力拓 (RIO) 2009 Q4 法說會逐字稿

So good morning, everyone.

And good evening to those of you joining us from Australia.

And welcome also to those participating via the webcast.

Tom Albanese is with me here in London.

And Guy Elliott, as you know, is hosting the presentation in Melbourne.

We've also got several of the Eskom members joining us here this morning.

I can see Bret Clayton and Debra Valentine in the audience in London, as well as our relatively new Chief Executive of the Diamonds & Minerals business, Harry Kenyon-Slaney.

Before we start the formal presentation, I thought I might spend just a few moments sharing with you some of my personal reflections on the events over the last 12 months.

When I became Chairman in April last year, Rio Tinto was not only the subject of intense stakeholder and media attention, but 18 months of non-stop corporate activity had taken its toll on the organization.

The global financial crisis was having a severe effect on our markets, finance liquidity was low and our debt level was causing a major concern.

While the proposed transaction with Chinalco would have addressed the Group's financial risk, various features of that transaction proved to be not only controversial but indeed unpopular with a number of shareholders and other stakeholders.

It was self evident to me that I needed to look for guidance from our shareholders.

And the feedback I received in the context of financial markets which had, by that time, improved considerably, led to our decision in early June to change direction.

The decision to change our recommendation on the Chinalco transaction was very difficult and clearly placed a strain on our relationship with stakeholders in China.

We continue to work to resolve these relations and we continue to seek out and pursue future opportunities for cooperation with Chinalco where it would make strategic and financial sense for both parties.

However, the decision to proceed with the rights issue and to pursue the Western Australian iron ore production joint venture with BHP Billiton was very well received by shareholders.

Looking back, it is almost as if those decisions, combined with a steadily improving external environment, did move the Company into a virtuous cycle.

The rights issue has taken pressure off our balance sheet.

We have been increasingly successful with our disposal program.

And as demand for our products picked up, our third and fourth quarter operations report showed much better numbers.

In fact, as I've been joking with Tom, he even found time to sort out and restructure his Executive Committee.

So these events had released the tremendous pressure that the Company was under.

And as new Chairman, it is hard to overstate how pleased I am to see the significant improvement in employee morale throughout the organization and the general return of real confidence to this organization.

We recognize we have a lot of work to do to fully restore corporate and individual and personal reputations.

But I believe that today's results show beyond doubt that Rio really is back in business.

So on the basis of those remarks, let me move on to the more formal presentation.

And I shall begin with the 2009 highlights.

We achieved very commendable results for the year in what was a rapidly changing macro environment.

In many ways, 2009 was a year of two halves.

Poor demand for commodities and low prices in the first half were followed by a substantial recovery in pricing for most of our key commodities, driven largely by government stimulus packages in the second half.

Rio Tinto was well positioned to benefit from higher prices due to the quality of its low-cost, long-life, expandable assets.

The strong operational performance of our assets during a time of economic turbulence has been exceptional, with cost savings of $2.6b achieved during the year.

Our Iron Ore business set a new annual record for production and sales.

We have clearly benefited from our earlier decisions to invest in growth.

I should also highlight the performance of our Aluminum group which turned a difficult corner from the first half and became profitable in the latter months of the year.

As I've already acknowledged, Rio Tinto's balance sheet was recapitalized, driven largely by the success of the rights issues.

However, we have also made significant progress with our divestment program and generated strong operating cash flows of $14b.

All these factors enabled us to reduce net debt by $20b whilst continuing to invest in value-adding growth.

As I mentioned, we also announced the Western Australian iron ore production joint venture with BHP Billiton.

This is a transaction that has no equal in the mining industry.

It will lead to synergies with an NPV of at least $10b attributable to the joint venture.

Good progress has been made in the second half, culminating in the signing of binding agreements with BHP Billiton and the commencement of regulatory filings with various authorities.

We continue to work towards completing the joint venture in the second half of this year.

The new strength of the balance sheet and of our business has allowed us to resume paying dividends to our shareholders.

The Board has approved a final dividend of $0.45 per share, in total about $875m, and we expect to pay out at least $1.75b in dividends in respect of 2010.

Turning to the global economic environment, we have seen a substantial recovery across most of our key commodities, driven by government stimulus measures in the wake of the global financial crisis.

Strong demand from China was related to its continuous public infrastructure spending package.

China is now the most significant destination for our products.

There has been a bottoming out of economic activity in most regions across the globe.

As this turns to economic recovery, we will see an increase, possibly substantial, in commodity demand growth.

Furthermore, production cutbacks and the postponement of some projects will limit near and medium-term supply growth.

For these reasons we believe that the factors that drove recovery in the second half of 2009 will continue through 2010.

We forecast that China will grow at above 9% this year and that the OECD, which is beginning to emerge from recession, could provide further impetus.

Risks remain in the short to medium term, and especially in the second half of this year and into 2011.

In particular, a reduction in government stimulus fiscal packages will have an effect on commodity demand.

Excessively aggressive tightening of monetary or lending policies in response to concerns about consumer and asset price inflation may also have a significant influence in key regions.

Furthermore, it is likely that consumer spending, in particular in OECD economies, will continue to be muted on concerns about unemployment and a desire to rebuild wealth.

Finally, low interest rates have reduced the cost of speculating in commodity markets.

And this will probably also contribute to volatility in the shorter term.

However, short term uncertainties notwithstanding, the long term outlook remains attractive.

We believe that the continuing industrialization and urbanization of China will lead to a doubling in demand for our key products over the next 15 years.

China is also becoming increasingly important -- I mean to say India.

And although India will follow a different path to China, its need for raw materials over the long term will be significant.

We expect India to rise up the metals intensity curve.

By 2025 it will be where China is today, supporting further potential demand growth.

This will require a significant supply response and we expect will result in some relatively high marginal cost production to meet growing metals and minerals demand.

This in turn will lead to increased volatility, driven by the speed of demand growth relative to the capacity to supply.

So to conclude, we continue to believe that the long term outlook for our industry presents an exciting opportunity for growth, and that Rio Tinto is well positioned to take advantage of these opportunities.

That concludes my introductory remarks.

And on that basis, I hand you over to Tom.

Thank you, Jan.

And before I comment on safety, I'd like to first say a few words about our four colleagues who've been detained in China.

One month ago the Chinese Public Security Bureau, who were investigating the four employees, transferred the case to the prosecuting authorities.

Today we have had confirmation the case has been transferred to court for trial.

Our senior managers from Rio Tinto continue to maintain a regular dialogue and contact with the families and -- of the detained employees and provide them continued support.

Our primary concern remains the wellbeing and care of our colleagues and therefore it would be inappropriate for me to comment any further as this legal process continues.

Turning to safety, I was pleased to note that our safety performance has continued to improve throughout 2009.

Many of you have had the opportunity over the past year to visit one or more of our operations and therefore know how important safety should be as a value and key indicator of our management performance.

Nevertheless, we did suffer four fatalities during the course of 2009 which, despite being an improvement from 2008, is still four fatalities too many and it shows we cannot afford to be complacent when it comes to safety and the welfare of all of our employees and each of our contractors.

So now let's take a look at our results.

As Jan has said, 2009 really was a year of two halves.

The speed and the severity of the downturn at the end of 2008 was absolutely unprecedented with prices declining to levels not seen for many years.

And our response was immediate and decisive.

We set ourselves some challenging but essential targets.

And we have delivered against them in 2009.

We have generated strong volume gains, notably from our Pilbara iron ore mines.

And during the second half these operated at an annualized rate in excess of the 220m tonne per year nameplate capacity.

Our Copper group also performed well, with Kennecott Utah Copper demonstrating significant operational improvements.

We benefited from higher copper and gold grades at both KUC and Grasberg.

In December 2008 we committed to a reduction in controllable operating costs of $2.5b per year by 2010.

We took rapid and decisive action to achieve this through a substantial reduction in headcount numbers, together with a series of cost reduction initiatives throughout the organization.

And today we've announced we've realized $2.6b in cost savings one year in advance of the target date.

We will continue to focus on cost optimization, although we will expect the return of some of the good costs, as Guy has previously noted, as likely as we ramp up evaluation work in a number of our large growth projects.

A year ago we also embarked on a transformation of our Aluminum group which put it back into profit in the second half of this year, with EBITDA improving by over $1b half on half.

Rio Tinto Alcan continues to focus on its cost structure as it positions itself as the leader in the aluminum industry.

At our interims, we announced a 16,000 reduction in headcount, 2,000 roles, that includes contractors and employees, in excess of our target.

Delivery against these targets, together with the resurgence in markets and prices for most of our key commodities, has led to strong financial results that we've announced today.

Rio Tinto generated over $14b in EBITDA in 2009, the second highest in the Group's history.

