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0001156973-07-001047.txt : 20070627
0001156973-07-001047.hdr.sgml : 20070627
20070627125100
ACCESSION NUMBER: 0001156973-07-001047
CONFORMED SUBMISSION TYPE: 20-F
PUBLIC DOCUMENT COUNT: 21
CONFORMED PERIOD OF REPORT: 20061231
FILED AS OF DATE: 20070627
DATE AS OF CHANGE: 20070627
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: RIO TINTO PLC
CENTRAL INDEX KEY: 0000863064
STANDARD INDUSTRIAL CLASSIFICATION: METAL MINING [1000]
IRS NUMBER: 000000000
STATE OF INCORPORATION: X0
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 20-F
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-10533
FILM NUMBER: 07943149
BUSINESS ADDRESS:
STREET 1: 6 ST JAMES'S SQUARE
CITY: LONDON, SW1Y 4LD
STATE: X0
BUSINESS PHONE: 44 20 7930 2399
MAIL ADDRESS:
STREET 1: RIO TINTO SERVICES INC.
STREET 2: 1343 SOUTH 1800 EAST
CITY: SALT LAKE CITY
STATE: UT
ZIP: 84108
FORMER COMPANY:
FORMER CONFORMED NAME: RTZ CORPORATION PLC
DATE OF NAME CHANGE: 19950522
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: RIO TINTO LTD
CENTRAL INDEX KEY: 0000887028
STANDARD INDUSTRIAL CLASSIFICATION: METAL MINING [1000]
IRS NUMBER: 000000000
STATE OF INCORPORATION: C3
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 20-F
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-20122
FILM NUMBER: 07943150
BUSINESS ADDRESS:
STREET 1: LEVEL 33, 55 COLLINS STREET
STREET 2: MELBOURNE
CITY: VICTORIA 3000
STATE: C3
ZIP: AUSTRALIA
BUSINESS PHONE: 61 3 9283 3333
MAIL ADDRESS:
STREET 1: RIO TINTO SERVICES INC.
STREET 2: 1343 SOUTH 1800 EAST
CITY: SALT LAKE CITY
STATE: UT
ZIP: 84108
FORMER COMPANY:
FORMER CONFORMED NAME: CRA LTD
DATE OF NAME CHANGE: 19950725
20-F
1
u51869_20f.htm
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
20549
FORM 20-F
(Mark One)
Registration statement pursuant
to Section 12(b) or 12(g) of the Securities Exchange Act of 1934
or
Annual report pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934
For the financial year ended:
31 December 2006
or
Transition report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from:________________
to________________
or
Shell company report pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of event requiring this shell
company report ________________
Commission file number: 1-10533
Commission file number: 0-20122
Rio Tinto plc
Rio Tinto Limited
ABN 96 004 458 404
(Exact name of Registrant as specified in its charter)
(Exact name of Registrant as specified in its charter)
England and Wales
Victoria, Australia
(Jurisdiction of incorporation or organisation)
(Jurisdiction of incorporation or organisation)
6 St Jamess Square
Level 33, 120 Collins Street
London, SW1Y 4LD, United Kingdom
Melbourne, Victoria 3000, Australia
(Address of principal executive offices)
(Address of principal executive offices)
Securities registered or to
be registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange
Name of each exchange
Title of each class
on which registered
on which registered
American Depositary Shares*
New York Stock Exchange
None
Ordinary Shares of 10p each**
New York Stock Exchange
*
Evidenced by American Depository Receipts. Each American Depository Share Represents four Rio Tinto plc Ordinary Shares of 10p each.
**
Not for trading, but only in connection with the listing of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Title of each class
Title of each class
None
Shares
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
None
Indicate the number of outstanding shares of each of the Issuers classes of capital or common stock as of the close of the period covered by the annual report:
Title of each class
Number
Number
Title of each class
Ordinary Shares of 10p each
1,071,488,203
456,815,943
Shares
DLC Dividend Share of 10p
1
1
DLC Dividend Share
Special Voting Share of 10p
1
1
Special Voting Share
Indicate by check mark if the registrants are well-seasoned issuers, as defined in rule 405 of the Securities Act.
Yes
No
If this report is an annual or transition
report, indicate by check mark if the registrants are not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 from their obligations
under those Sections.
Yes
No
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the
registrants (1) have filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrants were required to file
such reports), and (2) have been subject to such filing requirements for
the past 90 days:
Yes
No
Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, or non-accelerated filers. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated
filer
Indicate by check mark which financial statement item the registrants have elected to follow:
Item 17
Item 18
EXPLANATORY NOTE
The Rio Tinto Group is a leading international mining
group, combining Rio Tinto plc and Rio Tinto Limited in a dual listed companies
(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.
In previous years, the Form 20-F filed with the United States Securities and Exchange Commission (SEC), contained separate consolidated financial statements for the Rio Tinto plc and Rio
Tinto Limited parts of the Group. These were presented on the basis of the legal ownership of the various operations within each part of the Group. The separate financial statements for Rio Tinto Limited included, on
a consolidated basis, the Group undertakings under its legal ownership, and those for Rio Tinto plc included, on a consolidated basis, the Group undertakings under its legal ownership. This presentation of financial
information filed with the SEC was on the assumption that the formation of the Group through the dual listed companies (DLC) arrangements was not a business combination. The financial statements filed with the SEC also included supplemental financial information that combined the consolidated financial statements of the Rio Tinto plc and Rio Tinto Limited parts of the Group to present the Rio Tinto Group, with
no adjustment for fair values.
This combined financial information for the Rio Tinto Group was consistent with the financial statements that were used for the purposes of satisfying the Group's reporting obligations in the
United Kingdom and Australia. The combined financial statements for the Rio Tinto Group viewed the formation of the DLC as a business combination and accounted for the transaction as
a merger in accordance with UK Financial Reporting Standard No. 6 Acquisitions and Mergers (FRS 6). Applying FRS 6, Rio Tinto plc and Rio Tinto Limited were combined and
presented as one economic entity with no adjustment for fair values.
As
permitted under the transitional arrangements set out in IFRS 1 First time
adoption of International Financial Reporting Standards,
which sets out the rules for first time adoption of IFRS, the Group did not apply
the concepts of IFRS 3 Business Combinations for
business combinations prior to the first time application of EU IFRS. Accordingly,
the Group is following the same method of accounting for the DLC in its financial
statements under EU IFRS as was historically followed under UK GAAP: the Group
is presented as one economic entity at historical cost.
Subsequent to the formation of the Group, the accounting model used in filings with the SEC for the presentation of financial statements of companies that form
DLCs has changed. The formation of a new DLC is now viewed as a business combination. The Group now believes that it would be preferable to treat the formation of the DLC as a business combination, with the result
that the accounting and reporting of financial statements prepared in accordance with IFRS to the SEC will be consistent with the accounting and reporting in the United Kingdom and Australia.
Accordingly, the Group has revised the presentation of its financial statements included in Form 20-F to account for the formation of the DLC as a business combination. As a consequence,
separate financial statements for Rio Tinto plc and Rio Tinto Limited will no longer be presented. Instead, the financial statements will deal with the Rio Tinto Group as one combined economic entity. This new presentation is applied retrospectively
for all periods presented. The IFRS information presented on this new basis in the 20-F is the same as the combined supplemental information for the Rio Tinto Group that was previously disclosed.
Under US GAAP, the Group now accounts for the formation of the DLC using the purchase method. As a consequence
of this treatment, Rio Tinto shareholders' funds under US GAAP at 31 December
2006 are $1,519 million above those under EU IFRS; and US GAAP net earnings for 2006 are $62
million below those under EU IFRS. Further information on the impact of purchase
accounting under US GAAP is shown in note 48 to the 2006 financial statements on pages A-71 to A-72.
Rio Tinto plc and Rio Tinto Limited established separate ADR programmes prior to their DLC merger and had maintained both but following a review it was concluded that the Rio Tinto Limited ADR programme should be terminated
with effect from 10 April 2006 and a notice of termination was mailed to ADR holders. The Rio Tinto plc ADR programme was not affected by this termination.
Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2.
Offer Statistics and Expected Timetable
Not applicable.
Item 3.
Key Information
SELECTED FINANCIAL DATA
The selected consolidated financial data on pages 3 to 4 has been derived from the 2006 financial statements of the Rio Tinto Group under Item 18. Financial statements herein, have been restated where appropriate to accord
with the current accounting policies and presentations. The selected consolidated financial data should be read in conjunction with, and qualified in their entirety by reference to, the 2006 financial statements and notes thereto.
The 2006 financial statements were prepared in accordance with IFRS as adopted by the European Union, which differs in certain respects from US GAAP. Details of the principal differences
between EU IFRS and US GAAP are set out in note 48 to the 2006 financial statements.
In accordance with the General Instructions
for Form 20-F, Section G, audited information under EUIFRS is presented
for 2004, 2005 and 2006 only as International Financial Reporting Standards
were adopted from 1 January 2004.
(b)
Operating profit under EU IFRS includes the
effects of charges and reversals resulting from impairments and profit and
loss on disposals of interests in businesses, including investments. Operating
profit under US GAAP also includes the effects of charges but not reversals
resulting from impairments but excludes profit and loss on disposals of
interests in businesses, including investments. Both the EU IFRS and
US GAAP operating profit amounts shown above exclude equity accounted operations.
(c)
Dividends presented above are those
paid in the year.
(d)
Amounts shown are attributable to
equity shareholders of Rio Tinto.
(e)
The results for all years relate
wholly to continuing operations.
(f)
There are no differences between
International Financial Reporting Standards (IFRS) and IFRS adopted by the
European Union (EU IFRS) that would impact the financial statements
of the Rio Tinto Group for the years ended 31 December 2004, 2005 and 2006.
(g)
Certain jointly controlled assets,
which previously were equity accounted under UK and US GAAP, are proportionally
consolidated under EUIFRS. The above
US GAAP data for 2005 and 2006 also include these units on the basis of
proportional consolidation. Amounts presented for consolidated revenue
and operating profit in the years 2002 through 2004 have not been restated
and continue to incorporate these units on the equity accounting basis.
If these units had been subject to equity accounting, Group consolidated
revenue and operating profit, respectively, would have been $2.0 billion
and $1.0 billion lower (2005: $2.2 billion and $1.1 billion
lower). However, net earnings would have been unchanged
(h)
As a result of adopting IAS 32,
IAS 39 and IFRS 5 on 1 January 2005, the Group changed its method of accounting
for financial instruments and non-current assets held for sale. In line
with the relevant transitional provisions, the prior period comparatives
have not been re-stated. See Note 1 to the 2006 financial statements for
further discussion.
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 Groups business and financial results. They should also be considered in connection with any forward looking statements in this document and the cautionary
statement on the following page.
Economic conditions Commodity prices, and demand for the Groups
products, are influenced strongly by world economic growth, particularly that
in the US and Asia. The Groups 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 Groups asset values, revenues, earnings
and cash flows.
The strong underlying
economic conditions and commodity prices have led to a rapid growth in demand
for technical skills in mining, metallurgy and geological sciences, and for
materials and supplies related to the mining industry, causing skills and materials
shortages. The retention of skilled employees, the recruitment of new staff
and the purchasing of materials and supplies may lead to increased costs, interruptions
to existing operations and to delays in new projects.
Further discussion
can be found on page 12, Business environment, markets and regulations, and
on page 79, commodity prices.
Exchange rates The Groups asset values, earnings
and cash flows are influenced by a wide variety of currencies due to the geographic
diversity of the Groups sales and areas of operation. The majority of
the Groups 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 Groups asset
values, costs, earnings and cash flows. Further discussion can be found under,
Exchange rates, reporting currencies and currency exposure on page 77.
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 Groups costs, earnings and cash flows. Furthermore,
the Group may, under the terms of the acquisition, be liable for the
past acts or omissions of the acquired businesses in circumstances where the
price paid does not adequately reflect the eventual cost of these liabilities.
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 Groups financial results and prospects.
In particular, Rio Tinto has commenced or recommenced exploration for new projects
in a number of new countries which may increase risks around
land and resource tenure.
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
the economics of a project and, consequently, the Groups asset values,
costs, earnings and cash flows.
Ore reserve estimates There are numerous uncertainties inherent
in estimating ore reserves; 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 and amortisation rates, asset carrying
values, deferred stripping calculations and provisions for close
down, restoration and environmental clean up costs. Further discussion can be
found under Ore reserve estimates on page 82.
Political and community The Group has operations in jurisdictions
having varying degrees of political and commercial 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. Commercial instability caused
by bribery and corruption in their various guises can lead to similar consequences.
Any of these can have a material adverse effect on the profitability or, in
extreme cases, the viability of an operation.
Some of the Groups
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 may 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 Groups 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 Groups 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 Groups
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 Groups 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 Groups 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 Groups asset values,
earnings and cash flows.
Non managed projects and operations Where projects and operations are controlled
and managed by the Groups partners, the Group may provide expertise and
advice, but it cannot guarantee compliance with its standards and objectives.
Improper management or ineffective policies,
procedures or controls could not only adversely affect the value of the related
non managed projects and operations but could
also, by association, harm the Groups other operations and future access
to new assets.
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 on Form 20-Finclude,
without limitation, those regarding estimated
ore reserves, anticipated production or construction 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 Groups control. For example, future
ore 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 that could affect the Groups
results include the ability to produce and transport products profitably, demand
for our products, 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.
Rio Tinto is a leading international mining group
whose business is finding, mining and processing the earths mineral resources.
The Groups interests are diverse both in geography and product. Our activities
span the world but we are strongly represented in Australia and North America
and we have significant businesses in South America, Asia, Europe and southern
Africa. Those businesses include open pit and underground mines, mills, refineries
and smelters as well as a number of research and service facilities.
The Group combines
Rio Tinto plc, registered in England and Wales, listed on the London Stock Exchange
and headquartered in the UK; and, Rio Tinto Limited, incorporated in Victoria,
Australia, listed on the Australian Securities Exchange and with executive offices
in Melbourne. The Group consists of wholly and partly owned subsidiaries, jointly
controlled assets, jointly controlled entities and associated companies, the
principal ones being listed in notes 35 to 38 to the 2006 financial statements.
On 31 December
2006, Rio Tinto plc had a market capitalisation of £27.8 billion (US$54
.5 billion) and Rio Tinto Limited had a market capitalisation in publicly held
shares of A$21.2 billion (US$16.8 billion). The combined Groups
market capitalisation in publicly held shares at the end of 2006 was US$71.3
billion.
Objective, strategy and management structure Our fundamental objective is to maximise
the overall long term value and return to our shareholders. We do this by operating
responsibly and sustainably in areas of proven expertise such as exploration,
project evaluation and mining, where the Group
has a competitive advantage.
Our strategy
is to maximise net present value by investing in large, long life, cost competitive
mines. Investments are driven by the quality
of each opportunity, not by the choice of commodity.
Rio Tintos
management structure is designed to facilitate a clear focus on the Groups
objective. This structure, reflected in this report, is based on the following
principal product and global support groups:
•
Iron Ore
•
Energy
•
Industrial Minerals
•
Aluminium
•
Copper
•
Diamonds
•
Exploration
•
Technology and Innovation (formerly Operational
and Technical Excellence).
The chief
executive of each product group reports to the chief executive of Rio Tinto.
Nomenclature and financial data Rio Tinto Limited and Rio Tinto plc operate
as one business organisation, referred to in this report as Rio Tinto, the Rio
Tinto Group or, more simply, the Group. These collective expressions are used
for convenience only, since both Companies, and the individual companies in
which they directly or indirectly own investments, are separate and distinct
legal entities.
Limited,
plc, Pty, Inc, Limitada, SA
and similar suffixes have generally been omitted from Group company names, except
to distinguish between Rio Tinto plc and Rio Tinto Limited.
Financial data
in United States dollars (US$) is derived from, and should be read in conjunction
with, the 2006 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
and have been provided solely for convenience; exceptions arise
where data, such as directors remuneration, can be extracted directly
from source records.
Rio Tinto Group
sales revenue, profit before tax and net earnings and operating assets for 2005
and 2006 attributable to the product groups and geographical areas are shown
in notes 30 and 31 to the 2006 financial statements. In
the Operating and financial review (OFR),
operating assets and sales revenue for 2005 and 2006 are consistent with the
financial information by business unit in note 47 to the 2006 financial statements.
The tables on
pages 19 to 22 show production for 2004, 2005 and 2006 and include estimates
of proven and probable ore reserves. Words
and phrases, often technical, have been used which have particular meanings;
definitions of these terms are in the Glossary on pages 153 to 155. The weights
and measures used are mainly metric units; conversions
into other units are shown on page 155.
History Rio Tintos predecessor companies
were formed in 1873 and 1905. The Rio Tinto Company was formed by investors
in 1873 to mine ancient copper workings at
Rio Tinto, near Seville in southern Spain. The Consolidated Zinc Corporation
was incorporated in 1905 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, both RTZ and CRA discovered important mineral deposits, developed
major mining projects and also grew through
acquisition.
RTZ and CRA were
unified in 1995 through a dual listed companies structure. This means the Group,
with its common board of directors, 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 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.
Contact details The registered office of Rio Tinto plc
is at 6 St Jamess Square, London, SW1Y 4LD (telephone: +44 20 7930 2399)
and the registered office of Rio Tinto Limited is at Level 33, 120 Collins Street,
Melbourne, Victoria 3000 (telephone: +61 3 9283 3333). Rio Tintos agent
in the US is Shannon Crompton, secretary of Rio Tintos US holding companies,
who may be contacted at Rio Tinto Services Inc., 80 State Street, Albany, New
York, 12207-2543.
Rio Tinto is investing heavily in future growth opportunities from the Groups broad portfolio of assets. Projects have been financed out of internally generated funds. Major projects
completed and ongoing are summarised below.
Project
Estimated cost
Status/Milestones
(100% basis)
US$m
Completed in 2004
Iron ore Development
of the Eastern Range (Rio Tinto: 54%)
with a capacity of ten million tonnes per year.
67
First shipments dispatched in the first half of the
year.
Aluminium Construction
of the first stage of new 1.4
million tonnes per year alumina refinery at Gladstone.
750
Completed three months early. Initial shipments
started in early 2005.
Copper Northparkes
(Rio Tinto: 80%) construction of second
block cave.
Construction completed but production was
initially impacted by fragmentation of the cave.
Completed in 2005
Iron ore HIsmelt® plant
(Rio Tinto: 60%) at Kwinana in Western Australia.
200
The full production rate of 800,000 tonnes per year
is expected to be reached over three years.
Iron ore Expansion of Yandicoogina mine.
200
Expansion completed in the third quarter.
Iron ore Expansion
of West Angeles mine (Rio Tinto: 53%).
105
Project completed in the third quarter.
Titanium dioxide Expansion
of upgraded slag plant.
76
Commissioning started in first quarter.
Copper Development
of the Escondida Norte satellite deposit
(Rio Tinto: 30%) to provide mill feed to keep Escondidas capacity above
1.2 million tonnes of copper per year to the end of 2008.
400
First production occurred in 2005.
Iron ore Expansion
of port capacity to 116 million tonnes per
annum.
685
Focus on production ramp up following completion
of construction.
Completed in 2006
Iron ore Expansion
of Hamersley Irons (Rio Tinto: 100%)
Tom Price and Marandoo mines and construction of new mine capacity at Nammuldi.
290
The Marandoo and Nammuldi components are
complete and Tom Price is scheduled for completion
by the first quarter of 2007.
Iron ore Expansion
by Robe River (Rio Tinto: 53%) of rail capacity
including completion of dual tracking of 100 km mainline section.
200
The project was completed on budget and ahead of schedule.
Copper Escondida
sulphide leach (Rio Tinto: 30%). The project
will produce 180,000 tonnes per annum of copper cathode for more than 25
years.
925
The first cathode production from the sulphide
leach plant occurred in June 2006.
Titanium dioxide Expansion
of annual capacity at UGS plant from 325,000
tonnes to 375,000 tonnes.
79
The project was completed in October three months
ahead of schedule and under budget.
Boric acid Phase
2 of Rio Tinto Minerals boric acid Expansion
50
The project was completed on schedule and under budget.
Coking coal Hail
Creek (Rio Tinto: 82%) Expansion of annual
capacity from 6 million tonnes to nameplate 8 million tonnes per annum, with
washing plant increased to 12 million tonnes per annum.
223
The new dragline was commissioned early in the
third quarter of 2006.
Ongoing
Copper KUC (Rio
Tinto: 100%) East 1 pushback. The project
extends the life of the open pit to 2017 while retaining options for further
underground or open pit mining thereafter.
170
The project was approved in February 2005 and work
on the pushback continues. The pebble
crushing unit was commissioned in the third quarter
of 2006.
Diamonds Construction
at Diavik (Rio Tinto: 60%) of
the A418 dyke, and funding for further study of
the viability of underground mining, including the construction of an exploratory
decline.
265
The project was approved in 2004. The A418 dyke
was closed off in late 2005 with dewatering completed
in 2006. The dyke was completed during March
2007 with production from the A418 pipe
expected to commence during April 2008. Construction of the exploratory decline
is expected to be completed during June 2007.
Iron ore Brownfields
mine expansion of Hamersley
Irons (Rio Tinto: 100%) Yandicoogina mine
from 36 million tonnes per annum to 52 million tonnes per annum.
530
The project was approved in October 2005 and
completion is expected by the end of the third quarter
of 2007.
Iron ore Expansion
of Hamersley Irons
(Rio Tinto: 100%) Dampier port (Phase B)
from 116 million tonnes per annum to 140 million tonnes per annum capacity
and additional rolling stock and infrastructure.
803
This project was also approved in October 2005
and completion is expected by the end of 2007.
Titanium dioxide Construction
by QMM (Rio Tinto:
80%) of a greenfield ilmenite operation in Madagascar
and
associated upgrade of processing facilities at QIT.
850
Basic infrastructure is being put in place and the
port construction contract was awarded in 2006. First production is scheduled
for 2008.
Gold Development
of Cortez Hills (Rio Tinto: 40%).
504
Approved in September 2005, the project continues
to focus on permitting requirements.
Energy Rössing
(Rio Tinto: 68.6%) uranium mine life extension
to 2016.
82
Approved in December 2005, works are on schedule and
on budget to prolong the life of the
mine to 2016 and beyond.
Diamonds Argyle
(Rio Tinto: 100%) development of
underground mine and open pit cutback, extending
the life of the mine to 2018.
910
Approved in December 2005, the underground
development is progressing with the mine due to start ramping up from 2008. Underground
development cost estimates are currently
under review.
Recently approved
Iron ore Hope
Downs development (Rio Tinto share:
50% of mine and 100% of infrastructure). Construction
of
22 million tonnes per annum mine and related
980
Construction is under way. First production expected
in early 2008.
infrastructure.
Copper Northparkes
(Rio Tinto: 80%) E48 block cave project
extending mine life to 2016.
160
Approved in November 2006.
Energy Clermont
(Rio Tinto: 50.1%) is expected to produce
12.2 million tonnes per annum, replacing Blair Athol.
750
Approved in January 2007, first shipments are
expected in the second quarter of 2010 with full
capacity being reached in 2013.
Iron ore Cape
Lambert port expansion (Rio Tinto share:
53%) from 55 to 80 million tonnes per annum.
860
Approved in January 2007, the project is forecast to
be complete by the end of 2008, with progressive capacity ramp up in the first
half of 2009.
ACQUISITIONS
Asset
Estimated
Status
cost
US$m
Acquired in 2004
Energy additional
177 million tonnes of in-situ coal
reserves at West Antelope
146
Successful bid.
Acquired in 2005
Iron ore Hope
Downs iron ore assets in Western Australia
n/a
Rio Tinto reached agreement with Hancock
Prospecting Pty Ltd to purchase a 50% interest.
Acquired in 2006
Copper Ivanhoe
Mines (Rio Tinto: 9.9%)
303
Agreement to acquire a strategic stake including,
upon completion of satisfactory a long term investment agreement with the Mongolian
government, a second tranche of 9.9%
for
US$338m.
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.
Copper Zinkgruvan
Mining AB (Rio Tinto: 100%)
n/a
Sold to South Atlantic Ventures.
Zinkgruvan was acquired in 2000 as part of North
Ltd.
Copper Neves Corvo
copper mine in Portugal (Rio
Tinto: 49%)
92
Rio Tinto and Empresa de Desenvolvimento Mineiro
completed the sale of their interests to EuroZinc
for a cash consideration and a participation in
the average copper price in excess
of certain thresholds.
Diamonds Rio Tinto
Zimbabwe (RioZim) (Rio Tinto:
56%)
n/a
As a result of a restructuring
of Rio Tintos interests in Zimbabwe, it
became the holder of a direct 78% interest in
Murowa, and RioZim became an independent listed
company owning the remaining 22% and certain other
Zimbabwean
interests. Rio Tinto also retains
a reduced cash participation in RioZims other
interests for a period of ten years.
Energy Hail Creek
Joint Venture (Rio Tinto: 92%)
150
Sale of a 10% interest in the
Hail Creek Joint Venture and a 47% interest in
the Beasley River iron ore deposits to Rio Tintos Japanese partners.
Iron ore Beasley
River iron ore deposits (Rio Tinto:
100%)
Copper Rio Paracatu Mineração
(Rio Tinto: 51%)
250
The sale of the owner of the Morro
do Ouro mine in Brazil.
Divested in 2005
Iron ore Labrador
Iron Ore Royalty Income Fund (LIORIF) (Rio
Tinto: 19%)
130
LIORIF has an interest of 15.1%
in, and receives royalties from, Iron Ore Company
of Canada (IOC), a subsidiary of Rio Tinto. The
transaction had no effect on Rio Tintos
59% direct interest in IOC.
Other operations Lihir
Gold (Rio Tinto: 14.5%)
295
Rio Tinto relinquished its management
agreement with Lihir, and subsequently sold its
interest.
Divested in 2006
Aluminium Eurallumina SpA (Rio Tinto: 56.2%)
n/a
Sold to RUSAL
Diamonds Ashton
Mining of Canada Inc (Rio Tinto:
51.7%)
n/a
Sold to Stornaway Diamond Corporation
for US$26m plus shares representing an interest
of 17.7%
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. The competitive arena is spread across the globe.
Most
of Rio Tintos 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 and long life mineral resources, the basis of good financial returns,
are relatively scarce. Rio Tintos ownership of or interest in some of the
worlds
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 major economies requiring metals and
minerals for
development could mean even higher market growth.
Economic overview The world economy grew by 4.9 per cent in 2006 on a purchasing power parity basis. This was the fourth successive year of global growth in excess of four per cent.
Growth was broad based, but once again the US and China
provided the bedrock for this expansion. Although the pace
of US economic growth progressively slowed over the course of the year, as the
housing market faltered, it still managed to rise by 3.3 per cent over its 2005
level. Chinese growth for the year was 10.5 per cent, its biggest annual increase
in over a decade. The Japanese economy rose 2.4 per cent and in Asia as a whole
growth was 5.1 per cent. Latin America grew
by 4.8 per cent and activity picked up in Europe, rising by 2.7 per cent on 2005.
Despite
this sustained rapid global growth and higher commodity prices, global inflation
remained relatively tame. Central
banks have increased interest rates as the balance of inflationary pressure has
shifted towards the upside. Even the Japanese Central Bank raised interest rates for
the first time since 2001, but this has been a progressive development and both
financial and foreign exchange markets have been stable.
These strong underlying
economic conditions, a general ongoing low level of commodity stock availability
and continued delays in bringing on new supply contributed to further large increases
in commodity prices in the first half of 2006. In the second half of 2006 some
general easing in prices was recorded as the pace of demand growth slowed and
expectations of faster supply growth filtered through. There are however some
important differences between trends in individual
commodities. With few exceptions prices remain well above their historical levels
and significantly
so in many cases.
Strong growth
in Chinese iron ore imports continued into 2006 and the already tight market
conditions worsened following heavy rain early in the year. After a record price
increase of 71.5 per
cent during 2005 a further 19 per cent was agreed
in 2006. Benchmark prices are set to rise a further 9.5 per cent in 2007.
The
cash price of copper reached a record high of almost
US$4 per pound in May 2006, but finished the year on a weaker tone and over
the year averaged US$3.06
per pound.
After lagging the other base metals
in 2005 the aluminium price rose to an annual average of
US$1.16 a pound in 2006, its highest in real terms for 17 years. Whilst the
metal was strong, spot alumina prices fell sharply later in the year as a surge
in Chinese refinery production came on the market. After starting the year at
US$650
a tonne, spot alumina ended not much above US$200.
The
volatility seen in metals markets last year was replicated in the energy sector.
Spot prices for seaborne thermal coal reached the low US$50s a tonne early
in 2006, but were US$10
per tonne off their peak later in the year. The
annual average price was similar to that achieved in 2005. After more than doubling
in the 2005/6 marketing year, coking coal prices
fell slightly in 2006/7 in response to mixed demand in their major markets.
Prices for Powder River Basin coal in the US started the year at very high levels
and although they ended the year somewhat weaker the annual average price was up 25-30 per cent (depending on grade) over 2005
levels. Uranium prices rose sharply during 2006 on
concerns about low stocks. Spot prices doubled over the course of the year.
Demand for industrial
minerals such as borates and titanium minerals continued to benefit from solid
US demand in the first half of the year but
concerns about the US housing market dampened expectations in the latter part
of the year.
Diamond prices
started the year on a very firm basis but conditions declined, due to monsoon
flooding in major Indian cutting and polishing
centres, and
increased stockholding costs in the jewellery supply chain.
Gold prices have
not seen the same degree of escalation as other metals but recorded a strong
trend in 2006, averaging
over US$600 per ounce over the year
as a whole, up 36 per cent on 2005.
Many
less widely traded metals have also continued to benefit from firm demand. The
molybdenum price averaged US$25 per pound in 2006, down on its 2005 level
but still historically high.
Marketing channels Rio
Tintos marketing channels are described under Marketing on
page 66.
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
Tintos product and geographical spread, there is unlikely to be any
single governmental regulation that could have a material effect on the Groups
business.
Rio Tintos
operations in Australia, New Zealand, and Indonesia are subject to state, provincial
and federal regulations of general application
governing
mining and processing, land tenure and use, environmental requirements, including
site specific environmental licences, permits and statutory authorisations, workplace
health and safety, trade and export, corporations, competition, access to infrastructure,
foreign investment and taxation. Some operations are conducted
under specific agreements with the respective governments and associated acts
of parliament. In
addition, Rio Tintos uranium operations
in the Northern Territory, Australia and Namibia are subject to specific regulation
in relation to mining and the export of uranium.
US and Canada
based operations are subject to local, state, provincial and national regulations
governing land tenure and use, environmental aspects of operations, product and
workplace health
and safety, trade and export administration,
corporations, competition, securities and taxation.
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 existing 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 in relation to existing mining assets, 15 per cent ownership should vest in HDSAs within five years of 1 May 2004. Rio Tinto anticipates that the government of South Africa will continue working towards the introduction of new
royalty payments in respect of mining tenements, expected to become effective during 2009.
Environmental regulation Rio Tinto measures its performance against
environmental regulation referred to in the previous section by rating incidents
on a low, moderate, high, or critical scale of likelihood and consequence of
impacting the
environment. High and critical ratings are reported
to the Executive committee and the board Committee
on social and environmental accountability, including progress with remedial actions. Prosecutions and other
breaches are also used to gauge Rio Tintos
performance.
In 2006, there
were eight reportable incidents, the same number as in 2005. Three of these incidents
resulted in spills which caused minor contamination.
Four
operations incurred fines in 2006 amounting to US$56,779 (predominantly relating to incidents in 2005) compared with three operations incurring fines of US$67,900
during 2005. The
2006 fines included:
•
US$38,500 imposed by the Utah State governments Department of Environmental Quality, Division of Air Quality against Kennecott Utah Copper for exceeding the permissible
concentration of emissions of fine particles from its smelter near Salt Lake City, Utah on two occasions. However, the mass emission rate was below the threshold
permitted.
•
US$12,900 imposed by the United States Environmental Protection Agency following a spill at Greens Creek base and precious metals mine, Alaska of four gallons of diesel fuel during
exploration drilling. The company and the drilling contractor have implemented additional controls and training to prevent any further spills.
Further information in respect of the Groups environmental performance is in the 2006 Sustainable development review available on the Rio Tinto
website.
Bauxite mining commenced in 1961. Major upgrade completed
in 1998. Rio Tinto interest increased from 72.4% to 100% in 2000. In 2004 a mine
expansion was completed that has lifted annual capacity to 16.5 million tonnes.
Mining commenced on the adjacent Ely mining lease in 2006, in accordance with
the 1998 agreement with Alcan. A second shiploader that increases the shipping
capability
of the Weipa operation was commissioned in 2006
Open cut
On site generation; new power
station under construction
COPPER
Escondida (30%)
Production started in 1990 and expanded in phases to
2002 when new concentrator was completed; production from Norte commenced in
2005
and the sulphide leach produced the first cathode during 2006
Open pit
Supplied from SING grid under
various contracts with Norgener Gas
Atacama
and Edelnor
Grasberg joint venture
(40%)
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 with an expansion to a sustained rate
of 50,000 tones per day by mid 2007
Open pit and underground
Long term contract with US-Indonesian
consortium operated, purpos e built,
coal fired generating station
Kennecott Minerals Cortez/Pipeline (40%)
Gold production started at Cortez in 1969, Pipeline
in 1997 and Cortez Hills was approved in 2005.
Open pit
Public utility
Kennecott Minerals
Redeveloped in 1997
Underground / drift and fill
On site diesel generators
Greens Creek (70%)
Kennecott Utah Copper Bingham Canyon
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%)
Interest acquired in 2000; production started in 1995
Open pit and underground
Supplied from State grid
Palabora (58%)
Development of 20 year underground mine commenced 1996
with open pit closure in 2003
Underground
Supplied by ESCOM via grid
network
DIAMONDS
Argyle Diamonds
Interest increased from 59.7% following purchase of
Ashton Mining in 2000. Underground mine project approved in 2005 to extend mine
life to 2018
Open pit
Long term contract with Ord
Hydro Consortium and on site generation back
up
Diavik (60%)
Deposits discovered 1994-1995; construction approved
2000; diamond production started 2003. Second dyke closed off in 2005 for mining
of additional orebody
Open pit to underground in future
On site diesel generators; installed
capacity 27MW
Murowa (78%)
Discovered 1997; small scale production started 2004
Open pit
Supplied by ZESA
ENERGY
Energy Resources ofAustralia (68%)
Ranger
Mining commenced 1981; interest acquired through North
in 2000; life of mine extension to 2014 announced in 2005
Rio Tinto Coal Australia Bengalla (30%)
Blair
Athol (71%) Hail Creek (82%) Hunter
Valley Ops. (76%) Kestrel (80%) Mount
Thorley Ops. (61%) Tarong Coal Warkworth
(42%)
New South Wales and Queensland, Australia
Road, rail conveyor and port
Leases granted by State
Rio Tinto Energy America
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
Rössing Uranium (69%)
Namib Desert, Namibia
Rail, road and port
Federal lease
INDUSTRIAL MINERALS
Rio Tinto Minerals -Boron
California, US
Road, rail and port
Owned
Rio Tinto Minerals - 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
Rio Tinto Minerals - talc
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
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
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
IRON ORE
Hamersley Iron Brockman
Marandoo
Mount
Tom Price Nammuldi Paraburdoo Yandicoogina Channar
(60%) Eastern Range (54%)
Hamersley Ranges, Western
Australia
Railway and port (owned
by Hamersley Iron and operated by Pilbara
Iron)
Agreements for life of mine with Government
of We stern Australia
Iron Ore Company ofCanada (59%)
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
Rio Tinto Brasil
Corumbá
Matto Grosso do Sul, Brazil
Road, air and river
Government licence for undetermined period
Robe River Iron Associates (53%) Mesa
J
West Angelas
Pilbara region, Western
Australia
Railway and port (owned
by Robe River and operated by Pilbara Iron)
Agreements for life of mine with Government
of We stern Australia
Rio Tinto Coal Australia Bengalla (30%)
Blair
Athol (71%) Hail Creek (82%) Hunter
Valley Ops. (76%) Kestrel (80%) Mount
Thorley Ops. (61%) Tarong Coal Warkworth
(42%)
Peabody Australian interests acquired
in 2001. Production started for export at Blair
Athol and adjacent power station at Tarong in 1984.
Kestrel acquired and recommissioned 1999. Hail
Creek started 2003.
Open cut and underground (Kestrel)
State owned grid
Rio Tinto Energy America Antelope
Colowyo
(20%) Cordero Rojo Decker
(50%) Jacobs Ranch Spring
Creek
Antelope, Spring Creek, Decker and
Cordero acquired in 1993, Colowyo in 1995, Caballo
Rojo in 1997, Jacobs Ranch in
1998 and West Antelope in 2004
Open cut
Supplied by IPPs and Cooperatives
through national grid service
Rössing Uranium (69%)
Production began in 1978. Life of mine
extension to 2016 approved in 2005
Open pit
Namibian National Power
INDUSTRIAL MINERALS
Rio Tinto Minerals - Boron
Deposit discovered in 1925, acquired
by Rio Tinto in 1967
Open pit
On site co-generation units
Rio Tinto Minerals - salt (65%)
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
Rio Tinto Minerals - talc
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
Production started 1950; interest
acquired in 1989
Open pit
Long term contract with Quebec
Hydro
Richards Bay Minerals (50%)
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 Nammuldi Paraburdoo Yandicoogina Channar
(60%) Eastern Range (54%)
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 through the integrated
Hamersley and Robe power network operated
by Pilbara Iron
Iron Ore Company of Canada (59%)
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 13.5 million tonnes
can be pelletised. Interest acquired in 2000
through North
Open pit
Supplied by Newfoundland Hydro
under long term contract
Rio Tinto Brasil Corumbá
Iron ore production started 1978; interest
acquired in 1991
Open pit
Supplied by ENERSUL
Robe River Iron
Associates (53%)
Mesa
J West Angelas
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 mine expanded in 2005
Open pit
Supplied through the integrated
Hamersley and Robe power network operated
by Pilbara Iron
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 2006 and has applied over the period 2004 2006 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
2004
2005
2006
Atlantic
Copper
(k)
12.0
—
—
Grasberg
(k)
10.8
—
—
Hail
Creek
(h)
90.8
82.0
82.0
Palabora
(m)
49.2
49.0
50.5
(c)
Rio Tinto sold its 56.2 per cent share in Eurallumina
with an effective date of 31 October 2006 and production data are shown
up to that date.
(d)
Yarwun, previously known as Comalco Alumina
Refinery, started production in October 2004.
(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 t o the date of sale.
(f)
Borate quantities are expressed as B2O3.
(g)
Rio Tinto Coal Australia manages all the Australian
coal operations including the mines which were previously reported separately under the Coal & Allied name.
(h)
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 Energy America was previously known
as Kennecott Energy.
(j)
In view of Rio Tinto Energy Americas
responsibilities under a management agreement for the operation of the Colowyo
mine, all of Colowyos output is included in Rio Tintos share
of production.
(k)
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
to FCX 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.
(l)
Rio Tinto completed the sale of its 49 per
cent interest in Somincor on 18 June 2004. Production data are shown up
to the d ate of sale.
(m)
During the second half of 2005, the conversion
of debentures into ordinary shares resulted in a dilution of Rio Tintos
shareholding in Palabora from 49.2 per cent to 47.2 per cent. The conversions,
which continued during 2006, were completed during the third quarter when
Rio Tinto also participated, ending the year with a 57.7 per cent interest.
(n)
Ore mining and processing at Murowa commenced
during the third quarter of 2004.
(o)
On 30 November 2005, Rio Tinto sold its 14.5
per cent in Lihir Gold; it had agreed in September 2005 to relinquish the
management agreement for Lihir. The production data are shown up to 30
September 2005, from which date the Rio Tinto interest in Lihir was held
as an investment rather than being equity accounted..
(p)
Rio Tinto sold its 51 per cent interest in
Morro do Ouro on 31 December 2004. Production data are shown up to the date
of sale.
(q)
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.
(r)
Rio Tintos 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
(Rio Tinto 54 per cent), Hamersley Iron manages the operation and is obliged to purchase all mine production from the joint venture.
(s)
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.
(t)
HIsmelt® commenced production during September 2005.
(u)
Talc production includes some products derived
from purchased ores.
(v)
Quantities comprise 100 per cent of QIT and
50 per cent of Richards Bay Minerals production.
Reserves have been prepared in
accordance with Industry Guide 7 under the United States Securities Act
of 1933 and the following definitions:
•
An Ore Reserve means that part
of a mineral deposit that can be economically and legally extracted or
produced at the time of the reserves determination.
To establish this, studies appropriate to the type of mineral deposit
involved have been carried out to estimate the quantity, grade and value
of the ore mineral(s) present. In addition,
technical studies have been completed to determine realistic assumptions
for the extraction of the minerals including
estimates of mining, processing, economic, marketing, legal, environmental,
social and governmental factors. The degree of these studies is sufficient to
demonstrate the technical and economic feasibility
of the project and depends on whether or not the project is an extension
of an existing project or operation. The
estimates of minerals to be produced include allowances for ore losses
and the treatment of unmineralised materials
which may occur as part of the mining and processing activities. Ore Reserves
are sub- divided in order of increasing
confidence into Probable Ore Reserves and Proven Ore Reserves as defined
below.
•
The term “economically”, as used in the definition
of reserves, implies that profitable extraction or production under
defined investment assumptions has been established through the creation
of a mining plan, processing plan and cash
flow model. The assumptions made must be reasonable, including costs and
operating conditions that will prevail
during the life of the project.
•
Ore reserves presented in accordance with SEC
Industry Guide 7 do not exceed the quantities that, it is estimated,
could be extracted economically if future prices were to be in line with
the average of historical prices for the
three years to 30 June 2006, or contracted prices where applicable. For
this purpose, contracted prices are applied
only to future sales volumes for which the price is predetermined by an
existing contract; and the average of historical
prices is applied to expected sales volumes in excess of such amounts. Moreover,
reported ore reserve estimates have not been increased above the levels expected
to be economic based on Rio Tinto's own
long term price assumptions.
•
The term “legally”, as used in the definition
of reserves, does not imply that all permits needed for mining and
processing have been obtained or that other legal
issues have been completely resolved. However, for reserves to
exist, there is reasonable assurance of the issuance of these permits or
resolution of legal issues. Reasonable assurance
means that, based on applicable laws and regulations, the issuance of permits
or resolution of legal issues necessary
for mining and processing at a particular deposit will be accomplished in
the ordinary course and in a timeframe consistent with the Companys current mine
plans.
•
The term “proven reserves” means 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.
Proven reserves represent that part of
an orebody for which there exists the highest level of confidence in data
regarding its geology, physical characteristics, chemical composition and probable
processing requirements.
•
The term “probable reserves” means reserves
for which quantity and grade and/or quality are computed from information
similar to that used for proven 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 proven reserves, is
high enough to assume continuity between points of observation. This means
that probable reserves generally have a
wider drill hole spacing than for proven reserves.
•
The amount of proven and probable reserves
shown below does not necessarily represent the amount of material
currently scheduled for extraction, because the
amount scheduled for extraction may be derived from a life of mine
plan predicated on prices and other assumptions which are different to those
used in the life of mine plan prepared
in accordance with Industry Guide 7.
•
The estimated ore reserve figures in the following
tables are as of 31 December 2006. 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.
Commodity price information is given in footnote (a).
Commodity prices (based on a three
year average historical price to 30 June 2006) used to test whether the
reported reserve estimates could be economically extracted, include the following benchmark prices:
Ore reserves
Unit
US$
ALUMINIUM
Weipa (Australia)
pound
0.85
COPPER
Bingham Canyon (US)
pound
1.59
Escondida (Chile)*
pound
1.59
Escondida Norte (Chile)*
pound
1.59
Grasberg (Indonesia)*
pound
1.59
Northparkes (Australia)
pound
1.59
Palabora (South Africa)
pound
1.59
GOLD
Bingham Canyon (US)
ounce
446
Cortez / Pipeline (US)*
ounce
446
Grasberg (Indonesia)*
ounce
446
Greens Creek (US)
ounce
446
Northparkes (Australia)
ounce
446
IRON ORE
Australian benchmark (fines)
dmtu**
0.46
Atlantic benchmark (fines)
dmtu**
0.49
LEAD
Greens Creek (US)
pound
0.41
MOLYBDENUM
Bingham Canyon (US)
pound
20.5
SILVER
Bingham Canyon (US)
ounce
7.34
Grasberg (Indonesia)*
ounce
7.34
Greens Creek (US)
ounce
7.34
ZINC
Greens Creek (US)
pound
0.64
* = non managed operations
** = dry metric tonne unit
Prices for all other commodities are determined
by individual contract negotiation. The reported reserves for these commodities
have been tested to confirm that they could be economically extracted using
a combination of existing contract prices until expiry and thereafter three
year historical prices.
(b)
Type of mine: O/P = open pit, O/C = open cut, U/G = underground, D/O = dredging operation, S/P = stockpile.
(c)
Drill hole spacings are either average distances,
a specified grid distance (a regular pattern of drill holes - the distance
between the drill holes along the two axes of the grid will be aligned to
test the size, shape and continuity of the mineral deposit; as such there
may be different distances between the drill holes along the two axes of
a grid) or the maximum drill hole spacing that is sufficient to determine
the reserve category for a particular deposit.
As the continuity of mineralisation varies from deposit to deposit, the drill
hole spacing required to categorise a reserve varies between and within
deposit types.
(d)
Reserves of iron ore, bauxite (as alumina) and diamonds are shown as recoverable reserves of saleable product after accounting for all mining and processing losses. Mill recoveries are therefore not shown.
(e)
Reserves of industrial minerals are expressed in terms of marketable product, i.e. after all mining and processing losses. In the case of borates, the saleable product is B2O3.
(f)
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. All reserves at operating mines are assigned, all
undeveloped reserves are unassigned. By assigned and unassigned, we mean the following: assigned reserves means coal which has been committed by the coal company to operating mine shafts, mining equipment, and plant
facilities, and all coal which has been leased by the company to others; unassigned reserves represent coal which has not been committed, and which would require new mineshafts, mining equipment, or plant facilities before operations could begin in
the property.
(g)
Coal type: SC = steam/thermal coal; MC = metallurgical/coking coal.
(h)
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. 1 MJ/kg = 430.2 Btu/lb.
(i)
Stockpile components of reserves are shown for all operations.
(j)
Rio Tinto Minerals - Boron was previously known as Boron.
(k)
Rio Tinto Energy America was previously known as Kennecott Energy.
(l)
Rio Tinto Energy America 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.
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 construction and commissioning have yet to commence.
(n)
The increase in reserves at Escondida and Escondida Norte results from updated models following increased drilling and the application of new economic parameters, which transferred mineralised material to reserves. Oxide
material has been transferred to sulphide leach following the start up of new processing facilities.
(o)
Under the terms of a joint venture agreement between
Rio Tinto and Freeport-McMoRan Copper & Gold (FCX), Rio Tinto is entitled
to a direct 40 per cent share in reserves discovered at Grasberg after 31
December 1994 and
it is this entitlement that is shown.
(p)
Reserves at Palabora have decreased following
detailed remodelling of both grade and block cave models, and the effect
of diluting material from the open pit. The conversion of debentures into
ordinary shares continued during 2006 with Rio Tinto participating, ending
the year with a 57.7 per cent interest.
(q)
The successful completion of feasibility studies and change in economic parameters has increased reserves at Argyle.
(r)
Production depletion and refinement of mine design at Diavik, that reduced dilution, results in the reduced reserve.
(s)
Portions of the Pipeline and Crossroads extension reserves were reclassified as mineralised material following technical and economic review.
(t)
Following the acquisition of a 50 per cent interest in the Hope Downs iron ore project, reserves are presented here for the first time.
(u)
Mt Tom Price reserves have increased following the upgrading of mineralised material and approved mine design extensions into a new area.
(v)
Following a reassessment of economic and design criteria a proportion of reserves were reclassified as mineralised material at several of the talc operations. Rio Tinto Minerals - talc was formerly known as the Luzenac
Group.
(w)
The reserve model was updated on receipt of new
data, which including depletion, resulted in a reduction of reserves at
QIT.
(x)
Improvements in processing and economic parameters enabled lower grade stockpile material to be added to the reserves at Ranger #3.
As far as Rio Tinto is aware there are no unresolved written comments from the SEC staff regarding its periodic reports under the Exchange Act received more than 180 days before 31 December
2006.
Item 5.
Operating and Financial Review and Prospects
This Item contains forward looking
statements and attention is drawn to the Cautionary statement on page
6.
This Item includes a discussion of the main factors affecting the Groups Profit
for the year, as measured in accordance with International Financial
Reporting Standards as adopted by the European Union (EU IFRS).
In monitoring its financial performance, the Group also focuses on that part
of the Profit for the year attributable to equity shareholders of Rio Tinto,
which is referred to as Net earnings, and on an additional measure
called Underlying earnings. The latter measure, which is also
based on the amounts attributable to Rio Tinto shareholders, is reported
to provide greater understanding of the underlying business performance of
Rio Tinto operations. This measure is used by management to track the performance
of the Group on a monthly basis. The earnings of the
Groups product groups as reviewed by management exclude amounts that are
outside the scope of underlying earnings. Underlying
earnings is defined and reconciled with Net earnings in note 2 to the 2006 financial
statements.
Significant movements in the items excluded from
Underlying earnings are discussed on pages 40 to 41.
In this report, the sales revenue of the parent
companies and their subsidiaries
is referred to as Consolidated sales revenue. Rio Tinto also reports
a sales revenue measure that includes its share of jointly controlled entities
and associates, which is referred
to as Gross sales revenue. This latter measure is considered informative
because a significant part of the Group's business is conducted through operations
that are subject to equity accounting.
This Item is comprised of the following:
•
Chairmans message providing a high level
review of the Group
•
Interview with the chief executive providing
a high level review of the Groups operations
•
Group financial performance
•
Operating reviews for each of the principal
product groups and global support groups
•
Financial review of the Group
As a result of adopting IAS 32,
IAS 39 and IFRS 5 on 1 January 2005, the Group changed its method of
accounting for financial instruments
and non-current assets held for sale. In line with the relevant transitional
provisions, the prior period comparatives
have not been re-stated. See Note 1 to the 2006 financial statements
for further discussion.
CHAIRMANS MESSAGE
We continued to experience strong global demand and high prices across our product groups in 2006 and are pleased to report a third successive year of record earnings. This performance reflects the underlying quality of the
Rio Tinto portfolio, which has proved robust across the economic cycle.
I have warned in previous messages about the risk of complacency that can flow from a period of strong markets and sustained success. We remain alert to this and recognize the long term
cyclical nature of our industry. In response we continue to focus on rigorous investment discipline, operational excellence and pursuing all opportunities to enhance the underlying
performance of our business.
Results and dividends The
Groups underlying earnings in 2006 were US$7,338 million, US$2,383
million or 48 per cent above 2005. Net earnings
were US$7,438 million, compared with US$5,215
million in 2005. Cash flow from operations increased 36 per cent
to [US$10,923]* million.
The final dividend declared for 2006 of 64 US cents per share brings the total for 2006 to 104 US cents, an increase of 30 per cent. We have a long standing
policy of progressive dividend delivery and maintaining it remains a priority.
In addition, our strong operational cash flows have enabled us to return US$2.4 billion to shareholders through the buyback of shares
and the payment of US$1.5 billion special dividend. We have recently announced,
subject to market conditions, our intention
to return a further US$3 billion to be completed by the end of 2007, while
still retaining the financial flexibility to take up growth opportunities as
they arise.
Our main priority for the use of cash generated continues to be profitable investment in the growth of the business
with particular emphasis on our portfolio of economically robust projects. Our
capital investment grew from US$2.5 billion in 2005 to US$3.9 billion
in 2006. Our pipeline of project opportunities will see this grow to around US$5
billion in 2007.
