力拓 (RIO) 2011 Q2 法說會逐字稿

Ladies and gentlemen, good morning, everyone here in London and good evening for those joining us from Australia, and a warm welcome to those participating via the webcast. With me here in London we've got Tom Albanese, Chief Executive, and our CFO Guy Elliott is hosting our presentation from Sydney.

Rio Tinto has produced another set of impressive results reflecting favorable market conditions and strong demands for our products, in particular from Asia.

Our operations have performed well in the face of unusually adverse weather condition, and I must say that I continue to be impress with the way that our people respond to challenges such as these, leading to excellent operating results at all of our managed operations.

We are clearly in a major investment phase which is continuing to gather pace and over the past six months we've added to our growth portfolio through the highly successful acquisition of Riversdale. But as I said in February, we believe that the creation of shareholder value over the long term requires a balanced approach towards investing in high quality growth and returning excess cash to shareholders.

So far this year we have completed $3b of the $5b buyback program that we announced in February, and today we've announced that we intend to maintain this buyback through the coming months. We have increased our buyback program by $2b to $7b which we will complete by the end of the first quarter of 2012, subject of course, as always, to market conditions.

The global economic environment clearly continues to be volatile. Policy makers are grappling with substantial economic imbalances in both developed and developing countries. That rebalancing process will take time and change in unlikely to occur smoothly. However, in an uncertain and volatile environment, our strategy is clear and unchanged, to invest in assets of the highest quality supported by a strong balance. So together with our fundamental belief in the long term demand growth for our products, this gives us real confidence in the long-term future of our business.

That's all from me and I'm going to hand you over to Tom. Thanks, Tom.

Thank you, Jan, and good morning to you and for those of you in Australia, good evening. Before I turn to our first-half results I'd like to start, as always with safety.

Once again we recorded improvement in our lost time injury frequency and all injury frequency rates during the first half of the year. However, this was overshadowed by four fatalities during the first half, mostly at construction projects. These were unacceptable and we are taking action in all cases. At a time of rapid and substantial growth for our businesses, it is vital that we're able to grow our operations with everyone going home safely each and every day through their career. We will ensure that further improvements of safety performance are identified and implemented as soon as possible.

Turning now to our first half results. In 2011 we achieved record earnings, record EBITDA and record operating cash flow for the first half period. This was despite the exceptional adverse weather conditions that we experienced. We are recovering well through these although there are still some residual effects of some of our operations, in particular in Queensland and in the North Territory.

We are making great progress in our industry-leading portfolio of growth leading projects and during the first half of the year we increased the pace of spend at these projects, to expand iron ore product from Pilbara to 283m tonnes per year by the end of 2013. We also announced the acceleration of our plans to expand this business further to 333m tonnes, and our target has actually been brought forward by six months to the first half of 2015. This in stark contrast to broader iron ore industry trends which have seen many projects subject to significant delay.

Just this Monday we achieved a landmark when we completed the compulsory acquisition of the remaining Riversdale shares and we've reached 100% ownership. Key Rio Tinto management have been appointed and already are on site in Mozambique. And right now we're focused on the completion of the first phase of the Benga project and we're evaluating the most effective and value-enhancing strategy to develop the entire resource required with Riversdale.

We've increased our investment in Ivanhoe through the acquisition of shares and the exercise of our warrants, so we now own 46.5% of Ivanhoe and have nominated half the seats on the Board of Directors. We've put in place a Rio Tinto team to manage the development of world class Oyu Tolgoi copper-gold project and the development is well under way.

In Guinea we signed a settlement agreement with the Government which allows us to take the world-class Simandou resources forward to first production by 2015.

And as Jan mentioned, we're able to balance this investment in our industry leading-growth program with the return of excess capital to shareholders.

Of course, one of the key drivers to our record earnings was a strong price environment in the first half. Demand from China continues to be strong and we saw a number of supply constraints across the industry. These included significant interruptions from adverse weather and labor unrest in some key producing regions.

Looking ahead, consensus global growth estimates have moderated recently but remain at around 3.5% this year. We do expect strong GDP growth in China at about 9.5% in 2011 despite a year and a half of progressive credit tightening. Inflation does remain high but is likely to be close to its peak.

In Japan, a key market for our products, the economy contracted in the first half. Analysts are predicting a modest recovery as industrial production and manufacturing rebound following the tsunami disaster in March.

On the supply side the industry continues to struggle to bring on new production. Key input costs, including labor capital equipment and consumables are rising, and tightening supply is affecting small producers in particular. This macro conditions suggest higher average prices for the remainder of this year and into 2012.

However, there are two key macro risks to this outlook, the pace of credit tightening in development countries, and the risk of Sovereign debt crises. The extraordinary scenes that we saw played out in Washington last week and over the weekend are symptomatic of the challenges faced by countries with significant debt. Eurozone problems have worsened considerably in recent months and the potential remains for a debt crisis that could spread across the European Continent. If anything events in Washington, Greece, Italy and Spain over the last few weeks reinforce that we are in a volatile environment.

Any of these risks could lead to a destabilization of the global economic activity and therefore commodity markets. We are well positioned to navigate volatile conditions with our high quality, low cost operations and our strong balance sheet.

Now let's turn to the product groups, starting with Iron Ore. We benefited from relatively stable prices through the first half, driven by robust demand from China, but this has more than offset by weak demand from Japan that we saw after the devastating tsunami.

On the supply side, weaker than expected seaborne supply was a result of adverse weather in the Pilbara, lower than expected Brazilian exports and Indian supplies still constrained by export bans. As I've said, our Pilbara operations were heavily affected by the significant rains, we did suffer widespread flooding, a related train derailment and loss of about nine shipping days. All in all, these events led to a 5% decline in shipments during the first half compared to 2010.

Production did recover strongly in the second quarter and was, in fact, the second highest quarter on record. And this was a great result considering the adverse weather conditions. We successfully expanded our Pilbara capacity at 225m tonnes per year, on time and on budget and we remain on track for global production of 240m tonnes this year from Australia and Canadian operations.

Critical to the optimization of our supply chain and the maximization delivery of iron ore to the seaborne market is the flexibility and efficiency derived from integrated systems. In May, the Federal Court rules in favor that third parties were not permitted to run trains on our rail network, and while this case is not entirely closed, we welcome this endorsement and look forward to its eventual conclusion.

On the technology front we announced the doubling of our driver-less truck fleet in the Pilbara, the first operational deployment of this technology in Australia, or anywhere, on this scale. The trucks will be controlled from our industry leading operations centre in Perth whose benefits are becoming increasingly evident.

Turning now to our iron ore growth projects. Back in June we took a group of you to our Pilbara operations to view firsthand the progress that's being made on the expansion of, what I believe, to be the premier iron ore business in the world. Our expansion to 285m tonnes per year is progressing well and on schedule. We recently ordered the long-lead-time items required for the expansion to 333m tonnes, enabling us to accelerate the timetable by six months to the first half of 2015. By doing so we're able to keep all key contractors in place, they will simply move on from one expansion project to the next, creating greater efficiencies.

We've also approved a further $2b of expenditures as a result of the stronger forecast Australian dollar. I do want to want to emphasize that our capital expenditure in Australian controlled budgets remains on budget and on Australian dollar terms. Guy will cover this in more depth in a moment.

Our Canadian expansions are also progressing to plan. At IOC we expect annual capacity lifted by 4m tonnes early next year to 22m tonnes and we have clear pathway to 26m tonnes with the potential to almost double this to 50m tonnes.

At Simandou we signed a settlement agreement with the Government of Guinea, paving the way for the first shipment of iron ore by mid-2015. We certainly have a number of important milestones still to achieve before we approve this major project, but this vital agreement gives us a certainty to invest and to move forward.

Activities on the ground at Guinea continue to be ramped up, project spend is currently about 20m per month and this will increase nearly five-fold over the coming months. The timetable to first production is challenging requiring an intensive approach to project delivery. On ground rail and port surveys are now in progress and engineering is now underway. Tenders are being called for early infrastructure facilities with construction of the critical path items to commence in parallel with this.

Moving on to Aluminum, we benefited from tight physical markets and continued strength and demand in China where newly installed capacity is taking time to ramp up. As a result, we did see prices rising 20% half on half.

As foreshadowed in our February results, cost pressures are returning to the industry, including the effect of strong currencies and the higher cost of caustic, coke and pitch.

In addition we've had to attend with other external and abnormal factors such as heavy rains in Australia which impacted our aluminum refineries in Queensland in particular. Hydrology condition in the Sagueney did though return to normal in 2011, following the low snow and rain levels experienced in 2010.

