力拓 (RIO) 2010 Q2 法說會逐字稿

Good morning everyone and good evening to those of you joining us from Australia, and also welcome to all of the people joining us via the webcast. Tom Albanese is with me here in London and Guy Elliott is hosting the presentation in Sydney. We have today announced a record first half underlying earnings reflecting higher prices and Rio Tinto's strength in operational expertise.

At our full year results presentation in February I said that Rio was back in business and I think that these outstanding results bear testament to that. Our strong operating cash flows, together with the completion of our divestments, have significantly reduced our debt levels. In fact it's hard to believe that in the space of 12 months, going back to the end of June last year, we have reduced our overall net debt levels from $39b to $12b. This significant strengthening of our balance sheet means that we are now able to ramp up our investment in growth particularly in iron ore, but also in copper, nickel and moly.

Nevertheless we have of course also faced some challenges this year. The proposal of super profits tax in Australia and its subsequent replacement by the mineral resource rent tax proposal highlighted that resources and resource nationalism have become major items on the geopolitical agenda. It is clear that open lines of communication are essential to ensure the best outcome for all stakeholders. Rio Tinto is committed to working constructively with the Australian government to ensure that the tax system continues to encourage investment in Australia.

Developing our relationship with China continues to be a key priority for Rio Tinto. And I was very pleased to sign the agreement with Chalco last week for the Simandou joint venture. We are confident that the knowledge and experience gained from our Chinese ventures previously will help to make this one of our most successful yet with a Chinese partner.

As Chairman of Rio Tinto, I am in no doubt that with a strong balance sheet, a first-class portfolio of assets and a settled, confident organization, we are well placed to grow our business in the world that will in all likelihood continue to be a volatile one. We are firmly focused on high growth with conservative -- with considerable optionality and we look to the future with considerable confidence.

That's all from me. I'm going to hand you over to Tom and I'm going to sit in the audience and look what he's got to say. Thank you Tom.

Thank you Jan. Good morning and ladies and gentlemen good evening to those of you who are in Australia.

Before discussing the results, let me say something about safety. Safety continues to remain the highest priority throughout Rio Tinto. This year we've witnessed further reductions in the frequency of lost time injuries and in the rate of all injuries. And I would say overall we have a good safety record measured against others in the industry. However, during the first half, regrettably, we did suffer two fatalities, which is of course two fatalities too many. We'll continue to work toward our goal of zero harm. And I believe that our excellent safety record, together with our focus on process safety positions us as a leader in our industry in this critical area. However, we can never be complacent.

Let's turn now to the financial highlights. We achieved record underlying earnings of $5.8b for the half year following a recovery in our key markets. We benefited from cost reduction efforts implemented in 2009 and are driving our operations at close to capacity in a strong pricing environment. This strong operating performance led the record first-half cash flows with an impressive $9.9b. These were impressive cash flows and they're matched together with divested proceeds of $3.6b, allowing us to reduce our net debt to $12b as of the end of June 2010.

These results give us the confidence to today announce capital expenditures will be about $13b over the next 18 months and this investment will make strong businesses grow even stronger. Capital expenditures of $1.8b was relatively low in the first half as a result of the carry over of the cash preservation efforts in 2009. However, we do see it rebounding significantly in the second half of the year following about $3b of project approvals so far this year, as well as some other major approvals that we see coming on our horizon.

Investment in high quality growth adding -- this continues to be one of our highest priorities and our highest use of cash flows. Growth projects approved this year include the expansion of the Pilbara iron ore business, the investment in Simandou expansion and the Iron Ore Company of Canada expansion, development of Eagle and the moly autoclave project at Kennecott, Utah Copper. And I should highlight that in first half of 2010 we've increased our investment in Ivanhoe to just under 30%, thereby providing further funding for the Oyu Tolgoi project in Mongolia.

The pace of our capital approvals is accelerating. We'd expect much of the CapEx from these newly approved projects to flow through into 2011. And we would anticipate capital expenditures of about $9b in 2011, much of it in the higher quality tier one expansions such as we talked about in the Pilbara.

Although prices have improved since the middle of 2009, as we all know, markets have continued to remain volatile, displaying what we've referred to as a saw-toothed economy. And as shown to the left, prices from major -- most of our major products have been quite volatile over the past two and half years. And the impact of these price movements, they have been partially offset by movements in the Australian and in the Canadian currencies as compared to the US dollars.

However, even with this market volatility, our businesses have sustained underlying EBITDA and earnings growth since the first half of 2009, increasing 85% and 125% respectively. This is evidence of our high quality, low cost assets and operational delivery, leading to strong returns throughout the market cycles.

So let's now look at the product groups in turn, starting with Iron Ore. We benefited from the strong market environment in the first half of this year. However we will be cautious on the short term outlook for the global steel markets. As I've said before, some weakening in demand conditions within China is expected in the second half of this year, with some recent policy moves to slow down credit, and housing markets beginning to have some effects on the real economy.

Improved prices and volumes were the main factors that led to an impressive $2.2b increase in underlying earnings compared with the first half of 2009. During the first half of 2010 we signed agreements with almost 50% of our iron ore customers in Asia with pricing on a quarterly basis, reflecting the structural shift away from annual benchmark pricing. Sales will be made to some of the other customers on the same basis. Third quarter iron ore prices from July 1 are based upon the average index price from March to May of 2010.

Pilbara production was steady running close to its nameplate capacity of 220m tonnes per year throughout the year. Mesa A produced its first ore for the first quarter, and is now ramping up for full capacity of 25m tonnes per year. In July we commenced production of the Brockman 4 and of the Western Turner Syncline extensions of Tom Price. And over in Canada, pellet production at IOC returned to full capacity, improving the overall margin contribution from IOC.

During 2010 we continued to build on our technological advantage with the official opening of the operations center in Perth. And this is a key part of Rio Tinto's vision of the mine of the future and now our primary control center for the vast networks of mines, rail infrastructure and port operations in the Pilbara. The operations center now houses approximately 430 controllers and schedulers who are able to run a dynamic, just in time scheduling model to avoid/resolve bottlenecks through the supply chain, and is a key reason for our being able to consistently run our system at nameplate capacity levels.

In June we reached agreement with the Western Australia government to amend royalties and state agreements and in return we will enjoy considerable flexibility and efficiency in running our operations. And this will be a critical component to our expansions to 330m tonnes per year and ultimately beyond. Also in June we were pleased to see that the access application over our major Pilbara railway lines was refused. Rail flexibility and control is necessary to meet mine and port scheduling requirements and facilitate future growth.

Looking further ahead, the long-term view of the iron ore market remains robust as a result of continued development and urbanization in China followed by India. Rio Tinto has an exceptional and geographically diversified path in Iron Ore to meet this long term growth outlook. We're continuing to work through the approval process with the Western Australian production joint venture, albeit within a more challenging regulatory environment.

Our incremental capacity of 5m tonnes per year for the first quarter of 2011 and an additional 5m tonnes by the second quarter of 2012 remains on track.

I want to emphasize the quality of our tier-one, iron ore assets such as continued growth options we have in the Pilbara. We are moving forward with expansion of the Pilbara to annual capacity of 280m tonnes by early 2014 and then 330m tonnes we'd expect by about the first half of 2016. We recently approved $1b in total for dredging, marine works, some long lead time items. And this should allow us to start the construction of the 1.8 kilometer jetty, and will work as part of the early works on the expansion of the Cape Lambert facility, with the full project approval expected during the course of our second half.

We've restarted the expansion of the program at IOC with the approval of $401m, to increase annual concentrate capacity to 22m tonnes per year. And this is the first of three stages that can see annual concentrate capacity increasing to 26m tonnes.

Simandou is clearly a world-class tier-one asset. And as previously mentioned by Jan, a binding agreement was signed with Chalco just last week to develop the Simandou project in Guinea. And $170m of further expenditure was approved over the past few days to progress the project. Rio Tinto and Chalco are determined to advance the project rapidly and are working with all stakeholders to expedite this process, which will be done in consultation with the Guinean government. This current plan anticipates an annual capacity of 95m tonnes per year using a trans-Guinean dedicated rail line. And we would expect mining operations to begin within five years.

Turning now to Aluminum, we saw a healthy improvement in pricing in the first half, following a robust recovery in demand and the continued rollover of inventory financing positions. Quoted prices have dropped back recently, once again testing the profitability of smelters on the higher end of the cost curve in the context of rising input prices. With curtailments already announced at key production bases such as Hunan province in China, we would expect output levels to stabilize, or maybe even fall slightly over the remainder of 2010.

