力拓 (RIO) 2003 Q4 法說會逐字稿

Well, good morning ladies and gentlemen. Thank you for being with us. For those I haven’t met, I’m Paul Skinner, who took over from Bob Wilson as Chairman of Rio Tinto at the beginning of last November, so for me, this is a first event in this series.

With me, of course is Leigh Clifford, who is well-known to all of you, as our Chief Executive, and Guy Elliott, our Finance Director is joining us from Melbourne. Guy, you look fit and well on the screen. Are you hearing this okay?

Yes, thank you very much.

Excellent, good. The sequence for this morning is that I will give you a brief summary of our results, the outlook, what we see and the dividend. Leigh will then provide an overview of our performance in 2003, before he hands over to Guy for a detailed review of the financial results.

Looking forward to 2004, Leigh will then complete the presentation with some comments on key markets and projects before we take your questions. I’ll just mention that in the book you have, you will see the standard disclaimer, and we’ll spare you projecting it on the screen.

Adjusted earnings for 2003 were just under $1.4b. That’s about 10% lower than in 2002. This result was achieved against the backdrop of a sharply declining US dollar.

Non-ferrous metal prices did not compensate for the depreciation of the US dollar in the first half of the year, but the year did end with stronger prices for a number of our commodities, and Leigh and Guy will talk about that in some more detail.

Strong China-induced demand growth was apparent for several commodities in 2003, particularly Iron Ore, and it was this that gave the Board confidence to commit to a major expansion program of our Iron Ore assets in 2003, and over $1b of investments were approved last year.

The results for 2003 also reflect weaker performance in our Industrial Minerals and Energy project groups, and also a number of operational events which negatively impacted earnings. These will all be discussed later.

The Group has started 2004 in a strong financial position. Operating cash-flow in 2003 continued to be robust, at $3.5b, and net debt fell slightly, despite the significant capital spending program we have underway. I believe the Group is well-placed to benefit from firmer markets in 2004.

The Group’s net earnings in 2003 were just over $1.5b, and include the profit of $126m on divestments. We were very active in 2003 in managing the Group’s asset portfolio with the sale of our interests in Kaltim Prima Coal, Alumbrera, and the Peak goldmine.

In January this year, we also completed the sale of the Fortaleza nickel project in Brazil for about $90m, and have agreed to sell our interest in the Sepon project in Laos for $85m.

In 2002, you may recall that net earnings were reduced by impairment provisions, taken primarily against the carrying values of Kennecott Utah Copper, and the Iron Ore company of Canada. I am pleased to say no similar impairments were necessary in 2003.

In terms of the outlook, there are now clear indications of improvement in the US economy. There was strong economic growth in the second half of 2003. However, structural imbalances remain in the US economy and the forward direction of the US dollar remains uncertain. That’s going to be a key factor in our 2004 performance.

Some improvement is also now evident in Europe but it is slow. It’s in Asia that we are really seeing the major excitement, especially in China, where growth remains strong. We have not seen any evidence of the slow-down, despite the tightening of credit availability by the Government.

There were also positive signs of improvement in Japan, which is benefiting from the general economic buoyancy in Asia. Our sense is that confidence is returning to what is still a very important market for Rio Tinto.

The Board has set the final dividend at $0.34 per share, which means a total dividend for the year of $0.64, an increase of 7%. The dividend is covered 1.6 times by adjusted earnings.

The level of the final dividend reflects the Board’s confidence in the outlook for 2004, with prices for many commodities up, and in an improving global economic outlook.

2003 was certainly a challenging year, but the Group is in good financial and operational shape, and I believe we are well positioned for the future. Our cash-flow underpins our dividend increase.

You will recall that our dividend is set in US dollars, and is converted to sterling and Australian dollars at spot rates. We have a progressive dividend policy, with the interim dividend set as part of the total dividend for the prior year. You may therefore expect an interim dividend of $0.32 in 2004.

I think at that point I will now hand over to Leigh, to continue the presentation. Thank you.

Thank you, Paul. I will now give you a brief overview of our performance in 2003, before handing over to Guy to review the financials.

Following the last few years of strong earnings performance, the earnings in 2003 were, I think, pretty reasonable. Without a few operational events, however, and continuing market weakness with some of our products, results would have been much better.

Let me run through the Product groups to give an overview of how they fared.

The Iron Ore group had a very strong year, increasing earnings by 10%, despite the weakness of the US dollar.

The Copper group increased earnings by 29%, as a result of higher gold and copper prices, but this could have been much better without the events at Kennecott and Grasberg, on which more in a minute.

