力拓 (RIO) 2004 Q2 法說會逐字稿

Good morning and welcome. I think you all know Leigh Clifford, he needs no introduction. Guy Elliott, our Finance Director is actually in Melbourne and joins us from there. Good evening Guy. The sequence of the presentation today is that I'll give you a summary of the results and the outlook. Leigh will then provide an overview of our performance in the first half before handing on to Guy for a detailed review of the financials and then Leigh will come back on a number of our projects before we get into questions and answers.

Our adjusted earnings in the first half of the year as you may by now have seen were just short of $1b, $993m, an increase of 55% on 2003. This was our best ever half year result achieved despite a number of operational challenges in the first quarter which Leigh and Guy will talk about later. These earnings clearly benefited significantly from higher prices for traded metals and stronger prices for bulk commodities also are feeding through progressively into earnings. Another feature, of our result of course is the increased capacity that is now coming through on recently completed projects, and we have more to come in the next few years from further development of our existing asset base.

Capital expenditure in the first half year was $1b. These earnings, record earnings, would actually have been substantially higher but for the lower production from our interest in Grasberg and also some production and cost impact at Hamersley Iron driven by the first quarter cyclone, and also some costs incurred in preparation for increased production from Hamersley towards the end of next year.

Net earnings benefited from an exceptional gain of $446m, largely driven by a profit on asset sales of just over $600m and a charge of $160m relating to the Colowyo coal operation in the United States, and Guy is going to say more about both of these items later. This means that net earnings were over $1.4b. The cash inflow from asset sales of around $1.2b combined with the strong operating cash flow for the period have substantially strengthened our balance sheet. We actually believe we've locked in considerable shareholder value by the timely disposal of some non-core elements in our portfolio.

Net debt is now down by $1.2b to $4.5b, and gearing is at 28% at the half year. We think we're in a good position to take advantage of investment opportunities over the next few years, but as ever anything that we do will reflect Rio Tinto's longstanding commitment to shareholder value creation. The dividend for the first half has been set at $0.32. It's a bit formulaic, it's consistent with our policy of paying an interim dividend of half the full year dividend in the prior year, which was $0.64.

Looking forward we remain broadly positive on the global economic outlook. The US economy is performing well. Growth in Europe is perhaps unexciting, but Japan is showing signs of unexpected strength, and we anticipate the continuation of the current strong fundamentals in our key markets over the second half of the year. The strong growth we have seen recently in Chinese industrial production continued in the first half, however government concerns that the economy there is overheating have led to the adoption of measures which are likely to slow the rate of growth in the second half. I think the nature of the vast changes underway in China mean that it's almost inevitable that there will be some periods of economic uncertainty. But our business model which is built on low cost, long life assets and strong customer relationships is designed to respond flexibly to whatever eventuates and we remain confident that over the long term China will continue to grow strongly with a very beneficial effect on the demand for our products.

Another positive feature for us in 2004 has been the US dollar which has traded within a narrower band against most currencies of importance to us, which is quite a sharp contrast to what we saw in 2003. Finally, we are approaching elections in a number of countries that are of importance to us, and these and other uncertainties in the global political environment could well influence business conditions as we go forward and some of that is manifest, of course, in today's oil prices. One particularity important hope is that we will see global leaders really making an effort to secure a successful outcome to the Doha development round, which if completed successfully will have a very beneficial effect on world trade and provide a good backdrop for us. So on that note Leigh I'm going to hand over to you to continue the story. Thank you.

Thank you Paul, and good morning. Earnings for all our product groups are up. Copper is particularity strong despite the loss from Grasberg and the slower than expected ramp-up of Escondida. I think encouragingly Kennecott, Utah copper made an excellent contribution of $136m. Most product groups are starting to see the effects of the stronger markets. Iron ore and coal price rises started to flow through from April and both these markets have very strong fundamentals. Our aluminum operations are going very well, and the diamond business is strong despite weak production from Argyle because Diavik is performing extremely well. Even Industrial Minerals is seeing improvement in market fundamentals, but coal product prices are the major contributor to that improvement.

So let's look at some of the key factors affecting results in more detail. As Freeport advised the market, output from the Grasberg mine has been constrained. The focus of Grasberg operations was on ensuring safe access to the high grade areas of the pit, and this has been achieved. Mining in the high grade areas started in April. The sharing of production between PTFI and Rio Tinto is the subject of ongoing discussions. I think it's important to realize that the metal strip is calculated on an annual basis and really we can't finalize that until the end of the year.

