8/4/2019 ironore 2008

1/6

RIO TINTO

Presentations in Hope Downs, Australia

18 June 2008

Alan Davies, Managing Director, Global Development &

Chief financial officer

8/4/2019 ironore 2008

2/6

Presentations in Hope Downs, Australia 18 June 2008Alan Davies, Managing director, Global Development & Chief financial officer

2

Today Id like to take you through a review of our financial strength in iron ore

and also update you on our performance in delivering value to date.

Firstly let me start with the traditional cautionary statement, after which Ill move

onto the key messages. The iron group is a significant earnings contributor to

Rio Tinto. In 2007 it represented close to 36% of the groups underlying

earnings, up on its historical average of around 30%. Our ability to deliver

expansion projects on time and on plan has underpinned our volume growth,

predominantly in our Pilbara based assets. This has allowed us to benefit from

the Chinese demand driven price increases that have occurred in recent years.

We continue to reinvest our cash flows into the business with over $5 billion of

capital expenditure over the last 3 years, predominantly in our integrated assets

here in the Pilbara but also at the Iron Ore company of Canada and in Rio Tinto

Brazil. We do remain excellently positioned at the bottom of the cost curve with

our Pilbara assets well placed to serve the high growth Chinese demand.

Cost containment remains a key focus for us, with our overall aim being one of

value maximisation. Like the rest of the industry however we are subject to worldpressures on prices and inputs for commodities, however we do leverage our

group size to alleviate these impacts to the greatest extent we possibly can. In

some cases weve chosen to invest where theres a value maximising opportunity

available, particularly in contractors to increase short term production. We are

moving forward at pace and later in my presentation Ill touch on some of the key

achievements weve posted so far this year.

As you can see from the two graphs on this slide the financial performance of Rio

Tinto Iron Ore continues delivering record financial results. Firstly looking at the

top graph youll see that EBITDA has grown at cumulative 40% annual growth

rates since 2002, demonstrating the efficiency with which weve converted the

strong market conditions into the bottom line. Our earnings growth shown in the

8/4/2019 ironore 2008

3/6

Presentations in Hope Downs, Australia 18 June 2008Alan Davies, Managing director, Global Development & Chief financial officer

3

second graph at the bottom is a slightly better 43.5 % which was also referred to

by Sam in his introduction and discussion. In fact in 2007 the iron ore group

earnings at $2.7 billion were some 70% higher than the whole of Rio Tinto in

2002. We continue to explore all opportunities to maximise value in the future

and many of our high return options come from the Brownfield expansions we

have here in the Pilbara. As you will see over the next 2 days our $5 billion of

capital expenditure over the last 3 years has delivered significant capacity

expansion by investment in our ports, mines and rail system. Were also

investing in our non-Australian based operations and as Sam mentioned in

March we announced the approval of the $473 million increase in Iron Ore

company of Canadas annual production of iron ore concentrate to 22 million

tonnes per annum from 17 million tonnes per annum.

Moving onto the subject of freight. As part of our marketing efforts, to offer a

range of supply solutions to our customers were increasingly becoming involved

in the provision of freight delivered sales, on a CFR basis. Throughout our

group, through our group specialist company Rio Tinto Marine we are able to

source competitive freight rates. In our results reporting, freight revenues arereported as gross sales in the revenue line whilst the freight costs form part of

our operating costs. The top graph here in this slide shows the revenue position

from 2004 with the incremental amount associated with freight revenues shown

in orange. Increased freight revenues have been both a function of our CFR

delivered volumes and the price of the underlying freight. The bottom graph in

this slide shows the proportion of the increase of revenues between 2007 and

2006 due firstly to the underlying increase in iron ore prices and secondly the

increase in sales volumes as a result of expanding the output of our business

and also the freight component of our revenues.

Now lets take this picture on revenue to look at our margins. Rio Tinto Iron Ore

is a very high margin business, this graph shows the EBITDA margins of Rio

8/4/2019 ironore 2008

4/6

Presentations in Hope Downs, Australia 18 June 2008Alan Davies, Managing director, Global Development & Chief financial officer

4

Tinto Iron Ores Pilbara operations since 2004. Ive split the graph into two sets

of data. The first is reported EBITDA margins and the second in red and on the

left are the same margins adjusted for freight. As we saw in the previous slide

our delivered sales business has increased in size over recent years. The

increased presence of freight in our gross revenues obviously distorts the

underlying EBITDA margin because the freight business has not shared as high

a level of margin as our iron ore sales. Our margins however remain extremely

strong, despite being impacted by a range of cost factors. Some of these are

external such as diesel costs, Pilbara specific price factors that is the Pilbara

inflation effect and the depreciation of the Australian dollar. The 2007 margin

change undoubtedly reflects some of the cost impacts which reflect the timing

difference between rising costs and the adjustment to pricing for our products.

