3rd Feb 2005 07:00
Rio Tinto PLC03 February 2005 Record cash flows and earnings • Adjusted earnings* of $2,221 million were $839 million, or 61 per cent, above 2003. Total cash flow from operations of $4,449 million was $963 million, or 28 per cent, above 2003. Net earnings of $2,813 million compared with $1,508 million in 2003. • The final dividend brings total dividends for the year to US 77 cents per share, an increase of 20 per cent. • Rio Tinto announces the intention to return up to $1.5 billion of capital over two years through share buy back programmes. • Markets for most of the Group's products were stronger. Earnings benefited from new operations at Diavik (diamonds), Hail Creek (coking coal) and Eastern Range (iron ore) and the expansion at Escondida (copper). First shipments were made from the Comalco Alumina Refinery in November, three months ahead of schedule. • Opportunities were taken to divest non-core businesses generating proceeds of over $1.5 billion. • Major capital projects are progressing well. The major expansion of iron ore capacity in Western Australia is now underpinned with long term contracts. During the year, approval was given for an expansion of the Hail Creek coking coal mine and further developments at Diavik. Full year to 31 December 2004 2003 Change(All dollars are US$ unless otherwise stated) Gross turnover $14,135m $11,755m +20%Cash flow from operations (incl. associate and JV dividends) $4,449m $3,486m +28%Adjusted earnings* $2,221m $1,382m +61%Net earnings * $2,813m $1,508m +87%Adjusted earnings per share - US cents 161.0 100.3 +61%Earnings per share - US cents 204.0 109.5 +86%Dividends per share - US cents 77.0 64.0 +20% *2004 adjusted earnings are stated excluding net exceptional items of $592million comprising net gains on disposals of businesses of $913 million lessasset write downs and a provision for contract obligations of $321 million.2003 adjusted earnings are stated excluding exceptional gains of $126 million ondisposals of businesses. Adjusted earnings and adjusted earnings per shareexclude exceptional items of such magnitude that their exclusion is necessary inorder that adjusted earnings fulfil their purpose of reflecting the underlyingperformance of the business. Chairman's comments Rio Tinto's chairman Paul Skinner said, "Our record earnings and cash flowsreflect not only the strength of our markets but also the strength of RioTinto's asset base. The quality of our portfolio has been enhanced by theinvestments that we have made over recent years. Coupled with the Board'spositive view of future growth prospects, this has given us the confidence toincrease the annual dividend by 20 per cent setting a new higher baseline forthe continuation of our progressive dividend policy. "Our operating cash flow, combined with the proceeds from divestments, hassignificantly strengthened our balance sheet. We are committed to efficientcapital management and, while our top priority remains value creation throughinvestment in profitable projects, we are now in a position where we cancomfortably fund our current investment programme and also consider returningcapital to shareholders. Depending on market conditions, we are intending toreturn up to $1.5 billion of capital to shareholders over the next 2 yearsthrough both on-market and off-market share buy-back programmes. This stillleaves us with the flexibility to take advantage of opportunities as and whenthey arise. "The recovery in the global economy, that gathered momentum in 2003, continuedin 2004. Strong demand in the US and Asia, particularly China, was reflected inhigher prices for most of our products. While the rate of growth in the majorOECD economies now appears to be slowing, current market conditions for themajority of our products suggest that we will continue to see strong demand in2005. "The Board remains committed to Rio Tinto's strategy of investing in long life,low cost, mining assets and to a value driven, disciplined approach toinvestment decisions. This will ensure that our portfolio will continue todeliver for shareholders in periods when markets do not show today's strength." Chief Executive's comments Leigh Clifford, Rio Tinto's chief executive said, "The operational challenges wefaced early in the year, in particular the effects of tropical cyclone Monty onour iron ore operations and the 2003 material slippage at Grasberg, are now wellbehind us and our operations performed well in the second half of the year. "We have enhanced our portfolio both through divestments and investments.Stronger markets have given us opportunities to divest non-core businesses,generating proceeds of over $1.5 billion. Our new assets, including the Diavikdiamond mine and the Hail Creek coking coal mine, have performed ahead ofexpectations and we have announced investments that will further enhance theseoperations. The commissioning of the Comalco Alumina Refinery is going well andfirst shipments took place in November, three months ahead of schedule. Whilethe primary focus is still to complete the commissioning of the first phasesuccessfully, studies on expansion options at the refinery are also proceeding.The major expansion of the Western Australian iron ore operations is wellunderway and is now largely underwritten by long term contracts and will enableus to capitalise on the opportunities presented by a strong market. Weanticipate progressive commissioning during 2005. "Strong markets give us opportunities but they also bring challenges. Ourglobal procurement programme does not insulate us completely from the costpressures that our industry experiences when markets are strong. However,performance improvement remains a key focus within Rio Tinto and we are puttinggreater emphasis on our global scale and specialist skills to ensure