As I have said though, expect a very modest contribution from Grasberg in the second half of the year, but importantly a very strong 2005. In the Pilbara, operations are now essentially back to full production following cyclone Monty, wet ore continues however to be an issue predominantly at Tom Price and Paraburdoo. That really is wet ore affecting the finds. Cyclone Monty was a once in 50 year event. Rainfall was the highest since 1945, and over 450 millimeters of rain fell over two and a half days. As a consequence the water table has risen about 10 meters. Although port and rail were back up and running within a week, property damage and operational disruptions were extensive and we talked about this at the annual results. Importantly, however there was no significant effect on the capacity expansion projects that are well underway, and I'll talk a little bit more about those later, and Guy will quantify some of the effects of cyclone Monty, etc.

In 2003 the thermal coal market was very tough. However in late 2003 prices started to rise from the mid-$20s to now around $60 a ton. The market is buoyant and coal is in short supply. Strong demand with worldwide economic growth, and I'm sure the obvious impacts of the higher oil prices, etc. is the trigger. Infrastructure limitations have constrained the supply side of response in Australia and Indonesia, and these issues will take some time to sort out. Moreover, in 2003 with shortages of power and coal becoming increasingly evident in China, the government acted to restrict export licenses and started to withdraw export subsidies. The prospect of less coal available from China squeezed the market and forced utilities to secure supplies from elsewhere. We think another major increase in exports from China is unlikely in the short term.

Turning to the issue of port congestion. There has been a significant improvement. The capacity rationing system for Hunter Valley exports has worked. Ship queues in Newcastle have decreased from more than 50 ships to less than 10 with the coal chain through port reaching record levels. As a consequence demurrage has dropped from greater than $2.00/ton earlier this year to a few tens of cents a ton. In the Pilbara we've learned to manage the port better, while operating at the limits of the infrastructure and with the low stockpiles that have existed for some time. Dry bulk shipping capacity has freed up as a result. This together with the substantial shipbuilding program underway has resulted in some easing of freight rates in recent times.

Another area of concern last year was Industrial Minerals. We have seen a reasonable profit increase in this product group and a modest improvement in the underlying markets, but most of the improvement in earnings was due to the higher coal product prices, and to some degree exchange rate movements in iron and titanium. Demand growth for pigment has been reasonable but the benefit is not flowing through to us yet, since there is a surplus capacity in some sectors, especially conventional chloride and sulfite slag and there is still some excess inventories of chloride slag. However, the market for UGS remains strong, and the expansion of UGS capacity to 320,000/ton a year is underway.

In summary, therefore, we have generally strong markets. Prices I would describe as somewhere between satisfactory, good and in a number of cases very good. Grasberg is on track for a very strong 2005, and finally we've seen significant improvement in operational performance following some issues late last year and earlier this year. You would be aware that last week I announced management changes which flow as a consequence of Chris Renwick's retirement later this year, and I am confident that this very experienced team can take the company forward over the coming years. On that note, over to you Guy.

Well thank you Leigh, and good morning to everybody in London. The adjusted earnings in the first half of 2004 were $993m, and they were $352m higher than the $641m achieved in the first half of last year. Before I look at the results in detail, let me point out two items that may not have been expected. First of all the adjusted earnings include a $20m profit on the sale of our interests in Southern Era. This treatment is consistent with our normal way of accounting for undeveloped properties. We usually provide against all expenditure when incurred and then write back provisions when either development proceeds or a sale occurs. Secondly, we booked a further $29m credit in the period following our decision to enter the Australian tax consolidation regime. In 2003 you may remember that we booked an $8m credit. The additional credit reflects the results of the work in the first half of this year to resolve issues in the application of these new rules. But apart from these two, there were no other unusual items in these results.

Now let me look now at the financial results in our usual waterfall chart format. Prices for almost all our commodities moved higher in the first half of 2004 building on the momentum generated in late 2003 as economic recovery started to take hold worldwide. The US dollar on the other hand traded within a narrower band against most currencies of importance to our business, very different from what we saw in 2003. When combined with inflation, these factors increased earnings by $545m in all.

Turning to price effects in detail, overall price movements increased our earnings by a net $722m. Looking first at the traded metals, the copper price was the main contributor to the positive variance. The copper price averaged $1.25 in the period, 67% higher than in the first half of 2003. Taking into account provisional pricing of $15m the effect of the price rise was $328m. The aluminum price rise was more muted where the 19% price improvement contributed $75m. Gold rose by 15% and added $54m to earnings. Price changes for our other products added $223m to earnings with strong iron ore, aluminum and diamond markets delivering robust price increases. The substantial spot price rises in the thermal and coking coal markets in Asia started to float through to earnings as Leigh indicated. In the second half we'll enjoy significantly higher realized prices. Finally you will note the Rio Tinto iron and titanium variance of $34m. This reflects the strength of the iron and steel markets and the strong demand for zircon. As Leigh said, the coal slag market remains difficult.