During 2010 Jacynthe and her team led a transformation of the aluminum business that resulted in $1b of cost savings, delivery of $1.1b of synergies and the integration of Alcan and Rio Tinto. For the first half of 2010 we saw the benefit of technological and transformational changes aided by the improvement in aluminum prices with more than $1b increase in underlying earnings half on half.

Our EBITDA breakeven level in the first half was $1,530 per tonne. This was a slight increase on last year's numbers, mainly reflecting the higher Canadian and Australian currencies. At constant exchange rates, the breakeven level has been relatively consistent over the past 18 months. And this has allowed us to capture virtually all the benefit from increases in LME prices, despite some pressures that we have on LME linked cost.

Our Aluminum business continues to improve, but we do have some short term challenges, particularly in the second half of this year. Abnormally low snow and rain levels in the Saguenay during the first half have led to a reduction in power generation, resulting in the need for purchase of additional power from the state utility company. And the impact on EBITDA in the second half 2010 is expected to be approximately $100m as a consequence of these abnormally low rain and snowfalls.

In July the Laterriere smelter in Quebec suffered a significant power outage after two transformers failed. The smelter's currently running at half of its capacity of 235,000 tonnes and we expect to be back at full production in the fourth quarter of 2010.

The second wave of transformation is now underway and further improvement in the performance of the Aluminum group is part of a longer-term program to increase the long-term EBITDA margin to a level comparable with our other product groups.

As part of our transformation of the smelter portfolio, approval phase one of the AP50 pilot project and the upgrade of the Kitimat smelter in British Columbia would be scheduled for 2011. And we'll advance the preparation of the Kitimat upgrade project by primarily closing two lines of production in the second half of this year. And this closure represents about 67,000 tonnes of annualized capacity, and is a progressive step in the modernization that should transform Kitimat into a tier-one, low-cost large-scale and low-carbon asset.

At the ISAL smelter in Iceland we expect to move forward with additional 44,000 tonne per year expansion and upgrade the second half of this year following the implementation of a new long-term power contract with a state owned utility company in Iceland.

And we are progressing with improvement of our alumina portfolio, be it the optimization of Gove and the completion of Yarwun 2 refinery. This Yarwun 2 expansion is expected to be completed in the fourth quarter of 2012. And it will significantly reduce the cost of alumina and bring down operating costs for the entire facility. I was at Yarwun just a few weeks back, and some of you and I were here. And we're encouraged to see the progress there with commissioning of the co-generation plant which is now underway.

This should result in the alumina portfolio moving down the cost curve from the third quartile to the second quartile, and will be a key part of improving Rio Tinto Alcan's EBITDA margins to levels competitive with our other product groups.

Now let's look to Copper. Prices were stronger year-on-year, but softened compared to the highs experienced at the end of 2009. We saw reduction in underlying earnings from lower mine copper production as a result of lower grades at Grasberg and Kennecott Utah Copper. Refined copper production was also impacted by the 19 day plant maintenance shut down at the KUC smelter, and higher production of refined gold and moly helped partly to offset this copper shortfall.

Declining grades at maturing mines, in addition to the difficulty in finding and bringing new copper supply in the market, is symptomatic of the continued supply challenges facing the industry. We have approved two growth projects by 2010, the moly autoclave project, the Kennecott Utah Copper and the Eagle nickel mine in Michigan. Moly autoclave should improve moly recovery rates, should enable the processing of lower grade and provide entry into the chemical grade moly markets. And it's an important part of the ongoing plans to extend the mine life of Bingham Canyon.

Eagle is a small but high quality asset which will provide an excellent re-entry into the nickel project -- market. It will be the only primary nickel mine in the US and the first new nickel operation to be built in Michigan after several decades. And these have been under the some of the most stringent environmental permitting rules in the US. Eagle is small but very prospective. It's at the middle of a very prospective exploration region and we've got a very significant land and mineral rights holding in the surrounding district.

During 2010 we've continued to increase our interest in Ivanhoe, bringing the current interest to 29.6%. We are committed to developing Oyu Tolgoi in a way that delivers sustainable economic development to Mongolia and its people. Construction work has now commenced. And we expect to see first production in 2013. Oyu Tolgoi is another example of tier one development assets and part of our next generation of producing assets.

As at Iron Ore and Aluminum, technology will play an important role in future Copper developments. We are a key leader in this area. With our partners we are investigating new tunneling concepts that are more productive and more cost efficient. We're also developing new shaft boring machinery with the potential to dramatically reduce the development time for underground mines, particularly underground future block cave operations.

Moving on to Energy, demand for seaborne thermal coal in the first half of 2010 was quite strong. We do continue to see strong demand growth in China and India, and we've seen our traditional Asian markets continue their recovery.

Contracts for 2010 fiscal year were settled in the high $90s per tonne, an increase of 38% on the previous fiscal year. The majority of coking coal contracts for the 2010 fiscal year were settled for the first time on shorter-term pricing periods. And prices for the first six months have varied by quarter and were settled in the $187 to $225 per tonne range, depending on the quality of particular coal fractions.

Earnings of the Energy group declined overall 15% due to on average a lower price effect, a stronger Australian dollar and the inclement weather impacting thermal coal production in New South Wales, and uranium at ERA. The sale of two undeveloped coal properties partly mitigated these factors.

Our coking coal production was 30% higher in the first half of 2010 as a result of commissioning new heavy mobile equipment at Hail Creek, and good plant reliability and higher processing rates at Kestrel.

Australian coal thermal production was lower in the first half of 2010. Thermal coal was impacted by periods, as I've said, of wet weather in New South Wales, and some increased strip ratios at our Hunter Valley operations and at Mount Thorley, Warkworth. In Queensland, thermal coal was lower due to Blair Athol beginning to wind down, offset by the ramp up in Clermont which commenced production in May. These lower volumes were offset by improvements in sales mix at Rio Tinto Coal Australia, with sales of semi-soft coal increasing by 87%.

Infrastructure constraints are slowly easing in East Australia. Expansion by the Port Waratah coal services to 133m tonnes is expected to be complete by the end of 2011. However the coal chain will remain constrained as real capacity is expanding at a slower rate. The implementation of a long term framework for port access is continuing. And this framework will give certainty to coal producers and service providers, and is expected to align commercial contracts with those service providers across the entire Hunter Valley coal chain.

At our uranium businesses earnings were impacted by lower grades at ERA. And the long term outlook for uranium remains positive as many countries, including China, continue to expand their domestic nuclear industry.

Turning now to Diamonds and Minerals, the recovery in demand has been particularly notable in the first half of 2010 compared to 2009. These products are typically more consumer focused than our other product groups and therefore demand growth tends to lag some of our other bulk and industrial commodities. We've seen demand for some of these late-cycle products growing strongly during the course of the last six months. Demand for diamonds have been particularly impressive and that's particularly for China. And this indicates that our Chinese consumers are starting to spend some disposable income on luxury items and that consumer spending patterns may be beginning to change in China.

Long-term forecast figures suggest that the supply of rough diamonds will remain, at best, flat over the next decade. In many cases we're seeing a transition of mature under -- open-pit mines over to underground operations and these will be at reduced capacity. And this conversion will continue over the next 15 years, further diminishing production levels from known supplies. New discoveries of diamonds and kimberlites have been scarce and exploration programs around the world do remain subdued for diamonds.

Moving to TiO2, market conditions for titanium dioxide feedstocks did improve in the first half, with increased global demand evident in line with the global economic recovery. And this was reflected in higher production which included the increased QMM ore from the Madagascar mine which we processed in Quebec. Commissioning and ramp up of this new mine continues in line with market demand over the three year period.

Sales of borates and talc were driven by market recoveries in the Americas and Europe and steady Asian demand growth. Average sales price for both products are slightly higher than 2009, a year in which double-digit price increases were achieved for both borates and talc.

Diavik underground production commenced in March. And at Argyle we're evaluating re-ramping up the CapEx in the underground project, which had been slowed significantly during the course of the global financial crisis. A decision is expected on the underground of Argyle during the course of the second half of 2010.

So with that, let me hand it over to Guy in Sydney who will take you through the numbers in a little more detail. Guy over to you.

Thank you Tom. I'd now like to explain how the strong operating performance that Tom has described translates into the record underlying earnings that we've achieved in the first half of 2010.

The effect of prices on our profitability was substantial once again. This reflects the significant volatility that we've experienced over the past 24 months. Prices have strengthened, then deteriorated significantly and then strengthened again. Higher non-traded commodity prices increases earnings by $1.9b. Prices for iron ore were settled at a significant premium to the levels of 2009. Prices for thermal and coking coal were on average lower than the first six months of 2009. However, the second quarter of 2010 prices reflected a significant step up in coal prices from the first quarter of 2010. Following the evolution in the marketplace, the majority of our iron ore and coking coal is now sold on shorter term pricing periods.

