力拓 (RIO) 0 Q0 法說會逐字稿

Good morning, everyone, and welcome to the Webcast for 2012 interim results with our CFO Guy Elliott and me in London.

First, I know many of you'd rather be watching a broadcast of the Olympics than a Webcast of me here in London.

The London excitement of the games is sweeping the city.

And I'm very proud of the metal and the medals that come from Rio Tinto.

Tonight, for example, I'm hosting a welcome dinner for a group of Rio Tinto employees from around the world who have shown outstanding efforts at work or in their communities.

Their reward is a series of events at the games.

And I'm sure the last few days will be just as thrilling as what we've seen so far.

Of course, talking to an international audience, I'm aware that some countries are doing better than others when it comes to the medal table.

So, maybe I'd better just stop there.

I do look forward to visiting Australia next week and talking to our investors in Australia.

So, let's start, as usual, with safety.

We have seen the continued improvement on our safety record but I do deeply regret there was a fatality earlier in this year at one of our managed operations.

This was a terrible tragedy.

As I've said to all of you before, we'll not be satisfied until our workplace is injury free across the Group.

We have a strong safety culture throughout our business.

And making it even stronger is my priority for my executive team and for all of our senior leaders.

Before I turn to our numbers, let me start with strategy.

Rio Tinto's strategy of investing in Tier I assets gives us a strong base for earnings power and resilience in the short-term buffeting in the global market volatility.

As well as keeping a tight rein on the businesses in these uncertain times, we continue our program of disciplined investment in high-returning projects to position ourselves for long-term demand growth.

This investment decision takes into account our aim in maintaining a strong balance sheet and a single-A credit rating and our commitment to a progressive dividend.

We've seen some of the best quality projects in the world and the flexibility of phasing our investment plans.

And during the first half, capital expenditure in these projects increased to $7.6b in line with our full-year CapEx forecast of $16b.

Many of our high-quality projects are getting close to completion and will start to generate returns over the next 12 to 18 months.

By the end of 2013, we'll have 50m tonnes of new capacity in the Pilbara, taking us to 283m tonnes.

The second phase taking us to 353m tonnes by mid-2015 is also underway.

Commercial production from Oyu Tolgoi will start in the first half of 2013.

Early in this year, after more than five years of aggressively increasing our interest, we moved to a majority stake and management control of Ivanhoe Mines, now renamed Turquoise Hill Resources.

We have taken further actions this year to shape our portfolio through divestments, joint ventures, and one acquisition.

Now, I'd like to give you a snapshot of our first-half results.

We continued to deliver strong earnings and cash flows, despite the challenging global economic environment.

Our industry has experienced lower commodity prices almost across the board.

And this, of course, is the main reason for the fall in our earnings.

Our consistent view has been that market volatility would endure.

And we have seen these difficult economic conditions over the past six months.

But our Pilbara iron ore operations continue to be the standout, enjoying one of the highest margins in the industry and where we've set new first-half records for both sales and production.

Net earnings were higher than underlying due to the one-off tax accounting item related to the new resources tax in Australia, which Guy will explain shortly.

And finally, but importantly, our interim dividend has increased by 34% as a consequence of the Board's decision to increase our progressive dividend six months ago.

And we completed our $7b share buyback in the first half.

So, now, let's take a deeper dive into each of our businesses.

And I'll start with our industry-leading Iron Ore group.

Our business in the Pilbara continues to set new and higher standards of performance and to generate world-class returns.

Once again, we've improved productivity through low capital debottlenecking, while scaling up our step change Mine of the Future program.

These integrative and innovative technologies are delivering returns now, and they'll allow us to transition to a much higher-capacity business in the near future.

Our underlying iron ore earnings were the second highest for a first-half period.

And this was achieved despite lower prices as the market came off historic highs.

Of course, even in these challenging markets, we're realized an average price for our Pilbara blend fines product of $133 per tonne.

Our results were boosted by first-half production, leading to increased sales volumes as we increased annual capacity by 5m tonnes to 230m tonnes.

Work is advancing or on -- ahead of schedule on a major Pilbara expansion program.

As we prepare for the substantial growth in volumes, I was particularly pleased that costs have remained well under control.

Costs of Western Australia continue to escalate above Australian CPI and are currently increasing at about 6.5% per year.

We are setting the stage for the whole of the sector with our focus on productivity improvement and cost management through our Mine of the Future program.

This is delivering real performance improvements on the ground as we speak.

It's also setting us up for our planned growth and annual capacity of 350m tonnes in 2015 and for further major debottlenecking gains beyond that level.

So, once again, we've delivered an outstanding result in iron ore.

It is a good place to be.

Turning now to Copper, which remains a highly attractive business, given the on-go supply constraints that persist in this sector.

These challenges have shown no signs of abating.

Recently, some developers have reviewed their expansion plans due to concerns over escalating capital and operating costs, the weakening macroeconomic environment, and financing challenges.

The existing mine production has struggled to grow due to declining grades and production disruptions.

As a result the copper market has remained in deficit, and global exchange inventories have continued to decline.

As expected, our copper production was lower in the first six months of 2012.

At Kennecott Utah Copper, the relocation of the in-pit conveyor at the mine and the 26-day smelter shutdown were scheduled to coincide with the period of lower grades.

Both were successfully completed in the first half.

At Escondida, copper grades began to improve with mine copper production 29% higher half on half.

During the period, we approved projects that are Tier I brownfield assets to maintain production into the future.

At Kennecott Utah Copper, we're extending the life of the mine by another 10 years to 2029.

And at Escondida, new mill will replace Los Colorados and allow access to higher-grade ores.

In addition to brownfield volume growth, we will see first commercial production coming from Oyu Tolgoi in the first half of next year.

After acquiring our majority stake in Turquoise Hill, we agreed to support the comprehensive financing plan and nominate a new team of Rio Tinto management led by Kay Priestly.

After over two years of construction, I'm looking forward to seeing Oyu Tolgoi coming on stream in the very near future.

Moving onto Aluminum, our Aluminum business is better positioned compared to its industry peers, but we have experienced increasingly challenging market and operational conditions.

I am confident that we are pursuing the right course with our focus on EBITDA improvement, concentrating the portfolio on Tier I assets, and completing strategic investments in modernization projects.

But we do need to do more and particularly to aggressively achieve further cost reduction and EBITDA improvements.

This will require us to take some tough decisions across the global aluminum portfolio with these businesses that continue to lose cash in a current environment.

Global economic concerns continue to weight on the LME price with aluminum now trading about at $1,820 per tonne.

At these prices, combined with continued elevated raw material costs, approximately 25% of the smelting capacity outside of China is in a loss-making position.

Some smelter closures have been announced, but we've also seen local governments both in and outside of China providing incentives to ensure loss-making smelters continue to produce.

This is preventing the rationalization of high-cost capacity that's required to balance the industry.

Given the circumstances, we will continue our approved projects, including at Kitimat, AP60 Phase I, and [Issau].

But, we'll be deferring further allocation of capital to aluminum smelting and refining projects for the foreseeable future.

The net result of higher prices, higher raw material costs -- or lower prices, higher raw material costs, and favorable currency movements was to reduce EBITDA by about $600m compared to the first half of 2011.

EBITDA was further reduced by approximately $100m as a result of the lockout at Alma.

This was resolved in July when employees ratified a new collective labor agreement.

The new agreement will provide RTA with the flexibility required to implement cost and productivity improvements into the future.

The adverse impacts were partly offset by further progress on business improvement initiatives and the recovery from abnormal flooding that we saw in Queensland back in 2011.

Delivering on the business improvement initiatives outlined last year remains a top priority and we've now achieved a run rate of $250m of annual EBITDA improvement.

However, in the current environment, we are prioritizing our efforts on delivering further cost reductions.

To date, we have delivered improvements from better terms on bauxite sales, reductions in corporate costs, and capacity creep at the Canadian smelters.

In the second half, further cost savings will be delivered from reducing site and support costs in addition to productivity gains from the ramp up at Alma.

Another driver in the transformation of our aluminum business is delivering on strategic investments and highest-quality assets.

During the first half, the expansion of Yarwun, the first of these projects was completed.

