27th Apr 2007 11:06
Rio Tinto PLC27 April 2007 Third successive record year for Rio Tinto Solid global demand and high prices coupled with a strong operating performancein challenging conditions resulted in a third successive year of record earningsand cash flow, the chairman of Rio Tinto Paul Skinner told the annual meeting ofshareholders in Perth today. "Our performance reflects the underlying quality of our asset portfolio whichhas proved robust at all points of the economic cycle," he said. "In 2006, weachieved underlying earnings of more than seven billion dollars which was 48 percent above 2005. "Cash flow increased by 35 per cent to 11 billion dollars. These results allowedus to increase and rebase the dividend by a sizeable 30 per cent, to total 104cents per share. "Rio Tinto dividends have increased significantly since the dual listed mergerin 1995. The aim of our progressive dividend policy is to increase the dollarvalue of ordinary dividends continuously over time, without cutting them ineconomic downturns." Rio Tinto CEO Leigh Clifford said that the strong balance sheet allowed thecompany to invest heavily in growth and at the same time return capital toshareholders. "We are heading for a production capacity in Western Australia of 220 milliontonnes a year (of iron ore) by early 2009. This is nearly double our capacity in2003 and four times our production seven years ago. Due to continued strength inthe world's steel markets, particularly in China, we are now planning for asignificant lift beyond 220 million tonnes. We have the resources to enable thisand have teams evaluating the infrastructure requirements to achieve it. "We are very pleased with the recent progress in negotiations in Mongolia andthe announcement that agreement in principle has been reached on an InvestmentAgreement for the development of the Oyu Tolgoi project. The agreement remainssubject to approvals by the Mongolian Cabinet and Parliament, Ivanhoe and RioTinto, and the finalisation of formal documentation. "The investment in Mongolia represents a phased, risk managed entry into anoutstanding resource that suits our strategy for world class deposits and islocated close to the border with China, the world's largest consumer of copper. "We are particularly encouraged by the exploration potential of Energy Resourcesof Australia's uranium leases and the expansion possibilities of satellitedeposits at Rossing Uranium in Namibia. Together with the potential of Kintyrein Western Australia and Sweetwater in the US, we expect to be in a position to significantly expand oururanium production capacity in the near future." 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 seriously and I would ask that you all listen carefully. Directors Two of our directors - David Mayhew and Richard Goodmanson - are unable to bewith us today and send their apologies. Otherwise all our directors arepresent. I should like to begin by welcoming Mike Fitzpatrick who is standingfor election today for the first time. Mike joined the board last June after a successful period in investment and fundmanagement. He is a member of the Audit and Remuneration committees. I would also like to welcome and introduce Tom Albanese who will succeed LeighClifford as chief executive of Rio Tinto on May 1st. Tom's appointment was announced back in December to ensure a smooth leadershiptransition. When Leigh steps down from the board on April 30th he will remainwith us in an advisory capacity until his normal retirement date on his 60thbirthday in September. Tom brings a broad based experience of the mining industry which he hasdeveloped both outside and through a sequence of challenging roles in Rio Tinto. He has been a key player in a number of important growth initiatives over recentyears and in shaping our strategic direction. The board is confident that underhis leadership Rio Tinto will continue to deliver increased value to you, ourshareholders. 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. Results and dividend The mining sector continued to benefit from solid global demand and high pricesin 2006. Coupled with a strong operating performance in challenging conditions,this resulted in a third successive year of record earnings and cash flow. Our performance reflects the underlying quality of our asset portfolio which hasproved robust at all points of the economic cycle. In 2006, we achieved underlying earnings of more than seven billion dollars - weshall use US currency throughout - which was 48 per cent above 2005. Cash flow increased by 35 per cent to 11 billion dollars. These results allowedus to increase and rebase the dividend by a sizeable 30 per cent, to total 104cents per share. Rio Tinto dividends have increased significantly since the dual listed merger in1995. The aim of our progressive dividend policy is to increase the dollar valueof ordinary dividends continuously over time, without cutting them in economicdownturns. Capital management In managing our cash flow and capital base, our first priority is to invest inthe future of Rio Tinto in the form of value creating projects. Second is tomaintain our progressive dividend policy. Third we will return any cash surplusto our requirements to shareholders. Regarding the first priority, in 2006, our capital investment grew to 3.9billion dollars from 2.5 billion in 2005. This is expected to increase to aboutfive billion dollars in 2007. We have a strong project pipeline which Leighwill talk about in his remarks. In addition to the increased dividend, our strong cash flows enabled us toreturn 2.4 billion dollars to shareholders through the buyback of shares and thepayment of a 1.5 billion dollar special dividend in 2006. We intend, subject to market conditions, to return a further three billiondollars by the end of this year, 2007, while still retaining the financialflexibility to pursue growth opportunities as they arise. We have now returned nearly six billion dollars of our overall eight billiondollar capital management programme. It is our intention to complete this bythe end of 2007. One of the most satisfying features of 2006 was that almost all of our