Rio Tinto Half Year 2006 Earnings Results Conference Call Transcript (RTP)

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Rio Tinto (RTP)

Half Year 2006 Earnings Results Conference Call

August 3rd 2006 11.00 am EST


Paul Skinner, Chairman

Leigh Clifford, Chief Executive Officer


John Tumazos, Prudential Financial

Terry Ortslan, TSO & Associates


Ladies and gentlemen, we’re about to begin. Good day, everyone, and welcome to the Rio Tinto conference call to discuss the H1 2006 earnings results. At this time for opening remarks and introductions, I’d like to turn the call over to Mr. Paul Skinner. Please go ahead, sir.


Paul Skinner, Chairman

Thank you very much and good morning and welcome to all of you to our H1 2006 conference call. This is Paul Skinner, Chairman of Rio Tinto. Alongside me here in London is Leigh Clifford, our Chief Executive. I also have one or two other colleagues here, (Dan Larson?) who is our Group Controller and Nigel Jones who’s head of investor relations. I think most of you know that on a day like this we have an extended communications program and our CFO, Guy Elliott, is probably sleeping at this time in Australia so we’ll rely on Dan and Nigel if Leigh and I need help with any of the detailed financial questions. You should have had some slides distributed to you in advance in the call. As previously, we will make a short presentation and open up for questions. I’ll start with a few opening remarks and hand over to Leigh. The slides to which we talk are numbered in the bottom left hand corner. So I’m going to actually start with slide five, which is entitled ‘Record H1 Earnings’. You’ll note that we’ll be using US Dollars throughout the presentation.

Underlying earnings in H1 2006 increased to a record of $3.75 billion which was up 80% YoverY. The rise in earnings was driven by solid operational performance, despite some weather and other challenges we were facing, production growth at several of our business units and continuing strong demand. Earnings benefited in particular from recent investments in projects to expand capacity in our copper and iron ore product groups. Higher prices of many of our products clearly also made a substantial contribution to earnings. There was some softening of molybdenum from the record highs of last year, but this was more than compensated by increases in other products, particularly copper and iron ore. The business continued to experience the impact of industry-wide cost pressures during H1 2006. While it makes good business sense to incur some additional cost in the pursuit of higher margin production, we remain very alert to the need not to allow these costs to become embedded operationally.

Net earnings increased 75% to $3.8 billion and as was the case last year there were relatively few excluded items contributing to earnings in the half. Turning to slide six, in addition to the record underlying earnings, cash flows from operations plus dividends were also a record of $5.2 billion and the quality of our asset portfolio ensures strong cash flows throughout the cycle but exceptional cash flows at times of buoyant markets like those we see today. That cash flow strength is funding a record level of investment in the growth of the business, H1 capex rose to $1.8 billion. It also allows us to return surplus capital to shareholders while retaining the flexibility to take advantage of opportunities as they arise. Our financial position remains very strong. Net debt rose slightly, to $2.6 billion, reflecting a high level of capital expenditure, our capital management program and the timing of tax payments. Our gearing at the end of H1 was 14%.

In February we announced our intention to return $4 billion to shareholders by the end of 2007. In April, we paid a special dividend of $1.5 billion in addition to our ordinary and we also bought back, since February, over $1 billion of shares on the London market, bringing our total capital return under the $4 billion program to $2.5 billion. So we’re running ahead of the delivery schedule.

Finally, the significant expansion projects we have underway in our iron ore and diamond operations in Western Australia, and our ilmenite project in Madagascar remain on schedule and on budget in what remains a challenging construction environment and Leigh is going to say more about projects later in the presentation. Turning to slide seven, outlook, recent increases in interest rates in many of the world’s major economies combined with the political events in the Middle East have driven additional volatility in financial markets, however on balance, we believe that the global economic outlook continues to remain positive.

