Rio Tinto
is a leader in finding, mining and processing the earth’s mineral resources. The Group’s worldwide operations supply essential
minerals and metals that help to meet global needs and contribute to improvements in living standards.
In
order to deliver superior returns to shareholders over time, Rio Tinto takes
a long term and responsible approach to the Group’s business. We concentrate
on the development of first class orebodies into large, long life and efficient
operations, capable of sustaining competitive advantage through business cycles.
Major
products include aluminium, copper, diamonds, energy products, gold, industrial
minerals (borates, titanium dioxide, salt and talc), and iron ore. The Group’s
activities span the world but are strongly represented in Australia and North
America with significant businesses in South America, Asia, Europe and southern
Africa.
Wherever Rio Tinto operates, the health and safety of our employees is our first priority. We seek to contribute to sustainable development. We work as closely as
possible with our host countries and communities, respecting their laws and customs. We minimise adverse effects and strive to improve every aspect of our performance. We employ local people at all levels and ensure fair and equitable transfer of
benefits and enhancement of opportunities.
2004 Annual report and
financial statements
ANNUAL REPORT AND FINANCIAL
STATEMENTS
Rio Tinto’s
Annual
report and financial statements
encompass Australian and UK statutory
requirements and also includes some of the supplementary disclosures
required
in the Form 20-F. The majority of shareholders have chosen to receive
a
shorter
Annual review
but
those who wish to receive the full
Annual report and financial statements
for
all future years may do so by writing to the Companies’ registrars.
Both
the above documents are also available in electronic form. For further
details
please
visit the Rio Tinto website www.riotinto.com
Dear
shareholder
The recovery in the global economy
that gathered momentum in 2003 continued in 2004. As a result of strong
demand across our portfolio of metals and minerals, accompanied by increased
prices, we achieved a record financial performance.
An important
factor has been the strength in metal and minerals demand in the US
and
Asia, where China has been prominent but markets in Japan and elsewhere
have also recovered. Rio Tinto holds a long established position in
these
markets; 40 years in the case of Japan and 30 years in China. Our strong
position today reflects
these long term customer relationships.
China’s
rapid economic development has led to the adoption by the Government
of measures to achieve more balanced growth in the economy. However,
we continue to believe that China’s growth trend will remain well
above the global average in the years ahead.
In
2004, commodity prices were higher across the board and the US dollar was
more stable against our main producing currencies than in 2003. Adjusted
earnings* were a record US$2,221 million, US$839 million or 61 per cent
above 2003 and exceeding the previous high of US$1,662 million achieved
in 2001. Net earnings were US$2,813 million, or 204 US cents per share,
including a US$592 million net gain on exceptional items.
Total cash flow
from operations including dividends from joint ventures and associates at US$4,449
million was also a record and 28 per cent higher than 2003. An active portfolio
management programme, focused on the disposal of non core assets, generated an
additional US$1.5 billion in cash. This has further strengthened our balance
sheet, allowing us to undertake a major capital investment programme.
While our record
financial performance reflects the strong markets for our products, it also underlines
the quality of our asset portfolio which has been developed over many years on
the basis of a long term commitment to shareholder value.
Investments over
recent years have created a platform for earnings growth. This, coupled with
a positive view of future growth prospects, has given the board confidence to
increase our annual dividend to 77 US cents per share for 2004 an increase of
20 per cent from 2003. This also means that the 2005 interim dividend payable
in September can be expected to be 38.5 US cents per share. We intend to maintain
our progressive dividend policy from this higher baseline. The board has also
decided the current strength of the Group’s cash flow means that in addition
to comfortably funding the current and planned investments, capital can be returned
to shareholders without reducing our flexibility to pursue other development
opportunities. Subject to market conditions, Rio Tinto’s intention, therefore,
is to return up to US$1.5 billion of capital to shareholders during the course
of 2005 and 2006 through share buyback programmes.
A sustainable business
also requires commitment to social and
*Adjusted earnings excludes the effect of exceptional items of such magnitude that their exclusion is necessary in order that adjusted earnings fulfil their purpose of reflecting the Group’s underlying
performance. A reconciliation to net earnings can be found on page 86.
environmental performance alongside delivery
of consistently strong financial results. While much remains to be done in
this area we are very encouraged by an increasingly productive dialogue with
stakeholder organisations. Our sustainable development programmes are responding
positively to a range of issues including biodiversity, climate change and
HIV/AIDS. The Group’s social and environmental contribution helps to
sustain our pipeline of project opportunities in many countries and has a
business case which I believe is compelling.
The year 2005
will see the tenth anniversary of the formation of Rio Tinto’s dual listed
structure and unified management, which has fully met its objectives and continues
to provide great strength to Rio Tinto’s operations and governance.
It is
with great sadness I report the sudden death on 27 January 2005 of Bob Adams,
our executive director for planning and development. Bob was a major contributor
to Rio Tinto’s growth over 35 years, having joined our planning department
in 1970. He was a key figure in building Rio Tinto into a leading international
mining group. He was respected and liked by all who knew him and his wise
counsel and advice will be sorely missed.
At our forthcoming
annual meetings we shall see the retirement of Sir Richard Giordano, Leon
Davis and John Morschel, all of whom have been outstanding contributors to
the board and to our continuing success. I should particularly like to thank
Dick and Leon as deputy chairmen for the support they have given me in my
initial period as chairman. Their long experience of the Group has been invaluable
in a transition period.
We recently
welcomed three new colleagues to the board. Richard Goodmanson, executive
vice president
and chief operating officer of DuPont, was appointed on 1 December 2004.
Ashton Calvert, former secretary of the Department of Foreign Affairs and
Trade of
the Government of Australia, and Vivienne Cox, executive vice president of
BP plc for Integrated Supply and Trading and also for Gas Power and Renewables,
were both appointed on 1 February 2005. Each of them will add to the overall
skill and experience of the Rio Tinto boards which is a vital underpinning
of our high standard of corporate governance.
Looking forward,
we expect to see continuing underlying demand growth for metals and minerals
despite some economic uncertainties in 2005. We are now beginning to see a
supply response to higher prices but this will take some time to impact on
the currently tight markets. While prices may ease from current levels in
2005 we expect they will generally remain above the long term trend. The future
direction of the US dollar remains a significant uncertainty and, as was the
case in 2003, could have a major impact on earnings.
In 2004 I had
the opportunity to visit many of our operating locations. I have been impressed
not only with the scale and complexity of the operations themselves but the
depth of management and skill with which they are operated. I would therefore
like to acknowledge the hard work and dedication of the Group’s employees
throughout the world in 2004. Their commitment to Rio Tinto’s core values
underpins the strong results they continue to deliver for shareholders.
Paul Skinner
Chairman
2
Rio Tinto 2004
Annual
report and financial statements
We saw very strong demand across our product range in 2004. This momentum is expected to continue into 2005 though it may be affected by the uncertainties of the US economy and the rate of growth in China. Good market
conditions enable us to increase focus on capital management. Our record cash flow gives us considerable options for further organic growth based on our large reserve and resource position.
Operating performance
Product group earnings, excluding
exceptional items, were a record US$2,544 million, compared with US$1,584
million in 2003.
Higher metal
and mineral prices and greater output from new projects were the main reasons
for the strong result. Improved prices, mainly for copper, aluminium, iron
ore and coal, combined with additional output from new or expanded projects
such as Diavik in Canada (diamonds), Eastern Range, West Angelas and Hail
Creek in Australia (iron ore and coking coal), and Escondida in Chile (copper).
The depreciation
of the US dollar against most major currencies had an effect on earnings,
as did higher operating costs. While the mining industry benefits from higher
prices received for the commodities we produce, as a business we also incur
higher prices for consumables used in our operations.
To address cost
factors more rigorously, we are evolving our business processes to take advantage
of Rio Tinto’s scale and to share leading practices around the Group
as key levers to creating value. We have been successful in applying these
principles in our information technology, procurement and shipping activities.
We are working to extend greater capability and sharing of expertise to mining
and processing operations, asset management and marketing, to maximise value
on several fronts.
In 2004 I announced
a major reallocation of product group responsibilities. With the retirement
of David Klingner as head of Exploration and Chris Renwick as chief executive,
Iron Ore, Tom Albanese moved to Copper and Exploration, Sam Walsh to Iron
Ore, Oscar Groeneveld to Aluminium, and Andrew Mackenzie was recruited to
be chief executive Industrial Minerals. Preston Chiaro and Keith Johnson continue
as chief executives of Energy and Diamonds respectively. Both David Klingner
and Chris Renwick spent most of their working lives with Rio Tinto, each with
35 years’ service, making very valuable contributions in several areas
of the business.
Strategy
Earlier this year the board discussed Rio Tinto’s
strategic direction to provide a framework for our medium term decisions.
The discussion reaffirmed our focus on mining operations to produce minerals
and metals. Furthermore, we recognised that medium term growth will be biased
towards growth from within – the development of brownfield and greenfield
projects inherent in our existing assets.
The Group has
long maintained a commitment to exploration. I believe this is an increasingly
important source of competitive advantage. The Group’s diversity and
strength, particularly in Australia and North America, enable us to increase
our involvement in less familiar territories of the world should opportunities
present themselves.
The centre of
gravity of our operations has been firmly in the OECD countries where historically
we have found the most opportunities. This need not always be the case. The
generation of options globally is an important pathway to growth and we possess
the technical, community and environmental management capabilities to do so.
Also, a key building block will remain our ability to bring well thought out
projects to fruition on time without compromising their performance.
“Our
record
cash flow
gives us considerable options
for further organic growth
based on our large reserve
and resource position”
Rio Tinto 2004
Annual report and financial statements
A more competitive
mining industry is developing and Rio Tinto needs to improve faster to
keep ahead. Our fundamental strategy will not change as it has stood the
test of time, but we contemplate some changes in emphasis. We will continue
to focus on large, long life, low cost operations and run them efficiently.
Our growth will largely come from our existing operations and reserves,
supplemented by opportunistic mergers, acquisitions, structures and alliances,
where these make sense.
While historically
the decentralised model of Rio Tinto has delivered enormous benefits, to keep
improving we are putting greater emphasis on Rio Tinto’s global scale and
specialist skills. We need to continue to improve how we operate, recognising
that operational excellence and commercial acumen go hand in hand.
International reporting
Our financial statements for 2005 onwards
will be prepared in accordance with International Financial Reporting Standards
(IFRS). We welcome the adoption of a single accounting convention by so many
countries around the world. The expected implications for Rio Tinto are set
out on page 144. We will make available our 2004 financial results under
IFRS in early May.
Rio
Tinto is a foreign issuer in the US and so we are obliged to comply with
the Sarbanes-Oxley Act of 2002, in particular section 404. This means that
our 2005 20-F report will include a statement on the effectiveness of internal
financial controls which will be attested to and reported on by our auditors.
We have put in place a comprehensive compliance programme. We have embarked
on a major re-evaluation of our significant internal controls to ensure that
they are fully documented. As a result, Rio Tinto is well positioned to be
compliant by the end of 2005.
New projects
Over 2005 and 2006, we plan to spend up to
US$6 billion on new projects. We have many potential investment options including
opportunities in alumina, coal, iron ore, industrial minerals, diamonds and
copper. Most of these relate to the large, long life assets we already own.
We believe these provide our primary route to value growth and should represent
the priority use of shareholders’ funds.
We have recently
completed three development projects. Currently we have ten under way, and three
more were approved late in 2004. In addition, we have development studies progressing
on 15 more projects. Our level of success reflects efforts we have made over
a number of years and is a tangible result of our
Adjusted earnings
US$m
Net earnings
US$m
Net earnings in 2001, 2002,
2003 and 2004 include
exceptional items.
commitment to exploration.
Over the past year
we have transferred five projects from exploration to the product groups where
the necessary skills can be applied to take them through to the next level of
evaluation. These projects – in copper, iron ore, nickel, gold and potash – emphasise
the continuity of our growth potential for the medium term.
With a strong market,
the outlook for our iron ore businesses remains exciting. The expansion of capacity
in Western Australia at a cost of US$1,300 million is the single largest project
investment we have made in many years. The major elements of the programme are
on track for completion by the end of 2005 with the result that Rio Tinto expects
to have a managed capacity of over 170 million tonnes of iron ore per year.
The expansion is
part of a major capital expenditure programme in Western Australia that also
includes the US$200 million HIsmelt
®
iron
making plant that will be commissioned early in 2005 after more than 20 years
of research and development. The Comalco Alumina Refinery in Australia was successfully
commissioned in the fourth quarter of 2004 and made its first shipment to China
ahead of schedule.
The Hail Creek coking
coal mine reached its capacity of 5.5 million tonnes per annum in 2004 well ahead
of our original expectations. An expansion of capacity to eight million tonnes
is already under way for completion by 2006. This is an excellent example of
how our focus on assets with large reserves gives us options to expand in line
with demand. It is a large, high quality resource with reserves of nearly 200
million tonnes. Hail Creek also illustrates the value of patience and thoroughness;
it was under study on and off for 30 years.
The success of the
Diavik diamond project in Canada, where overall performance has comfortably exceeded
expectations, prompted us to bring forward development of a second orebody to
help sustain the advantages that have been created. Development will necessitate
construction of a second dike. Mining of the second orebody is scheduled to begin
in early 2008. A study is also under way into the viability of underground mining,
including the construction of an exploration decline.
During 2004, we
continued to pursue opportunities for asset disposals in a patient and disciplined
manner. We sold our shareholding in Freeport-McMoRan Copper & Gold, receiving
net proceeds of US$882 million while retaining our joint venture interest in
production from the Grasberg mine. We locked in further value with the sale of
the Zinkgruvan zinc mine in Sweden, and our
Cash flow from
operations
US$m
Margins
Dividends from
associates and
joint ventures
(earnings before interest,
tax and exceptional items
to sales revenue)
Operating cash flow
4
Rio Tinto 2004
Annual
report and financial statements
interests in the Neves Corvo copper and
tin mine in Portugal and the Morro do Ouro gold mine in Brazil. We restructured
our interest in Rio Tinto Zimbabwe to focus on the Murowa diamond project
in that country.
Safety, health, environment
and communities
There was a marked improvement in our safety
record in 2004 even though there is considerable work still to be done to
reach Rio Tinto’s goal of zero injuries and illnesses.
I
am sorry to report that there was one fatal accident at a managed operation.
While this compares with six deaths at operations in 2003, it remains wholly
unacceptable that anyone should be fatally injured at work. There were also
a number of near misses. We will redouble our efforts to increase visible
leadership from all levels of management and emphasise the role of employees
themselves in developing safe work habits. There were 371 lost time incidents
during the year, a 21 per cent decrease from 2003. The lost time frequency
rate was 0.65 compared with 0.82 in 2003.
The
2004 winners of the Chief Executive’s Safety Award were Rio Tinto Brasil’s
Morro do Ouro gold mine for the second consecutive year, Quebec Metal Powders
in Canada, and Rio Tinto Exploration Australasia, which was commended for
its performance in 2003. The awards improve recognition of good performance
based on Rio Tinto's safety targets and programmes.
We continued to
improve our understanding of the environmental implications of our activities
regarding biodiversity, climate change, water and energy use, waste disposal
and use of our products. There was no change in the number of significant environmental
incidents (16) compared to 2003. There was, however, a decrease, from eight to
four, in the number of significant spills.
At Energy Resources
of Australia (ERA) environmental incidents occurred that were unacceptable and
which marred an otherwise commendable performance. Numerous changes to systems
have been made and increased resources applied so that such shortcomings are
not repeated. Three subsequent Australian Government audits were satisfactorily
completed.
To improve consistency
and to share good practices, we developed standards and guidance to help our
businesses to work more closely with people neighbouring our operations. They
aim to arrive at an understanding of what we can do for mutual benefit and then
to secure implementation of agreed objectives. We support over 2,000 socio-economic
programmes covering health care,
Product group
earnings
US$m
Net debt: total
capital
%
education, agriculture, and business development.
We responded
to the Asian tsunami disaster by committing A$1 million (about US$750,000)
to the relief effort in countries where we are active. The funds will be
donated through appropriate international agencies in Indonesia and India
where we can leverage our local knowledge most effectively.
Outlook
The world economy is slowing to a more sustainable
pace after growth accelerated sharply in 2004. If the slowdown is well managed,
particularly in the US and China, which have been the key drivers for growth
in recent years, it will be a welcome development for commodity markets.
These are already severely stretched to meet demand. Developments in the
foreign exchange markets remain a key economic uncertainty.
Rio Tinto is benefiting
from a very strong business environment as developing countries ramp up their
demand for metals and minerals and mature economies enjoy relatively solid economic
growth. While this outlook is encouraging for the short and medium term, there
remain fundamental uncertainties on the world stage. Among them are the direction
the US economy will take, the rate of growth in China and the sustainability
of growth in Asia as a whole.
Our record financial
performance under strong market conditions in 2004 enabled us to focus on capital
management to achieve a balance between future investment and rewards for shareholders.
We have many options for investing in our future growth, with a strong suite
of opportunities in the project pipeline. As always we will apply our rigorous
capital appraisal processes.
The
world in which we operate is always changing and we are anticipating and
reacting to those changes in order to remain successful. Barring the uncertainties
I mentioned, the near term looks encouraging. Whatever the economic conditions,
Rio Tinto has the assets and the people to maximise shareholder value in
a sustainable way.
In conclusion, I
thank my management team and our valued employees all over the world for their
continued support during 2004.
Leigh Clifford
Chief
executive
*Adjusted earnings excludes the effect
of exceptional items of such magnitude that their exclusion is necessary
in order that adjusted earnings fulfil their purpose of reflecting
the Group’s underlying performance. A reconciliation to net earnings
can be found on page 86. 2004, 2003, 2002 and 2001 exclude exceptional
items.
Note: Product group earnings are stated
before exceptional items, net interest, exploration and evaluation
costs and other central items. A reconciliation is shown on page 138.
Rio Tinto 2004
Annual
report and financial statements
RISK FACTORS
The following describes some of the
risks that could affect Rio Tinto. There may be additional risks unknown
to Rio Tinto and other risks, currently believed to be immaterial, could
turn out to be material. These risks, whether they materialise individually
or simultaneously, could significantly affect the Group’s business and
financial results. They should also be considered in connection with any
forward looking statements in this document and the cautionary statement
below.
Economic conditions
Commodity prices, and demand for the
Group’s products, are influenced strongly by world economic growth,
particularly that in the US and Asia. The Group’s normal policy is to
sell its products at prevailing market prices. Commodity prices can fluctuate
widely and could have a material and adverse impact on the Group’s asset
values, revenues, earnings and cash flows. Further discussion can be found
on page 11, Business environment and markets, and on page 35, commodity prices.
Exchange rates
The Group’s asset values, earnings
and cash flows are influenced by a wide variety of currencies due to the
geographic diversity of the Group’s sales and areas of operation. The
majority of the Group’s sales are denominated in US dollars. The Australian
and US dollars are the most important currencies influencing costs. The relative
value of currencies can fluctuate widely and could have a material and adverse
impact on the Group’s asset values, costs, earnings and cash flows.
Further discussion can be found on page 34, exchange rates, reporting currencies
and currency exposure.
Acquisitions
The Group has grown partly through
the acquisition of other businesses. Business combinations commonly entail
a number of risks and Rio Tinto cannot be sure that management will be able
effectively to integrate businesses acquired or generate the cost savings
and synergies anticipated. Failure to do so could have a material and adverse
impact on the Group’s costs, earnings and cash flows.
Exploration and
new projects
The Group seeks to identify new mining
properties through an active exploration programme. There is no guarantee,
however, that such expenditure will be recouped or that existing mineral
reserves will be replaced. Failure to do so could have a material and adverse
impact on the Group’s financial results and prospects.
The
Group develops new mining properties and expands its existing operations
as a means of generating shareholder value. Increasing regulatory, environmental
and social approvals are, however, required which can result in significant
increases in construction costs and/or significant delays in construction.
These increases could materially and adversely affect a project’s economics,
the Group’s asset values, costs, earnings and cash flows.
Reserve estimation
There are numerous uncertainties inherent
in estimating ore reserves. Reserves that are valid at the time of estimation
may change significantly when new information becomes available. Fluctuations
in the price of commodities, exchange rates, increased production costs or
reduced recovery rates may render lower grade reserves uneconomic and may,
ultimately, result in a restatement. A significant restatement could have
a material and adverse impact on the Group’s asset values, costs, cash
flows and earnings.
Political and
community
The Group has operations in jurisdictions
having varying degrees of political instability. Political instability can
result in civil unrest, expropriation, nationalisation, renegotiation or
nullification of existing agreements, mining leases and permits, changes
in laws, taxation policies or currency
restrictions. Any of these can have a material
adverse effect on the profitability or, in extreme cases, the viability
of an operation.
Some
of the Group’s current and potential operations are located in or near
communities that may now, or in the future, regard such an operation as having
a detrimental effect on their economic and social circumstances. Should this
occur, it might have a material adverse impact on the profitability or, in
extreme cases, the viability of an operation. In addition, such an event
may adversely affect the Group’s ability to enter into new operations
in the country.
Technology
The Group has invested in and implemented
information system and operational initiatives. Several technical aspects
of these initiatives are still unproven and the eventual operational outcome
or viability cannot be assessed with certainty. Accordingly, the costs and
benefits from these initiatives and the consequent effects on the Group’s
future earnings and financial results may vary widely from present expectations.
Land and resource tenure
The Group operates in several
countries where title to land and rights in respect of land and resources
(including indigenous title) may be unclear and may lead to disputes over
resource development. Such disputes could disrupt relevant mining projects
and/or impede the Group’s ability to develop new mining properties.
Health, safety
and environment
Rio Tinto operates in an industry that
is subject to numerous health, safety and environmental laws and regulations
as well as community expectations. Evolving regulatory standards and expectations
can result in increased litigation and/or increased costs all of which can
have a material and adverse effect on earnings and cash flows.
Mining operations
Mining operations are vulnerable to
a number of circumstances beyond the Group’s control, including natural
disasters, unexpected geological variations and industrial actions. These
can affect costs at particular mines for varying periods. Mining, smelting
and refining processes also rely on key inputs, for example fuel and electricity.
Appropriate insurance can provide protection from some, but not all, of the
costs that may arise from unforeseen events. Disruption to the supply of
key inputs, or changes in their pricing, may have a material and adverse
impact on the Group’s asset values, costs, earnings and cash flows.
Rehabilitation
Costs associated with rehabilitating
land disturbed during the mining process and addressing environmental, health
and community issues are estimated and provided for based on the most current
information available. Estimates may, however, be insufficient and/or further
issues may be identified. Any underestimated or unidentified rehabilitation
costs will reduce earnings and could materially and adversely affect the
Group’s asset values, earnings and cash flows.
Non managed operations
Rio Tinto cannot guarantee that management
of mining and processing assets not subject to its management control will
comply with the Group’s standards and objectives, nor that effective
policies, procedures and controls will be maintained over those assets.
Rio Tinto 2004
Annual
report and financial statements
CAUTIONARY STATEMENT
ABOUT
FORWARD LOOKING STATEMENTS
This document contains certain forward
looking statements with respect to the financial condition, results of operations
and business of the Rio Tinto Group. The words “intend”, “aim”, “project”, “anticipate”, “estimate”, “plan”, “believes”, “expects”, “may”, “should”, “will”,
or similar expressions, commonly identify such forward looking statements.
Examples of forward looking statements in this Annual report include those
regarding estimated reserves, anticipated production or construction commencement
dates, costs, outputs and productive lives of assets or similar factors.
Forward looking statements involve known and unknown risks, uncertainties,
assumptions and other factors set forth in this document that are beyond
the Group’s control. For example, future reserves will be based in part
on market prices that may vary significantly from current levels. These may
materially affect the timing and feasibility of particular developments.
Other factors include the ability to produce and transport products profitably,
the effect of foreign currency exchange rates on market prices and operating
costs, and activities by governmental authorities, such as changes in taxation
or regulation, and political uncertainty.
In
light of these risks, uncertainties and assumptions, actual results could
be materially different from any future results expressed or implied by these
forward looking statements which speak only as at the date of this report.
Except as required by applicable regulations or by law, the Group does not
undertake any obligation to publicly update or revise any forward looking
statements, whether as a result of new information or future events. The
Group cannot guarantee that its forward looking statements will not differ
materially from actual results.
8
Rio Tinto 2004
Annual
report and financial statements
INTRODUCTION
Rio Tinto Limited and Rio Tinto plc operate as one business organisation, referred to in this report as Rio Tinto, the Rio Tinto Group or, more simply, the Group. These collective expressions are used for convenience
only since both Companies, and the individual companies in which they directly or indirectly own investments, are separate and distinct legal entities.
“Limited”, “plc”, “Pty”, “Inc”, “Limitada”, or “SA” has
generally been omitted from Group company names, except to distinguish
between Rio Tinto plc and Rio Tinto Limited.
Financial
data in United States dollars (US$) is derived from, and should be read
in conjunction with, the Rio Tinto Group’s consolidated financial statements which are in US$. In
general, financial data in pounds sterling (£) and Australian dollars (A$) have been translated from the consolidated financial statements at the rates shown on page 149 and have been provided solely for convenience; exceptions arise where
data, such as directors’ remuneration, can be extracted directly from source
records. Certain key information has been provided in all three currencies on
page 142.
Rio
Tinto Group turnover, profit before tax and net earnings and operating
assets for 2003 and 2004 attributable to the Group’s products and
geographical areas are shown in notes 26 and 27 to the Financial statements
on pages 111 to 115. In the Operational review, operating assets and turnover
are consistent with the financial information by business unit on pages
138 and 139.
The tables on pages 13 to 24 show production for 2002, 2003 and 2004 and include estimates of proven and probable reserves and mineral resources. The weights and measures used are mainly
metric units; conversions into other units are shown on page 149. Words and phrases, often technical, have been used which have particular meanings; definitions of these terms are on pages 146 to 148.
AN OVERVIEW OF RIO TINTO
Rio Tinto is a leading international mining group, combining Rio Tinto plc and Rio Tinto Limited in a dual listed companies (DLC) structure as a single economic entity. Nevertheless, both Companies remain legal
entities with separate share listings and registers. Rio Tinto plc is incorporated in England and Wales and Rio Tinto Limited is incorporated in Australia.
Rio
Tinto’s international headquarters are in London whilst the Australian representative office in Melbourne provides support for the operations, undertakes external and investor
relations and fulfils statutory obligations. For legal purposes, Rio Tinto’s US agent is Shannon Crompton, Secretary of Rio Tinto’s
US holding companies, 8309 West 3595 South, Magna, Utah 84044. Investor relations
in the US are provided by Makinson Cowell US Limited, One Penn Plaza, 250 W 34th
St, Suite 1935, New York, NY 10119.
Rio
Tinto’s address and telephone details are shown on the inside back
cover of this report.
Objective, strategy and management structure
Rio
Tinto’s fundamental objective is to maximise
the overall long term return to its shareholders by operating responsibly and
sustainably in areas of proven expertise where the Group has competitive advantage.
Its strategy is to maximise the net present value per share by investing in large,
long life, cost competitive mines. Investments are driven by the quality of opportunity,
not choice of commodity.
Rio
Tinto’s mining interests are diverse both in geography and product.
The Group consists of wholly and partly owned subsidiaries, joint ventures,
associated companies and joint arrangements, the principal ones being listed
in notes 31 to 34 of the Financial statements on pages 123 to 125.
Rio
Tinto’s management structure is designed to facilitate a clear focus on business performance and the Group’s
objective. The management structure, which is reflected in this report,
is based on principal product and global support groups:
•
Iron Ore
•
Energy
•
Industrial Minerals
•
Aluminium
•
Copper
•
Diamonds
•
Exploration, and
•
Technology.
The chief
executive of each group reports to the chief executive of Rio Tinto.
2004 financial summary
On
31 December 2004, Rio Tinto plc had a market capitalisation
of £16.4 billion (US$31.6 billion) and Rio Tinto Limited had a market capitalisation of A$19.5 billion (US$15.2 billion). The combined Group’s
market capitalisation in publicly held shares at the end of 2004 was US$41.1
billion.
At
31 December 2004, Rio Tinto had consolidated operating assets of US$16.6 billion:
61 per cent were located in Australia and New Zealand and 27 per cent in
North America. Group turnover, or sales revenue, in 2004 was US$14.1 billion
(or US$11.3 billion excluding Rio Tinto’s share of joint ventures’ and associates’ turnover).
Net earnings in 2004 were US$2,813 million.
History
The Rio Tinto Company was formed
by investors in 1873 to mine ancient copper workings at Rio Tinto in southern
Spain. The Consolidated Zinc Corporation was incorporated in 1905, initially
to treat zinc bearing mine
waste at Broken Hill, New South Wales, Australia.
The RTZ Corporation (formerly The Rio Tinto-Zinc Corporation) was formed in 1962 by the merger of The Rio Tinto Company and The Consolidated Zinc Corporation. CRA Limited (formerly Conzinc
Riotinto of Australia Limited) was formed at the same time by a merger of the Australian interests of The Consolidated Zinc Corporation and The Rio Tinto Company. Between 1962 and 1995, RTZ and CRA discovered important mineral deposits, developed
major mining projects and also grew through acquisition.
RTZ
and CRA were unified in December 1995 through a DLC structure. Directed by a
common board of directors, this is designed to place the shareholders of both
companies in substantially the same position as if they held shares in a single
enterprise owning all of the assets of both Companies.
In June 1997, The RTZ Corporation became Rio Tinto plc and CRA Limited became Rio Tinto Limited, together known as the Rio Tinto Group. Since the 1995 merger, the Group has continued to
invest in developments and acquisitions in keeping with its strategy.
RECENT DEVELOPMENTS
Share buybacks and issues 2004
In April 2004, Rio Tinto plc shareholders renewed approvals for the buyback of up to ten per cent of its own shares and Rio Tinto Limited shareholders renewed approvals to buy back up to 100 per cent of Rio Tinto
Limited shares held by Tinto Holdings Australia Pty Limited (a wholly owned subsidiary of Rio Tinto plc) plus, on market, up to ten per cent of the publicly held capital in any 12 month period.
The
Group announced on 3 February 2005, its intention to return US$1.5 billion
of capital to shareholders, therefore, Rio Tinto plc and Rio Tinto Limited
will seek renewal of their existing shareholder approvals at their respective
annual general meetings in 2005. Both Companies will also seek shareholder
approval for Rio Tinto Limited to make off market purchases of its shares
within 12 months of the annual general meeting,
within the overall limit of ten per cent of publicly held capital described above.
This would be through a tender process at a discount to the market price.
The shareholders’ approval being sought will also allow Rio Tinto
Limited to buy back its shares from Tinto Holdings Australia, after such
an off market tender (at the same price), to maintain the proportional
holding of Tinto Holdings Australia following
Rio Tinto 2004
Annual
report and financial statements
the off market buyback. The number of shares,
if any, which may eventually be bought back under these authorities will be
determined by the directors, based on what they consider to be in the best
interests of all
shareholders.
In
the year to 31 December 2004, neither Rio Tinto plc nor
Rio Tinto Limited purchased any
publicly held shares for cancellation in either Company. However, a further 1,346,874
Rio Tinto plc
and 280,332 Rio Tinto Limited shares were issued in respect of the Companies’
employee share plans. During the year, options for a further 1,541,367 Rio Tinto plc and 1,339,834 Rio Tinto Limited shares were granted under Rio Tinto’s
share plans.
Share buybacks and issues 2002-2003
In
2002, 887,000 Rio Tinto plc and 360,000 Rio Tinto Limited shares were issued
under the Companies’ employee share plans and options were granted over 2.6 million Rio Tinto plc shares and 2.2 million Rio Tinto
Limited shares.
In 2003, 1,193,000 Rio Tinto plc and 240,000 Rio Tinto Limited shares were issued in respect of the Companies’ employee share plans. During 2003, options were granted over 2.7 million Rio Tinto plc and 1.6 million Rio Tinto
Limited shares in respect of the Companies’ employee share plans.
In the years 2002 and 2003, neither Rio Tinto plc nor Rio Tinto Limited purchased any publicly held shares for cancellation in either Company.
Operations acquired and divested 2004
In
January 2004, Rio Tinto completed the sale of its 100 per cent interest in the
nickel mining company Mineração Serra
da Fortaleza Ltda to Votorantim Metais, a Brazilian controlled mining company.
Including an adjustment for future nickel prices, the total cash consideration
was approximately US$80 million.
A 20 per cent interest in the Sepon project in Laos, comprising a gold operation and the Khanong copper project, was sold to Oxiana Limited for a cash consideration of US$85 million.
In
March, Rio Tinto completed the sale of its shareholding in Freeport-McMoRan Copper & Gold
Inc (FCX). Rio Tinto received net proceeds of US$882 million for its 23,931,100
FCX shares. Rio Tinto retains its 40 per cent joint venture interest in
reserves discovered after 1994 at the Grasberg mine which is managed by
FCX. The sale of FCX shares does not affect the terms of the joint venture
nor the management of the Grasberg
mine.
In
June, Rio Tinto completed the sale of its 100 per cent interest in Zinkgruvan
Mining AB to South Atlantic Ventures. Zinkgruvan was acquired in 2000 as
part of North. Rio Tinto received US$101 million in cash plus US$5 million
for working capital, and can earn a further US$5 million over the next
two years in price participation payments based on zinc, lead and silver
prices. Also in June, Rio Tinto’s interest in the
Boké bauxite deposit in west Africa was divested for US$12 million.
Rio
Tinto and Empresa de Desenvolvimento Mineiro completed the sale of their
interests in the Neves Corvo copper mine in Portugal to EuroZinc for a
cash consideration and a participation in the average copper price in excess
of certain thresholds. Rio Tinto’s share of the consideration for
its 49 per cent share of the mine was US$70 million. The remaining price
participation rights relating to copper production from Neves Corvo, which
was sold in the first half of the year, were themselves sold for US$22
million.
The
directors of Rio Tinto Zimbabwe (RioZim) agreed to a restructuring of Rio
Tinto’s 56 per cent shareholding in RioZim. The Murowa diamond project in Zimbabwe had been a 50:50 joint
venture between Rio Tinto and RioZim. As a result of the restructuring, Rio Tinto owns a direct 78 per cent interest in Murowa and RioZim became an independent Zimbabwean controlled, listed company owning the remaining 22 per cent of Murowa. Rio
Tinto ceased to be an ordinary shareholder in RioZim but retains a reduced cash participation in RioZim’s
assets other than the Murowa diamond project for a period of ten years. The transaction
had no material effect on Rio Tinto.
The
sale of the Group’s 51 per cent interest in Rio Paracatu Mineração,
the owner of the Morro do Ouro mine in Brazil, was completed on 31 December
2004 for US$250
million, subject to an adjustment for working capital.
The sale to Nippon Steel of an eight per cent interest in the Hail Creek Joint Venture, and the increase in the combined share of the original participants, Marubeni Coal and Sumisho Coal
Development, by two per cent was completed in the fourth quarter. Rio Tinto will receive about US$150 million for the sale of these interests in the Hail Creek Joint Venture together with the sale of a 47 per cent interest in the Beasley River iron
ore deposit to its joint venture partners in Robe River, which includes Nippon Steel.
Kennecott Energy successfully bid for an additional 177 million tonnes of in-situ coal reserves at West Antelope at a cost of US$146 million.
Operations acquired and divested 2002-2003
In
January 2002, Kennecott Energy (KEC) purchased the North Jacobs Ranch coal reserves
for US$380 million, payable in instalments over
a five year period. The reserves are adjacent to KEC’s existing Jacobs Ranch
operation and provide a basis for low cost expansion in line with market demand.
Following
the purchase of outstanding units in the Western Australian Diamond Trust,
Rio Tinto’s interest in Argyle Diamonds increased from 99.8 per cent
to 100 per cent.
In
August 2002, Comalco completed the acquisition of an additional 9.5 per
cent interest
in reduction lines 1 and 2 of the Boyne Island Smelter for US$80 million.
This increased
Comalco’s share in lines 1 and 2 of the smelter to 59.5 per cent from 50 per cent. Comalco’s
interest in line 3 remains unchanged at 59.25 per cent.
During
the first half of 2002, Coal & Allied Industries completed the sale of its interest in the Moura Joint Venture for US$166 million and in Narama and Ravensworth for US$64
million. These were classified as assets held for resale and consequently their disposal had no effect on net earnings. In September, Rio Tinto acquired for cash in the market a further three per cent in Coal & Allied
to bring its shareholding
to 75.7 per cent.
As
a result of a refinancing in December 2002, in which the Labrador Iron Ore
Royalty Income Fund (LIORF) chose not to participate, Rio Tinto’s
interest in Iron Ore Company of Canada increased from 56.1 to 58.7 per
cent.
The
sale of Rio Tinto’s 25 per cent interest in Minera Alumbrera Limited
in Argentina, acquired as part of North, together with its wholly owned
Peak gold mine in New South Wales, Australia, was completed in March 2003.
The cash consideration was US$210 million.
Rio
Tinto Zimbabwe sold the Patchway gold mine in 2003.
The
Framework Agreement signed with the Government of Indonesia in 2002 for divestment
of 51 per
cent of Kaltim Prima Coal (KPC) to Indonesian interests lapsed in 2003
when no assignment of KPC’s offer was made or accepted within the
required timeframe.
On 21 July 2003 Rio Tinto and BP announced that they had agreed to sell their interests in KPC for a cash price of US$500 million, including assumed debt, to PT Bumi Resources, a public
company listed on the Jakarta and Surabaya Stock Exchanges. The sale was completed on 10 October and each company received 50 per cent of the net proceeds.
Development projects 2004
Rio Tinto invested over US$2.2 billion in 2004 on development projects around the world.
In December 2003, Hamersley Iron announced the US$920 million expansion of its port and mine capacity, with further expenditure on the rail network and power infrastructure being
evaluated. The partners in the Robe River Joint Venture approved US$214 million (Rio Tinto share US$113 million) to dual track a significant part of the Hamersley Iron rail line. Hamersley Iron will spend a further US$46 million to upgrade power
infrastructure in the Pilbara. The port and mine expansions are on track for completion by the end of 2005.
10
Rio Tinto 2004
Annual
report and financial statements
In January
2004, Rio Tinto approved the expansion of QIT-Fer et Titane Inc’s upgraded
slag (UGS) plant in Quebec, Canada. Total investment will be US$76 million
and capacity will be increased from 250,000 tonnes per year to 325,000 tonnes
per year in 2005.
The owners
of the Escondida copper mine in Chile approved expenditure of US$870 million
(Rio Tinto share US$270 million) on a sulphide leach project to produce 180,000
tonnes (Rio Tinto share 54,000 tonnes) of copper cathode per annum for more
than 25 years starting in the second half of 2006.
Construction
of the US$100 million second block cave at the underground Northparkes copper
and gold mine in New South Wales, Australia was completed and production commenced
in 2004.
Development
of the 54 per cent owned Eastern Range iron ore mine in Australia with a capacity
of ten million tonnes per year was completed. First shipments started in the
first half of 2004.
Expansion
of the Weipa bauxite mine in Queensland, Australia, was completed, resulting
in an increase in production capacity to 16.5 million tonnes per annum. This
supports the requirements of the new Comalco Alumina Refinery. A key component
of the US$150 million expenditure is a 9.5 million tonne beneficiation plant
for ore from the Andoom deposit. In 2005, a new US$42 million power station
will be constructed to service the Weipa mining operations and surrounding
communities.
Construction
of the first stage of Comalco’s new alumina refinery at Gladstone, Queensland
commenced in January 2002 and was completed in late 2004, three months early
and in line with its budget of US$750 million. Initial shipments from the
1.4 million tonnes per year plant started in early 2005. There is potential
for the refinery capacity to increase to over four million tonnes per year
in two additional stages when market conditions allow.
Construction
began in January 2003 on an expanded US$200 million HIsmelt
®
plant at Kwinana in Western Australia.
Cold commissioning commenced in late 2004. First hot metal is expected to
be produced in the second quarter of 2005 with the full production rate of
800,000 tonnes per year expected in the fourth quarter of 2006.
Approval
was given in 2004 for expansion of the Hail Creek coal mine in Australia to
eight million tonnes per year at a cost of US$157 million. At the Diavik diamond
mine in Canada construction begins in 2005 of a second dike at a cost of US$190
million to enable mining of a third orebody. Also approved was an optimisation
study costing US$75 million including construction of an exploration decline
to investigate underground mining.
Kennecott
Land’s Project Daybreak in Utah, US, a mixed use land development on
a 1,800 hectare site, started in 2003, with the first land sales in 2004 that
will ramp up over a period of five to six years.
Further
detail on these investments and projects is provided in the Operational review
on pages 38 to 57.
Development
projects have been funded using internally generated funds and proceeds of
asset disposals.
Development projects 2002-2003
Work on the Robe River Joint Venture’s
US$450 million West Angelas iron ore mine and port facilities in Western Australia
was completed in mid-2002 and the first shipments were made.
Freeport
Indonesia’s Deep Ore Zone (DOZ) underground block cave project was declared
fully operational from 1 October 2002. This achieved design capacity of 25,000
tonnes of ore per day in 2002, a year earlier than originally projected. In
the first quarter of 2003, Freeport Indonesia completed a further DOZ expansion
to 35,000 tonnes per day at a cost of US$34 million.
The Diavik
diamond project in the Northwest Territories, Canada was completed in January
2003 three months early and within budget. Initial production commenced from
the contact zone above the orebody with the main orebody accessed during the
second half of 2003.
Production
ramp up at Palabora’s US$465 million underground copper mine in South
Africa started in 2003 but was constrained by an inability to clear drawpoints
blocked by poorly fragmented, large rocks.
Development
of the Escondida Norte satellite deposit at the 30 per
cent owned Escondida copper mine in Chile
was started in June 2003 to provide mill feed to keep Escondida’s capacity
above 1.2 million tonnes of copper per year to the end of 2008. First production
is expected by the end of 2005. Commissioning of the new US$1,045 million,
110,000 tonnes of ore per day Laguna Seca concentrator was completed in the
second quarter of 2003.
In 2003,
Rio Tinto Coal Australia completed development of the US$255 million Hail
Creek coking coal project in Queensland, Australia with an initial capacity
of 5.5 million tonnes annually.
BUSINESS ENVIRONMENT AND
MARKETS
Competitive environment
Rio Tinto is a major producer in
all the metals and minerals markets in which it operates. It is generally
among the top five global producers by volume. It has market shares for different
commodities ranging from five per cent to 40 per cent. The competitive arena
is spread across the globe, including eastern Europe, Russia and China.
Most of
Rio Tinto’s competitors are private sector companies which are publicly
quoted. Several are, like Rio Tinto, diversified in terms of commodity exposure,
but others are focused on particular commodity segments. Metal and mineral
markets are highly competitive with few barriers to entry. They can be subject
to price declines in real terms reflecting large productivity gains, increasing
technical sophistication, better management, and advances in information technology.
High quality,
long life mineral resources, the basis of good financial returns, are relatively
scarce. Rio Tinto’s ownership of or interest in some of the world’s
largest deposits enables it to contribute to long term market growth. World
production volumes are likely to grow at least in line with global economic
activity. The emergence of China and eventually India as economic forces requiring
metals and minerals for development could mean even higher market growth.
Economic overview
World economic activity in 2004
grew at the fastest rate since the 1970s, rising to over five per cent from
three per cent the year before on a purchasing power parity basis. Trade growth
accelerated even faster, to more than eight per cent in real terms, nearly
double the rate seen in 2003.
The increase
in economic activity was widely based, led by the US and China which grew
by 4.3 per cent and nine per cent respectively. Japan benefited from strong
exports, which stimulated growth of four per cent. Growth elsewhere in Asia
was also stimulated by exports. Latin America grew by five per cent, driven
by the boom in demand for metals, oil and some agricultural products. European
activity lagged, but higher exports enabled growth to rise to over two per
cent.
Inflation
remained low by historical standards in spite of the large rise in prices
of oil and other commodities. This reflected fierce competition in the manufacturing
sector and generally weak labour markets.
The US
benefited from very low real interest rates and a loose fiscal policy in the
run up to the presidential election. The twin deficits of government finance
and trade increased rapidly. The fact that US growth was based on borrowing
was underscored by the decline in the value of the US dollar, which fell eight
per cent in trade weighted terms, following an 11 per cent fall in 2003. Some
currencies are pegged to the US dollar, notably the Chinese renimbi, and the
fall against freely traded currencies such as the euro and the Australian
dollar was considerably greater.
The other
pillar of global growth was China, with GDP rising by nine per cent. This
was driven by investment in fixed assets, which rose by more than 25 per cent
for the second successive year, and industrial output, which grew more than
16 per cent, also for the second year running.
Growth
was strongest in the first half and then slowed. This was most notable in
Europe and Japan as their currencies strengthened against the US dollar. The
picture in China was less clear. Growth there seems to have slowed from the
earlier breakneck pace as the government signalled before the middle of the
year that it wanted to reduce growth in investment in fixed assets and introduced
curbs. Trade with China in many commodities eased considerably in the second
half,
Rio Tinto 2004
Annual
report and financial statements
but other factors including port congestion
also contributed.
Commodity
markets had already started to improve in 2003, but the acceleration in economic
activity and trade in 2004 tipped many of them into a zone of extreme tightness.
Prices soared, aided by a declining US dollar. Fund activity fluctuated through
the year, but provided strong support for prices overall. Demand for many
products grew considerably faster than the world economy. Chinese growth continued
to be very commodity intensive, and there was some rebuilding of stocks in
the supply chain. Global steel production grew nine per cent, the fastest
since 1973.
Copper
benefited more than most non ferrous metals from the acceleration in growth,
as it was already in deficit and refined output was held back by a series
of disruptions to mine output and by smelter capacity. Demand grew by seven
per cent, the deficit in refined copper rose sharply and exchange stocks fell
below the levels seen in the mid 1990s. Fund buying intensified pricing in
a very tight physical market. The average cash LME price rose to US$1.30 per
pound from 80 US cents per pound the year before, only just short of the highest
ever price in nominal terms (not adjusted for inflation). In contrast, the
copper concentrates market, which had been tight for several years, was well
supplied in the second half.
The seaborne
iron ore trade continued to grow strongly with China’s iron ore imports
nearly 40 per cent above their 2003 level. Price increases of nearly 20 per
cent early in the year underlined the tightness of the market. The rapid growth
in demand for iron ore caused a shortage of shipping capacity leading to the
highest freight rates ever recorded.
Prices
for seaborne thermal coal rose by over 60 per cent. Even a rise of this magnitude,
however, did not dampen the market and spot prices remained above the contract
settlement price throughout the year. World seaborne thermal coal trade is
estimated to have grown by about six per cent during 2004. Coking coal prices
rose by less than those of thermal coal but significant increases in demand
in Asia meant that some spot cargos were trading at very high prices.
The North
American aluminium market improved significantly in 2004 with demand growth
of around ten per cent. Combined with demand in China, the primary aluminium
market moved into deficit for the first time since 2000. The annual average
price of aluminium increased accordingly to 78 US cents per pound in 2004
from 65 US cents the previous year. However, the rise was not as strong as
for copper because stocks were higher. The spot price for alumina remained
very high by historical standards throughout 2004 reflecting general market
tightness and strong demand from Chinese aluminium smelters.
The economic
recovery in developed countries, the US in particular, benefited the demand
for industrial minerals such as borates and titanium minerals. Demand growth
for these products, however, generally continued to fall short of that achieved
by metal markets. This was partly due to a lower exposure to the present stage
of Chinese growth.
Gold averaged
US$409 per ounce, a 16 year nominal high, almost entirely driven by the falling
US dollar. Many less widely traded metals also benefited from much higher
prices, notably molybdenum, which averaged US$14 per pound for trader oxide,
a 25 year nominal high, and silver, which averaged US$6.70 per ounce, up 40
per cent year on year.
A discussion of the financial results for
the two years to
31
December
2004 is given in the Financial review on pages 32 to 37.
Comments
on the financial performance of the individual product groups for the three
years to 31 December 2004 are included in the Operational review on pages
38 to 57. Details of production, reserves and resources, and information
on
Group mines are given on pages 13 to 24 and 26 to 31, respectively. Analyses
of Rio Tinto’s revenues by product group, geographical origin and geographical
destination have been set out in notes 26 to 27 to the Financial statements
on pages 111 to 115.
Marketing channels
Each business within each product group is
responsible for the marketing and sale of their respective metal and mineral
production.
Consequently, Rio Tinto has numerous marketing
channels, which now include electronic marketplaces, with differing characteristics
and pricing mechanisms.
In general,
Rio Tinto’s businesses contract their metal and mineral production direct
to end users under long term supply contracts and at prevailing market prices.
Typically, these contracts specify annual volume commitments and an agreed mechanism
for determining prices, for example, businesses producing non ferrous metals
and minerals reference their sales prices to the London Metal Exchange (LME)
or other metal exchanges such as the Commodity Exchange Inc (Comex) in New York.
Fluctuations in these prices, particularly for aluminium, copper and gold, inevitably
affect the Group’s financial results.
Businesses
producing coal and iron ore would typically reference their sales prices to
annually negotiated industry benchmarks. In markets where international reference
market prices do not exist or are not transparent, businesses negotiate product
prices on an individual customer basis.
Rio Tinto’s
marketing channels include a network of regional sales offices worldwide. Some
products in certain geographical markets are sold via third party agents or
to major trading companies.
Governmental regulations
Rio Tinto is subject to extensive governmental
regulations affecting all aspects of its operations and consistently seeks
to apply best practice in all of its activities. Due to Rio Tinto’s product
and geographical spread, there is unlikely to be any single governmental regulation
that could have a material effect on the Group’s business.
Rio Tinto’s
businesses in Australia, New Zealand, Papua New Guinea and Indonesia are subject
to state and federal regulations of general application governing mining and
processing, land tenure and use, environmental requirements, workplace health
and safety, trade and export, corporations, competition, foreign investment
and taxation. Some operations are conducted under specific agreements with
the respective governments and associated acts of parliament. In addition,
Rio Tinto’s uranium operation in the Northern Territory, Australia is
subject to specific regulation in relation to its mining and export of uranium.
US and
Canada based operations are subject to local and national regulations governing
land use, environmental aspects of operations, product and workplace health
and safety and trade and export administration.
The South
African Mineral and Petroleum Resources Development Act 2002, as read with
the Empowerment Charter for the South African Mining Industry, targets the
transfer for fair value of 26 per cent ownership of South African mining assets
to historically disadvantaged South Africans (HDSAs) within ten years. Attached
to the Empowerment Charter is a “scorecard” by which companies will
be judged on their progress towards empowerment and the attainment of the
target transfer of 26 per cent ownership. The scorecard also provides that
15 per cent ownership should vest in HDSAs within five years of 1 May 2004.
The Mineral and Petroleum Royalty Act, proposed for approval in 2005, will
govern state royalties and introduce new royalty payments in respect of mining
tenements in South Africa. The royalty will be calculated on a gross sales
value basis in relation to any minerals extracted, rather than on the basis
of profits generated. The South African government has confirmed that any
such royalties would become payable only from 2009.
12
Rio Tinto 2004
Annual
report and financial statements
Mine production figures for metals refer to the total quantity of metal produced in concentrates or doré bullion irrespective of whether these products are then refined onsite, except for the
data for iron ore and bauxite which represent production of saleable quantities of ore.
(b)
Rio Tinto percentage share, shown above, is as at the end of 2004 and has applied over the period 2002 – 2004 except for those operations where the share has varied during the year and the
weighted average for them is shown below. The Rio Tinto share varies at individual mines and refineries in the “others” category and thus no value is shown.
Rio Tinto share %
Operation
See Note
2002
2003
2004
Atlantic Copper
(n)
16.5
15.4
12.0
Argyle
(p)
99.9
100.0
100.0
Bengalla
(i)
29.4
30.3
30.3
Boyne Island
(d)
56.6
59.4
59.4
Grasberg
(n)
15.0
13.9
10.8
Hail Creek
(h)
–
92.0
90.8
Hunter Valley Operations
(i)
73.6
75.7
75.7
Iron Ore Company of Canada
(v)
56.2
58.7
58.7
Lihir
(r)
16.3
16.0
14.5
Mount Thorley Operations
(i)
58.9
60.6
60.6
Moura
(i) (j)
40.0
–
–
Narama
(i) (j)
36.4
–
–
Ravensworth East
(i) (j)
72.7
–
–
Warkworth
(i)
41.2
42.1
42.1
(c)
Comalco Alumina Refinery started production in October 2004.
(d)
Rio Tinto acquired an approximately five per cent additional interest in production from the Boyne Island smelter with effect from August 2002.
(e)
Rio Tinto completed the sale of its four per cent interest in the Boké mine on 25 June 2004. Production data are shown up to the date of sale.
(f)
Borate quantities are expressed as
B
2
O
3
.
(g)
Rio Tinto Coal Australia was previously known as Pacific Coal.
(h)
Hail Creek commenced production in the third quarter of 2003. Rio Tinto reduced its shareholding in Hail Creek from 92.0 per cent to 82.0 per cent on 15 November 2004.
(i)
Rio Tinto increased its stake in Coal & Allied Industries from 72.7 per cent to 75.7 per cent during September 2002.
(j)
On 14 March 2002, Coal & Allied completed the sale of its interests in Narama and Ravensworth. Coal & Allied sold its interest in the Moura coal mine with effect from 24 May 2002. Production
data are shown up to the dates of sale.
(k)
Rio Tinto had a 50 per cent share in Kaltim Prima and, under the terms of its Coal Agreement, the Indonesian Government was entitled to a 13.5 per cent share of Kaltim Prima’s production. Rio
Tinto’s share of production shown is before deduction of the Government share.
Rio Tinto completed the sale
of its interest in PT Kaltim Prima Coal on 10 October
2003. Production data are shown up to the date of sale.
(l)
Kennecott Energy has a partnership interest in the Colowyo mine but, as it is responsible under a management agreement for the operation of the mine, all of Colowyo’s output is included in Rio
Tinto’s share of production.
(m)
Rio Tinto completed the sale of its 25 per cent interest in Minera Alumbrera together with its wholly owned Peak gold mine on 17 March 2003. Production data are shown up to the date of
sale.
(n)
From mid 1995 until 30 March 2004, Rio Tinto held 23.93 million shares of Freeport-McMoRan-Copper & Gold (FCX) common stock from which it derived a share of production. This interest was sold on
30 March 2004. Also, through a joint venture agreement with FCX, Rio Tinto is entitled, as shown separately in the above tables, to 40 per cent of additional material mined as a consequence of expansions and developments of the Grasberg facilities
since 1998.
(o)
Rio Tinto completed the sale of its 49 per cent interest in Somincor on
18
June 2004. Production data are shown up to
the date of sale.
(p)
Rio Tinto’s interest in Argyle Diamonds increased from 99.8 per cent to 100 per cent on 29 April 2002, following the purchase of the outstanding units in the Western Australian Diamond
Trust.
(q)
Ore mining and processing at Murowa commenced during the third quarter of 2004.
(r)
Following a placement of shares on 13 November 2003, Rio Tinto’s interest in Lihir moved from 16.3 per cent to 14.5 per cent.
(s)
Rio Tinto sold its interest in Morro do Ouro on 31 December 2004. Production data are shown up to the date of sale.
(t)
As a result of the corporate restructuring completed on 8 July 2004, Rio Tinto has ceased to be an ordinary shareholder in the renamed RioZim but will retain a reduced cash participation in its gold
and nickel assets for a period of ten years.
(u)
Rio Tinto’s share of production includes 100 per cent of the production from the Eastern Range mine, which commenced production in March 2004. Under the terms of the joint venture agreement,
Hamersley Iron manages the operation and is obliged to purchase all mine production from the joint venture.
(v)
Rio Tinto increased its shareholding in Iron Ore Company of Canada from 56.1 per cent to 58.7 per cent on 20 December 2002.
(w)
Rio Tinto completed the sale of its 100 per cent interest in the
Zinkgruvan mine on 2 June 2004. Production data are shown up to the date of sale.
(x)
Rio Tinto completed the sale of its 100 per cent interest in the Fortaleza nickel mine on 16 January 2004. This was effective from 1 January 2004.
(y)
Talc production includes some products derived from purchased ores.
(z)
Quantities comprise 100 per cent of QIT and 50 per cent of Richards Bay Minerals’ production.
16
Rio Tinto 2004
Annual
report and financial
statements
Ore reserves and Mineral resources in this
report (for Rio Tinto managed operations) are reported in accordance with
the Australasian Code for Reporting of Exploration Results, Mineral Resources
and Ore Reserves, December 2004 (the JORC Code) as required by the Australian
Stock Exchange (ASX). Codes or guidelines similar to JORC with only minor
regional variations have been adopted in South Africa, Canada, US, UK, Ireland
and Europe and together these represent current best practice for reporting
ore reserves and mineral resources.
The JORC Code
envisages the use of reasonable investment assumptions, including the use
of projected long term commodity prices, in calculating reserve estimates.
However, for US reporting, the US Securities and Exchange Commission require
historical price data to be used. For this reason, some reserves reported
to the SEC will differ from those reported below.
Ore reserve
and mineral resource information in the tables below is based on information
compiled by Competent Persons (as defined by
JORC), or ‘recognised overseas mining
professionals’ as defined by the ASX, most of whom are full time employees
of Rio Tinto or related companies. Each has had a minimum of five years’ relevant
estimation experience and is a member of a recognised professional body whose
members are bound by a professional code of ethics. Each Competent Person
consents to the inclusion in this report of information they have provided
in the form and context in which it appears. A register of the names of the
Competent Persons who are responsible for the estimates is maintained by
the Company Secretaries in London and Melbourne and is available on request.
The
ore reserve figures in the following tables are as at
31
December 2004. Summary data for year end 2003 are shown for comparison. Metric
units
are used throughout.
The figures
used to calculate Rio Tinto’s share of reserves are often more precise
than the rounded numbers shown in the tables, hence small differences might
result if the calculations are repeated using the tabulated figures.
Type of
Proved ore reserves
Probable ore reserves
Total ore reserves 2004 compared with 2003
Rio Tinto share
mine
at end 2004
at end 2004
(a)
Tonnage
Grade
Tonnage
Grade
Tonnage
Grade
Interest
Recoverable
2004
2003
2004
2003
%
mineral
millions
millions
millions
millions
millions
BAUXITE
(b)
of tonnes
%Al
2
O
3
of tonnes
%Al
2
O
3
of tonnes
of tonnes
%Al
2
O
3
%Al
2
O
3
of tonnes
Reserves at operating mine
Weipa (Australia)
O/P
141
54.3
1,005
53.6
1,146
1,212
53.7
52.7
100.0
1,146
Marketable
product
millions
millions
millions
millions
millions
BORATES
(c)
of tonnes
of tonnes
of tonnes
of tonnes
of tonnes
Reserves at operating mines
Boron (US)
O/P
22.2
4.7
26.9
29.6
100.0
26.9
Tincalayu (Argentina)
O/P
0.2
0.1
0.3
0.3
100.0
0.3
Total
27.2
COAL
(d)
Coal
Recoverable
% Yield
Marketable reserves
Marketable coal quality
type
reserves
to give
(e
)
total
marketable
Proved
Probable
Total
Total
Marketable
reserves
2004
2003
(f
)
(f
)
reserves
Reserves at operating mines
millions
millions
millions
millions
millions
Calorific
Sulphur
millions
of tonnes
of tonnes
of tonnes
of tonnes
of tonnes
value
content
of tonnes
MJ/kg
%
Coal & Allied Industries
Bengalla (Australia)
O/C
SC
197
81
98
62
161
166
28.30
0.50
30.3
49
Hunter Valley Operations
(Australia)
O/C
SC+MC
491
68
262
74
336
326
28.94
0.57
75.7
254
Mount Thorley Operations
(Australia)
O/C
SC+MC
37
65
24
24
27
28.20
0.53
60.6
14
Warkworth (Australia)
O/C
SC+MC
386
64
149
97
246
216
29.35
0.53
42.1
104
Sub-total
421
Kennecott Energy
Antelope (US)
O/C
SC
249
100
249
249
260
20.59
0.22
100.0
249
Colowyo (US) (g)
O/C
SC
24
100
24
24
28
24.31
0.40
100.0
24
Cordero Rojo (US)
O/C
SC
365
100
365
365
402
19.59
0.30
100.0
365
Decker (US) (h)
O/C
SC
25
100
25
25
45
22.10
0.37
50.0
13
Jacobs Ranch (US)
O/C
SC
500
100
496
4
500
531
20.35
0.44
100.0
500
Spring Creek (US)
O/C
SC
225
100
225
225
250
21.75
0.33
100.0
225
Sub-total
1,375
Rio Tinto Coal Australia
Blair Athol (Australia)
O/C
SC
62
98
60
1
61
66
27.95
0.32
71.2
43
Hail Creek (Australia) (i)
O/C
MC
301
63
111
80
190
196
32.20
0.35
82.0
156
Kestrel (Australia)
U/G
SC+MC
149
80
57
63
120
123
32.20
0.65
80.0
96
Tarong-Meandu (Australia)
O/C
SC
136
68
86
7
93
100
21.05
0.30
100.0
93
Sub-total
388
Total reserves at operating mines
2,184
See notes on page 21.
Rio Tinto 2004
Annual
report and financial statements
Type of mine: O/P = open pit, O/C = open
cut, U/G = underground, D/O = dredging operation.
(b)
Reserves of iron ore, bauxite and diamonds
are shown as recoverable reserves of saleable product after accounting for
all mining and processing losses. Mill recoveries are therefore not shown.
(c)
Reserves of industrial minerals are expressed
in terms of marketable product, ie after all mining and processing losses.
In the case of borates, the saleable product is
B
2
O
3
.
(d)
Coal reserves are shown as both recoverable
and marketable. The yield factors shown reflect the impact of further processing,
where necessary, to provide marketable coal.
(e)
Coal type: SC = steam/thermal coal; MC
= metallurgical/coking coal.
(f)
Analyses of coal from the US were undertaken
according to “American Standard Testing Methods” (ASTM) on an
“As Received” moisture basis whereas the coals from Australia
have been analysed on an “Air Dried” moisture basis according
to Australian Standards (AS). MJ/kg = megajoules per kilogramme.
(g)
Kennecott Energy has a partnership interest
in the Colowyo mine but, as it is responsible under a management agreement
for the operation of the mine, all of Colowyo's reserves are included in
Rio Tinto's share shown above.
(h)
Reserves at Decker have decreased following
a reduction of tonnage commitments under a sales contract.
(i)
Rio Tinto reduced its shareholding in Hail
Creek from 92.0 per cent to 82.0 per cent on 15 November 2004.
(j)
The term ‘undeveloped reserves’
is used here to describe material that is economically viable on the basis
of technical and economic studies but for which mining and processing permits
have yet to be requested or obtained.
(k)
At Maules Creek and Oaklands, all reserves
have been reclassified as measured and indicated resources on the basis
of updated economic studies.
(l)
Open pit reserves at Bingham Canyon have
increased following revisions to the geological model and the development
of a revised mine plan. As a result of these revisions, the underground
block cave and underground skarn reserves have been reclassified as resources.
