力拓 (RIO) 2011 Q4 法說會逐字稿

So, good morning, everyone here in London, and good evening to those of you joining us from Australia and welcome also to those of you participating via the webcast.

Tom Albanese is with me here in London and Guy Elliot is presenting from Melbourne.

Rio Tinto has performed strongly in 2011.

We have today announced another set of record-breaking underlying earnings and cash flow numbers reflecting favorable albeit increasingly unpredictable markets.

This is, in my view, an excellent outcome.

But I also want to acknowledge the significant impairment charge that we've taken in relation to the aluminum assets.

This industry continues to be affected by oversupply and rising raw material costs but I'm confident that we are doing all we can to turn this business around.

On a more positive note, we were able to return $7.7b to our shareholders during 2011 through dividends and our share buyback program which is now almost complete.

Looking forward, I remain cautious about near-term prospects for the global economy.

I said to you six months ago that policymakers would grapple over the substantial economic imbalances that exist and that, of course, continues to be the case.

But looking further ahead and beyond the current volatile markets, the medium- to long-term picture remains positive for markets in metals and minerals with strong growth from emerging economies set to continue.

The quality of our Tier 1 assets combined with our superior growth options and our positive long-term outlook gives us confidence in the sustainable long-term cash-generating abilities of our business.

For this reason, and recognizing the importance of sustainable long-term returns to shareholders, we have today increased our annual dividend by 34% to $1.35 per share.(Sic-see press release) So that's all from my side.

Thank you and I hand you over to Tom.

Thank you, Jan.

And before I start talking about quality of assets as you said, Jan, the quality of the video feed is not so good so Guy when he gives his remarks will be sort of coming in and out but you can be sure that the sound -- he can hear us and we can hear him.

So let's speak about our full-year results.

Before I speak about those results, I'd like to start with safety.

Last year, there were six fatalities at Rio Tinto-managed operations.

I deeply regret each of these tragic deaths and the devastating impact they've had on their colleagues and certainly their families.

And I am certainly prepared to redouble any efforts to improve safety and tackle the root causes of all those accidents and the risks.

This year we will focus on critical risks and some of the more serious accidents.

But I do think, as a sector, we should recognize we're seeing some new risks out there in the safety front.

As the industry continues to expand to meet this increasing demand, more new people are coming on board.

We're seeing higher levels of turnover and higher levels of churn.

We need to improve how we train new employees to learn safe working practices and how they can play their own part in keeping a strong safety culture.

So this year, in addition to everything else, we will be focusing particularly on the front-line leaders who are so important in maintaining a safe workplace for an expanding workforce.

The road to zero harm is challenging but I'm not satisfied until our workforce is entirely injury-free and harm-free across the Group.

So, let's now turn to the 2011 results.

We have achieved record underlying earnings, record EBITDA, and record operating cash flows.

This was despite the severe weather conditions in the first half and the fall in commodity prices we saw through the second half.

Our Pilbara iron ore business broke annual production and sales records and shipped record volumes in the fourth quarter.

Not -- of course, as Jan said, not all of our divisions are enjoying those tailwinds.

At our November seminar, we outlined our refocused aluminum strategy in response to the uncertain evolving macroeconomic conditions.

As we did flag, we've had to impair some aluminum assets, which have been written down by $8.9b.

We're working hard to improve the performance of our aluminum business which I will come back in a moment.

Although we have made progress, I'm not content with our overall cost performance.

Cost increases are an industry-wide problem and I'm determined to tackle this at Rio Tinto and accelerating a number of productivity efforts.

We're advancing our industry-leading portfolio of growth projects.

And it's worth highlighting the Pilbara as the highest-quality iron ore expansion in the global sector.

Pilbara 283 is now fully approved and on track to reach its milestone by the end of next year.

We've brought forward plans for the next expansion by six months, raised them to 20m tonnes -- to 353m tonnes per year.

Subject to Board approval, we will reach this capacity in the first half of 2015.

This is in stark contrast to the broader iron ore industry trends, which have seen some projects subject to significant delay and increased capital intensity.

We successfully completed a number of acquisitions through the year which complement our organic pipeline and give us further growth options.

We now have significant Tier I resources in coking and thermal coal in Mozambique and uranium in Canada.

And earlier this year we moved to a majority stake in Ivanhoe Mines, further demonstrating our commitment to the safe and successful development of the Oyu Tolgoi Copper Goldmine.

Of course, just last week, we announced that we will be doubling our stake in Richards Bay Minerals.

And, as Jan mentioned, we have been able to balance this investment in growth with the return of capital to shareholders; and we have today increased our progressive dividend by 34%, demonstrating our confidence in the long-run outlook for this business.

Let's now turn to each of the product groups, starting with Iron Ore.

The Iron Ore business has turned in another very impressive performance with another year of record production and shipments at our world-class silver operation.

Of course this was underpinned by the highest-ever EBITDA and underlying earnings for the product group.

In line with the broader markets, the second half of the year saw high levels of volatility in iron ore pricing, which led to a shift in the shorter term in our sales portfolio with about 60% of our customers moving away from the quarterly lagged price.

We continued to sell everything we produced through this period, and we achieved record prices on average in 2011.

We continued to work closely with our customers in order to align our resource base with customer needs, and ensure the value in use of our products as recognized by the market.

On the supply side, we estimate that about 45m tonnes of iron ore was removed from the market in 2011 due to adverse weather in the Pilbara, lower-than-expected Brazilian exports, and rising export tariffs in India.

We exceeded our production targets for 2011 and increased our annual capacity in the Pilbara to 225m tonnes, completing our first debottlenecking project on time and on budget in the first quarter last year.

This incremental capacity, together with the continued productivity improvements from our industry-leading operations center, helped us achieve these records.

It is important of course to remember we're currently in the middle of the cyclone season in Western Australia, and already this year we've seen some disruptions and we'll keep a careful eye on all of the weather forecasts.

At IOC, concentrate production was maximized in the latter part of 2011 in response to market demand.

The operational leadership shown by our Pilbara team is exceptionally important, and all the more impressive when you consider that we're also well underway with the major expansion.

At Cape Lambert, all dredging for the expansion to 283m tonnes is complete and engineering is at 82%.

We've just approved the construction of Nammuldi Mine, and so this 283m-tonne expansion is now fully authorized.

And of course, studies are progressing well on our accelerated and enhanced expansion to 353m tonnes.

We've already ordered the long-lead items and just this week we approved $1.2b for further early works.

Cape Lambert, as shown in the picture here, continues to be the best expansion opportunity in the industry with embedded optionality for further growth.

We continue to drill out the resource base in our Tier I Pilbara ore body, and over the next five years we plan to drill another 600,000 meters per year to add to our 2.9b tonnes of iron ore reserve, in line with our multi-decade mine planning.

And our global growth options are not limited to the Pilbara.

At our Canadian operations, the first stage of the concentrate expansion project is currently being commissioned.

And at Simandou in Guinea, solid progress has been made; early works constructions ramping up, including the construction of roadworks and the development of early trucking options.

Moving onto Aluminum, at start -- after starting the year with a tight physical aluminum market, global economic concerns took hold in the second half, leading to prices falling below $2,000 per tonne.

Prices have recovered a little in early 2012 and are now trading about $2,200 per tonne.

In China, alumina prices have historically traded at a premium to the LME and have been less volatile.

Despite experiencing a rising cost of electricity, higher-margin cost smelters in the coastal and central provinces are able to take advantage of this higher Shanghai price premium.

This has also led to a further expansion of smelting capacity at the remote but coal-rich provinces in the west, particularly in the Xinjiang Province.

Outside of China, we estimate approximately 2.5m tonnes of smelting capacity is in a loss-making position at the current prices and input costs.

Further capacity reductions are necessary to move the aluminum market to a more balanced state.

The impact of higher raw material costs were also felt in the second half.

The Japanese earthquake had a global impact on caustic soda prices.

Costs for other raw materials, such as pet coke, remain high, and even as the price of aluminum fell.

