力拓 (RIO) 2007 Q2 法說會逐字稿

Thank you Guy. Maybe a quick and easy one to start with. Just on the demurrage charge. Obviously you had the sequential impact of cyclones in the first quarter; how much of an impact was related to that sort of timing difficulty, and how quickly can you see demurrage charges coming off in the Pilbara?

And can you just give us the breakdown of -- if you're happy to on the demurrage charge percentage coming out of iron ore in the Pilbara versus East coast coal?

Guy, can you take that question?

(inaudible) that some of the numbers, I'll just comment that in the Pilbara during the course of the first half, we saw really two pulses of demurrage, one associated with the cyclone activity where we had to bring some ships out of -- further out to sea with what they call storm swells. And then, as we saw demand tightening toward the second half of -- the latter part of the first half. Certainly what we intend to do going forward, is to -- is work to bring down the number of ships that are waiting at any point in time.

Brendan, I can't find that I'm afraid, but perhaps I can cover it separately with the analysts tomorrow. Sorry about that.

Okay, let's move on to the next point.

Thanks Guy. Two questions. The first one is on CapEx. You said that CapEx, this calendar year $5 billion, obviously a big step up in the second half. Excluding any impact on Alcan, could you give us some idea just with the growth projects you've identified, of CapEx in 2008 and 2009?

And also, can you separately discuss Pebble. I'm interested to see it on your copper chart, but obviously Anglo announced yesterday a 50% acquisition of that project, when you had really the box seat there with your investment in Northern Dynasty. Could you take us through what happened there too please?

Perhaps I could suggest that Guy, you deal with the CapEx point and Tom responds on Pebble?

Begin with CapEx. You're quite right Vicky, it does pick up in the second half, particularly in the iron ore area, but there's actually a broad amount of capital expenditure going on in each product group.

Turning to 2008, I think the only forecasts we've got are now some months old. I mean, they're probably nearly nine to ten months old, and those numbers were not very dissimilar for Rio Tinto. You know, they were in the region of $5 billion for next year. Now of course, I think one has to qualify that by saying that A, capital costs are under pressure, and B, you know, we may not have actually committed to the capital -- in quite the schedule that we thought nine months ago. Now of course, in addition to that, we would anticipate spending money in relation to Alcan, so that would be additional to the amounts that I've just mentioned. To give you some idea, we are not -- Alcan have not announced a capital expenditure number for 2008, but I think we're very attracted by many of the capital programs which Alcan has, and I would expect that to be quite a substantial figure. So those would be the points on capital.

Thank you Guy. Maybe, Vicky, if I could make a few comments on Pebble. I think it -- the announcement on Northern Dynasty yesterday reflects certainly the competitive activity that we continue to see in the mining sector and, as demonstrated, the hunger in the sector for quality assets. As we've said before, we do focus on strategy, then certainly there's a large ore body, world class ore body by any means, and we also focus on the value getting into the ore bodies. Effectively this means that we have a 10% interest in the project going forward. If you look at our 19.9, 19.8 percentage risks in Northern Dynasty and reminder that we're now carried for the first roughly $1.5 billion of expenditures in the projects going forward. So we do look forward to working with Anglo on this, and we certainly had a partnership relationship with them on projects such as Palabora.

Thank you Tom. Charlie, perhaps you'd like to bring in a couple of questions from Melbourne?

Thanks Paul. Yes, Rob Clifford from ABN Amro. Just quickly on the price benefits you got. You talked about significant benefits from the aluminum price rise, but at the same time talked about lower achieved prices for alumina and bauxite. I just wondered if you could talk me through that, given the linkage rate that's usually there in between them?

Guy, would you respond on that?

Yes I will. I mean, of course, the first thing to say is that there is a lag between them. They're not -- they're not -- they're not precisely all being priced at the same time, and so I think you will see some form of lag. Let me see if I can give you a little bit more texture to this. I think that -- yes we're see -- the variance that we're seeing is of the total $93 million variance between '06 and '07; the primary amount is $61 million, which relates to smelting and $27 million relating to mining and refining; offsetting which is a number of $18 million in the case of mining in France. So you could quite easily see how bauxite and purchased alumina has had an effect on that number. So I think that lag is part of the reason. I don't think there's any underlying problem with alumina. To the contrary, our confidence in alumina is exhibited, not only by the Alcan acquisition but also the Yarwun expansion.

Rob, if I may just add to that, as you recall we had some exceptional price movement in alumina last year, with some points the spot pricing of our member getting above $600. So then we saw a drop quite quickly as Chinese alumina came on, but then it dropped below what we would have called the incremental price -- or cost of Chinese alumina, rebounding it back then into somewhere -- now I see spot prices are somewhere you know, in that $350 to $400 range.

Thank you. Charlie, still with you.

Yes, we have more.

Craig Campbell, Morgan Stanley. My question relates to coal. With regard Hunter Valley coal and the logistic tone that's in place there, my understanding is that the participants in the Hunter Valley have to decide towards the end of this year if that continues. I was wondering what the Rio Tinto position is there, given that shipping queues are starting to come down?