The expansion more than doubled capacity to 3.4m tonnes of alumina per year and is expected to ramp up to full capacity by the third quarter of 2013 and will deliver unit cost improvements, moving our alumina production firmly into the second quartile of the cost curve.

Our Energy group has also seen a tough environment recently.

Excess seaborne thermal coal supply has been driven by growth from all the major producing regions as well as an increase in seaborne supply to the US due to low domestic gas prices.

Thermal coal prices have now fallen to levels that are putting pressure on producers at the top end of the cost curve.

The current environment of excess supply coupled with risking Australian cost is likely to be with us for some time.

Despite these global changes in the energy sector, we continue to see continued growth and demand for seaborne thermal coal over the long term.

As recent blackout events in India have demonstrated, emerging markets continue to need further investment in power generation.

The coking coal market is affected by increased supply from Australia and other regions at a time of weaker demand from the steel industry.

We are under no illusion about the scale of these challenges.

And we'll take strong action to return to acceptable levels of profitAbhility.

All of our Australian coal operations are actively looking for ways to reduce costs through ongoing business improvement and asset management programs.

We're also reviewing staffing levels of the Claremont mine.

And today we announced the decision to cease production of Blair Athol by the end of this year after nearly 30 years of mining.

We're also reviewing our allocation of capital for this sector.

In particular, we deferred a decision about the Mount Pleasant project until at least 2013.

In the meantime, we're undertaking a thorough review to identify how best to configure this project to optimize returns.

In Mozambique, we achieved a key milestone with the first delivery of coking coal to the Indian customer.

We do expect Benga mine to produce and rail more than 400,000 tonnes of coking coal this year.

Meanwhile, we're continuing exploration activity with promising results.

Early indications are the exploration potential is far higher than anticipated just a year ago and beyond that of coking coal.

Significant additional tonnes may be delivered.

However, it is likely it will take longer to develop its infrastructure than previously planned due to the timing approvals and internal constraints on our capital.

Discussions continue with the Mozambique government on a range of future infrastructure solutions.

In our uranium business, significant improvements in underlying operation performance have been achieved.

During the year, we did sell our shares of Kalahari Minerals and Extract Resources.

We do, however, continue to see an opportunity to realize synergies through joint development of the Husab uranium deposit, taking advantage of our strong asset base and existing infrastructure at Rossing.

Finally, our purchase of the Hathor uranium exploration business in Canada, our drilling program has been underway to increase ore body knowledge and expand the resource base.

Early signs have been positive, indicating a larger resource potential for this asset.

Turning now to Diamonds and Minerals, we'll see a portfolio shift of this product group over the coming years.

In particular, our late-cycle TiO2 feedstock business is just starting to see the benefits of growth in demand from China and other emerging markets.

Earnings did more than double over the period as the Group benefited from higher prices across the minerals portfolio.

In particular, we saw significant momentum for the prices achieved in titanium dioxide feedstock as long-term contracts continued to unwind.

Markets for both TiO2 and zircon did soften in the first half compared to late last year.

And this is in line with the current economic cycle following inventory build by consumers and weaker demand growth this year.

However, we do remain positive on the medium term outlook for TiO2 feedstocks.

And demand will strengthen in line with urbanization in the emerging markets.

We also enjoyed a healthy increase in TiO2 production with record half-year production at RTFT and year-on-year growth at QMM in Madagascar following successful implementation of dry mining and other improvement initiatives.

RTIT is the world's leading producer of TiO2 feedstock and has many options to enhance shareholder value through expansion and investment.

We are excited to be doubling our stake in Richards Bay Minerals, which is expected to be complete in the second half of this year.

This is a significant Tier I asset and will give us increased exposure to the growing market where China now represents 30% of global TiO2 feedstock demand.

The outlook of the diamonds industry is attractive.

And strong demand growth of the world's emerging economies coupled with lack of new supply means that it has some good prospects.

However, given the relative scale of our diamond business within the broader Rio Tinto group and the capital intensive nature of the industry, we may be able to create more value through a different ownership structure.

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

Thank you, Tom.

Let's first take a look at the decomposition of underlying earnings and net earnings in the first half.

Once again, price was the principle driver of half-on-half performance with iron ore and aluminum making up most of the $1.9b adverse variance.

This was only partially offset by the impact of currency movements, which collectively enhanced underlying earnings by $200m compared with the first half of 2011.

Lower sales volumes reduced earnings by $584m, largely due to temporarily lower copper and goal grades at Kennecott as expected and no metal churn from Grasberg.

This was partly mitigated by record iron ore and higher coal volumes, in line with recently completed thermal coal expansions and less severe weather conditions.

These boosted earnings by $366m compared with the first half of 2011.

Industry-wide cost pressures continued in 2012, notably in some of the mining hotspots in which we operate.

The impacts of inflation and higher energy costs lowered our first-half earnings by just over $170m.

Higher cash costs reduced earnings by a further $388m of which the majority related to an increase in operational readiness and site transition costs connected with the Pilbara expansions.

I'll return to this in a moment.

But, overall, I would say that we've had a good cost performance during the first half.

In 2012, we've seen quite a significant increase in exploration and evaluation costs, notably at some of our more advanced projects, including Simandou, Resolution, La Granja, and Mozambique Coal.

Given progress made, Simandou evaluation costs are now being capitalized from April 1 this year.

These higher exploration and evaluation costs are shown net of the gains on disposal of various exploration properties, notably our interest in Kalahari Minerals and Extract Resources.

Their total impact together with other movements, including interest and noncash were to lower earnings by just over $100m.

This brings us to our underlying earnings of $5.2b.

Now, let me touch briefly on net earnings.

The Australian government introduced the minerals resource rent tax or MRRT on July 1 this year.

We've recognized a deferred tax asset of just over $1b within net earnings in relation to this.

This is a noncash accounting item.

It reflects the deductibility for MRRT purposes of the market value at May 1, 2010, of our considerable past investment in our Australian iron ore and coal assets to the extent recovery is considered probable.

This is clearly a highly technical accounting area but it has no bearing on our underlying business performance.

And so, it's excluded from underlying earnings.

So, overall, net earnings came in at $5.9b.

Now, back to costs, as I previously mentioned, we're continuing to experience cost pressures and localized inflation in excess of normal CPI in some regions.

However, we are seeing external pressures reduce and a slowdown in the rate of increase.

Total cash costs were broadly flat half on half.

And after adjusting for volumes and grades, controllable unit cost increases slowed to less than 3% on the prior period.

I believe that this outcome will compare favorably with the rest of the industry.

In this slide, we've attempted to separate the one-off impact of certain costs compared with the more structural cost increases.

The principle effect has come from operational readiness and site transition costs, which I alluded to just now, as we prepare to bring online a number of major growth projects, in particular in the Pilbara.

While we would expect these costs to continue as we prepare for commissioning, they will be offset by higher sales volumes and unit cost efficiencies through improved productivity in the future.

We've also highlighted an increase in stripping rates at Rio Tinto Coal Australia, which is a phenomenon that we would expect to reverse over the shorter term.

And we incurred some additional one-off costs, in particular, the impact of the Alma lockout, which we've shaded in this chart.

Last year, we suffered significantly higher costs from exceptional weather events.

These have had a lesser impact in the first half of 2012, creating a positive variance.

We have a long established track record of cost control and productivity improvements.

While we've seen some softening of cost pressures, mining inflation is still above its historic levels; therefore, we're continually seeking to enhance our operational and financial performance.

Around 90% of our costs are incurred at our operations.

And so, it makes sense to focus on these areas.

But we also are not forgetting our functional and support costs and we're implementing a program to improve their effectiveness, starting with our corporate offices.

Now, I'm sure it hasn't escaped your notice that the Australian dollar has continued to strengthen in recent times.

The impact of a stronger Australian dollar when combined with the productivity issues in Australia are mounting a challenge for our local operations.

Our industry-leading investment in technology, which will lead to increased automation and improved productivity across many of our operations will help to mitigate some of these increases, notably the more structural ones.

Now, let's turn to cash flow.

First half cash flow from operations was $7.8b, 39% down relative to 2011, driven primarily by lower prices.

