16th Jan 2008 07:01
Rio Tinto PLC16 January 2008 Date: 16 January 2008 Ref: PR597g Modelling Rio Tinto Alcan Following Rio Tinto's successful acquisition of Alcan Inc. ("Alcan") in thefourth quarter of 2007, Rio Tinto will report its 2007 full year financialresults inclusive of Alcan with effect from 24 October 2007. As an interim step, Alcan's contribution to Rio Tinto's 2007 full year financialresults will be reported as a separate line in the financial information bybusiness unit. Rio Tinto's other aluminium businesses will be reportedseparately and in a format that is consistent with previous financial resultsannouncements. For 2008 and beyond, Rio Tinto intends to report Rio Tinto Alcan as threeseparate business units - Bauxite & Alumina, Primary Metal and EngineeredProducts. The Packaging business unit will be classified for accounting purposesas an asset held for sale. As previously announced on 26 November 2007, theGroup is exploring options for the divestment of the Engineered Productsbusiness unit taking into account broad stakeholder interests. Salient points • Annual post tax synergies of $940 million are expected from the end of 2009*. • Estimated $372 million pre-tax interest cost in respect of the $40 billion Alcan acquisition facility for the period to 31 December 2007. • Rio Tinto is continuing with the sale process for the Packaging business and is exploring options for the divestment of Engineered Products as part of the overall $15 billion asset divestment target. $10 billion of this total is targeted for 2008. • Packaging will be shown as an asset held for sale in the 2007 accounts. • The approximate long-term effective tax rate on underlying earnings for Rio Tinto Alcan, before one-off items and excluding the impact of foreign exchange rate movements, is expected to be 31%. This release provides some clarification on key issues relating to the modellingof Rio Tinto Alcan assets. The financial information contained in this release is unaudited. It should be noted that the provisional values for the purchase priceadjustments incorporated in the 2007 financial statements will be subject torevision within 12 months of the date of acquisition as permitted by therelevant accounting standard, IFRS 3, "Business Combinations and Goodwill". * Further analysis of the $940 million synergies was provided at the 26 November2007 Investor Seminar, available on the Rio Tinto website. All dollars are US dollars unless otherwise stated. Rio Tinto Alcan business units Rio Tinto Alcan is currently organised into four business units: 1. Bauxite & Alumina Encompassing Rio Tinto Alcan's bauxite mining and alumina refining operations,the Bauxite & Alumina business unit operates five bauxite mines and six smeltergrade alumina refineries. The business also produces specialty alumina from anumber of facilities. This is used in a variety of industrial and consumerproduct applications. Reserves and resources data for Alcan bauxite mines willbe published in the Rio Tinto Annual Report on 17 March 2008. Bauxite mines Asset Location Rio Tinto Alcan Rio Tinto Alcan share interest % of capacity (m tonnes)Weipa Australia 100.0 18.2Gove Australia 100.0 6.9Porto Trombetas Brazil 12.0 2.1Sangaredi Guinea 22.9 6.2Awaso Ghana 80.0 1.0Total 34.4 Smelter grade alumina refineries Asset Location Rio Tinto Alcan Rio Tinto Alcan share interest % of capacity (m tonnes)Yarwun Australia 100.0 1.4Gove Australia 100.0 2.0*QAL Australia 80.0 3.2Sao Luis (Alumar) Brazil 10.0 0.15Jonquiere Canada 100.0 1.3Gardanne France 100.0 0.2Total 8.3 \* The Gove alumina refinery is undergoing a 1.8mtpa expansion, with capacityexpected to reach 3.8mtpa by the end of 2008. Key business attributes Pricing and freight In general it may be assumed that Rio Tinto Alcan smelter grade alumina ispriced based on a percentage of the three month LME price for aluminium, with aone to three month lag. As a reference point, the benchmark Australian exportprice has typically averaged between 12 per cent and 13 per cent of the 3-monthLME aluminium price over the long term. Rio Tinto Alcan's smelter-grade aluminais typically sold on a Free-On-Board (FOB) basis. Operating costs As a broad guide (based on CRU 2006 data) the industry average key operatingcost components for an alumina refinery are: • Bauxite and related costs - 29 per cent; • Energy - 32 per cent; • Caustic soda - 13 per cent; • Labour - 10 per cent; and • Other - 16 per cent. Production and shipping In general it may be assumed that there is relatively little timing differencebetween production and shipping. Over the longer term these timing differenceseven out hence from a value perspective there is no impact. Revenues and shipments In order to obtain a more complete picture of the Bauxite & Alumina businessunit, the substantial inter-segment sales of smelter grade alumina made to thePrimary Metal business unit should be factored into any analysis. The Bauxite & Alumina business unit maintains a commercial sub-unit for thepurpose of maximising logistical efficiencies with respect to Rio Tinto Alcan'ssmelter system and, as a result, published revenues (intersegment and thirdparty) may not accurately reflect underlying production or operatingperformance. Analysts should ensure that total alumina shipments and revenuesare used if attempting to infer revenue per tonne. Total smelter grade andspecialty alumina shipments and revenues for 2006, 2005 and 2004 may be found atpage 61 of Alcan's 2006 Form 10-K filing. It should be noted that totalshipments will be higher than production due to the activities of the commercialsub-unit. Other businesses In addition to the sale of smelter grade alumina, the Bauxite & Alumina businessunit also sells bauxite, speciality alumina, technology and engineeringservices. While these are important businesses, they are far smaller in scalethan the smelter grade alumina business which comprises the vast majority ofBauxite & Alumina's activity. Key projects Project Location Rio Tinto Commissioning Project capacity Capex Alcan interest % timeframe (Rio Tinto Alcan (Rio Tinto Alcan share) share)Gove III Australia 100 2007/08 1.8mtpa $2.3bnAlumar expansion Brazil 10 2009 0.2mtpa $0.2bnYarwun expansion Australia 100 2010/11 2.0mtpa $1.8bnMa'aden Saudi Arabia 49 2012 0.8mtpa Pre-feasibilityGuinea Guinea 50 2013 0.8mtpa Pre-feasibilityGhana Ghana 51 2014 0.75mtpa Conceptual stageMadagascar Madagascar 51 2014 0.8mtpa Conceptual stage 2. Primary Metal Rio Tinto Alcan's Primary Metal business unit operates twenty five aluminiumsmelters, thirteen power facilities and a number of complementary businesses,including the manufacture and sale of anodes and cathodes, as well as smeltingtechnology and equipment sales, and engineering services. Aluminium smelters Asset Location Rio Tinto Alcan Rio Tinto Alcan interest % share of capacity (kt)Bell Bay Australia 100.0 178Boyne Australia 59.4 330Tomago Australia 51.6 268Alucam (Edea) Cameroon 46.7 47Alma Canada 100.0 415Alouette Canada 40.0 229Arvida Canada 100.0 166Beauharnois Canada 100.0 52Becancour Canada 25.1 101Kitimat Canada 100.0 277Grande-Baie Canada 100.0 207Laterriere Canada 100.0 228Shawinigan Canada 100.0 99Ningxia(Qingtongxia) China 50.0 76Dunkerque France 100.0 259Lannemezan* France 100.0 50St Jean de-Maurienne France 100.0 135ISAL (Reykjavik) Iceland 100.0 179Tiwai Point New Zealand 79.4 281SORAL (Husnes) Norway 50.0 82Sohar** Oman 20.0 -Anglesey UK 51.0 74Lochaber UK 100.0 43Lynemouth UK 100.0 178Sebree United States 100.0 196Total 4,150 *Sohar to be commissioned in 2008. **Lannemezan is in the process of being closed. Power facilities Asset Location Rio Tinto Alcan Rio Tinto Alcan Type interest % share of capacity (MW)Gladstone Australia 42.0 706 CoalQuebec (6 stations) Canada 100.0 2,687 HydroKemano Canada 100.0 896 HydroDaba China 21.8 261 CoalVigelands Norway 100.0 26 HydroLynemouth UK 100.0 420 CoalHighlands (2 stations) UK 100.0 80 HydroTotal 5,076 Key business attributes Pricing and freight In general, it may be assumed that Rio Tinto Alcan aluminium is priced based onthe three month forward LME price for aluminium, with a one month lag. From 1January 2008 Rio Tinto Alcan will be adopting the Rio Tinto policy on hedging.All fixed forward price sales realised from 1 January 2008 will be exposed tofloating LME market pricing. There is no current intention to swap the fixedprice position inherited on acquisition back to floating rate. Pricing usually includes a product and market premium for value added product.Observation of past period ingot realisations compared to relevant LME pricingwill derive a net premium which also includes the effect of past hedgingactivities. As an example, the 2006 ex-Alcan net premium was around 2.8 percent above three month forward LME with a one month lag. Rio Tinto Alcan's aluminium is generally sold on