(m)
Reserves at Escondida and Escondida Norte
have changed following the development of a new resource model that includes
additional drilling and revised cut off grades. Approval of the Sulphide
Leach Project has resulted in a new category, ‘Sulphide Leach’,
that includes material in the previously named ‘Low Grade Float’
and ‘Mixed’ categories. The significant increase in the reserve
tonnages of this material are a consequence of low grade primary mineralisation
now being considered to be processable by the sulphide leach process.
(n)
Rio Tinto completed the sale of its 100
per cent interest in the Fortaleza nickel mine on 16 January 2004. This
was effective from1
January 2004.
(o)
Rio Tinto completed the sale
of its interest in FCX on 30 March 2004. Under the terms of a joint venture
agreement between Rio Tinto and FCX, Rio Tinto is entitled to a direct 40
per cent share in reserves discovered after 31 December 1994 and it is this
entitlement that is shown.
(p)
Rio Tinto completed the sale
of its 49 per cent interest in Somincor on18
June
2004.
(q)
The depletion in ore reserves
at Northparkes is mainly due to the reclamation of material from stockpiles
and through production.
(r)
Reserves at Argyle have decreased
following the development of a new resource model and revised mine plan
which has resulted in some material being transferred to resources.
(s)
Reserves at Diavik have increased
following the development of a new resource model that incorporates additional
drilling and a revised diamond valuation.
(t)
The increase in reserves at
Cortez reflects the transfer of material from mineral resources at the Cortez
Hills and Pediment deposits.
(u)
At 2004 year end, Kelian was
in the process of closing and only minor amounts of stockpiled material
remain.
(v)
Proved reserves at Lihir and
Ranger #3 include 38.7 and 6.34 million tonnes respectively stockpiled at
the end of December 2004 for future treatment. The increase in reserves
at Lihir is a result of additional drilling which has led to significant
remodelling of the Minifie deposit and remodelling of the Kapit, Coastal
and Lienitz deposits and the subsequent development of a new resource model.
(w)
Rio Tinto completed the sale
of its 51 per cent interest in Rio Paracatu Mineração on 31
December 2004.
(x)
As a result of a restructure
completed on 8 July 2004, Rio Tinto has ceased to be an ordinary shareholder
in Rio Tinto Zimbabwe, which was subsequently renamed RioZim.
(y)
At Mt Tom Price, all Marra
Mamba reserves have been reclassified as resources pending development of
a new geological model and mine plan.
(z)
Reserves at Nammuldi have
increased following an update of resource models which resulted in material
being transferred to reserves from resources.
(aa)
The decrease in reserves at
Yandicoogina reflects production, cut off grade and recovery factor adjustments.
(bb)
Reserves at IOC have decreased
as a result of revisions to the geological model and the pit design.
(cc)
Rio Tinto completed the sale
of its 100 per cent interest in the Zinkgruvan mine on 2 June 2004.
(dd)
Comprises reserves at QIT-Fer
et Titane (Rio Tinto 100 per cent) and Richards Bay Minerals (RBM) (Rio
Tinto 50 per cent).
Rio Tinto 2004
Annual
report and financial statements
As required by the Australian Stock Exchange,
the following tables contain details of other mineralisation that has a reasonable
prospect of being economically extracted in the future but which is not yet
classified as Proven or Probable Reserves. This material is defined as Mineral
Resources under the JORC Code. Estimates of such material are based largely
on geological information with only preliminary consideration of mining, economic
and other
factors. While in the judgement of the Competent
Person there are realistic expectations that all or part of the Mineral Resources
will eventually become Proven or Probable Reserves, there is no guarantee that
this will occur as the result depends on further technical and economic studies
and prevailing economic conditions in the future.
Resources
are stated as additional to the reserves reported earlier.
Likely
Measured resources
Indicated resources
Inferred resources
Total resources
2004 compared with 2003
Rio Tinto
mining
at end 2004
at end 2004
at end 2004
interes
t
method
%
(a)
Tonnage
Grade
Tonnage
Grade
Tonnage
Grade
Tonnage
Grade
2004
2003
2004
2003
millions
millions
millions
millions
millions
BAUXITE
of tonnes
% Al
2
O
3
of tonnes
% Al
2
O
3
of tonnes
of tonnes
of tonnes
Weipa (Australia)
O/P
29
49.8
2,106
50.9
2,135
2,228
100.0
Coal type
Coal resources
at end 2004
(b)
Measured
Indicated
Inferred
millions
millions
millions
millions
millions
COAL
of tonnes
of tonnes
of tonnes
of tonnes
of tonnes
Coal & Allied Industries
(Australia)
Bengalla (c)
O/C+U/G
SC
78
110
188
286
30.3
Hunter Valley Operations
O/C
SC+MC
536
763
599
1,898
1,923
75.7
Maules Creek (d)
O/C+U/G
SC+MC
160
520
680
520
75.7
Mount Pleasant
O/C+U/G
SC+MC
200
218
281
699
699
75.7
Mount Thorley Operations (e)
U/G
SC+MC
30
68
17
115
167
60.6
Oaklands (d)
O/C
SC
480
800
1,280
880
75.7
Vickery
O/C+U/G
SC+MC
100
200
300
300
75.7
Warkworth (e)
O/C+U/G
SC+MC
60
345
16
420
753
42.1
Gokwe North
(Zimbabwe)
O/C
SC
508
406
446
1,360
1,360
50.0
Kennecott Energy
(US)
Colowyo (f)
O/C+U/G
SC
152
49
201
265
100.0
Decker
O/C
SC
68
68
71
50.0
Fort Union (g)
O/C
SC
–
75
–
Rio Tinto Coal Australia
Blair Athol (h)
O/C
SC
3
3
20
71.2
Clermont (i)
O/C
SC
11
4
15
5
50.1
Hail Creek (j)
O/C+U/G
MC
4
101
118
224
224
82.0
Kestrel West
U/G
SC
165
165
165
80.0
Lake Elphinstone
O/C
MC
61
17
78
78
82.0
SW Yarraman
O/C
SC
13
37
6
56
56
100.0
Tarong – Kunioon
O/C
SC
214
213
40
467
467
100.0
Tarong – Meandu
O/C
SC
245
64
18
327
327
100.0
Valeria
O/C
SC
200
240
440
440
71.2
Winchester South
O/C
SC
90
90
90
75.0
Measured resources
Indicated resources
Inferred resources
at end 2004
at end 2004
at end 2004
millions
grade
millions
grade
millions
grade
millions
millions
COPPER
of tonnes
%Cu
of tonnes
%Cu
of tonnes
%Cu
of tonnes
of tonnes
%Cu
%Cu
Bingham Canyon (US) (k)
O/P+U/G
42
0.6
872
0.6
46
2.3
960
–
0.7
–
100.0
Escondida (Chile) (l)
– sulphide
O/P
18
0.8
79
0.8
617
0.9
714
575
0.9
0.9
30.0
– sulphide leach
O/P
98
0.4
682
0.5
3,071
0.5
3,851
1,548
0.5
0.5
30.0
– oxide
O/P
4.1
0.3
17
0.3
26
0.4
48
55
0.4
0.5
30.0
Escondida Norte (Chile) (l)
– sulphide
O/P
0.0
1.6
6
0.9
185
0.9
192
147
0.9
1.0
30.0
– sulphide leach
O/P
0.7
0.4
144
0.4
1,177
0.5
1,321
590
0.5
0.6
30.0
– oxide
O/P
4.1
0.5
35
0.6
39
41
0.6
0.6
30.0
Grasberg (Indonesia)
O/P+U/G
363
0.5
1,633
0.5
457
0.5
2,453
1,861
0.5
0.6
(m)
Northparkes (Australia) (n)
– open pit
O/P
1.8
0.6
1.8
14
0.6
0.6
80.0
– underground
U/G
30
0.9
9.8
0.8
0.2
0.7
40
9.6
0.9
1.1
80.0
Neves Corvo (Portugal) (o)
U/G
–
7.6
–
4.0
–
Palabora (South Africa)
– oxide stockpile
4.2
0.6
4.2
4.4
0.6
0.6
49.2
– mixed stockpile
0.4
0.5
0.4
0.4
0.5
0.5
49.2
– sulphide stockpile
12
0.1
12
12
0.1
0.1
49.2
Zinkgruvan (Sweden) (p)
U/G
–
3.5
–
3.1
–
See notes on page 24.
22
Rio Tinto 2004
Annual
report and financial statements
Likely mining method: O/P
= open pit; O/C = open cut; U/G = underground; D/O = dredging operation.
(b)
Coal type: SC = steam/thermal
coal, MC = metallurgical/coking coal.
(c)
Resources at Bengalla have
decreased following the downgrading of some resources to inventory
coal.
(d)
Resources at Maules Creek
and Oaklands have increased as a result of the transfer of material
from reserves.
(e)
Resources at Mount Thorley
and Warkworth have decreased following the application of revised economic
criteria that have downgraded some resources to inventory coal.
(f)
Resources at Colowyo have
decreased following updates to the geological model and the transfer
of some material to reserves.
(g)
The Fort Union property
was sold during 2004.
(h)
Resources at Blair Athol
have decreased as a result of upgrading some material to the proved
reserve category with the remainder being written off.
(i)
Resources at Clermont have
increased following the completion of a feasibility study during 2004.
(j)
Rio Tinto reduced its shareholding
in Hail Creek from 92.0 per cent to 82.0 per cent on 15 November 2004.
(k)
Following revisions to
the geological model and the development of a revised mine plan at
Bingham Canyon, the underground block cave and underground skarn reserves
have been reclassified as resources.
(l)
Resoures at Escondida and
Escondida Norte have changed following the development of new geological
and resource models that include additional drilling. Approval of the
Sulphide Leach Project has resulted in a new category, ‘Sulphide
Leach’, that includes material in the previously named ‘Low
Grade Float’, ‘Low Grade Leach’ and ‘Mixed’ categories.
The significant increase in the resource tonnages of this material
are a consequence of low grade primary mineralisation now being considered
to be processable by the sulphide leach process.
(m)
Resources at Grasberg have
increased as a result of preliminary mine planning changes and the
inclusion of a new deposit.
(n)
Open pit mining at Northparkes
is almost complete; the remaining resources represent that material
which may be mined before mining ceases. Underground resources have
increased as a result of the development of a new geological model
following an extensive drilling programme.
(o)
Rio Tinto completed the
sale of its 49 per cent interest in Somincor on18
June
2004.
(p)
Rio Tinto completed the
sale of its 100 per cent interest in the Zinkgruvan mine on 2 June
2004.
(q)
Alluvial diamond resources
at Argyle have decreased as a result of the exclusion of several blocks
or sub-blocks from the resource base.
(r)
Resources at Diavik have
decreased as a result of upgrading material to reserves following additional
drilling and revised diamond valuations.
(s)
Rio Tinto completed the
sale of its 100 per cent interest in the Merlin deposit in December
2004.
(t)
Resources at Lihir have
decreased as a result of changes to cut off grade and re-optimisation
of the ultimate pit.
(u)
Rio Tinto completed the
sale of its 51 per cent interest in Rio Paracatu Mineração
on 31 December 2004.
(v)
At Wabu, a re-examination
of the life of mine pit shell has resulted in a reduction in resources.
(w)
Resources at Brockman have
decreased as a result of the development of new resource models incorporating
the results from additional drilling.
(x)
Resources of Marra Mamba
ore at Mt Tom Price have increased following the transfer of material
from reserves.
(y)
Detrital iron ore resources
at Nammuldi have increased as a result of the development of new resource
models incorporating results from additional drilling and a change
to the cut-off grade.
(z)
Resources in this category
consist of 33 separate deposits, 19 of which are wholly owned by Hamersley
Iron.
(aa)
The decrease in Detrital
resources at Hamersley reflects the reclassification of all material
from one deposit as either Brockman or Marra Mamba ore.
(bb)
Resources at Iron Ore Company
of Canada have decreased as a result of geological re-interpretation
and development of a new geological model.
(cc)
Developed pisolite resources
at Robe River have decreased following the application of revised economic
parameters.
(dd)
Developed Marra Mamba resources
at Robe River have decreased following the application of revised economic
parameters.
(ee)
Comprises resources at
QIT-Fer et Titane (Rio Tinto 100 per cent) and Richards Bay Minerals
(RBM) (Rio Tinto 50 per cent). Resources have decreased following a
major re-assessment of economic parameters.
24
Rio Tinto 2004
Annual
report and financial statements
Information on Group
mines
(Rio Tinto’s interest
100 per cent unless otherwise shown)
Mine
Location
Access
Title/lease
History
Type of mine
Power source
ALUMINIUM
Comalco
Weipa, Queensland, Australia
Road, air, and port
Queensland Government lease
expires in 2041 with 21 year extension,
then two years’ notice of termination
Bauxite mining commenced
in 1961; Major upgrade completed in 1998 to incorporate Alcan’s
adjacent Ely reserve in overall mining plan; Rio Tinto interest increased
from 72.4% to 100% in 2000;
In
2004 a mine expansion was completed to lift annual capacity to 16.5 million
tonnes
Open cut
On site generation; new power
station under construction
COPPER
Escondida
(30%)
Atacama Desert, Chile
Pipeline and road to deep sea
port
at Coloso
Rights conferred by Government under
Chilean
Mining Code
Production started in 1990 and expanded
in phases to 2002 when new concentrator was completed; approval in 2003
for Norte project and sulphide leach project approved 2004
Open pit
Supplied from SING grid under two
contracts
with Norgener to 2008
and Nopel
(Gas Atacama) to 2009
Grasberg
(40% of
joint
venture)
Papua, Indonesia
Pipeline, road and port
Indonesian Government Contracts of
Work
expire in 2021 with two ten year
extensions
Joint venture interest acquired 1995;
capacity expanded to over 200,000 tonnes of ore per day in 1998 with
addition of underground production of more than 35,000 tonnes per day
in 2003
Open pit and underground
Long term contract with
US-Indonesian
consortium operated,
purpose built,
coal fired generating
station
Kennecott Minerals
Cortez/Pipeline (40%)
Nevada, US
Road
Patented and unpatented mining claims
Gold production started at Cortez in
1969; Pipeline in 1997
Open pit
Public utility
Kennecott Minerals
Greens Creek (70%)
Alaska, US
Port
Patented and unpatented mining claims
Redeveloped in 1997
Underground/drift and fill
On site diesel generators
Kennecott Utah Copper
Bingham Canyon
Near Salt Lake City, Utah, US
Pipeline, road and rail
Owned
Interest acquired in 1989; modernisation
includes smelter complex
and expanded
tailings dam
Open pit
On site generation supplemented by
long
term contracts with Utah Power
and
Light
Northparkes
(80%)
Goonumbla, New South Wales,
Australia
Road and rail
State Government mining lease issued
in
1991 for 21 years
Interest acquired in 2000; production
started in 1995
Open pit and underground
Supplied from State grid
Palabora
(49%)
Phalaborwa, Northern Province,
South
Africa
Rail and road
Lease from South African Government
until
deposits exhausted and base
metal
claims owned by Palabora
Development of 20 year underground mine
commenced 1996 with
open pit closure
in 2003
Open pit and
underground
Supplied by ESKOM via grid
network
DIAMONDS
Diavik
(60%)
Northwest Territories, Canada
Air, ice road in winter
Mining leases from Canadian federal government
Deposits discovered 1994-1995;
construction approved 2000; diamond
production started 2003
Open pit to underground planned
On site diesel generators; installed
capacity
27MW
Argyle Diamonds
Kimberley Ranges,
Western
Australia
Road and air
Mining tenement held under Diamond (Argyle
Diamond Mines Joint Venture) Agreement
Act 1981-83; lease extended
for 21 years from 2004
Studies into further development options,
including underground
mining, continue;
interest increased from 59.7% following purchase
of
Ashton Mining in 2000
Open pit to underground planned
Long term contract with Ord Hydro
Consortium
and on site generation
back up
Murowa
(78%)
Zvishavane, Zimbabwe
Road and air
Claims and mining leases
Discovered 1997; small scale production
started 2004
Open pit
Supplied by ZESA
ENERGY
Coal & Allied Industries
(76%)
Bengalla (30%)
Hunter Valley Operations (76%)
Mount Thorley (61%)
Warkworth (42%)
New South Wales, Australia
Road, rail and port
Leases granted by State
Lemington acquired late 2000 and integrated
with Hunter Valley
Operations.
Peabody Australian interests acquired in 2001. Moura,
Narama
and Ravensworth interests divested in 2002
Open cut
State owned grid
Energy Resources of
Australia
(68%)
Ranger
Northern Territory, Australia
Road
Leases granted by State
Mining commenced 1981; interest acquired
through North in 2000
Open pit
On site diesel/steam power generation
26
Rio Tinto 2004
Annual
report and financial statements
Rio Tinto 2004
Annual
report and financial statements
Kennecott Energy
Antelope
Colowyo (20%)
Cordero Rojo
Decker (50%)
Jacobs Ranch
Spring Creek
Wyoming, Montana and
Colorado,
US
Rail and road
Leases from US and State
Governments
and private parties, with
minimum
coal production levels, and
adherence
to permit requirements and
statutes
Antelope, Spring
Creek, Decker and Cordero acquired in 1993, Colowyo in 1995, and Jacobs
Ranch in 1998; additional North Jacobs Ranch reserves purchased in
2002; West Antelope additional reserves 2004
Open cut
Supplied by IPPs
and Cooperatives
through
national grid service
Rio Tinto Coal Australia
Blair Athol (71%)
Kestral (80%)
Hail Creek (82%)
Tarong
Queensland, Australia
Conveyor, road, rail and port
Leases granted by State
Production started for export
at Blair Athol and adjacent power station at Tarong in 1984. Kestrel
acquired and recommissioned in 1999. Hail Creek production commenced
2003
Open cut (Blair Athol, Tarong
and Hail Creek)
and
underground
(Kestrel)
State owned grid
Rössing Uranium
(69%)
Namib Desert, Namibia
Rail, road and port
Federal lease
Production began
in 1978
Open pit
Namibian National
Power
INDUSTRIAL MINERALS
Boron
California, US
Road, rail and port
Owned
Mine redesign project
completed on budget and schedule in 2000
Open pit
On site cogeneration
units
Dampier Salt
(65%)
Dampier, Lake MacLeod and
Port
Hedland, Western Australia
Road and port
Mining leases expiring in 2013 at
Dampier,
2018 at Port Hedland and
2021
at Lake MacLeod with options to
renew
in each case
Construction of the Dampier field
started in 1969; first shipment in 1972. Lake MacLeod was acquired
in 1978 as an operating field
Solar evaporation of seawater
(Dampier
and Port Hedland) and
underground
brine (Lake MacLeod); dredging of gypsum from surface of Lake MacLeod
Dampier supply from Hamersley
Iron
Power;
Lake MacLeod from Western
Power
and on site generation units;
Port
Hedland from
Western
Power
Luzenac
Trimouns, France (other smaller
operations
in Australia, Europe
and North
America)
Road and rail
Owner of ground (orebody) and long
term
lease agreement to 2012
Production
started in 1885; acquired in 1988. (Australian mine acquired in
2001)
Open
pit
Supplied
by EdF and on site
generation
units
QIT-Fer et Titane
Saguenay County, Quebec,
Canada
Rail and port (St Lawrence River)
Mining covered by two Concessions
granted
by State in 1949 and 1951
which,
subject to certain Mining Act
restrictions,
confer rights and
obligations
of an owner
Production started 1950; interest
acquired in 1989
Open pit
Long term contract with Quebec
Hydro
Richards Bay Minerals
(50%)
Richards Bay, KwaZulu-Natal,
South
Africa
Rail, road and port
Long term renewable leases; State
lease
for Reserve 4 initially runs to end
2022;
Ingonyama Trust lease for
Reserve
10 runs to 2010
Production started
1977; interest acquired 1989; fifth dredge commissioned 2000
Beach sand dredging
Contract with
ESCOM
IRON ORE
Hamersley Iron
Brockman
Marandoo
Mount Tom Price
Paraburdoo
Yandicoogina
Channar (60%)
Eastern Range (54%)
Hamersley Ranges,
Western
Australia
Railway (owned by Hamersley Iron
and operated by Pilbara Rail Company)
and port (owned by
Hamersley Iron and operated by Pilbara Iron)
Agreements for life of mine with
Government
of Western Australia
Annual capacity
increased to 68 million tonnes during 1990s; Yandicoogina first ore
shipped in 1999 and port capacity increased; Eastern Range mine started
2004
Open pits
Supplied by
Hamersley Iron Power
Iron Ore Company of Canada
(59%)
(Rio Tinto also holds
a 19% interest in the
Labrador Iron Ore Royalty Income
Fund which owns 15.1% of
IOC)
Labrador City, Province of
Labrador
and Newfoundland
Railway and port facilities in
Sept-Iles,
Quebec (owned and
operated by
IOC)
Sublease with the Labrador Iron Ore
Royalty
Income Fund which has lease
agreements
with the Government of
Newfoundland
and Labrador that are
due to be
renewed in 2020 and 2022
Current operation began in 1962
and has processed over one billion tonnes of crude ore since; annual
capacity now 17.5 million tonnes of concentrate of which 12.5 million
tonnes can be pelletised. Interest acquired in 2000 through North
Open pit
Supplied by Newfoundland Hydro
under long term contract
Robe River
(53%)
Mesa J
West Angelas
Pilbara region, Western Australia
Railway (owned by Robe River
Iron
Associates and operated by
Pilbara
Rail Company) and port
(owned
by Robe River Iron Associates and operated by Pilbara Iron)
Agreements for life of mine with
Government
of Western Australia
First shipment
in 1972; annual sales reached 30 million tonnes in late 1990s; interest
acquired in 2000 through North; West Angelas first ore shipped in 2002
and port capacity increased
Open pit
Supplied by Robe River Iron Associates;
West Angelas supplied by Hamersley Iron Power (commercial arrangement)
Rio Tinto Brasil
Corumbá
Matto Grosso do Sul, Brazil
Road, air and river
Government licence for undetermined
period
Iron ore production started 1978; interest
acquired in 1991
Open pit
Supplied by ENERSUL
OTHER
Kelian
(90%)
Kalimantan, Indonesia
Road, river and port
Contract of Work with Indonesian
Government
for 30 years
Gold production started in 1992 and will cease in 2005
Open pit
Kelian’s own 29MW generating
station with six identical 4.9MW rated units
Lihir Gold
(14%)
Lihir Island, Papua New Guinea
Own road, airstrip and port
Special Mining Lease with Papua New
Guinea
Government expires in 2035
Production started
in 1997; refinancing in 1999 and merger with Niugini Mining in 2000
Open pit
12 diesel unit power plant, four
steam wells (geothermal power) producing ten per cent of requirements
28
Rio Tinto 2004
Annual
report and financial statements
Rio Tinto 2004
Annual
report and financial statements
Financial risk management
The
Group’s policies with regard to risk management are clearly defined and
consistently applied. They are a fundamental tenet of the Group’s
long term strategy.
The
Group’s business is mining and not trading. The Group only sells
commodities it has produced. In the long term, natural hedges operate in
a number of
ways to help protect and stabilise earnings and cash flow, obviating the
need to use derivatives or other forms of synthetic hedging for this purpose.
Such hedging is therefore undertaken to a strictly limited degree, as described
below.
The
Group has a diverse portfolio of commodities and markets, which have varying
responses to the economic cycle.
The
relationship between commodity prices and the currencies of most of the
countries in which the Group operates provides further natural protection.
In addition, the Group’s policy
of borrowing at floating US dollar interest rates helps to counteract the effect
of economic and commodity price cycles.
The
Group’s Financial statements and disclosures show the full extent of its financial commitments including debt and similar exposures. The Group’s
share of the net debt of
joint ventures and associates is also disclosed.
The
risk factors to which the Group is subject that are thought to be of particular
importance are summarised on page 7.
The
effectiveness of internal control procedures continues to be a high priority
in the Rio Tinto Group. A statement on this is included in Corporate governance
on pages 73 and 74.
The
Group’s policies with regard to currencies, commodities, interest
rates and treasury management are discussed below.
Adjusted earnings
UK
Financial Reporting Standard 3 permits the presentation of an adjusted measure
of earnings. As presented by Rio Tinto, this excludes
the effect of exceptional items of such magnitude that their exclusion is necessary
in order that adjusted earnings fulfil their purpose of reflecting the Group’s
underlying performance. Except where otherwise indicated, earnings contributions
from Group businesses and business segments exclude the effect of these exceptional
items. Adjusted earnings is reconciled with net earnings on page 86.
Group operating results
2004 compared with 2003
Net earnings of US$2,813 million were US$1,305 million above 2003. Adjusted earnings of US$2,221 million were US$839 million above 2003. The principal factors explaining the changes in earnings are shown in the table
below.
US$m
2003 Net earnings
1,508
Exclude: Exceptional gains
126
2003 Adjusted earnings
1,382
Prices
1,638
Exchange rates
(247)
Inflation
(118)
Grasberg slippage
(203)
Volumes
270
Energy costs
(81)
Other costs
(173)
Other
(247)
2004 Adjusted earnings
2,221
Add: exceptional net gains
592
2004 Net earnings
2,813
Stronger markets resulted in higher prices for most of
the Group’s products. Compared with 2003, average copper prices of 130c/lb
were over 60 per cent higher, average aluminium prices of 78c/lb were 20 per
cent higher and average gold prices of US$409/oz were 13 per cent higher. Average
molybdenum prices were over two and a half times those of 2003.
The benchmark
iron ore price increased 18.6 per cent. This resulted in increased seaborne
iron ore prices, mainly effective from 1 April 2004. The seaborne thermal
coal market also strengthened during the year with the benefit of higher
prices flowing through progressively in the second half of the year.
The
US dollar weakened further against those currencies in which the Group incurs
the majority of its costs. Against the Australian dollar it averaged 12 per
cent weaker. The effect of this and other currency movements on operating
costs reduced earnings by US$326 million. The effect on earnings of the revaluation
of monetary items to period end exchange rates was also adverse, although
relative to a more substantial charge in
2003 it had a positive effect of US$61 million. Gains on currency hedges initiated
by North and Comalco before they became wholly owned subsidiaries in 2000
increased earnings by US$18 million compared with 2003.
Production
of copper and gold from the Freeport managed Grasberg mine was significantly
below 2003 as a consequence of the material slippage in the fourth quarter
of 2003. The effect of this on volumes and costs, net of insurance, was to
reduce 2004 earnings by US$203 million. Production had returned to normal by
the fourth quarter of 2004.
Excluding
the effects of the Grasberg slippage, higher volumes, mainly from new projects
at Diavik (diamonds), Hail Creek (coking coal), West Angelas (iron ore) and
additional output from Escondida (copper) increased earnings by US$270 million.
As a result of tropical cyclone Monty the volume growth from the Western Australian
iron ore operations was more modest than would otherwise have been the case.
Excluding
the effect of inflation, higher energy costs and the Grasberg slippage, the
impact on earnings of increased costs was US$173 million. Strong markets create
cyclical cost pressures within the industry. Higher prices for skilled labour,
steel, rubber, diesel, explosives and freight have all had an effect on operating
costs.
At
Hamersley, costs were also higher due to increased material movement, including
prestripping, and higher maintenance activity. Tropical cyclone Monty had a
prolonged effect on the costs as well as volumes at Hamersley and Robe (iron
ore). Adverse cost variances at Argyle (diamonds) were attributable largely
to lower production and at Palabora (copper) to lower volumes and increased
depreciation following the commissioning of the
underground project.
Excluding
exceptional items, the effective tax rate of 29 per cent was in line with that
of 2003.
Other
variances included the absence of earnings from divested businesses which reduced
earnings by US$122 million.
The
East 1 Pushback project at Kennecott Utah Copper was approved in February 2005.
This project is a higher value, lower capital intensive, but shorter life option
than the previous mine plan which was predicated on development of an underground
mine from 2013. Options to extend operations beyond 2017, including further open
pit and underground developments, will be fully studied over the coming years
but the results for 2004
include a one off, non cash charge of US$36 million due to the increase in the
present value of environmental remediation provisions. Pending any extension
of the assumed mine life beyond 2017 there will be an increase in annual charges
for
depreciation and amortisation of discount from 2005 of around US$45 million.
In
2004 there were gains on disposals of undeveloped properties totalling US$38
million. Against this, the 2003 earnings of Rio Tinto Brasil included a benefit
of US$32 million resulting
from the part reversal of an impairment provision.
The
remaining ‘other’ variance includes business interruption insurance
claims to the extent that the costs are retained in the Group and reversion
to a higher effective tax rate
in the US.
The
2004 exceptional items of US$592 million include a net profit on disposals
of businesses (US$913 million), a charge of US$160 million relating to
Colowyo (coal) and a provision of US$161 million, after tax and outside
shareholder interests, for the write down of the carrying value of Palabora’s
copper assets.
Gains
relating to disposals of businesses include US$518 million
32
Rio Tinto 2004
Annual report and
financial statements
profit on sale of the Group’s equity interest in Freeport-McMoRan Copper & Gold Inc. (FCX). Rio Tinto invested in the Grasberg ore body through purchase of an equity interest in FCX and participation in the
Grasberg joint venture: these were two components of one investment decision. The investment occurred prior to the introduction of FRS10 and the goodwill arising was therefore eliminated directly against reserves in accordance with Rio Tinto’s
then current UK GAAP accounting policy. On disposal of the equity interest in
FCX, goodwill of US$228 million attributable to this part of the total investment
was written back through reserves and deducted from the profit on disposal.
Against
a background of adverse financial results, a review of Palabora’s business was finalised in the third quarter of 2004. Following this review, the workforce was reduced by 13
per cent and the management levels by 20 per cent. These events triggered an assessment of the balance sheet value of Palabora’s
copper assets, using forecast long term copper prices, which resulted in the
provision for asset impairment.
A detailed
review of the mine plan and projected cash flows of the Colowyo coal business
was completed in June 2004. This indicated that future operating and development
costs are substantially higher than previously estimated. As a consequence,
an exceptional charge was recorded in the first half of 2004 for the writedown
of Colowyo’s fixed assets and recognition of related onerous contract
obligations.
The
2003 exceptional items of US$126 million relate to gains on the disposal of
Kaltim Prima Coal and Peak/Alumbrera (gold, copper). No tax was payable on
these gains.
2003 compared with 2002
Net earnings of US$1,508 million compared with US$651 million reported for 2002. Adjusted earnings of US$1,382 million were US$148 million below 2002. The principal factors explaining the changes in earnings are shown
in the table below.
US$m
2002 Net earnings
651
Exclude: Exceptional charges
(879)
2002 Adjusted earnings
1,530
Prices
442
Exchange rates
(412)
Inflation
(106)
Volumes
38
Energy costs
(54)
Other costs
(82)
Other
26
2003 Adjusted earnings
1,382
Add: exceptional gains
126
2003 Net earnings
1,508
The weakening of the US dollar against the currencies
in which most of the Group’s costs are denominated reduced earnings by
US$412 million. The average levels of the Australian dollar, Canadian dollar
and South African rand were respectively 20 per cent, 11 per cent and 39 per
cent stronger in 2003 than in 2002. The effect of these and other currency movements
on operating costs was to reduce earnings by US$352 million. The effect of the
shift in exchange
rates on balance sheet values expressed in the functional currencies of the relevant
units further reduced earnings and this charge was US$100 million more than the
corresponding charge in 2002. Gains on currency hedges initiated by North, Ashton
and Comalco, before they became wholly owned subsidiaries in 2000, increased
earnings by US$40 million relative to 2002.
The
prices of many products were stronger, increasing earnings by US$442 million.
Copper prices averaged 13 per cent higher; gold 17 per cent and aluminium seven
per cent. The copper price was 51 per cent higher at the end of the year than
at the beginning and this led to a favourable effect from provisional pricing
of US$39 million. Benchmark iron ore prices increased by nine per cent.
Over
the full year, seaborne thermal coal prices were on average seven per cent
lower and realised uranium prices were lower due to some higher priced
contracts expiring at
Rössing.
Overall, volume changes increased earnings by US$38 million. Lower gold and molybdenum volumes at Kennecott Utah Copper, as a result of reduced by product grades, partly offset volume
growth from new mines at Diavik and West Angelas (iron ore) and capacity expansions at Escondida and Hamersley. The benefit of higher gold grades at Grasberg, particularly in the first half of the year, was negated by lower production following a
slippage in the mine in the fourth quarter of the year. Robust demand for diamonds enabled Argyle to reduce inventories. Volumes of titanium dioxide feedstock were affected by weak markets.
Turning
to costs, higher oil, power and gas prices reduced earnings by US$54 million.
Average oil prices were US$3.50 per barrel or 14 per cent higher than in 2002.
Gas prices in the US market were also higher and there were also increases in
electricity prices, principally in New Zealand.
Excluding
the effects of energy prices and the US$106 million impact of inflation, cost
increases reduced earnings by US$82 million. Two significant events adversely
affected cost performance in the period. In the first half of the year, there
was a three week smelter shut down at Kennecott Utah Copper as a result of an
acid plant failure. The slippage at the Grasberg mine in the fourth quarter impacted
both production
volumes and costs.
Costs
at Coal & Allied were affected by higher demurrage caused by a shortage of rail capacity in the Hunter Valley. Lower earnings at Rio Tinto Iron & Titanium
included a charge associated with the partial write down of a customer
receivable.
Excluding
exceptional items, the effective tax rate at 28.8 per cent compared with
31.2 per cent for 2002. The lower charge in 2003 reflected reduced tax
payments in the US and a number of one off benefits including a credit
of US$8 million resulting from the proposed entry into the Australian tax
consolidation regime, with effect from 1 January
2003.
The
after tax net interest charge was US$36 million less than in 2002, due
both to lower interest paid and higher capitalised interest. The net central
cost of the Group’s pension
schemes was about US$60 million higher than in 2002.
The
net earnings of Rio Tinto Brasil include a credit of US$32 million resulting
from the reversal of part of an impairment provision relating to Fortaleza (nickel)
recorded in a previous
year.
The
2003 exceptional items of US$126 million relate to gains on the disposal of Kaltim
Prima Coal, Peak and Alumbrera. No tax was payable on these gains.
Cash flow
2004 compared with 2003
A record total cash flow from operations, including dividends from associates and joint ventures, of $4,449 million, was 28 per cent above 2003. Working capital levels increased in absolute terms by US$60 million,
which is a relatively small amount compared with the increase in sales and production levels.
Investment
in the business continued. Capital expenditure and financial investment of US$2,085
million was US$412 million above 2003. Purchases of property, plant and equipment
included the major expansion of iron ore capacity in Western Australia, the construction
of the Comalco Alumina Refinery, and the purchase of West Antelope coal reserves
by Kennecott Energy.
Disposals
of interests in businesses generated proceeds of over US$1.5 billion. The
largest components of this were the sale of shares in FCX and the sale
of Rio Tinto’s interest in
the Morro do Ouro gold mine in Brazil.
The
net cash inflow before management of liquid resources and financing, but after
dividends, was $1,888 million.
2003 compared with 2002
The Group’s
operating cash flow remained strong. Total cash flow from operations of US$3,486
million, including dividends from
associates and joint ventures, was only seven per cent below 2002 despite ten
per cent
lower adjusted earnings.
Rio Tinto 2004
Annual report and
financial statements
Tax paid included an amount of US$106 million relating to the disputed tax assessments from the Australian Tax Office described in note 29 of the Financial statements. The amount paid has
been recorded as a receivable in these accounts because the directors believe that the relevant tax assessments are not sustainable.
Investment
in the business continued at a high level. Capital expenditure and financial
investment of US$1,673 million was US$197 million less than 2002. Purchases of
plant and equipment included the expansion of iron ore capacity and the construction
of the Comalco Alumina Refinery. Purchases less sales of investments in 2002
of US$323 million mainly related to US Treasury bonds held as security for the
deferred consideration on
the North Jacobs Ranch acquisition, of which US$76 million were sold in 2003.
The
sale of assets, principally Peak, Alumbrera and Kaltim Prima Coal, generated
a cash inflow of US$405 million.
Balance sheet
Shareholders’ funds increased by US$2,547 million. Profits exceeded dividends declared by US$1,751 million and there was a write back of goodwill of US$228 million relating to the disposal of shares in FCX.
Exchange rate translation changes increased shareholders’ funds by US$542
million.
As
a result of the strong cash flow, both from operations and from disposals, net
debt fell from US$5,646 million to US$3,751 million. The ratio of net debt to
total capital fell to 21.7 per cent from 33.8 per cent at 31 December 2003. Interest
was covered 20 times (2003: 11 times).
As detailed
in note 18 to the Financial statements, US$806 million (19 per cent) of
the Group’s borrowings at the end of 2004 will mature in 2005.
At
the year end, medium and long term borrowings totalled US$3,337 million. The
amount issued under the US$3 billion European Medium Term Notes Programme was
US$1.5 billion of which US$204
million is repayable within one year.
In addition
to the above, the Group’s share of the third party net debt of joint
ventures and associates totalled US$602 million at
31
December 2004. This debt is set out
in note 14 to
the Financial statements, which includes a description of the Group’s responsibilities in relation to Colowyo’s
debt. The debt held by other joint ventures and associates is without recourse
to the Rio Tinto Group.
Liquidity and capital resources
Rio
Tinto plc and Rio Tinto Limited enjoy strong long and short term credit ratings
from Moody’s and Standard and Poor’s
shown below.
Long term
Short term
Outlook
Standard & Poor’s
A+
A-1
Stable
Moody’s
Aa3
P-1
Stable
The unified credit status of the Group is maintained through cross guarantees whereby contractual obligations of Rio Tinto plc and Rio Tinto Limited are automatically guaranteed by the other. These ratings continue to
provide financial flexibility and consistent access to debt via money or capital markets and enable very competitive terms to be obtained.
The
Group’s commercial paper programmes are fully backed by bank standby
facilities which totalled US$1.45 billion at 31 December 2004, of which
US$0.85 billion was on terms exceeding one year. These facilities can be
drawn upon at any time.
As at 31 December 2004, the Group had contractual obligations other than bank borrowings repayable on demand arising in the ordinary course of business as follows:
Total
Less
Between
Between
After 5
than 1
1 and 3
3 and 5
years
US$m
year
years
years
Contractual cash
obligations
Debt (a)
4,143
806
2,043
813
481
Operating leases
114
36
37
10
31
Unconditional purchase
obligations
3,232
386
747
611
1,488
Deferred consideration (b)
250
96
126
28
–
Other (c)
700
564
48
88
–
Total
8,439
1,888
3,001
1,550
2,000
(a)
Debt obligations exclude bank borrowings repayable on demand.
(b)
Deferred consideration relates
to outstanding Lease By Acquisition payments at Kennecott Energy.
(c)
Other relates to long term obligations including capital commitments.
On the basis of the levels of obligations described above,
the unused capacity under the Group’s commercial paper programmes, the Group’s
anticipated ability to access debt and equity capital markets in the future and
the level of anticipated internal cash generation, the directors believe that
the Group has sufficient short and long term sources of funding available to
meet its liquidity requirements.
The
Group’s committed bank standby facilities contain a financial undertaking that the Group’s consolidated income before interest and taxes for any annual accounting period
shall not be less than three times consolidated interest payable for such period. The ratio for 2004 was 29.6. The Group does not have any financial agreements that would be affected to any material extent by a reduction in the Group’s
credit
rating.
The
Group’s policy is to centralise surplus cash balances whenever possible.
Exchange rates, reporting currencies and currency exposure
Rio Tinto’s assets, earnings and cash flows are influenced by a wide variety of currencies due to the geographic diversity of the Group’s sales and the countries in which it operates. The US dollar, however,
is the currency in which the great majority of the Group’s sales are denominated. Operating costs are influenced by the currencies of those countries where the Group’s
mines and processing plants are located and also by those currencies in which
the costs of imported equipment and services are determined. The Australian and
US dollars are the most important currencies influencing costs.
In any
particular year, currency fluctuations may have a significant impact on
Rio Tinto’s financial results. A weakening of the US dollar against the currencies in which the
Group’s costs are determined has an adverse effect on Rio Tinto’s net earnings. The approximate effects on the Group’s
UK GAAP net earnings of ten per cent movements from the 2004 full year average
exchange rates of the currencies
having most impact on costs are as follows:
Average
Effect of
exchange rate
10% change
for 2004
in full year
in US cents
average US$m
Australian $
73
190±
Canadian $
77
45±
Rand
16
20±
These sensitivities are based on 2004 prices, costs and volumes and assume that all other variables remain constant. They take into account the effect of hedges as disclosed in note 28 to the Financial statements.
These exchange rate sensitivities include the effect on operating costs of movements in exchange rates but exclude the impact through revaluation of foreign currency working capital. They should, therefore, be used with care.
34
Rio Tinto 2004
Annual report and
financial statements
In the case
of the Australian dollar, for example, there is a significant degree of
natural protection against cyclical fluctuations, in that the currency
tends to be weak, reducing costs in US dollar terms, when commodity prices
are low, and vice versa.
In addition, earnings drawn up in accordance with
International Financial Reporting Standards will be affected by exchange differences
relating to certain US dollar debt and derivatives as
explained on page 144.
Given
the dominant role of the US currency in the Group’s affairs, the US
dollar is the currency in which financial results are presented both internally
and externally. It is also the natural currency for borrowing and holding
surplus cash. Modest amounts of cash are held in other currencies for short
term operational reasons.
The
Group finances its operations primarily in US dollars, either directly
or using currency swaps, and a significant proportion of the Group’s
US dollar debt is located in subsidiaries having functional currencies
other than the US dollar. Exchange gains and losses relating to US dollar
debt impact on the profit and loss accounts of such subsidiaries. However,
such exchange gains and losses are excluded from the
Group’s profit and loss account on consolidation with a corresponding adjustment
directly to reserves. This means that financing in US dollars impacts in a consistent
manner on the Group’s
consolidated accounts irrespective of the functional currency of the particular
subsidiary where the debt is located.
The
Group does not generally believe that active currency hedging would provide long
term benefits to shareholders. Currency protection measures may be deemed appropriate
in specific commercial circumstances and are subject to strict limits laid down
by the Rio Tinto board. As set out in note 28 to the Financial statements, as
at 31 December 2004 there were forward
contracts, including synthetic forwards, to purchase A$1,113 million in respect
of future trading
transactions. From the Group’s perspective, these contracts offset the impact
of exchange rate variations on a portion of the local currency costs incurred
by various subsidiaries. A significant part of the above hedge book was acquired
with North Ltd. North held a substantial hedge book on acquisition which has
been retained
but is not being renewed as maturities occur.
Interest rates
Rio Tinto’s interest rate management policy is generally to borrow and invest cash at floating rates. Short term US dollar rates are normally lower than long term rates, resulting in lower interest costs to the
Group. Furthermore, cyclical movements of interest rates tend to compensate, to an extent, for those of commodity prices. In some circumstances, an element of fixed rate funding may be considered appropriate. At the end of 2004, only 20 per cent of
the Group’s net debt was fixed rate. Based on the Group’s net debt at 31 December 2004, and with other variables unchanged, the approximate effect on the Group’s
net earnings of a one percentage point increase in US dollar LIBOR interest rates
would be a reduction of US$21 million.
Commodity prices
The Group’s normal policy is to sell its products at prevailing market prices. Exceptions to this rule are subject to strict limits laid down by the Rio Tinto board and to rigid internal controls. Rio Tinto’s
exposure to commodity prices is diversified by virtue of its broad commodity
spread and the Group does not generally believe commodity price hedging would
provide long term benefit to shareholders.
Metals such as copper and aluminium are generally
sold under contract, often long term, at prices determined by reference to prevailing
market prices on terminal markets, such as the London Metal Exchange and COMEX
in New York, usually at the time of delivery. Prices fluctuate widely in response
to changing levels of supply and demand but, in the long run, prices are related
to the marginal cost of supply. Gold is also priced in
an active market in which prices respond to daily changes in quantities offered
and sought. Newly mined gold is only one source of supply; investment and disinvestment
can be important elements of
supply and demand. Contract prices for many other natural resource products are
generally agreed annually or for longer periods with customers, although
volume commitments vary by product.
Approximately
40 per cent of Rio Tinto’s 2004 net earnings from operating businesses
came from products whose prices were terminal market related and the remainder
came from products
priced by direct negotiation.
The
approximate effect on the Group’s net earnings of a ten per cent change
from the full year average market price in 2004 for the following metals
would be:
Average
market
price
for 2004
Effect of 10%
change in full
year average
US$m
Copper
130 c/lb
160 ±
Aluminium
78 c/lb
110 ±
Gold
US$409/oz
40 ±
The above sensitivities are based on 2004 volumes and give the estimated impact
on net earnings of changes in prices, assuming that all other variables remain
constant. These should be used with care. The relationships between currencies
and commodity prices is a complex one and movements in exchange rates can
cause movements in commodity prices and vice versa. The sensitivities allow
for the effect of the commodity hedges maturing in 2005, as disclosed in
note 28
to the Financial statements.
Treasury management and financial
instruments
Treasury activities operate as
a service to the business of the Rio Tinto Group and not as a profit centre.
Strict limits on the size
and type of transaction permitted are laid down by the Rio Tinto board and are
subject to rigorous internal controls. Corporate funding and overall strategic
management of Rio Tinto’s balance sheet is handled by the London based Group
Treasury.
Rio
Tinto does not acquire or issue derivative financial instruments for trading
or speculative purposes; nor does it believe that it has exposure to such
trading or speculative holdings through its investments in joint ventures
and associates. Derivatives are used to separate funding and cash management
decisions from currency exposure and interest rate management. The Group
uses interest rate swaps in conjunction with longer term
funds raised in the capital markets to achieve a floating rate obligation which
is consistent with the Group’s interest rate policy. Currency swaps are used to convert debt or investments into currencies, primarily the US dollar, which are
consistent with the Group’s policy on currency exposure management. No material
exposure is considered to exist by virtue of the possible non performance of
the counterparties to financial instruments held by the Group.
The derivative contracts in which the Group is
involved are valued for the purposes of the Financial instrument disclosures
in the Financial statements by reference to quoted market prices, quotations
from independent financial institutions or by discounting expected cash flows.
Dividends
Dividends paid on Rio Tinto plc and Rio Tinto Limited shares are equalised on
a net cash basis; that is without taking into account any associated tax credits.
Dividends are determined in US dollars.
Rio
Tinto’s progressive dividend policy aims to increase the US dollar value of dividends over time, without cutting them in economic downturns. Rio Tinto plc shareholders receive
dividends in pounds sterling and Rio Tinto Limited shareholders receive dividends in Australian dollars, which are determined by reference to the exchange rates applicable to the US dollar two days prior to the announcement of dividends. Changes in
exchange rates could result in a reduced sterling or Australian dollar dividend in a year in which the US dollar value is maintained or increased. The interim dividend for each year in US dollar terms will be equivalent to 50 per cent of the
previous year’s total US dollar dividends.
Rio Tinto 2004
Annual
report and financial statements
Critical accounting policies and estimates
Dual listed company reporting
As explained in detail in Outline of dual listed
companies’ structure
and basis of financial statements, the consolidated Financial statements
of the Rio Tinto Group on pages 85 to 141 deal with the results and assets
and
liabilities of both of the dual listed companies, Rio Tinto plc and Rio Tinto
Limited, and their subsidiaries. They are prepared under UK GAAP and satisfy
the obligations of Rio Tinto Limited, as laid down by the Australian Securities
and
Investments Commission. This
Annual report
also includes a statement
setting out the effect of the adjustments to net earnings and to shareholders’ funds for the
Group that would be required under Australian GAAP. The US dollar is the presentation currency used in these Financial statements, as it most reliably reflects the Group’s
global business performance.
The treatment of gains and losses on US dollar
debt is described above in the section dealing with Exchange rates, reporting
currencies and currency exposure.
Ore reserve estimates
Rio Tinto estimates its ore reserves and mineral resources based on information
compiled by Competent Persons as defined in accordance with the Australasian
Code for Reporting of Exploration results, Mineral Resources and Ore Reserves
of December 2004 (the JORC code). There are numerous uncertainties inherent
in estimating ore reserves; and assumptions that are valid at the time of estimation
may change significantly when new information becomes available.
Changes in the forecast prices of commodities,
exchange rates, production costs or recovery rates may change the economic status
of reserves and may, ultimately, result in the reserves being restated. Such
changes in reserves could impact on depreciation rates, asset carrying values,
deferred stripping calculations and provisions for close down, restoration and
environmental clean up costs.
Asset carrying values
Events or changes in circumstances can give rise to significant impairment
charges in a particular year.
When
such changes impact on particular income generating units, their carrying values
are assessed
by reference to the higher of disposal value and the net present value of
forecast future cash flows. The cash flows are particularly sensitive to
changes in two parameters: exchange rates and commodity selling prices. Management
considers that over the long term there is a tendency for movements in commodity
prices to compensate to some
extent for movements in the value of the US dollar (and vice versa). But such
compensating changes are not synchronized and do not fully offset each other.
The great majority of the Group’s sales are based on prices denominated
in US dollars. To the extent that the US dollar weakens without commodity
price offset, cash flows and, therefore, net present values are reduced.
Rio
Tinto’s cash
flow forecasts are based on assessments of expected long term commodity prices,
derived principally from analysis of the cost of production. Exchange rate
assumptions used in reviews of carrying values are forecasts of future long
term rates. Rio Tinto uses historical averages of exchange rates as a starting
point for these forecasts. The price and exchange rate assumptions may, therefore,
be different from
current levels.
For
the majority of Rio Tinto’s businesses, by both number and by value, the
net present value of the expected cash flows is substantially in excess of
the carrying
value in the balance sheet. For a minority of the businesses the carrying
value is close to the net present value of the cash flows, and these are
reviewed for impairment where appropriate. The effects of exchange rates
and commodity price changes on the values
of these units relative to their book values are monitored closely.
Close down, restoration and environmental obligations
Provision is made for environmental remediation costs when the related environmental
disturbance occurs, based on the net present value of estimated future costs.
Where the ultimate cost of environmental
disturbance is uncertain, there may be variances from these cost estimates
which could affect future financial results.
Close down and restoration costs are a normal
consequence of mining, and the majority of close down and restoration expenditure
is incurred at the end of the life of the mine. Although the ultimate cost to
be incurred is uncertain, subsidiary companies have estimated their respective
costs based on feasibility and engineering studies using current restoration
standards and techniques.
Post retirements benefits
Post retirement benefits are accounted for in accordance
with Statement of Standard Accounting Practice 24, which requires gradual
recognition of the surpluses and deficits that emerge as a result of variances
from actuarial
assumptions. As permitted under the transitional arrangements, FRS 17 has
not been implemented in the 2004 financial statements. Under FRS 17, all
deficits
would be recognised in full and surpluses would be recognised to the extent
that
they are considered recoverable. FRS 17 transitional disclosures are included
on pages 131 to 134. If FRS 17 had been applied in drawing up the 2004 Financial
statements, shareholders’ funds would have been US$756 million lower,
including the impact of the level of stock markets at 31 December 2004, and
net earnings would have been US$27 million higher.
Overburden removal costs
In open pit mining operations, it is necessary to remove overburden and other
waste materials to access ore from which minerals can economically be extracted.
The process of mining overburden and waste materials is referred to as stripping.
During the development of a mine, before production commences, it is generally
accepted that stripping costs are capitalised as part of the investment in
construction of the mine.
Stripping of waste materials continues during
the production stage of the mine. Some mining companies expense these production
stage stripping costs as incurred, while others defer such stripping costs. Those
mining companies that expense stripping costs as incurred will report greater
volatility in the results of their operations from period to period.
Rio Tinto defers production stage stripping costs
for those operations where this is the most appropriate basis for matching costs
with the related economic benefits and the effect is material.
The amount of stripping costs deferred is based
on the ratio obtained by dividing the tonnage of waste mined either by the quantity
of ore mined or by the quantity of minerals contained in the ore. In some operations,
the quantity of ore is used, being a more practical basis for matching costs
with the related economic benefits where there are important byproducts or where
the grade of the ore is relatively stable from year to
year.
In operations that experience material fluctuations
in the ratio on a year to year basis over the life of the mine, deferral of stripping
costs will smooth the cost of stripping expensed in individual reporting periods,
in relation to production of ore or contained minerals, as applicable. Stripping
costs incurred in the period are deferred to the extent that the current period
ratio exceeds the life of mine ratio. Such deferred
costs are then charged against reported profits to the extent that, in subsequent
periods, the ratio falls short of the life of mine ratio. The life of mine ratio
is based on the proven and probable reserves of the operation.
In some operations, there are distinct periods
of new development during the production stage of the mine. These may, for example,
relate to a discrete section of the orebody. The new development will be characterised
by a major departure from the life of mine stripping ratio. Excess stripping
costs during such periods are deferred and subsequently amortised on a unit of
production basis.
Deferred stripping costs form part of the total
investment in the relevant income generating unit, which is reviewed for impairment
if events or changes in circumstances indicate that the carrying value may not
be recoverable.
During 2004, production stage stripping costs incurred by
36
Rio
Tinto 2004
Annual report and
financial statements
subsidiaries and equity accounted operations exceeded the amounts charged
against pre tax profit by US$135 million. The net book value carried
forward in property, plant and equipment and in investments in joint
ventures and associated companies at 31 December 2004 was US$784
million.
Amortisation
of deferred stripping costs is included in depreciation of property, plant
and equipment
or in the Group’s share of the results of its equity accounted operations,
as appropriate.
Contingencies
Disclosure is made of material contingent liabilities
unless the possibility of any loss arising is considered remote. Contingencies
are disclosed in note 29 on page 122. These include tax assessments of
approximately A$500 million which, based on Counsels’ opinion, the Group
expects to be successful in challenging.
International financial reporting standards
Rio Tinto will be reporting its financial performance
in accordance with International Financial Reporting Standards (IFRS) starting
with the interim 2005 results. The transition project is well advanced.
The main conceptual differences, identified to
date, between UKGAAP and IFRS, insofar as Rio Tinto is concerned, are set out
on page 144 of this report. There may be additional differences identified as
interpretations in the application of all International Accounting Standards
are finalised.
In early May 2005, full year and half year 2004
financial information under IFRS will be released and the differences between
these and the previously reported results explained.
US GAAP Reconciliation
The Group has received a comment letter issued on 30 December, 2004 by the
US Securities and Exchange Commission (SEC) relating to its 2003
Annual Report
on
Form 20-F, which was filed on 26 March, 2004. The SEC reviews such filings as
a matter of routine. The Group is currently evaluating and responding to the
SEC’s comments. A US GAAP reconciliation and related information for
US investors will be provided to US shareholders as required by the Group’s New York Stock Exchange listing agreement and will be available to other shareholders on request from the secretaries of the Companies at the time the Companies’ 2004
Annual report on Form 20-F is filed with the SEC.
Forward looking statements
Forward looking statements are contained in this financial review and attention
is drawn to the Cautionary statement on page 8.
Rio Tinto 2004
Annual
report and financial statements
Rio Tinto’s Iron Ore group (RTIO) wholly owns Hamersley Iron in Western Australia. Hamersley wholly owns five mines and also operates the 60 per cent owned Channar mine and the 54 per cent owned Eastern Range mine
on behalf of joint venture partners. The Channar mine is a joint venture with an Australian subsidiary of the China Iron & Steel Industry & Trade
Group Corporation. The Eastern Range mine is owned in joint venture with the
Shanghai Baosteel
Group Corporation and was commissioned in April 2004.
RTIO
also includes Rio Tinto’s effective 53 per cent interest in Robe River Iron Associates’ two mines in Western Australia and Rio Tinto’s 59 per cent interest in Iron Ore
Company of Canada. The Iron Ore group operates both enterprises, which were acquired in 2000. From 2005, RTIO also manages Rio Tinto Brasil which owns a 100 per cent interest in Mineração Corumbaense Reunida, known as
Corumbá.
In addition, RTIO includes the HIsmelt
®
direct smelting technology developed in Western Australia
and resources held globally, including Orissa (India) and the Simandou (Guinea) deposits.
At
31 December 2004, the group accounted for 28 per cent of Rio Tinto’s operating assets, an increase of three per cent over the year. In 2004, the group contributed approximately 18
per cent of the Group’s turnover and 26 per cent of adjusted earnings.
In
2003, Rio Tinto reached agreement with its joint venture partners in Robe River
to allow closer cooperation between the Pilbara operations of Hamersley
and Robe. In 2004, a new company, Pilbara Iron, was formed to enable the
sharing of rail, port and power infrastructure as well as management of
non infrastructure assets, including mobile and other mining equipment,
and site and corporate services. Coordination was progressively
implemented during 2004. Together with Pilbara Rail Company, which runs the combined
rail assets of Hamersley and Robe, the two entities manage RTIO’s
iron ore assets in the Pilbara as an optimised and integrated operation.
Pilbara Iron, including employees seconded to Pilbara Rail Company, employs
2,880 people.
RTIO Expansion Projects was created in September 2003 to manage the growing portfolio of projects and studies in the Pilbara. The Expansion Projects team operates closely with Pilbara
Iron, but is managed independently in order to minimise the impact on operations through project study and implementation phases.
For the contract year commencing April 2005 Hamersley Iron reached agreement with Nippon Steel on price increases of 71.5 per cent for lump, fine and Yandi ore.
RTIO employs almost 6,000 people worldwide. Chris Renwick retired as chief executive Iron Ore in December 2004, and was succeeded by Sam Walsh, who is based in Perth, Western
Australia.
FINANCIAL PERFORMANCE
2004 compared with 2003
RTIO’s contribution to
2004 earnings was US$569 million, US$70 million higher than in
2003.
Demand for iron ore continued to be extremely strong across the product range throughout 2004. In addition to strong demand from China where iron ore imports rose 40 per cent compared to
2003, the Japanese steel industry operated near capacity and crude steel production in Korea and Taiwan was at record levels. Reflecting the strength of the market, 18.6 per cent price increases were achieved for fiscal year 2004 for both lump and
fines following the nine per cent increases agreed to in 2003.
In
June, new long term agreements with leading Chinese steel mills for the sale
of an incremental 40 million tonnes per annum of iron ore were announced.
These agreements, together with supply arrangements reached with Nippon
Steel and the Shanghai Baosteel Group earlier in the year, underpin the
current phase of Rio Tinto’s expansion of port, rail and mine capacity
that is on schedule for completion at the end of 2005.
2003 compared with 2002
RTIO’s contribution to 2003 earnings
was US$499 million, US$47 million higher than in
2002.
Demand for iron ore continued to be extremely strong throughout 2003, particularly from China, where imports of iron ore were 30 per cent higher than 2002. Strong demand for iron and steel
in China bolstered demand for iron ore in other markets, with Japan, Korea and Taiwan all at record levels.
Price increases reflected the strong market, with a nine per cent increase for 2003 achieved in May.
Hamersley Iron
(Rio Tinto: 100 per cent)
Hamersley Iron operates seven mines in
Western Australia, including two mines in joint venture, 630 kilometres of dedicated
railway, and port and infrastructure facilities located at Dampier. These assets
are run as a single operation managed and maintained by Pilbara Iron. Hamersley
employs approximately 70 people who work in Sales and Marketing. Hamersley has
fewer employees than in 2003 as the majority of employees have been transferred
to Pilbara Iron.
In 2003, Hamersley completed option analysis studies to increase its system capacity to ensure its ability to meet the needs of customers and the strong growth in demand for iron ore,
particularly in China.
As a consequence, in December 2003, Rio Tinto approved a US$920 million expansion of the Dampier port, Yandicoogina mine, additional rail assets and feasibility study costs.
The
port expansion will increase Dampier’s export capacity from 74 million
tonnes per annum to 116 million tonnes per annum. The Yandicoogina mine
expansion will increase its output to 36 million tonnes per annum; capacity
was increased to 24 million tonnes per annum in 2004.
Commissioning of the Yandicoogina expansion will take place in the first half of 2005. Completion of the port expansion is scheduled for late 2005, with progressive commissioning from
mid-2005.
Expansion work is continuing to provide additional rail, power and other infrastructure to complement the new port and mine requirements. Construction is well advanced to interconnect the
power systems of Hamersley and Robe. Plans are at an advanced stage to expand and convert Paraburdoo power generation to being gas fired. Pre-development studies to further increase the capacity of existing mines and develop new mines are being
progressed.
Construction of the US$67 million Eastern Range mine was completed in mid-April and its first product was shipped in the second quarter. Located ten kilometres east of Paraburdoo, the mine
services an unincorporated joint venture between Hamersley Iron and Shanghai
38
Rio Tinto 2004
Annual
report and financial statements
Baosteel Group Corporation, China’s largest
iron and steelmaker. The joint venture, in which Hamersley holds a 54 per cent
equity share, will supply ten million tonnes of standard Hamersley iron ore
products per
year over 20 years.
2004 operating performance
Hamersley Iron’s total production
in 2004 was 78.1 million tonnes, 4.7 million tonnes more than in 2003. Rio Tinto’s
share of this production was 74.2 million tonnes. Production was severely disrupted
in early March by tropical cyclone Monty that required port facilities to be
closed, and resulted in significant flood damage to the operations. Most operations
returned to normal by the end of April, though the Tom Price mine continued to
be affected
into July, adversely affecting volumes, product mix and costs.
Shipments
by Hamersley totalled 76.5 million tonnes, including sales through joint
ventures. Hamersley’s shipments to China also reached a record level
at 39.5 million tonnes, making China by far the single largest destination
for Hamersley Iron ore.
Production from all mines was stretched to achieve these levels, placing cost and other operating stresses on the Hamersley system.
Costs increased in preparation for volume growth, with increased material movement, pre-stripping and higher maintenance activity. Costs of key mining inputs were inflated as a result of
the high level of activity across the mining industry. Drilling and exploration programmes and pre-development studies all added significantly to 2004 costs.
The Pilbara Rail Company, formed in 2002, which effectively integrates the rail networks of Hamersley and Robe River into a single operation, continued to deliver operational efficiencies.
Additional locomotives and ore cars were commissioned to enhance the overall system capacity.
In
the spirit of closer cooperation with Robe, Hamersley shipped four million
tonnes of product from its Yandicoogina mine through Robe’s Cape Lambert
port facilities, now operated by Pilbara Iron. This has resulted in increased
operational flexibility and relieves congestion at Dampier.
Hamersley
Iron is currently undertaking an extensive drilling programme that will
accelerate conversion of its resource base into reserves. Focused on supporting
strategic mine development options, it is one of the largest drilling efforts
in Hamersley’s history.
In 2004, the Australian Industrial Relations Commission ratified the Rio Tinto Iron Ore Federal Award agreed between Hamersley Iron, Robe River, Pilbara Iron and the Australian Workers
Union.
Hamersley
continued to work sustainable development principles into its daily operations
throughout the year. The Environmental Management System, certified to
ISO 14001, passed the second audit conducted by an external accreditation
body. The IronSafe system was launched in 2004, which aligns internal and
external health and safety policies, procedures and documentation, throughout
Rio Tinto’s Western Australian based iron ore
operations.
Hamersley’s total sales of iron ore
to major markets in 2004
Million tonnes
China
39.5
Japan
19.0
Other Asia
14.5
Europe
3.5
Total
76.5
NOTE: This table includes 100 per cent of all sales through joint ventures.
Robe River Iron Associates
(Rio Tinto: 53 per cent)
Robe River Iron Associates (Robe) is
an unincorporated joint venture in which Mitsui (33 per cent), Nippon Steel (10.5
per cent) and Sumitomo Metal Industries (3.5 per cent) also have interests. Robe
is the
world’s fourth largest seaborne trader in iron ore, employing approximately
570 people, which is fewer than in 2003 as many employees have been transferred
to Pilbara Iron.