The squeeze effect has led to lower margins across the industry.

As we did flag in November, our results were impacted by this margin squeeze in the second half.

But the transformation program continued at Rio Tinto Alcan and delivered real benefits during the course of the year.

Overall, we did achieve a full-year EBITDA margin of 20% despite these headwinds.

Looking further ahead, we continue to believe in our long-run outlook for aluminum demand growth.

The Chinese output of primary aluminum is still tracking internal demand.

Production has shifted more towards the northwest where stranded coal is being used to generate cheaper electricity.

We had not previously anticipated the extent of this shift in new smelting capacity in the west of China.

These pressures, together with the strengthening of some currencies and escalating raw materials, may continue to squeeze our margins over the medium term.

I continue to believe a 40% margin is achievable, but I can't predict when the prices will recover, or when raw material costs will improve.

So that margin -- so when that margin can be achieved.

So we are focusing all that we can do in areas that we control to improve the performance of our aluminum business and the quality of our aluminum portfolio.

In November, Jacynthe outlined our strategies do just this.

We've had to make some tough decisions, such as the identification of a number of businesses that no longer fit with our strategy, nor our portfolio, and so will be closed or divested.

And the result will be an aluminum business that's smaller than it is today but one that is of higher quality.

Programs are underway to deliver $1b of incremental EBITDA from business improvements.

And we are focusing investment on the high return creep and modernization projects.

We'll be longer in bauxite and aluminum, taking full advantage of our exceptional Tier 1 bauxite resources.

And we'll have a portfolio of modern, hydro-based smelters supported by leading industry technology.

This is absolutely the right strategy but it has required us to re-look at the value ascribed to our aluminum assets.

And as a result we have recorded an impairment charge this year, which Guy will speak to you in more detail.

The current environment of the aluminum industry is tough.

Rising LME inventories, high raw material costs and strong currencies are leading to less investment being allocated to growth projects.

But I think the long-term outlook remains intact.

And my focus to ensure that we've done all we can to optimize our position when the industry improves.

And I firmly believe we're on track to secure our position as the lowest-cost aluminum producer in the industry.

Turning now to Copper.

As we have been saying for the past two years, the physical tightness of copper is leading to copper continuing to trade significantly above the marginal cost of production.

While supply and demand factors appear to support the price level, near-term price movements are highly geared to global macroeconomic indicators, the expectation of continued supply deficit and the relative strength of the US dollar.

In 2011, the copper market was in deficit with the shortfall in supply met by drawing down supplies, mainly in China.

We expect the market to continue to be finely balanced in 2012.

New global copper mine supply is expected to come online in 2012.

However, experience has shown that project delivery and ramp-up timelines have taken longer globally than expected.

Interruptions from industrial action and strikes, along with continued industry-wide declines in grades, will put further pressure on new supply.

We produced less copper in 2011 from an anticipated decline in grades at all three of our major operations.

But it's also important to remember the benefits of our gold exposure in these uncertain markets.

Although we don't have any primary goldmines, and gold byproducts are likely to decrease in 2012, we are the one of the larger gold producers in the world and the biggest among the diversified miners.

And it shouldn't go unnoticed that Grasberg and Oyu Tolgoi are two of the world's largest gold resources.

We do expect copper grades to recover in the second half of 2012 and from 2013 we'll also see new production coming from Oyu Tolgoi in Mongolia.

Organic growth will be offset by the absence of production from Palabora, which we intend to divest as it is no longer in line with our strategic focus.

Just a few weeks ago, and shortly after the expiry of the standstill agreement with Ivanhoe, we -- our shareholding in Ivanhoe increased to a majority 51% interest.

The project itself has made good progress.

And as you know, discussions continue on securing a power source for the project which is needed to remain on schedule.

And the feasibility study to Phase II to develop the underground block cave mine continues to make progress.

We're also, of course, moving forward with our other Tier 1 Copper projects.

La Granja received pre-feasibility funding to evaluate a three-staged phase development using conventional milling and leaching.

The feasibility study at Kennecott Utah Copper to extend the mine life to 2028 is expected to be complete in the first half of this year.

And again at Escondida, project approval for OGP 1 is targeted for the first half of 2012.

The resolution project for land exchange took an important step in 2011 with the clearance in the US House, and we now expect it to move to the US Senate.

While the land exchange process continues, we did approve a $103m expenditure with our partner BHP, and the shaft 9 development is expected to continue.

So again now let's turn to our Energy group.

In 2011, coal markets were volatile with both global supply and demand disruptions occurring at different times throughout the year.

After achieving near-record prices in January 2011, following Indonesian and Australian supply-side disruptions, global thermal coal markets experienced broad price declines through the remainder of 2011.

This decline reflected weaker global economic activity and strong supply growth.

However, prices remained well supported.

While the uranium market is likely to be subdued over the next few -- five years, uranium will continue to form an important part of the overall energy mix, with long-term demand expected to be driven by strong growth in China.

Our energy operations in Australia recovered well from the effects of significant wet weather that occurred extensively in Queensland, New South Wales and the Northern Territory in the first quarter of 2011.

Disruptions to the supply of explosives in Eastern Australia has impacted overburden removal at some of our New South Wales operations, as it has in the rest of the Eastern Australian mining sector, with a consequential effect to the level of in-pit inventories.

While there is no overall significant impact to the Australian coal production in 2011, there will be some impact in the first half of 2012.

As part of our continuous program to improve our portfolio we just completed joint acquisition of the minority interests in Coal and Allied in December, in partnership with Mitsubishi.

And this has resulted in a simpler ownership structure with greater flexibility and access to funds for growth.

At ERA, extreme wet weather caused the prolonged suspension of operations in the first half.

But the operations did recover well in the second half.

An AUD500m rights issue was completed in December, which will allow ERA to fund its strategic water management plan, closure obligations, and the Ranger 3 Deeps exploration decline.

Our Rossing grade will progressively improve over the next two years as we access lower benches in the mine.

Meanwhile, work continues on excavation drilling to extend mine life beyond 2023.

Our Energy group is now entering a new phase with many prospects for value-adding growth in the near term and beyond.

At Australia, our target is to increase annual coal capacity to 73m tonnes per year by 2015.

This growth will be underpinned by the development of a new mine at Mount Pleasant in the Hunter Valley, which is currently in feasibility study.

In the short term, we are increasing capacity in existing operations, such as the Clermont mine and the brownfield expansions in the Hunter Valley, Mount Thorley Warkworth and at Bengalla.

These will lead to an increase of about 15% to 20% in total Australian coal production in 2012.

The Kestrel mine extension is well advanced and scheduled to start production in 2013, with incremental annual production of around 1m tonnes.

Infrastructure will be a critical factor in the delivery of this growth, and our position for the future continues to strengthen.

In New South Wales and in Queensland, investment has been made in the coal supply chain to meet this increasing demand.

During the first half of the year we completed the acquisition of Riversdale, which has now been renamed Rio Tinto Coal Mozambique.

There's a good photo it in the upper side of the plant under construction at present.

This does provide a substantial Tier 1 coking coal development pipeline in the emerging Moatize Basin.

Initial production from the Benga project is scheduled for the first half of this year.

Following the Riversdale transaction, we completed the acquisition of Hathor in Canada.

Now, these encouraging uranium exploration development opportunities are one of the highest grade uranium basins in the world.

With the forecast demand for energy and steel production over the coming decades, I have real confidence the high quality growth projects being pulled together by the Energy team will deliver excellent results over the long term.

Turning now to Diamonds and Minerals.

Demand for borates and titanium dioxide feedstocks held up well despite ongoing market volatility.

2011 saw continued tightness in Ti02 feedstock supply, which is expected to continue over the medium term.

Diamonds, diamond prices were strong in the first half of 2011 but the second half did see lower prices due to high inventories.

Long-term fundamentals for diamonds do remain strong with limited supply of new diamonds and further potential for diamond growth in China and India.

Diamond production did decline 15% overall due to heavy rains we saw due to flooding at Argyle earlier in the year, and maintenance shutdowns that we saw at Argyle in the fourth quarter in the processing plant.