Underlying earnings were $6.3b, a commendable performance in some of the most challenging economic conditions since World War 2.

High levels of EBITDA translated into strong operating cash flows, which were also around $14b.

This cash flow in part was used to invest in capital.

Our spend on sustaining capital was $2.1b, with $3.3b invested in growth projects.

A number of these projects were accelerated over the course of the year as economic conditions improved.

Surplus cash generated was used to reduce debt -- the Group's debt.

And this, together with the proceeds achieved from our ongoing divestment program and the $14.8b in net proceeds raised by the rights offering, allowed us to reduce net debt by $20b, to $18.9b.

Gearing was reduced by 63 -- from 63% at the start of the year to 29% at the end of the year.

And we've also made excellent progress in our divestment program, announcing $7.2b in 2009, of which $5.7b has since completed.

Guy will give you more detail on this a little later.

Cumulatively, these achievements represented a very strong performance.

And I will now take you through each of the product groups.

Let's start with Iron Ore.

In late 2008 and early 2009 we witnessed an unprecedented iron ore market environment.

The full impact of the global financial crisis, together with severe Pilbara weather conditions, constrained our ability to produce and ship at first capacity at the start of the year.

Widespread flooding in the Pilbara during the first quarter damaged or destroyed several bridges and cut off the Robe Valley operations literally for weeks.

The Chinese stimulus measures began to take effect in the second quarter of the year, resulting in a significant up-tick in the demand for iron ore.

And as a result of these very effective stimulus measures, the industry now resembles the operating environment of pre-2008, when demand growth outstripped new supply.

And these conditions are expected to remain firm into 2010.

Steel production is expected to grow in all the major seaborne iron ore consuming countries during the course of this year.

And as Jan mentioned, some of the new iron ore capacity originally earmarked to come on stream in 2009 did not eventuate.

New entrants and existing producers postponed expansion plans as cash and financing dried up.

Some of these expansion plans are now being resumed as demand continues to pick up.

Moving on to the OECD countries, the sharp contraction in steel production last year has started to reverse, resulting in a recovery in demand for iron ore.

Amidst this volatility Rio Tinto instituted a number of programs to reduce costs and preserve our margins.

We maximized volumes, exceeding nameplate capacity in the Pilbara since the second quarter.

We set new full year production and sales records, despite the poor market conditions and severe weather impact at the start of the year.

Our operations center in Perth continued to enhance performance as it neared its final stages of construction and ramp-up.

High levels of shipments were maintained to our Chinese customers in the second half.

And as we've previously said, the majority of our sales to all of our major customers in the second half either were made at benchmarked or provisionally priced basis against long term contracts.

These provisional prices were made with reference to the benchmark agreed with our other Asian customers.

We remain active across a range of sales mechanisms with our Asian customers.

And our proven ability to deliver tonnes through all stages of the market cycle puts us in a good position to benefit from future demand growth in China and elsewhere.

During the course of late 2009, we made the first delivery of iron ore to India.

And while it's only been one shipment by the end of the year, this was significant in the context of India's great potential.

Toward the end of the year, signs of recovery in demand for iron ore were seen in our other markets, with pig iron production increasing in both Europe and North America.

IOC, which primarily serves Mideast, European and North American customers, had reduced production earlier in 2009 in response to the global financial crisis.

The recovery in demand in these markets allowed IOC to return to full production by September and sales returned to pre-crisis full capacity levels in the fourth quarter.

As our production record demonstrates, all Rio Tinto iron ore operations were well placed to benefit from a strong market in 2010.

Looking further ahead, our long term view of the iron ore market remains intact.

The continued industrialization and urbanization of China, followed by India, will lead to a doubling in demand for iron ore over the next 15 years.

And as I've said before, we will need a significant supply side response, equivalent to adding one new Pilbara system every five years to match this demand.

Rio Tinto is well positioned to benefit from this.

And we have continued to invest to assure our current capacity of 220m tonnes per year.

We will shortly rail first production from Mesa A to Cape Lambert.

This mine, with its 25m tonne per year capacity, will gradually replace Mesa J and was delivered on time and under budget, and is another demonstration of superb focus and delivery of Sam's team and the business units despite tumultuous external environment.

Brockman 4 remains on target to complete in mid 2010.

Our other major sustaining projects are also on schedule.

In the final quarter of last year we approved a small amount of capital to deliver 5m tonnes per year of incremental capacity by de-bottlenecking the Dampier Port.

This work will be complete by the first quarter of 2011.

Further studies are currently underway to add a further 5m tonnes per year of capacity at Dampier Port by the second quarter of 2012, increasing our total Pilbara system capacity to 230m tonnes per year.

Of course, as we've spoken, a number of other incremental Pilbara options are also available for us.

And these will include our innovative agreement with Iron Ore Holdings to buy ore from the Phil's Creek deposit at the mine gate.

This ore will then be transported to the coast for shipment as part of our product suite.

This agreement will enable the development of the Phil's Creek deposit, resulting in benefits for all respective shareholders and the community of Western Australia.

Studies into the step change expansion of capacity to 330m tonnes per year are progressing well.

We expect to be in a position to approve certain long-lead items in the first half of this year as the design -- detailed design and engineering work at Cape Lambert port expansion progresses.

The port studies are scheduled to be complete by the end of this year.

The first 50m tonnes are planned to be added by the end of 2013, taking our total port capacity at that time to 280m tonnes per year.

Our second 50m-tonne increment would then be complete by the end of 2015, thereby increasing our total port capacity to 330m tonnes per year.

These port expansions will coincide with increases in mine and rail capacity, with supporting infrastructure.

Of course, again, as we've said, Cape Lambert has potential for greater capacity than this.

And we would envision further growth beyond 330m tonnes and have a number of options available to us.

Beyond Western Australia, our global growth options remain intact.

In India, discussions with the Orissa state government over the Orissa project continue to make progress.

And we are proceeding with evaluation work at Simandou in Guinea.

At IOC we continue to monitor market conditions in order to assess when the time might be right to reactivate the project to expand to 25m tonnes per year.

Significant progress towards the formation of the West Australian production joint venture was also made during the second half of 2009.

We signed binding agreements in December, bringing this formation one step closer.

These agreements cover all aspects about how the production joint venture will operate and be governed.

And they will be in effect for decades.

It was therefore vital that the time was invested upfront to guarantee their quality and their practicality.

We have started the process of submissions for regulatory approvals.

The relevant authorities have confirmed that we have made joint filings in Brussels, Germany, Japan, Korea and Australia.

The European Commission has decided this is not a full merger under the terms of the European Union Merger Regulation.

That regulation covers so-called full function joint ventures, whereby ours is limited only to production only and being considered under Article 101.

We've always said we will file in China and Taiwan.

But we are not discussing the status of these processes ahead of those regulatory authorities.

We will cooperate fully with all relevant competition bodies as we work toward formation of the production joint venture.

It will unlock the full potential of our combined iron ore assets in the Pilbara, delivering more tonnes faster, through the optimal use of ports and railways, combining adjacent mines and by maximizing growth programs.

These tonnes will be at a lower cost.

And substantial synergies that exist between the two businesses in the Pilbara will be realized.

With those synergies of at least $10b of NPV, it's difficult to imagine a more attractive transaction in the mining industry today.

Of course, this is a production-only joint venture.

There will be no change in the number of sellers in the market.

Pricing will continue to be decided by the market as a whole.

And both Rio Tinto and BHP Billiton will take their own separate approaches to pricing and marketing arrangements, just as they do now.

The material for the joint venture will be sold into the global iron ore market with about 900m tonnes per year, of which about approximately 250m tonnes is supplied from China's domestic operations.

We will continue to deliver value to shareholders of Rio Tinto through our independent marketing of material from the Western Australian iron ore production joint venture.

Moving to Aluminum, Jacynthe Cote was appointed as CEO of Rio Tinto Alcan at the start of 2009.

Most of you will have probably met her since then.

And this was during one of the most difficult times the aluminum industry has ever faced.

She and her team have made great strides in transforming the product group, positioning it as a leaner, more profitable business with some of the best assets in the aluminum sector.

In 2009 we saw significant turnaround, in particular during the second half of the year.

Prices improved from the lows experienced in early 2009 to average $1,908 per tonne during the second half, compared to $1,422 in the first.

The cost improvement initiatives launched by Jacynthe in early 2009 also ramped up further in the second half, helping to boost EBITDA by over $1b and underlying earnings by $800m half on half.

Year on year the Aluminum group achieved operating cash cost savings of about $1b, a sizable portion of our total cash cost savings of $2.6b.

Of course we've also kept a close eye on our cash flows.

We reduced our working capital requirements by the equivalent of 10 days outstanding during the second half.