Robe operates two open pit mining operations in Western Australia. Mesa J is located in the Robe Valley, north of the town of Pannawonica. The mine produces Robe River fines and lump,
which are pisolitic iron ore products. The West Angelas mine, opened in 2002, is located approximately 100 kilometres west of the town of Newman. The mine produces West Angelas fines and lump, which are Marra Mamba iron ore products.
West
Angelas mine production reached its original design rate of 20 million
tonnes per year in the first quarter of 2004, two years earlier than planned.
This increased Robe’s
production capacity to a nominal 50 million tonnes per year. In 2003, Robe obtained
approval to expand West Angelas to 25 million tonnes per year. Work started
on the US$105 million expansion in early 2004 and completion is expected
by mid
2005.
The
rail expansion project to duplicate almost 145 kilometres of track and
associated interconnection and infrastructure to increase the capacity
of the Pilbara Rail main line is progressing. Robe uses a dedicated rail
system, operated by Pilbara Rail, to transport ore from its mines to the
company’s deepwater port facilities at Cape Lambert.
Robe exports under medium and long term supply contracts with major integrated steel mill customers in Japan, Europe, South Korea and China.
2004 operating performance
Robe’s total production in 2004
was a record 48.5 million tonnes, comprising 30 million tonnes from Mesa J, and
18.5 million tonnes from West Angelas. Production of Mesa J ore was affected
in the first quarter by flooding caused by tropical cyclone Monty although production
levels returned to normal by the end of April. Product quality was affected for
a prolonged period. Robe’s total sales were 50.4 million tonnes, with strong
demand in all major
markets.
Sales
were 31.2 million tonnes of Mesa J and 19.2 million tonnes of West Angelas
products. Sales growth was based on increased West Angelas tonnage availability
and focused primarily on Japan, where all customers exercised their tonnage
options. Further penetration of the Chinese market was also achieved, with
sales to China now accounting for one quarter of Robe’s sales. Increased
marketing effort in China resulted in the signing of long term agreements
with large steel mill customers.
Further studies are under way to improve understanding of the orebody at West Angelas and to determine appropriate mining strategies. In pit stockpiles were introduced in 2004 which has
successfully reduced grade variation.
As part of a commitment to sustainable development, Robe updated its long term closure plans for each operation in consultation with community stakeholders.
Robe’s total sales of iron ore to
major markets in 2004
Million tonnes
Japan
26.6
China
13.0
Europe
8.2
Other Asia
2.6
Total
50.4
Rio Tinto 2004
Annual
report and financial statements
Iron Ore Company of Canada
(Rio Tinto: 58.7 per cent)
Rio Tinto’s interest in Iron Ore Company of Canada (IOC) is 58.7 per cent. Mitsubishi (26.2 per cent) and the Labrador Iron Ore Royalty Income Fund (15.1 per cent) are also shareholders in IOC, Canada’s
largest iron ore pellet producer. IOC operates an open pit mine, concentrator
and pellet plant at Labrador City, Newfoundland, together with a 420 kilometre
railway to port facilities and the partially refurbished pellet plant at Sept-Iles,
Quebec.
Products
are transported on IOC’s railway to Sept-Iles. The port is ice free
all year and handles ore carriers of up to 255,000 tonnes. IOC exports
its concentrate and pellet products to major North American, European and
Asia Pacific steel makers.
The Sept-Iles pellet plant remains closed, following the suspension in September 2001 of the US$240 million refurbishment project.
A five year labour contract expired at the end of February 2004. As part of the change programme at IOC, a new contract was sought which would include more flexible working arrangements.
Negotiations for the new contract started in January but despite protracted negotiations the workforce went on strike on 19 July, finally returning to work on 28 September. Mine operations were halted for ten weeks though ship loading from
stockpiles continued for part of this period. IOC employs approximately 1,800 people.
2004 operating performance
Net earnings were US$3 million compared
with US$7 million in 2003. The reduction in earnings was attributable to the
lost production caused by a ten week strike.
Pellet production in the first half of 2004 showed a six per cent improvement over the corresponding period in 2003. Although operations recovered well from the shutdown, second half
results were significantly affected and, as a result, full year total production was down 22 per cent on the 2003 level.
During 2004, IOC maintained its focus on the cost reduction programme that commenced in 2002. While progress has been slower than originally anticipated, the new labour agreement provides
a further key element in improving the efficiency of the operation. The new agreement, taken together with the further gains made in 2004 in improving the reliability of key production systems, leaves IOC well placed to benefit in 2005. Emphasis
remains on improving safety performance.
IOC’s total sales of iron ore to
major markets in 2004
Million tonnes
Europe
5.7
North America
3.7
Asia Pacific
2.1
Total
11.5
Mineração
Corumbaense Reunida (Corumbá)
(Rio Tinto: 100 per cent)
Corumbá has been transferred to
the Iron Ore group in 2005 to accommodate plans to expand production at the mine
to 15 million tonnes per year from one million tonnes. In 2004, Corumbá produced
1.3 million tonnes of iron ore which was barged along the Paraguay River to South
American and European customers. Logistic options are being considered for expanded
export sales, including supplies to a proposed steel making project at Corumbá.
Total resources at Corumbá are over 400 million tonnes of lump ore grading
62.7 per cent iron. There are 420 employees.
IRON ORE GROUP PROJECTS
HIsmelt
®
(Rio Tinto: 60 per cent)
The HIsmelt
®
project
is a joint venture between Rio Tinto
(60
per cent interest through its subsidiary, HIsmelt
®
Corporation),
US steelmaker Nucor Corporation (25 per cent), Mitsubishi Corporation (10 per
cent), and Chinese steelmaker Shougang Corporation (5 per cent). The project
has received approval for Australian federal government support of A$125 million.
The HIsmelt
®
process is a direct iron smelting technology developed largely by Rio Tinto that
will convert iron ore fines into high quality pig iron (96 per cent iron content) without the use of coke ovens and sinter plants. Notably, the technology allows efficient processing of ore fines with higher levels of impurities.
A pilot plant to demonstrate the technology is being expanded to commercial scale at Kwinana in Western Australia. Construction began in January 2003. The plant will have a production
capability of 800,000 tonnes of pig iron per year. The project was being commissioned at year end. First hot metal is expected to be produced by the end of the first quarter of 2005, after which it is planned the plant will ramp up to 60 per cent of
capacity in the first year, 90 per cent in the second, to reach full capacity in the third. Significant industrial relations issues occurred in the latter half of 2004, resulting in 170,000 lost hours of construction.
In 2003, HIsmelt
®
signed a process licence agreement with the Laiwu Steel Group Ltd of China to
allow for the development of an ironmaking facility using HIsmelt
®
technology. HIsmelt
®
has 100 employees.
Orissa, India
(Rio Tinto: 51 per cent)
RTIO has a 51 per cent interest
in Rio Tinto Orissa Mining, a joint venture with the state owned Orissa Mining
Company. The joint venture holds rights to iron ore leases in Orissa, which it
is seeking to develop. RTIO has recently appointed a project director to expedite
the development of operations in India.
Simandou
(Rio
Tinto: 100 per cent)
The Simandou deposit in Guinea, west Africa, moved from Rio Tinto Exploration
to full project status as part of RTIO in October 2004. Simandou is a greenfields
discovery with potential to host significant resources of high grade iron ore.
A prefeasibility study, started in fourth quarter 2004, will assess mining and
transport options necessary to bring Simandou into production as quickly as possible.
The Government of Guinea has an option to take a 20 per cent interest on a commercial
basis.
40
Rio Tinto 2004
Annual
report and financial statements
Note: 2002, 2003
and 2004 exclude
exceptional charges
Rio Tinto Energy group’s coal interests
are in Australia and the US. They supply internationally traded and domestic
US and Australian markets. It also includes Rössing Uranium in Namibia
and Energy Resources of Australia which supply uranium oxide for electricity
generation.
In
2003, Rio Tinto formed a single management organisation for the Energy group’s
coal assets in Australia. Rio Tinto and Coal & Allied (Rio Tinto: 75.7
per cent) agreed to combine Coal & Allied corporate and service functions
with those of Pacific Coal to increase efficiencies and lower costs. Pacific
Coal (Rio Tinto: 100 per cent) was renamed Rio Tinto Coal Australia (RTCA).
Effective 1 February 2004, RTCA manages both Pacific Coal’s existing
assets and Coal & Allied’s assets in the Hunter Valley in a centralised
management structure which provides for shared costs.
At 31 December
2004, the Energy group accounted for 13 per cent of Group operating assets
and, in 2004, contributed 21 per cent of Rio Tinto’s turnover and 16
per cent of adjusted earnings.
Preston
Chiaro, chief executive Energy, is based in London.
FINANCIAL PERFORMANCE
2004 compared with 2003
The Energy group’s 2004 contribution
to adjusted earnings was US$365 million, US$208 million higher than in 2003.
Results
benefited from a strengthening market for thermal coal and the entry of the
new Hail Creek mine into a rising market for coking coal.
2003 compared with 2002
The Energy group’s 2003 contribution
to adjusted earnings was US$157 million, US$196 million lower than in 2002.
A lower export thermal coal price and a stronger Australian dollar were the
principal components of the reduced result.
Kennecott Energy
(Rio Tinto: 100 per cent)
Kennecott Energy (KEC) wholly owns and operates
four open cut coal mines in the Powder River Basin of Montana and Wyoming,
US and has a 50 per cent interest in, but does not operate, the Decker mine
in Montana. KEC also manages the Group’s interest in Colowyo Coal in
Colorado, US. In total it employs some 1,770 people.
One of
the largest US producers, KEC sells to electricity generators predominantly
in mid western and southern states. Sales are made under multiple year contracts
and on a spot basis for one year or less.
The domestic
US market for low sulphur coal continues to grow due to its competitive cost
per delivered energy unit and restrictions on sulphur emissions by utilities.
Continued strong demand for low cost and low sulphur western coal is expected
to increase with the announcement of numerous new coal fired generation projects
and increased utilisation of existing coal generation capacity in the US.
2004 operating performance
KEC’s attributable production of
118 million tonnes of coal was nine per cent higher than in 2003 as a result
of higher demand for low sulphur coal. Earnings of US$119 million were 35
per cent higher than 2003 earnings of US$88 million. This increase represents
higher realised prices and sales volumes and a lower tax charge. KEC also
made progress in implementing value delivery initiatives that led to cost
reductions, productivity improvements, reduced capital requirements and value
adding marketing benefits. These benefits were partially offset by higher
fuel prices.
A detailed
review of the mine plan and projected cash flows of the Colowyo coal business
was completed in June 2004. This indicated that future operating and development
costs are substantially higher than previously estimated. As a consequence
of this, an exceptional charge of US$160 million was recorded in the first
half of 2004 for the writedown of Colowyo’s fixed assets and recognition
of related contract obligations. This is excluded from adjusted earnings.
Modified
mining practices lowered the high wall and waste piles at Cordero Rojo and
were successful in alleviating the instability issues that had affected production
in 2003.
KEC successfully
bid for an additional 177 million tonnes of in-situ coal reserves at West
Antelope at a cost of US$146 million.
The improved
safety performance of 2003 was sustained into 2004.
Rio Tinto Coal
Australia
(Rio Tinto: 100 per cent)
Rio Tinto Coal Australia (RTCA), formerly Pacific
Coal, manages the Group’s Australian coal interests. These comprise the
Blair Athol (Rio Tinto: 71 per cent), Kestrel (Rio Tinto: 80 per cent), Tarong
(Rio Tinto: 100 per cent) and Hail Creek (Rio Tinto: 82 per cent) coal mines
and the Clermont deposit (Rio Tinto: 50 per cent). RTCA also provides management
services to Coal & Allied Industries for day to day operation of its four
mines.
About
60 per cent of Blair Athol thermal coal is sold to its two Japanese joint
venture partners under contracts extending to 2008 and 2010. The rest is sold
by long term and annual agreements to European and southeast Asian customers.
Production
from the wholly owned Tarong mine is sold to Tarong Energy Corporation, an
adjacent state owned power utility. A ten year contract for up to 7.5 million
tonnes annually expires in 2010.
Kestrel,
the only underground mine, sells mainly metallurgical coal to customers in
Japan, south east Asia, Europe and Central America generally on annual agreements.
After
the first commercial shipments in October 2003, the new coking coal mine at
Hail Creek ramped up to its production capacity of 5.5 million tonnes per
annum during 2004. Acceptance has been strong in all markets, resulting in
a decision in mid 2004 to expand production to eight million tonnes per year
at a total cost of US$157 million. During 2004, a further two per cent of
the asset was sold to existing joint venture partners and eight per cent to
Nippon Steel Corporation which entered a 15 year coal purchase contract.
RTCA employs
some 904 people.
2004 operating performance
RTCA’s earnings of US$180 million
were 157 per cent higher than in 2003 due to new production from Hail Creek,
stronger demand and improved prices. Export thermal coal prices increased
by 40 per cent, export coking coal prices increased by 20 per cent and domestic
prices by 28 per cent.
Blair
Athol shipments were constrained during the year by infrastructure: early
in the year by failure of loading equipment at the Dalrymple Bay Coal Terminal
and late in the year by port congestion.
Rio Tinto
2004
Annual report and financial
statements
Production decreased from 12.5 million tonnes
to 12.2 million tonnes while sales were 11.8 million. Kestrel’s production
of 3.3 million tonnes matched 2003 while shipments of 3.2 million tonnes of
coking and thermal coal were 13 per cent lower than in 2003. The production
sequence in 2004 involved two longwall changes. At Tarong, production increased
by seven per cent to seven million tonnes in line with increased demand from
Tarong Energy Corporation. Hail Creek production was 5.1 million tonnes of
which 4.7 million tonnes were shipped.
Rio
Tinto’s share of coal production was 23 million tonnes, an increase of
22 per cent on 2003, principally resulting from production ramp up at Hail
Creek.
Although
Blair Athol achieved a 75 per cent reduction over 2003 in lost time injury
frequency rate, the business overall improved safety performance by only 15
per cent and fell well short of the best ever recorded in 2002.
Coal & Allied
Industries
(Rio Tinto: 75.7 per cent)
Coal & Allied Industries (Coal & Allied)
is publicly listed on the Australian Stock Exchange and had a market capitalisation
of A$2.9 billion (US$2.2 billion) at 31 December 2004. In 2003, a committee
of independent Coal & Allied directors, negotiated an agreement with Rio
Tinto to combine Coal & Allied’s corporate and management functions
with those of Rio Tinto Coal Australia. The combined management organisation
lowers costs, achieves economies of scale and removes duplicated functions
for both Coal & Allied and Rio Tinto.
Coal
& Allied’s assets are all located within the Hunter Valley in New
South Wales, Australia. It wholly owns Hunter Valley Operations, has an 80
per cent interest in Mount Thorley Operations and a 55.57 per cent interest
in the contiguous Warkworth mine, and a 40 per cent interest in the Bengalla
mine which abuts its wholly owned Mount Pleasant development project. Coal
& Allied also has a 37 per cent interest in Port Waratah Coal Services.
Coal
& Allied produces thermal and semi soft coal. Most of its thermal coal
is sold under contracts to electrical or industrial customers in Japan, Korea
and elsewhere in Asia. The balance is sold in Europe and in Australia. Coal
& Allied’s semi soft coal is exported to steel producing customers
in Asia and Europe under a combination of long term contracts and spot business.
Coal & Allied
employs some 1,095 people.
2004 operating performance
Earnings of US$51 million were achieved
compared with a loss of US$24 million in 2003. Export coal prices increased
by 37 per cent. Good progress was made in implementing operational cost reductions
including the agreement to combine corporate and management functions with
those of RTCA, formerly Pacific Coal, and operational integration of the Mount
Thorley and Warkworth operations, in order to improve performance in 2004
and beyond.
At all
operations, sales were constrained by insufficient rail infrastructure to
meet producer demand. The Port Waratah Coal Services Port Allocation System
was introduced in April 2004 to limit ship queues and reduce demurrage and
will continue at least through 2005.
At Hunter
Valley Operations production increased from 12 million tonnes to 13.3 million
tonnes while sales were 12.8 million tonnes. The integrated Mount Thorley
Warkworth operations increased production from nine million tonnes to 10.5
million tonnes while sales were 10.1 million tonnes. At Bengalla, production
decreased from 6.2 million tonnes to 5.3 million tonnes due to mine sequencing
issues while sales were 5.8 million tonnes.
Rio Tinto’s
share of coal production was 16.7 million tonnes, an increase of nine per
cent on 2003, principally resulting from expanded use of seven day rosters,
improved productivity and use of contractors to meet strong market demand
within the constraints of the Port Allocation System.
Although
the lost time injury frequency rate was reduced by 45 per cent from 2003,
the result was overshadowed by a fatal injury to an employee of a contractor
at Mount Thorley operations in May.
Rössing Uranium
(Rio Tinto: 68.6 per cent)
Rössing produces and exports uranium oxide from Namibia to European,
US and Asia Pacific electricity producers. Production has been lower than
the 4,500 tonnes per year capacity for some years due to market conditions.
Rössing employs approximately 830 people.
2004 operating performance
Total production of 3,582
tonnes of uranium oxide was 49 per cent higher than 2003 as a result of higher
plant availability and improved market conditions. Expiring long term higher
priced sales contracts have been replaced by contracts in line with 2004 market
prices. Higher realised prices were more than offset by the strengthening
of the Namibian dollar against the US dollar resulting in a loss of US$4 million
compared with a loss of US$19 million in 2003. Initiatives to deliver cost
savings continued, as did studies on opportunities to extend the mine beyond
the life of the existing pit.
In 2004,
Rössing’s safety performance continued to improve with a 66 per
cent reduction in the lost time injury frequency rate.
Energy Resources
of Australia
(Rio Tinto: 68.4 per cent)
Energy Resources of Australia Ltd (ERA) is publicly listed and had a market
capitalisation of A$1.3 billion (US$1.0 billion) at 31 December 2004. ERA
employs approximately 260 people with 13 per cent of the operational workforce
represented by Aboriginal people.
ERA produces
uranium oxide at the Ranger open pit mine, 260 kilometres east of Darwin in
the Northern Territory. ERA also has title to the nearby Jabiluka mineral
lease, which in 2003 was put on long term care and maintenance. Ranger has
a 5,500 tonnes per year capacity and began production in 1981. Estimated ore
reserves are sufficient to maintain uranium oxide production for approximately
eight years at current rates. ERA’s operations including Jabiluka are
surrounded by, but remain separate from, the World Heritage listed Kakadu
National Park and especially stringent environmental requirements and governmental
oversight apply. Uranium oxide from Ranger is sold to electricity utilities
in Japan, Korea, Europe and North America.
2004 operating performance
Uranium oxide production of 5,143 tonnes
was above the previous year in response to greater sales commitments. Stronger
prices were offset by the strengthening Australian dollar and resulted in
earnings of US$19 million, an increase of US$8 million from 2003.
In response
to a water contamination incident and a series of equipment radiation clearance
breaches that occurred in late 2003 and early 2004, mining and processing
operations were suspended for a total of 10 days to ensure that all work necessary
to rectify the deficiencies was either complete or under way. In both cases,
the government Supervising Scientist's report concluded that it is most unlikely
that anyone suffered any long term health effects. ERA has since successfully
passed three government audits and has committed to implementing the Australian
Health and Safety Standard AS4801 in addition to ISO 14001.
Safety
performance for 2004 deteriorated against 2003 in terms of lost time injuries.
ENERGY GROUP PROJECTS
Clermont Coal
(Rio Tinto: 50.1 per cent)
The Clermont deposit is near
RTCA’s Blair Athol mine. It is suited to open cut development. A feasibility
study commenced in 2004. Integration options with Blair Athol are available
following the signing of a strategic alliance agreement by the Blair Athol
and Clermont Joint Ventures. JPower joined the Clermont Joint Venture after
acquiring a 15 per cent interest from Rio Tinto and Mitsubishi in 2003.
Mount Pleasant
(Rio Tinto: 75.7 per cent)
Development of the Mount Pleasant project continued with further optimisation
work in 2004 on the pre-feasibility study undertaken in 2002.
42
Rio
Tinto 2004
Annual report and financial statement
s
Rio Tinto’s Industrial Minerals group
produces borates, industrial salt, talc and titanium dioxide feedstock. Rio
Tinto Borax, Rio Tinto Iron & Titanium, Luzenac and Dampier Salt, its
principal businesses, are leading suppliers of their respective products.
The
Industrial Minerals group employed approximately 7,000 people in 2004.
At 31
December 2004, the Industrial Minerals group accounted for 13 per cent of
the Group’s operating assets and contributed approximately 15 per cent
of Rio Tinto’s turnover and 10 per cent of adjusted earnings in 2004.
Andrew
Mackenzie replaced Tom Albanese as chief executive Industrial Minerals, and
is based in London.
FINANCIAL PERFORMANCE
2004 compared with 2003
Industrial Minerals’ contribution
to 2004 earnings was US$223 million, 45 per cent higher than in 2003, reflecting
higher volumes and prices at Borax, increased prices at Rio Tinto Iron &
Titanium and the partial
reversal of a writedown taken in 2003 relating
to a customer receivable. There was also a steady improvement in trading conditions
for both the talc and salt businesses in 2004. These factors were partially
offset by the strength of the Canadian dollar and South African rand against
the US dollar.
Rio Tinto
Borax’s earnings were 18 per cent higher at US$94 million. The borates
business benefited from continued strength in the US housing market and increasing
demand from China.
Rio Tinto
Iron & Titanium earnings at US$95 million were 102 per cent higher than
in 2003. Although the conventional feedstock market remained in oversupply,
earnings benefited from stronger demand for iron, steel, rutile and zircon
co-products. Production of conventional slags reflected market conditions,
while production of upgraded slag (UGS) continued to run at capacity.
2003 compared with 2002
Industrial Minerals’ contribution
to 2003 earnings was US$154 million, 46 per cent lower than in 2002, reflecting
the significant weakening of the US dollar against both the Canadian dollar
and South African rand and continued weakness across North American and European
markets.
Rio Tinto
Borax’s earnings were eight per cent lower at US$80 million. The cost
base was negatively impacted by higher natural gas and diesel prices, rising
employee benefit costs in California and net one off charges.
Rio Tinto
Iron & Titanium earnings at US$47 million were 71 per cent lower than
in 2002 due to the effect of the weak US dollar, soft market conditions and
a charge associated with the writedown of a customer receivable in 2003.
Rio Tinto Borax
(Rio Tinto: 100 per cent)
Rio Tinto Borax’s Boron mine in California’s
Mojave Desert is the world’s largest borate mine. Borates are used
in the US for vitreous applications, such as fibreglass, glass wool, high
temperature
glasses and enamels. The perborate industry, a major market in Europe, uses
borates as bleach in detergents. Other uses include ceramics, fertilisers,
flame retardants, wood preservatives and corrosion inhibitors. Rio Tinto
Borax’s US and UK research laboratories
provide technical support and participate in collaborative projects with
customers.
2004 operating performance
Production volumes were steady at 565,000
tonnes. Sales were nine per cent higher than 2003, due to good trading conditions
driven by the US construction sector, growth from newer applications and Chinese
demand.
The first
phase of an expansion of boric acid capacity, announced in 2003, is scheduled
to come on stream in 2005. Approval to commence a second phase expansion has
been received, with construction to be completed by 2006.
Rio Tinto Iron
& Titanium
(Rio Tinto: 100 per cent)
Rio Tinto Iron & Titanium (RIT) comprises
the wholly owned QIT-Fer et Titane (QIT) in Quebec, Canada and the 50 per
cent interest in Richards Bay Minerals (RBM) in KwaZulu-Natal, South Africa.
Both produce titanium dioxide feedstock used by customers to manufacture pigments
for paints and surface coatings, plastics and paper, as well as iron and zircon
co-products.
QIT’s
proprietary process technology enables it to supply both the sulphate and
chloride pigment manufacturing methods. Its upgraded slag (UGS) plant supplies
the growing chloride sector and is designed for expansion in line with demand
up to a capacity of 600,000 tonnes per year from its current level of 250,000
tonnes. During 2003 RIT announced an expansion of its UGS plant to 325,000
tonnes per annum, with new production on schedule to commence in 2005.
RBM’s
ilmenite has a low alkali content which makes its feedstock suitable for the
chloride pigment process. RBM has the capacity to produce one million tonnes
of feedstock annually.
Rio Tinto
2004
Annual report and financial
statements
2004 operating performance
Demand for titanium dioxide pigment
improved strongly throughout 2004 operating performance 2004. However, the
feedstock side of the industry continued to be affected by the general oversupply
of conventional chloride and sulphate
slag
feedstocks and feedstock inventory levels at some pigment producers. In contrast,
demand for very high grade chloride feedstock products, such as UGS, remains
strong. Overall, RIT production of titanium dioxide feedstocks was the same
as 2003, reflecting both market conditions and the effect of the introduction
of new capacity.
Demand
for iron and steel coproducts was exceptionally strong during 2004, with prices
reaching historic highs. Zircon markets continued to be very tight.
Dampier Salt
(Rio
Tinto: 64.9 per cent)
Dampier Salt (DSL) is now the world’s
largest salt exporter. It produces industrial salt by solar evaporation at
Dampier, Port Hedland and Lake MacLeod, where it also mines gypsum, in Western
Australia.
The chemical
industry in Asia is the principal customer for DSL’s salt whilst gypsum’s
main use is in wallboard and cement manufacture.
2004 operating performance
Dampier Salt’s earnings in 2004 were unchanged,
at US$10 million. While trading conditions were improved through higher volumes,
earnings were impacted by the weakness of the US dollar and escalating costs
in north western Australia. Salt production was three per cent higher than
2003, at 7.4 million tonnes (Rio Tinto share: 4.8 million tonnes).
Commissioning
of a new process plant at Dampier began in December 2004.
Luzenac Group
(Rio
Tinto: 99.9 per cent)
The Luzenac Group operates talc mines, including
the world’s largest, in south west France, and processing facilities
in Australia, Austria, Belgium, Canada, France, Italy, Japan, Mexico, Spain,
the UK and the US.
Luzenac
products are used internationally. Principal uses are in paper, paints, cosmetics,
ceramics, agricultural and plastics industries.
2004 operating performance
Earnings in 2004, at US$24 million, were 41
per cent higher than the previous year reflecting recovery in the US paper
industry and new product developments. Luzenac’s production in 2004 was
six per cent higher than 2003 at 1.44 million tonnes.
Sales volumes
were slightly higher than from 2003, while prices showed gradual improvement.
INDUSTRIAL MINERALS GROUP
PROJECTS
QIT Madagascar Minerals
(Rio Tinto:
80 per cent)
RIT manages QIT Madagascar Minerals (QMM),
in which an agency of the Government of Madagascar has a 20 per cent interest.
QMM was formed to evaluate and, if appropriate, develop large mineral sand
deposits in the south east of Madagascar.
In November
2001, QMM was granted an environmental permit by the Government for the proposed
minerals sands project. The permit requires QMM to comply with a full range
of social and environmental obligations throughout the life of the project.
A feasibility
study is progressing and RIT is working with the Government, as well as all
other interested and affected parties, with a view to making a decision on
development in 2005.
Rio Colorado Potash
(Rio
Tinto: option to acquire 100 per cent)
Rio Tinto entered into an option agreement
in 2003 to acquire 100 per cent of Potasio Rio Colorado SA, an Argentine company
holding the mineral rights and other assets of the Rio Colorado potash project.
The project is located 1,000 kilometres south west of Buenos Aires, in the
provinces of Mendoza and Neuquen. The option runs until late 2005, during
which time Rio Tinto will evaluate the commercial potential for developing
the project. A pilot plant was commissioned in 2004 as part of this evaluation.
44
Rio Tinto 2004
Annual
report and financial statements
Weipa bauxite
(Rio Tinto share)
million tonnes
MINED
Weipa bauxite
(Rio Tinto share)
million tonnes
RESERVES
Alumina
(Rio Tinto share)
’000 tonnes
PRODUCTION
Aluminium
(Rio Tinto share)
’000 tonnes
PRODUCTION
Rio Tinto Aluminium
Earnings contribution
US$m
Earnings attributable
to Comalco’s minority interests
Earnings attributable to Rio Tinto
Note: the last of the Comalco minority
interests was purchased in 2000, and 2004 excludes an exceptional item.
Rio Tinto’s Aluminium group encompasses
its wholly owned, integrated aluminium subsidiary, Comalco, and its 51 per
cent share in Anglesey Aluminium.
At 31 December
2004, the Aluminium group accounted for 23 per cent of Rio Tinto’s operating
assets and in 2004 contributed 17 per cent of Group turnover and 15 per cent
of adjusted earnings.
Oscar Groeneveld
succeeded Sam Walsh as chief executive Aluminium, and is based in Brisbane,
Australia.
FINANCIAL PERFORMANCE
2004 compared with 2003
Rio Tinto Aluminium’s contribution to
2004 earnings was US$334 million, an increase of 67 per cent.
Stronger
aluminium prices increased earnings by US$162 million with the average three
months aluminium price in 2004 at 78 US cents per pound compared with 65 US
cents per pound in 2003. The effect of the weakening US currency reduced Aluminium’s
earnings by US$55 million.
2003 compared with 2002
Aluminium’s contribution to 2003 earnings
was US$200 million, a decrease of 22 per cent from 2002.
Stronger
aluminium prices increased earning by US$51 million with the average three
month aluminium price in 2003 at 65 US cents per pound compared with 61 US
cents per pound in 2002. The effect of the weakening US currency reduced Aluminium’s
earnings by US$111 million.
Rio Tinto Aluminium
Rio Tinto Aluminium is a major supplier of
bauxite, alumina and primary aluminium to world markets. It employs about
3,850 people.
Rio Tinto
Aluminium has a large, wholly owned bauxite mine on Cape York Peninsula, Queensland.
A US$150 million mine expansion was completed on time to supply the bauxite
requirements of the Comalco Alumina Refinery. Approximately 90 per cent of
the bauxite from Weipa is shipped to alumina refineries at Gladstone, Queensland
and Sardinia, Italy.
Construction
of the first stage of the wholly owned Comalco Alumina Refinery at Gladstone
in Queensland was completed in late 2004, ahead of schedule and close to the
budget of US$750 million. Operations have commenced and first shipments were
made in November 2004, three months ahead of schedule. The refinery is expected
to produce 1.4 million tonnes of alumina annually, with full capacity due
to be reached by the end of 2006. There is potential for capacity to be increased
to over four million tonnes per year in two additional stages and a small
team is working on a feasibility study for Stage Two. The majority of the
refinery’s Stage One output will go into Rio Tinto Aluminium smelters.
The balance will be placed in the traded alumina market. The refinery enables
Rio Tinto Aluminium to add further value to the Weipa bauxite deposit and
strengthen both Rio Tinto Aluminium’s and Australia’s positions
in the world alumina market.
In 2004,
Comalco sold its four per cent interest in the Boké bauxite deposit
in West Africa to other shareholders in the joint venture for US$12 million.
The gain of US$4 million has been excluded from adjusted earnings.
In 2003,
Comalco signed a long term alumina supply agreement with Norsk Hydro, to supply
300,000 tonnes of alumina in 2005 and then 500,000 tonnes of alumina per year
for more than 20 years. This agreement underpins the investment in the Comalco
Alumina Refinery.
Rio Tinto
Aluminium’s primary aluminium is produced by smelters at Boyne Island
at Gladstone (59.4 per cent), Bell Bay (100 per cent) in Tasmania, Tiwai Point
(79.4 per cent) in New Zealand and Anglesey Aluminium (51 per cent) in Wales,
UK.
Rio Tinto 2004
Annual
report and financial statements
2004 operating performanc
Overall, Rio Tinto’s share
of bauxite production in 2004 increased by 2004 operating performance four
per cent above 2003, despite a first quarter affected by wet
weather and the sale of Boké
in June 2004.
Bauxite
production at Weipa was 12.6 million tonnes, six per cent higher than in 2003.
Weipa bauxite shipments increased eight per cent, to 12.3 million tonnes,
compared with 2003 levels.
QAL production
increased by one per cent compared to 2003, despite an interruption to the
refinery’s power supply. This interruption reduced production by approximately
85,000 tonnes (33,000 tonnes Rio Tinto share) but otherwise QAL enjoyed strong
production for the balance of the year. Eurallumina production increased four
per cent over 2003 levels.
Comalco
Alumina Refinery produced 175,000 tonnes beginning in October with first shipments
occurring in November, three months ahead of schedule.
Rio Tinto
Aluminium’s share of aluminium production from its four smelters at 837,000
tonnes was 20,000 tonnes above 2003 production. Attributable metal shipments
for 2004 were 841,000 tonnes, an increase of 21,000 tonnes, and went to similar
destinations as in 2003, primarily Japan, Australia, Europe and Korea.
Production
at Anglesey increased by two per cent, Boyne Island increased by four per
cent, Tiwai Point increased by five per cent. The Bell Bay smelter suffered
equipment failure in June in the electrical switchyard, resulting in a three
per cent decrease in production. The equipment has been replaced and production
returned to normal levels.
ALUMINIUM GROUP PROJECTS
Weipa mine expansion
(Rio
Tinto: 100 per cent)
The US$150 million mine expansion at Weipa
in 2004 is expected to increase capacity to 16.5 million tonnes of bauxite
per year. The mining upgrade relates to a move to simultaneous mining at Weipa’s
Andoom and East Weipa mines and involves a change in ore characteristic (fine
ore) to that previously being mined. The majority of the expenditure for the
project was on a 9.5 million tonne beneficiation plant to allow mining of
lower grade fine ores. The next activity will be the construction of a new
US$42 million power station for the Weipa mining operations and surrounding
communities.
46
Rio Tinto 2004
Annual
report and financial statements
Note: 2004, 2003, 2002 and
2001 exclude
exceptional items
Gold
(Rio Tinto share)
’000 ounces
MINED
Gold
(Rio Tinto share)
’000 ounces
RESERVES
Other product groups
Copper
group
Rio Tinto’s Copper group comprises Kennecott
Utah Copper in the US and interests in the copper mines of Escondida in Chile,
Grasberg in Indonesia, Northparkes in Australia, Palabora in South Africa,
and the Resolution Copper project in the US. The group also has management
responsibility for Kennecott Minerals Company and Kennecott Land in the US.
In March
2004, Rio Tinto sold its holding in Freeport-McMoRan Copper and Gold Inc.
(FCX) to FCX for net consideration of US$882 million. Later in the year,
it divested its interests in the Zinkgruvan and Neves Corvo mines for a
net consideration of US$193 million which included a profit sharing adjustment
and the sale of the rights to future price participation on the Neves Corvo
sale. Sale of the Fortaleza nickel complex in Brazil
was completed in early 2004 for total cash consideration of about US$80 million.
The sale of Rio Tinto’s 51 per cent interest in Rio Paracatu Mineração for US$250 million was completed at the end of the year. Responsibility for
Rio Tinto Brasil, owner of the Corumbá iron ore mine, was transferred
to the Iron Ore group. The gains arising from business disposals by the Copper
group have been excluded from adjusted earnings.
At 31
December 2004, the Copper group, which also produces gold as a significant
co-product, accounted for 19 per cent of the Group’s operating assets and, in 2004, contributed
approximately 22 per cent of Rio Tinto’s turnover, of which 70 per cent
was from copper and the remainder mostly from gold. It accounted for 39 per cent
of adjusted earnings in 2004.
Tom
Albanese, who took over from Oscar Groeneveld as chief executive Copper, is based
in London.
FINANCIAL PERFORMANCE
2004 compared with 2003
The Copper group’s contribution
to earnings was US$856 million, US$416 million higher than in 2003. The average
price of copper
was 130 US cents per pound compared to 80 US cents in 2003. The average gold
price of
US$409 per ounce increased by 13 per cent.
Kennecott
Utah Copper’s contribution to earnings of US$293 million compared
with US$88 million in 2003.
Rio
Tinto’s share of earnings from Escondida increased by US$294 million
to US$416 million. Mined production of copper was up 22 per cent due to
the resumption of full production at
the beginning of 2004.
The
earnings contribution from the Grasberg joint venture decreased by US$66 million
to US$38 million chiefly as a result of the material slippage in October 2003.
Early in 2004 efforts were directed at accelerating the removal of waste material
to restore safe access to the higher grade area of the open pit. Production activities
in this area resumed in the second quarter and grades improved during the second
half.
Palabora
recorded a loss of US$21 million in 2004 due to the negative effect of the stronger
rand in relation to the US dollar combined with lower volumes and higher costs
due to continued
delays in reaching production capacity in the underground mine.
2003 compared with 2002
The Copper
group’s contribution to earnings was
US$440 million in 2003, US$99 million higher than in 2002. The average price
of copper was 80 US cents per pound compared to 71 US cents in 2002. The average
gold
price of US$363 per ounce increased by 17 per cent.
Kennecott
Utah Copper’s 2003 contribution to earnings of US$88 million was broadly
in line with 2002.
Rio
Tinto’s earnings from Escondida increased to US$122 million despite constrained output in response to weak market demand. Mined production of copper was up 32 per cent (Rio
Tinto’s share) due to the commissioning of the new Laguna Seca concentrator.
The
Grasberg joint venture’s earnings contribution decreased by US$5 million
to US$127 million chiefly as a result of the material slippage in October.
This had an adverse effect on both volumes and costs. In the fourth quarter,
only lower grade material was mined from the open pit and near term mine
sequencing operations were directed to restoration of safe access to the
higher grade areas. Despite full
Rio Tinto 2004
Annual
report and financial statements
production from the underground mine, mill throughput was still significantly below capacity.
Earnings
at Palabora decreased to US$1 million in 2003 due to the negative effect of
the stronger rand in relation to the US dollar combined with lower volumes
and higher costs due to delays in reaching production capacity in the underground
mine.
Kennecott Utah Copper
(Rio Tinto: 100 per cent)
Kennecott Utah Copper (KUC) operates the Bingham Canyon mine, Copperton concentrator and Garfield smelter complex, near Salt Lake City, US.
KUC
supplies more than ten per cent of annual US refined copper requirements and
employs approximately 1,500 people. Negotiation of a new labour agreement, to
last until September 2009, was concluded in June 2003. The agreement provided
for greater flexibility in deployment of personnel and assignment of work.
KUC
provides some management services to the wholly owned Barneys Canyon gold mine
due to its proximity to Bingham Canyon. Mining and milling at Barneys Canyon
ended in 2001 but gold production continues until 2005. The operation employs
about 20 people.
KUC,
as the owner of 53 per cent of undeveloped land in the Salt Lake Valley of Utah,
formed Kennecott Land to develop about 16,000 hectares of the 37,200 hectares
owned. The initial 1,800 hectare Daybreak project site lies in the path of expanding
residential areas. Kennecott Land has the right to build roads, make utility
connections and prepare the land for sale to builders who will construct houses
for 30,000 people. Rio Tinto
initially invested US$50 million. The first revenues were received in 2004.
2004 operating performance
Net earnings of US$293 million were US$205 million above 2003 assisted by higher metal prices. Byproduct grades, particularly gold and silver, remained at 2003 levels but are anticipated to return to life of mine
averages in 2005. Molybdenum production was 48 per cent higher than in 2003 due to higher head grades and recoveries.
Refined
copper production was seven per cent higher than in 2003.
A
project to enlarge the Bingham Canyon open pit was approved in February 2005.
The East 1 pushback is expected to extend
the life of the open pit to 2017. Capital expenditure on the project is budgeted
to be US$100 million for mine facilities, a concentrator upgrade and mobile
equipment, and US$70 million after 2008 for the relocation of the in pit
crusher and
dewatering facilities. The East 1 pushback is a higher value, lower capital
intensive option than the previous mine plan which was predicated on development
of an underground mine from 2013. Mine development options from 2017 will
be reviewed in the context of the decision to proceed with the East 1 pushback,
and include various open pit and underground alternatives. A one off non
cash charge of US$36 million has been recorded in 2004 to reflect an increase
in the present value of provisions
for environmental remediation costs, based on the assumption that mining operations
cease in 2017. Pending any extension of the assumed mine life beyond 2017,
there will be an increase in the annual depreciation charge and amortisation
of discount from 2005 of around US$45 million.
Principal operating statistics
at KUC 2002 – 2004
2002
2003
2004
Rock mined (’000 tonnes)
150,331
135,204
129,196
Ore milled (’000 tonnes)
40,720
46,105
45,712
Head grades:
Copper (%)
0.69
0.67
0.63
Gold (g/t)
0.44
0.29
0.29
Silver (g/t)
3.42
3.02
3.04
Molybdenum (%)
0.034
0.027
0.033
Copper concentrates produced (’000
tonnes)
992
1,147
1,106
Production of metals in copper concentrates
Copper (’000 tonnes)
260.2
281.8
263.7
Gold (’000 ounces)
412
305
308
Silver (’000 ounces)
3,663
3,548
3,584
Molybdenum concentrates produced (’000
tonnes)
11.2
8.8
12.9
Contained molybdenum (’000 tonnes)
6.1
4.6
6.8
Concentrate smelted on site (’000
tonnes)
1,096
1,060
1,098
Production of refined metals
Copper (’000 tonnes)
293.7
230.6
246.7
Gold (’000 ounces)
488
308
300
Silver (’000 ounces)
4,037
2,963
3,344
Grasberg
(Rio Tinto: 40 per cent joint venture)
Grasberg,
in Papua, Indonesia, is one of the world’s largest copper and gold mines in terms of reserves and production. It is owned and operated by Freeport Indonesia (PTFI), the principal and 91 per cent owned
subsidiary of the US based Freeport-McMoRan Copper & Gold Inc. (FCX).
To
meet the mine’s social obligations to local communities, at least one per cent of Grasberg’s
net sales revenues are committed to support village based programmes. In
addition, two new trust funds were established in 2001 in recognition of
the traditional land rights of the local Amungme and Komoro tribes. In
2004, PTFI contributed US$17.8 million (net of Rio Tinto portion) and Rio
Tinto US$1.6 million in total to the
funds.
As
a result of training and educational programmes, Papuans represented more
than a quarter of PTFI’s approximately 9,000 workforce by the end
of 2004.
2004 operating performance
Grasberg open pit production was affected
by two rock slippages in the last quarter of 2003. Consequently, a large part
of 2004 was focused on
ensuring a safe production environment into the future. This resulted in lower
than predicted open pit copper and gold production due to a combination of lower
tonnages and grades of ore exacerbated by using low grade ore from the pit to
supplement mill production during the first four months of the year. Pit production
stabilised during the second half of the year. In December 2004, Rio Tinto and
FCX agreed the adjustment to the Participation Agreement and sharing of insurance
proceeds attributable to the Grasberg pit slippage incidents. Rio Tinto’s
share of
insurance proceeds contributed US$20 million to net earnings.
48
Rio Tinto 2004
Annual report and
financial statements
Escondida
(Rio Tinto: 30 per cent)
The low cost Escondida copper mine in Chile is one of the largest copper mines
in the world, with a mine life expected to exceed 30 years at current rates
of production. The mine is 57.5 per cent owned and managed by
BHP Billiton.
Approval
was given in 2003 for the US$400 million Escondida Norte project. The satellite
deposit will provide mill feed to maintain capacity at Escondida above
1.2 million tonnes per annum of copper in concentrate and cathode to the
end of 2008 as existing Escondida mine grades decline. First production
from Norte is expected in the fourth quarter of 2005. Rio Tinto’s
share of the project cost is US$120 million.
In
2004 a US$870 million sulphide leach project was approved involving the use of
bacteria to leach copper from sulphide ores that would otherwise be discarded
as waste. The project will produce 180,000 tonnes (Rio Tinto share 54,000
tonnes) of copper cathode metal per annum for more than 25 years. It is scheduled
to start production during the second half of 2006.
Escondida
employs approximately 2,800 people directly, together with 2,400 contractor
personnel.
2004 operating performance
Escondida’s mined copper production
was 22 per cent higher than in 2003. In late 2003 high clay content in the
ore caused problems
in recovering water from tailings that inhibited production from the new Laguna
Seca concentrator. These problems were resolved in early 2004 and the concentrator
achieved an average throughput of 105,216 tonnes per day during the year compared
to the design capacity of 110,000 tonnes per day. Overall, Escondida ore tonnes
milled were 17 per cent higher and copper grades six per cent higher than in
2003.
Principal operating statistics
at Escondida 2002-2004
2002
2003
2004
Rock mined (’000 tonnes)
306,620
300,386
377,356
Ore milled (’000 tonnes)
46,536
70,347
82,378
Head grade:
Copper (%)
1.58
1.43
1.51
Production of metals in concentrates
Copper (’000 tonnes)
622.6
847.0
1,045.6
Gold (’000 ounces)
126
184
217
Silver (’000 ounces)
2,981
4,728
5,747
Copper cathode (’000 tonnes)
138.7
147.6
152.1
Palabora
(Rio Tinto: 49.2 per cent)
Palabora Mining Company (Palabora) is a publicly listed company on the Johannesburg
Stock Exchange and operates a mine and smelter complex in South Africa.
Palabora
has developed a US$465 million underground mine with a planned production
rate of 30,000 tonnes per day of ore. Approximately 1.6 million tonnes of
copper are expected to be
produced over its 20 year life.
Palabora
supplies most of South Africa’s copper needs and exports the balance.
It employs approximately 1,700 people and labour agreements are negotiated
annually.
2004 operating performance
Palabora recorded a net loss of US$21 million compared with earnings of US$1
million in 2003. With closure of the open pit mine in 2002 after 40 years
of production, a start was made on commissioning of the underground block
cave mining project. During 2003 and 2004 the ramp up to full production
of 30,000
tonnes per day was hindered by fragmentation problems and poor performance of
remote rock breaking equipment. The average production rate of underground
ore mined during the last quarter of 2004 was 26,500 tonnes per day, with
27,250 tonnes per day in December, compared to the target of 30,000 tonnes
per day.
The
aggregate impact of the limited production from the underground mine, and
the strength of the rand against the US dollar, partly offset by cost saving
actions, adversely affected earnings, and led to additional borrowing requirements.
In addition, this triggered an evaluation of the recoverable amount of
Palabora’s copper business which resulted in a provision for asset impairment of US$161 million after tax and outside
shareholders’ interests. This is excluded from adjusted earnings.
Palabora
is planning to sell its magnetite iron ore stockpile, a byproduct of previous
and current copper mining, that is stored on site. The stockpile is estimated
to contain over 235 million tonnes of material grading more than 55 per cent
iron.
Principal operating statistics
at Palabora 2002-2004
2002
2003
2004
Ore milled (’000 tonnes)
9,933
11,415
8,657
Head grade:
Copper (%)
0.63
0.59
0.74
Copper concentrates produced (’000
tonnes)
167.9
163.3
187.7
Contained copper (’000 tonnes)
52.2
52.4
54.4
New concentrates smelted on site (’000
tonnes)
258.6
267.6
253.4
Refined copper produced (’000 tonnes)
81.6
73.4
67.5
Northparkes
(Rio Tinto: 80 per cent)
Rio
Tinto’s interest in the Northparkes
copper-gold mine resulted from the acquisition of North Ltd. Northparkes
is a joint venture
with the Sumitomo Group (20 per cent).
Following
an initial open pit operation at Northparkes in central New South Wales,
Australia, underground block cave mining has been undertaken since 1997.
With present and future developments, the operation has an expected life
of 13 years at current production rates.
The
copper concentrate produced is shipped under long term contracts that provide
for
periodic negotiation of certain charges, as well as spot sales, to smelters
in Japan (67 per cent), Australia (14 per cent) and other countries (19 per
cent).
Northparkes
employs approximately 160 people together with 140 permanent contractors.
2004 operating performance
Production from the first underground block cave ceased in early 2003 and is
being replaced by the Lift 2 block cave which commenced production in 2004.
Progress with mine development for Lift 2 was hampered by high rock stresses
which adversely affected mine development but assists in the caving of the
orebody with good fragmentation. The transition to Lift 2 was completed in
2004.
Principal operating statistics
at Northparkes 2002-2004
2002
2003
2004
Ore milled (’000 tonnes)
5,364
5,168
5,008
Head grade:
Copper (%)
0.86
0.67
0.79
Gold (g/t)
0.35
0.44
0.66
Production of contained metals
Copper (’000 tonnes)
38.4
27.1
30.0
Gold (’000 ounces)
40.8
48.6
79.4
Rio Tinto 2004
Annual
report and financial statements
KENNECOTT MINERALS
(Rio Tinto: 100 per cent)
Kennecott
Minerals in the US manages the Greens Creek mine (Rio Tinto: 70 per cent) in
Alaska and the Rawhide mine (Rio Tinto:
51 per cent) in Nevada. It also owns the Group’s interest in the Cortez
gold mine (Rio Tinto: 40 per cent), also in Nevada. Ore extraction from Rawhide
was completed in October 2002 and reclamation work is well advanced.
Kennecott Minerals employs approximately 300 people, excluding employees of non managed operations.
2004 operating performance
Net earnings of US$79 million were US$19
million above 2003, benefiting from higher gold prices. Gold production decreased
by three per cent at the Cortez gold mine.
Greens Creek
(Rio Tinto: 70.3 per cent)
In addition to gold, the Kennecott
Greens Creek mine on Admiralty Island in Alaska produces silver, zinc and lead.
2004 operating performance
Mill throughput was three per cent higher
than in 2003, but due to lower grades, silver and zinc production from
Green’s Creek were 17 per cent and nine per cent lower, respectively, than
in 2003.
COPPER GROUP PROJECTS
Resolution
(Rio Tinto: 55 per cent)
The Resolution project is situated in
Arizona, US, in the area of the depleted Magma (Superior) copper mine. In 2001,
an agreement was signed with BHP Billiton Base Metals which allowed Rio Tinto
to earn a 55 per cent interest in the project by spending US$25 million over
six years. In 2003, five deep exploration drillholes intersected significant
copper mineralisation, indicating a large deposit at depth. Rio Tinto completed
earning its 55 per cent interest in the project in early 2004. The project is
currently in the preliminary stages of a prefeasibility study. It is anticipated
that studies will take some considerable time.
Cortez Hills
(Rio Tinto: 40 per cent)
Rio Tinto holds a 40 per cent interest
in the Cortez gold mine, a joint venture with Placer Dome. The mine is located
in northeastern Nevada, US, and the associated area of interest includes the
Cortez Hills deposit, discovered in 2003 which contains proven and probable reserves
of 7.5 million ounces of gold. A feasibility study is in progress to determine
the optimum sequencing for development of the deposits within the Cortez area
of interest. It is anticipated that operating permits for Cortez Hills will be
obtained in 2006, with initial gold production occurring in mid 2007.
Eagle
(Rio Tinto: 100 per cent)
The Eagle project is a small tonnage,
high grade nickel deposit located in Michigan, US, for which Kennecott Minerals
has commissioned a prefeasibility study.
50
Rio Tinto 2004
Annual
report and financial statements
With diamonds becoming a significant earner for Rio Tinto, the Diamonds product group was formed in 2003 from the former
Diamonds & Gold group. The group comprises Rio Tinto’s 60 per cent interest in the Diavik Diamonds mine in Canada, the wholly owned Argyle mine in Australia, Rio Tinto’s
78 per cent interest in the Murowa mine in Zimbabwe which started production
in 2004 and diamond sales and representative offices in Belgium and India.
Rio Tinto is a leading proponent of the Kimberley Process which seeks to ensure that only legitimately mined and traded rough diamonds are introduced into the world market. Programmes are
in place to ensure that firms operating to acceptable standards of social responsibility process diamonds mined by Rio Tinto. Rio Tinto sells its diamonds through its marketing arm, Rio Tinto Diamonds, according to their mine source in order to gain
the benefits of origin.
At
31 December 2004, Diamonds accounted for eight per cent of the Group’s operating assets and, in 2004, contributed five per cent of Rio Tinto’s
turnover and eight per cent of
adjusted earnings.
Keith Johnson,
chief executive, Diamonds, is based in London.
FINANCIAL PERFORMANCE
2004 compared with 2003
Diamonds contributed US$169
million to adjusted earnings, an increase of US$56 million from 2003, assisted
by the continuing operating success of the Diavik Diamonds mine.
The diamond market continued to be strong. There was robust growth in retail jewellery sales in the US and the Japanese market grew for the first time in a number of years. Industry rough
prices improved, particularly for large, clean, white rough diamonds for which demand has been consistently in excess of supply. Prices also increased for polished diamonds.
2003 compared with 2002
Diamonds in 2003 contributed US$113 million to adjusted earnings, up US$50 million from 2002, reflecting the startup of the Diavik Diamonds mine.
Demand for rough diamonds was strong throughout 2003 with the rough market outperforming the market for polished stones.
Diavik Diamonds
(Rio Tinto: 60 per cent)
Diavik
Diamond Mines (DDMI) owns Rio Tinto’s interest
in and manages the unincorporated Diavik Diamonds joint venture in the Northwest
Territories of Canada.
The project was completed in 2003 well ahead of schedule and within budget. Initial production of gem quality diamonds commenced in January 2003 with commissioning of the process plant.
Production will build up over the next two years.
DDMI’s
commitment to work with Aboriginal communities was formally concluded in
five participation agreements, providing training, employment and business
opportunities. Procurement contracts for the operating phase were negotiated
with Aboriginal businesses.
2004 operating performance
Net earnings were US$145 million, US$104 million more than in 2003. Sales of diamonds continued to attract a high level of interest with prices being achieved at a significantly higher level than originally
projected.
Production continued to ramp up during 2004 and exceeded expectations in nearly all respects. Record volumes were produced as the process plant comfortably exceeded design throughput on a
consistent basis. Improving grades continued to reflect the processing of mud rich material that surrounds the kimberlite proper.
A strategic planning team, separate from mine operations, is studying how best to capture the upside of a stronger market and new geological information for both the A154South and
A154North kimberlites. After 12 months of study, Rio Tinto approved the construction of the A418 dike at an expected cost of US$190 million. Construction is planned to commence in mid 2005. Rio Tinto also approved studies to investigate the
feasibility of underground mining of three of the four kimberlite bodies. The studies will include the construction of an exploratory decline. The project is expected to cost US$75 million. Diavik includes some of the most valuable kimberlites in
the world.
Argyle
(Rio Tinto: 100 per cent)
Rio Tinto owns and operates the Argyle diamond mine in Western Australia.
Production
from Argyle’s major resource, the AK1 open pit mine, is expected to
continue until 2007 with processing continuing for a short while thereafter.
A feasibility study is under way into underground mining by the block caving
method beneath the open pit. A decision is expected in 2005 relating to
mine closure or further mine development. Development of an exploration
decline commenced in 2003 to assist in confirming
design criteria. The range of statutory approvals required for underground operation
includes environmental and social impact assessments. Argyle employs approximately
780 people.
2004 operating performance
Net earnings of US$23 million were US$49 million lower than in 2003. Diamond production for 2004 was 33 per cent lower with 21 million carats produced. Tight mining conditions prevailed as a result of the deepening
open pit which, together with abnormally wet weather, limited mine production. Lower grade ore from stockpiles supplemented ore from the mine.
Reserves decreased following the development of a new resource model and revised mine plan which resulted in some material being transferred to resources.
Murowa
(Rio Tinto: 78 per cent)
Early in 2004, Rio Tinto and Rio Tinto Zimbabwe approved expenditure of US$11 million on a small scale plant to start diamond production at Murowa near Zvishavane in southern Zimbabwe.
An updated feasibility study confirmed the existence of three kimberlite pipes representing a mining reserve of 18.7 million tonnes of ore at a grade of 0.9 carats per tonne.
Commercial production commenced in the third quarter. Initial operations are focused on 1.3 million tonnes of weathered material
Rio Tinto 2004
Annual
report and financial statements
containing 140,000 tonnes of enriched ore. A phased approach reduces the initial investment required and allows confirmation of marketing and regulatory arrangements prior to expansion, which could be considered within
three years. Diamonds from Murowa are marketed through Rio Tinto Diamonds in Antwerp. Safeguards are in place regarding the chain of custody of the product. Zimbabwe is a signatory of the Kimberley Process.
Following
the decision to proceed with Murowa, the directors of Rio Tinto Zimbabwe
(RioZim) agreed to a restructuring of Rio Tinto’s 56 per cent shareholding
in RioZim. As a result of the restructure, Rio Tinto owns a direct 78 per
cent interest in Murowa and has a residual economic interest in RioZim.
RioZim became an independent, Zimbabwean controlled, listed company owning
the remaining 22 per cent of Murowa.
2004 operating performance
Net earnings were US$1 million. The construction
and commissioning of facilities and infrastructure was the main objective in
2004. While commissioning problems in the process plant delayed full capacity
being reached, the fourth quarter saw the first parcel of diamonds successfully
mined, processed and sold.
Other operations
Other operations comprise the Lihir gold mine in Papua New Guinea, the Kelian gold mine in Indonesia and the Sari Gunay gold project in Iran.
Lihir
(Rio Tinto: 14.5 per cent)
Lihir Gold is a publicly quoted company
formed to finance and develop the Lihir mine in Papua New Guinea. Lihir Gold
had a market capitalisation of A$1.49 billion (US$1.16 billion) at 31 December
2004.
Lihir directly employs approximately 1,070 people, of whom 91 per cent are Papua New Guinea nationals, including 36 per cent Lihirians. Some 1,600 contractors are also employed.
2004 operating performance
Lihir’s contribution to Rio Tinto’s
earnings for 2004 included US$12 million resulting from the revaluation of ore
stockpiles
to restore these to the lower of cost and net realisable value taking account
of
changes in circumstances including higher gold prices.
Gold production at Lihir was 8.9 per cent higher than in 2003 due to higher throughput and higher head grades.
Kelian
(Rio Tinto: 90 per cent)
Kelian Equatorial Mining (Kelian) operated an open pit gold mine in East Kalimantan, Indonesia.
Mining ceased in 2003 with production from stockpiled ore completed in February 2005. A mine closure consultative process was completed in 2003 with stakeholders agreeing on the key mine
closure directions. Work is continuing on mine closure activities including establishment of post closure institutions, the upgrade of the Namuk tailings dam, and rehabilitation and revegetation. Work is planned for removal of camp and operating
facilities and the camp site area prepared for future wetlands development.
Kelian has been reducing employee and contractor numbers as it winds down its operations and focuses on mine closure activities. Settlement of compensation claims is continuing under a
2001 agreement and a number of programmes are in place to provide sustainable solutions for local communities and former employees after closure.
2004 operating performance
Rio
Tinto’s share of Kelian’s production was 295,000 ounces in 2004, 30
per cent below the previous year, as a result of the processing of low grade
stockpiles.
PROJECT
Sari Gunay
(Rio Tinto: 70 per cent)
The Sari Gunay (formerly Dashkasan) project in Iran entered the prefeasibility stage during the year. Work continued on the delineation of the sizeable body of gold mineralisation discovered in Kordestan province in
western Iran. Drilling continued to outline additional mineralisation and to increase confidence in existing estimates. Metallurgical test work and community and environmental baseline studies continued.
52
Rio Tinto 2004
Annual
report and financial statements
Rio Tinto Exploration seeks to discover or identify mineral resources that will contribute to the growth of the Rio Tinto Group. The discovery of new resources is essential to replace deposits as they are mined and to
help meet the increasing global demand for minerals and metals.
The
Exploration group is opportunistic in approach and its resources are deployed
on projects that show the best chance of delivering a world class deposit
to Rio Tinto. Mineral
exploration is a high risk activity. Rio Tinto’s statistics show that an
average of only one in 350 mineral prospects that are drill tested result in
a mine for the Group. Rio Tinto believes in having a critical mass of projects,
selected
through a rigorous process of prioritisation.
The Exploration group is organised into four geographically based teams and a fifth team that looks for industrial minerals on a global basis. Additionally, a small focused project
generation team covers the world for new opportunities.
At
the end of 2004, Rio Tinto was exploring in 30 countries for a broad range
of commodities including copper, diamonds, nickel, industrial minerals, gold,
bauxite, iron ore and coal. Exploration employs 191 geologists and geophysicists
around the world and has a total complement of 880 people.
Tom Albanese succeeded David Klingner as head of Exploration, and is based in London.
2004 operating performance
Exploration in 2004 focused on advancing the most promising targets across the spectrum of grassroots, generative, drill test stage, and near mine programmes. Encouraging results were obtained from a number of
locations.
Order
of magnitude studies were completed on the Simandou (iron ore, Guinea) and Eagle
(nickel-copper, Michigan, US) projects. Both projects have been transferred to
relevant product group teams for pre-feasibility assessment. Since 2001 five
projects have moved from exploration to the next stage of project evaluation
including Resolution (copper, Arizona, US) and Potasio Rio Colorado (potash,
Argentina). In addition to these
projects, near mine exploration has also been undertaken. Where resources have
been supplemented or additional resource discovered this has been has reported
by the respective product group.
Several projects are in the process of, or about to initiate, order of magnitude studies to assess their economic potential for advancement to pre-feasibility assessment. An order of
magnitude study was commenced at the La Sampala nickel laterite resource in Indonesia, and is nearing completion.
The Çöpler
and Marcona deposits discovered previously were divested in 2003 and 2004 respectively.
In 2004, the Group’s interest in the Sepon project in Laos was
sold.
Diamond
exploration continued in Canada, southern Africa, Mauritania, Brazil and India.
A number of diamond bearing kimberlite pipes were discovered and follow up test
work is in progress
to gauge economic potential.
Copper exploration continued in Turkey, Peru, Chile, Argentina and the US. Copper mineralisation was encountered in drilling in projects in Turkey and Peru, which warrant further follow up
drill testing.
Exploration focus on the bulk commodities iron ore, coal and bauxite has been increasing each year for the last several years and evaluation of several projects is continuing with the
intention to progress two projects to product group handover in 2005.
The Exploration group was active in the search for industrial mineral deposits in a number of parts of the world including North and South America, Europe, south east Asia and
Turkey.
The Exploration group continued to support brownfield work at a number of Rio Tinto operations. Additional work to develop the Argyle diamond mine continued. In the US and Argentina,
active programmes
were conducted in the vicinity of the Boron and Tincalayu mines. In Indonesia,
exploration in and around the Grasberg mine led to the addition of further copper
reserves.
FINANCIAL PERFORMANCE
2004 compared with 2003
Cash expenditure on exploration in 2004
was US$193 million and the pre-tax charge to earnings was US$187 million, a US$60
million increase over 2003, reflecting increased iron ore exploration in Western
Australia and acceleration of evaluation on significant projects by product groups
during the year.
2003 compared with 2002
Cash expenditure on exploration in 2003
was US$130 million and the pre-tax charge to earnings was US$127 million, similar
to 2002.
Rio Tinto 2004
Annual
report and financial statements
The Technology group provides technical assistance
to Rio Tinto’s product groups and their businesses, and advises executive
management. In support of the drive towards operational excellence, a key focus
is to identify and implement best practices, to improve safety and environmental
performance, maximise operating efficiency and add value across Rio Tinto.
Technology
staff include experienced professionals covering all the main industry
related disciplines, while the Office of the Chief Technologist manages
the Group’s involvement in
external and collaborative research.
The total staff in the Technology group at year end was 362 compared with 333 in 2003.