Operationally, there have been some improvements, notably at the Gove aluminum refinery where output was stable and we set a new quarterly production record in the second quarter.

The expansion of Yarwun aluminum refinery remains on track. Bauxite processing will start in the first half of 2012 leading to the first alumina production in mid-2012. This expansion will move our average position further down the cost curve, however, like with iron ore, the US dollar cost has impacted by the strengthening of the Australian dollar.

Our transformation of the aluminum business continues with plans firmly in place to achieve an EBITDA margin of 40% by 2014. Jacynthe will provide further details on this initiative at our seminar in September. But just to summarize, the objective will be achieved through focusing on three key priorities. First, incremental EBITDA of $1b through cost and production efficiencies, optimization of product mix and capacity creep. Second, step change improvement through capital investment in major projects, such as Yarwun 2 and the modernization of Kitimat and AP60. And, of course, finally disciplined portfolio management.

Strategic reviews are underway at the Lynemouth smelter and power plant in the UK and at European specialty alumina refineries. And more work has been undertaken across the aluminum portfolio.

At Kitimat, if the decision is made to invest in the full modernization project at the end of this year, we would expect to have this project completed by the end of 2014, and this is a key element to realizing our 40% margin objective.

Moving into Copper, stronger prices continued for copper and all the byproducts, driven by a steady increase in demand, coupled with a very small increase in world refined production. Market tightness has meant that any news of labor disputes or weather disruptions reverberate through the spot price, and, of course, one example is the current strike at Escondida which is now in its second week.

At our 2010 investors seminar we gave some guidance on our future copper production and, as anticipated, we did see a dip in grades at the Kennecott Utah Copper, Escondida and Grasberg operations. These swings in grades reflect the normal cycles encountered in these types of copper deposits.

We do expect a recovery in 2012 as grades pick up again. And as we move into 2013 we'll also see some new production coming with the Oyu Tolgoi copper/gold mine in Mongolia.

In June of this year we increased our ownership of Ivanhoe to 46.5% following the exercise of our remaining warrants and we had the right to increase our interests into 49% prior to the expiry of our standstill on the January 18, 2012.

During the first half of this year and following the agreement reach with Ivanhoe in December 2010, Rio Tinto put in place a management team to lead the development in operations at Oyu Tolgoi. I have been pleased with the progress of on the ground with construction nearly a third compete as of June 30, 2011. While development continues to be on schedule Oyu Tolgoi does require an agreed power solution to deliver first commercial production in 2013.

Our other copper projects are making steady progress. At our Resolution project in Arizona, we recently approved just over $100m to deepen shaft number nine to full depth and for early engineering commitments on two further shafts. Exploration of the resource continues with encouraging drill results over the first half.

At La Granja in Peru we've completed 50% of our 30 kilometer drilling program with some promising high grade intersections identified.

And at Kennecott Utah copper we recently approved $238m to fund the feasibility study and long-lead-time items for the extension of the Bingham Canyon mine from 2020 to 2028. Approval has been given for pre-feasibility funding to evaluate the additional potential for small underground mine near the Bingham Canyon called the North Rim Skarn. This would operate in parallel with the open pit and could be operating in about five year's time.

In Northparkes we're evaluating a step change expansion which would increase production threefold. In addition next year we will trial our new tunneling technology at Northparkes, which has the potential to more than double the rate of conventional tunneling methods.

Moving on to Energy, demand for both coking and thermal coal was healthy in the first half of 2011 with growth from China and India offsetting reduced consumption by Japan following the tsunami. Supply disruptions are playing their part in boosting prices and our operations were no exception. Our four Queensland coal mines experienced major production challenges during the first quarter, leading to a declaration of force majeure at all sites. This has now been lifted and all operations are recovering well, although production rates have not yet reached their full capacity.

At Hunter Valley mines were impacted to a less extent but were also affected by rains in June. Expansions are progressing with additional port capacity now secured for the 8.5m tonne per year Mount Pleasant thermal coal project. We would expect this to come up for full Board approval toward the end of this year with first production in 2014.

Energy projects have also been affected by the strength of the Australian dollar and other inflationary effects, Kestrel in particular. We've not yet approved any additional capital but Kestrel but we are reviewing the budget and schedule of its underground expansion following extensive flooding in the first quarter and currency movements.

Turning to uranium, ERA experienced the worst weather conditions in living memory, causing it to shutdown the processing plant from January through June. Rio Tinto is supportive of the ERA strategy and plans as outlined by ERA today, including ERA's strategic water management initiatives. We understand that ERA has engaged a financial advisor and is well developed to developing a long-term funding plan. Subject to the usual internal approvals Rio Tinto is committed to playing its role as part of that funding.

An important highlight in this half was a transformation of our Energy group's growth portfolio through the acquisition of Riversdale, giving us access to a number of tier one coking coal projects in Mozambique. On Monday we completed the compulsory acquisition process and now own 100% of Riversdale. This was an uncontested bid where there were two existing strategic shareholders and many observers doubted our ability to reach full ownership. This was a major achievement by the deal team.

Eric Finlayson who took over from me as Global Head of Exploration has been appointed Managing Director of Riversdale and is now based in Mozambique. He's well placed to bring his expertise in resource optimization development to our newly acquired coking coal resources, assuring that they deliver value to shareholders for years to come. Eric and his team are reviewing the engineering and strategic planning options for this world class asset, their near term focus to get the first phase of Benga project up and running. And at this stage we'd expect first production at the end of the year, ramping up to full production from Phase 1 of 1.6m tonnes per year of coking coal and 800,000 tonnes per year thermal coal by the end of 2012.

There are some further exciting growth options under way including further expansion of Benga and the development of substantial Zambeze resource and the Tete East project, both of these 100% owned by Rio Tinto.

Now let's take a look at our Diamonds & Minerals product groups. Demand for borates and titanium dioxide feedstocks continued to strengthen in line with improving global economic conditions. Market conditions for rough diamonds strengthened during the first half of 2011 as demand from India and China continued to grow with a moderate recovery from the US.

TiO2 prices have been receiving a lot of focus this year. For the time being our exposure to spot prices will be relatively limited as our multiyear contracts mature over the next few years they'll be replaced by contracts with alternate pricing mechanisms which will provide increased exposure to the current market pricing.

At Argyle, production was impacted by significant rainfall that occurred in March and April which restricted access to the ore body due to flooding. Access has now been restored and the underground development project is progressing. Production will be affected by lower grades until the underground mine is fully operational in 2013, and like our other Australian projects, US dollar equivalent costs will be impacted by currency movements.

At QMM in Madagascar, production is up by over a third compared to the first half of 2010 due to the successful dry mining operations and full capacity is expect to be reached over the next two to three years.

We continue to evaluate further growth options across our Diamonds and Mineral portfolio, and just this week we finally completed divestment of our Talc operations.

So now, with that, over to Guy in Sydney.

Thank you, Tom. Hello, everybody. Now let's take a look at how our record first-half underlying earnings were achieved. It will come as no surprise that the primary driver has been price, increasing earnings by $5b. We've provided a breakdown of the price variance by commodity at the back of your handouts in which you'll see that by far the largest benefit came from the strong iron ore markets we continue to experience. Higher copper and aluminum prices were also significant, increasing earnings but approximately $600m apiece. These strong prices were partially offset by the impact of currency movements, notably the stronger Australian dollar. These collectively reduced our underlying earnings by $810m compared with the first half of 2010.

Lower sales volumes reduced earnings by $444m following the extraordinary weather disruptions in the first half. Iron ore operations were disrupted by several cyclones, widespread flooding and a subsequent train derailment. Despite these challenges we completed the expansion of our Pilbara system to a capacity of 225m tonnes per year and are looking forward to a strong second half. Sales volumes were also affected by expected lower copper and gold grades at Kennecott Utah Copper, Escondida and Grasberg. We will experience lower grades for the rest of this year before seeing an improvement in the second half of 2012.

Higher cash costs reduced earnings by $1.2b which I'll return to in a moment. The effect of exploration and evaluation costs reflects a greater level of investment in the business and that's what I consider to be a good cost. And so our underlying earnings were $7.8b, all things being considered this was a good result in a challenging operating environment.

However, we did see some pressures on our operating costs which I'd like to explain more thoroughly. As I just mentioned, cash costs reduced underlying earnings by $1.2b in the first half. This increase was significantly influenced by uncontrollable factors in the first half of 2011 including adverse weather and lower grades, higher input prices for raw materials and general inflation.