an FOB basis to Europeancustomers and on a delivered basis to North American and Asian customers. Operating costs As a broad guide (based on CRU 2006 data) the key operating cost components ofan industry average aluminium smelter are: • Alumina and related costs - 45 per cent; • Electricity - 26 per cent; • Consumables (mainly coke and pitch) - 10 per cent; • Labour - 8 per cent; and • Other - 11 per cent. Due to Rio Tinto Alcan's high proportion of self-owned electricity generationcapacity, exposure to cost escalation in respect of electricity is relativelymodest. In 2006, approximately 10 per cent of the cost of energy consumed by RioTinto Alcan's smelters was linked to the LME price. Power The electricity produced by Rio Tinto Alcan is for smelting, however excesspower, when available, may be sold to third parties. Rio Tinto Alcan's abilityto do this in respect of its hydropower facilities is unpredictable and dependson precipitation and regional water levels. ProductionRio Tinto Alcan's aluminium smelters operated at close to capacity in 2007, withthe exception of the Edea smelter in Cameroon which operated at levels in theregion of 85 per cent due to power constraints. Revenues and shipments Unlike the Bauxite & Alumina business unit, the Primary Metal business unit doesnot maintain a commercial sub-unit. Other businesses Aside from primary aluminium, the business unit sells smelting material (cathodeblocks and anodes), smelting technology and equipment and engineering services,and electricity. Total revenue in 2006 from these other businesses was $881million. Key projects Project Location Rio Tinto Commissioning Project capacity Est. capex Alcan interest % timeframe (Rio Tinto Alcan (Rio Tinto Alcan share) share)Sohar Oman 20 2008 74ktpa $340mCoega South Africa 80 2010 588ktpa $2.6bnQuebec Canada 100 2010/12 450ktpa $2.1bnKitimat Canada 100 2010/11 395ktpa $1.6bnAbu Dhabi Abu Dhabi 50 2011/12 375ktpa Pre-feasibilityISAL Iceland 100 2011+ 280ktpa $1.4bnMa'aden Saudi Arabia 49 2011/12 360ktpa Pre-feasibilitySarawak Malaysia 60 2011 450ktpa Pre-feasibilityAlucam (Edea) Cameroon 46.7 2012+ 285ktpa Pre-feasibility 3. Engineered Products The Engineered Products business unit is a portfolio of engineered andfabricated aluminium businesses that provide high value added solutions to arange of customers. Sub-business units include aerospace, cable, composites,extruded products, engineered and automotive solutions, specialty sheet and aselling and sourcing business called AIN. Key business attributes Costs Engineered Products' main cost is aluminium, followed by labour. Seasonality The Engineered Products business unit has a significant seasonal component asEuropean businesses close down for summer. Divestment As previously announced, the Group is exploring options for the divestment ofthe Engineered Products business unit taking into account broad stakeholderinterests. 4. Packaging As previously announced, the Packaging business unit of Rio Tinto Alcan is to bedivested and as such, will be treated as an asset held for sale. Accounting for and financing the Alcan acquisition Fair value accounting The Rio Tinto group will include Alcan in its consolidated financial statementsfor 2007 from the close of business on 23 October 2007, which was the date ofacquisition. Rio Tinto has commissioned expert valuation consultants to advise on the fairvalues of Alcan's assets. As required under International Financial ReportingStandards (IFRS), the tangible and intangible assets of the acquired businesswill be uplifted to fair value. The residue of the purchase price that is notallocated to specific assets and liabilities will be attributed to goodwill. Thefair value of net assets excluding goodwill does not necessarily represent netpresent value. For example, the purchase price allocation for tangible fixedassets (including smelters and refineries) is based on the lower of depreciatedreplacement cost and the net present value of the asset. The valuation is a detailed and lengthy process. The provisional valuesincorporated in the 2007 financial statements will be subject to revision within12 months of the date of acquisition as permitted by the relevant accountingstandard, IFRS 3. The uplift in the balance sheet values of tangible and intangible assets isexpected to give rise to a large increase in the depreciation and amortisationcharge against Rio Tinto Alcan's earnings. For