The increase in earnings from diamonds reflects a robust market, and the commissioning of Diavik. Diamonds are now a major product for us, and the operations are performing well.

The contribution from Aluminum fell 22%, but this was almost all attributable to the weaker US dollar. Higher electricity prices, particularly in New Zealand, also adversely affected the result.

In summary, the majority of the product groups performed well, but there were two problem areas. Energy and Industrial Minerals both experienced earnings decreases of close to 50%, due to weak market conditions, currency movements and some cost issues.

Clearly, these were disappointing results, but before I look at these two product groups in more detail, let me look briefly at the markets over the year. The following chart shows some of the key themes this year that have affected our results.

I have used the movement of the Australian dollar against the US dollar in the chart, since it is the most important currency for the group by a long way. However, the currencies of all commodity producing countries moved in pretty much the same way in 2003.

As you can see from this chart, Copper and Aluminum prices did not really react to the weakening dollar in the first half of the year. This changed at the end of the third quarter, when the Copper price appreciated sharply, driven by the weakening US dollar, some evidence of improving market fundamentals, and undoubtedly, some speculation.

The Aluminum price was slower to react, as production, particularly in China, was up. There is some evidence that the market is moving towards balance, but much depends on how the Chinese market develops over the next few years.

A final comment on prices – the 9% increase in Iron Ore prices from April 2003 did not reflect the strength of the market throughout 2003. Consequently, a price rise of 18.6% has been agreed, to apply from April 2004.

I will move now to key operational events, which were the acid plant failure at Kennecott and the material slippage of Grasberg.

We reported to you on the acid plant failure at the interim. Kennecott suffered a significant decrease in metal output from the smelter as a result of the loss of the acid plant for three weeks.

As we reported, the impact of this event was largely confined to the first half of the year. The smelter returned to normal in the second half of the year, and we’ve seen solid improvement in Kennecott’s performance generally.

The finalization of a new labor agreement has proved to be a real trigger for change. For example, the implementation of 12 hour shifts enabled a 20% improvement in truck productivity. Consequently, twelve haul trucks were stood down.

At Grasberg, the slippage in early October resulted in minimal earnings from Freeport in the fourth quarter, when the copper price was improving rapidly.

As Freeport has advised the market, output from the Grasberg mine will remain constrained for some time. Management has directed open pit operations to accelerate removal of waste material from the south wall, to restore safe access to the higher grade areas in the pit. Access to these areas is expected in the second quarter of the year.

Metal production is therefore expected to be skewed to the second half of the year. This photo shows the pit, and you can see the area of the pit slide-marked.

According to Freeport, the immediate focus will be on pre-stripping in the seventh south area, before they return to mining in the high-grade areas of five south and six south.

In terms of the effect of this on Rio Tinto, Freeport has recently given guidance that could result in a significant reduction in metal, attributable to our joint venture interest. This would be offset by an increased metal share in 2005.

I will turn now to the two product groups which performed weakly in 2003, Energy and Industrial Minerals. The results from the Energy group reflect the weakness of the Asia Pacific thermal coal market for much of 2003. Lower prices reflected excess supply in the region, following production growth in China and Indonesia.

The performance of Coal & Allied was unsatisfactory. In addition to lower prices, and the weakening of the US dollar, earnings were impacted particularly by high demurrage costs at the port of Newcastle, and other cost pressures.

Actions are being taken. We have announced the merger of the corporate and service functions of Pacific Coal, now renamed Rio Tinto Coal Australia, and Coal & Allied.

Likewise, in the US, we have taken steps to improve costs at Kennecott Energy by streamlining management and service functions, creating in the PRB the one mine concept that we developed in the Pilborough.

Coal prices in Asia have improved markedly late in 2003, on which more later. When combined with the actions I’ve outlined, I expect to see improvement in the Energy group in 2004.

It may take longer for the Industrial Minerals group, and in particular, the Titanium Dioxide business to turn around. Markets remain generally weak in the US and EU, but weakness in the demand side of these businesses only tells part of the story.

The key issue is that there is excess supply, partly caused by slow demand growth, but exacerbated by new supply capacity. Our primary products, including sodium borate, and conventional TAO2 slag, are bearing the brunt of this excess supply.

We do anticipate these excess supply positions coming back into balance, but it may take a few years. In the TA02 business, the problem of excess supply has been compounded by the shorter-term issue of some customers de-stocking.

This situation of over-supply is not, however, uniform across all sectors of the borate and TA02 market. There are some sectors in these markets where the supply and demand balance is much more favorable, notably the high-grade boric acid and UGS products.