Sustained capital was also targeted, it was cut by 40% over the course of 2009, while maintaining equipment reliability and without compromising safety.

And while we have seen some recovery in the aluminum market, there remains a significant supply overhang in the industry, both from historically high stockpiles, as well as latent production capacity.

For this reason we will continue to keep a tight hold on growth CapEx in 2010, while ensuring that we preserve our growth options into the future.

In Queensland the construction of the Yarwun 2 alumina refinery continues at a slower pace.

And this is sensible given market dynamics.

I wouldn't expect that we would intend to bring any new capacity back into production in alumina before 2012.

At our interim results, I highlighted the four main initiatives that we implemented across the Aluminum group.

And Jacynthe gave you more detail of these on our site visits to Saguenay and our investment seminar in November.

During the year, Rio Tinto Alcan retained its focus on the original synergy and integration targets, despite the difficult operating environment.

Due to changed economic circumstances, certain synergy projects have been deferred, while others have been accelerated.

However, the target remained in place.

And RTA continued to deliver against it, with $441m of synergies achieved in the second half, bringing the total to $924m for 2009.

The run rate at the end of 2009 was $1.1b.

And we expect to deliver $1.2b in 2010 against that target of $1.1b.

One-off integration costs were well below what we had initially expected, by some $500m.

This is the last time we're reporting synergies on a regular basis.

And it's pleasing to note we delivered early against our target set two years ago.

Our second and third initiatives were to close or divest of high-cost capacity and to implement temporary curtailments of some lower-cost capacity where we could sell power into the electricity grid.

At the end of the year, following the permanent closure of one of our Quebec smelters and the Anglesey smelter in Wales, and the divestment of the Ningxia smelter in China, the annual run rate on our smelters was 9% lower than a year previously.

Finally, a major cost cutting and cash flow improvement program was implemented across all sites and offices in 2009.

This has delivered over $1b of operating cash cost savings, as I've stated earlier.

And these have included further headcount reductions, lower SG&A and further procurement savings.

And Guy will refer to these later.

I'd say that overall the Aluminum group has performed well in difficult times.

Moving on to Copper, the Copper group had another good year, with earnings of $1.9b.

Prices rallied strongly throughout the year, to $3.35 per pound by the end of December.

The surge in Chinese imports was the main development in the copper market during last year, reversing the rising trend in LME stocks.

However, as we know, this market remains volatile, and we've seen this over the past few weeks, and focus is likely to remain on the levels of imports from China.

We did see a substantial gain from higher volumes in the Copper group which added more than $550m to the bottom line.

Much of this increase came from our share of mined gold production, which exceeded 1.1m ounces for the year.

Kennecott Utah Copper benefited from higher grades and significant operational improvements which led to higher recovery rates at the concentrator.

Improved ore grades and an increased tonnage in ore treated at Grasberg delivered an increased allocation above the metal strip.

At Escondida a permanent solution was implemented for the Laguna Seca SAG mill and it's now operating at full capacity.

And of course, back in October, we increased our stake in Ivanhoe to 19.7%, at the cost of $388m.

This followed the signing of an investment agreement with the Mongolian government for the development of the Oyu Tolgoi project.

First production is expected to be in 2013, with a five-year ramp-up to full production.

Earnings at the Energy group were steady, with higher volumes compensating for weak prices.

Demand for seaborne thermal coal at the first half of 2009 was weak in response to the global economic climate, which triggered reduced consumption in our major markets of Japan, Korea and Taiwan.

Demand, particularly from China, increased in the second half and now looks buoyant going into 2010.

China also emerged as a significant met coal importer in 2009.

Second half of the year saw a tight supply/demand balance for coal, with spot prices for hard coking coal supported above benchmark levels.

I'm pleased to say infrastructure constraints are slowly being resolved in Australia.

Expansion by Port Waratah Coal Services, to 113m tonnes per year, was completed in 2009.

And PWCS is now examining options to expand port capacity to 145m tonnes per year.

However, constraints will remain in the short term as rail capacity is expanding at a slower rate.

In total, $5b in new infrastructure is planned for delivery over the next four years at Newcastle.

2009 also saw the historic signing in port access agreements.

And this provides for 10-year contracts to underpin future expansion, give certainty to coal producers and service providers alike, and is designed to align commercial contracts with service providers across the Hunter Valley coal chain.

Moving north to Queensland, I look forward to the construction of the Northern Missing Link and subsequent improvement in the infrastructure capacity in our coal lines in Queensland.

The Clermont project continues on budget and first coal is expected in the first quarter of this year.

In the US, the US coal earnings reflected higher prices for coal under contract and the impact of divestments, which Guy will discuss in more detail later.

At our uranium businesses, ERA production was strong and continued to benefit from higher realized prices as legacy contracts continued to expire.

At Rossing, lower market prices resulted in lower revenue.

From my viewpoint, uranium is an increasingly important part of our energy portfolio as we move towards a carbon-constrained world.

Turning to Diamond & Minerals where, due to the reliance on the OECD markets, particularly the US market, we experienced the toughest conditions for years.

These businesses, as I've said, are primarily driven by that US market which only began to emerge from recession in the latter part of 2009.

The pick-up in the US will result in a better market environment for diamonds and most of our minerals in 2010.

In 2009, the effect of the rough diamonds market was worsened by the lowering of inventory levels in the diamond pipeline, resulting from reduced global cash liquidity.

However, we did see some improvement in prices for our products in the fourth quarter of 2009.

Like other businesses, we took action during the year across our Diamonds & Minerals operations, implementing six to 12-week shutdowns to balance production with market demand.

We had planned a second shutdown at Diavik in the winter, but a recovery in market conditions allowed us to cancel this.

Our Iron & Titanium business incurred a small loss following challenging market conditions, notably for metallic co-products and zircon.

Rio Tinto Minerals enjoyed more steady earnings, with prices compensating for lower volumes.

An important milestone was reached when the Broad Based Black Economic Empowerment transaction was completed at Richards Bay Minerals in South Africa.

This transaction for 26% of Richards Bay Minerals was completed in December, a full five years ahead of the required deadline for a 26% transaction.

With that, now I'll hand it over to Guy in Melbourne.

Thank you, Tom.

I'd like to start by reminding you of the significant progress we made in 2009 to strengthen our balance sheet.

At the start of 2009 Rio Tinto had net debt of $38.7b and gearing of 63%.

Against the backdrop of the most significant financial crisis since the Second World War and the drying up of international debt markets, we'd made the commitment to reduce debt by at least $10b during 2009.

We have more than delivered against that commitment.

Net debt at the end of 2009 stood at $18.9b, less than half the amount 12 months earlier.

This was achieved through the support of our shareholders who participated in the successful rights issues.

These raised net proceeds of $14.8b which were used to repay debt.

We've also made further progress with our divestment program, realizing $3.4b of cash during 2009.

A further $1.9b has been received already in 2010 following completion of the sale of most of the Alcan packaging business to Amcor.

And there are further divestments to come.

Our operations have also performed, generating net cash flow after capital expenditure, tax and interest of $3.8b.

Overall, net debt reduced by $19.8b, or 51%, during the year, to reach $18.9b.

Gearing reduced to 29% at the end of 2009.

We finished the year with $13.7b of net committed undrawn facilities and cash.

At the end of January we chose to use $2b of our cash to repay part of the Alcan acquisition facility.

This was a voluntary early repayment of debt that was not due until December 2012.

Having also repaid $1.5b in October 2009, the total amount outstanding on Facility D is now $6.5b.

Following the receipt of the $1.9b of proceeds from Amcor in early February, we've also cancelled the $2.1b dollar Facility B that was available but undrawn at the end of the year.

Our credit rating is now BBB+/Baa1 with a stable outlook.

We continue to target a return to a single A credit rating.

That will be driven by the strong underlying cash generation of our Tier 1 assets, disciplined investment in value-adding growth, and further progress on the divestment program.

The equalization payment to be received from BHP Billiton on the formation of the Western Australian iron ore production joint venture may also play a part in this.

The divestment program made exceptional progress in 2009, in particular in the final quarter of the year as financial markets and buyers' access to financing improved.

Early in 2009 we announced and completed the sale of our potash asset.

The sale of the Brazilian Corumba operation was also announced and subsequently completed in the third quarter of 2009.

In the final quarter of the year we completed the sale of the Jacobs Ranch Coal Mine in North America, the Alcan Engineered Products Composites division, and the IPO of Cloud Peak Energy.

Together with some smaller asset sales, we raised gross proceeds before tax of $3.7b in 2009.

We also still retain a 48% ownership of the North American coal assets that are now managed by Cloud Peak.

In 2009 we also announced agreements to sell the majority of the Alcan Packaging business in two separate transactions.

