Solid global demand and high prices coupled with a strong operating performance in challenging conditions resulted in a third successive year of records earnings and cash flow, the chairman of Rio Tinto Paul Skinner told the annual meeting of shareholders in London today. “Our performance reflects the underlying quality of our asset portfolio which has proved robust at all points of the economic cycle,” he said. “In 2006, we achieved underlying earnings of more than $7 billion, which was 48% above 2005.
“Cash flow increased by 35% to $11 billion. These results allowed us to increase and rebase the dividend by a sizeable 30%. Rio Tinto dividends have increased significantly since the dual listed merger in 1995. The aim of our progressive dividend policy is to increase the dollar value of ordinary dividends continuously over time, without cutting them in economic downturns.”
Rio Tinto CEO Leigh Clifford said that the strong balance sheet allowed the company to invest heavily in growth and at the same time return capital to shareholders. “We are heading for a production capacity in Western Australia of 220 Mt/y (of iron ore) by early 2009. This is nearly double our capacity in 2003 and four times our production seven years ago. Due to continued strength in the world’s steel markets, particularly in China, we are now planning for a significant lift beyond 220 Mt. We have the resources to enable this and have teams evaluating the infrastructure requirements to achieve it.
“We are very pleased with the recent progress in negotiations in Mongolia and the announcement that agreement in principle has been reached on an Investment Agreement for the development of the Oyu Tolgoi project. The agreement remains subject to approvals by the Mongolian Cabinet and Parliament, Ivanhoe and Rio Tinto, and the finalization of formal documentation. The investment in Mongolia represents a phased, risk managed entry into an outstanding resource that suits our strategy for world class deposits and is located close to the border with China, the world’s largest consumer of copper.
“We are particularly encouraged by the exploration potential of Energy Resources of Australia’s uranium leases and the expansion possibilities of satellite deposits at Rossing Uranium in Namibia. Together with the potential of Kintyre in Western Australia and Sweetwater in the US, we expect to be in a position to significantly expand our uranium production capacity in the near future.”
Considering the financial results, Clifford noted “2006 was another excellent year. We were able to make the most of higher prices with increased production volumes at many of our operations. With our strong balance sheet we are in a position to invest heavily in growth and at the same time return capital to shareholders.
“We completed six projects, in iron ore, copper, industrial minerals and energy in 2006, approved a further four major projects, and concluded a number of transactions that will cement our future as a leading copper producer. All product groups except Energy and Diamonds increased their underlying earnings. The Copper group was our best performer accounting for approximately half of our underlying earnings. This was due to higher copper and gold prices – increases of 84% and 36% respectively – and a higher molybdenum production as an important by product.
“In 2006, underlying earnings from the Energy group showed a three per cent decline. Higher coal prices were unable to offset the impact of higher demurrage and costs, following significant congestion at ports. Additionally, coking coal sales were lower. Our uranium earnings, although currently modest and also impacted by adverse weather this year, will benefit in coming years from the replacement of legacy supply contracts with new contracts that reflect today’s significantly higher price environment.
“Industrial Minerals’ contribution increased by 30% to $243 million with the absence of 2005’s restructuring costs and favourable revenue and volume trends.
“Rio Tinto Aluminium showed a sharp increase of 90% in its underlying earnings contribution. Earnings of $746 million resulted from an increase of 35% in the price of aluminium, somewhat offset by a weaker alumina price later in the year.
“Finally, the Diamonds product group underlying earnings at $205 million were 27% lower than the previous year due to a downturn in the rough diamond market in the second half of 2006. This caused us to withhold a quantity of rough diamonds from sale during the year. Underground development continues at the Argyle Mine in Western Australia. We are beginning to see considerable cost pressures concerning materials and especially underground mining skills, as a consequence of the superheated regional economy. In Canada, construction of a second dike at the Diavik diamond mine is on schedule. Feasibility studies for underground mining are continuing.
“These are buoyant times for the mining industry. We are struggling to meet demand that is fuelled by large developing economies going through a metals intensive phase of their development. Economic growth around the world, in Asia and particularly in China, has resulted in strong demand for metals and minerals. Although we see durability in this economic growth, ours is a cyclical business – even if the current cycle will be prolonged. When demand rises, supply responds. Currently, however, the supply side response is slower than in past cycles.
“There is a shortage of new projects, in some respects a consequence of reduced exploration spend and new investment over the past decade. A scarcity of skilled engineers and tradesmen and increased lead times for new equipment also contribute to a slower response. This won’t change quickly. We are fortunate to operate or share in some of the largest and best mineral deposits in the world. In these strong markets, we are benefiting.
“The large long life deposits we prefer also give us the optionality to increase production in line with demand – clearly an advantage in the current environment.
“Consistent with our strategy was our acquisition in 2006 of interests in three large, long term copper projects: La Granja in Peru, Oyu Tolgoi in Mongolia, and Pebble in Alaska. With the Resolution project in Arizona, this means Rio Tinto has a stake in four of the ten largest undeveloped copper deposits in the world. La Granja has started a pre-feasibility study. First production is at least seven years away. We have a 19.8% interest in the Pebble project in Alaska, a part of the US in which we have long operating experience and a record of responsible management. It is early days for the project, as it is expected to take about ten years to reach fruition.
“While we analyse all prospects and remain alert to merger and acquisition opportunities, it is often true that the greatest value is extracted from long life projects in which we can participate from the exploration and evaluation stage. This approach has enabled us to grow steadily and our current portfolio is creating more opportunities to extend this into the future. The key factor in the implementation of our strategy is discipline: discipline in analysis and discipline in execution.
“We have an encouraging array of exploration projects and once again have increased our exploration spending. In 2006, we spent $345 million, $81 million more than in 2005, reflecting increased activity and accelerated evaluation of high quality projects in the pipeline. We are doing sampling at the Bunder diamond discovery in India, and negotiations continue with the Government of Indonesia on the Sulawesi nickel project in Indonesia.
“Rio Tinto has a long track record of operational excellence. This remains a priority especially in today’s buoyant market conditions. Our Group wide programme Improving performance together is permanently changing the way we run our individual operations, replicating best practice and performance across everything we do – project analysis, project development, mine planning, mining, processing and marketing. By creating a standard operating model with common systems, standards and metrics we intend to ensure that we capture the best ways of operating, and replicate them across the Group.”
Turning to energy, Clifford noted the company’s “obligation to respond to climate change, contribute to the international debate and participate with others to reduce emissions. Our climate change programme is focused on identifying and addressing risks and taking advantage of opportunities.
“Coal remains the most abundant low cost alternative for energy security. We believe that clean coal technology has a vital part to play in reducing carbon dioxide emissions, and we are actively participating in a number of initiatives in Australia and the US. As the second largest uranium producer in the world, with over five decades of experience in marketing and mining the mineral, we are contributing to the deliberations regarding increased nuclear power generation.
“In 2006 we formed a new energy competency centre to concentrate on energy efficiency projects. We estimate that our improvement in energy efficiency reduced consumption and has saved over $110 million since 2003.