In China, the economy is growing rapidly. Reportedly above 11% in Q2 and the indicators point to strong economic activity this year as fixed assets and bank lending continue to rise. The trend of urbanization, infrastructure, construction and rising industrial production continues to create strong demand for our products. In addition to strong Chinese economic activity, we are seeing good growth in other parts of Asia and a continued steady recovery in Japan. I might just add that in H1, China accounted for 14% of our revenues, but Japan closer to 20%, so Japan remains a very important market for us.

Europe is doing reasonably, despite the slow pace of structural reform. I don’t need to tell you, but US growth has been strong, but this may moderate in response to higher interest rates, particularly if the housing market slows. Inventories of metals and minerals are generally remaining low and the pace of supply side response to strong prices continues to be limited by infrastructure and other constraints. At the start of this year, I said that we believe the prospects for 2006 were favorable and as we continue to see strong demand, I see no reason to change that underlying point of view. With those brief words of introduction, I’d like to hand over to Leigh, who will take you through the half year in a bit more detail.

Leigh Clifford, Chief Executive Officer

Thank you, Paul, and good morning everybody. Please turn to slide nine, entitled ‘Earnings strengthen across the board’. Without exception every one of our product groups showed a substantial increase in earnings in H1 2006. Our investment in value adding growth was reflected in record H1 production of aluminum, bauxite, iron ore, talc and US Coal. This combined with generally good operational performance contributed to record earnings. Copper earnings of $2 billion rose 140%, driven by increased production and strong copper, gold and molybdenum markets. Iron ore earnings of $955 million rose 40% as our expansion projects contributed additional volumes and from April, we saw the benefit of higher negotiated prices. Energy earnings of $377 million rose 23% with good contributions from our thermal coal operations in the US and Australia.

Aluminum earnings of $369 million rose 82% as a result of rising aluminum volumes and higher aluminum prices. Industrial minerals earnings of $137 million rose 10% as production of titanium feed stock increased. Finally in diamonds, earnings of $113 million rose 14% with improved production at Diavik. There were also a number of tax benefits which contributed to underlying earnings of the North American business units.

Turning to margins on slide 10, Rio Tinto’s operating margins have long been among the best in the mining business and remain strong at all points in the cycle, reflecting the quality of our assets. In 2006, notwithstanding cost pressures, our first half EBIT margin rose to 44% as we enjoyed a very strong pricing environment. Starting on slide 11, I would now like to review our product groups individually. Firstly copper.

The copper group enjoyed outstanding margins in H1 2006, this was driven by an average copper price of $2.71 per pound, up 79% on H1 2005 and strong gold and molybdenum prices. At Kennecott Utah Copper, copper and gold volumes rose as grades improved. Molybdenum production also rose, although the grade did decline as expected towards the end of the period. We again benefited from having moly roasting contracts in place. The Kennecott smelter performed well and in H2 it will be impacted by a scheduled maintenance shut down of 45 days in September/October. North Parks made an excellent contribution in H1 2006. Although relatively small in scale, the North Parks block cave operation is one of the most productive copper mines in the world. At Escondida we saw the benefit of production at Norte, the sulfide leach operation produced its first cathode in June and will make an increasing contribution in H2. At Palabora the block cave operation is going well with production rates improving. Finally, the contribution from Grasberg was disappointing as lower grades impacted metal production. The contribution to Rio Tinto from Grasberg may decline further in H2 due to the nature of the metal strip. Although performance at Grasberg has been fluctuating recently, this is a major ore body which will be in production for decades. It remains an important asset in the Group’s copper portfolio.

Turning to iron ore on slide 12, demand remained very strong during H1 2006. Chinese imports continued to grow rapidly, with an increase of 23%, to 162 million tons in the half year compared with the equivalent period in 2005. In June, we agreed a price increase of 19% for the 2006 contract year, reflecting the continuing tightness of the iron ore market. In the Palabora, our operation has recovered well from the significant impact of five cyclones early in the year. In fact, June and July have been strong months for production and shipping. Notwithstanding this interruption, and associated costs, we achieved record production levels for the half year as the mine expansions began to deliver. The expansion projects for the port and rail infrastructure and the brownfield mine developments remain on schedule and within budget, notwithstanding the challenge construction environment of Western Australia.