We have recently announced expansions in both these areas, offsetting production reductions in other parts of our product range.

So, how are we addressing these issues? Production restraint and the conversion of capacity to the products in high demand are the key near-term actions. We also have to continue to focus on cost reduction and performance improvement efforts. This is especially important in an environment of rising energy prices.

In the medium-term, we will continue to build on our success in introducing new products, and new applications into the market place.

In the longer-term, China will be a big factor in these markets, as consumer demand increases. We are putting added efforts in China now, to benefit from this anticipated demand.

In summary, we continue to be strongly placed in our respective sectors, both from a cost and product quality basis. In the current market, we are running at less than full capacity in our core sodium borate and slag markets. However, even in these products we offer an unrivalled level of customer value.

Despite the challenges we have faced in 2003, the portfolio is in excellent shape for the better market conditions we anticipate in 2004. The new projects we have recently commissioned in Iron Ore, Coking Coal, Diamonds and Copper, position us well in markets where demand is strong. In addition, the Alumina project is now well advanced.

Finally, as Paul outlined, we have also taken the opportunity to realize value from the portfolio through the sale of non-core assets, and our portfolio is always under review. On that note, maybe I can hand over to Guy.

Thank you, Leigh, and good morning everybody. Let me now look at the financial results in a bit more detail.

The adjusted earnings in 2003, of $1.38b, were $148m lower than the $1.53b achieved in 2002. Now, I’m going to break down the variances between these two periods in the usual waterfall chart.

Prices for many of our commodities moved higher in 2003, but the overall effect of this was largely offset by the weakness of the US dollar. When combined with inflation, these factors, over which we generally have no control, reduced earnings by $76m.

In the first half of the year, currency effects were much greater than price improvement. Therefore, taking the year as a whole, we have, as expected, seen the reassertion of the natural hedge.

Turning to price effects in detail, overall, price movement increased earnings by a net $442m. Looking first at the trading levels, the gold price averaged $363 per ounce in 2003, up 17% on 2002. Gold rose in price steadily throughout the year, and added $92m to earnings.

In terms of Copper and Aluminum, as Leigh has said, we only started to see the effects of the weaker US dollar on prices late in 2003. The Copper price increased more sharply than the Aluminum price, a reflection of better supply and demand fundamentals.

Over the year, the copper price increased by 51%, but the average price was only 13% higher than in 2002. The higher copper price increased earnings by $163m, including a positive provisional pricing adjustment of $39m. The aluminum price rise contributed $63m to earnings.

Price changes for our other products added just under $100m to earnings, with the strong Iron Ore, Alumina and Diamond markets delivering robust price increases. However, these are offset by weakness in the Asian thermal coal market.

The Alumina price variance reflects primarily the near doubling of spot Alumina prices in 2003. As we previously said, most of our Alumina is sold under long-term contract terms, but spot price sales for China and Russia do comprise about 15% of our Alumina portfolio.

Turning now to currency, exchange rate movement decreased earnings by $412m overall. The US dollar decreased in value against all the important currencies for Rio Tinto, as is shown on this slide.

The Australian dollar averaged 65 cents to the US dollar in 2003, compared to 54 cents in the previous year. This decreased earnings by $274m, and the year end rate was 75 cents, an increase since the start of the year of 32%.

The next slide analyses the exchange rate variance between its effect on operating costs, the balance sheet and hedging. You can see that the variance of the balance sheet revaluation brought through the profit and loss account was $100m adverse, relative to last year. The absolute charge in the period was approximately $140m.

This movement reflects primarily, the revaluation of US dollar receivables in the local currency balance sheet of group companies. A balance sheet adjustment at QIT, where the function currency is the US dollar, was $25m within the period.

Returning now to our variance analysis, higher volumes in the period increased earnings by $38m. At the half year, we reported strong volume growth, but unfortunately, the material slippage of Grasberg had a major effect on volumes in the last quarter.

Analyzing the volume variance by businesses, you can see that our major new projects added significantly to volume. Diavik, Escondida with the Phase 4 expansion and Robe’s West Angelas mine, together with just under six million tons of additional shipments at Hamersley, increased profits by $130m.

The benefits of these projects was offset, however, by the effect of lower bi-product grades at Kennecott Utah Copper and lower titanium dioxide sales volumes, as we foreshadowed in our fourth quarter investor seminar.

Now, Freeport makes no appearance in this analysis. Although volumes were lower as a result of a pit slide in late 2003, they were adversely affected by low grade in the first half of 2002. So, the year-on-year volume variance was negligible at Freeeport.