Bad weather in the first half, particularly at our Australian operations, impacted earnings by $245m. This was a consequence of higher unit operating costs from lower volumes and remediation costs to return operations to normal operating levels. At Tom previously highlighted, our operations have largely recovered from these severe weather conditions.

Markets for key raw materials to the mining and minerals industry have continued to tighten as output and investment has increased across the industry. Raw material prices have continued their upward trend. Some products with structural supply side constraints such as caustic, coke, pitch and explosives have continued to experience high prices during the first half of the year. Tightening raw materials prices, increased labor costs, localized inflation in mining hot spots and commodity price related expenditure, including an increase in royalty rates, all these decreased earnings by $384m.

Then there were unit cost increases associated with non-weather-related production declines, most notably from previously foreshadows lower grades in the copper group. These decreased earnings by a further $67m.

The next variance of $353m to earnings reflects our investment in our growth projects to begin the transition from the status of under construction to that of operating business. This involves putting teams and systems in place prior to project completion ensuring the most efficient ramp-up of production.

We've also incurred costs associated with the transition to new mining operations for the first time in 2011, particularly in our Pilbara operations. We expect to see continued growth in real mining wages over the medium term as many countries face an undersupply of skilled mining labor. Availability of appropriately skilled engineers, project managers and contractors is going to be critical to achieving short-term production forecasts.

Looking forward, we should expect to see continued inflation in production costs and in input prices, in particular labor costs in locations such as Australia and Canada, and certain critical raw materials. Our leadership in operational excellence helps us to identify further opportunities through a focus on cost management and productivity gains to ensure that our cost base continues to be well controlled.

Of course, our strong 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, increased by 31% to $12.9b in the first half of 2011.

We invested $5.1b in capital expenditure. Momentum is returning and this rate of spend is increasing into the second half of 2011 and beyond, as I'll explain in a minute.

Our successful acquisition of Riversdale was completed earlier this week, although the majority of the cash cost occurred in the first half. We invested a further $1.3b to increase our ownership of Ivanhoe to 46.5% and we participated in its right issue to support the development of Oyu Tolgoi. These investments reflect successful value accretive acquisitions in world class assets.

We continue to balance investing in the business with returning capital to shareholders. During the first half of 2011 we returned $3.6b to shareholders through the final dividend payment and the share buyback program. Overall after taking into account interest, tax and various other cash flows, we increased net debt by $4.5b leaving us at $8.6b at June 30.

We've also continued to optimize our repayment profile by issuing $2b of bonds in the first half with maturities of five, 10 and 30 years at attractive coupons. Our balance sheet remains in great shape.

Our strong cash generation and balance sheet will allow us to fund our substantial pipeline of high quality growth projects. Capital expenditure is ramping up with $5.1b invested in the first half, including the payment made by Simfer to the Government of Guinea.

Our major projects are making great progress against their key milestones. Yarwun 2 remains on schedule for first alumina production by mid-2012.

In the Pilbara, headcount related to construction projects has rapidly increased from about 1,000 at the beginning of the year, to 2,500 at the end of the June. This will continue to increase throughout the second half of the year, doubling to 5,000 by year end.

At Oyu Tolgoi the project is over 30% complete and more than 50% of the Phase 1 commitments have been made. This will drive increasing investment through the second half.

At the end of June we already had $6b of capital expenditure commitments scheduled for payment during the second half. We expect to continue ramping up our rate of spend on our portfolio of high-quality organic growth projects through the second half of 2011 and into 2012.

Capital projects are not immune to changes in currencies, particularly those located in Australia. We've seen a significant strengthening of the Australian dollar in recent months. As a results we've announced an increase in capital expenditure in US dollar terms.

A step change in market expectations for the Australian dollar has had the effect of increasing US dollar equivalent capital expenditure by approximately $2b at our approved projects in the Pilbara. This is a multiyear investment program and projects are subject to changes in economic conditions. As an example, when Yarwun 2 was approved in 2007 the Australian to US dollar exchange rate was about $0.85. It decreased to a low of about $0.61 in January 2009 during the global financial crisis, and then it peaked at over $1.10 a few days ago.

In order to provide additional insight into the impact that currencies can have on our capital projects I've provided these two examples of our larger projects, the Pilbara infrastructure expansion to 283m tonnes and the Yarwun 2 expansion.

The actual Australian to US dollar exchange rate on average tracked closely to or estimates through the middle of 2010. Since then, as you're all well aware, the exchange rate has risen sharply. As these projects are highly leveraged to the Australia dollar currency movements have impacted project costs in US dollar term.

Business units manage capital expenditures in local currencies, but let me reassure you that our projects remain on budgets in those terms with no significant changes in scope.

Stronger exchange rates are just one of the challenges facing the mining industry today. Lead times for most major pieces of equipment are extending and some are approaching timelines last seen in 2008. With greater lead times we also expect short term cost escalation for major pieces of equipment. The increase in lead times is adding to the overall challenges the industry is facing to bring on new supply, although our key projects are tracking to their original planned time lines.

Rio Tinto is favorably positioned in this environment with our global procurement strategies including long-term relationships with key suppliers and early commitments on critical equipment. This approach secures our placement in our suppliers' production plans. Taking haul trucks as an example, the normal lead is about one year, however lead times have been extended by about nine months due to current demand levels. Through early engagement we've secured our position within haul truck manufacturers production plans to deliver our truck requirements for major projects, including Pilbara 333 project.

While the availability of equipment is creating some headwinds, the industry supply response is also challenged by resource nationalism and for some smaller players, also by the availability of financing. Wherever we operate sustainable development underpins our approach to developing and operating our businesses. The mining and natural resources sector occupies an increasingly strategic and exposed position in the thinking of host governments. Whilst these factors can lead to tensions, with effective management and proactive leadership we can develop this into a competitive advantage. In volatile markets some companies may find it difficult to finance projects. Considering the strength of our balance sheet this environment may present opportunities for us to gain access to new resources.

Turning to our priorities for the use of our cash flows, as we've outlined many times, our first priority is to increase shareholder value by focusing on high quality growth. Value is the key. During the first half of 2011 we delivered on this priority with more than $10b of high quality investments, this included both organic capital expenditure and acquisitions. We have many attractive organic opportunities to grow and, as I've described, our rate of CapEx spend is rising.

We will retain a prudent balance sheet that will allow us to continue to invest as appropriate through the cycle in our first class growth projects and in other opportunities that may arise.

In April 2011 Standard & Poor's revised our credit rating to A- minus. We've now regained single-A status from all major international credit agencies achieving a key corporate target.

The third pillar of our financial strategy is capital management. I'm committed to ensuring that the capital structure of Rio Tinto is efficient and well balanced within the parameters of a single-A credit rating and a progressive dividend policy.

In February we announced a $5b buyback to be completed by the end of 2012. As a result of the businesses strong cash generation we've already completed $3b of this program. Today we announced that we would increase the program by $2b which would maintain our current pace of buyback. We expect to complete the program by the end of the first quarter of 2012 subject to market conditions.

This reflects a balance between our priority to invest in high-quality value-accretive growth while considering the economic volatility of the markets that we operate within.

Finally, an important priority for us remains the dividend. As foreshadowed six months ago, we have declared an interim dividend equal to one-half of the previous year's full year dividend. This leads to a payment of $0.54 per share, a 20% increase on last year's interim dividend. Given the long-term nature of our business it make sense to revisit the dividend on an annual basis. Of course we're aware of the importance of income to some shareholders and intend to closely review the level of the dividend in February next year.

Now back to you Tom.

Thank you, Guy. Turning to the long-term outlook, we continue to hold the view that the longer term drivers of industrialization and urbanization driven by increasing prosperity in developing countries remains intact. This is well demonstrated by the fact that China's Central and Western provinces continue to experience far lower GDP per capita in metals intensity rates than their Eastern neighbors.

I was recently in Chengdu, the capital of Sichuan province and witnessed the growth of the Western cities for myself. The activity on the ground and the development plans demonstrate quite clearly the intent of the inner regions to grow rapidly. As urbanization rates rise we're also seen increasingly metals intensive construction in China, as buildings become higher and regulations for construction more stringent. Notwithstanding the short-term uncertainty and volatility in the markets we continue to expect that over the next 15 to 20 years consumption trends will lead to a doubling in demand for iron ore, for copper, for aluminum and certainly for other commodities.