that weachieve industry leading performance. "Our long term commitment to exploration, which is a distinguishing feature ofRio Tinto, continues to generate high quality opportunities. As a result of ourexploration programme, during 2004 we had five significant projects - in copper,iron ore, nickel, gold and potash - move into the next stage of projectevaluation." Webcast A webcast of the results presentation starting at 10-00 GMT (21-00 AEDT) on 3February 2005 can be accessed through the Rio Tinto website (www.riotinto.com). Commentary on the Group financial results Adjusted earnings of $2,221 million were $839 million above 2003. The principalfactors explaining the movement are shown in the table below. Net earnings of$2,813 million were $1,305 million above 2003. Adjusted Net earnings earnings US$m US$m 2003 1,382 1,508 Prices 1,638 Exchange rates (247) Inflation (118) Grasberg (203) slippage Volumes 270 Energy costs (81) Other costs (173) Other (247) 839 839 Exceptional 466 items 2004 2,221 2,813 Adjusted earnings exclude the exceptional items which are described below. Prices and exchange rates Stronger markets resulted in higher prices for most of the Group's products.Compared with 2003 average copper prices of 130c/lb were over 60 per centhigher, average aluminium prices of 78c/lb were 20 per cent higher and averagegold prices of $409/oz were 13 per cent higher. Average molybdenum prices wereover two and a half times those of 2003. The benchmark iron ore price increased 18.6 per cent. This resulted inincreased seaborne iron ore prices, mainly effective from 1 April 2004. Theseaborne thermal coal market also strengthened during the year with the benefitof higher prices flowing through progressively in the second half of the year. The US dollar weakened further against those currencies in which the Groupincurs the majority of its costs. Against the Australian dollar it averaged 12per cent weaker. The effect of this and other currency movements on operatingcosts reduced earnings by $326 million. The effect on earnings of therevaluation of monetary items to period end exchange rates was also adverse,although relative to a more substantial charge in 2003 it had a positive effectof $61 million. Gains on currency hedges initiated by North, Ashton and Comalcobefore 2000 increased earnings by $18 million compared with 2003. Grasberg slippage Production of copper and gold from the Freeport managed Grasberg mine wassignificantly below 2003 as a consequence of the material slippage in the fourthquarter of 2003. The effect of this on volumes and costs, net of insurance, wasto reduce 2004 earnings by $203 million. Production had returned to normal bythe fourth quarter of 2004. Volumes Excluding the effects of the Grasberg slippage, higher volumes, mainly from newprojects at Diavik (diamonds), Escondida (copper), Hail Creek (coking coal) andWest Angelas (iron ore) increased earnings by $270 million. As a result oftropical cyclone Monty the volume growth from the Western Australian iron oreoperations was more modest than would otherwise have been the case. Costs Excluding the effect of inflation, higher energy costs and the Grasbergslippage, the impact on earnings of increased costs was $173 million. Strongmarkets create cyclical cost pressures within the industry. Higher prices forskilled labour, steel, rubber, diesel, explosives and freight have all had aneffect on operating costs. At Hamersley, costs were also higher due to increased material movement,including pre-stripping, and higher maintenance activity. Tropical cycloneMonty had a prolonged effect on the costs as well as volumes at Hamersley andRobe. Adverse cost variances at Argyle were attributable largely to lowerproduction and at Palabora to lower volumes and increased depreciation followingthe commissioning of the underground project. Tax Excluding exceptional items, the effective tax rate of 29 per cent was in linewith that of 2003. Other The absence of earnings from divested businesses reduced earnings by $122million. The East 1 Pushback project at Kennecott Utah Copper was approved in February2005. This project is a higher value, lower capital intensive, but shorter lifeoption than the previous mine plan which was predicated on development of anunderground mine from 2013. Options to extend operations beyond 2017, includingfurther open pit and underground developments, will be fully studied over thecoming years but the results for 2004 include a one-off non-cash charge of $36million due to the increase in the present value of environmental remediationprovisions. The 2003 earnings of Rio Tinto Brasil included a benefit of $32 millionresulting from the part reversal of an impairment provision. The remainingvariance of $57 million includes a number of provision movements, none of whichis individually material. Exceptional items The 2004 exceptional items of $592 million include a net profit on disposals ofbusinesses ($913 million), a charge of $160 million relating to Colowyo and aprovision of $161 million for the write down of the carrying value of Palabora'scopper assets. The net profit on disposals of businesses is stated after taxpayable of $11 million. The write down of Palabora's copper assets is statedafter tax of $108 million and minority interests of $129 million. A detailed review of the mine plan and projected cash flows of the Colowyo coalbusiness was completed in June 2004. This indicated that future operating anddevelopment costs are substantially higher than previously estimated. As aconsequence of this, an exceptional charge was recorded in the first half of2004 for the write down of Colowyo's fixed assets and recognition of relatedcontract obligations. The 2003 exceptional items of $126 million relate to gains on the disposal ofKaltim Prima Coal and