Turning to currency, exchange rate movements decreased earnings by $114m overall. Although the US dollar didn't move too far from its yearend valuation, on average it decreased in value against all the important currencies for Rio Tinto, when you compare the two periods. As expected, the relationship between the Australian and US dollars was a major factor behind the variance. Over the two six month periods the Australian dollar was on average 20% stronger. Combined with balance sheet effects and hedging gains, the net effect was a reduction in earnings of $94m. The positive Canadian dollar variance is the net of a negative variance on operating costs more than offset by the absence of the large negative balance sheet currency adjustment, which QIT suffered in the first half of 2003. The strength of the Rand continues to be a concern to our businesses in South African and Namibia.

The next slide breaks down the exchange rate variance between its effect on operating costs, the balance sheet and hedges. You can see that the variance for the balance sheet revaluations booked through the profit and loss account was $80m positive, relative to the first half of last year. The absolute credit was approximately $20m. This movement mainly reflects the revaluation of US dollar receivables in the local currency balance sheets of group companies.

Returning to our variance analysis, to help out your understanding of the underlying results of the group, I've separately identified the effect of the loss of earnings from Freeport due to the effects of the material slippage, which Leigh has outlined. The total volume and cost variance was $166m. This effectively represents what Freeport would have delivered if its volume and cost position had been the same as in the first half of 2003, but at the average prices for the first half of 2004.

Turning back to the variance analysis, higher volumes in the period increased earnings by $119m. This reflects strong volume growth at Escondida, Hail Creek and Daivik. The performance of Hail Creek and Daivik were especially pleasing. As you can see from this chart, iron ore volumes increased by only $3m. This would have been higher but for the effects of cyclone Monty. Hamersley shipments in the two periods were similar, but as a result of the significant disruption to all operations except Yandi, the ratio of premium products was reduced, and this had an adverse effect of about $13m on earnings. Hamersley volumes through Cape Lambert were also less than anticipated. Robe's Mesa J operations were also effected by the cyclone and although production levels returned to normal relatively quickly her product quality was effected for a prolonged period. West Angela's volumes rose in line with the ramp-up and the mine is now operating consistently at its $20m per year capacity. The total adverse cost variance for the period was $80m.

As others in the sector have reported there are cost pressures on our industry. Higher energy costs reduced our earnings in the period by $22m, and we experienced general inflation in consumables, for instance grinding media and mill liners as well as contractor costs, especially in certain parts of Australia. The inflation figure we provide to you is a CPI based calculation. It does not take account of specific cost items subject to strong inflationary pressures in the minerals industry, especially in Western Australia and Queensland. The majority of the adverse cost variances for the period was attributable to Hamersley, and I'd like to go through that in a bit more detail.

Costs reduced Hamersley earnings by about $60m. In addition to the more general cost related comments I've already made, this reflected two key factors. First the effect of cyclone Monty on costs both in terms of damage remediation and lower output, and the additional costs incurred in anticipation of the significant expansion in production from late 2005. Of the $60m adverse cost variance we estimate that Monty accounts for over one-third, excluding the lost margin on sales. But of course accurately quantifying the effect of such an event as this is always very difficult.

This slide shows the Mount Tom Price pit immediately following the cyclone and then again two weeks ago to give you some idea of what I'm talking about. You can still see some water on the ground, and this combined with the elevated water tables is still giving us some material handling issues as Leigh has already indicated. The second category of cost increase which accounted for the remainder of the cost variance reflects the significant growth and maintenance activity that's occurring in the Pilbara to meet contracted volumes following the expansion.

Let me give you a few examples. In the first half of this year we moved an additional 12m tons of overburden. We increased our employee numbers by 17%, we refurbished 175 houses and we carried out major planned refurbishments of the truck fleet of Mount Tom Price and Paraburdoo. All these additional costs are expensed rather than capitalized. In summary, Hamersley is making good progress towards building a bigger business. Generally we saw better operational performance in the period, especially in the second quarter, which translated into an improved cost performance. Adverse cost variances at a few businesses such as Argyle and Palabora, were attributable to volume deficits rather than higher costs, and in general it's fair to say that most of our operations are going well.

The other variance of $66m includes primarily the loss of earnings from businesses we've disposed of. The positive effects of the gain on the sale of Southern Era and the tax consolidation benefit both of which I have mentioned, were offset by items of a similar magnitude last year. There was a minor increase in pension costs, but nothing else notable in Other. As Paul outlined, net earnings have benefited from exceptional gains of $446m. The profit on the sale of the FCX shares in March was $518m. The cash received on the sale was $882m and the carrying value was $136m. To arrive at the gain we also had to take into account a proportion of the good will on the original Freeport transaction in 1995. That which had been written off to reserves under the UK accounting standard which then applied. The other asset sales which we have made resulted in minor gains and charges which net out to $88m.