John
O’Reilly, head of Technology, is based in London. He moves to a part
time role on 1 May, 2005 and will be succeeded by Ian Smith, currently
managing director, Aluminium Smelting,
Comalco.
2004 operating performance
Technical Services
Technical Services continued to increase its involvement with Rio Tinto operations and also provided significant contributions at non managed operations. Activity over the year was again at record levels, with a strong
focus on the enhancement of initiatives to improve performance and implement best practice such as in water management and metallurgical margin improvement. New initiatives recently commenced include Excellence in Mine Planning and Resource
Management.
A number of current development projects are linked with external research programmes in order to leverage value for Rio Tinto. Others are focussed on innovation and best practice in key
areas to add value in a shorter time frame.
Office of the Chief Technologist
The Office of the Chief Technologist is responsible for the identification and the transfer of technology based opportunities for the Group.
The external research portfolio covers a broad range of industry related initiatives. Some of these link directly with internal development projects. Work on improving efficiency and
reducing costs is continuing in areas such as comminution, water usage and materials handling. A number of breakthrough projects are also being pursued.
The Rio Tinto Foundation for a Sustainable Minerals Industry approved a further 14 projects for funding.
Technical Evaluation and Project Management
Technical Evaluation continued in its principal role of providing independent review of all major investment proposals being considered by the Group. Risk assessment and management is an important and integral
component of the project review process. The unit also continued with the programme of post investment reviews. It has established a database to consolidate the findings so that lessons learned from completed projects can be shared within the
Group.
The Project Management Unit provides ongoing support to major project teams across Rio Tinto, both for projects in execution and those still in the feasibility stage. There was also
continued involvement with some major projects at non managed operations. Two project management forums were held during the year focussing on collaboration between projects and lessons learned.
Asset Utilisation
This unit is now well established across the Group and its workload continued to expand. There has been particularly heavy involvement with the iron ore operations in Western Australia which is expected to continue
through 2005. The process control group is now well established. The development of tools to improve performance continues, including on asset integrity and remote monitoring.
There
is continuing emphasis on ensuring that safety, operability and maintainability
issues are fully addressed and incorporated in all the unit’s work.
FINANCIAL PERFORMANCE
The charge for the Technology group against net earnings was
US$25 million, compared with US$16 million in 2003. The increase was mainly due to the weaker US dollar and the greater level of activity in all Technology group units.
54
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statements
The way we work
Rio Tinto is in business to create value by finding and developing world class mineral deposits and operating and eventually closing operations safely, responsibly and efficiently. To do so, the Group takes a
disciplined and integrated approach to the economic, social and environmental aspects of all its activities.
The approach to achieving this is through implementation of the policies described in
The way we work
,
Rio Tinto’s statement of business practice, at all levels of the business.
The statement, redistributed in 2003 in 19 languages, is the result of many months of wide internal consultation and discussion and represents shared values from around the Group. The
document was published initially in January 1998. It was revised in 2002 in the light of experience, following further Group wide review and consultation, external benchmarking of policies against the best practice of other organisations and
approval by the Rio Tinto board.
The way we work
commits the Group to transparency consistent with normal commercial confidentiality, corporate accountability and the
application of appropriate standards and internal controls. It sets the basis for how Group companies' employees work and also provides guidance for joint venture partners and others. Every employee is responsible for implementing the policies in
the document.
Rio
Tinto has adopted the Association of British Insurers’ 2003 disclosure guidelines on social responsibility in preparing this report. Details of the Group’s overall and
individual businesses’ social and environmental performance continue to
be published on the Rio Tinto website: www.riotinto.com/se and in the
Sustainable development review
.
Board responsibilities
The directors of Rio Tinto, and of Group companies, are responsible for monitoring adherence to the Group policies outlined in
The way we work
.
Assurance for performance in these areas involves checking, reviewing and reporting
each business’s implementation of the policies, their compliance with regulations
and voluntary commitments, and the effectiveness of management and control systems,
while also providing mechanisms for improvement.
As
discussed in the section on Corporate governance on page 71, the boards established
a process for identifying, evaluating and managing the significant risks
faced by the Group. Directors meet regularly, have regular scheduled discussions
on aspects of the Group’s
strategy and full and timely access to the information required to discharge their responsibilities fully and effectively.
Rio
Tinto’s
Compliance guidance
requires that the identification of risk be systematic and ongoing.
It recommends that each Group company undertakes a structured risk profiling exercise to identify, categorise and weigh the risks it faces in the conduct of its business. Each Group company puts systems in place to ensure that risks are reviewed at
an appropriate frequency.
Total remuneration is related to performance through the use of annual bonuses, long term incentives and stretching targets for personal, financial and safety performance.
The
board’s
Committee on social and environmental accountability
reviews the effectiveness of
policies and procedures. The committee comprises four non executive directors and is chaired by the chairman of the main board. It meets three times annually with the chief executive and heads of Technology, Health, Safety and Environment and
Communication and Sustainable Development.
Reports
for the committee summarise significant matters identified through Rio
Tinto’s assurance activities. These include reviews every four years
of each business to identify and manage strategic risks in relation to
health, safety, and the environment; audits against Rio Tinto standards;
annual risk management audits; risk reviews for specific concerns, such
as cyanide management and smelter operations; procedures and
systems for reporting critical and significant issues and incidents; completion
of annual internal control questionnaires by all Group business leaders
covering the full spectrum of business and operational risk; and findings
and recommendations of the independent external assurance and data verification
programme.
Policies, programmes and results
Implementation of the policies in
The way we work
is discussed in the following sections named according to each policy area. Known
risks arising from social and environmental matters and their management in Group businesses are described in the relevant Group operations section.
Safety
Safety
is a core value and a major priority. Rio Tinto believes that all injuries are
preventable and its goal is zero injuries. To
achieve this, full and consistent implementation of and accountability for Rio
Tinto’s comprehensive standards, guidelines, systems and procedures is required
across the world. The Group is also building a supportive safety culture that
requires visible leadership, ongoing education and training and a high level
of
participation by everyone in the workplace.
However, there is still some way to go in achieving the goal of zero. In 2004, very regrettably one contractor lost his life at a managed operation. The Group has demonstrated strong
improvements in the lost time injury frequency rate (LTIFR) and all injury frequency rate (AIFR) from 2003, with reductions of 21 per cent and 15 per cent respectively. The LTIFR for 2004 was 0.65 per 200,000 hours worked by employees and
contractors (2003: 0.82).
Fines for infringement of safety regulations totalled US$19,200 (2003: US$162,000).
Occupational health
Rio Tinto strives to protect physical health and well being in the workplace. This requires clear standards, consistent implementation, transfer of best practice and improvement through Group wide reporting and
tracking of remedial actions.
During 2004, Group businesses worked to implement the occupational health standards and 81 per cent of employees now work at an operation where the occupational health standards have been
implemented. In 2004, there were 72 new cases of occupational disease per 10,000 employees, (2003: 107).
Operations
were temporarily suspended at Energy Resources of Australia’s (ERA)
Ranger uranium mine in Australia during March 2004 following an incident
of drinking water contamination. The government Office of the Supervising
Scientist appointed independent health experts
Rio Tinto 2004
Annual
report and financial statements
to investigate and advise on the potential
for long term harm to workers as a result of the water contamination. They
concluded that longer term health effects were most unlikely.
Operations
were again temporarily suspended at the end of August 2004 to review safety
and health systems following the issue of two reports from the Office of the
Supervising Scientist. One report concerned the incident of drinking water
contamination and the other concerned radiation clearance procedures for equipment
leaving site. Three Australian Government audits arising from the incidents
have been satisfactorily completed.
Rio Tinto’s
southern African operations are nearing full implementation of the Group HIV/AIDS
strategy. This provides access to antiretroviral therapy that is affordable
for employees and a partner. Operations in Asia and west Africa are in the
process of refining their local strategies to meet Group requirements.
In 2004,
Rio Tinto set targets to focus attention on reducing noise induced hearing
loss across the Group. The target of zero exposure of employees to a noise
dose of more than 82 decibels (averaged over eight hours), after allowing
for the use of hearing protection was not met, with 0.5 per cent of employees
still exposed to noise greater than this limit.
Fines
for infringement of occupational health regulations in 2004 involved four
operations, totalling US$257,000 (2003: US$900).
Environment
Wherever possible Rio Tinto prevents,
or otherwise minimises, mitigates and remediates, harmful effects of the Group’s
operations on the environment.
To do
this, the Group seeks to understand the environmental aspects and impacts
of what it does, build what is learned into systems to manage and minimise
those impacts, and set targets for improvement.
After
significant Groupwide consultation, Rio Tinto’s environment standards
were finalised and approved in 2003 for implementation by June 2005. During
2004, significant work continued on ways to improve efficiency of greenhouse
gas emissions, energy use and water withdrawn from the environment.
By the
end of 2004, 84 per cent of operations had implemented ISO 14001 or an equivalent
environmental management system (EMS). All Rio Tinto operations are required
to have a certified EMS by the end of June 2005: by the end of 2004, 72 per
cent of operations had achieved this. There was no change in the number of
significant environmental incidents (16) compared to 2003. There was a decrease
in the number of significant spills from eight to four. Fines for infringements
of environmental regulations involved three operations and totalled US$53,800
(2003: US$126,000).
Land access
Rio Tinto seeks to ensure the widest
possible support for its proposals throughout the life cycle of the Group’s
activities by coordinating economic, technical, environmental and social factors
in an integrated process.
This
involves negotiation of mining access agreements with indigenous landowners;
responsible land management and rehabilitation; planning for closure; developing
and implementing a biodiversity strategy; and forming strategic partnerships
with external organisations.
Political involvement
Rio Tinto does not directly or indirectly
participate in party politics nor make payments to political parties or individual
politicians.
A
Business
integrity guidance,
addressing bribery, corruption and political involvement,
was issued in 2003 to assist managers in implementing this policy. The guidance
covers questions relating to compliance and implementation; gifts and entertainment;
the use of agents and intermediaries; and “facilitation” payments.
Rio Tinto avoids making facilitation payments
anywhere in the
world. Bribery in any form is prohibited. Gifts
and entertainment are only offered or accepted for conventional social and business
purposes and then only at a level appropriate to the circumstances.
Communities
Rio Tinto sets out to build enduring
relationships with its neighbours that are characterised by mutual respect,
active partnership, and long term commitment.
Every
business unit is required to have rolling five year community plans which
are updated annually. In 2004, a series of pilot studies were completed aimed
at achieving a deeper level of understanding of the linkages between mining
activities and the economies in which they take place.
All Group
businesses produce their own reports for their local communities and other
audiences. Community assurance of the quality and content of these reports
is increasing. This provides an opportunity for engagement with the community
on their views of programmes sponsored by the operations.
Businesses
managed by Rio Tinto contributed US$87.8 million to community programmes in
2004 (2003: US$70 million). Of the total contributions, US$34.2 million was
community investment and US$24.1 million in direct payments made under legislation
or an agreement with a local community.
Human rights
Rio Tinto supports human rights consistent
with the Universal Declaration of Human Rights and Rio Tinto respects those
rights in conducting the Group’s operations throughout the world.
Rio Tinto
also supports the UN Secretary General’s Global Compact, the US/UK Voluntary
Principles on Security and Human Rights and the Global Sullivan Principles.
Rio Tinto’s
Human rights guidance
is designed to assist managers in implementing
the Group’s human rights policy in complex local situations. It was revised
and republished in 2003. In 2004, a web based training module was developed
to instruct managers on what the policy means in practice and how to respond
to difficult situations.
Employment
Rio Tinto recognises that business performance
is closely linked to effective people development. It has a long term plan
to strengthen approaches to the training and development of leaders in the
Group.
In 2004,
a suite of formal leadership programmes was developed and implemented for
both strategic and Group business leaders. In total, ten customised leadership
development programmes, involving 225 participants, were successfully run
in 2004 in partnership with leading business schools in Europe, North America
and Australia. All product groups and businesses were represented. It is planned
to run a further ten strategic and business leadership development programmes
in 2005 involving about 250 participants.
As well
as using the open programmes run by the London Business School and International
Institute for Management
Development
for future leaders, Rio Tinto commissioned the design of a customised, operational
leadership programme to be launched in 2005 with eight programmes involving
about 240 further participants from across the Group at manager and superintendent
level.
These
programmes are all focused on ensuring that leaders, at all levels, are well
prepared for the wide range of current and future challenges they will face
in taking forward a complex and commercially successful organisation. All
of these programmes are closely integrated with the core leadership competencies
Rio Tinto has identified as necessary for effective leaders wherever they
work in the organisation.
Pilot
programmes were undertaken in 2004 on the use of career development tools
and their application to new and better approaches to coaching and mentoring
employees. In 2005, Groupwide workshops to improve the capability of all involved
in managing careers will be organised.
56
Rio Tinto 2004
Annual
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People development
in Rio Tinto is focused on ensuring technical and professional competence.
In 2004, five projects were undertaken to define these competencies in Marketing,
Finance, Human Resources, Community Relations and Health, Safety and Environment
teams. This led to a pilot development programme being successfully designed
and delivered for early career Human Resources professionals.
In 2005,
all five streams will focus on implementing across the Group common professional
development tools, programmes and systems. Competency in these functions will
be extended to cover all other disciplines to ensure that the Group builds
and strengthens its skills capability at all levels and to facilitate more
effective collaboration on areas of common interest in different businesses.
In the
past few years, Rio Tinto has focused on strengthening and developing leaders;
in 2005 the focus will be on developing talent and potential at all levels
and building a stronger alignment between individual and business performance.
Rio Tinto
requires safe and effective working relationships in all its operations. Whilst
respecting different cultures, traditions and employment practices, common
goals are shared, in particular the elimination of workplace injuries, and
commitment to good corporate values and ethical behaviour.
In 2004,
Group companies employed 28,000 people (2003: 29,000) and, together with Rio
Tinto’s proportionate share of those employed by joint ventures and associates,
the total was 33,000 (2003: 36,000) mainly concentrated in Australia and North
America. Wages and salaries paid in 2004 excluding Rio Tinto’s proportionate
share of joint ventures and associates totalled US$1.7 billion (2003: US$1.5
billion).
Retirement
payments and benefits to dependants are provided in accordance with local
conditions and good practice.
Rio Tinto
encourages the involvement of its employees in the Group’s performance
through their participation in an employee share scheme. As stated in
The
way we work
, the Group recognises the right of employees to choose whether
or not they wish to be represented collectively.
Sustainable development
Rio Tinto believes that its businesses,
projects, operations and products should contribute constructively to the
global transition to sustainable development.
All businesses
are required to assess the sustainable development case for their activities.
Rio Tinto has committed itself to integrating the results of the Mining, Minerals
and Sustainable Development (MMSD) analysis of 2002 into the Group’s
policy and objectives, and developing measures to assess their implementation.
As a founding member of the International Council on Mining and Metals, Rio
Tinto is participating in dialogue and programmes to advance industry wide
progress on key sustainable development priorities.
A Sustainable
Development Leadership Panel (SDLP) was formed in 2004 to provide Group leadership
and encourage businesses to make sustainable development considerations an
integral part of business plans and decision making processes.
Openness and accountability
Rio Tinto conducts the Group’s
affairs in an accountable and transparent manner, reflecting the interests
of Rio Tinto shareholders, employees, host communities and customers as well
as others affected by the Group’s activities.
Policies
on transparency, business integrity, corporate governance and internal controls
and reporting procedures are outlined in
The way we work
. In 2003,
a
Compliance guidance
was issued to provide a framework to enable each
Group business to implement and maintain a best practice compliance programme
which should identify and manage risks associated with non compliance with
laws, regulations, codes, standards and Rio Tinto policies.
Assurance and
verification
To be accountable and transparent,
assurance is provided to the Group and others that Rio Tinto policies are
being implemented fully and consistently across the Group’s businesses
and operations.
The
overall objective of the external assurance and data verification programme
is to provide assurance that the material in the
Sustainable development
review
is relevant, complete, accurate and responsive, and, in particular,
that Rio Tinto’s policies and programmes are reflected in implementation
activities at operations. In 2004, Environmental Resources Management (ERM)
undertook the external assurance and data verification programme and the results
are available in Rio Tinto’s
Sustainable
development review
(previously the
Social
and environment review
).
Competition
Rio Tinto has adopted a specific antitrust
policy requiring all employees to compete fairly and to comply with relevant
laws and regulations. Under the policy, guidance is provided on contacts with
competitors and benchmarking as well as implementation of the policy in individual
businesses. As integral parts of the policy, all relevant employees will receive
regular training and will be required to certify annually that they are not
aware of any antitrust violations.
Rio Tinto 2004
Annual
report and financial statements
1
Paul
Skinner
(age 60)
Paul Skinner
was appointed chairman in November 2003. He graduated in law from Cambridge
University and in business administration from Manchester Business School.
A director of Rio Tinto since 2001, he is chairman of the
Nominations
committee
and the
Committee
on social and environmental accountability.
He was previously a managing
director of The “Shell” Transport and Trading Company plc and
group managing director of The Royal Dutch/Shell Group of Companies, for
whom he had worked since 1966. He is a director of Standard Chartered
PLC and the Tetra Laval Group. He is also a member of the board of INSEAD
business school. (notes b and d)
Notes
a)
Audit committee
b)
Nominations committee
c)
Remuneration committee
d)
Committee on social and
environmental accountability
e) Independent (as defined on pages 71 and 72)
2
Leigh
Clifford
(age 57)
Leigh Clifford became chief executive in
2000, having been a director of Rio Tinto plc since 1994 and Rio Tinto
Limited since 1995. A mining engineer he is a bachelor of engineering
and a master of engineering science. He has held various roles in the
Group’s coal and metalliferous operations since joining in 1970,
including managing director of Rio Tinto Limited and chief executive of
the Energy group. He is a former director of Freeport-McMoRan Copper &
Gold Inc and a non executive director of Barclays Bank plc.
3
Guy
Elliott
(age 49)
Guy Elliott became finance director of
Rio Tinto in 2002. He holds an MA from Oxford and joined the Group in
1980 after gaining an MBA from INSEAD business school. He has subsequently
held a variety of management positions, including being president of Rio
Tinto Brasil from 1996 to 1999.
4
Ashton
Calvert
(age 59)
Ashton Calvert was appointed a director
of Rio Tinto with effect from 1 February 2005. He recently retired as
secretary of the Department of Foreign Affairs and Trade of the Government
of Australia. He was educated at the University of Tasmania and, as a
Rhodes scholar, also gained a doctorate in mathematics from Oxford University.
During his career in the Australian foreign service he held appointments
in Washington and, on four occasions, in Tokyo, where he was ambassador
between 1993 and 1998 prior to his appointment as secretary. In these
and other roles he developed extensive experience of the Asian countries
which represent key markets for Rio Tinto. (notes b, d and e)
5 Sir David
Clementi
(age 56)
Sir David was appointed a director of Rio Tinto in January 2003. He is
chairman of Prudential plc, prior to which he was Deputy Governor of the
Bank of England. Sir David’s earlier career was with Kleinwort Benson
where he spent 22 years, holding various positions including chief executive
and vice chairman. A graduate of Oxford University and a qualified chartered
accountant, Sir David also holds an MBA from Harvard Business School.
(notes a, c and e)
6
Sir Richard Giordano
(age 70)
Sir Richard, who will also retire from the boards at the conclusion of
the 2005 annual general meetings, is the senior non executive director
and a deputy chairman. He is also chairman of the
Audit committee
.
He has been a director of Rio Tinto plc since 1992 and of Rio Tinto Limited
since 1995. A lawyer by training, he spent 12 years at BOC Group, first
as chief executive, then chairman. In 1993, Sir Richard became a director
of British Gas, assuming the role of chairman in 1994. A former chairman
of BG Group plc, he is a director of Georgia Pacific Corporation in the
US and a trustee of Carnegie Endowment for International Peace. (notes
a, b, d and e)
7
Leon
Davis
(age 65)
Leon Davis, who will retire at the conclusion
of the 2005 annual general meetings, is the Group’s Australia based
non executive deputy chairman. He became a director of Rio Tinto Limited
in 1994 and of Rio Tinto plc in 1995. He is a metallurgist and holds a
diploma in primary metallurgy and a DSc from Curtis University and the
University of Queensland. During nearly 50 years with the Group he has
held a number of managerial posts around the world, ultimately as chief
executive from 1997 to 2000. A former director of Codan Pty. Limited,
he is chairman of Westpac Banking Corporation and a director of Huysmans
Pty Limited and Trouin Pty Limited, and is also president of the board
of The Walter and Eliza Hall Institute of Medical Research. (note d)
58
Rio Tinto 2004
Annual
report and financial statements
8
Vivienne
Cox
(age 45)
Vivienne
Cox was appointed a director of Rio Tinto with effect from 1 February
2005. She is
currently executive vice
president of BP p.l.c. for Integrated Supply and Trading and also for Gas Power
and Renewables. She is a member of the BP group
chief executive’s committee. She holds degrees in chemistry from Oxford
University and in business administration from INSEAD. During her career in
BP she has worked in chemicals, exploration, finance, and refining and marketing.
(note e)
9
Andrew
Gould
(age 58)
Andrew Gould was appointed a director of
Rio Tinto in 2002. He holds a degree in economic history and is chairman
and chief executive officer of Schlumberger Limited, where he has held
a succession of financial and operational management positions, including
that of executive vice president of Schlumberger Oilfield Services and
president and chief operating officer of Schlumberger Limited. He joined
Schlumberger in 1975 from Ernst & Young.
(notes a, c and
e)
10
Lord
Kerr
(age 63)
Lord Kerr was appointed a director of Rio
Tinto in 2003. He has an MA from Oxford University and was a member
of the UK Diplomatic Service for 36 years, heading the service from
1997 to 2002. On a secondment to the UK Treasury he was principal
private secretary to two Chancellors of the Exchequer. His service
abroad included spells as Ambassador to the European Union from 1990
to 1995, and to the US from 1995 to 1997. He is chairman of the Court
and Council of Imperial College, London; a director of The “Shell” Transport
and Trading Company plc and The Scottish American Investment Trust
plc. Lord Kerr is also a Trustee of the Rhodes Trust. (notes a, d
and e)
11
David
Mayhew
(age 64)
David Mayhew was appointed a director of
Rio Tinto in 2000. He is chairman of Cazenove Group plc, which he
joined in 1969. Cazenove is a stockbroker to Rio Tinto plc. (notes
a and b)
12
John
Morschel
(age 61)
John Morschel, who will
retire from the boards at the conclusion of the 2005 annual general meetings,
was appointed to the boards of Rio Tinto in 1998. Educated in Australia
and the US, he spent most of his career with Lend Lease Corporation Limited
in Australia, culminating as managing director, followed by two years
as an executive director of the Westpac Banking Corporation. A former
chairman of CSR Limited and Leighton Holdings Limited, he is chairman
of Rinker Group Limited and is a director of ANZ Banking Group
Limited, Tenix
Pty Limited, Gifford Communications Pty Limited and Singapore Telecommunications
Limited. He is also a patron of the Property Industry Foundation.
(notes b, c, d and e)
13 Sir Richard Sykes
(age
62)
Sir Richard was appointed a director of Rio Tinto in 1997. Following
Sir Richard Giordano’s retirement, he will become Rio Tinto’s
senior independent director. He is chairman of the
Remuneration committee
. After reading
microbiology, he obtained doctorates in microbial chemistry and in science.
A former chairman of GlaxoSmithKline plc, Sir Richard is a director of Lonza
Group Limited and is rector of Imperial College, London. He is a fellow of
the Royal Society and a trustee of the Natural History Museum in London and
of the Royal Botanic Gardens, Kew. (notes c and e)
14 Richard Goodmanson
(age
57)
Richard Goodmanson was appointed a director of Rio Tinto on 1 December
2004. He is executive vice president and chief operating officer
of DuPont and holds
degrees in civil engineering, economics, commerce and business administration.
During his career he has worked at senior levels for McKinsey & Co, PepsiCo
and American West Airlines, where he was president and CEO. He joined DuPont
in early 1999 and in his current position has responsibility for the non US
operations of DuPont with particular focus on growth in emerging markets. (notes
c, d and e)
Robert Adams
died
at his home on 27 January 2005. Robert Adams joined the Group in
1970 after reading natural sciences and economics and subsequently
gaining an MSc from the London Business School. He had a long distinguished
career with Rio Tinto and becoming a director of Rio Tinto plc in
1991 and of Rio Tinto Limited in 1995 with responsibility for planning
and development. He was also a non executive director of Foreign & Colonial
Investment Trust plc.
Oscar Groeneveld
served
as a director until 1 October 2004 when he was appointed chief executive
of the Aluminium group. See Senior management on page 60 for his
full biography.
Lord Tugendhat
served
as director until 22 April 2004 when he retired by rotation following
the 2004 annual general meetings. He holds a BA and MA in history
from Cambridge University, and became a director of Rio Tinto in
1997. A former vice president of the Commission of the European Communities,
and chairman of the Civil Aviation Authority, he was chairman of
Abbey National plc from 1991 until 2002 when he was appointed chairman
of Lehman Brothers Europe Limited.
Rio Tinto 2004
Annual
report and financial statements
1 Tom Albanese
(age
47)
Tom Albanese was appointed chief executive of the Copper group and
head of Exploration in 2004. He joined Rio Tinto in 1993 on Rio Tinto’s
acquisition of Nerco. He holds a BS in mineral economics and an MS
in mining engineering.
He held a series of management positions before being appointed chief executive
of the Industrial Minerals group in 2000.
2 Preston Chiaro
(age
51)
Preston Chiaro was appointed chief executive of the Energy group
in 2003. He holds degrees in environmental engineering. He joined
the Group in 1991 at
Kennecott Utah Copper’s Bingham Canyon mine as vice president, technical
services. In 1995 he became vice president and general manager of Boron operations
in California. He was chief executive of Rio Tinto Borax from 1999 to 2003.
3 Oscar Groeneveld
(age
51)
Oscar Groeneveld has been with the Group for 29 years and was appointed chief
executive of the Aluminium group in October 2004. He has qualifications in
engineering, science and management. He has occupied senior roles in coal,
aluminium and technology and was Copper group chief executive from 1999 to
2004. Mr Groeneveld was also an executive director of the Group from 1998 to
2004.
4
Keith
Johnson
(age 43)
Keith Johnson was appointed
chief executive, Diamonds in 2003. He holds degrees in mathematics and
management and is a Fellow of the Royal Statistical Society. He joined
Rio Tinto in 1991 and has held a series of management positions, most
recently as managing director of Comalco Mining and Refining.
5 Andrew Mackenzie
(age
48)
Andrew Mackenzie joined Rio Tinto in 2004 as chief executive Industrial Minerals.
He has a BSc (geology) and a PhD (chemistry) and was previously group vice
president, BP Petrochemicals. He spent 22 years with BP primarily in the UK
and North America in senior positions including head of Capital Markets in
BP Finance, chief reservoir engineer with oversight of oil and gas reserves
and production, head of Government and Public Affairs worldwide and group vice
president Technology which included responsibility for research and development
and engineering.
6
Karen
McLeod
(age 58)
Karen McLeod was appointed
head of Human Resources in 1999. She joined the Group in 1974 at Comalco,
working in Aboriginal affairs. She holds a bachelor of social work and
a masters in business administration and has held senior positions in
human resources, business analysis, marketing and organisation development.
7
John
O’Reilly
(age 59)
John O’Reilly joined
Rio Tinto in 1987, following 20 years’ operations experience in
Africa and the Middle East. A metallurgical engineer by profession, he
has held a series of management positions within the Group, including
director of Rio Tinto Technical Services, chief executive officer, Lihir
Gold, and head of the former Gold and Other Minerals group, before being
appointed head of Technology in 1999. He will move to a part time role
at the end of April 2005 to be succeeded by Ian Smith, currently managing
director, Aluminium Smelting with Comalco.
8 Andrew Vickerman
(age
50)
Andrew Vickerman is head of Communication and Sustainable
Development.
His responsibilities include media, public affairs, internal and external communications,
as well as oversight of Rio Tinto’s work on sustainable development and
with communities. He has BA (Hons), MA and PhD degrees in economics and, prior
to joining Rio Tinto in 1991, worked as a development economist and as a consultant
for the World Bank and United Nations agencies. Previous roles with Rio Tinto
include finance director of Lihir Gold.
9
Sam
Walsh
(age 55)
Sam Walsh was appointed
chief executive of the Iron Ore group in 2004. He holds a bachelor of
commerce degree and joined Rio Tinto in 1991, following 20 years in the
automotive industry at General Motors and Nissan Australia. He has held
a number of management positions within the Group, including managing
director of Comalco Foundry Products, CRA Industrial Products, Hamersley
Iron Sales and Marketing, Hamersley Iron Operations, vice president of
Rio Tinto Iron Ore (with responsibility for Hamersley Iron and Robe River)
and from 2001 chief executive of the Aluminium group.
10 Charles Lenegan
(age
53)
Charles Lenegan joined the Group in 1981 and has worked in senior roles in
diamonds, coal, salt and gold business units in Australia, Indonesia and Zimbabwe.
He was appointed managing director, Rio Tinto Australia in March 2004. He has
a BSc Economics (Honours) (London) degree and is a chartered accountant.
11
Anette
Lawless
(age 48)
Anette Lawless joined Rio
Tinto in 1998 and became company secretary of Rio Tinto plc in 2000.
Before joining Rio Tinto, she spent 11 years with Pearson plc, five of
which as company secretary. She qualified as a chartered secretary in
1989 and became a fellow of the ICSA in 1992. She also holds an MA from
the Copenhagen Business School.
12 Stephen Consedine
(age
43)
Stephen Consedine joined Rio Tinto in 1983 and has held positions in Accounting,
Treasury, and Employee Services before becoming company secretary of Rio Tinto
Limited in 2002. He holds a bachelor of business and is a Certified Practising
Accountant.
Employees
Information on the Group’s
employees including their costs, is on pages 56, 95, 122 and 139.
60
Rio Tinto 2004
Annual
report and financial statements
The directors are pleased to present their report to shareholders of Rio Tinto plc and Rio Tinto Limited, together with the financial statements for the year ended 31 December 2004 on pages 85 to 141.
Activities and review of operations
Details of the Group’s results,
operations and principal activities, likely future developments, significant
changes during the year and post balance sheet events are set out in the Chairman’s
letter on page
2, the Chief executive’s report on pages 3 to 5 and in the Operational review
on pages 38 to 57.
As allowed by Section 299(3) of the Australian Corporations Act, information which may be unreasonably prejudicial, regarding likely future developments in, and the expected results of,
the operations of the Group has been omitted.
Dual listed structure
Details of the dual listed companies
structure (DLC), which unified Rio Tinto plc and Rio Tinto Limited in 1995, can
be found on page 81.
Corporate governance
A full report on corporate governance
can be found on pages 71 to 75.
Annual general meetings
The 2005 annual general meetings will
be held on 14 April in London and on 29 April in Sydney. Notices of the 2005
annual general meetings are set out in separate letters to shareholders of each
Company.
Dividends
Final dividends of 23.94p per share and
58.29 Australian cents per share will be paid on 8 April 2005. Full details of
dividends paid and dividend policy can be found on page 77.
Directors
The names of the directors who served
during the year, together with their biographical details and directorships of
other companies in the past three years, are shown on pages 58 to 59. Richard
Goodmanson, who was appointed a non executive director on 1 December 2004, and
Ashton Calvert and Vivienne Cox, who were appointed to the boards as non executive
directors on 1 February 2005, retire and offer themselves for election at the
2005 annual general meetings. Paul Skinner retires by rotation and, being eligible,
offers himself for re-election. Sir Richard Giordano, Leon Davis and John Morschel
also retire by rotation but do not offer themselves for re-election. Details
of directors’ service contracts and letters of appointment can be found
on page 66. A table of directors’ attendance at board and committee meetings
is on page 71.
Remuneration of directors and executives
A discussion of the Group’s policy
for determining the nature and amount of remuneration of directors and senior
executives, and of the relationship between that policy and the Group’s
performance appears in
the Remuneration report on pages 63 to 70.
The Remuneration report includes details of the nature and amount of each element of the remuneration of each director and of the five highest paid executives of the Group.
Secretaries
Details of the company secretaries of
each of Rio Tinto plc and Rio Tinto Limited are set out on page 60.
Indemnities and insurance
The articles of association and constitution
of the Companies require them to indemnify officers of the Companies, including
officers of wholly owned subsidiaries, against liabilities arising from Group
business, to
the extent permitted by law.
The
Group, therefore, purchased directors’ and officers’ insurance in 2004. In broad terms, the insurance indemnifies individual directors’ and officers’ personal
legal
liability and costs as permitted by law for
claims arising out of actions taken in connection with Group business. It is
a condition under the insurance contract that detailed terms and premium paid
cannot be disclosed.
Employment policies
The average number of people employed
worldwide by Rio
Tinto, including the Group’s share of joint ventures and associates, was
approximately 33,000 (2003: 36,000) during 2004. Of those, about 11,000 were
located in Australia and New Zealand, around 9,000 in the US and Canada and 1,000
in the United Kingdom.
Rio
Tinto’s employment policies are set out in its statement of business
practice,
The way we work
.
Rio Tinto is committed to equality of opportunity for all, as set out in
The way we work
, and applies
this philosophy to recruitment, development and promotion of individuals.
Within this philosophy, each operating company is further encouraged to develop its own policies and practices to suit individual circumstances. Group companies employ disabled people and
accept the need to maintain and develop careers for them. If an employee becomes disabled and, as a result, is unable to perform his or her current duties, every effort is made to offer suitable alternative employment and to assist with
retraining.
Rio Tinto respects the right of employees worldwide to choose for themselves whether or not they wish to be represented collectively.
Group companies actively promote a healthy and safe working environment through training and communication with employees. For further information about Group staff and health and safety
initiatives, please see pages 55 to 57.
Post retirement benefits are provided by Rio Tinto and its major subsidiaries in accordance with local conditions and good practice in the countries concerned.
Share capital
There were no changes to the authorised
share capital of Rio Tinto plc during the year. In 2004, 1,346,874 Rio Tinto
plc shares and 280,332 Rio Tinto Limited shares were issued in connection with
employee share
plans.
Since the year end 429,764 Rio Tinto plc shares and 167,248 Rio Tinto Limited shares have been issued as a result of the exercise of employee options. As at 14 February 2005, there were
9,253,990 options outstanding over Rio Tinto plc shares and 6,506,800 options outstanding over Rio Tinto Limited shares in connection with employee share plans.
At the annual general meeting of Rio Tinto plc held in April 2004, the authorities for Rio Tinto plc to buy its own shares and for Rio Tinto Limited to buy shares in Rio Tinto plc were
renewed and extended until October 2005. These authorities enable Rio Tinto plc to buy back up to ten per cent of its publicly held shares in any 12 month period. At its annual general meeting held in April 2004, Rio Tinto Limited renewed its
shareholder approvals to buy back up to all its shares held by Tinto Holdings Australia Pty Limited, a wholly owned subsidiary of Rio Tinto plc plus up to ten per cent of the publicly held share capital in any 12 month period on market. Neither
Company bought back any shares during 2004.
Creditor payments
It is the Group’s policy to agree
terms of payments with suppliers when entering into contracts and to meet its
obligations accordingly. The Group does not follow any specific published code
or standard on payment
practice.
At
31 December 2004, there were 23 days’ purchases outstanding in respect of Rio Tinto Limited and 24 days’ purchases
outstanding in respect of Rio Tinto plc, based on the total invoiced by
suppliers during the year.
Donations
Worldwide expenditure on community programmes
by Rio Tinto managed businesses amounted to US$87.8 million (2003:
Rio Tinto 2004
Annual
report and financial statements
US$70 million) and is described more fully
in Society and environment on page 55.
The Group
committed A$1 million (about US$750,000) to disaster relief following the
tsunami in Asia with support directed mainly to Indonesia and India where
the Group has a presence. Total community spending in Australia amounted to
A$6.9 million. Donations in the UK during 2004 amounted to £2.1 million
of which £0.4 million was for charitable purposes as defined by the
Companies Act 1985 and £1.7 million for other community purposes.
As in previous
years, no donations were made for political purposes during 2004 in the EU,
or elsewhere as defined by the UK Companies Act 1985 as amended by the Political
Parties, Elections and Referendums Act 2000, nor in Australia.
Environmental regulation
Details of the Group’s environmental
performance is set out on pages 55 to 57.
Value of land
The Group’s interests in land consists
mainly of leases and other rights which permit working of the land and the
erection of buildings and equipment to extract and treat minerals. This land
is normally carried in the financial statements at cost, as the market value
depends on product prices over the long term and therefore will vary with
market conditions.
Exploration, research
and development
Group companies carry out exploration, research
and development necessary to support their activities. They also make grants
to universities and other institutions which undertake relevant research.
Cash expenditure during the year was US$193 million for exploration and evaluation
and US$23 million for research and development.
Auditors
PricewaterhouseCoopers LLP and PricewaterhouseCoopers
are the auditors of Rio Tinto plc and Rio Tinto Limited respectively.
PricewaterhouseCoopers
LLP have indicated their willingness to continue in office as auditors of
Rio Tinto plc and a resolution to re-appoint them as auditors of Rio Tinto
plc will be proposed at the 2005 annual general meetings of Rio Tinto plc
and Rio Tinto Limited. PricewaterhouseCoopers will continue in office as auditors
of Rio Tinto Limited.
No officer
of Rio Tinto was a former partner or director of either Company’s auditors
during 2004.
Non audit services
The directors are satisfied that the provision
of non audit services by PricewaterhouseCoopers is compatible with the general
standard of independence for auditors on the basis set out in the
Audit
committee
report on page 74.
Income and Corporation
Taxes Act 1988
The close company provisions of the UK Income
and Corporation Taxes Act 1988 do not apply to Rio Tinto plc.
The Directors’ report is made in accordance
with a resolution of the board.
Paul Skinner
Chairman
24 February 2005
Leigh Clifford
Chief executive
24 February 2005
Guy Elliott
Finance director
24 February 2005
62
Rio Tinto 2004
Annual
report and financial statements
Introduction
The boards of Rio Tinto (the
board) have pleasure in presenting the Remuneration report to shareholders.
The report covers the following information:
•
a description of the
Remuneration
committee
and its duties;
•
a summary of the Group’s
remuneration policy, including a description of the policy on directors’
and senior executive remuneration;
•
a résumé of
the terms of directors’ service contracts and letters of appointment;
•
details of each director’s
and certain senior executives’ remuneration and awards under long
term incentive plans and the link to corporate performance;
•
details of directors’
interests in Rio Tinto shares; and
•
graphs illustrating the
performance of the Group, including relative to the HSBC Global Mining
Companies’ Index.
Remuneration
committee
The following independent, non executive
directors were members of the
Remuneration
committee
during 2004:
•
Sir Richard Sykes (chairman);
•
Sir David Clementi;
•
Richard Goodmanson (from
1 December 2004);
•
Andrew Gould; and
•
John Morschel.
The committee
met five times during 2004. Members’ attendance is set out on
page 71.
The committee’s
responsibilities are set out in its Terms of Reference which can be viewed
on Rio Tinto’s website. They include:
•
recommending any changes
to the chairman’s fees;
•
recommending remuneration
policy relating to executive directors and senior executives to the board;
•
reviewing and determining
the remuneration of executive directors, product group chief executives
and the company secretary of Rio Tinto plc;
•
reviewing and agreeing management’s
strategy for remuneration and conditions of employment for executives;
and
•
monitoring the effectiveness
and appropriateness of executive remuneration policy and practice.
Advisors
Jeffery Kortum, Group advisor, remuneration,
attends the committee’s meetings in an advisory capacity. The chairman,
Paul Skinner, and the chief executive, Leigh Clifford, also participated in
meetings of the committee, except where issues relating to their own remuneration
were discussed. Anette Lawless, the company secretary of Rio Tinto plc, acts
as secretary to the committee but is not present when issues relating to her
own remuneration are discussed.
The committee
appointed Kepler Associates, an independent consultant with no other links
to the Group, to provide advice on executive remuneration matters.
To carry
out its duties in accordance with its terms of reference, the committee monitors
global remuneration trends and developments and draws on a range of external
sources of data, including publications by remuneration consultants Towers
Perrin, Hewitt Associates, Hay Group, Watson Wyatt and Monks Partnership.
Corporate governance
The committee reviewed its terms of reference
in 2004 and concluded that, in the course of its business, it had covered
the main duties set out in the Combined Code as attached to the UKLA Listing
Rules (the Code) and Principle 9 of the ASX Best Practice Corporate Governance
Guidelines, and was constituted in accordance with the requirements of the
Code and the ASX Best Practice Corporate Governance Guidelines.
The board
considered the performance of the committee and determined that the committee
had satisfactorily performed the duties set out in its terms of reference.
The 2003
Remuneration report was approved by shareholders at the 2004 annual general
meetings.
Executive
remuneration policy
Rio Tinto operates in a global market, where
it competes for a limited resource of talented, internationally mobile executives.
It recognises that to achieve its business objectives, the Group needs high
quality, committed people.
Rio Tinto
has, therefore, designed an executive remuneration policy to support its
business goals by enabling it to attract, retain and appropriately reward
executives of the calibre necessary to produce very high levels of performance.
The main
principles of the Group’s executive remuneration policy are:
•
to provide total remuneration
which is competitive in structure and quantum with comparator companies’
practices in the regions and markets within which the Group operates;
•
to achieve clear alignment
between total remuneration and delivered personal and business performance,
with particular emphasis on shareholder value creation;
•
to tie variable elements
of remuneration to the achievement of challenging performance criteria
that are consistent with the best interests of the Group and shareholders
over the short, medium and long term;
•
to provide an appropriate
balance of fixed and variable remuneration; and
•
to provide appropriate relativities
between executives globally and to support executive placements to meet
the needs of the Group.
Executive remuneration
Total remuneration is a combination of fixed
and performance related elements, each of which is described below.
The performance
related, or variable, elements are the short and long term incentive plans,
which are tied to the achievement of personal and business performance goals
and are, therefore, at risk. The rest of the elements of the package are “fixed”,
as they are not at risk, although some, such as base salary, are also related
to performance.
The composition
of the total remuneration package is designed to provide an appropriate balance
between the fixed and variable components, in line with Rio Tinto’s stated
objective of aligning total remuneration with personal and business performance.
Excluding
allowances and pension/superannuation arrangements, the proportion of total
direct remuneration provided by way of variable components comprising the
Short Term Incentive Plan, the Share Option Plan and the Mining Companies
Comparative Plan (STIP, SOP and MCCP) described below, assuming target levels
of performance, is currently approximately 68 per cent for the chief executive,
62 per cent for the finance director and between 62 and 68 per cent for the
product group heads.
Full details
of the directors’ annual remuneration before tax and excluding pension
contributions are set out in Table 1 on page 67.
Base salary
Base salaries for executive directors and product
group chief executives are reviewed annually, taking into account the nature
of the individual executive’s role, external market trends and personal
and business performance. The
Remuneration
committee
uses a range of international
companies of a similar size, global reach and complexity to make this comparison.
Rio Tinto 2004
Annual
report and financial statements
STIP provides
an annual cash bonus opportunity for participants and is designed to
support overall remuneration policy by:
•
focusing participants on
achieving goals which contribute to
sustainable shareholder value;
and
•
providing significant bonus
differential based on performance against challenging personal, business,
and other targets, including safety.
The
Remuneration
committee
reviews and approves performance
targets for executive directors and product group chief executives annually.
The executive directors’ STIP payments are linked to three performance
criteria: Group financial performance, Group safety performance and personal
performance. The product group chief executives’ payments are linked
to Group and product group financial performance, product group safety performance
and personal performance. These criteria are partly measured on an actual
basis and partly on a basis normalised for fluctuations of market prices and
exchange rates. The target level of bonus for these participants for 2005
is 60 per cent of salary, the same as 2004. Executives may receive up to twice
their target for exceptional performance against all criteria.
STIP awards in
respect of 2004, payable in 2005, are included as annual cash bonus in Table
1 on page 67.
Long term incentives
Shareholders approved two new long term incentive
plans at the annual general meetings in 2004, the Share Option Plan and the
Mining Companies Comparative Plan.
The new
plans are intended to provide the
Remuneration
committee
with a means of linking
management’s rewards to Group performance. The committee regards total
shareholder return (TSR) as the most appropriate measure of a company’s
performance for the purpose of share based long term incentive plans and both
plans therefore use TSR as a performance measure.
The new
plans maintained the expected value of total executive remuneration at approximately
the same level as before, but modified the relative proportions in which share
options and performance shares may be awarded. For 2004 and 2005, this has
meant a shift towards performance shares being the primary long term incentive
vehicle.
Details
of awards under the long term incentive plans are set out on pages 69 and
70.
Share Option
Plan (SOP)
Each year,
the
Remuneration committee
considers
whether a grant of options should be made under the SOP, and if so,
at what level. In arriving at a decision, the committee takes into
consideration the personal performance of each executive as well as
local remuneration practice.
No
options will become exercisable unless the Group has met stretching
performance conditions. For grants made prior to 2004:
•
two thirds of options vest
when the Group’s adjusted earnings per share growth for a three year
performance period is at least nine percentage points higher than US inflation
over the same period, as measured by the US Consumer Price Index;
•
the balance of the grant
vests when growth of at least 12 percentage points above US inflation
has been achieved;
•
Rio Tinto performance is
tested against the performance condition after three years; and
•
there is an annual retest
on a three year rolling basis until options fully vest or lapse at the
end of the option period.
Under the rules of the new plan, approved
by shareholders at the 2004 annual general meetings, vesting will be subject
to Rio Tinto’s TSR, measured over three years, equalling or outperforming
the HSBC Global Mining Index. Rio Tinto’s TSR is calculated as a weighted
average of the TSR of Rio Tinto plc and Rio Tinto Limited. If the TSR performance
equals the index, the higher of one third of the original grant or 20,000
options will vest (subject to the actual grant level not being exceeded).
The full grant vests if the TSR performance is equal to or greater than
the HSBC Global Mining Index plus five per
cent per annum. TSR performance at this level is equivalent to the upper quartile
of the index. Between these points, options vest on a sliding scale, with
no options becoming exercisable for a three year TSR performance below the
index.
In addition,
the
Remuneration committee
retains
discretion to satisfy itself before approving any vesting that the TSR performance
is a genuine reflection of underlying financial performance.
Options
granted under the new plan before 31 December 2006 will be subject to a single
fixed base retest five years after grant if they have not vested after the
initial three year performance period, with options granted after 31 December
2006 not subject to any retest. These latter options will, therefore, lapse
if they do not vest at the conclusion of the three year performance period.
Prior to
any options being released to participants for exercise, the Group’s
performance against the criteria relevant to the SOP is examined and verified
by the external auditors. If there were a change of control or a company restructuring,
options would become exercisable subject to the satisfaction of the performance
condition measured at the time of the takeover or restructuring.
Where an
option holder dies in service, qualifying options vest immediately, regardless
of whether the performance conditions have been satisfied. The estate will
have 12 months in which to exercise the options.
The maximum
grant under the SOP is three times salary, based on the average share price
over the previous financial year. Under the SOP no options are granted at
a discount. Executive directors may, however, be granted options at a discount
under the Rio Tinto Share Savings Plan, described below.
Share options
granted to directors are included in Table 4 on page 69.
Mining Companies Comparative Plan (MCCP)
Rio Tinto’s performance share plan, the
MCCP, provides participants with a conditional right to receive shares. The
conditional awards will only vest if performance conditions approved by the
committee are satisfied. Again, were there to be a change of control or a
company restructuring, the awards would only vest subject to the satisfaction
of the performance condition measured at the time of the takeover or restructuring.
These conditional awards are not pensionable.
The performance
condition compares Rio Tinto’s TSR with the TSR of a comparator group
of 15 other international mining companies over the same four year period.
The composition of this comparator group is reviewed regularly by the committee
to provide continued relevance in a consolidating industry. The current members
of this group are listed at the bottom of the table of comparators on page
65.
The maximum
conditional award size under the current MCCP is two times salary (previously
70 per cent), calculated on the average share price over the previous financial
year.
The following
table shows the percentage of each conditional award which will be received
by directors and product group chief executives based on Rio Tinto’s
four year TSR performance relative to the comparator group for conditional
awards made after 1 January 2004:
Ranking
in comparator group
1st-2nd
3rd
4th
5th
6th
7th
8th
9th-16th
%
150
125
100
83.75
67.5
51.25
35
0
64
Rio Tinto 2004
Annual
report and financial statements
The historical ranking of Rio Tinto in relation
to the comparator group is shown in the following table:
Ranking of Rio Tinto versus comparator
companies
Period
Ranking
out of 16
1993 – 97
4
1994 – 98
4
1995 – 99
2
1996 – 00
2
1997 – 01
2
1998 – 02
3
1999 – 03
7
2000 – 04
11
Current comparator
companies:
Alcan, Alcoa, Anglo American, Barrick
Gold, BHP Billiton, Freeport, Grupo Mexico, INCO, Newmont, Noranda, Phelps
Dodge, Placer Dome, Teck Cominco, WMC and Xstrata
Before awards are released to participants,
the external auditors and Kepler Associates independently review the Group’s
performance compared to that of the comparator companies.
Awards
are released to participants as either Rio Tinto plc or Rio Tinto Limited
shares or an equivalent amount in cash. In addition, a cash payment to participants
equivalent to the dividends that would have accrued on the vested number of
shares over the four year period will be made.
Shares
to satisfy the vesting may be acquired by purchase in the market, by subscription,
or, in the case of Rio Tinto Limited, by procuring that Tinto Holdings Australia
Pty Limited transfers existing shares to participants.
Performance of Rio Tinto
To illustrate the performance of the
Companies relative to their markets, graphs showing the performance of Rio
Tinto plc compared to the FTSE 100 Index and Rio Tinto Limited compared to
the ASX All Ordinaries Index are reproduced in this report. A comparative
graph showing Rio Tinto’s performance relative to the HSBC Global Mining
Index is also included to illustrate the performance of the Companies relative
to other mining companies.
Other
share plans
UK executive
directors can participate in:
•
the Rio Tinto plc Share
Savings Plan, an Inland Revenue approved savings related plan which is
open to all UK employees. Under the Plan directors can save up to £250
per month for a maximum of five years. At the end of the savings period
the director may exercise an option over shares granted at a discount
of up to 20 per cent to the market value at the time the savings contract
is entered into. The number of options the director is entitled to is
determined by the option price, the savings amount and the length of the
savings contract; and
•
the Rio Tinto Share Ownership
Plan, also an Inland Revenue approved share incentive plan which was approved
by shareholders at the 2001 annual general meeting and introduced in 2002.
Under this plan, eligible employees can save up to £125 per month,
which the plan administrator invests in Rio Tinto plc shares. Rio Tinto
matches these purchases on a one for one basis. In addition, eligible
employees may receive an annual award of Rio Tinto shares up to a maximum
of five per cent of salary, subject to a cap of £3,000.
Australian executive directors can participate
in the Rio Tinto Limited Share Savings Plan, also introduced in 2001, which
is similar to the Rio Tinto plc Share Savings Plan.
Shareholding policy
In 2002, the committee decided
that it would be appropriate to encourage executive directors and product
group chief executives to build up a substantial shareholding, aiming to reach
a holding equal in
value
to two times salary over five years. Details of directors’ share interests
in the Group are set out in Table 3 on page 69.
Pension and superannuation
arrangements
United Kingdom
UK executive directors and senior management,
like all UK staff, participate in the non contributory Rio Tinto Pension Fund,
a funded, Inland Revenue approved, final salary occupational pension scheme.
The Fund
provides a pension from normal retirement age at 60 of two thirds final pensionable
salary, subject to completion of 20 years’ service. Proportionally lower
benefits are payable for shorter service or, having attained 20 years’
service, retirement is taken prior to the age of
60.
Spouse and dependants’ pensions are also
provided.
Members retiring early may draw a pension reduced
by
approximately four per cent a year
for each year of early payment from age 50 onwards.
Under
the rules of the Rio Tinto Pension Fund, all pensions are guaranteed to increase
annually in line with increases in the UK Retail Price Index subject to a
maximum of ten per cent per annum. Increases above this level are discretionary.
When
pensionable salary is limited by the UK Inland Revenue earnings “cap”,
benefits are provided from unfunded supplementary arrangements. The UK Government
has made a number of pensions related announcements over the last two years
and Rio Tinto continues to review developments in UK pensions legislation.
In February
2005, the defined benefit section of the Rio Tinto pension fund will be closed
to new participants. Employees joining after that date will join the new defined
contributions section of the Plan.
No cash
contributions were made in 2004 as the Rio Tinto Pension Fund remains fully
funded.
Australia
The Australian executive director and
senior management are members of the Rio Tinto Staff Superannuation Fund,
a funded superannuation fund regulated by Australian legislation. The fund
provides both defined benefit and defined contribution benefits. The executive
director is a defined benefit member, accruing lump sums payable on retirement.
Retirement benefits are limited to a lump sum multiple of seven times final
basic salary at age 62. For retirement after 62, the benefit increases to
7.6 times average salary at age 65.
Death
in service and disablement benefits are provided as lump sums and are equal
to the prospective age 65 retirement benefit. Proportionate benefits are also
payable on termination of employment for ill health or resignation.
Executive
directors and senior management are not required to pay contributions. During
2004, Company cash contributions were paid into the Rio Tinto Staff Superannuation
Fund to fund members’ defined benefit and defined contribution benefits.
Other pensionable
benefits
As the increase in the percentage of
total remuneration which is dependent on performance is substantial and has
risen over recent years, the committee considers it appropriate that a proportion
of this at risk pay should be pensionable. Annual STIP awards are pensionable
up to a maximum value of 20 per cent of basic salary.
Details
of directors’ pension and superannuation entitlements are set out in
Table 2 on page 68.
Service contracts
and compensation payments
All executive directors have service
contracts with a one year notice period. Rio Tinto has retained the right
to pay directors in lieu of notice. Under current pension arrangements, executive
directors are normally expected to retire at the age of 60. In 2004, Leigh
Clifford’s contractual
Rio Tinto 2004
Annual
report and financial statements
retirement age was reduced from 62 to 60,
with a corresponding change to his retirement arrangements. In the event of
early termination, the Group’s policy is to act fairly in all circumstances
and the duty to mitigate would be taken into account. Compensation would not
reward poor performance.
Neither
of the executive directors are proposed for election or re-election at the
forthcoming annual general meetings.
Notice periods:
Name
Date
of
Notice
period
Remaining
Agreement
service
period
if less
than
12 months
Leigh Clifford
30 March 2004
12 months
N/A
Guy Elliott
19 June 2002
12 months
N/A
External appointments
Executive directors are likely to be
invited to become non executive directors of other companies. Rio Tinto believes
that such appointments can broaden their experience and knowledge, to the
benefit of the Group. It is Group policy to limit executive directors’
external directorships to one FTSE 100 company or equivalent and they are
not allowed to take on the chairmanship of another FTSE 100 company. Consequently,
where there is no likelihood that such directorships will give rise to conflicts
of interests, the board will normally give consent to the appointment, with
the director permitted to retain the fees earned. Details of fees earned are
set out in the notes to Table 1 on page 68.
Non executive
directors’ remuneration
Chairman’s fees and letter of appointment
It is Rio Tinto’s policy that the
chairman should be remunerated on a competitive basis and at a level which
reflects his contribution to the Group, as assessed by the board. He does
not participate in the Group’s incentive plans or pension arrangements.
Details of his fees can be found in Table 1 on page 67.
Paul
Skinner’s letter of appointment summarises his duties as chairman of
the Group and was agreed by the
Remuneration
committee
.
It stipulates that he is expected to dedicate at least three days per week on
average to carry out these duties. The letter envisages that Paul Skinner will
continue in the role of chairman until he reaches the age of 65 in 2009, subject
to re-election as a director by shareholders.
Non executive directors’
fees and letters of appointment
The board as a whole determines non
executive directors’ fees, although non executive directors do not vote
on any increases of their own fees. Fees are set to reflect the responsibilities
and time spent by the directors on the affairs of Rio Tinto. In the light
of the increased volume of committee work following regulatory developments
in the UK, US and Australia, it was decided in October 2004 to increase the
fees for the chairmen of the
Audit
committee
and
Remuneration committee
to £20,000 and £15,000 respectively. It was also agreed to
increase the fees for
Audit committee
members to £10,000 and
introduce a £5,000 fee for
Remuneration committee
members.
Non executive
directors do not participate in the Group’s incentive plans, pension
or superannuation arrangements or any other elements of remuneration provided
to executive directors.
Non executive
directors have a formal letter of appointment setting out their duties and
responsibilities which is available for inspection at Rio Tinto plc’s
registered office and annual general meeting.
Details
of non executive directors’ remuneration is set out in Table 1 on page
67.
Auditable information
Tables 1, 2, 4 and 5 comprise the auditable
parts of the Remuneration report, except the information in Table 1 which
is required by the Australian Corporations Act (see note 16 to Table 1).
Annual general
meetings
Shareholders will be asked to vote on
this Remuneration report at the Companies’ forthcoming annual general
meetings.
By order of the board
Anette Lawless
Secretary
Remuneration committee 24 February 2005
TSR (£) – Rio Tinto plc vs FTSE
100
Total return basis Index 1999 = 100
TSR (A$) – Rio Tinto Limited vs ASX
All Share
Total return basis Index 1999 = 100
TSR (US$) – Rio Tinto Group vs HSBC
Global Mining Index
Total return basis Index 1999 = 100
66
Rio Tinto 2004
Annual
report and financial statements
The total remuneration is
reported in US dollars. The amounts, with the exception of the annual
cash bonus, can be converted into sterling at the rate of 1US$ =£0.5463
or alternatively, into Australian dollars at the rate of 1US$ = A$1.3617,
each being the average exchange rate for 2004. The annual cash bonus is
payable under the STIP and this may be converted at the 2004 year end
exchange rate of 1US$ = £0.519 to ascertain the sterling equivalent
or alternatively, 1US$ = A$1.2847 to calculate the Australian dollar value.
2.
Other emolument items include
healthcare, 401k contributions in the US where appropriate, car and fuel
benefits, travel allowances to attend overseas meetings, and professional
advice. Housing, relocation payments, tax equalisation adjustments and
children’s education assistance are also provided for executive directors
and product group executives living outside their home country. UK executive
directors are also beneficiaries under the Rio Tinto All Employee Share
Ownership Plan up to a maximum value of £3,000 (US$5,492) and may
also contribute to the Rio Tinto Share Ownership Plan where the Company
will match their personal contributions to a maximum of £1,500 (US$2,746)
per annum. A payment in respect of long service leave is paid to Australian
executive directors and senior executives on retirement.
3.
Richard Goodmanson was appointed
a director on 1 December 2004.
4.
Sir Richard Sykes’
fees were paid direct to him up until 30 April 2004 and thereafter paid
to Imperial College London.
5.
David Mayhew’s fees
are paid to Cazenove Group plc.
6.
Oscar Groeneveld resigned
as a director on 1 October 2004. The figures shown above relate to his
total remuneration with the Group for the year. His emoluments for the
period when he was a director amounted to US$1,182,341 comprising salary
US$552,811, bonus US$465,237 and other benefits US$164,293.
7.
Lord Tugendhat retired on
22 April 2004 and received a gift to the value of US$3,661.
8.
Emoluments of US$53,022
from subsidiary and associated companies were waived by two executive
directors (2003: two directors waived US$98,872). Executive directors
have agreed to waive any further fees receivable from subsidiary and associated
companies.
9.
In the course of the year,
Robert Adams received US$45,763 and Leigh Clifford received US$22,881
in respect of non Rio Tinto related directorships.
10.
Includes actual contributions
payable to both defined contribution and defined benefit arrangements
that are required to secure the pension benefits earned in the year.
11.
The amount of long term
share based compensation represents the estimated value of awards granted
under the Rio Tinto Share Option Plan (the SOP), the Share Savings Plan
(the SSP) and the Mining Companies Comparative Plan (the MCCP) which had
not vested at 1 January 2004 or were granted during 2004.The fair value
of the SOP and SSP awards have been calculated using an independent binomial
model provided by external consultants, Lane Clark and Peacock LLP. The
fair value of options granted to executive directors and product group
chief executives under the SOP is 17 per cent of face value. The fair
value of the MCCP awards has been calculated at the date of grant by external
consultants, Kepler Associates based on the share price at that date and
the percentage of the conditional awards expected to be paid out. The
fair value of
conditional awards made to
executive directors and product group chief executives under the plan
is 52.5 per cent of the face value. The value of long term share based
compensation has been valued in accordance with the guidelines issued
by the Australian Securities & Investments Commission dated 28 June
2004 (which replaced those of 30 June 2003). The non executive directors
do not participate in the long term incentive share schemes.
12.
The number of conditional
shares awarded to executive directors under the MCCP for the twelve month
period ending 31 December 2004 are shown under Table 4 of this report.
The figures in respect of the five highest paid senior executives of the
Group are as follows: Tom Albanese 56,015, Keith Johnson 30,387 and Preston
Chiaro 46,995 over Rio Tinto plc ordinary shares and Chris Renwick 44,171
and Sam Walsh 38,023 over Rio Tinto Limited ordinary shares. The market
price of the Rio Tinto plc and Rio Tinto Limited ordinary shares were
1276p and A$33.17 respectively.
13.
The award of options to executive
directors under the SSP during the 12 month period up to 31 December 2004
are shown in Table 5 of this report. During the same period, of the five
highest paid executives, only Preston Chiaro subscribed for 490 Rio Tinto
plc ordinary shares at an option price 1277p. These options must be exercised
in January 2006.
14.
The award of options to executive
directors under the SOP during the twelve month period up to 31 December
2004 are shown in Table 5 of this report. During the same period options
awarded to the five highest paid executives of the Group were as follows;
Tom Albanese 84,020, Preston Chiaro 70,490 and Keith Johnson 43,500 over
Rio Tinto plc ordinary shares and Chris Renwick 42,223 and Sam Walsh 54,400
over Rio Tinto Limited ordinary shares. The options are subject to the
performance criteria explained on page 64 and are exercisable between22
April 2007 and 21 April 2014. The exercise price was set at 1329p per
ordinary Rio Tinto plc share and A$34.406 per ordinary Rio Tinto Limited
share.
15.
The fair value of unvested
share grants is spread equally over the term of each plan’s performance
period. This adjustment spreads the fair value of each grant of long term
incentive shares over a three year period in respect of the SOP, a four
year period in respect of the MCCP and the length of the relative contract
period under the SSP.
16.
The following additional
information is provided to meet the requirements of the Australian Corporations
Act 2001:
•
details about pension contributions,
the value of long term incentive plans and accounting adjustments required
to spread the value of long term incentive plans over the performance
period;
•
the total remuneration of the five highest
paid senior executives below board level;
•
the inclusion of Oscar Groeneveld’s
earnings following his resignation from the board on 1 October 2004.
The bases for
determining the figures presented in respect of pension contributions
and long term incentive plans are described in notes 10, 11 and 17 respectively.
17.
Christopher
Renwick’s “Other benefits” included a statutory retirement
payment of US$1,325,552 relating to his service with the Group.