Other significant inflows during the half included the $1.35b proceeds from Chalco following the completion of the Simandou joint venture, the proceeds from the divestments of our interests in Kalahari Minerals and Extract Resources.

Capital expenditure was $7.6b, in line with our full-year guidance of $16b, based on approved projects and sustaining capital expenditure.

Major capital projects underway include the continued expansion of the Pilbara iron ore mines and infrastructure, the development of the Oyu Tolgoi copper-gold project, and the modernization of the Kitimat aluminum smelter.

Cash returns to shareholders during the period totaled $3.2b and included $1.5b to complete the share buyback program by the end of March.

Corporate taxes paid in the period increased 4% to $3.8b, in line with the higher taxable profits recorded in the second half of last year.

It's worth noting that, even before the introduction of the MRRT, Rio Tinto was the largest single income taxpayer in Australia in 2011.

Taxes are partly payable in arrears.

So, we would expect to see this number decline in the second half of this year.

Our capital expenditure forecast for 2012 remains at $16b.

As the slide shows, CapEx on approved and sustaining projects will taper off from this level in 2013.

New project approvals such as Phase II at Oyu Tolgoi, Simandou, and South of the Embley may lead to capital expenditure in 2013 at a similar level to 2012.

But this will depend on market conditions and the timing of approvals.

We retain a high degree of flexibility over our spend in any one period but would not envision capital expending -- capital spending above these levels due to our own internal limits, including financial and people constraints.

While this represents the CapEx strain in our cash flow statement, we now fully consolidate a number of businesses that we do not fully own.

Our share of this capital expenditure is more important and is actually lower at $13.6b.

For example, the Simandou mine is fully consolidated, even though we provide 50% of the capital.

We're continuing to take a disciplined approach to investments and are only allocating capital to the highest-quality projects, of which the Pilbara expansions represent the lion's share, as this slide demonstrates.

Our rigorous approach to project approval includes various stage gates, each of which requires review by internal but independent commercial and technical teams.

We're mindful of balancing the high returns that can be achieved from investing in our superior growth pipeline with the desire for cash returns to shareholders, our progressive dividend policy, and our aim to maintain a single-A credit rating.

For some time, we've been taking a phased approach to many of our project approvals, such as our decision in 2009 to expand the Pilbara in two distinct stages.

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

In the Pilbara, it has not only reduced risk but has created embedded options.

We've also enhanced the overall value of the project by increasing its scope from 100m to 133m tonnes of annual capacity by identifying and eliminating bottlenecks.

Our approach to investment will shortly be rewarded as we bring these new projects on stream.

Over the next 18 months, we will see first production from Yarwun II, Oyu Tolgoi, and the first phase of the Pilbara expansion.

And any new project approvals will only get the green light should market conditions be favorable.

Alongside investment to create -- to generate superior returns, we're also continually reviewing the portfolio to ensure that it remains aligned with our strategy.

We're, of course, aware that iron ore has come to dominate our earnings in recent times.

This reflects the superb quality and performance of that business.

As Rio Tinto has become larger, a number of businesses are no longer aligned with our strategy.

Over the past four years, we've divested over 20 businesses for approximately $12b, including a couple so far this year.

We've now completed the divestment of the specialty aluminums business.

And we expect the sale of the cable business to complete later this year.

This is a constant process.

And we currently have a number of assets identified for potential investment, including Palabora and Pacific Aluminium.

There may be more to come.

We're actively seeking to create value by introducing new partners to some of our businesses.

Joint ventures and farm-ins may provide access to resources or finance, reducing risk or creating synergies.

We've had many successful joint venture partnerships that have lasted many years and have created great value.

And finally, on the acquisition front, we've completed or announced several transactions, gaining majority ownership and control of Turquoise Hill and completing the acquisition of Hathor.

During the second half of this year, we expect to complete the doubling of our stake in RBM, subject to regulatory approvals.

Each of these incremental steps demonstrates progress in ensuring the portfolio remains in good shape.

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

While debt is increased, we aim to maintain a single-A credit rating.

Our progressive dividend policy provides sustainable and predictable long-term returns to shareholders and demonstrates our confidence in the long-run outlook for our business.

Today, we've declared a 34% increase in the interim dividend, in line with the announcement at our full-year results in February.

Within the parameters of the single-A credit rating and our progressive dividend policy, we're focusing our capital allocation decisions on the highest quality projects, which will deliver cash returns under any probable economic conditions.

We're making great progress with our major projects, many of which will start to deliver earnings in the near future.

As we've shown in the past, we're prepared to return surplus capital to shareholders.

In the light of the attractive returns that can be generated from our investment program, together with short-term uncertainty in the financial markets, we don't believe that it's appropriate to return surplus capital at this time.

However, we continue to keep this under review.

With that, let me hand you back to Tom.

Thanks, Guy.

So, let's now just take a moment to look at what's driving current market conditions.

Ongoing sovereign debt issues in Europe, the fragile US recovery, and fears of a hard landing in China all serve to increase risk aversion in financial markets.

My main concern remains a lack of action by policymakers to tackle the key structural issues in both the US and the European economies.

The continued uncertainty is undermining sentiment and deterring investment.

Of course, against this backdrop, the Chinese government has launched a series of pro-growth policies since April.

About 500 of these investment projects are slated to start later this year and in 2013.

As a result, we still expect the modest pickup of activity in the fourth quarter and for Chinese GDP growth to be around 8% during the course of 2012.

But I do acknowledge that there's still a lot of uncertainty and a wide range of potential outcomes in the short term.

There are a number of tensions in the global economy, including the sovereign debt crises, structural imbalances, and elections in a number of key countries.

So, while the risks in Europe and the US remain high, we do expect emerging economies, particularly China, to remain resilient.

But ours is a long-term business based upon a long-term view of demand.

And it is critical that we remain resilient in the short-term volatility but must keep our eyes on that horizon.

And I remain convinced on the strength of the long-term demand outlook.

As we've said before, this continues to be driven by the force of increasing global wealth, leading to literally billions of people moving through increasingly metals-intensive phases of development.

While the rate of year-on-year demand growth in China will inevitably slow, these demand changes remain large in absolute terms.

By the middle of the century, some 400m people in China are expected to urbanize, requiring additional investment in residential housing.

Looking specifically at steel demand, the urban population will typically reside and work in high-rise buildings, own at least one car, have a myriad of home appliances, including computers, etc., and depend on supporting infrastructures as the metro, rail, elevated roads, bridges, power, and water to sustain that urban lifestyle.

Construction will continue to drive steel demand in this decade before consumer demand begins to take over beyond 2020.

Our top-down and bottoms-up analysis indicates that Chinese annual crude steel production will peak at around 1b tonnes toward 2030.

And you can see from this chart that our projections are modest compared to some of the most other reputable industry analyses.

And remember, this is not just a story about China.

This is a transition we will see repeated, albeit in response to unique country circumstances in a number of emerging economies over the coming decades, including India and parts of Southeast Asia, Africa, and South America.

While there are currently about 3.5b people live in urban areas across the globe, this is expected to increase by another 2.6b by the middle of this century.

Moving to supply, our industry also faces increasingly challenges on the supply side.

In fact, the changes to our assessment of long-term supply growth have been far more significant than changes to the demand outlook in recent years.

As an example, a persistent feature of the iron ore industry has been the delays experienced in bringing new projects to market.

Building new iron ore operations is an incredibly complex and difficult task.

The major producers and even Rio Tinto have not been immune from this.

For Rio Tinto, the global financial crisis in 2008 and 2009 followed by the proposed super tax in Australia led us to rephrase our Pilbara growth plans.

While still significant, our near-term growth is less than anticipated back in 2008.

However, due to the quality of our assets, we expect to close this gap within the original plan by 2015.

Other producers have been equally affected and some to a much greater extent.

Among other challenges, the complexity of their growth projects, competition for capital, and rising costs have all conspired to slowdown growth.

In addition and as we've been saying for some time, resource nationalism is elevating risk and reducing available capital, leading to reduced supply.

A range of emerging stakeholder issues is also leading to greater pressure on permit approval processes.