In terms of Colowyo a detailed review of the mine plan and projected cash flows of the business was completed in June 2004. This indicated that future operating and development costs are substantially higher than previously estimated. As a consequence of this, an exceptional charge of $160m has been recorded for the write down of Colowyo and related provisions. As background, Colowyo was purchased in 1994 and at that time we guaranteed the future supply of coal under certain contracts. We're now not sufficiently confident that we will be able to economically service the contracts in their entirety. We're looking at various options for Colowyo but given that none of these options is well-advanced we've decided to take the charge now. In the last six months there's been an extensive rationalization of the portfolio of operations. Better markets have provided the opportunity to lock in shareholder value for some of our non-core assets. In addition we've restructured some of our smaller long term investments such as Rio Tinto Zimbabwe to simplify the portfolio.

In total we've realized cash of approximately $1.2b in the first half of this year from these disposals. These proceeds, together with the strong operating cash flow in the period have significantly strengthened the balance sheet. Net debt is now $4.5b and gearing is at 28%. As we've previously said, we see a strong balance sheet as a significant competitive advantage in this industry. It enables us to take advantage of opportunities as and when they arise. Rest assured that we will continue to monitor the capital structure of the group, but at this stage of the business cycle, and in the context of the large capital expenditure planned for this year and next, we feel comfortable with our current position.

Operating cash flow in the period was just over $2b, continuing the strong trend of underlying growth we've seen over the last decade. Our strong cash flow is being put to good use to fund a significant program of projects. Capital expenditure in the period was $1b, and we expect a similar or slightly higher level of spend in the second half of this year. The rise in capital spend seen on this graph is a reflection of the quality of the options we have in our portfolio. Our capital approval procedures are as rigorous as ever, but current markets have given us the opportunity to exercise some of these options. On that note, back to you Leigh.

Thanks Guy. So far we have discussed operational performance in the markets, now for an update on projects and explorations. The $1.3b investment program in the Pilbara is going well. Infrastructure to ship 170m tons from the Pilbara will be in place by the end of 2005. Sales contracts are in place to underpin most of the expanded capacity. Contracts have been signed with Baosteel and the other major Chinese steel mills. Therefore from 2006, Hamersley will have around 70m tons a year locked into long term sales arrangements with Chinese steel mills. Hamersley now has contracts with the top ten steel mills in China. From 2006 Robe will have $15m tons a year under long term contracts to China. However other markets are also very important, and a new long term contract was signed with Nippon Steel for Yandi ore totaling 150m tons over 20 years.

Let's look at how the projects are progressing. In the Pilbara we have and experienced team in place and we're confident in the execution of the various projects, all of which are on track. As you can see here, the stockyard, and this is the expanded portion is being substantially upgraded, obviously we'll be also upgrading the loading facilities, and the next picture describes the train dumper. Now in loading capacity is vital in our operations here, and this is certainly on the critical path. But as you can see, this is a pretty substantial undertaking. Here's a bus and a truck in the foreground, and bear in mind we started this project in December last year, so as you can see we're very well advanced.

The expansion of the Yandi operations to 36m tons is also on schedule as is the rail and power upgrading. The Hail Creek operations are going extremely well. It's ramping up to 5.5m tons a year, and we are fully sold for 2004 and should do a bit better than the 4m tons that I've advised previously. The Board this week approved an expansion to 8m tons, and with the regulatory approvals and infrastructure in place it's full steam ahead on this project. That increased production level should be reached by 2006. Of course the contract with Nippon Steel for the supply of up to 30m tons a year over 15 years, together with the current strong market underpins this expansion. I think it's fair to say that we haven't stopped there. We've also commenced a study looking at options for an expansion beyond 8m tons. As you know, Hail Creek is a very substantial resource.

Moving to the Comalco Aluminum refinery. Pre-operational testing and commissioning of the plant has started. For instance commissioning is progressing in the coal dump station, bauxite reclaim conveyors, bauxite mill and slurry systems and the residue disposal system. We've also fired up the coal boilers in the steam plant as part of this process. Production will begin in the fourth quarter and first shipments are expected early 2005. The new weeper project which underpins the bauxite supply to the refinery is also on track. We're progressing with the studies for a further expansion, but I'd have to say our focus certainly over the next six months is on commissioning of stage one.