Strategy Our strategy remains to focus on large, long life, low cost ore bodies capable of delivering superior returns across the economic cycle. Creating value for shareholders is our primary
objective and will remain so. We are fortunate to have a geographical portfolio weighted towards large, mature and growing economies. However, we recognise that pursuit of future value growth will see us operating in
a wider range of countries than in the past. Recent projects and investments in Russia, Madagascar, Peru and Mongolia are evidence of this.
We are also focused on driving productivity and performance improvements across all our primary business processes, thereby adding to the resilience of our
portfolios in more challenging markets. We made significant progress towards that objective in 2006.
Sustainable development Rio Tinto is in a long term, capital intensive business and our investments typically have life spans of 30 years or more and are often in remote locations. Without economic and social stability we cannot deliver economic
returns to our host governments, local communities and our shareholders. We therefore remain committed to the principles of sustainable development, which is fully reflected in all aspects of our business. It facilitates access to new opportunities,
improves business performance and inspires our own people, who fully share this commitment.
As we move into new geographical areas, meeting economic, social and environmental challenges simultaneously will be an increasingly critical feature of our business. I am pleased that our way
of doing business has received positive recognition and support from our various stakeholders in these environments.
New chief executive We have announced that Tom Albanese will succeed Leigh Clifford as chief executive on 1 May 2007. Leigh has made an outstanding contribution to Rio Tinto for almost 37 years. His seven years as chief executive have seen
significant growth in the profitability and value of the business and major enhancements in our operational performance. We thank him for all he has done for Rio Tinto and wish him
well for the future.
Tom brings a broad based experience of the mining industry developed in a sequence of challenging roles in Rio Tinto. He has been a key player in a number of important initiatives over recent
years and in shaping our strategic direction. We have plans in place for a smooth handover from Leigh to Tom and the board is confident that, under his leadership, Rio Tinto will
continue to deliver profitable growth and increased value for shareholders.
Board developments Michael Fitzpatrick joined the board in June 2006 after a successful period in investment fund management. He brings a long experience of entrepreneurial activity to the board and is a
valuable addition to our Australian representation. We are fortunate to have an experienced and diverse board which provides strong support and constructive challenge to our executive
team.
Forward outlook The
global economy remains resilient in the face of a range of political and economic
risks. We expect a continuation of positive economic growth in 2007 in most of
the major economies. Chinas strong, growing demand
for metals and minerals, which has been a key driver of market strength, seems
set to continue.
On the supply side, a number of constraints, ranging from shortages of key consumables, like truck tyres and explosives, to the tight supply of skilled
technical managers and tradesmen, have limited the growth of new production capacity. Stocks of most products have remained low, resulting in tight markets. This has reinforced the strength of the current cycle and
we expect prices in 2007 to continue at levels significantly above the long term trend.
Our people Despite the benefit of strong markets, 2006 was very challenging in operational terms. We have faced daily pressures in meeting the requirements of our customers and developing new projects
within tight timetables and budgets. Our record results would not have been possible without the commitment, dedication and hard work of our global workforce. Once again, on behalf of the board and you, our
shareholders, I thank them for all they have achieved in an excellent year for Rio Tinto.
Paul Skinner Chairman
23 February 2007
*
Adjusted following a reclassification post
publication in the 2006 Annual report and financial statements.
How would you describe the past year? Underlying
earnings in 2006 were a record US$7.3 billion. Not only were prices for metals
and minerals higher, but we were able to make
the most of the situation with increased
production at many of our operations maximising delivery into strong markets. With our strong balance sheet we are in a position to invest heavily in growth and to return capital to shareholders. Through our
business improvement programme, Improving performance together (IPT), we are seeing a significant change in the way business units cooperate
and share best practice. IPT resulted in substantial additional cash flow in 2006 and should deliver very large value enhancements in the future. Health, safety and environment indicators generally showed steady
improvement, but unfortunately the year was marred by three fatalities at Rio Tinto managed operations.
Why are markets this good? Economic growth and development around the world, particularly in China and India, mean an increased need for minerals. The mining industry is struggling to keep pace with demand. There is normally a quicker supply response
when demand rises. However, because of previous under investment in exploration, the next generation of large world class deposits is only now being identified and evaluated. These deposits are often in remote locations, present new technical
challenges and will take some years to come into production. The delivery times for major items of equipment have also significantly increased. While we believe a new higher base level of prices has developed for most commodities, this is mirrored
by higher operating and development costs.
Rio Tintos volume growth has typically been six to seven per cent a year where to now? We
concentrate on what we do best, which is mining the first stage of the
supply chain. Rio Tinto operates or shares in some of the largest deposits in
the world. That is partly why we are enjoying financial success at a time of
strong prices, although all our product groups generate strong cash flow at all points of the cycle. Large long life deposits also give
us the opportunity to increase production in line with demand, a great advantage
in the current environment. Ours is a simple strategy and it works. While most
of our existing assets are in OECD countries, we are responding to new opportunities
in the developing world
Peru, Guinea and Indonesia to name a few and in countries that are only
now opening up to mining investment, like Madagascar, Russia and Mongolia.
We are always alert to merger and acquisition opportunities, but growth is often ab out choosing between buying and
building. When you build a new project you
should know what youre getting if you execute the project well, but when
you buy you may find not all the assets are jewels. The key is to make value
creating decisions not just increase volume. We are
willing to make the big bets, as we have in iron ore and copper, but the key
factor in the execution of our strategy is discipline: discipline in analysis and discipline in execution.
How are you responding to cost pressures? We work very hard to manage costs related to operational inputs, supplies, wages, energy and higher material costs through the excellent work of our global procurement team and our strong
supplier relationships. However, the prices of many key inputs, including labour, have risen sharply in recent times. Of course our exploration and project evaluation costs feeding our development pipeline are in the
nature of investments in the future.
Can you say a little more on the Improving performance together initiative? We
need to permanently change the way we run our individual operations, replicating
best performance across everything we do project analysis, project development,
mine planning, mining, processing and marketing. We
are a global Group and we need to work across functions and international borders to solve problems together instead of businesses going it alone. By creating a standard operating
model with common systems, standards and metrics we will ensure that we capture the best ways of operating and reproducing these across the Group. The substantial additional cash flow we achieved in 2006 is the start
to adding considerable value to the Group over time.
You spent about US$4 billion in new capital in 2006. How are the major projects going? Overall, our new projects are coming along well. Our iron ore expansion projects in Western Australia remain our biggest current capital investment. The challenge of operating and expanding
ten mines, three ports and more than 1,600km of rail line in the Pilbara at a time of buoyant market conditions should not be underestimated. With total expenditure
of US$3 billion, by the end of 2007 our port
and rail infrastructure will be capable of handling up to 195 million tonnes of iron ore annually. The recently announced expansion of Cape Lambert port, at a cost of US$860
million, will further expand capacity to 220 million tonnes. The Yandicoogina
mine will expand to 52 million tonnes a year in the same period and the Hope
Downs project will start production in 2008 with output of 22 million tonnes,
rising to 30 million tonnes in stage two. From negotiation of the agreement on
Hope Downs to first deliveries will be only three years.
Our
ilmenite project in Madagascar is on schedule, and construction of basic infrastructure
by local contractors is under way. The port contract has been awarded, enabling
us to finalise a
definitive cost estimate of US$850 million for the total project including
the building of additional processing capacity in Canada. First production is
scheduled for 2008, when we believe there will be growing
demand for the high quality ilmenite that Madagascar will produce for 40 years.
Development continues at the Argyle Diamond mine in Western Australia, Diavik in Canada and Cortez in Nevada, as does the extension of the life of the Rössing Uranium mine in Namibia.
Earlier this year we announced the development of the Clermont thermal coal mine in Queensland, and we completed significant investment to expand capacity at the Weipa bauxite mine in
Queensland.
What about new opportunities? We have acquired interests in three promising copper projects: La Granja in Peru, the Pebble project in Alaska and Oyu Tolgoi (Turquoise Hill) in Mongolia which, together with Resolution
Copper in the US, give us an interest in four world class undeveloped copper mineral deposits. The investment in Mongolia represents a phased, risk managed entry into a potentially
outstanding resource. La Granja has
been given the go ahead for a US$95 million pre-feasibility study.
We
are encouraged by the exploration potential on ERA leases in Australia and the
expansion possibilities at Rössing Uranium in Namibia. These, together with
the potential of Kintyre in Western Australia and Sweetwater in Wyoming, US,
mean we are well placed to extend uranium reserves in the near future.
In
addition we have an extensive global exploration programme, spending a total
of US$345 million in 2006, and we continue to evaluate numerous development
opportunities, often with others.
Much is being made of a skills shortage. What is your view? Technical skills in mining, metallurgy and geological sciences are in short supply and there is strong competition for recent graduates, experienced engineers and artisans as well as supervisors. However, I believe we are
better placed than most. Global graduate recruitment is a high priority and we are doing well in attracting good quality people. We are seen as an organisation that can provide
exciting international experience, good training and lots of opportunity. We are also being more creative in retaining the skills and experience of staff in the later stages of their career. All that said , I think
the mining industry as a whole needs to sell itself as an attractive employer more effectively. We need to consider
changes to career structures to retain staff by offering greater flexibility
and to identify adventurous people at the recruitment stage.
Any reflections on your handover to Tom Albanese? I am fortunate to have worked for Rio Tinto for almost 37 years. It has given me a diverse and interesting career during which
I have met and worked with many different people who form this great team that
is Rio Tinto. In Tom Albanese we have a very able, experienced and committed
individual to continue Rio Tintos success. I would like to take this opportunity
of wishing him well, and to thank all my colleagues around the world for the
strong support they have given me in the many roles over my career.
Underlying earnings is the key financial performance indicator which management use internally to assess performance. It is presented here as an additional measure of earnings to provide greater understanding of the
underlying business performance of the Groups operations. The categories of items excluded from net earnings to arrive at underlying earnings are explained in note 2 to the 2006
financial statementstogether with information on a minor change in the definition of underlying earnings.
Both net earnings and underlying earnings deal with amounts attributable to equity shareholders of Rio Tinto. However, EU IFRS requires that the profit for the
period reported in the income statement should also include earnings attributable to outside shareholders in subsidiaries. The profit for the period is reconciled to net earnings and to underlying earnings as
follows:
2006
2005
2004
US$m
US$m
US$m
Profit for the year
7,867
5,498
3,244
Less: attributable to outside equity shareholders
(429
)
(283
)
53
Attributable to equity shareholders of Rio Tinto (net earnings)
7,438
5,215
3,297
Less: exclusions from underlying earnings
(100
)
(260
)
(1,025
)
Underlying earnings attributable to shareholders of Rio Tinto
7,338
4,955
2,272
Amounts attributable to outside equity shareholders increased in 2006 largely because of improved results at Palabora and the reversal of impairment at IOC. Amounts attributable to outside
equity shareholders increased in 2005 because of improved results at Robe River, IOC, Coal & Allied, Rio Tinto Iron & Titanium and Palabora. In addition, in 2004 outside equity shareholders interests
included a US$129 million charge for impairments.
Earnings contributions from Group businesses and business segments are based on underlying earnings. Amounts excluded from net earnings in arriving at underlying earnings are summarised in the
following table and discussed further below.
2006
2005
2004
US$m
US$m
US$m
Profit less losses on disposal of interests in businesses
3
311
1,175
Impairment reversals less charges
44
4
(321
)
Adjustment to environmental remediation provision
37
84
—
Exchange gains/(losses) on external
net debt and intragroup balances (including those relating to equity accounted
units)
(14
)
(99
)
159
Gains/(losses) on currency and interest rate derivatives not qualifying for hedge
accounting (including those relating to equity accounted units)
30
(40
)
12
Total excluded in arriving at underlying earnings
100
260
1,025
Changes in underlying earnings 2004 - 2006
US$m
2004 Underlying earnings
2,272
Effect of changes in:
Prices
2,374
Exchange rates
(123
)
General inflation
(141
)
Volumes
1,140
Costs
(598
)
Tax and other
31
2005 Underlying earnings
4,955
Effect of changes in:
Prices
3,068
Exchange rates
(35
)
General inflation
(174
)
Volumes
(135
)
Costs
(741
)
Tax and other
400
2006 Underlying earnings
7,338
2006 compared with 2005 Net
earnings of US$7,438 million in 2006 were US$2,223 million above 2005,
an increase of 43 per cent. Underlying earnings
of US$7,338 million were US$2,383 million above
2005, an increase of 48 per cent. Underlying earnings per share, which increased by 52 per cent, also reflected the lower number of shares resulting from the share buyback programme. The principal factors explaining
the changes in underlying earnings are shown in the table above.
Changes in underlying earnings The
effect of price movements on all major commodities was to increase underlying
earnings by US$3,068 million. Prices for the major products remained strong throughout the year and were
considerably higher than those experienced in 2005: average copper prices were 84 per cent higher whilst average aluminium prices were 35 per cent higher. The strength of the global iron ore market was reflected in
the 19 per cent increase in the benchmark price, mainly effective from 1 April 2006. The seaborne thermal coal market was also strong, although it weakened in the second half.
Molybdenum
prices averaged US$25/lb throughout 2006, a decline of 20 per cent compared
with the prior year.
The net effect of changes in average levels of
exchange
rates against the US
dollar for those currencies influencing the
Groups costs was to reduce underlying earnings relative to 2005 by US$35
million.
Lower
sales volumes decreased underlying earnings by US$135 million compared with 2005. As anticipated, significantly reduced volumes from lower grades at Grasberg impacted earnings by
US$355 million year on year. This more than offset higher volumes at other operations. The ramp up of new projects in iron ore (including the Yandicoogina and brownfields expansions), higher copper in concentrate
volumes from improved grades and throughput at Northparkes, higher ore grades and the commencement of sulphide leach production at Escondida, along with higher molybdenum and gold
production at Kennecott Utah Copper (KUC), were the main contributors. Record volumes of thermal coal sales at Rio Tinto Energy America and alumina at Yarwun (formerly Comalco Alumina Refinery), also contributed to
higher volumes. Lower sales volumes were recorded at Argyle with a build up of diamond inventories due to softer market conditions, at Kennecott Minerals from lower grades at Cortez, and at Hail Creek from lower
coking coal volumes in response to lower customer demand.
Excluding
the effects of general inflation, higher costs reduced underlying earnings by
US$741 million, of which US$77 million
was the result of higher energy costs. Ongoing acute shortages in the mining
industry, in particular in the Pilbara, have continued to put pressure on costs.
Costs at KUC were affected by an extended, scheduled smelter maintenance shutdown
whilst Escondida experienced higher wages, following the strike in August. Significant shipping congestion at the port of Newcastle affected coal sales in the second half of the year with a resulting impact on costs
at Rio Tinto Coal Australia, through higher demurrage and a higher unit cost of sale.
The
effective tax rate on underlying earnings, excluding equity accounted units,
was 24.2 per cent compared with 29.2 per cent in 2005, following the recognition
of US$335 million of US
Alternative Minimum Tax (AMT) credits now expected to be utilised in future years. This reflected improved projections of long term taxable earnings from our US operations. Additionally, the high levels of profit generated by the Groups US
operations in 2006 resulted in the realisation of US$140 million of previously unrecognised deferred tax assets in the year. Deferred tax provisions decreased by US$46
million as a result of a reduction in Canadian tax rates. These favourable tax
variances are included within the favourable
variance of US$400 million for Tax and other items.
Exclusions in arriving at underlying earnings In
2006 a US$3 million gain was realised from disposals of interests in non core businesses, compared with gains from disposals of US$311 million in 2005. In 2005, the gains related mainly to the sale of Rio
Tintos interests in the Labrador Iron Ore Royalty Income Fund and in Lihir
Gold.
Net earnings
in 2006 included net impairment reversals totalling US$44 million. Impairments
were reversed at KUC and IOC which more than offset impairment
charges at Argyle and Tarong Coal. The valuation of the Argyle underground project is being kept under review, given the continuing pressure on mine development costs resulting from
acute shortages in the mining industry and more challenging mining conditions
than expected. In addition, net earnings in 2006 include a reduction of US$37 million (2005: US$84
million) in an environmental remediation provision at KUC, reversing an exceptional charge taken up in 2002 (which was excluded from adjusted earnings in that year).
Exchange gains and losses on external net debt and intragroup balances that are recorded in the US dollar income statement,
together with gains and losses on currency and interest rate derivative contracts
that do not qualify as hedges under EU IFRS, are excluded from underlying earnings.
In 2006, these items represented a gain of US$16 million (2005: a loss of US$139
million).
The effective tax rate on net earnings, excluding equity accounted units was 26.8 per cent compared with 27.8 per cent in 2005. There were significant untaxed gains in 2005 which lowered the
effective tax rate and the tax benefits referred to above reduced the tax rate for 2006.
2005 financial results compared with 2004 Net
earnings of US$5,215 million in 2005 were US$1,918 million above 2004,
an increase of 58 per cent. Underlying earnings
of US$4,955 million were US$2,683 million above
2004, an increase of 118 per cent. The increase of 120 per cent in underlying
earnings per share also reflected the lower number of shares resulting from the
share buyback programme. The principal factors explaining
the changes in underlying earnings are shown in the table above.
Changes in underlying earnings The
effect of price movements on all major commodities was to increase earnings by
US$2,374 million. Prices for the major products remained strong throughout
the year and were appreciably higher than those experienced in 2004: average
copper prices were 28 per cent higher whilst average aluminium prices were ten
per cent higher. The strength of the global iron ore market was reflected in
the 71.5 per cent increase in the benchmark price, mainly effective from 1
April 2005. The seaborne thermal and coking coal markets were also strong.
Molybdenum prices, which had generally been below US$5 per pound over the previous ten years, averaged over US$30 per pound during 2005, although they did soften towards the end of that
year.
The US dollar was generally weaker than in 2004 relative to the currencies in which the Group incurs the majority of its costs. The average levels of the
Australian and Canadian dollars strengthened against the US dollar by four per cent and eight per cent, respectively. The effect of this, together with other currency movements, was to reduce underlying
earnings
relative to 2004 by US$123 million.
Over
40 per cent of the underlying earnings increase year on year came from higher
sales volumes, resulting in a favourable variance of US$1,140 million compared
with 2004. The West Angelas
and Yandicoogina mine expansions (to 36 million tonnes per annum) were completed in 2005 whilst strong operational performance led to major production gains at many operations
including IOC and Argyle. The improvement over 2004 also reflected the following adverse influences on that earlier year: the Grasberg slippage, the ten week strike at IOC and the effects of Cyclone Monty at
Hamersley Iron and Robe River. To take advantage of the strong market for molybdenum, the mine sequencing at KUC was optimised to maximise molybdenum production. This, together with modifications to the molybdenum
circuit at the concentrator, boosted production volumes by 130 per cent.
Excluding
the effects of inflation, higher costs reduced earnings by US$598 million. Of this, US$130 million was due to higher energy costs and US$46
million was attributable to
increased exploration expenditure from brownfield exploration and further evaluation work. More generally, costs were influenced by the strong price environment being enjoyed by the
mining industry. This led to rising mining input costs caused by supply constraints for skilled labour, steel, tyres, explosives, freight and other mining related goods and services. Costs at KUC were affected by a scheduled 17 day smelter maintenance shutdown in the first half of 2005 whilst continued port congestion at Dalrymple Bay, Queensland, fed through to higher demurrage charges.
Higher non cash costs reflected increased depreciation at KUC following the changes in the mine plan at the end of 2004. Increases in closure cost provisions
resulted in higher depreciation charges on the amounts capitalised. One-off costs
included restructuring costs of US$30 million relating to the formation of
the Rio Tinto Minerals organisation.
The effective tax rate on underlying earnings, excluding equity accounted units, was 29.2 per cent compared with 27.1 per cent in 2004 because of higher rates
on increased profits in Canada and Indonesia and higher withholding taxes.
In
total Tax and other items improved by US$31 million. Within that
total, the net after tax interest expense of US$44 million was US$25
million lower than in 2004 due to lower levels of net debt. Also within Tax and other items, 2004 underlying earnings included contributions totalling US$88
million from the operations of businesses that were sold during that year. Earnings
in 2005 benefited from an improvement in the net impact of insurance items, including lower claims on the captive insurers due to the absence of cyclone related damages experienced in 2004.
Exclusions in arriving at underlying earnings In
2005 the net profit on the disposal of interests in businesses was US$311 million relating mainly to the sale of Rio Tintos interests in the Labrador Iron Ore Royalty Income Fund and in Lihir Gold. Disposals in
2004, principally the holding in Freeport-McMoRan Copper & Gold, resulted in gains of US$1,175
million.
Net earnings
in 2005 include a reduction of US$84 million in an environmental remediation
provision at Kennecott Utah Copper, reversing part of an
exceptional charge taken up in 2002 (which was excluded from adjusted earnings
in that year). Net earnings in 2004 included an impairment charge of US$160
million relating to the Colowyo coal operation and of US$161 million for the write down of Palaboras
copper assets.
Exchange gains and losses on external net debt and intragroup balances that are recorded in the US dollar income statement, together with gains and losses on
currency and interest rate derivative contracts that do not qualify as hedges under
EU IFRS, are excluded from underlying earnings. In 2005, these items represented
a loss of US$139 million (2004: a gain of
US$171 million).
The effective tax rate on net earnings, excluding equity accounted units was 27.8 per cent compared with 18.5 per cent in 2004. There were very significant
untaxed gains in 2004 which lowered the effective tax rate. There was a smaller amount of untaxed gains in 2005 which, together with the adverse 2005 tax effects referred to above, resulted in a higher effective tax
rate.
Group financial results by product group The
table below summarises the Groups underlying earnings by product group
for each of the three years to 2006.
2006
2005
2004
US$m
US$m
US$m
Iron Ore
2,279
1,722
565
Energy
711
733
431
Industrial Minerals
243
187
243
Aluminium
746
392
331
Copper
3,562
2,020
860
Diamonds
205
281
188
Other operations
33
40
25
Exploration and evaluation
(163
)
(174
)
(128
)
Other items
(261
)
(202
)
(174
)
Net interest
(17
)
(44
)
(69
)
Group underlying earnings
7,338
4,955
2,272
Exclusions from underlying earnings
100
260
1,025
Net earnings
7,438
5,215
3,297
Trend information The
demand for the Groups products is closely aligned with changes in global
GDP. Changes in the GDP of developing countries are expected to have greater
impact on materials such as iron ore and coal that can be used
to improve infrastructure whereas changes in the GDP of developed countries are expected to have greater impact on industrial
minerals that have many applications in consumer products. Copper is used in
a wide range of applications from infrastructure to consumer electronics and
demand for it has tended to grow in line with or slightly faster than global
GDP. Trends in production of the Groups minerals and metals,
gross sales revenue and underlying earnings are set out in this Operating and financial review.
A reconciliation of the net earnings with
underlying earnings for 2004, 2005 and 2006 as determined under EU IFRS
is set out on page
39
Rio Tintos Iron Ore group (RTIO) comprises
iron ore operations in Australia, Canada and Brazil and development projects
in Guinea (west Africa) and India. The portfolio also includes a HIsmelt ® plant in Australia, which is a revolutionary process that converts iron ore fines into high quality pig iron.
At
31 December 2006, the iron ore group accounted for 32 per cent of Rio Tintos
operating assets, and in 2006 contributed
27 per cent of the Groups
gross sales revenue and 31 per cent of underlying earnings.
RTIO employs 4,800 people in Western Australia and approximately 7,000 worldwide. RTIO recruited strongly during the year and in a highly contested recruitment market in Western Australia hired
1,400 new starters, in addition to making a large number of internal transfers, secondments and promotions.
Work progressed
on a number of safety and environmental initiatives, and particularly focused
on the issues surrounding contractor management and the operation of heavy mobile
equipment.
Final
steps were taken for the next stage of the groups expansion, with infrastructure now in place or approved to handle up to 220 million tonnes of iron ore exports annually. The
growth strategy has seen approximately US$5 billion committed to port, rail,
power and mine assets since 2003, resulting in a world class, integrated iron
ore network able to capitalise on continued strong demand
internationally.
In
April 2006, RTIOs 50:50 joint venture with Hancock Prospecting for the development of the Hope Downs project was ratified following State Government approval. Construction of the
US$980 million, 22 million tonnes per annum stage one Hope Downs mine has started, with production expected to commence in early 2008.
Sam Walsh, chief executive Iron Ore, is
based in Perth, Western Australia.
Financial performance
2006 compared with 2005 RTIOs contribution to 2006 underlying
earnings was US$2,279 million, US$557 million higher than in 2005.
Demand
for iron ore remained extremely strong across the product range throughout
2006, driven by the continuing strong growth in global steel demand and production.
Total Chinese iron ore imports rose from 275 million tonnes to 326 million
tonnes. Hamersley Iron, Robe River, Iron Ore Company of Canada and Corumbá in
Brazil all operated at
record or near record levels of production in 2006.
For the contract year commencing April 2006, RTIO reached agreement with customers on price increases of 19 per cent for all products following on from the
previous agreement of a 71.5 per cent increase. In December 2006, prices for the 2007 contract year were agreed with Baosteel of China, for a 9.5 per cent increase to the benchmark price. Similar price increase agreements were subsequently reached with other steelmakers.
2005 compared with 2004 RTIOs contribution to 2005 underlying earnings was US$1,722 million, US$1,157 million higher than in 2004. Demand for iron ore continued to be extremely strong across the product range throughout 2005, driven
by continued strong growth in global steel production and improvements in steel demand. Chinese iron ore imports rose 30 per cent year on year, and Hamersley Iron, Robe River, IOC and Corumbá all
achieved record production in 2005.
Operations Hamersley Iron (Rio Tinto: 100 per cent)
Hamersley Iron operates eight mines in Western
Australia, including two mines in joint ventures, 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.
The first
phase of major expansions to the Pilbara infrastructure (including expanding
Dampier port to 116 million tonnes per annum and Yandicoogina mine to 36
million tonnes per annum, and brownfields mine expansion) is now fully operational
and the second phase is well under way and tracking on schedule and on budget.
The Marandoo mine was expanded and the new Nammuldi mine was completed in the second quarter of the year.
Hamersley
Irons Yandicoogina mine is being expanded from 36 million tonnes per
annum to 52 million tonnes and the scheduled completion has been accelerated
to the end of the third quarter in 2007. Work also continued on pre-development
studies for new mines.
2006 operating performance Hamersley
Irons total production in 2006 was 97.2 million tonnes, 7.6 million tonnes
more than the 89.6 million tonnes in 2005, notwithstanding
the volume of expansion work under way
across the business. Rio Tintos share of this production
was 93.3 million tonnes.
Flooding caused by a
succession of five cyclones early in the year hindered operations significantly.
Production increases through the year sought to recover from the early
setbacks and meet increased capacity targets.
Shipments
by Hamersley Iron totalled 98.1 million tonnes, including sales through joint
ventures. Hamersley Irons shipments to China also reached a new record
level at 52.9 million
tonnes, securing Chinas place as the single largest destination for Hamersleys
iron ore.
Production from all mines was stretched to achieve these levels, placing cost and other operating stresses on the Hamersley Iron system. Ongoing labour
shortages in a competitive market and materials pressures such as tyre shortages also provided significant challenges to meeting production targets.
Hamersleys total shipments
of iron ore to major markets in 2006
Million tonnes
China
52.9
Japan
27.4
Other Asia
15.8
Europe
2.0
Total
98.1
Note
This table includes 100 per cent of all shipments 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 River is the
worlds fourth largest seaborne trader
in iron ore.
Robe River 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. Preparations are under way for
these products to contribute to the Pilbara Blend from the third quarter 2007,
when RTIOs product range will be simplified
from nine products to five.
Expansion of mine,
rail and port operations has continued. As a result of the 2005 expansion of
the West Angelas mine,
which took production capacity to 25
million tonnes per annum, Robe Rivers overall production capacity increased
to a nominal 57 million tonnes per year.
The expansion of the dedicated rail system, operated by Pilbara Iron, was completed during the year, ahead of schedule. Completion of the northern section of
the Pilbara Iron main line meant that almost 100 kilometres of track and associated interconnection and infrastructure such as signalling and communications is now duplicated. This provides
significantly greater flexibility, and hence improvements
to capacity, in delivering ore to Robe Rivers deepwater port facilities
at Cape Lambert.
The expansion
of the Cape Lambert port facility from 55 million tonnes to a rated capacity
of 80 million tonnes per annum was recently
approved. This is a significant project, comprising a number of major initiatives,
including a new product reclaimer and an extended wharf.
Robe River primarily exports under medium and long term supply contracts with major integrated steel mill customers in Japan, China, Europe, South Korea and
Taiwan.
2006 operating performance Cyclones
slowed production early in the year at Robe Rivers Pannawonica and West
Angelas mines and hindered operations well into
the second quarter. Robe Rivers total production
in 2006 was 52.9 million tonnes, comprising 29.3 million tonnes from Mesa J,
and 23.7 million tonnes from West Angelas. Sales were 29.1 million tonnes of
Mesa J and 23.3 million tonnes of West Angelas products.
Sales
growth, based on increased production from West Angelas, was again fuelled by
the growth in
the Chinese market, where Robe River achieved record total sales of 18.5
million
tonnes. However, Japan remains Robe Rivers
largest single market, with total shipments in 2006 of 24.7 million tonnes.
A
new mining strategy at West Angelas has resulted in an improved product,
with less grade variation. This improved performance is expected to continue
through
the transition to the Pilbara Blend.
Robes total shipments of
iron ore to major
markets in 2006
Million tonnes
Japan
24.7
China
18.5
Europe
6.1
Other Asia
2.7
Total
52.0
Iron Ore Company of Canada (Rio Tinto: 58.7 per cent)
RTIO
operates Iron Ore Company of Canada (IOC) on behalf of shareholders Mitsubishi
(26.2 per cent) and the Labrador Iron Ore Royalty Income Fund (15.1 per cent).
IOC is Canadas largest iron ore pellet producer. It
operates an open pit mine, concentrator and
pellet plant at Labrador City, Newfoundland and Labrador, together with a 418 kilometre
railway to its port facilities in Sept-Îles,
Quebec. IOC has large quantities of ore reserves with low levels of contaminants.
Products
are transported on IOCs railway to Sept-Îles. The port is open all
year, handles ore carriers of up to 255,000 tonnes and provides competitive access
to all seaborne pellet
markets and to the North American Great Lakes region.
IOC exports its concentrate and pellet products to major North American, European
and Asian steel makers.
IOC employs approximately 1,900 people and recruited 250 people during the year to offset an increase in retirements and to meet greater production needs.
2006 operating performance While
concentrate prices continued to rise, showing a 17.3 per cent increase, the pellet
premium retreated from the record high of the previous year, resulting in pellet
prices softening by 3.5 per cent. Pellets account for
80 per cent of IOCs production.
Total saleable
production was 16.1 million tonnes (compared with 15.6 million tonnes in 2005)
following a strong recovery from weather related
production losses in the first quarter. The total was made up of 12.7 million
tonnes of pellet production (13.3 million tonnes
in 2005) and 3.4 million tonnes of saleable concentrate production (2.3 million
tonnes in 2005).
Higher oil prices
and efforts to recover first quarter production losses put pressure on unit costs.
A project to increase annual concentrate production
to 17.5 million tonnes was largely completed by the year end, and plans for
further expansion are currently under consideration. IOC commenced negotiation
of a new collective agreement in the fourth
quarter of 2006, and following a five-week labour dispute, a new five-year collective
agreement was concluded in the second quarter of 2007.
IOCs total shipments of iron
ore to major
markets in 2006
Mineração Corumbaense Reunida (Corumbá) (Rio
Tinto: 100 per cent)
Corumbá produced
a record two million tonnes of lump iron ore in 2006 and sold 1.8 million tonnes,
which was barged along the Paraguay River for export to South American and European
customers. The feasibility of expanding production
at the mine in stages to 15 million tonnes per annum is under study. Logistic
options are being considered for expanded export sales and for supplies to a
proposed
steel making project at Corumbá, which is being promoted by Rio
Tinto. Corumbá has over 200 million tonnes of reserves and over 400 million
tonnes of additional mineralised material. There are approximately 500 employees.
HIsmelt® (Rio
Tinto: 60 per cent)
The HIsmelt® iron
making project at Kwinana in Western Australia 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 (five per cent). The project
has so far received
support of A$80 million from the Australian federal government.
The HIsmelt® process
is a direct iron smelting technology developed largely by Rio Tinto that converts
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.
In 2006 the Hlsmelt® plant
moved into the first year of a three-year ramp up to its full production rate
of 800,000 tonnes per annum. Since start up, the facility has produced 98,000
tonnes of pig iron and has made three shipments of product.
HIsmelt® has
approximately 130 employees.
In 2006 the HIsmelt® facility
hosted visits from senior representatives of the Chinese government, as well
as a
significant number of international steel companies.
HIsmelt® Corporation
continues to promote the technology globally and expects interest to increase as the ramp up phase progresses.
In November, Australian state and federal ministers attended a special ceremony
at Kwinana to recognise the opening of the worlds first commercial HIsmelt® plant.
Projects Orissa, India (Rio
Tinto: 51 per cent)
Orissa is one of the key iron ore regions of
the world. RTIO has a joint venture interest in Rio Tinto Orissa Mining with the
state owned Orissa Mining Corporation. The joint venture holds rights to iron
ore leases in Orissa, which it is seeking to develop. Rio Tinto is keen to participate
in the development of the Indian iron ore sector through its joint venture.
A project team has been established and is working to expedite the development
of operations in India.
Indias
economy is expected to maintain its present growth, so providing support for
an expanding domestic steel industry, and discussions have continued with major
domestic steel
companies.
Simandou, Guinea (Rio
Tinto: 95 per cent)
The Simandou project in eastern Guinea, west
Africa, is a Rio Tinto greenfields discovery with potentially significant quantities
of high grade iron ore. Simandou moved from Rio Tinto Exploration to full project
status as part of RTIO in October 2004. A prefeasibility study is assessing the
mining and transport options needed to bring Simandou into production
as quickly as possible. The International Finance Corporation (the private sector
arm of the World Bank Group)
took a five per cent stake in the project in August 2006 and is working with
Rio Tinto to develop the project in an environmentally and socially sustainable
way. To date Rio Tinto has spent more than US$50 million on the project.
A reconciliation of the net earnings with
underlying earnings for 2004, 2005 and 2006 as determined under EU IFRS
is set out on page
39
The Energy group comprises thermal coal and coking coal operations and uranium. Coal interests are located in Australia and the US. They supply internationally traded and US and Australian domestic markets. The energy
portfolio also includes Rössing Uranium in Namibia and Energy Resources of Australia which supply uranium oxide for electricity generation globally.
The group has consolidated its asset holdings, branding
and product stewardship with the creation of Rio Tinto Coal Australia, Rio Tinto
Energy America and Rio Tinto Uranium. An overarching group strategy was needed
to harness and focus resources to deliver a
world class performance in operations, sustainable development and value creation.
In 2006 the Energy group undertook a review of its strategy and asset portfolio. The review highlighted the importance
of the Japanese and US markets to the business and the role of China in providing
depth in demand whilst increasing the potential volatility. The strategy is focused
on becoming the worlds leader in mineable energy.
A key part of
the strategy is to ensure that the group is a leading advocate of, and investor
in, the sustainable future uses of coal and
uranium. In 2006 the group dedicated resources and investment funds to the FutureGen
project in the US, COAL21 in Australia and the International Energy Agency Clean
Coal Centre.
In
uranium, both ERAs Ranger mine in Australia and the Rössing Uranium
mine in Namibia represent low cost brownfield expansion opportunities. Rio Tinto
also holds other attractive undeveloped uranium deposits, including Kintyre in
Western Australia, and we are currently assessing the viability of restarting
the Sweetwater uranium mill and adjacent uranium mine in Wyoming, US.
At
31 December 2006, the Energy group accounted for 13 per cent of Group operating
assets and, in 2006, contributed 17 per cent of Rio Tintos gross sales
revenue and ten per cent of
underlying earnings.
Preston Chiaro, chief executive Energy, is based in London.
Financial performance 2006 compared with 2005 The Energy
groups 2006 contribution to underlying earnings was US$711 million,
US$22
million lower than in 2005.
Results benefited from a sustained increase in the
price received for thermal coal during 2006.
Problems in the coal supply chain in the Hunter
Valley region of New South Wales impeded production from Coal & Allied
operations. Drought in parts of Queensland and New South Wales has begun to
affect production levels.
Operations focused on producing high margin products and optimising the coal
supply chain. Increases in the cost of basic materials, fuel,
explosives and labour were not fully offset by production
growth, resulting in a rise in the cost per unit of production across all operations.
Our uranium businesses continue to provide options and opportunities in the reinvigorated international uranium market. The focus of the uranium operations is
to seek additional production volumes and long term expansions to sell into the current favourable price environment. Spot prices for uranium oxide strengthened considerably during the period,
increasing from
US$36.38 at the beginning of the year to close at US$72 in December.
Uranium oxide is typically sold on long term contracts, with pricing determined several years in advance. The significant rise in the spot
price of uranium oxide during the period is therefore not fully reflected in the current earnings. The effects of the 2006 pricing levels will flow through to earnings in future years. Our uranium businesses are
contracted and priced to 98 per cent in 2007 and 88 per cent in 2008.
2005 compared with 2004 The
Energy groups 2005 contribution to underlying earnings was US$733 million,
US$302
million higher than in 2004.
A significant
increase in the price received for both thermal and coking coal during 2005 was
a key factor in this improvement. Third party infrastructure issues continued
to impede production
growth in all of the coal operations. Operational
emphasis shifted to high margin products and to facilitating the further expansion
of the Hail Creek mine into a strong market
for coking coal. The inability to reap the required economies of scale and an
increase in the price of fuel and explosives resulted in a rise in the unit cost
of production across the group.
Spot
prices for uranium oxide strengthened considerably during 2005, increasing from
US$20.43 at the beginning of the year to
close at US$36.38 in
December. The significant rise in the spot price of uranium oxide during the period was not fully reflected in the years
earnings.
Operations Rio Tinto Energy America (Rio
Tinto: 100 per cent)
Rio Tinto Energy America (RTEA, formerly known
as Kennecott Energy) 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. RTEA also manages the groups interest in Colowyo
Coal in Colorado, US. In total it employs approximately 2,300 people.
One of the largest
US producers, RTEA sells its ultra low sulphur coal 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. The strong demand for low
cost and low sulphur western coal is expected to continue and grow with the announcement of numerous new coal fired generation projects and increased utilisation of existing coal generation capacity in the US.
2006 operating performance RTEAs
attributable production of 125 million tonnes of coal was eight per cent higher
than in 2005, with production increasing at
all of the mines. Expansions at Antelope and Spring Creek increased output to
record levels. The new dragline commissioned at Jacobs Ranch during the
year enabled a new production record to be set. Underlying earnings
of US$177 million were 31 per cent
higher than the US$135 million recorded in 2005. This increase was attributable
to overall production increases and a higher sales price realisation, somewhat
offset by a higher effective tax rate and increased operational costs, particularly
the cost of diesel, explosives, tyres and labour.
Spot
prices were volatile during the period. The spot price for 8800 BTU (0.80 sulphur)
moved from US$23 a tonne in December 2005 to US$9 in December 2006 for
delivery the following
year.
A fatality occurred at the Spring Creek mine in November 2006.
Rio Tinto Coal Australia (Rio
Tinto: 100 per cent)
Rio Tinto Coal Australia
(RTCA) manages the groups Australian coal interests. These include, in
Queensland; 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 (Coal & Allied)
for operation of its four mines located within the Hunter Valley in New South
Wales. Coal & Allied
(Rio Tinto: 75.7 per cent) is publicly listed on
the Australian Securities Exchange and had a market capitalisation of A$6.5
billion (US$ 4.9
billion) at 31 December 2006.
Coal & Allied wholly owns Hunter Valley Operations, has an 80 per cent interest
in Mount Thorley Operations and a 55.6 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 loading terminal.
Production from the Tarong mine is sold exclusively to Tarong Energy Corporation, an adjacent state owned power utility. A ten year contract for up to 7.5 million tonnes annually expires at the
end of 2010.
Kestrel and Hail Creek sell mainly metallurgical coal to customers in Japan, south east Asia, Europe and Central
America, generally on annual agreements.
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 Australia.
Coal & Allieds semi soft coal is
exported to steel producing customers in Asia and Europe under a combination
of long term contracts and spot business.
In May 2007
Coal & Allied announced production cutbacks of approximately 20% at its
Hunter Valley mines following notice of reductions
in its port and rail allocations for the remainder of the year.
In June
2007 Coal & Allied declared force majeure on a number of its sales contracts
as a result of the severe weather conditions
encountered at the Port of Newcastle and in the Hunter Valley region of New
South Wales.
RTCA and Coal & Allied collectively employ
approximately 2,500 people.
2006 operating performance RTCA and Coal & Allieds combined
underlying earnings of US$490 million in 2006 were 14 per cent below the
2005 result because of coal supply chain bottlenecks
and increased operating costs.
At all
operations other than Tarong, sales were constrained by inability of the infrastructure
to handle producer demand. Blair Athol and Hail Creek shipments were both affected
by infrastructure constraints at the Dalrymple Bay Coal
Terminal, while Coal & Allied mines were similarly affected at Port Waratah
in New castle because of constraints in the
volume of material that could be railed to the port.
Total
production at Blair Athol decreased from 10.6 million tonnes to 10.2 million
tonnes primarily
as a result of limited port capacity. Kestrels production fell three
per cent to 3.6 million tonnes in 2006; this included 2.7 million tonnes of
coking
coal. At Tarong, production increased by eight per cent to 7.0 million tonnes
in line with demand from Tarong Energy Corporation. Hail Creek production was
4.5 million tonnes, a reduction of 23 per cent.
At Hunter Valley Operations, total production
decreased from 12.4 million tonnes to 12.0 million tonnes. The integrated Mount
Thorley Warkworth operations increased production by ten per cent to 11.2 million
tonnes. At Bengalla, production decreased seven per cent from 6.0 million tonnes
to 5.5 million tonnes.
Safety performance
and awareness continue to be the major focus of all operations managed by RTCA.
Rössing Uranium (Rio
Tinto: 68.6 per cent)
Rössing produces and exports uranium
oxide from Namibia to European, US and Asia Pacific electricity producers.
In June,
Rössing celebrated its thirtieth anniversary of uranium oxide production.
2006 also marked the first year of production
of the life of mine extension.
Rössing
employs approximately 900 people.
2006 operating performance In 2006, total production of uranium
oxide decreased slightly to 3,617 tonnes. The higher market prices for uranium
oxide are beginning to flow through into underlying earnings. However, the
higher
realised prices were partially offset by an increase in cash costs and higher
taxation levels, resulting in a US$27million underlying earnings contribution
in 2006.
Rössing
continues to put a significant effort and management focus on safety. The goal
is to eliminate all injuries from the workplace
and to have an embedded safety culture and systems that identify and rectify
potential safety incidents.
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$4.0 billion (US$3.0 billion)
at 31 December 2006. ERA employs approximately 400 people, with 13 per cent
of the operational workforce being 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 nameplate capacity and started production in 1981.
ERAs
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.
2006 operating performance
Total uranium oxide production of 4,704 tonnes was
significantly below the 5,903 tonnes produced in 2005 owing to the effects
of a tropical cyclone and a failure in the acid plant. Stronger prices were
partially
offset by the higher cost of consumables and resulted in underlying earnings
of US$17 million. During the year, ERA embarked upon an extensive exploration
and development programme to identify new reserves and increase the mine life
of existing reserves.
Rössing Uranium (Rio
Tinto: 68.6 per cent)
In December 2005, approval was granted
to extend the life of the operation until at least 2016 and restore annual
production
capacity to 4,000 tonnes per annum at a total incremental and sustaining capital
cost of US$112 million.
Energy Resources of Australia (Rio
Tinto: 68.4 per cent)
ERA is spending A$27.6 million in 2007
to construct a plant at the Ranger mine to process lateritic ore, a material
containing a high proportion of clay minerals. The laterite processing plant
will contribute approximately 400 tonnes per annum of uranium oxide to ERAs
production from 2008 through to 2014. Construction of the plant will commence
in April 2007, with the first lateritic ore scheduled for processing in the
first quarter of 2008.
Rio Tinto Coal Australia Clermont (Rio
Tinto: 50.1 per cent)
Rio Tinto and its joint venture partners
approved investment of US$750 million for the development of the Clermont
thermal coal mine in central Queensland, situated 15 kilometres south east
of the Blair
Athol Mine. Clermont is expected to become
Australias largest thermal coal producer when it reaches full capacity,
which is scheduled for 2013. The mine is expected to be brought into production
to replace Blair Athol, due to close in 2012, and will use Blair Athols
existing infrastructure and market position.
Coal & Allied Mount Pleasant (Rio
Tinto: 75.7 per cent)
In 2006, Coal & Allied started
a feasibility study on the Mount Pleasant coal mine project located adjacent
to the Bengalla
mine near Muswellbrook in the Hunter Valley, New South Wales. The study is
expected to take about 12 months to complete and will
include extensive community consultation.
Hydrogen Energy (Rio
Tinto: 50.0 per cent)
In May 2007, Rio Tinto and BP announced
the formation of a new jointly owned company, Hydrogen Energy, which would
develop
decarbonised energy projects around the world. The venture would initially
focus on hydrogen fuelled power generation, using
fossil fuels and carbon capture and storage technology to produce new large
scale supplies of clean electricity. The first new project would be for the
potential development of a US$1,500 million coal fired power generation
project at Kwinana in Western Australia. This project would be subject to the
successful outcome of detailed engineering and commercial studies and to government
policy to make it commercially viable.
A reconciliation of the net earnings with underlying
earnings for 2004, 2005 and 2006 as determined under EU IFRS is set
out
on page 39.
Rio Tintos Industrial Minerals group comprises
Rio Tinto Minerals, which produces borates, talc and salt, and Rio Tinto Iron
& Titanium, a major producer of titanium dioxide feedstock. Rio Tinto is
a global leader in the supply and science of these products. There are more
than 200 industrial minerals and markets are often diverse, highly technical
and require unique marketing and sales expertise.
At 31
December 2006, Industrial Minerals accounted for 13 per cent of the Groups operating
assets and in 2006 contributed approximately ten per cent of Rio Tintos
gross sales revenue and three per cent of underlying earnings. Approximately
7,000 people were employed in 2006.
The Industrial
minerals group was combined with the Diamonds group with effect from 1 June
2007, to form the Diamonds and Minerals
group. Andrew Mackenzie, chief executive Diamonds and Minerals and formerly
chief executive
Industrial minerals, is based in London.
Financial performance
2006 compared with 2005 Industrial Minerals contribution
to 2006 underlying earnings was US$243 million, a 30 per cent improvement
on 2005.
Rio Tinto Minerals underlying earnings,
at US$91 million, were 54 per cent higher than in 2005. Despite upward
cost pressure caused by cyclones and labour markets in Western Australia, the
absence in 2006 of the 2005 Rio Tinto Minerals
restructure provision, coupled with modest revenue increases, led to this improved
result.
Rio Tinto
Iron & Titanium underlying earnings, at US$152 million, were 19 per
cent higher than in 2005. Good price
performance across all products, combined with favourable volume trends, strict
cost control
at Richards Bay Minerals and beneficial Canadian
tax changes, offset increased costs in the Canadian operations and the impact
of the strong Canadian dollar.
2005 compared with 2004 Industrial Minerals contribution
to the Groups 2005 underlying earnings was US$187 million, 23 per
cent lower than in 2004, reflecting
significant one off costs of US$42 million after tax, including provision
for restructuring in relation to the formation of Rio Tinto Minerals.
There were also increased energy and distribution costs at all business units.
Dampier
Salt and Rio Tinto Iron & Titanium incurred high initial operating costs
for the commissioning of a new plant
and for the upgraded titanium slag (UGS) expansion. Rio Tinto Iron & Titanium
also incurred a tax expense of US$13 million resulting
from a change in the tax rate for QIT-Fer et Titane in Quebec.
Rio Tinto Boraxs underlying
earnings, at US$48 million, were 48 per cent lower than in 2004. The borates business
was affected by lower sales volumes and higher energy and distribution costs.
Rio Tinto Borax also incurred a one
off restructuring cost of US$12 million after tax in relation to the formation
of Rio Tinto Mineral.
Rio Tinto Iron & Titaniums underlying earnings, at US$128
million, were ten per cent higher than in 2004. Strong price performance across
all products, combined
with increased volumes and strict cost performance at Richards Bay Minerals
led to this strong result.
Operations
Rio Tinto Minerals During 2006, three of Rio Tintos
Industrial Minerals businesses Borax, Luzenac and Dampier Salt combined
their management to form a new and
more efficient organisation called Rio Tinto Minerals. Rio Tinto Minerals global
presence includes mines and refineries, shipping facilities, refining and
packing facilities
and sales and technical
facilities throughout the Americas, Asia and Europe.
The company serves
2,500 customers in approximately 100 countries. The global operational headquarters
have been relocated to Denver, Colorado, and
the global commercial headquarters are in Chiswick, London. Borates
More than one million tonnes of refined borates are produced at the principal
borate mining and refining operation, Boron, in Californias Mojave Desert.
Borates are essential to plants and are part of a healthy diet for people.
They
are also key ingredients in hundreds of modern products, chief among them:
insulation fibreglass, textile fibreglass and heat resistant glass (44 per
cent of world
demand); ceramic and enamel frits and glazes (13 per cent); detergents, soaps
and personal care products (six per cent); agricultural micronutrients (seven
per cent); and other uses including wood preservatives
and flame retardants (30 per cent). Talc
Rio Tinto Minerals operates talc mines, including the worlds largest
(in south west France), and processing facilities
in Australia, Austria, Belgium, Canada, France, Italy, Japan, Mexico, Spain,
the UK and the US. Talcs enhance performance in countless applications, including
paper, paints, putties, roofing materials, plastics, automotive parts,
ceramics, foundry, rubber goods, personal care products, agriculture, food,
pharmaceuticals, soap, cosmetics, and pesticides.
This multiplicity demands an in depth understanding not only of talcs
properties and functions but also of its full range of applications and user
industries. Salt
Rio Tinto Minerals manages Dampier Salts (Rio Tinto: 64.9 per cent) three
salt operations located in Western Australia. It produces industrial salt by
solar evaporation at Dampier, Port Hedland and Lake MacLeod, where it also mines
gypsum. Dampier Salts customers are located in Asia and the Middle East
. The majority are chemical companies which use salt as basic feed for the
production of chlorine and caustic soda (together known as chlor-alkali production).
Dampier Salts product is also used as food salt and for general purposes,
including road de-icing.
2006 operating performance In 2006 Rio Tinto Minerals streamlined
its sales and administrative function, reducing staff by 20 per cent and closing
three laboratories and three offices. There are plans to close two more. In
its operations, Rio Tinto Minerals divested several less profitable product
lines and operational sites, built boric acid capacity, approved new salt capacity,
and improved plant efficiency, mine
planning and energy use. In the marketplace, North America remains the most
profitable
region for Rio Tinto Minerals products. Developing economies such as
China, eastern Europe and India hold promise because
of their rising living standards and the demand for higher quality raw materials. Borates
Production volumes were down one per cent, at 553,000 tonnes, but sales volumes
remained consistent with 2005s total. Asia continued to drive growth
in the borate market, though there were pockets of growth in Russia and eastern
Europe. In North America, stagnation in the housing market signals a possible
decline in demand from insulations and wood preservatives customers, but this
is likely to be offset by retrofit and remodeling trends. Rio Tinto Minerals
expanded its boric acid capacity by a further 56,000 tonnes to supply market
growth. The project was completed on time and under budget and is meeting planned
throughput. Talc Talc
production volumes increased two per cent, while sales volumes remained at
the same level as 2005, reflecting stable
markets with growth in the polymer, paint and technical ceramics sector offsetting
declines in paper. Salt Five
cyclones in Western Australia during 2006 adversely affected salt operations,
reducing production by almost two per cent to 8.3 million tonnes (Rio Tinto
share: 5.4 million tonnes). Sales volumes decreased by five per cent. Despite
this, supply reliability and excellent customer relations were maintained.