Higher traded metal prices also increased earnings by $1.9b. The aluminum price was on average 50% higher than the first half of 2009. This added $1.1b to our underlying earnings. Stronger copper prices, net of the adverse effect from provisional pricing, added just over $600m. Partly offsetting the stronger price environment, was the headwind of a weaker US dollar relative to the currencies in which we incur many of our costs. The combined effect of these currency movements was to reduce our underlying earnings by $620m.

We took full advantage of the strong market conditions through our excellent operational performance. In iron ore market demand was strong, following the lows experienced in the first half of 2009. The Pilbara system continued to operate close to its nameplate capacity following the completion and ramp up of the 220m tonne per annum expansion project. With the recent approval of $1b of early funding for expansion of capacity to 330m tonnes, we're well positioned to take advantage of the next phase of growth in demand for iron ore.

Gold volumes were also higher, adding $75m to underlying earnings. This was due to the processing of high grade raw material produced in late 2009 at Utah Copper. The benefit from gold volumes was partly offset by lower copper volumes of $48m due to a lower share of copper under the metal strip arrangement at Grasberg, as well as safety interventions and weather interruptions at Escondida, and lower copper grades at Utah Copper.

We saw a dramatic improvement in diamonds and industrial minerals during the first half of 2010. This was largely driven by improved demand in China and elsewhere in the Asia Pacific region, as well as a recovery in diamond demand in the important markets of the United States and India. Taken together, higher volumes in the Diamonds and Minerals group added $103m.

A favorable sales mix occurred in the Aluminum group as demand for value added products recovered. In the Energy group, a greater proportion of higher value semi soft and hard coking coal contributed to higher margins.

Turning now to costs, the combined effect of general price inflation and energy-linked costs reduced underlying earnings by $238m. The effect on earnings of cash costs has been broadly flat year-on-year, following the significant reduction that we achieved last year.

Copper group costs increased following the planned shutdown of the Utah Copper smelter which led to higher contractor costs and the need to purchase some cathode. Lower grades led to unit cost inefficiencies at Grasberg. In the Aluminum group, lower costs added $110m to underlying earnings. Lower caustic coke and pitch prices, together with improved efficiency at the alumina refineries contributed to this improvement.

As the global economy recovers, we're seeing a return of cost inflation to the mining industry. This will be a particular risk in those locations where there's a high level of activity in the resources sector such as Western Australia. We will not be complacent in ensuring that our costs remain well controlled. Spend on exploration and evaluation projects was broadly flat year-on-year. We expect the rate of spend to increase during the second half of the year, as we progress our greenfield exploration program and ramp up spend on our important evaluation projects, including Resolution.

In the first half of 2010 we realized a gain of $229m from the sale of undeveloped Australian coal properties. This was lower than the $797m in the first half of 2009 from the sale of undeveloped potash properties. So this leads to the reduction in earnings from exploration and evaluation activity that you can see on the waterfall.

Interest tax and other variances added $183m to underlying earnings mainly due to a lower net interest cost and other central items.

So at $5.767b the first half of 2010's underlying earnings were a new record and 125% higher than 2009. Our net earnings were similar to underlying at $5.845b. The main differences between underlying and net earnings were an impairment charge of $403m related to Alcan Engineered Products and a loss on disposal of Alcan Packaging of $61m. These were offset by gains and losses related to exchange and derivatives of $544m. Overall the record first half underlying earnings reflects the quality of our asset base and our ability to deliver excellent operational performance.

Our stronger earnings led to strong cash flows demonstrating the exceptional cash generating capabilities of our tier one assets. Cash flow from operations, including dividends received from equity accounted units, nearly doubled year-on-year to $9.9b for the period under review. As can be seen from the chart on the right hand side, this was the second highest half year operating cash flow in the Group's history, surpassed only by that achieved in the second half of 2008.

This cash from operations was supplemented by proceeds from the completion of a number of divestments. Since its launch, we've generated over $10b of cash proceeds from our divestment program. Of this, over $3b was received in the first half of 2010 as we completed the sales of the Alcan Packaging businesses. Since the end of June we've also completed the sales of Alcan Packaging beauty and medical flexibles businesses.

In addition we've announced today the receipt of a binding offer for 61% of Alcan Engineered Products. The successful completion of this transaction will substantially complete our current divestment program. The binding offer for Engineered Products, when finalized, completes the sales of all parts of the downstream businesses of Rio Tinto Alcan except the comparatively small cable business. The sale of the downstreams has been an exceptionally complex set of transactions. We split the business six ways. Around 42,000 employees would have left Rio Tinto in over 30 countries.

Now of the cash generated by the business and by these divestments, we invested $1.8b of the inflow in capital expenditure. Our spend on CapEx slowed as a consequence of our decisive response to the global financial crisis in 2009. However, momentum is returning and we expect this rate of spend to increase through the remainder of 2010 and into 2011. I will return to this shortly. We also invested around $400m to increase our ownership of Ivanhoe to almost 30%. These investments, largely through the exercise of fixed price warrants, together with the further instruments which we own, provide a risk-managed pathway to increase our stake in the world class Oyu Tolgoi project.

We also paid taxes of over $2b during the period and of course we resumed dividend payments in April. Overall we were able to reduce net debt by $6.9b during the first six months of 2010. This represents a further transformation of our balance sheet, allowing us to increase our future levels of investment in value-adding growth.

Building and maintaining a strong balance sheet is central to Rio Tinto's strategy. We believe that balance sheet strength will allow us to thrive during a period of volatility in the macro economic environment, while at the same time maintaining a program of investment in value adding growth projects. By the end of June our net debt had been reduced to $12b. Our gearing level was down to 20%.

As can be seen from the chart on the right hand side of this slide, since June of last year we have removed the risk that short-term debt maturities presented to our liquidity. During the first half of 2010 we made an early repayment of the 2012 tranch of the Alcan facility, leaving only $1b outstanding. This leaves our debt repayment profile evenly spread and prudent. At the end of June cash on hand was over $3b and available-but-undrawn facilities were $7.3b.

Now that our balance sheet is recapitalized, we're able to reemphasize investment in value adding growth projects. This has always been our first priority for use of cash. But it's important that we have a stable environment within which we can invest. This wasn't the case in early 2009 when the global economic outlook was extremely uncertain. We responded to this by reducing our planned capital investments significantly.

In early 2010 we were faced with an uncertain fiscal environment in Australia. Our response to this was to delay a number of investment decisions on major capital projects within Australia. During the first half of 2010, as economic conditions continued to improve, we were able to press ahead with project approvals in other countries. We approved the expansion of iron ore production at IOC, the moly autoclave project in Utah, the construction of the new Eagle nickel mine in Michigan. The announcement of the minerals resource rent tax in early July largely removed the great uncertainty that existed in Australia for much of the first half. This will allow us to get many of our Australian projects moving again.

We expect global economic conditions to remain volatile for some time. We're also committed to regaining a single-A credit rating. As I illustrated a moment ago, our debt and liquidity is much improved now. Many of the ratios that the rating agencies focus on are close to or within levels commensurate with a single-A rating. It's important that we demonstrate these strong ratios consistently over a period of time. I was pleased that Standard & Poor's changed Rio Tinto's outlook to positive in June.

And last but not least, an important priority for us is the dividend. As anticipated six months ago, we declared an interim dividend to shareholders of $0.45 per share. The final dividend will be at least $0.45 per share, subject to Board approval. This is in line with our commitments a year ago when we said that dividends declared in respect of the 2010 financial year would be equivalent to at least $1.75b in total. From 2010 onwards we're committed to a progressive dividend policy over the longer term.

Returning to our first priority, investment in growth. Rio Tinto has many options available to grow the value of the business. Our rate of capital spend in the first half was lower than in 2009 as a consequence of our actions last year in response to the global financial crisis. However momentum is returning to our investment program, and we expect the rate of spend to rebound in the second half of the year.

So far in 2010 we've approved over $3b of project expenditure. This includes iron ore projects in Australia, Guinea and Canada, Eagle nickel and the moly autoclave in the United States, as well as an increased stake in Ivanhoe. These are all strong projects that will contribute to the future growth of Rio Tinto's value.

We have a strong pipeline of projects currently in the study phase and where we expect to make decisions in the coming months. These include the full commitment to the expansion of the Pilbara iron ore network to 330m tonnes, the resumption of the Argyle project, the modernization of the Kitimat aluminum smelter in British Columbia and the construction of the AP50 pilot plant.