Turning back to our variance analysis, higher energy prices reduced earnings by $54m. The oil price averaged $29 per barrel, $3.50 per barrel higher than in 2002. This accounted for $20m of the income. Higher electricity prices at Comalco, particularly in New Zealand, accounted for most of the remaining zone.

Costs decreased earnings by $82m. As usual, this variance includes cash costs, non-cash costs, and one-off costs. This negative variance is disappointing, but it can be attributed to two main factors.

Firstly, these were the operational events which Leigh outlined earlier at Kennecott and Grabserg. High cash costs decreased earnings by $49m in these businesses, with much of this variance attributable to the acid plant failure at Kennecott and the material slippage at Grasberg.

Secondly, those product groups with weak markets also experienced higher costs, much of which is attributable to one-off events. Coal & Allied costs increases reduced earnings by $20m due to restructuring charges, lower production and ongoing demurrage charges amounting to $1 per ton shipped.

Elsewhere in the Energy group, costs were affected by the high wall and spoil pile problems at Cordero Rojo. At Rössing there was lower production, and an inventory write-down arising from the strong Namibian dollar.

Costs and other items at Rio Tinto Iron & Titanium reduced earnings by $35m, and I’ll talk more about that in a moment.

Now, the total effect of cost increases on this slide is $122m. That total is higher than the negative cost factor of $82m shown on my previous slide. In the rest of the Group, therefore, the process of cost reduction continues with good results. Leigh has outlined some of the cost reduction initiatives in the Energy group, and generally, we expect a better cost performance in 2004.

The sharp drop in RIT earnings, from $161m to $47m, requires further comment. This slide reconciles earnings in the two periods, and I’ve marked those variances, which include a substantial one-off component.

I’ve already mentioned the effect of balance sheet currency movements on QIT results. Unless there is a further deterioration in the US dollar, this will not be repeated in 2004.

The adverse volume gain was $28m. Sales in the second half were weak by comparison to recent years, with certain customers running down their inventories.

Finally, costs – unit costs were adversely affected by the decision to keep production volumes below capacity. However, most of the variance is attributable to non-recurring items.

You may recall that in 2002, RIT benefited from the settlement of a patent dispute. In 2003, we’ve had to take a sizeable charge for a potential bad debt. I’m afraid I’m unable to give out the quantum or nature of this bad debt since its recovery will shortly be subject to negotiation.

As always, Other is the net of some fairly large items. The pensions financing charge was $60m higher in 2003, with the absolute charge in the year at just under $50m.

We continue to benefit from low US dollar interest rates. The interest charge in 2003 was $36m lower, due to both favorable interest rates and higher capitalized interest associated largely with the Alumina refinery.

In addition, Other benefited from a $30m write-back of impairments made previously at Fortaleza. The sale of Fortaleza was completed early in January 2004. This meant that we had to reinstate some of the write-offs from 1998. In addition to that, there will be a small profit booked in 2004 on the sale of Fortaleza.

Finally, there were a few other tax and provision movements in 2003, but nothing to be disclosed.

Turning now to the balance sheet, there was, as expected, and as previously disclosed, minimal change to our net debt during the period. Net debt now stands at $5.6b, a small leap. The gearing ratio decreased from 41% to 34%, due to the depreciation of the US dollar raising asset value on the balance sheet. Interest cover in 2003 was a healthy 11 times.

Our operating cash-flow in 2003 was again strong, at $3.5b, 7% below the record $3.7b achieved in 2002. This compares to a 10% decline in earnings. The operating cash-flow included a net inflow of $177m from net working capital movement.

Capital expenditure in 2003 came in slightly below forecast at $1.6b. Following a commitment to the Iron Ore expansion program, we would expect capital expenditure in 2004 to be closer to $2b.

So, to summarize this section of the presentation, prices improved during the year, especially in the second half, but this was largely offset by US dollar weakening. Our new projects added significant volume growth, and this will continue over the next few years.

The underlying cost performance was reasonable, but it was more than offset by one-off events. The balance sheet is strong, despite the significant investment program of the last few years. Finally, our cash-flow remains strong.

With that, back to you, Leigh.

Thank you, Guy. Appropriately, we’ve been talking a lot about 2003, but let’s now look forward to 2004 and beyond. In this section of the presentation, I would like to talk about our projects, and how some of the key markets are developing.

The markets have been changing pretty dramatically over the last few months. The non-ferrous metal markets are pretty transparent to you, so I won’t make any further comments on them. However, there are some pretty interesting developments elsewhere, many related to continuing strong growth in China.