Repairs
are well under way. The residual impact of
dilution from the record rains will be felt for the next two years. At Lake
MacLeod, a 26 per cent capacity increase was approved by all shareholders.
Rio Tinto Iron & Titanium 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 operations produce titanium dioxide feedstock
used as pigment by manufacturers of paints and surface coatings, plastics and
paper. Coproducts include high purity iron and zircon.
QITs 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. During 2006,
RIT expanded its UGS plant to 375,000 tonnes per annum,
three months ahead of schedule.
RBMs
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.
2006 operating performance RIT increased production across all
of its products in 2006, with a ten per cent increase in UGS as expanded capacity
was brought on-line. RBM operated at full capacity and saw an eleven per cent
increase in titanium dioxide (TiO2)
feedstock production.
Strong market performance
led to strong financial performance as TiO2 pigment producers
reported an increase in sales volumes of five per cent on average during 2006,
after a decrease in 2005 of 0.5 per cent. Market
conditions remain tight for chloride feedstock, as chloride pigment plants
continue to run at high utilisation rates. Demand for high-grade
TiO2 feedstock, such as QITs UGS, remains strong.
Market conditions for iron and steel co-products also remain strong.
Zircon prices continued to increase throughout 2006, as demand was effectively
constrained by available supply. The offices of RIT were relocated from Montreal
to the UK during 2006.
Projects
QIT Madagascar Minerals (Rio
Tinto: 80 per cent)
In 2005 Rio Tinto announced the approval
of the Madagascar titanium dioxide project. RIT manages the project, in which
an agency of the Government of Madagascar has a 20 per cent interest.
The project
comprises a mineral sands operation and port in Madagascar and an upgrade of
Rio Tintos
ilmenite facilities in Canada. First
production from the operation in the Fort-Dauphin region of Madagascar is expected
in late
2008 and the initial capacity will be 750,000 tonnes of ilmenite per year.
During 2006 the definitive cost estimate of the project
was finalised. The cost increased by just under ten per cent to US$850
million. The cost inflation was mainly caused by higher
materials costs and foreign exchange pressures but increased production capacity
and logistics will ensure the project value is unchanged.
The ilmenite
will be smelted at Rio Tintos facilities at Sorel in Quebec. This will
require an upgrade of storage and handling facilities as well as their associated
ancillary services. With a grade of 60 per cent titanium dioxide, the Madagascar
orebody is the worlds largest known undeveloped high grade ilmenite deposit.
It has an expected mine life of 40 years and
will supply a new, high quality chloride slag with 91 per cent titanium dioxide
content to meet long term demand for titanium
dioxide by the pigment industry.
A deep sea multi-use
public port at Ehoala, near the town of Fort-Dauphin, is an important component
of the project. The mine will be the
key initial customer, providing the base load to help establish the port. Over
time, it
is expected the port will make an important
contribution to the economic development of the region.
The Government
of Madagascar contributed US$35 million to the establishment of the port,
as part of its Growth Poles Project
funded by the World Bank. RIT will manage the port operations.
Potasio Rio Colorado S.A. (Rio
Tinto: 100 per cent)
The Rio Colorado potash project in
Argentina lies 1,000 km south west of Buenos Aires. Evaluation of the project
began in
late 2003, and a large scale trial of solution mining of the potash has run
successfully from late 2004. Currently a feasibility
study is under way and, assuming favourable progress, will be completed in
2007. A positive development decision in 2007 could
see first production from the mine in 2010 and production volumes in the range
of 1.6 to 2.4 million tonnes per year.
A reconciliation of the net earnings with underlying earnings for 2004, 2005
and 2006 as determined under EU IFRS is set out on page
39.
Rio Tinto Aluminium is an integrated product group with operations in Australia,
New Zealand and the UK. The Comalco name was replaced by Rio Tinto Aluminium
in November 2006 to take advantage of the Rio Tinto global brand and reputation.
The
Aluminium groups strategy is to maximise shareholder return by committing
to excellence in health, safety and environmental performance; maximising value
generated from existing
assets; and optimising and opportunistically growing
the bauxite, alumina and aluminium portfolio. Rio Tinto Aluminium uses its dedicated
business improvement programme, called Lean
Six Sigma, to solve operational problems, improve process stability and eliminate
waste.
The
Aluminium group has two operating business units Mining and Refining,
and Smelting. At 31 December 2006, the
group
accounted for 17 per cent of Rio
Tintos operating assets and in 2006 contributed 14
per cent of the Groups gross sales revenue and ten per cent of its underlying
earnings.
Rio Tinto Aluminium employs about 4,300 people. Oscar Groeneveld, chief executive Aluminium, is based in Brisbane, Australia.
2006 compared with 2005
In
2006, Rio Tinto Aluminiums contribution to the Groups underlying earnings was US$746
million, an increase of 90 per cent.
Higher
aluminium prices resulted in earnings
increasing by US$451 million, with the average aluminium price in 2006 at
116 US cents per pound compared with 86 US cents in 2005.
2005 compared with 2004
Rio
Tinto Aluminiums contribution to underlying earnings in 2005 was US$392 million, an increase of 18 per cent. The average aluminium price in 2005 was 86 US cents per pound compared with 78 US cents in 2004 and
this led to an increase in earnings of US$106 million. However, the effect of the weakening US currency reduced Aluminiums earnings by US$34
million.
Operations
Mining and refining
Rio Tinto Aluminium has a large, wholly owned bauxite mine at Weipa on Cape York Peninsula, Queensland. A US$150
million expansion in 2004 increased capacity to 16.5 million tonnes per year.
This expansion, when combined with recent infrastructure investment, provides
the foundation for Weipa to increase annual production to 25 million tonnes.
As at 31 December 2006, mineable reserves of bauxite at Weipa were 1,193 million tonnes. Approximately 90 per cent of the bauxite from Weipa was shipped to alumina refineries at Gladstone,
Queensland, and Sardinia, Italy in 2006.
In
2006, Weipas safety performance was recognised when it received the Minerals Council of Australias
National Minerals Industry Safety and Health Excellence Award (the MINEX
Award).
Rio Tinto Aluminium owns the Yarwun alumina refinery (formerly Comalco Alumina Refinery) and 38.6 per cent
of Queensland Alumina in Gladstone. Rio Tinto Aluminium sold its 56.2 per cent
interest in the Eurallumina refinery in Sardinia, Italy. The sale was effective
in October and was in line with Rio Tintos strategy of selling non core
assets.
The
Yarwun alumina refinery reached and exceeded nameplate capacity of 1.4 million
tonnes per annum in the fourth quarter of 2006, in line with the original development
schedule. A two million tonne per annum expansion is under study. There is potential
for total capacity to be expanded to over four million tonnes. Most of the refinerys current
output goes into Rio Tinto Aluminium smelters; the balance is placed in the
traded alumina market. The refinery adds value to the Weipa bauxite deposit and
strengthens both Rio Tinto Aluminiums and Australias positions in
the world alumina market.
Rio
Tinto Aluminium is continuing to pursue new market opportunities for bauxite
and alumina, including participation in Chinas growing alumina market.
2006 operating performance
Bauxite production at Weipa reached record levels in 2006, at 16.1 million tonnes, four per cent higher than in 2005. This increase was a result of the ongoing ramp up of project NeWeipa, which led to increased production
from both the East Weipa and Andoom mines.
Weipa bauxite shipments rose by six per cent, to 15.9 million tonnes.
Rio Tinto
Aluminium advised its calcined bauxite customers in December 2006 that it would
withdraw from
the production of calcined bauxite by 2008 after
40 years of providing this product to the abrasives and oil and gas exploration
industries. Calcined bauxite represents about one per cent of Weipas total
bauxite production.
Rio
Tintos share of alumina production for 2006 was ten per cent higher than
in 2005. This increase was the result
of the ramp up at the Yarwun alumina refinery, which produced 1.2 million tonnes,
about 400,000 tonnes more than in 2005. Production at Queensland Alumina Limited
and Eurallumina (until its sale effective in October) was similar to 2005 levels.
Smelting
Rio
Tinto Aluminiums primary aluminium is produced by smelters at Boyne Island
(59.4 per cent) near Gladstone, 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 Aluminium also maintains a 42.1 per cent interest in the Gladstone
Power Station.
During the year, Rio Tinto Aluminium participated in the Minding
the Carbon Store project and, through it, will generate carbon
credits for up to one million tonnes of greenhouse gas emissions. This represents
about ten per cent of Rio Tinto Aluminiums
total emissions, including the emissions from purchased electricity and forms
part of
Rio Tinto Aluminiums climate change strategy.
Rio Tinto Aluminium continued to invest in the development of drained cathode cell technology in 2006. This new
smelter technology has the potential to save ten to 15 per cent of the electricity
currently used at Rio Tinto Aluminium smelters. Rio Tinto Aluminium Technology
is currently undertaking a demonstration project of the new technology at Bell
Bay.
Rio Tinto Aluminium is exploring opportunities for developing its smelting business. In addition to work being undertaken in the Middle East, it has expressed a strong interest to the Sarawak
state and federal governments in Malaysia to build an aluminium smelter based on hydro electricity.
2006 operating performance
Rio
Tinto Aluminiums share of aluminium production from its four smelters,
at 845,000 tonnes, was slightly below 2005
production levels because of reduced hydro-electricity generation in New Zealand
after low inflows. Attributable metal shipments for 2006 were 850,000 tonnes,
a decrease of 9,000 tonnes. They went primarily to Japan, Korea, Australia, South
East Asia and Europe.
Rio Tinto Aluminium smelters continued to produce at or close to capacity in 2006. Production at Bell Bay, Anglesey Aluminium and Boyne Smelters was consistent
with 2005 levels.
Projects
Weipa (Rio Tinto: 100 per cent)
In
2006, Rio Tinto Aluminium commissioned a new US$40 million 26 megawatt power station. The new power station services the mining operation and surrounding communities. A US$60
million second shiploader was commissioned in the fourth quarter to ensure reliability
of bauxite supply to customers.
To
meet the needs of increased trade of bauxite and alumina, Rio Tinto Marine committed
US$120 million to the purchase of three new post Panamax bulk ore carriers
to be used primarily on the Weipa to Gladstone run. The first ship will be delivered
in the third quarter of 2007.
Yarwun (Rio Tinto: 100 per cent)
Rio Tinto Aluminium continues to study the expansion of the Yarwun alumina refinery, formerly Comalco Alumina Refinery, in Gladstone to meet the growing needs of its own smelters and to
supply growing demand, particularly from China and the Middle East.
Abu Dhabi aluminium smelter (Rio Tinto: 50 per cent)
In 2006, Rio Tinto Aluminium signed a preliminary agreement with General Holding Corporation of Abu Dhabi to undertake a feasibility study into construction of an aluminium smelter in the United Arab Emirates.
Development could result in a smelter with a first stage production capacity of 550,000 tonnes of metal per year. A company, Abu Dhabi Aluminium Company
(Adalco) has been formed to manage the joint venture. With its abundant gas resources, the Middle East is fast becoming a key region in the global aluminium industry.
A reconciliation of the net earnings with underlying earnings for 2004, 2005
and 2006 as determined under EU IFRS is set out on page
39.
Rio Tintos 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 in the US. Since the beginning of 2006, the group
acquired the La Granja project in Peru and took an ownership stake in Ivanhoe
Mines and Northern Dynasty Minerals which have the Oyu Tolgoi and Pebble deposits
in Mongolia and the US respectively.
Historically, the Copper group built the majority of its portfolio through acquisitions (Kennecott) or joint ventures
(Escondida, Grasberg) followed by expansions. The current pipeline of projects
(Oyu Tolgoi, Resolution, La Granja
and Pebble) represents a transition with a greater proportion of opportunities
created through exploration and acquisitions at an early stage of development.
In addition to the Copper groups interests in these four world class deposits,
the group is developing the E48 underground deposit at Northparkes and undertaking
a prefeasibility study at
Kennecott Utah Copper to extend the mines life, either through a further
pushback of the open pit or a transition to underground mining.
The
Copper groups long term development plans are not just confined to its
principal product. Rio Tinto has a number of nickel development opportunities
which are currently being
evaluated. At the small, high grade Eagle nickel deposit
(Rio Tinto: 100 per cent) in Michigan in the US, feasibility studies have been
undertaken and a decision on developing the
deposit is expected in 2007.
At 31 December 2006, the Copper group, which also produces gold and molybdenum as significant coproducts,
accounted for 16 per cent of the Groups operating assets and in 2006 contributed
approximately 28 per cent of Rio Tintos gross sales revenue, of which 74
per cent was from copper, 13 per cent from molybdenum
and
the remainder mostly from gold. It accounted for 49 per cent of underlying earnings in 2006.
Bret Clayton succeeded Tom Albanese as chief executive Copper, and is based in London.
Financial performance
2006 compared with 2005
The
Copper groups contribution to underlying earnings was US$3,562 million, US$1,542
million higher than in 2005. The average
price of copper was 306 US cents per pound during 2006, 84 per cent higher than
in
2005. The average gold price of US$602 per ounce increased by 36 per cent. The average price of molybdenum was US$24.60 per pound compared with US$30.70
per pound in 2005.
Kennecott
Utah Coppers
contribution to underlying earnings of US$1,804 million was US$767 million higher than in 2005, with the operation benefiting from higher prices and volumes and a tax credit of US$289 million following recognition of deferred tax assets.
Record molybdenum production was achieved during the year, offsetting the impact of lower refined copper production due to a scheduled smelter shutdown in the second half of 2006. An increase in the groups
long term copper price assumption triggered an assessment of the amount of recoverable
copper at Kennecott Utah Copper. As a result, the impairment made in 2001 and
2002 was reversed in 2006.
Rio
Tintos share of underlying earnings from Escondida increased by US$648
million to US$1,250
million. Higher prices and the commencement of sulphide leaching counterbalanced
higher mining costs and input prices.
The
Grasberg joint venture contributed US$122 million to underlying earnings, US$110
million below 2005. Lower grades of copper, gold and silver, the result of
mine sequencing, led to significantly
lower production of all three metals.
Palaboras 2006 earnings of US$52 million were US$33
million above the prior year, benefiting from higher copper prices and sales
volumes and the sale of some smelter stocks.
Northparkes contribution to underlying earnings of US$229 million represents a US$172
million increase from 2005. In addition to higher prices, better grades, increased
throughput
and improved recoveries all contributed to a 54 per cent increase in production of copper contained in concentrates.
Kennecott
Minerals 2006 earnings of US$105 million were US$32 million above 2005. The effect of higher gold and zinc prices and the recognition of a US$14
million deferred tax
asset were offs et by higher costs and lower sales volumes from Cortez, due to lower grades.
2005 compared with 2004
The
Copper groups contribution to underlying earnings was US$2,020 million,
US$1,160
million higher than in 2004. The average price of copper was 166 US cents per
pound compared with 130 US cents in 2004. The
average price of molybdenum was US$30.70
per pound compared with US$14.60 in 2004. The average gold price of US$444
per ounce increased by nine per cent.
Kennecott
Utah Coppers contribution to underlying earnings was US$1,037 million, compared with US$311 million
in 2004. Molybdenum production increased significantly as a result of the refocusing
of the mine plan in response to significantly higher molybdenum prices.
Rio
Tintos share of underlying earnings from Escondida increased by US$196 million to US$602
million. Mined production of copper was up five per
cent.
The underlying
earnings contribution from the Grasberg joint venture increased by US$200 million to US$232
million chiefly as a result of the continuation of full production after the
material slippage in October 2003.
Palabora
recorded a profit of US$19 million in 2005, helped by improved performance
of underground production. Northparkes copper
production was 80 per cent above the previous year due to the successful ramp
up of Lift 2. Kennecott Minerals lower sales volumes were due to lower grades
at Cortez.
Operations
Kennecott Utah Copper (Rio Tinto: 100 per cent)
Kennecott Utah Copper (KUC) operates the Bingham Canyon mine, Copperton concentrator and Garfield smelter and refinery
complex, near Salt Lake City, US. KUC is a polymetallic mine, producing copper,
gold, molybdenum and silver. As the second largest copper producer in the US,
KUC supplies more than 17 per cent of the nations annual refined copper
requirements and it employs approximately 1,700
people.
2006 operating performance
KUC continued to demonstrate operating flexibility by delivering record molybdenum production during a period of exceptionally
high prices. Employing Rio Tintos Improving performance together (IPT) methodology, KUC substantially improved its knowledge of molybdenum mineralisation in the orebody to optimise molybdenum production, which was eight per cent higher than 2005.
In July, a pebble crushing facility was commissioned at the concentrator. Final modifications to this circuit will
be completed in 2007, leading to a projected increase
in plant throughput of approximately 18 per cent. A capital investment of US$82
million was approved in October, to expand and modernise the bulk flotation circuit
at the concentrator. This project is expected
to increase recoveries of copper, molybdenum and gold and improve concentrate grade,
thereby benefiting smelter throughput rates. The scheduled completion of this
pr oject is mid 2008 with full production benefits realised by 2009.
The
Garfield smelter was shut down in September for planned maintenance work and
was re-commissioned in early November. The interruption
reduced refined copper production by six per cent, compared with 2005. Smelter
throughput rates following the shutdown are exceeding initial expectations.
Current
ore reserves will support open pit operations until 2019. Prefeasibility studies
continued during the year to
evaluate alternatives for extending the
mines life beyond 2019. The alternatives include additional open pit pushbacks
and/or underground mining options. KUC intends to dewater and rehabilitate an
existing mine shaft in 2007 to provide access
for an
underground drilling programme to augment these studies.
Principal operating statistics at KUC 2004-2006
2004
2005
2006
Rock mined (000 tonnes)
129,196
140,906
145,343
Ore milled (000 tonnes)
45,712
46,664
47,857
Head grades:
Copper (%)
0.63
0.53
0.63
Gold (g/t)
0.29
0.37
0.49
Silver (g/t)
3.04
3.23
3.50
Molybdenum (%)
0.033
0.058
0.057
Copper concentrates produced (000 tonnes)
1,106
881
1,019
Production of metals in copper concentrates
Copper
(000 tonnes)
263.7
220.6
265.6
Gold
(000 ounces)
308
401
523
Silver
(000 ounces)
3,584
3,958
4,214
Molybdenum
concentrates produced (000 tonnes)
12.9
29.5
30.2
Contained
molybdenum (000 tonnes)
6.8
15.6
16.8
Concentrate
smelted on site (000 tonnes)
1,098
1,042
918
Production of refined metals
Copper
(000 tonnes)
246.7
232.0
217.9
Gold
(000 ounces)
300
369
462
Silver
(000 ounces)
3,344
3,538
4,152
Grasberg joint venture (Rio Tinto: 40 per cent)
Grasberg,
in Papua, Indonesia, is one of the worlds 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).
In
meeting the mines social obligations to local communities, at least one
per cent of Grasbergs
net sales revenues are committed to support
village based programmes. In addition, two trust funds were established in 2001
in recognition of the traditional land rights of the local Amungme and Komoro
tribes. In 2006, PTFI contributed US$43.9 million
(net of Rio
Tinto portion) and Rio Tinto US$3.6 million in total to the funds.
As a result
of training and educational programmes, Papuans represented more than a quarter
of PTFIs
approximately 9,000 strong workforce by the end of 2006.
2006 operating performance Rio
Tintos share of metal production is dependent on the metal strip, which
determines the allocation of volumes between
the joint venture partners. Owing to lower grades, Rio
Tintos share of production from the Grasberg mine was constrained
in 2006 and owing to adjustments to the mine schedule, will continue to show
significant variation year to year. After 2021, Rio Tinto shares 40 per cent
of total production as the metal strip ceases.
PTFI,
as manager, recently completed an analysis of its longer range mine plans to
assess the optimal design of the Grasberg open pit and the timing of development
of the Grasberg underground
block cave ore body. The revised long range
plan includes changes to the expected final Grasberg open pit design which will
result in a section of high grade ore previously
expected to be mined in the open pit to be mined in the Grasberg underground
block cave mine. The revised mine plan reflects a transition from the Grasberg
open pit to the Grasberg underground block cave ore body in
mid 2015. The mine plan revisions alter the timing of metal production in the
period of 2015 and beyond but do not have a
significant effect on ultimate recoverable reserves.
Escondida (Rio Tinto: 30 per cent)
The low cost Escondida copper mine in Chile
is one of the largest copper mines in the world in terms of annual production,
and has a mine life expected to exceed 30 years. It accounts for approximately
eight per cent of world primary
copper production. BHP Billiton owns 57.5 per cent of Escondida and is the operator
and product sales agent.
The Escondida district
hosts two of the largest porphyry
copper deposit systems in the world Escondida and Escondida
Norte, located five kilometres from Escondida. A sulphide leach project was complete
d during the year with the
first cathode being produced in June. During August, operations were affected
by strike action over wage negotiations. Operations resumed in September after
a new three year contract was settled.
Escondida employs approximately 2,900 people.
2006 operating performance Escondidas
mined copper production was three per cent higher than in 2005, with higher grades
and the commencement of sulphide leaching more than offsetting the effects of
the strike action. Cathode production was seven per cent lower than in 2005 due
to lower grade oxide ore.
Principal operating statistics at Escondida
2004-2006
2004
2005
2006
Rock mined (000 tonnes)
377,356
359,569
338,583
Ore milled (000 tonnes)
82,378
86,054
84,158
Head grade:
Copper (%)
1.51
1.53
1.59
Production of metals in concentrates
Copper
(000 tonnes)
1,046
1,127
1,122
Gold
(000 ounces)
217
183
170
Silver
(000 ounces)
5,747
6,565
6,646
Copper
cathode (000 tonnes)
152.1
143.9
134.4
Palabora (Rio Tinto: 57.7 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
developed a US$465 million underground mine with a current planned production
rate of at least 32,000 tonnes of ore per day.
Approximately 663,500 tonnes of copper are expected to be produced over the
remaining life of the mine.
Palabora
supplies most of South Africas copper needs and exports the balance. It
employs approximately 2,000 people and labour
agreements are negotiated
annually.
2006 operating performance Palabora
recorded a net profit of US$52 million in 2006, US$33 million higher
than 2005. Underground production for the year averaged 30,200 tonnes per day,
which is ten per cent higher than 2005.
Production
rates peaked in the last week of December at 36,562 tonnes per day. The average
annual
production fell short of the planned target of 32,000 tonnes per day as a result
of breakdown
and maintenance problems. The average ore grade
was 0.71 per cent compared with 0.72 per cent in 2005.
During the first quarter
of 2006, Palaboras reverberatory furnace, which has been in operation for
over 40 years, was subjected to its eighth rebuild, the last having occurred
in 2000. A ten per cent increase in capacity is expected from the rebuild, taking
the overall operational capacity to 110,000 tonnes per annum.
As part of the decision to build the magnetite business using current production, Palabora entered into a supply contract with Minmetals for the supply of two million tonnes of magnetite
concentrate per annum starting in October 2006.
As a result of mine production shortfalls and lower grades, concentrate production was supplemented by purchases of concentrate material to optimise smelter throughput. Palabora will continue
to purchase concentrates to
supplement the smelter as capacity exceeds the mine output.
Vermiculite
revenue of US$40 million increased by five per cent on 2005. Production in
2006 was down by six per cent compared with 2005, and the strong
market demand for the coarser grades continues to exceed production in all market segments.
Palaboras
lending facilities and hedge contracts, which were finalised in September 2005
as part of a refinancing project, were closely monitored during
2006. Forward pricing contracts, representing 62.5 per cent of the budgeted underground production up to 2008, and 30 per cent up to 2013, are in place.
Principal operating statistics at Palabora
2004-2006
2004
2005
2006
Ore milled (000 tonnes)
8,657
9,536
10,730
Head grade:
Copper (%)
0.74
0.72
0.71
Copper concentrates produced (000 tonnes)
187.7
197.1
208.9
Contained copper (000 tonnes)
54.4
61.2
61.5
New concentrates smelted on site (000 tonnes)
253.4
304.4
288.5
Refined copper produced (000 tonnes)
67.5
80.3
81.2
Northparkes (Rio Tinto: 80 per cent)
Rio
Tintos interest in the Northparkes copper-gold mine in central New South
Wales, Australia, 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, underground block cave mining has
been undertaken since 1997. In November 2006, the joint venture partners approved
the development of
the E48 block cave project, which is expected to cost US$160 million (Rio Tinto share: US$127 million) and extend the mines
life until 2016. The project is a state of the art development incorporating
experience and know how from the previous two block cave projects. The E48 block
cave will progressively replace the current block cave from 2009, and output
from E48 will be processed in the existing concentrator and transported by rail to Port
Kembla for export.
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 (74 per cent), China (13 per cent), and India (13 per cent). Northparkes employs approximately 220 people.
2006 operating performance Northparkes achieved a solid performance during 2006, with production of concentrate up 40 per cent from 2005 due to increased grades, milling rates and recoveries.
Principal operating statistics at Northparkes
2004-2006
2004
2005
2006
Ore milled (000 tonnes)
5,008
5,453
5,789
Head grade:
Copper (%)
0.79
1.12
1.53
Gold (g/t)
0.66
0.46
0.64
Production of contained metals
Copper
(000 tonnes)
30.0
54.0
83.3
Gold
(000 ounces)
79.4
57.0
94.7
Kennecott Minerals (Rio Tinto: 100 per cent)
Kennecott Minerals in the US manages the Greens
Creek mine (Rio Tinto: 70 per cent) on Admiralty Island in Alaska which produces
silver, zinc, lead and gold. The Rawhide mine (Rio Tinto: 51 per cent) in Nevada
produces gold
and silver by leaching since mining operations
ceased in 2002. Reclamation work is well advanced. Kennecott Minerals also owns
the groups interest in the Cortez joint venture
(Rio Tinto: 40 per cent), also in Nevada.
Kennecott Minerals employs approximately 322 people, excluding employees of non managed operations.
2006 operating performance Underlying
earnings of US$105 million were US$32 million higher than 2005 underlying
earnings, reflecting the strong price environment for gold, silver, zinc and lead.
At Greens Creek, production was affected by a major rehabilitation programme at the mine. Mill throughput is expected to increase in 2007 following the
substantial completion of the project in 2006.
In 2006 there was a dramatic but expected decline in Cortez production due to the move into the final lower grade stages of the Pipeline orebody. While production is expected to increase in
2007, it will remain below the levels experienced when mining the best Pipeline ore zones. Production is expected to increase in 2009 when production from Cortez Hills is planned to
commence.
Resolution (Rio Tinto: 55 per cent)
The Resolution project is situated in Arizona,
US, in the area of the depleted Magma (Superior) copper mine. The project
team is
currently working through a prefeasibility study, including a proposed land
exchange, an environmental impact study, further deposit definition drilling
and the sinking
of two shafts to gain access to the mineralisation. Expenditure to the end
of feasibility in 2011, if approved, is expected to be approximately US$700 million, with
total capital to initiate production forecast to be about US$2.5 billion.
While there are technical challenges with regard to depth and rock temperature,
we believe that Resolution could become a leading global copper producer over
several
decades.
The Act supporting
a land exchange programme was introduced in the Senate and House of Representatives
during 2006, but the timing did not allow the Act to progress to point of Presidential
signature. It will be re-introduced in both Houses in early 2007.
Oyu Tolgoi (Rio Tinto: 9.9 per cent stake in Ivanhoe Mines)
Rio
Tinto acquired a 9.9 per cent holding of Ivanhoe Mines in order to jointly develop
and operate Ivanhoes Oyu Tolgoi copper-gold complex in Mongolias
South Gobi region. A joint Ivanhoe-Rio Tinto technical committee will engineer,
construct and operate the project.
Subject
to reaching a satisfactory long term investment agreement with the Mongolian
government, an open pit mine is expected to be in operation by the end of the
decade followed by an
underground mine several years later. Rio Tintos holding in Ivanhoe Mines
is expected to rise to 19.9 per cent upon completion of the long term investment
agreement. The Group has an option to increase its stake in due course to 33.35
per
cent, and potentially take it up to 40 per cent via open market transactions.
As part of the investment arrangements, Ivanhoe Mines has agreed with Rio Tinto to divest its joint venture interest in the Myanmar Copper Project located in the Union of Myanmar, together with
any other rights, interests or investments relating to the country. Pending their sale, the Myanmar based assets have, in accordance with the terms of the agreement between Rio Tinto and Ivanhoe Mines, been
transferred to an independent third party trust, the sole purpose of which is to sell the assets. Ivanhoe Mines has no interest in the trust, other than as an unsecured creditor under
a promissory note issued by trust on the transfer of the Myanmar based assets (which is to be repaid once the assets are sold).
La Granja (Rio Tinto: 100 per cent)
Rio
Tinto won the state privatisation tender for the La Granja copper project, located
in the Cajamarca region of northern Peru. The bid comprised staged payments to
the Peruvian government of US$22 million and
US$60 million in investment in exploration
and feasibility work. In late 2006, Rio Tinto approved expenditure up to US$95
million, most of which is expected to be spent
over
20072009. The La Granja project is technically challenging and has modest
copper grades. However, the deposit contains significant mineralisation of more
than two billion tonnes.
Instead of looking at La Granja as a conventional milling operation producing concentrates for export, the prefeasibility study is aimed at demonstrating the
possibility of recovering copper metal using bioleaching and electrowinning.
Pebble (Rio Tinto: 19.8 per cent stake in Northern Dynasty Minerals)
Rio Tinto acquired a 9.9 per cent interest in Northern Dynasty Minerals during the year and increased its interest to 19.8 per cent during February 2007. Northern Dynasty Minerals is
advancing the Pebble copper-gold-molybdenum deposit in southwestern Alaska, which is another world class ore body that is amenable to block caving.
Cortez Hills (Rio Tinto: 40 per cent)
Rio Tinto holds a 40 per cent interest in the Cortez joint venture, with Barrick Gold managing the joint venture and holding the remaining 60 per cent interest. The operation is located in north-eastern Nevada, US, and
contains total proven and probable reserves of 7.5 million ounces; this includes the Cortez Hills deposit discovered in 2003.
Eagle (Rio Tinto: 100 per cent)
The Eagle project is a high grade nickel deposit located in Michigan, US. Kennecott Minerals has carried out a project feasibility study. Permitting approvals are under way while exploration continues in the area around
Eagle and the wider district. A decision on developing the deposit is expected in 2007.
A reconciliation
of the net earnings with underlying earnings for 2004, 2005 and 2006 as
determined under EU IFRS is set out on
page 39
The Diamonds group comprises Rio Tintos 60 per cent interest in the Diavik Diamonds mine located in the Northwest Territories of Canada, the wholly owned Argyle mine in Western Australia, Rio Tintos 78 per cent
interest in the Murowa mine in Zimbabwe and diamond sales and representative offices in Antwerp, Belgium, and Mumbai, India. It also includes new teams established in 2006 with responsibility for business
development, product security and the development and transfer of best practice across the group.
The group has enjoyed strong growth over the past five years as Diavik has been brought to full production and Murowa has been added to the portfolio and as the Argyle product has benefited
from improved pricing. Over the past five years, sales revenues and underlying earnings have tripled. This has positioned Diamonds as a strong contributor to Rio Tinto overall.
Within the industry, the Diamond group is well positioned as a leading supplier to the market, with a clear focus on
the upstream portion of the value chain.
Rio Tintos exploration programme has been successful in discovering new assets for Diamonds to develop, and a differentiated approach to marketing has enabled the capture of higher prices. The groups
strategy is to compete in the diamond business and strive to build further value.
The focus is on the mining, recovery and sale
of rough diamonds. In keeping with Rio Tintos values, the Diamonds group
is a leading proponent of a number of programmes and partnerships that help improve social and environmental standards of partners, suppliers and customers.
Rio Tinto sells diamonds from all three operations through its marketing arm, Rio Tinto Diamonds, according to a strict chain of custody process, ensuring all
products are segregated according to mine source.
At the end of 2006 Diamonds employed 1,500 people and had 930 contractors.
The Diamonds group was combined with the Industrial minerals group with effect from 1 June 2007, to form the Diamonds and Minerals group. Keith Johnson, based
in London, who had been chief executive Diamonds, became Group executive Business Resources; and, Andrew Mackenzie, based in London, became chief executive Diamonds and Minerals.
Financial performance
2006 compared with 2005 Diamonds
contributed US$205 million to Rio Tintos underlying earnings in 2006, a decrease of US$76 million from 2005. Sales revenue for 2006 was US$838 million, US$238
million lower than in 2005. The lower earnings and sales revenue arose mainly
from a downturn in the rough diamond market in the second half of 2006. This
resulted in lower
prices for most product types, with Rio Tinto Diamonds
stocking some lower priced product, which will be sold in future periods.
Diamond production
remained at similar levels to 2005 across all operations. Argyle produced 29.1
million carats in 2006, approximately
1.4 million carats less than in 2005. This was in line with expectations of
a decreasing
diamond production profile as the open pit winds down and underground production
ramps up over the next five years. Diavik produced
5.9 million carats in 2006, 0.9 million carats more than in 2005. Murowa produced
0.2 million carats in 2006, slightly less than
in 2005.
The rough diamond
market started strong in the first half of 2006 but deteriorated into the second
half. Year end prices closed at similar
levels to the start of 2006. A number of factors influenced this mid year correction
including a congested processing pipeline,
tight liquidity in the manufacturing sector and extensive flooding in Indias
major cutting centre, Surat, which forced the shutdown of many cutting and
manufacturing
centres for several weeks.
Polished diamond
prices remained constant through 2006 with reasonable demand experienced for
most products, particularly for larger better quality white diamonds.
2005 compared with 2004 Diamonds contributed US$281million
to underlying earnings, an increase of US$93 million from 2004, assisted
by a strong diamond market and the
solid performance by Argyle, Diavik and Murowa.
The rough diamond
market remained strong for most of 2005 with the Rio Tinto product offering
in great demand. Seasonal softening toward the end of the year was mainly due
to holidays and festivals in the key customer markets.
Prices for polished
diamonds increased in 2005, with the majority of gains made in the first half
of the year. Strongest demand was seen in the product types in shortest supply.
This included large diamonds greater than two carats in
size with better colour and quality, and the smaller diamond segments.
Operations
Argyle Diamonds (Rio
Tinto: 100 per cent)
Rio Tinto owns and operates the Argyle
diamond mine in Western Australia. Production from Argyles AK1 open pit
mine is expected to continue until 2012. From 2009 the mine is expected to
gradually
transition to underground operations which would extend the life of the mine
to about 2018.
2006 operating performance Despite tight mining conditions in
the deepening and geotechnically challenging open pit, the operation maintained
production and plant throughput in 2006, producing
29.1 million carats in 2006 compared with 30.5 million carats in 2005.
Commencing in
2006, underground safety performance was separated from that of the open pit
section. Although the aggregate 2006 safety
performance was only slightly better than in 2005, the open pit operation achieved
exceptional performance with lost time injury frequency rate down by over 300
per cent.
Argyle celebrated
the signing of a Participation Agreement with neighbouring communities in June
2005 and has spent the last 18 months implementing
the terms of the agreement.
Diavik Diamonds (Rio
Tinto: 60 per cent)
Construction of Diavik was completed in 2003
with production first commencing in January 2003. Since then the project has
exceeded expectations and is now focused on further improving value recovery
and business excellence, and planning for the integration of the A418 open pit.
Safety performance
in 2006 was considerably better than 2005, with the lost time injury frequency
rate down by almost half and the all injury
rate down by a third.
In 2006
total cumulative spending since 2000 on local purchasing with northern Aboriginal
businesses surpassed the C$1 billion mark.
2006 operating performance Diavik produced more carats in 2006
than in any other previous year, thanks to higher ore grade, excellent operational
performance throughout the year and ore blending
strategies employed to maximise process plant throughput.
This was achieved
during a massive winter road recovery operation. Freight and construction
materials
scheduled for trucking to the mine
up the 2006 winter road could not be transported on surface due to a shorter
season
of cold winter conditions necessary for maintenance
of the ice road. The recovery operation included the air lifting of fuel,
bentonite,
explosives and consumables to site.
Open pit mining
is expected to be predominantly from A154 in 2007 with some A418 open pit ore
commencing in 2008.
Murowa (Rio
Tinto: 77.8 per cent)
Production at Murowa commenced in late
2004 after US$11 million was spent on constructing a 200,000 tonnes per
year plant and supporting infrastructure. Chain of custody safeguards put in
place
at the commencement of production have performed
without incident.
Murowas
2006 safety performance was exceptional with no lost time injuries reported
in 2006 and the all injury frequency rate down
by more than 80 per cent.
2006 operating performance A start was made on upgrading the 200,000
tonnes per year processing plant to increase throughput, improve recoveries
and protect against power outages.
The modification was completed during April 2007 and is expected to give Murowa
several more years of operation. Worsening power outages are impacting production
and
this situation is not expected to improve until August 2007 when a new generator
is expected to be operational.
Projects
Argyle (Rio
Tinto: 100 per cent)
Rio Tinto approved the development
of an underground block cave mine under the AK1 open pit in late 2005. It also
approved an open
pit cutback on the Northern Bowl to facilitate the transition from open pit
to underground mining. The capital cost of
the underground mine is expected to be US$760 million, and the cutback US$150
million.
Construction
started in February 2006. By the end of 2006, 10,600 metres of underground development
in four main access declines had been completed. In late 2006 the first of the
underground declines reached the required depth for
ore extraction. The underground block cave undercut is expected to be initiated
on schedule in 2008.
Diavik (Rio
Tinto: 60 per cent)
In late 2004 the joint venture approved
a study of the feasibility of underground mining of the A154N, A154S and A418
kimberlites.
This study includes the development of a 3.3 kilometre exploratory decline,
at an estimated cost of US$75 million.
In 2006
a three phase underground development funding model, totalling some US$265
million, was approved. If underground mining is given the go ahead, the first
ore is
planned to be extracted in 2008.
Meanwhile, a
US$190 million project, involving the construction of a dyke round the
A418 kimberlite to allow open pit mining beneath the lake bed, is well advanced.
The construction and dewatering of the dyke was completed in 2006
and pre-stripping began in December. The A418 ore is softer than that of the
A154 pipes and will allow ore blending strategies
to maintain the high process plant throughput achieved in 2006. The first ore
from the A418 open pit is scheduled to be mined in late 2007 and will continue
through to 2012.
About two kilometres
south of the A154 pipes, under the waters of Lac de Gras, is the A21 kimberlite
pipe. It does not currently form part of the Diavik ore reserve or mine plan
as little is known about the value of the diamonds it holds. A feasibility study
into open pit mining, which includes the development of an exploratory decline,
is now in hand. At the end of 2006, the decline had reached the kimberlite,
and bulksampling results are expected in the first quarter of 2007. The study
is scheduled for completion in 2007, at which time it will be decided whether
the A21 kimberlite should be included in reserves, but ore extraction would
not start until 2012.
Murowa (Rio
Tinto: 77.8 per cent)
Murowa commenced studies in mid 2006 to determine
whether to expand the mine.
Kennecott Land (Rio
Tinto: 100 per cent)
Kennecott Land was established in 2001
to capture value from the non mining land and water rights assets of Kennecott
Utah Copper.
Kennecott Lands holdings are around 53 per cent of the remaining undeveloped
land in Utahs Salt Lake Valley. Approximately 16,000 hectares of the
37,200 hectares owned is developable land and is all within 20 miles (32km)
of downtown
Salt Lake City.
The initial
Daybreak community encompasses 1,800 hectares and is entitled to develop nearly
14,000
residential units and nine million square feet of commercial space. Kennecott
Land develops the required infrastructure and prepares the land for sale to
home builders. The project is well advanced, with over 1,200 home sales completed
since opening in June 2004. At full build out, the community will house 30,000
to 40,000 residents. Revenues in 2006 were US$60 million.
Kennecott Land
is in the process of securing development rights from Salt Lake County for the
remaining landholdings. Current development potential for this land is in excess
of 150,000 residential units and 50 million square feet of commercial space.
Securing entitlement is a long term public process that will culminate in a
plan being submitted for approval by the Salt Lake County Council in the next
one to two years.
Sari Gunay (Rio
Tinto: 70 per cent)
Rio Tinto has carried out exploration and project
evaluation in Iran since 2000. Preliminary results from the Sari Gunay gold
project in Western Iran have indicated the potential for a medium sized low
grade oxide resource. Following successful geostatistical and infill drilling
programme in 2004, a feasibility study, including further evaluation drilling
and metallurgical testwork, has been completed. Rio Tinto is currently evaluating
its options for Sari Gunay.
MARKETING
Marketing and sales of the Groups various
metal and mineral products are handled either by the specific business concerned,
or in some cases are undertaken at a product group level.
In
2006, Rio Tinto established a small central marketing team based in London
to develop
and share leading marketing practices across the Group. The team supports the
Groups businesses by helping to identify new ways of adding value in meeting
customers needs.
Rio Tinto has
numerous marketing channels, which include electronic market places, with differing
characteristics and pricing mechanisms depending
on the nature of the commodity and markets being served.
Rio
Tintos
businesses contract their metal and mineral production direct with end users
under both short and long term supply
contracts. Long term contracts typically specify annual volume commitments
and an agreed mechanism for determining prices at prevailing
market 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.
Ocean freight Ocean freight has become an important part
of Rio Tintos marketing. It is managed by Rio Tinto Marine, which is based
in Melbourne. In 2006, Rio Tinto Marine handled 70 million tonnes of dry bulk
cargo, a significant increase on the 51 million tonnes transported in 2005.
Rio Tinto
Marine leverages the Groups substantial cargo base to obtain a low cost
mix of short, medium and long term
freight cover. It seeks to create enterprise value from its freight by creating
competitive
advantage for the Groups products rather than by trading freight.
Rio Tinto
Marine sets and maintains the Groups HSE and vessel assurance standards
for freight and is one of three equal shareholders in Rightship,
a ship vetting specialist, promoting safety and efficiency in the global maritime
industry.
Rio Tinto Exploration seeks to discover or identify
mineral deposits that will contribute to the growth of the Rio Tinto Group.
The discovery of new deposits is essential to replace reserves as they are
mined, to provide new opportunities for growth, 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.
Exploration maintains close dialogue with product groups to ensure
that strategies and project portfolios are closely aligned.
Mineral
exploration is a high risk activity. Rio Tintos 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 five geographically-based teams in North America, South
America, Australasia, Asia and Africa/Europe and a sixth project generation
team that searches the world for new opportunities and
provides specialised geological, geophysical and commercial expertise to the
regional teams. The Asia team was formed in
2006, reflecting a significant expansion in exploration effort in Russia, Mongolia
and the FSU. Industrial minerals exploration, previously a separate team, has
been integrated into the regional teams and project generation.
At the end of
2006, Rio Tinto was exploring in over 35 countries for a broad range of commodities
including copper, diamonds, nickel, industrial
minerals, bauxite, uranium, iron ore and coal. Exploration employs about 180
geoscientists around the world and has a total complement of approximately 900
people.
Eric Finlayson
was appointed head of Exploration, based in London, from January 2007, succeeding
Tom Albanese, director, Group Resources, who
became chief executive of Rio Tinto from May 2007.
Financial performance
2006 compared with 2005 Cash expenditure on exploration in
2006 was US$345 million, an increase of US$81 million
over 2005, reflecting an increase
in contractor costs, the high quality of projects in the Exploration
pipeline and acceleration of evaluation
on significant
projects. The pre-tax charge to underlying earnings was US$237 million,
due to the sale of Ashton Mining of Canada shares and various other interests
during 2006.
2005 compared with 2004 Cash expenditure on exploration in
2005 was US$264 million and the pre-tax charge to underlying earnings was
US$250 million, a US$60 million increase over 2004, reflecting a further
increase in iron ore exploration in Western Australia, the growth of high quality
projects in the Exploration pipeline and acceleration of evaluation on significant
projects by product groups during the year.
Operations
2006 operating performance Since 2001 six projects have moved
from Exploration to the next stage of project evaluation including Resolution
(copper, US), Potasio Rio Colorado (potash, Argentina) and Simandou (iron ore,
Guinea). Last year, five iron ore deposits in the Pilbara were transferred to
the product group evaluation team.
Rio Tinto also
conducts near mine exploration around a number of operations. Where additional
mineralisation has supplemented reserves or
new mineralisation has been discovered this has been reported by the relevant
product group.
Exploration in
2006 focused on advancing the most promising targets across the spectrum of
grassroots and near mine programmes. Encouraging
results were obtained from a number of locations.
Order of magnitude
studies are in progress at the Chapudi project (coal, South Africa) and the
Bunder project (diamonds, India).
Negotiations
continue on a Contract of Work for the La Sampala project (nickel, Indonesia)
with the Government of Indonesia.
During 2007 projects
in Mozambique and Serbia (industrial minerals), Brazil (bauxite), Colombia (coal),
and the US (coal and nickel) are expected to
commence order of magnitude studies to assess their economic potential for advancement
to pre-feasibility study.
Diamond exploration
continues, focused in Canada, southern Africa, Mauritania, Brazil and India.
Work commenced in Mali. A number of kimberlite
pipes were discovered and follow up test work is in progress to assess economic
potential.
Copper exploration
continued in Turkey, Kazakhstan, Peru, Chile, Argentina, Mexico and the US
and in Russia under the RioNor joint venture with Norilsk Nickel. Drilling
encountered significant copper mineralisation in Chile, Kazahkstan and the
US, warranting
further follow up drill testing.
Exploration focus
on the bulk commodities, iron ore, coal and bauxite continued in 2006. Drilling
progressed on bauxite projects in Brazil. Thermal and coking coal projects were
drill tested in the US, Canada, southern Africa,
Colombia and Mongolia. Results in all countries
are encouraging and work is continuing in 2007. Iron ore exploration continued
in west Africa and further iron ore deposits in the Pilbara in Australia
have been handed over to the iron ore product group
in 2007.
Industrial minerals
exploration was active in many parts of the world including southern Africa,
Europe and South America. Following the successful tender for the Jarandol
concession (borates, Serbia), drilling has commenced.
Brownfields
exploration support continued at several Rio Tinto operations and product
group
projects, including Diavik, Argyle, Kennecott
Utah Copper, Eagle, Energy Resources of Australia, La Granja, Pilbara Iron,
Greens Creek and Rössing. Exploration also provided expertise to the brownfields
programmes at the Grasberg and Cortez joint ventures.
In December
the Exploration groups ISO14001 environmental management system certification
was extended to cover the new Asia region and the project generation team.
The Technology and Innovation group, formerly Operational and Technical Excellence, was formed during 2006 by bringing together the Technology group and the Groups Improving
performance together business improvement work in the areas of mining, processing and asset management.
Technology and Innovation provides a central body of expertise for supporting the business units to embed operational best practice and is the vehicle through which technology innovations are
driven and technical talent is developed.
The group comprises a number of Centres of Excellence which drive sustainable performance in the areas of health, safety and environment, mining, processing, assets integrity, project
development and evaluation, and strategic planning. Key elements are standardisation of core processes to make them leading practice, the improvement of analytical tools, the
introduction of common, transparent metrics and data to measure performance, and enhanced functional training and capability development of staff.
A further Centre of Excellence focuses on major innovation likely to be required to develop the orebodies of the future.
The total staff in Technology and Innovation at year end was 368, compared with 343 in 2005. The increase was due to the higher level of activity resulting from
the current climate of growth in the industry.
In July 2006, Grant Thorne succeeded Ian Smith as global head of Technology and Innovation.
Operations
Health, Safety and Environment The HSE Centre of Excellence ensures that strategies and standards are in place to minimise HSE risk and drive performance. Activities support their implementation in the businesses and
report results and performance trends to the board.
Specific activities during 2006 included the embedding of key environmental standards and metrics within business units, complementing the health and safety
standards which place Rio Tinto as an industry leader in terms of performance in these areas, and completing development of the product stewardship strategy, which integrates product stewardship into business
systems, securing both market access and competitive advantage.
Innovation The Innovation Centre of Excellence is designed to drive step change innovation for Rio Tinto, focused on a five to ten year timeframe. The main focus is on technologies applicable across
the Group, particularly in mining, processing and energy.
Key innovation programmes were undertaken in underground and surface mining as well as processing. Specific activities during 2006 focused on the block cave
mining method, tunnel development and remote monitoring in underground mining, in pit material sizing and conveying, data fusion in surface mining, and process advances in ore sorting and comminution.
Shared Expertise Shared Expertise, a core group of technical
professionals located across five global offices, provides a breadth of experience
and a multi disciplinary approach in delivering projects to the business units
across the Group. This team works in partnership with the operating sites to
implement leading practice. It also provides technical support on an ongoing
basis as required.
Mining and Processing The Mining and Processing Centres of Excellence address the core mine production processes. Specific activities in these areas during 2006 focused on continuing to establish and disseminate
leading practice in orebody knowledge and value driven production planning across the operations.
Assets Integrity The Assets Integrity Centre of Excellence develops world class asset management capabilities to create significant value for Rio Tinto. Activities for 2006 focused on the reliability and performance of physical assets
across the Group, including the implementation of standards and internal league tables for maintenance of heavy mobile equipment such as trucks and shovels. This led to significant improvement in areas such as tyre life, truck utilisation and
prolonging engine and component life.
Project Development and Evaluation On 1 March 2007 the Projects Centre of Excellence and the Evaluation team were combined to form a new Centre for Excellence for Project Development and Evaluation (PDE). The principal accountabilities of PDE are to provide
independent advice to the capital appraisal and approval process, and on the adequacy of project submissions, from prefeasibility studies through to execution and commissioning. It
also conducts post investment reviews; and ensures that the substantial experience of the Group in project definition and delivery is reflected in future projects.
Strategic Planning The Strategic Planning Centre of Excellence focuses on three separate but related areas. These are value optimisation in the strategic planning horizon, risk assessment and management, and
business improvement, providing a centre for coordinating leading practice for improvement methodologies across Rio Tinto.
Financial performance 2006 compared with 2005 The
charge against net earnings for the group was US$50 million, compared with US$41
million in 2005. The increase was due to the greater level of activity, reflected
also in the addition of staff.
2005 compared with 2004 The
charge for the Technology group (including Health, Safety and Environment) against
net earnings was US$41 million, compared
with US$35 million in 2004. The increase was due to
the great er level of activity in all Technology group units.
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 Tintos
statement of business practice, at all levels of the business.
The statement was published initially in January 1998 and revised in 2002 and 2003. It is now available in more than 20 languages. It is the result of wide internal consultation and discussion
and represents shared values from around the Group. 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 Groups overall and individual
businesses social and environmental performance continue to be published
on the Rio Tinto website: www.riotinto.com 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
businesss 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 122, 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 Groups strategy and full and timely access to the information
required to discharge their responsibilities fully and effectively.
Rio
Tintos 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
boards Committee on social and environmental accountability reviews the effectiveness of policies and
procedures. The committee comprises four non executive directors. It meets four times annually with the chief executive and heads of Technology, Health, Safety and Environment (HSE), and Communications and External
Relations.
Reports
for the committee summarise significant matters identified through Rio Tintos
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; risk reviews for specific concerns; 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. In 2006 a new Corporate Assurance function was established to integrate all assurance activities, including the assurance
activities of Internal Audit, HSE, and Communities, into a single assurance process.
Policies, programmes and results Implementation of the policies in The way we work is discussed in the following sections according to each policy area. Known risks arising from social and environmental matters and their management in Group businesses is described in
the relevant Group operations section.
In 2006 HSE developed an integrated HSE and Quality Management System. Implementation will commence in 2007 and is mandatory for all managed businesses.
Safety Rio Tinto believes that all injuries are preventable and its goal is zero injuries. Wherever we operate, we hold the health and safety of our employees to be core values. This requires
visible leadership and a culture of supportive workplace behaviour, as well as clear standards, consistent implementation, and the transfer of best practice and improvement throughout the Group.