Turning to Diavik, Diavik is performing strongly. The plant is well ahead of nameplate capacity and quarter two production was over 2m carats. We have just announced the establishment of a separate team under Ross Hannigan to evaluate and develop the underground ore bodies. As many of you would know, Ross is a very experienced underground operator who developed the Peak Mine [ph] as well as Hail Creek and Kestrel Coal, so I think in Ross we have an excellent complement to the existing operations team with his focus very much on the development of further [dikes]. Escondida. Escondida's position as one of the world's premiere copper assets is being enhanced with Norte and the sulfide leaks projects. Rio Tinto's share of Escondida's current expansion capital expenditure is close to $400m, and the sulfide leaks project which has just commenced represents incremental copper production of about 180m tons a year, and that should be operational in the second half of 2006.

Moving to some of the key challenges, firstly IOC. IOC has been showing some improvement, but a successful outcome to the labor negotiations currently underway remain critical to its future competitiveness. This business has been in financial difficulty, and therefore the changes that we have proposed are vital to the short term and long term survival of this business. At Palabora progress has been slow in ramping up production. Additional secondary breaking equipment has been ordered and has been delivered and is now in operation and pleasingly fragmentation is improving as the cave advances, but performance remains unsatisfactory and this will have to lift. A review of options to improve performance is underway and there's an urgent need to reduce cost base. Two weeks ago the management of Palabora announced that there will be 300 redundancies along with a range of other cost saving initiatives at Palabora to tackle this economic performance. I think you may rest assured that Palabora is the focus of significant management attention.

Turning to some longer term opportunities, we have a strong portfolio of exploration projects, and here are some of those that I have referred to previously. Studies are underway on all these projects. As Placer Dome reported yesterday the reserve at Cortez Hills has been expanded to 7.5m oz and a feasibility study along with further drilling has been commenced.

So in summary, operations are performing well. Continuing strong demand for our products exists, especially iron ore and coal. Completed projects are delivering and our major new projects are on schedule. We have an excellent suite of development opportunities and options and importantly as has been emphasized a number of times this morning, we have an extremely strong cash flow. Perhaps on that note we can take your questions.

Right, open to your questions. I'll take the first one from here.

Thank you, it's Russell Skirrow from Merrill Lynch. I think you mentioned twice during the presentation that you'd locked in shareholder value. I wondered if at the Board level you discussed locking in shareholder returns. Clearly your earnings are up 55% and yet the UK shareholder has taken a 5% cut in dividend. Don't you think this is an opportunity to demonstrate your capital management and your leadership in the industry by topping up that dividend with a special? Is this something that was discussed at the Board and will you remedy the situation at year end? That was my first question.

Well, let's-do you want to come and join us here Leigh. Let's address the dividend. You know our dividend policy, which is a progressive policy expressed in US dollars and half yearly dividends are a formulaic result of 50% of the full year dividend in the prior year, so I don't think this is necessarily an issue for us at the half year. Our balance sheet strength is increasing as has been demonstrated clearly, our net debt is down to $4.5b, our gearing is now below 30% at 28%, and we feel reasonably comfortable with that position. We've got a very strong organic investment program. While markets are certainly strong, there are no doubt some uncertainties still out there. So we, while we will continue to monitor our balance sheet and our ability to return cash to shareholders, I don't think we're at the point yet where we feel we've got surplus capital. If we do arrive at that point then we would certainly look to return it to shareholders in the most efficient manner. But we'll keep an eye on this, but I don't think we feel at all uncomfortable with where we are now.

The second question I had referred to the copper division and it's unfortunate that you've had the operating problems at the time of such high prices. Some of this obviously couldn't be avoided, such as Grasberg, but given that the operation is in an earthquake zone, I wondered under the terms of the original joint venture agreement that there wasn't a more defined remedial situation whereby you could determine the impact on your company and without waiting until the year end. Your joint venture partner there that has the majority holding reports quarterly earnings, so I don't understand why you don't know the impact until the end of this year, but you've clearly warned that it will be effectively no contribution in the second half despite doubling copper and gold sales from that operation.

Leigh do you want to speak to that.

When the agreement was negotiated in 1995 we had a formulaic approach to the metal strip that extended out to I think it was 2021 or thereabouts, and the plan each year is a determining factor in determining that metal strip. Now obviously there can be variations from month to month, and what we are talking about is a 12 month period, and given the magnitude of the operation, I think that the basis on which we calculate that is fair. I recognize it would be nice to have precision, but the 12 months reflects the nature of the operation. This is not an operation with unlimited flexibility, and we're pretty satisfied with that arrangement and it's worked well. At the end of the year we'll have clarity. As I've said a number of times, expect little if any contribution under the joint venture arrangement this year. Unfortunate though it is, that's the fact of life. Now as I've said also, 2005 will be a very strong year, because effectively much of that metal gets, if you like bow waved into 2005.

Thank you.

Nest question up on the left.