We started construction on the Hope Downs project in April, within 10 months of announcing the formation of the joint venture. Also in April, we signed a mining concession for the Simandou iron ore project with the Government of Guinea. This is a project with the potential to be a major supplier of iron ore to the world market and represents a significant platform for Rio Tinto’s future involvement in the Atlantic Basin. Finally, it was good to see HIsmelt shipping its first delivery of nearly 40,000 tons of pig iron to the US in June. After a planned maintenance shutdown, HIsmelt is back up and performing well.

Slide 13, energy: the thermal coal markets remain strong in both the pacific basin and North America. Demand for coke and coal was soft during H1, impacting Hail Creek and the margins of the product group. In the Powder River Basin, the completion of the maintenance program increased available rail capacity and the Antelope and Spring Creek mines achieved production records as the mine expansions continued. In Australia, thermal coal production rose in line with available port capacity and the Claremont project advanced towards approval. Claremont has the potential to replace the Blair Athol mine and be a cost competitive 12 million ton operation, starting up in 2010. In Uranium, the market continues to strengthen as demand exerts upward pressure on the spot and long-term prices. Production at ERA was impacted by Cyclone Monica earlier in the year, but drilling work continued on what looks like interesting exploration prospects in the vicinity of the Ranger Mine. With ERA and Rossing, our position in the uranium market remains strong with a 15% share of world mine supply in 2005.

Turning to aluminum on slide 14, the market improved with the average H1 price rising 37% to $1.15. The aluminum market remains strong, but was below the peak at 2005. At Weipa, Bauxite production was a H1 record. Investment continues at increasing capacity to over 16 million tons, and a new ship loader is scheduled for delivery in H2. Production of aluminum was also a record as the Comalco Alumina Refinery ramped up. The reliability of CAR continues to improve, with production averaging over 90% capacity in Q2. We’re now well into a planned routine shutdown of the refinery, which will lead to about a month’s lost output. CAR II remains under evaluation. The experience we’re gaining as the operational performance of CAR I improves is providing important learning for the second phase of the CAR project.

The smelters generally performed well. We continue to seek opportunities to expand our smelter interests in regions where power costs are competitive, such as our recently announced study of the construction of a smelter in Abu Dhabi. We are also focused on building our alumina alliances which allow us to leverage the fabulous Weipa bauxite resource. Slide 15, in the diamonds product group, progress continued on the underground developments at Argyle and Diavik. At Diavik, the A418 dyke is nearly complete and dewatering will start in September. Production from that ore body is scheduled for 2008. Both operations were impacted by the weather early in the year. At Diavik, the early spring caused the early suspension of ice road deliveries. You will be aware that in the Arctic, the ice road provides the only vehicular access to the mine. The suspension of the ice road therefore had a major impact on operational plans for the year. This has been overcome by a three-phase cargo airlift using Hercules and other carrier airport to transport critical supplies.

Although achieved at some cost, it’s testament to the ingenuity of the Diavik team that they’ve been able to increase production under this constraint. At Argyle, the weather effect was heavy rain, which impacted production in Q1. Again, the Argyle team did a good job in recovering production, so that the half ended strongly.

Turning to industrial minerals on slide 16, in iron and titanium the UGS plant performed well, setting new production records as the ramp up continues towards 375,000 tons per year. In Madagascar, basic infrastructure construction is underway. More on that project later. Demand for high grade chloride feed stocks continues to be strong. The price of ferrous and zircon co products remains firm. In Rio Tinto minerals the new organization structure is delivering and remains on track to achieve significant cost savings by 2008. The boric acid project remains on track and within budget, with completion scheduled for Q3 2006.