The largest of these, the sale of global pharma, tobacco, food Europe and Asia to Amcor completed in early February.

We continue to work towards the completion of the sale of Alcan Packaging Food Americas to Bemis, and this is expected to occur in the first quarter of this year.

Since the start of 2008 we've now achieved over $10b of agreed sales, of which $8.8b have now completed.

We have a number of other businesses that we still intend to sell as and when market conditions allow us to achieve an appropriate valuation.

These include Alcan Beauty Packaging, our talc business, and the Sweetwater uranium mill and deposits.

We're also pursuing options for the remainder of Alcan's Engineered Products divisions and a number of smaller assets.

The customer base of Engineered Products is primarily in the US and Europe, including the automotive and aerospace industries.

The global financial crisis has had a severe effect on these markets.

We've taken decisive actions this year to ensure that Engineered Products is positioned to weather the economic downturn.

These have included severe cost reduction initiatives, including headcount reductions totaling 1,700 employees, plant closures, as well as significant working capital reduction and cutbacks in capital expenditure.

Throughout our disposal process we've retained our focus on achieving good value.

When the sales process has not achieved values acceptable to us, we've withdrawn the business from sale.

This was the case, for example, with our Borax and Northparkes operations, both of which we've decided to retain.

We will continue to monitor and evaluate our portfolio, as we always have, seeking to ensure that it's aligned with our strategy of investing in long-life, low cost, expandable assets for the benefit of our shareholders.

Now while cash flow from our divestment programs and rights issues have been significant, we shouldn't forget the exceptional cash-generating abilities of our Tier 1 operating assets.

Cash flow from operations in the first half of 2009 was $4.6b, excluding the proceeds from undeveloped property sales.

In the second half it was nearly double that level, at $8.3b.

The first half performance illustrates the exceptional resilience of our assets in difficult times.

The strong cash flow performance includes the benefit of a renewed focus on working capital during 2009.

We have reduced our net working capital days from 70 at the start of the year to 55 at the end.

This has resulted in a strong release of cash.

This improvement in cash generation, together with our more optimistic view of the short term outlook, has allowed us to progressively increase our allocation of funds to capital investment.

In the depths of the financial crisis we undertook to reduce CapEx in 2009 to $4b.

As the year went on, we chose to continue with investment in a number of projects where the valuations were strong, including Yarwun 2, Clermont and the Kestrel expansion.

This increased our guidance to $5b.

And the final level of investment of $5.4b reflects increased spend towards the end of the year.

We've restarted the E48 project at Northparkes, approved additional spend to increase capacity in the Pilbara, and resumed a number of other projects that were slowed.

Moving on to tax, our tax paid of $3.1b is a large amount.

However, this doesn't fully reflect the contribution that we make to the countries in which we operate.

The figure covers corporate taxes only.

It's almost half of our total taxes paid, which include royalties, payroll taxes and property taxes.

In 2009 our total taxes paid and collected were $5.8b.

This is a significant proportion of our profits.

We invest large amounts of capital with a long-term horizon.

It's important that the tax environments in which we invest are stable and competitive.

To date, the relatively stable taxation regime in Australia has helped to attract investment.

We're concerned by some of the speculation around possible future tax proposals in Australia.

It's critical that policy settings continue to attract investment and that we're fully engaged in any consultation and review process.

Turning now to underlying earnings, the effect of prices, of course, on our profitability was substantial.

Lower non-traded prices reduced earnings by $3.8b.

Benchmark prices for iron ore, thermal and coking coal were all settled at significant reduction from previous levels.

Lower traded metal prices reduced earnings by $3.1b.

The chart on the right demonstrates the significant decline in prices for aluminum and copper, our two most significant traded products.

This chart also demonstrates that prices of both have recovered in recent months to levels not that different from two years ago.

Some of this price decline was mitigated by a general strengthening of the US dollar relative to the currencies in which we incur our costs.

Movements in the two most significant of these, the Australian and Canadian dollars, are also illustrated on the right hand of the chart.

While not as volatile as movements in traded metal prices, the correlation is clear.

The impact of these exogenous factors was compensated for, in part, by our excellent operational performance.

In iron ore we set new records for production and sales.

This was despite a very difficult start to the year caused by cyclonic damage.

The Pilbara system operated above nameplate capacity for much of the year.

We're well positioned to take advantage of the next phase of growth in demand for iron ore.

Gold volumes were also higher due to the increase in the sharing rate at Grasberg and improved grades at Utah Copper.

At a time of record gold prices, we produced over 1.1m ounces last year.

We reduced production at some of our higher-cost aluminum operations, in the Diamonds & Minerals Group, as well as in Alcan Engineered Products, all of them in response to the market environment.

Turning now to costs, the $172m impact of general price inflation was more than offset by lower energy costs.

Lower cash costs boosted earnings by $742m.

This is a significant amount and I will return to it in a minute.

During 2009, in response to the global financial crisis, we scaled back evaluation work at many of our advanced growth projects.

The central exploration budget was more than halved as we prioritized our spending.

These actions improved underlying earnings by $576m.

Earnings were improved by a further $314m as the gain on sale of the undeveloped potash properties in 2009 more than offset the corresponding gain related to the disposal of Kintyre in 2008.

Interest, tax and other variances reduced earnings by $40m.

So at $6,298m, 2009 full year underlying earnings were $2,390m higher than 2008, once adjusted for the effect of movements in traded and non-traded prices and exchange rates.

One of our targets was to reduce our controllable operating costs by at least $2.5b by 2010 compared with 2008.

We have in fact exceeded this target one year in advance.

This is a reflection of the intensive cost-cutting efforts that have taken place throughout the organization in 2009.

Looking at the chart in this slide, you'll see that our total cash costs declined by $5.6b between 2008 and 2009.

However, this reduction also includes the benefits from a stronger US dollar on average against 2008, lower fuel costs and other price-driven costs outside our control, such a royalties and LME-linked impacts.

Setting these uncontrollable items aside, and excluding also the impact on cost of changes in production levels between the two years, we reduced our pre-tax cash operating costs by $2.6b.

This exceeds the target we set ourselves and has been achieved one year early.

These changes have been achieved through the cumulative effect of many different initiatives, including the significant reduction in our workforce numbers.

We've also reduced spending on exploration and evaluation projects and we've targeted SG&A reductions.

Of the $2.6b of cost savings, $1b was contributed by the Aluminum product group.

This is the outcome of the initiatives undertaken during the year that Tom referred to earlier.

These savings include headcount reductions, lower SG&A, procurement savings and many other cost improvements across the business.

Cost reductions were evident across other product groups, including the downstream aluminum business.

Now we define controllable costs to include the effect of some lower input prices.

This includes the significant procurement efforts at Aluminum to reduce prices for consumables, such as coke and pitch.

We also include the value achieved by our central freight management group in optimizing our freight costs.

We've managed to take advantage of existing market conditions in our procurement efforts and further realized benefits from input prices for raw materials.

But as market conditions improve, we may see a return of pressure on input prices.

In the earnings waterfall chart which is, of course, presented on a post-tax earnings basis, the $2.6b of cash cost savings are mostly reflected in the $742m cash cost variance and the exploration and evaluation variance that I referred to earlier.

Of course, our costs are sensitive to movements in exchange rate.

A significant proportion of our cost base is denominated in Australian or Canadian dollars.

These currencies have appreciated markedly against the US dollar in recent months and that will affect our cost base.

Input price pressure is also likely as the economic environment improves.

It's also possible that we'll see some good costs return to the business as we resume some of our exploration and evaluation projects.

However, you can rest assured that we will remain focused on our target and we will not allow waste or inefficiency to increase our cost base.

Early delivery against our operating cost and debt reduction targets has allowed us to reinvigorate our program of investment in value-adding growth projects.

As I said in October, our first priority for allocation of capital has always been and remains to make value-adding investments in our business in order to maximize shareholder value.

In order to achieve this it is important that our capital structure is appropriately balanced.

This was not the case at the start of 2009, but we've now restored our balance sheet.

However, our recapitalization does allow us to resume our focus on new value-adding investments in growth through selective but targeted allocation of capital expenditure.

Our capital expenditure plan for 2010 is approximately $5b.

We may allocate a further $1b of capital expenditure to new investments, allowing us to be responsive to quality opportunities as and when they arise.

Such opportunities will be assessed on a case-by-case basis, using our rigorous and proven process for reviewing major capital requests from the business and taking into account the economic environment.

Of course, in a volatile environment it's always possible that greater value can be achieved through buying capacity rather than building it.

We're constantly scanning the market for opportunities to undertake small to medium-sized bolt-on acquisitions, and we will continue to do so.