While in 2006 the safety record improved for the seventh consecutive year, there is still some way to go in achieving
the goal of zero injuries. In 2006, very regrettably, three employees lost their
lives at managed operations. The incidents have been investigated and actions
taken to prevent recurrance. The Group has again demonstrated strong improvements
in the year end lost time injury frequency rate
(LTIFR) at 0.50 (2005: 0.56) and all injury frequency rate (AIFR) at 1.10 (2005:
1.35), reductions of 11 per cent and 18 per cent respectively. Rio Tinto set
targets in 2003 for a 50 per cent reduction in LTIFR and AIFR by 2008 in
2006 we
were on trajectory to meet those targets.
Fines
for infringement of safety regulations involved nine operations, totalling US$34,794 (2005: US$87,600).
Occupational health Occupational health is a major priority.
Rio Tinto is committed to ensuring the good health of its employees and contractors.
Our occupational health standards have now been implemented in 96 per cent of our businesses. In 2006 there were 32 new cases of occupational illness per 10,000 employees, a 40 per cent
improvement compared with 54 in 2005. The Group has achieved a 69 per cent reduction in the rate of new cases of occupational illness since 2003.
The nature of occupational illnesses is changing and we have active programmes in place to manage the emerging issues of stress, fatigue, and age related illnesses such as heart disease and
reduced physical capacity. In 2006 we also revised our HIV/AIDS strategy and, whereas in the past our efforts had been concentrated on southern Africa, today our approach is global.
In 2004, in order to focus attention on reducing noise induced hearing (NIHL) loss across the Group, a target was set of a 20 per cent reduction in the rate of
exposure (per 10,000 employees) to a noise environment of more than 85 decibels (dB) between 2004 and 2008.
Implementation of the hearing conservation standard has increased the awareness of NIHL, resulting in an increased baseline after 2004. The reported rate of
exposure to more than 85 dB in 2006 was reduced by 1.0 per cent from 2004.
Fines
for infringement of occupational health regulations in 2006 involved two operations,
totalling US$3,000 (2005: US$58,100).
Environment Respect
for the environment is at the heart of Rio Tintos approach to sustainable development. Wherever possible Rio Tinto prevents, or otherwise minimises, mitigates and remediates, harmful effects of the
Groups operations on the environment. The strategic framework used to improve environmental performance provides a coherent way of assessing and addressing risks to the business.
We have devised and implemented a number of practical, core programmes covering the management of water, mineral and non mineral waste, air quality, product stewardship, land stewardship and
biodiversity. These programmes involve input from our partners and local communities as well as from experts in these fields.
Rio Tinto believes that emissions of greenhouse gases (GHGs) from human activities are contributing to climate change. Controlling GHG emissions is one of our
biggest challenges, and the Group is working to reduce emissions from its processes and in the use of its products. We have five year targets to reduce our GHG emissions by four per cent per tonne of product and
improve our energy efficiency by five per cent per tonne of product by 2008, compared with a 2003 baseline.
In 2006, energy
efficiency improved by 2.6 per cent compared with 2003, while GHG efficiency
improved by 0.3 per cent. Both areas slipped from 2005 and remain below the trajectory
needed to achieve the 2008 targets. Our emissions
efficiency result is affected by both production interruptions and changes in
the emissions intensity of purchased electricity. The scheduled maintenance shutdown
of the
Kennecott Utah copper smelter significantly impacted
our performance per unit. Without the smelter shutdown our performance would
have been one per cent better.
We continued to engage with governments and stakeholders who are also trying to find solutions to climate change. In order to ensure that Group actions remain
effective and that Rio Tinto maintains a leading position in this area, in 2006 Rio Tinto embarked on a new three year climate change plan. Changes in emission factors affected performance by a further 0.6 per cent.
The improvement in freshwater withdrawal efficiency, at 11.5 per cent compared with 2003, remained on track to achieve the 2008 target of ten per cent.
By the end of 2006, 96 per cent of operations had certified ISO 14001 or an equivalent environmental management system (EMS). There were eight significant environmental incidents in 2006, of
which three were spills, compared with eight in 2005, of which two were spills. Fines for infringements of environmental regulations involved
four operations and totalled US$56,799 (2005: US$67,900).
Land access Rio Tinto manages 35,000 square kilometres of land, five per cent of which is disturbed for mining purposes. Rio Tinto seeks
to ensure the widest possible support for its proposals throughout the life cycle
of the Groups 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$96.4 million to community programmes in 2006 (2005: US$93.4 million) calculated on the basis of the London Benchmarking Group model. Of
the total contributions, US$29.6 million was community investment and US$32.6
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 also respects those rights
in conducting the Groups operations throughout the world.
Rio
Tinto also supports the UN Secretary Generals Global Compact, the US/UK
Voluntary Principles on Security and Human Rights and the Global Sullivan Principles.
Rio
Tintos Human rights guidance is
designed to assist managers in implementing the Groups 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.
New talent is essential to our business and Rio Tinto provides attractive career opportunities for outstanding graduates across many disciplines. However, the recent rapid growth in demand for
skilled recruits, coupled with a reduced flow of qualified candidates from traditional schools, is making competition for human resources very intense within the mining industry.
Making mining more attractive as a career is therefore crucial for our ability to access new people. We are committed to the training and development of our existing employees.
People development in Rio Tinto is focused on ensuring leadership and competence across the Group. In addition to a comprehensive and customised series of leadership development programmes from
supervisor through to managing director, Rio Tinto is developing a series of functional development programmes for professionals and practitioners across the Group, such as mining, processing or marketing.
Beyond
formal programmes we are also developing our own approach to coaching which will
further strengthen our people development activities. This plus an increased
focus on training and
e-learning will be key to Rio Tintos people development strategy moving
forward. Rio Tinto values diversity because we believe it confers a real business
benefit. An international group like ours needs to be able to draw on the broad
range of
management experience and insight that can only come from a team of men and women with a diversity of racial and cultural backgrounds.
In 2004, we focused on achieving specific diversity related targets important to the future of our organisation. While we continue to work towards these targets, these were reviewed and refined
in 2006 to ensure their continuing alignment with our business objectives and needs. Diversity will continue to be an important people development agenda for the Group.
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 2005
and 2006, Group companies, mainly concentrated in Australia and North America,
employed
approximately 31,000 people and, together with Rio Tintos proportionate
share of consolidated companies and equity accounted
units, the total was approximately 35,000 (2005: 32,000). Wages and salaries
paid in 2006 excluding Rio Tintos proportionate
share of consolidated companies and equity accounted units, totalled US$2.5
billion (2005: US$2.1 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 Groups 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 has made a strategic commitment to sustainable development, in the belief that acting responsibly will result in
long term business benefits such as lowering risks, reducing costs, creating
options, and leveraging reputation. It is corporate policy that Group businesses,
projects, operations and products should contribute constructively to the global
transition to sustainable development. Details of our policy, programmes and
results are provided in our Sustainable
development
review, available on the website.
During the course of 2006, our Sustainable Development Leadership
Panel (SDLP), composed of senior executives from all six product groups and corporate
functions, focused on Rio Tintos sustainable development strategy. Input
was sought from a wide range of sources, both within Rio Tinto and outside. The
panel assessed the current status of sustainable development practice in the
Group, decided that Rio Tinto should strive to be the sector leader in its contribution
to sustainable development, and defined the areas we need to focus on in order
to accomplish that goal.
The focus areas
include developing a sustainable development culture, similar to that already
in place on safety, key performance indicators, effective communication, supply
chain management, and taking account of sustainable development in risk management,
long term, planning and mines of the future.
To help explain the concepts of sustainable development, both to existing employees and newcomers, we introduced training and awareness raising tools throughout the Group. In addition, we are
using another, more detailed programme
for managers, based on the e-learning tool, Chronos, developed by the World Business
Council for Sustainable Development and Cambridge University in the UK. By the
end of 2006
more than 700 managers had participated in the programme.
As a founding member of the International Council on Mining and Metals, Rio Tinto is committed to superior business practices in sustainable development. We have committed to implement the ICMM
Sustainable Development Framework and comply with policy statements of the ICMM Council.
Openness and accountability Rio Tinto conducts the Groups 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
Groups 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 Groups 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
Tintos policies and programmes are reflected in implementation activities
at operations. In 2006, Environmental Resources Management (ERM) undertook
the
external assurance and data verification programme and the results are available
in Rio Tintos Sustainable development
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 receive regular training and are required to certify annually
that they are not aware of any antitrust violations. No violations were reported
in 2006.
2006
compared with 2005 Cash flow from operations, including
dividends from equity accounted units, was a record US$10,923 million,
36 per cent higher than in 2005. The
increase was mainly due to increased profits. There was a cash outflow on working
capital
in both years reflecting higher receivables across all product groups due to
higher metal prices and sales volumes. The cash outflow on inventory was US$454
million in 2006 compared to US$249 million in 2005, partly due to
increased operating activity and production costs.
The Group
invested at record levels, in particular in expansion projects. Expenditure
on property,
plant and equipment, exploration and other intangible assets was US$3,992
million in 2006, an increase of US$1,402 million over 2005.
This included the second phase of the Dampier port and Yandicoogina iron ore
mine expansions, as well as construction of
the Hope Downs iron ore mine in Western Australia, the A418 dyke construction
at the Diavik diamond mine, the Madagascar ilmenite mine and the capacity increases
at Rio Tinto Energy America. Capital expenditure is expected
to continue at a high level in 2007.
Tax paid
in 2006 increased to US$2,799 million, US$1,782 million higher than
in 2005. The increase reflects higher profits including the lag effect of tax
payments
on higher profits from 2005.
Acquisitions
less disposals were US$279 million in 2006 mainly relating to the acquisition
of an initial stake in Ivanhoe Mines.
In 2005, there were net proceeds of disposal of US$321 million arising mainly from
the sale of the Groups interest in Lihir.
Dividends
paid in 2006 of US$2,573 million were US$1,432 million higher than
dividends paid in 2005. These included
the special dividend totalling US$1.5 billion which was paid to shareholders in April 2006. Capital
management activity also included the on market buyback of Rio Tinto plc shares
in 2006, comprising US$2,299 million from
the 2006/07 programme and US$95 million in January from the 2005/06 programme
(before deducting US$24 million proceeds from the exercise of options).
In 2005 an off market buyback of Rio Tinto Limited shares returned
US$774 million to shareholders and an on market buyback of Rio Tinto plc
shares returned US$103 million.
2005 compared with 2004 Cash flow from operations, including
dividends from equity accounted units at US$8,031 million, was 88 per cent higher than in 2004.
The increase
was mainly due to increased profits. This was partly offset by an increased
cash outflow on working capital in
2005 mainly reflecting higher receivables across all product groups due to
higher metal
prices and sales volumes.
Cash flow
of US$323 million from disposals of interests in businesses in 2005 primarily
related to the sale of Lihir. In 2004, disposals 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 Tintos interest in the Morro do Ouro gold mine
in Brazil.
Purchase of property,
plant and equipment and intangible assets of US$2,590 million included
the major port and rail infrastructure
expansion in Western Australia, payments for coal reserves purchased by Rio
Tinto Energy
America, the expansion of Hail Creek coking
coal and initial expenditure on the construction of a new dyke at Diavik.
During
the year the Group repaid US$893 million of its gross outstanding debt
and cash balances increased by approximately
US$2.0 billion.
Dividends paid in 2005 of US$1,141 million were US$235 million higher
than dividends paid in 2004 following the 20
per cent increase in the dividend declared in respect of the previous year.
A capital return programme was commenced under which an off market buy back
of Rio Tinto Limited shares was carried out, and subsequently an on market
buy
back of Rio Tinto plc shares. Almost two thirds of the US$1.5 billion capital
management programme announced on 3 February 2005 had been completed by the
end of January 2006.
Balance sheet The balance sheet remained strong during the period, although record capital expenditure and the increased capital management
activity resulted in an increase in net debt of US$1,124
million to US$2,437 million at 31 December 2006. Debt to total capital rose
to 11 per cent but interest cover strengthened to 89 times.
In
2006, net assets increased by US$3,646 million. Outside interests increased by US$362
million mainly due to retained profits
at Robe
River and IOC.
Equity attributable to Rio Tinto shareholders increased by US$3,284 million:
as net earnings attributable to Rio Tinto shareholders
of US$7,438 million exceeded the combined amounts of share buybacks and
dividends paid by US$2,207 million; and there was a positive currency translation effect of US$820
million mainly reflecting the eight per cent strengthening of the Australian
dollar.
The
Groups borrowings, net of related currency and interest rate swaps, totalled US$3.2 billion at 31 December 2006, of which US$1,143 million will mature in 2007. The majority of
the Groups borrowings relate to amounts issued under
the Groups corporate bond and medium term notes programmes totalling approximately US$2.0 billion, of which US$847
million will mature in 2007.
In addition
to the above, the Groups share of the third party net debt of equity accounted
units totalled US$459 million at 31 December 2006. This debt, which is
set out in note 15 to the 2006 financial statements, is without recourse
to the Rio Tinto Group.
Financial risk management The
Groups policies with regard to risk management are clearly defined and
consistently applied. They are a fundamental
principle of the Groups long term strategy.
The
Groups 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. 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 the long term. These natural hedges reduce the
relevance of derivatives or other forms of synthetic hedging.
Such hedging is therefore undertaken to a strictly limited degree, as described
in the sections on currency, interest rate, commodity price exposure and treasury
management below.
The
Groups 2006 financial statementsand disclosures show the full extent of its financial commitments
including debt.
The risk factors to which the Group is subject that are thought to be of particular importance are summarised on pages 5 to 6.
The
effectiveness of internal control procedures continues to be a high priority
in the Rio Tinto Group. The boards statement on internal control is included
under Corporate governance on page 126.
Liquidity and capital resources 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. Rio Tinto
plc and Rio Tinto Limited enjoy strong
long and short term credit ratings from Moodys and Standard and Poors.
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 ratings outlook from both agencies is presently reported as stable.
Credit ratings are not a recommendation to purchase, hold or sell securities,
and are subject to revision or withdrawal at any time by the ratings organisation.
Rio Tinto does not have a target debt/equity ratio, but has a policy of maintaining a flexible financing structure so as to be able to take advantage of new investment opportunities that may
arise. This policy is balanced against the desire to ensure efficiency in the debt/equity structure of the Rio Tinto balance sheet in the longer term through pro-active capital management programmes.
The Group maintains
backup liquidity for debt maturing within 12 months and its commercial paper
programmes by way of bank standby credit facilities, which totalled US$2.3
billion at 31 December 2006. These facilities, which were
unused at the year end, can be drawn upon at any time on terms extending out
to five years.
As at 31 December 2006, the Group had contractual cash obligations arising in the ordinary course of business as follows:
Contractual
cash obligations
Total
Less than 1
Between 1
Between 3
After 5
year
and 3 years
and 5 years
years
US$m
US$m
US$m
US$m
US$m
Debt
(a)
3,179
1,157
847
544
631
Operating leases
427
62
72
51
242
Unconditional
purchase obligations (b)
3,600
903
1,211
660
826
Deferred consideration
179
37
78
29
35
Other
(c)
2,413
1,675
572
129
37
Total
9,798
3,834
2,780
1,413
1,771
Notes
(a)
Debt obligations include bank borrowings
repayable on demand and reflect the impact of related currency and interest
rates waps
(b)
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 future
payment commitments have not been discounted and mainly relate to commitments
under take or pay power and freight contracts. They exclude
unconditional purchase obligations of jointly controlled entities apart
from those relating to the Group
s tolling arrangements.
(c)
Other relates primarily to capital
commitments. <
/TD>
(d)
In addition, the Group had liabilities
for trade and other payables, other financial liabilities, tax and provisions.
Information regarding the Groups pension commitments and funding
arrangements is provided in the Post retirement benefits section of this
Financial review and in note 46 to the 2006 financial statements.
On the
basis of the levels of obligations described above, the unused capacity under
the Groups
commercial paper and European Medium Term Notes programmes, the Groups
anticipated ability to access debt and equity capital markets in the future and
the level of anticipated free cash flow, there are reason able grounds to believe
that the Group has sufficient short and long term sources of funding available
to meet its liquidity requirements.
The
Groups committed bank standby facilities contain no financial undertakings
relating to interest cover. The Group
has no financial agreements that would be affected to any material extent by
a reduction
in the Groups credit rating. There are no covenants relating to corporate
debt which are under negotiation at present.
The
Groups policy is to centralise debt and surplus cash balances whenever
possible.
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 Tintos
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 total US dollar dividends declared
in respect of the previous year.
In
April 2006 the Group paid a US$1.5 billion special dividend (US$1.10
per share) announced as part of the 2006
capital
management programme (see below). The special dividend was paid concurrently
with the 2005 final ordinary dividend, but did not form part of the Groups
progressive ordinary dividend policy.
The Group announced a re-basing of its ordinary dividend in February 2007, increasing the full year ordinary dividend in respect of 2006 by 30 per cent to 104
US cents. An interim dividend of 40 US cents was paid in October 2006 and a final dividend for the year of 64 US cents was paid in April 2007.
Capital management programme On
2 February 2006 the Group announced a US$4 billion capital management programme, comprising the US$1.5 billion
special dividend (US$1.10 per share paid in April 2006) referred
to above and a US$2.5 billion share buyback programme over two years to the
end of 2007.
The
US$4 billion programme was completed almost a year ahead of schedule in January
2007.
On 27 October
2006, the Group announced an increase in the programme by US$3 billion to US$7
billion, to be completed over the remaining period to the
end of 2007. The additional cash return is planned through the buyback of shares, subject to market conditions.
As
at 31 December 2006, the cumulative cash returns to shareholders under the 2005/06
and 2006/07 capital management programmes amounted to US$4.8 billion.
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 Tintos 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 Groups interest rate policy as described in the section on Interest rates below.
Currency swaps are used to convert debt or investments into currencies, primarily
the US dollar, which are consistent with
the
Groups policy on currency exposure management as described in Exchange rates, reporting currencies and currency exposure below. 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 by reference to quoted market prices, quotations from independent financial institutions or
by discounting expected cash flows.
Off balance sheet arrangements In
the ordinary course of business, to manage the Groups operations and financing,
Rio Tinto enters into certain performance guarantees and commitments for capital
and other expenditure.
The aggregate amount of indemnities and other performance guarantees, on which no material loss is expected, including
those related to joint ventures and
associates, was US$501 million at 31 December 2006.
Other commitments include contracted capital expenditure, operating leases and unconditional purchase obligations as set out in the table of contractual cash
obligations, included in the Liquidity and capital resources section above.
Exchange rates, reporting currencies and currency exposure Rio Tintos shareholders equity,
earnings and cash flows are influenced by a wide variety of currencies due
to the geographic diversity of the
Groups
sales and the countries in which it operates. The US dollar, however, is the
currency in which the great majority of the
Groups sales are denominated. Operating costs are influenced by the currencies
of those countries where the Groups 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 Canadian dollars are the most important
currencies
influencing costs, apart from the US dollar.
In
any particular year, currency fluctuations may have a significant impact on Rio
Tintos financial results. A weakening of the US dollar against the currencies in which the Groups
costs are determined has an adverse effect on Rio
Tintos underlying earnings.
However, this
would also result in exchange gains on net debt denominated in US dollars
held in non US functional currency operations, which has a positive effect
on Rio Tintos EU IFRS
profit and net earnings. It would also
result in exchange gains and losses on intragroup balances denominated in US
dollars held by non US functional currency operations. Such gains
and losses on US dollar net debt and intragroup balances are excluded from underlying
earnings.
The following sensitivities give the estimated effect on underlying earnings of a ten per cent change in the full year
average exchange rate, assuming that each exchange rate moved in isolation. Movements
in exchange rates can cause movements in commodity prices and vice versa. However,
the relationship between currencies and commodity prices is a complex one, with
varying
degrees of correlation depending on the currency in question. Where the functional
currency of an operation is that of a country for which production of commodities
is an important feature of the economy, such as the Australian dollar, there
is a certain degree of natural protection against cyclical fluctuations in the
long term, in that the currency tends to be weak, reducing costs in US dollar
terms, when commodity prices are
low, and vice versa.
The exchange rate sensitivities quoted below include the effect on operating costs of movements in exchange rates but exclude the effect of the revaluation of
foreign currency working capital, US dollar net debt and intragroup balances. They should therefore be used with care.
Exchange rate sensitivities
2006
Effect on underlying
Average
earnings of 10%
Exchange
change in full
rate for
year average
2006
+/- US$m
Australian dollar
75 US cents
280
Canadian dollar
88 US cents
80
Chilean peso
US$1 = 530 pesos
10
New Zealand dollar
65 US cents
6
South African rand
15 US cents
22
UK Sterling
184 US cents
15
Other
n/a
6
The sensitivities in the 2006 column are based on 2006 prices, costs and volumes
and assume that all other variables remain constant.
Gains and losses on exchange arising from net monetary assets/(liabilities), other than US dollar net debt and intragroup balances, that are not denominated in the functional currency of the
relevant business unit are recorded in the income statement and are included in underlying earnings. The table below reflects the amounts of assets less liabilities, net of tax and outside interests as at the end of
2006, which expose the Group to such exchange gains and losses. These balances will not remain constant throughout 2007, however, and therefore these numbers should be used with care.
Currency
of exposure
2006
US dollar
Other
Total
US$m
US$m
US$m
Functional
currency of business unit:
Australian dollar
487
1
488
Canadian dollar
86
8
94
South African
rand
26
5
31
Other currencies
95
19
114
Total
694
33
727
Given the dominant role of the US currency in the Groups affairs, the US
dollar is the currency in which financial results are presented both internally
and externally. It is also the most appropriate currency for
borrowing and holding surplus cash, although a portion of surplus cash may also be held in other currencies, most notably Australian dollars, in order to meet short term operational and capital commitments and
dividend payments.
The Group finances its operations primarily in US dollars, either directly or using currency swaps, and a substantial
part of the Groups US dollar debt is
located in subsidiaries having functional currencies other than the US dollar.
Exchange differences on net debt that hedges the net assets of entities with
functional currencies other than the US dollar are dealt
with through equity. All other exchange differences on net debt are dealt with
in the income statement, but those related to US dollar net debt are excluded
in arriving at underlying earnings. Exchange gains and losses which arise on
balances between Group entities are taken to equity where that balance is, in
substance, part of the Groups
net investment in a subsidiary or equity accounted unit. All other exchange differences
on intragroup balances are dealt with in the income statement but are excluded
from underlying earnings.
The table below
reflects the amounts of net debt and intragroup balances at the end of 2006,
net of tax and outside interests, that
expose the Group to exchange gains and losses that would be recorded in the
income
statement. These balances will not remain constant
during 2007, however, and these numbers should therefore be used with care.
The table shows exposures after taking account of the impact of currency
swaps. Further details of currency swaps are included in note 32 to the 2006
financial statements.
2
These amounts relate to intragroup liabilities denominated in Australian
dollars reported by subsidiaries with a US dollar functional currency. They
are shown as positive balances because they have the effect of offsetting
the exposures resulting from external and intragroup US dollar liabilities
in
Australian functional currency subsidiaries.
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 32 to the 2006 financial statements, as at 31 December 2006 there were
derivative contracts to sell US$581 million and buy A$550
million and NZ$520 million in respect of future trading transactions. A significant
part of the above hedge book was acquired with North Limited. North held a substantial
hedge book on acquisition which has been retained but is not being renewed as
maturities occur.
The functional currency of most operations within the Rio Tinto Group is the local currency in the country of operation. Foreign currency gains or losses arising on translation of the net
assets of these operations are taken to equity and,
with effect from 1 January 2004, recorded in a currency translation reserve.
The approximate translation effects on the Groups net assets of ten per
cent
movements from the year end exchange rates are as follows:
2006
Effect on net
Closing
assets of
exchange
10% change in
rate
closing rate
US cents
+/- US$m
Australian dollar
79
1,161
Canadian dollar
86
152
South African rand
14
(4
)
UK Sterling
196
32
Other
—
(1
)
Interest rates Rio
Tintos 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 in the long term, 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
2006, US$1.2 billion of the Groups debt was at fixed rates after taking into account interest rate swaps. Based on the Groups
net debt at 31
December 2006, and with other variables unchanged, the approximate effect on
the Groups net earnings of a one percentage
point increase in US dollar LIBOR interest rates would be a reduction of US$6
million.
Commodity prices The
Groups 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 Tintos
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. The
forward
contracts to sell 420 million pounds of copper at a fixed rand price per pound
were entered into as a condition of the refinancing of Palabora in 2005.
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 pr iced 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
53 per cent of Rio Tintos 2006 net earnings from operating businesses
came from products whose prices were terminal market related and the remainder
came from products
priced by direct negotiation.
Commodity prices
increased rapidly in 2005 and 2006. Looking to 2007, there are a number of uncertainties
in the global economy, not least the
direction of inflation and interest rates in major economies. The Group expects
some moderation
of global economic growth, although confidence in Japan and Europe is increasing.
Growth in China, which is
critical to the demand
outlook for many of the Groups products, is expected to remain strong and
well balanced. The Group continues to view the
overall outlook for commodities as positive, with prices expected to remain well
above
their long run averages in 2007.
Ore reserves (under Industry Guide 7) presented on pages 23 to 33 do not exceed the quantities that it is estimated
could be extracted economically if future prices were to be in line with the
average of historical prices for the three years to 30 June 2006, or contracted
prices where applicable. For this purpose, contract ed prices are applied only
to future sales volumes for which the price is predetermined by an existing contract;
and the average of historical prices is applied to expected sales volumes in
excess of such amounts. Moreover, reported ore reserve estimates have not been
increased
above the levels expected to be economic based on Rio Tinto's own long term price
assumptions. Therefore, a reduction in commodity prices from the three year average
historical price levels would not necessarily give rise to a reduction in reported
ore reserves.
The
table below shows published benchmark prices for Rio Tintos
commodities for the last three years where these
are publicly available, and where there is a reasonable degree of correlation
between the benchmark and Rio Tintos realised prices. The prices set out
in the table are the averages for each of the calendar years, 2004, 2005 and
2006.
The
Groups revenue will not necessarily move in line with these benchmarks
for a number of reasons which are discussed
below.
2004
2005
2006
Commodity
Source
Unit
US$
US$
US$
Aluminium
LME
pound
0.78
0.86
1.16
Copper
LME
pound
1.30
1.66
3.06
Gold
LBMA
ounce
409
.
444
.
602
.
Iron ore
Australian benchmark (fines)(a)
dmtu (b)
0.35
0.55
0.71
Lead
LME
pound
0.40
0.44
0.59
Molybdenum
Metals Week: quote for dealer oxide price
pound
16
.
31
.
25
.
Silver
LBMA
ounce
6.6
7.3
11.6
Zinc
LME
pound
0.48
0.63
1.49
Notes
(a)
average for the calendar year
(b)
dry metric tonne unit
The discussion of revenues below relates to the Groups gross revenue from
sales of commodities, including its share of the revenue of equity accounted units, as included in note 47 to
the 2006 financial statements.
The
Australian iron ore fines benchmark increased by 19 per cent in April 2006. The
higher prices, combined with higher volumes at Hamersley, contributed to an increase
in the Groups iron
ore revenue of 26 per cent. The benchmark
price
increased by 71.5 per cent in April 2005 compared with 2004. This contributed
to an increase in the Groups iron ore revenue of 83 per cent, with the
additional benefits of volume increases from the West Angelas and Yandicoogina
expansions and the recovery of output at IOC, after a ten week strike in 2004.
A
significant proportion of Rio Tintos coal production is sold under long
term contracts. In Australia, the prices applying to sales under the long term
contracts are generally renegotiated annually; but prices are fixed at different
times of the year and on a variety of bases. For these reasons, average realised
prices will not necessarily reflect the movements
in any of the publicly quoted benchmarks. Moreover, there are significant product
specification differences between mines. Sales volumes will vary during the year
and the timing of shipments will also result in differences between average realised
prices and benchmark prices.
Revenues
of the Groups Australian coal operations increased by two per cent in 2006.
There was a sustained increase in the received price for thermal coal. This benefit
was largely offset
by lower coking coal sales because of market
weakness and the delay in thermal coal shipments arising from congestion at Newcastle.
Published market indications for Australian thermal
coal show a slight increase in thermal coal prices in 2006 on a calendar year
basis and a seven per cent increase in the coking coal benchmark price.
Revenues from
these operations increased by 45 per cent in 2005, benefiting from a significant
increase in prices realised on sales
both of thermal and coking coal yet published market indications for Australian
thermal
coal showed a reduction of ten per cent in 2005 compared with 2004. The coking
coal benchmark price increased by 99 per cent in 2005.
In
the US, Rio Tinto Energy Americas revenues increased by 19 per cent in
2006, with higher realised prices for Powder River Basin coal and increased volumes.
Published market indications
of spot prices for Wyoming thermal coal show
an increase of 24 per cent for the average spot price in 2006 compared with 2005.
However, spot prices were volatile during the period.
Revenues increased by six per cent in 2005, with benefits from higher prices
limited by the influence of long term contracts. Published market indications
of spot prices for Wyoming thermal coal showed an
increase
of 61 per cent in 2005 over 2004.
Information
included in the RWE NUKEM Inc. Price Bulletin indicated price increases of
71 per cent in 2006 and
54 per cent in 2005 for uranium oxide. The Groups uranium revenue increased
by 27 per cent in 2006 and by 23
per cent in 2005 as a result of higher prices. The large increases reported
in the Price Bulletin are not fully reflected in the revenues for the period
because uranium oxide is typically sold on long term contracts with pricing
determined for
several years beyond the commencement of the contracts. However, a significant
portion of output from Rössing is not
under long term contracts and there is therefore more exposure to the spot
market from Rössings output than from ERAs.
Industrial
Minerals sales are made under contract at negotiated prices. Revenue from
industrial minerals increased
by five per cent in 2006 against 2005. This was mainly attributable to improved
prices and to stronger demand for titanium dioxide chloride feedstock. Revenue
in 2005 was 17 per cent higher than in 2004. This was mainly attributable
to strong price performance across all products at Rio Tinto Iron and Titanium
and increased volumes, particularly at Richards Bay Minerals.
The
Aluminium groups sales revenues are from aluminium, alumina and bauxite.
Revenue increased by 27 per cent
in 2006. Average aluminium prices quoted on the LME increased by 35 per cent
in 2006 but achieved spot alumina prices were lower than in 2005. In 2005,
revenue increased by 16 per cent while average prices quoted on the LME increased
by ten per cent. In addition to these price increases, revenues reflected
increased sales volumes, including the ramp
up of output from Yarwun, which commenced shipments in November 2004.
The
Copper group also produces gold and molybdenum as significant by products.
Total Copper group sales revenues
in 2006 increased by 46 per cent over 2005. Copper revenues increased by
77 per cent, broadly in line with the 84
per cent increase in the LME price. Lower grades and therefore volumes at
Grasberg more than offset the higher volumes at the other copper operations.
A 22 per cent decrease in gold revenue was also attributable to lower grades
at Grasberg
which outweighed the effect of the 36 per cent increase in the gold price.
Molybdenum revenue was only six per
cent down on 2005 with record production at KUC offsetting much of the effect
of the 20 per cent fall in price.
In 2005, the Copper groups revenues
were 60 per cent higher than in 2004. Copper revenues increased by 33 per
cent while the average LBMA copper price increased by 28 per cent. Revenues
benefited
both from the increase in prices
and from increased volumes, including the effect of a return to full operations
at Grasberg after a pit wall slippage in 2003. Gold revenues in 2005 were
69 per cent higher than in 2004 while the average LBMA gold price increased
by nine per cent year on year. Revenues benefited from the price increase
and also from the very substantial recovery in sales volumes at Grasberg.
Average molybdenum prices quoted in Metals Week in 2005 almost doubled from
the 2004 level. Sales revenue was over five times higher. In addition to
the higher prices, this reflected a major step
up in volumes achieved through changes in the mine plan at KUC to maximise
molybdenum production in response to the strong market.
Whilst
the Diamond Trading Company (DTC) reported a two per cent increase in diamond
prices in February, market
reports indicated that prices were re-adjusted downwards in the second half
of the year. While movements in the DTC price are a general indicator of
the overall rough diamond market, they do not necessarily correlate closely
with prices
actually realised by Rio Tinto, which reflect the particular type of diamonds
in its diverse product mix. The 22 per cent decrease in Diamond group revenue
in 2006 against 2005 was almost wholly attributable to the softer markets
experienced by Argyle which resulted in excess of US$100 million of surplus
rough diamonds being held in inventory at the end of the year. Diamond revenue
increased 45 per cent in 2005 against 2004. There was a six per cent increase
in the DTC indicated price for rough diamonds in the year. The majority of
the increase in Rio Tinto diamond revenues was attributable to higher volumes
and higher prices at Argyle and the commencement of the Murowa operation.
Lead, zinc
and silver accounted for less than one per cent of revenue in each of the
two years to 2006.
The
approximate effect on the Groups underlying earnings of a ten per cent
change from the full year average market
price in 2006 for the following products would be:
Average
Effect on underlying
market price
earnings of 10% change in
for 2006
full year average
Unit
US$
+/- US$m
Copper
Pound
3.06
422
Aluminium
Pound
1.16
167
Gold
Ounce
602
.
46
Molybdenum
Pound
25
.
56
Iron ore
dmtu
n/a
367
The above sensitivities are based on 2006 volumes and give the estimated impact
on underlying earnings of changes in prices
assuming that all other variables remain constant. These should be used with
care. As noted previously, the relationship between currencies and commodity
prices is a complex one and changes in exchange rates can influence commodity
prices and vice versa.
Dual listed company reporting In previous years, the Form 20-F filed with the United States Securities and Exchange Commission (SEC), contained separate consolidated financial statements for the Rio Tinto plc and Rio Tinto Limited parts of the Group.
These were presented on the basis of the legal ownership of the various operations within each part of the Group. The separate financial statements for Rio Tinto Limited included, on a consolidated basis, the Group undertakings under its legal
ownership, and those for Rio Tinto plc included, on a consolidated basis, the Group undertakings under its legal ownership. This presentation of financial information filed with the SEC was on the assumption that the formation of the Group through
the dual listed companies (DLC) arrangements was not a business combination. The financial statements filed with the SEC also included supplemental financial information that combined the consolidated financial statements of the Rio Tinto plc and
Rio Tinto Limited parts of the Group to present the Rio Tinto Group, with no adjustment for fair values.
This
combined financial information for the Rio Tinto Group was consistent with the
financial statements that were used for the purposes of satisfying the Group's
reporting obligations in the United Kingdom and Australia. The combined financial
statements for the Rio Tinto Group viewed the formation of the DLC as a business
combination and accounted for the transaction as a merger in accordance with
UK Financial Reporting Standard No. 6
Acquisitions and Mergers (FRS 6). Applying FRS 6, Rio Tinto plc and
Rio Tinto Limited were combined and presented as one economic entity with no
adjustment for fair values.
As
permitted under the transitional arrangements set out in IFRS 1 First time
adoption of International Financial Reporting Standards, which sets out
the rules for first time adoption of IFRS, the Group did not apply the concepts
of IFRS 3 Business Combinations for
business combinations prior to the first time application( of EU IFRS. Accordingly,
the Group is following the same method of accounting for the DLC in its financial
statements under EU IFRS as was historically followed under UK GAAP: the Group
is presented as one economic entity at historical cost.
Subsequent to the formation of the Group, the accounting model used in filings with the SEC for the presentation of financial statements of companies that form DLCs has changed. The formation
of a new DLC is now viewed as a business combination. The Group now believes that it is preferable to treat the formation of the DLC as a business combination, and as a result, that the accounting and reporting of financial statements prepared in
accordance with IFRS to the SEC will be consistent with the accounting and reporting in the United Kingdom and Australia.
Accordingly, the
Group has revised the presentation of its financial statements included in Form
20-F to account for the formation of the DLC as a business combination. As a
consequence,
separate financial statements for Rio Tinto plc
and Rio Tinto Limited will no longer be presented. Instead, the financial statements
will deal with the Rio Tinto Group as one combined economic entity. This new
presentation is applied retrospectively for all periods presented. The EU
IFRS information presented on this new basis in the 20-F is the same as the combined
supplemental information for the Rio Tinto Group that was
previously disclosed.
Under US GAAP, the Group now accounts for the formation of the DLC using the purchase method. As a consequence
of this treatment, Rio Tinto shareholders' funds under US GAAP at 31 December
2006 are US$1,519 million above those under
IFRS; and US GAAP net earnings for 2006 are US$62 million below those under
EU IFRS. Further information on the impact of purchase accounting under US GAAP
is shown in note 48 to the 2006 financial statements.
The 2006 Annual
report and financial statements satisfy
the obligations of Rio Tinto Limited to prepare consolidated accounts under
Australian company law, as amended by an order issued by the Australian Securities
and Investments Commission on 27 January 2006
(as amended on 22 December 2006). The 2006 financial
statementsdisclose
the effect of the adjustments to consolidated EU IFRS profit, consolidated total
recognised income and consolidated shareholders funds for the Group
that would be required under the version of IFRS that is applicable in Australia
(Australian IFRS).
The
US dollar is the presentation currency used in these financial statements, as
it most reliably reflects the Groups global business performance.
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).
The amounts presented under EU and Australian IFRS are based on the reserves,
and in some cases mineral resources, determined
under the JORC code.
For
the purposes of the Groups financial information under US GAAP, ore reserves are computed in accordance with the SECs
Industry Guide 7 and are shown on pages 23 to 33. Estimates of ore reserves and
mineral resources in accordance with JORC are not shown in this combined annual report on Form 20-F.
Ore reserves presented in accordance with SEC Industry Guide 7 do not exceed the quantities that, it is estimated, could be extracted economically if future prices were to be in line with the
average of historical prices for the three years to 30 June 2006, or contracted prices where applicable. For this purpose, contracted prices are applied only to future sales volumes for which the price is
predetermined by an existing contract; an d the average of historical prices is applied to expected sales volumes in excess of such amounts. Moreover, reported ore reserve estimates have not been increased above the levels expected to be economic
based on Rio Tinto's own long term price assumptions. Therefore, a
reduction in commodity prices from the three year average historical price levels would not necessarily give rise to a reduction in reported ore reserves.
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 cost s 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 and amortisation 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 or reversals of impairment provisions
in a particular year. In 2006, the Groups results included net
impairment reversals of US$396 million (US$44 million after tax and outside
shareholders interests). Impairments were reversed at KUC and IOC which more
than offset impairment charges at Argyle and Tarong Coal. In 2005, there were
no significant
impairment charges or reversals.
However in 2004, the Group incurred a US$558 million impairment charge, (US$321 million net of tax and outside shareholders interests).
When such events
or changes in circumstances impact on a particular asset or cash generating unit,
its carrying value is assessed by reference
to its recoverable amount being the higher of fair value less costs to sell
and value in use (being the net present value of expected future cash flows of
the relevant cash generating unit). The best evidence of an assets fair
value is its value obtained from an active market or binding sale agreement.
Where neither exists, fair value less
costs to sell is based on the best information available to reflect the amount
the Group could receive for the cash generating unit in an arms length
transaction. In most cases this is estimated using a discounted cash flow analysis.
The cash flows used in these analyses are
particularly sensitive to changes in two parameters: exchange rates and commodity
selling prices. The great majority of the Groups sales are based on prices
denominated in US dollars. To the extent that the currencies of countries in
which the Group produces commodities strengthen against the US dollar without
commodity price offset, cash flows and, therefore, net present values are reduced.
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
synchronised
and do not fully offset each other.
Recent favourable changes in commodity prices have exceeded adverse shifts in exchange rates. Comparing average exchange rates in 2006 against those in 2003, the Australian dollar strengthened
by 16 per cent against the US dollar,
the Canadian dollar strengthened by 24 per cent and the South African rand by
ten per cent. Over the same period, commodity prices rose substantially: for
example, copper prices
increased by 281 per cent, aluminium by 79 per cent and gold by 66 per cent.
Reviews
of carrying values relate to cash generating units which, in accordance with
IAS 36 Impairment of Assets, are identified by dividing an entity
into as many largely
independent cash generating streams as is reasonably practicable.
In some cases the business units within the product groups consist of several
operations with independent cash
generating streams, which therefore constitute separate cash generating units.
The cash flow forecasts are based on best estimates of expected future revenues and costs. These may include net cash flows expected to be realised from extraction, processing and sale of other
mineralisation that does not currently qualify
for inclusion in proven or probable ore reserves. Such non reserve material is
included where there is a high degree of confidence in its economic extraction.
This
expectation is usually based on preliminary drilling and sampling of areas of
mineralisation that are contiguous with existing reserves. Typically, the additional
evaluation to achieve reserve status for such material has not yet been done
because this would involve incurring costs earlier than is required for the efficient
planning and operation of the mine.
The expected future
cash flows of cash generating units reflect long term mine plans which are based
on detailed research, analysis and iterative modelling to optimise the level
of return from investment, output and sequence of extraction. The plan takes
account of all relevant characteristics of the orebody, including waste to ore
ratios, ore grades, haul distances, chemical and metallurgical properties of
the ore impacting on process
recoveries and capacities of processing equipment that can be used. The mine
plan is therefore the basis for forecasting production output in each future
year and production costs.
Rio
Tintos cash flow forecasts are based on assessments of expected long term
commodity prices, which for most commodities are derived from an analysis of
the marginal costs of the producers of these commodities. These assessments often
differ from current price levels and are updated periodically.
In some cases, prices applying to some part of the future sales volumes of a cash generating unit are predetermined by existing sales contracts. The effects of such contracts are taken into
account in forecasting future cash flows.
Cost levels incorporated in the cash flow forecasts are based on the current long term mine plan for the cash generating
unit. For impairment reviews, recent cost levels are considered, together with
expected changes in costs that are compatible with the current condition of the
business and which meet the requirements of IAS 36. IAS 36 includes a number
of restrictions on the future cash flows that can be recognised in respect of
future restructurings and improvement related capital expenditure.
The useful lives of the major assets of a cash generating unit are usually dependent on the life of the orebody to which they relate. Thus the lives of mining properties, smelters,
concentrators and other long lived processing
equipment generally relate to the expected life of the ore body. The life of
the ore body, in turn, is estimated on the basis of the long term mine plan.
Forecast
cash flows are discounted to present values using Rio Tintos weighted aver
age cost of capital with appropriate adjustment for the risks
associated with the relevant cash flows, to the extent that such risks are not
reflected in the forecast cash flows. For final feasibility studies and ore reserve
estimation, internal hurdle rates are used which are
generally higher than the weighted average cost of capital.
Final feasibility studies, ore reserve estimates
and value in use estimates are based on the exchange rates current at the time
of the evaluation. In estimates of fair value, a forecast of the long term exchange
rate is made having regard to spot exchange rates, historical data and external
forecasts.
Forecast
cash flows for ore reserve estimation for JORC purposes and for impairment testing
are based on Rio Tintos long term price forecasts. For final feasibility
studies these prices
and projected costs, are assumed to decline systematically in real terms.
For
the majority of Rio Tintos businesses, both by number and by value, the
recoverable amounts are substantially in excess of the carrying value in the
balance sheet. For a minority of the businesses the carrying value is close to
their recoverable amount, and these are reviewed for impairment where required.
The effects of exchange rate and commodity price changes on the values of these
units relative to their book values are monitored closely.
All goodwill and intangible assets that are not
yet ready for use or have an indefinite life are tested annually for impairment
regardless of whether there has
been any change in events or circumstances.
Under US GAAP,
assumptions used in cash flow forecasts are principally the same as those used
under EU IFRS, except that the estimated cash flows related to the liability
for asset retirement obligations are excluded under US GAAP (and the related
liabilities are excluded from the determination of the carrying value of the
asset group). Goodwill is tested annually for impairment. Impairment of other
intangible assets and of property, plant and equipment is only recognised when
the anticipated undiscounted cash flows are insufficient to recover the carrying
value of the asset group. Once impairment is determined, an asset is written
down to its fair value, which is normally calculated using discounted cash flows,
similar to those under EU IFRS and the result is generally similar to that under
EU IFRS. It is not possible to reverse impairment charges under US GAAP.
Close down, restoration and clean up obligations Provision is made for environmental remediation costs when the related environmental disturbance occurs, based on the net present value of estimated future costs.
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. The costs are estimated on the basis of a
closure plan. The cost estimates are calculated annually during the life of the
operation to reflect known developments, eg updated cost estimates and
revisions to the estimated lives of operations, and are subject to formal review
at regular intervals.
Although the ultimate cost to be incurred is uncertain, the Groups businesses
estimate their respective costs based on feasibility and engineering studies
using current restoration standards and techniques. The initial closure provision
together with changes, other than those arising from the unwind of the discount
applied in establishing the net present value of the provision, are capitalised
within property, plant and equipment and depreciated over the lives of the assets
to which they relate.
Clean up costs result from environmental damage
that was not a necessary consequence of mining, including remediation, compensation
and penalties. These costs are charged to the income statement. Provisions are
recognised at the time the damage, remediation process and estimated remediation
costs become known. Remediation procedures may commence soon after this point
in
time but can continue for many years depending on the nature of the disturbance
and
the remediation techniques.
As noted above, the ultimate cost of environmental
disturbance is uncertain and cost estimates can vary in response to many factors
including changes to the relevant legal requirements, the emergence of new restoration
techniques or experience at other mine sites. The expected timing of expenditure
can also change, for example in response to changes in ore reserves or production
rates. As a result there
could be significant adjustments to the provision for close down and restoration
and environmental clean up, which would affect future financial results.
Overburden removal costs In open pit mining operations, it is necessary to remove overburden and other barren 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.
Where a mine operates several open pits that are
regarded as separate operations for the purpose of mine planning, stripping costs
are accounted for separately by reference to the ore from each separate pit.
If, however, the pits are highly integrated for the purpose of mine planning,
the second and subsequent pits are regarded as extensions of the first pit in
accounting for stripping costs. In such cases, the initial stripping of the second
and subsequent pits is considered to be production phase stripping relating to
the combined operation.
Stripping of waste materials continues during the
production stage of the mine or pit. Some mining companies expense these production
stage stripping costs as incurred, while others defer such stripping costs. In
operations that experience material fluctuations in the ratio of waste materials
to ore or contained minerals on a year to year basis over the life of the mine
or pit, deferral of stripping costs reduces the volatility of the
cost of stripping expensed in individual
reporting periods. Those mining companies that expense stripping costs as incurred
will therefore 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. Stripping costs incurred
in the period are deferred to the extent that the current period ratio exceeds
the life of mine or pit 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 or pit ratio.
The life of mine or pit ratio is based on the proven and probable reserves of
the mine or pit and is 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 a more practical basis for matching
costs with the related economic benefits where
there are important by products or where the grade of the ore is relatively stable
from year to year.
The life of mine or pit waste-to-ore ratio is a
function of the pit
design and therefore changes to that design will generally
result in changes to the ratio. Changes in other technical or economic parameters
that impact on reserves will also have an impact on the life of mine or pit
ratio even if they do not affect the pit design. Changes to the life of mine
or
pit ratio are accounted for prospectively.
In the production stage of some operations, further
development of the mine or pit requires a phase of unusually high overburden
removal activity that is similar in nature to preproduction mine development.
The costs of such unusually high overburden removal activity are deferred and
charged against reported profits in subsequent periods on a units of production
basis. This accounting treatment is consistent with that for stripping costs
incurred during the development phase of a mine or pit, before production commences.
Deferred stripping costs are included in property,
plant and equipment or in investment in equity accounted units, as appropriate.
These form part of the total investment in the relevant cash 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 operating costs or in the Groups share of the results
of its jointly controlled entities and associates as appropriate.
During 2006, production stage stripping costs incurred
by subsidiaries and equity accounted operations exceeded the
amounts charged against pre tax profit, which included net impairment reversals
of US$36 million, by US$56 million (2005:
US$93 million). The net book value carried forward in property, plant and equipment and in investments in equity accounted
units at 31 December 2006 was US$929 million (2005: US$ 845 million).
Information about the stripping ratios of the business
units, including equity accounted units, that account for the majority of the
deferred stripping balance at 31 December 2006, along with the year in which
deferred stripping is expected to be fully amortised, is set out in the following
table:
Actual stripping ratio for the year
Life of mine
stripping ratio
2004
2005
2006
2004
2005
2006
Kennecott Utah Copper (2019) (a) (b)
1.83
2.02
2.04
1.24
1.51
1.36
Argyle Diamonds (2009) (a)
6.70
6.60
4.00
4.91
4.40
4.40
Grasberg Joint Venture (2015) (a)
3.39
3.12
3.01
2.43
2.43
2.63
Diavik (2008) (c)
1.47
1.21
0.89
0.94
0.91
0.96
Escondida (2042) (d)
0.11
0.09
0.08
0.11
0.12
0.12
Notes
(a)
Strip ratios shown are waste to ore.
(b)
Kennecotts life of mine strip
ratio decreased as the latest mine plan provides for the pit walls to
be made steeper in an area within the mine
which resulted in adding ore without adding waste.
(c)
Diaviks strip ratio is disclosed
as bank cubic metre per carat.
(d)
Escondidas strip ratio is
based on waste tonnes to pounds of copper mined.
Borax capitalised stripping costs as part of
a distinct period of new development
during the production stage of the mine. Capitalisation stopped in 2004. The
capitalised costs will be fully
amortised in 2034.
In 2006, the Group adopted EITF Issue No. 04-06
'Accounting for Stripping Costs Incurred during Production in the Mining Industry'
('EITF 04-06') for US GAAP. Under EITF 04-06, stripping costs incurred during
the production phase of a surface mine are considered variable production costs
that should be recorded directly as a component of production cost, except to
the extent they can be attributed to inventory in accordance with normal inventory
valuation principles.
As
a consequence, on 1 January 2006 a cumulative adjustment of US$651 million (US$415 million net of taxation) attributable to subsidiaries was recognised directly in US GAAP equity. A
further US$94 million net of taxation related to equity accounted units was
recognised directly in US GAAP equity.
Deferred tax on mining rights On transition to EU IFRS with effect from 1 January 2004, deferred tax was provided in respect of fair value adjustments
on acquisitions in previous years. No other adjustments were made to the assets
and liabilities recognised in such prior year acquisitions and, accordingly,
shareholders funds were reduced by US$720 million on transition to
EU IFRS primarily as a result of deferred tax on
fair value adjustments to mining rights. In general, these mining rights are
not eligible for income tax allowances. In such cases, the provision for deferred
tax was based on the difference between their carrying
value and their nil income tax base. The existence of a tax base for capital
gains tax purposes
was not taken into account in determining the
deferred tax provision relating to such mineral rights because it is expected
that the carrying amount will be
recovered primarily through use and not from the disposal of the
mineral rights. Also, the Group is only
entitled to a deduction for capital gains tax purposes if the mineral rights
are sold or formally relinquished.
For acquisitions after 1 January 2004 provision
for deferred tax on acquisition results in a corresponding increase in the amounts
attributed to acquired assets
and/or goodwill under EU IFRS.
Under US GAAP, such provisions for deferred tax result
in corresponding increases in the amounts attributed to acquired assets and/or
goodwill irrespective of the date of acquisition. The different treatment of
acquisitions prior to 1 January
2004, results in higher shareholders funds under US GAAP.
Post retirement benefits For defined benefit post employment plans,
the Group has adopted the option under IAS 19 to recognise the difference between
the fair value of the plan assets (if any) and the present value of the plan
liabilities as an asset or liability on the balance sheet and to record actuarial
gains and losses directly in the Statement of Recognised Income and Expense.
The
most significant assumptions used in accounting for post retirement plans are
the long term rate of
return on plan assets, the discount rate and the mortality assumptions.
The
long term rate of return on plan assets is used to calculate interest income
on pension assets, which is credited to the Groups income statement. The discount rate is used to
determine the net present value of future liabilities and each year the unwinding of the discount on those liabilities is charged to the Groups
income statement. The mortality assumption is used to project the future stream
of benefit payments, which is then discounted to arrive at the net present value
of liabilities.
Valuations are carried out using the projected
unit method.
The
expected rate of return on pension plan assets is determined as managements
best estimate of the long term return on the major asset classes, ie equity,
debt, real estate and other, weighted by the actual allocation of assets among
the categories at the measurement date. The expected rate of return is calculated
using geometric averaging.
