力拓 (RIO) 2023 Q4 法說會逐字稿

(Operator Instructions)

Well, thank you very much for the safety briefing. Good morning and welcome to all of you. With me here in London is Leigh Clifford, our chief executive, known to all of you, I think. And Guy Elliot, our finance director joins us from Melbourne. Guy, I understand you've had a pretty horrid journey as a result of inclement weather. Could you just register your aerial presence?

Here I am.

The sequence of the presentation today is that I'll give you a summary of the results, our dividend declaration and the capital management initiatives that we announced this morning. Leigh will then provide an overview of our performance in 2004, which Guy will then elaborate in terms of financial detail. And then Leigh is going to come back and complete the presentation with some comments on our growth opportunities. And then, of course, as usual, we'll be very happy to take all your questions.

Adjusted earnings in 2004 were a record $2.2 billion. It's an increase of 60% on the preceding year. These results reflect a cyclical improvement in global markets and ongoing growth in China. Prices for most of our products increased strongly as markets tightened. Inventories have been depleted due to the strength of customer demand. Base metal prices increased strongly in late 2003 and early 2004 and we've since seen increasing strength in the bulk commodity in aluminum markets, which were reflected in our second half earnings.

The industrial minerals group has also seen an improvement in market conditions. The operational performance of the group stabilized after what you will recall was rather a difficult first quarter and production for the last 3 quarters has been strong, boosted by new capacity in several areas. In the near-term, production has been constrained in some areas, notably iron ore and thermal coal, due to infrastructure limitations, not all of which are under our control.

We've got a strong pipeline of organic growth opportunities across our portfolio. Leigh's going to talk quite a bit about that later on. And in 2004, we invested more than $2 billion and we expect our capital program to increase in the coming years. Earnings after exceptional items were 2.8 billion, due to the significant going we made on asset disposals last year. This was partly offset by a non-cash impairment charge for Palabora of $161 million and the charge we took on Colowyo at the interim stage. Total cash flow from asset disposals was over $1.5 billion, leading to a net profit on those transactions of close to $1 billion.

The disposals were typically significantly above our assessed holding value and therefore value accretive to our shareholders. These cash receipts combined with our strong operational cash flow have resulted in a significant strengthening of our balance sheet. Net debt has reduced to $3.8 billion at the year-end and our gearing was around 22%. As a result of this and the strong near-term outlook for the company, the board has had a close look at the company's capital structure. And I'd like to talk about that a little bit now.

In order to maintain an efficient balance sheet for the group, we have established a clear set of priorities for the use of cash flow. And for me, this is a really important sequence. First, we're in business to invest in profitable opportunities that create value for our shareholders. We have an exciting pipeline of projects. I think it's the best we've ever had and the board fully supports the related increase in capital expenditure going forward.

Second, the board is committed to the group's long-established, progressive dividend policy. Finally, and this is third, any residual surplus cash will be returned to shareholders in as efficient a manner as possible. When assessing residual surplus cash, I'd also like to make another important point, which is that we believe in the competitive advantage of a strong balance sheet. It ensures that we reclaim the flexibility to take advantage of investment opportunities as and when they arise.

So, reflecting that sequence of priorities, we've decided the following. First, we believe we are now in a position to rebase the level of the group's ordinary dividend. And the 2004 dividend has thus been increased by 20% to 77 cents per share. In future, we will continue to retain our progressive dividend policy. And this dividend increase is underpinned by the cash flows from our portfolio of high-quality assets in which we have invested significantly in recent years. We've had a series of well-timed acquisitions in 2000 and early 2001 and these have been followed by the development of a number of greenfield and brownfield opportunities. And it's this increased capital base and the results in free cash flow, which supports the step-up in our dividend payments.

Second, the group will implement a buyback program of up to $1.5 billion over the next 2 years. And as set out in our release, we will buy on market when appropriate. Guy will also tell you about an off-market tender offer in Australia, which we intend should form an important component of this program. Now, for Rio Tinto, both the dividend decision and the capital return are significant sets which reflect the value-based approach which we've followed over recent years.

Looking forward, for 2005, we remain positive about the markets in which we operate. Supply of most of our products remains tight and although the investment by the industry is being stepped up. In China, there's been some slowing in the rate of growth, following government intervention in 2004. But for the time being, I can report that demand for our products remain strong. In the U.S., we are concerned that the potential impact of the ongoing imbalances in the economy and, of course, the direction of the U.S. dollar in relation to our producing currencies remains a key variable for us.

So, with those opening remarks, Leigh, I'll hand over to you to take the presentation forward. Thank you.

Thanks, Paul, and good morning, ladies and gentlemen. 2004 was a good year. I'm going to just raise it a little if I may. During the year, we struggled with some operational issues carried over from 2003, as Paul mentioned, and clearly the - also the cyclone Monty in Western Australia. Since then, I'm very pleased with how the operations have performed. The results in the last 3 quarters have been strong. And the current market environment is good, but not easy for the operations. Several of our business units are stretching their production limits to meet demand. This put significant pressure on our people, plants and equipment.