We will also continue to look for innovative opportunities to enter into new joint ventures with various parties, including Chinese partners.

We have in the past gained access to new resources, new geographies and special expertise through such vehicles and will look to do so again in the future.

We've also remembered our commitment to shareholders to resume paying dividends.

At the time of the rights issues, we undertook to make a 2009 final dividend payment, subject to satisfactory trading results, progress on divestments and prevailing market conditions.

We're satisfied that each of these conditions has been achieved and we've declared a final dividend of $0.45 a share in respect to 2009, equivalent to a total payout of $882m.

I can also confirm our intention that the interim dividend in 2010 will be $0.45, again equivalent to a total payout of $882m.

The final dividend for 2010 will be set by the Board in a year's time.

As outlined previously, we expect that the total dividend paid in cash in respect to the 2010 financial year will be at least equal to the total cash dividend payment made in respect of 2008, or $1.75b, although of course this will be distributed across a larger number of issued shares.

From that point on, we're committed to the resumption of a progressive dividend policy over the longer term.

The table on this slide outlines how this policy will work.

Now, back to you, Tom.

Thank you, Guy.

Despite the challenging market conditions we've encountered since the start of 2009, we've continued to invest in the long term growth of the Company and preserved our growth options for the future.

At our investment seminar last autumn, we gave an update of our capital expenditure plans for 2010, with guidance increased to $5b and a potential for an additional $1b.

Our Iron Ore business in the Pilbara is currently expanding beyond its 220m tonne per year capacity by first injecting a new incremental capacity of 10m tonnes per year and then looking for further stage developments which will take us up to 330m tonnes per year.

In Energy, we'll complete the Clermont and Kestrel projects, with first coal from Clermont expected to be shipped on time and on budget in the first quarter of this year and full capacity by 2013.

For Copper, we have one of the best portfolios of undeveloped copper projects in the world, highlighted by our Oyu Tolgoi investment.

We believe that the Oyu Tolgoi Mine is the next first-tier copper operation.

And we're working currently with Ivanhoe and the Mongolian government to finalize the conditions precedent in the investment agreement.

Construction planning is underway, with a target of first production in 2013.

Before I conclude, let's take another look at the long term outlook for our products.

We retain the view that economic development in emerging markets will provide the basis for relatively high commodity prices and margins.

China's development will remain key given its absolute size.

However, it will be increasingly ever important that Indian growth dynamics could provide increasingly positive influence on commodity markets over the coming decades.

Our Executive Committee met in India at the end of last year.

And we're all very impressed at the recent rate of progress.

Analysts project that India's GDP per capita should reach current Chinese levels in about 15 years.

The gap in terms of metal demand per capita is enormous.

India's steel, copper and aluminum consumption per person in 2009 was only about a 10th of equivalent Chinese levels.

So even assuming that India continues to follow a lower-grade, lower metal-intensive growth profile than China, it will gradually become an increasingly important source of demand growth for our business toward the end of this next decade and into the next year.

In 2009 we delivered against commitments that we've set for ourselves at the end of 2008.

We reduced our controllable operating costs by $2.6b, exceeding the target one year in advance.

We reduced our global headcount by 16,000 roles in the first half of 2009, again ahead of target.

We recapitalized our balance sheet through the successor rights issue and divestment programs, enabling us to cut our net debt by more than half.

We reached $1.1b annual synergy run rate in our Aluminum business at the end of 2009, again ahead of target.

The strengthening of our balance sheet allowed us to resume some spending on capital projects, leading to CapEx of $5.4b in 2009.

And we delivered a very commendable set of results as momentum gained pace in the second half following recovery in pricing for most of our key commodities.

So, to wrap up, we expect 2010 to be a strong year for commodity demand, driven by China, our biggest market, although we do retain some caution over the volatility of recovery as governments unwind their stimulus programs.

Our priorities for the year remain unchanged, mainly -- [dearly] to focus on operational delivery and in particular the continued transformation of our Aluminum business.

To bring some of our growth options forward through disciplined capital expenditure as the recapitalization of our balance sheet gives us greater flexibility.

To complete the Western Australian iron ore production joint venture.

To prudently manage the balance sheet and move towards a single A credit rating through the completion of our divestment programs and continued strong operating cash flows.

And last but not least, I've made a personal commitment to further develop our longstanding and broad-based relationship with China, our largest trading partner and shareholder.

You have now seen an announcement we made last week on the appointment of Ian Bauert as Managing Director Rio Tinto China.

I am confident that Ian will use his many years of experience of working in China to provide strategic direction and help guide all aspects of our engagement.

As part of our commitment to China, Rio Tinto is proud to be a platinum sponsor of the Australian Pavilion at the Shanghai Expo.

Our delivery against the targets we set ourselves for 2009 and our clear priorities for 2010 position us for a stronger -- as a stronger business, well positioned for the next phase of growth and demand for our products.

With that, I now take questions.

And back to you, Jan.

Thank you, Tom.

Ladies and gentlemen, that completes our formal presentation.

And we will now move on towards taking questions and answers.

I will be taking some questions in the auditorium in London first.

Thereafter, Guy, I will move to you in Melbourne to take two or three questions there and we will of course not forget those on the telecast.

Can I just ask that, as is of course the custom, that when you do ask you first question you just state very clearly your name and the name of the organization that you represent.

I think looking in London I'll just start right in front and then move to you behind.

Yes, sir?

Blue tie.

Thank you.

It's Charles Kernot from Evolution.

Can I just first ask as far as the dividend is concerned, your announcement, the actual printed announcement says that it'll be paid on April 1, but your slide said that it will be April 10.

That has an impact as far as UK taxpayers are concerned given that April 10 is after the change in the tax year.

Could you please clarify?

I think then if that's what the slide says, that doesn't look right because we do intend to pay on April 1.

We do intend to pay before the end of the tax year.

Is that correct?

It says April '10, April 2010, not April 10.

So our intention clearly is you will have noted the change of the timing of the actual payment of the dividend.

We've done it quite deliberately so as to accommodate the changes in the UK with regard to the tax regime that takes effect there from the next tax year.

So it will be paid before April 5.

Behind him immediately, the gentleman with the yellow tie.

It's Jason Fairclough, Bank of America-Merrill Lynch.

Just a question on iron ore in the upcoming iron ore negotiations.

Yesterday we had BHP Billiton's results and they made it very clear that they think that current spot prices which indicate plus 90% are the appropriate starting point for the negotiations, with the view being basically that that's the deep liquid terminal market.

Do you share that view?

Or how would you be approaching the iron ore negotiations this year?

Well, Jason, as we've had a longstanding policy of not commenting on the iron ore negotiations and leaving the negotiations to the negotiator, I think it's a pretty good policy to continue for 2010.

I would say, and it's quite important to recognize that pricing is ultimately driven by supply and demand conditions, and demand for iron ore has never been stronger.

Could I just follow up?

Inasmuch as at the beginning of this year you achieved spot prices which were below benchmark, and in the second half of the year you achieved benchmark prices which were below spot, are you happy with that outcome and will you actually be looking to recover some of those deferred tonnes which never were delivered?

I think we will continue to look at maximizing our overall revenue position with our very strong cost base in the Pilbara.

Again, I don't want to comment on the negotiations specifically.

We have longstanding had a number of different pricing mechanisms.

And we continue -- expect to continue to use that range of pricing mechanisms going forward in the future.

I would remind you that given our position, we had actually very strong margins through 2010 in terms of our iron ore business -- 2009, our iron ore business.

For example, during the overall year, I think we ran about a 60% EBITDA margin for the year.

That's a very commendable performance.

And I think the overall team did a good job in that environment.

So low-cost production.

As we said we would do, we're selling the second half of the year on benchmarks or provisional pricing off benchmark.

And certainly we will be working to maximize the business and, again, continue to deliver strong margins in that business in the years ahead.

Then just the gentleman next to you, then we'll take them there.

Thanks.

Sam Catalano from Macquarie.

If we assume the successful completion of the iron ore JV and then combine in the other assets that you're in JVs but non-controlled, it looks like then around 65% of your EBIT-generating assets would be not solely controlled by Rio Tinto.

Does that concern you in terms of your ability to control your own growth?

And secondly, does it influence your decisions to JV some of your growth projects that you currently wholly own?

Thanks, Sam.

I think from a portfolio perspective and a historic perspective Rio Tinto, like others in the mining sector, have a long history of joint ventures and a long history of contributing to joint ventures however we've been involved with them.

So we know joint ventures, we know how to maximize value in joint ventures.

And certainly as I look ahead I actually think that the model that the oil industry has also employed, which is the series of both operated and involvement with ventures that are independently operated, is a very good model that we'll look for in the future.