John MacKinnon from Deutsche Bank. Just a couple of financial questions. First, the impact in terms of Freeport that Guy was talking about, the $166m, does that include the joint venture and the direct stake in terms of impact? The second question the Southern Era profit, where was that reported or included in the divisional numbers? And the third question, this is in respect to Argyle, a good first result. Are the second half sales going to match that result? And can you give us an update in terms of the underground development and the timing for that.

Perhaps Guy you might like to address the financial questions on Freeport and Southern Era and Leigh the Argyle question. First to you Guy.

The $166m dealt solely with the joint venture. The effect of the shareholding in Freeport is dealt with in 'Other' as is the Southern Era profit, that is in 'Other.' In other words, that swing number of $66m, which I referred to, so I think that answers those two points.

All right.

As regards Argyle, John, quite a strong production in the last quarter last year reflected in sales this year, and we've also sold down all our Brown stocks, so we don't have stocks available for sale going forward. So, it's really production which is going to determine the sales level going forward from now on. Now we did have some impacts, some of it flowing from last year, we had a shortage of tracks for a variety of reasons, and also the heavy rain did impact production in the first quarter. I'd have to say that as it reaches the twilight of its years our flexibility in operating at Argyle is increasingly constrained so I think it's an issue which is with us. As regards the underground development, what we're doing is putting a deep line in, I can't remember the exact advancement, but it's over a kilometer down at this stage. It's pretty much on schedule. The plan is that that will enable us to test the ore body both grade and geo-mechanics issues, and that's something that won't really be clear until well into next year before we're able to make an decision as to whether and how we go forward, but clearly there are some challenges facing us in the underground, but I'm pleased with the progress of the deep line. I think the other aspect that's heartening about the diamonds business is the strength of the rough market, and it's a strong market.

It's Nick Hatch from Investec. Given the strong fundamentals that we're seeing at the moment in both thermal and coke and coal and very high spot prices, I was wondering whether you could give some guidance on your expectations for next year's contract pricing and perhaps further out the more fundamental question of supply and demand balances and whether apart from the Hail Creek expansion you have any other opportunities in your portfolio to exploit those markets?

I think you'll appreciate we'd be reluctant to give any guidance other than to say that perhaps the so-called term prices are going to rise. Spot prices for coke and coal if you can buy it, are astronomically high at the moment. Thermal coal prices are very strong and there's very limited spot available, so I think you can say prices, we anticipate, will certainly remain strong and I would think the so called term prices are going to rise. Going out a little bit, I think the issue is slightly different for each. In thermal coal there are some infrastructure limitations certainly in Australia and to some degree in Indonesia, but also you've got China sitting there, and as I said in my presentation, I doubt that China is going to come onto the market as they did a few years back, so I think that in the median term steam coal remains, or thermal coal remains strong. In the case of coking coal, there are limited development opportunities around the world. I mean really we're talking about Western Canada and Queensland, and there aren't that many new deposits available. I suppose Hail Creek with the timing has turned out to be very good, and the expansion to 8m tons reflects both the market and I think the buyer's interest in securing long term supply. I'm not aware of any other substantial deposits that are close to development and certainly we will be looking at expansion beyond 8m tons a year, but that's really something that's in front of us.

Just two questions. Firstly, regarding iron ore and we clearly saw the impact of not just Monty, but in fact the expansion. In terms of, I think it was two-thirds, roughly, with the expansion impact, in terms of the higher costs, should we expect to see that level of cost increase, hold through to the end of completion of the expansion which I guess is the end of '05? And secondly, I see sticking with, steel making raw materials, is it, are you any further, are you still of a mind to progress and try and turn around the labor operations there and the costs? And it seems to me that now you've got a quite tight market, and that if you wanted to be looking to sell, the environment over the course of the next 12 months probably looks better than it has done for some time, particularly given the general shortage in steel making raw materials. And on that, you're selling from stockpiles at the minute let's assume the labor disagreement goes on for some time. What are the level of stocks and how long can you deliver? Because you'd be aware there are some supply issues in that market?

You've got a few things covered there. Let me say in relation to costs in iron ore. Putting Monty to one side, and there are, the increased moisture in the finds does have some impact on throughput, through some of the plants. But as a consequence of lifting in a few years time, our production quite dramatically, we're having to increase significantly our drilling for short term planning, medium term planning, so we have considerably increased the expenditure in that area. We're having to increase employee numbers, so that's meaning substantial refurbishment of our houses there, we've had excess houses from times when there were more employees we're having to increase that, that's being expensed.

We're also taking more material from further away, and obviously there's also some other burden ratio increases, but a greater proportion is coming from further away, so we have the transport cost associated with that. Against that we are -- the Pilbara Iron, the creation of Pilbara Iron following the Sunshine project, provides opportunities for improvement in our basic costs. Now that's being progressively implemented from earlier this year, and that will tend to flow through, so I'll expect that latter to show some benefits. I would hope that the short term impacts of cyclone Monty are going to be flushed out of the system, and we're also increasing what I'd call shared services. But it's not a global basis, we're tending to do it by regional basis, so Western Australia, East Coast Australia, United States, etc.