The impact of the record wet season at Argyle, coupled with the continued strength of the Australian dollars, did result in the further $500m of capital be improved -- being approved to complete the Argyle underground project.

And we would expect to experience lower grades until the underground mine is at full production by 2014.

Earnings for our Iron and Titanium business did double in 2011 as we continued to replace its multiyear sales contracts with alternative pricing mechanism, increasing the business's exposure to market prices for Ti02 feedstocks.

At QMM in Madagascar, production steadily increased due to successful dry mining operations.

Full capacity is expected to be reached over the next two to three years.

As you know, we sold our talc business in August and have created new opportunities in potash through a joint venture agreement in Saskatchewan, home to nearly half the world's potash reserves.

And finally, just last week we announced we'll be doubling our stake in Richards Bay Minerals, a Tier 1 asset that we've been managing for many years, actually many decades.

Overall, each of our product groups have delivered solid results through 2011.

So with that I'll hand it over to you, Guy, in Melbourne, recognizing that you're working on your video quality but we can hear you and I hope you can hear us.

Thank you, Tom.

And good morning, everybody.

I can certainly hear you well and I hope you can hear me.

Let me start by taking a look at how our record underlying earnings were achieved.

It will come as no surprise that the primary driver has been price, increasing earnings by $6.7b.

By far the largest benefit came from iron ore prices, although copper and hard coking coal increases were also significant.

These benefits were partially offset by the impact of currency movements, notably the stronger Australian dollar.

These collectively reduced our underlying earnings by nearly $1 billion compared with 2010.

As previously flagged, lower copper and gold grades at Kennecott Utah Copper, Escondida and Grasberg have led to lower sales volume, which reduced our earnings by just over $0.5b.

This was partially offset by record volumes from Iron Ore as increased port capacity was brought online.

Continued cost pressure is evident throughout the industry and we are not immune.

The impacts of inflation and higher energy costs reduced our 2011 earnings by over $600m.

And, more importantly, higher cash costs reduced earnings by a further $2.1b, which I'll return to in detail in a moment.

During 2011, we progressed many of our evaluation projects, including Simandou, Resolution and La Granja, as well as our newly-acquired Mozambique coal project.

The effect of higher exploration and evaluation costs, together with the absence of gains on undeveloped property sales, lowered earnings by just under $800m.

And so, after the impact of higher non-cash costs and other items, our underlying earnings were $15.5b.

Turning now to net earnings, back in November we indicated that there would be some asset impairment following a deterioration of macroeconomic conditions and stronger currencies.

The valuation used for impairment testing is based on our assessment of fair market value less costs to sell, at the testing date.

This is determined using a number of reference points, including current industry share price multiples.

Strong currencies in some regions, high raw material costs, and rising LME inventory, are delaying growth projects for new aluminum capacity; and leading to much lower market values for aluminum assets than a year ago.

Given these uncertain macroeconomic conditions, the market valuation used for impairment purposes does not fully reflect the value of our planned EBITDA improvement, and the successful implementation of our growth projects.

The combination of these factors has led us to write off $8.9b of our aluminum assets in 2011, of which $7.4b was goodwill.

Elsewhere, there were net impairments of just over $400m in our Diamonds and other businesses.

This was largely due to the higher capital costs now expected for us to complete the Argyle mine.

Other exclusions included a deferred tax asset write-off due to changes in French legislation, and a number of other smaller items.

So, overall net earnings came in at $5.8b.

Returning now to costs.

As previously discussed, the whole of the mining industry is experiencing cost pressures and localized inflation far in excess of normal CPI.

Markets for raw materials remain tight as activity has increased across the industry.

This was particularly felt at Rio Tinto Alcan, as prices for caustic soda, coke and pitch have remained at elevated levels even in a softer aluminum market.

Reduced production volumes from lower copper and gold grades led to higher unit costs of production.

This effect will reverse in time as we anticipate grade recovery in the second half of 2012.

The exceptional weather experienced in the first half of the year also impacted our volumes, and as a consequence increased our unit cash costs.

And we have also incurred additional costs due to our investment in operational readiness as we prepare to bring on line a number of major growth projects, in particular in the Pilbara.

We are determined to tackle these issues and are accelerating a number of cost and productivity initiatives.

In order to combat rising raw materials costs, we are continuing to look at alternative supplies.

We spent approximately $1b in China in 2011, up from $0.5b in 2010.

Purchases from China include coke, caustic soda, rail cars and other supplies.

And we will also continue to mitigate some of these cost increases through our industry-leading investments in technology.

This will lead to increased automation and improved productivity across many of our operations in years to come.

Despite these pressures, we generated record cash flows from our operations.

And this was achieved with a decline in dividends from equity-accounted units, primarily due to the retention of cash within Escondida in order to fund its growth plan.

Momentum returned to our rate of spend on capital projects during the year, resulting in total capital expenditure of $12.3b.

We supplemented these investments with just over $6b of value-accretive transactions.

This included the acquisitions of Riversdale and Hathor, and the AUD258m we paid to increase our stake in Coal and Allied to 80%.

And we also increased our interests in Ivanhoe Mines from 40.5% to 49%; and participated in Ivanhoe's rights offering for a total consideration of $1.9b.

In January, we moved to a majority stake in Ivanhoe, taking our interest to 51%.

Let me remind you that our average entry price into Ivanhoe has been under $12 per share.

During the year we paid $6.2b of taxes, 50% more than 2010.

Of course, taxes are paid with a slight lag; we had around $2.5b of tax accruals in respect to 2011 that will be paid in early 2012.

These amounts relate to corporate taxes only; our total payments to government, including royalties, are much higher.

And this will be set out in detail in our tax transparency report, which we will be publishing in March.

We continue to balance investing in the business with a return in capital to shareholders.

During 2011, we returned a total of $7.7b to shareholders through the progressive dividend and share buyback program.

Overall, after taking into account interest and various other cash flows, we increased net debt by $4.4b to $8.5b at the end of December.

As I just described, capital expenditure ramped up in the second half.

Most of our projects remain on time and on budget in local currency terms.

There have been a few exceptions, such as Argyle and Kestrel, primarily driven by decisions made in 2008 and 2009 to slow down the rate of spend.

We expect capital expenditure of $16b in 2012, based on sustaining capital and major projects already approved.

This amount is likely to rise as we approve further projects, mainly in the Pilbara.

Looking further out, CapEx will remain around this level for several years as we complete a number of multi-year major construction projects.

This is a substantial program of investment, but one that we're undertaking in a controlled manner.

We are taking a phased approach to many of our major project approvals, such as our decision to expand the Pilbara in two stages.

This phased approach allows us to commit capital in a risk-measured way, balancing our capital expenditure commitments with the market environment and other potential uses of cash.

This is critical when managing an investment program in the tens of billions of dollars.

And it means that if market conditions were to rapidly deteriorate we can defer or modify subsequent stages.

Our capital spend in 2012 is well distributed, both geographically and by product.

Brownfield expansions in Australia, Canada and the United States account for the great preponderance of our planned spend.

But we are also investing in new emerging resource basins, most notably in Mongolia.

While I believe we have an enviable track record of completing our expansion plans on time and on budget, we recognize that it's becoming increasingly difficult for the industry to bring new supply to market.

This is well illustrated by the iron ore market where projected industry supply growth has consistently over-promised and under-delivered.

There are many different hurdles; technically challenging ore bodies, competition for skilled labor and higher stakeholder demands.

Given the challenges the commercial banks are facing, project finance has become more difficult to source for some companies; a situation that has worsened in the past six months.

Resource nationalism is becoming more prominent.

This manifests itself in many ways; one of the more visible in recent times has been the rapid changes in tax policy proposed by some governments.

Rio Tinto's approach is to engage with governments in the development of tax policy and to be open and transparent about the amount of tax that we pay.

These challenges altogether lead to increased risk and higher costs of capital; not just for project developers but also for host communities as investors seek stable, low-risk geographies for investment.