The
sources used to determine managements best estimate of long term returns
are numerous and include country specific bond
yields, which may be derived from the market using local bond indices or by analysis
of the local bond market, and country specific inflation and investment market
expectations derived from market data and analysts or
governments expectations as applicable.
In
particular, the Group estimates long term expected real returns on equity, ie
returns in excess of inflation, based on the economic outlook, analysts views
and those of other market
commentators. This is the most subjective of the assumptions used and it is reviewed
regularly to ensure that it remains consistent with best practice.
The discount rate used in determining the service
cost and interest cost charged to income is the market yield at the start of
the year on high quality corporate bonds. For countries where there is no deep
market in such bonds the yield on Government bonds is used. For determining the
present value of obligations shown on the balance sheet, market yields at the
balance sheet date are used.
Details of the key assumptions are set out in note
46 to the 2006 financial statements.
For
2006 the charge against income for post retirement benefits net of tax and minorities
was US$158 million under EU IFRS. Under US GAAP the net cost was US$200
million. These charges
include both pension and post retirement healthcare benefits. The charges are
net of the expected return on assets which (net of tax and minorities) was
US$228 million under EU
IFRS and US$209 million under US GAAP.
In calculating the 2006 EU IFRS expense the average
future increase in compensation levels was assumed to be 4.7
per cent and the same rate will be used for 2007. For US GAAP, the 2006 average
future increase in compensation levels was assumed to be 4.6 per cent and this
will remain at 4.6 per cent for 2007. For EU IFRS, the average discount rate
used for the Groups plans in 2006 was 5.0 per cent
and the average discount rate used in 2007 will be 5.4 per cent. This increase
is attributable to higher bond yields across all regions. For US GAAP, the average
discount rate used for the Groups
plans in 2006 was 5.2 per cent and the average discount rate to be used in 2007
will be 5.4 per cent. This is also due to higher bond yields.
For both EU IFRS and US GAAP, the average expected
long term rate of return on assets used to determine 2006 pension cost was 6.3
per cent. This will increase to 6.9 per cent for 2007. This is due to an increase
in bond yields and a change in the methodology for setting the expected return
on equity. Previously, the expected return on equities was set by reference to
a fixed margin above inflation. This will be amended for 2007 so that the expected
return on equities will be set by adding a risk premium to the yield on government
bonds. This methodology is more consistent with that used by other major organisations
and is considered to be more theoretically robust.
Based
on the known changes in assumptions noted above and other expected circumstances,
the impact of post retirement costs on the Groups EU IFRS net earnings in 2007 would be expected to
decrease by some US$26 million to US$132 million. The impact of post-retirement benefits on the Groups
US GAAP net earnings in 2006 would be expected
to decrease by some
US$28 million to US$172 million. The actual charge may be impacted by
other factors that cannot be predicted, such as the effect of changes in benefits
and exchange rates.
The
table below sets out the potential change in the Groups 2006 net earnings
(after tax and outside interests) that would result from hypothetical
changes to post retirement assumptions and estimates. The sensitivities are viewed
for each assumption in isolation.
Sensitivity of Groups 2006 net earnings to changes in:
US$m
US$m
Expected return on assets
increase of 1 percentage
point
26
24
decrease of 1 percentage
point
(26
)
(24
)
Discount rate
increase of 0.5 percentage
points
1
8
decrease of 0.5 percentage
points
(1
)
(8
)
Salary increases
increase of 0.5 percentage
points
(4
)
(6
)
decrease of 0.5 percentage
points
4
6
Demographic allowance for
additional future mortality improvements
overall increase of 5% in
benefit obligation
(11
)
(18
)
overall decrease of 5% in
benefit obligation
11
18
The figures in the above table only show the
impact on net earnings. Changing
the assumptions would also have an impact on the balance sheet.
The
impact on cash flow in 2006 of the Groups pension plans, being the employer
contributions to defined benefit and defined
contribution pension plans,
was US$172 million. In addition there were contributions of US$19 million
in respect of unfunded healthcare schemes. Contributions to pension plans for
2007 are estimated to be around US$8m higher than
for 2006. Healthcare plans are unfunded and contributions for future years will
be equal to benefit payments and therefore cannot be predetermined.
Further information on pensions and other post
retirement benefits is given in note 46 to the 2006 financial statements.
US deferred tax potentially recoverable Rio
Tintos US tax group have Alternative Minimum Tax (AMT) credits and temporary
differences, which have the potential
to reduce tax charges in future years. These potential reductions in future tax
charges
(possible tax assets) totalled US$577 million at 31 December 2005. An asset of US$10
million was recognised in the balance sheet at 31 December 2005 based on utilisation
of
AMT credits projected for 2006.
Principally
as a result of current high commodity prices, US$140 million of these possible tax assets were realised in 2006. Updated projections of future taxable profits for the operations
that form part of Rio Tintos US tax group
resulted in the recognition of a further deferred tax asset of US$335 million
during 2006. Having taken account of other
adjustments this leaves possible tax assets of US$65 million. Recoveries
are dependent on future commodity prices, costs, financing arrangements and business
developments in future years.
Exploration During the year the Group changed its policy on accounting
for exploration and evaluation expenditure. Previously, the Group
capitalised exploration and evaluation expenditure from acquisition of a beneficial
interest or option in mineral rights. Full provision was made for impairment
unless there was a high degree of confidence in the projects viability
and hence it was considered probable that future economic benefits would flow
to the Group. If, as a result of developments in subsequent periods, the expenditure
was considered to be recoverable, such provisions were reversed. Under
the Groups
revised policy, exploration and evaluation expenditure is not capitalised until
the point is reached at which there is a high degree of confidence in the projects
viability and it is considered probable that future economic benefits will flow
to the Group. This change was made to
improve the alignment of Rio Tintos accounting with the way that EU IFRS
is being applied generally. Under US GAAP, exploration and evaluation expenditure
is expensed as incurred.
The carrying values of exploration assets are reviewed
twice per annum by management and the results of these reviews are reported to
the Audit committee.
There may only be mineralised material to form a basis for the impairment review.
The review
is based on a status report regarding the Groups intentions for development
of the
undeveloped property. In some cases, the undeveloped properties are regarded as successors to orebodies currently in production and will therefore benefit from existing infrastructure and equipment.
Temporary differences related to closure costs and finance leases Under
the initial recognition rules in paragraphs 15 and 24 of IAS 12 Income
Taxes,
deferred tax is not provided on the
initial recognition of an asset or liability in a transaction that does not affect
accounting profit or taxable profit and is not a business combination.
The
Groups interpretation of these initial recognition rules has the result
that no deferred tax asset is provided on the recognition of a provision for
close down and restoration costs and the related asset or on recognition of
assets held under finance leases and the associated lease liability, except where
these are recognised as a consequence of business
combinations.
On creation of the closure provision, for instance, there is no effect on accounting or taxable profit because the cost is capitalised. As a result, the initial recognition rules would appear
to prevent the recognition of a deferred tax asset in respect of the provision and of a deferred tax liability in respect of the related capitalised amount.
The temporary differences will reverse in future
periods as the closure asset is depreciated and when tax deductible payments
are made that are charged against the provision. Paragraph 22 of IAS 12 extends
the initial recognition rules to the reversal of temporary differences on assets
and liabilities to which the initial recognition rules apply. Therefore, deferred
tax is not recognised on the changes in the carrying amount of the asset which
result from depreciation or from the changes in the provision resulting from
expenditure. When tax relief on expenditure is received this
will be credited to the income statement as part of the current tax charge. The
unwind of the discount applied in establishing the present value of the closure
costs does affect accounting profit. Therefore, this unwinding of discount results
in the recognition of deferred tax assets.
The application of this initial recognition exemption
has given rise to diversity in practice: some companies do provide for deferred
tax on closure cost provisions and the related capitalised amounts. Deferred
tax accounting on initial recognition is currently the subject of an IASB/FASB
convergence project which may at some future time require the Group to change
this
aspect of its deferred tax accounting policy.
If the Group were to provide for deferred tax on
closure costs and finance leases under EU IFRS (as is already the
case for US GAAP), the impact on net
earnings and shareholders equity would be as follows:
Impact on closing
Impact on net earnings
shareholders equity
US$m
%
US$m
%
2006
9
.001
%
127
.007
%
2005
15
.003
%
120
.008
%
2004
20
.006
%
105
.008
%
Contingencies Disclosure is made of material contingent liabilities unless the possibility of any loss arising is considered remote. Contingencies are disclosed in note 33 to the 2006 financial statements. These include tax assessments
in Australia of approximately A$515 million which, based on Counsels opinion,
the Group expects to be successful in challenging.
Underlying earnings The
Group presents Underlying earnings as an additional measure to provide
greater understanding of the underlying business
performance of its operations. The adjustments made to net earnings to arrive
at underlying earnings are explained above in the section on underlying earnings.
Paul Skinner BA
(Hons) (Law), DpBA (Business Administration) age 62. Appointment and election: Director of Rio Tinto plc and Rio Tinto
Limited since 2001, he was appointed chairman of the Group in November 2003.
Paul was last re-elected by shareholders in 2005 and is chairman of the Nominations
committee (note b). Skills and experience: Paul graduated in law from Cambridge University
and in business administration from Manchester Business School. 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. During his career he worked in all Shells
main businesses, including senior appointments in the UK, Greece, Nigeria,
New
Zealand and Norway. He was CEO of its global Oil Products business from 1999
to 2003. External appointments (current and recent):
Director of The Shell Transport and Trading
Company plc from 2000 to 2003.
Director of Standard Chartered plc since 2003.
Director of the Tetra Laval Group since 2005.
Director of LAir Liquide SA since 2006.
Chairman of the International Chamber of Commerce
(UK) since 2005.
Non executive member of the Defence Management Board
of the UK Ministry of Defence since June 2006.
Member of the board of INSEAD business school
since 1999.
CHIEF EXECUTIVE
Tom Albanese BS
(Mineral Economics) MS (Mining Engineering) age 49. Appointment and election: Director of Rio Tinto plc and Rio Tinto
Limited since March 2006. Tom was elected by shareholders in 2006. Skills and experience:Tom joined Rio Tinto in 1993 on Rio Tintos
acquisition of Nerco and held a series of management positions before being appointed chief executive of the
Industrial Minerals group in 2000, after which he became
chief executive of the Copper group and head of Exploration in 2004. He took
over as chief executive from Leigh Clifford with effect from 1 May 2007. External appointments (current and recent): Director of Ivanhoe Mines Limited since
November 2006.
Director of Palabora Mining Company from 2004 to 2006.
Member of the Executive Committee of the International
Copper Association from 2004 to 2006.
Guy Elliott MA (Oxon) MBA (INSEAD)
age 51. Appointment and election:Finance
director of Rio Tinto plc and Rio Tinto Limited since 2002. Guy was last
re-elected by shareholders in 2007. Skills and experience:Guy
joined the Group in 1980 after gaining an MBA. He has subsequently held
a variety of commercial and management positions, including head of Business
Evaluation and president of Rio Tinto Brasil. External appointments (current and recent): None.
NON EXECUTIVE DIRECTORS
Ashton Calvert AC,
BSc (Hons) (Tas), DPhil (Oxon), Hon DSc (Tas) age 61. Appointment and election: Director of Rio Tinto plc and Rio Tinto
Limited since 2005. Ashton was re-elected by shareholders in 2007 (notes b,
d and e). Skills and experience: Ashton retired as secretary of the Department
of Foreign Affairs and Trade of the Government of Australia in January 2005 after six and a half years in that
position. 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
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. External appointments (current and recent): Director of Woodside Petroleum Limited
since 2005.
Director of The Australian Trade Commission
between 1998 and 2005.
Director of The Export Finance and Insurance
Corporation between 1998 and 2005.
Director of The Australian Strategic Policy
Institute between 2001 and 2005.
Sir David Clementi MA,
MBA, FCA age 57. Appointment and election: Director of Rio Tinto plc and Rio Tinto
Limited since 2003. Sir David was last re-elected by shareholders in 2006 (notes
a, c and e). Skills and experience: Sir David is chairman of Prudential plc,
prior to which he was Deputy Governor of the Bank of England. His 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. External appointments (current and recent): Chairman of Prudential plc since 2002.
Member of the Financial Reporting Council since
2003.
Vivienne Cox MA
(Oxon), MBA (INSEAD) age 47. Appointment and election: Director of Rio Tinto plc and Rio Tinto
Limited since 2005. Vivienne was elected by shareholders in 2005 (notes a and
e). Skills and experience: Vivienne is currently executive vice president
of BP p.l.c. for Gas Power & Renewables. She is a member of the BP group chief executives 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. External appointments (current and recent): Non executive Director of Eurotunnel
plc between 2002 and 2004.
Sir Rod Eddington B.Eng
M.Eng (University of Western Australia), D.Phil (Oxon) age 57. Appointment and election: Director of Rio Tinto plc and Rio Tinto
Limited since 2005. Sir Rod was elected by shareholders in 2006 (notes b, d and e). Skills and experience:Sir Rod was chief executive of British
Airways Plc until the end of September 2005. Prior to his role with British Airways, Sir Rod was Managing Director
of Cathay Pacific Airways from 1992 until 1996 and Executive
Chairman of Ansett Airlines from 1997 until 2000. External appointments (current and recent): Director of News Corporation plc since
1999.
Director of John Swire & Son Pty Limited since 1997.
Non executive chairman of JPMorgan Australia
and New Zealand since January 2006.
Director of CLP Holdings since January 2006.
Director of Allco Finance Group Limited since
July 2006.
Chief executive British Airways Plc from 2000 until 2005.
Chairman of the EU/Hong Kong Business Co-operation
Committee of the Hong Kong Trade Development Council from 2002 until March
2006.
Michael Fitzpatrick B.
Eng (University of Western Australia), BA (Oxon) age 54. Appointment and election: Director of Rio Tinto plc and Rio Tinto
Limited since June 2006. Michael was elected by shareholders in 2007 (notes a, c
and e). Skills and experience:Michael recently sold his interest in,
and ceased to be a director of, Hastings Funds Management Ltd., the pioneering infrastructure asset management company
which he founded in 1994. He is Chairman of the Victorian
Funds Management Corporation, which manages funds on behalf of the State of
Victoria, and of Treasury Group Limited, an incubator of fund management companies.
He is a commissioner of the Australian Football League, having
previously played the game professionally, and is a former chairman of the
Australian Sports Commission. External appointments (current and recent): Managing Director of Hastings Funds
Management Ltd from 1994 to 2006.
Chairman of the Victorian Funds Management
Corporation since 2006.
Chairman of Treasury Group Limited since 2005.
Director of Pacific Hydro Limited from 1996
to 2004.
Director of Australian Infrastructure Fund
Limited from 1994 to 2005.
Director of the Walter & Eliza Hall Institute of Medical Research since
2001.
Richard Goodmanson MBA
(Columbia University), BEc and BCom (University of Queensland), B. Eng. Civil
(Royal Military College, Duntroon)
age 59. Appointment and election: Director of Rio Tinto plc and Rio Tinto
Limited since 2004. He was elected by shareholders in 2005 and is chairman of
the Committee on social and environmental accountability (notes c, d and e). Skills and experience: Richard is executive vice president and
chief operating officer of DuPont. 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 a number of the global functions, and for the non US
operations of DuPont, with particular focus on growth in emerging markets. External appointments (current and recent): Executive vice president and chief
operating officer of DuPont since 1999.
Chairman of the United Way of Delaware since
January 2006 (director since 2002).
Director of the Boise Cascade Corporation between
2000 and 2004.
Andrew Gould BA
FCA age 60. Appointment and election: Director of Rio Tinto plc and Rio Tinto
Limited since 2002. Andrew was last re-elected by shareholders in 2006. He is
also chairman of the Audit committee (notes a, c and e). Skills and experience: Andrew 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 has worked in Asia,
Europe and the US. He joined Schlumberger in 1975. He holds a degree in economic
history from Cardiff University
and qualified as a chartered accountant with Ernst & Young. External appointments (current and recent): Chairman and Chief Executive Officer
of Schlumberger Limited since 2003.
Member of the Advisory Board of the King Fahd
University of Petroleum and Minerals in Dhahran, Saudi Arabia since January
2007.
Member of the commercialization advisory board
of Imperial College of Science Technology and Medicine, London since
2002.
Member of the UK Prime Ministers Council
of Science and Technology from 2004 to February 2007.
Lord Kerr of Kinlochard GCMG
MA age 65. Appointment and election: Director of Rio Tinto plc and Rio Tinto
Limited since 2003. He was re-elected by shareholders in 2007 (notes a, d and e). Skills and experience:An Oxford graduate, he was in the UK Diplomatic
Service for 36 years an d headed it from 1997 to 2002 as Permanent Under Secretary
at the Foreign Office. His foreign service included periods in the Soviet Union
and Pakistan, and as Ambassador to the European Union (1990 to 1995), and the
US (1995 to 1997). He has been a member of the House of Lords since 2004. External appointments (current and recent): Deputy Chairman of Royal Dutch Shell
plc since 2005.
Director of The Shell Transport
and Trading Company plc from 2002 to 2005.
Director of The Scottish American Investment
Trust plc since 2002.
Chairman of the Court and Council of Imperial
College, London since 2005.
Trustee of the Rhodes Trust since 1997, The
National Gallery since 2002, and the Carnegie Trust for the Universities of
Scotland since 2005.
David Mayhew age
66. Appointment and election: Director of Rio Tinto plc and Rio Tinto
Limited since 2000. He was last re-elected by shareholders in 2006 (note b). Skills and experience:David joined Cazenove in 1969 from Panmure
Gordon. In 1972 he became the firms dealing partner and was subsequently
responsible for the Institutional Broking Department. From 1986 until 2001
he
was the partner in charge of the firms
Capital Markets Department. He became Chairman of Cazenove on incorporation
in 2001 and Chairman of JPMorgan Cazenove in
2005. External appointments (current and recent): Chairman of Cazenove Group Limited
(formerly Cazenove Group plc) since 2001.
Chairman of Cazenove Capital Holdings Limited
since 2005.
Sir Richard Sykes BSc
(Microbiology) PhD (Microbial Biochemistry), DSc, Kt, FRS, FMedSci age 64. Appointment and election: Director of Rio Tinto plc and Rio Tinto
Limited since 1997. Sir Richard was appointed the senior non executive director
in 2005 and is chairman of the Remuneration committee. Sir Richard was re-elected
for a further term of office in 2007 but his intention is to retire after the
annual general meetings in 2008 (notes b, c and e). Skills and experience: After reading microbiology at the University
of London, Sir Richard obtained doctorates in microbial chemistry and in science
from the University of Bristol and the University of London respectively. A
former chairman of GlaxoSmithKline plc Sir Richard is a Fellow of the Royal
Society. He is currently Rector of Imperial College London. External appointments (current and recent): Director of Lonza Group Limited since
2003, Deputy Chairman since 2005.
Chairman of the Healthcare Advisory Group (Apax Partners Limited) since 2002.
Chairman of Metabometrix Ltd since 2004.
Chairman of Merlion Pharmaceuticals Pte Limited
since 2005.
Chairman of OmniCyte Ltd since 2006
Chairman of Circassia Ltd since 2007
Director of Abraxis BioScience Inc since 2006.
Director of Bio*One Capital Pte Ltd since 2003
Chairman of GlaxoSmithKline plc between 2000
and 2002.
Rector of Imperial College London since 2001.
Trustee of the Natural History Museum, London
between 1996 and 2005 and of the Royal Botanic Gardens, Kew between 2003 and
2005.
DIRECTOR RETIRING AT CONCLUSION OF THE 2007 ANNUAL GENERAL MEETINGS
Leigh Clifford B
Eng (Mining), M Eng Sci age 59. Appointment and election: Director of Rio Tinto plc since 1994 and
Rio Tinto Limited since 1995, he was appointed chief executive in 2000. Skills and experience: Leigh graduated from the University of
Melbourne as a mining engineer and gained a Master of Engineering Science degree
from the same University. He has held various roles in the Groups coal
and metalliferous operations since joining in 1970, including managing director
of Rio Tinto Limited and chief executive of the Energy group. He was a member of the Coal Industry Advisory Board of the
International Energy Agency for a number of years
and its chairman from 1998 to 2000. External appointments (current and recent): Director Barclays Bank plc since 2004.
Chairman of the International Council
on Mining & Metals since October 2006.
Director of Freeport-McMoRan Copper & Gold Inc between 2000 and 2004.
Appointed to Bechtel Board of Counsellors in May 2007.
Notes
(a)
Audit committee
(Sir David Clementi,
Vivienne Cox, Michael Fitzpatrick, Andrew Gould and Lord Kerr of Kinlochard)
(b)
Nominations committee
(Paul Skinner, Ashton
Calvert, Sir Rod Eddington, David Mayhew and Sir Richard Sykes)
(c)
Remuneration committee
(Sir David Clementi,
Michael Fitzpatrick, Richard Goodmanson, Andrew Gould and Sir Richard
Sykes)
(d)
Committee on social and environmental
accountability
(Ashton Calvert,
Sir Rod Eddington, Richard Goodmanson and Lord Kerr of Kinlochard)
(e)
Independent
(Ashton Calvert,
Sir David Clementi, Vivienne Cox, Sir Rod Eddington, Michael Fitzpatrick,
Richard
Goodmanson, Andrew Gould, Lord Kerr of Kinlochard,
Sir Richard Sykes)
For accounting standards purposes (IAS 24 and AASB 124) the Groups key
management personnel as defined, comprises the directors and the product group
chief executives. From 1 June 2007 they include the Group executive Technology and Innovation, and the Group executive Business Resources.
Preston Chiaro BSc
(Hons) Environmental Engineering, MEng Environmental Engineering), age 53. Skills and experience:Preston was appointed chief executive of
the Energy group in September 2003. He heads the Groups climate change and sustainable development leadership
panels. He joined the Group in 1991 at Kennecott Utah Coppers Bingham
Canyon mine as vice president, technical services. In 1995 he became vice president
and general manager of the Boron operations
in California. He was chief executive of Rio Tinto Borax from 1999 to 2003. External appointments (current and recent): Director of the World Coal Institute
since 2003 (chairman since November 2006).
Member of the Executive board of the Coal Industry
Advisory Board to the International Energy Agency since 2004.
Director of Energy Resources of Australia Limited
Director of Coal & Allied Industries Limited
between 2003 and September 2006.
Director of Rössing Uranium Limited since
2004.
Bret Clayton BA
(Accounting), age 44. Skills and experience: Bret was appointed chief executive of the
Copper group in July 2006. He joined the Group in 1995 and has held a series
of management positions, including chief financial officer of Rio Tinto Iron
Ore and president and chief executive officer of Rio Tinto Energy America. Prior
to joining the Group, Bret worked for PricewaterhouseCoopers for nine years,
auditing and consulting to the mining industry. External appointments (current and recent): Member of the Executive Committee of
the International Copper Association since July 2006.
Oscar Groeneveld BE
(Mining), MSc, DIC age 53. Skills and experience:Oscar has been with the Group for over
30 years and was appointed chief executive of the Aluminium group in October 2004. Oscar has qualifications in engineering,
science and management and is also responsible for Rio Tinto Japan, Kennecott
Land and heads the Groups safety leadership panel. He has occupied senior
roles in coal, aluminium and technology and was the Copper group chief executive
from 1999 to 2004. He was an executive director of the Group from 1998 to 2004. External appointments (current and recent): Director of Australian Aluminium Council
since 2004.
Chairman of International Aluminium Institute
since 2006.
Director of Rio Tinto plc and Rio Tinto Limited
between 1998 and 2004.
Director of Freeport-McMoRan Copper & Gold
Inc between 1999 and 2004.
Director of Palabora Mining Company Limited
between 1999 and 2004.
Keith Johnson BSc
(Mathematics), MBA age 45. Skills and experience: Keith was appointed Group executive Business
Resources on 1 June 2007 having been chief executive, Diamonds since 2003. He
holds degrees in mathematics and management and is a Fellow of the Royal Statistical
Society. Prior to joining Rio Tinto he worked in analytical roles in the UK
Treasury, private consulting and the oil industry. He joined Rio Tinto in 1991
and has held a series of management positions including head of Business Evaluation
and managing director of Comalco Mining and Refining. External appointments (current and recent): None.
Andrew Mackenzie BSc
(Geology), PhD (Chemistry) age 50. Skills and experience: Andrew was appointed chief executive Diamonds
and Minerals on 1 June 2007. He joined Rio Tinto in 2004 as chief executive Industrial Minerals from BP Petrochemicals
where he was group vice president. 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. External appointments (current and recent): Director of Centrica plc since 2005.
Trustee of Demos since 1998.
Grant Thorne BSc (Hons) Metallurgy, PhD (Mineral Processing) age 57. Skills and experience: Grant
was appointed Group executive Technology and Innovation on 1 June 2007. After
tertiary study at the University of
Queensland, he joined the Group in 1975 and has held senior operational roles
in base metals, aluminium and coal. He was Vice-president
of Research and Technology for Comalco from 1994 to 1995. His service has included
appointments in Australia, Indonesia, Papua New Guinea and UK. Prior to his current
appointment, he was Managing
Director of Rio Tintos coal business in Australia. Grant is a Fellow and
Chartered
Professional (Management) of the Australasian
Institute of Mining and Metallurgy. External appointments (current and recent): Member of the Coal Industry Advisory Board to the International Energy Agency from 2002 to 2006
Director of The Wesley Research Institute from 2002 to 2003
President of the Queensland Resources Council from 2002 to 2004
Managing Director of Coal and Allied Industries from 2004 to 2006
Sam Walsh B Com (Melbourne) age 57. Skills and experience: Sam was appointed chief executive of the Iron Ore group in 2004. He 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 to 2004 chief executive of
the Aluminium group. Sam is also a Fellow of the Australian Institute of Management,
the Australian Institute of Company Directors and the Australasian Institute
of Mining and Metallurgy. External appointments (current and recent): Director of the Australian Mines and Metals Association, between 2001 and 2005.
Director of the Australian Chamber of Commerce and Industry, between 2003 and 2005.
Director of the Committee
for Perth Ltd since 2006.
COMPANY SECRETARIES
Anette Lawless MA, FCIS age 50. Skills and experience: Anette 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. External appointments (current and recent): Member of the Regulatory Decisions Committee of the UK Financial Services Authority from 2001 to 2006.
Stephen Consedine B Bus CPA age 45. Skills and experience: Stephen joined Rio Tinto in 1983 and has held various positions in Accounting, Treasury, and Employee Services before becoming company secretary of Rio Tinto
Limited in 2002. He holds a bachelor of business degree and is a certified
practising accountant. External appointments (current and recent): None.
EMPLOYEES
Information on the Groups employees including their costs, is on pages
71 to 74, and in notes 4 and 34 to the 2006 financial
statements.
REMUNERATION
The Remuneration report to shareholders dated 24 February 2006 has been reproduced
below, except that the page numbers have been revised to reflect those in this
combined annual report on Form 20-F, Tables 3, 4 and 5 have been augmented to
show share interests as at the latest practicable date.
Introduction This report forms part of the Directors report and
covers the following information:
•
a description of the Remuneration committee and its duties;
•
a description of the policy on directors, product group chief executives and
company secretaries remuneration;
•
a summary of the terms of executive directors and product group chief executives contracts
and non executive directors letters of appointment;
•
details of each directors and product group chief executives
remuneration and awards under long term incentive plans and the link to corporate performance;
•
details of directors and product group chief executives interests
in Rio Tinto shares; and
•
graphs illustrating Group performance, including relative to the HSBC Global
Mining Companies Index.
Remuneration committee The following independent, non executive
directors were members of the Remuneration
committee during 2006:
•
Sir Richard Sykes (chairman)
•
Sir David Clementi
•
Michael Fitzpatrick
•
Richard Goodmanson
•
Andrew Gould
The committee met four times
during 2006 and members attendance is set out on page 123. The
committees responsibilities
are set out in its Terms of Reference, which can be viewed
on Rio Tintos website. They include:
•
recommending remuneration policy relating to the executives to the board;
•
reviewing and determining the remuneration of the product group chief executives and the company secretary of Rio Tinto plc;
•
reviewing and agreeing managements strategy for remuneration
and conditions of employment for managers other than the executives;
•
monitoring the effectiveness and appropriateness of general executive remuneration
policy and practice; and
•
reviewing the chairmans fees.
Jeffery Kortum, global practice leader, Remuneration,
attends the committees meetings in an advisory capacity. The chairman,
Paul Skinner, the chief executive, Leigh Clifford and Tom Albanese, the chief
executive designate, also participated in meetings at the invitation of the
committee, but were not present when issues relating to their own remuneration
were discussed. Anette Lawless, the company secretary of Rio Tinto plc, acts
as secretary to the committee, but was not present when issues relating to
her remuneration were discussed.
In 2004, the committee appointed Kepler Associates, an independent remuneration consultancy, to provide advice on executive remuneration matters. Apart from providing specialist remuneration
advice, Kepler Associates has no links to the Group.
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, in addition
to that supplied by Kepler Associates, including publications by remuneration
consultants Towers Perrin, Hay Group, Mercer and Watson Wyatt.
Corporate governance The committee reviewed its Terms of Reference in 2006 and concluded that, in the course of its business, it had covered the main duties set out in the Combined Code on Corporate Governance,
published by the UK Financial Reporting Council (the Code), and Principle 9 of the Australian Securities Exchange (ASX) Corporate Governance Council Principles of Good Corporate Governance and Best Practice Recommendations (the ASX Principles), and
was constituted in accordance with the requirements of the Code and the ASX Principles.
The board considered the performance of the committee and confirmed that the committee had satisfactorily performed the duties set out in its Terms of
Reference.
The 2006 Remuneration report was approved by shareholders at the 2007 annual general meetings.
Executive remuneration Rio Tinto is subject to a number of different reporting requirements for the contents of the Remuneration report . The Australian Corporations Act requires certain disclosures in respect
of the five highest paid executives below board level, and Australian and International
accounting standards (AASB 124 and IAS 24 respectively) both require additionaldisclosures
for key management personnel. The board has considered the definition of key
management personnel and has decided that, in addition to the
executive and non executive directors, they comprise the six product group chief
executives. In 2006, the five highest paid executives below board level in respect
of whom disclosures are required are all product group chief executives. Throughout
this report, the executive directors and the product group chief executives will
collectively be referred to as the executives.
Board policy Rio Tinto operates in global, as well as local markets, where it competes for a limited resource of talented 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 pro duce very high levels of performance. This policy
is regularly reviewed to take account of changing market, industry and economic
circumstances, as well as developing Group
requirements.
The main principles of the Groups
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 business and personal performance, with particular emphasis on shareholder value creation and performance in the health,
safety and environmental areas;
•
to link 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 within Rio Tinto, in order to support executive placements to meet the needs of the Group.
The composition of total remuneration packages for management, including
the remuneration of the company secretaries, is designed to provide an appropriate
balance between fixed and variable components. This is in line with
Rio Tintos stated objective of aligning total remuneration with personal and business performance. Details of the executives remuneration
composition are set out in Table 1 on pages 107 to 108.
The
Groups return to shareholders over the last five years is set out in the
table on page 101.
Remuneration components
Base salary Base
salaries for executives are reviewed annually and adjusted as necessary, taking
in to account the nature of the individual executives role, external market
trends and business and personal performance. The Remuneration committee uses
a range of international companies of a similar size, global reach and complexity
to make this comparison.
Executive remuneration is explicitly related to business performance through the following long and short term arrangements:
Short term incentive plan (STIP)
STIP is a cash bonus plan, designed
to support overall remuneration policy by:
•
focusing participants on achieving calendar year performance
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 and
objectives for ex ecutives annually. Executive directors STIP payments
are linked to three performance criteria: Group financial performance, Group
safety performance and personal performance. Product group chief executives STIP
payments are linked to Group and product
group financial performance, product group safety performance and personal performance.
Group and product group financial performance is partly measured on an actual
underlying earnings basis and partly on a basis normalised for fluctuations of
market prices and exchange rates.
The target level of bonus for executives for 2007 is 60 per cent of salary, the same as 2006. Executives may receive up to twice their target (ie up to 120 per cent of salary) for exceptional
performance against all criteria.
Details relating to STIP awards for 2006 are on page 104.
Long term incentives Shareholders approved two long term incentives for senior employees including executives at the annual general meetings in 2004, the Share Option Plan and the Mining Companies Comparative
Plan.
These are intended to provide the Remuneration committee with
a means of linking managements rewards to Group
performance. Total shareholder return (TSR) was, at the time of the introduction
of these plans, considered the most appropriate measure of a companys
performance for the purpose of share based long term
incentives and a TSR performance measure was therefore applied to both plans.
The committee intends to review the incentive structure and performance criteria
over the next 12 months to ensure continued relevance and
effectiveness.
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. The maximum grant under the SOP is three times salary, based on the
average share price over the previous financial year. Under the SOP, options
are granted to purchase shares at a weighted average market price using the closing
share price for the
five days preceeding the grant. No options are granted at a discount and no amount
is paid or payable by the recipient upon grant of the options. Grants made to
executives are set out in Table 5 on pages 116 to 121.
No options will become exercisable unless the Group has met stretching performance conditions. In addition, before approving any vesting and regardless of
performance against the respective performance conditions, the Remuneration committee retains discretion to satisfy itself that the TSR performance is a genuine reflection of
underlying financial performance.
Under
the plan, vesting is subject to Rio Tintos TSR equalling or outperforming
the HSBC Global Mining Index over a three-year
performance period. The HSBC Global Mining Index covers the mining industry in
26 countries. Rio Tintos
TSR is calculated as a weighted average of the TSR of Rio Tinto plc and Rio Tinto
Limited. If 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. Historically,
TSR performance at this level has been equivalent to the upper quartile of companies
in 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.
Options granted
under the 2004 plan before 31 December 2006 will be subject to a single fixed
base re-test 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 re-test. 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 Groups
performance against the criteria relevant to the SOP is examined and verified
by the external auditors. If Rio Tinto were subject to 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 restructure.
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.
All SOP grants made prior to 2004 under the rules approved by shareholders in 1998 have now vested in full. The SOP grant made in 2004 was due for testing
against the performance condition in 2007. The performance condition was not achieved and these options have therefore not vested.
SOP options may, upon exercise, be satisfied by treasury shares, the issue of new shares or the purchase of shares on market.
Mining Companies Comparative Plan (MCCP) Rio
Tintos performance share plan, the MCCP, provides participants with a conditional
right to receive shares. The maximum conditional award under the current MCCP
is two times salary, calculated using the average
share price over the previous financial
year. Awards made to executive directors and product group chief executives are
set
out in Table 4 on pages 112 to 115.
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. Additionally, if a performance period is deemed to end during
the first 12 months
after the conditional award is made, that award will be reduced pro-rata. These
conditional awards are not pensionable.
The
performance condition compares Rio Tintos 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 members
of this group relevant to the 2006 conditional
award are listed at the bottom of the ranking table below. The comparator group
for the 2007 conditional award will be determined by the Remuneration
committee prior to approving the
award.
The following
table shows the percentage of each conditional award which will be received by
executives based on Rio
Tintos four year TSR performance relative to the comparator group for conditional
awards made after 1 January 2004:
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
2001 - 05
10
2002 - 06
10
Note
Comparator companies for the 2006 Conditional
Award were:
Alcan, Alcoa, Anglo American, Barrick Gold,
BHP Billiton, Cameco Corporation, Cia Vale do Rio Doce, Freeport-McMoRan
Copper & G old, Grupo Mexico, INCO, Newmont, Peabody, Phelps Dodge,
Teck Cominco and Xstrata
Before awards are released to participants, the
external auditors and Kepler Associates independently review the Groups
TSR performance compared to that of the comparator companies.
Awards are released to participants as either Rio Tinto plc or Rio Tinto Limited shares or as an equivalent amount
in cash. In addition, for MCCP Conditional Awards made after 1 January 2004,
a cash payment equivalent to the dividends that would have accrued on the vested
number of shares over the four year period will be made to executives.
Shares to satisfy
the vesting may be treasury shares, shares purchased in the market, by subscription,
or, in the case of Rio Tinto Limited, transfers
of
existing shares.
New restricted share plan The Remuneration committee has
approved a restricted share plan for senior employees below director and product
group chief executive level. The new
plan is designed to support the Groups ability to attract and retain key
staff in an increasingly tight and competitive
labour market. Under the new plan, eligible employees may receive a conditional
award of shares which will vest, wholly or partly, when performance conditions
laid
down by the Remuneration committee at the time of the award
have been satisfied. Shares to satisfy these awards will be purchased in the market. No directors are eligible to participate and no new shares will be issued to satisfy awards under this plan.
Post employment benefits Under current pension arrangements, executives in the UK can take their pension benefits unreduced for early payment from the age of 60. Executives with Australian employment contracts would normally be expected to retire
at age 62. In 2004, Leigh Cliffords
contractual retirement age was reduced from 62 to 60, with a corresponding change
to his retirement arrangements.
United Kingdom Guy Elliott and Tom Albanese participate in the non contributory Rio Tinto Pension Fund, a funded occupational pension scheme approved by HM Revenue and Customs. The Fund provides both
defined benefit and defined contribution benefits. In April 2005, the defined benefit section of the Fund was closed to new participants.
Members
of the defined benefit section of the Fund who retire early may draw a pension
reduced by approximately four per cent a year for each year of early payment.
Spouse and dependants pensions are also provided. Pensions
paid from this section 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.
During 2006, there was no requirement for Company cash contributions to be paid into the Rio Tinto Pension Fund.
Rio Tinto reviewed its pension policy in the light of the legislation changes introduced from April 2006. The Rio Tinto Pension Fund was amended to incorporate a fund specific limit equivalent
to the earnings cap for all members previously
affected; unfunded benefits continue to be provided, where already promised,
on pensionable salary above the fund specific limit.
Guy Elliott is
accruing a pension of 2.3 per cent of basic salary for each year of service with
the Company to age 60. Proportionally lower
benefits are payable on leaving service or retirement prior to the age of 60.
The unfunded arrangements described above will be utilised to deliver this promise
to the extent not provided by the Fund.
Rio Tinto plc exercised discretion to allow Tom Albanese to join the Rio Tinto Pension Fund as a member of the
defined benefit section on 1 July 2006 in recognition of his participation in
one of the US defined benefit pension arrangements offered by Rio Tinto prior
to that date. He is accruing a pension of two thirds of basic salary payable
at the normal retirement
age of 60, subject to completion of 20 years service with the Group, inclusive
of benefits accrued under the US pension arrangements.
Proportionally lower benefits are payable for shorter serv ice or, if having
attained 20 years service, retirement is taken prior to the age of 60.
His benefits under the Rio Tinto Pension Fund are restricted to the fund specific
limit, with the balance provided through unfunded arrangements.
Australia Leigh Clifford is a member 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. Leigh Clifford is a defined benefit member, accruing lump sums payable
on retirement. Retirement benefits are limited to a lump sum multiple of up to
seven times final basic salary at age 62, although, as stated above, Leigh Clifford
will retire at age 60. For retirement after 62, the benefit increases to up 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.
Executives
are not required to pay contributions. During 2006, Company cash contributions
were paid into the Rio Tinto Staff Superannuation Fund to fund members defined
benefit and
defined contribution benefits.
Other pensionable benefits The percentage of total remuneration which is dependent on performance is substantial. For Australian participants annual
STIP awards are pensionable up to a maximum value of 20 per cent of basic salary.
This results in a defined contribution payment equivalent to 20 per cent of the
pensionable component of STIP and does not impact the defined benefit component.
For the UK executive directors basic pay
only is pensionable.
Details
of directors pension
and superannuation entitlements are set out in Table 2 on page 110.
Performance and non performance related remuneration Total remuneration is a combination of fixed and performance related elements, each of which is described in this report. In addition, some executives have specific arrangements for remuneration outside these core
elements. They include expatriate/secondment
packages, which may include items such as housing benefit, assistance with incremental
school fees and tax equalisation. Other compensation includes medical insurance,
the provision of a company car and fuel, or an allowance in lieu, 401k contributions
in the USA, annual leave accruals and professional advice. The total remuneration
for executives shown in Table 1 includes these non performance related items,
which are specific to the circumstances of each executive.
The performance related, or variable, elements are the short and long term incentive plans, which are linked to achievement
of business and personal 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.
Excluding post employment costs and expatriate secondment costs, employment costs and other benefits, the proportion of total direct remuneration provided by way of variable components,
assuming target levels of performance, is approximately 68 per cent for the chief executive, 62 per cent for the finance director and between 62 per cent and 68 per cent for the product group chief executives. Variable components comprise the Short
Term Incentive Plan, the Share Option Plan and the Mining Companies Comparative Plan (STIP, SOP and MCCP). The actual proportion of total direct remuneration provided by way of variable components is set out in Table 1 on pages 107 to 109 and may
differ from these target percentages depending on Company and personal performance.
Share based remuneration not dependent on performance Executives may participate in share and share option plans that apply to all employees at particular locations and for which neither grant nor vesting is subject to the satisfaction of a performance condition. These plans
are consistent with standard remuneration practice whereby employees are offered share and option plan participation as part of their employment entitlements in order to encourage alignment with the long term performance of the Company.
Executives
employed in the Rio Tinto plc part of the Group may participate in the Rio Tinto
plc Share Savings Plan, a savings-related plan which is open to employees in
the UK and elsewhere.
Under the plan, participants can save up to £250 per month, or equivalent
in local currency, for a maximum of five years. At the end of the savings period
participants may exercise an option over shares granted at a discount of up to
20 per cent to the market value at the time of the grant. The number of options
to which participants are entitled is determined by the option price, the savings
amount and the length of the savings contract. No consideration is paid or payable
by the participant on receipt of the options. The UK section of this plan is
Inland
Revenue approved.
Eligible
UK employees, including some of the executives, may also participate in the Rio
Tinto Share Ownership Plan, 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, participating 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.
Executives employed in the Rio Tinto Limited part of the Group may elect to participate in the Rio Tinto Limited Share Savings Plan, also introduced in 2001,
which is similar to the Rio Tinto plc Share Savings Plan.
Service contracts Each of the executives has a service contract with a Group company.
It
is the Groups policy that executives service contracts have no fixed
term but are capable of termination giving
no
less than 12 months notice. Notice periods for executives are as follows:
Notice periods
Remaining
service period
Date of
Notice
if less than
Name
Agreement
period
12 months
Executive directors
Leigh Clifford
30 Mar 2005
12 months
7 months
Guy Elliott
19 Jun 2002
12 months
N/A
Tom Albanese
10 Apr 2006
12 months
N/A
Product group chief executives
Preston Chiaro
30 Sep 2003
12 months
N/A
Oscar Groeneveld
1 Oct 2004
12 months
N/A
Bret Clayton
1 Jun 2006
12 months
N/A
Keith Johnson
12 Mar 2004
12 months
N/A
Andrew Mackenzie
4 May 2004
12 months
N/A
Sam Walsh
3 Aug 2004
12 months
N/A
Termination payments Rio Tinto has retained the right to pay executives in lieu of notice. Given the wide variety of possible circumstances leading
to early termination, the executives service contracts
do not provide explicitly for compensation, but in the event
of early termination, it is the Groups policy to act fairly in all circumstances
and the duty to mitigate would be taken into account. Compensation would not
provide unmerited reward for poor performance.
There were no termination payments made in 2006.
Shareholding policy In 2002, the committee decided that it would be appropriate to encourage executives to build up a substantial shareholding,
aiming to reach a holding equal in value to two times base salary over five
years. Details of executives share interests in the Group are set out in
Table 3 on page 111.
In 2006, the board recommended that non executive directors be encouraged to build up a shareholding equal in value
to one years base fees. To help
facilitate this, the Companies have put in place share purchase plans under
which non executive directors can elect to invest a proportion of their fees
net of tax on a regular basis.
Remuneration paid in 2006
Performance of Rio Tinto, product groups and individual executives 2006 was another year of strong operational performance and was the third successive year of record results for the Group.
To
illustrate the performance of the Companies relative to their markets, graphs
showing the performance of Rio Tinto plc in terms of TSR over the last five years,
compared to the FTSE 100 Index and Rio Tinto Limited compared to the ASX All
Ordinaries Index are reproduced below. A graph showing Rio Tintos performance
relative to the HSBC Global Mining Index is also included to illustrate the
performance of Rio Tinto relative to other mining companies.
TSR (£) Rio Tinto plc v FTSE 100 Total return basis Index 2001 = 100
TSR (A$) Rio Tinto Limited v ASX All Share Total return basis Index 2001 = 100
TSR (US$) Rio Tinto Group v HSBC Global Mining
Index Total return basis Index 2001 = 100
The effect of this performance on shareholder wealth, as measured by TSR, is
detailed in the table below and the relationship between TSR and executive remuneration is discussed in the
Executive remuneration and Remuneration components sections above.
Rio Tinto shareholder return 2002-2006
Dividends per share
Share price
Share price
Total shareholder return
Year
paid during the year
Rio Tinto plc
Rio Tinto Limited
(TSR)
1 Jan
31 Dec
1 Jan
31 Dec
plc
Limited
Combined
US cents
pence
pence
A$
A$
%
%
%
2006
191.5
2,655
2,718
69.00
74.30
6.3
12.2
7.6
2005
83.5
1,533
2,655
39.12
69.00
77.5
81.3
78.4
2004
66.0
1,543
1,533
37.54
39.12
1.7
7.4
3.0
2003
60.5
1,240
1,543
33.95
37.54
27.9
14.7
24.8
2002
68.5
1,316
1,240
37.21
33.95
(2.3
)
(5.4
)
(3.0
)
Rio Tinto Group and product group performance during 2006, and over relevant
performance periods ending at 31 December 2006, impacted executives remuneration
as follows:
Share based awards:
•
MCCP Rio Tinto ranked tenth in the sixteen company comparator
group at the completion of the four-year performance period ending 31 December 2006, resulting in zero vesting of the
conditional award made to executives who were directors at the date of the conditional award. This group included Leigh Clifford, Guy Elliott and Oscar Groeneveld. The vesting shown
in Table 4 on pages 112 to 115, for other product group chief executives, where relevant, is in accordance with the performance condition applicable to the 2003 award and represents
25 per cent of the original awards.
•
SOP Rio Tinto TSR growth over
the three years ending 31 December 2006 did not achieve the level required by
the applicable performance condition. This grant will therefore not vest
in
2007, but will be subject to one retest after
a further two years.
Annual cash bonus Cash bonuses (STIP) in respect of
the 2006 performance period, to be paid in March 2007, are set out in Table
1 on page 108 and the percentages awarded to each executive (or forfeited)
are
set out in the table on page 103. These bonuses were approved by the committee
on the basis of delivered performance against financial, safety and personal
targets and objectives for each executive.
Financial performance was assessed against underlying earnings targets for the Group and product groups as relevant
and established by the committee at the commencement of the performance period.
The potential impact of fluctuations in exchange rates and some prices are
outside the control of the Group. The committee therefore compares, on an equal
weighting basis, both actual results and underlying performance. This approach
is designed to ensure that the annual bonus reflects financial results and
addresses underlying performance excluding the impact of prices and exchange
rates. The committee retains discretion to consider underlying business performance
in deciding STIP awards.
The safety measures included Group or relevant product group lost time injury frequency rates (LTIFR) and overall assessment of progress against improvement targets in other safety measures,
including all injury frequency rates (AIFR). These measures are chosen as they reflect the priority of safety at all Rio Tinto operations.
Personal performance targets and objectives were established for each executive at the start of the performance period. These comprise a balanced set of measures for each individual that
reflect current operational performance, as well
as progress on initiatives and projects designed to grow the value of each business
unit and the Rio Tinto portfolio. The targets and objectives chosen enable personal
performance and the benefit accruing
to shareholders in the long term to be mirrored in each of the executives at risk remuneration.
To achieve linkage between business/financial and personal/non-financial performance and remuneration, each executive
directors STIP payment is calculated
as a percentage of salary in accordance with the formula set out below:
Business / financial
Personal / non financial
(score = 0% to 133%)
(score = 0% to 133%)
Target
STIP
x
75% weight
25% weight
x
(60%)
Group
Group
Personal targets
financial results
safety performance
and objectives
For each product group chief executive, STIP payments are calculated as a percentage
of salary in accordance with the formula set out below:
Business / financial
Personal / non financial
(score = 0% to 133%)
(score = 0% to 133%)
Target
STIP
x
40% weight
60% weight
x
25% weight
75% weight
(60%)
Group
Product group
Product group
Personal targets
financial results
financial results
safety
and objectives
Strong Group financial performance for 2006 resulted in a STIP score at 117.2
per cent for this component. Financial performance for each product group varied and the Remuneration committee approved STIP scores ranging from 81 per cent of target to 120 per cent of target (maximum is 133 per cent) for this component. Group safety
performance resulted in the Remuneration committee approving a score of 120 per cent of target (maximum is 133 per cent) for this component.
Product group safety performance varied and STIP scores ranged from 90 per cent of target to 150 per cent of target (where 150 per cent is the maximum achievable) for this component.
Consequently, total STIP awards for executives ranged from 68.7 per cent to 92 per cent of salary (57 per cent to 77 per cent of maximum).
Each of the results set out below therefore
reflect the above, including a second successive year of record results, strong operational performance and portfolio initiatives to secure future value for the business across the Group, as well as individual
considerations as outlined:
Leigh Clifford
•
The committee assessed personal performance as above target and the overall STIP award was 153.3 per cent of target (76.6 per cent of maximum).
Guy Elliott
•
The committee assessed personal performance as above target and the overall STIP award was 153.3 per cent of target (76.6 per cent of maximum).
Tom Albanese
•
The committee assessed product group financial and safety performance as well as personal performance as above target. The overall STIP award was 147.6 per cent of target (73.8 per cent of
maximum).
The committee assessed product group financial performance as below target and safety and personal
performance as above target. The overall STIP award was 114.5 per cent of target (57.3 per cent of maximum).
Bret Clayton (from 1 June 2006)
•
The committee assessed product group financial and safety performance as well as personal performance as
above target. The overall STIP award was 133.3 per cent of target (66.6 per cent of maximum).
Oscar Groeneveld
•
The committee assessed product group financial performance and personal performance as above target and safety performance as below target. The overall STIP award was 136.2 per cent of
target (68.1 per cent of maximum).
Keith Johnson
•
The committee assessed product group financial and safety performance as well as
personal performance as
above target. The overall STIP award was 149.7 per cent of target (74.8 per cent of maximum).
Andrew Mackenzie
•
The committee assessed product group financial and safety performance as well as
personal performance as
above target. The overall STIP award was 151.5 per cent of target (75.8 per cent of maximum).
Sam Walsh
•
The committee assessed product group financial performance as below target, safety performance at target and personal performance as above target. The overall STIP award was 116.7 per cent
of target (58.3 per cent of maximum).
Share based payment long term incentives granted in 2006 Options over either Rio Tinto plc or Rio Tinto Limited shares as appropriate were granted to each executive under the Share Option Plan on 7 March 2006. The Remuneration committee
reviewed the performance condition applicable
to this grant and confirmed that vesting will be dependent on Rio Tintos
TSR relative to the HSBC Global Mining Index over a three year performance period.
Share options granted are included in Table 5 on pages 116 to 121.
A conditional award of performance shares in either Rio Tinto plc or Rio Tinto Limited shares was made to each executive under the MCCP on 7 March 2006. The Remuneration committee reviewed the performance condition applicable
to the conditional award and confirmed that vesting will be dependent on Rio
Tintos TSR
relative to 15 other mining companies.
The percentages of maximum bonuses made to executives in respect of 2006 and grants vested in respect of performance periods ending 31 December 2006, as well
as the percentages forfeited because the relevant Company or individual did not meet the performance criteria required for full vesting, are as follows:
Bonuses and grants made during
or in respect of 2006
STIP Cash1
SOP Options2
MCCP Shares3
% of
% of
%
%
%
%
maximum
maximum
vested
forfeited
vested
forfeited
vested
forfeited
Leigh Clifford
76.6
23.4
—
—
—
100
Guy Elliott
76.6
23.4
—
—
—
100
Tom Albanese
73.8
26.2
—
—
25
75
Preston Chiaro
57.3
42.7
—
—
25
75
Bret Clayton
66.6
33.4
—
—
25
75
Oscar Groeneveld
68.1
31.9
—
—
—
100
Keith Johnson
74.8
25.2
—
—
25
75
Andrew Mackenzie4
75.8
24.2
—
—
—
—
Sam Walsh
58.3
41.7
—
—
25
75
Notes
1.