Strong market conditions for our products have also translated into strong markets for our suppliers. We have seen cost pressures build up as input prices have risen. And some of our consumables are in quite short supply. It seemed therefore reassuring that in this environment we have continued to see improvement in our safety performance. In 2004, the lost time injury (ph) frequency rate of the group improved by 20% and the commitment to further improvement is embedded throughout our operations.

Turning to the results, earnings from all product goods were higher in 2004. The copper group contribution nearly doubled, despite the absence of earnings from our investment in Grasberg for most of the year and the sale of some our less strategic assets. As you are aware, iron ore production was significantly impacted by the cyclone and costs increased due to inflationary pressures in Western Australia and the need to achieve higher output to meet the strong market demand. Costs also increased in preparation for a significant step up in production at the end of this year. As a consequence, iron ore earnings were only 14% higher than in 2003.

The energy group enjoyed significantly better prices in the second half of the year and the investment in Hail Creek couldn't have been better timed. The operating performance of the aluminum division continues to be good and the early startup of the Comalco Alumina Refinery was excellent. I think this project has been a credit to the whole Comalco team.

The industrial minerals group enjoyed a much better year. This reflected price improvements, particularly for iron, steel and zircon products and a good operating performance. Looking forward, we are now seeing signs of improvement in titanium dioxide feedstock markets. And finally, Diavik's first full year was a strong one and despite the lower output at Argyle, earnings in diamonds were up 50%.

This next chart shows the EBIT margins of the product groups in 2003. The bubble size represents turnover with the EBIT margin on the left-hand axis and the EBIT contribution along the bottom axis. This chart shows how the margins have moved for each product group in 2004. With the exception of iron ore where margins were squeezed by higher costs as I've just described, all the product groups have improved their margins and, in some cases, the movement has been quite impressive.

Looking forward, bulk commodity prices are clearly rising and this will have a positive effect in 2005. But the industry is facing cost pressures, which are offsetting some of the revenue gains from higher prices. Industry cost pressures related to higher input prices, the additional costs we've elected to incur in order to make profitable demand at the margin. Higher input prices and costs are not unusual at this stage of the mining cycle. The reality is that we've not seen markets like this for close to 20 years. Let's remind ourselves that supply and demand partners can apply as much to our input costs as it can to our products. Guy will talk about this and the way that we have mitigated increasing costs a little later.

In terms of volume effects, we are pushing our assets harder than is optimal for cost management. And this is a sensible approach if you think about it, from a value perspective. Generally, the cost effects are more than offset by higher revenues. In addition to these external factors, there have been a number of effects that have increased our costs this year. The considerable achievement of our expiration team in the last few years has resulted in higher evaluation costs. And frankly, this is a pretty good problem to have and encouraging for the future.

There have been some unusual factors. These include the aftereffects of the material slippage at Grasberg, cyclone Monty and the moisture effects that flowed from that, a low-grade year in a tight (ph) mine of Argyle, the strike at IOC and protracted ramp-up of production of Palabora. It's early days, but we're encouraged by changes at IOC. Although we still face some challenges leveraging the benefits of the new labor agreement. I can assure you that we very focused on Palabora achieving its rated capacity.

One business unit that's seen a lot of positive changes - Kennecott Utah Copper. I'd like to make some brief comments on the investment we announced before I hand over to Guy. As you are aware, production from the open pit was planned to end around 2013. For the last few years, we've been investigating the options for Kennecott with a large underground mine as a base case. We have now determined that the highest value option for Kennecott is a pushback of the east wall. This is colored blue and red on the slide. This will extend the open pit mine life for 4 years. Total expenditure will be $170 million with $100 million spent over the next 2 years and the rest later in the decade.

In addition to the pushback, we will also invest in a pedal crasher to increase concentrated capacity. This is a low capital cost and a low risk investment. It retains the options for underground developments or even for further open pit developments. And over the next few years, these will be investigated extensively and we confidently expect life at Kennecott to go beyond 2017.

Associated with this decision has some accounting effects, which Guy will take you through. Now, over to Guy.

Thank you, Leigh, and good morning to all of you. As Leigh said, this has been a very good year. The adjusted earnings in 2004 were $2.2 billion, $839 million higher than in 2003. Now, as usual, I will present the results in a waterfall chart format. To begin with, prices rose sharply across our range of products, increasing earnings by $1.6 billion. The U.S. dollar traded in a relatively narrow band against most of the currencies of importance to us. Very different to what we saw in 2003. In total, currency effects reduced earnings by $247 million compared with 2003. When combined with inflation, all these factors together increased earnings by $1.3 billion.

Now, turning to price effects in detail, higher traded metal prices increased earnings by just over $1 billion. The copper price averaged 130 cents a pound compared to 80 cents in 2003. This accounted for $674 million of the increase. Other price effects were more modest, but the molybdenum variance is notable. Kennecott benefited from a moly price that was almost 3 times higher than in 2003. The price variance for non-traded products was $588 million. The iron ore price increased by 18.6% from April 2004 and we enjoyed substantially higher coal prices as the year progressed.