Rio Tinto is well placed to address these challenges through our strong balance sheet and our emphasis on sustainable development and stakeholder engagement.

So, to wrap up with our well-established and consistent financial strategy, our balance sheet is strong.

Within the parameters of a single A credit rating, our first priority for the use of our cash flows is to increase shareholder value by investment in high quality growth.

As I said earlier, we expect to spend $16b on capital projects this year, and we have a rich portfolio of opportunities ahead of us.

And we are committed to a balance of investment in growth and returns to shareholders.

As I've said, we returned a total of $7.7b to shareholders during 2011 through our progressive dividend and share buybacks.

The Board continues to see attractive and significant growth opportunities, and short-term uncertainty in the financial markets, particularly around the euro.

For these reasons the Board does not believe that it's appropriate to expand the buyback program at this time.

However, we continue to keep this under review.

While share buybacks are an effective means to return short-term excess capital, a progressive dividend provides sustainable and predictable long-term returns to shareholders.

It also demonstrates our confidence in the long-run outlook for our business.

Given this, we have now decided to raise our full-year dividend by 34%.

This leads to a final dividend of $0.91 per share and a full-year payout of $1.45.

Applying our usual formulaic approach we therefore expect our interim dividend in 2012 to be $0.725 per share.

And with that, let me hand you back to Tom.

Thank you, Guy.

Let me just take a moment for a deeper dive at what's driving our current market conditions.

2011 really was a year of two halves for commodity prices.

We did see a strong first half followed by weakness though in the second half, and almost all the commodity prices finished the year lower than they started.

These price declines you see in the chart were driven by ongoing macroeconomic uncertainty associated with the debt -- sovereign debt crisis in Europe and the impact of policy actions in China aimed at cooling down the economy and reducing their own inflation rates.

So far in 2012 we have seen some more positive signs, with improvements seen in most of our prices.

I have been following closely the performance on the ground in talking with each of the marketing teams.

We are experiencing some softness in the European markets, more so in Southern Europe; for example, industrial minerals producers that sell into, say, the Portuguese and the Spanish tile industry going tough.

But Northern Europe hasn't been so bad.

Certainly in the US we have seen some robust buying conditions that are pretty much aligned with what we've been seeing in terms of job creation and GDP numbers out of the US.

And I think in general, stability in Asia, while everyone sees how Asian businesses come out of the Chinese New Year.

However, just remember we are only in February; we do expect heightened economic and political uncertainty to continue to weigh on sentiment, and increase market volatility over the course of the year.

In Europe, recent indications do suggest the sovereign debt crisis has finally spilled over to the real economy in Europe, with expectations now pointing to a contraction in the euro zone in 2012.

In contrast, in the US, a number of recent indicators have surprised on the upside, fueling expectations that the US may be stronger in 2012 than all of us would previously have thought.

However, of course, in the US, as you know, risks remain; with high unemployment and a weak housing market.

In our key Chinese market the signs continue to point to a soft landing, which is what we've been saying -- we've been saying for the past year, with growth in excess of 8% in 2012.

But of course there's a wide range of uncertainties and potential outcomes ahead of us globally over the short term.

There are a number of tensions in the global economy, including the sovereign debt crisis if you look at was in the news on Greece this morning, and elections that we see in a number of key countries, not to mention structural imbalances.

So while the risk of European contagion is high, we do expect emerging economies, particularly in China, to remain resilient.

And I believe that the impact of current economic concerns on our business should be manageable, unless of course financial markets substantially deteriorate.

Looking further ahead, and shifting to the long-term outlook which drives the decisions we're taking today to invest in capital and growth.

Despite the volatility we're currently experiencing, our view of long-term demand remains pretty much the same.

That is, as the world gets richer we expect to see billions of people moving through the increasingly metal-intensive phases of development.

The industry, as Guy says, does continue to face challenges in the supply side from rising raw material and labor costs, as well as industrial action and weather events.

And projects, as you've heard, are becoming increasingly difficult to finance for some and the capital intensity for growth projects is continuing to rise.

Resource nationalism and long processes for permitting stakeholder engagement approvals also have the effect of reducing supply growth.

Of course, geologically, the deposits are becoming more difficult to find and technically more difficult to develop.

And all these factors will continue to put pressure on the supply side within an environment of this increasing demand.

This development of course will go through period of volatility, such as what we're currently facing right now.

At Rio Tinto we have to look beyond the current market turmoil.

We do see major structural changes happening in the global economy.

So the longer-term demand picture remains positive and the Chinese growth story does have some way to run.

By utilizing our strong balance sheet we continue to invest throughout the cycle on high quality growth options to meet this future demand.

We are clear about the strategy that we have been pursuing, which is continue to pursue; that is invest and operate large, long-term cost-competitive mines and businesses driven by the quality of each opportunity.

We own some of the world's best operating assets.

We have an unrivaled portfolio of quality growth options and a proven track record of developing major projects on time and on budget.

But it's also becoming more difficult to bring new sources of supply into the market.

Rising costs, more challenging ore bodies and creative stakeholder engagements are leading us to think more carefully and more creatively about how we will allocate our capital.

Our phased approach to investment and growth allows 5s to manage some of this risk, while creating inventive options that can deliver value over that long term.

So in line with the strategy we currently have $33b worth of major capital projects underway, including those recently announced.

The rate of spend for each of these projects ramped up in the second half of 2011, with higher levels of capital expenditure continuing in 2012; and, as Guy said, 2013.

Projects are making good progress.

The first production from nine of these projects listed here are expected to occur during the course of this year.

This investment is focused on large, long life, cost-competitive projects across a wide range of products in line with our strategy.

We are also differentiating ourselves through the leadership and the development and the implementation of innovative technologies.

I, for one, am genuinely excited by the step changes in technology, which include our Mine of the Future program.

Late last year we announced with Komatsu the expansion of our driverless fleet in the Pilbara from 10 to 150 trucks; the first operational deployment of this technology in deployment in Australia or anywhere else on such a scale.

These trucks can be run from the Operations Center in Perth, 1,200 kilometers away.

And we are seeing the benefits of that Operations Center increasingly becoming evident in our day-to-day production and conduct of the businesses.

Rio Tinto will also be deploying autonomous drills and driverless trains, expanding our leadership in this area.

Of course in the Copper group, our tunnel boring system remains on schedule with trials due to start in Northparkes early in the second half of this year.

We're evaluating opportunities also to trial a second boring -- tunnel boring system.

Over in the Exploration group, work has led to the finding in developing in the next-generation of ore bodies.

From bauxite in Brazil through to potash in Saskatchewan, new projects across the globe are delivering promising results.

So, to conclude, 2011 has been another record-breaking year for Rio Tinto.

We have delivered record underlying earnings, EBITDA, and operating cash flows.

Our balance sheet is strong as our investment program continues to gather momentum.

We have accelerated our iron ore expansion in the Pilbara, which, I believe is the highest-value, lowest-risk iron ore project anywhere in the world.

(technical difficulty) ore body knowledge.

At the same time, we continue to balance our investment program with the long-term shareholder return through the rebasing of our dividend.

To summarize, we are delivering exceptional operating and financial performance.

We have some of the best expansion options available in the industry today, a leadership position in operations, exploration, innovation and sustainable development and a long-established strategy of focusing a large, long-life, cost-competitive and expandable assets.

All these advantages position us well to continue to enhance shareholder value over the long term, as evidenced for today by the actions on the dividend.

So with that, Guy and are happy to take any questions.

And what I will do is I will start with the audience here in London, and then we will move over to the telephone.

Good morning, Rob Clifford Deutsche Bank.

Two questions please, Tom.

Firstly, just could you talk a little bit more about the issues surrounding getting power to Oyu Tolgoi, what are the issues there and what are the hurdles?

And secondly, just on CapEx protection, three-quarters of your CapEx is being spent in Australia and Canada, so I don't -- there's not the diversification you've had in the past and, while commodity prices and currencies are often naturally hedged, when you're building a project you're not producing those commodities.