largedevelopment projects continued to reach their milestones on time and on budgetin challenging construction markets, where the skills and resources we need arein short supply. Strategy Rio Tinto has maintained a consistent strategy over many years, and I make noapology for restating it briefly. Our strategy is to invest in large, long life, low cost orebodies and to developand deliver them in a way that reflects operational best practice. We believethis will, over time, produce value growth for shareholders in varying marketconditions, which may not always be as favourable as today's. Our experience also suggests that a focus on large orebodies will result inadditional development options emerging as geological understanding andtechnology advance. It is very reassuring that we have established ownership interests in some ofthe world's biggest underdeveloped mineral deposits. This gives us confidencethat we will continue to grow production volumes as we have done over recentyears. We continue to maintain a disciplined approach to investment appraisal with longterm value creation for shareholders as the leading criterion. Alongside our investment programme we are also intent on driving productivityand performance improvements across all our primary business processes, therebyadding to the resilience of our operations in more challenging markets. We aremaking significant progress towards this objective. Sustainable development Rio Tinto maintains a strong emphasis on the important social and environmentalaspects of our global business. This is necessary because of the long term nature of our projects. Our capitalintensive investments typically have life spans of more than 30 years. Withoutstability and local support we cannot deliver the economic returns that hostgovernments, communities and our shareholders expect. Acting responsibly alsogives us priority access to people, land and capital. As we move into new geographical areas such as Madagascar, Peru, Russia andMongolia, as well as established Rio Tinto mining areas, our emphasis on meetingeconomic, social and environmental challenges simultaneously becomes anincreasingly critical feature of our approach. 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 2006 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. The latter gives a clear overview of some ofour challenges in this area including climate change, water supply and manyothers. Regulation I would like to make brief mention of the impact of the increasing burdens ofregulation on the activities of large international corporations such as ours. In the financial area the recent introduction of the new International FinancialReporting Standards and the Sarbanes Oxley Act has resulted in significantadditional work and cost. We have done everything possible to mitigate theimpacts to make our compliance as cost effective as possible. We also suffer the impact of regulation in other areas, such as the EuropeanUnion REACH directive relating to the classification of chemicals. Rio Tinto recognises that regulation is a necessary feature of the businesslandscape but it needs to be applied thoughtfully. We therefore urge government bodies to follow strategies of cost effective,value creating regulation and to ensure that costs and benefits are properlyaligned. Economic outlook As I said in the Annual report, the global economy faces a range of politicaland economic risks, but the outlook remains broadly positive. We expect a continuation of positive economic growth in 2007 in most of themajor economies. China's strong growing demand for metals and minerals isexpected to continue, and there is strong momentum in most Asian economies whichrepresent big markets for us. Europe and the US are performing reasonably well. On the supply side, a number of constraints, ranging from shortages of keyconsumables to the tight supply of skilled professionals and tradesmen willcontinue to limit the growth of new production capacity. Stocks of most products have therefore remained low, resulting in tight markets.Reflecting this we expect prices in 2007 to continue at levels significantlyabove the long term trend. Our approach will continue to be to invest in value creating production growthto provide long term supply assurance to our customers, and to maintain ourmarket position. Our existing portfolio, especially the early stage copper projects we acquiredin 2006, has the potential to generate continuing growth in future. Meanwhile weremain alert to further opportunities for mergers, acquisitions and alliances. I believe that Rio Tinto remains in very good shape and competitively wellpositioned to remain one of the world's leading mining companies. Leigh Clifford Our strong position today owes much to our outgoing chief executive, LeighClifford. Leigh has made an outstanding contribution to Rio Tinto for almost 37years. His seven years as chief executive have seen significant growth inprofitability and improvements in operational performance. The business has also grown in value under his leadership, including a number ofsignificant acquisitions and the building of our position in Asian markets. We thank him for all he has done for Rio Tinto and wish him well for the future. Thanks Although we had a record year, 2006 was nevertheless very challenging inoperational and project development terms. Our people have been under enormous pressure to maximise delivery despiteshortages of production materials and manpower. The board is very appreciative of the important part our employees played in2006 in all the countries in which we operate. Our record results would not havebeen possible without the commitment, dedication and hard work of our globalworkforce. Let me now ask Leigh to comment on 2006 in this his last annual meeting inAustralia as chief executive. Remarks by the chief executive, Leigh Clifford Thanks Paul, and good morning ladies and gentlemen. Before I look at the results in detail, let me say something on safety. Thisremains the highest priority throughout Rio Tinto. We achieved an improvement in our safety performance for the seventh year in arow, though I regret this was marred