On the supply side volatility to capital markets could reduce availability of finance for some projects. New ore bodies are harder to find, are getting deeper and are more technically challenged. Many are located in higher risk regions and often subject to longer stakeholder engagement processes. This is just one reason why the Group's strategic commitment to sustainable development is a crucial factor maintaining and extending our ability to do business.

The combination of strong demand growth and industry supply challenges gives us confidence that real long-term prices and margins for almost all the minerals and metals will continue at elevated levels, albeit, of course, with heightened price volatility.

We are growing into the strong environment of rising demand for our products through our strategic allocation of capital to our high quality growth programs. We currently have $26b worth of major capital projects underway. Many of these projects have been approved recently and are still in the process of ramping up expenditure. We have spent $5b of capital in the first half and, as Guy said, we already have committed to spend a further $6b during the second half of this year.

As you see from the details before you this investment is focused on large, long life, cost competitive projects across a wide range of products. This is right in line with our strategy of focusing on the development of tier one ore bodies and I look forward to reporting on further milestones as these projects progress through to completion.

Looking further ahead, we have a world class portfolio of high quality tier one projects in advanced study. We have tens of billions of dollars of this type including the underground development at Oyu Tolgoi, the world's best undeveloped greenfield copper deposit, and the largest high grade undeveloped iron ore deposit at Simandou. These projects have not yet been approved for full development but most are expected to come before the Board over the next 12 months. Each of these projects has a natural fit with our strategy and they are truly tier one assets.

And further we have an active program of projects at an earlier stage of evaluation in each of our product groups. These projects may be longer term but they're all exceptionally high quality tier one assets themselves and this will allow Rio Tinto to continue to grow through the decades ahead. Over the course of the year we'll be providing more information on the progress that we're making with each of these world class assets over the investment seminars that we have two scheduled in the second half.

The quality of our growth program is underpinned by our strategic focus and leadership in two vital areas, exploration and step change innovative technologies. Rio Tinto has a record of success in exploration literally spanning many decades. Our in-house explorations teams have discovered many of the tier one assets in operation today, including our Pilbara iron ore business, Weipa, Diavik and QMM in Madagascar to name just a few.

Our leading organization of exploration professionals have also added significant value to the outstanding growth profile we have, either through the initial discovery of tier one ore bodies, the evaluation of other people's discoveries to optimize the resource development plan, or by applying their expertise to turn minor deposits into tier one resources.

Our strategic production planning process allows us to evaluate literally thousands of alternative mine planning scenarios in order to optimize our growth plans. And this skill is vital in a business where large sums of capital must be invested upfront and early design decisions can influence value creation literally over a number of decades.

When I became Chief Executive in 2007, I and we took the strategic decision to target investment in innovative step change technologies. We focused our attention on a small number of areas where we believed we could generate significant value and differentiate ourselves from the rest of the industry. This decision is now delivering. We see real benefits from our Operations Center in Perth from where we control the whole of the Pilbara supply chain including 14 mines, 1,400 kilometers of rail and three separate port terminals. We're also moving forward with advanced underground mine development technologies and intend to prototype some of these at Northparkes in 2012.

These step change technologies, along with others, have a potential to deliver significant value over the coming years and I believe our approach will allow us to gain access to the best ore bodies in the world either through discovery or value optimization. And we believe this will provide us with competitive advantage over the years and decades to come.

So, to conclude, the first half of 2011 has been another exceptional period for Rio Tinto. We've delivered record first half earnings, EBITDA and operating cash flows.

In the near term we expect demand for our products to remain strong within a volatile macroeconomic environment. At the same time the strength of the Australian and Canadian currencies and rising raw material costs will continue to put pressure on the industry. We will not be complacent and we'll ensure that our costs remain well controlled.

Looking over the longer term our growth continues to gather momentum. We've accelerated our iron ore expansion in the Pilbara which I believe is the highest value, lowest risk iron ore project in the industry.

Our spend is gathering pace and we've secured future growth options at Oyu Tolgoi, Simandou and Riversdale. In just six months we've invested over $10b in high quality projects either through organic investment or M&A.

At the same time we're able to balance our investment programs with the return of excess capital to our shareholders through our enhanced share buyback program.

Six months ago I told you Rio Tinto was entering 2011 in a position of strength. Our range of organic growth options is larger than ever, our business is generating record cash flows and our people are continuing to deliver industry leading operational performance and project delivery. In challenging market conditions those companies with the best assets, the best people and the best operational capability will be the most successful. Our long-established strategy of focusing on large, long life, cost competitive, expandable assets, together with our expertise in sustainable development, exploration and technology and innovation will allow us to enhance shareholder value over the longer term.

So we'll now be happy to take your questions starting here with the audience in London. And I think with the total audience I'll start with the questions in London and then I'll move over to Sydney and then I'll move over the phone and Guy, you'll of course moderate the questions when we move over to Sydney. So first we'll start here.

Yes, good morning, Tom, Rob Clifford, Deutsche Bank. Just two questions on CapEx. Firstly, I'm just a bit concerned about the rate. Last year you fell short of the CapEx target and said it would carry into this year. In the first half you've spent $5.1b but $700m of that goes to the Guinea government and not into the ground, so it's more like $4.4b, so you long way short of the $13b that had been discussed previously. And on top of that the Australian dollar obviously is inflating probably up to that $4.4b. So how do we get confidence that you can actually ramp up to the rate that you've just been talking about?

Rob, thank you for that, I'll just maybe make a few comments and then Guy if you can say in a little more detail. We've had a long history of project development and what we all recognize, I know you know, you've been following us quite closely, there's a normal S-curve in project development. We're in the early months and sometimes it takes even longer than the early months, you're really doing to the surveys, you're doing the pre-commitments, you're doing the work that needs to be done before you actually have large construction activities on the ground.

For example, Pilbara expansion continues to remain on track, I was there about a month ago, they're putting in pilings for the various activities and all that's generating a burn rate of cash being spent. It's certainly a lot less than you'll see in the coming months because, again, as you put foundations in, as you put pilings in, then after that you begin to put on the true fabrication and the true more expensive burn rates.

To look at the $5.1b and then look at the fact that we've got commitments of at least $6b in the second half, I'm comfortable that we're going to be spending in excess of $11b, certainly the math would show that, in the second half, and probably closer to $12b. Now our previous numbers would have been $13b. Are our projects, the key projects on tracks? Yes, Oyu Tolgoi on track, Pilbara on track, Yarwun 3 in track. Am I asking people to spend money just for the sake of meeting a target? No. Again, we want to be prudent with all of the monies that we spend and we will be properly reflective of the fact that you don't really want to change the pace of what should be a normal construction spend S-curve.

So I don't know, Guy, if there's anything else you can add to that?

Well, I think that you by implication raise the question of currency understandably. The amount of higher capital that was expended because of the currencies in the first half was about $280m. So it is true that the run rate obviously is lower than what we expect for the year but I do think that if you look at the mining and the other commitments that we've got it's very, very clear that we're going to see a much escalated level of capital expenditure in the second half.

I think that the exact timing of payments in the period November through February, I don't know what that will be, but the important thing is that we do not foresee delays in our main projects, the ones that we've mainly been describing today. So I think that we're pretty confident of the numbers that we've given out actually.

Rob, just one more point on sustaining capital, because a large portion of our total capital budget will be sustaining capital. During the financial crisis we, like everyone else, cut way back on the sustaining capital, we focused on those things needed to protect the safety of the facilities and our employees of course. But we actually held back quite a bit of activity and I think as we ramp projects back, I think on reflection we probably had some element of wish-lists of projects that are on each plant by plant sustaining capital that actually may take longer to get done than would have been scheduled for this year.

That's not affecting the growth rates, of course, and of course we will continue to do the work required to protect the integrity but just in terms of just the ability of plants to do that work in that given time, I suspect that will be part of the reason why will come in less than that $13b we would have said earlier this year.

Okay, and just a second question, I guess following on from Guy's point about currency. Rio Tinto used to hedge currencies so that when the Board committed to a US dollar number they could be more confident of getting the original returns rather than as we're seeing now, reduced returns. Why did Rio move away from that and would you look at reinstating that?

I'll let Guy answer that but I'd just like to make one comment about history, because I think in the past actually we've looked, our actual practice is in some cases we hedged the currency on capital projects, in some cases we didn't, and generally the bias would be in those cases where we had a, say a third party involved with the project that wouldn't necessarily have been as capable weathering the financial issues. We've always borne in mind whether it's operating costs or capital costs and once you begin hedging the currency you actually begin to break that natural hedge. So we are mindful of that as we look at hedging on a going forward basis. Guy.