So for instance the blow-out at Argyle changes the economics of that project substantially.

So how are you going about thinking on protecting CapEx against currencies?

Thank you.

Rob.

I'll start maybe by talking about power in OT, then I'll ask Guy to come in on the Australian and the Canadian capital projects, I know you asked that question at the interims about hedging and what we do about currency fluctuations.

First of all, on OT, we have two things that are being done that will need to be done on the power.

First is the construction of the power lines on the Chinese side of the border between the power generator capacity and the OT operation.

And second would be the power supply agreements.

While we have continued to, I think, make good progress on the construction activities, there will be a point in time we'll need that power to start the initial process to be ready by 2013.

We're well within that window now and I'm very pleased with the work that's going on the ground, actually on both areas.

I think part of it will be engineering, engineering activities on the ground, the actual construction, which again is something that is measurable and definable and I think there are actually good efforts that I'm confident are underway as we speak.

The second area, in terms of power supply agreements; that will involve the activity of the Oyu Tolgoi team on the ground but also a close cooperation, which we've continued to see, between the governments of Mongolia and China.

And again I've actually been quite pleased with the progress on that front, some of it we can influence but to some extent that is a government to government discussion.

So, Guy, can you maybe talk about capital and currencies?

Yes, let me start by challenging a little bit, Rob.

The purpose of drawing the attention to the whereabouts of a lot of our capital spend was to remind you that we have very great opportunities to invest in the heartland of our business.

Some people have perceived that the Company has moved in the direction decisively of investing in emerging market regions and we are doing some of that, we're obviously investing in Mongolia, in Mozambique, in Guinea, Madagascar, etc.

But the point that we're making, in relation to the spread of capital expenditure, is that a lot of it is going into the traditional heartlands such as North America and Australia.

Now on the subject of the particular risk you're talking about of currency, this is something we are looking at again and, as I've said before, we will tell shareholders if we make a change.

It's actually quite difficult to suddenly lock in when the Australian dollar is at $1.07 your capital expenditure, is that a good judgment or not?

That's the kind of question we're asking ourselves.

We recognize, as you say, that we have had some currency hit on our project.

You mentioned Argyle, actually although currency contributed to that, there are a number of other features to that overrun; the first being that we slowed the project down in the global financial crisis and that had a whole lot of demobilization and then remobilization effects.

And, on top of that we had the effect of the weather last year, which certainly led to some difficult conditions which had safety implications within the mine, so we had to slow things down.

So there were a number of other features in the case of Argyle.

But anyway, to reassure you, we are looking at it and, if we make a change, we will tell the shareholders.

-- Fairclough, Bank of America Merrill Lynch, two questions if I may.

First, just on CapEx, yesterday we heard from BHP that they're dialing back CapEx expectations a little bit and that seems to be driven by two things, it's a concern on bottlenecks in the capital formation process and then, beyond that, they're concerned about a deceleration of steel demand growth in China.

So I'm just wondering, it's quite a different message from you today, maybe you could talk a little bit about your confidence, about committing this much capital to iron ore still.

Yes, thank you, Jason.

I'm going to talk about iron ore and our longer-term view of iron ore and frankly where we probably have some similar ideas but where we might have a different approach from BHP.

Our view on steel demand in China is that we are moving towards a point, which you would expect, of deceleration of steel consumption growth in China and that's nothing that wouldn't be surprising as all modelers and econometric forecasters have been saying, at some point in the S curve it's inevitable that there will be a slowdown.

And we're in that stage that you're moving from steel consumption leading GDP to steel consumption beginning to lag GDP while GDP growth begins to moderate.

So from a much larger base and, just as a reminder of that larger base, we had very, very rapid steel consumption increases in 2007, which we had been flagging.

It's slowed down since then but the overall level of steel consumption in China is more than 40% higher than 2007, so it's slowing down from a much larger base.

Meanwhile, the Chinese domestic iron ore production is not getting any better, it's not getting any cheaper, it's not getting any more efficient, it's actually rising in terms of overall cost levels.

You have expansions flagged in Australia, in Brazil and to a lesser extent in West Africa.

We also have production coming out of the market likely on a trend basis from India.

So we have to look at all of these individual balances when we map out what level of capacity is there in the seaborne market.

I do think that, as I said in my comments, we have some of the best quality iron ore assets.

I think that I want to refer to quality in several ways.

The first is it is closer to the Chinese market than the Brazilian material, the Australian material is actually more accessible and no matter how big you build the ships, it's still proximity makes the difference, so I'd rather have proximity over size any day.

So then I think that in the case of then the resource, it's about having the large amount of resources that's actually clustered and can be developed, as we have been so successful in doing, and the ability to continue to improve and innovate and add to the efficiencies, which is exactly also what we were doing.

The third piece of it would be the ability to phase the capital and what we have been doing different than what BHP has been doing is that we have the ability to phase it in 50m increments, by just frankly adding two berths at a time to the Cape Lambert facility.

That allows us -- when we look at this capital, we discussed it with the Board, it allows us to say, well, we'll take this, look at it and then let's wait to see how the markets eventuate before we come up with the next tranche.

And, by having a series of smaller tranches and having a construction project that's phased and organized to actually adapt to those tranches, it gives us time to see, what is the actual trajectory of the Chinese demand growth?

It has surprised to the upside so far, at some point in time it's inevitable it's going to be slowing down.

This gives us a chance to manage that.

And the final step I think is capital intensity.

I'm very, very pleased with the capital intensity compared to the rest of the sector, although I'm concerned about the fact that capital intensity in general has increased, which probably has just increased the reason why we do need to phase in some of these next tranches.

Now in addition to (inaudible) of course we have IOC, which is basically an even smaller pipe with these various smaller expansions, essentially it concentrates capacity.

If we have the magnified resource it's just a matter of developing the concentrating, the gravity separation and the magnetic separation so we can increase the concentrated production.

And at Simandou where, in addition to the rail line development which will take over the next several years, I think I would expect to see parallel road shipping, which allows us again to build tonnes in the market and then, as the market continues to grow, it allows the market to understand the quality of material and I would expect to see a premium value and use for that material.

Thank you.

Just a follow-up question if it's okay.

In iron ore I think it's fair to say you guys got dragged kicking and screaming to the spot market.

Could you talk a little bit more about the price discovery for titanium dioxide and how that's going to eventuate?

Yes, I think that the market in iron ore has evolved to a point where, basically, there's more volume in the spot markets than compared to five years ago, so there has been actually a price discovery mechanism in the shorter term.

As you know, we've said that we will work with customers who want longer-term contracts as long as it's deliverable on both sides of that contract.

And so I think you will see differentiation between customers, some which will be ready to live with the good and the bad of a longer-term, say quarterly, contract, others that probably are going to be better suited for a very short-term market.

Now in terms of TiO2, I think that the structure of the TiO2 market, which is not as big as iron ore, obviously, but we have a very big part of it, has been one of contracts on a business-to-business basis.

And I think these contracts have served Rio Tinto in titanium well over the past 20 years during a period in time when the sector had been, I think, a mature sector primarily driven off of North American and European building construction and taking seasons and further conventional attributes of the pigment sector.

What we've seen, and we would have seen it coming but it's finally happened, is that the Chinese are beginning to play into these industrial minerals that are more consumer oriented.

So the Chinese consumer is actually demanding a higher quality of paint that means a higher quality of pigment which means a higher quality of feedstock.

So we're well positioned on the supply side for that, but we still have these existing contracts that we do -- we will honor them, we will work them through.

In some cases we're finding some of the customers are coming to us saying they're worried about the end of those contracts where they may get a good price for a longer period, at the end of it they might not have any supply at all.

So again they're coming and saying we will be happy to talk with you about moving to a shorter term earlier on if you can give us some security supply after the end of what would have been the contract.

Thank you.

Hi, thanks, Tom.

It's [James Garry] from Credit Suisse.

I just want to talk about Pacific Aluminum and when do you think you might divest that asset and whether you expect to achieve above book value for that asset when you do eventually divest it?