The approvals we've made so far, and those that we hope to make later on this year, will lead to an acceleration in our rate of capital expenditure. I expect that CapEx in 2010 will be up to $6b and will be in the order of $9b in 2011. These levels of expenditure are dependent on future project approvals, which will be contingent on the stable investment conditions I referred to earlier. But this level of investment is consistent with that seen in 2008 and the Group is organizationally well-structured to manage such an investment program.

Beyond organic growth, we continue to scan the globe for opportunistic mergers and acquisitions. In a volatile environment it's always possible that greater value can be achieved through buying capacity rather than building it. We're constantly reviewing potential opportunities to undertake small- to medium-sized acquisitions and we will continue to do so. We will also continue to review our current portfolio to identify any businesses that are not core or which may be more valuable to other owners.

Finally, we'll continue to look for innovative opportunities to enter 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 we would look to do so again in the future. The recent agreement signed with Chalco is an excellent example of such an approach. Chalco brings advantages in the infrastructure field and in its profound understanding of the Chinese market. With Rio Tinto's technologies and experience of large mining projects we together should be a powerful combination.

Of course all opportunities for investment in growth, whether organic or inorganic, will be assessed carefully. In each case we will use our rigorous and proven process of evaluation and we'll take into consideration the economic environment. We will remain focused on value accretion and not growth for growth's sake.

Now back to you Tom.

Thank you Guy. Turning now to our outlook for our future, as Guy and I have described, 2010 is shaping up well for Rio Tinto. We're driving our operations at close to capacity, but most of our markets are strong and the overall long-term demand outlook is positive. Of course in recent months some external commentators have been expressing fears about market weakness in OECD economies and the slowdown in Chinese growth. We do believe there will be an ongoing pattern of volatility in the global economy and this will be continuing, albeit within the context of, for our sector, a secular uplift in the demand for our products.

Much of the volatility that we've experienced over the past two years and likely continue to experience over the near term is driven by persistent and significant economic imbalances. OECD-public-sector-debt-to-GDP ratios have ballooned to dangerous levels. Bringing these ratios under control will require governments to make some hard decisions. In addition to this there's a possibility that consumer spending in OECD economies will remain constrained for an extended period on concerns about unemployment.

Sovereign debt risk persists and continues to have negative implications for investor confidence. The recent sovereign debt crisis we've seen in Europe and the sweeping contagion into the financial markets around the world illustrate the potential for hidden risk to cause ongoing volatility to global economic activity.

These imbalances will need to be resolved and that process will take some time. In particular, developed countries will be under increased pressure to reduce public and private debt, while China is expected to begin a move to reduce dependence on exports and investments to fuel economic growth. Within this environment, the IMF predicts global growth of about 4% this year and in 2011. Chinese GDP growth expected to grow by 9% next year. And such outcomes would have positive implications for Rio Tinto's markets.

Over the long term, increasing prosperity in developing countries, including China, including India, including South East Asia, with the associated industrialization and urbanization, that will continue to drive underlying growth in demand for each of these commodities. And on this basis we'd expect that real long-term prices and margins for almost all of the minerals and metals will average significantly higher than the decade preceding the most previous five-year boom.

Of course it's apparent that global imbalances will take some years, many years to resolve and the implication is a high average growth setting for our markets, but one that's characterized by high highs, low lows and elevated volatility, and certainly scope for discontinuities. A pattern we've internally dubbed as a 'sore tooth economy'.

But Rio Tinto perspective, we're well positioned to benefit from this outlook through both our product diversification and the geographic location of most of our businesses. We have a truly global pipeline of projects across a range of commodities and geographies and this is due in part to our leading exploration program and due in part to our early identification and early entry into a variety of valuable prospects at an early stage.

In Iron Ore we've approved investments in projects in three different continents over the past six months. In Aluminum we've a range of greenfield and brownfield growth [Signet] options, which are significant, and many of these are expansions of our current operations and our current infrastructure. Our greenfield smelter options are primarily positioned close to sources of power, clean power, a competitive advantage in the future world of carbon pricing.

We have one of the best portfolios of underdeveloped copper prospects and projects in the world, with an ownership interest in four of the 10 largest greenfield projects. We have growth options in India, in Australia, in Serbia, in Madagascar and in Namibia across the Diamonds, Minerals and Energy groups at various stages of evaluation.

Our exploration programs are active in seeking to identify future options for growth and right now we have exploration teams on the ground in over 25 different countries.

I'm proud of our sustainable-development practices that we've been consistently applying as a key focus area through every stage of a project's life. And our focus on sustainable development provides the framework for which we operate, ensuring ongoing access to projects, people, capital and ultimately mineral resources.

So far this year we've approved over $3b of investment in growth projects. As Guy mentioned we expect this rate of spend will increase over the coming months, and predict capital expenditure of up to $13b over the next 18 months. Projects approved so far this year include the molybdenum autoclave in Utah, the expansion of the iron ore production capacity in IOC and the construction of the Eagle nickel mine in Michigan.

At our Iron Ore businesses, the Pilbara, where we approved $1b of expenditures in preparation for the expansion of 330m tonnes capacity. And I would expect again this project come before the Board later this year for full approval.

Following the signing of our joint venture with Chalco last week, we announced $170m of further investment in Simandou. Simandou will be the largest iron ore mine, integrated iron ore mine, infrastructure project ever developed in Africa. Rio Tinto's experience and expertise in developing large-scale iron ore projects, together with Chalco's knowledge of the infrastructure development, will enable us to bring this complex project on stream.

We believe the Oyu Tolgoi mine is the next tier-one copper operation. With the conditions precedent on the investment committee agreement met at the end of March construction work was able to start during the northern hemisphere summer.

And as part of the transformation of our Aluminum portfolio we've begun preparation for the modernization of Kitimat which will lay the groundwork for a key strategic project.

Work will continue on a number of other projects across the whole of the Group's portfolio.

So to conclude, Rio Tinto has had an outstanding six months. Our strong operating performance continued, generating record underlying earnings. Our strong operating cash flows together with proceeds from divestments allowed us to reduce net debt to $12b. We have completed a number of key projects during this period including first production from the underground mine at Diavik, Mesa A, Brockman 4 and Clermont. We are continuing to work through the regulatory approval process with the Western Australian iron ore production joint venture.

And we are stepping up investment in growth across a range of commodities and geographies. We have growth projects underway in four continents and we expect CapEx of $13b over the next 18 months. Our strategy of investing in large-scale, low-cost, long-life expandable assets, and our consistently strong operational delivery gives us the confidence as we move forward with our many high-quality growth projects.

So with that, thank you and we'll take some questions.

I will start by taking questions from London and then I'll move it over, Guy, to you where I'll allow you to take some questions from Sydney. We have I think a number of people on conference calls, including in London, Melbourne etc., so third we'll go over to those and then we'll repeat the cycle. So first question, I think your hand was up first.

It's Damien Hackett here from Canaccord Genuity, thanks Tom. Two questions if I may, one relates to Simandou and one relates to the proposed RRT in Australia.

On Simandou, you've mentioned the project three times and it certainly looks like an excellent project, but every time it seems to make the press the Guinea Government seems to come back with slightly more contentious opinions and views relating to not just tenure, but the process and perhaps the access to the [cote] whether it's Liberia or through Guinea. Perhaps you could comment a little bit on why those issues are being raised.

And the second question, as I said, relates to RRT. The Australian Government put out some pretty high numbers about a few months back as to how much revenue might have been generated. I certainly couldn't get anywhere near them and I'm just wondering if Rio Tinto has made any estimates of what might have been paid, for example, in 2010 had RRT been in place for the current 12-month period.

I will, if I may Damien, I'll answer Simandou. I'll ask Guy if you want to talk about the resource rent tax. And, again, these are not our numbers, they're Treasury numbers, so to the extent we can comment on the Australian Government's Treasury numbers.

First of all on Simandou, the focus of what we've been talking about over the past few weeks, particularly the joint venture sign up with Chalco and the $170m will be on the southern leases. The southern leases contain the resources which we have articulated and we would have disclosed. Those resources in the southern lease represent a sufficient size to basically support a 95m tonnes bigger operation. Again we'd hope to see first production in five years.

We have and we'll continue to engage with the Guinean Government on all aspects. Obviously they'd like to see production coming sooner. There's high expectation in the country for this. And certainly I think that the monies that we're investing, which are well, well above anyone else investing in the Guinean iron ore industry, are clear commitments of our intent to bring production as soon as we can from Guinea into the world iron ore markets. Of course we will continue to engage with the Guinean Government on all aspects of our tenure and we will continue to assert our rights on all aspects of our tenure as we continue to engage with the Guinean Government.