I’m sure that you will agree that 2003 was an excellent year for the Iron Ore group. Despite the current infrastructure constraints, the team at Hamersley did a great job, increasing 2003 shipments to over 74m tons, and the platform has been established to meet the strong demand we expect over the next few years.

That strong demand was confirmed by the 18.6% price rise I talked about earlier. We will again be pulling out all stops to meet demand in 2004.

At the same time, we are making real progress in wringing efficiencies out of the Hamersley and Robe operations through closer co-operation. The common usage of rail infrastructure has now been extended to port and power facilities. In addition, we are looking at closer co-operation of site and corporate services.

However, the main focus of attention in the Iron Ore group is the expansion of capacity at Hamersley, and the expansion of Robe’s West Angelas mine. In 2003, we approved over $1b of projects in the Iron Ore group, the major component being the $685m for the expansion of the Hamersley port capacity.

This slide shows the current parker-point terminal at the Dampier port, and here we can see the expansion plans for the site, with the new wall, expanded stock-yard, and rail dump-station. As we have said previously, the port investment is about giving us the capacity to deliver more tons, and we will invest in mine capacity in line with market demand.

The more mine capacity is needed now, however, and we have committed $200m to expand the capacity of the Yandicoogina mine to 36m tons per annum. In addition, the West Angelas mine will be expanded to 25m tons per capital of just $100m.

As I said at our Investment Seminar late last year, a new addition to the list of opportunities in China is hard coking coal. China has significant quantities of coal, but domestic, high-quality, hard coking coal sources are limited. Demand for hard coking coal in both traditional markets and China, increased markedly in 2003, and the expectation is for a substantial price growth this year.

The strength of interest we have seen in Hail Creek offers the potential for a partial ramp-up of production than we initially expected. We expect shipments of over 4m tons in 2004.

Turning to thermal coal, as I said earlier, we saw significant improvement in spot prices in the Asia Pacific market late in 2003. The spot prices increased to over $40 per ton, compared to the low middle twenties in the middle of 2003, as Chinese coal has been diverted to domestic markets, and Indonesian supply has been affected by heavy rain. After the terrible market conditions for most of 2003, this increase is most welcome.

At Coal & Allied, where the majority of sales are made on a short-term basis, the benefit will flow through progressively during the year, as shipments priced last year are fulfilled. In the first quarter, most shipments by Coal & Allied were priced before the markets took off. Post the first quarter, about 50% of shipments should benefit from the higher prices.

Turning to Alumina, you can see in this set of slides that our new refinery is now well advanced. It’s an impressive site, and it’s right on track to start commissioning in the fourth quarter of this year.

Finally, Diamonds – Diavik continues to meet or exceed all our expectations. Production came off a bit in the fourth quarter, as we moved through the material at the top of the A154 north pipe, but we expect rapid improvement from here.

The first contribution of $41m for six months of sales during commission shows just what a good progress this is, and the diamond market continues to be robust. The Christmas period was good for the retailers, and there is every prospect that 2004 will be a solid year for rough diamond producers.

In conclusion, 2003 was a challenging year. The depreciating US dollar, two major operating issues and weak markets in Energy and Industrial Minerals, more than offset the positive effect of the higher prices and the additional volumes from new projects.

Looking forward, though, the business is very well positioned. The direction of the US dollar does remain a risk, but the supply and demand equation, for most products, is in better shape. We are seeing improvement in the OECD economies, although it is still limited at this stage. China continues to grow strongly, and commodity prices, as I have said, have increased, particularly towards the end of the year.

In terms of the Rio Tinto asset base, our newly commissioned projects will start to reach full output levels in 2004, and in addition, our Alumina refinery, and iron ore capacity expansion will follow on close behind.

These assets enhance what is already a high-quality portfolio, and position us well to keep delivering for our share-holders. Perhaps, on that note, we can take your questions.

Thank you, Leigh, and also Guy, down there in Melbourne. So, if we could move to q and a. We’ve got microphones available, and if you would be kind enough just to identify yourselves as you put your questions. Thank you.

[Inaudible] what that shortfall might be.

Secondly, just some general comments about how you see copper [inaudible]?

Well, firstly on Freeport, I think, as you would be aware, Freeport has given detailed guidance on their position and their expectation going through the first half. I’m a little reluctant to embellish that, for obvious reasons with their managers.

Suffice to say, that the split will have a significant effect on the attributable metal for us from under our joint venture. Now, a lot of that is still under discussion with Freeport, but the circumstances are such that they anticipate resuming mining in the higher-grade section in the second quarter of this year.

So, the circumstances are such that that will obviously unfold as the first and second quarters unfold, but it will have a significant impact on us. Our earnings are going to be significantly affected as a consequence of that, but at this stage I can’t go into any more details.