Rob, the history is actually that we very rarely have hedged the capital projects. Now there was an important exception which was in 2003/4 when we did the first stage of the Pilbara expansion we did hedge that project, the capital element of it. And we took that decision because we thought it was an easy decision, the Aussie dollar at that time was in the range $0.50 to $0.55. It's a bit easier to take a decision when the Aussie dollar is at that level; it's much more difficult when it's at approaching parity. And so we have not hedged these matters and, as you can see, that's gone slightly against us in these two projects that we've discussed today, but I think that the world knows that we're not very big hedgers and that's the policy that we've followed. Getting it right is very difficult.

Thanks for that. Tom, just to push on the natural hedge --

Last question because we have other questions Rob so --

Yes, on the natural hedge, how do you get a natural hedge when you're not earning from your commodities while you're constructing?

I think what we've generally seen over the past few years is sort of a higher elevated view of long-term commodity trends and so I think to some extent Australian currency as a commodity currency would be reflecting that.

Yes, Tom, two questions, firstly on aluminum. It seems like you're mapping out a bit of a plan there to meet your target of 40%, but it seems like the two big drivers to that are going to be divestments, if I'm sort of hearing you correctly, and also capital costs. Just in terms of divestments, is now everything open? You've had a number of underperforming assets in the portfolio, like Gove, so are you throwing everything open now and reviewing that?

And secondly, just on capital spend, the carrying value of the aluminum business is $40b, you're spending another $4b over the next few years, I'm just wondering, are you very confident about the return on invested capital that you're actually going to achieve out of that; margin's one thing, return on capital is the next thing.

And just a second question just following on from Rob's question, there's a very interesting chart that Guy put up in terms of just your planned exchange rate and how you've revised that up. But if I'm reading that correctly you're still looking for the Aussie dollar to fall in 2013 to $0.90 and then in 2014 to $0.85. So if the Aussie does stay here we would see a large increase in terms of your capital spend in US dollars. Thank you.

Guy, I'll ask that you talk about the portfolio work we're doing within Rio Tinto Alcan. I'll tackle the capital projects within Rio Tinto Alcan, I want to say a few words about the planned exchange rate, but then Guy can be quite precise and specific on that.

So on the portfolio, I think we're looking at all aspects of it, but Guy if you want to say something in more detail.

Well look, we said in February and we've said again today that we're looking at our portfolio. We're particularly looking at the aluminum portfolio because, as you say, it's one of the drivers that will take us to this 40% margin target. But it's not only the aluminum business that we're looking at. Tom's mentioned a couple of sites where we're carrying out a strategic review, in Britain and in France, mainly in France, but we are giving consideration to whether there are other assets in the Rio Tinto Alcan portfolio that maybe would be better off in somebody else's hands. We've taken no decision along those lines and I would say that also we regularly review the whole portfolio to say is this asset really a tier one asset. And if it doesn't have a pathway to attaining that status, well, then we begin to wonder whether we should take another look at its future.

Thank you. If I look at the key capital projects which will make a difference in terms of EBITDA margins for Rio Tinto Alcan, I really want to focus on three, actually I should say four. The first is completing the Yarwun 2 project, I think that has been an attractive project, we kept it going through the worst of the financial crisis because we recognized the forward importance of adding that alumina into the market and I'm very happy we kept it running through the financial crisis because, again, having it ready to go into 2012 and then moving into a net long position in alumina I think will be quite important.

In Canada we have some of the most competitive power positions in the world in the aluminum sector, but they're also matched with some of the oldest plants in the world, Kidimat, Arvida, these are very, very old facilities, they date back to the forties and the fifties and, frankly, you're never going to get the efficiencies and effectiveness out of a facility with that technology, with that level of productivity and that age. And I think under virtually any economic assumption for aluminum or currency or anything else those make quite a bit of sense on a going-forward basis.

Then finally I'd say any opportunity that we can find to expand the bauxite production, so as we look at Weipa and we look at moving south of the Embley this would be a very important project in terms of delivering, again, even more bauxite, which seems to be increasingly of value from a global perspective.

So, again, what we're looking at for a 40% EBITDA margin in terms of the capital projects would be those projects that are well flagged, well accepted, very attractive and we're certainly not looking at rolling a series of assorted greenfield projects in to make that. We're looking at those projects that you are very, very clearly aware of and we've had quite explicit and detailed discussions in the past.

I guess just one comment on the planned exchange rate and Guy will go into it, and that is that I think to some extent the markets and their forward view of what exchange rates will be in 2014 are probably making some assumptions of reversions of commodity price which are probably matched with reversions in currencies, and again, that would be, I think reflective of the natural hedge. So if currency stays high in those periods of time it means that probably the commodities are probably also quite strong in that period of time which wouldn't necessarily be a bad thing. But Guy, anything more detailed?

Well, I think that's the important point that Tom's just made, and it goes back to Rob's question about the natural hedge. The natural hedge is not a perfect thing, there's lags in it, the degree of movement of currencies is not necessarily the same in the opposite direction as the move in metal prices, but there definitely is some relationship. We have, unusually, given out today a projection of the Aussie dollar rate. We might even revise it as we get closer to the years concerned, I don't know, that will be informed by whatever the current state of the markets are, but as Tom said, if we do revise it, it may very well be that that revision takes place because we've reached a different view of the price that we're likely to attain for the metal concerned.

So to the extent that we're paying a higher capital cost for the Pilbara expansion than the price that we had originally anticipated when we committed to it, we also could say, I think that we're expecting to receive higher iron ore prices than we expected at the time we took that decision, and the same would be true of alumina. So in this case we can say that there is a relationship.

Thank you. I've got to pass it on so if we can. Thank you. One more question here and then Guy I'll turn it over to you in Sydney.

Thanks Tom. Jason Fairclough, Bank of America Merrill Lynch. I guess just a question about medium term capital allocation and deployment. This year it's looking more likely that you're going to go and expand into three new geographies, three new mineral basins with Simandou, with Riversdale and with Oyu Tolgoi, and I'm just wondering, given the embarrassment of riches that you have in terms of cash flow, hat is the capacity of each of these new districts to soak up capital? Should we be thinking $10b to $20b apiece, or should we be thinking $30b to $50b for each of these districts?

I think it -- I'd like to say that these are three, I think, emerging global districts. And emerging global districts you don't try to develop out over a few years. Actually, it's going to probably take -- you've got to get the first infrastructure out and a lot of (inaudible) with that first round of infrastructure. But what I would hope to see is something where we move along at what would be a logical pace of development, get early production in quite quickly, and then we provide that next generation of engineers with the tools, the infrastructure, the capabilities, the systems, but most importantly the resources, so they can look at optimizing.

And I think that very much plays into our long-term strategy of having access to that resource and having access to mineralization, and having access to mineral domains that have yet to be fully considered, and in putting in capital, as the markets are there, as the technology's there and the capabilities are there to bring it forward.

So, if I look at capital allocation over the next few years, I've got to say, first and foremost, the number-one priority would be to expand the Pilbara to 283 to 333. It is, -- as I said, it's the lowest risk. It is the most enabled, in terms of having the key parts of it, which is the port, the rail, it's all there, it's in place. It's been well-flagged. That makes the most sense, to put the highest priority into that.

I think getting first production going out of Oyu Tolgoi, -- and again, that's going on, as we said, on schedule. It is very important for the government of Mongolia and the economy of Mongolia to get that going. There are -- certainly, it's going to be important to get underground at Oyu Tolgoi, ultimately, to access higher grades. And then the exact mining method, the exact pace of that, I think will be driven by the opportunities that present themselves. But, again, we're going to be driven by getting first production out of the open pit as quickly as we can on this schedule, and then properly pace the underground.

I think, in Simandou, it's going to be about -- again, I'd like to get production sooner rather than later, but recognize that the big-ticket capital for the infrastructure, the rail, the port, it's most important that that's done properly; the sites are picked properly, the engineering is in properly, and we don't try to get into too much of a rush to do something too quickly.

Now, we have other options on the inner base to get early production quicker, and certainly that's been an active part of the consideration. But, again, given the prospectivity, given the providence, a huge piece of [carajos]-type material, undeveloped, will be tremendously valuable in the future world iron ore and steel market. And, again, it's going to be about what I see as progressively develop but rapidly bring that -- rapidly bring some production in there, get that infrastructure going as soon as it can, but with the right infrastructure decision, the right siting decisions, the right placement of things like ore-loading, ore unloading, and make sure the soil configuration -- the boring stuff the engineers do has to be done right and properly. And we have to build those teams on the ground in advance of that.