The cumulative effect of all these factors will continue to lead to less supply coming to market than envisioned just several years ago.

And this is not just a feature of the iron ore industry.

It's also affecting copper, coking coal, and a number of other key commodities.

Our track record of delivering iron ore expansion projects in Western Australia on time and on budget is unrivaled, as demonstrated by this third-party study.

Our Pilbara expansion project will be amongst the first to market, taking advantage of conditions created by other project delays.

I am confident that this is the best iron ore project in the sector today and will generate high returns for shareholders under any probable macroeconomic condition.

We are making great progress with expansion of our Pilbara annual capacity to 283m tonnes due to come on stream the second half of next year.

And in June, we approved the next stage of phase growth from our global iron ore business.

Approvals include the port and rail elements of the 353m-tonne per year capacity project and funding for other detailed studies, early works, and long-lead items for the continued development of the Simandou project in Guinea with our partners the IFC, Chalco, and the Government of Guinea.

Not only are we delivering projects on time and on budget, but we can hold our product quality for the longest single-traded iron ore product, our Pilbara blend fines for the next 30 years.

And this is an unrivaled position in the sector.

Our product portfolio will also be enhanced with high-grade and high-quality Simandou iron ore in 2015 as construction in that project continues.

While we have options for further expansion of Pilbara beyond 353m, as I've said before, it's unlikely -- it's likely at that time we will pause for breath.

And our intention is that we will redirect our engineers toward debottlenecking with a plan to have a larger stated capacity than the current nameplate objective of 353m tonnes at that time.

These efforts will be focused on a combination of normal business improvement plans and taking full advantage of the integration on automation of the Pilbara through our Mine of the Future program.

We'll cover this in more detail later in the year.

These next few slides show in pictures the progress we're making with our Pilbara growth programs.

At the port we've now completed ahead of schedule, dredging for not only -- dredging for not only the 283m-tonne expansion project but also that required for the ramp up of production 353m tonnes.

We're also on schedule with the sinking of pylons for the phase A wharf and jetty, which is now almost 85% complete.

And you'll see in the quarterly production has consistently exceeded the sales for the last 18 months.

And this is all part of our expansion program.

We are progressively ramping up new mine capacity at our some -- at some of our existing mines in anticipation of this infrastructure expansion.

Moving to the rail system, we are in the process of fitting out all ore cars electrically controlled pneumatic brakes.

This will improve braking efficiencies and reduce the risk of breakaways and derailment.

And work progresses on fitting out the same technology on our locomotives to further increase speed at which our trains can safely travel.

Overall, the 283m expansion program is now about 55% complete and on schedule for the ramp up to commence at the second half of next year.

Moving over to Copper and into Mongolia, construction of the Oyu Tolgoi is now over 90% complete.

The stockpiling of ore began in April.

Precommissioning of the crusher, conveyor, and course ore stockpile circuits is progressing with first ore put into the crusher in July.

Physical construction of all the transmission infrastructures is complete and has been energized and tested on both sides of the border.

Discussions continue with securing power from China to enable the completion of final commissioning activities and the processing of first ore.

And I remain confident that agreement on the terms of power supply from China will be achieved shortly.

We do look forward to working with the new government in Mongolia and a professional relationship that'll be good for Oyu Tolgoi and good for Mongolia.

As you know, we are ahead of the industry in developing and using innovative technologies.

As I've said, we're already seeing the benefits of the Mine of the Future program in the Pilbara.

Integrating these technologies to Pilbara iron ore operations is helping us hold the line on costs.

Automation in the operations center are bringing greater efficiencies.

And in the near term, there will be more benefits from further debottlenecking in the Pilbara supply chain.

But Mine of the Future is much more than just automation.

It's things like faster underground tunneling, better mineral recovery, and an airborne gravity gradiometer that will help us find future Tier I ore bodies, all of which we're starting to trial.

And it's more than just for iron ore.

The new technologies and trials starting are planned across the business.

As the former head of exploration of Rio Tinto, I've always been excited by developments in the exploration area, and we will build on our unrivaled track record to keep us further ahead.

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

So, to conclude, our consistent strategy of investing in operating large, long-term, cost-competitive assets and businesses has given us a solid first half result.

We continue to generate strong margins despite falling prices, reflecting the low-cost nature of our businesses and our first-rate operational performance.

Our record production in sales from the Pilbara is complemented by the best iron ore expansions projects in the sector.

Our balance sheet remains resilient in the face of short-term macroeconomic uncertainty.

And we aim to retain our single-A credit rating.

I recognize that we live in a world of volatile short-term marketing conditions but we must keep our eye on the long-term horizon.

And we remain confident in the long-term Chinese growth story and plan to position ourselves to capture the opportunities that this presents.

With this in mind, we continue to balance our disciplined project investment with cash return to shareholders.

Our major projects are on track to deliver new revenues over the next 18 months.

And we've taken action to shape the portfolio.

All these advantages position us well to continue to maximize shareholder value over the long term.

And with that, we'll now be happy to take your questions.

And I'll hand over to the operator to explain the process.

(Operator Instructions).

The question comes from Lyndon Fagan from JP Morgan.

Please go ahead.

Hi there.

I've just got a question on impairment charges.

I noticed there wasn't any major impairments for the aluminum division, yet your net asset value's still quite high compared to market valuations.

Just wondering if you can perhaps shed a bit of light on that.

And then just a second question, can you perhaps talk a little bit more about the iron ore market and your take on where iron ore prices are sitting at the moment relative to marginal costs and whether you've seen any material production cuts to Chinese domestic ore?

Thanks.

Maybe, Guy, you could focus on the impairment question.

I'll focus on the iron ore markets.

Yes, look, there are a couple of small items in impairment.

We have reversed the impairment on the cable business, which we had previously taken a write-off on, but which we now anticipate selling.

But there has been an impairment which more than offsets that in the specialty alumina business, which we have just sold.

On the subject of aluminum, we actually regularly look at all our businesses and goodwill in the fourth quarter of the year.

That review has not taken place.

It will take place later in the year.

There hasn't been any triggering event in the first half which would cause us to look at any of our values, except for the two which I already mentioned.

So, this is something we'll be looking at later in the year, as usual.

Thank you, Guy.

On the iron ore markets, I think that we have seen a continued softening of both steel pricing and iron ore market -- and iron ore pricing over the past few months.

And again, over the past two to three weeks, we've been seeing iron ore pricing just below $120 per tonne in terms of the indexes.

And that actually would be below what people would have been flagging, including ourselves, the support level representing Chinese marginal costs.

It's been relatively stable at these levels over the past two weeks.

We're watching this very closely.

Of course, people are watching the correlation between iron ore pricing and the possible leading effect of rebar pricing at the same time.

In terms of our business, we are continuing to see full sales and full order books.

And again, our sales are really more affected by operational performance than anything else.

As we certainly recognize that the margins are very thin within the steel industry, we've seen some buildup in inventories.

But, frankly, if you look at overall inventories, whether at sea or in stockpiles or at the steel plants, they've been relatively flat over the past year in, say, weeks of consumption or days of consumption purposes.

I think in talking with steel makers, they are watching very closely these Chinese stimulus programs and what effect that will have on their business.

So, I think we're all watching for the same thing.

As these projects begin to kick in and move beyond the approval stage, actually seeing metal consumed on the ground, we would be seeing some changes in the overall balance of steel markets and steel inventories.

Your next question comes from Danielle Chigumira from UBS.

Please go ahead.

Hi, it's Myles Allsop actually from UBS.

Just another couple of questions.

First of all, on your sort of Chinese steel production, looking at Sam's iron ore investor briefing back in April, you were talking about China production reaching 1b tonnes by 2020.

Now, you're saying by 2030.

Should we read that you're getting slightly more cautious on the longer-term outlook for sort of that Chinese steel consumption in China?

And then secondly, just could you remind us with the sort of target 40% EBITDA margin for aluminum, sort of when we can get that?

What is realistic in the current pricing environment?

Yes, thank you.

I think it's to the extent that there is something significantly different we'll come back and clarify that, but I don't think we have a fundamental difference in our curve.