What about copper pricing?

Copper price – look, I think it would be wrong to try and speculate on copper price. I think we all know the circumstances regarding the shortage of concentrate. Copper is currently about $1.14 per pound, stocks are at about 6.5 weeks, and a number of producers have announced a resumption of production in the United States.

However, a lot is going to depend on economic recovery and the strength of economic recovery in the US and Europe. Demand from China is very strong. So I wouldn’t want to speculate going forward, but I think it’s sufficient to say it’s a far more healthy environment for producers than we entered into 2003.

It’s John McKenna from Deutsche Bank. I just have a couple of questions – Iron Ore, it looks like solid results from Hamersley and West Angelas, but Robe River’s second half profit looked quite a bit down, and I wondered whether there were any particular afflictions there, or whether that’s permanent?

The second question is in terms of Diavik. The level of sales of finished production – there was an expectation there was going to be quite a bit of stockpiling there. What level of stockpile have you got there, and/or have you got a dollar for a carat?

A what, sorry? A dollar per carat?

Yes, average price.

John, West Angelas has performed very well, and we have had to put a fair emphasis on pre-stripping, because really, we are now ramping up West Angelas much faster than anticipated. We want to build flexibility into that operation.

The [indiscernible] operation has had some challenges during that second half, nothing of a dramatic nature but it’s meant some higher costs associated with generally wetter ore.

That obviously impacted on the Robe operations, but I would have to say Robe as a whole is going very, very well, and we’re very satisfied, particularly with market acceptance of West Angelas.

We’re bringing Diavik up to full capacity, and in terms of sales, we’ve got to build up diamond stocks so that we’ve got a reasonable sale when we go forward with that. There’s nothing untoward there. I mentioned that we were mining into one south wall north during the latter part of the year, but frankly, overall, Diavik is going extremely well.

I wouldn’t want to be specific – it’s a competitive environment there in the rough diamond market, but I think encouraging news is the key. Enthusiasm for Diavik has been very strong, and the diamond market as a whole was quite robust in December which remains the same now.

Thank you.

Hi, it’s Charles Curnow from Seymour Pearce. I just have a question as far as Rössing is concerned. You said there were quite a lot of problems there with the loss of long-term high-price contracts, or the expiry of those contracts, and the fact that the Namibian dollar has also been quite strong.

You also say there is an impending closure possible of the operation. Can you give us more details on that? Would that actually happen prior to the need in 2010 for the pit wall push-back?

Thanks, Charles. In common with a lot of businesses in southern Africa, and I think, as most of you are aware, the Namibian dollar is tied to the South African rand, that had a significant impact on the business. It was also compounded by a number of issues.

Firstly, in the first quarter, there was very limited production. We were constructing and tying in some new conveying systems in the plant, and also the market for uranium, the spot market, really only started to pick up later in the year.

Therefore, we have had weak prices, expiry of a higher-cost price contract, limited production in the first quarter and the rand effect.

We also had some revaluing of stocks that are low-level, so in all, a pretty challenging environment for Rossing, which is a pretty mature mine. That means we are faced with some very challenging decisions going forward regarding [mine loss extensions].

At the moment, the aim is very much focused on making those businesses profitable, in the short term, and fortunately, the market has picked up a little bit.

The issue of a major push-back and a continuation of mine [loss] is before us, but no decisions, and certainly that strong rand makes it a very challenging situation in front of us.

I’ve got one for Guy. That interest charge-line, the capitalized interest was quite a large number, and then the accrual was also an item in there. What can we expect this year in terms of capitalized interest and accruals?

Did you get that, Guy?

In answer to that, we obviously capitalize on projects until they start up, and so therefore, we will be starting at Comalco, which is the refinery, which is the big item there in the fourth quarter.

A much more important variable, to answer your question, is the lower interest rate, but I wouldn’t give a forecast of any of those numbers.

It’s Rob Marshall-Lee from Newton. I would be interested to hear Rio Tinto’s view on the shipping market and how that’s likely to impact either their market or the costs, such as demurrage, etc, moving forward.

Well, I think, as many of you are aware, firstly shipping rates have risen dramatically. Timed charter rates for cage-sized vessels have gone over $100,000.

Most of our supplies are on an FOB basis. Probably about 17% I think is on a C&F basis, and we do have a book that enables us to have a lot of our forward price positions covered.

As regards the FOB market, obviously that’s had an impact on a number of customers that choose to take FOB. Many of them would have long-term contacts with the freighters in place.