Table 2 – Directors’
pension entitlements
(as at 31
December 2004)
Accrued
benefits
Transfer
values
3
Age
Years
of
service
completed
At
31 December
2003
At
31 December
2004
Change in accrued
benefits
during the year
ended 31 December 2004
Change in
accrued benefit
net of
inflation
At
31 December
2003
At
31 December
2004
Change, net of personal
contributions
Transfer value
of change
in accrued
benefit net
of inflation
UK directors
£’000 pa
pension
£’000 pa
pension
£’000 pa
pension
£’000
pa pension
£’000
£’000
£’000
£’000
Robert Adams
5
59
34
360
389
29
18
6,159
7,465
1,306
353
Guy Elliott
49
24
212
256
44
37
2,066
2,915
849
429
Australian directors
A$’000
Lump sum
A$’000
Lump sum
A$’000
Lump sum
A$’000
Lump sum
A$’000
A$’000
A$’000
A$’000
Leigh Clifford
2,
3
57
34
12,099
12,026
(73
)
(1,881
)
12,099
12,026
(73
)
(1,881
)
Oscar Groeneveld
2,
6
51
29
4,661
5,079
418
21
4,661
5,079
418
21
Notes to Table 2
1.
A$76,659 and A$42,384 were credited to
the respective accounts belonging to Leigh Clifford and Oscar Groeneveld
in the Rio Tinto Staff Superannuation Fund in relation to the superannuable
element of their 2004 performance bonus.
2.
The changes in accrued lump sums for
Australian directors are before contributions tax and exclude interest.
3.
Transfer values are calculated in a manner
consistent with “Retirement Benefit Schemes – Transfer Values
(GN 11)” published by the Institute of Actuaries and the Faculty
of Actuaries and dated 4 August 2003.
4.
During the period, Leigh Clifford’s
Australian superannuable salary was determined by conversion of his sterling
pay to A$ through exchange rates. The reduction in his overall accrued
benefits reflects the changes in the exchange rate. The
Remuneration
committee
has resolved that
in respect of 2005 Leigh Clifford’s Australian superannuable salary
will be uplifted by the same percentage used to uplift his sterling pay.
5.
Robert Adams died on 27 January 2005.
6.
Oscar Groeneveld resigned as a director
on 1 October 2004. The accrued entitlement shown above represents the
value at this date.
68
Rio Tinto 2004
Annual
report and financial statements
Table 3 – Directors’ beneficial
interests in shares
1 Jan
31 Dec
14 Feb
2004
2
2004
7
2005
Robert Adams
3,
4
71,764
72,243
N/A
Ashton Calvert
8
–
–
–
Sir David Clementi
–
–
–
Leigh Clifford
2,100
2,100
2,100
76,428
90,296
91,255
Vivienne Cox
8
–
–
–
Leon Davis
6,100
6,100
6,100
187,293
187,293
187,293
Guy Elliott
3
40,847
42,888
42,920
Sir Richard Giordano
1,065
1,065
1,065
Richard Goodmanson
–
–
–
Andrew Gould
–
1,000
1,000
Oscar Groeneveld
4
19,010
19,010
N/A
23,515
32,012
N/A
Lord Kerr
–
2,300
2,300
David Mayhew
2,500
2,500
2,500
John Morschel
–
2,000
2,000
Paul Skinner
5,140
5,277
5,277
Sir Richard Sykes
2,359
2,422
2,422
Lord Tugendhat
4
1,135
1,135
N/A
Notes to
Table 3
1.
Rio Tinto plc – ordinary
shares of 10p each;
Rio Tinto
Limited shares stated in italics
.
2.
Or date of appointment if
later.
3.
These directors also have
an interest in a trust fund containing 8,219 Rio Tinto plc shares at 31
December 2004 (1 January 2004: 21,849 Rio Tinto plc shares) as potential
beneficiaries of The Rio Tinto Share Ownership Trust. At 14 February 2005
this trust fund contained 8,219 Rio Tinto plc shares.
4.
Lord Tugendhat and Oscar
Groeneveld retired and resigned as directors on 22 April 2004 and 1 October
2004 respectively. Robert Adams died on 27 January 2005.
5.
The above includes the beneficial
interests obtained through the Rio Tinto Share Ownership Plan, details
of which are set out on page 65 under the heading “Other share plans”.
6.
The total beneficial interest
of the directors in the Group amounts to less than one per cent.
7.
Or date of retirement or
resignation if earlier.
8.
Ashton Calvert and Vivienne
Cox were appointed non executive directors on
1
February
2005.
Table 4 – Awards to
directors under long term incentive plans
Plan terms and conditions
Plan
1 Jan
2004
2
Awarded
2
Lapsed
2
Vested
2
31 Dec
2004
8
Conditional
award
granted
Performance
period
concludes
Market
price at
award
Date
award
vests
Market
price at
vesting
4
Monetary
value of
vested award
US$’000
4
Leigh Clifford
6
MCCP 2001
37,474
–
37,474
–
–
6 Mar 2001
31 Dec 2004
A$34.406
–
–
–
MCCP 2002
34,435
–
–
–
34,435
13 Mar 2002
31 Dec 2005
A$39.600
–
–
–
MCCP 2003
36,341
–
–
–
36,341
7 Mar 2003
31 Dec 2006
A$30.690
–
–
–
MCCP 2004
–
119,581
–
–
119,581
22 Apr 2004
31 Dec 2007
A$33.170
–
–
–
108,250
119,581
37,474
–
190,357
–
Robert Adams
9
MCCP 2001
27,330
–
27,330
–
–
6 Mar 2001
31 Dec 2004
1,310
p
–
–
–
MCCP 2002
25,064
–
–
–
25,064
13 Mar 2002
31 Dec 2005
1,424
p
28 Jan 2005
1,687
p
407
MCCP 2003
26,837
–
–
–
26,837
7 Mar 2003
31 Dec 2006
1,198
p
28 Jan 2005
1,687
p
436
MCCP 2004
–
54,372
–
–
54,372
22 Apr 2004
31 Dec 2007
1,276
p
28 Jan 2005
1,687
p
619
79,231
54,372
27,330
–
106,273
1,462
Guy Elliott
1
MCCP 2001
7,845
–
6,865
980
–
6 Mar 2001
31 Dec 2004
1,310
p
21 Feb 2005
1,687
p
32
MCCP 2002
16,935
–
–
–
16,935
13 Mar 2002
31 Dec 2005
1,424
p
–
–
–
MCCP 2003
22,923
–
–
–
22,923
7 Mar 2003
31 Dec 2006
1,198
p
–
–
–
MCCP 2004
–
51,550
–
–
51,550
22 Apr 2004
31 Dec 2007
1,276
p
47,703
51,550
6,865
980
91,408
32
Oscar Groeneveld
6
MCCP 2001
20,934
–
20,934
–
–
6 Mar 2001
31 Dec 2004
A$34.406
–
–
–
MCCP 2002
20,322
–
–
–
20,322
13 Mar 2002
31 Dec 2005
A$39.600
–
–
–
MCCP 2003
21,469
–
–
–
21,469
7 Mar 2003
31 Dec 2006
A$30.690
–
–
–
MCCP 2004
–
43,785
–
–
43,785
22 Apr 2004
31 Dec 2007
A$33.170
–
–
–
62,725
43,785
20,934
–
85,576
–
Notes to
Table 4
1.
The Rio Tinto Group's 11th
place ranking against the comparator group for the MCCP 2001 award will
not generate any vesting of the conditional award to any participant who
was an executive director at the time of the initial grant. Guy Elliott
was not an executive director at that time and along with participating
senior executives of the Group, he will qualify for a 12.5 per cent vesting
based on the scales applied to conditional awards made prior to 2004.
2.
Rio Tinto plc – ordinary
shares of 10p each;
Rio Tinto
Limited shares stated in italics
.
3.
The shares awarded to Guy
Elliott under the MCCP 2001 did not vest until
21
February 2005 but, as the performance cycle ended on 31 December
2004,
they have been dealt with in this table as if they had vested on that
date.
4.
For the purposes of this
report the value of the awards have been based on a share price of 1,687p,
being the closing share price of Rio Tinto plc ordinary shares of 10p
each on 14 February 2005, the latest practicable date prior to the publication
of this annual report. The amount in sterling has been translated into
US dollars at the year end exchange rate £1.9268.
Rio Tinto 2004
Annual
report and financial statements
The shares awarded under
the MCCP 2000 last year vested on 27 February 2004 but, as the performance
cycle ended 31 December 2003, they were dealt with in the 2003
Annual report and financial statements
as
if they had vested on that date. The values of the awards in the 2003
Annual
report and financial statements
were based on share prices of
1386p and A$35.24, being the closing share prices on
6
February
2004, the latest practicable date prior to the publication of the 2003
Annual
report and financial statements
. The actual share prices on 27
February 2004, when the awards vested were 1440.5p and A$35.8327 with
the result that the values of the awards had been understated in respect
of Leigh Clifford by US$3,485, Robert Adams by US$17,335, Guy Elliott
by US$2,663 and Oscar Groeneveld by US$1,975.
6.
Leigh Clifford was given
a conditional award over 119,581 Rio Tinto Limited shares
and Oscar Groeneveld
was given a conditional award over 43,785 Rio Tinto Limited shares
during the year. These awards were approved by the shareholders
under ASX Listing Rule 10.14 at the 2004 annual general meeting.
7.
A full explanation of the
MCCP can be found on pages 64 and 65.
8.
Or as at date of resignation
or retirement if earlier.
9.
Robert Adams died on 27
January 2005 and the unvested conditional awards will now vest based
on the assumption that Rio Tinto achieved median ranking on each of
the outstanding performance cycles. This leads to a 50 per cent vesting
in respect of the 2002 and 2003 awards and a 35 per cent vesting in
respect of the 2004 award. The awards will be made to his estate at
the earliest opportunity and, for the purpose of this report, have
been valued using the closing price on 14 February 2005 (see also note
4).
Table 5 – Directors’ options
to acquire Rio Tinto plc and Rio Tinto Limited shares
Option
At 1 Jan
Granted
Exercised
At 31 Dec
Option
Market price
Date from
Expiry date
type
2004
2004
price
at date of
which first
exercise
exercisable
Robert Adams
6
RTPSSP
595
–
–
595
976p
–
1 Jan 2005
31 Dec 2005
431
–
–
431
876p
–
28 Jan 2005
27 Jan 2006
RTSOP
69,878
–
69,878
–
820p
1562p
27 May 2001
–
72,885
–
72,885
–
808.8p
1562p
12 Mar 2002
–
42,158
–
42,158
–
965.4p
1562p
7 Mar 2003
–
21,080
–
–
21,080
965.4p
–
28 Jan 2005
27 Jan 2006
100,268
–
–
100,268
1265.6p
–
28 Jan 2005
27 Jan 2006
91,320
–
–
91,320
1458.6p
–
28 Jan 2005
27 Jan 2006
114,014
–
–
114,014
1263p
–
28 Jan 2005
27 Jan 2006
–
77,700
–
77,700
1329p
–
28 Jan 2005
27 Jan 2006
Leigh Clifford
RTLSSP
959
–
–
959
A$27.86
–
1 Jan 2005
30 Jun 2005
–
1,486
–
1,486
A$29.04
–
1 Jan 2010
30 Jun 2010
RTSOP
52,683
–
–
52,683
A$23.4382
–
28 May 2002
28 May 2009
59,318
–
–
59,318
A$24.069
–
7 Mar 2003
7 Mar 2010
29,660
–
–
29,660
A$24.069
–
7 Mar 2005
7 Mar 2010
241,430
–
–
241,430
A$33.0106
–
6 Mar 2005
6 Mar 2011
208,882
–
–
208,882
A$39.8708
–
13 Mar 2005
13 Mar 2012
254,132
–
–
254,132
A$33.336
–
7 Mar 2006
7 Mar 2013
–
179,370
–
179,370
A$34.406
–
22 Apr 2007
22 Apr 2014
Leon Davis
RTSOP
93,978
–
–
93,978
A$23.4382
–
28 May 2002
28 May 2009
Guy Elliott
RTPSSP
1,431
–
–
1,431
1107p
–
1 Jan 2009
30 Jun 2009
RTSOP
3,807
–
–
3,807
965.4p
–
7 Mar 2005
7 Mar 2010
13,432
–
–
13,432
1265.6p
–
6 Mar 2005
6 Mar 2011
61,703
–
–
61,703
1458.6p
–
13 Mar 2005
13 Mar 2012
97,387
–
–
97,387
1263p
–
7 Mar 2006
7 Mar 2013
–
73,700
–
73,700
1329p
–
22 Apr 2007
22 Apr 2014
Director leaving the board in
2004
Oscar Groeneveld
7
RTLSSP
1,431
–
–
1,431
A$27.48
–
1 Jan 2009
30 Jun 2009
RTSOP
43,851
–
43,851
–
A$23.4382
A$38.76
28 May 2002
–
33,542
–
33,542
–
A$24.069
A$38.76
7 Mar 2003
–
16,771
–
–
16,771
A$24.069
–
7 Mar 2005
7 Mar 2010
80,920
–
–
80,920
A$33.0106
–
6 Mar 2005
6 Mar 2011
73,965
–
–
73,965
A$39.8708
–
13 Mar 2005
13 Mar 2012
90,080
–
–
90,080
A$33.336
–
7 Mar 2006
7 Mar 2013
–
62,600
–
62,600
A$34.406
–
22 Apr 2007
22 Apr 2014
Notes
1.
Rio Tinto plc ordinary shares
of 10p each;
Rio Tinto Limited
– shares – stated in italics
.
2.
Options have been granted
under the Rio Tinto Share Option Plan, (“RTSOP”) the Rio Tinto
plc Share Savings Plans (“RTPSSP”) and the Rio Tinto Limited
Share Savings Plan (“RTLSSP”).
3.
The closing price of Rio
Tinto plc ordinary shares at 31 December 2004 was 1533p (2003: 1543p)
and the closing price of Rio Tinto Limited shares at
31
December 2004 was A$39.12
(2003: A$37.54). The highest and lowest prices
during the year were 1574p
and 1212p respectively for Rio Tinto plc and A$40.20 and A$31.98
for Rio Tinto Limited.
4.
No directors’ options
lapsed during the year.
5.
Or at date of retirement
or resignation if earlier.
6.
In accordance with the Plan
rules, Robert Adams’ outstanding options become exercisable with
immediate effect following his death. His award of options under the 2004
grant has been reduced by 17,881 to 59,819 options.
7.
Oscar Groeneveld exercised
his options after his resignation as a director.
Rio Tinto’s register of directors’ interests,
which is open to inspection, contains full details of directors’ shareholdings
and options to subscribe for Rio Tinto shares.
70
Rio Tinto 2004
Annual
report and financial statements
The directors of Rio Tinto believe that
high standards of corporate governance are critical to business integrity and
performance. The following report describes how this philosophy is applied in
practice.
As
Rio Tinto’s
three main listings are in London, Melbourne and New York, the directors
have referred to the Combined Code as attached to the United Kingdom Listing
Authority Listing Rules (the Code), the Australian Stock Exchange (ASX) Best
Practice Corporate Governance Guidelines and the New York Stock Exchange
(NYSE) Corporate Governance Listing Standards, as well as the Sarbanes-Oxley
Act of 2002, when formulating this statement.
During 2004,
Rio Tinto applied the principles contained in Part 1 of the Code. The detailed
provisions of Section 1 of the Code have been complied with as described
below. Rio Tinto also complied with the ASX Best Practice Corporate Governance
Guidelines and has voluntarily adopted the recommendations of the US Blue
Ribbon Committee in respect of disclosures to shareholders, as detailed in
the
Audit committee’s
statement
on page 74. A statement on compliance with the New York Stock Exchange’s
Corporate Governance Listing Standards is contained below in this statement.
The board
The Companies have common boards of directors which are collectively responsible for the success of the Group and accountable to shareholders for the performance of the business. Throughout the rest of this report,
they will be described as the board.
The board currently consists of 14 directors: the chairman, two executive directors and 11 non executive directors. The
Nominations committee
continually assesses the balance of executive and non executive directors and the composition of the board in terms of the skills and diversity required to ensure it remains relevant in the current
environment.
The role and responsibilities of the board
The
role of the board is to provide the Companies with good governance and strategic
direction. The board also reviews the Group’s control and accountability framework. The directors have agreed to a formal
schedule of matters specifically reserved for decision by the board, including strategy, major investments and acquisitions. The full list is available on Rio Tinto’s
website.
Responsibility
for day to day management of the business lies with the executive team,
with the board agreeing annual performance targets for management against
the Group’s financial
plan. The board is ultimately
accountable to shareholders for the performance
of the business.
To
ensure an efficient process, the board meets regularly and in 2004 had eight
scheduled
and one special meeting. Details of directors’ attendance at board and
committee meetings are set out below.
The
board has regular scheduled discussions on various aspects of the Group’s
strategy and, in line with best practice, a dedicated annual two day meeting
at which
in depth discussions of Group strategy take place.
Directors
receive timely, regular and necessary management and other information
to enable
them to fulfil their duties. The board has agreed a procedure for the directors
to have access to independent professional advice at the Group’s expense
and to the advice and services of both company secretaries.
In
addition to these formal processes, directors are in regular communication with
senior
executives from the different product groups, at formal and informal meetings,
to ensure regular exchange of knowledge and experience between management
and non executive directors. To continue building on the formal induction
programmes, which all new non executive directors undertake, they are encouraged
to take every opportunity to visit the Group’s operating locations.
The chairman
also holds regular meetings with non executive directors without the executive
directors present.
Board performance
In 2004, the board conducted a further formal
process to evaluate its effectiveness and that of the board committees and
individual directors.
Each
director’s
performance was appraised by the chairman and, in a meeting chaired by the
senior non executive director, the non executive directors assessed the chairman’s
performance, taking into consideration the views of executive colleagues.
This evaluation process takes place annually and aims to cover board dynamics,
board capability, board process, board structure, corporate governance, strategic
clarity and alignment and the performance of individual directors. Following
the evaluation, the directors believe they comply with the requirements of
Clause A.6 of the Code and Principle 8 of the ASX Best Practice Corporate
Governance Guidelines.
Independence
The
board has adopted a policy on directors’ independence.
The policy, which contains the materiality thresholds approved by the board,
can be viewed on the Rio Tinto website.
The tests of
director independence in the jurisdictions where Rio Tinto is listed are
not wholly consistent. The board has, therefore,
Directors’ attendance
at board and committee meetings during 2004
Name of Director
Board
Audit committee
Remuneration
Committee on social
Nominations
committee
and environmental
committee
accountability
A
B
A
B
A
B
A
B
A
B
Robert Adams
9
8
David Clementi
9
8
8
8
5
4
Leigh Clifford
9
9
Leon Davis
9
9
3
3
Guy Elliott
9
9
Sir Richard Giordano
9
8
8
7
3
3
2
2
Richard Goodmanson
1
–
–
Andrew Gould
9
8
8
8
5
4
Oscar Groeneveld
2
7
7
Lord Kerr
3
9
8
5
5
2
2
David Mayhew
9
8
8
7
2
2
John Morschel
9
9
5
5
3
3
2
2
Paul Skinner
9
9
3
3
2
2
Sir Richard Sykes
9
8
5
5
Lord Tugendhat
4
3
2
3
3
1
1
A =
Maximum number of meetings
the director could have attended
B =
Number of meetings attended
1.
Richard Goodmanson was appointed on 1 December 2004
2.
Oscar Groeneveld resigned on 1 October 2004
3.
Lord Kerr became a committee member on 1 June 2004 (Audit and CSEA)
4.
Lord Tugendhat retired on 22 April 2004
Rio Tinto 2004
Annual
report and financial statements
adopted the following criteria for independence:
independence of management, the absence of any business relationship which
could materially interfere with the director’s independence of judgement and ability to
provide a strong, valuable contribution to the board’s deliberations or which could interfere with the director’s
ability to act in the best interest of the Group. Where contracts in the ordinary
course of business exist between Rio Tinto and a company in which a director
has declared an interest, these are reviewed for materiality to both Companies.
Applying
these criteria, the board is satisfied that the majority of the directors,
Sir David Clementi, Sir Richard Giordano, Richard Goodmanson, Andrew Gould,
Lord Kerr, John Morschel, Sir Richard Sykes, Ashton Calvert and Vivienne
Cox are all independent. Although Sir Richard Giordano has served as a
director since 1992, the strength, objectivity and nature of his contribution
to board and committee discussions are fully
consistent with those of an independent director. Sir Richard will retire at
the end of the 2005 annual general meetings. Leon Davis, a former chief
executive of the Group, and David Mayhew, who is chairman of one of Rio
Tinto plc’s
stockbrokers, are not independent. Leon Davis will also be retiring by rotation
at the end of the 2005 annual general meetings.
Paul Skinner was, until his appointment as chairman in 2003, an independent, non executive director in compliance with the Code. He satisfies the tests for independence under the ASX Best
Practice Corporate Governance Guidelines.
The
directors’ biographies are set out on pages
58 and 59.
Election and re-election
Directors are elected by shareholders
at the first annual general meetings after their appointment and, after that,
offer themselves for re-election at least once every three years. Non executive
directors are normally expected to serve at least two terms of three years and,
except where special circumstances justify it, would not normally serve more
than three such terms.
Chairman and chief executive
The roles of the chairman and chief executive
are separate and the division of responsibilities has been formally approved
by the board.
Board committees
There are four board committees, the
Nominations committee
,
Audit committee
,
Remuneration committee
and the
Committee on social and environmental accountability.
Each committee plays a vital role in ensuring that good corporate governance
is maintained throughout the Group. Committee terms of reference are reviewed
annually by the board and the committees themselves to ensure they continue to
be at the forefront of best practice and are posted on the Group’s website.
Minutes of all committee meetings are circulated to the board, with oral reports
at the next board meeting. All committee members are non
executive directors.
The
Audit
committee’s
main responsibilities include the review of accounting
principles, policies and practices adopted in the preparation of public
financial information; review with management of procedures relating
to financial and capital expenditure controls, including internal audit
plans and reports; review with external auditors of the
scope and results of their audit; the nomination of auditors for appointment
by shareholders; and the review of and recommendation to the board for
approval of Rio Tinto’s risk management policy. Its responsibilities
also include the review of corporate governance practices of Group sponsored
pension funds. The committee has a number of training sessions which
may cover new legislation and other relevant information. The external
auditors, the finance director, the Group controller and
Group internal auditor attend meetings. A copy of the
Audit committee
charter is reproduced on page 76 and can be found on the Rio Tinto website.
The
Audit committee
is
chaired by Sir Richard Giordano and its members are Sir David Clementi,
Andrew
Gould, David Mayhew and Lord Kerr. Following Sir Richard’s retirement in
April 2005, Andrew Gould will assume the chairmanship of the committee.
The
Remuneration committee
is
responsible for determining the policy for executive remuneration and for
the remuneration and benefits of individual executive directors and senior
executives. Full disclosure of all elements of directors’ and relevant senior executives’ remuneration can be found in the Remuneration report on pages 63 to 70,
together with details of the Group’s remuneration policies. The committee
is chaired by Sir Richard Sykes and its members are Sir David Clementi, Andrew
Gould, John Morschel and Richard Goodmanson.
The
Nominations committee
is
chaired by the chairman of Rio Tinto, Paul Skinner. It is the
committee’s responsibility to ensure that there is a clear, appropriate
and transparent process in place to source and appoint new directors. Its responsibilities
also include evaluating the balance of skills, knowledge and experience on the
board and identifying and nominating, for the approval by the board, candidates
to fill board vacancies as and when they arise. The committee reviews the structure,
size and composition of the board and makes recommendations with regard to any
changes it considers appropriate. The committee also reviews the time required
to be committed to Group business by non executive directors and assesses whether
non executive directors are devoting sufficient time to carry out their duties.
In
addition to Paul Skinner, the committee consists of Ashton Calvert, Sir Richard
Giordano, David Mayhew and John Morschel. Under the Code, two members of the
committee are not considered independent: Paul Skinner, following his appointment
as chairman, and David Mayhew. The committee composition is therefore not fully
aligned with recommended practice in the UK. The board takes the view, however,
that the skills and experience of the members of the committee, combined with
the
flexibility of a relatively small committee, makes the current composition both
efficient and effective.
The
Committee on social and environmental accountability
reviews the effectiveness of management policies
and procedures in place to deliver those standards in
The way we work
,
Rio Tinto’s statement of business practice, which are not covered by the
other board committees and, in particular, those relating to health, safety,
the environment and social issues. The overall objective of the committee is
to promote the development of high quality business practices throughout the
Group and to develop the
necessary clear accountability on these practices. Members of the committee,
which is chaired by Paul Skinner, are Ashton Calvert, Leon Davis, Sir Richard
Giordano, Lord Kerr, John Morschel and Richard Goodmanson.
Executive directors’ other directorships
Executive directors are likely to be
invited to become non executive directors of other companies. For full details
of the Group policy and fees, see pages 63 to 70.
Directors’ dealings in shares
Rio Tinto has a Group policy in place
to govern the dealing in Rio Tinto securities by directors and employees. The
policy, which prohibits dealings when in possession of price sensitive information
and shortly before
a results announcement, can be viewed on the Rio Tinto website.
Communication
Rio Tinto recognises the importance of effective communication with shareholders and the general investment community. To ensure shareholders are kept informed in a timely manner, the Group has adopted an
External disclosure guidance
, which is posted on the website appended to the
Corporate governance guidance
.
In addition to statutory documents, Rio Tinto has a comprehensive website featuring in depth information on health, safety and the environment, as well as general investor information and
Group policies. Results presentations and other significant events are available as they happen and as an archive on the website.
The Group also produces a range of informative publications, which are available on request. For further details, see page 151.
Full advantage is taken of the annual general meetings to inform shareholders of current developments and to give shareholders the
72
Rio Tinto 2004
Annual
report and financial
statements
opportunity to ask questions.
As recommended by the ASX Best Practice Corporate Governance Guidelines,
Rio Tinto Limited’s external auditor attends the AGM and is available to answer shareholder questions about
the conduct of the audit and the preparation and content of the auditor’s
report.
The
main channels of communication with the general investment community are
through the chairman, chief executive and finance director, who conduct
regular meetings with the
Companies’ major shareholders. Non executive directors and the senior independent
director are also available as appropriate.
The
Group also organises regular investor seminars which provide a two way
communication with investors and analysts; the valuable feedback is communicated
to the board. An annual survey
of major shareholders’ opinion and perception of the Group is presented to the board by the Group’s
investor relations advisors.
Statement of business practice
The way we work
provides the directors and all Group employees with a summary of the principal policies and procedures in place to help ensure that high governance and
business standards are communicated and achieved throughout the Group.
Main policies are adopted by the directors after wide consultation, externally and within the Group. Once adopted, they are communicated to business units worldwide, together with guidance
and support on implementation. Business units are then required to devote the necessary effort by management to implement and report on these policies.
The following policies are currently in place: health, safety and the environment; communities; human rights; access to land; employees; business integrity; bribery and corruption;
corporate governance; compliance; external disclosures, including continuous disclosure, and code of ethics covering the preparation of financial statements and political involvement. These policies apply to all Rio Tinto managed businesses.
There
is also a Groupwide “whistle blowing” programme called
Speak-OUT.
Employees
are encouraged to report any concerns, including any suspicion of a violation
of the Group’s financial reporting and environmental procedures, through
an independent third party and without fear of recrimination. A process
has been established for the investigation of any matters reported with
clear lines of reporting and responsibility in each Group business.
Where
the Group does not have operating responsibility for a business, Rio Tinto’s
policies are communicated to the business partners and they are encouraged
to adopt similar policies
of their own.
Rio
Tinto’s report on social and environmental matters follows the Association of British Insurers’ guidelines. This report can be found on page 55. Details of the Group’s
overall and individual businesses’ social and environmental performance continue to be published on Rio Tinto’s
website and in the
Sustainable development review
.
Responsibilities of the directors
The directors are required by UK and Australian company law to prepare financial statements for each financial period which give a true and fair view of the state of affairs of the Group as at the end of the financial
period and of the profit or loss and cash flows for that period. To ensure that this requirement is satisfied, the directors are responsible for establishing and maintaining adequate internal controls and procedures for financial reporting
throughout the Group.
The directors consider that the financial statements present a true and fair view and have been prepared in accordance with applicable accounting standards, using the most appropriate
accounting policies for Rio Tinto's business and supported by reasonable and prudent judgments. The accounting policies have been consistently applied.
The directors have received a written statement from the chief executive and the finance director to this effect. In accordance with ASX Best Practice Recommendation 7.2, this written
statement is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by
the board and confirms that the Group’s risk management
and internal compliance and control systems are operating efficiently and effectively
in all material respects.
The directors, senior executives, senior financial managers and other members of staff who are required to exercise judgement in the course of the preparation of the financial statements
are required to conduct themselves with integrity and honesty and in accordance with the ethical standards of their profession and/or business.
The directors are responsible for maintaining proper accounting records, in accordance with the UK Companies Act 1985 and the Australian Corporations Act 2001. They have a general
responsibility for taking such steps as are reasonably open to them to safeguard the assets of Group and to prevent and detect fraud and other irregularities.
The
directors are also responsible for the maintenance and integrity of the
Group’s website. The work carried out by the auditors does not involve
consideration of this and, accordingly, the auditors accept no responsibility
for any changes that may have occurred to the financial statements since
they were initially loaded on the website.
Going concern
The financial statements have been prepared
on the going concern basis. The directors report that they have satisfied themselves
that the Group is a going concern since it has adequate financial resources to
continue
in operational existence for the foreseeable future.
Boards’ statement on internal
control
Rio Tinto’s
overriding corporate objective is to maximise long term shareholder value through
responsible and sustainable investment
in mining and related assets. The directors recognise that creating shareholder
value is the reward for taking and accepting risk.
The
directors are responsible for the Group’s system of internal control
and for reviewing its effectiveness in providing shareholders with a return
on their investments that is consistent with a responsible assessment and
mitigation of risks. This includes reviewing financial, operational and
compliance controls, and risk management procedures. Because of the limitations
inherent in any such system this is designed to
manage rather than eliminate risk. Accordingly, it provides reasonable but not
absolute assurance against material misstatement or loss.
The directors have established a process for identifying, evaluating and managing the significant risks faced by the Group. This process was in place during 2004 and up to and including
the date of approval of the 2004
Annual report and financial statements.
The process is reviewed annually by the directors and accords with the guidance set out in
Internal Control:
Guidance for Directors on the Combined Code.
The
Group’s management committees review information on the Group’s significant risks, with relevant control and monitoring procedures, for completeness and accuracy. This
information is presented to the directors to enable them to assess the effectiveness of the internal controls. In addition, the board and their committees monitor the Group’s
significant risks on an ongoing basis.
Assurance functions, including internal auditors and health, safety and environmental auditors, perform reviews of control activities and provide regular written and oral reports to
directors and management committees. The directors receive and review minutes of the meetings of each board committee, in addition to oral reports from the respective chairmen at the first board meeting following the relevant committee
meeting.
Certain risks, for example natural disasters, cannot be mitigated to an acceptable degree using internal controls. Such major risks are transferred to third parties in the international
insurance markets, to the extent considered appropriate.
Each
year, the leaders of the Group’s businesses and administrative offices
complete an internal control questionnaire that seeks to confirm that adequate
internal controls are in place and operating effectively. The results of
this process are reviewed by the executive committee and it is then presented
to the board as a further part of their review of the
Rio Tinto 2004
Annual
report and financial statements
Group’s internal controls. This process
is continually reviewed and strengthened as appropriate.
In 2002,
the Group also established a
Disclosure
and procedures committee,
which
was tasked with reviewing the adequacy and effectiveness of Group controls
and procedures over the public disclosure of financial and related information.
The committee has been presenting the results of this process to senior management
and directors and will continue to do so.
The Group
has material investments in a number of joint ventures and associated companies.
Where Rio Tinto does not have managerial control, it cannot guarantee that
local management of mining assets will comply with Rio Tinto standards or
objectives. Accordingly, the review of their internal controls is less comprehensive
than that for the Group’s managed operations.
The New York Stock Exchange
In November 2003, the SEC approved the new
corporate governance listing standards of the New York Stock Exchange (NYSE).
The Company, as a foreign issuer with American Depositary Shares listed on
the NYSE, is obliged to disclose any significant ways in which its corporate
governance practices differ from these standards.
The Company
has reviewed the NYSE’s listing standards and believes that its corporate
governance practices are consistent with them, with two exceptions where the
Company does not meet the strict requirements set out in these standards.
The standards
state that companies must have a nominating/ corporate governance committee
composed entirely of independent directors and with written terms of reference
which, in addition to identifying individuals qualified to become board members,
develops and recommends to the board a set of corporate governance principles
applicable to the Company. Rio Tinto has a
Nominations
committee
, information about which
is set out on page 72. This committee does not develop corporate governance
principles for the board’s approval. The board itself performs this task
and approves the Group’s overall system of governance and internal controls.
Rio Tinto’s
Audit committee
is
made up of a majority of independent non executive directors. However, one
committee member, David Mayhew, is technically deemed not to be independent.
The board, the
Audit committee
and
the
Nominations committee
are
made up of a majority of independent, non executive directors as defined by
the NYSE listing standards.
Principal auditors
The remuneration of the Group’s principal
auditors for audit services and other services as well as remuneration payable
to other accounting firms has been set out in note 37 on page 127.
Rio Tinto
has adopted policies designed to uphold the independence of the Group’s
principal auditors by prohibiting their engagement to provide a range of accounting
and other professional services that might compromise their appointment as
independent auditors. The engagement of the Group’s principal auditors
to provide statutory audit services, certain other assurance services, tax
services and certain other specific services is pre-approved by the
Audit
committee
. The engagement of the
Group’s principal auditors to provide other permitted services are individually
subject to the specific approval of the
Audit
committee
or its chairman.
Prior to
the commencement of each financial year, the Group’s finance director
and its principal auditors submit to the
Audit
committee
a schedule of the types
of services that are expected to be performed during the following year for
its approval. The
Audit committee
may impose a US dollar limit on
the total value of other permitted services that can be provided. Any non
audit service provided by the Group’s principal auditors, where the expected
fee exceeds a pre-determined level, must be subject to the Group’s normal
tender procedures. However, in exceptional circumstances the finance director
is authorised to engage the Group’s principal auditors to provide such
services without going to tender, but if the fees are expected to exceed US$250,000
then the chairman of the
Audit committee
must approve the engagement.
The
Audit
committee
adopted policies for the
pre-approval of permitted services provided by the Group’s principal
auditors during January 2003 which were further refined and adopted during
September 2003. Engagements for services provided by the Group's principal
auditors since the adoption of these policies were either within the pre-approval
policies or approved by the
Audit
committee
.
Audit committee
US Blue Ribbon Compliance
statement
The
Audit
committee
meets the membership requirements
of the Code and the Blue Ribbon Report in the US. The Group also meets the
disclosure requirements in respect of audit committees required by the Australian
Stock Exchange. The
Audit committee
is governed by a written charter
approved by the board, which the
Audit
committee
reviews and reassesses
each year for adequacy. A copy of this charter is reproduced on page 76. With
effect from 31 July 2005, the Group will become subject to the NYSE Rules
on Audit Committees. The committee intends to comply with these rules when
they come into force.
The
Audit
committee
comprises the five members
set out below. The members, with the exception of David Mayhew, are independent
and are free of any relationship that would interfere with impartial judgement
in carrying out their responsibilities. David Mayhew is technically deemed
not to be independent by virtue of his professional association with the Group
in his capacity as chairman of Cazenove Group PLC, a stockbroker and financial
adviser to Rio Tinto plc. However, the board has determined that the relationship
does not interfere with David Mayhew’s exercise of independent judgement
and believes that his appointment is in the best interests of the Group because
of the substantial financial knowledge and expertise he brings to the committee.
Report of the Audit committee
The
Audit
committee
met eight times in 2004.
It monitors developments in corporate governance in the UK, Australia and
the US, to ensure the Group continues to apply high and appropriate standards.
Many of
the new US requirements have long been best practice and are incorporated
into the committee’s charter, reproduced on page 76. The charter is subject
to regular discussion and has been reviewed in the light of new requirements
and emerging best practice.
There is
in place a set of procedures, including budgetary guidelines, for the appointment
of the external auditor to undertake non audit work, which aims to provide
the best possible services for the Group at the most advantageous price. The
committee reviews the independence of the external auditors on an annual basis
and a process is also in place to review their effectiveness to ensure that
the Group continues to receive an efficient and unbiased service. The committee
advised the directors that the
Audit
committee
is satisfied that the
provision of non audit services by the external auditors during 2004 is compatible
with the general standard of independence for auditors imposed by the Australian
Corporations Act 2001. Furthermore, as part of its responsibility to foster
open communication, the committee meets with management, the external auditors
and the internal auditor separately.
Financial expert
The
Audit
committee
reviewed the SEC requirements
for audit committees’ financial experts and the Combined Code requirement
that at least one committee member should have recent and relevant financial
experience. Following an in depth assessment, the committee recommended to
the board that Sir Richard Giordano, Sir David Clementi and Andrew Gould be
identified as the
Audit committee’s
financial experts in the
2004
Annual report and financial statements.
The
board has concluded that Sir Richard Giordano, Andrew Gould and Sir David
Clementi possess the requisite skills, experience and background to qualify
for the purpose of C.3.1. of the Code as well as fulfilling the SEC criteria.
74
Rio Tinto 2004
Annual
report and financial statements
2004 financial statements
The
Audit
committee
has reviewed and discussed
with management the Group’s audited financial statements for the year
ended 31 December 2004.
We have
discussed with the external auditors the matters described in the American
Institute of Certified Public Accountant Auditing Standard No. 90,
Audit
committee communications
, and in
the UK Statement of Auditing Standard No 610,
Reporting
to those charged with Governance (SAS 610),
including
their judgements regarding the quality of the Group’s accounting principles
and underlying estimates.
The committee
has discussed with the external auditors their independence, and received
and reviewed their written disclosures, as required by the US Independence
Standards Board’s Standard No. 1, Independence Discussions with Audit
Committees and SAS 610.
Based on
the reviews and discussions referred to above, the committee has recommended
to the board of directors that the financial statements referred to above
be included in this
Annual report
.
Sir Richard Giordano
(Chairman)
Sir David Clementi
Andrew F J Gould
Lord Kerr
David L Mayhew
Report of the Nominations
committee
The
Nominations
committee
is pleased to present
the report of its activities, which cover a period of considerable change
in composition of the board. A number of long standing non executive directors
will have retired over the period 2004/5, including Lord Tugendhat, Sir Richard
Giordano, Leon Davis and John Morschel. The recruitment, with input from an
external search agency, of replacements with appropriate skills and experience
has been the main priority of the committee. Richard Goodmanson joined the
board on 1 December 2004 and Ashton Calvert and Vivienne Cox on 1 February
2005. Each is an independent director who brings an experience profile which
will ensure that the overall quality of the board is maintained. Apart from
making a general overview of the composition of the board, the committee members
have been directly involved in the assessment of all individuals considered
for appointment. As part of his annual performance assessment of individual
directors, Paul Skinner, who is chairman of the
Nominations
committee
, has reviewed the time
committed to Group business and confirmed this to be appropriate in each case.
Paul Skinner
(Chairman)
Sir Richard Giordano
David L Mayhew
John Morschel
Rio Tinto 2004
Annual
report and financial statements
The Group is
required by the UK Listing Authority (UKLA), the New York Stock Exchange
(NYSE), and the Australian Stock Exchange (ASX) to establish an Audit
committee. Each of the UKLA, the NYSE and the ASX also lay down rules
and guidelines for the composition of the committee and the work to
be undertaken by it. These requirements, where not self evident, have
been incorporated into this Charter.
The
primary function of the
Audit
committee
is to assist the
boards of directors in fulfilling their responsibilities by reviewing:
•
the financial information
that will be provided to shareholders and the public;
•
the systems of internal
financial controls that the boards and management have established;
•
the Group’s auditing,
accounting and financial reporting processes.
In
carrying out its responsibilities, the committee has full authority to
investigate all matters that fall within the terms of reference of
this Charter.
Accordingly,
the committee may:
•
obtain independent professional
advice in the satisfaction of its duties at the cost of the Group;
•
have such direct access
to the resources of the Group as it may reasonably require, including
the external and internal auditors.
Composition
The
Audit
committee
shall comprise three or
more non executive directors, at least three of whom shall be independent.
The boards will determine each director’s independence having regard
to any past and present relationships with the Group which, in the opinion
of the boards, could influence the director’s judgment.
All members
of the committee shall have a working knowledge of basic finance and accounting
practices. At least one member of the committee will have accounting or related
financial management expertise, as determined by the boards.
A
quorum will comprise any two independent directors.
The committee
may invite members of the management team to attend the meetings and to provide
information as necessary.
Meetings
The committee shall meet not less than four
times a year or more frequently as circumstances require.
Audit
committee
minutes will be confirmed
at the following meeting of the committee and tabled as soon as practicable
at a meeting of the boards.
The Group’s
senior financial management, external auditors and internal auditor shall
be available to attend all meetings.
As part
of its responsibility to foster open communication, the committee should meet
with management, the external auditors and the internal auditor, at least
annually, to discuss any matters that are best dealt with privately.
Responsibilities
The boards and the external auditors
are accountable to shareholders. The
Audit
committee
is accountable to the
boards. The internal auditor is accountable to the
Audit
committee
and the finance director.
To
fulfil its responsibilities the committee shall:
Charter
•
Review and, if appropriate, update this
Charter at least annually.
Financial
reporting and internal financial controls
•
Review with management and
the external auditors the Group’s financial statements, stock exchange
and media releases in respect of each half year and full year.
•
Review with management and
the external auditors the accounting policies and practices adopted by
the Group and their compliance with accounting standards, stock exchange
listing rules and relevant legislation.
•
Discuss with management
and the external auditors management’s choice of accounting principles
and material judgments, including whether they are aggressive or conservative
and whether they are common or minority practices.
•
Recommend to the boards
that the annual financial statements reviewed by the committee (or the
chairman representing the committee for this purpose) be included in the
Group’s annual report.
•
Review the regular reports
prepared by the internal auditor including the effectiveness of the Group’s
internal financial controls.
External
auditors
•
Recommend to the boards
the external auditors to be proposed to shareholders.
•
Review with the external
auditors the planned scope of their audit and subsequently their audit
findings including any internal control recommendations.
•
Periodically consult with
the external auditors out of the presence of management about the quality
of the Group’s accounting principles, material judgments and any
other matters that the committee deems appropriate.
•
Review the performance of
the external auditors and the effectiveness of the audit process, taking
into consideration relevant professional and regulatory requirements.
•
Review and approve the fees
and other compensation to be paid to the external auditors.
•
Review and approve any non
audit work and related fees to be carried out by the external auditors.
•
Ensure that the external
auditors submit a written statement outlining all of its professional
relationships with the Group including the provision of services that
may affect their objectivity or independence. Review and discuss with
the external auditors all significant relationships they have with the
company to determine their independence.
Internal
auditor
•
Review the qualifications,
organisation, strategic focus and resourcing of internal audit.
•
Review the internal audit
plans.
•
Periodically consult privately
with the internal auditor about any significant difficulties encountered
including restrictions on scope of work, access to required information
or any other matters that the committee deems appropriate.
Risk management
•
Review and evaluate
the internal processes for determining and managing key risk areas.
•
Ensure the Group
has an effective risk management system and that macro risks are reported
at least annually to the board.
•
Require periodic
reports from nominated senior managers:
–
confirming the operation
of the risk management system including advice that accountable management
have confirmed the proper operation of agreed risk mitigation strategies
and controls, and
–
detailing material risks.
•
Address the
effectiveness of the Group’s internal control system with management
and the internal and external auditors.
•
Evaluate the
process the Group has in place for assessing and continuously improving
internal controls, particularly those related to areas of material risk.
Other matters
The committee shall also perform any other
activities consistent with this Charter that the committee or boards deem
appropriate. This will include but not be limited to:
•
Review of the corporate
governance practices of Group sponsored pension funds.
•
Review of the Group’s
insurance cover.
•
Review the Group’s
tax position.
76
Rio Tinto 2004
Annual
report and financial statements
DIVIDENDS
Both
Companies have paid dividends on their shares every year since incorporation
in 1962. The rights of Rio Tinto shareholders to receive
dividends are explained under the description of the Dual Listed
Companies’ Structure on page 81.
Dividend policy
The
aim of Rio Tinto’s progressive dividend policy
is to increase the US dollar value of dividends over time, without cutting them
in economic downturns.
The
rate of the total annual dividend, in US dollars, is determined taking
into acount the results for the past year and the outlook for the current
year. The interim dividend is set at one half of the total dividend for
the previous year. Under Rio Tinto’s dividend policy the final dividend
for each year is expected to be at least equal to the interim dividend.
Dividend determination
As
the majority of the Group’s sales are transacted in US dollars it is the most reliable currency in which to measure the Group’s
financial performance and is its main reporting currency. So the US dollar is
the natural currency for dividend determination. Dividends determined in US dollars
are translated at exchange rates prevailing two days prior to announcement and
are then declared payable in sterling by Rio Tinto plc and in Australian dollars
by
Rio Tinto Limited.
Australian shareholders of Rio Tinto plc can elect to receive dividends in Australian dollars and UK shareholders of Rio Tinto Limited can elect to receive dividends in sterling. If you
would like further information contact Computershare.
2004 dividends
The 2004 interim and final dividends were determined at 32 US cents and at 45 US cents per share respectively and the applicable translation rates were US$1.8245 and US$1.8796 to the pound sterling and US$0.7029 and
US$0.7720 to the Australian dollar.
Final dividends of 23.94 pence per share and of 58.29 Australian cents per share will be paid on 8 April 2005. A final dividend of 180 US cents per ADR (each representing four shares) will
be paid by JP Morgan Chase Bank NA to Rio Tinto plc ADR holders and by The Bank of New York to Rio Tinto Limited ADR holders on 11 April 2005.
The tables below set out the amounts of interim, final and total cash dividends paid or payable on each share or ADS in respect of each financial year, but before deduction of any
withholding tax.
Rio Tinto Group – US cents per share
2004
2003
2002
2001
2000
Interim
32.0
30.0
29.5
20.0
19.0
Final
45.0
34.0
30.5
39.0
38.5
Total
77.0
64.0
60.0
59.0
57.5
Rio Tinto plc – UK pence per share
2004
2003
2002
2001
2000
Interim
17.54
18.45
18.87
14.03
12.66
Final
23.94
18.68
18.60
27.65
26.21
Total
41.48
37.13
37.47
41.68
38.87
Rio Tinto Limited – Australian cents per share
2004
2003
2002
2001
2000
Interim
45.53
45.02
54.06
39.42
32.68
Final
58.29
44.68
51.87
75.85
69.76
Total
103.82
89.70
105.93
115.27
102.44
Rio Tinto plc and Rio Tinto Limited – US cents per ADS
2004
2003
2002
2001
2000
Interim
128
120
118
80
76
Final
180
136
122
156
154
Total
308
256
240
236
230
Dividend reinvestment plan (DRP)
Rio
Tinto offers shareholders a DRP which provides the opportunity to use cash dividends
to purchase Rio Tinto shares in the market
free of commission. Please see Taxation on page 79 for an explanation of the
tax consequences. The DRP is made available only to shareholders whose names
are recorded on the respective Company’s register and due to local legislation
cannot be extended to shareholders in the US, Canada and certain other countries.
Please
contact Computershare for further information.
MARKET LISTINGS AND SHARE PRICES
Rio Tinto plc
The principal market for Rio Tinto plc shares is the London Stock Exchange (LSE).
As a constituent of the Financial Times Stock Exchange 100 index (FTSE 100), Rio Tinto plc shares trade through the Stock Exchange Electronic Trading Service (SETS) system.
Central to the SETS system is the electronic order book on which an LSE member firm can post buy and sell orders, either on its own behalf or for its clients. Buy and sell orders are
executed against each other automatically in strict price, then size, priority. The order book operates from 8.00 am to 4.30 pm daily. From 7.50 am to 8.00 am orders may be added to, or deleted from the book, but execution does not occur. At 8.00 am
the market opens by means of an uncrossing algorithm which calculates the greatest volume of trades on the book which can be executed, then matches the orders, leaving unexecuted orders on the book at the start of trading.
All orders placed on the order book are firm and are for standard three day settlement. While the order book is vital to all market participants, orders are anonymous, with the
counterparties being revealed to each other only after execution of the trade.
Use of the order book is not mandatory but all trades, regardless of size, executed over the SETS system are published immediately. The only exception to this is where a Worked Principal
Agreement (WPA) is entered into for trades greater than 8 x Normal Market Size (NMS). Rio Tinto plc has an NMS of 100,000 shares. Publication of trades entered under a WPA is delayed until the earlier of 80 per cent of the risk position assumed by
the member firm taking on the trade being unwound or the end of the business day.
Closing LSE share prices are published in most UK national newspapers and are also available during the day on the Rio Tinto and other websites. Share prices are also available on CEEFAX
and TELETEXT and can be obtained through the Cityline service operated by the Financial Times in the UK: telephone 0906 843 3880; calls are currently charged at 60p per minute.
Rio
Tinto plc has a sponsored American Depositary Receipt (ADR) facility with
JP Morgan Chase Bank NA under a Deposit Agreement, dated 13 July 1988,
as amended on 11 June 1990, as further amended and restated on 15 February
1999 and as further amended and restated on 18 February 2005. JP Morgan
Chase Bank NA replaced The Bank of New York following its removal as Depositary.
The ADRs evidence Rio Tinto plc American Depositary Shares
(ADS), each representing four ordinary shares. The shares are registered with
the US Securities and Exchange Commission (SEC), are listed on the New
York Stock Exchange (NYSE) and are traded under the symbol ‘RTP’.
Rio
Tinto plc shares are also listed on Euronext and on Deutsche Börse.
Rio Tinto 2004
Annual
report and financial statements
Shareholder information continued
The
following table shows share prices for the period indicated, the reported high
and low
middle market quotations, which represent an average of bid and asked prices,
for Rio Tinto
plc’s shares on the LSE based on the LSE Daily Official List, and the highest
and lowest sale prices of the Rio Tinto plc ADSs as reported on the NYSE composite
tape.
Pence per
Rio Tinto plc share
US$ per
Rio Tinto plc ADS
High
Low
High
Low
2000
1,478
900
96.56
55.13
2001
1,475
930
84.10
55.00
2002
1,492
981
85.93
62.00
2003
1,543
1,093
111.35
71.70
2004
1,574
1,212
119.39
86.42
Aug 2004
1,434
1,356
105.77
100.40
Sept 2004
1,496
1,348
108.65
98.05
Oct 2004
1,562
1,421
111.68
103.48
Nov 2004
1,548
1,438
118.47
105.78
Dec 2004
1,540
1,430
119.39
111.59
Jan 2005
1,690
1,472
126.25
111.57
2003
First quarter
1,298
1,093
83.80
71.70
Second quarter
1,272
1,129
85.26
72.30
Third quarter
1,420
1,132
93.83
75.31
Fourth quarter
1,543
1,290
111.35
86.85
2004
First quarter
1,574
1,297
111.50
95.95
Second quarter
1,409
1,212
105.30
86.42
Third quarter
1,496
1,313
108.65
97.03
Fourth quarter
1,562
1,421
119.39
103.48
As at 14 February 2005, there were
63,016 holders of
record of Rio Tinto plc’s shares. Of these holders, 258 had registered addresses
in the US and held a total of 146,746 Rio Tinto plc shares, representing 0.1
per cent of the total number of Rio Tinto plc shares issued and outstanding as
at such date. In addition, 129 million Rio Tinto plc shares were registered in
the name of a custodian account in London. These shares were represented by 32.25
million
Rio Tinto plc ADSs held of record by 349 ADR holders. In addition, certain accounts
of record with registered addresses other than in the US hold shares, in whole
or in part, beneficially for US persons.
Rio Tinto Limited
Rio Tinto Limited shares are listed on the Australian Stock Exchange (ASX) and the New Zealand Stock Exchange. The ASX is the principal trading market for Rio Tinto Limited shares. The ASX is a national stock exchange
operating in the capital city of each Australian State with an automated trading system. Although not listed, Rio Tinto Limited shares are also traded in London.
Closing ASX share prices are published in most Australian newspapers and are also available during the day on the Rio Tinto and other websites.
Rio
Tinto Limited has an ADR facility with The Bank of New York under a Deposit
Agreement, dated 6 June 1989, as amended on 1 August 1989, and as amended
and restated on 2 June 1992. The
ADRs evidence Rio Tinto Limited’s ADSs, each representing four shares and are traded in the over the counter market under the symbol ‘RTOLY’.
The
following tables set out for the periods indicated the high and low closing
sale prices of Rio Tinto Limited shares based upon information provided
by the ASX and the highest and lowest trading prices of Rio Tinto Limited
ADSs, as advised by The Bank of New York. There is no established trading
market in the US for Rio Tinto Limited’s shares or ADSs.
A$ per
US$ per
Rio Tinto Ltd
share
Rio Tinto Ltd
ADS
High
Low
High
Low
2000
33.54
22.65
87.50
50.00
2001
38.62
28.40
80.55
54.00
2002
41.35
29.05
85.24
63.62
2003
37.54
28.17
112.42
73.85
2004
40.20
31.98
125.00
91.60
Aug 2004
38.35
35.88
105.00
03.00
Sept 2004
38.60
35.70
108.20
102.00
Oct 2004
39.63
36.30
111.60
107.00
Nov 2004
39.52
36.59
122.20
110.60
Dec 2004
40.20
37.81
125.00
108.00
Jan 2005
43.80
38.75
135.00
118.80
2003
First quarter
35.25
30.69
83.22
73.85
Second quarter
33.26
29.21
84.00
74.53
Third quarter
35.31
28.17
94.00
76.55
Fourth quarter
37.54
32.32
112.42
88.22
2004
First quarter
38.50
33.80
115.00
99.45
Second quarter
36.18
31.98
108.00
91.60
Third quarter
38.60
35.56
108.20
102.00
Fourth quarter
40.20
36.30
125.00
107.00
As at 14 February 2005, a total of 326,359 Rio Tinto Limited shares were held of record by 219 persons with registered addresses in the US, which represented approximately 0.65 per cent of the total number of Rio Tinto
Limited shares issued and outstanding as of such date. In addition, an aggregate of 220,651 Rio Tinto Limited ADSs were outstanding, representing 882,604 Rio Tinto Limited shares, and were held of record by 29 persons with registered addresses in
the US, which represented less than one per cent of the total number of Rio Tinto Limited shares issued and outstanding. In addition, nominee accounts of record with registered addresses other than in the US may hold Rio Tinto Limited shares, in
whole or in part, beneficially for US persons.
ADR holders
ADR holders may instruct either JPMorgan Chase Bank NA or The Bank of New York as appropriate as to how the shares represented by their ADRs should be voted.
Registered holders of ADRs will have the
Annual review
and interim reports mailed to them at their record
address. Brokers or financial institutions, which hold ADRs for shareholder clients, are responsible for forwarding shareholder information to their clients and will be provided with copies of the
Annual
review
and interim reports for this purpose.
Rio Tinto is subject to the US Securities and Exchange
Commission (SEC) reporting requirements
for foreign companies. A Form 20-F, will be filed with the SEC. The Form 20-F
corresponds with the Form-10K
which US public companies are required to file with the SEC. Rio
Tinto’s Form 20-F and other filings can be viewed on the SEC web site at
www.sec.gov
Investment warning
Past performance of shares is not necessarily a guide to future performance. The value of investments and any income from them is not guaranteed and can fall as well as rise depending on market movements. You may not
get back the original amount invested.
Credit ratings
Rio Tinto has strong international credit ratings:
Short term
Long term
Standard & Poor’s Corporation
A-1
A+
Moody’s Investors Service
P-1
Aa3
78
Rio Tinto 2004
Annual
report and financial statements
The ratings by Standard & Poor’s Corporation have a “stable” outlook. The ratings by Moody’s Investor Services improved from a “negative” to a “stable” outlook
during
2004.
TAXATION
UK resident individuals
Taxation of dividends
Dividends carry a tax credit equal to
one ninth of the dividend. Individuals who are not liable to income tax at the
higher rate will have no further tax to pay. Higher rate tax payers are liable
to tax on UK dividends at 32.5 per cent which, after taking account of the tax
credit,
produces a further tax liability of 25 per cent of the dividend received.
Reclaiming income tax on dividends
Tax credits on dividends are no longer
recoverable. However, tax credits on dividends paid into Personal Equity Plans
or Individual Savings Accounts will be refunded on dividends paid prior to 6
April 2004.
Dividend reinvestment plan (DRP)
The taxation effect of participation
in the DRP will depend on individual circumstances. Shareholders will generally
be liable for tax on dividends reinvested in the DRP on the same basis as if
they had received the cash and arranged the investment. The dividend should,
therefore, be included in the annual tax return in the normal way.
The shares acquired should be added to shareholdings at the date and at the net cost shown on the share purchase advice. The actual cost of the shares, for Rio Tinto plc shareholders
including the stamp duty/stamp duty reserve tax, will form the base cost for capital gains tax purposes.
Capital gains tax
Shareholders who have any queries on capital gains tax issues are advised to consult their financial adviser.
A leaflet which includes details of relevant events since 31 March 1982 and provides adjusted values for Rio Tinto plc securities as at that date is available from the company
secretary.
Australian resident individuals
Taxation of dividends
The basis of the Australian dividend imputation system is that when Australian resident shareholders receive dividends from Rio Tinto Limited, they may be entitled to a credit for the tax paid by the Group in respect
of that income, depending on the tax status of the shareholder.
The application of the system results in tax paid by the Group being allocated to shareholders by way of franking credits attaching to the dividends they receive. Such dividends are known
as franked dividends. A dividend may be partly or fully franked. The current Rio Tinto Limited dividend is fully franked and the franking credits attached to the dividend are shown in the distribution statement provided to shareholders.
The
extent to which a company can frank a dividend depends on the credit balance
in its franking account. Credits to this account can arise in a number
of ways, including when a company pays company tax or receives a franked
dividend from another company. The dividend is required to be included
in a resident individual shareholder’s assessable income. In addition,
an amount equal to the franking credit attached to the franked dividend
is also included in the assessable income of the resident individual, who
may then be entitled to a rebate of tax equal to the franking credit amount
included in their income. Should the franking credits exceed the tax due,
the excess is
refunded to the resident individual.
The effect of the dividend imputation system on non resident shareholders is that, to the extent that the dividend is franked, no Australian tax will be payable and there is an exemption
from dividend withholding tax.
A withholding tax is normally levied at the rate of 15 per cent when unfranked dividends are paid to residents of countries with which Australia has a taxation treaty. Most Western
countries have a taxation treaty with Australia. A rate of 30 per cent applies to countries where
there is no taxation treaty.
Since
1988, all dividends paid by Rio Tinto Limited have been fully franked.
It is the Group’s policy to pay fully franked dividends whenever possible.
Dividend reinvestment plan (DRP)
Shareholders will generally be liable for tax on dividends reinvested in the DRP on the same basis as if they had received the cash and arranged the investment. The dividend should therefore be included in the annual
tax return in the normal way.
The shares acquired should be added to the shareholding at the date of acquisition at the actual cost of the shares, which is the amount of the dividend applied by the shareholder to
acquire shares and any incidental costs associated with the acquisition, including stamp duty, will form part of the cost base or reduced cost base of the shares for capital gains tax purposes.
Capital gains tax
The Australian capital gains tax legislation is complex. Shareholders are advised to seek the advice of an independent taxation consultant on any possible capital gains tax exposure.
If shareholders have acquired shares after 19 September 1985 they may be subject to capital gains tax on the disposal of those shares.
US resident individuals
The
following is a summary of the principal UK tax, Australian tax and US Federal
income tax consequences of the ownership of Rio Tinto plc
ADSs, Rio Tinto plc shares, Rio Tinto Limited ADSs and Rio Tinto Limited
shares ‘the Group’s ADSs and Shares’ by a US holder as defined below. It is not intended to be a comprehensive description of all the tax considerations that are relevant to all classes of taxpayer. Future changes in legislation may
affect the tax consequences of the ownership of the Group’s ADSs and shares.
It
is based in part on representations by the Group’s depositary banks as
Depositaries for the ADRs evidencing the ADSs and assumes that each obligation
in the deposit agreements will
be performed in accordance with its terms.
A
US holder is a beneficial owner of securities who, for purposes of the income
tax conventions between the US and both the UK and Australia ‘the Conventions’,
is a resident of the US and is not a US corporation owning directly or
indirectly ten per cent or more of the stock issued by either of the Companies.
For
the purposes of the Conventions and of the US Internal Revenue Code of 1986,
as amended, (the Code) US holders of ADSs are treated as the owners of the underlying
shares.
The summary describes the treatment applicable under the Conventions in force at the date of this report.
UK taxation of shareholdings in Rio Tinto plc
Taxation of dividends
US holders do not suffer deductions of
UK withholding tax on dividends paid by Rio Tinto plc. Dividends carry a tax
credit equal to one ninth of the net dividend, or ten per cent of the net dividend
plus the tax
credit. The tax credit is not repayable to US holders.
Capital gains
A US holder will not normally be
liable to UK tax on capital gains realised on the disposition of Rio Tinto plc
ADSs or shares unless the holder carries on a trade, profession or vocation in
the UK through a permanent establishment in the UK and the ADSs or shares have
been used for the purposes of the trade, profession or vocation or are acquired,
held or used for the purposes of such a permanent establishment.
Inheritance tax
Under the UK Estate Tax Treaty, a US
holder, who is domiciled in the US and is not a national of the UK, will not
be subject to UK inheritance tax
Rio Tinto 2004
Annual
report and financial statements
upon the holder’s death or on a transfer during the holder’s
lifetime unless the ADSs and shares form part of the business property of a
permanent establishment in the UK or pertain to a fixed base situated in the
UK used in the performance of independent personal services. In the exceptional
case where ADSs or shares are subject both to UK inheritance tax and to US
Federal gift or estate tax, the UK Estate Tax Treaty generally provides for
tax
payments to be relieved in accordance with the priority rules set out in the
Treaty.
Stamp duty and stamp duty reserve tax
Transfers of Rio Tinto plc ADSs
will not be subject to UK stamp duty provided that the transfer instrument
is not executed in, and at all times remains outside, the UK.
Purchases
of Rio Tinto plc shares are subject either to stamp duty at a rate of 50 pence
per £100 or to stamp duty reserve tax (SDRT) at a rate of 0.5 per cent.
Conversions of Rio Tinto plc shares into Rio Tinto plc ADSs will be subject
to additional SDRT at a rate of 1.5 per cent on all transfers to the Depositary
or its nominee.
Australian taxation of shareholdings in Rio Tinto Limited
Taxation of dividends
US holders are not normally liable to Australian withholding tax on dividends paid by Rio Tinto Limited because such dividends are normally fully franked under the Australian dividend imputation system, meaning that
they are paid out of income that has borne Australian income tax. Any unfranked dividends would suffer Australian withholding tax which under the Australian income tax convention is limited to 15 per cent of the gross dividend.
Capital gains
US holders are not normally subject to any Australian tax on the disposal of Rio Tinto Limited ADSs or shares unless they have been used in carrying on a trade or business wholly or partly through a permanent
establishment in Australia, or the gain is in the nature of income sourced in Australia.
Gift, estate and inheritance tax
Australia does not impose any gift, estate or inheritance taxes in relation to gifts of shares or upon the death of a shareholder.