Secondly, we think Queensland -- I believe there's been an announcement, they're looking to replicate that type of logistics team interaction, just wondering if you had any thoughts as to how long it will take for improvement in Queensland?

And I suppose, thirdly, when you look at coal markets and energy markets, your next major league of investment, will it be in Australia or outside of Australia?

Thank you Craig. Tom, would you be able to start?

Maybe I'll start with the Hunter Valley, then move on to Queensland and then coal in general -- coal energy in general, for investments.

In the Hunter Valley if you may recall, we had -- the industry had some arrangements in place which were working for a while but I think we all saw some gaming taking place during the course of last year. That caused that to go into suspension, but we rebuilt those arrangements which I think they are now working, and as you point out, we are now seeing a reduction. I think the key with the Hunter Valley is it's not just -- it's not just the port capacity or just the rail capacity or the mining capacity, it's how they become coordinated together, and I think in the long run we need to see processes where they can be coordinated and sequenced in in plan, because what happens if someone sort of can slip -- ship into the queue, not only does that impact someone else's production but it may take longer to load that particular ship because you may not have coal on the ground ready to immediately load and if that ship stays in the wharf longer than normally would be the case, that just reduces the total level of production, so lack of coordination means that you know, it's worse than a zero sum game. You'll see an overall reduction to the 100% of coal shipments out of the Hunter Valley.

In Queensland we were encouraged by the report by the -- that was put out between the industry and the Queensland government this week, and there's a recognition of two additional train sets. With those two additional train sets we'll see the next bottleneck being the loading point at Dalrymple Bay. I think what we are seeing, and certainly in my conversation with the premier last week, is a commitment to grow and Queensland -- to give Queensland's infrastructure credit, it's been the most rapidly growing coal export business [in the] world. It's doubled it's overall shipments. But I think there's a great recognition certainly by the industry, certainly by government that it has to grow even further. And I think that everyone's going to have to work together to take the steps to free up those bottlenecks in the coal chain wherever they may exist and provide what looks like a stronger Asian thermal coal and coking coal market going forward.

Now finally with respect to investments. As you saw in our chart we showed lots of investments in a range of sectors; we didn't talk about coal expansions and I think that that is driven by this infrastructure issue. Until we see infrastructure ready to go it's -- wouldn't want to see ourselves investing ahead of that infrastructure, but we're certainly exploring for coal, not only in Australia but elsewhere. And there is a recognition that as the markets aren't satisfied by the tonnage that's been delivered by Australia it will begin will looking elsewhere and we're also looking, with some of our exploration, in places such as British Columbia in the US, countries like South Africa and certainly we're drilling for coal in Mongolia.

Thank you Tom, Charlie one further question from Melbourne and then we'll go back to our Sydney audience.

(inaudible) from Goldman Sachs (inaudible). Just on time because obviously Argyle performances is disappointing; I just wondered whether you could give us a bit more detail into what are the problems and what are the risks, I guess, from the ground conditions that you seem to be having at Argyle? And as a broader question, how much of your exploration spend is now going into diamonds and how does diamonds sit in the overall Group once you've got Alcan in there?

And just a second question. The other items in this result were quite large, can you just run through the details of those other items and just give us some clarification on what is ongoing and what's one-off?

Fine thanks. Tom I think you should take the Argyle question. Perhaps Guy can deal with the last part about the analysis of the other items.

Thank you. I'll talk about, first of all, what's happening in Argyle, maybe a bit about the ground conditions, our overall approach for exploration in diamonds and then move on to Guy.

I think that Argyle, which is somewhat different from say our other projects in WA, is a longer-term project. Instead of it being a two or three year project, just typically see in WA where you can actually plan a sequence that what you see is the cost escalation factors, and what would be in some cases reductions in performance productivity reflecting the boom conditions. When you have a project that is closer to a four or five year project you see those escalation factors, small differences become bigger numbers quickly and that's been a part of what's transpired. Certainly in Western Australia we've talked about the very compressed construction market, contractor market but it's additionally accelerated by the natural scarcity we also see in terms of underground contractors, underground skills. So that doubles up on what's already an overheated sector and certainly that's reflected in what we now see as our numbers for Argyle.

Looking ahead we've gone across, what I'd say, the worst of some of the development issues as the initial part of it was really into a single heading. So you can only throw so much resource at a single heading to basically bring you on a critical path. We're now past the point we're moving into multiple headings and that's actually increased our overall development rate quite a bit. And as a matter of fact we're seeing the development rate over the past month or so, actually for the first time, exceeding our forecasted development rates. I think that gives us some confidence going ahead, but certainly this is something that is a concern, it's disappointing from my perspective and we're watching it on a very close month-by-month basis.