The variance for industrial minerals mainly represents higher prices for RITs iron steel and zircon co-products. Although the core sodium borate and ClO2 feedstock markets remained somewhat soft in the period, we did achieve good price increases for other products, particularly salt and boric acid.

The effects of exchange rates on the results, as I said, was relatively less pronounced in 2004. The effects of the currency changes on the balance sheet also was less marked. Now, returning to the variance analysis, to help your understanding of the underlying results of the group, I've separately identified the loss of earning from Freeport, due to the effect of the material slippage in late 2003. The total volume in cost variance was just over $200 million. This effectively represents what Freeport would have delivered if its costs and volumes had been the same as in 2003, but at 2004 prices. The result is based on the final agreement with Freeport on the metal strip and includes an insurance receipt of about $20 million after tax.

Excluding Freeport, higher volumes in the period increased earnings by $270 million. This reflected strong growth at Diavik, Escondida, Hail Creek and West Angelas. Generally, we've been operating at the limits of our mine and/or infrastructure capacity. Costs in the period were negatively influenced by a number of factors. Leigh has already highlighted some of these earlier on. Higher near mine exploration and evaluation costs for new discoveries reduced 2004 earnings by $45 million. This includes increased activity in the Pilbara as we prove our reserves to support a higher production profile. It also includes the transfer of a number of prospects to the business units for further study.

Energy related costs decreased earnings by $81 million. The key factor was the oil price, but we saw cost escalation in energy inputs across the board. The impact of non-cash costs on earnings was negative $33 million, reflecting mainly a higher depreciation charge on new investments. Finally, higher cash costs elsewhere reduced earnings by $95 million. Why was that? Well, as Leigh said earlier, there were some specific factors that contributed to this rise - cyclone Monty, lower grades at Argyle, the IOC strike and the protracted ramp-up of production of Palabora.

All the business or cost pressures, however, are the result of the strong cyclical pickup in the industry. For instance, we continue to experience high demurrage charges in Australia as a result of customer demand and port congestion. Across the board, we've experienced increases in input costs. Now, these can be categorized into those inputs which are specific or critical to the mining industry - trucks, off-road tires, explosives, for example. And also inputs which are broadly consumed within the global economy such as steel and oil.

The scale of new investment in the mining industry is putting significant pressure on our supplies to meet demand. Letters of intent for heavy mobile equipment purchases have doubled since 2000. Prices have escalated with demand and higher manufacturing unit costs. The market for cars is extremely tight. No capacity has been added to the off-road car industry over the last 3 years. Raw material prices such as rubber and steel have increased significantly. They're up by close to a third over the last 3 years.

Ammonium nitrate demand in Australia is up around 10% year-on-year. The increasing effectiveness of our procurement processes have shielded us from the worst effect of these rising. We have long-term contracts insights for key inputs in the mining industry. In addition, we've secured our position in markets where supply options are limited. But no one in the industry can escape from the general trend in rising input costs affecting both operating and capital costs. And in certain regions, especially the Pilbara, market conditions are so strong that labor and contractor costs are also rising sharply.

But I would not like to leave the impression that cost increases are simply accepted by us. We have a number of photo finishes in place across the business to deliver underlying structural improvements in our competitive position.

Returning to our variance analysis, other factors reduced earnings by $247 million. The main item here is the absence of the earnings which we would have enjoyed if we'd continued to hold the businesses which we sold last year. Of course, we did enjoy $1.5 billion in sales proceeds. In total, these businesses would have contributed an additional $122 million.

The second major item is related to Kennecott Utah Copper. Leigh earlier talked you through the investment decision of KUC. Consistent with that announcement, we've aligned the accounting to match the end of the life of the extended pit in 2017. The KUC mine will most probably continue well beyond this date, but until we've completed the studies, which Leigh referred to, we believe that this is the appropriate approach.

Pending any extension of the mine life beyond 2017, there will be an increase in the annual depreciation charge from 2005 of around $45 million. A one-off non-cash charge of $36 million has been recorded in 2004 to reflect the bookings of environmental remediation costs over a shorter period of time. The third major item is the absence of the $32 million provision reversal related to Portoleva (ph) in 2003. The balancing figure of 57 million includes a number of tax and provision movements, none of which is individually material.

Cash flow in the period has been extremely strong with cash from operations and dividends from joint ventures and associates of $4.4 billion. Through tight working capital management, we've seen a major improvement also in inventories and receivables as expressed in days. When combined with the cash flow and asset disposals, all this has resulted in a considerable stronger balance sheet. As Paul said, net debt and gearing have reduced considerably. Net debt now stands at $3.8 billion and gearing at 21.7%. It's the strength of the cash flow that has allowed us to fund a significant program of capital expenditures, to announce the dividend increase and to initiate the buyback program.

Our capital spend on new projects has been rising steadily in the last few years as we've developed a number of high-quality greenfield mines as well as some major brownfield extensions. In 2004, total capital expenditure was $2.2 billion. Looking forward, we expect capital expenditure to be at least as high in 2005 and 2006, if not higher. Dependent on the timing of project approvals, CapEx could be close to $3 billion each year.