Stamp duty
An issue or transfer of Rio Tinto Limited ADSs or a transfer of Rio Tinto Limited shares does not require the payment of Australian stamp duty.
US Federal income tax
Dividends
Dividends on the Group’s
ADSs and shares will generally be treated as dividend income for purposes
of US Federal income tax. In the case of Rio Tinto Limited, the income will
be the net dividend plus, in the event of a dividend not being fully franked,
the withholding tax.
Dividend
income will not be eligible for the dividends received deduction allowed to
US corporations.
Dividends
paid by Qualified Foreign Corporations (QFCs) are subject to a maximum rate
of income tax of 15 per cent. This maximum rate applies to taxable years beginning
after 31 December 2002 and ending before 1 January 2009. Both Rio Tinto plc
and Rio Tinto Limited expect to be QFCs throughout this period. To qualify
for the 15 per cent maximum income tax rate on dividends the stock of the
QFC must be held for more than 61 days during the 121 day period beginning
on the date which is 60 days before the ex-dividend date.
EXCHANGE CONTROLS
Rio Tinto plc
At present, there are no UK foreign exchange controls
or other restrictions on the export or import of capital or on the payment of
dividends to non resident holders of Rio Tinto plc shares or the conduct of Rio
Tinto
plc’s operations. The Bank of England, however, upholds international law
and maintains financial sanctions against specified
terrorist organisations and specific targets
related to Myanmar, Federal Republic of Yugoslavia and Serbia, Iraq, Liberia
and Zimbabwe.
There
are no restrictions under Rio Tinto plc’s memorandum and articles of
association or under English law that limit the right of non resident or foreign
owners to hold or vote Rio Tinto plc’s shares.
Rio
Tinto Limited
Under existing Australian
legislation, the Reserve Bank of Australia does not restrict the import and
export of funds and no permission is required by Rio Tinto Limited for the
movement of funds into or out of Australia, except that restrictions apply
to certain transactions relating to the following:
(a)
supporters of the former government of the Federal Republic of Yugoslavia; and
(b)
ministers and senior officials of the Government of Zimbabwe.
The Department
of Foreign Affairs and Trade upholds international law that prohibits anyone
from making assets available to terrorists and their sponsors.
Members
of the general public are also required to report the sending of A$10,000 or
more in currency out of Australia to the Australian Transaction and Reports
Analysis Centre. Rio Tinto Limited must also deduct withholding tax from foreign
remittances of dividends, to the extent that they are unfranked, and of interest
payments.
There
are no limitations, either under the laws of Australia or under the constitution
of Rio Tinto Limited, on the right of non residents, other than the Foreign
Acquisitions and Takeovers Act 1975 (the Takeovers Act). The Takeovers Act
may affect the right of non Australian residents, including US residents, to
acquire or hold Rio Tinto Limited shares but does not affect the right to vote,
or any other right associated with any Rio Tinto Limited shares held in compliance
with its provisions.
Under
the Takeovers Act, a foreign person must notify the Treasurer of the Commonwealth
of Australia of a proposal to acquire a “substantial shareholding” in
an Australian corporation, which involves a person, together with associates,
holding 15 per cent or more of the issued shares or voting power of the corporation.
In addition, acquisition or issue of shares, including an option to acquire
shares, in a corporation that carries on an Australian business, such as Rio
Tinto Limited, which would result in foreign persons “controlling” the
corporation, or a change in the foreign persons “controlling” it,
is also subject to prior notification to, and review and approval by, the Treasurer,
who may refuse approval if satisfied that the result would be contrary to the
Australian national interest. A foreign person will “control” a corporation
if it, together with associates, holds 15 per cent or more of the issued shares
or voting power, and the Treasurer is satisfied that it is in a position to
determine the policy of the corporation, and a number of foreign persons will “control” a
corporation if it, together with associates, holds 40 per cent or more of the
issued shares or voting power, and the Treasurer is satisfied that it is in
a position to determine the policy of the corporation.
In
the context of the Takeovers Act, a foreign person is:
(a)
an individual not ordinarily resident in Australia; and
(b)
any corporation or trust in which there is a substantial foreign interest.
Unless the Treasurer
in the particular circumstances deems otherwise, a “substantial foreign
interest” in a corporation is an interest of 15 per cent or more in
the ownership of voting power by a single foreign interest either alone
or together with associates, or an interest of 40 per cent or more in aggregate
in the ownership or voting power by more than one foreign interest and
the associates of any of them.
If
a single foreign interest, either alone or together with associates, holds
a beneficial interest in 15 per cent or more of the capital or income of a
trust, or if two or more foreign interests and any associates together hold
40 per cent or more, there will be a substantial foreign interest in the trust.
A beneficiary under a discretionary trust is deemed, for this purpose, to hold
a beneficial interest in the maximum percentage that could be distributed to
the beneficiary.
80
Rio Tinto 2004
Annual report and
financial statements
In addition
to the Takeovers Act, there are statutory limitations in Australia on foreign
ownership of certain businesses, such as banks and airlines, not relevant to
Rio Tinto Limited. There are no other statutory or regulatory provisions of
Australian law or ASX requirements that restrict foreign ownership or control
of Rio Tinto Limited.
DUAL
LISTED COMPANIES STRUCTURE
On 20 December 1995, Rio
Tinto shareholders approved the terms of the dual listed companies merger (the
DLC merger) which was designed to place the shareholders of both Companies
in substantially the same position as if they held shares in a single enterprise
owning all of the assets of both Companies. As a condition of its approval
of the DLC merger, the Australian Government required Rio Tinto plc to reduce
its shareholding in Rio Tinto Limited to 39 per cent by the end of 2005. The
current holding is approximately 37.6 per cent.
Following
the approval of the DLC merger, both Companies entered into a DLC Merger Sharing
Agreement (the Sharing Agreement) through which each Company agreed:
(a)
to ensure that the businesses of Rio Tinto plc and Rio Tinto Limited are managed on a unified basis,
(b)
to ensure that the boards of directors of each Company is the same, and
(c)
to give effect to certain arrangements designed to provide shareholders of each Company with a common economic interest in the combined enterprise.
In order to achieve
this third objective, the Sharing Agreement provided for the ratio of dividend,
voting and capital distribution rights attached to each Rio Tinto plc share
and to each Rio Tinto Limited share to be fixed in an Equalisation Ratio
which has remained unchanged at 1:1. The Sharing Agreement has provided
for this ratio to be revised in special circumstances where, for example,
certain modifications are made to the share capital of one Company, such
as rights issues, bonus issues, share splits and share consolidations,
but not to the share capital of the other. Outside these specified circumstances,
the Equalisation Ratio can only be altered with the approval of shareholders
under the Class Rights Action approval procedure described under Voting
rights. In addition, any adjustments are required to be confirmed by the
auditors.
One
consequence of the DLC merger is that Rio Tinto is subject to a wide range
of laws, rules and regulatory review across multiple jurisdictions. Where these
rules differ, in many instances it means that Rio Tinto, as a Group, complies
with the strictest applicable level.
Consistent
with the creation of a single combined enterprise under the DLC merger, directors
of each Company are to act in the best interests of the shareholders of both
Companies ie, in the best interests of Rio Tinto as a whole. Identified areas
where there may be a conflict of the interests of the shareholders of each
Company must be approved under the Class Rights Action approval procedure.
To
ensure that directors of each Company are the same, resolutions to appoint
or remove directors must be put to shareholders of both Companies as a joint
electorate as a Joint Decision as described under Voting rights, and it is
a requirement that a person can only be a director of one Company if the person
is also a director of the other Company. So, for example, if a person was removed
as a director of one Company, he or she would also cease to be a director of
the other.
Dividend rights
The Sharing Agreement provides
for dividends paid on Rio Tinto plc and Rio Tinto Limited shares to be equalised
on a net cash basis, that is without taking into account any associated tax
credits. Dividends are determined in US dollars and are then, except for ADR
holders, translated and paid in sterling and Australian dollars. The Companies
are also required to announce and pay their dividends and other distributions
as close in time to each other as possible.
In
the unlikely event that one Company did not have sufficient distributable
reserves to pay the equalised dividend or the equalised capital distribution,
it would be entitled to receive a top up payment from the other Company. The
top up payment could be made as a dividend
on the DLC Dividend Share, on the Equalisation
Share if on issue or by way of a contractual payment.
If
the payment of an equalised dividend would contravene the law applicable to
one of the Companies, then they may depart from the Equalisation Ratio. However,
should such a departure occur then the relevant Company will put aside reserves
to be held for payment on the relevant shares at a later date.
Rio
Tinto shareholders have no direct rights to enforce the dividend equalisation
provisions of the Sharing Agreement.
The
DLC Dividend Share can also be utilised to provide the Group with flexibility
for internal funds management by allowing dividends to be paid between the
two parts of the Group. Such dividend payments are of no economic significance
to the shareholders of either Company, as they will have no effect on the
Group's overall resources.
Voting rights
In principle, the Sharing
Agreement provides for the public shareholders of Rio Tinto plc and Rio Tinto
Limited to vote as a joint electorate on all matters which affect shareholders
of both Companies in similar ways. These are referred to as Joint Decisions.
Such Joint Decisions include the creation of new classes of share capital,
the appointment or removal of directors and auditors and the receiving of
annual financial statements. Joint Decisions are voted on a poll.
The
Sharing Agreement also provides for the protection of the public shareholders
of each Company by treating the shares issued by each Company as if they were
separate classes of shares issued by a single company. So decisions that do
not affect the shareholders of both Companies equally require the separate
approval of the shareholders of both Companies. Matters requiring this approval
procedure are referred to as Class Rights Actions and are voted on a poll.
Thus,
the interests of the shareholders of each Company are protected against decisions
which affect them and the shareholders in the other company differently, by
requiring their separate approval. For example, fundamental elements of the
DLC merger cannot be changed unless approved by shareholders under the Class
Rights Action approval procedure.
Exceptions
to these principles can arise in situations such as where legislation requires
the separate approval of a decision by the appropriate majority of shareholders
in one Company and where approval of the matter by shareholders of the other
Company is not required.
Where
a matter has been expressly categorised as either a Joint Decision or a Class
Rights Action, the directors do not have the power to change that categorisation.
If a matter falls within both categories, it is treated as a Class Rights
Action. In addition, the directors can determine that matters not expressly
listed in either category should be put to shareholders for their approval
under either procedure.
To
facilitate the joint voting arrangements each Company has entered into shareholder
voting agreements. Each Company has issued a Special Voting Share to a special
purpose company held in trust by a common Trustee.
Rio
Tinto plc has issued its Special Voting Share (RTP Special Voting Share) to
RTL Shareholder SVC and Rio Tinto Limited has issued its Special Voting Share
(RTL Special Voting Share) to RTP Shareholder SVC. The total number of votes
cast on Joint Decisions by the public shareholders of one Company are voted
at the parallel meeting of the other Company. The role of these special purpose
companies in achieving this is described below.
In
exceptional circumstances, certain public shareholders of the Companies can
be excluded from voting at the respective Company’s general meetings
because they have acquired shares in one Company in excess of a given threshold
without making an offer for all the shares in the other Company. If this should
occur, the votes cast by these excluded shareholders will be disregarded.
Following
the Companies’ general meetings the overall results of the voting on
Joint Decisions and the results of voting on separate decisions will be announced
to the stock exchanges, published on the Rio Tinto website and advertised
in the Financial Times and Australian
Rio Tinto 2004
Annual report and
financial statements
newspapers. The results of the 2005 annual general meetings may also be obtained on the appropriate shareholder helpline (Rio Tinto plc: Freephone 0800 435021; and Rio Tinto Limited: toll free 1800 813 292).
Rio Tinto plc
At a Rio Tinto plc shareholders’
meeting at which a Joint Decision will be considered, each Rio Tinto plc share
will carry one vote and the holder of its Special Voting Share will have one
vote for each vote cast by the public shareholders of Rio Tinto Limited. The
holder of the Special Voting Share is required to vote strictly and only in
accordance with the votes cast by public shareholders for and against the
equivalent resolution at the parallel Rio Tinto Limited shareholders’
meeting.
The
holders of Rio Tinto Limited ordinary shares do not actually hold any voting
shares in Rio Tinto plc by virtue of their holding in Rio Tinto Limited and
cannot enforce the voting arrangements relating to the Special Voting Share.
Rio Tinto Limited
At a Rio Tinto Limited shareholders’
meeting at which a Joint Decision will be considered, each Rio Tinto Limited
share will carry one vote and, together with the Rio Tinto Limited ordinary
shares held by Tinto Holdings Australia, the holder of its Special Voting
Share will carry one vote for each vote cast by the public shareholders of
Rio Tinto plc in their parallel meeting. Tinto Holdings Australia and the
holder of the Special Voting Share are required to vote strictly, and only,
in accordance with the votes cast for and against the equivalent resolution
at the parallel Rio Tinto plc shareholders’ meeting.
The
holders of Rio Tinto plc ordinary shares do not actually hold any voting shares
in Rio Tinto Limited by virtue of their holding in Rio Tinto plc and cannot
enforce the voting arrangements relating to the Special Voting Share.
Capital distribution rights
If either of the Companies goes
into liquidation, the Sharing Agreement provides for a valuation to be made
of the surplus assets of both Companies. If the surplus assets available for
distribution by one Company on each of the shares held by its public shareholders
exceed the surplus assets available for distribution by the other Company
on each of the shares held by its public shareholders, then an equalising
payment between the two Companies shall be made, to the extent permitted by
applicable law, such that the amount available for distribution on each share
held by public shareholders of each Company conforms to the Equalisation Ratio.
The objective is to ensure that the public shareholders of both Companies
have equivalent rights to the assets of the combined Group on a per share
basis, taking account of the Equalisation Ratio.
The
Sharing Agreement does not grant any enforceable rights to the shareholders
of either Company upon liquidation of a Company.
Limitations on ownership
of shares and merger obligations
The laws and regulations
of the UK and Australia impose certain restrictions and obligations on persons
who control interests in public quoted companies in excess of certain thresholds
that, under certain circumstances, include obligations to make a public offer
for all of the outstanding issued shares of the relevant company. The threshold
applicable to Rio Tinto plc under UK law and regulations is 30 per cent and
to Rio Tinto Limited under Australian laws and regulations is 20 per cent.
As
part of the DLC merger, the memorandum and articles of association of Rio
Tinto plc and the constitution of Rio Tinto Limited were amended with the
intention of extending these laws and regulations to the combined enterprise
and, in particular, to ensure that a person cannot exercise control over one
Company without having made offers to the public shareholders of both Companies.
It is consistent with the creation of the single economic enterprise and the
equal treatment of the two sets of shareholders, that these laws and regulations
should operate in this way. The articles of association of
Rio Tinto plc and the constitution of Rio
Tinto Limited impose restrictions on any person who controls, directly or
indirectly, 20 per cent or more of the votes on a Joint Decision. If, however,
such a person only has an interest in Rio Tinto Limited or Rio Tinto plc,
then the restrictions will only apply if they control, directly or indirectly,
30 per cent or more of the votes at that Company’s general meetings.
If
one of the thresholds specified above is breached then, subject to certain
limited exceptions and notification by the relevant Company, such persons
(i) may not attend or vote at general meetings of the relevant Company; (ii)
may not receive dividends or other distributions from the relevant Company;
and (iii) may be divested of their interest by the directors of the relevant
Company. These restrictions will continue to apply until such persons have
either made a public offer for all of the publicly held shares of the other
Company, or have reduced their controlling interest below the thresholds specified,
or have acquired through a permitted means at least 50 per cent of the voting
rights of all the shares held by the public shareholders of each Company.
These
provisions are designed to ensure that offers for the publicly held shares
of both Companies would be required to avoid the restrictions set out above,
even if the interests which breach the thresholds are only held in one of
the Companies. The directors do not have the discretion to exempt a person
from the operation of these rules.
Under
the Sharing Agreement, the Companies agree to cooperate to enforce the restrictions
contained in their articles of association and constitution and also agree
that no member of the Rio Tinto Group shall accept a third party offer for
Rio Tinto Limited shares unless such acceptance is approved by a Joint Decision
of the public shareholders of both Companies.
Guarantees
In December 1995, each Company entered into a Deed Poll Guarantee in favour of creditors of the other Company. Pursuant to the Deed Poll Guarantees, each Company guaranteed the contractual obligations of the other
Company and the obligations of other persons which are guaranteed by the other Company, subject to certain limited exceptions. Beneficiaries under the Deed Poll Guarantees may make demand upon the guarantor thereunder without first having recourse
to the Company or persons whose obligations are being guaranteed. The obligations of the guarantor under each Deed Poll Guarantee expire upon termination of the Sharing Agreement and under other limited circumstances, but only in respect of
obligations arising after such termination and, in the case of other limited circumstances, the publication and expiry of due notice. The shareholders of the Companies cannot enforce the provision of the Deed Poll Guarantees.
SUPPLEMENTARY INFORMATION
General shareholder enquiries
Computershare Investor
Services PLC and Computershare Investor Services Pty Limited are the registrars
for Rio Tinto plc and Rio Tinto Limited, respectively. All enquiries and correspondence
concerning shareholdings, other than shares held in ADR form, should be directed
to the respective registrar. Their addresses and telephone numbers are given
under Useful addresses on page 150. Shareholders should notify Computershare
promptly in writing of any change of address.
Enquiries
concerning Rio Tinto plc and Rio Tinto Limited shares held in ADR form should
be directed to JP Morgan Chase Bank NA and The Bank of New York respectively,
whose addresses and telephone numbers are also given under Useful addresses.
Shareholders
can obtain details about their own shareholding on the internet. Full details,
including how to gain secure access to this personalised enquiry facility,
are given on the Computershare website: www.computershare.com
82
Rio Tinto 2004
Annual report and
financial statements
Consolidation of share
certificates
If a certificated shareholding in Rio Tinto
plc is represented by several individual share certificates, they can be replaced
by one consolidated certificate; there is no charge for this service. Share
certificates should be sent to Computershare together with a letter of instruction.
Share certificates –
name change
Share certificates in the name of The RTZ Corporation
PLC remain valid notwithstanding the name change to Rio Tinto plc in 1997.
Share warrants to bearer
All outstanding share warrants to bearer of
Rio Tinto plc have been converted into registered ordinary shares under the
terms of a Scheme of Arrangement sanctioned by the Court in 2001. Holders
of any outstanding share warrants to bearer should contact the company secretary
of Rio Tinto plc for an application form in order to obtain their rights to
registered ordinary shares.
Low cost share dealing
service
Stocktrade operates the Rio Tinto
Low Cost Share Dealing Service which provides a simple telephone facility
for buying and selling Rio Tinto plc shares. Basic commission is 0.5 per cent
up to £10,000, reducing to 0.2 per cent thereafter, subject to a minimum
commission of £15. Further information is available from Stocktrade,
a division of Brewin Dolphin Securities which is authorised and regulated
by the Financial Services Authority. Their details are given under Useful
addresses.
Individual Savings Account
(ISA)
Stocktrade offers UK residents the opportunity
to hold Rio Tinto plc shares in an ISA. Existing PEPs or ISAs may also be
transferred to Stocktrade. Further information can be obtained from Stocktrade
whose details are given under Useful addresses.
Corporate nominee service
Computershare in conjunction with Rio Tinto
plc, have introduced a corporate nominee service for private individuals.
Further information can be obtained from Computershare.
Publication of financial
statements
Shareholders wishing to receive the
Annual
report and financial statements
and/or
the
Annual review
in
electronic rather than paper form should register their instruction on the
Computershare website.
Unsolicited mail
Rio Tinto is aware that some shareholders have
had occasion to complain that outside organisations, for their own purposes,
have used information obtained from the Companies’ share registers. Rio
Tinto, like other companies, cannot by law refuse to supply such information
provided that the organisation concerned pays the appropriate statutory fee.
Shareholders
in the UK who wish to stop receiving unsolicited mail should register with
The Mailing Preference Service by letter, telephone or through their website.
The Mailing Preference Service
Freepost 22
London
W1E 7EZ
Rio Tinto on the web
Rio Tinto maintains a substantial amount of
information on its website, including this and previous annual reports, many
other publications and links to Group company websites.
The maintenance
and integrity of the Rio Tinto website is the responsibility of the directors.
Legislation in the UK governing the
preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
Website: www.riotinto.com
General enquiries
If you require general information about the
Group please contact the External Affairs department. For all other enquiries
please contact the relevant company secretary or the share registrar.
Publications
The following publications may be obtained
from Rio Tinto:
2004
Annual
report and financial statements
2004
Annual review
2004
Sustainable Development review
The way we work
–
Rio Tinto’s statement of business practice
Review
magazine – Rio Tinto’s
quarterly magazine for shareholders
Copies of the 2004 annual reports for the
following listed Rio Tinto Group companies are also available on request:
Bougainville Copper Limited
Coal & Allied Industries Limited
Energy Resources of Australia Limited
Palabora Mining Company Limited
Lihir Gold Limited
Full parent entity financial statements for
Rio Tinto Limited are available free of charge from the Rio Tinto Limited
company secretary on request. These financial statements are also available
on the Rio Tinto website.
Rio Tinto 2004
Annual
report and financial statements
Major shareholders and
related party transactions
Major shareholders
Details of the Group’s major shareholders
are shown under Share ownership on page 145.
Directors’
interests in Group voting securities are shown in Table 3 of the Remuneration
report on page 69.
Related party transactions
Details of the Group’s material related
party transactions are set out in note 38 – Related party transactions
on page 128 of the Financial statements.
As explained
on page 32, the Group’s financial statements show the full extent of
the Group’s financial commitments including debt and similar exposures.
It has never been the Group’s practice to engineer financial structures
as a way of avoiding disclosure. Substance rather than form is a fundamental
principle of Rio Tinto’s reporting.
Financial information
Legal proceedings
Neither Rio Tinto plc nor Rio Tinto Limited
nor any of their subsidiaries is a defendant in any proceedings which the
directors believe will have a material effect on either Company’s financial
position and results of operations.
Dividends
The Group’s policy on dividend distributions
is set out under Shareholder information on page 77.
Post balance sheet events
There have been no significant post balance
sheet events.
The Offer and listing
Share prices and details of the markets on
which the Group’s shares are traded are set out under Shareholder information
on page 77.
Additional information
Memorandum and articles of association
There have been no changes to either Rio Tinto
plc’s memorandum and articles of association since new articles of association
were adopted by Special Resolution passed on 11 April 2002 or to Rio Tinto
Limited’s constitution since it was amended by Special Resolution passed
on
18
April
2002.
Exchange controls
At present, there are no exchange controls
or other restrictions that affect remittance of the Group’s dividends
to US residents, but see Shareholder information on page 77 for controls on
remittances from Australia to certain specific territories.
There are
no restrictions under Rio Tinto plc’s memorandum and articles of association
or under English law that limit the right of non resident or foreign owners
to hold or vote its shares. Nor are there any restrictions under Rio Tinto
Limited’s constitution or under Australian law that limit the right of
non residents to hold or vote its shares, except under the Foreign Acquisitions
and Takeovers Act 1975, see Shareholder information on page 78 for details.
Taxation
See Shareholder information on page 79 for
information regarding the tax consequences of holding the Group’s ADSs
and shares by US residents.
Quantitative and qualitative
disclosures about market risk
The Rio Tinto Group’s policies for currency, interest rate and commodity
price exposures, and the use of derivative financial instruments are discussed
in the financial review on pages 34 and 35. In addition, the Group’s
quantitative and qualitative disclosures about market risk are set out in
note 28 to the financial statements on pages 116 to 121.
Defaults, dividend arrearages
and delinquencies
There are no defaults, dividend arrearages
or delinquencies.
Material modification
to the rights of security holders and use of proceeds
There are no material modifications to the
rights of security holders.
Controls and procedures
In designing and evaluating the disclosure
controls and procedures of each of Rio Tinto plc and Rio Tinto Limited, the
management of each of Rio Tinto plc and Rio Tinto Limited, including their
respective chief executive and finance director, recognised that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and the
management of each of Rio Tinto plc and Rio Tinto Limited necessarily was
required to apply its judgement in evaluating the cost-benefit relationship
of possible controls and procedures. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within each of Rio
Tinto plc and Rio Tinto Limited have been detected.
The management
of each of Rio Tinto plc and Rio Tinto Limited with the participation of their
chief executive and finance director have evaluated the effectiveness of the
design and operation of its disclosure controls and procedures as of the period
covered by the
Annual report
.
Based on that evaluation, the chief executive and finance director of each
of Rio Tinto plc and Rio Tinto Limited have concluded that these disclosure
controls and procedures are effective at the reasonable assurance level.
There were
no significant changes in the internal controls or in other factors that could
significantly affect internal controls of each of Rio Tinto plc and Rio Tinto
Limited subsequent to the date of their most recent evaluation.
Audit committee financial
expert
See Corporate governance on page 74 for information
regarding the identification of the
Audit
committee
financial expert.
Code of ethics
The way we work
,
Rio Tinto’s statement of business practice, summarises the Group’s
principles and policies for all directors and employees.
Since the
first edition of
The way we work
in 1998, expectations of corporate
responsibilities have increased. Although the Group’s values and objectives
are unchanged its responses have evolved and have been further developed and
reflected in a revised 2003 edition.
The way we
work
is supported by supplementary
guidance documents and applies to all Rio Tinto managed businesses.
The way we
work
and the supplementary guidance
documents are discussed more fully under Corporate governance on pages 72
to 73. They can be viewed on Rio Tinto’s website: www.riotinto.com and
will be provided to any person without charge upon written request received
by one the company secretaries.
Principal accountant fees
and services
Auditors’ remuneration including audit
fees, audit related fees, taxation fees and all other fees have been dealt
with in note 37 – Auditors’ remuneration on page 127 of the Financial
statements.
84
Rio Tinto 2004
Annual
report and financial statements
Gross turnover (including share of joint ventures and associates)
14,135
11,755
Share of joint ventures’ turnover
(2,373
)
(1,820
)
Share of associates’ turnover
(418
)
(707
)
Consolidated turnover
11,344
9,228
Net operating costs (2004 includes exceptional charges of US$558 million)
2
(9,622
)
(7,732
)
Group operating profit
1,722
1,496
Share of operating profit of joint ventures
1,052
536
Share of operating profit of associates
156
234
Profit on disposal of interests in operations
4, 35
920
126
Profit on ordinary activities before interest and taxation
3,850
2,392
Net interest payable
5
(149
)
(206
)
Amortisation of discount
6
(105
)
(92
)
Profit on ordinary activities before taxation
3,596
2,094
Taxation (2004 is reduced by a tax credit of US$97 million relating to exceptional items)
7
(841
)
(567
)
Profit on ordinary activities after taxation
2,755
1,527
Attributable to outside equity shareholders (2004 includes a credit of US$133 million relating to exceptional items)
58
(19
)
Profit for the financial year (net earnings)
2,813
1,508
Dividends to shareholders
8
(1,062
)
(882
)
Retained profit for the financial year
1,751
626
Earnings per ordinary share
9
204.0
c
109.5c
Adjusted earnings per ordinary share
9
161.0
c
100.3c
Diluted earnings per ordinary share
9
203.6
c
109.3c
Adjusted diluted earnings per ordinary share
9
160.8
c
100.2c
Dividends per share to Rio Tinto shareholders
8
77.0
c
64.0c
(a)
The results for both years
relate wholly to continuing operations.
(b)
The profit for each year includes exceptional items which are added back in the table below to arrive at ‘Adjusted earnings’ where the items are of such magnitude that their exclusion is
necessary in order that ‘Adjusted earnings’ fulfil their purpose of reflecting the underlying performance of the Group.
2004
2003
Note
US$m
US$m
Profit for the financial year (net earnings)
2,813
1,508
Exceptional items impact on the above profit and loss account as follows:
Profit on disposal of interests in operations
920
126
Asset write downs and provision for contract obligation
(558
)
–
Taxation
97
–
Attributable to outside equity shareholders
133
–
Net exceptional items
4
592
126
Adjusted earnings
2,221
1,382
86
Rio Tinto 2004
Annual
report and financial statements
Net
earnings attributable to members under Australian GAAP
2,849
1,346
281.3c
150.8c
Earnings
per ordinary share under Australian GAAP
206.6c
97.7c
Diluted earnings
per share under Australian GAAP are 0.3 US cents (2003: 0.2 US cents) less
than the above earnings per share figures.
2004
2003
2004
2003
A$m
A$m
US$m
US$m
16,167
13,404
Shareholders’ funds under UK GAAP
12,584
10,037
Increase/(decrease) net of tax in respect
of:
772
1,165
Goodwill
601
872
59
92
Taxation
46
69
804
626
Dividends
626
469
135
–
Contributions to fixed
asset additions
105
–
(33
)
(32
)
Other
(26
)
(24
)
17,904
15,255
Shareholders’ funds under Australian
GAAP
13,936
11,423
The Group’s financial statements have been prepared in accordance with UK GAAP, which differs in certain respects from Australian GAAP. These differences relate principally to the following items, and the effect
of each of the adjustments to net earnings and shareholders’ funds that
would be required under Australian GAAP is set out above.
Goodwill
For 1997 and prior years, UK GAAP permitted
the write off of purchased goodwill on acquisitions directly against reserves.
Under Australian GAAP, goodwill is capitalised and amortised by charges against
income over the period during which it is expected to be of benefit, subject
to a maximum of 20 years. Goodwill previously written off directly to reserves
in the UK GAAP accounts has been reinstated and amortised for the purpose of
the reconciliation
statements.
For acquisitions in 1998 and subsequent years, goodwill is capitalised under
UK GAAP, in accordance with FRS 10. Adjustments are required for Australian GAAP
purposes where such capitalised goodwill is amortised over periods exceeding
20 years in the UK GAAP accounts.
Profit on sale of operations
Under UK GAAP, goodwill previously written
off to reserves is reinstated for the purpose of calculating profit on the sale
of an operation. Under Australian GAAP, the equivalent goodwill is capitalised
and is subject to amortisation. The adjustment to the profit on sale of operations
under Australian GAAP reflects the lower book value of goodwill for operations
sold under Australian GAAP compared with UK GAAP, which results from the above
amortisation.
Contributions to fixed asset additions
Under UK GAAP, contributions made by
governments to the cost of acquiring fixed assets are deferred on the balance
sheet and credited to the profit and loss account over the expected useful economic
life of the fixed assets to which they relate. Under Australian GAAP, such contributions
are recognised immediately in the profit and loss account.
Taxation
Under UK GAAP, provision for taxes arising
on remittances of earnings can be made only if the dividends have been accrued
or if there is a binding agreement for the distribution of the earnings. Under
Australian GAAP, provision must be made for tax arising on expected future remittances
of past earnings.
Under UK GAAP, tax benefits associated with goodwill charged directly to reserves,
in 1997 and previous years, must be accumulated in the deferred tax provision.
This means that the tax benefits are not included in earnings until the related
goodwill is charged through the profit and loss account, on disposal or closure.
For Australian GAAP, no provision is required for such deferred tax because the
goodwill that gave rise to these tax benefits was capitalised and gives rise
to amortisation charges against profit.
Dividends
Under UK GAAP, ordinary dividends are
recognised in the financial year in respect of which they are paid. Under Australian
GAAP, such dividends are not recognised until they are declared, determined or
publicly recommended by the Board of directors. Prior to 1 January 2003, Australian
GAAP was consistent with UK GAAP.
Exceptional items
Earnings under UK GAAP, stated above,
include exceptional net gains of US$592 million (2003: US$126 million) relating
to profits on disposal of interests in operations less asset write downs and
a provision for a
contract obligation.
Rio Tinto 2004
Annual
report and financial statements
Outline of dual listed
companies structure and basis of financial statements
The Rio Tinto Group
These are the financial statements
of the Rio Tinto Group (the
‘Group’),
formed through the merger of economic interests (‘merger’) of Rio
Tinto plc and Rio Tinto Limited, and presented by both Rio Tinto plc and Rio
Tinto Limited as their consolidated accounts in accordance with both United
Kingdom and Australian legislation and regulations.
Merger
terms
On 21 December 1995, Rio
Tinto plc and Rio Tinto Limited, which are listed respectively on Stock Exchanges
in the United Kingdom and Australia, entered into a dual listed companies
(‘DLC’) merger. This was effected by contractual arrangements between
the companies and amendments to Rio Tinto plc’s Memorandum and Articles
of Association and Rio Tinto Limited’s constitution.
As a
result, Rio Tinto plc and Rio Tinto Limited and their respective groups operate
together as a single economic enterprise, with neither assuming a dominant
role. In particular, the arrangements:
–
confer upon the shareholders
of Rio Tinto plc and Rio Tinto Limited a common economic interest in both
groups;
–
provide for common boards
of directors and a unified management structure;
–
provide for equalised dividends
and capital distributions; and
–
provide for the shareholders
of Rio Tinto plc and Rio Tinto Limited to take key decisions, including
the election of directors, through an electoral procedure in which the public
shareholders of the two companies effectively vote on a joint basis.
The merger involved no change in the legal
ownership of any assets of Rio Tinto plc or Rio Tinto Limited, nor any change
in the ownership of any existing shares or securities of Rio Tinto plc or Rio
Tinto Limited, nor the issue of any shares, securities or payment by way
of
consideration, save for the issue by each company of one special voting share
to a trustee company which provides the joint electoral procedure for public
shareholders. During 2002, each of the parent companies issued a DLC Dividend
Share to facilitate the efficient management of funds within the DLC structure.
Accounting standards
The financial statements have
been drawn up in accordance with United Kingdom accounting standards. The merger
of economic interests is accounted for as a merger under FRS 6.
Australian
Corporations Act
The financial statements are drawn
up in accordance with an order, under section 340 of the Australian Corporations
Act 2001, issued by the Australian Securities and Investments Commission
(‘ASIC’) on
21 July 2003.
The main provisions of the order are that the financial statements are:
–
to be made out in accordance
with United Kingdom requirements applicable to consolidated accounts;
–
to be expressed in United
States dollars, but may also be expressed in United Kingdom and Australian
currencies; and
–
to include a reconciliation
from UK GAAP to Australian GAAP (see page 89).
For further details of the ASIC Class Order
relief see page 140.
United Kingdom Companies
Act
In order to present a true and fair view
of the Rio Tinto Group, in accordance with FRS 6, the principles of merger accounting
have been adopted. This represents a departure from the provision of the United
Kingdom Companies Act 1985 which sets out the conditions for merger accounting
based on the assumption that a merger is effected through the issue of equity
shares.
The main
consequence of adopting merger rather than acquisition accounting is that the
balance sheet of the merged group includes the assets and liabilities of Rio
Tinto Limited at their carrying values prior to the merger, subject to adjustments
to achieve uniformity of accounting policies, rather than at their fair values
at the date of the merger. In the particular circumstances of the merger, the
effect of applying acquisition accounting cannot reasonably be quantified.
In order
that the financial statements should present a true and fair view, it is necessary
to differ from the presentational requirements of the United Kingdom Companies
Act 1985 by including amounts attributable to both Rio Tinto plc and Rio Tinto
Limited public shareholders in the capital and reserves shown in the balance
sheet and in the profit for the financial year. The Companies Act 1985 would
require presentation of the capital and reserves and profit for the year attributable
to Rio Tinto Limited public shareholders (set out in note 25) as a minority
interest in the financial statements of the Rio Tinto Group. This presentation
would not give a true and fair view of the effect of the Sharing Agreement under
which the position of all public shareholders is as nearly as possible the same
as if they held shares in a single company.
Rio Tinto 2004
Annual
report and financial statements
a Basis of preparation
The Group’s accounting policies
comply with applicable United
Kingdom
accounting standards and are consistent with last year. As
explained in the section headed ‘Outline of dual listed
companies
structure and
basis of financial statements’, the accounting policies depart from the
requirements of the Companies Act in order to provide a true and fair view
of the merger between Rio Tinto plc and
Rio
Tinto Limited. The financial statements are prepared on the
historical
cost basis.
b Basis of consolidation
The financial statements consist of the consolidation of the accounts
of Rio Tinto plc and Rio Tinto Limited and their respective
subsidiary undertakings (‘subsidiaries’).
Subsidiaries:
A
subsidiary is an entity which is controlled by one of the parent companies. Control
exists where the parent owns the majority of the voting rights (which does not
always equate to percentage ownership) in another entity, except where severe
permanent or long term restrictions substantially hinder the exercise of the
parent’s rights
over the assets or management of the entity (which includes the veto rights held by joint venture partners). Control can also arise in other situations, for example where the parent has the right to control board decisions or otherwise exercise
dominant influence over the entity. The consolidated financial statements include all the assets, liabilities, revenues, expenses and cash flows of the parent and its subsidiaries after eliminating intercompany balances and transactions. For partly
owned subsidiaries, the net assets and net earnings attributable to minority shareholders are presented as ‘outside shareholders’ interests’ on
the consolidated balance sheet and consolidated profit and loss account.
Associated
undertakings (‘associates’):
An
associate is an entity in which the Group has a participating interest,
and over whose operating and financial policies it exercises significant
influence. Significant influence is presumed to exist where an ownership
interest of between 20 per cent and 50 per cent is held, but can also
arise where the Group holds less than 20 per
cent if it is actively involved and influential in policy decisions affecting
the entity. The Group’s share of the net assets, results and reserves of associates are included in the financial statements using the equity accounting method. This
involves recording the investment initially at cost to the Group, and then, going forward, adjusting the carrying amount of the investment to reflect the Group’s share of the associate’s results less any amortisation or impairment of
goodwill and any other changes to the associate’s net assets such as dividends.
Joint ventures:
A
joint venture is an entity in which a long term interest is held and which
is jointly controlled by the Group and one or more other venturers under
a contractual arrangement (such that significant operating and financial
decisions affecting the entity require the consent of all venturers that
together jointly control the entity). Joint ventures are accounted for
using the
gross equity accounting method. This is the same as the equity accounting method,
except the Group’s share of a joint venture’s assets and liabilities
are separately disclosed on the balance sheet.
Joint
arrangements that are not entities (‘joint
arrangements’):
The
Group has certain contractual arrangements under which the participants engage
in joint activities that do not create an entity
carrying on a trade or business of its own. This includes situations where the
participants derive benefit from the joint activity through a share of the production,
rather than by receiving a share in the results of trading. The Group’s proportionate interest in the assets, liabilities, revenues, expenses and cash flows
of joint arrangements are incorporated into the Group’s financial statements
under the appropriate headings.
Acquisitions and disposals:
The results of acquired businesses are brought into the consolidated financial statements from the date of
acquisition; the results of businesses sold during the year are included in the consolidated financial statements for the period up to the date of disposal. Gains or losses on disposal are calculated as the difference between the sale proceeds (net
of expenses) and the
net assets attributable to the interest which has been sold (including any goodwill
which has been capitalised but not amortised and any goodwill previously written
off through reserves). Where a disposal has a material effect on the nature or
focus of the Group’s operations, the operating results attributable to the
disposal are shown separately in the consolidated profit and loss account under
the heading ‘discontinued operations’.
c Turnover
Turnover comprises sales to third parties at invoiced
amounts, with most sales being priced ex-works, free on board (FOB) or
cost, insurance and freight (CIF). Turnover excludes any applicable sales
taxes. Mining
royalties are presented as an operating cost.
Byproduct
revenues are included in turnover.
A
large proportion of Group production is sold under medium to long term contracts,
but turnover is only recognised on individual sales when persuasive evidence
exists indicating that all
of the following criteria are me:
–
there has been a transfer of risks and benefits to the customer and in exchange the Group has received the right to consideration
–
the product requires no further work or processing by the Group
–
the quantity and quality of the goods has been determined with reasonable accuracy
–
the selling price is fixed or determinable
–
collection of the sale proceeds is reasonably assured.
These conditions are generally satisfied when title passes
to the customer. In most instances turnover is recognised when the product is
delivered to the destination specified by the customer, which is typically the
vessel on which it will be shipped, the destination port or the customer’s
premises.
The
turnover from sales of many products is subject to adjustment based on
a survey of the product by the customer. In such cases, turnover is initially
recognised on a provisional basis
using the Group’s best estimate of the contained metal. Any subsequent adjustments
to the initial estimate of metal content are recorded in turnover once they have
been determined.
Certain
products are ‘provisionally priced’, ie the selling price is
subject to final adjustment at the end of a period normally ranging from
30 to 180 days after delivery to the customer, based on the market price
at the relevant quotation point stipulated in the contract. Turnover is
initially recognised when the conditions set out above have been met, using
market prices at that date. At each reporting date the
provisionally priced metal is marked to market, with adjustments recorded in
turnover, based on the forward selling price for the quotational period
stipulated in the contract until the quotational period expires. For this
purpose, the selling price is considered determinable for those products,
such as copper, for which there exists an active and freely traded commodity
market such as the London Metals Exchange and the value of the product
sold by the Group is directly linked to the form in
which it is traded on that market.
Gross
turnover shown in the profit and loss account includes the Group’s
share of the turnover of joint ventures and associates.
d Shipping and handling costs
All shipping and handling costs incurred
by the Group are recognised as operating costs. Amounts billed to customers in
respect of shipping and handling, where the Group is responsible for the carriage,
insurance and freight, are classified as revenue. If, however, the Group is acting
solely as an agent, amounts billed to customers are credited to operating costs.
e Currency translation
Transactions in foreign currencies are translated at the exchange rate ruling at the date of transaction or, where foreign currency forward contracts have been arranged, at contractual rates. Monetary assets and
liabilities denominated in foreign currencies are retranslated at year end exchange rates, or at a contractual rate if applicable.
On consolidation, profit and loss account items are translated into US dollars at average rates of exchange. Balance sheet items
92
Rio Tinto 2004
Annual
report and financial
statements
are translated into US dollars at year end exchange
rates. Certain non United States resident companies, whose functional currency
is the US dollar, account in that currency.
The
Group finances its operations primarily in US dollars and the majority
of the Group’s US dollar debt is located in subsidiaries having functional currencies other than the US
dollar. Exchange gains and losses relating to US dollar debt impact on the profit and loss accounts of such subsidiaries. However, such exchange gains and losses are excluded from the Group’s profit and loss account on consolidation, with a
corresponding adjustment to reserves. This means that financing in US dollars impacts in a consistent manner on the Group’s
consolidated accounts irrespective of the functional currency of the particular
subsidiary where the debt is
located.
Exchange differences on the translation of the net operating assets of companies with functional currencies other than the US dollar, less offsetting exchange differences on net debt in currencies other than the US
dollar financing those net assets, are dealt with through reserves.
All other exchange differences are charged or credited to the profit and loss account in the year in which they arise, except as set out below in note (p) relating to derivative
contracts.
f Goodwill and intangible assets
Goodwill represents the difference between the cost of acquisition and the fair value of the identifiable net assets acquired. Goodwill and intangible assets arising on acquisitions after 31 December 1997 are
capitalised in accordance with FRS 10. The goodwill and intangible assets are amortised over their useful economic lives. The amortisation period may exceed 20 years where the lives of the relevant operations are sufficient to justify this,
supported by ore reserves (and for some operations, mineral resources).
In 1997 and previous years, goodwill was eliminated against reserves in the year of acquisition as a matter of accounting policy. Such goodwill was not reinstated on implementation of FRS
10; but on sale or closure of a business, any related goodwill eliminated against reserves is charged to the profit and loss account.
g Exploration and evaluation
Exploration and evaluation expenditure
comprise costs which are directly attributable to researching and analysing existing
exploration data; conducting geological studies, exploratory drilling and sampling;
examining and testing extraction and treatment methods; and compiling pre-feasibility
and feasibility studies. Exploration and evaluation expenditure also includes
the costs incurred in acquiring mineral rights, the entry premiums paid to gain
access to areas of interest and amounts payable to third parties to acquire interests
in existing projects. During the initial stage of a project, full provision is
made for the costs thereof by charge against profits for the year. Expenditure
on a project after it has reached a stage at which there is a high degree of
confidence in its viability is carried forward and transferred to tangible fixed
assets if the project proceeds. If a project does not prove viable, all irrecoverable
costs associated with the project are written off. If an undeveloped project
is sold, any gain or loss is included in operating profit, such transactions
being a normal part of the
Group’s activities. Where expenditure is carried forward in respect of a
project which may not proceed to commercial development for some time, provision
is made against the possibility of non development by charge against profits
over a period of up to seven years. When it is decided to proceed with development,
any provisions made in previous years are reversed to the extent that the relevant
costs are recoverable.
h Tangible fixed assets
The cost of a tangible fixed asset comprises
its purchase price and any costs directly attributable to bringing it into working
condition for its intended use. Once a mining project has been established as
commercially viable, expenditure other than that on land, buildings, plant and
equipment is capitalised under mining properties and leases together with any
amount transferred from exploration and evaluation. This includes costs incurred
in preparing the site for mining operations, including stripping costs (see below).
Costs associated with a start up period are capitalised where the asset is
available for use but incapable of operating at normal levels without a commissioning
period. Development costs incurred after the commencement of production are capitalised
to the extent they give rise to a future economic benefit. Pre-tax interest payable
on borrowings related to construction or development projects is capitalised
until the point when substantially all the activities that are necessary to make
the asset ready for use are complete.
i Mining properties and leases
As noted above, stripping (ie overburden and other waste removal) costs incurred in the development of a mine before production commences, are capitalised as part of the cost of constructing the mine and subsequently
amortised over the life of the operation.
The
Group defers stripping costs incurred during the production stage of its
operations for those operations where this is the most appropriate basis
for matching the costs against the related economic benefits, because of
fluctuations in stripping costs over the life of the mine, and the effect
is material. Deferred stripping costs are presented within ‘mining properties and leases’.
The
amount of stripping costs deferred is based on the ratio (‘Ratio’)
obtained by dividing the tonnage of waste mined either by the quantity
of ore mined or by the quantity of minerals contained in the ore. Stripping
costs incurred in the period are deferred to the extent that the current
period Ratio exceeds the life of mine Ratio. Such deferred costs are then
charged against reported profits to the extent that, in
subsequent periods, the Ratio falls short of the life of mine Ratio. The life
of mine Ratio is based on proven and probable reserves of the operation.
In some operations, there are distinct periods of new development during the production stage of the mine. These may, for example, relate to a discrete section of the ore body. The new
development will be characterised by a major departure from the life of mine stripping ratio. Excess stripping costs during such periods are deferred and charged against reported profits, in subsequent periods on a units of production basis.
If
the Group were to expense stripping costs as incurred, there would be greater
volatility in the year to year results from operations and excess stripping
costs would be expensed at an
earlier stage of a mine’s operations.
Deferred stripping costs form part of the total investment in the relevant income generating unit, which is reviewed for impairment if events or changes in circumstances indicate that the
carrying value may not be recoverable.
Amortisation
of deferred stripping costs is included in depreciation of property, plant
and equipment or in the Group’s share of the results of its equity
accounted operations, as appropriate. Changes to the life of mine stripping
ratio are accounted for prospectively.
j Depreciation and carrying values
of fixed assets
Assets are fully depreciated over their economic lives, or over the remaining life of the mine if shorter. For certain assets, such as mining properties and leases and some mining equipment, the economic benefits from
the asset are consumed in a pattern which is linked to the level of production. In such cases, depreciation is charged on a units of production basis. The straight line method is used for some operations where this provides a suitable alternative
because production is not expected to fluctuate significantly from one year to another. Assets for which the consumption of economic benefits is linked to the passage of time are depreciated on a straight line basis. Straight line depreciation rates
for buildings vary from 10 to 40 years and for property, plant and equipment from three to 35 years.
In applying the units of production method, depreciation is normally calculated using the quantity of material extracted from the mine in the period as a percentage of the total quantity
of material to be extracted in current and future periods based on proven and probable reserves (and, for some mines, mineral resources).
Development costs that relate to a discrete section of an ore body and which only provide benefit over the life of those reserves, are depreciated over the estimated life of that discrete
section.
Rio Tinto 2004
Annual
report and financial statements
Development costs incurred which benefit the entire ore body are depreciated over the estimated life of the ore body.
Tangible
and intangible fixed assets are reviewed for impairment if events or changes
in circumstances indicate that the carrying amount may not be recoverable.
This applies to the
Group’s share of the fixed assets held by associates, joint ventures and joint arrangements as well as the fixed assets held by the Group itself. In addition, goodwill is reviewed for impairment at the end of the first complete financial year
after the relevant acquisition and, where the goodwill is being amortised over a period exceeding 20 years, annually thereafter. When a review for impairment is conducted, the recoverable amount is assessed by reference to the net present value of
expected future cash flows of the relevant income generating unit, or disposal value if higher. Future cash flows are based on estimates of the quantities of ore reserves and certain mineral resources for which there is a high degree of confidence
of economic extraction, future production levels, future commodity prices (assuming that the current market prices will revert to the Group’s
assessment of the long term average price, generally over a period of three to
five years), future exchange rates (which are assessed using historical average
exchange rates as a starting point), and future cash costs of production, capital,
close down, restoration and environmental clean up. For operations with a functional
currency other than
the US dollar, the impairment review is undertaken in the relevant functional
currency. These estimates are based on detailed mine plans and operating budgets,
modified as appropriate to meet the requirements of FRS 11.
The
discount rate applied is based upon the Group’s weighted average cost
of capital with appropriate adjustment for the risks associated with the
relevant unit, to the extent that such risks are not reflected in the forecast
cash flows.
k Determination of ore reserves
The Group estimates its ore reserves and mineral resources based on information compiled by Competent Persons (as defined in accordance with the Australasian Code for Reporting of Mineral Resources and Ore Reserves of
December 2004 (the JORC code)). Reserves and, for certain mines, resources determined in this way are used in the calculation of depreciation, amortisation and impairment charges, the assessment of life of mine stripping ratios and for forecasting
the timing of the payment of close down and restoration costs.
In assessing the life of a mine for accounting purposes, mineral resources are only taken into account where there is a high degree of confidence of economic extraction.
l Provisions for close down and restoration
and for environmental clean up costs
Close down and restoration costs include the dismantling and demolition of infrastructure and the removal of residual materials and remediation of disturbed areas. Close down and restoration costs are provided for in
the accounting period when the obligation arising from the related disturbance occurs, whether this occurs during mine development or during the production phase, based on the net present value of estimated future costs. Provisions for close down
and restoration costs do not include any additional obligations which are expected to arise from future disturbance. The costs are estimated on the basis of a closure plan. The cost estimates are updated annually during the life of the operation to
reflect known developments and are subject to formal review at regular intervals.
The
amortisation or ‘unwinding’ of the discount applied in establishing
the net present value of provisions is charged to the profit and loss account
in each accounting period. The amortisation of the discount is shown as
a financing cost rather than as an operating cost. Other movements in the
provisions for close down and restoration costs, including those resulting
from new disturbance, updated cost estimates, changes
to the lives of operations and revisions to discount rates, are capitalised within
fixed assets. These costs are then depreciated over the lives of the assets
to which they relate.
Where rehabilitiation is conducted systematically over the life of the operation, rather than at the time of closure, provision is made for the outstanding continuous rehabilitation work
at each balance sheet date. All other costs of continuous rehabilitation are charged to the profit and loss account as incurred.
Provision is made for the estimated present value of the costs of environmental clean up obligations outstanding at the balance sheet date. These costs are charged to the profit and loss
account. Movements in the environmental clean up provisions are presented as an operating cost, except for the unwind of discount which is shown as a financing cost.
m Inventories
Inventories
are valued at the lower of cost and net realisable value on a first in, first
out (‘FIFO’) basis. Cost for raw materials
and stores is purchase price and for partly processed and saleable products is
generally the cost of production, including the appropriate proportion of depreciation
and overheads. For this purpose, the costs of production include labour costs,
materials and contractor expenses which are directly attributable to the
extraction and processing of ore; the depreciation of mining properties and leases
and of fixed assets used in the extraction and processing of ore; and production
overheads.
Stockpiles
represent ore that has been extracted and is available for further processing.
If there is significant uncertainty as to when the stockpiled ore will
be processed it is expensed as incurred. Where the future processing of
this ore can be predicted with confidence because it exceeds the mine’s
cut off grade, it is valued at the lower of cost and net realisable value.
If the ore will not be processed within the 12 months after the balance
sheet date it is disclosed as ‘Inventories not expected to be sold
nor used within 12 months’.
Work in progress inventory includes ore stockpiles and other partly processed material. Quantities are assessed primarily through surveys and assays.
n Deferred
tax
Full provision is made for deferred
taxation on all timing differences that have arisen but have not reversed at
the balance sheet date, except in limited circumstances. The main exceptions
are as follows:
–
Tax payable on the future remittance of the past earnings of subsidiaries, associates and joint ventures is provided only to the extent that dividends have been accrued or there is a binding
agreement to distribute such past earnings.
–
Deferred tax is not recognised on revaluations of non monetary assets arising on acquisitions unless there is a binding agreement to sell the asset and the gain or loss expected to arise from the
disposal has been recognised.
–
Deferred tax assets are recognised only to the extent that it is more likely than not that they will be recovered.
Provisions for
deferred tax are made in respect of tax benefits related to goodwill that
was charged directly to reserves on acquisitions made prior to 1998. Such
provisions are released when the related goodwill is charged through the
profit and loss account on disposal or closure. Deferred tax balances are
not discounted to their present value.
o Post retirement benefits
In accordance with SSAP 24, the expected
costs of post retirement benefits under defined benefit arrangements are charged
to the profit and loss account so as to spread the costs over the service lives
of employees entitled to those benefits. Variations from the regular cost are
spread on a straight line basis over the expected average remaining service lives
of relevant current employees. Costs are assessed in accordance with the advice
of qualified
actuaries.
p Financial instruments
The
Group’s policy with regard to ‘Treasury management and financial instruments’ is
set out in the Financial Review. When the Group enters into derivative contracts,
these transactions are designed to reduce exposures related to assets and liabilities,
firm commitments or anticipated transactions, and are therefore accounted for
as hedges. Amounts receivable and payable in respect of interest rate swaps are
recognised as an adjustment to net
interest
94
Rio Tinto 2004
Annual
report and financial statements
over the life of the contract. Gains or losses
on foreign currency forward contracts and currency swaps relating to financial
assets and liabilities are matched against the losses or gains on the hedged
items, either in the profit and loss account or through reserves, as appropriate.
Gains and losses on financial instruments relating to firm commitments or
anticipated transactions for revenue items are
deferred and recognised when the hedged
transaction occurs. Gains and losses on financial instruments relating to
firm commitments or anticipated transactions for capital expenditure are
capitalised and depreciated in line with the underlying asset. The cash flows
from these contracts are classified in a manner consistent with the underlying
nature of the related transaction.
2
NET OPERATING COSTS
2004
2003
Note
US$m
US$m
Raw materials and consumables
3,470
2,975
Depreciation and amortisation (a)
1,204
1,006
Employment costs
3
1,842
1,666
Royalties and other mining taxes
486
439
Decrease in inventories
93
55
Other external costs
1,788
1,451
Provisions (a)
20
147
154
Exploration and evaluation
11
187
127
Research and development
23
23
Net exchange losses on monetary items
33
123
Costs included above qualifying for capitalisation
(50
)
(168
)
Other operating income
(159
)
(119
)
Net operating costs before exceptional
charges
9,064
7,732
Exceptional charges (a)
558
–
9,622
7,732
(a)
The above detailed analysis of 2004 costs is before exceptional charges. Including
exceptional charges, the total 2004 charge for depreciation and amortisation was
US$1,612 million and the charge
for provisions was US$296 million.
(b)
Information on auditors’ remuneration is included in note 37.
3
EMPLOYEE COSTS
2004
2003
Note
US$m
US$m
Employment costs, excluding joint ventures
and associates
– Wages and salaries
1,695
1,515
– Social security costs
74
72
– Net post retirement cost (a)
173
184
1,942
1,771
Less: charged
within provisions
(100
)
(105
)
1,842
1,666
(a)
The net post retirement cost includes the gradual recognition under SSAP 24 of
the deficits and surpluses in the Group’s defined benefit pension schemes.
(b)
UITF Abstract 17 requires the intrinsic value of share options to be recognised as
a cost. However, the Group’s SAYE schemes are exempt from this requirement.
None of the Group’s other
share option schemes involves granting new options at
a discount to market value.
Rio Tinto 2004
Annual
report and financial statements
Gains/(losses) relating to
disposals of interests in
– Subsidiaries
213
(9
)
4
208
(6
)
– Joint ventures (b)
67
(2
)
–
65
107
– Associates (c)
536
–
–
536
25
– Other investments
104
–
–
104
–
920
(11
)
4
913
126
Charges relating to
– Palabora asset write
down (d)
(398
)
108
129
(161
)
–
– Colowyo asset write
down and provision for contract obligation (d), (e)
(160
)
–
–
(160
)
–
(558
)
108
129
(321
)
–
Net exceptional items
362
97
133
592
126
(a)
Additional information on the disposals of interests in subsidiaries, joint ventures, associates and other investments is included in note 35.
(b)
The gain from disposal of a joint venture in 2004 relates to the sale of a 10% interest in Hail Creek. The Group retained joint control after the disposal.
(c)
Gains relating to disposals of associates include US$518 million profit on sale of the Group’s equity interest in Freeport-McMoRan Copper & Gold Inc. (‘FCX’). Rio Tinto invested
in the Grasberg ore body through purchase of an equity interest in FCX and participation in the Grasberg joint venture. The investment occurred prior to the introduction of FRS10 and the goodwill arising was therefore eliminated directly against
reserves in accordance with Rio Tinto’s UK GAAP accounting policy at the time. On disposal of the equity interest in FCX, the US$228 million of goodwill attributable to this interest was written back through reserves and deducted in arriving at
the profit on disposal.
(d)
The asset write down for Palabora aligns the balance sheet value of the relevant fixed assets with the net present value of the expected future cash flows relating to those assets. The pre-tax
discount rate of nine per cent used in calculating the net present value of expected future cash flows was derived from the Group’s weighted average cost of capital, with appropriate adjustments for risk. This discount rate has been applied to
the relevant pre-tax cash flows stated in real terms.
(e)
Future operating and development costs
relating to Colowyo are now estimated to be substantially higher than
previously expected. This has resulted in the above exceptional charge
of US$160 million, which includes asset write downs totalling US$11 million
and a provision of US$149 million in respect of the Group’s obligations
under the management agreement referred to in note 14. These charges
are based on the expected future cash flows of the Colowyo operation,
having regard to the Group’s obligations under the management agreement.
In calculating the asset write downs and provision for contract obligations,
the cash flows have been estimated in real terms and discounted at a
pre-tax discount rate of five per cent. The major area of uncertainty
affecting the provision for contract obligations relates to the future
operating and development costs of the Colowyo operation, which have
been estimated over the next eighteen
years.
(f)
The gains arising on disposals of subsidiaries,
joint ventures and associates in 2003 did not give rise to a tax charge.
(g)
The taxation credit comprises a deferred
tax credit of US$112 million offset by a current tax charge of US$15
million.
5
NET INTEREST PAYABLE
AND SIMILAR CHARGES
2004
2003
Note
US$m
US$m
Interest payable on
– Bank borrowings
(53
)
(56
)
– Other loans
(119
)
(143
)
(172
)
(199
)
Amounts capitalised
35
39
(137
)
(160
)
Interest receivable and similar
income from fixed asset investments
– Joint ventures
13
8
– Associates
–
5
– Other investments
3
4
16
17
Other interest receivable
8
4
24
21
Group net interest payable
(113
)
(139
)
Share of joint ventures’
net interest payable (a)
(20
)
(13
)
Share of associates’ net
interest payable (a)
(16
)
(54
)
Net interest payable
(149
)
(206
)
Amortisation of discount
6
(105
)
(92
)
Net interest payable and
similar charges
(254
)
(298
)
(a)
The Group’s share of net interest payable by joint ventures and associates
relates to its share of the net debt of joint ventures and associates, which is
disclosed in note 14.
96
Rio Tinto 2004
Annual
report and financial statements
The amortisation of discount
relates principally to provisions for close down and restoration and for
environmental clean up costs as explained in accounting policy It also includes
the unwinding of the discount on non-interest bearing long term accounts
payable.
(b)
Amounts capitalised relate to costs
on specific projects for which construction or development activities
are ongoing.
7
TAXATION CHARGE
2004
2003
US$m
US$m
UK taxation
Corporation tax at 30%
– Current
22
99
– Deduct: relief for overseas
taxes
(15
)
(96
)
7
3
– Deferred
–
(7
)
7
(4
)
Australian taxation
Corporation tax at 30%
– Current
390
300
– Deferred
(25
)
9
365
309
Other countries
– Current
204
47
– Deferred
(88
)
(27
)
116
20
Joint ventures –
charge for year
(b)
319
160
Associates – charge
for year
(b)
34
82
841
567
(a)
A current tax charge of US$20 million (2003: charge of US$194 million) and a deferred tax charge of US$13 million (2003: charge of US$162 million) are dealt with in the Statement of Total Recognised Gains and Losses (‘STRGL’). These tax charges relate to exchange gains and losses which are
themselves dealt with in the STRGL.
(b)
Some tax recognised by subsidiary holding companies is presented in these accounts as part of the tax charge on the profits of the joint ventures and associates to which it relates.
(c)
A benefit of US$15 million was recognised in 2004 (2003: US$34 million) for operating losses that are expected to be recovered in future years. Of this benefit US$5 million (2003: US$nil) is
included within ‘UK taxation’, US$nil (2003: US$16 million) within ‘Australian taxation’ and US$10 million (2003: US$18 million) within ‘Other countries’.
(d)
Adjustments of prior year accruals and provisions reduced the total tax charge by a net amount of US$8 million (2003: US$28 million).
(e)
The 2004 tax charge was reduced by US$26
million (2003: US$11 million) as a result of the entry into the Australian
tax consolidation regime with effect from 1 January 2003.
(f)
The Group’s effective tax rate for
2004 is 29.0 per cent (2003: 28.8 per cent) excluding exceptional items
and 23.4 per cent (2003: 27.1 per cent) including exceptional items.
(g)
Tax paid during 2003, of US$917 million,
included an amount of US$106 million relating to the disputed tax assessment
from the Australian Tax Office described in note 29. The amount paid
has been recorded as a receivable in these accounts because the Directors
believe that the relevant tax assessments are not sustainable. Tax payments
also include amounts related to exchange gains and losses on net debt
which are recorded directly in the Statement of Total Recognised Gains
and Losses.
Rio Tinto 2004
Annual
report and financial statements
Prima facie tax payable at UK and Australian
rate of 30%
1,079
628
Impact of exceptional items
(94
)
(38
)
Other permanent differences
Other tax rates applicable outside the
UK and Australia
93
59
Permanently disallowed amortisation/depreciation
55
53
Research, development and other investment
allowances
(8
)
(5
)
Resource depletion allowances
(87
)
(54
)
Other (h)
(30
)
(24
)
23
29
Other deferral of taxation
Capital allowances in excess of other depreciation
charges
(89
)
(48
)
Other timing differences
34
14
Total timing differences related to the
current year
(55
)
(34
)
Current taxation charge for the year
953
585
Deferred tax recognised on timing differences
55
34
Deferred tax impact of exceptional items
(112
)
–
Other deferred tax items (i)
(55
)
(52
)
Total taxation charge for the year
841
567
(h)
‘Other’ components of the current tax charge include the benefit of reduced Alternative Minimum Tax payable in the United States.