Basically the curve shows a slowing down and tapering off over the next five years and then gradually a flattening of demand at that 1b tonnes of crude production, 900m of finished production.

I don't think it really has changed that much since Sam would have presented.

But again if -- we will follow up if it's been significantly different, then I'll -- we'll let you know.

In terms of the 40% EBITDA margin I think as we would have said in February it is -- we need to be realistic about what happens with LME pricing.

And as we said back then clearly there is more metal being produced in the Western part of the China than we would have expected.

The question is going to be whether the actual industry moves there and we see some shuttering of some of the higher cost capacity in the coastal areas of China.

But I think realistically it means that it will take longer for that to take place.

I think it's important for us to continue to retain that target of a 40% EBITDA margin.

But we do need to be realistic about the fact that ultimately LME prices will be driving the top line of that margin number.

Next question, operator.

The next question comes from Paul Young from Deutsche Bank.

Please go ahead.

Yes, good morning, gentlemen.

Two questions, one on your iron ore expansions and the second one on Oyu Tolgoi.

First on the growth Pilbara you clearly have started to accelerate that expansion or that seems to be apparent to 353m and beyond.

And if your view is that global seaborne demand will increase by that 80m to 100m tonnes over the medium term.

And combined with the fact that your global peers appear to be really rethinking their future expansion plans, surely this presents a massive opportunity to Rio Tinto.

And therefore the question is shouldn't you be trying to accelerate your expansions from this point in time.

And on Oyu Tolgoi can you just give us some clarity on, or some more information on when you think you'll approve some more CapEx for the underground or Phase II.

And can you comment on when you'll announce a review of Ivanhoe's.

I think it was $11b CapEx estimate for -- the open pit, the blockage and the plant expansion.

Thank you.

Yes, I think first of all on iron ore expansion I do appreciate your view that we are well positioned to go beyond 353m.

I think in the context of our view of the markets but also recognizing the need to find this balancing between how we expend our funds, also cash returned to shareholders and a strong balance sheet, it's probably better for us to be prudent, get 353m built -- recognize at 353m we would have had a massive expansion from the 200 level to get to that point.

And we should by the nature of that have opportunities to create de-bottlenecking.

And I think we'd be best served in terms of value creation to put some efforts in, probably for a couple of years, to get the maximum de-bottlenecking at that level.

I wouldn't see us not having the opportunity to expand either Cape Lambert beyond the 353m; say to about 450m, whether we do that in two phases; or four phases, beyond 450m; we also have other expansion opportunities at other ports.

These are tremendous opportunities.

We've got to, of course, develop the resource with that.

But I think as you say, Paul, we are better positioned than anyone in the sector for this growth vector.

But again we want to do that growth in a sense which is prudent recognizing the need to balance all the other interests and keep a strong balance sheet.

So I think if we talk about value creation I think anything we can do to create low capital intensity de-bottlenecking opportunities over and above 353m at the end of the current phase of the Cape Lambert work will be best for shareholders.

I think in terms of OT there's been quite a bit of work going on.

Of course, we've -- we are -- let's just say Turquoise Hill has flagged a review.

They are involved with the discussions with government.

And we would want -- we see them carrying the way for that.

I would say that we have several more months of work to do, and a lot of that will have to take its natural course.

Again for us it's the important thing is to get the done -- get the work done right rather than to see it getting done too quickly.

Next question.

Your next question comes from Paul McTaggart from Credit Suisse.

Please go ahead.

Hi, guys, just back on ali for a moment, you mentioned that your $1b EBITDA improvements running at the $250m level, how quickly could we bring -- can we achieve the balance of the $750m.

And I'm not talking about the 40% EBITDA target but the cost saves.

And secondly with the effective tax rate -- excuse my voice I've got a cold, with the effective tax rate, looking into next year as we start to employ some of that deferred tax asset back, -- will the guidance change for the effective tax through the P&L?

Thanks., I'll try to take on the aluminum question and maybe Guy can take on the tax question.

I think in the numbers we would have flagged last year we were looking at that $1b EBITDA coming in -- improvement coming in by 2014.

And what I've said to the aluminum team is given the fact that we've actually had quite a setback in terms of market conditions in just the past few months, if anything, that's causing us to need to accelerate some of that work and actually do more.

I think I referred to it with the Rio Tinto aluminum term of turbo charging that transformation work.

And certainly Jacynthe and her team are very focused on doing just that.

Of course this involves jobs.

This involves people.

This involves communities.

So we have to do it in a way which is also reflective of stakeholder sensitivities.

So it's a very -- I think it's a balance but it's going to be very aggressive and if anything an accelerated approach from what we had talked about late last year.

On the tax rate let me first of all differentiate between the rate on net earnings and the rate on net earnings.

So the rate on underlying earnings this year was, or this half was very low, 11%.

And that's because of the big credit on MRRT the deferred tax asset.

And that will reverse over time.

In terms of underlying earnings, our tax rate in this half was 27% approximately.

That's a little bit lower than the normal guidance which would be about 30%.

And so that guidance would be what I would give you for 2013.

Of course, it embraces numerous geographies and does depend on the mix of earnings, but that's a pretty good guide for 2013.

Okay.

Next question, operator.

The next question comes from Heath Jansen from Citigroup.

Please go ahead.

I'm sorry to harp on about aluminum again, but you sort of made the comment that you said you were willing to take strong action on aluminum.

Does that sort of mean that you are going to shut in capacity?

And just on that what percentage of your ali capacity and aluminum capacity now is cash negative and potentially would be in a shutdown situation?

And the second question just for Guy.

Obviously, operating cash flow came down quite significantly year on year, there seemed to be a big build up in working capital or inventories.

So I am just wondering whether you can confirm that of about sort of $600m.

And if so, just give us some detail about which commodity that may be and why that working capital increased.

Thanks.

Yes, I think first of all I think that it is quite important to recognize that every plant manager in the aluminum business would be aware of the fact that they have to be generating positive cash margins otherwise they face the very real risk of plant closures.

And whenever we consider the -- whether to keep an operation running or not we look at the cost of the closure and cost of restart up against that.

I'd say even in the current market that virtually all our facilities are holding their heads above water.

We have shut down some facilities and we have been permanently closing down some facilities as you know.

And we've done that with all the proper stakeholder consultation.

In the smelter area I'd say that their businesses are basically holding their own even in the current environment although I think some are quite stressed.

And in some cases we have been reducing capacity say and not rebuilding pots as we've gone through to protect cash.

The area probably in the aluminum business that would be probably most in the position of losing cash in the current market would be the Gove refinery.

And that is basically affected by not only the weakness in the aluminum markets but also the high cost of fuel required for the steam for the refining process.

On operating cash flow, you're basically right.

We have got a higher working capital element here.

It's mainly inventory, it's mainly increasing iron ore inventory in the Pilbara as we prepare for the expansion to 283.

And it is to some extent in Oyu Tolgoi as we prepare for production there.

Other features in the difference between operating cash flow and EBITDA are the utilization of various provisions post-retirement closure, etc.

So those are some of the features.

But essentially your numbers are right for inventory.

Next question, operator.

The next question comes from Jason Fairclough from Bank of America.

Please go ahead.

Good morning, gentlemen.

Just two quick questions on pricing if that's okay, the first one is on Ti02 feedstock.

Perhaps you could discuss the extent to which you are now exposed to the spot market versus still selling on these longer-term contracts.

And I guess as part of that, how are you setting prices for your Ti02 products now?

And then second on iron ore, to what extent are you exposed to counterparty risk?

We do remember 2008/2009 where we had mass reneging on contracts.

Is there a risk that the iron ore that you think is contracted isn't actually because clients decide they'd rather buy it at a lower level?

Thanks.

I'll cover both of these.

First of all, on Ti02, as we have flagged that most of our product is on long-term contracts they are winding off over the next couple of years.

I think as we see these coming off we are replacing those with pricing contracts that are shorter term in nature, and are quite elevated levels from where they would have been under the long-term contracts.

And you can see that playing through in terms of the year-on-year improvement in earnings in the Ti02 business.

And we would expect that to continue going forward.