The announcement that we made internally this week for what that next level down within the iron ore joint venture organization, which I think is a healthy balance of Rio Tinto and BHP Billiton, managers including the CFO coming from Rio Tinto, reflects I think bringing the best of breed from both companies but also recognizing that we do want to bring our top manager in there, we do expect to deliver best performance.

And we have structured, and this is part of the detail that went into the definitive agreement in December, assure that we always use the experiences within the venture.

Both companies to learn best practices that we can bring to other parts of the venture.

So I think we are very mindful of the portfolio effects and we have had a long history with joint ventures.

And I think you can look to other sectors like the oil industry as good guidance as how to run an effective multi-commodity international business with ever-increasingly large projects in a way that maximizes value for shareholders.

Right, we'll move to this side of the auditorium, the gentleman exactly over there?

Thanks.

Des Kilalea from RBC.

Two questions on aluminum.

You've had a $1b EBITDA swing positive in aluminum.

Do you have any prospect of increasing your production from the level?

And could you also comment on shipments to the United States?

Yes, thank you.

I'll focus on aluminum and maybe the first part.

Jacynthe and her team -- and I just had a conversation with her yesterday about this as we were talking about the numbers for last year -- they are fully aware of the fact they need to continue the transformation of business.

The job's not done.

As I've said to her, my vision for her business is to have an EBITDA margin in that business that is on a long term competitive with any other product group that we would have.

So she has more work to do.

She knows that and her team knows that and that's what they've got to deliver against.

So we will continue to work on improving that business.

We have some capital put in for modernization of some of the facilities that we will be doing in due course.

I would say though in terms of bringing production back, I'm mindful of the inventories that are out there right now in the LME and in various stockpiles.

And I think while we recognize that the majority of those inventories are tied up in financial transactions, those financial transactions make a lot of sense largely because stimulus programs have kept interest rates low and that as stimulus programs were to wind back we would see as you would expect to see interest rates having some effect.

And you may not see the same dynamics of those financial transactions.

So until we see actual real inventories between worked off, which means the US economy, the European economy as well as the other economies need to be picking up a bit more than they have been, I would be cautious about bringing new production in.

I think we've found the right balance and we're going to keep on that balance.

And again the objective that Jacynthe has with her team is to drive that next stage of transformation off of what was a very successful first stage during the course of 2009.

Now I'd say during the course of the past few months we have been seeing evidence of restocking by our US customers.

And one pleasing item to note was particularly the balance of value-added products does suggest that our customers are beginning to see changes to the positive in their order chain and they're building stocks accordingly.

So that's a sign of better news certainly than we would have heard a year ago but I think we're still some ways before saying mission accomplished.

Okay.

I'm going to take one more question from the lady on the left and then Guy, I'm going to come to you in Melbourne afterwards.

Hi.

Olivia Ker from UBS.

You have some near-term growth in iron ore, you're not growing the aluminum division until 2012.

Could you take me through what sort of growth you have coming on line over the next two years and what projects you might look to accelerate in 2010?

Thank you, Olivia.

I think that when I look at -- the two that I want to focus on for 2010 would be those that I would refer to in the presentation which is steady progressive buildup, initially the Creek but then the big, chunky projects in iron ore associated with the Cape Lambert expansions.

And those would be on the path that I have identified.

Those make a lot of sense.

As I said, the margins are strong in those businesses.

And that's something that we would be doing with or without the joint venture.

I think in the case of copper, we've had -- after a number of years of just patiently working through the government of Mongolia processes I think we had a very good breakthrough in October last year with the investment agreement.

That allowed us to take our stake up in that business and it allowed us to have our people, we have some people, including managing directors, seconded into Ivanhoe beginning to do more work.

I'm planning and what I would like to see is the pick-up in construction activities over the course of this year.

There's still a few conditions precedent on the investment agreement that we've got to get through and that's quite important before we start churning the construction up.

But I would say that that has some very attractive projects, the grades are there, it's well-positioned in terms of its market.

While it is a remote location there aren't any real technical issues, it's really doing all the things that we're very good in terms of our competencies.

So I'd say Oyu Tolgoi would be a high priority in that list.

We were fortunate last year that we kept the Yarwun 2 project going which was the right thing to do it turns out in terms of supply/demand of alumina and aluminum.

But we'll keep that going as you said.

And keeping the two Queensland operations, having Clermont ready to come into production this year as Blair Athol begins to wind back.

And then have Kestrel ready to come in in 2011 as the existing Kestrel panel begins to wind back I think will be very useful in that.

Over the course of this year we're going to have to take a look, and Harry and his team will take a look at, as and hope to see diamond prices beginning to pick up that we'll be able to see whether we can start to churn back up the underground development at Argyle.

And we will be commissioning the underground development at Diavik just in a few months' time.

So I would say that we will recover the diamond production as those markets begin to emerge.

I would like to see more coal production growth in the Hunter Valley.

I'd like to see more coal production growth in Queensland.

But again we're going to have to be also watching very closely the coal chain.

So again we need to see the Abbot Point project being completed, we need to see the Missing Link project completed.

But that will allow us to open the doors in those particular areas.

We continue to do work on other iron ore projects around the world and I would like to see resuming of some of the work at IOC as those markets improve.

And we'll take those as a matter of course over the course of the year.

So I think we have quite a robust range -- there's quite a few I haven't mentioned in that list -- but quite a robust range of internal projects that we can essentially have the options to bring into the market as those respective markets come through.

And as Guy says, we look at balancing that with overall an ongoing improvement of the balance sheet.

Thank you, Tom.

I think, Guy, it's time for us to go over to you in Melbourne.

Have you got some questions on your side?

Okay, let's start with you, Neil.

Thank you.

It's Neil Goodwill from Goldman Sachs JB Were.

Just a quick question on Grasberg.

It's becoming or it's become an important part of your earnings last year.

Can you give us some guidance to what you expect over the next few years in terms of your share of the production from the operation?

Thank you, Neil.

If I can probably answer that.

As you know, Neil, the metal strip calls for the period up until about 2023 to be 40% of any production above the production levels effectively in place when we entered the joint venture in 1995 or so.

And of course in 2023 we move up to a straight 60/40.

So what that means is as production has been lower over the past few years than it would have been during the course of the prior 10 years that it has been closer to that metal strip number.

So that moderate changes in grade can have a proportionate -- more than a proportionate effect on metals production.

I think Freeport does a pretty good job of providing multi-year guidance on overall production levels and I would use that guidance to play it against the metal strip formula.

And we can certainly help you with the calculations on that to see how that would flow through to copper and gold units flowing through to the metal strip and then to the 40% portion that we would own of that metal strip.

Are there questions here in Melbourne?

Well Jan, it looks a little quiet here today.

Wonderful.

I can only assume we've astonished them with our results today.

I'm going to just as a courtesy -- yes, yes, I'm going to see -- do we have one or two questions on the telecast and then I'll come back to the auditorium?

If the operator can tell us, do we have a question on the telecast?

Clarke Wilkins of Citigroup.

Hi, Tom.

Just a question with regard to the iron ore contract versus spot sales going through 2010, 2011 and what sort of percentage of the production is actually contracted versus available to take advantage of the spot prices, obviously significantly higher than where the contract is at the moment?

Thank you, Clark.

I think we will -- I just want to say we will be mindful of the markets, certainly of the spot price market as we look at balancing the various components of spot and contract during the course of 2010.

I wouldn't want to speculate on where that contract process would go and normally we wouldn't speculate it.

So we're certainly mindful of markets through.

Is there another question on the telecast for us?

Glyn Lawcock of UBS.

Good morning, Tom.

I just want to push a little bit harder on the iron ore market.

You made a comment that you're prepared to have different pricing strategies.

In the first half of '09 you actually said you did 50% on contract, 50% on non-contract.

Then you did 100% on contract in the second half.

I really want to understand why did you do that?

Why not spot?

And was that a conscious decision or was it forced upon you?

And then secondly, every other mining company that we've heard from in the last week or so has talked about changing pricing dynamics.

Quarterly pricing in coking coal, linkages in alumina, moving up towards spot equivalent.

I just wondered if you could share your views on pricing strategies across your other commodities as well please?

Yes, thank you, Glyn.

Maybe talk first about iron ore markets.

I just want to go again back to the first half.

We should all remind ourselves it was truly an extraordinary period.

Each of those on the call and in the room recognize it was a different world at that time.

And most steel mills around the world thought -- if lucky they would have throttled back blast furnace capacity.

In most cases they literally turned off furnaces during that period.

So everyone was scrambling to get whatever tonne they could at that period of time.

And a 50/50 balance was about appropriate given those unique circumstances.

We said at the [middle] of the year that our intention was to deliver to our long-term contracts in China but also in our other markets.

And that's exactly what we did.