Leigh will take you through some of the projects we have under active review, but under any scenario, our capital spend in the next few years will be high. Mostly, this is attributable to new projects. But we're also seeing an increase in our underlying level of sustaining capital. Partly, this reflects an increase in the asset base over the last few years. And partly a need to refurbish some of our older assets from which more is being demanded in these markets.

Maintaining the integrity of our asset base is a key priority. All these capital requirements have been taken into account in deciding the amounts that we feel comfortable distributing to shareholders. The increase in the quality and size of our asset base since 2000 and the strong pipeline of projects which we're currently developing has given us the confidence to step up the dividend payout. We've moved to a higher earnings platform.

As you can see, we rebased our dividend payout on a few occasions in the past. This is a similar one-off decision. We believe that we can maintain the same firm commitment to a progressive dividend policy that we've shown historically. All pipelines are buyback program for you. Let me give you some more details. We will seek to renew the existing shareholder approvals to make on-market purchases of both TLC and limited shares. This will be part of an overall program of up to $1.5 billion to be executed on and off market over the next few years, dependent on market conditions.

We plan to initiate an off-market buyback program in Australia as early as possible, subject to prevailing market conditions and regulatory approvals. We will be seeking shareholder approval for an off-market tender at the forthcoming AGMs in London and Sydney. We contemplate a total tender offer of $300-400 million or 400-500 million Australian dollars. But the ultimate size will be dependent on shareholder demand and market conditions at the time. The structure of the tender offer will enable us to buy back shares in limited, at a material discount to the market price of somewhere between 8-14%. We will keep the issue of balance sheet management under review. If more capital returns are warranted, we will make them, by these or by other means, but always within the framework of priorities, which Paul mentioned.

Let me now hand you back to Leigh.

Thanks, Guy. At the investors seminar late last year, I talked you through the strategy that I agreed with the board. In your packs, you have a slide summarizing the key components of the strategy. As I said at that time, 2 key areas of focus are organic growth and business improvement. And I want to spend the last section of this presentation looking at these areas, particularly the organic growth profile of the group over the next few years. We are returning capital, but we have plenty of projects.

First, let me look back. This slide reinforces the point Paul and Guy made on the steep change in quality of the capital base of the group. The cash generative capacity of these assets underpins the decision to lift the group's dividend by 20%. This slide identifies about 6 billion of investments in key assets, including the Pilbara, the Comalco Alumina Refinery, Diavik, Hail Creek and Escondido. These are all robust value-creating projects by anyone's definition. These are excellent assets with high margins and long lives.

I also showed you a version of this slide of last year's seminar. It breaks our current project pipeline into committed, advanced and conceptual projects. The size of those segments is based on the revenue expectations from each project. Since the seminar, a few projects have been completed, particularly the aluminum refinery, reducing the size of the committed project segments, but new projects are moving through the system always.

Here is a list of the committed projects underway. Since the seminar, the Diavik optimization project and the open pit extension at KUC have been added to the list. We've also added reserves in the PIBs through the West Antelope leased acquisition, which gives us options for future expansion in that market.

In terms of the advanced study project, there are a considerable number that we expect to come forward for approval over the next couple of years. We expect to commit to some large projects such as new mine capacity in the Pilbara in the near future. Some need more work. But there is nothing on this list that needs more than a couple of years. That doesn't necessarily mean that approval will be forthcoming then. As always, these projects will need to meet our rigorous investment criteria. We continue to aspire to own assets that are value adding throughout the cycle.

Looking at the projects in each product group - firstly, iron ore. You're well aware that we've committed 1.3 billion on infrastructure in the Pilbara and new mine capacity at Yandi and West Angelas. These projects are going extremely well, although as Guy said, there are cost pressures at the margin, due to industry-wide pressures on input costs and the very hot economy in the Pilbara.

We also have the HIsmelt facility where commissioning of ancillary equipment is now on underway. Looking forward, we see potential commitments of over $1 billion in the iron ore group. Some of this is brownfield expansion we referred to at the investors seminar last year. We're looking at expanding Pumprice (ph) and Marandoo and building new capacity at Namaldi (ph). This will enable us to ramp up production in 2006, in line with our contractual sales commitments. The cost of this is expected to be in the order of $300 million.

In addition, we expect to commit to a new greenfield mine in the Puroo (ph) within the next couple of years and we're investigating the expansion of Yandi to around 50 (ph) million tons a year. Finally, we expect to double capacity of Corumba from its current capacity of around 2 million tons. We're also studying a substantial increase in production in the longer term there and the capital for this is not included in these numbers.

In the energy division, the key focus has been on Hail Creek, which is being expanded to 8 million tons. We've also made the investment in the West Antelope reserves that are referred to earlier. Advanced studies include a further expansion at Hail Creek. The development of Clermont as the success for Blair Atholl and the development of Mount Pleasant. In total, we can spend up to $1 billion on these and other energy developments.