It's a great resource. When you look at the grade, you look at the quality, you look at how we can blend into our broader Pilbara strategy, it is something that should get to market. We've been working hard on it. It's not a small project. We shouldn't underestimate the size of the project. This is not a question of making promises. This is a question about delivering one of the largest infrastructure projects in Africa, and delivering in a way that meets our standards and can get that iron ore into the global seaborne market.

Why would they have challenged Rio Tinto? If I'm correct in reading the press, why would they have challenged Rio Tinto's right to sell part of that to Chalco?

I think, as I recall, the latest comments that I've seen over the course of the past several days, there's actually been a recognition that the joint venture with Chalco should facilitate that early production. So I felt that there -- while there have been a number of comments, I thought those particular comments recognize the benefits that Chalco can bring to bringing that into production. So, again, I'd say we will continue to engage but first and foremost we will put in the money and we will put in the resources to get the Simandou iron ore to market.

And then finally to be sure, the debate about whether it goes through Guinea or through Liberia, that's been put to rest?

Look, I think that there's -- you haven't had the microphone so some of those who haven't heard it, I'll just restate the question. That is the debate about the route, whether it should be through Guinea or whether it should be through Liberia. Infrastructure-wise, capital cost-wise, logistics-wise, a trans-Liberian route makes a lot of sense. It reduces the capital cost of the project. But also, I think we have to recognize that there's a strong desire by the Guinean Government to see infrastructure that can support the overall country's development.

So we're sensitized to all those points. We will continue the dialogue. We have to consider that, ultimately, down the road there may be a sufficient amount of resources to deliver a number of infrastructure solutions, but, ultimately, at the end of the day, I think that the vision of a trans-Guinean railway should be very much fixed in our minds.

Thank you.

Guy, can you comment on the proposed resource tax and some of the Treasury numbers?

I -- Damien, I can't really comment on the Treasury numbers because of course they are based on the internal forecasts done by the Treasury. And based on their, in particular, their price forecasts, which are I think an important part of this because of course the ABARE forecast did change during the period under which this was being debated.

We're not really able to give the estimate that you want. You talked about 2010. Of course this tax wouldn't apply until 2012. But even if it did apply in 2010, there's a mass of detail that we don't yet know about the way in which this tax might work. We can make assumptions, but of course we don't really know the detail, for example, of how mine-gate valuation will work. And so a lot has still yet to be settled. And that will happen through the consultative process and through the body that's been set up to look at this, and we're looking forward to that consultation.

I would add, Damien, that just within the past day or so, I think the past several hours, we've seen some pretty encouraging numbers coming out of -- the economic numbers for the Australian economy. And certainly they reinforce the importance that mineral exports, particularly iron ore exports, have on the overall Australian economy. And this has been a key part of what we've been saying that it's very important to continue to encourage investment, like what we've announced, the $1b or so that we've recently announced, to continue to build that industry. It's very important not just for the Australian iron ore industry but for the entire Australian economy.

Thank you. Yes.

Thanks Tom. It's Jason Fairclough, Bank of America - Merrill Lynch. Two questions if I may, one on iron ore pricing and one on Alcan Engineered Products. If we look at the reasons the benchmark system broke down it seems to be because the Chinese treated it as a best-of option for themselves which made it a worst-of option for you. If we look at the way you've structured the new contracts, does that opportunity still present itself and do you see a risk of the Chinese not honoring the new contracts?

And then just on the Engineered Products, if we look at the write downs that you've taken on Engineered Products and the fact that, unless I missed it, you haven't disclosed a price that these assets have been sold to, to Apollo, that indicates to me that this was below your level of materiality for disclosure, so less than $200m?

I will save the Alcan EP question for Guy and maybe I'll comment on the iron ore pricing. I think a big part of the sort of move we've made from annual to quarterly pricing was reflecting the fact that in that annual period, given the high pickup in liquidity and volatility that we saw in the spot pricing, it increased the risk that either -- that a producer may game the system and buy from spot instead from the contract and that would undercut the integrity of that long-term pricing mechanism. But by going to a quarterly basis you reduce the amount of time so you actually reduce the commercial incentive to do so.

Notwithstanding that, during a significant portion of the third quarter so far we've seen spot prices lower than what it would be, the quarterly price, as measured by that March-to-May period. But that being said, over the past few weeks we've seen that delta significantly reduce. We're now looking at spot prices not far off of what that average price would be, given the recent strength we've seen in iron ore pricing.

All during that period we've said that if we start seeing a loss of the quarterly pricing to opportunistic spot pricing, it probably would force us to move away from the tenure of a quarterly pricing even to shorter term, which I'm not sure is in the steel-makers best interest. So, yes, from our prospective, I think we've seen, as I said, the bulk of the third quarter business being to that quarterly pricing, which is what should have happened as we've moved into a quarterly environment.

Thank you.

Guy, on to you for EP.

Yes, Jason, first of all let me say about Alcan Engineered Products that this is a major step, completing these various downstream disposals, which we haven't yet done in the case of Engineered Products but this is the first step towards doing so. And this is a very great simplification of Rio Tinto's business to be able to limit ourselves to the Aluminum business that we had as the original target.

Now on the question of the value I'm afraid that we've agreed with Apollo that that's confidential and so I can't say any more about it. Obviously it would be, if it were material, we would have had to explain it. But remember that we are retaining an upside in this business. We're retaining a shareholding and the capability to earn more in certain circumstances. And I think that what you need to understand is that of all the businesses that we had in the whole of Rio Tinto, this was hit hardest by the recession. Its markets are basically European and American markets and they are not recovering very quickly, let me tell you. So we're very pleased with this sale and I think that, as I say, it will greatly simplify our business going forward.

Jason and Guy, I would just add to that question that from my perspective, e said this was not part of the core of what we were -- what our business is. When you look at $10b of cash coming in from our core businesses over the course of six months, from a strategic perspective you can understand why we really want to focus our management efforts on those core aspects of what we're good at doing.

Understood. Thanks.

Tom, morning. Peter Davey from Ambrian. Just to follow on, on the Iron Ore as it's such a big component of your earnings, could we get an update on how many of the customers have gone onto the quarterly pricing? The latest we had was 50% of Asian customers. Is there any change in the third quarter?

And in the Asian customers, are any Chinese in there or is it just the Koreans and Japanese?

And moving on from there, if we have a breakdown in the quarterly pricing because spot falls below quarterly and people start to renege on it, or let's say particularly the Chinese, does the industry then move straight on to spot? And does that make it a lot harder for you to make your long-term decisions on all those long lead articles for expansions?

Peter, I think what's important is to recognize that virtually all of our third quarter business is on a quarterly pricing mechanism. So we have some it are basically locked up and agreed, some are basically accepting that quarterly pricing without necessarily being locked up and agreed. So whether the Chinese or non-Chinese steel mills effectively, the pricing is on the same basis. And I do think that that's actually an encouraging sign.

I want to be an optimist and try to, hope for seeing something that's success. Because, on one hand, the steel mills are saying they'd like longer term pricing periods. On the other hand, they're asking for flexibility when it suits their purposes. Those are commercially opposed concepts and I think the current quarterly mechanism is trying to find that right balance. And I just hope that we can, with this evolution we've been flagging for a couple of years in this, in the iron ore pricing, that that balance can be ultimately achieved. If it can't, yes, we'll see it go to shorter, more frequent pricing, could even go to spot pricing. Is that something that we would say is our first objective? Not really. I'm happy for a quarterly mechanism if it works for our customers.

Yes?

It's Chris LaFemina from Barclays. Just a question about long-term commodity price assumptions. We've heard some other iron ore miners talk about $100 per tonne long-term prices. Also we're seeing the spread between very high-quality, high-grade, low-[fast]-risk-content ores versus lower quality ores spread quite a bit. I'm wondering if your view about long term, especially iron ore prices has changed over the last six months.

And I guess the same question about copper as well.

Yes, Chris, I think first of all we have some different thoughts on mechanism on copper versus iron ore because in one you have probably a greater scarcity of the resource, with the copper than you would in iron ore.

I think that iron ore, it's, iron ore is petrified rust. It's not something that is geologically scarce on the earth's surface. It's a question of getting it in sufficiently concentrated quantities and close enough to an infrastructure source or something that is buildable. So you have a very high entry cost to get that infrastructure burden over-weighed but after that you can begin putting it in the market. So I think we are very realistic to the fact that this is a good-margin business and good-margin businesses tend to attract new entrants.