Paid in March 2007 in respect of 2006.
2.
There was no vesting of the 2004 SOP options in March
2007.
3.
Vesting of 2003 Conditional Award in February 2007.
4.
Andrew Mackenzie joined in 2004 after the 2003 MCCP
award had been made.
Minimum and maximum total bonuses and grants 2007 The estimated maximum and minimum total value of bonuses and share and option-based compensation for the 2007 financial year are set out below.
STIP Cash 1
Potential range of
bonus payments in
SOP Options
MCCP Shares
March 2008 in
(% of March
(% of March
respect of 2007
2007 salary) 2,3
2007 salary) 2,4
Min
Max
Min
Max
Min
Max
US$
US$
Leigh Clifford5
2,231,890
300
200
Guy Elliott
1,449,432
200
140
Tom Albanese
1,451,788
300
200
Preston Chiaro
792,000
300
200
Bret Clayton
696,000
300
200
Oscar Groeneveld
1,355,640
200
140
Keith Johnson
930,936
200
140
Andrew Mackenzie
1,025,208
200
140
Sam Walsh
1,279,800
200
140
Notes
1.
Based on eligibility at 1 March 2007 at exchange rates of £1 = US$1.964 and A$1 = US$0.790.
2.
Grant/Conditional Award based on the average share price during 2006.
3.
SOP Options to be granted in 2007 may, subject to achievement
of the performance condition, vest in 2010. The maximum value of these options
at the date of vesting would be calculated by multiplying the number of vested
options
by the intrinsic value at that time (ie the difference between the option exercise
price and the current market price).
4.
MCCP performance shares to be awarded conditionally
in 2007 may, subject to achievement of the performance condition, vest in 2011.
The maximum value of these shares at the date of vesting would be calculated
by
multiplying the number of vested shares by the intrinsic value at that
time (ie the current market price plus, the value of
dividends earned on the vested shares during the performance period).
5.
Leigh Cliffords STIP, SOP option grant and MCCP
conditional award will be reduced proportionally to reflect the actual pro portion
of 2007 he was an employee of the Group.
OTHER DISCLOSURES
Executives external and other appointments Executives 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 executives 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 executive permitted to retain the fees earned. Details of fees earned are set out in the notes to Table 1 on pages 107 to 109.
Executives
have agreed to waive any fees receivable from subsidiary and associated companies. One executive director waived US$1,390 during the period (2005: Nil).
Company secretary remuneration The broad policy described above applies to the company secretary of each of Rio Tinto plc and Rio Tinto Limited. The secretaries
participate in the same performance based remuneration arrangements as the executives.
The individual performance measures for the secretaries annual cash bonus
comprise Group and personal measures. Their personal measures reflect the key responsibilities of the
company secretarial role and included ensuring compliance with regulatory requirements, oversight of good corporate governance practice and the provision of corporate secretarial services.
Chairman and non executive director remuneration
Remuneration policy Reflecting
the boards focus on long term strategic direction and corporate performance
rather than short term results, remuneration
for the chairman and non executive directors is structured with a fixed fee component
only, details of which are set out below and in Table 1 on pages 107 to 109.
The board as a whole determines non executive directors fees, although non executive directors
donot vote on any changes to their own fees. Fees are set to reflect the responsibilities and time spent by the directors on the affairs of Rio Tinto. To reflect the commitment expected from directors, as well as
market practice for similar companies, fees for committee chairmen and members were reviewed in December 2006. The new fees are set out in the table below.
It
is Rio Tintos 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. The chairman
is not present at any discussion regarding
his own remuneration and he does not participate in the Groups incentive plans or pension arrangements.
Letters of appointment Non executive directors have formal letters of appointment setting out their duties and responsibilities. These letters are available
for inspection at Rio Tinto plcs registered office
prior to the annual general meeting and at the meeting itself. Each non executive
director is appointed subject to periodic re-election by shareholders as detailed
on page 124. There are no provisions for
compensation payable on termination of any non executive directors appointment.
The
chairmans 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, although the appointment may be terminated by
either Rio Tinto or Paul Skinner giving six months notice. Other than in
this case, there is no provision for compensation payable on termination of his
chairmanship or directorship.
Remuneration components The
following table sets out the annual fees payable to the chairman and the non
executive directors in £/A$, as appropriate.
As at 31 Dec 2006
As at 1 Jan 2006
Base fees:
Chairman
£630,000
£600,000
Other directors
£60,000 / A$150,000
£60,000 / A$150,000
Additional fees:
Senior independent director
£35,000
£35,000
Audit committee chairman
£30,000
£20,000
Audit committee member
£15,000 / A$37,500
£10,000
Remuneration committee chairman
£20,000
£15,000
Remuneration committee member
£10,000 / A$25,000
£5,000
Committee on social and environmental
accountability chairman
£20,000
£10,000
Committee on social and environmental
accountability member
£7,500 / A$18,750
£3,000 / A$7,500
Overseas meeting allowances:
Long distance (flights over 10 hours
per journey)
£4,000 / A$10,000
£4,000 / A$10,000
Medium distance (flights of 5-10
hours per journey)
£2,000 / A$5,000
£2,000 / A$5,000
No additional fee is payable to the chairman or members of the Nominations committee although this arrangement remains subject to review and will
depend on the volume of committee business in future. Rio Tinto does not pay retirement benefits or allowances tonon executive directors, nor do any of them participate
in any of the Groups incentive plans.
Where the payment of statutory minimum superannuation contributions for Australian non executive directors is required by the Australian superannuation guarantee legislation, these contributions are deducted from the directors overall
fee
entitlements.
Remuneration paid during 2006 Details of the nature and amount of each element of remuneration paid to the chairman and non executive directors during 2006 are set out in Table 1 on pages 107 to 109. No post employment,
long term or termination payments were paid and no share based payments made.
Auditable information Under
Part 3 of Schedule 7A to the United Kingdom Companies Act 1985, the information
included in respect of the directors in the table immediately below, the information
about the directors short term employee
benefits (excluding employment costs), defined contribution pension costs and
termination benefits in Table 1, 4 and 5 are auditable. The
Australian Securities Investments Commission issued an order dated 27 January
2006 (and amended on 22 December 2006) under which the information included in
the Remuneration report to comply with paragraph 25 of Australian Accounting
Standard AASB 124 Related Party Disclosures (relating to key management personnel compensation)
is also auditable. This information comprises Tables 1, 3, 4 and 5 and the disclosures
provided under the headings Executive remuneration, Remuneration components, Remuneration paid in 2006 and chairman and non executive director remuneration.
Table 1 Directors and senior managements total remuneration
Post employment
costs9
Termination
Remuneration
Total
benefits
mix10
remuneration
Pension Defined
Fixed
At-risk
Post
as %
as %
Options
Currency
Contrib-
Medical
service
2006
2006
as %
of actual
Stated in US$000
Benefits
utions
costs
payments
Gifts
total
total
total
2006
2005 13,14
payment
Chairman
Paul Skinner
100.0
1,292
1,182
£
Non executive
directors
Ashton Calvert
100.0
188
139
A$
Vivienne Cox
100.0
152
120
£
Sir David Clementi
100.0
171
154
£
Leon Davis16
100
£
Sir Rod Eddington
100.0
137
48
£
Michael Fitzpatrick11
100.0
115
£
Sir Richard Giordano16
88
£
Richard Goodmanson
100.0
156
127
£
Andrew Gould
100.0
171
142
£
Lord Kerr
100.0
159
145
£
David Mayhew12
100.0
148
123
£
John Morschel16
46
A$
Sir Richard Sykes12
100.0
217
189
£
Executive directors
Robert Adams16
2,114
£
Tom Albanese11,13,14
707
60.5
39.5
17.7
3,390
3,962
£
Leigh Clifford15
346
60
64.1
35.9
25.6
4,261
6,704
£
Guy Elliott
707
68.6
31.4
17.5
2,935
3,897
£
Product
group chief executives
Preston Chiaro14
168
12
5
58.2
41.8
25.0
1,781
2,983
US$
Bret Clayton
57
13
3
65.9
34.1
6.6
1,545
900
US$
Oscar Groeneveld13
204
50
72.9
27.1
17.5
2,411
3,509
A$
Keith Johnson
385
57.5
42.5
15.0
2,174
2,284
£
Andrew MacKenzie
475
57.1
42.9
10.9
2,464
2,217
£
Chris Renwick16
1,225
A$
Sam Walsh
220
32
56.2
43.8
16.5
2,325
3,151
A$
2006 Remuneration
3,269
167
8
26,192
2005 Remuneration
2,199
114
12
1,115
14
35,549
Short term employee benefits
and costs
20,380
19,204
Other long term benefits
737
737
Value of share based awards5
1,631
12,154
Post employment costs9
3,444
2,325
Termination benefits
1,129
26,192
35,549
Notes to Table 1
1.
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 US$1 = £0.5432 or alternatively into Australian dollars at the
rate of US$1 = A$1.329, each being the average exchange rate for 2006.
The annual cash bonus is payable under the STIP and this may be converted
at the 2006 year end exchange rate of US$1 = £0.5092 to a scertain
the sterling equivalent or alternatively, US$1 = A$1.2653 to calculate
the Australian dollar value.
2.
Other
cash and non cash based benefits are described in the Remuneration report
on page 95 to 121. Cash based benefits include car, fuel, overseas meeting
allowances and cash in lieu of holiday. The amounts shown as paid to non executive directors relate entirely to overseas meeting allowances.
Non monetary benefits include heathcare, 401K contributions in the US,
the provision of a car, annual leave accruals and professional advice.
3.
Secondment
costs comprise housing, education, tax equalisation and relocation payments
made to and on behalf of executive directors and product group chief
executives living outside their home country. The figure in respect of
Tom Albanese reflects a tax refund to the Company during the course
of the year.
4.
Employment
costs comprise social security contributions and accident insurance premiums
in the UK and US and payroll taxes in Australia paid by the employer
as a direct additional cost of hire.
5.
The
value of share based awards has been determined in accordance with the
recognition and measurement requirements of IFRS2 Share-based Payment.
The fair value of awards granted under the Rio Tinto Share Option Plan
(the SOP) and the Rio Tinto Share Savings Plan (the SSP) have been calculated
at their dates of grant using an independent lattice based option valuation
model provided by external consultants, Lane Clark and Peacock LLP.
The fair value of awards granted under the Mining Companies Comparative
Plan (the MCCP) has been based on the
market price of shares at the measurement date adjusted to reflect the number
of awards expected to vest based on the current and anticipated relative TSR
performance and, where relevant, for non receipt of dividends between measurement
date and date of vest. The failure of the 2003 conditional award to vest for
directors reduced the projected value of future awards, as calculated in accordance
with the relevant accounting standards. This in turn led to a negative MCCP
value arising for certain individuals to offset earlier valuations which are
now, under these accounting standards, considered over-valued. Further details
of the valuation methods and assumptions used for these awards ar e included
in the note 45 (Share based payments). The non executive directors do not participate
in the long term incentive share schemes. The fair value of other share based
awards is measured at the purchase cost of the shares from the market.
6.
The number of conditional shares awarded to executive
directors and senior executives under the MCCP for the twelve month period
ending 31 December 2006 are shown in Table 4 of this report. The MCCP is
stated under primary emoluments to reflect the treatment of the plan as
a cash settled share based payment.
7.
The award of options to executive directors under the SOP and SSP during
the twelve month period up to 31 December 2006 are shown in Table 5 of
this report.
8.
Details of other share based awards refer to the Rio Tinto Share Ownership
Plan and the SSP, details of which are set out in the Remuneration report
on page 95 to 121. Under the Share Ownership Plan UK executives are beneficiaries
of free shares up to a maximum value of £3,000 (US$ 5,523) and
may also contribute to purchase additional shares where the Company will
match their personal contributions up to a maximum of £1,500 (US$ 2,762)
per annum. Under these plans Guy Elliott, Keith Johnson and Andrew Mackenzie
each received a total of £4,500 (US$8,285). American group product
chief executives enjoy a Company matching of personal contribution for
shares under the 401k
arrangements up to a maximum of US$13,213. The Company matched personal contributions
to the following values: Tom Albanese US$ 13,213, Preston Chiaro US$5,410
and Bret Clayton US$11,534.
9.
The costs shown for defined benefit pension plans and post retirement medical
benefits are the service costs attributable to the individual, calculated
in accordance with IAS19. The cost for defined contribution plans is the
amount contributed in the year by the company
10.
Remuneration mix shows the proportions of total remuneration
comprising fixed and variable pay components and the percentage of total
remuneration comprising share options only. Fixed pay is represented by
base salary, non monetary and other cash benefits, secondment and employment
costs, post employment costs, long service payments, termination benefits
and voluntary share based awards as detailed in Note 8.
Variable pay is made up of the cash bonus and the values
of the share based awards related to company performance.
11.
Tom Albanese was appointed an executive director
with effect from 7 March 2006, having previously been chief executive
Copper and Exploration. The aggregate figure of US$3,390,000 reported above
represents his remuneration for the full year. The part year since his
appointment as executive director amounted to US$2,413,000 and is made
up of short term benefits and costs of US$1,388,000, share based awards
of US$360,000 and post employment costs of
US$665,000. Michael Fitzpatrick was appointed a non executive director with
effect from
6
June 2006. Bret Clayton became chief executive, Copper
on 1 July 2006.
12.
David Mayhews fees were paid to JP Morgan Cazenove and Sir Richard
Sykess fees were paid to Imperial College. The fees disclosed above
include £10,000 (US$ 18,410) paid to JP Morgan Cazenove for David
Mayhews attendance at Audit committee meetings in his capacity
as
advisor.
13.
Prior to Tom Albaneses appointment as an executive director and Oscar
Groenevelds transfer to product group chief executive, Aluminium
and with a view to retaining their services, both were awarded a one-off
three year retention bonus in April 2004 of 100 per cent of salary as at
1 March 2007 which may vest in October 2007, if they remain employed by
Rio Tinto at that time. The maximum values for Tom Albanese and Oscar Groeneveld
are US$1,134,000
and US$1,076,000 respectively. These amounts have been spread equally over
the three year period on an accrual basis and are reported here as long service
payments of US$378,000 for Tom Albanese and US$359,000 for Oscar Groeneveld
.. The comparative figures for 2005 have similarly been adjusted
and restated.
14.
In 2005, the tax equalisation figures for Tom Albanese and Preston Chiaro,
which were included under secondment costs, were overstated by US$524,894
and US$262,517 respectively. The 2005 total remuneration comparative
figure shown above has been restated to reflect the adjustment.
15.
In the course of the year, Leigh Clifford received US$139,533 in respect
of his non Rio Tinto related directorship.
16.
Leon Davis, Sir Richard Giordano and John Morschel retired on 29 April
2005. Robert Adams died on 27 January 2005 and Chris Renwick received a
post retirement payment in 2005.
Table
2 Executive
directors pension entitlements (as
at 31 December 2006)
Accrued benefits
Transfer values
Age
Years of
At 31
At 31
Change in
Change in
At 31
At 31
Change,
Transfer
service
December
December
accrued
accrued
December
December
net of
value of
completed
2005
2006
benefits
benefit
2005
2006
personal
change in
during the
net of
contribs.
accrued
year ended
inflation1
benefit
31
net of
December
inflation 1
2006
UK
£000 pa
£000 pa
£000 pa
£000 pa
£000
£000
£000
£000
directors
pension
pension
pension
pension
Tom Albanes2,3
49
25
115
126
11
7
729
882
153
137
Guy Elliott2
51
26
291
335
44
31
3,781
4,484
703
415
Australian
A$000
A$000
A$000
A$000
A$000
A$000
A$000
A$000
director
Lump sum
Lump sum
Lump sum
Lump sum
Leigh Clifford4,5
59
36
13,877
15,341
1,464
1,006
13,877
15,341
1,464
1,006
Notes to Table 2
1
Price inflation is
calculated as the increase in the relevant retail or consumer price index
over the year to 31 December 2006.
2
Transfer values are calculated in a manner consistent
with Retirement Benefit Schemes Transfer Values (GN11) published
by
the Institute of Actuaries and the Faculty of Actuaries.
3
Tom Albanese became a director of Rio Tinto plc and Rio Tinto Limited with
effect from 7 March 2006; the figures shown cover the whole of 2006. He
accrued pension benefits in the US plans for service up to 30 June 2006
and in the UK fund for subsequent service. The transfer value of his benefits
in the US plans is represented by the Accumulated Benefit Obligation calculated
on the accounting assumptions used
for the Groups post retirement benefits disclosures. In addition, the employer
paid $13,200 in respect of Tom Albanese into a 401k plan in the US for the
period.
4
In addition, A$79,730 was credited to the account belonging to Leigh
Clifford in the Rio Tinto Staff Superannuation Fund in relation to the
pensionable element of his 2006 performance bonus.
5
The figures shown for Leigh Clifford include allowance for an enhancement
to benefits granted in 2004, whereby his contractual retirement age was
reduced from 62 to 60 and the pension multiple at age 60 was increased
from 6.65 to 7.0. The figures as at 31 December 2005 shown in the 2005
Financial statements did not include this enhancement. As a result the
accrued lump sum
shown at the start of the year, of A$13,877,000, is higher than the figure
disclosed in the 2005 Financial statements, of A$13,147,000.
Table 3 Directors and
senior managements beneficial interests in Rio Tinto shares
Rio Tinto plc
Rio Tinto Limited
Movement
1 Jan
31 Dec
31 May
1 Jan
31 Dec
31 May
Exercise
Compen-
Other 6
20061
20062
2007
200611
2006 2
2007
of
sation 5
options 4
Directors
Tom Albanese3,7,9
23,261
41,814
44,839
—
—
—
35,350
3,025
(19,640
)
Ashton Calvert
—
—
—
—
—
735
—
—
735
Sir David Clementi
—
147
308
—
—
—
—
—
308
Leigh Clifford
2,100
2,100
2,100
91,255
91,255
91,255
—
—
—
Vivienne Cox
381
528
692
—
—
—
—
—
311
Sir Rod Eddington
—
—
—
—
—
—
—
—
—
Guy Elliott7
47,827
48,033
48,644
—
—
—
—
357
470
Michael Fitzpatrick3
—
—
—
2,100
2,100
2,100
—
—
—
Richard Goodmanson
—
677
1,628
—
—
—
—
—
1,628
Andrew Gould
1,000
1,000
1,000
—
—
—
—
—
—
Lord Kerr
2,300
3,000
3,000
—
—
—
—
—
700
David Mayhew
2,500
2,500
2,500
—
—
—
—
—
—
Paul Skinner
5,409
5,598
5,657
—
—
—
—
—
248
Sir Richard Sykes
2,482
2,569
2,596
—
—
—
—
—
114
Product group chief executives
Preston Chiaro7,9
60,762
60,927
62,585
—
—
—
490
—
1,823
Bret Clayton3,7,9
6,640
6,867
7,376
—
—
—
—
—
736
Oscar Groeneveld
3,000
3,000
3,000
79,502
66,790
66,790
171,000
—
(183,712
)
Keith Johnson7
2,236
17,536
18,882
—
—
—
43,426
2,446
(29,216
)
Andrew Mackenzie10
39,197
40,456
40,597
—
—
—
—
357
1,053
Sam Walsh
—
—
—
6,570
42,322
42,723
187,118
4,156
(155,121
)
Notes to Table 3
1
Or date of appointment if later.
2
Or date of retirement or resignation if earlier.
3
Tom Albanese was appointed executive director on 7 March 2006 and took over
as chief executive from Leigh Clifford with effect 1 May 2007. Bret Clayton
was appointed chief executive Copper on 1 July 2006. Michael Fitzpatrick
was appointed non executive director on 6 June 2006.
4
Shares obtained through
the exercise of options under the Rio Tinto Share Savings Plan or the
Rio Tinto Share Option Plan. The number of shares retained may differ from
the
number of options exercised.
5
Shares obtained through the Rio Tinto Share Ownership Plan and/or vesting
of awards under the Mining Companies Comparative Plan.
6
Share movements due to sale or purchase of shares, shares
received under the Dividend Reinvestment Plan, shares purchased/sold through
the Rio Tinto America Savings Plan or non executive directors
share purchase plan.
7
These executives
also have an interest in a trust fund containing 864 Rio Tinto plc shares
at 31 December 2006 (1 January 2006: 835 Rio Tinto plc shares) as potential
beneficiaries of the Rio Tinto Share Ownership Trust. At 8 June 2007
this trust fund contained 873 Rio Tinto plc shares.
8
Shares in Rio Tinto plc are ordinary shares of ten pence each. Shares in
Rio Tinto Limited are ordinary shares.
9
The shareholdings of Tom Albanese, Preston Chiaro and Bret Clayton include
Rio Tinto plc ADRs held through the Rio Tinto America Savings Plan.
10
Andrew Mackenzies 31 December 2005 balance was understated in the 2005
Remuneration report by ten Rio Tinto plc shares.
Table 4 Awards to executive directors and product group chief executives under long term incentive plans
Mining Companies Comparative
Plan
Plan terms and conditions
Conditional
Market
1 Jan
Awarded3
Lapsed3
Vested3
31 May
Perfor-
Date
Market
Monetary
award
price at
20073
200710
mance
award
price at
5
value of
granted
award
period
vests
vesting
vested
concludes
award
US$000
Oscar
22 Apr
A$
31 Dec
Groeneveld
2004
33.17
43,785
43,785
2007
9 Mar
A$
31 Dec
2005
47.39
45,024
45,024
2008
7 Mar
A$
31 Dec
2006
69.60
36,460
36,460
2009
13 Apr
A$
31 Dec
2007
74.50
26,590
26,590
2010
125,269
26,590
151,859
Keith
22 Apr
31 Dec
Johnson
2004
1276
p
30,387
30,387
2007
9 Mar
31 Dec
2005
1839
p
33,556
33,556
2008
7 Mar
31 Dec
2006
2630
p
26,508
26,508
2009
13 Apr
31 Dec
2007
2681
p
19,805
19,805
2010
90,451
19,805
110,256
Andrew
22 Apr
31 Dec
Mackenzie
2004
1276
p
16,270
16,270
2007
9 Mar
31 Dec
2005
1839
p
37,638
37,638
2008
7 Mar
31 Dec
2006
2630
p
29,413
29,413
2009
13 Apr
31 Dec
2007
2681
p
21,811
21,811
2010
83,321
21,811
105,132
Sam Walsh
22 Apr
A$
31 Dec
2004
33.17
38,023
38,023
2007
9 Mar
A$
31 Dec
2005
47.39
41,176
41,176
2008
7 Mar
A$
31 Dec
2006
69.60
33,655
33,655
2009
13 Apr
A$
31 Dec
2007
74.50
25,103
25,103
2010
112,854
25,103
137,957
Notes to Table 4
1.
Awards denominated in pence
were for Rio Tinto plc ordinary shares of 10p each. Awards denominated
in A$ were for Rio Tinto Limited shares.
2.
The fair value of conditional awards
granted in 2006 was 964p for Rio Tinto plc and A$24.96 for Rio Tinto
Limited shares.
3.
The Groups 10th place ranking
against the comparator group for the MCCP 2003 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.
Tom Albanese was not an executive director at that time and along with participating
senior employees of the Group he will qualify for a 25 per cent vesting
based on the scales applied to conditional awards made prior to 2004.
4.
The value of the vested awards
have been based on share prices of 2697p and A$75.60 being the respective
closing share prices
for Rio Tinto plc and Rio Tinto Limited ordinary shares on 9 February
2007, the latest practicable
date prior to the publication of the 2006 Annual report and financial statements.
The amount in US dollars has been converted from sterling at the rate
of
US$1 = £0.5092 and Australian dollars at the rate of US$1 =
A$1.2653, being the year end exchange rate used elsewhere in this publication.
5.
Conditional awards are awarded at
no cost to the recipient and no amount remains unpaid on any shares granted.
No award would be vested and unexercisable at the reporting date.
6.
Leigh Clifford was given a conditional
award over 84,661 Rio Tinto Limited shares during the year. These awards
were approved by the shareholders under
the ASX Listing Rule 10.14 at the 2004 annual general meeting.
7.
A full explanation of the MCCP can
be found on pages 97 to 98.
Table 5 Directors and senior managements
options to acquire Rio Tinto plc and Rio Tinto Limited shares
Value of
Vested and
options
Market
Vested
exercisable
exercised
price on
Date from
1Jan
during
on 31 May
31May
Option
during
date of
which first
Expiry
2007
Granted
2007
Exercised
2007
2007
price
20079
exercise
exercisable
date
Rio Tinto Limited Share Option Plan
Leigh
A$
12
Mar
12
Mar
Clifford11
52,683
—
—
—
52,683
52,683
23.4382
—
—
2002
2009
A$
7
Mar
7
Mar
59,318
—
—
—
59,318
59,318
24.069
—
—
2003
2010
A$
7
Mar
7
Mar
29,660
—
—
—
29,660
29,660
24.069
—
—
2005
2010
A$
6
Mar
6
Mar
241,430
—
—
—
241,430
241,430
33.0106
—
—
2005
2011
A$
13
Mar
13
Mar
208,882
—
—
—
208,882
208,882
39.8708
—
—
2005
2012
A$
7
Mar
30 Sept
254,132
—
—
—
254,132
254,132
33.336
—
—
2006
2012
A$
22
Apr
30 Sept
179,370
—
—
—
—
179,370
34.406
—
—
2007
2012
A$
9
Mar
30 Sept
169,987
—
—
—
—
169,987
47.042
—
—
2008
2012
A$
7
Mar
30 Sept
126,992
—
—
—
—
126,992
71.06
—
—
2009
2012
A$
13
Mar
13
Mar
—
92,325
—
—
—
92,325
74.588
—
—
2010
2017
Oscar
A$
A$
A$
7
Mar
30 Sept
Groeneveld
90,080
—
—
—
90,080
90,080
33.336
5,464,613
94.00
2006
2012
A$
22
Apr
30 Sept
62,600
—
—
—
—
62,600
34.406
—
—
2007
2012
A$
9
Mar
30 Sept
64,321
—
—
—
—
64,321
47.042
—
—
2008
2012
A$
7
Mar
30 Sept
52,086
—
—
—
—
52,086
71.06
—
—
2009
2012
A$
13
Mar
13
Mar
—
37,987
—
—
—
37,987
74.588
—
—
2010
2017
Sam
A$
22
Apr
22
Apr
Walsh
54,400
—
—
—
—
54,400
34.406
—
—
2007
2014
A$
9
Mar
9
Mar
58,823
—
—
—
—
58,823
47.042
—
—
2008
2015
A$
7
Mar
7
Mar
48,079
—
—
—
—
48,079
71.06
—
—
2009
2016
A$
13
Mar
13
Mar
—
35,861
—
—
—
35,861
74.588
—
—
2010
2017
Notes to Table 5
1
Or at date of appointment if later.
2
Bret Clayton was appointed chief executive of the Copper group on 1 July 2006.
3
All options are granted over ordinary shares. Rio Tinto
plc ordinary
shares of 10p each stated in pence sterling; Rio Tinto Limited ordinary shares stated
in Australian dollars. Each option is granted over one share.
4
No options lapsed during the year.
5
The closing price of Rio Tinto plc ordinary shares at
31 December 2006 was 2718p (2005: 2655p) and the closing price of Rio
Tinto Limited shares
at 31 December 2006 was A$74.30 (2005: A$69.00). The highest and
lowest prices during the year were 3322p and 2352p respectively for Rio
Tinto plc and A$88.10 and A$65.01 for Rio Tinto Limited.
6
The option price represents the exercise price payable
on the options. No amount was paid or payable by the recipient at the
date of grant. No amounts
are unpaid on any shares allocated on the exercise of the options.
7
Under the plans no options would be vested and unexercisable at the reporting date.
8
The fair value per option, granted during 2006, at date
of grant was as follows: Rio Tinto plc Share Savings Plan two year contract 676p; three year
contract 812p and five year contract 944p; Rio Tinto Limited Share Savings
Plan three year contract A$22.37 and five year contract A$26.07.
Rio Tinto plc Share Option Plan 740p; Rio Tinto Limited Share Option Plan
A$17.09.
9
The value of options exercised during 2006 is calculated
by multiplying the number of options exercised by the difference between
the market price
and the option price on date of exercise.
10
Andrew Mackenzie was granted
40,216 phantom options over Rio Tinto plc shares at a price of 1329p
per share, exercisable between
22 April 2007 and 22 April 2014. This grant
will not vest in 2007, but will be subject to retest after a further two
years.
11.
Leigh Clifford was
granted options over 126,992 Rio Tinto Limited shares during the year.
This option grant was approved by shareholders
under ASX Listing Rule 10.14 at the 2004
annual general meeting. Subject to the rules of the Rio Tinto Limited Share
Savings Plan, Leigh Cliffords options granted
under that plan will be reduced proportionally to reflect the actual portion
of 2007 he was an employee of the Group.
The directors of Rio Tinto believe that high standards of corporate governance are central to business integrity and performance. The following describes how this philosophy is applied in
practice.
As Rio
Tintos three main listings are in London, Melbourne and New York, the directors
have referred to The Combined Code on Corporate Governance,
published by the UK Financial Reporting Council (the Code), the Australian Securities Exchange (ASX) Corporate Governance Council Principles of Good Corporate Governance and Best Practice Recommendations (the ASX
Principles), and the New York Stock Exchange (NYSE) Corporate Governance Standards (the NYSE Standards), as well as the Sarbanes-Oxley Act of 2002.
Rio Tinto complied fully with the detailed provisions of Section 1 of the Code and the ASX Principles as detailed further below. A statement on compliance with the NYSE Standards is set out
below.
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 this report, they are described
as the board.
The board currently consists of 14 directors: the chairman, three executive directors and ten 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 skills, experience and expertise of each
director together with their term s in office are shown in the biographical details on pages 89 to 92.
The role and responsibilities of the board The role of the board is to provide the Group with good governance and strategic direction. The board also reviews the Groups
control and accountability framework. The directors have agreed a formal schedule
of matters specifically reserved for decision by the board, including strategy,
major investments and acquisitions. This is available on Rio Tintos
website at www.riotinto.com.
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 Groups
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 2006, had eight
scheduled and one unscheduled meeting. Details of directors attendance
at board and committee meetings
are set out on page 123.
The
board has regular scheduled discussions on aspects of the Groups strategy,
as well as two separate strategy review meetings, one half day and one two day
meeting, both of which are
dedicated to in-depth discussions on Group strategy.
Directors receive timely, regular and necessary management and other information to en able them to fulfil their duties. The board has agreed a procedure for the directors to have access to
independent professional advice at the Groups
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 product groups, at both 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
Groups operating locations. The full board also takes the opportunity to combine attendance at the annual general meeting in Australia and at the two day strategy review meeting
with site visits when they are able to witness at first hand operations at individual business units and to meet local staff.
The chairman holds
regular meetings with non executive directors without the executive directors
being present.
Directors attendance at board and committee meetings during 2006
Committee on
social and
Audit
Remuneration
environmental
Nominations
Board
committee
committee
accountability
committee
Name of Director
A1,2
B1
A
B
A
B
A
B
A
B
Tom Albanese3
7
7
Ashton Calvert
9
9
4
4
4
4
Sir David Clementi
9
8
7
6
4
4
Leigh Clifford
9
9
Vivienne Cox
9
7
7
7
Sir Rod Eddington
9
8
4
2
4
4
Guy Elliott
9
9
Michael Fitzpatrick4
6
6
3
2
1
—
Richard Goodmanson
9
9
4
4
4
4
Andrew Gould
9
8
7
6
4
4
Lord Kerr
9
8
7
7
4
4
David Mayhew
9
9
4
4
Paul Skinner
9
9
4
4
Sir Richard Sykes
9
9
4
4
4
4
Notes
1
A = Maximum number of meetings the director could have attended; B = Number of meetings attended
2
Eight of the board meetings were scheduled and one was called at short notice.
3
Tom Albanese was appointed on 7 March 2006.
4
Michael Fitzpatrick was appointed on 6 June 2006 and became an Audit committee and Remuneration committee
member on the same date.
Board performance In 2006 the board conducted a formal process, facilitated by external consultants, to evaluate once again its effectiveness and that of the board committees and individual directors.
Each
directors performance was appraised by the chairman and, in a meeting chaired by the senior independent non executive director, the non executive directors assessed the
chairmans performance, taking into consideration the views of executive
colleagues.
The 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. The directors
believe that, through this evaluation process, they comply with the requirements
of Clause A.6 of the Code, Principle 8 of the
ASX
Principles, and of the NYSE Standards.
Independence The tests of director independence in the jurisdictions where Rio Tinto is listed are not wholly consistent. The board has, therefore, adopted a formal policy for the determination of
independence of directors. The policy, which contains the materiality thresholds approved by the board, can be viewed on the Rio Tinto website. Among the key criteria are independence of management and the absence of
any business relationship which could materially interfere with the directors independence of judgement and ability to provide a strong, valuable contribution to the boards
deliberations or which could interfere with the directors 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 the Group and the other party to the contract. Applying these criteria, the board is satisfied that the majority of the non
executive directors: Ashton Calvert, Sir David Clementi, Vivienne Cox, Sir Rod Eddington, Michael Fitzpatrick, Richard Goodmanson, Andrew Gould, Lord Kerr and Sir Richard Sykes are independent.
The board is also satisfied that the strength and objectivity of Sir Richard Sykes contribution to the board, as a non executive director since 1997, is fully consistent with that of an
independent director and so continues to regard him as independent. He was re-elected at the 2007 annual general meetings, to serve one more year, to support the board during a period of executive transition. Sir Richard is the senior independent
director and also chairs the Remuneration committee.
David Mayhew, who is chairman of one of Rio Tinto plcs stockbrokers, is
not considered independent in accordance with
the Code.
Paul Skinner was, until his appointment as chairman in 2003, an independent non executive director in compliance with the Code. He also satisfies the tests for independence under the ASX
Principles and the NYSE Standards.
The
directors biographies are set out on pages 89 to 92.
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 Audit
committee, Remuneration
committee, Nominations 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 to ensure they continue to be at the
forefront of best practice; and are posted on the Groups website. Minutes
of all committee meetings are circulated to the board, with oral reports at the
next board meeting. None of the executive directors are members of any of these
committees.
Audit committee
The Audit
committees 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 Tintos 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
all attend meetings. A copy of the Audit
committee
charter is reproduced on page 129 to 130 and can be found
on the website.
The Audit committee is chaired by Andrew Gould and its members are Sir David Clementi, Vivienne Cox, Michael Fitzpatrick
and Lord Kerr. David Mayhew attends in an advisory capacity.
Remuneration 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 95 to 121, together with details of the Groups remuneration policies.
The committee is chaired by Sir Richard Sykes and its members are Sir David Clementi, Michael Fitzpatrick, Richard Goodmanson and Andrew Gould.
Nominations committee
The Nominations committee is chaired by the chairman of Rio Tinto, Paul Skinner. The committee is responsible, on behalf of the board, for ensuring that a suitable process is in
place to meet the recruitment requirements of the board. It reviews the mix,
structure and experience of the board and the desired profiles of potential candidates
for
membership. In consultation with external search consultants it oversees the
review and recruitment process to fill vacancies as they arise. The recruitment
process itself includes identification of suitable candidates, followed by a
formal assessment of each candidate, leading to a final selection process. Proposals
for new members are submitted to the full board for approval. On behalf of the
board it also reviews proposals
for senior executive appointments and succession planning.
The committee further 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 Rod Eddington, David Mayhew and Sir Richard Sykes. Under the Code, two members of the committee are not considered
independent: Paul Skinner, following his appointment as chairman, and David Mayhew. The Code specifically allows the chairman to chair the Nominations
committee. As stated above, the board takes the view that Sir Richard continues to be an independent director and the composition of the committee is therefore compliant with the Code.
Committee on social and environmental accountability
The Committee on social and environmental accountability reviews the effectiveness of management policies and procedures in place to deliver those standards in our statement of business practice, The way we work, 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 Richard Goodmanson, are Ashton Calvert, Sir Rod Eddington and Lord Kerr.
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 page 74.
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 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 Continuous disclosure standards, which are appended to the Corporate governance standards and posted on the website.
In addition to statutory documents, Rio Tinto has a recently redesigned website featuring in-depth information on health, safety and the environment, as well as general investor information and
Group policies. Results presentations and investor seminars are made available as they happen as well as in the form of an archive on the website.
The Group produces a range of informative publications, which are available on request. For further details, see our website.
Full
advantage is taken of the annual general meetings to inform shareholders of current
developments and to give shareholders the opportunity to ask questions. As recommended
by the ASX
Principles, Rio Tinto Limiteds external auditor attends the annual general meeting and is available to answer shareholder questions about the conduct of the audit and the preparation and content of the auditors report. Rio Tinto Limited
shareholders are also able to submit written questions regarding the statutory audit report to the auditors via the Company. Any questions received and answers provided are made available to the members at the Rio Tinto Limited annual general
meeting. Rio Tinto plcs auditors attend the annual general meeting in London
and are available to respond to audit related shareholder questions.
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. The senior independent director and other non executive directors are also available as appropriate.
The
Group 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 Groups
investor relations advisors.
Statement of business practice The way we work provides the directors and all Group employees with a summary of the global policies and controls in place to help ensure that high governance and business standards
are communicated and maintain ed throughout the Group.
Global policies are adopted by the board after wide consultation, externally and within the Group. Once adopted, they are communicated to business units worldwide, together with mandatory
standards and guidance notes to support implementation. Business units are required to devote the necessary effort by management to implement and report on these policies and standards.
In 2006, Rio Tinto undertook a review of its global policies. The following policies are currently in place: access to
land; communities; corporate governance; employment; environment; human rights;
information management; occupational health; political involvement; safety and
sustainable development. To complete the suite of policies, the following are
being revised: business integrity; information security management and information
technology; internal controls and reporting; transparency; and risk. Each of
these policies is supported by standards expanding on the minimum expectations
on topics such as antitrust, continuous disclosure, compliance, and health, safety
and the environment. Many of these standards are supplemented by guidance notes.
These policies and standards 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 Groups 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 Tintos
policies are communicated to its business partners and they are
encouraged to adopt similar policies of their own.
Rio
Tintos report on social and environmental matters follows the guidelines
of the Global Reporting Initiative and
the Association
of British Insurers.
This report can be found on page 71. Details of the Groups overall and individual businesses social
and environmental performance continue to be published on the website and in
the Sustainable development review.
Responsibilities of the directors
The directors are required 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. This includes, in respect of Rio Tinto
plc, preparing financial statements in accordance with UK company law which
give a true and fair view of the state of the Companys affairs, and preparing
a Remuneration report which includes the information required by Part 3 of Schedule
7A to the UK Companies Act 1985 and Australian Accounting
Standard AASB 124 Related Party Disclosures.
To ensure that these requirements are satisfied, the directors are responsible for establishing and maintaining adequate internal controls, including disclosure controls and procedures for
financial reporting throughout the Group.
The directors consider that the 2006 Annual report and 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
Tintos business and supported by reasonable and prudent judgements and
estimates. 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 Principle 7.2, this written statement relies on
a sound system of risk management and internal compliance and controls which
implements the policies adopted by the board and confirms that
the Groups
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 co nduct 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 the Group and to prevent and detect fraud and other irregularities. The directors
are also responsible for ensuring that appropriate systems are in place to maintain
and preserve the integrity
of the Groups website. Legislation in the UK governing the preparation
and dissemination of financial statements may differ from current and future
legislation in other jurisdictions. The work carried out by the auditors does
not involve consideration of such developments and, accordingly, the auditors
accept no re
sponsibility for any changes, should any be made, to the financial statements
since they were initially available 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 Companies and the Group are a going concern since they have adequate financial
resources to continue in operational existence for the foreseeable future.
Boards statement on internal control
Rio
Tintos 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 Groups system of internal controls 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. Due to the limitations inherent in any such system,
this is designed to manage
rather than eliminate risk and to provide 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
2006 and up to and including the date of approval of the 2006 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.
Two
of the Groups management committees, the Executive committee and the Disclosures and procedures committee regularly
review information related to the Groups control framework. This information
is presented to the Audit
committee to enable its members to assess
the effectiveness of the internal controls. In addition, the board and its committees
monitor the Groups 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 Groups businesses and administrative offices complete
an internal control questionnaire that seeks to confirm that adequate internal
controls are in place,
are operating effectively and are designed
to capture and evaluate failings and weaknesses, if any exist, and take prompt
action as appropriate. The results of this process are
reviewed by the executive committee and it is then presented to the Audit committee and
board as a further part of their review of the Groups internal controls.
This
process is continually reviewed and strengthened as appropriate.
The Group has material investments in a number of jointly controlled entities and associates. Where Rio Tinto does not have managerial control, it cannot guarantee that local management of
mining and related assets will comply with
Rio Tinto standards or objectives. Accordingly, the review of their internal
controls is less comprehensive than that of
the Groups
managed operations.
Disclosure controls and procedures
The common management of each of Rio Tinto plc and Rio Tinto Limited,
with the participation of their common chief executive and finance director,
have evaluated the effectiveness of the design and operation of the Groups
disclosure controls and procedures as of 31 December 2006 and have concluded
that these disclosure controls and procedures were effective to provide reasonable
assurance that the information it is required to disclose is reported fairly
as and when required.
The Disclosure and procedures
committee is 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 the directors
since its establishment in 2002 and will continue to do so.
Managements report on internal
control over financial reporting has been set out on
page 147.
New York Stock Exchange
Rio Tinto plc, as a foreign issuer with American Depositary Shares listed on the NYSE, is obliged by the NYSE Standards to disclose any significant ways in which its practices of corporate
governance differ from the NYSE standards.
The Company has reviewed the NYSE Standards and believes
that its practices are broadly consistent with them, with
one exception. The NYSE 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
128. This committee does not develop corporate governance principles for the
boards approval.
The board itself performs this task and
approves
the
Groups overall system of governance and internal controls.
New Zealand Stock Exchange
Rio
Tinto Limited is also listed on the New Zealand Stock Exchange (NZX)
which has introduced a Corporate Governance
Best Practice Code (the NZX Code). As an overseas listed issuer on the NZX, Rio
Tinto Limited is deemed to comply generally with the NZX Listing Rules, including
the NZX Code, while it remains listed on the ASX. Whilst the ASX Principles and
the NZX Code are substantially the same, there may be some AS X
Principles or other ASX corporate governance
rules which differ materially from the NZXs corporate governance rules
or the NZX Code. The ASX Principles and other corporate governance rules can
be found on the
ASX website: www.asx.com.au.
Principal auditors
The
remuneration of the Groups principal auditors for audit services and other
services, as well as remuneration payable to other accounting firms, has been set out in note 41 to the
2006 financial statements.
Rio
Tinto has adopted policies designed to uphold the independence of the Groups
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 Groups
principal auditors to provide statutory audit services, certain other assurance
services, tax services and some other specific services are pre-approved annually
by the Audit
committee.
Each engagement of the Groups principal auditors to
provide other permitted services is subject to the
specific approval of the Audit committee or
its chairman.
Prior to the commencement of each
financial year, the Groups finance director submits 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 Groups principal
auditors, where the expected fee exceeds a pre-determined level, must be
subject to the Groups normal tender
procedures. However, in exceptional circumstances the finance director is authorised
to engage the Groups 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 has adopted policies for the pre-approval of permitted services
provided by the Groups principal auditors. These are regularly reviewed
by the committee. Engagements for services provided by the Groups
principal auditors since the adoption of these policies were either within
the pre-approval policies or approved by the Audit committee.
Audit committee
The Audit committee meets the membership requirements of
the Code, the ASX Principles and the NYSE Standards. The Group also meets the
composition, operation and responsibility requirements in respect of audit committees
mandated by the ASX. 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 129 to 130.
The Audit committee comprises
the five members set out below. Michael Fitzpatrick became a member of the committee
with effect from June 2006. The members of the committee are independent and
are free of any relationship that would interfere with impartial judgement in
carrying out their responsibilities. David Mayhew attends the meetings in an
advisory capacity.
Report of the Audit committee
The Audit committee met seven times in 2006. It monitors developments in corporate governance in the UK, Australia and the US, to ensure the Group continues to apply high and appropriate standards.
The charter, reproduced on page 129, is subject to regular discussion and review.
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 Audit committee advised
the directors that it is satisfied that the provision of non audit services
by the external auditors during 2006
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 separately with management,
the external auditors and the internal auditor.
Financial expert
The Audit committee reviewed
the SEC requirements for audit committees financial experts and the Code
requirement that at least one committee member should have recent and relevant
financial experience. Following a detailed review, the committee recommended
to the board that Michael Fitzpatrick, Andrew Gould and Sir David Clementi be
identified as the Audit committees financial
experts in the 2006 Annual report and financial
statements . The board has also concluded
that Michael Fitzpatrick, Andrew Gould and Sir David Clementi possess the requisite
skills, experience and background to qualify for the purpose of clause C.3.1
of the Code.
2006 financial statements
The Audit committee has
reviewed and discussed with management the Groups audited financial statements
for the year ended 31 December 2006.
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 International Standard on Auditing (UK and Ireland) 260, Communication of Audit Matters with those charged with governance (ISA 260), including
their judgements regarding the quality of the Groups 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
Boards
Standard No. 1, Independence Discussions with Audit Committees and ISA 260.
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 the 2006 Annual report and
financial statements.
Andrew Gould (Chairman) Sir David Clementi
Vivienne Cox
Michael Fitzpatrick
Lord Kerr
Report of the Nominations committee
The Nominations
committees activities during 2006 covered executive and non executive
succession and appointments. 2006 saw the appointment of both an executive director, Tom Albanese,
and a non executive director, Michael Fitzpatrick, as well as the appointment
of Bret Clayton as Tom Albaneses successor as chief executive, Copper,
followed
by the announcement in December 2006 of Toms succession as chief executive
in May 2007.
Michael Fitzpatrick is an Australian independent director, who
brings extensive Australian and international business experience to the board.
A short biography of each is set out on pages 89 to 92.
As part of his annual performance assessment of individual directors, Paul Skinner, who is chairman of the Nominations committee, has also reviewed the time committed by directors to Group business and confirmed this to be appropriate in each case.
Paul Skinner (Chairman) Ashton Calvert, AC
Sir Rod Eddington
David Mayhew
Sir Richard Sykes
The Company 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 controls that the
boards and management have established;
•
The Groups 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 internal
auditors.
Composition The Audit committee shall comprise three or
more non executive directors, all of whom shall be independent. The chairman
of the Audit committee will be an independent director, who is not also
the chairman of the boards. The boards will determine each directors
independence having regard to the Independence Policy adopted by the boards,
which includes consideration of any past and present relationships with the
Group which, in the opinion of the boards, could influence the directors
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 committee members.
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 Companys 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 Groups financial statements, Form 20-F, 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 company and their
compliance with accounting standards, stock exchange listing rules and
relevant legislation.
•
Discuss with management and the external auditors
managements 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 and
interim financial statements and Form 20-F reviewed by the committee
(or the chairman representing the committee for this purpose) be included
in the Groups annual report.
•
Review the regular reports prepared by the
internal auditor including the effectiveness of the Groups internal
financial controls.
External auditors
•
Review and recommend to the boards
the external auditors to be proposed to shareholders, following a commercial
tender if deemed necessary.
•
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 Groups
accounting principles, material judgments and any other matters that
the committee deems appropriate.
•
Periodically 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 and approve the internal audit plans.
•
Review internal audit performance.
•
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 Company 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
Companys internal control system with management and the internal
and external auditors.
•
Evaluate the process the Company
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 Groups insurance cover.
•
Review the Groups tax planning and
compliance.
•
Review the Groups whistle-blowing
procedures for financial reporting.
As far as is known, Rio Tinto plc is not directly
or indirectly owned or controlled by another corporation or by any government.
Rio Tinto plc does not know of any arrangements which may result in a change
in its control. As of 8 June 2007, the total amount of the voting securities
owned by the directors of Rio Tinto plc as a group wa s 112,964 ordinary
shares of 10p each representing less than one per cent of the number in
issue.
As far as is known, Rio Tinto
Limited, with the exception of the arrangements for the dual listed companies
merger described on pages 136 to 139, is not directly or indirectly owned
or controlled by another corporation or by any government.
As of 8 June 2007, the only person known to Rio Tinto Limited as owning more
than five per cent of its shares was Tinto Holdings Australia Pty Limited,
which is an indirect wholly owned subsidiary of Rio Tinto plc, with 171,072,520
shares, representing 37.48 per cent of its issued capital. Rio Tinto Limited
does not know of any arrangements which may result in a change in its control.
As of 8 June 2007 the total amount of the voting securities owned by the
directors of Rio Tinto Limited as a group was 96,190 shares representing
less than one per cent of the number in issue.
Directors interests in Group
voting securities are shown in Table 3 on page 111. Their total beneficial interest
in the Group amounts to less than one per cent.
Except as provided under the DLC Merger
Sharing Agreement as explained on pages 136 to 137, the Groups major
shareholders have the same voting and other rights as other shareholders.
As at 8 June 2007 there were 250 shareholders
who had registered addresses in the US holding 157,241 shares in Rio
Tinto plc, and 255 who had registered addresses in the US holding 342,609 shares
in Rio Tinto Limited.
SUBSTANTIAL SHAREHOLDERS
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. Excluding the interest held by Tinto
Holdings Australia Pty Limited in Rio Tinto Limited, the shareholders to have provided such
notice are:
Rio Tinto plc
Date of
Number of
Percentage
notice
shares
of issued
share capital
Barclays PLC
12 Jul 2006
42,129,019
4.02
The Capital Group Companies,
Inc
13 Jun 2006
41,031,494
3.90
Legal & General plc
5 Oct 2005
33,539,570
3.13
Note
As far as it is known, Rio Tinto is not
directly or indirectly owned or controlled by another corporation or
by any government.
Rio Tinto Limited
Date of notice
Number of
Percentage
shares
of issued
share capital
None
—
—
Note
Rio Tinto is not aware of any arrangement
which may result in a change in its control.
ANALYSIS OF ORDINARY SHAREHOLDERS As at
9 February 2007
Rio Tinto plc
Rio Tinto Limited
No of
%
Shares
%
No of
%
Shares
%
accounts
accounts
1 to 1,000 shares
38,405
71.07
14,822,316
1.46
82,340
80.40
29,578,002
10.35
1,001 to 5,000 shares
12,810
23.70
25,735,953
2.53
17,665
17.25
34,745,068
12.16
5,001 to 10,000 shares
1,098
2.03
7,540,348
0.74
1,489
1.45
10,395,908
3.64
10,001 to 25,000 shares
560
1.04
8,800,248
0.86
597
0.58
8,920,489
3.12
25,001 to 125,000 shares
550
1.02
31,301,789
3.07
225
0.22
11,279,596
3.95
125,001 to 250,000 shares
204
0.38
37,073,012
3.64
40
0.04
6,602,885
2.31
250,001 to 1,250,000 shares
273
0.50
148,918,025
14.63
36
0.04
20,609,086
7.21
1,250,001 to 2,500,000
71
0.13
124,513,650
12.23
8
0.01
15,088,234
5.28
2,500,001 and over
68
0.13
515,236,968
50.61
10
0.01
148,524,155
51.98
ADRs
—
—
104,131,792
10.23
—
—
—
—
Publicly held shares
54,309
100
1,018,074,101
100
102,411
100
285,743,423
100
Shares held in treasury
53,607,337
—
Tinto Holdings Australia Pty
Limited
171,072,520
1,071,681,438
456,815,943
Number of holdings
less than marketable parcel of A$500.