In aluminum, Car 1 (ph) is complete, as is the mine expansion at Weipa. The new Weipa project continues into 2005 with a power station upgrade. The focus of Car 1 continues to be on bedding down the commissioning phase and to learn our lessons on process optimization and capital efficiency. We have a team looking at the Car stage 2 (ph) expansion, which will be a replication of stage 1, but incorporating the lessons we learned. We're also looking at some other small, smelter investments including a small capacity increase at Bell Bay. As with the energy group, I can see us spending close to $1 billion in this area.

Moving to diamonds, I've discussed the Diavik optimization proceeds. We will be reviewing a possible next phase of the Argyle project in the second half of the year. If we progress and there are still some critical uncertainties, this would be an investment of around $0.5 billion.

In industrial minerals, we are undertaking expansion in a few niche markets - boric acid and upgraded slag. And I can see us undertaking a further UGS expansion soon, given the strength of demand for that product. We also have a potential new aluminized mine opportunity in Madagascar, which we will review during the year.

Finally, copper. You are well aware of the Escondido project and I've described what we're going at Kennecott. The other projects we are looking at are the exciting Cortez Hills gold project and a further extension of the Northparkes mine. And of course, we are looking at a number of underground development opportunities at Grasberg with FCX.

Taking all these projects together, you can see why Guy said we expect to exceed the capital spend of 2004 over the next few years. We are looking at $6-8 billion of spend even before we consider sustaining capital or M&A. This will be spread over more than 2 years, but underpins our growth for several years to come.

Looking further out, we have a very good array of projects in the conceptual stage of review. Some of these are existing mine extensions and some come from our exploration program. As I've previously said, I believe that exploration is a real competitive advantage for Rio Tinto. This slide shows some of the most exciting exploration prospects we have. As you can see, we are particularly hopeful of some projects in the copper group.

Finally, I would like to emphasize that portfolio management is not just about new projects. It's also about realizing value from non-core assets. As we've said earlier, in 2004, we sold assets yielding about $1.5 billion. The second area of our significant management process is business improvement. As I said at the investment seminar, we are continuing our work into how we can leverage the scale of Rio Tinto to create value. We have done this very successfully in procurement and we are looking to extend the applicability of that model to other areas of Rio Tinto.

At the heart of the change process we're looking at is enhanced collaboration across the group and improvement of our capabilities. In essence, we are aiming to deliver global base practice across all of our primary business processes. Additionally, our investment in common IT systems across the group will create a much better platform for collaboration.

This model of our key business processes is being used as a template for this work to ensure that we are managing our business in the most efficient way possible. It's early days, but I do believe there are some good opportunities for value creation. And I plan to talk to you about this in more detail later in the year.

In conclusion, this business is in good shape, due to new investments and the sale of non-core assets. The longer term output look for value growth is strong as a result of the exploration program and the options within our existing businesses. The strength of our cash flow enables us to invest in all new opportunities that meet our stringent investment criteria to rebase the level of our progress dividend and to give capital back to shareholders while still maintaining the financial flexibility to take advantage of any value-creating investment opportunities that present themselves. On that note, perhaps we can take your questions.

Thanks very much, Leigh, and also Guy. So, we're happy to answer your questions. Who'd like to - who'd like to begin? Take it from over there to start with and then come across. Yes? It would be helpful if you could just mention who you are and your affiliation.

Jonathan Alias (ph), Investor's Chronicle. Could you give us some detail on the issues raised by the SEC in their comment letter? Is there anything there that shareholders should be concerned about.

I think my first response to that and I'm going to pass the question to Guy is that this is something we haven't had in our hands very long. And are still studying it. And we will need to take all the time that's required to do that. But, Guy?

I would echo exactly what Paul said. It is a recent letter that we've received and we're going into it in the proper detail. Nothing to say at this point.

You will have noted that we have not included a U.S. GAAP reconciliation in this release for just that reason until we have covered the whole ground. Thank you. Yes?

(off mic) Just a question on the CapEx. You've mentioned that you're seeing cost pressure in terms of the unit cost of the operation. Just wondering how much of the increase in CapEx that you've highlighted over sort of 2005, 2006 is coming back from those (inaudible) in terms of increase in raw material costs. Just trying to find out in a like-to-like basis on stable commodity, stable currency costs, what that increase in CapEx is.

Secondly, in terms of fast tracking some of these exciting projects you've got out there, what sort of spin do you think you'll be putting on during the feasibility study - drilling, exploring, et cetera and just are we expecting any sort of increases there in terms of exploration expenditure over the next couple of years?

Craig (ph), thanks for the question. I think the, obviously, a lot of the projects we're talking about, the increased costs relate to particularly steel costs. And not surprising, given that steel prices have risen globally. I'd have to say, fortunately, in the Pilbara, we've locked in our position some time back and we're executing those projects. And the Car 2 project benefited from a very different environment, both in exchange rates and raw materials input. But going forward, undoubtedly, some of the capital numbers that I referred to would be impacted by input costs. But not dramatically so. I'd like to keep it in sort of perspective.