Studies of Potasio Rio Colorado, our potash project in Argentina, are progressing and again I will touch on that project later in the presentation. Potash would complement the other assets of Rio Tinto minerals. On balance, the industrial minerals group has had a good first half with a recovery in margins, notwithstanding the effect of a strong Canadian dollar and rising energy costs. Slide 17, as I’ve highlighted, we had a number of weather-related impacts on the business early in the year and I hope I’ve demonstrated that we’ve been able to mitigate those effects successfully. Iron ore and diamonds, for example, have delivered a good performance after a challenging Q1. In this strong pricing environment, the operations are running safely at full stretch and delivering record volumes in a range of products. Expansion projects we have underway represent the biggest investment program in the history of the group. They’re on track and will deliver substantial value to shareholders in years to come.

Now please turn to slide 18, where I’ll start the review of the financial results in more detail. In presenting the financial results, I’ll follow our standard waterfall format. Starting with price, market strengthened further during 2006 reflecting sustained demand for our products and continued tightness in supply. Compared with the first half of 2005, prices increased earnings by $1.8 billion in H1 2006. There was movement in the UD dollar in H1 2006 relative to the currencies in which we incur the majority of our costs, but these movements balanced each other out. Combining price effects, exchange variances and inflation, earnings increased versus H1 2005 by $1.7 billion. Slide 19, prices for our major commodities were significantly above those experienced in H1 2005. The rise in the copper price boosted earnings by $1 billion, accounting for over half the total price variance. The strength of the iron ore market, which led to a negotiation of a 19% price increase this year, lifted earnings by $396 million. Strong demand for Australian thermal coal, tighter energy markets in the US and an improvement in uranium prices enabled the energy group to generate $207 million of additional earnings. Moly prices have slipped back from their highs of 2005, averaging $23 per pound, but they are still very strong prices.

Aluminum and alumina added $242 million jointly with the price of aluminum averaging $1.15 per pound, a 37% increase over H1 2005. More favorable pricing for industrial minerals products and diamonds improved earnings by a further $18 million in each of those product groups. The other price variance relates mainly to higher treatment and refining charges and hedging activity at Palabora. Turning to volumes on slide 20, in H1 2006, market conditions remained extremely favorable but some of our operations were constrained by the impact of severe weather conditions across Northern Australia. This impacted production of iron ore, bauxite, diamonds and uranium. In addition, lower grades and production at Grasberg impacted volumes negatively by $195 million compared to H1 2005. Nevertheless, volume increases contributed $129 million to earnings in H1. If not for weather impacts across the group’s operations, the increase would have been well over double this figure.

Looking at the product groups in more detail, on slide 21, copper benefited from improved grades at Kennecott Utah Copper, the commissioning of Escondida Norte and the increase volumes at North Parks. This added a net $171 million to earnings, more than offsetting lower grades at Freeport where $90 million lower copper volumes were reported. The optimization of mine production at Kennecott Utah Copper in favor of the higher molybdenum grade ore continued, raising moly production by 11% and contributing $67 million to earnings. The gains from copper and moly were partly offset by significantly lower gold production, notably at Grasberg and Cortez in line with lower grades at these two joint venture operations. This reduced earnings by $79 million. Iron ore sales increased by 3% compared to H1 2005, adding $30 million to earnings but were affected by a severe series of cyclones earlier in the year.

Sales volumes for coke and coal fell back during H1 2006 due to decreased demand in some markets. Diamonds were impacted by lower grades and volumes at Argyle, where once again heavy rains were experienced in Q1 2006. The combined volume effect of aluminum industrial minerals, net of some smaller items, was a negative $2 million. Turning to costs on slide 22, non-cash costs were $71 million higher than H1 2000, net of a small one-off credit. This was as expected following the recent expansions that have taken place in iron ore, copper, coking coal and thermal coal. The negative impact of cost increases on earnings was $442 million in H1 2006.
Cost pressure worsened in H1. The recent severe cyclone season also impacted results, notably at our Australian iron ore operations. Rising energy costs accounted for $56 million of the total negative earnings effect. I will go into a breakdown of these costs in more detail in a moment. Rising costs are a concern in any business, but we should be mindful that some of these costs are being taken unconsciously in pursuit of value. When margins are high, it makes sense to incur additional costs required to increase production.