1,378
TWENTY LARGEST REGISTERED SHAREHOLDERS
In accordance with the ASX Listing Rules, below
are the names of the twenty largest registered holders of Rio Tinto Limited
shares and the number of shares and the percentage of issued capital each
holds:
Rio Tinto Limited
Percentage
of issued
Number of
share
shares
capital
1
Tinto Holdings Australia Pty
Limited
171,072,520
37.45
2
National Nominees Limited
38,626,816
8.46
3
J P Morgan Nominees Australia
Limited
36,164,864
7.92
4
Westpac Custodian Nominees Pty
Limited
33,163,997
7.26
5
Citicorp Nominees Pty Limited
10,141,523
2.22
6
ANZ Nominees Limited
8,209,196
1.80
7
Cogent Nominees Pty Limited
6,320,939
1.38
8
Queensland Investment Corporation
6,151,422
1.35
9
HSBC Custody Nominees (Australia)
Limited
4,006,203
0.88
10
Citicorp Nominees Pty Limited
3,186,324
0.70
11
Westpac Financial Services Limited
2,552,871
0.56
12
Australian Foundation Investment
Company Limited
2,438,414
0.53
13
AMP Life Limited
2,424,837
0.53
14
UBS Wealth Management Australia
Nominees Pty Ltd
2,332,068
0.51
15
Citicorp Nominees Pty Limited
2,125,342
0.47
16
RBC Dexia Investor Services Australia
Nominees Pty Ltd
1,793,472
0.39
17
Citicorp Nominees Pty Limited
1,397,217
0.31
18
Argo Investments Limited
1,298,920
0.28
19
RBC Dexia Investor Services Australia
Nominees Pty Ltd
1,277,964
0.28
20
Suncorp Custodian Services Pty
Limited
1,240,193
0.27
335,925,102
73.55
Notes
1
Tinto Holdings Australia Pty
Limited is a wholly owned subsidiary of Rio Tinto plc.
2
Other large registered shareholders
are nominees who hold securities on behalf of beneficial shareholders.
RELATED PARTY TRANSACTIONS
Information about material related party transactions
of the Rio Tinto Group is set out in note 42 to the 2006 financial statements.
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 Companys financial position
or profitability.
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 pages 136 to 139.
Dividend policy The aim of Rio Tintos progressive dividend policy
is to increase the US dollar value of ordinary dividends over time, without
cutting them during economic downturns.
The rate of the total annual
dividend, in US dollars, is determined taking into account the results for
the past year and the outlook for the current year. The interim dividend is
set at one half of the total ordinary dividend for the previous year. Under
Rio Tintos dividend policy the final ordinary dividend for each year
is expected to be at least equal to the previous interim dividend.
Dividend determination The majority of the Groups sales are transacted in US dollars, making
this the most reliable measure for the Groups global business performance.
It is Rio Tintos main reporting currency and consequently the natural
currency for dividend determination. Dividends determined in US dollars are
translated at exchange rates prevailing two days prior to the announcement
and are then declared payable in sterling by Rio Tinto plc and in Australian
dollars by Rio Tinto Limited.
On request
shareholders of Rio Tinto plc can elect to receive dividends in Australian
dollars and shareholders of Rio Tinto Limited can elect to receive dividends
in sterling. Shareholders
requiring further information should contact Computershare.
2006 dividends The 2006 interim and final dividends were determined
at 40.0 US cents and at 64.0 US cents per share respectively and the applicable
translation rates were US$1.8674 and US$1.96145 to the pound sterling
and US$0.7622 and US$0.77255 to
the Australian dollar.
Final
dividends of 32.63 pence per share and of 82.84 Australian cents per share
were paid on 13 April 2007. A final dividend of 256 US cents per Rio Tinto
plc ADR (each representing four shares) was paid by JPMorgan Chase Bank NA
to ADR holders on 16 April 2007.
The tables below set out
the amounts of interim, final and special 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 plc and Rio Tinto Limited US
cents
per ADS
2006
2005
2004
2003
2002
Interim
160
154
128
120
118
Final
256
166
180
136
122
Special
—
440
—
—
—
Total
416
760
308
256
240
Dividend reinvestment plan (DRP) Rio Tinto offers a DRP to registered shareholders, which provides the opportunity to use cash dividends to purchase Rio Tinto
shares in the market free of commission. See Taxation on page 143 for an explanation
of the tax consequences. Due to local legislation the DRP cannot be extended
to shareholders in the US, Canada and certain other countries. Please contact
Computershare for further information.
POST BALANCE SHEET EVENTS
No significant changes have occurred since the date of the financial statements.
Item 9.
The Offer and Listing
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. In addition, share prices are 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
plus VAT, in addition to any mobile phone charges.
Rio Tinto plc has a sponsored American Depositary Receipt (ADR) facility with JPMorgan Chase Bank NA (JPMorgan) 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 20 05 when JPMorgan became
Rio Tinto
plcs depository. 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.
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 plcs 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.
As at 8 June 2007, there were 25.9 million Rio Tinto plc ADSs in issue, representing
103.6 million Rio Tinto plc shares which
were held of record by 380 ADR holders and which represented 10.35 per cent of
the publicly held shares. There were 53,482 holders of record of Rio Tinto plcs
shares of whom 250 had registered addresses in the US, holding 157,241 Rio Tinto
plc shares which represented 0.016 per cent of the publicly held shares. 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 Securities Exchange (ASX) and the New Zealand Securities 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 had an ADR facility with JPMorgan Chase Bank NA under a Deposit Agreement, dated 6
June 1989, as amended on 1 August 1989, as further amended and restated on 2
June 1992 and as further amended and
restated on 7 July 2005 when JPMorgan became Rio Tinto Limiteds depository.
Rio Tinto Limited had established a separate ADR programme before the DLC merger in 1995 but the Group did not
believe that there was any benefit in continuing to maintain two separate ADR
programmes and in 2006 decided that, due to the relative size of the Rio Tinto
Limited ADR programme, it should be terminated. In February 2006 formal notice
of termination of the Deposit Agreement was given to JPMorgan and it was terminated
on 10 April 2006, immediately after the payment of the final dividend to the
ADR holders. Any questions concerning holdings of Rio Tinto Limited ADRs should
be directed to the JPMorgan Service Center on (800) 990 1135.
The following table sets out for the periods indicated the high and low closing sale prices of Rio Tinto Limited shares
based upon information provided by the ASX. There is no established trading market
in the US for Rio Tinto Limiteds shares.
As at 8 June 2007, there were 104,491 holders of record of Rio Tinto
Limiteds shares of whom 255 had registered addresses in the US holding
342,609 Rio Tinto Limited shares which represented 0.12 per cent of the publicly
held shares. In addition, certain 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 JPMorgan 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. ADR holders will receive the Annual review and
interim reports on request.
Rio Tinto is subject to the US Securities and Exchange
Commission (SEC) reporting
requirements for foreign companies. A Form 20-F, which corresponds with the Form
10-K in US public companies, will be filed with the SEC. Rio Tintos Form
20-F and other filings can be viewed on the Rio Tinto website as well as 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 shares and investments and the income derived from them can go down as well as up, and investors may
not get back the amount they invested.
Item 10.
Additional Information
DUAL LISTED COMPANIES STRUCTURE
In 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. Consistent
with the commitments made to the Australian Government in 1995, the Rio Tinto
plc shareholding in Rio Tinto Limited has been reduced over time and it now stands
at approximately
37.5 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 to ensure that
the businesses of Rio Tinto plc and Rio Tinto
Limited are managed on a unified basis, to ensure that the boards of directors
of each Company is the same, and 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 Rio Tinto, as a Group, aims to comply with the strictest applicable level.
Consistent with the creation of a single combined enterprise under the DLC merger, directors of each Company act in the best interests of Rio Tinto as a whole.
When matters may involve a conflict of interests between the shareholders of each Company they must be approved under the Class Rights Action approval procedure.
To ensure that
the boards of both Companies are identical, resolutions to appoint or remove
directors must be put to shareholders
of both as a joint electorate as Joint Decisions as described under Voting rights,
and
it is a requirement that a person can only be a director of one Company if that
person is also a director of the other Company. So, for example,
if a person was removed as a director of Rio Tinto plc, he or she would also
cease to be a director of Rio Tinto Limited.
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, 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 Groups 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 Companys 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 were announced to the stock exchanges, published on the Rio
Tinto website and advertised in the Financial Times and The Australian newspapers.
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 restrictions and obligations on persons who control interests in
public quoted companies in excess of defined 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
law 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 either 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
Companys 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 may not
attend or vote at general meetings of the relevant Company, may not receive dividends or other distributions from the relevant Company, and 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 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.
MEMORANDUM AND ARTICLES OF ASSOCIATION
Rio Tinto plc adopted new Articles of Association
by special resolution passed on 11 April 2002 and, amended on 14 April 2005
and 13 April 2007. And Rio Tinto Limited adopted a new Constitution by special
resolution passed on 24 May 2000 and, amended by special resolution on 18
April 2002, 29 April 2005 and 27 April 2007. The resolution passed during
April 2007 was in response to the implementation in the United Kingdom of
the European Union Directive on Takeover Bids on 20 May 2006. Following the
DLC merger in 1995 the Group introduced some change of control provisions
which were designed to ensure that no one could gain control of one Company
without making an offer to the shareholders of the other. The resolution
removed certain discretions conferred on the directors by the change of control
provisions which might have been impacted by the
implementation of the Directive on Takeover Bids.
Introduction As explained on pages 136 to 139 under the terms of the DLC merger the shareholders of Rio Tinto plc and of Rio Tinto Limited entered into certain contractual arrangements which are designed to place the shareholders of
both Companies in substantially the same
position as if they held shares in a single enterprise which owned all of the
assets of both Companies. Generally and as far as is permitted
by the UK Companies Act and the Australian Corporations Law this principle is
reflected in the Memorandum and Articles of Association of Rio Tinto plc and
in the Constitution of Rio Tinto Limited. The summaries below include descriptions
of material rights of the shareholders of both Rio Tinto plc and Rio Tinto Limited.
Unless stated otherwise the Memorandum and Articles of Association of and Constitution
are identical.
Rio
Tinto plc is incorporated under the name Rio Tinto plc and is registered
in England and Wales with registered
number
719885 and Rio Tinto
Limited is incorporated under the name Rio Tinto Limited and is registered
in Australia with ABN 96 004 458 404.
No holder of shares, which may be held in either certificated or uncertificated form, will be required to make any additional contributions of capital.
Objects The objects of Rio Tinto plc are set out in the fourth clause of its Memorandum of Association and the objects of Rio Tinto Limited are set out in the second clause of its Constitution. Included in these objects is the
right for each Company to enter into, with one another, operate and carry into effect an Agreement known as the DLC Merger Sharing Agreement and a Deed Poll Guarantee.
Other objects of Rio Tinto plc include provisions:
•
to carry on as an Investment Holding Company;
•
to subscribe for, sell, exchange or dispose of any type of security or investment;
•
to purchase any estate or interest in property or assets;
•
to borrow and raise money to secure or discharge any debt or obligation of
or binding on the Company;
•
to draw, make or deal in negotiable or transferable instruments;
to amalgamate with and co-operate with or assist or subsidise any company, firm or person and to purchase or otherwise acquire or undertake all or any part of the business property or
liabilities of any person, body or company carrying on any business which this Company is authorised to carry on;
•
to promote the Company;
•
to lend money and guarantee contracts or obligations of the Company and to
give all kinds of indemnities;
•
to sell, lease, grant licences and other rights over any part of the Company;
•
to procure the registration of the Company outside England;
•
to subscribe or guarantee money to any national, charitable, benevolent, public, general or exhibition which may further the objects of the Company or the interest of its members;
•
to grant pensions or gratuities to employees, ex-employees, officers and
ex-officers;
•
to establish any scheme or trust which may benefit employees;
•
to lend money to employees to purchase Company shares;
•
to purchase and maintain insurance for employees and
to carry on the objects of the Company in any part of the world
either as principals, agents, contractors, trustees or
otherwise.
Other objects of Rio Tinto Limited
include the powers:
•
to prospect for, explore, quarry, develop, excavate, dredge for, open, work, win, purchase or otherwise obtain all minerals, metals and substances;
•
to carry on business as proprietors of and to purchase, take on, lease or in exchange or otherwise acquire and control mineral and other properties, lands and hereditaments of any tenure,
mines and other rights or options thereon;
•
to raise, win, get, quarry, crush, smelt, calcine, refine, dress, amalgamate, manipulate and otherwise treat, prepare, sell and deal in ores, metals and other products of mines;
•
to carry on business as ship owners, railway proprietors, motor car, lorry and coach proprietors, and garage proprietors, carriers and hauliers, bankers, storekeepers, wharfingers, cartage,
storage, building and general contractors and to buy and sell or otherwise deal in real or personal property of any kind;
•
to carry on business as manufacturers of and dealers in and exporters and importers of goods and merchandise of all kinds and merchants generally; and
•
to guarantee the payment of premiums on any sinking fund or endowment policy or policies taken out by any company having objects similar to the objects of the Company.
Directors Under Rio Tinto plc's Articles of Association
a director may not vote in respect of any proposal in which he or any other
person connected with him, has any material interest other than by virtue of
his interests in shares or debentures or other securities of or otherwise in
or through the Company, except where resolutions:
(a)
indemnify him or a third party in respect of obligations incurred by the
director on behalf of, or for the benefit of, the Company, or in respect
of obligations of the Company, for which the director has assumed responsibility
under an indemnity, security or guarantee;
(b)
relate to an offer of securities in which he may be interested as a holder
of securities or as an underwriter;
(c)
concern another body corporate in which the director is beneficially interested
in less than one per cent of the issued shares of any class of shares of
such a body corporate;
(d)
relate to an employee benefit in which the director will share equally with
other employees; and
(e)
relate to liability insurance that the Company is empowered to purchase for
the benefit of directors of the Company in respect of actions undertaken
as directors (or officers) of the Company.
Under Rio Tinto Limited's Constitution,
except where a director is constrained by Australian law, a director may
be present at a meeting of the board while a matter in which the director
has a material interest is being considered and may vote in respect of
that matter.
The directors
are empowered to exercise all the powers of the Companies to borrow money,
to charge any property or business
of the Companies or all or any of their uncalled capital and to issue debentures
or
give any other security for a debt, liability
or obligation of the Companies or of any other person. The directors shall
restrict the borrowings of Rio Tinto plc to the limitation that the aggregate
amount of all moneys borrowed by the Company and its subsidiaries
shall not exceed an amount equal to one and one half times the
Companys share capital plus aggregate reserves unless sanctioned by an
ordinary resolution of the Company.
Directors are
not required to hold any shares of either Company by way of qualification, but
a director is nevertheless entitled to attend
and speak at shareholders' meetings. Nevertheless, as disclosed in the Remuneration
report on pages 95 to 121 the Remuneration committee has informed the executive
directors that they would be expected to build up a shareholding equal in value
to two times
salary over five years.
Directors are
required to retire in accordance with statutory age limits. Directors who we
re elected or re-elected a director in the third year before each annual general
meeting are required to retire by rotation and such further directors (if any)
shall retire by rotation as would bring the number retiring by rotation up to
one third of the number of directors in office at the date of the notice of meeting
(or, if their number is not a
multiple of three, the number nearest to but not greater
than one third). These further directors required to retire shall be selected
from the other directors subject to
retirement by rotation who have been longest in office since their last re-election
and where directors were re-elected on the
same day then, unless they otherwise agree amongst themselves, they will be selected
by the alphabetical order of their names. In addition any director appointed
by the directors since the last annual general meeting is also required to retire.
A retiring director shall be
eligible for re-election.
In the absence of an independent quorum, the directors are not competent to vote compensation to themselves or to any members of their body.
Rights attaching to shares Under English law, dividends on shares may only be paid out of profits available for distribution, as determined in accordance
with generally accepted accounting principles and by the relevant law. Shareholders
are entitled to receive such dividends as may be declared by the directors. The
directors may also pay shareholders such interim dividends as appear to them
to be justified by the financial
position of the Group.
Any Rio Tinto
plc dividend unclaimed after 12 years from the date the dividend was declared,
or became due for payment, will be forfeited and returned to the Company. Any
Rio Tinto Limited
dividend unclaimed may be invested or otherwise
made use of by the board for the benefit of the Company until claimed or otherwise
disposed of according to Australian law.
Voting rights Voting at any general meeting of shareholders
on a resolution on which the holder of the Special Voting Share is entitled
to vote shall be decided by a poll, being a written vote, and any other resolution
shall be decided
by a show of hands unless a poll has
been duly demanded. On a show of hands, every shareholder who is present in person
or by proxy
at a general meeting has one vote regardless of the number of shares held. On
a poll, every shareholder who is present in person or by proxy has one vote for
every ordinary share or share for which he or she is the holder and, in the case
of Joint Decisions, the holder of the Special Voting Share has one vote for each
vote cast by the public shareholders at the parallel meeting of shareholders.
The voting rights attached to the Special Voting Share have been set
out on pages 137 to 138. A poll may be demanded by
any of the following:
•
the chairman of the meeting;
•
at least five shareholders entitled to vote at the meeting;
•
any shareholder or shareholders representing in the aggregate not less than one tenth (Rio Tinto plc) or one twentieth (Rio Tinto Limited) of the total voting rights of all shareholders
entitled to vote at the meeting;
•
any shareholder or shareholders holding shares conferring a right to vote at the meeting on which there have been paid-up sums in the aggregate equal to not less than one tenth of the total
sum paid up on all the shares conferring that right; or
•
the holder of the Special Voting Share.
A proxy form will be treated
as giving the proxy the authority to demand a poll, or to join others
in demanding one.
The necessary
quorum for a Rio Tinto plc general meeting is three persons and for a
Rio Tinto
Limited general meeting is two persons carrying a right to vote upon
the business to be transacted, whether present in person or by proxy.
Matters are transacted
at general meetings by the proposing and passing of resolutions, of which there
are three kinds:
•
an ordinary resolution, which includes resolutions for the election of directors, the receiving of financial statements, the cumulative annual payment of dividends, the appointment of
auditors, the increase of authorised share capital or the grant of authority to allot shares;
•
a special resolution, which includes resolutions amending the
Companys
Memorandum and Articles of Association of Rio Tinto plc or the Constitution of
Rio Tinto Limited, disapplying statutory pre-emption rights or changing
the Companys name; and
•
an extraordinary resolution, which includes resolutions modifying
the rights of any class of the Groups shares at a meeting of the holders of such class of shares or relating to
certain matters concerning the winding up of either Company.
An ordinary resolution requires
the affirmative vote of a majority of the votes of those persons voting
at a meeting at which there is a quorum. Special and extraordinary resolutions
require the affirmative vote of not less than three fourths of the persons
voting at a meeting at which there is a quorum. In the case of an equality
of votes, whether on a show of hands or on a poll, the chairman of the
meeting is entitled to cast the deciding vote in addition to any other
vote he may have.
The DLC Merger
Sharing Agreement further classifies these three kinds of resolutions
into Joint Decisions and Class Rights Actions as explained
under voting rights on
pages 137 to 138.
Annual general
meetings must be convened with 21 days advance written notice for Rio Tinto
plc and with 28 days for Rio Tinto Limited. Other meetings must be convened
with 21 days advance written notice for the passing of a special resolution
and with 14 days for any other resolution, depending on the nature of the
business to be transacted. The days of delivery or receipt of the notice
are not included. The notice must specify the nature of the business to
be transacted. The board of directors may,
if they choose, make arrangements for shareholders who are unable to attend
the place of the meeting to participate at other places.
Variation of Rights If, at any time, the share capital is divided
into different classes of shares, the rights attached to any class may be varied, subject
to the provisions of the relevant legislation, with the consent in writing of
holders of three fourths in value of the shares
of that class or upon the adoption of an extraordinary resolution passed at a
separate meeting of the holders of the shares of that class. At every such separate
meeting, all of the provisions of the Articles of Association and Constitution
relating to proceedings at a general meeting apply, except that the quorum is
to be the
number of persons (which must be two or more) who hold or represent by proxy
not less than one third in nominal value of the issued shares of the class.
The Sharing Agreement provides for the protection of the public shareholders of both Companies and so any variations
of rights would be dealt with as Class Rights Actions that require
the separate approval of the shareholders of both Companies.
Rights in a Winding-up Except as the shareholders have agreed
or may otherwise agree, upon a winding up, the balance of assets available
for distribution:
•
after the payment of all creditors including certain preferential creditors, whet her statutorily preferred creditors or normal creditors; and
•
subject to any special rights attaching to any class of shares;
is to be distributed among the
holders of ordinary shares according to the amounts paid-up on the shares
held by them. This distribution
is generally to be made in cash. A liquidator may, however, upon the
adoption of an
extraordinary resolution of the shareholders,
divide among the shareholders the whole or any part of the assets in
kind.
The DLC Merger
Sharing Agreement further sets out the rights of ordinary shareholders in a liquidation
as explained on page 138.
Limitations on Voting and Shareholding Except for the provisions of the Foreign Acquisitions and Takeovers Act 1975 which impose certain conditions on the foreign ownership of Australian companies, there are no limitations imposed by law, Rio Tinto plc's
Memorandum and Articles of Association
or Rio Tinto Limited's Constitution, on the rights of non residents or foreign
persons to hold or vote
the Groups ordinary shares or ADSs
that would not apply generally to all shareholders.
EXCHANGE CONTROLS
Rio Tinto plc There
are no UK foreign exchange controls or other restrictions on the import or export
of capital or on the payment of dividends to non resident holders of Rio Tinto
plc shares or that affect the conduct of Rio Tinto
plcs operations. The Bank of England, however, administers financial sanctions against specified targets related to certain regimes.
There
are no restrictions under Rio Tinto plcs memorandum and articles of association
or under UK law that limit the right of non resident owners to hold or vote Rio
Tinto plc shares.
Rio Tinto Limited Under current Australian legislation, the Reserve Bank of Australia does not restrict the import and export of funds and no permission is required for the movement of funds into or out of Australia, except that restrictions
apply to certain financial transactions relating to specified individuals and entities associated with certain regimes.
The Department of Foreign Affairs and Trade has responsibility for the administration of restrictions relating to terrorists and their sponsors, and the former
Iraqi regime.
Rio Tinto Limited may be required to deduct withholding tax from foreign remittances of dividends, to the extent that they are unfranked, and from payments of
interest.
There are no restrictions under the constitution of Rio Tinto Limited that limit the right of non residents to hold or vote Rio Tinto Limited shares.
However acquisitions of interests in shares in Australian companies by foreign interests are subject to review and approval
by the Treasurer of the Commonwealth of Australia under the Foreign Acquisitions
and Takeovers Act 1975 (the Takeovers Act). The Takeovers Act applies to any
acquisition of 15 per cent or more of the outstanding shares of an Australian
company or to any transaction that results in one non resident, or a group of
associated non residents, controlling 15 per cent or more of an Australian company.
The Takeovers Act also applies to any transaction which results in a group of
non associated non residents controlling 40 per cent or more of an Australian
company. Persons who are proposing such acquisitions or transactions are required
to notify the Treasurer of their intention.
The Treasurer has the power to order divestment in cases where such acquisitions
or transactions have already occurred. The Takeovers Act does not affect the
rights of owners whose interests are held in compliance
with the legislation.
UK resident individuals shareholdings in Rio Tinto plc
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.
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. Details of relevant events since 31 March 1982 and adjusted values for Rio Tinto plc securities as at that date
are available from the company secretary.
Australian resident individuals shareholdings in Rio Tinto Limited
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 Australian 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 the Australian 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 shareholders 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 Groups 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 as assessable income.
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. If shareholders have acquired shares after 19 September 1985 they may be subject to capital gains tax on the disposal of those shares.
Generally, disposal of shares held on capital account would give rise to a capital gain or loss. A capital gain arises when the proceeds on disposal are greater than the cost base of shares. A
capital loss arises when the proceeds on sale are less than the cost base or reduced cost base. Where a capital gain arises on shares held for at least 12 months,
individual, trust and superannuation fund shareholders may be
eligible for a capital gains tax discount.
Shareholders are advised to
seek the advice of an independent taxation consultant on any possible capital
gains tax exposure.
US residents 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 and Rio Tinto Limited
shares the Groups 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 Groups
ADSs and shares.
It is based
in part on representations by the Groups depositary bank as Depositary
for the ADRs evidencing the ADSs and
assumes that each obligation in the deposit agreements will be performed in accordance
with its terms.
You are a US holder if you are a beneficial owner
of the Groups ADSs and shares, you are eligible for the benefits of the
relevant Convention, and you are: a citizen or resident of the United States,
a domestic corporation, an estate whose income is subject to United States federal
income tax regardless of its source, or a trust if a United States court can
exercise primary supervision
over the trusts administration and one or more United States persons are
authorized
to control all substantial decisions of the trust.
This section
applies to US holders only if shares or ADSs are held as capital assets for tax
purposes. This section does not apply to shareholders who are members of a special
class of holders
subject to special rules, including a dealer in
securities, a trader in securities who elects to use a mark-to-market method
of accounting for securities holdings, a tax-exempt organization, a life insurance
company, a person liable for alternative minimum tax, a person that actually
or constructively owns ten per cent or more of Rio
Tintos voting stock, a person that holds shares or ADSs as part of a straddle
or a hedging or conversion transaction, or a US holder whose functional currency
is not the US dollar.
This section
is based on the Internal Revenue Code of 1986, as amended, its legislative history,
existing and proposed regulations, published rulings and court decisions, and
on the convention
between the United States of America
and United Kingdom, and the convention between the United States of America and
Australia
which may affect
the tax consequences of the ownership
of the Groups ADSs and shares. These laws and conventions are subject to
change, possibly on a retroactive basis.
US holders should
consult their own tax adviser regarding the United States federal, state
and local and foreign and other tax
consequences of owning and disposing of shares and ADSs in their particular
circumstances.
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. Exchanges of shares for ADSs, and ADSs for
shares, generally will not be subject to US federal income tax.
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 upon the holders death or on a
transfer during the holders 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 shares does not require the payment of Australian stamp duty.
US Federal income tax
United States Internal Revenue Service Circular 230 Notice To ensure compliance with Internal Revenue Service Circular 230, holders are hereby notified that, any discussion of US federal tax issues contained or referred to in this report or any document referred to herein is not
intended or written to be used, and cannot
be used by holders for the purpose of avoiding penalties that may be imposed
on them under the United States Internal Revenue Code, such
discussion is written for use in connection with the matters addressed herein,
and holders should seek advice based on their particular circumstances from an
independent tax adviser.
Taxation of dividends Under the US federal income tax laws, and subject to the passive foreign investment company, or PFIC, rules discussed below,
the gross amount of any dividend that we pay out of our current or accumulated
earnings and profits (as determined for US federal income tax purposes) 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 being subject to withholding tax, the withholding tax.
The dividend is taxable to you when you, in the case of shares, or the Depositary,
in the case of ADSs,
receive the dividend, actually or constructively.
Dividend income will not be eligible for the dividends
received deduction allowed to US corporations. Distributions
in excess of current accumulated earnings and profits, as determined for US federal
income tax purposes, will be treated as non-taxable return of capital to the
extent of your basis in the shares or ADSs and
thereafter as capital gain.
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
before
1 January 2011.
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 60 days during the 121 day period beginning on the date
which is 60 days before the ex-dividend date.
Dividends
will be income from sources outside the US, but dividends paid in taxable years
beginning before January
1, 2007 generally will be passive
or financial services income, and dividends paid in taxable years
beginning
after December 31, 2006 will, depending on the circumstances, be passive or general income
which, in either case, is treated separately from other types of income for purposes
of computing the foreign tax credit allowable to you.
Taxation of Capital Gains Subject to the PFIC rules discussed below, if you are a US holder and you sell or otherwise dispose ofthe
Groups ADSs or shares, you will
recognise capital gain or loss for US federal income tax purposes equal to the
difference between the US dollar value
of the amount that you realize and your tax basis, determined in US dollars,
in your shares or ADSs. Capital gain of a non corporate US holder that is recognised
in taxable years beginning before 1 January 2011 is generally taxed at a maximum
rate of 15% where the holder has a holding period greater than one year. The
gain or loss will generally be income or loss from sources within the United
States for foreign tax credit limitation purposes.
Passive Foreign Investment Company (PFIC) Rules We
believe that the Groups shares or ADSs should not be treated as stock of
PFIC for US federal income tax purposes, but this conclusion is a factual determination
that is made annually and thus may be subject to
change. If we were to be treated as a
PFIC,
unless the shares or ADSs are marketable stock and a US Holder elects
to be taxed annually on a mark-to-market basis with respect to the shares or
ADSs, gain realized on the sale or other disposition of the shares or ADSs would
in general not be treated as capital gain. Instead, if you are a US Holder, you
would be treated as if you
had realized such gain and certain excess distributions rateably
over your holding period for the shares or ADSs and would
be taxed at the highest tax rate in effect for each such year to which the gain
was allocated, together with an interest charge in respect of the tax attributable
to each such year. In addition, dividends that you receive from us will not be
eligible for the special tax rates applicable to qualified dividend income if
we are a PFIC either in the taxable year of the distribution or the preceding
taxable year, but instead will be taxable at rates applicable to ordinary
income.
DOCUMENTS ON DISPLAY
Rio Tinto plc and Rio Tinto Limited file reports and other information with the
SEC. You may read without charge and copy
at prescribed rates any document filed at the public reference facilities of
the SECs principal office at 100 F Street NE, Washington, DC 20549, United
States of America. Please call the SEC at 1-800-SEC-0330 for further information
on
the operation of the public reference
facilities.
Item 11.
Quantitative and Qualitative Disclosures about
Market
Risk
The Rio Tinto Groups policies for currency, interest rate and commodity price exposures, and the use of derivative financial instruments are discussed in the Operating and financial review on pages 76 to 81. In
addition, the Groups quantitative and qualitative disclosures about market
risk are set out in Note 32 to the 2006 financial statements. The discussion
regarding market risk contains certain forward looking statements and attention
is drawn to
the Cautionary statement on page 6.
Item 12.
Description of Securities other than Equity Securities
There are no defaults, dividend arrearages or delinquencies.
Item 14.
Material Modifications to the Rights
of Security Holders and Use of Proceeds
There are no material modifications to the rights of security holders.
Item 15.
Controls and Procedures
Disclosure controls and procedures The
common management of each of Rio Tinto plc and Rio Tinto Limited, with the
participation of their common chief executive and finance director, have
evaluated the effectiveness of the design and operation of the
Groups disclosure controls and procedures as of 31 December 2006 and have
concluded that these disclosure controls and procedures were effective to provide
reasonable assurance that the information it is required to disclose is reported
fairly
as and when required.
Managements report on internal control over financial reporting The common management of each of Rio Tinto plc and Rio
Tinto Limited is responsible for establishing and maintaining
adequate internal control over financial reporting. The Companies internal
control over financial reporting is a process
designed under the supervision of their common chief executive and finance director
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation and fair presentation of the Groups published financial
statements for external reporting purposes in accordance with EU IFRS and the
required reconciliation to US GAAP.
Because of its
inherent limitations, internal control over financial reporting cannot provide
absolute assurance, and may not prevent
or detect all misstatements whether caused by error or fraud, if any, within
each of Rio
Tinto plc and Rio Tinto Limited.
The
Groups internal control over financial reporting includes policies and
procedures that pertain to
the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and dispositions of assets;
provide reasonable assurances that transactions are recorded as necessary to
permit
preparation of financial statements in accordance
with EU IFRS and the required reconciliation to US GAAP.
Management conducted
an assessment of the effectiveness of internal control over financial reporting
as of 31 December 2006, based
on the Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), and concluded
that it was effective.
The Groups internal control over financial
reporting includes policies and procedures that pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect transactions
and dispositions of assets; provide
reasonable assurances that transactions are recorded as necessary to permit
preparation of financial statements in accordance with EU IFRS and the required
reconciliation to US GAAP, and that receipts and expenditures are being made
only in accordance with authorisation of management and the directors of the
Companies; and provide reasonable assurance regarding prevention or timely detection
of unauthorised acquisition, use or disposition of the Companys assets
that could have a material effect on our financial statements.
PricewaterhouseCoopers
LLP and PricewaterhouseCoopers, the auditors of Rio Tinto plc and Rio Tinto Limited
respectively, have audited the 2006 financial statements, and have also audited
managements assessment of the internal controls
over financial reporting and the internal controls over financial reporting as
of 31 December 2006 and have issued their report
included herein.
Changes in internal control over financial reporting There
has been no change in Rio Tintos internal control over financial reporting
during the year ended 31 December 2006 that has materially affected or is reasonably
likely to materially affect, Rio Tintos
internal control over financial reporting.
Item 16A.
Audit Committee Financial Expert
See Corporate governance on page 128 for information regarding the identification of the Audit committee financial expert.
The way we work,
Rio Tintos statement of business practice, summarises the Groups
principles and policies for all directors and employees. The way we work and the supplementary guidance documents are discussed more fully under Corporate governance
on pages 122 to 130 and in Group society and environment on pages 71 to 74. They
can be viewed on Rio Tintos website: www.riotinto.com and will be provided
to any person without charge upon written request received by one the company
secretaries.
Item 16C.
Principal Accountant Fees and Services
The remuneration of the Groups principal auditors
including audit fees, audit related fees, tax fees and all other fees, as
well as remuneration payable to other accounting firms, has been set out
in note
41 to the 2006 financial statements.
Rio Tinto has
adopted policies designed to uphold the independence of the Groups 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 Groups principal
auditors to provide statutory audit services, certain other assurance services,
tax services and certain limited other services are pre approved. Each engagement
of the Groups principal auditors to provide other permitted services is
subject to the specific approval of the Audit
committee or
its chairman.
Prior to the commencement of each financial year
the Groups
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 Groups principal auditors, where the expected
fee exceeds a pre determined level, must
be
subject to the Groups normal tender procedures. However, in exceptional
circumstances the Finance director is authorised
to engage the Groups principal auditors to provide such services without
going to tender, but if the fees are expected to exceed $250,000
then the chairman
of the audit committee must approve the engagement.
The Audit
committee has adopted policies for the pre approval of permitted services
provided by the Groups principal
auditors. Engagements for services provided by the Groups principal auditors
since the adoption of these policies were either within the pre approval policies
or approved by the Audit committee.
Item 16D.
Exemptions from the Listing Standards
for Audit Committees
Not applicable.
Item 16E.
Purchases of Equity Securities by the
Issuer and Affiliated
Purchasers
Rio Tinto plc ordinary shares of 10p each; Rio Tinto Limited shares.
2.
The average prices paid have been translated into US dollars at the exchange rate on the day of settlement.
3.
The average prices paid for shares purchased each month
between 1 January 2006 and 31 May 2006 have, where applicable, been restated
to
include stamp duty.
4.
Shares purchased by the Companies registrars
in connection with the dividend reinvestment plans and employee share plans were not deemed to form part of any publicly announced plan or programme.
PART III
Item 17.
Financial Statements
Not applicable.
Item 18.
Financial Statements
The 2006 financial statements of the Rio Tinto Group and the separate 2006 financial statements of Minera Escondida Limitada (Rio Tinto: 30 per cent), which exceeded certain tests of
significance under Rule 3-09 of Regulation S-X, are included as the A pages in this annual report on Form 20-F.
Item 19.
Exhibits
Exhibits marked * have been filed as exhibits to this annual report on Form 20-F and other exhibits have been incorporated by reference as indicated.
DLC Merger Implementation Agreement, dated 3 November
1995 between CRA Limited and The RTZ
Corporation PLC relating to the implementation of the DLC merger (incorporated
by reference to Exhibit 2.1 of Rio Tinto plc's Annual report on Form 20-F for
the financial year ended 31 December
1995, File No. 1-10533)
3.2
DLC Merger Sharing Agreement, dated 21 December 1995
and amended on 29 April 2005 between CRA
Limited and The RTZ Corporation PLC relating to the ongoing relationship between
CRA and RTZ following the DLC merger (incorporated by reference to Exhibit 4.23
of Rio Tinto plc's Annual report on Form 20-F for the financial year ended 31
December 2004, File
No. 1-10533)
3.3
RTZ Shareholder Voting Agreement, dated 21 December
1995 between The RTZ Corporation PLC, RTZ
Shareholder SVC Pty. Limited, CRA Limited, R.T.Z. Australian Holdings Limited
and The Law Debenture Trust Corporation p.l.c. (incorporated by reference to
Exhibit 2.3 of Rio Tinto plc's Annual report on Form 20-F for the financial year
ended 31 December 1995, File
No. 1-10533)
3.4
CRA Shareholder Voting Agreement, dated 21 December
1995 between CRA Limited, CRA Shareholder SVC
Limited, The RTZ Corporation PLC and The Law Debenture Trust Corporation p.l.c.,
relating to the RTZ Special Voting Share (incorporated by reference to Exhibit
2.4 of Rio Tinto plc's Annual report on Form 20-F for the financial year ended
31 December 1995, File
No.
1-10533)
Letter dated 1 January 1992 to Mr R Adams about
supplementary pension arrangements (incorporated by reference to Exhibit
4.23 of Rio Tinto plc's Annual report on Form 20-F for the financial year
ended 31 December 2000, File No. 1-10533)
4.02
Supplementary letter dated 1 January 1992 to
Mr R Adams about pension arrangements (incorporated by reference to Exhibit
4.24 of Rio Tinto plc's Annual report on Form 20-F for the financial year
ended 31 December 2000, File No. 1-10533)
4.03
Letter dated 22 November 1994 to Mr R Adams
about supplementary pension arrangements (incorporated by reference to Exhibit
4.29 of Rio Tinto plc's Annual report on Form 20-F for the financial year
ended 31 December 2000, File No. 1-10533)
4.04
Letter dated 20 January 1997 to Mr R Adams
about directors' pension arrangements (incorporated by reference to Exhibit
4.32 of Rio Tinto plc's Annual report on Form 20-F for the financial year
ended 31 December 2001, File No. 1-10533).
4.05
Service Agreement dated 15 April 2003 between
Mr R Adams and Rio Tinto London Limited (incorporated by reference to Exhibit
4.30 of Rio Tinto plc's Annual report on Form 20-F for the financial year
ended 31 December 2002, File No. 1-10533)
4.06
Memorandum effective 1 March 2004 to Service
Agreement dated 15 April 2003 between Mr R Adams and Rio Tinto London Limited
(incorporated by reference to Exhibit 4.06 of Rio Tinto plc's Annual report
on Form 20-F for the financial year ended 31 December 2003, File No. 1-10533)
4.07
Service Agreement dated 12 April 2006 between
Mr T Albanese and Rio Tinto London Limited (incorporated by reference to
Exhibit 4.07 of Rio Tinto plc's Annual report on Form 20-F for the financial
year ended 31 December 2005, File No. 1-10533)
Service Agreement dated 30 March 2004 between
Mr R L Clifford and Rio Tinto Limited (incorporated by reference to Exhibit
4.23 of Rio Tinto plc's Annual report on Form 20-F for the financial year
ended 31 December 2004, File No. 1-10533)
4.10
Supplemental letter dated 30 March 2004 to
Service Agreement dated 30 March 2004 between Mr R L Clifford and Rio Tinto
Limited (incorporated by reference to Exhibit 4.23 of Rio Tinto plc's Annual
report on Form 20-F for the financial year ended 31 December 2004, File
No. 1-10533)
4.11
Memorandum effective 1 March 2005 to Service
Agreement dated 30 March 2004 between Mr R L Clifford and Rio Tinto Limited
(incorporated by reference to Exhibit 4.23 of Rio Tinto plc's Annual report
on Form 20-F for the financial year ended 31 December 2004, File No. 1-10533)
4.12
Memorandum effective 1 March 2006 to Service
Agreement dated 30 March 2004 between Mr R L Clifford and Rio Tinto Limited
(incorporated by reference to Exhibit 4.11 of Rio Tinto plc's Annual report
on Form 20-F for the financial year ended 31 December 2005, File No. 1-10533)
Service Agreement dated 19 June 2002 between
Mr G R Elliott and Rio Tinto London Limited (incorporated by reference to
Exhibit 4.31 of Rio Tinto plc's Annual report on Form 20-F for the financial
year ended 31 December 2002, File No. 1-10533)
4.15
Memorandum effective 1 March 2003 to Service
Agreement dated 19 June 2002 between Mr G R Elliott and Rio Tinto Limited
(incorporated by reference to Exhibit 4.32 of Rio Tinto plc's Annual report
on Form 20-F for the financial year ended 31 December 2002, File No. 1-10533)
4.16
Memorandum effective 1 March 2004 to Service
Agreement dated 19 June 2002 between Mr G R Elliott and Rio Tinto London
Limited (incorporated by reference to Exhibit 4.32 of Rio Tinto plc's Annual
report on Form 20-F for the financial year ended 31 December 2002, File
No. 1-10533)
4.17
Memorandum effective 1 March 2005 to Service
Agreement dated 19 June 2002 between Mr G R Elliott and Rio Tinto London
Limited (incorporated by reference to Exhibit 4.23 of Rio Tinto plc's Annual
report on Form 20-F for the financial year ended 31 December 2004, File
No. 1-10533)
4.18
Memorandum effective 1 March 2006 to Service
Agreement dated 19 June 2002 between Mr G R Elliott and Rio Tinto London
Limited (incorporated by reference to Exhibit 4.16 of Rio Tinto plc's Annual
report on Form 20-F for the financial year ended 31 December 2005, File
No. 1-10533)
Mining Companies Comparative Plan (incorporated
by reference to Exhibit 4.65 of Rio Tinto plc's Annual report on Form 20-F
for the financial year ended 31 December 2000, File No. 1-10533)
4.21
Share Option Plan (incorporated by reference
to Exhibit 4.66 of Rio Tinto plc's Annual report on Form 20-F for the financial
year ended 31 December 2000, File No. 1-10533)
4.22
Medical expenses plan (incorporated by reference
to Exhibit 4.67 of Rio Tinto plc's Annual report on Form 20-F for the financial
year ended 31 December 2000, File No. 1-10533)
4.23
Pension plan (incorporated by reference to
Exhibit 4.68 of Rio Tinto plc's Annual report on Form 20-F for the financial
year ended 31 December 2000, File No. 1-10533)
The Registrants hereby certify that they meet all of the requirements for filing on Form 20-F and that they have duly caused and authorised the undersigned to sign this Annual Report on
their behalf.
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:
Adjusted earnings
An additional measure of earnings reported
by Rio Tinto with its UK GAAP results which excludes
exceptional items of such magnitude that their exclusion is necessary
to reflect the underlying performance of the Group.
ADR
American Depositary Receipt evidencing American
Depositary Shares (ADS).
Australian dollars
Australian currency. Abbreviates to A$.
Australian GAAP
Generally accepted accounting principles
in Australia.
A IFRS
International Financial Reporting Standards
as adopted in Australia.
Billion
One thousand million.
Canadian dollars
Canadian currency. Abbreviates to
C$.
Company / Companies
Rio Tinto plc and/or Rio Tinto Limited, as
the context so requires.
DLC merger
Dual listed companies merger (1995)
EU IFRS
International Financial Reporting Standards
as adopted by the European Union.
IFRS
International Financial Reporting Standards.
LBMA
London
Bullion Market Association.
LME
London Metal Exchange.
New Zealand dollars
New Zealand currency. Abbreviates to NZ$.
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
Rio Tinto Limited, and, where the context
permits, its subsidiaries and associated companies.
Rio Tinto Limited shareholders
The holders of Rio Tinto Limited shares.
Rio Tinto Limited
The agreement, dated 21 December 1995, between
Rio Tinto plc, Rio Tinto Limited, RTL
Shareholder Voting Agreement
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 shares
The ordinary shares in Rio Tinto Limited.
Rio Tinto Limited / RTL DLC Dividend Share
The DLC Dividend Share in Rio Tinto
Limited.
Rio Tinto Limited / RTL Special Voting Share
The Special Voting Share in Rio Tinto Limited.
Rio Tinto plc
Rio Tinto plc and its subsidiaries 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 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.
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.
Underlying earnings
An additional measure of earnings reported
by Rio Tinto
with its EU IFRS results to provide greater
understanding of the underlying business performance of its operations. This
measure is explained in greater detail in the financial statements.
US dollars
United States currency. Abbreviates to dollars, $ or
US$ and US cents or USc.
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 and cathode copper
At the final stage of the smelting of copper
concentrates, the copper is cast into specially shaped slabs called anodes
for subsequent refining to produce refined cathode copper.
Bauxite
Mainly hydrated aluminium oxides (Al2O3.2H2O).
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 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 electro-winning.
Classification
Separating crushed and ground ore into portions
of different size particles.
Coking coal
By virtue of its carbonisation properties,
it is used in the manufacture of coke, which is used in the steel
making process. Also known as
metallurgical coal.
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.
FOB
Free on board.
Grade
The proportion of metal or mineral present
in ore, or any other host material, expressed in this document as per
cent, grammes per tonne or ounces per ton.
Head grade
The average grade of ore delivered to the
mill.
Ilmenite
Mineral composed of iron, titanium and
oxygen.
Metallurgical coal
By virtue of its carbonisation properties,
it is used in the manufacture of coke, which is used in the steel making
process. Also known as coking coal.
Ore
A rock from which a metal(s) or mineral(s)
can be economic ally and legally extracted.
Ore milled
The
quantity of ore processed.
Ore hoisted
The quantity of ore which is removed from
an underground
mine for processing.
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.
Reserves for which quantity and grade and/or
quality are computed from information similar to that used for proven
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 proven reserves, is high enough to assume continuity
between points of
observation.
Proven 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
(TiO2).
Steam coal
Also referred to as steaming coal, thermal
coal or energy coal. It is used as a fuel source in electrical
power generation, cement
manufacture and various industrial applications.
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 (electro-winning)
to recover cathode copper.
Tailings
The rock wastes which are rejected from
a concentrating process after the recoverable valuable minerals
have been extracted.
Titanium dioxide feedstock
A feedstock rich in titanium dioxide, produced,
in Rio Tintos case, by smelting
ores containing titanium minerals.
Zircon
Zirconium mineral (ZrSiO4).
CONVERSION OF WEIGHTS AND
MEASURES
1 troy ounce = 31.1 grams
1 kilogram = 32.15 troy ounces
1 kilogram = 2.2046 pounds
1 metric tonne = 1,000 kilograms
1 metric tonne
= 2,204.6 pounds
1 metric tonne = 1.1023 short tons
1 short ton = 2,000 pounds
1 long ton = 2,240 pounds
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
EXCHANGE RATES
The following table shows, for the periods and
dates indicated, certain information regarding the exchange rates for the
pound sterling and the Australian dollar,
based on the Noon Buying Rates for pounds sterling and Australian dollars expressed
in US dollars per £1.00 and per A$1.00.
Pounds sterling
Australian dollars
Year ended 31 December
Period
Average
High
Low
Year ended 31 December
Period
Average
High
Low
end
rate
end
rate
2006
1.96
1.84
1.98
1.72
2006
0.788
0.753
0.791
0.706
2005
1.73
1.82
1.93
1.71
2005
0.734
0.763
0.799
0.727
2004
1.93
1.83
1.95
1.76
2004
0.783
0.737
0.798
0.686
2003
1.78
1.63
1.79
1.55
2003
0.749
0.648
0.752
0.562
2002
1.61
1.50
1.41
1.61
2002
0.563
0.544
0.575
0.506
Note
The
Noon Buying Rate on such dates differed slightly from the rates used in
the
preparation of Rio Tintos financial statements as of such date. No representation
is made that pound sterling and Australian dollar amounts have been, could have
been or could be converted into dollars at the Noon Buying Rate on such dates
or at any other dates.
Net operating costs (excluding impairment reversals less charges)
3
(13,892
)
(12,436
)
(10,249
)
Impairment reversals less charges
5
396
3
(558
)
Profits less losses on disposal of interests in businesses
39
5
322
1,180
Operating profit
8,974
6,922
3,327
Share of profit after tax of equity accounted units
6
1,378
776
523
Profit before finance items and taxation
10,352
7,698
3,850
Finance items
Exchange gains/(losses) on external net debt and intragroup balances
23
46
(128
)
204
Gains/(losses) on currency and interest rate derivatives not qualifying for hedge accounting
35
(51
)
16
Interest receivable and similar income
7
106
82
28
Interest payable and similar charges
7
(160
)
(173
)
(148
)
Amortisation of discount related to provisions
(139
)
(116
)
(87
)
(112
)
(386
)
13
Profit before taxation
10,240
7,312
3,863
Taxation
8
(2,373
)
(1,814
)
(619
)
Profit for the year
7,867
5,498
3,244
– attributable to outside equity shareholders
429
283
(53
)
– attributable to equity shareholders of Rio Tinto (Net earnings)
7,438
5,215
3,297
Basic earnings per ordinary share
9
557.8
c
382.3
c
239.1
c
Diluted earnings per ordinary share
9
555.6
c
381.1
c
238.7
c
Dividends paid during the year (US$m)
2,573
1,141
910
Dividends per share: paid during the year
–ordinary dividend
10
81.5
c
83.5
c
66.0
c
– special dividend
10
110.0
c
—
—
Dividends per share: declared in the announcement of the results for the year
– ordinary dividend
10
64.0
c
41.5
c
45.0
c
– special dividend
10
—
110.0
c
—
The notes on pages A-7 to A-68 form part of these accounts. Material variations from accounting principles generally accepted in the United States are set out on pages A-69 A-86.
(Acquisitions) / disposals of subsidiaries, joint ventures and associates
39
(279
)
321
1,507
Purchase of property, plant and equipment and intangible assets
(3,992
)
(2,590
)
(2,259
)
Sales of other financial assets
293
133
261
Purchases of other financial assets
(167
)
(231
)
(30
)
Other investing cash flows
56
110
127
Cash used in investing activities
(4,089
)
(2,257
)
(394
)
Cash flow before financing activities
3,714
4,460
2,799
Cash flow from financing activities
Equity dividends paid to Rio Tinto shareholders
(2,573
)
(1,141
)
(906
)
Own shares purchased from Rio Tinto shareholders
(2,370
)
(877
)
—
Proceeds from issue of ordinary shares in Rio Tinto
31
100
26
Proceeds from issue of new borrowings
483
388
206
Repayment of borrowings
(1,102
)
(893
)
(2,061
)
Other financing cash flows
142
12
30
Cash used in financing activities
(5,389
)
(2,411
)
(2,705
)
Effects of exchange rates on cash and cash equivalents
30
(8
)
(9
)
Net (decrease)/increase in cash and cash equivalents
(1,645
)
2,041
85
Opening cash and cash equivalents
2,367
326
241
Closing cash and cash equivalents
20
722
2,367
326
Cash flow from consolidated operations
Profit for the year
7,867
5,498
3,244
Adjustments for:
Taxation
2,373
1,814
619
Finance items
112
386
(13
)
Share of profit after tax of equity accounted units
(1,378
)
(776
)
(523
)
Profit on disposal of interests in businesses (including investments)
(5
)
(322
)
(1,180
)
Depreciation and amortisation
1,469
1,334
1,171
Impairment (reversals) less charges
5
(396
)
(3
)
558
Provisions
26
60
202
192
Utilisation of provisions
26
(271
)
(261
)
(220
)
Change in inventories
(454
)
(249
)
(217
)
Change in trade and other receivables
(394
)
(530
)
(97
)
Change in trade and other payables
116
303
237
Other items
97
35
16
9,196
7,431
3,787
The notes on pages A-7 to A-68 form part of these accounts. Material variations from accounting principles generally accepted in the United States are set out on pages A-69 A-86.
– Rio Tinto Limited (excl. Rio Tinto plc interest)
28
1,099
1,019
Share premium account
29
1,919
1,888
Other reserves
29
641
(24
)
Retained earnings
29
14,401
11,893
Equity attributable to Rio Tinto shareholders
29
18,232
14,948
Attributable to outside equity shareholders
29
1,153
791
Total equity
19,385
15,739
The notes on pages A-7 to A-68 form part of these accounts. Material variations from accounting principles generally accepted in the United States are set out on pages A-69 A-86.