And Mozambique, it's a (inaudible) space and I started personally keeping -- getting my eye on it back in about 2001. I think it is going to be something that will be a key part of the future seaborne coking coal market. Initial infrastructure is going to be restricted to modernization of what's on the ground today, getting existing rail configured, the existing port configured, and in looking for progressive expansions of Benga after that first production. And then again, as I said with Simandou, for Zambeze in particular, making sure that we get the long-term infrastructure solution properly engineered, properly optimized and properly sited and constructed because, again, that's something that will be benefiting Rio Tinto for literally decades to come.

So, again, number-one priority, Pilbara. We have other bases but, again, we get quick -- first production on a fairly rapid basis, but then we've got to take the right decisions on a progressive basis. I think, in terms of the overall capital allocation, that's the appropriate thing to do, given our longer-term outlook.

Thanks.

We're going to go over, Guy, to you in Sydney. And then I'll do the phones, and then back to the room here.

Okay. Glyn, go ahead.

All right. Thanks, Guy. Tom, just a couple of quick questions. It's Glyn Lawcock of UBS. Firstly, just --if you can cut that pie chart a different way, the cost one? If you can just cut it quickly into what's recurring and what's non-recurring, if you could do that? I don't know if you've done that.

And then just on Mozambique, I know you've talked a lot about it, but I was just wondering if you could comment on your thoughts in terms of the Zambeze project, in terms of partnering and potential size? Given you've already talked about first production, you must have a view for size? I'm just wondering what you're thinking in terms of that, as well? Thanks.

Yes. Thanks, Glyn. I think, -- and, Guy, help me if you want to add anything to the pie chart, because it's your pie chart. But what I would say is that there's one chunk which is related to one-off and production issues, and I think those had better be one-offs, so I'd put that in that category. And whether -- we always know the first half is a challenging environment anyway, particularly in Northern Australia. This was an exceptional period of weather-related impacts, and I would hope to say that that's a one-off.

If I look at the segment, which is a very interesting one, about site readiness, one thing that we have learned and we spend quite a bit of time on is, if we focus the growth projects on just the capital owner teams and just the construction, and then we plan for just-in-time readiness for having the people ready to go, and hire a general manager right at the time when it's ready to go, we end up with a longer commissioning period, a longer ramp-up period. And given the state of the markets, we're consciously saying, let's make sure we have these mines ready to go, we have the teams, particularly in this tight market, we have the teams, the capabilities, the systems, ready to go for 283m tons, then 333m not on a just-in-time basis but in advance of that, so that we can fully take advantage of that infrastructure when it's ready to go, and ramp up the capital as quickly as possible.

Now, one could say, well, that's -- doesn't that sound like part of the project and shouldn't that be capitalized? We run, I think, a conservative balance sheet, and we do take the appropriate thing. It's very difficult to distinguish that type of work from the normal type of hiring you would be doing at the operation. So I think it's appropriate for that to go into the P&L, but we have been trying to isolate that from the P&L. But I would expect that that will be something that you will see as we go through the ramp-up stage of -- particularly in the Pilbara.

And then I think the -- in terms of the one that is probably the most challenging is the ongoing input pressures. I think, again, to some extent these are driven by the market, so, when the markets rise, they will rise. But I'm more concerned about, say, labor increases, increases in rates of royalty, in new types of tax imposts that could get themselves baked in, and they'll be there in good times and bad. And all I would say, and certainly from our organizational perspective, what we are focusing on is the fact that we can't just accept them as they go because we'll then run the risk of a burdened cost structure in a different type of market circumstance. So we've got to focus on operational improvements, we've got to focus on innovation, and most importantly we've got to focus on individual productivity.

So a very important point, particularly from the Australian perspective is, as we see stepped-up pressures on IR and industrial relations, if we -- our highest-paid market is the Australians. We pay more, on average, to Australian wages than any other country in the world. It's got to be matched with higher productivity. So, higher wages, higher benefits, have got to be matched, side by side, with higher productivity, or ultimately, over time, those markets get themselves uncompetitive and priced out of the position. I don't know, Guy, if there's anything more you want to say on that particular chart?

No, I think you've covered it very well, Tom. Mozambique?

Mozambique. I think, right now, the emphasis is, let's get the first production out of Benga as soon as is reasonably practical, and let's look at the options for expanding that as soon as is reasonably practical. And we're right in the midst of strategic production planning on Zambeze. Again, we are now at a point where we're outside that bidders period, but I think, before -- I don't want to preempt what the engineering is that's currently going on in the ground. As I've said, it is a tremendous resource. We've got to look at the right infrastructure solution. I suspect that infrastructure solution will have a component of public-private partnership. Again, that seems to be something that's supported by the Mozambique government. So they'll be engaged with other stakeholders as we come to that final infrastructure solution, but, again, the resource is there and the resource is worth the effort to take time and get it going, while we focus initially on the ramp-up of Benga.

Paul, you had a question. Yes.

Yes. Paul Young, from Deutsche Bank. Two questions. First one is on your transformation of the Aluminum division. I'll ask in a different way. Your EBITDA margin for the first half was around 20% and it was flat year on year. You have stated you want to increase EBITDA by $1b. I presume that's on a half basis. So that would take your EBITDA margin to 30%, so how do we get it to 40%? Or should I say, what component is expanding your better-quality assets, and what percentage is actually higher prices?

The second question I have is actually on sovereign risk, and your acquisition strategy. Now, you did touch on resource nationalization. But look at what's happened over the last year, with having to make that $700m payment to the Ghanaian government for what should be, I guess you could term, a fiscal stability payment. And then there is also discussion now of the government of Mozambique potentially taking part-ownership in resources in Mozambique. So, how does this change, one, your acquisition strategy towards Africa? Or has it simply, I guess two, lifted the required hurdle rates on these projects?

Thank you, Paul. First of all, on Aluminum transformation, I feel that, actually, the efforts on Aluminum transformation, the key capital projects which I've already referred to with Jacynthe, and the work in terms of really focusing the portfolio on the highest-quality piece of the assets, are all not quite equal but they're all materially important to that 40%. And I want to also say that, a year ago, I actually put that 40% out there on an aspirational basis for the team, but also externally. And now, over the past 12 months, I've been very encouraged by the fact that the team has, under Jacynthe's leadership, has not only focused on recognizing it's aspirational, but it's got to be something that they build into their planning and also their base-case performance expectation. So, again, what we are doing is those things which are prudent and those things that are in what I would call a long-term pricing environment, to make that happen.

Over the past 12 months, I think we've seen industry cost pressures bring the long end of the curve up to a higher level. So, what we've -- while we've enjoyed the higher LME price, we haven't seen the full benefit of alumina price flowing through margins, because some of those industry cost pressures, and particularly coke, pitch and caustic, were those that traveled through the entire cost curve. And I think, as we look forward, we're just going to -- I would expect to see that there'll be components of the industry cost curve, particularly around energy, which will disproportionally affect some other parts of it. But, again, we're not looking at what I would call anything that's out of the range of what I'd say is the longer-term LME price environment for aluminum. But all three of these have to hit, to get to that 40% EBITDA target.

In terms of sovereign risk, I don't think there's a single country in the world where we're not dealing with sovereign risk, in one way or another. And I think that we are seeing an environment where governments have a decreasing range of fiscal challenges, debt challenges, budget-balancing challenges, populist challenges. At the same time, our industry and our sector is doing quite well, and I think we have to be realistic about that.

But we also have to recognize that we have to educate everyone that part of the benefit of the resource sector would be the fact that, as we make long-term investments, we can be job-creation engines for years and years to come; and that we're more likely to make those investments in fiscal and political regimes that are stable for those types of long-term capital infusions.

And -- so that's, again, a key part of why feel it's very important to do everything we do on a transparent basis. We do subscribe to EITI. We subscribe to open, transparent taxes. We've actually been the first of the big mining companies to publish our taxes on a country-by-country basis and, again, educate and inform everyone about the benefits of stable fiscal regimes, leading to stable investment regimes, leading to more spending.

Certainly, as we look on a country-by-country basis, we are very realistic about what are -- what the regimes look like and what types of investments we make as a consequence of that. Certainly, we have a very good relationship with governments in Mongolia, of Guinea and Mozambique, and we work quite constructively in all cases, as we do with every other government around the world. But I'd say that resource nationalism is probably, from a strategic standpoint, one of the largest sector challenges we face at the moment, and probably for the next few years.