Okay, well, first of all, as we've said that we're not going to be in a rush to do it for balance sheet purposes, we're going to look to the market opportunities.

But maybe Guy, if you could cover both those points?

Yes, we are value driven and we're open-minded as to the way in which we sell this business.

We could IPO it, we could distribute it to our shareholders in specie, we could sell it to trade buyers as a whole or in pieces, so there's a lot of different ways we could do this.

We're not under any pressure, as we said earlier we've got a strong balance sheet and we're in a position where we can look for value.

As to the value that we might get for this business, it is not an easy time to be selling aluminum assets right now, but as I've tried to explain when dealing with the impairment, we have taken the values of the aluminum businesses, including Pacific Aluminum, down to what we think the market level is.

Now that's difficult to be quite sure what it is but we've done our very best through a mechanistic process and, therefore, you might think that it does approximate to the value that might be attainable in a sale.

But, as I say, we're not going to be rushed into that, we're going to look to maximize value and one means that we're using to get there is to try and manage the business in a different way.

So we put a new team into that business, we have separated the business form Rio Tinto Alcan and we're running it as if it were already a separate entity altogether.

And we're hoping that that's going to generate real improvements in the business and that should all help in the sale process.

And I just wanted to say that the team at Pacific Aluminum are doing a real good job and even just the first 100 days of work in terms of thinking about ways to improve the business, thinking about the business differently than in the larger Rio Tinto, and I think we're going to learn some things that we can apply elsewhere to Rio Tinto as a consequence of that.

So one more question from here and then we'll go over to phone lines please.

Yes, Myles Allsop, UBS.

Could you talk a bit more about your uranium strategy more broadly, but in particular Hathor, do you see that as a standalone project or a platform for further growth in the region?

Yes, thank you, Myles.

If I look at the uranium markets and I talk with our team in Rio Tinto Energy, my view is that uranium is going to be probably one of the least exciting one of our markets for at least the next five years.

And the way we can plot that out is the fact that you can really see plants, either they're in construction or they're not in construction, take many years to get built and we've seen this certainly in a post-Fukushima world some countries deferring projects, some countries leading policies right or wrong that basically are trying to be moving away from nuclear power.

But that being said, there continues to be, especially in China but I think elsewhere in the world, a need for large central sources of power, a large -- and distributor systems, the environmentalists might think that all you need is windmills in every house, but that's not going to work, you're going to need large central systems.

You've got options of basically hydro, and that's not an easily expandable power source, you've got options of nuclear, you've got options of coal and increasingly there's more and more pressures on future generators to think about something besides coal.

And that's even more the case as we see the markets for carbon beginning to eventuate and of course natural gas.

So yes, I think natural gas will probably be one in the post-2020 which will go more head to head with nuclear.

But for those countries that don't have natural gas, or they're not conveniently situated for LNG or just LNG is fairly expensive by then, nuclear power looks quite attractive.

And I think in China and elsewhere, in the post-2020 environment, I do see nuclear power and uranium to be a growing part of the global energy mix.

I would not be surprised if by post-2020 global energy requirements are actually higher than what people are forecasting, for the same reasons that we're looking at higher steel consumptions and higher copper consumption.

So for that, what it means for our strategy is essentially be prudent, at least for the next five years in terms of what we're investing in the sector, no big bets.

We have some housecleaning to do and our ERA business; we have to move from open pit to underground over the next year, we have to deal with the water issues from a series of what were record high rainfalls and then we will be well positioned, I think, in that post-2020 period with options at that point.

Rossing too it's -- Rossing's a mature mine, the existing ore body is at the bottom pit, there's not a lot of room in the bottom pit to move, we have to undertake the next stage of pre-stripping, which is what's going on at Rossing to basically expose that next generation of ore which will be in there in the post five-year period.

And of course, as the commercial situation of Rossing South eventuates I would hope to be in a position where we could think about the benefits of utilization, which I think makes sense commercially, I think it makes sense from a sustainable development perspective and I think it makes sense from a national Namibian perspective.

And then finally, in Canada, we should remind ourselves that the Athabasca Basin contains, by an order of magnitude, some of the highest quality and highest grade uranium ores in the world.

This is material you have to actually dilute before you can put it in the mill it's so rich; it's 100 times higher in grade than the grade in Rossing.

So grade does make a lot of sense in this business, if you can get good grades.

Our geologists, basically, they look around at all sorts of opportunities and all sorts of sectors and our geologists were quite excited about this opportunity that came to us.

As you know, I've listened to geologists in the past, we've had some pretty good hits, Oyu Tolgoi being one of them and they said this is a place to look and I was ready to back the Energy group and the geologists for Hathor uranium.

Quite excited about what that will deliver but again it's not going to be a five-year plan.

So again what we've got to do in our sector is we've got to look out past the next five years and we have got to set aside the options for the future generations of Rio Tinto so that we can actually create great businesses and that's where I think we can go with uranium.

From the phone lines please, if there are any.

(Operator Instructions).

We will take our first question from (technical difficulty).

Please go ahead.

Thank you and hi, Tom and Guy.

My question actually relates to the aluminum business and what I was wondering is, is there -- we've seen yesterday BHP highlight the fact that they'd be willing to make quite aggressive moves in terms of curtailing production, looking to divest assets which quickly become cash negative.

Within the aluminum business and in particular within some of those high-cost assets that are flagged to divestment, including those within Pacific Aluminum, are there any in there that might fit that criteria and is that something you'd be willing to move on quite aggressively, particularly given they are flagged for divestment?

And then I guess the second part of the question is we've heard quite a bit in relation to the phased approach to capital, which certainly gives you benefits relative to some of your peers.

Can you just elaborate on that a little bit in relation to the aluminum assets, perhaps particularly Kitimat, given the magnitude of the spend there?

I will -- maybe I'll tackle the first part of aluminum but I think, Guy, if you can add to that, and then I'll say something about Kitimat.

On aluminum in these markets with a really strained LME price and higher input costs, I think it's fair to say that every plant manager of every smelter in Rio Tinto and in the global sector is really paying very close attention to their own marginal costs of production versus the LME price.

And we should remind ourselves the marginal cost for aluminum capacity is somewhere in the [$2300 to $2400] per ton range or even higher, so there is a fair amount of global capacity that's probably running in the red as we speak.

You've seen in the global financial crisis and again you've seen some of our actions that we've had over the past year or so that if a project is not viable on a marginal cost basis we will turn off the power and that's something that is appropriate and legitimate.

We will do it in a way that's sensitive, of course, to stakeholder concerns; so we've got to look after the shareholder, we've got to look after the business.

So that's something you've seen us do, frankly you've seen most others in the sector do and I would say that every plant manager knows just that and it's in their best interest, safely, to find a way to run their businesses in this environment of low LME and high inset price.

Guy, if there's anything else you want to say about aluminum first?

Well, look, I think whether an asset is within Pacific Aluminum or within Rio Tinto Alcan or, for that matter, within anybody else's portfolio, you do have to look at anything that it is bleeding cash and of course that would happen.

At the same time we've got a plan to improved Pacific Aluminum, well all our assets, but in particular we're focusing on Pacific Aluminum at the moment and we're hopeful that that will get over those kinds of problems.

I think we will see a lot of closures in this industry.

That will help the supply side a bit, so I would underline what Tom said.

Thank you.

On Kitimat and certainly we really pushed hard on the system and the engineering team through Kitimat's phases there.

As you may recall we had approved the construction of Kitimat before the financial crisis and then we basically unapproved it during the middle of the financial crisis.

So we have had a facility that's actually an older pre-date facility and would not win any awards for prettiness, as you walk through that facility at Kitimat.

And it's definitely something anyone looking at it would say this is probably yesterday's technology; it's not tomorrow's technology.

So we looked at the various options, we did push on whether we could create a smaller starting point, but we also have a very large -- very low cost source of power, I think it's in the first decile in terms of power costs at Kitimat.

And we have so much power that actually you -- they have more power than they can actually distribute down the transmission line.