I think it's important to recognize in Ti02 that even though the current spot market is actually weaker for pigments now, or I'd say the underlying market is weaker for pigments now than it would have been six months ago because of market conditions, the pigment sector itself is increasingly challenged to find adequate sources of high grade feed stocks, in particular better match for their particular pigment production configuration.

So we are very well positioned in that space.

And as we see these contractors wind down, it's generally been a positive effect on overall business performance.

In terms of iron ore right now about 35% of our iron ore business would be going to Japan, Korea and the Taiwanese markets.

And the bulk of that would be on a quarterly lag basis.

And we haven't seen really any counterparty issues.

I think we've seen recognition by those markets that there is a benefit for the purchaser and for the consumer alike to have some type of say predictability in the pricing.

And we respect the customers on that, and I think they respect that this actually a win/win for both of us.

In the Chinese market we've seen, I think, a case as you say correctly in 2008 and I think some recent events which would show that longer-term contracts could -- have the risk of being gamed in a short term drop in the price.

And progressively you've seen that the Chinese steel markets moving to shorter, shorter contracts, either spot or some type of monthly actual or quarterly actual where frankly there is less incentive to create a counterpart risk environment in those contracts.

There is effectively not much of a difference between those contracts in what would be a traded -- tradable spot market.

I think when you talk about counterpart risk we've also got to think about credit.

And I think for the most part we've actually had a pretty good track record on our credit conditions with all our customers frankly in all our businesses over at least the past 10 years.

And these are -- in the iron ore business these are all generally backed by letters of credit with Australian banks.

Tom, could I just push you back a little bit on the Ti02, so perhaps could you give us a little bit more color on how you are actually setting prices for these new Ti02 products that are available to deliver into some kind of a spot market?

What's the price discovery mechanism there?

We are moving into some new territory here, so can't just open up the Wall Street Journal and find a Ti02 price listed.

So -- and what we will have is a mechanism that we will basically be working with our customers to recognize that there needs to be a more frequent price discovery than what we would have seen in the past.

But it's not obvious in terms of what that market mechanism will be off what I call a quoted index.

Okay, thank you.

Thank you.

Operator, next question please.

The next question comes from Rob Clifford from Deutsche Bank.

Please go ahead.

Good morning, Tom.

Just a comment on the country diversification would be great just with reference to the fact that Guinea has proven much more difficult to grow than you first thought.

You also made the comment today that in fact Mozambique will take longer to develop than you first thought.

What have you learned from these exercises?

Are you pulling back to home ground territory, or have you got to the point where you can now develop in new regions more effectively?

Well, Rob, I wouldn't say that Rio Tinto has a OECD or non-OECD strategy per se, because if you look at our history which literally goes back for more than 100 years, we have a long history of operating in a mix of OECD and non-OECD countries.

We've been in many of the African countries for 80 years or more, long experience in these areas, and a culture of operating in each of these regions.

And on a diversification basis I think it would be safe to say we are oriented toward OECD domination of our earnings right now.

But we have to recognize our strategy and look for the best global resources around the world.

And I am comfortable that Guinea for iron ore or bauxite, Mongolia for copper, Mozambique for coking coal would be actually putting our hands on the best quality assets in the world.

And even so it's in an overall risk basket that is actually quite positive -- favorably oriented toward OECD now and in the future.

It does take longer to develop in emerging countries.

But frankly emerging countries have their own permitting delays themselves.

So I can't say that one is completely easier than others, but it does take a different set of skills.

I think in Guinea we've recognised that the pathway for success involves bringing in partners and having those partners de-risk the project with us.

And they then bring in equalities that actually can help that.

And again it is -- they end up giving us less than 100% interest in it, but I think on an overall risk basis, phasing it in it is a better outcome.

And certainly I think our true success in terms of progressively de-risking our development of Oyu Tolgoi with Turquoise Hill has I think been a real success story in this place too.

So I am actually quite comfortable with our strategy of focusing on world class assets wherever they are, recognising and being realistic that some of these countries are going to be harder to develop than in others.

But frankly we've got to be in a position that we can do that, provided that the countries are providing a sufficient, what I call, fiscal regime either through their history or through some type of agreement or we can bring some type of partner structure in to properly de-risk it, so that our shareholders will ultimately see the return that they would expect from these projects in terms of their own long-term shareholder returns.

Thanks.

Next question operator.

The next question comes from James Gurry from Credit Suisse.

Please go ahead.

All right, thanks very much, guys.

I just want to pick you up on the debottlenecking of the iron ore operations in Western Australia.

Is it too early to be thinking that by the first half of 2015 you will actually have capacity a step higher than 353m if you're going to do 5m tonnes per annum of debottlenecking between now and then?

Or when does that 5m tonnes per annum of debottlenecking start?

And just also on capex approvals, there is a huge step down in non-iron ore CapEx spend based on your currently approved projects next year.

Is it a concern of yours given that over 90% of earnings is coming from iron ore at the moment, more volume growth is coming in the future?

How do you look at being a diversified miner now given the fact that even iron ore is a huge strength at the moment?

Thank you.

I think on debottlenecking in my comments I referred to wanting to get into this -- in more detail later in the year.

I think when we have our investment seminars I'll be asking Sam to spend a lot of time in this area.

Sam and I, with Sam's team, are spending quite a bit of time looking at what are the drivers for taking our production back beyond 353m without significant capital increments.

And again these will not necessarily just be at the port or at the rail.

They'll be in all of the individual places of process, in all the individual transfer points from the mine into a tonne of ore getting into a ship.

Some of this is actually -- it looks obvious, when you do it, but actually it's quite complicated to make it work.

I would just remind you that we moving it from 225m to 230m tonnes.

On reflection it was as obvious as just increasing tug capacity.

You've got -- that was the bulk of that.

It seems obvious in reflection but actually it was a lot of hard work to actually find out where those pinch points were that could be actually debottlenecked on an efficient basis.

I think we are moving into some new ground here with our operating center and our automation.

For those of you in the audience that have actually run a mine and have been responsible for the 24/7 nature of a mine, you know that at any given time no matter what we might say in our polished script here there is always something that's breaking, there is always a truck that's down here or a drill rig that's not working over here or a train that's not met its production -- its maintenance schedule.

Something is always happening that wasn't expected.

And you are always on a 24/7 basis trying to create some workarounds so you can keep production going notwithstanding that outage that's happening somewhere.

And the larger the business the more likelihood you'll have that you'll have unexpected outages that do need workarounds.

The minute you have the ability to see in a single room on a single screen on a 24/7 basis where all of these outages are occurring so that you can immediately in real time begin to create a response for that, you immediately begin creating opportunities to debottleneck.

Some of them you can actually measure in advance.

Some of them you have to actually have to put into practice and see how they play out.

I think the evolution of the mine in the future, the continued learnings we are seeing out of the operation center will be a big part of this.

And certainly I am quite excited about what we think we can do in terms of driving that additional production.

And going back to the earlier question about why don't you just keep expanding Cape Lambert to 450m.

I think ultimately we'll get there, but boy I think there is a lot of space to create value after 353m and as you say on the way to 353m in the meantime.

On capex approvals I think we are being realistic about the need to balance, how we look to the future and how we develop to the future particularly with the quality of the Pilbara investment of 353m, with the need to reflect cash returns to shareholders and with the need to be resilient with a strong balance sheet, with the aim of single A credit rating.

That means we need to make some trade-offs.

And the trade-offs mean that we are probably going to be spending less capital outside the Pilbara than otherwise would have been the case.

Does that mean we are moving away from a diversified strategy in the long term?

Not at all.

If you just think about the quality of the assets that we have outside the Pilbara, and outside of iron ore, you think about what Oyu Tolgoi is going to be in terms of a future producer of copper.

If you think about the quality of our interest in Escondida or ownership in Kennecott Utah Copper, you think about the emerging quality of what will be the Moatize Basin in terms of the next big coking coal business.

And you think about the quality of what our Ti02 business will be as we move off these contracts, and China continues to march up the consumption curve.

These are all quite good businesses in their own right.

And any other mining company would just get their -- they'd give their eye teeth for a company or a business of that quality.

This is a tremendous group of assets.

These are all first tier assets.