Turning to the detail of our costs on slide 23, you will see that we’ve broken out the $442 million cash cost variants into what we have called investment costs and common industry costs. An increase in investment costs, which include bringing expansions on stream, business improvement programs, technology, a larger budget for exploration and other items reduced earnings by $99 million. We welcome an increase in these costs, as we consider them to be value creating investments which will have lasting beneficial effects on the group. Common industry costs include energy, input prices and general costs of production. The negative earnings variance from a rise in these costs was $34 million. These are areas which cause us great concern and we remain very focused on business improvement programs to raise operational performance and productivity. I’ve already referred to energy, which is related mostly to the rising costs of oil.

Rising input prices impacted earnings in the half year by over $70 million, reflecting ongoing tightness in the supply of many of our key inputs and raw materials. Finally, in the cost of production category, we have captured those costs generic to the mining business, including labor, contractual rates, defective grade variability, maintenance and so on. Rising production costs reduced earnings by over $200 million in H1, including a negative variance of $25 million as a result of adverse weather. We do not as yet see any end to the rise in this type of cost, though the rate of increase might be anticipated to ease over time.

Returning to the waterfall chart of slide 24, the combined effect of other items on earnings contributed $316 million. The most significant item relates to the recognition of a deferred tax asset of $211 million. This reflects improved projections for estimated future taxable earnings in our US businesses, net of a write-off of the UK deferred tax assets taken centrally. In addition, a reduction in Canadian tax rates has led to a $46 million reduction in deferred tax provisions. These benefits flow chiefly through KUC, QIC, Rio Tinto Energy America and Diavik. Other items, many relating to the exclusion of earnings from divested businesses, were offset by positive items, principally relating to provision adjustments. This therefore brings us to the first half underlying earnings number of $3.75 billion. Slide 25 shows that net earnings for H1 2006 were $45 million higher than underlying earnings. We realized a $10 million gain from disposal of interest in smaller businesses. In addition, net earnings included a reduction in an environmental provision on Kennecott Utah Copper of $37 million. This reversed part of an exceptional charge taken in 2002.

These two items, together with some sundry items, bring us to the net earnings figure of $3.796 billion. Turning to cash flow on slide 26, the group’s cash flow from operations increased 39% in H1 to $4.4 billion. Dividends from jointly controlled entities and associates made a strong contribution of a further $788 million to bring total cash flow to $5.2 billion, up 52%. The quality of our assets, which produced positive cash returns at all points in the cycle, becomes particularly evident in good market conditions when their cash generative strength is outstanding. Slide 27, the balance sheet. Net debt at the end of June was $2.6 billion, up $1.3 billion since the end of 2005, while operational cash flow and dividends increase substantially, so also did outflows of cash, in particular through capital management. Cash returned to shareholders in the form of ordinary and special dividends plus buybacks totaled $3.1 billion in H1. Cash invested in the business totaled $1.8 billion and the tax authority’s share of cash flow was $1.6 billion. As a consequence of these outflows, gearing rose to 14%. Our balance sheet remains very strong.

Turning to capital management on slide 28, I’ve shown that shareholders benefited from significant cash returns in H1. Our policy is to set the level of our interim dividend at half of the level of the previous full year’s ordinary dividend. So our interim dividend in 2006 is set at $0.40 per ordinary share. Notwithstanding our capital investment and capital management programs and substantial tax payments, our balance sheet remains only lightly geared. This provides us with the flexibility to pursue value adding opportunities as they arise. The capital management program we announced in February is ahead of schedule, as Paul said, with $2.5 billion of the $4 billion total returned by the end of June.

