion. This comprises a US$1.5 billion special dividend of US$1.10 per share and ashare buyback programme totalling US$2.5 billion dollars by the end of 2007.This replaces the approximately 500 million dollars remaining from the 2005buyback programme. Rio Tinto dividends have increased each year since the dual listed companiesmerger in 1995. The aim of our progressive dividend policy is to increase thedollar value of ordinary dividends continuously over time, without cutting themin economic downturns. The final dividend declared for 2005 under this progressive policy brings totaldividends for the year to 80 US cents per share. This means that the 2006 interim dividend payable in September can be expectedto be 40 US cents per share. Strategy Rio Tinto has maintained a consistent strategy over many years - to invest inlarge, long life, low cost orebodies and to develop and deliver them in a waywhich reflects best operational practice. We believe this will, over time,produce value growth for shareholders in varying market conditions, which maynot always be as supportive as those we enjoy today. Our experience also suggests that a disciplined focus on large orebodies willresult in additional development options emerging as geological understandingand technology advances. We continue to maintain a rigorous approach to investment appraisal with valuecreation for you, our shareholders, as the leading criterion. At a time whenprices for most commodities are at record levels we believe it is vital to focuson investing in projects which are economically robust. As I noted earlier, our capital expenditure continues to grow and we have anexciting set of development opportunities. While much of this programme isfocused on our heartland areas of Australia and North America, we recognise thata significant part of our future growth will lie in new areas for us. The recent decision to proceed with a titanium sands development in Madagascarand the exploration joint venture agreed with Norilsk Nickel in Russia exemplifythis. Alongside our investment programme we are doing all we can to leverage thebenefits of our global reach and scale through programmes designed to promoteglobal best practice in our operations and reducing costs by improving theeffectiveness of our primary business processes. Sustainable development Rio Tinto also seeks to differentiate itself by a strong focus on the importantsocial and environmental aspects of our global business. We need to be able to deal with complex stakeholder relationships and positionourselves as a preferred mining partner. This means we have to show that ourenvironmental performance, business transparency, community relations andemployee conditions match our traditional technical skills. With social and community experts working alongside our mining professionals, wecontribute to the economic and social development of our host communities whileminimising the effect of our activities on the environment. It is very encouraging to see these values in action. I recently visited ourmining project in Madagascar which is in the early stages of construction. At aninauguration ceremony the President of Madagascar spoke very positively aboutthe economic potential of the project and expressed his appreciation of the roleRio Tinto is playing in developing it. I also saw the care being taken by our scientists and anthropologists to addresscomplex environmental and social challenges that are integral to a majorresource development in one of the world's poorest countries. Personally I have no doubt that a proactive approach to sustainable developmentwill be of long term benefit to the Group and add value to the business in allphases of our activity. Details of our 2005 sustainable development performance and financial results,as well as more details of our projects, are set out in our year endpublications, the Annual report and financial statements, the Annual review andthe Sustainable development review. You should have all received copies of the last two and additional copies areavailable outside after the meeting for anyone who would like them. China's major impact These remarks would not be complete without noting the major impact of China'seconomic growth on our markets. Our view is that China will continue to enjoystrong long term economic growth - probably with some occasional short termvariations. The 11th five year plan, which was recently adopted, places considerableemphasis on balanced and sustainable growth and a gradual transition frominvestment to consumption as the key driver of the economy. We believe this willbe supportive of metals and minerals markets over the longer term. We continue to enjoy strong relationships with our Chinese customers which havebeen built up over many years. It is also encouraging to see a more positiveeconomic environment in Japan, which remains a major market for Rio Tintoproducts. Outlook Looking at the wider global economy, several potential threats to economicgrowth remain, including higher energy prices, structural imbalances in tradeflows, concerns over the future of the multi-lateral trading system, and thepotential for currency fluctuations. However, we believe economic growth will continue the positive trend of 2005,even if rates of growth slow somewhat. This, in turn, should result in acontinuation