(i)
‘Other deferred tax items’ include benefits from adjustments of prior year provisions (see (d) above) and from Australian tax consolidation (see (e) above).
8
DIVIDENDS
2004
2003
US$m
US$m
Rio Tinto plc Ordinary Interim dividend
341
320
Rio Tinto plc Ordinary Final dividend
481
363
Rio Tinto Limited Ordinary Interim dividend
(b)
100
93
Rio Tinto Limited Ordinary Final dividend
(b)
140
106
1,062
882
2004
2003
Number
Number
of shares
of shares
(millions
)
(millions
)
Rio Tinto plc Interim
1,067.5
1,066.1
Rio Tinto plc Final
1,068.0
1,066.7
Rio Tinto Limited Interim – fully
franked at 30% (b)
311.7
311.6
Rio Tinto Limited Final – fully franked
at 30% (b)
311.9
311.6
(a)
The 2004 dividends have been based on the following US cents per share amounts: interim – 32 cents, final – 45 cents (2003: interim – 30 cents, final – 34 cents).
(b)
The number of shares on which the Rio Tinto Limited dividends are based excludes those shares held by Rio Tinto plc, in order that the dividends shown represent those paid to public
shareholders.
(c)
The proposed Rio Tinto Limited dividends will be franked out of existing franking credits or out of franking credits arising from the payment of income tax during 2005.
(d)
Rio Tinto Limited formed a
tax consolidated group in Australia with effect from
1 January 2003. The approximate amount of the Rio Tinto Limited tax consolidated
group’s retained profits and reserves that could be distributed as
dividends and franked out of the existing franking credits, which arose
from net payments of income tax in respect of periods up to 31 December
2004 (after deducting franking credits on the proposed final dividend),
is US$3,360 million.
98
Rio Tinto 2004
Annual
report and financial statements
Adjusted earnings and adjusted earnings per share exclude exceptional items of such magnitude that their exclusion is necessary in order that adjusted earnings fulfil their purpose of reflecting the
underlying performance of the Group.
(b)
The daily average number of ordinary shares in issue of 1,379.2 million (2003: 1,377.5 million) excludes the Rio Tinto Limited shares held by Rio Tinto plc.
(c)
The daily average number of ordinary
shares used for the diluted earnings per share calculations is 1,381.4
million (2003: 1,379.4 million) and excludes the Rio Tinto Limited shares
held by Rio Tinto plc. The extra two million shares included in the calculation
relate to unexercised share options.
10
GOODWILL
2004
2003
Note
US$m
US$m
Cost
At 1 January
1,562
1,282
Adjustment on currency translation
41
260
Additions
35
–
20
At 31 December
1,603
1,562
Accumulated amortisation
At 1 January
(377
)
(267
)
Adjustment on currency translation
(10
)
(30
)
Amortisation for the year
(77
)
(76
)
Other movements
–
(4
)
At 31 December
(464
)
(377
)
Net balance sheet amount
1,139
1,185
(a)
Goodwill is being amortised over the economic lives of the relevant operations, which involves periods ranging from nine to 40 years with a weighted average of around 26 years (2003: 26 years). The
amortisation
period exceeds 20 years where the ore
reserves (and, for some mines, mineral resources) are sufficient to justify
this.
11
EXPLORATION AND EVALUATION
2004
2003
US$m
US$m
At cost less amounts written off
At 1 January
834
694
Adjustment on currency translation
23
119
Expenditure in year
193
130
Charged against profit for the year
(51
)
(47
)
Disposals, transfers and other movements
(a)
(39
)
(62
)
At 31 December
960
834
Provision
At 1 January
(765
)
(637
)
Adjustment on currency translation
(20
)
(104
)
Charged against profit for the year
(136
)
(80
)
Disposals, transfers and other movements
58
56
At 31 December
(863
)
(765
)
Net balance sheet amount
97
69
(a)
Disposals, transfers and other movements’ includes the capitalisation of US$17 million of close down and restoration provisions in respect of certain exploration projects.
(b)
The total of US$187 million (2003: US$127 million) charged against profit in respect of exploration and evaluation includes US$51 million (2003: US$47 million) written off cost and an increase in
the provision of US$136 million (2003: US$80 million).
Rio Tinto 2004
Annual
report and financial statements
Capitalisation of additional closure costs
(note 20)
260
–
–
–
260
167
Other additions (g)
199
97
570
1,559
2,425
1,462
Disposals
(13
)
(29
)
(208
)
(2
)
(252
)
(449
)
Subsidiaries newly consolidated
–
–
–
–
–
3
Subsidiaries sold
(203
)
(12
)
(244
)
–
(459
)
(185
)
Transfers and other movements (c)
160
123
1,356
(1,621
)
18
(2
)
At 31 December
6,008
3,803
20,241
1,726
31,778
28,596
Accumulated depreciation
At 1 January
(1,409
)
(1,540
)
(10,317
)
(134
)
(13,400
)
(11,144
)
Adjustment on currency translation
(66
)
(49
)
(472
)
–
(587
)
(1,886
)
Exceptional asset write downs
(7
)
(3
)
(398
)
–
(408
)
–
Other depreciation for the year
(246
)
(119
)
(762
)
–
(1,127
)
(930
)
Disposals
13
9
160
1
183
419
Subsidiaries sold
71
–
110
–
181
148
Transfers and other movements (c)
10
(18
)
(4
)
(3
)
(15
)
(7
)
At 31 December
(1,634
)
(1,720)
(11,683)
(136
)
(15,173
)
(13,400
)
Net balance sheet amount at 31 December
2004
4,374
2,083
8,558
1,590
16,605
Net balance sheet amount at 31 December
2003
3,983
1,983
7,625
1,605
15,196
(a)
The net balance sheet amount at 31 December 2004 includes US$374 million (2003: US$394 million) of pledged assets, in addition to assets held under the finance leases disclosed in note
22.
(b)
The net balance sheet amount for land and buildings includes freehold US$2,005 million; long leasehold US$68 million; and short leasehold US$10 million.
(c)
‘Transfers and other movements’ includes reclassifications between categories.
(d)
Accumulated depreciation on ‘Capital works in progress’ at 1 January 2004 relates to an exceptional charge made in 2002.
(e)
Interest is capitalised at a rate based on the Group’s cost of borrowing or at the rate on project specific debt where applicable.
(f)
During 2002, the Group acquired North Jacob’s Ranch for US$380 million. Payments of US$76 million were made in each of 2002, 2003 and 2004. The remainder of the consideration, US$152 million,
is payable over the next two years.
(g)
During 2004, the Group acquired additional reserves at West Antelope at a cost of US$146 million.
(h)
At 31 December 2004, net tangible assets per share amounted to US$8.22 (31 December 2003: US$6.38).
(i)
A change in the mine plan at Kennecott Utah Copper was approved in February 2005. Pending any extension of the assumed mine life there will be an increase in the annual depreciation charge and
amortisation of the discount, relating to provisions, together totalling approximately US$45 million, from 2005.
(j)
Details of production stage deferred stripping costs, which have been included in ‘Mining properties and leases’, and investments as appropriate, are set out in the following
table:
2004
2004
2004
2003
2003
2003
Sub-
Share
Total
Sub
-
Share
Total
sidiaries
of joint
sidiaries
of joint
ventures
ventures
and
and
associates
associates
US$m
US$m
US$m
US$m
US$m
US$m
Carrying values
At 1 January
441
230
671
326
198
524
Adjustment on currency translation
10
1
11
17
3
20
Net deferral of stripping costs during
year
116
19
135
77
32
109
Other
2
(35
)
(33
)
21
(3
)
18
Deferred stripping balance carried forward
at 31 December
569
215
784
441
230
671
100
Rio Tinto 2004
Annual
report and financial statements
The Group’s
investments in joint ventures and associates include, where appropriate,
entry premiums on acquisition plus interest capitalised by the Group during
the development period of the relevant mines. At 31 December 2004, this
capitalised interest less accumulated amortisation amounted to US$21 million
(2003: US$12 million).
(b)
The cash flow
statement analyses additions to joint ventures and associates between
the following:
–
Funding of Group share of
joint ventures’ and associates’ capital expenditure’,
which reports cash supplied
by the Group for the formation of new operating assets whose benefits
will be attributable to the Group, and
–
‘Repayments from/(other
funding of) joint ventures and associates’ which includes any financial
investment in joint ventures and associates that does not have the above
characteristics, and all loan repayments.
(c)
Further details
of investments in joint ventures and associates are set out below and
in notes 14, 32 and 33.
2004
2003
US$m
US$m
Joint ventures
Rio Tinto’s share of assets
– Fixed assets
2,749
2,768
– Current assets
726
465
3,475
3,233
Rio Tinto’s share of third party liabilities
– Liabilities due within one year
(437
)
(312
)
– Liabilities due after more than
one year (including provisions)
(606
)
(698
)
(1,043
)
(1,010
)
Rio Tinto’s share of net assets
2,432
2,223
(a)
The Group’s share of joint venture liabilities set out above excludes US$166 million (2003: US$172 million) due to the Group. These excluded liabilities correspond with the loans to joint
ventures that are presented earlier in this note as an asset of the Group. Including these loans, the Group’s share of the total liabilities of joint ventures was US$1,209 million (2003: US$1,182 million).
(b)
Of the US$606 million of liabilities due after more than one year, US$482 million relates to long term debt, which matures as follows: US$111 million between 1-2 years; US$111 million between 2-3
years; US$96 million between 3-4 years; US$63 million between 4-5 years and US$101 million after 5 years.
Rio Tinto 2004
Annual
report and financial statements
– Liabilities due after more than
one year (including provisions)
(256
)
(733
)
(312
)
(947
)
Non-equity capital and outside shareholders’
interests
–
(42
)
Rio Tinto’s share of net assets
247
421
(a)
Of the US$256 million of liabilities due after more than one year, US$230 million relates to long term debt which matures as follows: US$58 million between 1-2 years; US$60 million between 2-3
years; US$60 million between 3-4 years; US$15 million between 4-5 years and US$37 million after 5 years.
2004
2003
US$m
US$m
Investments in and loans to associates/other
Investments in and loans to associates
247
421
Other investments (a)
138
96
385
517
(a)
Other investments include listed investments of US$46 million with a market value of US$114 million (2003: US$92 million); this includes a 19 per cent holding in the Labrador Iron Ore Royalty Income
Fund which itself owns 15.1 per cent of Iron Ore Company of Canada Inc. Further information on the net debt of joint ventures and associates is shown in note 14.
14 NET DEBT OF JOINT
VENTURES AND ASSOCIATES
Rio Tinto
Rio Tinto
Rio Tinto
Rio Tinto
percentage
share of
percentage
share of
net debt
net debt
2004
2004
2003
2003
%
US$m
%
US$m
Joint ventures
Minera Escondida Limitada
30.0
324
30.0
414
Leichhardt
44.7
22
44.7
31
Colowyo
20.0
31
20.0
32
Warkworth
42.1
28
42.1
34
Associates
Freeport-McMoRan Copper & Gold Inc.
–
–
13.1
236
Tisand (Pty) Limited
50.0
137
50.0
121
Port Waratah Coal Services
27.6
106
27.6
114
Sociedade Mineira de Neves-Corvo SA (Somincor)
–
–
49.0
37
Other
(46
)
(15
)
Net debt of joint ventures and associates
602
1,004
(a)
In accordance with FRS 9, the Group includes its net investment in joint ventures and associates in its consolidated balance sheet. This investment is shown net of the Group’s share of the net
debt of joint ventures and associates due to third parties, which is set out above.
(b)
Some of the debt of joint ventures and associates is subject to financial and general covenants.
(c)
The group holds 44.7 per cent of the equity of the Leichhardt joint venture, which has a 31.4 per cent interest in the Blair Athol joint venture. Leichhardt has US$91 million (2003: US$85 million)
of shareholders’ funds and US$50 million (2003: US$70 million) of debt finance.
(d)
The Group has a partnership interest in the Colowyo Coal Company and has undertaken, via a subsidiary company which entered into a management agreement, to cause the partnership to perform its
obligations under certain coal supply contracts. The debt of US$156 million owed by the Colowyo Coal Company is to be serviced and repaid out of the proceeds of these contracts. The exceptional charge in 2004, referred to in note 4, includes a
provision of US$149 million in respect of the Group’s obligations under the above management agreement.
(e)
Except for the obligations referred to above, in relation to Colowyo, the debt of joint ventures and associates is without recourse to the Rio Tinto Group.
102
Rio Tinto 2004
Annual
report and financial statements
Inventories expected to be sold or used
within 12 months
1,988
1,746
Inventories not expected to be sold nor
used within 12 months
38
37
2,026
1,783
(a)
As reported in the Cash flow statement, the increase in inventories during 2004 was US$179 million excluding the effects of subsidiaries sold and changes in exchange rates on translation into US
dollars.
16 ACCOUNTS RECEIVABLE
AND PREPAYMENTS
2004
2003
Note
US$m
US$m
Due within one year
Trade debtors
1,305
1,266
Bills receivable
20
13
Amounts owed by joint ventures
5
–
Amounts owed by associates
2
4
Other debtors
268
225
Current tax recoverable
33
102
Pension prepayments (a)
35
5
Other prepayments
55
59
1,723
1,674
Due in more than one year
Bills receivable
–
6
Other debtors
39
36
Current tax recoverable
138
130
Deferred tax assets
21
42
17
Pension prepayments (a)
581
615
Other prepayments
36
5
836
809
(a)
Movements in pension prepayments are included
in ‘Other items’ in the Cash flow statement.
17 CURRENT ASSET INVESTMENTS,
CASH AND LIQUID RESOURCES
2004
2003
Note
US$m
US$m
Liquid resources
Time deposits
116
206
Other
2
2
Total liquid resources
23
118
208
Deduct: items qualifying as cash for balance
sheet disclosure
(116
)
(206
)
2
2
Other current asset investments
US Treasury bonds (a)
76
228
Investments per balance sheet (unlisted)
78
230
Cash
Cash as defined in FRS 1 Revised (‘FRS
1 cash’)
23
206
41
Add back bank borrowings repayable on demand
included in FRS 1 cash
18
68
148
Investments qualifying as cash
116
206
Cash per balance sheet
390
395
(a)
Current asset investments include US$76 million (2003: US$228 million) relating to US Treasury bonds that are not regarded as liquid assets because they are held as security for the deferred
consideration for certain assets acquired during 2002.
Rio Tinto 2004
Annual
report and financial statements
US$1.1
billion of the commercial paper outstanding at 31 December 2003 was backed
by medium term facilities. Under Australian GAAP this amount would be grouped
within non-current borrowings.
19
ACCOUNTS PAYABLE AND ACCRUALS
2004
2003
US$m
US$m
Due within one year
Trade creditors
950
737
Amounts owed to joint ventures
5
9
Amounts owed to associates
15
44
Other creditors (a)
303
226
Tax on profits
189
250
Employee entitlements
146
125
Royalties and mining taxes
151
133
Accruals and deferred income
198
123
Dividends payable to outside shareholders
of subsidiaries
–
1
Dividends payable to Rio Tinto shareholders
632
492
2,589
2,140
Due in more than one year
Other creditors (a)
208
194
Accruals and deferred income (b)
130
29
Tax on profits
63
99
401
322
(a)
Other
creditors’ includes deferred consideration of US$250 million (2003:
US$219 million) relating to certain assets acquired during 2002 and 2004,
of which US$96 million (2003: US$76 million) is due within one year. The
deferred consideration is included at its net present value. The amortisation
of the discount applied in establishing the net present value is treated
as a finance cost.
(b)
Accruals
and deferred income’ include contributions made by governments to the
cost of acquiring fixed assets which are to be credited to the profit and
loss account over the expected useful economic life of the fixed assets
to which they relate.
104
Rio Tinto 2004
Annual report and financial
statements
Capitalisation of additional closure costs
(note 12)
–
–
260
–
260
167
Charged to profit for the year
43
57
53
(6
)
147
154
Exceptional charge (note 4)
–
–
–
149
149
–
Amortisation of discount related to provisions
–
–
95
5
100
89
Utilised in year:
provisions set
up on acquisition of businesses
–
–
–
(3
)
(3
)
(4
)
other provisions
(26
)
(84
)
(51
)
(22
)
(183
)
(155
)
Subsidiaries sold
(1
)
(10
)
(62
)
–
(73
)
(7
)
Transfers and other movements
–
(19
)
31
11
23
(3
)
523
292
2,489
347
3,651
3,138
Provision for deferred taxation (see note
21)
1,407
1,398
Provisions for liabilities and charges
per balance sheet
5,058
4,536
(a)
The main assumptions used to determine
the provision for post retirement healthcare are disclosed in note 41.
The provision is expected to be utilised over the next 15 to 20 years.
(b)
The provision for other employee entitlements
includes pension entitlements of US$53 million and a provision for
long service leave, based on the relevant entitlements in certain Group
operations. Some US$64 million is expected to be utilised within the
next year.
(c)
The Group’s policy on close down
and restoration costs is shown in note 1(l). Close down and restoration
costs are a normal consequence of mining, and the majority of close
down and restoration expenditure is incurred at the end of the life
of the mine. Remaining lives of mines and infrastructure range from
2 to over 50 years with an average, weighted by discounted closure
provision, of around 16 years. Although the ultimate cost to be incurred
is uncertain, subsidiary companies have estimated their respective
costs based on feasibility and engineering studies using current restoration
standards and techniques. Provisions of US$2,489 million for close
down and restoration costs and for environmental clean up obligations
include estimates of the effect of future inflation and have been discounted
to their present value at an average of approximately six per cent
per annum, being an estimate of the risk free pre-tax cost of borrowing.
Excluding the effects of future inflation, but before discounting,
the provision is equivalent to some US$4.1 billion.
(d)
Some US$142 million of environmental
clean up expenditure is expected to take place within the next five
years. The remainder includes amounts for the operation and maintenance
of remediation facilities in later years. The provision for environmental
expenditure includes the issue described in (e) below.
(e)
In 1995, Kennecott Utah Copper (‘KUC’)
agreed with the US Environmental Protection Agency (‘EPA’)
and the State of Utah to complete certain source control projects and
perform specific environmental studies regarding contamination of ground
water in the vicinity of the Bingham Canyon mine. A remedial investigation
and feasibility study on the South Zone ground water contamination,
completed in March 1998, identified a range of alternative measures
to address this issue. Additional studies were conducted to refine
the workable alternatives. A remedial design document was completed
in 2002. A joint proposal and related agreements with the State of
Utah Natural Resource Damage Trustee, the State of Utah and the Jordan
Valley Water Conservancy District were approved in 2004. KUC also anticipates
entering into a formal agreement with the EPA in 2005, for the remedial
action on the ground water, including the acidic portion of the contamination.
(f)
At Kennecott Utah Copper, provisions
for close down and restoration costs were increased by US$76 million
and provisions for environmental clean up costs were increased by US$46
million, based on the current assumption that the expenditure will
occur earlier as a result of the change in the mine plan.
(g)
Other provisions deal with a variety
of issues and include US$35 million relating to the remaining provision
for the market valuation of the hedge books held by companies acquired
in 2000 and 2001, which will be utilised over the next seven years (see
note 28), and US$40 million relating to payments received from employees
for accommodation at some sites which are refundable in certain circumstances.
21
DEFERRED TAXATION
2004
2003
Note
US$m
US$m
At 1 January
1,381
1,006
Adjustment on currency translation
74
197
Reported in the STRGL
13
162
Subsidiary sold
–
6
Credited to profit for the year in respect
of timing differences
(113
)
(25
)
Other movements (a)
10
35
1,365
1,381
Included in provisions for liabilities
and charges
1,407
1,398
Included in accounts receivable
16
(42
)
(17
)
1,365
1,381
(a)
‘Other
movements’ includes deferred tax recognised by subsidiary holding companies
that is presented in these accounts as part of the tax charge on the profits
of the joint ventures and associates to which it relates. The amounts
reported
in the Statement of Total Recognised Gains and Losses relate to the provisions
for tax relief on exchange differences on net debt recorded directly in
reserves.
Rio Tinto
2004
Annual report and financial
statements
US$342 million (2003: US$380
million) of potential deferred tax assets have not been recognised as an
asset in these accounts. There is no time limit for the recovery of these
potential assets. This total includes US$298 million (2003: US$306 million)
of United States Alternative Minimum Tax credits and US tax losses for which
recovery is dependent on the level of taxable profits in the US tax group
and US$44 million (2003: US$74 million) of tax losses arising in countries
other than the US.
(c)
There is a limited
time period for the recovery of US$6 million (2003:US$26 million) of tax
losses which have been recognised as deferred tax assets in the accounts.
22
MEDIUM AND LONG TERM BORROWINGS
2004
2003
US$m
US$m
At 1 January
5,895
5,913
Adjustment on currency translation
25
184
Subsidiaries sold
(12
)
–
Loans drawn down
205
1,817
Loan repayments
(2,038
)
(2,019
)
At 31 December
4,075
5,895
Deduct: short term
(738
)
(2,046
)
Medium and long term borrowings
3,337
3,849
Borrowings at 31 December
Commercial paper
–
1,687
Bank loans
Secured
281
296
Unsecured
223
289
504
585
Other loans
Secured
Loans
33
47
Finance leases
100
119
Unsecured
Rio Tinto Finance
(USA) Limited Bonds 5.75% 2006
500
500
Rio Tinto Finance
(USA) Limited Bonds 2.625% 2008
600
600
Rio Tinto Finance
(USA) Limited Bonds 7.125% 2013
100
100
European Medium
Term Notes (b)
1,499
1,618
North Finance
(Bermuda) Limited 7% 2005
200
200
Other unsecured
loans
539
439
3,571
3,623
Total borrowings
4,075
5,895
(a)
The majority of the fixed rate
borrowings shown above are swapped to floating rates. Details of interest
rate and currency swaps and of available standby credit facilities are shown
in note 28.
(b)
The Group has a US$3 billion
European Medium Term Note programme for the issuance of short to medium
term debt of which US$1.5 billion was drawn down at 31 December 2004.
106
Rio Tinto 2004
Annual
report and financial statements
1,346,874 Ordinary shares were issued during the year resulting from the exercise of options under Rio Tinto plc employee share option schemes at prices between 521p and 1,107p (2003:
1,192,702 shares at prices between 521p and 1,061p).
(b)
At 31 December 2004, options over the following number of Ordinary shares were outstanding:
–
nil under the Rio Tinto plc Executive Share Option Scheme 1985 (31 December 2003: 23,000 shares at a price of 861p).
–
8,053,292 under the Rio Tinto Share Option Plan 1998 at prices between 808.8p and 1,458.6p (31 December 2003: 7,662,925 shares at prices between 808.8p and 1,458.6p). The exercise of share options
is subject to the satisfaction of a graduated performance condition set by the Remuneration committee at various dates up to April 2014.
–
1,679,702 under the Rio Tinto plc Share Savings Plan at prices between 711p and 1,277p and exercisable at various dates up to June 2010 (31 December 2003: 1,920,430 shares at prices between 521p and
1,150p).
(c)
At the 2004 annual general meeting the shareholders resolved to renew the general authority for the Company to buy back up to 10 per cent (within any 12 months) of its Ordinary shares of 10p each
for a further period of 18 months. Rio Tinto plc is seeking renewal of these approvals at its annual general meetng in 2005. During the year to 31 December 2004, no shares were bought back (2003: nil).
(d)
The ‘special voting share’ was issued to facilitate the joint voting by shareholders of Rio Tinto plc and Rio Tinto Limited on Joint Decisions, following the DLC merger. Directors have the
ability to issue an equalisation share if that is required under the terms of the DLC Merger Sharing Agreement. The ‘DLC dividend share’ was issued to facilitate the efficient management of funds within the DLC structure.
(e)
The aggregate consideration received for shares issued during 2004 was US$21 million (2003: US$20 million).
108
Rio Tinto 2004
Annual
report and financial statements
280,332 (2003: 240,466) shares were issued during the year, of which 223,617 (2003: 71,563) resulted from the exercise of share options under various Rio Tinto Limited employee share option schemes
at prices between A$20.14 and A$27.86 (2003: A$20.37 and A$27.86) and 56,715 (2003: 168,903) from the vesting of shares under the Rio Tinto Mining Companies Comparative Plan.
(b)
Rio Tinto Limited is authorised by shareholder approvals obtained in 2004 to buy back up to all the Rio Tinto Limited shares held by Tinto Holdings Australia Pty Limited (a wholly owned subsidiary
of Rio Tinto plc) plus, on-market, up to ten per cent of the publicly held shares in any 12 month period. Rio Tinto Limited is seeking renewal of these approvals at its annual general meeting in 2005. During the year to 31 December 2004 no shares
were bought back (2003: nil).
(c)
Total share capital in issue at 31 December 2004 was 499.3 million plus one special voting share and one DLC dividend share (31 December 2003: 499.1 million plus one special voting share and one DLC
dividend share). The ‘special voting share’ was issued to facilitate the joint voting by shareholders of Rio Tinto Limited and Rio Tinto plc on Joint Decisions following the DLC merger. Directors have the ability to issue an equalisation
share if that is required under the terms of the DLC Merger Sharing Agreement. The ‘DLC dividend share’ was issued to facilitate the efficient management of funds within the DLC structure.
(d)
At 31 December 2004, options over the following number of shares were outstanding:
–
4,073,599 shares under the Rio Tinto Share Option Plans 1998 & 2004 at prices between A$20.37 and A$39.87 (31 December 2003: 3,602,137 shares at prices between A$20.14 and A$39.87). These share
options are exercisable at various dates up to April 2014, subject to the satisfaction of a graduated performance condition set by the Remuneration committee.
–
2,651,980 shares under the Rio Tinto Limited Share Savings Plan at prices between A$25.57 and A$29.04 (31 December 2003: 2,385,453 shares at prices between A$25.57 and A$27.86). These share options
are exercisable at various dates up to June 2010.
(e)
The aggregate consideration received for shares issued during 2004 was US$5 million (2003: US$5 million).
Rio Tinto
2004
Annual report and financial
statements
Parent and subsidiary companies’ profit and loss account
At 1 January
6,266
3,968
Adjustment on currency translation (b)
487
1,569
Retained profit for the year
1,538
614
Goodwill written back on disposal of interest in operation (c)
228
–
Transfers and other movements (d)
48
115
At 31 December
8,567
6,266
Joint ventures’ profit and loss account
At 1 January
526
504
Adjustment on currency translation (b)
1
53
Retained profit for the year
166
15
Transfers and other movements (d)
9
(46
)
At 31 December
702
526
Associates’ profit and loss account
At 1 January
42
107
Adjustment on currency translation (b)
4
7
Retained profit/(loss) for the year
47
(3
)
Transfers and other movements (d)
(42
)
(69
)
At 31 December
51
42
Total profit and loss account
9,320
6,834
Other reserves
At 1 January
334
303
Adjustment on currency translation (b)
7
31
Transfers and other movements (d)
(15
)
–
At 31 December
326
334
Total reserves
– Parent and subsidiary companies
8,893
6,585
– Joint ventures
702
526
– Associated companies
51
57
9,646
7,168
(a)
A substantial portion of Group reserves are in overseas companies. If these reserves were distributed, there would be a liability to withholding taxes and to corporate tax in the UK and Australia.
This would, however, be reduced by double taxation relief. Provision is made in these accounts for such additional tax only to the extent that dividends have been accrued or there is a binding agreement to distribute such past earnings.
(b)
Adjustments on currency translation include net of tax exchange gains of US$139 million (2003: gains of US$715 million) on net debt.
(c)
The goodwill written back relates to the disposal of the Group’s interest in Freeport-McMoRan Copper & Gold Inc. (see note 4).
(d)
‘Transfers and other movements’ primarily relate to the disposal of operations during 2004 and 2003.
(e)
At 31 December 2004, cumulative goodwill written off directly to reserves amounted to US$2,936 million (2003: US$3,142 million).
Amounts attributable to Rio Tinto Limited public shareholders
The
consolidated shareholders’ funds of the DLC include US$2,845 million
(2003: US$2,270 million) and profit for the financial year includes US$636
million (2003: US$341 million) attributable to the economic interests of
shareholders in Rio Tinto Limited other than Rio Tinto plc.
110
Rio Tinto 2004
Annual
report and financial statements
Gross turnover (including share of joint ventures and associates)
Copper
15.7
12.7
2,225
1,495
Gold (all sources)
4.5
9.1
634
1,068
Iron ore
18.6
18.4
2,636
2,165
Coal
18.7
18.1
2,644
2,125
Aluminium
16.8
15.7
2,374
1,847
Industrial minerals
14.9
15.7
2,106
1,849
Diamonds
5.3
4.7
744
556
Other products
5.5
5.6
772
650
Total
100.0
100.0
14,135
11,755
Profit before tax
Copper, gold and by-products
31.5
27.3
1,186
680
Iron ore
23.1
30.1
869
748
Coal
13.7
10.2
516
255
Aluminium
13.3
11.5
501
287
Industrial minerals
9.7
11.5
366
286
Diamonds
7.6
7.5
288
187
Other products
1.1
1.9
40
46
100.0
100.0
3,766
2,489
Exploration and evaluation
(187
)
(127
)
Net interest (c)
(113
)
(139
)
Other items
(232
)
(255
)
3,234
1,968
Exceptional items (d)
362
126
Total
3,596
2,094
Net earnings
Copper, gold and by-products
33.8
27.1
861
429
Iron ore
22.4
31.6
569
500
Coal
13.8
10.3
350
163
Aluminium
13.1
11.9
334
189
Industrial minerals
9.3
10.0
236
159
Diamonds
6.6
7.0
169
111
Other products
1.0
2.1
25
33
100.0
100.0
2,544
1,584
Exploration and evaluation
(152
)
(98
)
Net interest (c)
(57
)
(59
)
Other items
(114
)
(45
)
2,221
1,382
Exceptional items (d)
592
126
Total
2,813
1,508
(a)
Operating assets of subsidiaries comprise net assets before deducting net debt, less outside shareholders’ interests which are calculated by reference to the net assets of the relevant
companies (ie net of such companies’ debt). For joint ventures and associates, Rio Tinto’s net investment is shown.
(b)
The above analyses include Rio Tinto’s shares of the results of joint ventures and associates including interest.
(c)
The amortisation of discount is included in the applicable product category. All other financing costs of subsidiaries are shown as ‘Net interest’.
(d)
Exceptional items are shown separately in the above analysis of ‘Profit before tax’ and ‘Net earnings’. Of the exceptional items, US$920 million before tax (US$913 million after
tax and outside shareholders’ interests) relates to profit on disposal of interests in operations, US$(398) million before tax (US$(161) million after tax and outside shareholders’ interests) relates to Palabora which is part of the
‘Copper, gold and by-products’ segment and US$(160) million before and after tax relates to Colowyo which is part of the ‘Coal’ segment.
Rio Tinto 2004
Annual
report and financial statements
The Group figures on page 111 include the
following amounts for joint ventures
2004
2003
US$m
US$m
Net investment
Copper, gold and by-products
1,236
1,072
Coal
1,122
1,080
Other
74
71
Total
2,432
2,223
Turnover
Copper
1,088
625
Gold
83
283
Coal
1,121
836
Other
81
76
Total
2,373
1,820
Profit before tax
Copper, gold and by-products
692
378
Coal
311
139
Other
25
3
Total
1,028
520
Net earnings
Copper, gold and by-products
465
256
Coal
223
102
Other
21
2
Total
709
360
The Group figures on page 111 include the
following amounts for associates
2004
2003
US$m
US$m
Net investment
Copper, gold and by-products
180
362
Other
67
59
Total
247
421
Turnover
Copper
85
185
Gold
211
411
Other
122
111
Total
418
707
Profit before tax
Copper, gold and by-products
120
147
Other
19
33
Total
139
180
Net earnings
Copper, gold and by-products
93
77
Other
12
21
Total
105
98
(a)
On 30 March 2004 Rio Tinto sold its 13.1 per cent shareholding in Freeport-McMoRan Copper & Gold Inc. which was included in ‘Copper, gold and by-products’.
112
Rio Tinto 2004
Annual
report and financial statements
Gross turnover (including share of joint
ventures and associates) by country of origin
North America
32.0
30.3
4,522
3,567
Australia and New Zealand
46.7
43.8
6,603
5,152
South America
8.0
5.8
1,130
682
Africa
5.7
5.6
812
662
Indonesia
2.2
8.8
308
1,037
Europe and other countries
5.4
5.7
760
655
Total
100.0
100.0
14,135
11,755
Profit before tax
North America
28.3
18.9
948
399
Australia and New Zealand
49.8
53.7
1,666
1,131
South America
18.5
11.1
619
234
Africa
1.9
3.1
65
65
Indonesia
2.4
16.5
80
348
Europe and other countries
(0.9
)
(3.3
)
(31
)
(70
)
100.0
100.0
3,347
2,107
Net interest (c)
(113
)
(139
)
3,234
1,968
Exceptional items (d)
362
126
Total
3,596
2,094
Net earnings
North America
32.0
25.2
730
363
Australia and New Zealand
48.7
52.3
1,109
754
South America
16.8
10.8
382
156
Africa
0.7
0.8
15
12
Indonesia
2.1
12.6
48
181
Europe and other countries
(0.3
)
(1.7
)
(6
)
(25
)
100.0
100.0
2,278
1,441
Net interest (c)
(57
)
(59
)
2,221
1,382
Exceptional items (d)
592
126
Total
2,813
1,508
(a)
Operating assets of subsidiaries
comprise net assets before deducting net debt, less outside shareholders’
interests which are calculated by reference to the net assets of the relevant
companies (ie net of such companies’ debt). For joint ventures and
associates, Rio Tinto’s net investment is shown.
(b)
The above analyses include
Rio Tinto’s shares of the results of joint ventures and associates
including interest.
(c)
The amortisation of discount
is included in the applicable geographical category. All other financing
costs of subsidiaries are shown as ‘Net interest’.
(d)
Exceptional items are shown
separately in the above analysis of ‘Profit before tax’ and ‘Net
earnings’. Of the exceptional items, US$920 million before tax (US$913
million after tax and outside shareholders’ interests) relates to profit
on disposal of interests in operations, US$(398) million before tax (US$(161)
million after tax and outside shareholders’ interests) relates to Palabora,
which is included in the ‘Africa’ segment and, US$(160) million
before and after tax relates to Colowyo, which is included in the ‘North
America’ segment.
Rio Tinto 2004
Annual
report and financial statements
The Group’s
policies with regard to currency, interest rate and commodity price exposures,
and the
use of derivative financial instruments, are discussed in the following sections
on
pages 34 and 35 of the Financial review:
A – Exchange rates, reporting currencies
and currency exposure
B – Interest
rates
C – Commodity
prices
D – Treasury management
and
financial instruments
Except where stated, the information given below relates to the financial instruments of the parent companies and their subsidiaries and excludes joint ventures and associates. The
information provided is as at the end of the financial year. Short term debtors and creditors are included only in
the currency analysis.
Financial instruments held by companies
acquired are marked to market as part of the adjustment of assets and liabilities
acquired to fair value.
Where appropriate, these fair value adjustments,
calculated on a basis consistent with that disclosed in Section E, are shown
in the disclosures
below.
A)
Currency
The Group’s currency
derivatives are itemised below:
a)
Forward contracts
hedging trading transactions
Buy
Sell
Weighted
Fair value
Total
currency
currency
average
fair
amount
amount
exchange
value
rate
Buy Australian dollar: sell US dollar
A$m
US$m
A$/US$
US$m
US$m
Less than 1 year
213
129
0.61
34
1 to 5 years
529
321
0.61
64
More than 5 years
30
18
0.61
2
Total
772
468
0.61
100
Of the above, contracts to sell US$439 million were acquired with companies
purchased in 2000 and 2001.
Buy New Zealand dollar: sell US dollar
NZ$m
US$m
NZ$/US$
US$m
Less than 1 year
95
45
0.47
23
1 to 5 years
520
233
0.45
100
More than 5 years
130
58
0.45
19
Total
745
336
0.45
142
Other currency forward contracts
(6
)
Total fair value
236
Adjust: Negative fair value recognised
in respect of these contracts (of which US$11m was recognised on acquisition)
13
Fair value not recognised
249
116
Rio Tinto 2004
Annual
report and financial statements
The Group acquired a series of bought call
options with companies purchased in 2000. The majority of these bought call
options were matched at 31 December 2003 by sold puts. The combination of
these instruments had a similar effect to forward contracts. During 2004
all of
these sold puts totalling US$248 million
were knocked out, ie automatically cancelled, because the Australian dollar
strengthened above a predetermined level.
Buy
Sell
Weighted
Fair
Total
currency
currency
average
value
fair
amount
amount
strike
value
rate
Bought A$ call options
A$m
US$m
A$/US$
US$m
US$m
Less than 1 year
94
66
0.70
7
1 to 5 years
247
173
0.70
17
Total fair value
341
239
0.70
24
Adjust: Negative fair value recognised on acquisition in respect of these contracts
25
Fair
value
not recognised
49
c)
Currency swaps hedging
non US dollar debt
Buy
Sell
Weighted
Fair
Total
currency
currency
average
value (a)
fair
amount
amount
exchange
value
Buy Euro: sell US dollars
US$m
rate
US$m
Less than 1 year
Euro 125m
153
0.82
17
1 to 5 years
Euro 850m
781
1.09
377
934
1.04
394
Buy Japanese yen: sell US dollars
1 to 5 years
Yen 21 billion
177
119
28
Buy sterling: sell US dollars
Less than 1 year
£10m
15
0.67
4
1 to 5 years
£165m
235
0.70
83
250
0.70
87
Buy Swiss francs: sell US dollars
Less than 1 year
CHF50m
36
1.39
9
1 to 5 years
CHF20m
12
1.67
6
48
1.46
15
Total currency swaps
1,409
524
Fair value recognised within carrying value of debt
(524
)
Fair value not recognised
–
(a)
These fair values comprise
only the ‘currency element’ of the swaps. The fair value of
the ‘interest element’ is presented in the summary of interest
rate swaps.
Rio Tinto
2004
Annual report and financial statements
Currency exposures
arising from the Group’s net monetary assets/(liabilities)
After taking into account
the effect of relevant derivative instruments, almost all the Group’s
net debt is either denominated in US dollars or in the functional currency
of the entity holding the debt. The table below sets out the currency
exposures arising from net monetary assets/(liabilities), other than
net debt, which are not denominated in the functional currency of the
relevant business unit. Gains and losses resulting from such exposures
are recorded in the profit and loss account. This table reflects the
currency exposures before adjusting for tax and outside interests.
Currency of exposure
Currency of exposure
United
Other
2004
United
Other
2003
States
currencies
Total
States
currencies
Total
dollar
dollar
US$m
US$m
US$
m
US$m
US$m
US$m
Functional currency of business unit:
United States dollar
–
36
36
–
30
30
Australian dollar
345
9
354
385
(16
)
369
Canadian dollar
57
–
57
51
(1
)
50
South African rand
22
12
34
47
6
53
Other currencies
12
(19
)
(7
)
20
15
35
Total
436
38
474
503
34
537
The table below shows the Rio Tinto share of
the above currency exposures after tax and outside interests:
Currency
of exposure
Currency
of exposure
United
Other
2004
United
Other
2003
States
currencies
Total
States
currencies
Total
dollar
dollar
US$m
US$m
US$m
US$m
US$m
US$m
Functional currency of business unit:
United States dollar
–
24
24
–
20
20
Australian dollar
222
7
229
251
(11
)
240
Canadian dollar
21
–
21
19
(1
)
18
South African rand
8
3
11
16
2
18
Other currencies
5
(16
)
(11
)
14
9
23
Total
256
18
274
300
19
319
B)
Interest rates
(i)
Financial liabilities and assets
including the effect of interest rate and currency swaps
This table analyses the
currency and interest rate composition of the Group’s financial
assets and liabilities:
2004
2003
United
Australian
Sterling
South
Other
Total
Total
States
dollar
African
currencies
carrying
carrying
dollar
rand
value
value
US$m
US$m
US$m
US$m
US$m
US$
m
US$m
Financial liabilities
(f)
Fixed rate
(758
)
–
–
–
–
(758
)
(721
)
Floating rate
(2,660
)
(422
)
(12
)
(265
)
(26
)
(3,385
)
(5,322
)
Non interest bearing (g)
(250
)
–
–
–
–
(250
)
(219
)
(3,668
)
(422
)
(12
)
(265
)
(26
)
(4,393
)
(6,262
)
Financial assets
(f)
Fixed rate
87
–
–
–
–
87
239
Floating rate (including loans to joint ventures and associates)
(ii) Fixed
rate liabilities and assets, presented gross, and interest rate and currency
swaps
The US$758
million (2003: US$721 million) of fixed rate liabilities shown in (i)
above comprise the gross liabilities of US$2,670 million (2003: US$2,716
million) less the interest rate and currency swaps of US$1,912 million
(2003: US$1,995 million) shown below:
Gross liabilities
2004
2003
Principal
Average
Excess of
Principal
Average
Excess of
fixed
fair value
fixed
fair value
rate
over
rate
over
principal
principal
Maturity
US$m
% p.a.
US$m
US$m
% p.a.
US$m
Less than 1 year
200
7.0
(6
)
–
–
–
1 to 5 years
1,150
4.1
8
1,350
4.6
(33
)
More than 5 years
100
7.1
(18
)
100
7.2
(17
)
US$ fixed rate liabilities
1,450
4.7
(16
)
1,450
4.8
(50
)
Less than 1 year
15
5.4
–
46
2.3
–
1 to 5 years
1,205
4.5
(67
)
1,220
4.5
(62
)
Non US dollar fixed rate liabilities (a)
1,220
4.5
(67
)
1,266
4.4
(62
)
Fixed rate liabilities before interest
rate swaps
2,670
(83
)
2,716
(112
)
Interest rate swaps
Principal
Average
2004
Principal
Average
2003
fixed
Fair
fixed
Fair
rate
value
(i)
rate
value
Maturity
US$m
% p.a.
US$m
US$m
% p.a.
US$m
Less than 1 year
200
7.0
5
–
–
–
1 to 5 years
850
4.7
5
1,050
5.1
41
Interest rate swaps to US$ floating rates
1,050
5.1
10
1,050
5.1
41
Less than 1 year
15
5.4
–
46
2.3
–
1 to 5 years
1,205
4.5
59
1,220
4.5
55
Interest rate swaps from non US$ fixed
rates to US$ floating rates (a)
1,220
4.5
59
1,266
4.4
55
Less than 1 year
225
7.0
(5
)
20
7.5
(1
)
1 to 5 years
133
5.8
(11
)
225
7.0
(19
)
More than 5 years
–
–
–
76
5.6
(8
)
Interest rate swaps to US$ fixed rates
(b)
358
6.6
(16
)
321
6.7
(28
)
Interest rate swaps (net impact)
1,912
53
1,995
68
Total fixed rate financial liabilities
after interest rate swaps
(b), (d)
758
(30
)
721
(44
)
(i) These
fair values include the interest element of the currency swaps described
earlier.
Gross assets
2004
2003
Principal
Average
Excess of
Principal
Average
Excess of
fixed
fair value
fixed
fair value
rate
over
rate
over
principal
principal
US$m
% p.a.
US$m
US$m
% p.a.
US$m
Less than 1 year
87
2.1
–
239
1.0
(1
)
Total fixed rate financial assets
87
2.1
–
239
1.0
(1
)
(a)
All of the above non US$ liabilities are swapped to US$. The principal amounts shown above reflect the currency element of the related currency swaps.
(b)
As a consequence of acquisitions during 2000, the Group holds a number of interest rate swaps to receive US$ floating rates and pay US$ fixed rates which have been included in the total of fixed
rate debt shown above.
(c)
The Group has US$100 million of finance leases (2003: US$119 million), the largest of which has a principal of US$74 million, a maturity of 2018 and a floating interest rate.
(d)
After taking into account all interest rate swaps, the Group’s fixed rate debt totals US$758 million and has a weighted average interest rate of 5.1 per cent and a weighted average time to
maturity of four years (2003: US$721 million with a weighted average interest rate of 5.1 per cent and a weighted average time to maturity of four years).
(e)
Interest rates on the great majority of the Group’s floating rate financial liabilities and assets will have been reset within six months. The interest rates applicable to the Group’s US
dollar denominated floating rate financial liabilities and assets did not differ materially at the year end from the three month US dollar LIBOR rate of 2.5 per cent (2003: 1.2 per cent).
(f)
The above table does not include the remaining US$35 million (2003:
US$39 million) net provision for the mark to market valuation of the hedge books held by
companies acquired in 2000 and 2001 and other financial assets of US$216 million (2003: US$145 million) all of which are non interest bearing. Further details of the instruments included within the acquisition provision for mark to market valuation
of the hedge books held by companies acquired are shown in section A above and section C below.
(g)
These non interest bearing financial liabilities have been presented in the financial statements on a discounted basis, using a discount rate of 3.8 per cent.
Rio Tinto 2004
Annual
report and financial statements
The Group’s material
commodity derivatives are summarised below:
2004
2003
Fair value
Fair value
US$m
US$m
Commodity derivatives, including options (in 2003)
(10
)
(20
)
Adjust: Fair value recognised on acquisition in respect of these contracts
(1
)
(2
)
Fair value not recognised
(11
)
(22
)
D) Liquidity
The maturity profile of the Group’s
net debt is discussed in the Balance Sheet section of the Financial review
on page 34.
Financial assets and liabilities are repayable as follows
2004
2003
US$m
US$m
Financial liabilities
Within 1 year, or on demand
(903
)
(2,270
)
Between 1 and 2 years
(1,168
)
(672
)
Between 2 and 3 years
(1,000
)
(1,109
)
Between 3 and 4 years
(798
)
(1,019
)
Between 4 and 5 years
(43
)
(745
)
After 5 years
(481
)
(447
)
(4,393
)
(6,262
)
Financial assets
Within 1 year, or on demand
515
670
Between 1 and 2 years
14
10
Between 2 and 3 years
15
14
Between 3 and 4 years
14
15
Between 4 and 5 years
15
14
After 5 years
72
87
Total per currency/interest rate analysis
(3,748
)
(5,452
)
In addition, of the remaining US$35 million
net provision for the mark to market of the hedge books held by companies on
acquisition in 2000 and 2001, US$10 million matures in 2005, US$24 million in
2006 to 2009 and US$1 million thereafter. There are other financial assets totalling
US$216 million, of which US$138 million have no fixed maturity and US$78 million
has a maturity greater than one year.
As
at 31 December 2004, a total of US$1,499 million is outstanding under the US$3
billion European Medium Term Notes facility, of which US$204 million is repayable
within one year.
In
accordance with FRS 4, all commercial paper is classified as short term borrowings.
There were no outstandings as at 31 December 2004, (2003: commercial paper of
US$1.1 billion backed by medium term facilities).
At
31 December 2004, the Group had unutilised standby credit facilities totalling
US$1.45 billion. These facilities, which are summarised below, are for back
up support for the Group’s commercial paper programmes and for general
corporate purposes:
2004
2003
US$m
US$m
Unutilised standby credit facilities
Within 1 year
600
1,650
Between 1 and 2 years
850
–
After 2 years
–
1,100
1,450
2,750
120
Rio Tinto 2004
Annual
report and financial statements
The carrying values and the fair values of Rio
Tinto’s financial instruments at 31 December are shown in the following
table. Fair value is the amount at which a financial instrument could be exchanged
in an arm’s length transaction between informed and willing parties. Where
available, market values have been used to determine fair values. In other cases,
fair values have been calculated using quotations from independent financial
institutions, or by discounting expected cash flows at prevailing market rates.
The fair values of cash, short term borrowings and loans to joint ventures and
associates approximate to their carrying values, as a result of their short
maturity or because they carry floating rates of interest.
If
Rio Tinto’s financial instruments were realised at the fair values shown,
tax of US$84 million would become payable (2003: US$86 million payable). The
maturity of the financial instruments is shown in the notes above.
2004
2003
Carrying
Fair
Carrying
Fair
value
value
value
value
US$m
US$m
US$m
US$m
Primary financial instruments held or issued to finance the Group’s operations:
Cash (note 17)
390
390
395
395
Investments (b)
89
89
230
229
Short term borrowings (note 18) (a)
(836
)
(836
)
(2,199
)
(2,199
)
Medium and long term borrowings (note
22) (a)
(3,831
)
(3,914
)
(4,231
)
(4,343
)
Loans to joint ventures and associates
(note 13)
166
166
174
174
Other assets
216
302
156
156
Other liabilities
(250
)
(250
)
(219
)
(219
)
(4,056
)
(4,053
)
(5,694
)
(5,807
)
Derivative financial instruments held to manage the interest rate and currency profile:
Less: mark to market provision at acquisition/other provisions
37
47
‘Other’ financial assets
(216
)
(145
)
Total per liquidity analysis
(3,748
)
(5,452
)
(a)
Of the currency swaps, of US$524 million, US$30 million are netted against short term borrowings in the balance sheet and US$494 million are netted against medium and long term
borrowings.
(b)
US$11 million of these investments are in fixed assets.
Gains and losses on hedges
Changes in the fair value of derivatives used
as hedges of trading transactions, capital expenditure and interest rate exposures,
including changes relating to derivatives held by companies acquired during 2000
and 2001, are not recognised in the financial statements until the hedged position
matures.
2004
2003
Gains
Losses
Total net
Total net
gains/
gains/
(losses)
(losses)
US$m
US$m
US$m
US$m
Unrecognised gains and losses on hedges at 1 January
471
(66
)
405
25
Gains and losses arising in previous years recognised in the year
(161
)
18
(143
)
(35
)
Gains and losses arising before 1 January that were not recognised in the year
310
(48
)
262
(10
)
Gains and losses arising in the year that were not recognised in the year
87
(9
)
78
415
Unrecognised gains and losses on hedges at 31 December
397
(57
)
340
405
Of which:
Gains and losses expected to be recognised within one year
105
(27
)
78
143
Gains and losses expected to be recognised in more than one year
292
(30
)
262
262
397
(57
)
340
405
Rio Tinto 2004
Annual
report and financial statements
‘Contracted capital expenditure’
includes amounts falling due within one year of US$564 million (2003: US$598
million).
(b)
‘Operating lease commitments’
includes amounts falling due within one year of US$36 million (2003: US$38
million).
Unconditional purchase obligations
The aggregate amount of future payment
commitments under unconditional purchase obligations outstanding at 31 December
was:
2004
2003
US$m
US$m
Within 1 year
386
268
Between 1 and 2 years
382
278
Between 2 and 3 years
365
275
Between 3 and 4 years
324
243
Between 4 and 5 years
287
234
After 5 years
1,488
1,712
3,232
3,010
Unconditional purchase obligations relate to
commitments to make payments in the future for fixed or minimum quantities of
goods or services at fixed or minimum prices. The balance outstanding at 31
December 2004 relates mainly to commitments under ‘take or pay’ contracts.
Contingent liabilities
The aggregate amount of indemnities and other
performance guarantees on which no material loss is expected is US$435 million
(2003: US$266 million).
In
2002, the Australian Tax Office issued assessments of approximately A$500 million
(which amount includes penalties and interest) in relation to certain transactions
undertaken in 1997 to acquire franking credits. The transactions were conducted
based on the Group’s considered view of the law prevailing at the time.
Subsequently, the law was changed. The Group lodged objections to the assessments
and on 26 May 2003 the Australian Tax Office (‘ATO’) substantially
disallowed those objections. The Group subsequently lodged proceedings in the
Federal Court to dispute the assessments.
As
required by Australian tax law and practice, part payment of the disputed tax
assessments was required pending resolution of the dispute. A payment of A$164
million (US$128 million at the year end exchange rate) was made, which will
be subject to recovery with interest if, as it is believed based on Counsels’
opinion, the Group is successful in challenging the assessments. Consequently,
the amount paid has been recorded as a receivable on the balance sheet.
As
at the year end, the amount of the disputed tax assessments, penalties and interest
stood at approximately A$479 million (US$373 million at the year end exchange
rate) after tax relief on the general interest charge component.
There
are a number of legal claims arising from the normal course of business which
are currently outstanding against the Group. No material loss to the Group is
expected to result from these claims.
30
AVERAGE NUMBER OF EMPLOYEES
Subsidiaries and
Joint ventures
and
Group total
joint arrangements
(a)
associates
(Rio Tinto share)
2004
2003
2004
2003
2004
2003
Principal locations of employment
Australia and New Zealand
10,002
9,274
925
983
10,927
10,257
North America
8,275
8,478
1,055
1,034
9,330
9,512
Africa
4,724
5,661
441
422
5,165
6,083
Europe
2,630
3,059
161
386
2,791
3,445
South America
1,361
1,794
851
773
2,212
2,567
Indonesia
511
569
1,754
3,234
2,265
3,803
Other countries
195
205
155
144
350
349
27,698
29,040
5,342
6,976
33,040
36,016
(a)
Employee numbers, which represent the average for the year, include 100 per cent of employees of subsidiary companies. Employee numbers for joint arrangements, joint ventures and associates are
proportional to the Group’s equity interest.
(b)
Part time employees are included on a full time equivalent basis. Temporary employees are included in employee numbers.
(c)
People employed by contractors are not included.
122
Rio Tinto 2004
Annual
report and financial statements
In addition, the Group holds 19.0 per cent of the Labrador Iron Ore Royalty Income Fund which has a 15.1 per cent interest in the Iron Ore Company of Canada.
(c)
The Group’s shareholding in Rössing Uranium Limited carries 35.54 per cent of the total voting rights. Rössing is consolidated by virtue of board control.
(d)
The results of Bougainville Copper Limited are not consolidated (see note 40).
(e)
The Group comprises a large number of companies and it is not practical to include all of them in this list. The list therefore only includes those companies that have a more significant impact on
the profit or assets of the Group.
(f)
The Group’s principal subsidiaries are held by intermediate holding companies and not directly by Rio Tinto plc or Rio Tinto Limited.
(g)
All entities operate mainly in the countries in which they are incorporated.
Rio Tinto 2004
Annual
report and financial statements
The Group has joint control
of the above ventures and therefore includes them in its accounts using
the gross equity accounting technique.
(b)
These entities are unincorporated.
(c)
The Group comprises a large
number of entities and it is not practical to include all of them in this
list. The list therefore only includes those entities that have a more significant
impact on the profit or assets of the Group.
(d)
The Group’s principal joint ventures are held by intermediate holding companies and not directly by Rio Tinto plc or Rio Tinto Limited.
(e)
All entities operate mainly in the countries in which they are incorporated.
(f)
The year end of Minera Escondida Limitada is 30 June.
33
PRINCIPAL ASSOCIATES
At 31 December 2004
Name and country of incorporation/operation
Principal activities
Number of
Class of
Proportion
Group
shares held
shares held
of class held
interest
by the Group
%
%
Papua New Guinea
Lihir Gold Limited (a)
Gold mining
185,758,126
Ordinary Kina
0.1
14.46
14.46
South Africa
Tisand (Pty) Limited
Rutile and zircon mining
7,353,675
R1
49.5
50
United States of America
Cortez
Gold mining
(b)
40
(a)
The Group continues to have significant influence over the activities of Lihir Gold Limited, including Board representation; consequently the Group equity accounts for its interest in this
company.
(b)
This entity is unincorporated.
(c)
The Group comprises a large number of entities and it is not practical to include all of them in this list. The list therefore only includes those entities that have a more significant impact on the
profit or assets of the Group.
(d)
The Group’s principal associates are held by intermediate holding companies and not directly by Rio Tinto plc or Rio Tinto Limited.
(e)
All entities operate mainly in the countries in which they are incorporated.
124
Rio Tinto 2004
Annual
report and financial statements
The Group comprises a large number of entities
and it is not practical to include all of them in this list. The list therefore
only includes those entities that have a more significant impact on the
profit or assets of the Group.
(b)
These entities are unincorporated.
(c)
All entities operate mainly in the countries in which they are incorporated.
(d)
The Group’s principal joint arrangements are held by intermediate holding companies and not directly by Rio Tinto plc or Rio Tinto Limited.
35
SALES AND PURCHASES
OF SUBSIDIARIES, JOINT VENTURES, ASSOCIATES AND OTHER INTERESTS IN
OPERATIONS
2004 Disposals
Name of operation
Location
Principal activities
Ownership
Date of
disposed
disposal
%
Subsidiaries
Mineração Serra de Fortaleza
Limitada
Brazil
Nickel mining
99.9
1 January 2004
Zinkgruvan AB
Sweden
Zinc, lead and silver mining
100.0
2 June 2004
Rio Paracatu Mineração S.A.
Brazil
Gold mining
51.0
31 December 2004
Joint ventures
Hail Creek
Australia
Coal mining
10.0
15 November 2004
Associates
Freeport-McMoRan Copper & Gold Inc.
(b)
USA
Copper and gold mining in
Indonesia
13.1
30 March 2004
Sociedade Mineira de Neves-Corvo S.A. (Somincor)
Portugal
Copper mining
49.0
18 June 2004
Other investments
Lake Cowal
Australia
Gold mining
(c)
9 July 2001
Sepon
Laos
Gold mining
20.0
1 January 2004
Boke
Guinea
Bauxite mining
4.0
25 June 2004
(a)
The aggregate profit on disposal of interests in operations in 2004 was US$920 million, which is analysed in note 4. These gains have been classified as exceptional items and consequently excluded
from adjusted earnings at the foot of the profit and loss account.
(b)
The sale of investment in Freeport-McMoRan Copper & Gold Inc. does not affect the terms of the Grasberg joint venture referred to in note 32 above.
(c)
The Group disposed of the Lake Cowal gold project in July 2001. In accordance with the sale agreement, a US$15 million payment on commencement of mining activity was made to the Group on 5 March
2004.
(d)
In accordance with FRS 2 and FRS 9, the Group consolidates the results of subsidiary operations, and recognises its share of the results of joint ventures and
associates,
up to the date of disposal. In addition to the amount recorded as ‘Profit
on disposal of interests in operations’ on the face of the profit
and loss account, the subsidiaries which were disposed of during the year
contributed US$16 million to Group profit.
(e)
The Cash flow
statement includes proceeds from disposals of interests in operations
as follows:
–
US$1,511 million included
in ‘Disposals less acquisitions’ which, in accordance with FRS1,
is stated net of US$16 million cash and overdrafts transferred on sale
of subsidiaries. This comprises US$431 million in respect of subsidiaries
and US$1,080 million in respect of joint ventures and associates.
–
US$110 million included
in ‘Sales less purchases of other investments’.
Rio Tinto 2004
Annual
report and financial statements
SALES AND PURCHASES
OF SUBSIDIARIES, JOINT VENTURES, ASSOCIATES
AND OTHER INTERESTS IN OPERATIONS
CONTINUED
2003 Disposals
Name of operation
Location
Principal activities
Ownership
disposed
%
Date of
disposal
Subsidiaries
Peak Gold Mines Pty Limited
Australia
Gold mining
100
17 March 2003
Joint ventures
P.T. Kaltim Prima Coal
Indonesia
Coal mining
50
10 October 2003
Associates
Minera Alumbrera Limited
Argentina
Copper and gold mining
25
17 March 2003
(f)
The profit on disposal of interests in operations in 2003 was US$126 million. This was classified as an exceptional item and consequently excluded from adjusted earnings at the foot of the profit
and loss account.
(g)
The sale proceeds of US$403 million relating to these disposals were included in the Cash flow statement within ‘Disposals less acquisitions’.
2003 Acquisitions
During 2003 Kennecott Energy
increased its holding in Pegasus Technologies Inc from 20 per cent to 86 per
cent. The transaction gave rise to goodwill of US$20 million. The transaction
did not involve any cash consideration.
36
DIRECTORS’ REMUNERATION
Aggregate remuneration of
the directors of the parent companies was as follows:
2004
2003
US$’000
US$’000
Emoluments
9,992
9,571
Long term incentive plans
57
3,278
10,049
12,849
Pension contributions
669
424
Gains made on exercise of share options
2,414
2,029
For 2004, a total of US$4,190,900 (2003: US$4,048,800)
was attributable to the highest paid director in respect of the aggregate amounts
disclosed in the above table, including gains made on exercise of share options.
The accrued pension entitlement for the highest paid director was US$712,400
(2003: US$1,158,700).
The aggregate
remuneration incurred by Rio Tinto plc in respect of its directors was US$7,756,000
(2003: US$9,794,000). There were no pension contributions.
The aggregate
remuneration, including pension contributions and other retirement benefits,
incurred by Rio Tinto Limited in respect of its directors was US$5,376,000 (2003:
US$5,508,000). The aggregate pension contribution was US$668,982 (2003: US$423,938).
During 2004, four directors
(2003: six) accrued retirement benefits under defined benefit arrangements.
Shares
awarded last year in respect of the MCCP 2000 performance periods vested after
the publication of the 2003
Annual Report and financial statements
and
the value of awards provided therein were estimated based on share prices of
1,386p and A$35.24. The actual share prices on 27 February 2004 when the awards
vested were 1,440.5p and A$35.83 and the above 2004 figures for long term incentive
plans have included this adjustment. Further details are given in the Remuneration
report on page 69.
Emoluments
included in the table above have been translated from local currency at the
average rate for the year with the exception of bonus payments which, together
with amounts payable under long term incentive plans, have been translated at
the year end rate.
More detailed
information concerning directors’ remuneration, shareholdings and options
is shown in the Remuneration report, including Tables 1 to 5, on pages 67 to
70.
126
Rio Tinto 2004
Annual report and
financial statements
Remuneration payable to other accounting
firms
(g)
Statutory audit
0.4
0.4
Tax services
3.0
2.5
Internal audit
1.8
2.3
Other services
5.9
6.9
11.1
12.1
22.6
22.2
(a)
The audit fees payable to PricewaterhouseCoopers, the Group Auditors, are reviewed by the
Audit committee
. The
committee sets the policy for the award of non audit work to the auditors and reviews the nature and extent of such work, and the amount of the related fees, to ensure that independence is maintained. The fees disclosed above consolidate all
payments made to PricewaterhouseCoopers by the companies and their subsidiaries.
(b)
‘Audit related regulatory reporting’ includes the audit of employee benefit plans, consultation regarding the application of accounting principles (including IFRS) and work performed in
connection with Section 404 of the Sarbanes-Oxley Act.
(c)
‘Further assurance services’ includes due diligence for potential business acquisitions and disposals.
(d)
‘Tax services’ includes tax compliance, involving the preparation or review of returns for corporation, income, sales and excise taxes acquisitions advice on transfer pricing and dealing
with tax returns for expatriates.
(e)
‘Other services’ includes reviews of risk management policies and procedures, forensic investigations and provision of training services.
(f)
Internal audit fees payable to Group Auditors in 2003 relate to projects which were carried forward from 2002.
(g)
‘Remuneration payable to other accounting firms’ does not include fees for similar services payable to suppliers of consultancy services other than accountancy firms.
(h)
Amounts payable to PricewaterhouseCoopers for non audit work for the Group’s UK companies were US$1.7 million (2003: US$1.3 million) and for the Group’s Australian companies were US$2.1
million (2003: US$2.3 million).
Rio Tinto 2004
Annual
report and financial statements
Information about material related party transactions
of the Rio Tinto Group is set out below:
Subsidiary companies:
Details of investments in principal
subsidiary companies are disclosed in note 31.