To date, approximately half the quantum of the intended share buybacks has been completed and we are only six months into the program, to which we remain totally committed. Incidentally, since the end of June, we have bought back over $225 million worth of shares. I can assure you that we have no intention of accumulating surplus cash and we will ensure that anything in excess of our planned needs will be returned to shareholders in the most efficient manner. We will look again at options for capital management around the year end and this will include a review of the level of the final dividend. Turning now to slide 29, I’d like to conclude today’s presentation with a brief look at our part line of growth projects, starting with an update on our committed projects which remain on schedule and within budget. We’ve a broad range of projects currently under construction across four continents, with the most significant commitments shown on this world map.

Our share of the capex committed to these projects is approximately $5 billion. I’ll talk about some specific projects in a moment but it’s worth emphasizing that nearly three quarters of these projects represent new growth opportunities beyond the existing mine life extensions and sustaining capex. On slide 30, you will see our numerous conceptual and early stage projects. These cover a broad range of geographies, products and activities. While not all of these projects may be developed, they offer the group many future options for growth. I’ll be speaking about some of these projects in more detail but in general, I’d like to draw to your attention the number of projects where the estimated capital expenditure exceeds $1 billion. These include the Simandou iron ore project, where a pre-feasibility study is now underway, and the La Sampala nickel project in Indonesia. There are several years of work ahead of us at La Sampala before we get to the feasibility stage, but we believe that this project along with the Eagle nickel project in the USA, offers us significant entry into the nickel market.

Looking at other opportunities at an early stage of development, in South Africa, diamond drilling is progressing at the Chapudi coal project, where an order of magnitude study is underway. In India, we’re advancing our Bunda diamond discovery towards bulk sampling. In the US, we continue to seek out interesting coal opportunities in the vicinity of the Powder River Basin. Also in the US, we have entered into an agreement with Northern Dynasty Minerals to evaluate the Pebble Project, a promising, but early stage copper discovery in Alaska. Finally in Australia, I’ve already mentioned Clermont, where the JV partners will be soon considering approval of the project. Moving onto our significant investment in iron ore expansion projects on slide 31. These remain on budget and ahead of schedule. The first phase in the expansion of Hamersley's port capacity to 116 million tons was completed as planned in H1 2006. The second phase announced in October 2005 is on schedule to raise capacity further to 140 million tons by the end of 2007. Together with the existing 55 million ton port facilities at Cape Lambert, this will give us annual infrastructure capacity of close to 200 million tons. We are currently carrying out feasibility studies to expand Cape Lambert and envisage a further phase of expansion that would take it to 220 million tons.

We are also expanding our iron ore margin line with growing demand. The 15 million ton per annum brownfield expansions are on track and the expansion of the Hamersley’s Yandicoogina mine from 36 million to 52 million tons per annum is due to be completed by the end of next year. Construction has started on the first phase of the $1 billion Hope Downs project within 10 months of the announcement of the joint venture with Hancock prospecting. Slide 32, in Madagascar the mineral sands project is progressing to schedule. Construction has started on laying down basic infrastructure such as roads, water, power supply and mine side preparation. Most of this work has been awarded to local civil construction companies.

We expect to award the main port construction contract later this year, and the tender process is being conducted at the World Bank. The project objectives remain unchanged and we expect the first shipments at the end of 2008 ramping up to 750 million tons per annum of ilmenite by 2012. The mine will supply ilmenite for a new high quality chloride slag to meet demand from the pigment industry at a time when we believe that the supply and demand balance will be favorable. Turning to Argentina on slide 33, Potasio Rio Colorado represents an opportunity to diversify into a new commodity for the group. We have identified a large scale resource of high mineralogical and structural quality and consistency. The solution mining trials are going well, and the technology comes from the oil industry. PRC has the potential to be the first major potash producer in the southern hemisphere with approximately 5% of global potash supply and a competitive logistical position close to the Brazilian market. We expect a decision to be reached on this project next year.