of strong markets for our products and prices above the long termtrend. We recognise that the current strong markets will not continue indefinitely. Atsome point the supply position will become more balanced and we will see adownturn in the cycle. Our approach will be to continue to invest in value creating production growthto provide long term supply assurance to our customers, and to maintain ourmarket position. Our existing portfolio has the potential to generate continuing growth in futureand we remain alert to potential opportunities from mergers, acquisitions andalliances. I believe that Rio Tinto is in very good shape and competitively well positionedto remain one of the world's leading mining companies. In conclusion, I would like to recognise Rio Tinto's employees and thecontribution they make. Their continuing efforts, and commitment to our corevalues, will ensure that we maintain a strong and competitive company. The board is very appreciative of the important part our employees played in2005 in all the countries in which we operate. Mining is a demanding occupationthat calls for great dedication. Let me now ask Leigh to comment on our performance in 2005 and, in more detail,on the future direction of the Group. Leigh, over to you. Remarks by the chief executive, Leigh Clifford Thanks Paul, and good morning ladies and gentlemen. Product group results As the chairman pointed out, 2005 was an excellent year. The mining industry isexperiencing strong prices across most of our products. We were able to capitalise on the upswing with a strong operating performancethat maximised production. There was a significant improvement in our safety record for the sixth year in arow. We approved major projects and concluded a number of well executed transactions.At the same time, we concentrated on operational and project delivery, andachieved record output in many areas. All product groups except Industrial Minerals, which is in a reorganisation andrenewal phase, increased their underlying earnings. The Copper group was our best performer with underlying earnings of more thanUS$2 billion. This was due to higher copper and gold prices and a significantincrease in molybdenum production to take advantage of a price increase of morethan 100 per cent. Iron ore underlying earnings were more than 200 per cent higher at US$1.7billion in a year that also saw fast track development of simultaneous expansionprojects across the Group's mines, rail and ports in Western Australia. This year a succession of cyclones in Western Australia has disrupted productionat our iron ore operations, leading to some lost tonnage in the first quarterand some effect early in the second quarter as well. In 2005, results from the Energy group benefited from a significant increase inthe price received for both thermal and coking coal, leading to a 70 per centincrease in underlying earnings to US$733 million. Industrial Minerals' contribution was US$197 million, 23 per cent lower than in2004, due to significant one-off costs and restructuring provisions in relationto the formation of Rio Tinto Minerals. In the Aluminium group, a ten per cent increase in prices lifted earnings byUS$106 million to US$392 million and volumes increased with the first fullyear's production from the Comalco Alumina Refinery. Finally, in Diamonds, a strong market for gemstones and a solid operatingperformance from our three mines increased underlying earnings by nearly 50 percent to US$281 million. Strategy implementation The mining industry is riding high at the moment, but we realise that thesefavourable conditions are no basis for complacency. Although we see durability of economic growth in China and elsewhere, thereality is that we are in a cyclical business - even if successive cycles havedifferent characteristics. We may be seeing stronger demand for some time, and some constraints in the formof input shortages, yet eventually there will be a supply side response. Rio Tinto's long term strategy for portfolio development, investment, andoperational excellence is designed to create shareholder value whatever theprevailing business conditions. The key elements of our strategy remain intact, but we are seeing some changesin emphasis and application. In the current competitive environment where we are stretched to meet strongdemand, some cost increases are inevitable. Other costs are, in fact, desirableand make good business sense, such as increased exploration and projectevaluation spending. This is a "bad" cost, "good" cost story, and "good" costswill result in future value. We give particular attention to managing "bad" costs with global procurement,shipping and recruitment strategies, and tight operational control. Adjusted for inflation, in 2005 our costs increased by five per cent per unit ofproduction, a performance that compares favourably with our peer groupcompanies. Improving performance together Rio Tinto has a long track record of creating value through businessimprovement. This remains a priority notwithstanding the buoyant marketconditions. We are currently in an exciting new phase of improvement. This is a dedicatedGroup wide programme we call Improving performance together. We are building onthe success of our decentralised business model with strong local managementaccountability. By making