As far as exploration spin, the important thing here is that exploration is not something you start now and the byproduct occurs in the third quarter or fourth quarter. And it's a result of a program that we've had going for a number of years. And we haven't backed off our exploration effort. It's very focused, but I would say we are spending quite a bit more on our near-mine evaluation, near-mine exploration. We're certainly spending more in the Pilbara, where one of the reasons is that a consequence of our production expansions - and that significant expansion, we're having to make sure we convert more of our resource to reserves, et cetera. So, our rule, exploration and evaluation spend is continuing and some of that relates to projects like Cortez Hills, et cetera.

Let's go to the lady in the middle.

Sandra Buchanan (ph) from the Nata Bulletin Monthly. With regard to the prices you'll be wanting, wanted to introduce this year for your products, could you tell me if it's true that you - sorry, this is quite a long question - it's got three parts. Is it true that you're asking for a 50% rise in the price of iron ore and do you see a settlement? And could you describe your thinking behind the price rise, taking into account the higher costs and your expectations of the iron ore market this year? And could you also say something about whether Japanese buying or Chinese buying is now key to the iron ore price settlement?

Could I make a general comment, which may make it a little easier for Leigh. We are not in the habit of commenting on large-scale negotiations like this, which are currently in progress. And it would be, I think, inappropriate to do so for all sorts of competitive and even legal reasons. So, I apologize if that frustrates your curiosity. But perhaps, Leigh, you might like to say a little bit about the background for some of these markets?

Sorry that we can't offer you any specific. Demand for iron ore and coking coal is very strong. Steel - the steel industry is running at capacity and you've seen the recent coking coal settlement to the order of $125 a ton with the Asian customers. As regards to priorities, we have had long-term, long relationship with, particularly, the Japanese, Korean and Chinese steel mills and also Taiwanese steel mills. And demand in all those areas remains strong. Sales of iron ore to China have exceeded our sales to Japan, but it's reflecting the fact that Japanese steel industry is running at capacity and Chinese steel industry is still expanding.

Thanks, Leigh, very much. Come here (inaudible).

(inaudible) from Merrill Lynch. In the board's deliberations regarding capital management, could you just explain the thought process and why you excluded a special cash dividend to all shareholders instead of perhaps the more selective approach with 300, 400 million directors through this special situation you have with the off market buyback in Australia. Obviously, one side of the register may benefit to a greater extent with that particular mechanism.

Well, we can certainly make a couple of broader comments and then hand this to Guy. I'd just like to reiterate once again that the driving logic for this capital - approach to capital management is, number 1, investment in profitable projects, number 2, commitment to a progressive dividend policy. And the capital return comes third in that sequence. We have considered all the options available to us and I don't think any one solution is going to necessarily make everybody happy.

But our judgment was that this was the best combination of the various approaches to capital management that we could make. We certainly gave consideration to other possibilities. Do you want to answer that, Guy?

Yes. Sure. Russell (ph), I would make a couple of points in addition to those that Paul has made. And the first is that we have made a very significant dividend increase. And that is the big news, it seems to me, in this area. But in addition to that, I think that, as Paul says, it is difficult to satisfy everybody. We tried to make the fairest conclusions and it's quite clear that a very efficient means of returning capital to shareholders is through this off market system that exists in Australia, thanks to the (inaudible) credit system.

And it's wrong to say, I think, that one class of shareholders benefit more than another. Because one of effect of this, of course, is that we're buying these back at a discount from the prevailing market price. And to that extent, other shareholders are benefiting, the remaining shareholders are benefiting from that discount. And so, I mentioned numbers between 8 and 14%. And so, I think that you can see that there is a benefit that's being conferred on everybody else, as a result of that transaction.

Thank you. We'll go here now. Keep moving around the room if we can.

PeteJensen (ph) from JPMorgan. Just a question on your portfolio balance. If you look at the acquisitions and the CapEx you've made over the past 4 years, it's more leaning towards the bulk commodities. And if you look again your need to bulk projects a whole lot - you're talking about those 6 billion going to the bulk commodities and just (inaudible) into, say copper or aluminum. Is that really a change of focus for you or just an outcome of where you see your opportunities. And do you see more pricing power sustaining in those bulk commodities going forward and much more higher margin for higher (inaudible).

And that sort of leads into my second question. You said that for the half-year result, you're using a strong cash flow to pay down debt and look for the next down cycle. Do you think really, have you changed your view now that we think we're in a sustainable up period in terms of the commodities cycle that could continue to moderate the issue?

Would you like to take those questions, Leigh? I may add a comment or 2.

Maybe I could take certainly the first one. I think the - we've got to remember there's been substantial investment in copper with our share in Escondido. Phase 4, Norte, sulfide leach (ph) and a year or 2 before - well, it was a couple years before that, substantial investment in Grasberg. And as opportunities occur, that will continue. So, it's not been entirely focused on the bulks. And I'm not sure what - I think Alumina doesn't fall into that category and we've just completed the expansion there. So, I don't think that's quite the description I'd give.