However, what it has tended to do has meant that the market has become bi-focated, if you like. Shipments out of Australia for iron ore or coal into the Asia Pacific stay a lot more competitive than out of Brazil or South Africa into the Asia Pacific, but on the other side, iron ore shipments or coal into Asia are more the province of Brazil, in the case of iron ore, and South Africa and Columbia in the case of coal.

As I said, a number of players do have long-term contracts with freighters. It’s made worse by the fact that I’ve heard estimates of up to 10% of the world’s [Pan-American] cage-size vessels are in ports, waiting to load. Many of you will be aware that Newcastle had, I think, at one stage, 50 ships waiting offshore, so that’s exacerbating the situation.

There is a new build program coming down the pipe, but that’s not going to ameliorate it in the really short-term. I have to say our Rio Tinto Shipping group, and the benefit of having that in place is standing us in good stead.

If we can come back to the net debt, can you add a bit more flavor in terms of your expectations of the net debt this year, and also regarding the composition between the short-term and long-term position.

That sounds like you, Guy.

Well, the composition of the net debt is predominantly short-term. Nearly all the debt is either held in the commercial paper market or it is in the European MTM program or in bond issues.

The great majority of that, if it is of medium-term, has been swapped back into short-term interest rates. So in other words, something like 90% of our debt book is held on a very short-term basis.

Now, I’m not going to give you a forecast for the debt this year, but if present conditions continue, and if our capital expenditure is what we expect, then, other things being equal, it’s not going to change all that much.

Now, from time to time, we have fixed small amounts of our debt – you know, last year, for example, we fixed $300m of our debt to replace the maturing fixed rate debt, but in general, it’s our preference to be short-term.

The reason that we see that is that at the moment that is a very, very low rate of interest that they’re paying, and we’re very content with that. We have observed the relationship between prices and interest rates, which is currently exhibiting a lag – in other words, the interest rates haven’t yet caught up with the level of prices.

We’re enjoying the benefits of that, as we have done for the last couple of years. We’ve benefited greatly from the short-term orientation of our debt book.

Hi there, it’s John Clemo from Investec. I have two questions, both about coal. Firstly, you’ve made some comments about the state of the Asian thermal coal market and that China has been the swing factor there. Is this a long-term phenomenon or are the Chinese just playing ahead of the Japanese negotiations?

Secondly, you made the comment in the hand-out that China has vast reserves of high-quality thermal coal, but they have problems getting it out. Have you ever thought of trying to get it out?

Many, many have. Firstly, I don’t think there’s anything about playing ahead of the negotiations. I was in China three weeks ago, and there is an energy shortage in China, and there are energy shortages in a variety of places.

There are also tremendous requirements on the infrastructure. I mean, I heard it put to me that there is a demand of 400,000 wagons a day - but perhaps I’ve got the number wrong, as that sounds too few – and the supply was a quarter of that.

I think the situation is that a number of the coal mines in China are small, inefficient, unsafe, and those are now really under threat. They have some absolute world-class mines, but the export situation in China is such that it’s more attractive, and there is strong demand for domestic coal.

Now, to a degree, a number of commentators have been suggesting that that might occur for some time. How sustainable it is, all depends on development of those reserves, which are significant.

It also depends on the continuing strong demand for energy in China, but at the moment, that is, I think, a situation which is quite genuine and certainly is having an impact in the Asian markets.

We’ve looked at coal properties in China. The reality is that most of the players in China don’t feel that they need foreign investment to assist them with mining Chinese coal. They feel that they are quite capable of doing that, and whilst we’ve looked at opportunities, we haven’t seen something which we believe justifies our investment.

Our focus has very much been on supplying China with metals and minerals which they don’t have. I’d have to say that Chinese companies and the government feel that they are quite capable of [inaudible].

I think the point Leigh makes about energy supplies is worth underlining. I think looking at it from where we stand, energy supplies are probably going to prove to be one of the primary constraints on the sustained rate of economic growth in China.

Good morning, it’s Peter Davey from HSBC. If we look at the current projects, you’ve got permissions there, but looking beyond 2005, when basically all your operations, including Alumina and the Iron Ore are sort of ramping up or hitting their full capacity, and given the decline in exploration spend, not just by you but by the industry, where are you turn to for any impact projects, given the tightness in the Copper market?

I mean, you’ve sold off a lot of your exploration projects and have moved on. There’s not a lot left in the cupboard.

Peter, thank you for that question. This wasn’t a planted question! I think at times you are under-estimating the performance of this Group. If you look over the last decade, we’ve been able to grow our volumes pretty consistently. I know some of that’s been M&A.