Slide 34, in December 2005, we were pleased to win the tender for the privatization of the La Granja Copper Project located in northern Peru. La Granja is a major surface outcropping ore body, which we believe could support a large long life copper mining operation. It contains more than 2 billion tons of mineralization. We are spending $60 million on exploration and feasibility study work associated with the development of the deposit. With a grade of 0.6% copper, and challenging mineralogy, low cost processing technology will be required to extract value. Sulfide bioleaching with recovery of copper metal using electrowinning is likely to be the approach. La Granja illustrates that we are wiling to take on technological risk in a measured way if the upside potential is there. It shows our ability to spot opportunities and be innovative in looking for technical solutions in our pursuit of world class resources.

Turning then to slide 35, in summary, the operations put in a very good performance in H1 2006, notwithstanding the weather-related challenges early in the year. Delivering into strong markets, we achieved record production of many minerals and metals and generated record cash flows. The substantial global investment program we are undertaking continues to deliver growth and the projects are on time and budget. We are seeing good demand for our products in our key markets and the outlook remains positive. The company is financially robust, and while strong operationally, we are focused on building our capabilities through our business improvement programs. On that, let us now take your questions.

Questions and Answers


Operator instructions. And we do have a couple of questions in the queue now. We’ll go first to John Tumazos as Prudential Financial.

Q - John Tumazos, Prudential Financial

Congratulations on everything. In terms of your slides of projects, they’re really quite extraordinary and there are many that are world class. In the first half, you distributed capital at 2.5 times the rate that you promised to shareholders, or a $10 billion rate by the end of 2007 and you have these terrible penalties in volume that kept you from earning a third of a billion dollars more, (Freeport’s grade?) and the cyclones. Metal prices are generally higher. How do you gauge capital return versus capital construction and I guess with this great project cube, we should assume a near zero likelihood that you make an acquisition of some expensive publicly-traded company because you find it better.

A - Paul Skinner

Thank you for your kind words in introduction. Yes, we’re in an interesting situation with very strong cash generation. We clearly are very busy on a project front. I mean, our capex in H1 was $1.8 billion. The likelihood is, I think, that the rate in H2 will be a bit higher. It could take us to around $4 billion and if that was the case, that would be a 50% lift on the previous year. We’ve got a pretty full projects slate ahead of us. What is enormously encouraging is the fact that our large projects, particularly those in iron ore, are being delivered on time and on budget and that’s really where we see our first commitment to dispose of cash in value accreted projects. We do not intend to have a lazy balance sheet develop, our gearing is relatively low as Leigh indicated, and we will have another look at the question of capital return at the end of the year. We remain alert to potential acquisition opportunities, I can assure you that the money that we’re generating is not burning a hole in our pocket and that if we were to make any move on the M&A front it would be in pursuit of value creation. But we want, certainly in this interesting period for the industry to retain the capacity to take opportunities which might arise. So yes, we’re generating a lot of cash, we’re investing a lot of cash and we’re certainly intent on managing any surplus in a thoughtful way. I can assure you that we will return any surplus cash to shareholders in as efficient a way as we can.

A - Leigh Clifford

If I could just make one comment in your comments on the projects, as I’ve said we’ve got $5 billion worth of projects underway and we have that suite of conceptual and early stage projects. If we fast forward to a year from now, I wouldn’t be surprised that a number of those conceptual projects would be on that committed list. So we certainly are very pleased with the suite of projects we have in front of us.

Q - John Tumazos, Prudential Financial

Could you talk about – since you’re alert, and opportunities might arise and you didn’t rule things out – you know, there’s many great diseases in the world. HIV, malaria, the $22 billion of goodwill that the three-way nickel merger proposed etc. What is your attitude toward goodwill and premiums paid for publicly traded companies? I joke mentioning it with serious diseases, it’s not a good thing.