Costs going forward, there's a quite a hot market environment in the Pilbara at the moment, so you get some second order effects. But, putting all those to one side, I can assure you that our focus is on operational excellence and improving what has been a trend over a long period of time in terms of our management of costs in the Pilbara. As regards IOC, IOC is a challenge because notwithstanding that it is a very long life ore body the yield out of that ore body is limited. I'd have to say that probably for the first time there's a real focus on ensuring productivity and work practice efficiency in IOC, and that's the focus of our operations. What we do longer term, well that will unfold in due course, but certainly our belief is the value of that business is best enhanced by the improvements that we're talking about with the workforce there. As regards the stockpile situation there, we have been loading from stockpiles, but the mining operations at Carol Lake [ph] have been down, we've been loading from stockpiles. We can do a little more of that, but virtually the end of this month that comes to an end should there not be a resumption of work.

If I could just underline one part of Leigh's answer there. Our view of the IOC asset is that it is susceptible to significant structural improvement of which workforce restructuring is an important feature, and that the disposal of that asset is not in our current contemplation.

It's Charles Kernot from Seymour Pierce. Three questions please. The first is just regarding your balance sheet, in fact. You talk about how strong it is. One of the situations there remains that you've got quite a lot still of commercial paper borrowing. Alan Greenspan has been talking a lot about the increases in interest rates that he's going to be pushing through over the next 12 to 18 months, or whatever. I know you've made some moves to fix your interest rates, are you going to think about doing anything more there. And the second question, perhaps also financially oriented, do you have a number that you can give us for capital expenditure at least as it's planned or envisaged at the moment for 2005. And the third question actually comes back to the situation in the coal market. Could you give us an indication of how much of the current contract year you've actually sold on contract, and how much you've got available to try and take advantage of these very high spot prices.

We'll come back to you on the coal market question and deal first with capital expenditure which was $1b in the first half of this year. I wouldn't want to offer a precise forecast, but ratably I would expect over the next two to three quarters to be running at the same kind of rate, about $2b a year, through to end of 2005. Guy I think should address the question of the structure of our debt, but of course one of the background features to that is this very strong cash flow, so the notion of sort of, as it were, locking in further arrangements which anticipate what might happen to interest rates has to be seen against that background. That our debt is reducing, but Guy, that's really more of a question for you.

Well Charles, you're quite right, I mean we've paid off about $800m of short term debt in the last few months. If you look at our debt structure of $4.5b, about $1.2b resides in subsidiaries where there is an element of recourse to the asset, and the balance of $3.6b is controlled from the center. And so you're quite right, we have got a much lower proportion of commercial paper than we've had in the past. But remember that the great majority of our medium term notes and bonds are actually swapped back into short term rates, and that policy of being short term orientated has been very profitable for the shareholders in the period, particularly in the last couple of years when we've been well geared to a reduction in rates, and we knew eventually of course that rates would go up, and that is exactly what's beginning to happen as of the end of June. We're comfortable with this policy because it is a bit like our approach to hedging. In this case there is a pretty good correlation between prices and interest rates. At the moment it's out of kilter, but ordinarily we would expect to have a natural hedge of the same kind as we do in the case of currency. You talk about the level of fixing that we have, and we have got $600m of the total, of the corporate debt fixed, at a weighted average rate of 4.8%, and some of that is a legacy that has been established for a long time and some of it we established, about half of it, last year, at a very low rate. As to whether we're going to fix more, I think that the answer is that that's something that we'll keep under review, regular review, but the essential orientation of the company on this as on other areas is to remain unhedged. So I wouldn't know precisely the moment at which we'd fix, I'm not sure that it's now, so you can expect our book to remain probably more orientated towards the short term.

Thank you Guy.

In relation to the coal market, we would have very, very little coal, if any, available at the moment. I mentioned that Hail Creek, our expectations at Hail Creek are slightly better than the 4m tons I had indicated previously. We have sold some of our coal at better than the so-called benchmark numbers, some at very much better, but rather modest in the total perspective.

Question at the back and then over here.

I wonder if you can answer something that's been a serious puzzle to me. You've had a fantastic half year, you say things look very good going forward, yet your share price is flat for the year. Could you first, have you got any explanation as to why your share price hasn't gone up, and secondly could you tell us why you think the BHP Billiton and the others have done better than you?