Perhaps I could add that, while it is true that we face sovereign risk in all countries, the great majority of our assets actually sit in OECD countries, point number one, and that will remain the case for many years. The second point, in answer to your question about discount rates is, of course we require a higher return from riskier-looking environments, but we need to be thoughtful about how we might mitigate those risks and the time at which assets are most at risk. So we're thinking a lot about that and, in particular, thinking about how to mitigate risk. So, shall we go to the next question. Yes?

Hi Tom, Guy. Lee Bowers, from Macquarie. I had a couple of questions. The first one just relates to the progress of your labor procurement efforts up in the Pilbara. It's -- I notice, in the presentation, you've highlighted that you're looking for the site count to basically double into the second half. Things are on time and on budget, right now. But, clearly, the critical path items start to emerge when we really start to scale up, which is the point you've made. So I'm just wondering if you can provide a bit more color on those efforts.

And the second one relates to capital management and the broader view of it. I'm wondering what sort of signals we're meant to take out of the last few buyback announcements, in the sense that the first one was structured over -- basically to the end of 2012, and you've bought back at more than twice the rate to the current point. And then this one basically takes us, on the rate specified, just past the next financial result. I guess it's just interesting from the perspective of you name, within the presentation, the fact that you've invested $10b. I guess I see it a little bit differently. In my mind, you've invested more like $12.3, when I include the stock that you've bought back, certainly on the basis of what we value it at, and I think what most people in this room and in the room in London value it at, as well. So perhaps just a bit more insight into your thinking there would be appreciated.

Tom, do you want me to try and handle the second question, if you'd like to handle the first? Would that make sense?

Yes, thank you. The -- well, it is certainly a challenge to fill all the skilled positions, all the operating positions, all the construction positions in the Pilbara at the moment. And actually, given that a number of the flagged projects in West Australia haven't actually been fully kicked off, in some cases they are still in pre-approval stage, not just in mining but also in terms of some of the offshore gas projects. I suspect that the labor environment will even get tighter in 2012 and 2013. So we do recognize that an early-mover will get the advantage, in terms of bringing those skills in, bringing the people in.

I visit sites on a regular basis, and you can't help but notice that construction camps, that fly-in fly-out camps, that the town sites are all in much better shape than they were in the past. We've got to not only compete in terms of the wages and benefits, but also in terms of the quality of the accommodations, the quality of the food, the living experience we can give for people that are actually working in those areas. We have to do -- we have to put a lot more effort into -- some of this gets built into our cost structure, the cost of hiring and make sure we recruit the right people.

To some extent, the decision we made to accelerate the 333 was to, essentially, match construction contracts together. So, rather than get into a situation where we were de-manning construction camps in 2013 and then waiting six to nine months and then re-manning them in 2014, we recognized that providing stability of a construction camp actually provides us with a better position in that overall environment. I can't say it's easy but, with the team in Perth, the team in the Pilbara, they are an exceptional team. And I have confidence that Sam and that team will be able to do what's required to ensure that we have the people in place.

On the capital management signals that you asked about, I guess we do see it slightly differently from you in that we wouldn't say that we've invested $12.3b, in quite the same sense that you imply. What we are saying is that there's a balance. And the balance needs to be struck between, -- as a first priority we think it's our job to invest in high-quality mining and metals opportunities, whether they be organic or M&A. When we have exhausted those opportunities, then, within the constraints, as I said, of the dividend and the single-A target, then we need to return cash to shareholders by whatever the most efficient means may be. And that's what we've done, and we did it more quickly than we originally said.

In other words, we have bought back $3b at a pace that might have, compared to our original announcement, have taken longer. We've done that because the surplus cash was greater than we anticipated at the moment that we made the announcement. Now, we have chosen to maintain something like the same run rate, and, if we were to do that, it would be completed at approximately the end of March. Now, this is all subject to market conditions. We do see it slightly differently from pure investment in the Pilbara. It is a different proposition, we believe, but we do think it's an appropriate balance, and it is -- that's what we struck in selecting this time period and this amount of money.

Guy, thank you. I'm going to now bring it over to the phones, if I may, and see if there's anyone that's standing by for a question from the phone lines.

Thank you, sir. Our first question will come from Clarke Wilkins, of Citi. Please go ahead; your line is open, sir.

Hi, yes. Just a question in regards to the Queensland coal, you said operation is not quite back at full production yet. When do you expect those operations to be back at full production in the second half of the year?

Clarke, again, I think that's going to be a progressive return over the course of the second half. And, in some cases, we have areas where there still would be water in the pits, where there would be exposed coal ready to go. In other cases, we had a situation where we had to defer stripping during some of the wet weather, and we have got to get caught up on those stripping before we get into those new coal areas. So I would say it's a progressive ramp-up over the second half. Next question?

Our next question today is from Lyndon Fagan, of RBS. Please go ahead.

Oh, hi there. My question is on the dividend policy. You mentioned that it would be reviewed significantly next year. I was wondering if yield comes into that equation, and whether the progressive nature might be looked at in favor for something at a sustainable higher level?

Guy, over to you.

The words that I used were very carefully chosen, and the answer is we will look at the dividend in February. And I'm not making any commitments about it at all. We look, of course, at yield, but you have to realize that's a function of the share price, which -- we don't know what that will be when we come to February. But probably the most important question that we consider when we set the dividend is, considering that it is a progressive policy, that the level of the dividend, if there is to be an increase, has got to be able to withstand any shock in the future. We wish to be completely dependable in future, where the payment of that dividend is concerned. So we don't -- we need to look beyond today's very strong conditions, and what I think will probably be strong conditions also in February, and say to ourselves, well, what are the most difficult conditions that we can imagine, and then set the dividend according to that. And so I think that this is a very strong business. We've got very low-cost assets, very large assets that generate cash, even in the worst possible conditions.

So we can certainly afford to have this progressive dividend policy, but it's those considerations that go through our minds as we set the dividend. So I don't think we're going to look at the notion of the progressive dividend and adopt some completely new type of dividend approach. We have said, for years, that this is the intent of our dividend policy, and we most recently committed to it, for example, in the rights issue that we had. So, at the moment there's no intent to look completely, root and branch, at a different form of dividend policy.

Thank you. Operator, one more question from the phone lines, please.

Our next question today comes from [David George], of Bell Potter Securities. Please go ahead.

Good evening, good morning. Just back on Aluminum, the total asset value of the business, $40b, out of a total Rio asset value of $73b. So we're all aware of the low returns that you get on that large chunk of your asset base. If I move to your 40% EBITDA margin target, and let's say you're doing that in this period already, and annualize that as a rough estimate, it translates through to that at 12% EBIT over asset return. So is that enough, the 40% target? Could it mean that you actually have to look at further write-downs or impairments in that asset value of your Aluminum business? So that 12% really pales against some of your other businesses, particularly Iron Ore.

Guy, you want to take that?

Well, I think it is difficult to compare it to Iron Ore, right now. I do understand that. We have given an EBITDA target in margin terms; we haven't given a return target. And I haven't checked your calculation, but it may very well be in that sort of order that you've come up with. I can assure you that we look at all assets, every year, when there's been a triggering event, to determine whether they're being carried at the correct value. And, if they're not, we take an impairment or reverse an earlier impairment.

In the case of assets which have a lot of goodwill, which is the case with Rio Tinto Alcan, we look at that annually, in all cases. So we'll do that this year, as we have done in all previous years. But of course, taking a hit, if that's what we chose to do, to the book value of Rio Tinto Alcan, would make no difference at all to the EBITDA, which is basically a cash measure. And it's that margin that we're trying to increase, by the various methods that Tom outlined in detail. And I think that's the most important thing. We've got to focus on getting the performance of the business back up, through operational improvement, through investment and through divestment. And that's what we're focused on doing.

David, I might just say that we set that 40% target on the basis that, over long periods of time, we've noticed that product groups have to be generating, on average, a 40% EBITDA margin in order to competitively attract capital, compared to other opportunities. If you look at this period, I think we're roughly a 45% EBITDA margin, and that's been certainly benefiting from Iron Ore, which is probably plus-70%. But yes, I think both the Aluminum and the Energy groups are in the 20%s. So, again, what we see over time is there is a cyclical nature. Different businesses -- over long periods of time, different businesses are doing better than others, and not necessarily the same one every single decade. So that drove the 40% target, but, as Guy said, that was predominantly to generate cash returns. I think we have just a few more minutes, but I'd like to maybe get something in the audience here in London, please.