Peak/Alumbrera. No tax was payable on these gains. Cash flow A record total cash flow from operations, including dividends from associatesand joint ventures, of $4,449 million, was 28 per cent above 2003. Net workingcapital levels improved with days inventories and receivables falling despite asignificant increase in the level of activity. Investment in the business continued. Capital expenditure and financialinvestment of $2,085 million was $412 million above 2003. Purchases ofproperty, plant and equipment included the major expansion of iron ore capacityin Western Australia, the construction of the Comalco Alumina Refinery, and thepurchase of West Antelope coal reserves by Kennecott Energy. Disposals of interests in businesses generated proceeds of over $1.5 billion.The largest components of this were the sale of shares in Freeport-McMoRanCopper & Gold Inc and the sale of Rio Tinto's interest in the Morro do Ouro goldmine in Brazil. Second half adjusted earnings Second half adjusted earnings were $235 million above the first half of 2004principally as a result of higher selling prices. Volumes were also higher dueto the ramping up of production at Diavik, Hail Creek, the recovery of theWestern Australian iron ore operations from the first half effects of tropicalcyclone Monty and the return of Grasberg to normal production. The increase inthe charge for exploration and evaluation was biased towards the second half ofthe year. Balance sheet Shareholders' funds increased by $2,547 million. Profits exceeded dividendsdeclared by $1,751 million and there was a write back of goodwill relating todisposals of $228 million. Exchange rate movements increased shareholders fundsby $542 million. As a result of the strong cash flow, both from operations and from disposals,net debt fell from $5,646 million to $3,751 million. The ratio of net debt tototal capital fell to 21.7 per cent from 33.8 per cent at 31 December 2003.Interest was covered 20 times (2003 11 times). Dividends Dividends are determined in US dollars. Rio Tinto plc dividends are declaredand paid in pounds sterling and Rio Tinto Limited dividends are declared andpaid in Australian dollars, converted at exchange rates applicable on Tuesday 1February 2005. The interim and final dividends are summarised below. 2004 2003Rio Tinto GroupInterim (US cents) 32.00 30.00Final (US cents) 45.00 34.00Total dividend (US cents) 77.00 64.00 Rio Tinto plcInterim (pence) 17.54 18.45Final (pence) 23.94 18.68Total dividends (pence) 41.48 37.13 Rio Tinto LimitedInterim (Australian cents) 45.53 45.02Final (Australian cents) 58.29 44.68Total dividends (Australian cents) 103.82 89.70 Rio Tinto Limited shareholders will be paid dividends which will be fullyfranked. The directors consider that there are sufficient franking creditsavailable for paying fully franked dividends for at least the next year. The respective dividends will be paid on Friday 8 April 2005 to Rio Tinto plcshareholders on the register at the close of business on Friday 25 February 2005and to Rio Tinto Limited shareholders on the register at the close of businesson Tuesday 1 March 2005. The ex- dividend date for both Rio Tinto plc and RioTinto Limited will be Wednesday 23 February 2005. Dividends will be paid to RioTinto ADR holders on Monday 11 April 2005. As usual, Rio Tinto will operate its Dividend Reinvestment Plans, details ofwhich can be obtained from the Company Secretaries' offices and from the RioTinto website (www.riotinto.com). The last date for receipt of the electionnotice for the Dividend Reinvestment Plans is Wednesday 16 March 2005. Capital management Rio Tinto is committed to maintaining an efficient balance sheet structure whileretaining sufficient flexibility to fulfil its overall strategic priority ofgrowing both organically and through acquisition where value enhancingopportunities arise. A series of acquisitions in 2000 and 2001, coupled with investment in a numberof greenfield and brownfield opportunities, have increased the capital base ofthe Group and resultant free cash flow. This has put the Group in the positionof being able to rebase the level of the ordinary dividend from which it willcontinue its progressive dividend policy. The current strength of the Group's cash flow means that in addition tocomfortably funding the current planned investments, capital can be returned toshareholders whilst maintaining the flexibility to take advantage of acquisitionand organic opportunities as and when they arise. Subject to market conditions, Rio Tinto's intention therefore is to return up to$1.5 billion of capital to shareholders during the course of 2005 and 2006. At the 2005 Annual General Meetings, Rio Tinto will once again be seekingshareholder approvals to renew its existing authority to make on-marketpurchases of shares in Rio Tinto plc. While it is Rio Tinto's intention toexercise this authority, the precise manner and timing of such purchases will bedetermined by, amongst other things, prevailing market conditions. In addition, Rio Tinto will also be seeking shareholder approval to make anoff-market purchase of shares of Rio Tinto Limited through a tender processunder which part of the buy-back price will be treated as a fully frankeddividend for Australian tax purposes. The off-market buy-back tender structureenables Australian companies to buy back shares at a material discount to theprevailing share price. This type of off-market buy-back is likely to beattractive to a range of shareholders because of the treatment of the buy-backproceeds under the Australian tax regime. However, the buy-back tender willbenefit all shareholders of the Group as the buy-back price would be at adiscount to Rio Tinto Limited's market price. Broadly, Rio Tinto Limited is targeting to repurchase the equivalent of aroundUS$300 - 400 million (A$400-500 million) of capital under the buy-back tenderbut the ultimate size of the buy-back will be dependent on shareholder demandand market conditions at the time. The buy-back tender will be conditional onRio Tinto obtaining shareholder and other regulatory approvals. Subject toreceipt of these approvals, it is intended to implement the buy-back as early aspossible, subject to prevailing market conditions. As in previous years, Rio Tinto will also be seeking shareholder approval at the2005 AGMs to renew its existing authorities to buy back Rio Tinto Limited shareson-market (after taking into account those bought back under the proposedoff-market tender offer) as well as those held (indirectly) by Rio Tinto plc. Rio Tinto financial information by Business Unit (1) US$ millions Rio Tinto Gross turnover (a) EBITDA (b) Net earnings (c) interest % 2004 2003 2004 2003 2004 2003 Iron OreHamersley (inc. HIsmelt(R)) 100.0 1,625 1,329 800 711 447 424Robe River 53.0 552 374 325 213 119 68Iron Ore Company of Canada 58.7 428 442 55 47 3 7 2,605 2,145 1,180 971 569 499 EnergyKennecott Energy 100.0 1,107 955 277 236 119 88Rio Tinto Coal Australia 100.0 769 433 336 157 180 70Kaltim Prima Coal (d) - 142 - 74 - 31Coal & Allied 75.7 769 597 204 52 51 (24)Rossing 68.6 124 86 8 (33) (4) (19)ERA 68.4 174 131 70 58 19 11 2,943 2,344 895 544 365 157 Industrial Minerals 2,057 1,801 538 465 223 154 Aluminium (e) 2,411 1,936 720 488 334 200 CopperKennecott Utah Copper 100.0 1,113 722 496 230 293 88Escondida 30.0 1,003 502 699 284 416 122Freeport (f) 43 344 7 169 (4) 23Grasberg joint venture (g) 153 397 102 225 38 104Palabora 49.2 305 206 (20) 20 (21) 1Kennecott Minerals 100.0 263 239 129 122 79 60Rio Tinto Brasil (h) 108 139 31 48 1 48Other (d) 167 176 91 51 54 (6) 3,155 2,725 1,535 1,149 856 440 DiamondsArgyle 100.0 322 434 102 198 23 72Diavik 60.0 420 122 316 106 145 41Murowa 78.0 2 - 1 - 1 - 744 556 419 304 169 113 Other operations 145 184 83 77 28 21 Other items 75 64 (221) (233) (114) (45)Exploration and evaluation (187) (127) (152) (98)Net interest (57) (59)Adjusted EBITDA & earnings 4,962 3,638 2,221 1,382Exceptional items 771 126 592 126Total 14,135 11,755 5,733 3,764 2,813 1,508 Reconciliation to the profit and loss accountProfit on ordinary activities before interest 3,850 2,392Depreciation and amortisation in subsidiaries 1,204 1,006Asset write downs relating to subsidiaries & JVs 408 -Depreciation and amortisation in JVs and associates 271 366 5,733 3,764 References above are to notes on page 27 Rio Tinto financial information by Business Unit (2) US$ millions Rio Tinto Capital Depreciation & Operating assets interest Expenditure (i) amortisation (j) (k) 31 Dec 31 Dec % 2004 2003 2004 2003 2004 2003 Iron OreHamersley (inc. HIsmelt(R)) 100.0 745 298 161 110 2,211 1,543Robe River 53.0 109 75 93 74 1,910 1,852Iron Ore Company of Canada 58.7 51 37 41 29 530 489 905 410 295 213 4,651 3,884 EnergyKennecott Energy 100.0 169 168 118 105 447 561Rio Tinto Coal Australia 100.0 50 92 73 52 661 649Kaltim Prima Coal (d) - 2 - 16 - -Coal & Allied 75.7 15 34 94 91 717 787Rossing 68.6 2 4 15 7 40 46ERA 68.4 7 5 35 30 179 178 243 305 335 301 2,044 2,221 Industrial Minerals 248 139 176 172 2,170 2,038 Aluminium (e) 449 436 202 169 3,683 3,258 CopperKennecott Utah Copper 100.0 105 83 90 92 1,243 1,277Escondida 30.0 113 45 54 79 624 492Freeport (f) - 33 3 54 - 144Grasberg joint venture (g) 35 60 43 43 428 417Palabora 49.2 30 66 41 17 358 426Kennecott Minerals 100.0 36 9 27 42 166 136Rio Tinto Brasil (h) 18 19 6 (18) 50 138Other (d) 42 63 23 52 190 335 379 378 287 361 3,059 3,365 DiamondsArgyle 100.0 89 22 58 76 666 600Diavik 60.0 49 78 67 34 599 674Murowa 78.0 14 - - - 16 - 152 100 125 110 1,281 1,274 Other operations 10 4 45 37 89 98 Other items 5 17 418 9 (642) (455)Less joint ventures and associates (234) (181) (271) (366) - -Total 2,157 1,608 1,612 1,006 16,335 15,683Less net debt (3,751) (5,646)Net assets 12,584 10,037 References above are to notes on page 27 Review of Operations Comparison of adjusted earnings 2004 adjusted earnings of $2,221 million were $839 million above the adjustedearnings of 2003. The table below shows the difference by product group. Allfinancial amounts in the tables below are US$ millions unless indicatedotherwise. $ m 2003 adjusted earnings 1,382 Iron Ore 70 Energy 208 Industrial Minerals 69 Aluminium 134 Copper 416 Diamonds 56 Other operations 7 Exploration and evaluation (54) Interest 2 Other (69) 2004 adjusted earnings 2,221 Iron Ore 2004 2003 ChangeIron ore production (million tonnes) 106.5 101.5 +5%Turnover 2,605 2,145 +21%Net earnings 569 499 +14%EBITDA 1,180 971 +22%Capital expenditure 905 410 Market Conditions Global demand for iron ore continued to be extremely strong throughout 2004.Iron ore imports into China increased by over 40 per cent but demand was alsostrong in the rest of Asia and North America. Reflecting the strength of the market, 18.6 per cent price increases wereachieved for fiscal year 2004 following the nine per cent price increases agreedin 2003. New long term supply agreements with leading Chinese and Japanese steel millsannounced during the year underpin the current phase of Rio Tinto's expansion ofport, rail and mine capacity that is on schedule for completion at the end of2005. Agreements covering closer co-operation between Robe and Hamersley weresigned in the fourth quarter of 2004 which will benefit both operations. Hamersley Iron Net earnings of $447 million were $23 million above 2003. First half productionwas severely disrupted by tropical cyclone Monty which hit the Pilbara in earlyMarch. Mines and port facilities were closed and the subsequent flooding alsoaffected mining operations and transport infrastructure. Despite thisdisruption, Hamersley achieved record production