I'll talk maybe a little about exploration in diamonds. Again we do see roughly 20% of our total exploration spend being driven by diamonds and I would say the economics of diamonds are all about the discovery of kimberlites and turning those kimberlites into producers because that's really where the value add takes place. And I've been encouraged by our track record of new kimberlite discoveries and diamonds over the years, again starting with Argyle in the '80s, Diavik in the '90s, Murowa, well it suffers from a very difficult external environment in Zimbabwe. It's an attractive project in itself although it's being mined at a very limited rate, until we do see it clearing up some of the challenge you see in Zimbabwe. And I've been encouraged by our ongoing bulk sampling that we're seeing in India. So I think we do have an opportunity to add another kimberlite or kimberlite cluster to the queue.

Guy could you provide a reasonably quick response on these other items and then perhaps we have time for two or three more questions from your side.

Well the biggest item there, Neil, is the absence of those tax items from the US and Canada that I touched on. But in addition to that, central items are always a jumble of positives and negatives. Now the most important of these relate to exploration, and what we had as a -- the principal areas of exploration, we've greatly increased our expenditure. So after tax the non-business unit expenditure moved from 80 in the first half of last year to 147 and the business unit expenditure moved from 27 to 74. But offsetting that were some important exploration asset sales, Penasquito being the most important, which had a net positive effect of $98 million. Now in addition to that there were other increased costs of a mainly investment nature to do with higher technology spending, the increased work on the ABS program, that's the installation of SAP, and of course, costs related to M&A. Those will be the main things that I would highlight, Neil.

Now shall we -- I think you wanted to come to Sydney, Paul. Any more questions here?

Brendan hello. Yes?

Just back to iron ore again if I can, just interested from a strategic point of view, if the recent glut, if you like, of potential new entrants into the market magnetite aspirants in the Pilbara, a range of players, whether that creates any concern for you with your longer term expectations for surpluses or, should I say, supply demand balance? Particularly when you've seen the recent announcements by some of the aspirants up there with mega plans if you look at the timeline that they're looking at to grow with significant magnitude?

Thank you Brendan, I think on iron ore, certainly with the strong markets that would naturally encourage capital into the sector, and that's what you would expect in any sector, in any business activity. I think what we have to -- what we do when we look at our modeling we have to make a somewhat of a distinction and analysis of the difference between aspiration versus delivery. And as we've built of our assumptions of delivery into the model, including some of the magnetite coming out, we would also look at the total balance, we would look at what's taking place in terms of domestic iron ore production in China, and certainly the increasing pressures to restrict Indian iron ore into the China market. As you know that comes into the Chinese market in various -- spot bases, in various grades of quality at various times a bit opportunistic, and you're seeing more and more pressure within the Indian steel sector to basically capture that for their either current use or strategically future use within India. And that's where our Orissa project actually can play a good part.

As we look ahead we do build in some of these aspirants but I'd say we do a healthy discount from what we see as very good public relations activity. And we see, to some extent, that will also be in many cases spot business, maybe varying quantities, varying qualities over time, and what you could see is it essentially supplements the current Indian business as we continue to expand our base load production we continue to work toward base loading the principal steel mills in Japan, in China and other key steel centers around the world.

Okay. A further question Guy from you.

Before we do that, Paul if I may. I'll just -- I have now tracked down the answer to Brendan's earlier question about demurrage, which is that it increased our share of it after tax in the west from 20 in the first half of last year to $51 million and at Coal & Allied the amount was, I've only got in dollars per ton, $4 per ton, a very high level compared to earlier years.

Now leaving that on one side, are there other questions here? Yes, please.

Doug Little from Constellation Capital Management. Bookmakers in Australia are currently bidding that there'll probably be a change of government later on in the year, and given your position in the mining industry could you please comment on issues that investors need to look out for in terms of costs associated with a removal of Australian workplace agreements? What are the issues that you'd be looking for in terms of the structure of a new industrial agreement and any other comments that you might like to make in that regard?

I wonder if I might take that question Doug. I think that I just make one observation and that is that the industrial relations framework within which we've been operating in Australia for a number of years now has, I think, served the industry very, very well in terms of helping us build productivity levels. And actually from the standpoint of our employees to result in a pretty satisfied workforce and a lot of alignment across our businesses. So we would obviously be concerned if that were fundamentally disturbed, I don't think now is the time for us to speculate on different approaches which different parties might take post an Australian election, I just, I think, like to register the point that the framework within which we've been working has been a very constructive one, and if that were fundamentally disturbed we'd clearly have some concerns and that's been the nature of the public discussion. Beyond that I don't think it would be sensible for us to go at this point.

I might add if I could that certainly Charlie in Melbourne has made a number of public comments and a number of submissions and certainly I think he's extremely knowledgeable and I fully support everything that Charlie's been doing in terms of presenting our views on the subject.

I think we probably have time for just one more question from Australia, given the unfortunately pretty compressed communication schedule we've got at this end of the world this morning here. So Charlie can we give that one to you?

(inaudible) any takers at the moment. Another question from Melbourne? Passing back to you then, Guy.

Question. We're done here as well actually.

Okay, right, well thank you to our audience in both places for joining us and I hope that session was valuable and informative for you. Thank you all very much.