So in all of our modeling we make the assumption that there is a continued expansion by ourselves, by others, basically it's been flagged by others, and that there will be new entrants and certainly entrepreneurs. Western Australia has been great for bringing new entrepreneurs in the system and we're also seeing them coming into Africa. These will add new supply into the system, which will have the effect of dampening prices.

Now the other part of the variable which is actually not a precise measurement would be what is the demand picture looking like? Ever since 2003 when the markets began to take off in steel, we, industry analysts, even the Chinese have been underestimating the Chinese capacity to expand their steel sector. And that has actually been putting more of a demand pull on this even in the environment where people are trying to add supply. So those are actually two very variable effects. Neither of them I would say are stable.

I think you will at some point see the Chinese demand beginning to not flatten off, but it's slope of growth will begin to taper off as they reach some equilibrium point on terms of kilograms of steel per capita. Is there a single population or a bimodal population in China and will they be a different kilogram per capita, are going to be part of that modeling exercise. But realistically, I think we have at least five years before that tapering begins to take effect. And then the question becomes, what happens in Southeast Asia, what happens in the Middle East, what happens in India? Where do they come in? Do they have some gap or lag before that kicks in or not?

I don't want to be prescriptive on it but I would say that there will be a supply response. At some point demand will begin to taper off and we will see a reversion from current prices. I would say that $100 a tonne in my eyes would be seen to be a very optimistic assessment of the world. Certainly I'd hope to see that that is correct, but I would put it on the optimistic side of the balance sheet.

In terms of copper, we have to look past the normal supply curve and the cost curve because we recognize that as we are now we're sitting and we've been consistently seeing the price of copper being at least double the marginal producer. And you'd say, why is that case because economics would suggest that basically more marginal producers should come in, but the fact of the matter is that the marginal copper is either scarce or, more likely, it's encumbered to come in the market by something that's non-economic.

For example, we have a number of projects in North America we'd like to get running but we have to go through regulatory and permitting processes in the US that are actually quite difficult, so keeping it off the market. There are quite a number of resources in Chile and in the Indian belt that have a range of power or shortage of water or basically infrastructure issues that need to be overcome. You have community issues in some Andean locations that actually keep that copper off the market. DRC could be the Saudi Arabia of copper but you've got to really completely change the political environment for that to happen.

So there are some -- there's certainly copper out there but it is held back from the market by a series of non-economic environments. So what we have to do is build in an element of incentive of modeling into a normal marginal cost model. I'm not giving you specific answers but I'm just giving you directional ideas as to how we would try to model what is a very, a large set of quite large drivers.

Has your view of either of those changed over the last six months or has that been the --

No. I would say over the past six months we haven't seen material changes in either of those businesses.

Yes?

Des Kilalea, RBC. Two questions please. The first is the changed royalty environment in the Pilbara, does that capture, and if it does, how much does it capture, of the synergies that you'd envisaged in the JV?

And the second is, your partners in Diavik talk about block caving potentially reducing costs materially, could you comment on that?

Yes. I think that, first, the West Australian royalty agreement, basically what it's doing is taking out some discounts that were provided literally several decades ago and it basically brings the fines market in parity across the sector. So I wouldn't really say that that has any effect on synergy capture in any way. This is something that is, that basically it's just bringing the overall business into alignment.

I think the importance for us of the WA agreement, it actually provides us with a greater level of flexibility for growth, for switching ores to different rail lines, and I would hope that that is something that we'll see value arising. Just because, as we've seen, the more flexibility we have as we continue to expand, generally the more efficient we make these operations.

The second question was --

on Diavik

On Diavik, I'm going to have a little mining-engineering speak here I think to go into this, because the thing about block caving as you know, when you begin to mass excavate an underground cavern you put stresses on the sidewalls. And we have to remind ourselves that the integrity of the sidewalls is absolutely critical for protecting the dykes that basically keep the lake out of the pit. And so any mining method has to be robust and sufficiently sensitized to the process-safety aspects of protecting those sidewalls, which effectively protect the integrity of those dykes. So I'd say block caving is something that would not from my perspective address the broad-process safety exposures to the integrity of those dykes.

Yes?

Can you comment on the progress of resolving the long-term ownership of Ivanhoe? I guess my concern is, as a Rio shareholder, there's the potential for leakage of value. And is there some concern that you have of increasing your exposure that would -- is there a reason why you wouldn't want to increase your exposure to 100% of that?

First of all, I want to focus on the rights that we have and we should remind ourselves that we have been willing investors in Ivanhoe and through that the Oyu Tolgoi project for going on four years. We have put in about $1.7b of investments to continue to progress the Oyu Tolgoi project. We've said from the beginning that's been our intent and we have been working together with Ivanhoe to get this mine built and built properly, first production by 2013. As we said recently we put another $390m and we're essentially, Rio Tinto's essentially funding that development to the tune of about $3m per day, day-in, day-out.

In the course of our agreeing to make those fundings - and a lot of this funding was before the security and certainty of the investment agreement, some of this funding was during some pretty dark days during the global financial crisis - we agreed with Ivanhoe on certain rights that we receive with that. These rights relate to how we can continue to increase our interest. So essentially as we invest in the project we're increasing our interest in Ivanhoe as we're effectively then increasing our interests in Oyu Tolgoi. Those rights are subject to a disagreement now between us and Ivanhoe. There are some technical components that we've taken to arbitration and we'll look at those being resolved. And I'm confident of our position in those over the coming months.

But it's important to recognize that we and Ivanhoe together are continuing to cooperate and work well together on the proper development of the Oyu Tolgoi project. That's the real prize and that should be what people should be focusing on. I don't want to speculate or don't want to comment on how things can play out. That's not appropriate. The appropriate thing is that we are making the money, we are making the investments, that's progressively increasing our position in Ivanhoe and we want to get the best copper mine in the business built.

Yes, right here. Yes, one more question and then I'll go to Sydney.

Hi, it's Olivia Ker from UBS. Just a couple of questions on comments that you've made today. Firstly, in relation to working with BHP on the iron ore JV, you mentioned it's becoming a more increasingly challenging environment. Could you maybe comment there?

And then secondly, you talked a lot about the benefits of JV-ing on projects such as Simandou with partners such as Chalco. Can you talk about maybe some other potential projects either that are under construction or that are in your portfolio that you could look to joint venture on in the future?

Thank you. Let me first just talk about the broad concepts of joint ventures. I'll get Guy actually to comment on joint ventures too because we've done quite a bit of work over the years in terms of understanding why joint venturing makes sense for certain projects and why it might not make sense for necessarily all projects. But I'll leave that to you, Guy, but maybe if I comment on the Pilbara.

We should recognize that the synergies in the iron ore joint venture are quite large and they are a prize that we should be doing everything we can to achieve. Of course, as we've said from the beginning, we will go through the various regulatory processes and we'll respect those regulatory processes as appropriate. And that's what we've said and that's exactly what we're doing. We haven't commented on the specificity of those discussions because we agreed with the regulators to keep those confidential as we should. I think from my own perspective breaching that trust with the regulators actually makes for a more difficult regulatory process than would otherwise be the case.

We are in an environment of rising iron ore pricing. We are in an environment where annual contracts have moved to quarterly or even lesser frequent pricing. That has what I call raised the political backdrop in this environment. That's we're being realistic. We understand that. We recognize that. We read the newspapers. We recognize what steel industry associations are saying and trade associations are saying, but we also recognize that we have strong technical cases, strong technical arguments besides -- beyond this being a strictly production joint venture.

ACCC has been extending their process and I think there's probably more visibility to that process than any of the others. But I think we are, we're doing everything we can to achieve the regulatory approvals but we have to be, recognize and be realistic as to what the challenges and the hurdles are.

Guy, can you speak about sort of the broader comment of joint ventures and why they sometimes make sense in particular cases?

In an ideal world we get access to a fantastic resource, can own it and finance it 100%. But of course there are many cases and reasons why that's not always the case. As I said, access to resources very often is something that you can only gain from joint venturing with the existing owner. That's how most exploration starts. And I can think of many cases where that -- where we've done that. Two that spring to mind are the Freeport joint venture at Grasberg and Escondida in Chile, but there are plenty of others.

Another reason why one might enter a joint venture is because it gives you access to a new country. And as we've seen in Mongolia it is necessary to have a joint venture with the Government in order to get access to a reasonable investment agreement. And that kind of idea might easily be replicated elsewhere. And sometimes there's special expertise that you can get as a contribution to a joint venture, something that we, for example, may offer or sometimes we may obtain as an objective in a joint venture.