and shipments for the year.The new Eastern Range mine was opened in April and shipped its first product inthe second quarter and the expanded Yandi mine began producing at a 24 milliontonne rate in the third quarter. An expansion of Yandi to 36 million tonnes wasapproved late in 2003, and construction began in 2004. The project is on trackfor completion in the first half of 2005. Material movement and maintenance activity increased during the period, as thebusiness prepared for a significant increase in production from the end of 2005. Hamersley's net earnings include a net loss of $11 million (2003 $2 million) forHIsmelt(R) due to pre-production marketing and administration costs. As aresult of various contractor labour disputes, the start-up of the plant is nowexpected in the first half of 2005. Robe River Net earnings of $119 million were $51 million above 2003. The West Angelas minereached its design capacity of 20 million tonnes per annum in the first quarter,two years ahead of schedule and, except for the fourth quarter when productionwas affected by the timing of maintenance in advance of increased production in2005, operated at this capacity for the remainder of the year. An expansion to25 million tonnes per annum was approved late in 2003. Construction began in2004 and is on track for completion in mid-2005. First half production from Pannawonica was also affected by flooding associatedwith tropical cyclone Monty. Production levels returned to normal relativelyquickly but product quality was affected for a prolonged period. Iron Ore Company of Canada Net earnings of $3 million were $4 million below 2003. The effects of higheriron ore prices were all but negated by the interruption to production due to athree month industrial dispute over a new labour contract. As a result of thedispute, there was minimal production in the third quarter, but operationsreturned to normal progressively during the fourth quarter. The new collectiveagreement reduces the number of job classifications, introduces individualperformance evaluations for all employees and provides the basis for asignificant improvement in productivity. Energy 2004 2003 ChangeProduction Coal (million tonnes) Hard coking coal 6.8 2.3 +196% Other Australian/Indonesian 32.9 38.3 -14% US 117.7 108.2 +9% Uranium (tonnes) 5,974 5,158 +16%Turnover 2,943 2,344 +26%Net earnings 365 157 +132%EBITDA 895 544 +65%Capital expenditure 243 305 US Coal - Kennecott Energy Net earnings of $119 million were $31 million above the net earnings of 2003.Production was nine per cent higher than in 2003 as a result of higher demandfor low sulphur coal. Higher volumes, higher realised prices and a lower taxcharge all contributed to the improved result. Kennecott Energy also madeprogress in implementing initiatives leading to cost reductions, productivityimprovements, reduced capital requirements and marketing benefits. Thesebenefits were partially offset by higher fuel prices. Kennecott Energy successfully bid for an additional 177 million tonnes ofin-situ coal reserves at West Antelope at a cost of $146 million. Asia Pacific Thermal Coal Markets The markets for thermal coal that had begun to strengthen late in 2003 remainedstrong throughout 2004 and the benefits of rising prices flowed throughprogressively in the second half of the year. The market for coking coal, intowhich Rio Tinto introduced production from the new Hail Creek mine, was alsostrong. Rio Tinto's mines generally operated at the capacity permitted by railand port infrastructure in New South Wales and Queensland. Rio Tinto Coal Australia (formerly Pacific Coal) Net earnings of $180 million were $110 million above 2003. Production from thenew Hail Creek mine ramped up to capacity well ahead of schedule. Totalproduction in 2004 was 5.1 million tonnes and an expansion in capacity to eightmillion tonnes was approved in July 2004. The proportion of coking coal fromthe Kestrel mine increased during 2004. In the first quarter of the year shipments from Blair Athol were constrained fora period of seven weeks due to a reclaimer failure at the independently managedDalrymple Bay Coal Terminal (DBCT). Congestion at DBCT again constrainedshipments towards the end of the year. Coal & Allied Net earnings of $51 million compared with a loss of $24 million in 2003. Theport and rail congestion that had affected sales through the port of Newcastle(NSW) in 2003 and the first quarter of 2004 eased during the second quarterfollowing the approval of a port rationing agreement by the AustralianCompetition and Consumer Commission in mid-March. Coal & Allied was brought under unified management with Rio Tinto Coal Australiawith effect from 1 February 2004. In addition, the Mount Thorley and Warkworthmines have been managed as one operation since late January. Rossing A net loss of $4 million compares with a net loss of $19 million in 2003. 2004earnings benefited from lower inventory values following a stock write down inthe second half of 2003. The effects of a stronger uranium market were offsetby the effects of the stronger Namibian dollar. Work continued on studyingopportunities to extend the life of the operation beyond that of the existingpit. Energy Resources of Australia Net earnings of $19 million were $8 million above 2003 due to higher uraniumprices and a lower tax charge. Industrial Minerals 2004 2003 ChangeProduction Borates (000 tonnes) 565 559 +1% Titanium dioxide (000 tonnes) 1,192 1,192 0% Salt (000 tonnes) 4,792 4,633 +3% Talc (000 tonnes) 1,443 1,357 +6%Turnover 2,057 1,801 +14%Net earnings Rio Tinto Borax 94 80 +18% Rio Tinto Iron & Titanium 95 47 +102% Dampier Salt 10 10 0% Luzenac 24 17 +41% 223 154 +45%EBITDA 538 465 +16%Capital expenditure 248 139 Rio Tinto Borax Net earnings of $94 million were $14 million higher than 