We said we were going to do it, we did sell to those long-term contracts.

But we wouldn't have done anything differently in China from what we would have done with our other important iron ore markets.

So I think it's consistent with -- what we said is what we've done.

Now again, as I said, looking forward we're going to be -- we have been very mindful of those markets.

And those will be reflected in our pricing and our market decisions going forward.

And certainly I think we've seen, and as we've said, that prices always do travel to that marginal producer.

It's been a longstanding part of our own planning.

We've certainly seen over the past 18 months in all of our markets that pricing has been driven around the marginal cost producer, with the possible exception of copper where there was just a shortage of supply so you saw pricing well above, for most of the time well above the marginal cost.

That's reflected in our thinking on a going-forward.

I think it would be something that we would be tackling.

We get asked the question from time to time on alumina versus aluminum but again I think it's also important to recognize that we are somewhat balanced between our alumina and aluminum.

So whether we were priced as a percentage of LME on our alumina or whether we're priced on the global marginal cost of alumina, it would have a little net effect from a Rio Tinto Aluminum perspective.

So I think overall we certainly recognize markets are dynamic, markets are moving toward a position of shorter terms.

A lot of that is associated with information technology, a lot of that's associated with more players that are involved on the market.

And that would be part of normal evolution.

As we've said over the years that with that benchmark, for it to survive it will need to evolve.

And again if it does not evolve it will not survive.

Thanks, Tom.

I'm going to ask the operator if there's one more question on the telecast and then come back to the London auditorium.

Peter O'Connor of Merrill Lynch.

Tom, based on what you've just said, the index or spot price would reflect the marginal cost of production?

Is that correct?

Could you speak up again, I just -- it was pretty broken up.

Based on your last answer, the spot or index price would reflect the marginal cost of production?

Is that correct?

I think what we've been seeing over the past 18 months is that the spot pricing for iron ore specifically has been correlated with the marginal cost of production, taking into account Chinese domestic production.

My question being does the spot price or index price represent that marginal cost?

I think there is a consistency between the two numbers.

And the price formation that you use bases your view off the marginal cost?

Is that correct?

Again, as I've said, pricing formation, which of course it's important to remember that's related to demand as well as supply.

As demand increases you increasingly need to pull supply from the upper end of the cost curve.

And as you pull supply from the upper end of the cost curve it will not come in unless it's incentivized to come in.

So you will see that new supply incentivized to come in only with that higher price.

From a Rio Tinto perspective where we're not on that part of the cost curve, we're basically watching other players, predominantly Chinese domestic players, setting those prices.

So if I'm looking at price formation one year out, the best guide that I've got sitting here in the public domain would be the index or the spot price?

I guess I would look as much to what your expectation or what people's expectation of steel demand would be.

Because ultimately you've got to have -- you've got to take a view on steel demand to determine how much of that marginal production is needed or not needed by the market.

Is the index price one year forward a reasonably liquid and realistic indicator of the market one year out?

I think that there's an evolution going on in those areas.

We are looking at a lot of tonnes on that global market.

I think I mentioned 900m tonnes sitting there, floating around watching those markets.

And I think that's a very large amount of physical business that would be quite sizeable compared to what would be on the over -- screen-traded basis.

And on iron ore as well, Tom, the equalization payment that will ultimately be paid to you by BHP, with the CapEx that you're both announcing and flagging and doing early stage developments, could you just remind me of the credits and debits that go with that and how that will wash up at some stage in the second half of this year?

Well I think, Guy, I'd like you to answer that one because what this is related to would be essentially the cash balancing from what was the effective date of the agreement of the true-up payment.

Yes, Peter, if you remember the intent is that the true-up should place us in the position where this joint venture was created as at July 1, 2009.

And so the $5.8b equalization payment is adjusted by the movement in the net cash flow of the two businesses.

And we have to equalize for the fact that we're going to have different ownerships than we currently have.

Those sums attract a rate of nominal interest of 6.5% a year.

At the time that we entered into the transaction it was our expectation at that time that the consequence of this, assuming that it was completed in the middle of 2010, would be that BHP would receive -- sorry, that we would receive from BHP less than $5.8b because of the pattern of the two companies' cash flows.

Now of course a lot of water has flown under the bridge since then and I'm not going to give any indication of what I think that adjustment might be.

But it is true that we have different expansion characteristics and also different revenue and cost characteristics.

So all of those are going to be relevant in making that calculation when it's eventually made.

Thank you.

I think we should come back to the auditorium and I'm going to go to the gentleman right in the back.

Thank you.

It's Chris Lafemina from Barclays.

I have a question about marginal cost of production in iron ore and how that might be changing.

If you go back to 2005 or 2004 the Chinese were mining iron ore, they had average grades of between 40% and 45%.

Based on the 250m tonne production number that you mentioned earlier, I guess that's on a grade equivalent basis?

China's reporting -- mine production of around 800m times.

That would imply grades of around 20% or maybe less.

And I think if you look at the iron content of Chinese iron ore it's actually been declining over the last few years.

What in the world is going on?

Is this just due to reserve depletion in China that's going to be irreversible?

Are you we going to see continued decline in grades there in which case the marginal cost of production may have dramatically increased?

And if that is the case, have you changed your views around long term pricing in iron ore?

Thanks.

Thank you.

I think you're making a number of correct observations from my view and that is we've been watching the average grades of Chinese iron ore production diminish over time.

During those real peaky points in late 2006, 2007, early 2008 we saw some quite marginal material coming on the market.

They were mining tailings ponds from old mining activities and recovering in some cases 5%, 10% type iron ore grades to basically deliver the market.

That was actually way at the top end of that cost curve.

Now that material went out and disappeared quite quickly last year and I think what we saw during the course of the financial crisis would be large amounts of domestic production leaving the market.

And we saw probably with that an average grade that would have -- I suspect would have gone up.

Now that material progressively has come in the market.

Now I would expect -- it hasn't necessarily come in the market as quickly as we would expect with current spot prices over the past few months.

And I think to some extent that has been held back by winter conditions.

So we would be expecting as the spring weather would be coming in some of that other iron ore production in China will begin coming in and you would see some more supply from Chinese producers in those -- just in those few months ahead.

But that's again as much a seasonal effect as anything else.

Again, when we're looking at this we have to look at what's going to happen in the next few months, but also what's going to happen on a year-to-year basis.

If you look at the Chinese iron ore market in say the first half of 2009 versus 2005, I think the implied grades in early '09, even though demand was obviously much weaker were far, were half of what they were five years ago.

So does that mean that incremental capacity coming on line is going to be even lower grade and we should see grades continuing to decline?

And then I guess the key point here is how does that affect long term pricing and how does it affect your own assumptions about long term prices?

Have they increased in the last year or have they not really changed much?

I think on long term pricing as we've said pretty consistently they have been much less volatile than we would see the near-term pricing movements.

Because again you have to make certain assumptions as to not only what would be the quality of the existing resource stock but the fact that certain prices -- over the long term period it incentivizes exploration, incentivizes development and incentivizes R&D.

And it incentivizes essentially productivity improvements again toward lower cost production.

So it's more than just a simple two-step calculation.

There's actually a couple of different iterations that you need to think through on that.

And that would tell us that as iron ore prices are sustained at higher levels, the longer that would be the more of a reversion you'll see at some point down the road from that.

One more follow-up on that.

You must be the Chief Economist.

If you look at non-Chinese iron ore production growth over the next four or five years and if you assume that even some of the more sketchy projects are able to come on line, are we going to be in an environment where the market will be adequately supplied?

Or are you going to need more of that high cost Chinese capacity to come on line to balance the market?

Well, we certainly see opportunities to bring in the announced and the anticipated expansion projects that I've talked about here, again taking 220m to 230m then to 280m to 330m.

And then again opportunities beyond that.

And those are certainly opportunities out there.

And certainly that's one of the benefits I think from the iron ore joint venture and that is it will bring more tonnes faster.

And that's what the market needs.

So what we're trying to do is get more tonnes faster to what is I think a pretty robust demand environment.

Can I go to the left, right to the back?

Hi, Rob Clifford, Deutsche Bank.

Just a question on a different type of red dirt and your aluminum strategy.

Historically you said that bauxite was low value so you preferred to extract the value further down.

You're ramping up now your bauxite production.

Does that reflect a change in strategy or part of this trying to strengthen your relationship with China or part of Jacynthe's trying to increase your targeted EBIT margin in that division?

Well, I think, Rob, I'd like to say overall you'd like to have a balance as we look at the overall production profile from bauxite to alumina to aluminum.

That being said, we have to look at opportunities that may be term opportunities or in the case of bauxite they're temporal, they come in the market from time to time where we can capture additional values.