by three fatalities at managed operations. Product group results Turning to the financial results, as we have seen, 2006 was another excellentyear. We were able to make the most of higher prices with increased productionvolumes at many of our operations. With our strong balance sheet we are in a position to invest heavily in growthand at the same time return capital to shareholders. We completed six projects, in iron ore, copper, industrial minerals and energyin 2006, approved a further four major projects, and concluded a number oftransactions that will cement our future as a leading copper producer. All product groups except Energy and Diamonds increased their underlyingearnings. The Copper group was our best performer accounting for approximately half of ourunderlying earnings. This was due to higher copper and gold prices - increasesof 84 per cent and 36 per cent respectively - and a higher molybdenum productionas an important by product. Underlying earnings in Iron Ore were one third higher than in 2005 at 2.3billion dollars in a year that also saw fast track development of simultaneousexpansion projects being executed across the Group's mines, rail and ports inWestern Australia. A succession of cyclones in the Pilbara impacted 2006 iron ore production in thefirst part of the year, especially with high rainfall in our mining areas.Cyclones this year have impacted shipping, but to a lesser extent compared to2006. In 2006, underlying earnings from the Energy group showed a three per centdecline. Higher coal prices were unable to offset the impact of higher demurrageand costs, following significant congestion at ports. Additionally, coking coalsales were lower. Our uranium earnings, although currently modest and also impacted by adverseweather this year, will benefit in coming years from the replacement of legacysupply contracts with new contracts that reflect today's significantly higherprice environment. Industrial Minerals' contribution increased by 30 per cent to 243 milliondollars with the absence of 2005's restructuring costs and favourable revenueand volume trends. Rio Tinto Aluminium showed a sharp increase of 90 per cent in its underlyingearnings contribution. Earnings of 746 million dollars resulted from an increaseof 35 per cent in the price of aluminium, somewhat offset by a weaker aluminaprice later in the year. Finally, the Diamonds product group underlying earnings at 205 million dollarswere 27 per cent lower than the previous year due to a downturn in the roughdiamond market in the second half of 2006. This caused us to withhold a quantityof rough diamonds from sale during the year. Strategy implementation These are buoyant times for the mining industry. We are struggling to meetdemand that is fuelled by large developing economies going through a metalsintensive phase of their development. Economic growth around the world, in Asia and particularly in China, hasresulted in strong demand for metals and minerals. Although we see durability in this economic growth, ours is a cyclical business- even if the current cycle will be prolonged. When demand rises, supply responds. Currently, however, the supply side responseis slower than in past cycles. There is a shortage of new projects, in some respects a consequence of reducedexploration spend and new investment over the past decade. A scarcity of skilledengineers and tradesmen and increased lead times for new equipment alsocontribute to a slower response. This won't change quickly. We are fortunate to operate or share in some of the largest and best mineraldeposits in the world. In these strong markets, we are benefiting. The large long life deposits we prefer also give us the optionality to increaseproduction in line with demand - clearly an advantage in the currentenvironment. Consistent with our strategy was our acquisition in 2006 of interests in threelarge, long term copper projects: La Granja in Peru, Oyu Tolgoi in Mongolia, andPebble in Alaska. With the Resolution project in Arizona, this means Rio Tinto has a stake in fourof the ten largest undeveloped copper deposits in the world. More on theseprojects a little later. While we analyse all prospects and remain alert to merger and acquisitionopportunities, it is often true that the greatest value is extracted from longlife projects in which we can participate from the exploration and evaluationstage. This approach has enabled us to grow steadily and our current portfolio iscreating more opportunities to extend this into the future. The key factor in the implementation of our strategy is discipline: disciplinein analysis and discipline in execution. Improving performance together Rio Tinto has a long track record of operational excellence. This remains apriority especially in today's buoyant market conditions. Our Group wide programme Improving performance together is permanently changingthe way we run our individual operations, replicating best practice andperformance across everything we do - project analysis, project development,mine planning, mining, processing and marketing. As a global group we need to increasingly work across functions andinternational borders to solve problems together instead of different businessunits going it alone. By creating a standard operating model with common systems, standards andmetrics we intend to ensure that we capture the best ways of operating, andreplicate them across the Group. We achieved substantial additional cash flow from IPT in 2006 and expect this tobe the start of considerable value addition over time. It goes to the core of Rio Tinto's business approach, which is about sustainedfirst class operational and project delivery. Energy efficiency As a major energy producer Rio Tinto has an obligation to respond to climatechange, contribute to the international debate and participate with others toreduce emissions. Our climate change programme is focused on identifying and addressing risks andtaking advantage of opportunities. Coal remains the most abundant low cost alternative for energy security. Webelieve that clean coal technology has a vital part to play in reducing carbondioxide emissions, and we are