2003. Production ofborates was slightly above 2003 reflecting improvement in some end use markets.The business benefited from continuing strength in the US housing sector anddemand for boric acid remained strong. The expansion of boric acid capacityremains on schedule for completion in the first half of 2005. Further expansionof boric acid capacity has been approved and is in the engineering phase withconstruction to be completed by the end of 2006. Rio Tinto Iron & Titanium Net earnings of $95 million were $48 million above 2003, which included a chargeassociated with the write down of a customer receivable which was partiallyreversed in 2004. The demand for high-grade chloride feedstocks, like QIT's UGS product, remainedvery strong. Conventional chloride and sulphate slags remained in generaloversupply, but with some short-term tightness in chloride slag caused byproducer production difficulties. Rio Tinto Iron & Titanium benefited from thestrong markets for its iron, steel, rutile and zircon products. Production ofconventional slags remained below capacity whereas production of the high purityupgraded slag (UGS) was at capacity. Expansion of the UGS plant to 325,000tonnes per annum is on schedule for start up in early 2005. Dampier Salt Net earnings of $10 million were in line with 2003 with higher sales volumesoffsetting the effects of the stronger Australian dollar. Luzenac Net earnings of $24 million were $7 million above 2003. The market forautomobile applications was strong on both sides of the Atlantic with Luzenacproducts increasingly used in new models and applications. Sales volumes to thepaper sector in North America, Latin America and Asia also increased. 2003 netearnings included one-off costs for restructure and site closure. Aluminium 2004 2003 ChangeProduction Bauxite (000 tonnes) 12,828 12,316 +4% Alumina (000 tonnes) 2,231 2,014 +11% Aluminium (000 tonnes) 837 817 +2%Turnover 2,411 1,936 +25%Net earnings 334 200 +67%EBITDA 720 488 +48%Capital expenditure 449 436 All sites except Bell Bay achieved record production volumes in 2004. Prices The average aluminium price of 78c/lb was 20 per cent higher than the averageduring 2003. The alumina market also strengthened with spot prices averaging$372/tonne compared with $275/tonne in 2003. The effect of these and otherprice movements was to increase earnings by $201 million compared to 2003. Bauxite Production of bauxite was four per cent above 2003, despite the sale of Boke inJune 2004. Following a first quarter affected by wet weather, productionincreased during the year. The mine expansion component of the NeWeipa Project,which takes Weipa capacity from 12 million tonnes per annum to 16.5 milliontonnes per annum, was completed in time to meet the bauxite requirements of thenew alumina refinery. Alumina QAL suffered an interruption to its power supply in October which reducedproduction by about 85,000 tonnes (33,000 tonnes Rio Tinto share), but otherwiseenjoyed strong production for the balance of the year, reflecting high processstability. The new CAR alumina refinery commenced production three months aheadof schedule with first shipments in November. Aluminium Production at all smelters was strong except at Bell Bay where minor equipmentfailure affected production in the middle of the year. Copper 2004 2003 ChangeProduction Mined copper (000 tonnes) 753 867 -13% Refined copper (000 tonnes) 333 349 -5% Mined gold (000 oz) 1,164 2,207 -47%Turnover 3,155 2,725 +16%Net earnings 856 440 +95%EBITDA 1,535 1,149 +34%Capital expenditure 379 378 Kennecott Utah Copper Net earnings of $293 million were $205 million above 2003 with earningsbenefiting from high copper, gold and molybdenum prices. By-product productionimproved in the second half of the year following a period of about 18 monthswhen volumes were adversely affected by poor mineralogy. A project to extend the life of the Bingham Canyon open pit was developed during2004, and approved in February 2005. This project, the East 1 pushback, willextend the life of the open pit to 2017. Capital expenditure on the projectwill be $100 million for mine facilities, a concentrator upgrade and mobileequipment and $70 million after 2008 for the relocation of the in pit crusherand dewatering facilities. The East 1 pushback is a higher value, lower capitalintensive option than the previous mine plan which was predicated on developmentof an underground mine from 2013. Mine development options from 2017 will bereviewed in the context of the decision to proceed with the East 1 pushback, andinclude various open pit and underground alternatives. A one off non-cash chargeof $36 million has been recorded in 2004 to reflect an increase in the presentvalue of provisions for environmental remediation costs, based on the assumptionthat mining operations cease in 2017. Pending any extension of the assumed minelife beyond 2017 there will be an increase in the annual depreciation chargefrom 2005 of around $45 million. Escondida Net earnings of $416 million were $294 million above 2003 due mainly to highercopper prices and higher production volumes. Full year production reflects thereturn to the normal mine plan from the beginning of the year, the ramp-up ofthe Laguna Seca concentrator and an increase in mill throughput rates due tooperational improvements. Freeport and Grasberg Joint Venture Net earnings of $34 million were $93 million below the net earnings in 2003.Both copper and gold production at the Grasberg mine were severely disrupted asa consequence of the material slippage in the fourth quarter of 2003. Freeport,the manager of the Grasberg mine, resumed mining activities in the higher gradeareas of the open pit in the second quarter. Mill throughput and grades, andhence production volumes, improved progressively during the