Other cost increases which we have decided to take on relate to investment in

our business. These include drilling costs, expansion studies, investments in our

technology projects that will deliver future benefits like our recent announcement

on the automated train operations, driverless trucks and the remote operation

centre.

I spoke earlier about the levels of reinvestment in our business. Id like to briefly

touch on this again. We have been investing an increasing amount back into our

iron ore business in recent years. In 2007 we invested just over $2 billion of

capital in our worldwide iron ore operations. This graph shows that just over $1.8

billion of that investment was in our Pilbara business. Weve also obtained

further significant capital approval so far in the first half of 2008. Were also on

track for another strong year of capital investment in the Pilbara with our existing

projects including mine developments at Mesa A/Warramboo, Brockman 4 and

the expansion of Cape Lambert to 80 million tonnes per annum.

I spoke a bit earlier about the CFR deliveries in our business. This chart shows

the cost curve of iron delivered to China over the last 2 years and a projected

8/4/2019 ironore 2008

5/6

Presentations in Hope Downs, Australia 18 June 2008Alan Davies, Managing director, Global Development & Chief financial officer

5

view of 2008. On the right hand side of the graph, the average spot prices in

those periods and for April in the case of 2008. Starting with 2006 it shows that

Rio Tinto is favourably positioned at the lowest quartile of the curve. The spot

price is roughly around the 90th percentile at around $65 per tonne delivered.

The Chinese domestic producers sit mostly at the top of this curve.

Moving into 2007, rising costs of production and freight of ore delivered to China

have been driving up spot prices. The market clearing price is $113 per tonne.

Costs have risen for all supplies including Rio Tinto, but the relative position of

Rio Tinto has improved. Were well positioned towards the bottom of the curve.

This structural shift is likely to continue due to declining grades in China as Sam

referred to and pressures on India to withhold ore for domestic use as Sam also

referred to. Increasingly high spot prices are required to provide an incentive for

the high cost suppliers in China and exporters from India. This is a hypothetical

2008 cost curve, some adjustments have been made for illustrative purposes

including assuming an oil price of $125 dollars a barrel, further Renminbi

revaluation and other cost pressures. As the cost curve undergoes a structural

shift upwards it will provide fundamental cost base support to iron ore prices. Forcomparatively well positioned suppliers like Rio Tinto where we are actively

managing our cost base, this is an environment where margins will remain strong

and substantial value can be created through price and volume growth and of

course appropriate cost containment.

Now looking at our costs in the context of the Western Australia operating

environment. Despite cost pressures we have continued to demonstrate an

ability to manage these impacts. Most importantly were applying a combination

of approaches to achieve this. Weve successfully maintained our focus on the

underlying process improvement delivered through the implementation of the

lean process including Project Drum Beat in our rail operations that Sam

introduced. Well explain further in detail tomorrow.

8/4/2019 ironore 2008

6/6

Presentations in Hope Downs, Australia 18 June 2008Alan Davies, Managing director, Global Development & Chief financial officer

6

This is combined with our functional approach to specialised areas such as

strategic sourcing through Rio Tinto procurement and our CFR in logistic

offerings through Rio Tinto Marine which I mentioned earlier. This is then

combined with the innovative use of emerging and applied technologies that have

the potential to deliver a favourable future cost position via automation and

placing functions in the lower cost operating environments outside of the Pilbara,

like what were doing with our remote operation centre in Perth.

Id like to reflect for a moment on just some of the key milestones achieved within

Rio Tinto Iron Ore so far in 2008. Our performance in the first quarter saw a

record for Rio Tintos global production of iron ore which is up 16% on the first

quarter of 2007. Our Pilbara operations also achieved record performance in the

first quarter, up 15%. And this was despite being impacted by a number of

cyclonic events. Our pace of identifying and developing value accretive capital

projects has continued with a further approximately $2 billion of capital projects

approved so far this year, including the large ore carriers, the automated train

operations and the long lead time items for the 320 million tonne expansion,including studying Western Turner Syncline that Warwick will go into further detail

in his presentation.

So in summary Rio Tinto Iron Ore is performing strongly as a key contributor to

Rio Tinto. We are delivering increased value to shareholders now with our cost

competitiveness, high margin and high volume business, while ensuring that we

remain a leader in the industry through significant investment in the future of the

business.

Thank you very much.