I think that another reason why one, why we've entered lots of joint ventures over the years in the history of the Company has been to diversify risk. That's probably less important now but it still has a role I think in certain geographies where maybe a partner can bring something that we haven't got. An element of political diversification is sometimes helpful. It's sometimes helpful for example to have more than the British and Australian Governments making the case for us in a particular country. It maybe helpful to have another partner, the US Government for example or the Chinese Government or whoever it may be.

The other thing is that it could be that our appetite for growth at some point involves so much capital that we may want to access capital through a joint venture process. Now mostly that hasn't been the case up until now, but it might be the case in future.

So I think that actually we've done an enormous number of joint ventures. We've really thought about what makes a success in a joint venture and what makes a failure. And I think we may have built a competitive advantage in the formation and operation of joint ventures just because we've had so many for so long and we've thought so deeply about it.

I'll just add that joint ventures are not novel in our sector or in Rio Tinto. The original development of the Hamersley was a with-joint-ventures. The original development of Weipa would have been with joint ventures. I think, as Guy says, there are certain principles that we do apply as we go forward in terms of why joint ventures make sense for early entry.

But again, what we're trying to do is to develop new resources that may be multi-generational. These things will span literally periods of decades. If we can find ways of getting added insights or early entry into projects by joint venturing or to facilitate the development by joint venturing, it does make a lot of sense. And that's what we're trying to do. Or if we can get synergies which would be the case in the iron ore joint venture. In the case of the Simandou project we do run the project. We continue to operate it and that gives us then what I'd say the optionality, working with Chinalco to look at the right development path.

I know there are a few more questions in here. I see you there, but I really want to turn it over to Guy now in Sydney for some questions.

(inaudible) in the back, please?

Thanks very much Guy. Really a question regarding the Aluminum division and I think, Tom, I heard you say earlier on in your presentation that you were hopeful of getting the Aluminum division margins up to levels similar to the other divisions. And I thought you said that. I just wanted to clarify that please because I noticed that Iron Ore division was about 70% and Copper was about 55% and Energy was about 50% and I'm wondering how you hope to get up to those levels. Is it assumed price increases of about 30%? And if it was assuming those sort of price increases, is there any reason why the aluminum prices at the moment aren't up at that level? Are there some sort of structural difficulties within that market?

Thank you. I will tackle that, Guy, if I may. When I refer to EBITDA margins I'm looking at longer-term EBITDA margins. As I said earlier, we'd like to see iron ore prices stay at this level forever but realistically we recognize there will be a supply response. And I think copper and everything else has certain -- you have to take it from a longer-term perspective.

What's been quite important for the Rio Tinto Alcan management team, and this was just reinforced by just said to me just a couple of days ago as a matter of fact, was a recognition that Rio Tinto Alcan shouldn't just compare its margins and its business as performance against its aluminum peers. It already does a pretty good job. If you look at the upstream EBITDA margins for Rio Tinto Alcan in the first half of this year, compared to all of its major peers, it was attractive. It was actually probably the highest of any of them.

But that shouldn't be a sufficient hurdle. In the past that may have been seen, that's you're doing good, you're doing a better margin than the other aluminum producers. But with Rio Tinto Alcan as part of Rio Tinto, for it to have the ability to attract capital competitively, it has to have the ability to be more competitive in terms of its EBITDA margins on a long term basis, with the EBITDA margins for the other businesses.

I think we're probably 19% or so EBITDA margin the first half. Of course we didn't have what we would have called a perfect price. We had high inventories holding things back. We've got other things that we need to do, but I would see that that's a number that should be substantially increased in terms of a long-term objective to be competitive.

And we do have a pathway for that. Aome specific areas that are non-price related would include the fact that as I've said we have another stage of transformation beyond the $1b we've saved so far. $1b of savings was certainly very good but it's not going to be enough to get to where we need to go. We recognize that and that's certainly very much built into all of the metrics that the Rio Tinto Alcan people are being judged by and perform by.

We also have to modernize the Canadian smelting assets. These are attractive investments under virtually any pricing assumption for aluminum because you've got some of the most attractive power pricing in the global sector. But frankly it's linked up with some Soderberg technology. It's linked up with older, multi-decade old technology, not very efficient, relatively high cost. And we're not getting the sufficient pounds of aluminum per kilowatt hour of power that we should be getting. So we do need to go through those modernizations of those facilities and that's why I flagged that we would anticipate those happening in 2011.

Frankly, we've been constraining some of the capital in Rio Tinto Alcan until we can see some of these inventories work down. That's why we're not doing as much as we are this year because we want to see some of that transformation first.

The third thing that we need to do is we frankly have to move at least one notch down on the alumina-refining cost curve. Right now we have on balance our alumina refining, and those in Brisbane would have heard this, in roughly in the third quartile. If we can do what we want to do, which is basically to complete Yarwun 2, to bring the overall Yarwun complex down considerably on a global cost curve, which it will be with the economies of scale that come with that, and frankly fix the problems that we have with Gove, which are problematic but they're the type of things that Rio Tinto does a good job of fixing in terms of the technical aspects of that over time, I can see easily our cost position in alumina refining moving from the third quartile to the second quartile.

If you look at your numbers, you'll see our EBITDA margins were lagging more [V&A] than they would have been in the primary metals. So we've got to get that fixed. But if you take those three pieces in combination, which are very much part of defined management efforts that are underway as we speak, and then you have to make some judgments as to where aluminum prices would be. And we do believe aluminum prices will over time follow the marginal costs of electricity. I think it's not unreasonable to begin mapping out a pathway of EBITDA margins that are considerably better than they are right now and certainly which would be competitive with the long-term margins of our businesses.

And let's remind ourselves that 10 years ago, when we were buying North, and people were saying, 'why did you buy North? Iron ore's a pretty dumb business to get into'. That we were happy to use aluminum, we were happy to use copper, we have to use industrial minerals businesses to generate the cash flows to basically make the investments that we were making in copper and iron ore. We've got to think multi-decade. We can't just assume that the pricing position where we are today is the pricing position where we were 10 years ago.

The key is to have top first-tier assets in all the sectors going to be and make sure those assets are working hard, make sure those assets are delivering the performance that you expect. That's what we need to do with Rio Tinto Alcan and that's exactly what Jacynthe and her team are doing.

Guy?

Yes.

Paul Young, Deutsche Bank.

Sorry, go ahead. I won't -- haven't forgotten you, Paul.

Paul Young from Deutsche Bank, thank you. Two questions. First one is on iron ore pricing. The second question's on your growth strategy and more long term.

First of all on iron ore pricing, I notice that the Robe River discount to Hamersley [blend] really closed up again during the half and we're actually seeing now two periods of near parity between those two products. Can you comment maybe on is this a permanent move?

And secondly, with your comments on demand, potential demand weakness in third quarter or fourth quarter, could we see some contraction? And between that, those two products.

And second question is on your long-term growth. Now I look at your growth, organic growth, pretty compelling between now and 2015/'16, but beyond that period it does look a little bare compared to your peers. How do you think about growth beyond 2015? And actually are you happy with your organic growth potential from 2015 onwards?

Guy, if I may, I can take maybe the Robe one, if you want to supplement with some numbers. Then maybe if you want to take third versus second quarter and I'll talk about the long-term growth?

I can't give any numbers I'm afraid on any of that pricing matter, I'm sorry to say.

Okay, let me, maybe Paul, if I want to answer, first of all maybe if you send a note of thanks to our marketing team at Robe for doing as good a job as they've done would be nice. But I think really we should also recognize that Robe's long-term contracts are on an annualized January-to-December basis. So during the first quarter they would have picked up something more than the 2010 or 2009 benchmark pricing. As it normally goes through it's one quarter lag from the other business and I suspect that would be making a bit of that difference.

On the growth strategy, Tom, are you going to talk about that or shall I?

I'd like to comment post-2015, if you want to comment on what the question on third versus second quarter.

As I've said, I can't comment on iron ore pricing.

This is -- what we've said again on the third quarter is that we've got pricing that is reflecting that January -- that March-through-May period. I hope that answers your question. And again, as we've said, we're working to deliver all the tonnes to that basis.

And I'd say on long-term growth plus 2015, it's not that we don't have those options. It's just that we're probably focusing more on the things we're doing between now and 2015. If you look past 2015 there are several additional drivers of growth that we've talked about over the years that still remain in the system.

First and foremost, we wouldn't necessarily cap our ultimate potential in the Pilbara to 330m tonnes per year. As you know, we had flagged the possibility of continued expansions of the Cape Lambert facility and possibly expansions of the Dampier facilities. We have a very attractive port infrastructure and mine system that I think give us those growth prospects and certainly we would not necessarily constrain ourselves at 330m.