year. Net earningsinclude a $20 million benefit due to the insurance settlement relating to thematerial slippage. Rio Tinto sold its holding in Freeport-McMoRan Copper & Gold Inc. (FCX) to FCXfor net consideration of $882 million in March 2004. The sale of FCX shares hasno effect on the terms of the joint venture, nor the management of the Grasbergmine. The profit on the sale of these shares is treated as an exceptional itemand is excluded from adjusted earnings. Palabora A net loss of $21 million compared with net earnings of $1 million in 2003. Thebenefit of higher copper prices was partially offset by the strength of theSouth African rand relative to the US dollar. Production from the undergroundmine improved during the year but was constrained by poor fragmentation and theperformance of secondary breaking equipment. A review of the business wasfinalised in the third quarter of 2004, as a result of which the workforce wasreduced by 13 per cent and the management levels by 20 per cent. These eventshave triggered an assessment of the balance sheet value of Palabora's copperassets, using long term copper prices, which has resulted in a provision forasset impairment of $161 million after tax and outside shareholders interests.This is excluded from adjusted earnings. Kennecott Minerals Net earnings of $79 million were $19 million above 2003 as both Cortez andGreens Creek benefited from higher prices. Other copper operations Net earnings at Northparkes of $26 million compared with a loss of $10 millionin 2003. In addition to benefiting from higher copper and gold prices, oregrades were higher than in 2003 with the successful completion and commissioningof the new Lift 2 block cave in the second half of the year. Lift 2 is rampingup ahead of schedule. The sale of Rio Tinto's interests in Fortaleza, Somincor, Morro do Ouro andZinkgruvan were completed during 2004. The net gain on disposal is excludedfrom adjusted earnings. Diamonds 2004 2003 ChangeProduction Diamonds (000 carats) Argyle 20,620 30,910 -33% Diavik 4,545 2,300 +98%Turnover 744 556 +34%Net earnings 169 113 +50%EBITDA 419 304 +38%Capital expenditure 152 100 Diamond market The market for rough diamonds was strong in 2004, resulting in price rises forboth the Argyle and Diavik productions. The decline in industry stockpiles ofrough diamonds combined with increased retail demand for diamond jewellery inthe US market contributed to the tight market conditions. Diavik Net earnings of $145 million were $104 million above 2003. Production ramped-upduring the year and the process plant comfortably exceeded design capacity on aconsistent basis. The construction of a new dike and funding for the furtherstudy of the viability of underground mining, including the construction of anexploratory decline, were approved in December 2004. Argyle Net earnings of $23 million were $49 million below 2003. Tight miningconditions, as a result of the deepening open pit, limited mine productionduring the first three quarters of the year. Ore processed therefore consistedof lower grade ore from the open pit supplemented by ore from stockpiles.Production returned to normal in the fourth quarter. The feasibility study onthe underground mine at Argyle is expected to be completed in the second half of2005. Other diamond operations The construction of small scale operations was completed at Murowa andproduction commenced in the fourth quarter of 2004. Other Operations 2004 2003 ChangeProduction Gold (000 oz) 388 524 -26%Turnover 145 184 -21%Net earnings 28 21 +33%EBITDA 83 77 +8%Capital expenditure 10 4 Net earnings of $28 million were $7 million above 2003 with both Lihir andKelian benefiting from higher gold prices. Exploration and evaluation 2004 2003 ChangePost tax expenditure 152 98 +55% Evaluation work on the Sari Gunay (gold, Iran), Eagle (nickel, USA), PotasioRio Colorado (potash, Argentina) and Simandou (iron ore, Guinea) by the productgroups commenced during the year. The expenditure on evaluation thereforeincreased in 2004. Placer Dome, the manager of the Cortez mine (Rio Tinto 40per cent ), announced the initiation of a feasibility study at Cortez Hills.The pre-feasibility study at Resolution (copper, USA) continued. Exploration drilling continued on copper targets in Peru, Turkey, Alaska andUtah. Diamond exploration continued in Canada, Botswana, India and Brazil.Iron ore exploration continued in the Hamersley Basin (Western Australia) and inwest Africa. Exploration on coking coal opportunities continued in southernAfrica, Australia and Canada. Capital Projects The following major projects have recently been approved, are in construction orwere completed during the year. Project Estimated Cost Status/Milestones (100%)Completed in 2004 Iron ore - Eastern Range mine (Rio Tinto 54%). $67 m Construction completed on time and the mineDevelopment of a new mine with a capacity of 10 was officially opened in April 2004.million tonnes per annum. The mine services ajoint venture formed between Hamersley andShanghai Baosteel Corporation. Aluminium - Comalco Alumina Refinery (Rio Tinto $750 m Operations have commenced and first shipments100%). Construction in Queensland of a were made in November 2004, three monthsgreenfield alumina refinery with initial annual ahead of schedule.capacity of 1.4 million tonnes but with optionsto expand to 4.2 million tonnes. Copper - Northparkes Lift 2 Expansion project $100 m Variable ground conditions and higher than(Rio Tinto 80%). New 15,000 tonne per day expected rock stress caused a delay to theblock cave mine approximately 400 metres below project. The project cost increased from anthe existing underground operation. initial estimate of $76 million to $100 million. Production commenced in the second half of 2004 with full ramp up in 2005. Copper - Palabora