I would really like to turn the question around actually. Look I think that these are very difficult questions to answer, particularly those which relate to comparisons with others, and I think we should avoid that. I think that we are very aware, looking back over 12 months, that we have encountered a number of operational issues, some arguably controllable, others like cyclone Monty which were just visited upon us, and that the sequence within which those things developed may have created a perspective about the soundness of our operations, and I think that's something we've had to live with. What encourages me greatly is the way in which as these problems have gotten behind us we've started to see very solid performance across all of our operations and my hope is that that will continue strongly into the second half of the year, and perhaps that perception may recede. It could also be as a second point that people may have felt that in some ways we've been in retreat from assets by virtue of the disposal program that we've undertaken. My belief and our Board's firm belief is that we have done the best by our shareholders in using a strong market environment to take out non-core assets in the margins of our portfolio. As I think Leigh's presentation amply demonstrated. We have a huge amount of development activity on our hands simply from within the limits of our existing asset base. So I think that my answer to your question is, as of course is often the case with markets, it's a bit about perception, and perhaps some of the issues I've touched might have contributed to that, but we feel pretty confident about the position we're in currently.

Can I just make a comment, we've got, and depending on how you classify them, but around about 70 major operations around the world, and given the diversities, the activities we're involved in at times issues arise. I mean, I've sat here many, many times, talking about, probably being berated about Kennecut, Utah copper, and I've said we're going to tackle the labor relations issue, we've now got a contract that's still got six years to run on the labor contract, I've said we're going to tackle performance in the smelter and the concentrator and when you've got such a diversity of operations there are always going to be issues, and I suspect that some people maybe over-emphasized some of those issues. There's a perception of growth, and all I can say is that this company over a long period of time has been able to bring forward organic and on occasions [inaudible] opportunities but organic Brownfield, Greenfield opportunities, and at the moment through our investment committee projects, I'll have to tell you we're extremely busy. We have a lot of projects underway and we have an excellent exploration portfolio. All we can do is explain them, all we can do is address the issues when they arrive, and I think we've in large part been able to do that.

Yeah, let's go here first.

Tony Charlwood[ph] from [Merriam Management]. Could you give us a bit of color about how you see the aluminum market going, going forward and in particular what sort of demand you're seeing in China at the moment?

Leigh?

Well, demand in China if I can address that one, because it's very short term, has come off somewhat as a consequence of the governments measures, some of the individual players, I might add, I think we've got to be careful that we don't react to one month. Over a period of time there is attempts by the purchasers obviously to try and create an environment which results in slightly lower alumina prices. Now they've come back to the, into the three hundreds, these are still pretty heady prices compared to historical trends, and I'll have to say demand for alumina remains strong. I think what it does indicate is the prudence in the policy we established at having some available for spot sales, some available for very term contracts, and you'd be aware of the long term contract we signed with [Norris Kedra]. I think the situation if you look at alumina, at aluminum metal growth, there is going to be a requirement for alumina going forward. Now there have been a number of expansions announced, some talked about, but it's a pretty capital intensive business and you do need access to high quality bauxite, so we are very well placed, and I'd have to say that I think the alumina market going forward is quite encouraging.

You talked about the growth options and the growth and there wasn't a slide, they usually keep that for the end of the year, but you could give sort of any indication of the sorts of the things that might come to the Board in the next couple of years in terms of the sequencing.

Well, I mean I can sort of start to roll off some of the lists that we have shown previously but I think that there's a bit of a danger in that because history has shown that our people are quite creative in what they're able to bring forward. If you'd have gone back three years and said we would be coming forward with a proposal 8m tons at Hail Creek and starting a study on an expansion beyond that, some people would have looked askance, so things do change. I'll have to say the diversity of our businesses, the basis of our long life operations and reserves gives us the scope to do that. You know we haven't talked here much about what happens past [Blair Ethel], the [Claremont] project. We're looking at that. Obviously I wouldn't be doing myself justice if I tried to recall everything that's coming forward. All I can say to you is when we've looked at it internally when we've made presentations to the Board, we have an extremely strong suite of projects and options for the future.

I agree with what Leigh has just said. From the perspective of the Board, there is certainly a desire to want to accelerate to the most prudent extent some of the bigger value creating projects that have arisen from our exploration portfolio, but not to relax in any way the rigor of our investment appraisal processes which I think are quite fundamental to Rio Tinto.

I think a good example is potash. We've been looking at potash for a number of years. We have opportunity, an option in relation to Argentina, the market is strong in Latin America for potash, demand is strong in China, and here is something which the nature of it has changed. I think it really reflects our willingness to take a long term position in resources. This company got involved in Hail Creek in 1970. So I think you can say that sometimes when the stars align there's a real opportunity if you've got a long life high quality resource.

Anybody else. It appears not, a cup of coffee's out there if anybody would like one. Thank you very much for joining us today.