I hope and anticipate that we would continue to look for opportunities to expand what will then be our fleet of copper operations, including Oyu Tolgoi at that time with additional optionality. Have our engineers figure it out exactly where that will be and how that will be? No, but you can anticipate that we would certainly be working on that. We will have the resource and the flexibility to do that.

And I'd also note that we have a number of longer-dated copper options that we would be seeing coming into place in the second half of the next -- of this decade. Things like Resolution, La Granja, maybe Pebble in that particular time horizon would be when we'd hope to get that copper production to place. And that's going to be a particularly important time because as we look at the existing copper producers a lot of them will be seeing themselves even maturing even further and seeing their production beginning to decline.

I think in Aluminum, after we get through the individual modernizations of the Canadian facilities, I mentioned we have a number of greenfield sites. But frankly, we're going to need to see some -- in terms of directional movements in terms of aluminum pricing, where that inventory is, we would see that inventory be worked off by then and that should provide growth opportunities post-2015.

I'd like to see further expansions in Energy. I'd like to see further expansions in coal, uranium, industrial minerals and possibly diamonds if we can be successful in India in that post-period. And I would hope by the post-2015 periods some of the infrastructure challenges in Eastern Australia will further open up more, giving us further option for growth in our important coal business in Australia.

Paul?

Hi, Paul McTaggart with Credit Suisse. Just want to go back to CapEx numbers for a minute. If I heard correctly, you're looking at your formal approval for the 330m project, Pilbara 330m in the second half of this year. And if that's the case, you must be pretty close to knowing what final capital numbers will be for that project. And the $1b or so that's committed to the port expansion is obviously but a small portion of that. So can you give us a sense of what total CapEx would likely be for that 100m-tonne expansion or at least a range?

And if so, looking into CapEx estimates for calendar '11, which are $9b, I presume that a pretty big chunk of that is coming out of iron ore. And if you can give a sense of how much of that $9b would relate to the iron ore expansion.

Do you want me to take that, Tom, or would you like to take it?

Guy, I think you'd be good for that.

Look, you're right, we're up for a big amount if we're looking at 330m. This is double-figure billions. We haven't given a number out and I think we'll wait until we're -- until we make the announcement to do so.

I think that you're right in relation to the $9b. Iron Ore is taking the lion's share of that, as it should. I think that that, the prospects in Iron Ore and the quality of the business that we have there makes it a no-brainer, but of course we do still have to do some further study in this before we make the commitment.

Other questions here?

Guy, thank you. I think we're running tight. Maybe one more question there then we'll go over to the phones.

Okay. Tim?

Yes, Guy. Just with regard to the 330m tonnes project, previously you've talked about doing that in two tranches of 50m tonnes each. Am I right in assuming you're really signaling now that the capital committed will be for the full 100m, rather than two lots of 50m?

Guy, I can quickly answer that. If you listen to my comments, I would say that we would be focusing on 280m by that early 2014. So I think two tranches. But certainly as we put capital into that first tranche, we want to make sure that the facilities, particularly the wharf, would be appropriately configured to handle and essentially engineering-wise optimized to ultimately handle the 330m.

If we can go to the phone lines now, please?

Certainly. (Operator Instructions). We'll pause for a moment to allow everyone to signal. We will now take our first question from Clarke Wilkins from Citi. Please go ahead.

Hi, good morning and good evening. First question in regards to the Copper projects, you mentioned La Granja, Resolution. Has there started to be an allocation of CapEx back towards those projects, given they've had greatly reduced CapEx over the last couple of years?

And secondly just in regard to Madagascar, how much is the ramp-up there driven by the market issue versus just technical issues associated with commissioning that operation? And, i.e., could you ramp it up quicker if the market did recover on the titanium dioxide feedstock?

Thank you, Clarke. Maybe, Guy, I'll take both of those. First of all, on the Copper projects, Resolution, the prime determinate will be getting the US land exchange through Congress, and that's important. We are doing some shaft-development work with PHP, our joint-venture partner in that particular case, although at a relatively slow pace, until we get better direction on the land exchange. I'd say that land exchange represents a key part of the critical path and then it'll be about shaft sinking and developing of the drifts to basically follow-up past that point.

And it's quite important, my point about the mine of the future and some of the work we doing on speeding up the rate of shaft-sinking and the rate of drift advance as part of that, because will be a big enabler for that project ultimately. It's a very high grade, one of the highest grade, but also deep, deep mines, requires quite a bit of complex technology. But, again, it's the type of target we should be going after.

In the case of La Granja in Peru, I think what we've seen with the project is as we've looked at it and evolved it, we did slow some of the work down during the global financial crisis but our geologists have recognized, this resource continues to get bigger and bigger and bigger. And as a resource gets bigger and bigger and bigger, some of the capital options get more complicated. And so our first focus is to get a better assessment of how big this resource ultimately is and then finding the right technical pathway. But I think as earlier pointed out, but by Paul, this is correctly in that post-2015 part of the growth pipeline.

Moving on to Madagascar, I think it's -- the growth in the ilmenite production from Madagascar has been primarily because we've begun to de-bottleneck some of those constraints, particularly the clay layer that we identified during the dredging activity. But the slag that's produced from that product which runs roughly 90% is in a very nice marketing sweet spot between conventional slag, conventional chloride slag and, say, a rutile, synthetic rutile or UGS type product. So it's in very much strong demand on the market and I think there's no question, the more that we can produce, the more of it that will be snapped up quickly in the marketplace.

Do we have any other questions on the phone line?

Our next question comes from Sam Berridge from RBS. Please go ahead.

Sorry, my question's been answered.

Okay. Can I have one more question? I know Toby, you've had your hand up for a long time. I just want to give you the courtesy of the question, and then we may have to wrap it up.

Always very polite, Rio Tinto, thank you so much. Firstly with regard to the Chinese domestic iron ore market or production, could you give us your thinking/observations on volumes and on grades compared to last year and where that is going?

And secondly, Guy, you mentioned the political advantages of having JV partners such as, for example, the Chinese government. But if I may say so, the Chinese government may have a diametrically opposed objective to yours in as far as they want volume at the lowest cost I suspect. How do you square those different objectives?

I'd like to maybe just before Guy comments on that second one, I'd like to make a quick response on that and then move on to your first question, and that is we are operating the project. We're running the project so it's got to be something that we find acceptable. If it's not an economic pathway for us, then we will look at something that's an economic pathway. So that's why I think it's appropriate as we create these joint ventures, we find something that ultimately creates a mutually acceptable growth pathway. And I think that given the quality of the Simandou ore, that's going to be quite easy to achieve.

Now in terms of domestic Chinese production, we're in a -- we've seen prices over the first half that's been a fairly steep part of the Chinese domestic cost curve. And I think we've seen a relatively rational response. When spot prices have gone up we've seen capacity come in. Of course it was constrained a bit during the Chinese winter months, but it ultimately did see that supply response. And then when prices went down you see some of that supply coming out of the market. It's not perfect, but actually there's a certain economic efficiency focusing particularly on the private iron ore mines, not necessarily the state-owned or mine-mouth iron ore mines.

Grades are continuing to decline, and I think that the average grades and the continued cost performance of those mines will continue to be challenged. And from my own perspective that does create some space for premier projects, such as Pilbara expansions, Simandou. But we would see that like in aluminum, we would see that, to the Chinese, would basically represent the fourth quartile of the cost curve. And down the road, ultimately, as the renminbi does begin to creep upward - which we would put it as a creep rather than a gallop upward - that that will probably put further pressure on the fourth quartile in both iron ore and aluminum.

Guy, anything else you want to say?

Look, I understand the point you're making, Tobias, but think back a bit here. We've had -- our joint venture partners have come from all parts of the world. And Japan probably has the most numerous joint ventures with us, but also US companies have had joint ventures with us. In many cases we've had the World Bank or the IFC as partners. And the point I was trying to make was that in the case where a government tries to be coercive against the mining company, it is helpful to have more than one government on the telephone to complain about that. And that's the point I'm trying to make.

Of course there are differing objectives that joint ventures partners have. They all have that differing objective issue. Many of our joint venture partners are customers and, by definition, the customer will have a different perspective from the mining company. But we've found that we can actually work through those things, especially when we run the project, as Tom said.

Thank you. We've given this probably 15 more minutes than we had allotted. I have lots of people tapping on their watches pulling me to the next place. I do want to thank all of you for good questions. We will have a number of people being available for coffee afterwards. Unfortunately it doesn't look like I'm going to be one of them because they're going to drag me to the next agenda item. So thank you very much.