Underground (Rio Tinto 49%). $465 m Construction is complete and the propagation30,000 tonnes of ore per day block caving of the cave is proceeding well. However,operation. fragmentation at this early stage of the cave has impacted production at some of the drawpoints. Ongoing Aluminium - NeWeipa. Expansion of Weipa (Rio $150 m The mine expansion project was completed onTinto 100%) bauxite production to 16.5 million time and within budget in 2004 to meet thetonnes, and move to a two mine operation. bauxite requirements of CAR. Iron Ore - HIsmelt(R) (Rio Tinto 60%) direct $200 m Construction is 99% complete. Commissioningiron smelting technology. Construction of an has commenced and first production is now800,000 tonne capacity plant at Kwinana, expected in the first half of 2005.Western Australia. Other - Project Daybreak (Rio Tinto 100%). Initial cash Land sales started in mid 2004 and will rampDevelopment for mixed use of a 4,100 acre area requirement of up over a period of 5-6 years. To dateof land near Salt Lake City, Utah. $50 m builders have closed on over 300 lots.Copper - Escondida Norte (Rio Tinto 30%). $400 m Project approved in June 2003. FirstSatellite deposit will provide mill feed to production is expected in the fourth quarterkeep Escondida capacity above 1.2 million of 2005.tonnes per annum to the end of 2008. Iron ore - Expansion of Hamersley's (Rio Tinto $685 m Construction is 57% complete and remains on100%) port capacity to 116 million tonnes per schedule for completion in late 2005.annum. Iron ore - Expansion by Robe River (Rio Tinto $200 m Construction began in June 2004 and is53%) of rail capacity including completion of scheduled for completion by mid-2006.dual tracking of 145 km mainline section. Iron ore - Expansion of Yandicoogina mine (Rio $200 m Construction is 80% complete. Completion isTinto 100%) from 24 million tonnes per annum to scheduled for the first half of 2005.36 million tonnes per annum. Iron ore - Expansion of West Angelas mine (Rio $105 m Construction is 35% complete. Completion isTinto 53%) from 20 million tonnes per annum to expected for mid-2005.25 million tonnes per annum.Recently approved Coking coal - Hail Creek (Rio Tinto 82%) $120 m Project approved in July 2004 with completionExpansion of annual capacity from 6 million by the end of 2005. Capital costs aretonnes to 8 million tonnes per annum. currently under review in light of cyclical cost pressures in the industry. Copper - Escondida sulphide leach (Rio Tinto $870 m The approval of the project was announced in30%). The project will produce 180,000 tonnes April 2004 and production is expected toper annum of copper cathode for more than 25 begin in the second half of 2006.years. Titanium dioxide - Expansion of Rio Tinto Iron $76 m The approval of the project was announced in& Titanium's (Rio Tinto 100%) upgraded slag January 2004 and production is scheduled toplant (UGS) from 250,000 tonnes per annum to start-up in early 2005.325,000 tonnes per annum. Diamonds - Construction at Diavik (Rio Tinto $265 m The project was approved in December 2004.60%) of the A418 dike, and funding for further First production from the A418 open pit willstudy of the viability of underground mining, be in 2008.including the construction of an exploratorydecline. Copper - Kennecott Utah Copper East 1 Pushback. $170 m The project was approved in February 2005.The project extends the life of the open pitto 2017 while retaining options for furtherunderground or open pit mining thereafter. Divestments The improved market conditions brought Rio Tinto a number of opportunities todivest non-core businesses generating proceeds of over $1.5 billion. Rio Tinto sold its holding in Freeport-McMoRan Copper & Gold Inc. (FCX) to FCXfor net consideration of $882 million. In addition to the holding in FCX, RioTinto has a joint venture interest in production from the Grasberg mine, whichis managed by FCX. The sale of FCX shares does not affect the terms of the jointventure, nor the management of the Grasberg mine. In addition, Rio Tinto completed the sale of Fortaleza, (nickel, Brazil),Zinkgruvan (zinc, Sweden), its remaining 20 per cent interest in Sepon (copper/gold, Laos), its 49 per cent interest in Somincor (copper/tin, Portugal) and its51 per cent interest in the Morro do Ouro mine (gold, Brazil). The sale to Nippon Steel of an eight per cent interest in the Hail Creek JointVenture, and the increase in the combined share of the original participants,Marubeni Coal and Sumisho Coal Development, by two per cent was completed in thefourth quarter of the year. Rio Tinto will receive around $150 million for thesale of these interests in the Hail Creek Joint Venture together with the saleof a 47 per cent interest in the Beasley River iron ore deposit to its jointventure partners in Robe River. Price and exchange sensitivities The following sensitivities give the estimated effect on net earnings assumingthat the price or exchange rate moved in isolation. The relationship betweencurrencies and commodity prices is a complex one and movements in exchange ratescan cause movements in commodity prices and vice versa. The exchange ratesensitivities quoted below include the effect on operating costs of movements inexchange rates but exclude the effect due to the revaluation of foreign currencyworking capital. They should therefore be used with care. Estimated effect on Rio Tinto's full year net earnings of: Change in full year average US$m Copper +/- 13.0c/lb 160Gold +/-$41/oz 40Aluminium +/-7.8c/lb 110Australian dollar +/-7.3USc 190Canadian dollar +/-7.7USc 45South African rand +/- 0.7 Rand 20 International Financial Reporting Standards Rio Tinto will be reporting its financial performance in accordance withRelated Shares:
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