So you've got to find a market for it and I think Kitimat, as we designed it and as we approved it in December, took into account both our objectives for phases, but frankly it also had to take into account that we had some of the most attractive, most competitive power anywhere in the world, but sitting with some of the oldest technology anywhere in the world.

Anything else on the phone lines?

Yes, we will take our next question from Paul McTaggart from Credit Suisse.

Please go ahead.

Hi Tom, hi Guy.

Look, a pretty simple question, yesterday BHP talked about the rate of pace of cost increases, and you obviously touched on that, they did quantify it in unit cost sense generally and basically noted that it had moved from a 5% inflation rate unit cost terms, I guess on the previous cost half on half, to a rate of 10%.

So I'm trying to get a sense of whether you're feeling those same sorts of cost pressures if you can quantify it in those terms, please?

And they also made the comment, which was interesting, that they felt that 80% odd of that was non-structural, really driven by linked prices, input prices, etc.

So I guess they were trying to give us a sense that yes, we're seeing high cost pressures but at some point they'll abate.

Guy, why don't you start off with that one, I may make some closing remarks about the structural observation.

I think that when we look at our cost increases, I'll give you some numbers which are year on year as opposed to half on half and the reason I'm going to do that is that last year was a complicated one to analyze because of the effects on unit cost of weather that harmed the first half and also because of grade, which also reduced volume in the copper group.

But if you exclude royalties, freight and the trading activities that go on in aluminum to save transport costs, the overall increase in our unit cost was 14.6%.

Now that included what we consider to be mining inflation and input price increase of about 8.4% and the effects of weather, which we compute at just under 4%.

So I think that when we look at this we feel, and of course it's much too high a level of increase, we're taxing it in the various ways which we described during the presentation, but I think that breaking it down by half is distorted by that weather and -- particularly that weather effect.

Thanks, Paul, I think maybe Guy would help me with this one too on the point about 80% is non-structural and only 20% is enduring.

I hope BHP is right, I'm worried about that one and I don't think we can be complacent.

If we look at what we see around the world, it's very evident in Australia but it's also evident in many other parts of the world, we're seeing rising rates of labor inflation and unfortunately it's being matched by lowering rates of employee productivity.

And if we get that twin challenge of rising labor rates, which basically wage rates don't go down, they only go up over time, and then that's matched by lower levels of employee productivity, partly because of high turnover, partly because the skills may be there, then we're going to see a larger-than-20% component of this inflation being structural, so we've got actually to be ahead of that curve.

We've got to do more in terms of, first of all, what can we do on the industrial relations environment, particularly in countries that are going through periods of industrial relations in forum to ensure that we put productivity in the same box as all the other components of IR.

The second thing we've got to do, which is critically important, is to actually look at the labor capital tradeoffs, can we actually, without necessarily reducing the number of employees, reduce the rate of employee growth by increasing productivity.

In 2015 I hope to see half the tons we move in the Pilbara being moved with driverless trucks and that's where I come about looking at shifts between capital and labor.

So I hope that BHP is right that only 20% of these cost increases are structural, but I think we'd actually have to work harder to keep that from getting worse.

Maybe if we have a question from the audience, a couple here and then I'll go back to the telephone.

Hi, operator, you've got an open telephone, have you got any questions?

Yes, we will take our next question from Paul Young from Deutsche Bank.

Please go ahead.

Yes, good morning, Tom, and good evening, Guy.

A question on your pipeline of projects in advanced study phases on slide 31 of the presentation.

Can you just talk through how you sequence or you think about sequencing these projects?

And also, on your cash flow forecast, can you actually build all these projects at once?

And then a question on your aluminum division, Alma, which is, certainly on my numbers, the most profitable and valuable smelter in your fleet; it's running at just 30% output.

Are there any one-off costs that we should be aware of?

Can you give us an update on the industrial action there?

And then, further to that, just the full-on effects upstream on your aluminum production, where were you placing that 600,000 tons of spare aluminum now?

Thank you.

Guy, why don't you maybe just handle the capital pipeline one and I'll talk about Alma?

Okay, our objective is -- we have got a lot of high quality projects, as you say.

They are screened all the time, they go through a process as they're developed both at a conceptual stage, at feasibility stage and we are constantly looking for quality and value and we have to throw things out or send them back to be reassessed and to come forward maybe under some different design, different size, different timescale.

We would not propose a schedule of projects that we could not finance, obviously, and while it is our first objective to invest in high quality projects, we don't want to do that if it threatens the strong balance sheet that we have and the commitment to a single A that we have.

And so for that reason we are tending to delay some of these projects but the best ones, such as the ones in the Pilbara, for example, are getting through without any real difficulty because they are so high quality, so high return and so low risk.

And so when I look at these projects, some of them of course have not been approved, I think you're looking at the ones that are in advanced study.

Not all of those will come through for certain, some of them may get rescheduled, at the moment though we do -- they all are in our plan, I have to say.

So I think that this is a question that we constantly reassess as we prepare our cash flow forecasts and we have the flexibility, this is the point we're trying to make, of phasing them should we need to, and that is why we have a few months before we make the final decision on the 353 project in the Pilbara, for example.

I think it's very likely that we will take that decision.

So I hope I can give you a sense that we are balancing all the time this question of the balance sheet strength on the one hand with the quality of each investment on the other.

Thank you, on Alma, just a little bit of background for those who have not been following it, we were in a period where, instead of having a strike, we locked out the Alma plant and we are running it with the salaried staff of the plant and, in order to do that on a safe basis, we've reduced capacity by about a third of normal capacity.

And you're right, Paul, it's one of our lower cost plants, so we're doing that basically because of industrial relations matters.

The outstanding matters have nothing to do with pay and conditions, they are related to contracting out provisions, how the union's request to basically control the plant floor, neither of those are acceptable either at Alma or anywhere else in Rio Tinto operations and frankly it's an ask that you don't see anywhere else within Quebec.

So we are basically choosing to keep that plan locked out until we come to a point where we can come to an agreement with the union and that will be as long as it takes.

Now, that does put us in a position, we probably have excess water, it will affect the supply chain and we've made moves accordingly, but it has led to us having excess hydro capacity.

And so that's allowed us -- so that's very low incremental power costs with that and so we have diverted some of that into restarting two of the lines at Shawinigan, which will run as long as that makes economic sense to do that.

The net effect has probably been to just create some additional tightness in the North American aluminum physical market.

And again it does suggest that, although LME pricing is a problem in different parts of the world, particularly in the US you're seeing some buying demand growing, you are seeing some physical tightness growing in the metal markets

So if we could have two more questions from the phone lines please.

So we'll take our next question from Brendan Fitzpatrick from Morgan Stanley.

Please go ahead.

Thanks very much.

Two questions on the Richards Bay Minerals transaction if I might.

I'm just wondering if first one can get a sense of, were there discrete windows during which BHP could elect to exercise the option to transfer the stake or was it an open-ended timeframe?

And the second part, there was reference to the pricing mechanism already being established in the agreement, but given the price isn't disclosed am I right in thinking there's components to the mechanism still to be determined and can we get a sense of what those might be?

Brendan, that is a confidential agreement between us and BHP and I think we both chose to keep it confidential and probably best to keep it that way in both aspects.

Okay, understood.

Thanks, next question.

Next question will come from Peter O'Connor from Merrill Lynch.

Please go ahead.

Tom, just a thought on your latent capacity in your system.

Guy walked through the copper issues with lower grade at Escondida, Kennecott and also Grasberg.

I'm just wondering, compared to the tonnage you put out in 2011, what could we reasonably expect in terms of the copper units that come back over the next couple of years?

And, similarly, with weather in iron ore and weather in coal, what low capital latent capacity do you have that's available over the next one, two, three years?

Thank you, Peter.

Let me try on that latent capacity because I listened to their words with interest yesterday.

For example, Escondida's known to have latent capacity and if they could put another ton of ore through the concentrator they would put it through the concentrator.

It's not a question of capacity of ore, it's a question of what the grade is of the ore that's being mined and it is going through a period of lower phases.