A lot of that has been brown-field, green-field and some exploration success. I mean, Diavik is a case in point. We’re putting in place infrastructure in our Iron Ore business such that we can bring on mines dependent on demand.

Now, a lot of people are asking about the Chinese iron ore demand going to be, what is steel production going to be? So we’re well-placed. We’re expanding Yandi, we’re expanding West Angelas, with capability beyond that, because we will have put in place to describe that infrastructure.

The Alumina project is going to come on-stream later this year. We have already put in place a small team looking at expansion beyond that, on the back of the billion tons of resource at NeWeipa. We’re very well placed with bauxite.

Now, as I’ve said before, we can be a 6m ton Alumina producer in a decade, and so there’s an example there. Many of you are aware of the Claremont project which is the logical follow-on to Blair Athol.

We’ve separated in Diavik the strategic planning group from the operations group, such that we can look at the diax beyond 154 South and 154 North. What we don’t want to have is, given the enthusiasm for those diamonds and I think what is looking to be a great project, we don’t want to have a strategic group distracted by the day-to-day operations.

We are looking at what we need to do to bring those on. Now, the timing of that will depend on things going forward.

You mentioned selling off exploration projects. Now, what we have done is sell off projects which don’t fit our criteria in terms of size, and we’re quite opportunistic about it. I think we are very comfortable with the [indiscernible] sale. It’s a real exploration success, but it doesn’t meet our criteria. Marcona similarly – quite an exploration success but more suitable to others.

We’ve had, what I think in resolution is a vast body of mineralization, and we’ll bring that forward. Sure, we are spending less dollars but I know that David Clementi, who is here would say that we are probably more focused than we have been for a long, long time.

I’m comfortable with the sweep of projects that we have going forward. I’ve talked about UGS in the presentation. David, I don’t know, would you like to comment at all upon our strategy on exploration? I think we have been unfairly dealt with on selling off exploration.

And he hasn’t come banging the door for more exploration dollars, but is there any comment you’d like to make?

No, I don’t have too much to add to what you said, Leigh. I think that there isn’t a one-to-one relationship between what you spend and what you find. I think it’s fair to say that we were brought up, with the rest of the industry in the early 1990s in a very high exploration spend, but one which I think really led to destruction of value rather than creation of value.

Since then, I think we’ve been on a course of being much more selective in what we do. We do an awful lot of, for example, bulk commodity exploration. We have got a very good program going in the Hamersley ranges to back up the expansions there, and some good news coming out of it. We’re doing bulk-size work as a back-up at the Comalco Alumina refinery with development and possible future expansion.

When we look at the exploration projects we have around the world, whether it’s diamonds, nickel, we have a nisulphide resource in the US, and we have a very, very good [indiscernible] resource in Indonesia. There are a lot of projects there, I think, for us to be getting our teeth into over the coming year.

Thanks, David. I mean, I think it’s interesting to look at Hail Creek. Here is a project with resource of a billion tons, reserves of close to 200m tons. We’ve been involved in Hail Creek for, I suppose, close to thirty years. I’m pretty pleased. Sometimes a little bit of patience is necessary.

The Cortez Hills discovery, which I think is an outstanding discovery (we are 40% partners with Plas) is more an out-sized business than, say, a step-on.

Can I maybe just add a brief general comment on the disposals bit which I think you have commented on. One of the things that struck me in the early period of being closely engaged with the leadership of Rio Tinto is just how deeply embedded in the company this sense of value creation and value realization is.

I must say, I find it a very healthy response to think about active portfolio management, taking opportunities to dispose of non-core assets at a time when we can lock in value to the share-holder. I don’t see that as in any sense giving away the future, but a consistency of value creation within the company.

Is there anybody else? We do have the opportunity to have a cup of tea or coffee outside and if there are any questions which haven’t surfaced in this general discussion, we can take them there. There is one more.

Given the way commodity prices are trading today, you would probably be well placed to say that some of them were above long-term average prices, and therefore based on a value-based approach to managing a portfolio, would you say there is potential for further disposals? Can you comment on that?

We’re not going to be specific, obviously, but I think it’s fair to say we always keep to what we’ve said in the presentation. Our portfolio is under review. I think you’ve got to recognize that Rio Tinto has taken a very long-term perspective on its investments, and we are quite satisfied that should the circumstances be there, we will look for share-holder value.

The important thing is, given the strength of the company, we don’t have to panic in any of those situations, and we are able to get what we think is good value for the share-holder. We are always constantly under review, but no panic.

Thank you, ladies and gentlemen. We’ll leave it there, and pick up outside for those who’d like to. Thank you.