The other aspect is where the opportunities arise. The important thing is we are not limited in our ability to pursue value-creating opportunities. Part of it is pricing power. I think the real issue is we'll - I'm not so sure that that is reality. The circumstances are that at the moment there's extremely strong demand for iron ore. But there's been strong demand for copper, also.

And I've forgotten what the other question was.

Well, the other question was about the sustainability of the cycle. Should I make a few comments on that? And it's a question I think everybody in our industry is kind of asking themselves currently and probably it's a question which migrates into other areas of the resources businesses as well. Just a few general comments. I mean, China has been a major factor in short-term price formation. I don't know if everybody sees that. I think our reading is that while the China growth path over the years may not be entirely smooth, we remain optimistic that that growth will continue and so that will be a factor in markets, I think, for some time to come.

Second, one of the reasons I think prices have moved as dramatically as they have is because there's been, to some degree, an underinvestment in the supply side of the industry over the years. That's, I think, being addressed and there's come cash up taking place. Third, I would say that in any kind view of the different scenarios, one has to recognize that each of the metals and other minerals really justified separate examination. I mean, this is not a one size fits all analysis.

And lastly, I would have to say that the role of the U.S. economy moves forward and the imbalances, which are a feature of its connection with the global economy are key issues. Because they're going to ultimately determine what happens to the dollar and what happens to industrial production in what remains the biggest economy in the world by far. So, you have many, many forces at work. But we have, I think, come out on the positive side of the analysis and it is that which has been a significant feed into our decision about the dividend, which Guy rightly characterized as perhaps being the most important of the messages we're bringing today.

If I could just make a couple of comments. I think we've got to say if you take a medium long-term perspective in China, it's clearly going to have a significant and ongoing effect in metal consumption. And as Paul said, you can't - you've got to look at each of those commodities, the industry structure, the supply dynamics, all of them. Certainly, we are very focused on examining that. But there are going to be speed bumps on the way sometime out there. The important thing is that you have businesses that are really long life, low cost businesses. And that's very much preferred through our pension (ph).

Let's go to (inaudible)

John McGuiness, (ph) from Deutsche Bank. Just a question on CapEx. I guess, the $3 billion or so that's in play for this year or next is a bit of a quantum change from the previous numbers which would have been flagged at around a 2004 level of 2 or 2.2. I just want to explore that a little bit because, obviously, we've got a fairly good understanding, I think, in terms of what's been approved at the board level in terms of new projects. Do you think there will be more explicit in terms of what you see as the sustaining capital increase across the businesses. You did mention that there's been some pressures across the - in which areas of the businesses are feeling when you're saying increased capital on them.

The second question, just in terms of Car or Car 2, you indicated you had a team of people on that. What's the timing for that now? Previously you indicated that with the stronger sway in the dollar and a few other factors that the time had been pushed out, how's it coming .

Thanks, John. Good question. I think the expenditure this year are around 2.2 billion. We're saying up towards 3 billion. Now, it really depends on the timing of some of those projects coming forward. We will also be increasing our spend on sustaining capital. Across the board, we are running a lot of our operations at capacity and therefore important that we ensure the integrity of those business going forward. I mentioned briefly the power station at Weipa. We are looking at the expansion of the loading capacity at Weipa.

This is all part of what I would call sustaining CapEx. And I can assure you that that is important to ensure the ongoing viability and operability of our businesses. As regards Car 2, we don't have a large team. Our focus is very much on commissioning Car 1 and making sure that performs. But we have an ongoing team and we are examining pretty carefully what's necessary to get Car 2 up. Now, obviously, we're impacted by the stronger currency or the weaker dollar, if you like and the impact of particularly higher steel prices. So, I wouldn't want to put any timing on it, but it's under active evaluation with the first priority on Car 1.

I guess one other small point in relation to Car 2 is the desire to bank the operational experience as the first phase. To make sure that we have the maximum capital efficiency optimization for any additional capacity which follows that.

(inaudible), Ethan Investment (ph). A couple of operational questions, if I may. Firstly, with the Kennecott decision on the pushback. I was wondering whether that (inaudible) on block caving (ph)? Secondly, on infrastructure, I was wondering if you could give us an update on infrastructure constraints, not least in the Australian coal ports.

What was the last ...

Australian coal ports ...

Well, maybe I can suggest - I'll tackle the coal ports and we might get Tom Albanese who's here. He can really give you some views on what we're doing at KUC and our experience with block caving in a variety of areas. Infrastructure in coal ports - PWCS in Newcastle is examining expansion of that capacity. But the important bottleneck in the Newcastle port is rail infrastructure. Addressing that infrastructure issue and, frankly, we were pretty frustrated with time it's taken to address this - that's out of our control - is underway. So, fortunately, that's a matter that's being addressed.

The other infrastructure issue that impacts on us is the Dalrymple Bay Coal Terminal. Whilst they have been able to manage - you might recall they had a reclaimer failure - I think it was a reclaimer failure. They've been able to manage that quite well. The real impact there is demand - demand, particularly, to a higher coking coal. And that's where the higher coking coal is located. The operator's there, prime infrastructure, I think well advanced in negotiations regarding the charges that will apply to an expansion. And I would hope that that matter will be announced very, very shortly. So, at the moment, undoubtedly, it's impacting. Fortunately, we have the allocation systems in operation and I understand there's talk of a similar system in Dalrymple Bay, which has reduced the demurrage. But that is with us for a little while yet. Tom, do you want to ...