We should also recognize at Weipa that we have different grades of material and some grades of material may be better suited for some other users of bauxite than our own purposes.

And we have a choice of either stockpiling those materials for some later time and defer any cash from that or bringing that into revenues today.

So again all of those have to be part of the balancing.

Certainly, as you know, last year, for example, we reduced our bauxite production at a higher percentage than we would have reduced our alumina or aluminum production, largely because some of those other markets were just not there at the time.

Guy, can I ask have you got any hands in Melbourne or can I stay here?

Any more questions here?

No, I think, Jan, back to you.

Time to go to the pub.

Right can I ask the operator, if there's a question on the teleconference line I'll take a question then I'll take two more questions in London and then I think we're going to close.

Operator?

Brendan Harris of Macquarie Bank.

Good morning, good evening, gentlemen.

It's Brendan here.

I just wanted to ask a couple of questions.

Firstly, around the CapEx guidance, can you just give us a sense for what expectation you have around additional equity payments to Ivanhoe this year and I assume that those are excluded from your guidance?

Secondly, just on aluminum.

You've obviously got a very strong competitive advantage with your energy and your technology.

But some would argue that an aluminum business can only be as good as its upstream business and obviously its alumina capacity.

And when I look at your alumina business, 30% of capacity comes from Gove, your equity volume.

Gove seems to be a problematic asset given its obviously heavy reliance on fuel oil and it's failed dismally to live up to I guess the expectations of growth that we were obviously -- was proposed a couple of years ago.

Can you just give us a sense for what work's going on at Gove and how you can turn that asset around and obviously deliver both the expanded capacity but also reduce costs?

Thank you.

Maybe, Brendan, I'll tackle your aluminum, alumina question first and then, Guy, if you'd be ready to talk about the CapEx side and guidance specifically about additional equity toward the Ivanhoe.

You're correct, we've got to look at all aspects of the supply chain, Weipa and our other bauxite alumina and aluminum.

And I certainly think we recognized that Gove had a number of operational challenges.

Gove was underachieving expectations back in 2007 and it's continued to be a challenging project in execution.

We've had a number of defects during construction that had to be resolved.

We've had a number of engineering modifications that we've needed to make.

But, Brendan, this plays to Rio Tinto's strengths.

We are -- for the past 10 years we've talked about when we've had problems at Kennecott with the processor, the smelter.

We put the right people in, we didn't get it turned around right away but we got them fixed.

We had problems IOC.

It took us a year or two to get them ready but we got them fixed.

We had problems at Palabora, operational issues, we got them fixed.

We know we have problems at Gove, the team, Jacynthe, the organization know they have problems at Gove.

They will get them fixed.

They're going to put the same intensity of effort in basically driving that up.

Now Gove longer term we have challenges because not only do you have the operational issues which we will get fixed but we've also got -- it is basically driven off of fuel oil versus cheaper forms of energy.

And I think long term we will look at the options for that.

But first and foremost the order of business at Gove is to get us the production levels we want at a competitive unit cost of production.

I'd also add, Brendan, that what will also happen with our business as we go forward is that as Yarwun 2 is completed and it is basically brought into production and integrated with Yarwun 1 the overall unit cost of production of the Yarwun complex will go down considerably on a per unit basis.

Because again you're spreading the fixed costs which will roughly be the same with Yarwun 2 over a much greater number of tonnes.

Thank you.

Brendan, on the capital expenditure point.

The guidance that we've given is that we have identified projects, all of them organic, on which we plan to spend $5b in 2010.

We've also kept in reserve $1b where we haven't identified what that's going to be spent on, whether it would be spent on organic or non-organic projects.

Now you referred particularly to the Ivanhoe situation where there are a number of convertibles, warrants and other instruments which mature in 2010, 2011 and 2012.

And we will make up our mind about those and any other acquisition opportunities as well as any other organic opportunities as the year goes on in the light of what the best opportunity is.

Brendan, I might just add on that that the original transaction with Ivanhoe was designed with optionality.

It was designed for progressive investments as the project is progressively de-risked with government approvals and just project reviews, etc.

And that's very much part and parcel of the longstanding Rio Tinto strategy.

First of all focusing on the highest quality assets but second giving ourselves as much optionality as we can to invest as we see fit.

I think we should take two more questions in London then I'm going to close.

The gentleman over there and then I'll come to you afterwards.

Hi, it's Nick Hatch at ING.

Just turning back to the Pilbara joint venture, both you and your friends at BHP have got some very dramatic proposals for increasing iron ore production.

But can I ask you what happens if at some point in the future that view changes, you have a divergent view?

How does the joint venture work in terms of prioritizing the developments of mining and infrastructure, the financing of that and then the marketing of the product?

Well, yes, I think it's a very important part of the architecture of the venture and it was something that was flagged when we made the first announcement in June of last year that if the different parties have different views of the market -- of course we're looking at things independently so we would have different views of the market -- if those mean that one party wants to do something the other party doesn't, well there's a sole risking provision.

So again, one party can make the investment.

It stays 50/50 but for that individual investment you may see a distribution of tonnes that are off that 50/50.

It allows both parties to take different views.

If one of the parties has a more optimistic view you can see tonnes coming on a distribution that would be reflecting that.

I'm going to take one more question.

Yes, the gentleman?

Tobias Woerner from MF Global.

Just a general question.

When I look at your outlook for the longer term it seems to be very strong.

But at the same time when I look at your CapEx spend and budget not only where it is now but where it's come from and where you want to increase it to, i.e.

the potential $1b, then I ask myself either you don't believe in your long term outlook or you don't have the balance sheet.

So how do you square those two things?

Well, Tobias, I might just want to talk about the macro environment and the outlook and then, Guy, if you could talk about how we basically meet that outlook with our overall objectives in terms of balance sheet management.

Again, as we've said in the outlook statement, if you look out on a broad basis I think we have a multi-decade demand uplift still ahead of us.

This is something that is really being driven by China but it will be followed up by India and other parts of the world as you have many billions of people basically wanting to live like you and I would live in apartments rather than low intensive metals lifestyles.

That will drive metal demand.

That is something that's going to be there, it's going to be something that's going to be with us for quite a period of time.

We also have however a world that does not have a stable financial system.

The world that has deficit spending that is not easily repaid.

We have balance sheets within the US economy, we have balance sheets within the UK economy and many, many other economies around the world that are going to be in structural difficulty.

We have new modern communications.

We have more aggressive derivatives-type trading and everything else meaning that complexity.

I think, in my view, it means that when everyone decides to do something they all decide to do it at exactly the same moment.

They're going to all buy at exactly the same moment, they're all going to sell at exactly the same moment.

That volatility will create investment uncertainty.

What we've got to do in terms of managing the long-term business plan is to progressively expand our production but be very mindful of the fact that some of the volatility we've experienced over the past 18 months is not necessarily a one-off event.

We have to be ready for a more jagged recovery that could persist for some time.

And that means we do have to look at our balance sheet.

But it also very much plays to Rio Tinto's strategy because if you have a more volatile but generally uplifted broad economy, it's a good thing to have the lowest-cost production.

It's a good thing to have cash generation at all stages of the cycle.

It's a good thing to have optionality that can be put into the place when we see fit.

And this is all part and parcel and core of the Rio Tinto strategy.

But, Guy, if you want to talk about more specifically from a balance sheet perspective.

Well, I'd just add some comments if I may, Tom.

The first thing to say is of course we've got lots of options to grow, high quality options to grow the business in Tier one assets across all our product groups.

And the question is when we exercise those options.

And Tom's just referred to the volatile character of the markets at the moment.

We have to for organic options, look two or three years ahead normally because that's the time at which these projects would actually be coming into operation.

And we have to try and see through this volatility and choose the moment at which to bring these projects on.

A very difficult task and one which probably we won't get right every single time.

But right now we are still saying that our first objective is to invest in a mining business.

We've been saying that throughout.

And the other objective, which is important, is to have a prudent balance sheet and to continue to target the single A rating, a rating which we think is important because it affords the company more flexibility.

So I think that there isn't really the contradiction I would suggest that you're making.

But if there were such a contradiction, we've always got another option which I referred to in my presentation which is to say well, look, if we can't afford to do a particular piece of growth that we would like to we can joint venture it.

We can bring in a partner in order to accelerate a particular project if we feel that we can't finance it.

So I think that actually we have quite a number of levers to pull here to grow the value of the business.

(technical difficulty) none of these issues are new because again we've been joint venturing really for the past 30, 40 years.

I think we should close there and it just remains for me to thank you all for coming, for joining us this morning.

And particularly to our friends in Melbourne and Sydney and elsewhere in Australia, it's well past 9 o'clock, thanks for staying up to join us and see you in about six months' time.