If they are not first tier, as Guy says we will put them to the test and we'll look at whether they fit in the portfolio.

But I am completely committed to a diversified strategy.

But I also recognize that we should be allocating capital to where we are going to get the highest returns.

And right now and for the foreseeable future that will be in the Pilbara.

Great, okay.

And just one little follow up on the capex, can you just tell me what sort of a strategy your implementing to keep sustaining capital at $4b for six years?

That's a -- it's a good question because we spend quite a bit of time looking at what is the appropriate level of sustaining capital.

And frankly if we looked at our businesses 10 years ago we would have been spending much, much less than $4b.

So we do ask ourselves is that too much as it is?

At the same time I think we do recognize that some of our assets they are getting older.

Some of our assets are quite a bit bigger now because of the growth we've put into place.

And again we have, I think, increasing obligations and requirements to ensure that our businesses are meeting permit conditions.

And certainly I don't want to create a situation where we have an asset that is creating a hazard for the workers or the communities nearby.

So, we do need to keep the businesses in good working order.

It does make sense at a certain point in a truck life to actually replace a truck with a new truck.

In some businesses say at Salt Lake City you can actually let a truck run for longer, maybe 100,000 hours.

In the Pilbara where it's more expensive to bring a maintenance person on site, actually frankly we turn them over probably closer to 70,000 or 80,000 hours.

So you have to look at these on a business-by-business basis.

But I think it's fair to say we are going back to each of the individual business unit leaders and asking them to take a hard look at the wish list that always gets started at the start of a budgeting process and keep it pruned as we go forward.

And keep focused on first and foremost process safety and employee community safety, then we move on to what it takes to ensure productivity and a compliance on a going forward basis.

Next question.

The next question comes from Desmond Kilalea from RBC.

Please go ahead.

Thank you very much.

Tom, I just wondered about the strategy.

Two of your divisions have faced sort of what could be kind of major changes.

The gas threat to thermal coal and what you see for price and maybe you could talk to that.

And then also in aluminum the persistence of production continuing at a loss, and whether this is going to be something you see as a long-term problem and what it might do to the way you think about those two divisions.

And then finally are there any changes in Oyu Tolgoi's power tariff from the Chinese or is that all secured now?

Okay, thank you.

I think on strategy let me talk about gas then aluminum and then I'll say something on OT, although frankly I think it's probably more appropriate for Turquoise Hill to get into the specifics of how that's evolving.

I just want to say on OT power I do -- I am confident that when the commissioning of the mine needs that power then we will have the power at that point, and it's going to be something that, it's going to be seen to be commercially competitive.

I think on the gas and thermal coal we've been spending quite a bit of time with Doug Richie and his team asking ourselves the broad question about the global energy sector, because I think that the energy sector globally has actually had more change in the past two years than it's seen for the prior 20 years.

Now when you think about the post-Fukushima world and the effect on nuclear, when you think about the changing and the evolving nature of carbon and whether it's going to be priced or not.

And certainly when you look at what has been a phenomenal boost into the US economy in terms of moving from being an energy -- almost an energy importer to being almost an energy exporter that, that has consequences in terms of the markets and how we see the business long term.

We have looked quite a bit at what this means for seaborne thermal coal.

We have asked the question.

We've tested quite a bit with experts outside our industry in terms of what would be the likelihood or the propagation of shale gas outside the US market, and to what extent that shale gas will play into traditional markets for thermal coal.

And I think on balance I am convinced that thermal coal for at least the next 10, probably the next 20 years maybe into the 2020s, maybe 2030 will still be seen as the cheapest source of a btu in terms of -- or say kilowatt cost basis.

It's still going to be the cheapest source of electricity.

You've seen in India what happens when you don't have the electricity and doesn't grow at the rate of the population or the development.

Things get difficult quite quickly.

Each government, consuming government will make trade-offs between energy security versus energy cost versus the ancillary issues, the carbon versus nuclear safety.

And I think that thermal coal will play well into that into the long term.

Of course we have made some strategic decisions ourselves over the past couple of years.

I think they were the right ones.

Three years ago we said let's focus on thermal coal business just on the seaborne market.

And we chose to divest for a variety of reasons from our coal business in the US.

That was the right decision on reflection.

We did that partly because of our concerns about carbon -- and how carbon will be basically priced via regulation rather than being priced via market.

And also the fact that we've had this longstanding issue with the rail carriers basically carrying the economic value.

And subsequent to that of course, shale gas has made that market much more difficult, so that was the right decision.

We will always keep our eye on that.

But for the foreseeable future I think that in the long term the thermal coal seaborne market will have a robust demand environment.

It will also have a robust supply environment because people will come up with new thermal coal.

In terms of aluminum we are continuing to see production at a loss.

We are -- we have to ask ourselves how permanent that situation is, because some of the subsidies you are seeing, not just in China but also you're seeing them in Australia you're seeing them to some extent in Europe.

Are they permanent subsidies or are these going to be something that basically represent a transition to a closure.

I think in China the real challenge is going to be as Chinese planners move that aluminum production to the West, partly for job creation in more remote areas, what will they do with their traditional aluminum production facilities in the East and Central parts of China where frankly power supply is actually a more difficult issue.

I spent some time in Xinjiang Province in -- about a month and half ago to just get my first-hand sense as to the challenge we face.

I think we are being very realistic about what the Chinese are doing now and what they plan to be doing going forward.

In China today I think we are seeing probably some smelting capacity being carried at a loss.

But we are also in a weaker Chinese economic environment where we are also seeing power generation not being as stressed as it is when times are tougher.

What we'll all be watching is, as the Chinese economy gets boosted by the stimulus and say overall power generation is no longer in surplus like it is right now, will they continue to carry that aluminum at a loss?

And again these are questions that certainly we are keeping a close, close watch on.

And they do have an effect on how we think of the business but frankly we should remind ourselves we have first tier assets.

Late last year we talked about a strategy which is going to basically curtailing capital on the parts of the business that are most exposed to, as you say, the smelting capacity issues, but also being ready to focus more of the business on those parts of the sector which are benefiting from that, particularly bauxite feeding into the Chinese market.

Thank you.

Thank you.

Next question please.

Your next question comes from Abhi Shukla from Societe Generale.

Please go ahead.

Hi, good morning.

I would like to ask three questions if I may.

First is what do you make of the recent fall in the prices of steel, iron ore, coking coal, etc?

Is it just a question of lower demand or is there also an element of de-stocking or higher supply in it?

Second could you please just remind us of your guidance for how much coal you expect to export out of Mozambique over the next few years?

And what is your likely unit cash cost of production on an FOB basis?

And third could you please let us know roughly how much MRRT you expect to pay in 2013 if all commodity prices and exchange rates, etc.

stay where they are?

And am I right in assuming that given your high level of capex it will be a very small amount?

And in the longer and if iron ore prices fall to something like $75 a tonne you may actually be a net beneficiary because you will pay little MRRT and you may actually end up benefiting from higher depreciation?

Thank you.

Thank you, Abhi.

I'll try with the first two questions and maybe ask Guy to talk about MRRT.

I think as we've been seeing, as you said -- and you correctly pointed out we've seen a fall in steel pricing both finished steel and also rebar pricing.

We've seen falls in iron ore pricing, although to a lesser extent than we've probably seen in steel and coking coal.

I think we are seeing as the Chinese economy has slowed its GDP growth from say the 9s to something closer to mid-7s in terms of GDP growth we've had probably overcapacity of steel in China that has created an excess -- an increase in steel inventories.

Although it's not been extreme there has been an increase in inventories and a drop off in prices.

I think that there are probably others that are in a better position to talk about where that price is going to go on steel.

But let me just focus on iron ore and coking coal.

As we've said before, we do see iron ore pricing generally driven by the cost of iron ore at the margins.

And in the current environment of where seaborne supply sits right now our view is, and I think the market view is that the floor has been somewhere about 120.

And that's essentially the marginal cost of Chinese consumption.

We are now probably two, three weeks into a period of time when the prices have been below 120 albeit not a big level.

And I think everyone is going to be asking how does that support get tested in this environment or do we break through that support.

I can't say I see any real changes on the ground in terms of the mines, but you wouldn't expect mines to be reacting that quickly.