the period ended 31 December2007, this additional depreciation and amortisation is expected to be around$100 million (pre-tax). The incremental depreciation and amortisation on thefair value uplift for the year ended 31 December 2008 is estimated to be around$500 million (pre-tax) based on the provisional purchase price allocation. Alcan's Packaging business will be reported in the 2007 financial statements asan 'Asset held for sale'. Therefore no operating profit will be taken up by RioTinto from this segment of the Alcan group. Alcan one-off items in 2007 Excluded from underlying earnings will be the impact of the requirement touplift finished goods and work in progress inventories to fair value at the dateof acquisition based on selling prices. This considerably reduces the profitmargin in the two to three months immediately after the acquisition, when theinventory is sold. Inventories subsequently produced are valued at cost, in thenormal way. Also excluded from underlying earnings will be the non-recurring costs ofintegrating Alcan with the Rio Tinto Group. Format of 2007 reporting Alcan's contribution to the Group's 2007 results will be reported in total butseparately from the Rio Tinto Aluminium business. In 2008, information will bereported for Rio Tinto Alcan incorporating a full year's results of aluminium,alumina and bauxite and Engineered Products production from the newly acquiredAlcan businesses combined with Rio Tinto Aluminium. Debt and interest In support of its acquisition of 100 per cent of Alcan's common shares, RioTinto arranged $40 billion of term loan and revolving credit facilities, fullyunderwritten and subsequently syndicated. The $40 billion term loan andrevolving credit facilities are divided into four tranches with maturitiesranging from 364 days (with an option to extend for an additional year at theborrower's option) out to five years and one business day. The total amount drawn under the facility as at 31 December 2007 was $37.9billion. It is estimated that the total interest cost in respect of the facilityfrom the date of acquisition to 31 December 2007 was $372 million with aweighted average interest rate including margin of 5.3 per cent. Rio Tinto accounting for Rio Tinto Alcan businesses The following table lists the non-wholly owned upstream Rio Tinto Alcanbusinesses that will be consolidated into the Rio Tinto accounts. Note thatAlouette, Boyne, QAL, Tiwai Point and Tomago are "tolling entities". All 100 percent owned operations listed in the preceding tables are fully consolidated. Asset Location Rio Tinto Alcan Product Accounting treatment interest %Porto Trombetas Brazil 12.0 Bauxite Equity accountingSangaredi Guinea 22.9 Bauxite Equity accountingAwaso Ghana 80.0 Bauxite ConsolidationQAL Australia 80.0 Alumina Equity accountingSao Luis (Alumar) Brazil 10.0 Alumina Proportionate consolidationBoyne Australia 59.4 Aluminium Equity accountingTomago Australia 51.6 Aluminium Proportionate consolidationAlucam (Edea) Cameroon 46.7 Aluminium Equity accountingAlouette Canada 40.0 Aluminium Proportionate consolidationBecancour Canada 25.1 Aluminium Equity accountingNingxia China 50.0 Aluminium Equity accounting(Qingtongxia)Tiwai Point New Zealand 79.4 Aluminium Equity accountingSORAL (Husnes) Norway 50.0 Aluminium Equity accountingSohar Oman 20.0 Aluminium Equity accountingAnglesey UK 51.0 Aluminium Equity accounting Further background on the respective accounting treatments can be found in note1(b) to the 2006 financial statements ("Basis of consolidation") on page 103 ofthe 2006 Annual Report. Key Alcan reference documents • 2006 Form 10-K • Supplementary Information - second quarter 2007 These documents are available on the Rio Tinto Alcan website at: http://www.alcan.com/web/publishing.nsf/content/Investors+-+Reports+and+Filings About Rio Tinto Rio Tinto is a leading international mining group headquartered in the UK,combining Rio Tinto plc, a London listed company, and Rio Tinto Limited, whichis listed on the Australian Securities Exchange. Rio Tinto's business is finding, mining, and processing mineral resources. Majorproducts are aluminium, copper, diamonds, energy (coal and uranium), gold,industrial minerals (borax, titanium dioxide, salt, talc) and iron ore.Activities span the world but are strongly represented in Australia and NorthAmerica with significant businesses in South America, Asia, Europe and southernAfrica. Forward-Looking