Joint ventures and associates:
Information relating to joint ventures and associates can be found in the following notes:
Note 4
– Exceptional items
Note 5
– Net interest payable and similar charges
Note 6
– Amortisation of discount
Note 7
– Taxation charge
Note 12
– Property, plant and equipment
Note 13
– Fixed asset investments
Note 14
– Net debt of joint ventures and associates
Note 16
– Accounts receivable and prepayments
Note 19
– Accounts payable and accruals
Note 25
– Share premium and reserves
Note 26
– Product analysis
Note 27
– Geographical analysis
Note 30
– Average number of employees
Note 32
– Principal joint venture interests
Note 33
– Principal associates
Note 35
– Sales and purchases of subsidiaries, joint ventures, associates and other interests in operations
Information relating to joint
arrangements can be found in note 34 – Principal joint arrangements.
Pension funds
Information relating to pension fund
arrangements is disclosed in note 41.
Directors
Details
of directors’ remuneration are set out in note 36 and in the Remuneration
report on pages 63 to 70.
Leighton Holdings Limited (Leighton)
In 2001, John Morschel became a director
and, subsequently, the chairman of Leighton,
Australia’s largest project development and contracting group. A number
of Rio Tinto companies in Australia and Indonesia have, in the ordinary course
of their businesses, awarded commercial contracts to subsidiaries of Leighton.
The Board does not consider the value of these contracts to be material to the
business of either Leighton or the Rio Tinto Group. John Morschel resigned from
the board of Leighton on 25 March 2004.
Barclays Bank plc and ANZ Banking Group Limited
On 1 October 2004, Leigh Clifford became
a director of Barclays Bank plc and John Morschel became a director of ANZ Banking
Group Limited. Rio Tinto is a client of both these banks.
DuPont
Richard
Goodmanson’s employer, the DuPont Company, has commercial buy and sell arrangements
with Rio Tinto. These are not material to either company, and in the normal course
of his duties, he does not play a
role
in nor exert influence over these transactions.
39
EXCHANGE RATES IN
US$
The principal exchange rates
used in the preparation of the 2004 financial statements are:
Annual average
Year end
2004
2003
2004
2003
Sterling
1.83
1.63
1.93
1.78
Australian dollar (a)
0.73
0.65
0.78
0.75
Canadian dollar
0.77
0.71
0.83
0.77
South African rand
0.155
0.132
0.177
0.151
(a)
The Australian dollar exchange rates, given above, are based on the Hedge
Settlement Rate set by the Australian Financial Markets Association.
128
Rio Tinto 2004
Annual
report and financial statements
The Panguna mine remains shut down.
Access to the mine site has not been possible and an accurate assessment of
the condition of the assets cannot be determined. Considerable funding would
be required to recommence operations to the level which applied at the time
of the mine’s closure in 1989 and these funding requirements cannot be
forecast accurately. The directors do not have access to reliable, verifiable
or objective information on BCL and the directors have therefore decided to
exclude BCL information from the financial statements. BCL reported a net profit
of US$2 million for the financial year (2003: profit of US$4 million). This
is based upon actual transactions for the financial year. The aggregate amount
of capital and reserves reported by BCL as at 31 December 2004 was US$106 million
(2003: US$97 million). The Group owns 214,887,966 shares in BCL, representing
53.6 per cent of the issued share capital. The investment of US$195 million
was fully provided against in 1991. At
31
December
2004, the market value of the shareholding in BCL was US$40 million.
41
POST RETIREMENT BENEFITS
a) SSAP 24 accounting
and disclosure
Pensions
The Group operates a number
of pension plans around the world. Whilst some of these plans are defined contribution,
the majority are of the funded defined benefit type, with assets held in separate
trustee administered
funds. Valuations of these plans are updated annually to
3
1
December by independent qualified actuaries. Further details regarding the plans
are provided in the FRS 17 disclosures in section (b) of this note.
UK
Australia
US
Canada
Other (e)
Summary of independent actuarial
reviews
At 31 December 2004
Assumptions
Rate of return on investments (a)
6.8%
6.4%
6.8%
6.8%
8.2%
Rate of earnings growth, where appropriate
(b)
4.9%
4.7%
4.2%
4.4%
6.0%
Rate of increase in pensions
2.9%
2.7%
–
–
4.0%
Results
Smoothed market value of assets ($m) (c)
1,738
1,273
682
815
208
Percentage of coverage of liabilities by
assets (d)
121%
101%
91%
82%
112%
Amount of deficit for individual plans
with net deficits ($m)
15
–
97
186
12
At 31 December 2003
Assumptions
Rate of return on investments (a)
6.9%
6.4%
6.7%
6.5%
9.2%
Rate of earnings growth, where appropriate
(b)
4.8%
4.0%
4.0%
4.0%
6.5%
Rate of increase in pensions
2.8%
2.5%
–
–
4.5%
Results
Smoothed market value of assets ($m) (c)
1,506
962
573
673
194
Percentage of coverage of liabilities by
assets (d)
124%
100%
81%
80%
91%
Amount of deficit for individual plans
with net deficits ($m)
13
7
145
174
19
(a)
The rate of return on investments assumed for Australia is after taking into account the tax applicable to Australian pension schemes.
(b)
The rate of earnings growth assumed includes a promotional salary scale where appropriate.
(c)
Assets were measured at market value smoothed over a one year period.
(d)
Asset coverage of the liability is quoted after allowing for expected increases in earnings.
(e)
The assumptions vary by location for the ‘Other’ plans. Assumptions shown are for Africa.
Other information
A triennial actuarial valuation of the Group’s
UK plan was made at 31 March 2003 using the projected unit method.
In Australia,
whilst Group companies sponsor or subscribe to a number of pension plans, the
Rio Tinto Staff Superannuation Fund is the only significant plan. This plan
principally contains defined contribution liabilities but also has defined benefit
liabilities. Valuations are made at least every three years using the projected
unit method, with the latest valuation being as at 30 June 2004.
A number of defined benefit
pension plans are sponsored by the US entities, typically with separate provision
for salaried and hourly paid staff. Valuations are made annually at 1 January
using the projected unit method.
A number of defined benefit
pension plans are sponsored by entities in Canada. Valuations are updated annually
using the projected unit method.
Other defined benefit
plans sponsored by the Group around the world were assessed at various dates
during 2002, 2003 and 2004. The above summary is based on the most recent valuation
in each case, updated to the appropriate balance sheet date.
The expected average remaining
service life in the plans relating to the Group’s major entities ranges
from eight to 17 years, with an overall average of 12 years.
The main pension plans, providing purely defined contribution
benefits, held assets equal to their liabilities, of US$180 million as at 31
December 2004 (US$186 million at 31 December 2003). The Group’s contributions
to these plans of US$6 million (2003: US$9 million) are charged against profits
and are included in the ‘Regular cost’ shown below.
The Group also operates
a number of unfunded plans, which are included within the deficit and percentage
coverage statistics above, measured on a basis consistent with both SSAP 24
and FRS 17.
Rio Tinto 2004
Annual
report and financial statements
Profit
and loss account – effect of pension costs, before tax and outside
shareholders’ interests
2004
2003
US$m
US$m
Regular cost
(118
)
(102
)
Variation cost
(92
)
(90
)
Interest on prepayment under
SSAP 24
39
42
Settlement
41
–
Net post retirement cost
(130
)
(150
)
The variation cost reflects the amortisation of the excess of the pension asset
carried in the balance sheet at the beginning of the year over the surplus/(deficit)
in the relevant plans calculated on a SSAP 24 valuation basis. The settlement
represents a pension surplus allocated to the Group in South Africa, which is
reflected as a credit.
Balance sheet – effect
of pension assets and liabilities, before tax and outside shareholders’ interests
2004
2003
US$m
US$m
Prepayment under SSAP 24
616
620
Provisions
(53
)
(77
)
Net post retirement asset
563
543
Post retirement healthcare
Certain subsidiaries of the Group, mainly in the US, provide health and life insurance benefits to retired employees and in some cases their beneficiaries and covered dependants. Eligibility for cover is dependent upon
certain age and service criteria. These arrangements are unfunded.
On 30 September 2004, the unfunded accumulated post retirement benefit obligation and annual cost of accrual of benefits were determined by independent actuaries using the projected unit
method. The main financial assumptions were: discount rate 5.7 per cent (at 30 September 2003: 6.1 per cent), Medical Trend Rate 10.5 per cent reducing to 5.0 per cent by the year 2011 (at 30 September 2003: initially 11.2 per cent reducing to 4.7
per cent by the year 2011), claims cost based on individual company experience. The assumptions were consistent with those adopted for determining pension costs. At 30 September 2004, which is the measurement date, the unfunded accumulated post
retirement benefits obligation (excluding associates and joint ventures) was US$523 million (at 30 September 2003: US$563 million).
Profit and loss account – effect
of post retirement healthcare costs, before tax and outside shareholders’ interests
2004
2003
US$m
US$m
Regular cost
(10
)
(9
)
Amortisation
(4
4
Interest
(32
)
(29
)
Curtailment
3
–
Net post retirement cost
(43
)
(34
)
Balance sheet – effect
of post retirement healthcare liabilities, before tax and outside shareholders’ interests
2004
2003
US$m
US$m
Provisions
(523
)
(498
)
130
Rio Tinto 2004
Annual
report and financial statements
b) FRS 17 Transitional
disclosures
FRS 17 – ‘Retirement benefits’,
which deals with accounting for post retirement benefits, has not been adopted,
but the additional disclosures which are required are shown below. The standard
requires pension deficits, and surpluses to the extent that they are considered
recoverable, to be recognised in full. Annual service cost and net financial
income on the assets and liabilities of the plans are recognised through earnings.
Other fluctuations in the value of the surpluses/(deficits) are recognised in
the Statement of Total Recognised Gains and Losses (‘STRGL’).
Details
of post retirement benefit plan assets and liabilities at 31 December 2004,
2003 and 2002, valued on a projected unit basis in accordance with FRS 17, are
set out below:
UK
Australia
US
Canada
Other
(mainly
Main assumptions for FRS 17 purposes
Africa)
At 31 December 2004
Rate of increase in salaries
4.9%
4.7%
4.2%
4.4%
6.0%
Rate of increase in pensions
2.9%
2.7%
–
–
4.0%
Discount rate
5.3%
5.1%
5.6%
5.6%
8.5%
Inflation
2.9%
2.7%
2.7%
2.7%
4.0%
At 31 December 2003
Rate of increase in salaries
4.8%
4.0%
4.0%
4.0%
6.5%
Rate of increase in pensions
2.8%
2.5%
–
–
4.5%
Discount rate
5.4%
6.0%
5.9%
6.1%
9.0%
Inflation
2.8%
2.5%
2.5%
2.3%
4.5%
At 31 December 2002
Rate of increase in salaries
4.8%
4.0%
3.2%
3.7%
10.5%
Rate of increase in pensions
2.3%
2.5%
–
–
7.0%
Discount rate
5.6%
6.2%
6.2%
6.5%
11.5%
Inflation
2.3%
2.5%
2.2%
2.2%
7.0%
The main financial assumptions
used for the healthcare schemes, which are predominantly in the US, were:
discount rate: 5.6% (2003: 5.9%, 2002: 6.2%), Medical Trend Rate: 10.7%
reducing to 5.2% by the year 2011 (2003: Medical Trend Rate: 11.5% reducing
to 5.0% by the year 2011, 2002: Medical Trend Rate 8.0% reducing to 5.0%
by the year 2009), claims cost based on individual company experience. For
the pension and healthcare arrangements the post retirement mortality assumptions
allow for expected increases in longevity. The mortality table used for
the main arrangements implies that a 60 year old male has an expected future
lifetime of 24 years.
UK
Australia
US
Canada
Other
(mainly
Africa
)
Long term rate of return expected at 31
December 2004
Equities
7.9%
7.2%
7.7%
7.7%
9.0%
Fixed interest bonds
4.8%
4.7%
5.1%
5.1%
8.5%
Index linked bonds
4.8%
4.7%
5.1%
5.1%
8.5%
Other
4.5%
4.9%
5.2%
4.0%
5.0%
Long term rate of return expected at 31
December 2003
Equities
7.8%
7.0%
7.5%
7.3%
9.5%
Fixed interest bonds
5.0%
5.1%
5.4%
5.2%
8.5%
Index linked bonds
5.0%
5.1%
5.4%
5.2%
8.5%
Other
4.6%
5.1%
5.1%
3.3%
5.6%
Long term rate of return expected at 31
December 2002
Equities
7.3%
7.0%
7.2%
7.2%
12.5%
Fixed interest bonds
5.0%
5.5%
5.6%
6.0%
11.0%
Index linked bonds
5.0%
5.5%
5.6%
6.0%
11.0%
Other
4.6%
5.9%
6.4%
5.0%
10.2%
Rio Tinto 2004
Annual
report and financial statements
The assets in the pension plans and the
contributions made were:
UK
Australia
US
Canada
Other
Total
(mainly
Africa)
US$m
US$m
US$m
US$m
US$m
US$m
Value at 31 December 2004
Equities
1,211
852
460
534
114
3,171
Fixed interest bonds
318
299
154
228
14
1,013
Index linked bonds
162
–
–
54
–
216
Other
84
132
79
11
80
386
1,775
1,283
693
827
208
4,786
Value at 31 December 2003
Equities
1,094
646
401
451
82
2,674
Fixed interest bonds
300
229
126
193
15
863
Index linked bonds
127
7
12
44
–
190
Other
54
88
74
21
97
334
1,575
970
613
709
194
4,061
Value at 31 December 2002
Equities
823
377
342
271
93
1,906
Fixed interest bonds
294
160
139
148
18
759
Index linked bonds
95
5
11
32
–
143
Other
60
65
39
64
190
418
1,272
607
531
515
301
3,226
Employer contributions made during 2004*
–
56
41
37
9
143
Employer contributions made during 2003*
6
45
4
43
5
103
*
The
contributions shown include US$6 million (2003: US$9 million) for defined
contribution plans.
In addition, there were contributions of US$26
million (2003: US$18 million) in respect of unfunded healthcare schemes in the
year. Since these schemes are unfunded, contributions for future years will
be equal to benefit payments and therefore cannot be pre-determined.
In relation
to pensions, it is currently expected that there will be no significant regular
employer or employee contributions to the UK plan in 2005. Contributions are
made to the main Australian plan according to the recommendation of the plan
actuary and are primarily to a mixed defined benefit/defined contribution type
arrangement (included in the above figures). In North America, contributions
are agreed annually in nominal terms. Whilst contributions for 2005 are yet
to be determined, the currently expected level of contributions by the Group
to the plans in Australia, Canada and the US is expected to be similar in aggregate
to that made in 2004.
The most
recent full valuation of the UK plans was at 31 March 2003. The most recent
full valuation of the Australian plans was at 30 June 2004. For both the US
and Canadian major plans, the most recent full valuation was at 1 January 2004.
Surplus/(deficit) in the
plans
The following amounts were measured in accordance
with FRS 17:
At 31 December 2004
UK
Australia
US
Canada
Other
Total
Healthcare
Total
pensions
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
Total market value of plan assets
1,775
1,283
693
827
208
4,786
–
4,786
Present value of plan liabilities
(1,760
)
(1,275
)
(868
)
(1,129
)
(185
)
(5,217
)
(544
)
(5,761
)
Surplus/(deficit) in the plans
15
8
(175
)
(302
)
23
(431
)
(544
)
(975
)
Related deferred tax
168
Related outside shareholders’ interest
108
Net post retirement liability
(699
)
Surplus/(deficit) in the plans comprises:
Surplus
36
8
6
6
35
91
–
91
Deficit
(21
)
–
(181
)
(308
)
(12
)
(522
)
(544)
(1,066
)
15
8
(175
)
(302
)
23
(431
)
(544
)
(975
)
132
Rio Tinto 2004
Annual
report and financial statements
If the above amounts had been recognised in the financial statements, the Group’s shareholders’ funds at 31 December would have been as follows:
2004
2003
US$m
US$m
Shareholders’ funds including SSAP
24 post retirement net asset
12,584
10,037
Deduct: SSAP 24 post retirement pension
net asset
362
357
Deduct: SSAP 24 post retirement healthcare
liability
(305
)
(290
)
Shareholders’ funds excluding SSAP
24 post retirement net asset
12,527
9,970
Include: FRS 17 post retirement pension
net liability
(382
)
(242
)
Include: FRS 17 post retirement healthcare
liability
(317
)
(341
)
Shareholders’ funds including FRS
17 post retirement net liability
11,828
9,387
The post retirement assets and liabilities shown
above are net of tax and outside shareholders’ interests.
Movements in deficit during
the year
The net post retirement deficit under
FRS 17 before deferred tax and outside shareholders’ interests would have
moved as follows during 2004:
2004
2003
Pension
Other
Total
Total
benefits
benefits
US$m
US$m
Net post retirement deficit at 1 January
(237
)
(561
)
(798
)
(666
)
Movement in year:
Currency translation adjustment
(12
)
(14
)
(26
)
(45
)
Total current service cost (employer and
employee)
(164
)
(10
)
(174
)
(149
)
Past service cost
(15
)
(4
)
(19
)
(7
)
Curtailment and settlement gains
31
4
35
3
Subsidiaries sold
7
–
7
–
Plan amendments
–
–
–
(10
)
Other net finance (expense)/income
19
(33
)
(14
)
(30
)
Contributions (including employee contributions)
185
26
211
156
Actuarial (loss)/gain recognised in STRGL
(245
)
48
(197
)
(50
)
Net post retirement deficit at 31 December
(431
)
(544
)
(975
)
(798
)
The curtailment and settlement gain primarily
reflects the allocation of a surplus to the employer in a South African plan.
Rio Tinto 2004
Annual
report and financial statements
Amounts which would have
been recognised in the profit and loss account and in the STRGL under FRS
17
The following amounts would have been included
within operating profit under FRS 17:
2004
2003
Pension
Other
Total
Total
benefits
benefits
US$m
US$m
Employer current service cost
(125
)
(10
)
(135
)
(122
)
Past service cost
(15
)
(4
)
(19
)
(7
)
Curtailment and settlement gains
31
4
35
3
Total operating charge
(109
)
(10
)
(119
)
(126
)
Employer contributions of US$6 million (2003: US$9 million) for defined contribution arrangements have been included in the above operating charge.
The following amounts would have been included
as other net finance (expense)/income under FRS 17:
2004
2003
Pension
Other
Total
Total
benefits
benefits
US$m
US$m
Expected return on pension scheme assets
272
–
272
213
Interest on post retirement liabilities
(253
)
(33
)
(286
)
(243
)
Net return
19
(33
)
(14
)
(30
)
If the above amounts had been recognised in the financial statements instead of the SSAP 24 charges, the Group’s reported net earnings for 2004 would have increased by US$27 million (2003: increased by US$17
million).
The following amounts would have been recognised
within the STRGL under FRS 17:
2004
2003
2002
US$m
US$m
US$m
Excess actual returns on plan assets compared with the expected return
Amount (US$m)
226
354
(599
)
As a percentage of plan assets
5%
9%
–19%
Experience (losses)/gains on plan liabilities
(ie variances between the actual estimate of liabilities
and the subsequent outcome)
Amount (US$m)
(7
)
(118
)
28
As a percentage of the present value of the plan liabilities
–
–2%
1%
Change in assumptions
Amount (US$m)
(416
)
(286
)
(148
)
Total amount recognised in STRGL
Amount (US$m)
(197
)
(50
)
(719
)
As a percentage of the present value of the plan liabilities
–3%
–1%
–18%
134
Rio Tinto 2004
Annual
report and financial
statements
Prepared under Australian GAAP. In relation to Rio Tinto Limited, the only significant measurement difference between Australian and UK GAAP is that relating to proposed dividends, which is
described further on page 89.
(c)
Note 29 provides information regarding part payment of disputed tax assesments, of which A$73 million relates to Rio Tinto Limited.
(d)
Rio Tinto became the head entity of a tax group under the Australian tax consolidation regime, with effect from 1 January 2003 and consequently
recognised additional assets
and liabilities in respect of current and deferred taxation previously
attributable to subsidiaries. The transfer of these balances gave rise
to corresponding changes in intragroup liabilities and assets.
(e)
‘Accounts receivable and prepayments’ are pension prepayments in Rio Tinto plc and tax recoverable in Rio Tinto Limited.
(f)
The Group companies to which amounts are owed include subsidiaries of Rio Tinto Limited and a subsidiary of Rio Tinto plc.
The financial statements on pages 86 to 140 were approved by the directors on 24 February 2005 and signed on their behalf by:
Paul Skinner
Chairman
Leigh Clifford
Chief executive
Guy Elliott
Finance director
Rio Tinto 2004
Annual
report and financial statements
Shares in Group companies and, for Rio Tinto Limited, other investments
At 1 January
2,235
2,235
2,712
2,586
Additions
–
–
5,040
126
At 31 December
2,235
2,235
7,752
2,712
Loans to Group companies
At 1 January
1,355
2,542
5,874
5,573
(Repayments)/advances
(478
)
(1,187
)
(4,359
)
301
At 31 December
877
1,355
1,515
5,874
Total
3,112
3,590
9,267
8,586
Deferred taxation (liability)/asset
At 1 January
(46
)
(44
)
(658
)
23
Charged to profit and loss account
–
(2
)
(2
)
(17
)
Recognition of subsidiary deferred tax balances due to tax consolidation
–
–
(111
)
(664
)
At 31 December (relating to timing differences)
(46
)
(46
)
(771
)
(658
)
Share capital account
At 1 January
155
154
1,711
1,703
Issue of shares
–
1
7
8
At 31 December
155
155
1,718
1,711
Share premium account
At 1 January
1,629
1,610
Premium on issue of ordinary shares
21
19
At 31 December
1,650
1,629
Other reserves
At 1 January and 31 December
211
211
536
536
Profit and loss account
At 1 January
2,975
3,655
1,588
1,269
Retained (loss)/profit for year
(599
)
(680
)
2,847
319
At 31 December
2,376
2,975
4,435
1,588
Contingent liabilities
Bank and other performance guarantees (e)
3,594
5,300
3,326
5,527
(a)
Prepared under UK GAAP.
(b)
Prepared under Australian GAAP (see note (b) on page 135).
(c)
Profit after tax for the year
dealt with in the profit and loss account of the
Rio
Tinto plc parent company amounted to US$223 million (2003: US$3 million).
As permitted by section 230 of the United Kingdom Companies Act 1985,
no profit and loss account for the Rio Tinto plc parent company is shown.
(d)
Pursuant to the DLC merger both Rio Tinto plc and Rio Tinto Limited issued deed poll guarantees by which each guaranteed contractual obligations incurred by the other or guaranteed by the other.
These guarantees are excluded from the figures above.
(e)
Bank and other performance guarantees relate principally to the obligations of subsidiary companies.
(f)
The Group has a US$3 billion European Medium Term Note programme. Amounts utilised by subsidiary companies under this programme are guaranteed by the parent companies and totalled US$1.5 billion at
the year end.
(g)
Auditor’s remuneration for the audit of Rio Tinto plc was US$0.8 million (2003: US$0.8 million).
(h)
In relation to Rio Tinto Limited, the only significant measurement difference between Australian and UK GAAP is that relating to proposed dividends, which is described further on page 89.
136
Rio Tinto 2004
Annual
report and financial statements
Asset write downs relating to subsidiaries and joint ventures
(408
)
–
Depreciation & amortisation in joint ventures and associates
(271
)
(366
)
Profit on ordinary activities before interest and tax
3,850
2,392
(a)
Gross turnover includes 100 per cent of subsidiaries’ turnover and the Group’s share of the turnover of joint ventures and associates.
(b)
EBITDA of subsidiaries, joint ventures and associates represents profit before: exceptional items, tax, net interest payable, depreciation and amortisation, that is attributable to the Rio Tinto
Group.
(c)
Net earnings represent after tax earnings attributable to the Rio Tinto Group. Earnings of subsidiaries are stated before interest charges but after the amortisation of the discount related to
provisions. Earnings attributable to joint ventures and associates include interest charges.
(d)
During June 2004, Rio Tinto sold its interests in Somincor and Zinkgruvan. During 2003 Rio Tinto sold its interests in Kaltim Prima Coal, Alumbrera and Peak.
(e)
Includes Rio Tinto’s interest in Anglesey Aluminium (51 per cent) and Comalco (100 per cent).
(f)
On 30 March 2004 Rio Tinto sold its 13.1 per cent shareholding in Freeport-McMoRan Copper & Gold Inc. The sale of the shares does not affect the terms of the joint venture referred to
below.
(g)
Under the terms of a joint venture agreement, Rio Tinto is entitled to 40 per cent of additional material mined as a consequence of expansions and developments of the Grasberg facilities since
1998.
(h)
Rio Tinto sold its 99.9 per cent interest in Fortaleza on 1 January 2004, and its 51 per cent interest in Morro do Ouro on 31 December 2004.
(i)
Business units have been classified above according to the Group’s current management structure. Generally, this structure has regard to the primary product of each business unit but there are
exceptions. For example, the Copper group includes certain gold operations. This summary differs, therefore, from the Product analysis, in which the contributions of individual business units are attributed to several products as
appropriate.
138
Rio Tinto
2004
Annual report and financial
statements
Capital expenditure comprises the net cash outflow on purchases less disposals of property, plant and equipment. The details provided include 100 per cent of subsidiaries’ capital expenditure
and Rio Tinto’s share of the capital expenditure of joint ventures and associates. Amounts relating to joint ventures and associates not specifically funded by Rio Tinto are deducted before arriving at total capital expenditure for the
Group.
(k)
Depreciation figures include 100 per cent of subsidiaries’ depreciation and amortisation of goodwill and include Rio Tinto’s share of the depreciation and goodwill amortisation of joint
ventures and associates. Amounts relating to joint ventures and associates are deducted before arriving at the total depreciation charge.
(l)
Operating assets of subsidiaries comprise net assets before deducting net debt,
less outside shareholders’ interests
which are calculated by reference to the net assets of the relevant companies
(ie net of such companies’ debt). For joint ventures and associates,
Rio Tinto’s net investment is shown. For joint ventures and associates
shown above, Rio Tinto’s shares of operating assets, defined as for
subsidiaries, are as follows: Escondida US$948 million (2003: US$905
million), Grasberg joint venture US$428 million (2003: US$417 million).
(m)
Employee numbers, which represent the average for the year, include 100 per cent of employees of subsidiary companies. Employee numbers for joint arrangements, joint ventures and associates are
proportional to the Group’s equity interest. Part time employees are included on a full time equivalent basis and people employed by contractors are not included. Temporary employees are included in employee numbers.
Rio Tinto 2004
Annual
report and financial statements
AUSTRALIAN CORPORATIONS
ACT – SUMMARY OF ASIC CLASS ORDER RELIEF; DIRECTORS’ DECLARATION
Australian Corporations Act – summary
of ASIC class order relief
Pursuant
to section 340 of the Corporations Act 2001 (Corporations Act), the Australian
Securities and Investments Commission
issued an order dated 21 July 2003 that granted relief to Rio Tinto Limited
from certain
requirements of the Corporations Act in relation to the Company’s financial statements. The order essentially continues the relief that has applied to Rio Tinto Limited since the formation of the Group’s dual listed companies structure in
1995. The order applies to Rio Tinto Limited’s financial reporting obligations
for financial years and half years ending between 30 June 2003 and 31 December
2004 (inclusive).
In
essence, the order allows Rio Tinto Limited to prepare, and to treat
as the principal financial statements for it and its controlled entities, ‘combined’ financial
statements of Rio Tinto Limited and Rio Tinto plc and their respective
controlled entities as if the Group constituted a single economic entity
and the ‘combined’ financial statements were consolidated financial
statements. In addition, those ‘combined’ financial statements
are to be prepared:
–
on the basis of ‘merger’, rather than ‘acquisition’, accounting under United Kingdom GAAP (ie on the basis that Rio Tinto Limited was not acquired by, and is not controlled by,
Rio Tinto plc and that carrying amounts, rather than fair values, of assets and liabilities at the time of formation of the Group’s
dual listed companies structure were used to measure those assets and liabilities
at formation);
–
in accordance with the principles and requirements of United Kingdom GAAP, rather than Australian GAAP (except for one limited instance in the case of any concise report), and in accordance with
United Kingdom financial reporting obligations generally;
–
with United States dollars as the reporting currency (although translations to Australian dollars and United Kingdom pounds may be included, and translations to Australian dollars are required for a
summary statement of financial position for the Group); and
–
with a reconciliation of information from United Kingdom GAAP to Australian GAAP (see page 89).
The ‘combined’ financial statements must also be audited in accordance
with relevant United Kingdom requirements. Rio Tinto Limited must also prepare
a directors’ report which satisfies the content requirements of the Corporations
Act (applied on the basis that the consolidated entity for those purposes is
the Group). Rio Tinto Limited is also required to comply generally with the lodgement
and distribution requirements of the Corporations Act (including timing requirements)
in relation to the combined financial statements (including any concise report),
the auditor’s report and the directors’ report.
Rio
Tinto Limited is not required to prepare consolidated financial statements
for it and its controlled entities. Rio Tinto Limited is required to
prepare and lodge parent entity financial statements for itself in respect
of each relevant financial year, in accordance with the principles and
requirements of Australian GAAP and with Australian dollars as the reporting
currency, and to have those statements audited. The statements are not
required to be laid before the Company’s annual general meeting
or distributed to shareholders as a matter of course.
However,
Rio Tinto Limited must:
–
include in the ‘combined’ financial
statements for the Group, as a note, summary parent entity financial statements
for Rio Tinto Limited (ie summary statements of financial position, financial
performance and cash flows), prepared in accordance with Australian GAAP
and with Australian dollars as the reporting currency; and
–
make available the full parent
entity financial statement free of charge to shareholders on request,
and also include a copy of them on the Company’s website.
The parent entity financial statements are available for download from the Rio
Tinto website at www.riotinto.com. Shareholders may also request a copy free
of charge by contacting the Rio Tinto Limited company
secretary.
Directors’ declaration
The financial statements and notes have been
prepared in accordance with applicable United Kingdom law and accounting
standards and other relevant financial reporting requirements and in accordance
with applicable Australian law.
The financial statements
and notes give a true and fair view of the state of affairs of the Rio Tinto
Group, Rio Tinto plc and Rio Tinto Limited at 31 December 2004 and of the profit
and cash flows of the Group for the year then ended.
In the directors’ opinion:
–
The financial statements and notes are in accordance with the United Kingdom Companies Act 1985 and the Australian Corporations Act 2001 as modified by the Australian Securities and Investments
Commission order dated 21 July 2003.
–
There are reasonable grounds to believe each of the Rio Tinto Group, Rio Tinto plc and Rio Tinto Limited has adequate financial resources to continue in operational existence for the foreseeable
future and to pay its debts as and when they become due and payable.
By order of the board
Paul Skinner
Leigh Clifford
Guy Elliott
Chairman
Chief executive
Finance director
24 February 2005
24 February 2005
24 February 2005
140
Rio Tinto 2004
Annual
report and financial statements
To the members of Rio Tinto plc and Rio Tinto Limited.
We have audited the financial statements of the Rio Tinto Group which comprise
the Group profit and loss account, the balance sheets, the Group cash flow statement,
the Group statement of total recognised gains and losses, the reconciliation
with Australian GAAP, and the related notes. We have also audited the disclosures
required by Part 3 of Schedule 7A to the United Kingdom Companies Act 1985 contained
in the directors’ remuneration report (‘the
auditable part’).
Respective responsibilities
of directors and auditors
The directors’ responsibilities
for preparing the Annual report and the financial statements in accordance
with applicable United Kingdom law and accounting standards and Australian
law are set out in the statement of directors’ responsibilities. The
directors are also responsible for preparing the directors’ remuneration
report.
Our
responsibility is to audit the financial statements and the auditable part
of the directors’ remuneration report in accordance with relevant legal
and regulatory requirements and United Kingdom Auditing Standards issued by
the Auditing Practices Board. This report, including the opinion, has been
prepared for and only for each company’s members as a body in accordance
with Section 235 of the United Kingdom Companies Act 1985 (in respect of Rio
Tinto plc) and Section 308 of the Australian Corporations Act 2001 (in respect
of Rio Tinto Limited) and for no other purpose. We do not, in giving this
opinion, accept or assume responsibility for any other purpose or to any other
person to whom this report is shown or into whose hands it may come save where
expressly agreed by our prior consent in writing.
We
report to you our opinion as to whether the financial statements give a true
and fair view and whether the financial statements and the auditable part
of the directors’ remuneration report have been properly prepared in
accordance with the United Kingdom Companies Act 1985 and the Australian Corporations
Act 2001 as amended by the Australian Securities and Investments Commission
order dated 21 July 2003. We also report to you if, in our opinion, the directors’
report is not consistent with the financial statements, if the companies have
not kept proper accounting records, if we have not received all the information
and explanations we require for our audit, or if information specified by
law regarding directors’ remuneration and transactions is not disclosed.
We
read the other information contained in the Annual report and consider the
implications for our report if we become aware of any apparent misstatements
or material inconsistencies with the financial statements. The other information
comprises only the items
listed in the contents section of the Annual Report,
apart from the 2004 audited financial statements and the auditable part of the
directors’ remuneration report.
We
review whether the corporate governance statement reflects Rio Tinto plc’s compliance with the nine provisions of the 2003 FRC Combined Code, specified for our review by the
Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the
companies’ or Group’s corporate governance procedures or their risk
and control procedures.
Basis of audit opinion
We conducted our audit in accordance
with United Kingdom
Auditing Standards issued by the Auditing
Practices Board. An audit includes examination, on a test basis, of evidence
relevant to the amounts and disclosures in the financial statements and the auditable
part of the
directors’ remuneration report. It also includes an assessment of the significant
estimates and judgements made by the directors in the preparation of the financial
statements, and of whether the accounting policies are appropriate to the
Group’s circumstances, consistently applied and adequately disclosed.
We
planned and performed our audit so as to obtain all the information and explanations
which we considered necessary in order to provide us with sufficient evidence
to give reasonable assurance that the financial statements and the auditable
part of the directors’ remuneration report are free from material
misstatement, whether caused by fraud or other irregularity or error. In
forming our opinion we also evaluated the overall adequacy of the presentation
of information in the financial statements.
Opinion
In our opinion:
–
the financial statements give
a true and fair view of the state of affairs of the Rio Tinto Group, Rio
Tinto plc and Rio Tinto Limited at31 December 2004 and of
the profit and cash flows of the Group for the year then ended;
–
the financial statements have been properly prepared in accordance with the United Kingdom Companies Act 1985 and the Australian Corporations Act 2001 as amended by the Australian Securities and
Investments Commission order dated 21 July 2003; and
–
those parts of the directors’ remuneration
report required by Part 3 of Schedule 7A to the United Kingdom Companies
Act 1985 have been properly prepared in accordance with the United Kingdom
Companies Act 1985.
PricewaterhouseCoopers
LLP
PricewaterhouseCoopers
Chartered Accountants & Registered
Auditors
Chartered Accountants
London
Perth
24 February 2005
24 February 2005
In respect of the members of Rio
Tinto plc
In respect of the members of Rio
Tinto Limited
Rio Tinto 2004
Annual
report and financial statements
SUMMARY
FINANCIAL DATA IN AUSTRALIAN DOLLARS, STERLING AND US DOLLARS
Summary financial data in Australian dollars, sterling and US dollars
2004
2003
2004
2003
2004
2003
A$m
A$m
£m
£m
US$m
US$m
19,248
18,143
7,722
7,198
Gross turnover (including share of
14,135
11,755
joint ventures and associates)
4,897
3,232
1,964
1,282
Profit on ordinary activities before
taxation
3,596
2,094
3,024
2,133
1,213
846
Adjusted earnings
(a)
2,221
1,382
3,830
2,327
1,537
923
Profit for the financial year (net earnings)
2,813
1,508
277.8c
169.0
c
111.4
p
67.1p
Earnings per ordinary share
204.0
c
109.5c
219.3c
154.8
c
88.0
p
61.4p
Adjusted earnings per ordinary share (a)
161.0
c
100.3c
Dividends per share to Rio Tinto shareholders
41.48
p
37.13p
– Rio Tinto plc
77.0c
64.0c
103.82c
89.70
c
– Rio Tinto Limited
77.0
c
64.0c
6,058
5,380
2,430
2,135
Total cash flow from operations
(b)
4,449
3,486
(2,839
)
(2,582
)
(1,139
)
(1,024
)
Capital expenditure and
financial investment
(2,085
)
(1,673
)
(4,819
)
(7,540
)
(1,944
)
(3,170
)
Net debt
(3,751
)
(5,646
)
16,167
13,404
6,520
5,636
Equity shareholders’ funds
12,584
10,037
(a)
‘Adjusted earnings’ exclude exceptional net gains of US$592 million (2003: US$126 million).
(b)
‘Total cashflow from operations’ includes dividends from joint ventures and associates.
(c)
The financial data above have been extracted from the primary financial statements set out on pages 86 to 140. The Australian dollar and Sterling amounts are based on the US dollar amounts,
retranslated at average or closing rates as appropriate, except for the dividends which are the actual amounts payable. For further information on these exchange rates see page 128.
142
Rio Tinto 2004
Annual
report and financial statements
‘Adjusted earnings’ and ‘Adjusted earnings per share’ exclude exceptional items of such magnitude that their exclusion is necessary in order that adjusted earnings fulfil their
purpose of reflecting the underlying performance of the Group. In this statement, ‘Adjusted profit before interest and tax’ (‘Adjusted PBIT’) and ‘Adjusted profit before tax’ exclude the pre-tax values of such
exceptional items. ‘Adjusted PBIT’ includes the Group’s share of joint ventures’ and associates’ operating profit, excluding exceptional items.
(b)
These lines contain the exceptional items referred to in (a) above and related taxation. In addition, outside shareholders’ interests for 2004 include a credit for US$133 million relating to
exceptional items. For 2004, exceptional items include profit on disposal of interests in operations of US$920 million less asset write-downs and a provision for contract obligation of US$558 million. For 2003, exceptional items include profit on
disposal of interests in operations of US$126 million. For 1998, 2001 and 2002 exceptional items include exceptional asset write-downs of US$403 million, US$583 million and US$763 million respectively, net of tax and outside shareholders’
interests. In addition, 2002 includes US$116 million for an exceptional environmental remediation charge. For 1994 and 1995, the exceptional items comprise amounts that are required to be excluded from operating profit under FRS 3.
(c)
Changes in accounting policy: Reported figures for 1994 – 1998 have been restated following the change in accounting policy on implementation of FRS 12 in 1999. Shareholders’ funds for
2001 and prior years have been restated following the implementation of FRS 19 in 2002.
(d)
‘Earnings per share’ and Rio Tinto Limited dividends per share have been adjusted for the years 1994 and 1995 in respect of the 7.5 per cent bonus issue on 15 January 1996 which applied to
Rio Tinto Limited shares.
(e)
Capital expenditure comprises purchases of property, plant and equipment plus direct funding provided to joint ventures and associates for Rio Tinto’s share of their capital expenditure, less
disposals of property, plant and equipment. The figures include 100 per cent of subsidiaries’ capital expenditure, but exclude that of joint ventures and associates except where directly funded by Rio Tinto.
(f)
Total cash flow from operations comprises ‘Cash flow from operating activities’ together with ‘Dividends from joint ventures and associates’.
(g)
‘Cash flow before financing’ represents the net cash flow before management of liquid resources and financing.
(h)
‘Operating margin’ is the percentage of ‘Adjusted PBIT’ to ‘Gross turnover’.
(i)
Total capital comprises year end shareholders’ funds plus net debt and outside shareholders’ interests.
(j)
This represents ‘Adjusted earnings’ expressed as a percentage of the mean of opening and closing shareholders’ funds.
(k)
Interest cover represents the number of times by which subsidiary interest (excluding the amortisation of discount but including capitalised interest) is covered by Group operating profit (excluding
exceptional items) less amortisation of discount plus dividends from joint ventures and associates.
(l)
Treasury bonds acquired in 2002 as security for the deferred consideration payable in respect of the North Jacobs Ranch acquisition have been excluded from net debt and included in investments
(2004: US$76 million, 2003: US$228 million, 2002: US$304 million).
(m)
Amounts shown for ‘Acquisitions’ and ‘Disposals’ comprise the amounts included in the cash flow statement in respect of acquisitions and disposals of subsidiaries, joint
ventures, associates and other interests in operations.
Rio Tinto 2004
Annual
report and financial statements
The Group will be preparing its financial statements
for the 2005 half year and subsequent reporting periods in accordance with International
Financial Reporting Standards (IFRS). The main conceptual differences identified
to date between UK GAAP and IFRS, insofar as Rio Tinto is concerned, are likely
to be:
Foreign exchange gains/(losses)
on debt
The Group finances its operations
primarily through US dollar debt, a significant proportion of which is located
in operations whose functional currency is not the US dollar. Under UK GAAP,
US dollar debt is dealt with in the context of the currency status of the Group
as a whole, and exchange differences reported by these operations are adjusted
through reserves. IFRS permits these exchange gains and losses to be taken to
reserves only to the extent that the US dollar debt is an effective hedge of
US dollar assets or, in the case of loans between Group companies, meets the
net investment criteria set out in IAS 21, The Effects of Changes in Foreign
Exchange Rates. Exchange gains and losses that do not meet these criteria will
therefore be recorded in the Group IFRS profit and loss account, which will
continue to be expressed in US dollars; shareholders’ funds will be unaffected
by this reclassification.
Derivatives not qualifying
for hedge accounting under IFRS
The Group is party to derivative contracts
in respect of some of its future transactions in order to hedge its exposure
to fluctuations in exchange rates against the US dollar. Under UK GAAP, these
contracts are accounted for as hedges: gains and losses are deferred and subsequently
recognised when the hedged transaction occurs.
However,
certain of the Group’s derivative contracts will not qualify for hedge
accounting under IFRS because the hedge is not located in the entity with
the exposure. These contracts will be marked to market under IFRS, thereby
giving rise to charges or credits to the profit and loss account in periods
before the hedged transaction is recognised.
Derivatives qualifying
for hedge accounting under IFRS
Unrealised gains and losses on derivatives hedging
future transactions are not shown on the balance sheet under UK GAAP. Under
IAS 39, Financial Instruments: Recognition and measurement, all derivatives
will be marked to market and recognised on the balance sheet. For cash flow
hedges where derivatives provide an effective hedge against forecast transactions
and firm commitments, unrealised gains and losses will be recorded on the balance
sheet and deferred in shareholders’ funds. When realised, these gains and
losses will be recycled to the profit and loss account, or set against the cost
of the relevant fixed asset. Unrealised gains and losses on fair value hedges
will be recognised in the profit and loss account and offset against the corresponding
gains and losses on the hedged item.
Post retirement benefits
For UK GAAP, the Group applies SSAP 24, Accounting
for Pension Costs
.
Post
retirement benefit surpluses/deficits are spread on a straight line basis over
the expected average remaining service lives of relevant current employees.
The basis of calculating the surplus or deficit under IAS 19 differs from SSAP
24. Under the current IAS 19, Employee Benefits
,
as amended in 2004,
there are three alternative ways in which the surplus or deficit can be recognised.
It is probable that the Group will choose to recognise actuarial gains and losses
directly in shareholders’ funds via the Statement of Recognised Income
and Expense. This treatment is similar to the new UK standard FRS 17, Retirement
Benefits
.
The FRS 17 disclosures included in the financial statements
on pages 129 to 134 therefore give an indication of the effect of adopting this
alternative on the Group’s 2004 profit and loss account. IAS 19 as amended
in 2004 is yet to be endorsed by the European Union. However, we are assuming
that this standard will be endorsed before 31 December 2005.
Deferred tax
UK GAAP requires the provision of deferred tax
on fair value adjustments to monetary items, and downward fair value adjustments
to non monetary items. IFRS requires deferred tax to be recognised on all fair
value adjustments, other than those recorded as goodwill, including
those on non monetary items. For future acquisitions,
this will generally result in an additional provision for deferred tax with
a corresponding increase in the amounts attributed to the acquired assets and/or
goodwill. However, on first adoption, IFRS permits the presentation of deferred
tax provisions relating to acquisitions in previous periods as either a reduction
in shareholders’ funds or an increase in the carrying value of acquired
assets.
Under
IFRS, full provision must be made for tax arising on unremitted earnings from
subsidiaries, joint ventures and associates, except to the extent that the Group
can control the timing of remittances and remittance is not probable in the
foreseeable future. Under UK GAAP, tax is only provided on unremitted earnings
to the extent that dividends have been accrued or if there is a binding agreement
for the distribution of earnings at the reporting date.
Joint ventures
The basis for determining whether joint ventures
are accounted for using the gross equity method, or included in the financial
statements on a line by line basis in proportion to the investor’s interest
(‘proportional consolidation’), differs under IFRS from UK GAAP. As
a result, certain joint ventures which were previously accounted for using the
equity method will be proportionally consolidated under IFRS. In addition there
are a number of investments, proportionally consolidated under UK GAAP, which
may be accounted for using either proportional consolidation or the equity method
under IFRS. The most appropriate presentation for these investments is currently
being considered. There will be no effect on net earnings or shareholders’
funds as a result of this reclassification.
Dividends declared after
reporting date
Under IFRS, dividends that do not represent a
present obligation at the reporting date are not accrued for in the balance
sheet. Hence, the companies’ proposed dividends will not be recognised
in the Group accounts until the period in which they are declared payable by
the directors.
Non amortisation of goodwill
The systematic amortisation of goodwill under
UK GAAP, by an annual charge to the profit and loss account, will cease under
IFRS, to be replaced with annual impairment reviews. Due to the finite life
of mining assets, impairment charges relating to goodwill are expected to arise
in future reporting periods. Charges for impairment of goodwill are likely to
fluctuate more between periods than UK GAAP goodwill amortisation charges.
Impairment
There are certain differences between IFRS and
UK GAAP in the basis for quantifying impairment charges against fixed assets.
These differences may impact on the impairment reviews previously conducted
under UK GAAP.
Share based payments
Currently under UK GAAP, no cost is recognised
in respect of share based payments provided that, where the strike price is
below the market price at the date of issue, the option scheme applies to all
relevant employees and the intention is to satisfy the exercise of options by
the issue of new shares. IFRS requires the economic cost of all share based
payments to employees of the Group to be recognised by reference to fair value
on the grant date, and charged to the profit and loss account over the expected
vesting period.
144
Rio Tinto 2004
Annual report and
financial statements
As far as is known, Rio Tinto is not directly or indirectly owned or controlled by another corporation or by any government.
(b)
Rio Tinto is not aware of any arrangement which may result in a change in its control.
(c)
Tinto Holdings Australia Pty Limited is a wholly owned subsidiary of Rio Tinto plc.
(d)
Other large shareholders are nominees who hold securities on behalf of beneficial shareholders, for example BNY (Nominees) Limited holds Rio Tinto plc shares on behalf of the holders of American
Depository Receipts that are traded on the New York Stock Exchange.
RIO TINTO
LIMITED
Number of
Percentage
shares
of issued
share
capital
1
Tinto Holdings Australia Pty Limited
187,439,520
37.52
2
National Nominees Limited
45,071,472
9.02
3
JP Morgan Nominees Australia Limited
44,527,685
8.91
4
Westpac Custodian Nominees Limited
42,274,410
8.46
5
Citicorp Nominees Pty Limited
11,875,963
2.38
6
Anz Nominees Limited
11,019,930
2.21
7
Cogent Nominees Pty Limited
7,203,002
1.44
8
Queensland Investment Corporation
6,484,928
1.30
9
RBC Global Services Australia
Nominees Pty Limited
3,595,894
0.72
10
HSBC Custody Nominees (Australia)
Limited
3,585,137
0.72
11
AMP Life Limited
3,146,536
0.63
12
Citicorp Nominees Pty Limited
<CFS WSLE GEARED SHR FND A/C>
3,094,846
0.62
13
Citicorp Nominees Pty Limited
<CFS WSLE IMPUTATION FND A/C>
2,890,455
0.58
14
UBS Nominees Pty Ltd
<PRIME BROKING A/C>
2,636,088
0.53
15
ANZ Nominees Limited
2,301,363
0.46
16
RBC Global Services Australia Nominees
Pty Limited <PIPOOLED A/C>
2,190,759
0.44
17
IAG Nominees Pty Limited
2,154,975
0.43
18
Westpac Financial Services Limited
2,060,695
0.41
19
RBC Global Services Australia Nominees
Pty Limited
1,946,255
0.39
20
Citicorp Nominees Pty Limited
<CFS IMPUTATION FUND A/C>
1,881,535
0.38
387,381,448
77.55
(e)
Under the listing rules, any shareholder of Rio Tinto plc with a beneficial interest of more than three per cent, or of Rio Tinto Limited with a beneficial interest of more than five per cent, is
required to provide the Companies with notice. The only shareholder to have provided such notice is The Capital Group of Companies Inc by way of a notice dated 31 January 2005 which confirmed an interest in 64,021,998 ordinary shares issued by Rio
Tinto plc, representing 5.99 per cent of its shares as at the date of notice.
Analysis of ordinary shareholders
As at 14 February 2005
Rio Tinto plc
Rio Tinto Limited
No of
%
Shares
%
No of
%
Shares
%
accounts
accounts
1 to 1,000 shares
42,642
67.67
18,272,340
1.71
55,684
76.35
22,327,099
4.47
1,001 to 5,000 shares
16,977
26.94
34,351,886
3.22
15,093
20.69
29,784,565
5.96
5,001 to 10,000 shares
1,472
2.34
10,232,719
0.96
1,315
1.80
9,157,549
1.83
10,001 to 25,000 shares
698
1.11
10,938,289
1.02
551
0.76
8,070,612
1.62
25,001 to 125,000 shares
640
1.01
36,140,355
3.38
197
0.27
9,783,825
1.96
125,001 to 250,000 shares
177
0.28
32,558,472
3.05
33
0.05
6,074,624
1.22
250,001 to 1,250,000 shares
271
0.43
150,765,734
14.11
32
0.04
16,310,955
3.27
1,250,001 to 2,500,000
70
0.11
120,880,971
11.31
13
0.02
22,268,625
4.46
2,500,001 and over
69
0.11
525,327,145
49.17
14
0.02
374,845,866
75.04
ADRs
128,983,028
12.07
882,604
0.17
63,016
100
1,068,450,939
100
72,932
100
499,506,324
100
Number of holdings less than
marketable parcel of A$500.
1,566
Rio Tinto 2004
Annual
report and financial statements
NON MINING DEFINITIONS
Throughout this document, the collective expressions
Rio Tinto, Rio Tinto Group and Group are used for convenience only. Depending
on the context in which they are used, they mean Rio Tinto plc and/or Rio Tinto
Limited and/or one or more of the individual companies in which Rio Tinto plc
and/or Rio Tinto Limited directly or indirectly own investments, all of which
are separate and distinct legal entities.
Unless the context indicates otherwise, the
following terms have the meanings shown below:
ADR
American Depositary Receipt
evidencing American Depositary Shares (ADS).
Australian dollars
Australian currency. Abbreviates to A$.
Australian GAAP
Generally accepted accounting principles
in Australia.
Billion
One thousand million.
Canadian dollars
Canadian currency. Abbreviates to C$.
Company/Companies
Means, as the context so requires, Rio
Tinto plc and/or Rio Tinto Limited.
DLC merger
Refers to the dual listed companies merger
(1995).
IFRS
International Financial Reporting Standards.
LME
London Metal Exchange.
New Zealand dollars
New Zealand currency. Abbreviates to NZ$.
Pounds sterling
UK currency. Abbreviates to £, pence
or p.
Public
shareholders
The holders of Rio Tinto plc shares that
are not companies in the Rio Tinto Limited Group and the holders of Rio
Tinto Limited shares that are not companies in the Rio Tinto plc Group.
Rand
South African currency. Abbreviates to
R.
Rio Tinto Limited
Refers to Rio Tinto Limited, and, where
the context permits, its subsidiaries, joint ventures and associated companies.
Rio Tinto Limited ADS
An American Depositary Share representing
the right to receive four Rio Tinto Limited shares.
Rio Tinto Limited Group
Rio Tinto Limited and its subsidiaries,
joint ventures and associated companies.
Rio Tinto Limited shareholders
The holders of Rio Tinto
Limited shares.
Rio Tinto Limited shares
The ordinary shares in Rio Tinto Limited.
Rio
Tinto Limited Shareholder
Voting Agreement
The agreement, dated 21 December 1995,
between Rio Tinto plc, Rio Tinto Limited, RTL Shareholder SVC Limited and
the Law Debenture Trust Corporation p.l.c. relating to the voting rights
of the Rio Tinto plc Special Voting Share at meetings of shareholders of
Rio Tinto plc.
Rio Tinto Limited/RTL
Special Voting Share
The Special Voting Share in
Rio Tinto Limited.
Rio Tinto plc
Rio Tinto plc and its subsidiaries, joint
ventures and associated companies.
Rio Tinto plc ADS
An American Depositary Share representing
the right to receive four Rio Tinto plc ordinary shares.
Rio Tinto plc Group
Rio Tinto plc and its subsidiaries, joint
ventures and associated companies.
Rio Tinto plc ordinary
shares
The ordinary shares of 10p each in Rio
Tinto plc.
Rio Tinto plc shareholders
The holders of Rio Tinto plc shares.
Rio Tinto
Shareholder
Voting Agreement
The agreement, dated 21 December 1995,
between Rio Tinto plc, Rio Tinto Australian Holdings Limited, RTP Shareholder
SVC Pty Limited, Rio Tinto Limited and the Law Debenture Trust Corporation
p.l.c. relating to the voting rights of the Rio Tinto Limited shares held
by the Rio Tinto plc Group and the Rio Tinto Limited Special Voting Share
at meetings of Rio Tinto Limited shareholders.
146
Rio Tinto 2004
Annual
report and financial statements
Rio Tinto Limited shares or Rio Tinto plc
ordinary shares, as the context requires.
Sharing
Agreement
The agreement, dated 21 December 1995,
as amended between Rio Tinto Limited and Rio Tinto plc relating to the regulation
of the relationship between Rio Tinto Limited and Rio Tinto plc following
the DLC merger.
UK GAAP
Generally accepted accounting principles
in the UK.
US dollars
United States currency. Abbreviates to
dollars, $ or US$ and US cents.
US GAAP
Generally accepted accounting principles
in the United States.
MINING AND
TECHNICAL DEFINITIONS
Alumina
Aluminium oxide. It is extracted from bauxite
in a chemical refining process and is subsequently the principal raw material
in the electro-chemical process by which aluminium is produced.
Anode copper
At the final stage of the smelting of copper
concentrates, molten copper is cast into specially shaped slabs called anodes
for subsequent electrolytic refining to produce refined cathode copper.
Bauxite
Mainly hydrated aluminium oxides
(Al
2
O
3
.2H
2
O).
Principal ore of alumina, the raw material from which
aluminium is made.
Beneficiated bauxite
Bauxite ore that has been treated to remove
waste material to improve its physical or chemical characteristics.
Bioleaching
The deliberate use of bacteria to speed
the chemical release of metals from ores.
Block caving
An underground bulk mining method. It involves
undercutting the orebody to induce ore fracture and collapse by gravity.
The broken ore is recovered mechanically through draw points below.
Borates
A generic term for mineral compounds which
contain boron and oxygen.
Cathode copper
Refined copper produced by electrolytic
refining of impure copper or by electrowinning.
Classification
Separating crushed and ground ore into
portions of different size particles.
Coking
coal
Also referred to as metallurgical coal.
By virtue of its carbonisation properties, it is used in the manufacture
of coke, which is used in the steel making process.
Concentrate
The product of a physical concentration
process, such as flotation or gravity concentration, which involves separating
ore minerals from unwanted waste rock. Concentrates require subsequent processing,
such as smelting or leaching, to break down or dissolve the ore minerals
and obtain the desired elements, usually metals.
Cutoff
grade
The lowest grade of mineralised material
considered economic to process. It is used in the calculation of the quantity
of ore present in a given deposit.
Doré
A precious metal alloy which is produced
by smelting. Doré is an intermediate product which is subsequently
refined to produce pure gold and silver.
DWT
Dead weight tons is the combined weight
in long tons (2,240 pounds weight) of cargo, fuel and fresh water that a
ship can carry.
Flotation
A method of separating finely ground minerals
using a froth created in water by specific reagents. In the flotation process
certain mineral particles are induced to float by becoming attached to bubbles
of froth whereas others, usually unwanted, sink.
Grade
The proportion of metal or mineral present
in ore, or any other host material, expressed in this document as per cent,
grams per tonne or ounces per tonne.
Head grade
The average grade of ore delivered to the
mill.
Rio Tinto 2004
Annual
report and financial statements
Material of intrinsic economic interest
occurring in such form and quantity that there are reasonable prospects
for eventual economic extraction.
Ore
A rock from which a metal(s) or mineral(s)
can be economically extracted.
Ore milled
The quantity of ore processed.
Ore hoisted
The quantity of ore which is removed from
an underground mine for processing.
Ore reserve
That part of a mineral deposit which could
be economically and legally extracted or produced at the time of the reserve
determination.
Pressure
oxidation
A method of treating sulphide ores. In
the case of refractory gold ores, the object is to oxidise the sulphides
to sulphates and hence liberate the gold for subsequent cyanide leaching.
The technique involves reaction of the ore with sulphuric acid under pressure
in the presence of oxygen gas.
Probable
ore reserves
Reserves for which quantity and grade and/or
quality are computed from information similar to that used for proved reserves,
but the sites for inspection, sampling and measurement are farther apart
or are otherwise less adequately spaced. The degree of assurance, although
lower than that for proved reserves, is high enough to assume continuity
between points of observation.
Proved
ore reserves
Reserves for which (a) quantity is computed
from dimensions revealed in outcrops, trenches, workings or drill holes;
grade and/or quality are computed from the results of detailed sampling
and (b) the sites for inspection, sampling and measurement are spaced so
closely and the geologic character is so well defined that size, shape,
depth and mineral content of reserves are well established.
Rock mined
The quantity of ore and waste rock excavated
from the mine. In this document, the term is only applied to surface mining
operations.
Rutile
A mineral composed of titanium
and oxygen (TiO
2
).
Stripping ratio
The tonnes of waste material which must
be removed to allow the mining of one tonne of ore.
Solvent
extraction
and electrowinning (SX-EW)
Processes for extracting metal from an
ore and producing pure metal. First the metal is leached into solution;
the resulting solution is then purified in the solvent extraction process;
the solution is then treated in an electro-chemical process (electrowinning)
to recover cathode copper.
Tailing
The rock wastes which are rejected from
a concentrating process after the recoverable valuable minerals have been
extracted.
Thermal
coal
Also referred to as steam or energy coal.
It is used as a fuel source in electrical power generation, cement manufacture
and various industrial applications.
Titanium dioxide
feedstock
A feedstock rich in titanium
dioxide, produced, in Rio Tinto’s case, by smelting ores containing
titanium minerals.
Zircon
Zirconium mineral (ZrSiO
4
).
Notes
•
Ore reserve estimates in this document
have been adjusted for mining losses and dilution during extraction.
•
Metal grades have not been adjusted for
mill recoveries, but mill recoveries are presented in the table of reserves
and are taken into consideration in the calculation of Rio Tinto’s
share of recoverable metal.
•
Unless stated to the contrary, reserves
of industrial minerals and coal are stated in terms of recoverable quantities
of saleable material, after processing or beneficiation losses.
•
Reserve and resource terminology used in
this document complies in general with the requirements of the Australian
Stock Exchange and the London Stock Exchange.
148
Rio Tinto 2004
Annual
report and financial statements
1 gram per metric tonne = 0.02917 troy ounces per short ton
1 gram per metric tonne = 0.03215 troy ounces per metric tonne
1 kilometre = 0.6214 miles
1 megajoule per kilogram = 430.2 British thermal units (btu) per pound (coal)
Exchange rates
The following tables show, for
the periods and dates indicated, certain information regarding the exchange rates
for the pound sterling
and Australian dollar, based on the Noon Buying Rates for pounds sterling and
Australian dollars expressed in US dollars per £1.00 and per A$1.00.
Pounds sterling
Year ended 31 December*
Period
Average
High
Low
end
rate
2004
1.93
1.83
1.95
1.76
2003
1.78
1.63
1.79
1.55
2002
1.61
1.50
1.61
1.41
2001
1.45
1.44
1.50
1.37
2000
1.49
1.52
1.65
1.40
* The Noon
Buying Rate on such dates differed slightly from the rates used in
the preparation of Rio Tinto’s consolidated financial statements
as of such date. No representation is made that pound sterling and
Australian dollar amounts have been, could have been or could be converted
into dollars at the Noon Buying Rate on such dates or at any other
dates.
Australian dollars
Year ended 31 December*
Period
Average
High
Low
end
rate
2004
0.783
0.737
0.798
0.686
2003
0.749
0.648
0.752
0.562
2002
0.563
0.544
0.575
0.506
2001
0.512
0.517
0.571
0.483
2000
0.556
0.579
0.672
0.511
Rio Tinto 2004
Annual
report and financial statements
Rio Tinto plc and Rio Tinto Limited shares and
ADRs quoted “ex-dividend” for 2004 final dividend
25 February 2005
Record date for 2004 final dividend for Rio Tinto plc shares and ADRs
1 March 2005
Record date for 2004 final dividend for Rio Tinto Limited shares and ADRs
16 March 2005
Plan notice date for election under the dividend reinvestment plan for the 2004 final dividend
8 April 2005
Payment date for 2004 final dividend
11 April 2005
Payment date for 2004 final dividend for holders of ADRs
14 April 2005
Annual general meeting for Rio Tinto plc
29 April 2005
Annual general meeting for Rio Tinto Limited
Early May 2005
Release of half year 2004 and full year 2004 results restated under International Financial Reporting Standards
4 August 2005
Announcement of half year results for 2005
10 August 2005
Rio Tinto plc and Rio Tinto Limited shares and
ADRs quoted “ex-dividend” for 2005 interim dividend
12 August 2005
Record date for 2005 interim dividend for Rio Tinto plc shares and ADRs
16 August 2005
Record date for 2005 interim dividend for Rio Tinto Limited shares and ADRs
17 August 2005
Plan notice date for election under the dividend reinvestment plan for the 2005 interim dividend
8 September 2005
Payment date for 2005 interim dividend
9 September 2005
Payment date for 2005 interim dividend for holders of ADRs
February 2006
Announcement of results for 2005
Publications
The following publications may be obtained from Rio Tinto:
2004
Annual report and financial statements
2004
Annual review
2004
Sustainable development review
The way we work
– Rio Tinto’s
statement of business practice
Review
magazine – Rio Tinto’s
quarterly magazine for shareholders
The 2004
Databook
and the 2004
Sustainable development review
are available on the Rio Tinto website.
Copies of the 2004 Annual reports for the following listed Rio Tinto Group companies are also available on request:
Bougainville Copper Limited
Coal & Allied
Industries Limited
Energy Resources of Australia Limited
Palabora Mining Company
Limited
Lihir Gold Limited
Rio Tinto on the web
Information about Rio Tinto is available on our website www.riotinto.com
Many of Rio Tinto’s publications
may be downloaded in their entirety from this site and access gained to Group
company and other
websites.
General enquiries
If you require general information about the Group please contact the External Affairs department. For all other enquiries please contact the relevant company secretary or Computershare.
Rio Tinto 2004
Annual
report and financial statements
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