the most of our global scale and reach, we now want to ensure wemaximise the skills, experience and energy of our employees across the Group. This means adjusting our organisational structure to ensure greatercollaboration between businesses and replicating best practice across the Group.The use of improved information technology and common infrastructure is key tothis approach. We are still in the early stages of this journey but we are confident it willdeliver lasting value through a combination of greater capital efficiency,higher volumes, improved revenues and enhanced productivity. This goes to the core of Rio Tinto's business approach, which is about sustainedfirst class operational delivery and replicating our best practice andperformance throughout the Group. The effect of China As the chairman indicated, we expect demand from China to continue to supportmetal prices above the long term trend for some time yet. Depending on the commodity, China now accounts for between 20 and 30 per cent oftotal global demand. Furthermore, 15 per cent of Rio Tinto's total sales revenuein 2005, over three billion dollars, was derived from China. It is worth noting the increasing gap between demand and supply of key mineralresources in China. While this may be offset to some degree by discovery of newmines in China, geological prospectivity is a key factor and identifying newindigenous resources is a challenge. To illustrate, China consumes 33 per cent of all steel, but produces only 17 percent of the world's iron ore. Likewise, China consumes 22 per cent of copper,but its mine production is only five per cent of world output. For aluminium,they consume 22 per cent of aluminium metal but produce only 12 per cent of theworld's alumina. Major project developments The Group has announced plans to spend in excess of three billion dollars onbrownfield and greenfield projects in each of 2006 and 2007. In iron ore alone, we have embarked on our largest development project in RioTinto's existence with nearly US$3 billion committed to mine, rail and portexpansion in Western Australia to meet strong demand principally from China. Also, following our agreement with Hancock Prospecting in the middle of 2005, weexpect to proceed with the 22 million tonne Hope Downs project, once we receiveall necessary approvals from the Western Australian Government. Towards the end of 2005, we announced the extension of two of the Group'slargest and most mature mines. Firstly, in Australia, the Argyle Diamonds underground block caving project isgoing ahead at a cost of US$760 million to prolong its 20 year life by at leastanother 11 years. And in Namibia, US$82 million will be spent at Rossing Uranium to add anotherten years to an already 30 year mine life. These projects underline the optionality conferred by long life orebodies. In addition to these expansions, we approved development of the Cortez Hillsunderground gold project in Nevada with our joint venture partner Barrick Gold,and construction of a US$775 million mineral sands project in Madagascar. We can potentially add to this a new generation of advanced prospects in thepipeline. • We have started evaluation of the La Granja copper project in Peru; • The Simandou iron ore project in Guinea is currently in the pre-feasibility stage; • The PRC potash project in Argentina recently entered the feasibility study stage, and • Work continues on the Resolution copper project in Arizona. Exploration We have an encouraging array of exploration projects and once again haveincreased our exploration spending. In 2005, we spent US$110 million onexploring new areas, US$83 million on evaluation and US$57 million onexploration associated with operating mines. This year we expect spending toincrease further. In January we signed a ground breaking exploration joint venture with NorilskNickel of Russia. The focus of the joint venture will be a very large region offar eastern Russia. Whilst not excluding other minerals, the focus of our efforts in the jointventure will be on base metals and gold. Summing up Our business is in great financial shape, generating record cash flows, and alsoinvesting at record levels. Through strong operational performance and focus on project delivery, weproduced record volumes in many of our product groups At the same time we are managing the cost pressures that the global industry iscurrently facing. We believe that Rio Tinto, with its combination of technical capability anddepth, its focus on operational performance and business improvement, itscommitment to responsible mining practices, and its strong balance sheet, iswell positioned for the future. End For further information, please contact:LONDON AUSTRALIA Media Relations Media Relations Hugh Leggatt Ian Head Office: +44 (0) 20 7753 2273 Office: +61 (0) 3 9283 3620 Mobile: +44 (0) 7764 369 977 Mobile: +61 (0) 408 360 101Investor Relations Investor Relations Nigel Jones Dave Skinner Office: +44 (0) 20 7753 2401 Office: +61 (0) 3 9283 3628 Mobile: +44 (0) 7917 227 365 Mobile: +61 (0) 408 335 309 David Ovington Susie Creswell Office: +44 (0) 20 7753 2326 Office: +61 (0) 3 9283 3639 Mobile: +44 (0) 7920 010 978 Mobile: +61 (0) 418 933 792 Website: www.riotinto.com This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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