So I wouldn't necessarily have called that latent capacity, but I think as they flagged what the grade profile will be at Escondida, as we've flagged it, that's probably what you're going to see.

There's not a mill sitting there that's just not running at this time.

I think certainly from our perspective, in virtually every one of our businesses, if we can produce a product that we can sell at a profit, we are producing a product and selling it at a profit.

Now a lot of the latent capacity one would argue is because of weather and I wish I could predict the weather but we're no better at it than they were a thousand years ago.

We have -- you've seen that we can run the Pilbara, for example, at 240m tons per year and people say, well, if you do that in one quarter, why can't you do it for the whole year?

And I do have to remind you that these cyclones do come through and I have been assured, and certainly the past couple of years I've seen evidence of this, that the cyclonic activity in Western and Northwestern Australia is actually the most unpredictable cyclone activity of any hurricane/cyclone/typhoon system in the world.

And these things do literally turn on a dime, so it's very difficult to make any kind of prediction.

All we can do is basically derate our capacity during these summer wet seasons and then just hope for the best and then, during the dry season, hope we can make up for whatever the gaps were.

We had two weather systems that came through the Pilbara in January, one hit all of Pilbara, hit land and affected across the board.

The second one didn't hit land, but, boy, it created some sea swells and also impacted production, because with these cyclones you have three things that can drive the outcome.

One is the wind effects and basically you have to tie down and protect the plants from wind damage, and the wind effects with winds that are over 200 miles an hour can be quite enormous, so you have to actually shut down facilities and spend lots of days of prep and unprepping.

The second would be rain and again here you have not only the rain hitting the site but more likely, because you don't have mature river systems in the Pilbara, you have washouts and you have large valleys that flood with water.

And that can have the effect on rail capacity and do quite a bit of damage to rail systems.

The third would be, which is probably the least known, the sea swells and that is that if the storm's sitting off the coast and is creating sea swells, and I think the last system easily we saw sea swells of three meters in the port.

You've got to actually -- you've got to take the ships out to sea, so you can't load during those periods.

Unpredictable, I wish I could predict them, but I wouldn't have called that latent capacity, I think we've got to build our own overall assumption of capacity, making the presumption that we will have a weather factor and we'll try to calculate that as best we can.

Tom, can I follow-on on Coal & Allied and firstly congratulate you after four decades of trying you finally got there last year.

Where did that business go and how quickly can you make that business actually work?

Sorry, I missed that, I never want to miss a congratulations so can you repeat that again please?

I said congratulations on your Coal & Allied deal, which is four decades in the making so well done finally.

As I said at the last seminar that it took us 20 years to do it, I was corrected afterwards and they said it was actually 30 years.

You're saying 40, you're probably right.

Where does it go from here and how can you do that?

Sorry, Guy, can you talk about Coal & Allied please?

Where do we go to with Coal & Allied?

Well, I think this business has had a tough, if we go back over that, the last 10 years particularly, we have seen a mismatch between what we might have liked to put through that system.

It's quite distinct from what we have in the west in the sense that we don't control the railway, we don't fully control the port either and so what we would like to do (technical difficulty) put through that system and that's the work that we're doing.

That's always been the intent and I'm not going to give you numbers for it.

I think that's partly contingent on capital expenditure on things like Mount Pleasant, which you saw in the list that we showed and we were talking about a few minutes ago.

But there is, as it were, latent capacity there; if the whole system worked like a Swiss watch and if we had the mining capacity to match up with the rail and port capacity more would be produced and at a lower cost.

So that is something that we would like to take advantage of in future years.

Thank you, can I get one more question from the audience here so we have.

Yes, we will take a --

James Garry again from Credit Suisse.

If it took you 30 years to consolidate Coal & Allied can you just tell us that I hope it doesn't take that long to consolidate Oyu Tolgoi and how you feel about that asset going forward and perhaps how you are in control of the rest of the Ivanhoe -- you're the majority shareholder so how do you feel about the rest of the Ivanhoe assets?

Well, I hope it doesn't take that long.

I think we are -- first and foremost what attracted us to Ivanhoe and what the discussion with Robert Friedland and I were around both of us seeing the potential for Oyu Tolgoi and we have moved it over the past several years from an exploration project to what is becoming a great mine.

We have several steps left to go but I think, if you look at our progress from 2006, I think it's been quite extraordinary.

And while we have been focusing on the proper development of Oyu Tolgoi, we've been doing it under mechanisms that actually are respectful of the commercial regimes, respectful of the markets; Ivanhoe is a separate listed company and has its own shareholder base.

We have been making our investments of OT on a phased risk-weighted basis, same theme we're hearing elsewhere today, by making individual tranches of investments in Ivanhoe and then the agreement with Ivanhoe was those funds would be reinvested in Oyu Tolgoi for the development of the site.

And that's actually provided us with phases of risk assessment and also provided us with optionality going forward, and that's essentially what we've been doing since 2006.

I don't think it's the end of the story; we still have more work to do.

We will do so in a way which is, of course, respectful of all the contractual commitments, the various exchange requirements and very respectful of what I would say is the partner and the biggest stakeholder being the government of Mongolia.

Thank you.

A question which maybe we haven't heard, is when we would see a CapEx estimate?

It's in feasibility for the second phase; I think it would be too early to give any time on that.

I think we have room for one more question from the room here.

Thanks, Richard Hatch, RBC.

Just a quick question on your CapEx, so your aluminum CapEx and your copper CapEx is around about the same sort of money in total.

Given the fact that copper's contributing more than aluminum, could you put more money into copper than -- sorry, given that copper is contributing more money than aluminum, would you push more money into your copper assets than your aluminum?

I'd like maybe Guy to make some comments about capital allocation in general, but I would say just in terms of the -- if you just deep dive into the numbers themselves you'll see that Kitimat has a large portion of the total capital, which we committed to in December.

And of course we have the phase two of Yarwun, which was something we committed to before the financial crisis, which will be successfully commissioned we expect middle of this year.

Whereas copper, the bulk of the projects would be in those projects like Oyu Tolgoi, which I just talked about.

But Guy, if you want to talk more generally about the principles of capital allocation.

Well, we don't really do it in the way that you're suggesting, in other words just putting money into things that are making money today.

We try and take a long-term view of all the capital projects that we do.

We're not deterministic, in other words we're not trying to create a particular percentage portfolio for copper and aluminum by 2020, let's say.

What we're doing is looking at numerous options in all our products and, in fact, sometimes in products that we're not in at all such as potash, for example, where we recently invested.

And so what we look for are individual opportunities and if they pass muster in terms of being high quality Tier 1 resources and if they look as if they will generate good value at acceptable risk, then we try to do them.

And it is true indeed that, today, the copper business is earning much more than the aluminum business, absolutely right, but over the next 40 to 50 years I wouldn't be so certain that that was going to be the case.

I think that copper will have a good few years and in time I think aluminum will come back.

So I think we're making these investments for periods like that, we're not making them for just a few months or even just a few years, we're making them for a very long term.

So Kitimat, the big investment that we're making, is actually, as Tom was explaining earlier, a very good project indeed, the best probably in the aluminum industry by far.

So we have no regrets about that project.

And I think that the other point to make is, although it looks as if we're spending quite a lot on aluminum, much of it is just finishing Yarwun, which is after all going to be in production in August, so most of that capital has already been spent.

So the big one, as I've said, is Kitimat and it's a good project, as are our copper projects, they're also good and, by the way, finding new copper projects to put money into at the moment is problematic.

That is part of the bull case for copper, there just aren't very many opportunities that are available in the short-term, we'd very much like to have more of them and we're putting money where we can, but there is a limit.

Thank you.

With that, anyone that's got a copper opportunity please see us after the meeting.

I think I'll draw that to a close.

I guess as you're having a chance to see lots of companies in this result season, there aren't too many of them that are delivering more than $27b of cash flow, more than $15b of underlying earnings and a 34% dividend all at the same time.

So thank you very much.