actively participating in a number of initiativesin Australia and the US. As the second largest uranium producer in the world, with over five decades ofexperience in marketing and mining the mineral, we are contributing to thedeliberations regarding increased nuclear power generation. In 2006 we formed a new energy competency centre to concentrate on energyefficiency projects. We estimate that our improvement in energy efficiencyreduced consumption and has saved over 110 million dollars since 2003. Major project developments Turning now to our growth projects, our iron ore expansions in Western Australiaremain our biggest current capital investment and are progressing well. The challenge of operating and expanding ten mines, three ports and a 1,600kmrail network in the Pilbara at a time of maximum production should not beunderestimated. Our teams in the Pilbara are doing an excellent job,notwithstanding the challenging cost environment and the occasional cyclone. We are heading for a production capacity in Western Australia of 220 milliontonnes a year by early 2009. This is nearly double our capacity in 2003 and fourtimes our production seven years ago. Due to continued strength in the world's steel markets, particularly in China,we are now planning for a significant lift beyond 220 million tonnes. We havethe resources to enable this and have teams evaluating the infrastructurerequirements to achieve it. Meanwhile construction is well under way on the Hope Downs joint ventureproject. It will start production next year at a rate of 22 million tonnes,rising to 30 million tonnes in stage 2. Our ilmenite project in Madagascar remains on schedule. First production isscheduled for 2008, at a time we believe there will be growing demand for thehigh quality ilmenite that Madagascar will produce for 40 years. Underground development continues at the Argyle Mine in Western Australia. Weare beginning to see considerable cost pressures concerning materials andespecially underground mining skills, as a consequence of the superheatedregional economy. In Canada, construction of a second dike at the Diavik diamond mine is onschedule. Feasibility studies for underground mining are continuing. Earlier this year we announced the development of the Clermont thermal coal minein Queensland, and we completed significant investment to expand capacity at theWeipa bauxite mine in Queensland. At the Simandou iron ore project in Guinea, West Africa, we have recentlycommitted to an expanded prefeasibility study to improve resource definition andevaluate transport options needed to bring this substantial resource intoproduction. This project has the potential to become an important feature ofglobal iron ore supply in the longer term. We expect to make a decision on the Potasio Rio Colorado potash project inArgentina later this year. Looking to the future, we have acquired interests in three promising copperprojects that I mentioned earlier - La Granja in Peru, Oyu Tolgoi in Mongolia,and the Pebble project in Alaska. La Granja has started a pre-feasibility study. First production is at leastseven years away. We are very pleased with the recent progress in negotiations in Mongolia and theannouncement that agreement in principle has been reached on an InvestmentAgreement for the development of the Oyu Tolgoi project. The agreement remainssubject to approvals by the Mongolian Cabinet and Parliament, Ivanhoe and RioTinto, and the finalisation of formal documentation. The investment in Mongolia represents a phased, risk managed entry into anoutstanding resource that suits our strategy for world class deposits and islocated close to the border with China, the world's largest consumer of copper. We have a 19.8 per cent interest in the Pebble project in Alaska, a part of theUS in which we have long operating experience and a record of responsiblemanagement. It is early days for the project, as it is expected to take aboutten years to reach fruition. Exploration We have an encouraging array of exploration projects and once again haveincreased our exploration spending. In 2006, we spent 345 million dollars, 81 million more than in 2005, reflectingincreased activity and accelerated evaluation of high quality projects in thepipeline. We are particularly encouraged by the exploration potential of Energy Resourcesof Australia's uranium leases and the expansion possibilities of satellitedeposits at Rossing Uranium in Namibia. Together with the potential of Kintyre in Western Australia and Sweetwater inthe US, we expect to be in a position to significantly expand our uraniumproduction capacity in the near future. We are doing sampling at the Bunder diamond discovery in India, and negotiationscontinue with the Government of Indonesia on the Sulawesi nickel project inIndonesia. Farewell Our business is in a strong position, generating record cash flows, and alsoinvesting at record levels. Through strong operational performance and focus on project delivery, we aredelivering maximum volumes of product into strong markets. At the same time we are managing the cost pressures that the global industry iscurrently facing. It has been a privilege and an honour for me to be part of this organisation andto share in its success. I am fortunate to have had such an interesting andrewarding career with Rio Tinto, especially over the last seven years as chiefexecutive. I would like to reiterate my comments in the Annual report by thanking the manypeople throughout the Group for their support over the years. In Tom, I'm confident that Rio Tinto has a talented and dedicated leader,capable of taking the Group forward. I wish him and the company all the best forthe future. For further information, please contact: LONDON AUSTRALIA Media Relations Media Relations Christina Mills Ian Head Office: +44 (0) 20 8080 1306 Office: +61 (0) 3 9283 3620 Mobile: +44 (0) 7825 275 605 Mobile: +61 (0) 408 360 101 Nick Cobban Office: +44 (0) 20 8080 1305 Mobile: +44 (0) 7920 041 003 Investor 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 High 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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