Thank you, Paul. I think the open pit, the additional cutback at KUC in no way precludes a number of the underground development options. As a matter of fact, we have quite a range of deposits that we are doing quite a bit of drilling and engineering on. This cut will give us additional time to find out how best to optimize those developments. But it wouldn't certainly preclude that affidavit.

Tom, I think there's a couple of general comments are broad savings, didn't you have?

Well, I think we - I feel that block caving will be progressively more and more important in terms of our mining options going forward. As Leigh's mentioned, we've had an extended ramp up at Palabora. But that said, we've had a, as I'd say, pretty successful conversion of lift 2 at Northparkes. So, we're bringing all these fields into bear. And we're certainly bringing these learnings into position as we look at what we do next, that kind of stuff.

As we also have not made a significant contribution to it and learned a lot from the block caving at Grasberg.

Yes, we were actually actively involved with Freeport in the Grasberg activities and that will be very much as Freeport, as announced and indicated, very much a part of the future life of mine planning at Freeport.

Okay. Any - another question at the back there and then one over here. Yes?

Helmut Tagus. I noticed with interests, you made some comments about detained dockside.. And we've all seen - well, we've seen in product prices arising in - across our chemical sector for awhile. I wanted to know, really, I saw volumes were up in the fourth quarter, I think, for maybe 9% year-on-year. Are we're finally starting to see some turnaround in that business? And again, does that start to bring forward your expectations about the possibilities in Madagascar in terms of the timing? Of course, when we were expecting that in the past, it's been somewhere on the back burner.

I wonder if I might ask Andrew Mackenzie to make a few comments on that. Andrew is our chief executive of our industrial minerals group. He joined us last year from BP. And so, perhaps, some of you have not met him in the Rio Tinto context before, but right up your street, isn't it?

I think the simple answer to all your questions is yes, actually. I'll give you a slightly more complicated explanation. But firstly, the big regrowth in demand in the segment sector is now falling through into the - if you like, the titanium worldwide supply. And we see it, obviously, strongest in the higher titanium contents like first, so UGS is, I think, been moving really from most of last year. We're now seeing quite a lot of (inaudible) coming into the chloride sector.

Still a lot of softness, if you like, in the lower-grade products, in the sulfate sector, which I would predict will also start to firm as demand pace follows up the - if like the product slate (ph). As regards Madagascar, yes, well, I mean, the earliest that we could probably implement this project is around 2009 and whether we go ahead at that date or not is something that we will decide this year, but we're certainly ready with all the options and we would say that this is indeed a very exciting project. It's got a tremendous resource in terms of its titanium content and its mineability. And we've certainly now completed our feasibility studies, so the decision is imminent.

Okay. Thank you, Andrew, very much. In the center?

Stuart Collings from Insight Investment. One of your key metrics for shareholder value is NPV with reference to WMC (ph). Is this your NPV traction at $7.20 to Rio Tinto?

As I think has always been the case and always will be the case, at Rio Tinto, we're not going to make comments on any specific situation. But we do remain a value-committed business.

Paul Gray (ph), Goldman Sachs JB Weir. I accept you can't discuss pricing negotiations, but it's been fairly widely reported on the coal side, semi-soft coking coal contracts settled around $80 a ton. Can you just give an indication if that's in the right sort of ballpark for your contract? And if so, the - some comments on your sustainability of that premium over the thermal coal. Is this a one-off or is it more sustainable? And if I may, just a quick one or so on high smelt? Can you just update on the phases in terms of timing. And I guess, also ...

That's three.

With high smelt, the cost savings that you think are achievable versus the conventional iron making (ph).

Okay. Two. I think, well, I'm not going to comment on negotiations, but I will make a comment that coking coal is clearly in short supply. You've seen higher coking coal prices. And as you know, for semi-soft, some of the producers in the Hunter Valley, that's were semi-soft is predominantly from, do have the options in their washers to split the output differently. But going forward, a lot is going to depend on the growth in the steel demand. And at the moment, demand is very strong and demand for coking coal is very strong. As regards high smelt, and I suppose I will have to say we've got to keep in mind what high smelt is. This is a ramp up to a commercial stage of a demonstration plant which was very successfully operated.

We hope that it is going to be extremely competitive. And the reason is because it eliminates the coke and cinder step. Now, obviously with coking coal prices at their current levels, that makes it even more attractive. But it is really proving that scale-up. Now, we're in the process of commission and we're commission elements of the plant at the moment. It was impacted by some industrial activity associated with the construction, but we're progressively commissioning now and we'd expect full commission to take place, probably at the start of the second quarter or thereabouts.

Any more? Well, I think we're done. But if there are any other things that occur to you, we'll be very pleased to have a cup of coffee outside, but for the moment, thank you very much for coming and thank you for your questions.