Statements This announcement includes "forward-looking statements" within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. All statements other thanstatements of historical facts included in this announcement, including, withoutlimitation, those regarding Rio Tinto's financial position, business strategy,plans and objectives of management for future operations (including developmentplans and objectives relating to Rio Tinto's products, production forecasts andreserve and resource positions), are forward-looking statements. Suchforward-looking statements involve known and unknown risks, uncertainties andother factors which may cause the actual results, performance or achievements ofRio Tinto, or industry results, to be materially different from any futureresults, performance or achievements expressed or implied by suchforward-looking statements. Such forward-looking statements are based on numerous assumptions regarding RioTinto's present and future business strategies and the environment in which RioTinto will operate in the future. Among the important factors that could causeRio Tinto's actual results, performance or achievements to differ materiallyfrom those in the forward-looking statements include, among others, levels ofactual production during any period, levels of demand and market prices, theability to produce and transport products profitably, the impact of foreigncurrency exchange rates on market prices and operating costs, operationalproblems, political uncertainty and economic conditions in relevant areas of theworld, the actions of competitors, activities by governmental authorities suchas changes in taxation or regulation and such other risk factors identified inRio Tinto's most recent Annual Report on Form 20-F filed with the United StatesSecurities and Exchange Commission (the "SEC") or Form 6-Ks furnished to theSEC. Forward-looking statements should, therefore, be construed in light of suchrisk factors and undue reliance should not be placed on forward-lookingstatements. These forward-looking statements speak only as of the date of thisannouncement. Rio Tinto expressly disclaims any obligation or undertaking(except as required by applicable law, the City Code on Takeovers and Mergers(the "Takeover Code"), the UK Listing Rules, the Disclosure and TransparencyRules of the Financial Services Authority and the Listing Rules of theAustralian Securities Exchange) to release publicly any updates or revisions toany forward-looking statement contained herein to reflect any change in RioTinto's expectations with regard thereto or any change in events, conditions orcircumstances on which any such statement is based. Nothing in this announcement should be interpreted to mean that future earningsper share of Rio Tinto plc or Rio Tinto Limited will necessarily match or exceedits historical published earnings per share. Subject to the requirements of the Takeover Code, none of Rio Tinto, any of itsofficers or any person named in this announcement with their consent or anyperson involved in the preparation of this announcement makes any representationor warranty (either express or implied) or gives any assurance that the impliedvalues, anticipated results, performance or achievements expressed or implied inforward-looking statements contained in this announcement will be achieved. For further information, please contact: Media Relations, Australia Media Relations, LondonAmanda Buckley Christina MillsOffice: +61 (0) 3 9283 3627 Office: +44 (0) 20 8080 1306Mobile: +61 (0) 419 801 349 Mobile: +44 (0) 7825 275 605 Ian Head Nick CobbanOffice: +61 (0) 3 9283 3620 Office: +44 (0) 20 8080 1305Mobile: +61 (0) 408 360 101 Mobile: +44 (0) 7920 041 003 Media Relations, AmericasNancy IvesMobile: +1 619 540 3751 Investor Relations, Australia Investor Relations, LondonDave Skinner Nigel JonesOffice: +61 (0) 3 9283 3628 Office: +44 (0) 20 7781 2049Mobile: +61 (0) 408 335 309 Mobile: +44 (0) 7917 227365 Simon Ellinor David OvingtonOffice: +61 (0) 7 3867 1607 Office: +44 (0) 20 7781 2051Mobile: +61 (0) 439 102 811 Mobile: +44 (0) 7920 010 978 Investor Relations, North AmericaJason CombesOffice: +1 (0) 801 685 4535Mobile: +1 (0) 801 558 2645 Email: [email protected] Website: www.riotinto.comHigh resolution photographs available at: www.newscast.co.uk This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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