Tom, hi. It's Andrew Keen, from HSBC. Two questions, one on acquisitions. You previously used some very carefully chosen words to say that you would look at things in the low single-digit billions. You just spent $4b, which I guess is close to the limit of that definition. I wasn't sure whether you were saying per deal or in total. But can you give us some idea of your appetite for adding more growth options from where you are at the moment, given the fact that you're now at $11b to $13b in CapEx?

And just, secondly, a very specific question, because you spoke about sustaining CapEx and the way that that's moved. Can you give us an idea of what a proper normalized sustaining CapEx is for this business?

Yes. Okay, I'll maybe make a comment on acquisitions. And then, Guy, if you want to supplement that on acquisitions, but maybe if you could give us something on sustaining capital and I'll supplement that. Now, first on acquisitions. What we had said over the past year or so was small to intermediate size, and I think that Riversdale was frankly fit for purpose. It was a good opportunity. It represents what we see as a first-tier asset. There are not that many out there. As I look around at the suite of investment opportunities and things that are being considered, most of them are assets that have been around for the past 10 or 20 years. They're on their third stage of being shopped, in some particular cases, or there may be some opportunities. They don't necessarily meet the same -- so they won't necessarily meet that same successful screen as Riversdale would have.

So I think, if I -- first and foremost I have to say, what do we have in-house? And, if I look at our in-house assets, I'd say that we have the best -- as far as I'm concerned, the best in-development Copper project in Oyu Tolgoi. We have some of the best, now, coking coal projects underway in Mozambique. We have an incredible suite of Iron Ore opportunities, of course led by the Pilbara but also, as I talked about, IOC, with the north shore of Canada and also in Guinea. These are very strong options within the Company, and I'd actually want to focus on those strong opportunities as they are things we know and we know what we can do to bring value. We will, of course, keep our eyes on the spectrum out there, but it's not that there is a rich spectrum of opportunities outside. Guy?

Well, on M&A, I think the key point to make, which you've kind of made already, is we're entirely focused on value and focused on quality. In addition to which, we're very focused on execution. And quite a lot of desirable assets are difficult to get out of the hands in which they sit. It is very difficult to execute those transactions, as we can see from our own efforts and from the efforts of others. It doesn't mean we're not going to try.

On the question of sustaining capital, we've slightly changed our definition of this, in recent times. And the reason we've done that is that the Pilbara machine is essentially causing us to open and close mines at a very great rate in the coming years. And so we're reclassifying the opening and closing of mines as sustaining capital, which means that our sustaining capital is at a level of approximately $4b, plus or minus, in coming years. And so what we'll do in the seminars that we'll be holding later this year is to give a bit more detail about that. But I think you'd have to understand that many people would regard us opening a mine as normal organic capital but, because of the nature of the infrastructure being so important in the Pilbara, we tend to regard it as sustaining. But $4b would be the sort of level that you should think about.

Yes. A specific example of that would be Western Turner Syncline, which was a new mine that we put in place last year and that was designed to basically ramp up as (inaudible) price naturally began to ramp down. So, a good example -- a specific example of that type of capital. One -- oh yes, sorry. Here, yes, thank you.

Thanks. Just a question on the --.

Can you give your name and affiliation, just for the audio?

Sorry, it's [Terry Arsenal], from (inaudible.) Some of the updates that you've given, on Oyu Tolgoi for instance, the production schedules, there are some milestones though, not only for the start up or the ramp up in the future, given the size of the projects. What's the timing of these key milestones of the power, transportation, smelter contracts, their own smelter, for that matter, that they're talking about, and also the project financing, which has not been completed yet?

Yes. I think, again, many of those questions, also regarding finance, are probably best-directed to Ivanhoe and not to us. But let me just talk about it from a project-specific basis. The first priority is to develop the open pit and the surface structure for that open pit; that's the mill and the various surface facilities. And that is, again, as I've said, nearly a third of the way there, and it continue to run on schedule.

We will, over this period of time, need to have a power -- an electricity solution, particularly for the mill, which is -- mills are normally very heavy power consumers. And there I think there'll be -- ultimately there'll be a culmination of, probably, Mongolian power production driven off Mongolian coal. By the interim, I think it's going to be requiring Chinese power that's been exported into Mongolia. The power line is being built on the Mongolian side of it; it has not yet been done on the Chinese side of it. So those will be things that will need to be solved, and the teams are working very hard on those particular areas in this period of time.

I think, in terms of the pace of underground, it's continuing to develop as we would expect. And, again, we're going to be motivated to bring underground production in, but properly, because that's where the highest grades are going to be coming into the production picture. Additional facilities, smelting on-site, etc., I would not see those as critical path milestones, and there may never actually be a need for a smelter on site. It may be part of the project; it may be something that's separate from the project. These will be the types of options that we'll be able to consider in the future.

So again, the first stage, the key milestones would be the open pit, the surface facilities, getting the power for those surface facilities. And then, once that's up and running, which is -- we've said, 2013 commercial production, then being readying for the next phase, which is going to be oriented around getting the underground -- the higher grades from the underground into that mill complex. Yes, back here.

Thanks, Tom. Nick Hatch at RBS. Returning to the shareholder returns theme, there are two mechanisms you've used in the past, namely the off-market buyback in Australia and special dividends. Can you outline your current philosophy on those?

Guy, please?

Well, Nick, you're right to say we've used both of them. In relation to the off-market buyback, that worked at the time we did it because the delta between the limited and the plc share prices was such that it made good financial sense for an Australian investor to do the buyback. It would, at the present delta between the two prices, probably not make sense for such an Australian shareholder to buy back the shares, just because that gap has widened so much. We do keep a very close eye on that, because it certainly is an option. And we recognize that there would be those who would want to do it if the circumstances were right.

The idea of a special dividend is occasionally discussed. To date, we have felt that the buyback of plc shares is the most efficient means of returning cash to shareholders, but you can be sure that we do keep these other ideas in mind and, from time to time, look at them again. But the important thing is that we're returning capital to shareholders on a pretty major scale.

Thank you. I'll just ask Guy if you can just take one question in Sydney, and then I've got an appointment with the TV studios to get my face powdered. So, over to you.

Tim?

Yes. Tim Gerrard, from Investec. Just a quick question on the TiO2 feedstock business. Can you give us a little bit of an idea on how quickly you might be able to grow that, or put it as a priority? And I noticed you talked about Madagascar being up 30% on last year's. Can you just say -- tell us what that actually means, in terms of tons? And, within two or three years' time, Madagascar will be at full capacity. Can you, again, just remind us what is full capacity for Madagascar?

Guy, I'll talk about the broader growth objectives for TiO2. Maybe if you could then be ready to talk about the more specific numbers that Tim's asked. So I'd say, on TiO2, we have a very strong market position, but also, I'd say, technology position and resource position. So I would see ourselves leveraging those technology capabilities and the resource opportunities.

We are in discussions with the government of Quebec, where, of course, our Sorel assets are located. And again, that's been an important part of the Quebec industrial economy. That -- I think there are going to be opportunities to look for, working with the government of Quebec, on their Plan Nord, or Plan North, and leveraging some of their government objectives with our business objectives. So I think that there are going to be opportunities to expand both feedstock and smelting capacity up in Quebec.

I think we'll also have large resource positions in Mozambique that we'll be able to bring in and consider opportunities for, in addition to those in Madagascar. I think, with respect to South Africa, we've got to look at the overall power position and the availability of power, because, again, the smelting of TiO2, or TiO2 slag is a very power-intensive activity.

On Madagascar, Tim, I'm afraid I haven't got all the data at my fingertips here, but I believe we were about 10% below target, in terms of our production, in the year to date. The programs to improve the mining at QMM are well underway, and I understand that we -- we're looking at different mining methods, including dry mining, which is currently going on there. And we should be able to look at the development of the Phase 2 at some point following 2015.

Yes. And Tim, I'm just going off memory, but I think what we've said is the rate of capacity for QMM that we'd like to get to is 750,000 tons per year of TiO2 concentrate.

Thank you very much. Again, I appreciate all your questions and your interest. A very strong set of numbers. It was a challenging weather environment. The operations and the organization pulled through quite nicely. I'm very excited about the state of our current businesses, the long-term position of our markets, and certainly I think we have some premier growth opportunities to leverage off in the coming years, and not only in the coming years but also the coming decades. And certainly we are continuing to ramp up our capital spending accordingly, but also mindful of the balance that we've talked about. We've accelerated and increased the size of our capital buyback program. Thank you very much.