A - Paul Skinner

If we have any affliction, John, it’s a deep commitment to value creation.

Q - John Tumazos, Prudential Financial

Well it’s good that you don’t have those others.


We’ll go next to Terry Ortslan at TSO & Associates.

Q - Terry Ortslan, TSO & Associates

Thank you. A related question, looking at your concepts and also the ongoing projects, there is not much note of India or Asia, although you had a recent strategic alliance commitment with local partners on exploration in Russia and the Russian Republic. Maybe you want to highlight that? What’s going to unfold in that part of the world? And secondly, specifically on La Granja and the (Serco Aro?), the potash, can you talk about the infrastructure issues? Because my recollection was there was a lot of infrastructure involved in those projects which would also require a substantial commitment on everybody’s part.

A - Leigh Clifford

Thanks. I think it’s fair to say there’s not a lot covered in Russia and Mongolia etc. We are exploring in Turkey. We’re exploring, we just announced earlier in the year a joint venture, Rio-Nor joint venture with Norilsk and we have some exploration in Mongolia. But early stage exploration and I’m pretty comfortable with the programs we have there. As regards La Granja and Potasia Rio Colorado, you are correct about infrastructure in the case of PRC in Argentina and that’s something which are alert to. We’ll be probably considering that project in H1 2007, the potash project. As regards La Granja, we envisage that that will involve in situ leach or heap leach operation, and therefore we’d be going straight to cathode. So we’d be able to contemplate a transport of cathode from that region. But there is some infrastructure, but mostly road access etc. which will be part of the initial $50 million we’re committing to that investigation.

Q - Terry Ortslan, TSO & Associates

I’m glad to hear that, because the previous owner I believe was talking about (the acid plant?) and the phosphate deposit nearby to make (a fab), but if that’s not the case you’re looking for a (inaudible) operation altogether.

A - Leigh Clifford

I think you know, it’s very early days there but we’ll be talking about a bioleach type of operation. There may be some opportunity for some mining of some of the higher grade material, but very early days. All I’d say is we’re looking at it with fresh eyes and I’m very encouraged by what people are saying.

Q - Terry Ortslan, TSO & Associates

Let me ask quickly, if you’re going to fast track and make a decision on the potash project next year, how long would it take before you could bring it into production?

A - Leigh Clifford

Look, I would say there is a couple of years ahead of us so if we make a decision on that, I’m sure most projects of that magnitude have a couple of years construction before they’re in operation so I doubt that we’d be seeing much before 2009.

Q - Terry Ortslan, TSO & Associates

On Mongolia, yes it also has a challenging infrastructure, it seems to be everywhere nowadays. But the way that the exploration is developing and the way that next door also is evolving, and the fact that there are also some tax challenging issues in Mongolia, and given that the metallurgic outlook also is, what’s your view of Mongolia as a specific country?

A - Leigh Clifford

I think you highlight the particular issue that’s been of late – the tax issue and you know, that’s the subject of discussion between all of the players who are there and the Mongolian government. But you can’t wait forever sometimes to pick some exploration ground. You’ve got to be there and as you’re probably aware, most of the major players are in Mongolia. It’s very, very early days and as always, we take account of those factors in determining whether we put substantial investment. But first you’ve got to get the issue of your exploration tenement, and we’ve got some interesting opportunities there.


Gentlemen, we have no other questions in the queue at this time so I’d like to turn the call back to you for any closing comments.

Paul Skinner

Thank you very much indeed. We’ve given you a pretty full presentation which I hope you found useful and interesting and as always, we appreciate your connecting with the call to listen to our story. I hope those questions that have been asked have received satisfactory responses and thank you very much for joining us.


Thank you, that does conclude the call, we do appreciate your participation, at this time you may disconnect. Thank you.

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