But in the last two times this has happened over the past couple of years traders have reacted quite quickly, and they haven't so far this time around.

So I think we just have to keep watching that point.

And to some extent I think coking coal is following that same basis.

I think coking coal has the added feature of the Chinese market probably has more self-sufficiency in coking coal and less of a reliance on the seaborne market than you would see overall in terms of the iron ore space.

I think in Mozambique we have flagged that we would expect about 400,000 tonnes of production of coking coal.

It's been a good quality coking coal that we've been delivering so far this year.

And I think as we've been saying we will want to be ramping that up.

But to be realistic our own imposed constraints on capital spending will mean that that will probably be a slower rate of ramp up than we probably would have envisaged 12 months ago.

But the potential for that ramp up exists.

If anything I'd say the work we've been doing over the past 12 months indicates we probably have more potential in total as we go forward.

And again this is truly a world-class basin deposit.

So I am comfortable with the position of getting Benga going.

I use that to develop our team, use that to develop our local capabilities, continue the engage with the government, continue the engage with others and find the right pathway and the optimal supply chain solutions which frankly will be there for the long term.

In terms of cost I think realistically as you are working at lower levels of production you are not going to get the full benefits of higher costs.

But I would say that the Mozambique asset does benefit from a much lower stripping ratio than we see from traditional coking coal provinces around the world, so that will be a mitigating factor.

Thank you.

Operator another question.

Oh, Guy, sorry (multiple speakers).

Let me finish on the MRRT.

Look, what I would say is as I mentioned earlier we are a very big taxpayer.

In Australia we paid about AUD7b last year.

And under the MRRT we do expect to pay the MRRT.

I am not going to give you guidance though as to how much we are going to pay.

And I would discourage you from trying to calculate from the deferred tax asset any number which you might expect reflects the likely cash payments that we'll be making in October and early next year.

And the reason for that is that there are a lot of moving parts in this calculation to do with iron ore prices, coal prices, volumes of both, foreign exchange rates, costs, etc.

In the event that as you point out of a very much lower price, I cannot -- I can hardly think of one as low as $35 as you say.

Could we benefit?

Well, we might pay less or no MRRT in such an extreme event.

There would be curious results to the deferred tax asset, but that would depend on what we then thought about the future likely direction of prices.

And in any case that's a non-cash item.

So I think the important thing is how much we pay and we are not giving an indication of that.

What I have to tell you is that this is a rent tax and it is therefore going to be a volatile tax.

It will raise money.

I am not sure whether it will raise -- we are not giving any guidance as to how much exactly it will raise from us.

I think there are other questions in --.

Thank you operator.

Any other questions?

There is a question from Glyn Lawcock from UBS.

Morning.

I just wanted to ask two questions, firstly just on Pacific Aluminium, my usual question is -- we've been waiting a while now, the aluminum market doesn't seem to be improving at all and doesn't -- and given your comments about subsidies, government interference to stop closures it feels like it will be problematic for a while longer.

When do we actually see some resolution to what you're going to do with it?

And then also are you thinking about given it's loss making some of its assets will you be closing some of the assets within Pacific Aluminium?

And then I just wanted to talk -- see if you had any thoughts on China, and you made some comments before about marginal costs, etc.

The Chinese government has been very quick to support its local industries, cutting power tariffs to help the smelting industry, last week talking about introducing rent -- VAT rebates to help the steel industry out.

The iron ore industry as I understand it has some taxes it pays, royalties and taxes, do you think the risk is or have you heard anything about whether the government may step in and lower the taxes on domestic iron ore and make them competitive with what's happening in the international arena.

Thanks.

Thanks.

Maybe, Guy, if you could tackle Pacific Aluminium and I'll tackle China.

Well, I accept that it's true that we have not been able to sell this business yet, though we are very focused on doing so and we have a number of different options as to how we might do it, trade sale, spin possibly later on an IPO.

I do accept that it's not the easiest environment in which to do this.

So what are we doing?

Well, we've put a new management team in as you know, and they are focused on running this business in a very lean manner without compromising of course safety or compliance.

But in a different way than probably the normal RioTinto operations would be run, more along a private equity model.

And we are pleased with the progress that's being made there.

In respect of closures we are not looking at that at the moment.

I don't think that there is any -- it's certainly true that some of the businesses are challenged.

But we are focused on trying to improve them through various actions.

And a very good example of that was the recent new contract that Bell Bay obtained in Tasmania.

So we are determined to resolve this through sale.

And we are confident that we can do that.

It may not be tomorrow.

And we are not going to be pushed into accepting too low a value.

We want to get a good value for these businesses.

Thank you.

I think, in terms of marginal cost, let's focus since time's short on iron ore.

First of all, I think we generally have focused more on the private iron ore producers than the SOE iron ore producers.

And if you look at the demographics of those private producers they tend to be pretty small.

They tend not to be -- some are quite sophisticated some are less -- are very informal.

They don't tend to be what I'd call big parts of an employment base or to the extent that an SOE would be.

And I think over the past five years or so we have seen I think a reasonable correlation between price activity and whether they come in and out of the market.

So we wouldn't envision that to be much of a different pattern as we go forward.

If anything we have to recognize that grades are continuing to fall.

We certainly have seen a number of industries in China labor costs are continuing to rise.

We are certainly seeing that as the renminbi gets stronger that also plays into this.

So I think the premise of pricing being driven off of marginal cost, particularly driven around the demographics of private iron ore operations in China remains valid.

Now, maybe we have one -- for one.

Can I clarify?

Sorry?

I was just going -- want to clarify something Guy said if I could please.

Go ahead, Glyn.

Yes, sorry.

Guy, I just wanted to clarify you said your preferred method is the sale of Pacific Aluminium.

Does that mean the in specie distribution to shareholders is off the table?

No, it's not off the table.

I didn't prefer any particular route other than to say that we would -- we are looking at selling it, there are more than one option as to how we might do it.

And we are focused on that.

We are fully prepared for that.

And meanwhile we are running the business as best -- in a very tough manner and very keen to prepare it for that sale process.

I am not preferring one route of sale rather than another it's all about value.

And I think, Glyn, the focus is on ensuring that it can be run on a standalone basis, which gives us options for whatever commercial pathway is the most optimal.

Maybe if we have time for one more question.

I do want to close off at 11 o'clock.

It is now 11.

Operator?

You have a question from Clarke Wilkins from Citi.

[Have that one].

Yes, just a couple of questions around capex, just in terms of the 2013 where would you expect capex to come out, based on the current approved projects and given you do have some major projects coming to an end outside of iron ore.

I think Guy said earlier that CapEx wouldn't go any higher, but without approving additional projects would you actually see capex potentially drop next year?

And secondly just in regards to Simandou what's the sort of spend rate at the moment?

And how long do you continue that spend rate without clarity on the timing about the rail and the port?

And when do you have to make a decision to stop spending there and wait for the government to catch up?

Yes, thank you.

I'll just tackle these both pretty quickly.

I think as we said and I think the slide showed if we don't approve anything capex drops in 2013 as compared to 2012.

I hope you've got an appreciation that the burden for our manager to get approval on a new capital project is very, very high right now.

There is not a lot of appetite to increase capital above current levels.

As a matter of fact I think Guy recognised that 16 probably represents a capacity limit both in terms of both financial resources but also people resources and other capabilities.

So that means that I think that again it's going to take quite an astounding project to get through the hurdles over that next 12 to 18 months.

I think in terms of the -- Simandou I think we are continuing to do quite a bit of work on engineering.

We are engaging with the government of Guinea, we are engaging with our partners on all that work.

We are doing the site prep and -- in terms of future camp areas.

So we are laying all the groundwork.

We haven't given a spend rate per se.

But I'd say that it is fair to say the activity on the ground that we are putting in is much, much higher than anyone else in Guinea.

I am clearly committed to see a rail built, but a rail built under the terms that we had agreed upon with the Government of Guinea and with Chinalco over the past 12 months.

So it is in the process for development.

With that, thank you very much.

For some of you it's getting late in the evening, others you might want to switch over to the Olympic channel.

Thank you.