Group statement of recognised income and expense (SORIE)
Attributable
Outside
Year to 31
to
Interests
December
shareholders
2006
of Rio Tinto
Total
US$m
US$m
US$m
Currency translation
adjustment
820
42
862
Cash flow hedge fair
value (losses)
(178
)
(200
)
(378
)
Gains on available for
sale securities
14
5
19
Cash flow hedge losses
transferred to the income statement
63
74
137
Gains on available for
sale securities transferred to the income statement
(4
)
—
(4
)
Currency translation
transferred to the income statement on disposals
4
—
4
Actuarial gains on post
retirement benefit plans
338
35
373
Net tax recognised directly
in equity
19
83
102
Net income recognised
directly in equity
1,076
39
1,115
Profit after tax for
the year
7,438
429
7,867
Total recognised income
for the year
8,514
468
8,982
Attributable
Outside
Year to 31
to
Interests
December
shareholders
2005
of Rio Tinto
Total
US$m
US$m
US$m
Currency translation adjustment
(401
)
(44
)
(445
)
Cash flow hedge fair value (losses)
(116
)
(26
)
(142
)
Gains on available for sale securities
32
5
37
Cash flow hedge losses transferred to the income statement
—
1
1
Gains on available for sale securities transferred to the income statement
(88
)
—
(88
)
Actuarial gains/(losses) on post retirement benefit plans
179
(1
)
178
Net tax recognised directly in equity
56
1
57
Net expense recognised directly in equity
(338
)
(64
)
(402
)
Profit after tax for the year
5,215
283
5,498
Total recognised income for the year
4,877
219
5,096
Attributable
Outside
Year to 31
to
Interests
December
shareholders
2004
of Rio Tinto
Total
US$m
US$m
US$m
Currency translation adjustment
365
45
410
Actuarial losses on post retirement benefit plans
(180
)
(23
)
(203
)
Net tax recognised directly in equity
50
(2
)
48
Net income recognised directly in equity
235
20
255
Profit / (loss) after tax for the year
3,297
(53
)
3,244
Total recognised income / (loss) for the year
3,532
(33
)
3,499
Reconciliation with Australian IFRS
The Groups financial statements have been prepared in accordance with IFRS as adopted by the European Union ('EU IFRS') which differs in certain respects from the version of IFRS that is applicable in Australia
('Australian IFRS').
Prior to 1 January 2004, the Group's financial statements were prepared in accordance with UK GAAP. Under EU IFRS, goodwill on acquisitions prior to 1998, which was eliminated directly against equity in the Group's UK GAAP
financial statements, has not been reinstated. This was permitted under the rules governing the transition to EU IFRS set out in IFRS 1. The equivalent Australian Standard, AASB 1, does not provide for the netting of goodwill against equity. As a
consequence, shareholders' funds under Australian IFRS include the residue of such goodwill, which amounted to US$740 million at 31 December 2006 (US$743 million at 31 December 2005).
Save for the exception described above, the Group's financial statements drawn up in accordance with EU IFRS are consistent with the requirements of Australian IFRS.
The notes on pages A-7 to A-68 form part of these accounts. Material variations from accounting principles generally accepted in the United States are set out on pages A-69 A-86.
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 International Financial Reporting Standards as adopted by the European Union ('EU IFRS'). The merger of economic interests of Rio Tinto plc and Rio Tinto
Limited was accounted for as a merger under UK GAAP. As permitted under the rules governing the transition to EU IFRS, which are set out in IFRS 1, the Group did not restate business combinations that occurred before the transition date of 1 January
2004. As a result, the DLC merger of economic interests described above continues to be accounted for as a merger under EU IFRS.
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 plc and 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. For accounting purposes Rio Tinto plc and Rio Tinto Limited are viewed as a single public
parent company (with their respective public shareholders being the shareholders in that single company). As a result the amounts attributable to both Rio Tinto plc and Rio Tinto Limited public shareholders are included in the amounts attributed to
equity shareholders on the balance sheet, income statement and statement of recognised income and expense.
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 27 January 2006 (as amended on 22 December 2006). The main provisions
of the order are that the financial statements are:
–
to be made out in accordance with IFRS as adopted
by the European Union ('EU IFRS'); and
–
to include a reconciliation from EU IFRS to
the Australian equivalents of IFRS (see page A-5).
For further details of the ASIC
Class Order relief see page A-87.
Elimination of Separate financial statements
In previous years, the Form 20-F filed with the United
States Securities and Exchange Commission ('SEC'), contained separate consolidated
financial statements for the Rio Tinto plc and Rio Tinto Limited parts of the
Group. These were presented on the basis of the legal ownership of the various
operations within each part of the Group. The separate financial statements
for Rio Tinto Limited included, on a consolidated basis, the Group undertakings
under its legal ownership, and those for Rio Tinto plc included, on a consolidated
basis, the Group undertakings under its legal ownership. This presentation of
financial information filed with the SEC was on the assumption that the formation
of the Group through the dual listed companies (DLC) arrangements was not a
business combination. The financial statements filed with the SEC also included
supplemental financial information that combined the consolidated financial
statements of the Rio Tinto plc and Rio Tinto Limited parts of the Group to
present the Rio Tinto Group, with no adjustment for fair values.
This combined financial
information for the Rio Tinto Group was consistent with the financial statements
that were used for the purposes of satisfying the Group's reporting obligations
in the United Kingdom and Australia. The combined financial statements for the
Rio Tinto Group viewed the formation of the DLC as a business combination and
accounted for the transaction as a merger in accordance with UK Financial Reporting
Standard No. 6 Acquisitions and Mergers ('FRS 6'). Applying FRS 6, Rio Tinto
plc and Rio Tinto Limited were combined and presented as one economic entity
with no adjustment for fair values.
As permitted under
the transitional arrangements set out in IFRS 1 'First time adoption of International
Financial Reporting Standards', which sets out the rules for first time adoption
of IFRS, the Group did not apply the concepts of IFRS 3 'Business Combinations'
for business combinations prior to the first time application of IFRS. Accordingly,
the Group is following the same method of accounting for the DLC in its financial
statements under IFRS as was historically followed under UK GAAP: the Group
is presented as one economic entity at historical cost.
Subsequent to the formation
of the Group, the accounting model used in filings with the SEC for the presentation
of financial statements of companies that form DLCs has changed. The formation
of a new DLC is now viewed as a business combination. The Group now believes
that it is preferable to treat the formation of the DLC as a business combination,
and as a result, that the accounting and reporting of financial statements prepared
in accordance with IFRS to the SEC will be consistent with the accounting and
reporting in the United Kingdom and Australia.
Accordingly, the Group
has revised the presentation of its financial statements included in Form 20-F
to account for the formation of the DLC as a business combination. As a consequence,
separate financial statements for Rio Tinto plc and Rio Tinto Limited will no
longer be presented. Instead, the financial statements will deal with the Rio
Tinto Group as one combined economic entity. This new presentation is applied
retrospectively for all periods presented. The IFRS information presented on
this new basis in the 20-F is the same as the combined supplemental information
for the Rio Tinto Group that was previously disclosed.
The basis of preparation and accounting policies
used in preparing the financial statements for the year ended 31 December 2006
are set out below.
The financial statements
are prepared in accordance with International Financial Reporting Standards
adopted by the EU ('EU IFRS'). These standards are subject to Interpretations
issued from time to time by the International Financial Reporting Interpretations
Committee (IFRIC).
Basis of preparation
The financial statements for the
year ended 31 December 2006 have been prepared on the basis of all IFRSs
and Interpretations adopted by the European Union that are mandatory for
periods ending 31 December 2006 and in accordance with applicable United
Kingdom law, applicable Australian law as amended by the Australian Securities
and Investments Commission Orde dated 27 January 2006 (as amended on 22
December 2006) and Article 4 of the European Union IAS regulation. The 2004
comparative financial information has also been prepared on this basis,
with the exception of certain standards, details of which are given below,
for which comparative information has not been restated.
As
permitted by the rules for first-time adoption of IFRS, which are set out
in IFRS 1, the Group elected to adopt IAS 32, IAS 39 and IFRS 5 with effect
from 1 January 2005, with no restatement of comparative information for
2004. Accounting policy notes b), e) and i) explain the treatment of non-current
assets held for sale prior to and after adopting IFRS 5. Accounting policy
note p) explains the basis of accounting for financial instruments pre and
post 1 January 2005.
The
EU IFRS financial information has been drawn up on the basis of accounting
policies consistent with those applied in the financial statements for the
year to 31 December 2005, except for the following:
–
the adoption of IFRIC 4 'Determining whether
an arrangement contains a lease'.
–
a change to the Group's policy on accounting
for exploration and evaluation expenditure. Previously, the Group capitalised
exploration and evaluation expenditure on acquisition
of a beneficial interest or option in mineral rights together with subsequent
expenditure. Full provision was made for impairment unless there was a
high degree of confidence in the project's viability as a consequence
of which it was considered probable that future economic benefits would
flow to the Group. If, as a result of developments in subsequent periods,
the expenditure was considered to be recoverable, such provisions were
reversed. Under the Group's revised policy, exploration and evaluation
expenditure is not capitalised until the point is reached at which there
is a high degree of confidence in the project's viability and it is considered
probable that future economic benefits will flow to the Group.
–
a change to
the Group's presentation of the marking to market of provisionally priced
sales contracts. This is now recorded as an adjustment to sales revenue
having previously been shown as an adjustment to net operating costs.
The
effect of the above adjustments is not material to Group earnings or
to shareholders' funds in the current or prior periods. Therefore, prior
period information has not been restated.
Certain
prior year information has been reclassified to conform with the current
year presentation. Exploration and evaluation costs charged against income
were previously included in 'Cash used in investing activities' but are
now included within 'Cash flow from operating activities'. As a result,
exploration and evaluation costs expensed of US$226 million and US$187
million have been reclassified in the comparative figures for 2005 and 2004
respectively, within the Cash flow statement.
The Group has not applied the following
pronouncements, the last three of which have not been endorsed by the EU:
IFRS 7 Financial Instruments:
Disclosures - mandatory for year 2007
Amendment to IAS 1 Presentation
of Financial Statements Capital Disclosures - mandatory for year 2007
IFRIC 8 Scope of IFRS 2 (share
based payments) - mandatory for year 2007
IFRIC 11 (IFRS 2) Group and Treasury
share transactions - mandatory for year 2008
IFRIC D12-D14 - Service concession
arrangements - mandatory for year 2008
IFRS 8 Operating Segments - mandatory
for year 2009
The
Group is evaluating the impact of the above pronouncements but they are
not expected to be material to the Group's earnings or to shareholders'
funds
Judgements in applying accounting
policies and key sources of estimation uncertainty Many
of the amounts included in the financial statements involve the use of judgement
and/or estimation. These judgements and estimates are based on management's
best knowledge of the relevant facts and circumstances, having regard to
previous experience, but actual results may differ from the amounts included
in the financial statements. Information about such judgements and estimation
is contained in the accounting policies and/or the Notes to the financial
statements, and the key areas are summarised below.
Areas of judgement that have the most significant
effect on the amounts recognised in the financial statements are:
–
Merger accounting for the 1995 merger of the
economic interests of Rio Tinto plc and Rio Tinto Limited into the dual
listed companies ('DLC') structure (page
A-6).
–
Determination of ore reserve estimates - note
1(j)
–
Deferral of stripping costs - note 1(h)
–
Recognition of deferred tax on mineral rights
recognised in acquisitions - note 1(m)
–
Capitalisation of exploration and evaluation
costs - note 1(f)
–
Identification of functional currencies - note
1(d)
–
The definition of Underlying earnings - note
2
–
The election to adopt IAS 32, IAS 39 and IFRS
5 from 1 January 2005 without restatement of comparatives as noted above
Key sources of estimation uncertainty
that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year are:
–
Estimation of close down and restoration costs
and the timing of expenditure - note 1(k) and note 26
–
Review of asset carrying values and impairment
charges and reversals note 1(e) and (i), note 5 and note 11
–
Estimation of environmental clean up costs
and the timing of expenditure - note 1(k) and note 26
–
Recoverability of potential deferred tax assets
- note 1 (m) and note 18(d)
–
Estimation of liabilities for post retirement
costs - note 46
–
Contingent liabilities regarding claims from
the Australian Tax Office relating to 1997 - note 33
(a)
Accounting convention
The financial information included in the financial
statements for the year ended 31 December 2006, and for the related comparative
periods, has been prepared under the historical cost convention as modified
by the revaluation of certain derivative contracts and financial assets
and liabilities as set out in the notes below.
(b)
Basis of consolidation
The financial statements consist of the consolidation
of the accounts of Rio Tinto plc and Rio Tinto Limited (together 'the Companies'
and their respective subsidiaries (together 'the Group').
Subsidiaries: Subsidiaries
are entities over which the Companies have the power to govern the financial
and operating policies in order to obtain benefits from their activities.
Control is presumed to exist where the Companies own more than one half
of the voting rights (which does not always equate to percentage ownership)
unless in exceptional circumstances it can be demonstrated that ownership
does not constitute control. Control does not exist where joint venture
partners hold veto rights over significant operating and financial decisions.
The consolidated financial statements include all the assets, liabilities,
revenues, expenses and cash flows of the Companies and their subsidiaries
after eliminating intercompany balances and transactions. For partly owned
subsidiaries the net assets and net earnings attributable to outside shareholders
are presented as 'Amounts attributable to outside equity shareholders' in
the consolidated balance sheet and consolidated income statement.
Associates: An
associate is an entity, that is neither a subsidiary nor a joint venture,
over whose operating and financial policies the Group exercises significant
influence. Significant influence is presumed to exist where the Group has
between 20 per cent and 50 per cent of the voting rights, but can also arise
where the Group holds less than 20 per cent if it has the power to be actively
involved and influential in policy decisions affecting the entity. The Group's
share of the net assets, post tax 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, which
therefore includes any goodwill on acquisition, and then, in subsequent
periods, adjusting the carrying amount of the investment to reflect the
Group's share of the associate's results less any impairment of goodwill
and any other changes to the associate's net assets such as dividends.
Joint ventures: A
joint venture is a contractual arrangement whereby two or more parties undertake
an economic activity that is subject to joint control. Joint control is
the contractually agreed sharing of control such that significant operating
and financial decisions require the unanimous consent of the parties sharing
control. The Group has two types of joint ventures
Jointly controlled entities ('JCEs'): A
JCE is a joint venture that involves the establishment of a corporation,
partnership or other entity in which each venturer has a long term interest.
JCEs are accounted for using the equity accounting method. In addition,
the carrying value will include any long term debt interests which in substance
form part of the Group's net investment.
Jointly controlled assets ('JCAs'): A
JCA is a joint venture in which the venturers have joint control over the
assets contributed to or acquired for the purposes of the joint venture.
JCAs do not involve the establishment of a corporation, partnership or other
entity. This includes situations where the participants derive benefit from
the joint activity through a share of the production, rather than by receiving
a share of the results of trading. The Group's proportionate interest in
the assets, liabilities, revenues, expenses and cash flows of JCAs are incorporated
into the Group's financial statements under the appropriate headings. In
some situations, joint control exists even though the Group has an ownership
interest of more than 50 per cent because of the veto rights held by join
venture partners.
The Group uses the term 'Equity accounted units'
to refer to associates and jointly controlled entities collectively.
Where necessary, adjustments are made to the
results of subsidiaries, joint ventures and associates to bring their accounting
policies into line with those used by the Group.
The results of businesses acquired during the
year are brought into the consolidated financial statements from the date
at which control, joint control or significant influence commences and taken
out of the financial statements from the date at which control joint control
or significant influence ceases.
From 1 January 2005, Individual non-current
assets or 'disposal groups' (i.e. groups of assets and liabilities) to be
disposed of, by sale or otherwise in a single transaction, are classified
as 'held for sale' if the following criteria are met:
–
the carrying amount will be recovered principally
through a sale transaction rather than through continuing use, and
–
the disposal group is available for immediate
sale in its present condition subject only to terms that are usual and customary
for such sales, and
Disposal groups held for sale are carried at
the lower of their carrying amount and fair value less costs to sell and
are presented separately on the face of the balance sheet with the related
assets and liabilities being presented as a single asset and a single liability
respectively. Comparative balance sheet information is not restated
For a disposal group held for sale which continues
to be carried at its carrying amount, the profit on disposal, calculated
as net sales proceeds less the carrying amount, is recognised in the income
statement in the period during which completion of the sale takes place.
Where the fair value less costs to sell of a disposal group is lower than
the carrying amount, the resulting charge is recognised in the income statement
in the period during which the disposal group is classified as held for
sale. On classification as held for sale, the assets are no longer depreciated.
If the disposal group or groups represent a
separate major line of business or geographical area of operations, and
are part of a single co-ordinated plan of disposal or are subsidiaries acquired
exclusively with a view to resale, they are classified as discontinued operations.
The net results attributable to such discontinued operations are shown separately
and comparative figures in the income and cash flow statements are restated.
Prior to 1 January 2005, the results of businesses
sold during the year were included in the consolidated financial statements
for the period up to the date of disposal. Gains or losses on disposal were
calculated as the difference between the sale proceeds (net of expenses)
and the net assets attributable to the interest which had been sold.
(c)
Sales revenue
Sales revenue comprises sales to third parties
at invoiced amounts, with most sales being priced ex works, free on board
(f.o.b.) or cost, insurance and freight (c.i.f.). Amounts billed to customers
in respect of shipping and handling are classed as sales revenue where the
Group is responsible for carriage, insurance and freight. All shipping and
handling costs incurred by the Group are recognised as operating costs.
If the Group is acting solely as an agent, amounts billed to customers are
offset against the relevant costs.
Sales revenue excludes any applicable sales
taxes. Mining royalties are presented as an operating cost or, where they
are in substance a profit based tax, within taxes. Gross sales revenue shown
in the income statement includes the Group's share of the sales revenue
of equity accounted units. To avoid duplication, this excludes sales by
jointly controlled entities to third parties of products purchased from
the Group and excludes charges by jointly controlled entities to the Group.
By-product revenues are included in sales revenue.
A large proportion of Group production is sold
under medium to long term contracts, but sales revenue is only recognised
on individual sales when persuasive evidence exists that all of the following
criteria are met:
–
the significant risks and rewards of ownership
of the product have been transferred to the buyer;
–
neither continuing managerial involvement to
the degree usually associated with ownership, nor effective control over
the goods sold, has been retained;
–
the amount of revenue can be measured reliably;
–
it is probable that the economic benefits associated
with the sale will flow to the Group; and
–
the costs incurred or to be incurred in respect
of the sale can be measured reliably.
These conditions are generally satisfied
when title passes to the customer. In most instances sales revenue 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.
Sales revenue is commonly subject
to adjustment based on an inspection of the product by the customer. In
such cases, sales revenue is initially recognised on a provisional basis
using the Group's best estimate of contained metal, and adjusted subsequently.
Certain products are 'provisionally
priced', i.e. 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. Revenue on provisionally priced sales is recognised based
on estimates of the fair value of the consideration receivable based on
forward market prices. At each reporting date provisionally priced metal
is marked to market based on the forward selling price for the quotational
period stipulated in the contract. For this purpose, the selling price can
be measured reliably 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 product sold by the Group is directly linked to
the form in which it is traded on that market.
The marking to market of provisionally
priced sales contracts is recorded as an adjustment to sales revenue.
The functional currency for each entity in the Group, and for jointly controlled entities and associates, is the currency of the primary economic environment in which it operates. For most entities, this is the
currency of the country in which it operates. Transactions denominated in other currencies are converted to the functional currency at the exchange rate ruling at the date of the transaction unless hedge accounting applies. Monetary assets and
liabilities denominated in foreign currencies are retranslated at year end exchange rates.
The US dollar is the currency in which the Group's
Financial statements are presented, as it most reliably reflects the global business
performance of the Group as a whole.
On consolidation, income statement items are translated into US dollars at average rates of exchange. Balance sheet items are translated into US dollars at year end exchange rates. Exchange differences on the
translation of the net assets of entities with functional currencies other than the US dollar, and any offsetting exchange differences on net debt hedging those net assets, are recognised directly in the foreign currency translation
reserve.
Exchange gains and losses which arise on balances between Group entities are taken to the foreign currency translation reserve where the intra group balance is, in substance, part of the Group's net investment in the
entity.
The balance of the foreign currency translation reserve relating to an operation that is disposed of is transferred to the income statement at the time of the disposal.
The Group finances its operations primarily in US dollars
but a substantial part of the Group's US dollar debt is located in subsidiaries
having functional currencies other than the US dollar. Except as noted above,
exchange gains and losses relating to such US dollar debt are charged or credited
to the Group's income statement in the year in which they arise. This means that
the impact of financing in US dollars on the Group's income statement is dependent
on
the functional currency of the particular subsidiary where the debt is located.
Except as noted above, or in note (p) below relating
to derivative contracts, all exchange differences are charged or credited to
the income statement in the year in which they arise.
(e)
Goodwill and intangible assets (excluding exploration and evaluation expenditure)
Goodwill represents the difference between the cost
of acquisition and the fair value of the identifiable assets, liabilities and
contingent liabilities acquired. Goodwill on acquisition of subsidiaries is separately
disclosed and goodwill on acquisitions of associates and JCEs is included within
investments in equity accounted units.
In 1997 and previous years, goodwill was eliminated against reserves in the year of acquisition as a matter of accounting policy, as was then permitted under UK GAAP. Such goodwill was not reinstated under subsequent
UK accounting standards or on transition to IFRS.
Goodwill is not amortised; rather it is tested annually
for impairment. Goodwill is allocated to the cash generating unit or group of
cash generating units expected to benefit from the related business combination
for
the purposes of impairment testing. Goodwill impairments cannot be reversed.
Finite life intangible assets are recorded at cost
and are amortised over their useful economic lives on a straight line or units
of production basis, as appropriate. From 1 January 2005, finite life intangible
assets held for sale, or included within a disposal group held for sale, are
not amortised. In accordance with the accounting requirements for disposal groups,
intangible assets held for sale are carried at the lower of their pre-existing
carrying amount
and fair value less costs to sell, and are presented separately on the face of
the balance sheet. Internally generated intangible assets and computer software
acquired are amortised over 2 to 5 years. Other intangible assets are amortised
over 2 to 20 years. Intangible assets which are not yet ready for use are reviewed
annually for impairment.
(f)
Exploration and evaluation
Exploration and evaluation expenditure comprises 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/or
–
compiling pre-feasibility and feasibility studies.
Exploration and evaluation expenditure also includes 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.
Capitalisation of exploration and evaluation expenditure
commences when there is a high degree of confidence in the project's viability
and hence it is probable that future economic benefits will flow to the
Group.
Capitalised exploration and evaluation expenditure
is reviewed for impairment at each balance sheet date. In the case of undeveloped
properties, there may be only inferred resources to form a basis for the impairment
review. The carrying values of these assets are reviewed twice per annum by
management and the results of these reviews are reported to the Audit Committee.
The review is based on a status report regarding the Group's intentions for development
of
the undeveloped property. In some cases, the undeveloped properties are regarded
as successors to ore bodies currently in production. It is intended that these
will be developed and go into production when the current source of ore is
exhausted.
Subsequent recovery of the resulting carrying value depends on successful development of the area of interest or sale of the project. If a project does not prove viable, all irrecoverable costs associated with the
project and any related impairment provisions are written off.
The cost of property, plant and equipment comprises
its purchase price, any costs directly attributable to bringing the asset to
the location and condition necessary for it to be capable of operating in the
manner intended by management and the estimated close down and restoration
costs associated with the asset. 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'.
In open pit mining operations, it is necessary to remove overburden and other barren 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 (or pit), before production commences, stripping costs are capitalised as part of the investment in construction of the mine (or pit).
Costs associated with commissioning new assets, in the period before they are capable of operating in the manner intended by management, are capitalised. Development costs incurred after the commencement of production
are capitalised to the extent they are expected to give rise to a future economic benefit. Interest 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 its intended use are complete.
(h)
Deferred stripping
As noted above, stripping costs incurred
in the development of a mine (or pit) before production commences are capitalised
as part of the cost of constructing the mine (or pit) and subsequently amortised
over the life of the mine (or pit) on a units of production basis.
Where a mine operates several open pits that are
regarded as separate operations for the purpose of mine planning, stripping
costs are accounted for separately by reference to the ore from each separate
pit. If, however, the pits are highly integrated for the purpose of mine planning,
the second and subsequent pits are regarded as extensions of the first pit
in accounting for stripping costs. In such cases, the initial stripping (i.e.
overburden and other
waste removal) of the second and subsequent pits is considered to be production
phase stripping relating to the combined operation.
The Group defers stripping costs incurred subsequently,
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 and the effect is material. This is generally the case where there
are fluctuations in stripping costs over the life of the mine (or pit), and
the effect is material. 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 (or pit) Ratio. Such deferred costs are then charged
against reported profits to the extent that, in subsequent periods, the current
period Ratio falls short of the life of mine (or pit) Ratio. The life of mine
(or pit) Ratio is based on
proved and probable reserves of the mine (or pit).
The life of mine (or pit) waste-to-ore Ratio is a
function of the pit design(s), and therefore changes to that design will generally
result in changes to the Ratio. Changes in other technical or economic parameters
that impact on reserves will also have an impact on the life of mine (or pit)
Ratio even if they do not affect the pit design(s). Changes to the life of
mine (or pit) Ratio are accounted for prospectively.
In the production stage of some mines (or pits), further development of the mine (or pit) requires a phase of unusually high overburden removal activity that is similar in nature to preproduction mine development. The
costs of such unusually high overburden removal activity are deferred and charged against reported profits in subsequent periods on a units of production basis. This accounting treatment is consistent with that for stripping costs incurred during
the development phase of a mine (or pit), before production commences.
If the Group were to expense production stage 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 operation.
Deferred stripping costs are included in 'Mining
properties and leases' within property, plant and equipment or in investments
in equity accounted units, as appropriate. These form part of the total investment
in the relevant cash 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 operating
costs or in the Group's
share of the results of its equity accounted units, as appropriate.
(i)
Depreciation and impairment
Property, plant and equipment is depreciated over
its useful life, or over the remaining life of the mine if shorter. The major
categories of property, plant and equipment are depreciated on a units of production
and/or
straight-line basis as follows:
Units of production basis
For mining properties and leases and certain
mining equipment, the economic benefits from the asset are consumed in
a pattern which is linked to the production level. Except as noted below,
such assets are depreciated
on a units of production basis.
Straight line basis
Assets within operations for which production
is not expected to fluctuate significantly from one year to another or
which have a physical life shorter than the related mine are depreciated
on a straight line basis as
follows:
Residual values and useful lives are reviewed, and
adjusted if appropriate, at each balance sheet date. Changes to the estimated
residual values or useful lives are accounted for prospectively. 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 proved and probable
reserves and, for some mines, other mineral resources. Such non reserve material
may be included in depreciation calculations in limited circumstances and where
there is a high degree of confidence in its economic extraction. 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. Development costs incurred which benefit the entire
ore body are
depreciated over the estimated life of the ore body.
From 1 January 2005, property, plant and equipment
held for sale, or which is part of a disposal group held for sale, is not depreciated.
Property, plant and equipment and finite life intangible
assets are reviewed for impairment if there is any indication that the carrying
amount may not be recoverable. In addition, from 1 January 2005, an impairment
loss is recognised for any excess of carrying amount over the fair value less
costs to sell of a non-current asset or disposal group held for sale.
When a review for impairment is conducted, the recoverable
amount is assessed by reference to the higher of 'value in use' (being the net
present value of expected future cash flows of the relevant cash generating
unit) and 'fair value less costs to sell'. Where there is no binding sale agreement
or active market, fair value less costs to sell is based on the best information
available to reflect the amount the Group could receive for the cash generating
unit
in an arm's length transaction. The estimates used for impairment reviews are
based on detailed mine plans and operating plans, modified as appropriate to
meet the requirements of IAS 36 'Impairment of Assets'. Future cash flows are
based on
estimates of:
–
the quantities of the reserves and mineral resources
for which there is a high degree of confidence of economic extraction;
–
future production levels;
–
future commodity prices (assuming 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); and
–
future cash costs of production, capital expenditure,
close down, restoration and environmental clean up.
The cash flow forecasts are based on best estimates
of expected future revenues and costs. These may include net cash flows expected
to be realised from extraction, processing and sale of mineral resources that
do not currently qualify for inclusion in proved or probable ore reserves. Such
non reserve material is included where there is a high degree of confidence in
its economic extraction. This expectation is usually based on preliminary drilling
and sampling
of areas of mineralisation that are contiguous with existing reserves. Typically,
the additional evaluation to achieve reserve status for such material has not
yet been done because this would involve incurring costs earlier than is required
for the
efficient planning and operation of the mine.
The expected future cash flows of cash generating units
reflect long term mine plans which are based on detailed research analysis and
iterative modelling to optimise the level of return from investment, output and
sequence of extraction. The plan takes account of all relevant characteristics
of the ore body, including waste to ore ratios, ore grades, haul distances, chemical
and metallurgical properties of the ore impacting on process recoveries and
capacities of processing equipment that can be used. The mine plan is therefore
the basis for forecasting production output in each future year and the related
production costs.
Rio Tinto's cash flow forecasts are based on assessments of expected long term commodity prices, which for most commodities are derived from an analysis of the marginal costs of the producers of these commodities.
These assessments often differ from current price levels and are updated periodically.
In some cases, prices applying to some part of the future sales volumes of a cash generating unit are predetermined by existing sales contracts. The effects of such contracts are taken into account in forecasting
future cash flows.
Cost levels incorporated in the cash flow forecasts
are based on the current long term mine plan for the cash generating unit. For
impairment reviews, recent cost levels are considered, together with expected
changes in costs that are compatible with the current condition of the business
and which meet the requirements of IAS 36. IAS 36 includes a number of restrictions
on the future cash flows that can be recognised in respect of future restructurings
and
improvement related capital expenditure.
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 cash flows, to the extent that such risks are not reflected
in
the forecast cash flows.
For operations with a functional currency other than
the US dollar, the impairment review is undertaken in the relevant functional
currency. The great majority of the Groups sales are based on prices denominated
in US dollars. To the extent that the currencies of countries in which the Group
produces commodities strengthen against the US dollar without commodity price
offset, cash flows and, therefore, net present values are reduced.
When calculating 'value in use', IAS 36 requires that calculations should be based on exchange rates current at the time of the assessment.
For the majority of Rio Tinto's businesses, by both
number and by value, the recoverable amounts are substantially in excess of the
carrying value in the balance sheet. For a minority of the businesses the carrying
value is close to recoverable amount, and these are reviewed for impairment
where appropriate. The effects of exchange rate and commodity price changes on
the values of these units relative to their carrying values are monitored closely.
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 Exploration Results, Mineral Resources
and Ore Reserves of December 2004 (the JORC code). Reserves, and for certain mines, other mineral 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 and clean up 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.
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.
(k)
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. Estimated 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 the 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 calculated
annually during the life of the operation to reflect known developments e.g.
updated cost estimates and revisions to the estimated lives of operations,
and are subject to formal review at regular intervals.
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, the Group's businesses estimate their respective costs based
on feasibility and engineering studies using current restoration standards
and techniques.
The amortisation or 'unwinding' of the discount applied in establishing the net present value of provisions is charged to the income statement in each accounting period. The amortisation of the discount is shown as a
financing cost, rather than as an operating cost.
The initial closure provision together with other movements in the provisions for close down and restoration costs, including those resulting from new disturbance, updated cost estimates, changes to the estimated lives
of operations and revisions to discount rates are capitalised within property, plant and equipment. These costs are then depreciated over the lives of the assets to which they relate.
Where rehabilitation is conducted systematically over the life of the operation, rather than at the time of closure, provision is made for the estimated outstanding continuous rehabilitation work at each balance sheet
date and the cost is charged to the income statement.
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 income statement. Movements in the
environmental clean up provisions are presented as an operating cost, except
for the unwind of the discount which is shown as a financing cost. Remediation
procedures may commence soon after the time the disturbance, remediation process
and
estimated remediation costs become known, but can continue for many years depending
on the nature of the disturbance and the remediation techniques.
As noted above, the ultimate cost of environmental
remediation is uncertain and cost estimates can vary in response to many factors
including changes to the relevant legal requirements, the emergence of new
restoration techniques or experience at other mine sites. The expected timing
of expenditure can also change, for example in response to changes in ore reserves
on production rates. As a result there could be significant adjustments to
the provision for close
down and restoration and environmental clean up, which would affect future financial
results.
(l)
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. 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 property, plant and equipment 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,
e.g. 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 included within non-current assets. Work in progress inventory includes
ore stockpiles and other partly processed material. Quantities are assessed
primarily through surveys and assays.
Current tax is the tax expected to be payable on the
taxable income for the year calculated using rates that have been enacted or
substantively enacted by the balance sheet date. It includes adjustments for
tax expected
to be payable or recoverable in respect of previous periods.
Full provision is made for deferred taxation on all temporary differences existing at the balance sheet date with certain limited exceptions. Temporary differences are the difference between the carrying value of an
asset or liability and its tax base. The main exceptions to this principle are as follows:
–
tax payable on the future remittance of the past earnings
of subsidiaries, associates and jointly controlled entities is provided for except
where Rio Tinto is able to control the remittance of profits and it is probable
that there will be no remittance in the foreseeable future;
–
deferred tax is not provided on the initial recognition
of an asset or liability in a transaction that does not affect accounting profit
or taxable profit and is not a business combination, such as on the recognition
of a provision for close down and restoration costs and the related asset or
on the inception of finance leases. Furthermore, with the exception of the unwind
of discount, deferred tax is not recognised on subsequent changes in the carrying
value of such assets and
liabilities, for example where they are depreciated of finance leases are repaid;
and
–
deferred tax assets are recognised only to the extent
that it is more likely than not that they will be recovered – this is considered
having regard to the reasons why the deferred tax asset has arisen and projected
future taxable profits for the relevant entity (or group of entities).
Deferred tax is provided in respect of fair value adjustments
on acquisitions. These adjustments may relate to assets such as mining rights
that, in general, are not eligible for income tax allowances. In such cases,
the provision for deferred tax is based on the difference between the carrying
value of the asset and its nil income tax base. The existence of a tax base for
capital gains tax purposes is not taken into account in determining the deferred
tax
provision relating to such mineral rights because it is expected that the carrying
amount will be recovered primarily through use and not from the disposal of mineral
rights. Also, the Group is only entitled to a deduction for capital gains tax
purposes if the mineral rights are sold or formally relinquished.
Current and deferred tax relating to items recognised
directly in equity are recognised in equity and not in the income statement.
(n)
Post employment benefits
For defined benefit post employment plans, the difference
between the fair value of the plan assets (if any) and the present value of the
plan liabilities is recognised as an asset or liability on the balance sheet.
Any asset recognised is restricted, if appropriate, to the present value of
any amounts the Group expects to recover by way of refunds from the plan or reductions
in future contributions. Actuarial gains and losses arising in the year are taken
to the
Statement of recognised income and expense. For this purpose actuarial gains
and losses comprise both the effects of changes in actuarial assumptions and
experience adjustments arising because of differences between the previous actuarial
assumptions and what has actually occurred.
Other movements in the net surplus or deficit are recognised
in the income statement, including the current service cost, any past service
cost and the effect of any curtailment or settlements. The interest cost less
the expected return on assets is also charged to the income statement. The amount
charged to the income statement in respect of these plans is included within
operating costs or in the Group's share of the results of equity accounted units
as
appropriate.
The most significant assumptions used
in accounting for pension plans are the long term rate of return on plan
assets, the discount rate and the mortality assumptions. The long term
rate of return on plan assets is used to calculate interest income on pension
assets, which is credited to the Group's income statement. The discount
rate is used to determine the net present value or future liabilities and
each year the unwinding of the discount on those liabilities is charged
to the Group's income statement as the interest cost. The mortality assumption
is used to project the future stream of benefit payments, which is then
discounted to arrive at a net present value of liabilities.
The values attributed to plan liabilities are assessed
in accordance with the advice of independent qualified actuaries.
The Group's contributions to defined contribution pension plans are charged to the income statement in the period to which the contributions relate.
(o)
Cash and cash equivalents
Cash and cash equivalents are carried in the balance
sheet at amortised cost. For the purposes of the balance sheet, cash and cash
equivalents comprise cash on hand, deposits held on call with banks and short-term,
highly liquid investments that are readily convertible into known amounts of
cash and which are subject to insignificant risk of changes in value. For the
purposes of the cash flow statement, cash and cash equivalents are net of bank
overdrafts which
are repayable on demand.
The Group's policy with regard to 'Treasury management
and financial instruments' is set out in Note 32. When the Group enters into
derivative contracts these transactions are designed to reduce exposures
related to
assets and liabilities, firm commitments or anticipated transactions.
The Group adopted IAS 32 and IAS
39 from 1 January 2005. Adjustments were made to the opening balance sheet
at 1 January 2005 for the adoption of IAS 39; these are shown separately
in the Group statement of changes in equity. Comparative figures for the
year ended 31 December 2004 were not restated to reflect IAS 39.
Fair value: Where
financial instruments are accounted for at fair value, this is the amount
at which they 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 the
Group's cash, short term borrowings and loans to jointly controlled entities
and associates approximate to their carrying values, as a result of their
short maturity or because they carry floating rates of interest. A further
description of the accounting for each class of financial instrument is
given below.
Financial assets: From
1 January 2005, all financial assets are initially recorded at fair value.
The Group has certain investments in companies that are not subsidiaries,
associates or jointly controlled entities. These investments are classed
as 'available for sale'. Such investments are subsequently measured at
fair value with unrealised gains and losses recognised in equity until
the investment is disposed of. Impairment charges and exchange gains and
losses on such investments are recognised directly in the income statement.
Other financial assets that the Group has the expressed intent and ability
to hold to maturity together with loans and receivables are measured at
amortised cost less any impairment charges. Prior to 1 January 2005, these
investments were accounted for at cost less provisions for diminution in
value.
Borrowings: From
1 January 2005, borrowings and other financial liabilities are recognised
initially at fair value, net of transaction costs incurred and are subsequently
stated at amortised cost. Any difference between the amounts originally
received (net of transaction costs) and the redemption value is recognised
in the income statement over the period to maturity using the effective
interest method. Prior to 1 January 2005, borrowings were stated at amortised
cost.
Derivative financial instruments and hedge
accounting
Commodity based contracts that
meet the 'expected purchase, sale or usage' requirements in IAS 39 are
recognised in earnings as described in note c) above.
From 1 January 2005, all derivatives
are initially recognised at their fair value on the date the derivative
contract is entered into and are subsequently remeasured at their fair
value at each balance sheet date. The method of recognising the resulting
gain or loss depends on whether the derivative is designated as a hedging
instrument and, if so, the nature of the item being hedged. The Group
designates certain derivatives as either hedges of the fair value of
recognised assets or liabilities or of firm commitments (fair value hedges)
or hedges of highly probable forecast
transactions (cash flow hedges).
–
Fair value hedges: Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the
income statement, together with any changes in the fair value of the hedged asset or liability or firm commitment that is attributable to the hedged risk. Where derivatives are held with different counterparties
to the underlying asset or liability or firm commitment, the fair value of the derivative is shown separately in the balance shee as there is no legal right of
offset.
–
Cash flow hedges: The
effective portions of changes in the fair value of derivatives that are designated
and qualify as cash flow
hedges are recognised in equity. The gain or loss relating to the ineffective
portion is recognised immediately in the income
statement. Amounts accumulated in equity are recycled in the income statement
in the
periods when the hedged item will affect profit
or loss (for instance, when the forecast sale that is being hedged takes place).
–
Derivatives that do not qualify for hedge
accounting: Certain derivative contracts
entered into by the Group in order to hedge
its exposure to fluctuations in exchange rates against the US dollar are
not located in the entity with the exposure. Such
contracts, and any other derivative contracts that do not qualify for hedge
accounting, are marked to market at the balance
sheet date. In respect of currency swaps, the gain or loss on the swap and
the offsetting gain or loss on the financial asset
or liability against which the swap forms an economic hedge are shown in
separate lines in the income statement. In respect
of other derivatives, the mark to market will give rise to charges or credits
to the income statement in periods before the
transaction against which the derivative is held as an economic hedge is
recognised.
–
Embedded derivatives: Derivatives
embedded in other financial instruments or other host contracts are treated as separate
derivatives when their risks and characteristics are not closely related to
their host contracts.
Prior to 1 January 2005, derivative financial
instruments were accounted for as follows
–
Amounts receivable and payable in respect
of interest rate swaps were recognised as adjustments to net interest
over the life of the contract.
–
Derivative contracts which had been entered
into by the Group in respect of its firm commitments or anticipated
transactions in order to hedge its exposure to fluctuations in exchange
rates against the US dollar or to fluctuations against commodity
prices and which were located in the entity with the exposure, were
accounted for as hedges: gains and losses were deferred and subsequently
recognised when the hedged transaction occurred. Where such contracts
were not located in the entity with the exposure they were fair valued
at the balance sheet date. This gave rise to charges or credits to
the income statement in periods before the transaction against which
the derivative was held as an economic hedge was recognised.
Where contracts and financial instruments
contained embedded derivatives, the derivative element was not treated
as a separate derivative.
–
Gains or losses on foreign currency
forward contracts and currency swaps relating to financial assets and
liabilities were matched against the
losses or gains on the hedged items in the income statement. Where currency
swaps were held with different counterparties to the underlying borrowing,
the fair value of the swaps was shown separately in the balance sheet
as there was no legal right of offset.
(q)
Share based payments
The fair value of cash-settled share plans is recognised
as a liability over the vesting period of the awards. Movements in that liability
between accounting dates are recognised as an expense. The grant date fair value
of the awards is taken to be the market value of the shares at the date of award
reduced by a factor for anticipated relative Total Shareholder Return ('TSR')
performance. Fair values are subsequently remeasured at each accounting date
to
reflect the number of awards expected to vest based on the current and anticipated
TSR performance. If any awards are ultimately settled in shares, the liability
is transferred direct to equity as the consideration for the equity instruments
issued.
The Group's equity-settled share plans are settled
either by the issue of shares by the relevant parent company, by the purchase
of shares on market or by the use of shares previously acquired as part of a
share buyback. The fair value of the share plans is recognised as an expense
over the expected vesting period with a corresponding entry to retained earnings
for Rio Tinto plc plans and to other reserves for Rio Tinto Limited plans. If
the cost of shares
acquired to satisfy the plans exceeds the expense charged, the excess is taken
to the appropriate reserve. The fair value of the share plans is determined at
the date of grant, taking into account any market based vesting conditions attached
to the award (e.g. Total Shareholder Return). The Group uses fair values provided
by independent actuaries calculated using a lattice based option valuation model.
Non market based vesting conditions (e.g. earnings per share targets) are taken into account in estimating the number of awards likely to vest. The estimate of the number of awards likely to vest is reviewed at each
balance sheet date up to the vesting date, at which point the estimate is adjusted to reflect the actual awards issued. No adjustment is made after the vesting date even if the awards are forfeited or not exercised.
Further information about the treatment of individual
share based payment plans is provided in note 45.
RECONCILIATION OF NET EARNINGS
TO UNDERLYING EARNINGS
Pre-tax
Taxation
Outside
Net
Net
Net
interests
amount
amount
amount
2006
2005
2004
Exclusions from underlying earnings
US$m
US$m
US$m
Profits less losses on disposal of interests in businesses
(a) (note 39)
5
(2
)
—
3
311
1,175
Impairment reversals less charges (b)
396
(276
)
(76
)
44
4
(321
)
Exchange differences and derivatives:
Exchange gains/(losses) on external debt and intragroup balances (c)
46
(70
)
8
(16
)
(87
)
159
– Gains/(losses) on currency and interest
rate derivatives not qualifying
for hedge accounting (d), (e)
35
(9
)
4
30
(40
)
8
– Gains/(losses) on external debt
and derivatives not qualifying as
hedges in equity
accounted units (c), (d), (e)
2
—
—
2
(12
)
4
Adjustment to environmental remediation provision (f)
37
—
—
37
84
—
Total excluded from underlying earnings
521
(357
)
(64
)
100
260
1,025
Net earnings
10,240
(2,373
)
(429
)
7,438
5,215
3,297
Underlying earnings
9,719
(2,016
)
(365
)
7,338
4,955
2,272
'Underlying earnings' is an additional measure of earnings, which is reported by Rio Tinto to provide greater understanding of the underlying business performance of its operations. Underlying earnings and Net earnings
both represent amounts attributable to Rio Tinto shareholders. Items (a) to (f) below are excluded from Net earnings in arriving at Underlying earnings.
(a)
Gains and losses arising on the disposal of interests in businesses. Additional information on these disposals is included in note 39.
(b)
Credits and charges relating to impairment of non-current assets other than undeveloped properties.
(c)
Exchange gains and losses on US dollar debt and intragroup balances.
(d)
Valuation changes on currency and interest rate derivatives which are ineligible for hedge accounting, other than those embedded in commercial contracts.
(e)
The currency revaluation of embedded US dollar derivatives contained in contracts held by entities whose functional currency is not the US dollar.
(f)
Other credits and charges that, individually, or in aggregate if of a similar type, are of a nature or size to require exclusion in order to provide additional insight into underlying business performance.
The 'adjustment to environmental remediation' provision
of US$37 million (2005: US$84 million; 2004: US$nil) relates
to the obligations of Kennecott Utah Copper described in note 26 (e). It
reverses part of an exceptional charge taken up in 2002, which was excluded
from Adjusted earnings at that time, and is therefore excluded in arriving
at Underlying earnings.
Change in treatment of undeveloped properties in
Underlying earnings The Group frequently sells undeveloped properties
as an alternative to development, and such activities are a component of the
Group's regular business activities.
For this reason, the above definition of Underlying earnings has been amended
in 2006 to include gains and losses on sales of undeveloped properties and impairment
charges relating to these. This change in definition resulted in an increase
of US$46 million in the Group's Underlying earnings for 2006 but has no impact
on Underlying earnings for 2005 or 2004.
Amounts charged by jointly controlled entities mainly for toll processing
1,196
1,128
980
Other external costs
1,936
1,649
1,519
Provisions
26
60
202
192
Exploration and evaluation
12
237
250
190
Research and development
15
20
16
Costs included above qualifying for capitalisation
(69
)
(83
)
(89
)
Other operating income
(262
)
(242
)
(161
)
Net operating costs (excluding impairment (reversals)/charges)
13,892
12,436
10,249
(a)
Information on auditors' remuneration
is included in note 41.
4
EMPLOYMENT COSTS
2006
2005
2004
Note
US$m
US$m
US$m
Employment costs
– Wages and salaries
2,337
2,093
1,700
– Social security costs
83
84
68
– Net post retirement cost (a)
46
189
167
151
– Share option costs (b)
45
32
48
40
2,641
2,392
1,959
Less: charged within provisions
(182
)
(230
)
(142
)
3
2,459
2,162
1,817
(a)
Post retirement costs include the aggregate service and interest cost of providing post retirement benefits under defined benefit plans, net of the related expected return on plan assets. Additional detail of the
amount charged to the income statement in respect of post retirement plans, and the treatment of actuarial gains and losses, is shown in note 46.
(b)
Further details of the Groups' share options and other share based payment schemes are given in note 45.
An increase in the Groups long term copper
price assumption triggered an assessment of the recoverable amount of KUC.
The value
in use was based on cash flows forecast in real terms and discounted at a pre-tax
rate of 8%. The KUC impairment provision in 2002 was calculated using a pre-tax
discount rate of 6%.
An increase in the Groups long term iron ore
price assumption triggered an assessment of the recoverable amount of IOC. The
value in use was based on cash flows forecast in real terms and discounted at
a pre-tax rate of 8%. The IOC impairment provision in 2002 aligned the carrying
value with the value negotiated between shareholders during that year as part
of a financial restructuring exercise.
A continuation of operating losses triggered an assessment
of the recoverable amount of Tarong, one of the Group's coal mines in Australia.
The value in use was based on cash flows forecast in real terms and discounted
at a pre-tax rate of 8%.
The carrying value of Argyle included goodwill and was
therefore subject to annual impairment reviews. In the case of Argyle, impairment
has occurred earlier than expected as a result of adverse changes in assumptions
about
future prices, capital and operating costs. The impairment provision included
the elimination of the balance of Argyle's goodwill, which amounted to US$223
million. The value in use was based on cash flows forecast in real terms and
discounted at a pre-tax rate of 8% which was the same as the discount rate used
in the 2005 annual assessment.
Against a background of adverse financial results,
including limited production from the underground mine and the strengthening
of the rand against the US dollar, an assessment of the recoverable amount of
Palaboras copper business was undertaken in the second half of 2004. This resulted in a provision for asset impairment of US$398 million (US$161 million after tax and outside shareholders interests)
which aligned the balance sheet value of the assets with their recoverable amount,
based on an assessment of fair value less costs to sell.
In line with market practice, fair value was estimated using a discounted cash flow analysis. The price assumption for copper was based on prevailing market prices for the first two years and long term forecast prices
thereafter. The Rand exchange rate was forecast principally based on an historical average. The cash flow forecasts were discounted at a pre-tax rate of nine percent.
A detailed review of the mine plan and projected cash
flows of the Colowyo coal business was undertaken in June 2004. This cash generating
unit is part of RTEA. The review indicated that future operating and development
costs would be substantially higher than previously expected. As a consequence,
a provision for asset impairment of US$160 million was recognised (US$98 million of intangible assets and US$62
million of property, plant and equipment) based on an assessment of value in
use. The pre-tax cash flows were estimated in real terms and discounted at five
percent per annum. The major area of uncertainty affecting the write down related
to the future operating and development
costs of the Colowyo operation, which were estimated over the next 18 years.
6
SHARE OF PROFIT AFTER TAX OF EQUITY ACCOUNTED
UNITS
2006
2005
2004
US$m
US$m
US$m
Sales revenue (a)
2,975
1,709
1,576
Operating costs
(771
)
(504
)
(739
)
Profit before finance items and taxation
2,204
1,205
837
Exchange gains/(losses) on external net debt
3
(17
)
4
Gain on currency and interest rate derivatives not qualifying for hedge accounting
—
—
1
Net interest payable
(45
)
(40
)
(46
)
Amortisation of discount
(14
)
(11
)
(11
)
Profit before tax
2,148
1,137
785
Taxation
(770
)
(361
)
(262
)
Profit after tax (Rio Tinto share)
1,378
776
523
(a)
The sales revenue of equity
accounted units excludes charges by jointly controlled entities to Rio
Tinto Group subsidiaries.
A benefit of US$335 million was recognised
in 2006 (2005: US$20 million; 2004: US$15 million) for US AMT credits
and operating losses that are expected to be recovered in future years.
Of this benefit US$nil (2005: US$20 million; 2004: US$5 million)
is included within 'UK taxation' and US$335 million (2005: US$nil;
2004: US$10 million) within 'Other countries'.
2006
2005
2004
US$m
US$m
US$m
Prima facie tax reconciliation
Profit before taxation
10,240
7,312
3,863
Deduct: share of profit after tax
of equity accounted units
(1,378
)
(776
)
(523
)
Parent companies' and subsidiaries'
profit before tax
8,862
6,536
3,340
Prima facie tax payable at UK and
Australian rate of 30%
2,659
1,961
1,002
Impact of items excluded in arriving
at underlying earnings (e)
201
(102
)
(309
)
Other permanent differences
Additional recognition of deferred
tax assets (b)
(335
)
—
—
Utilisation of previously unrecognised
deferred tax assets
(140
)
(83
)
(50
)
Adjustments to deferred tax liabilities
following changes in tax rates (c)
(46
)
—
—
Other tax rates applicable outside
the UK and Australia (d)
242
214
64
Resource depletion and other depreciation
allowances
(187
)
(164
)
(87
)
Research, development and other
investment allowances
(21
)
(21
)
(7
)
Other
—
9
6
Total taxation charge
2,373
1,814
619
(b)
The "Additional recognition of deferred tax
assets" of US$335 million reflects improved prospects for future earnings
from the Group's US operations
(c)
The "Adjustments to deferred tax liabilities
following changes in tax rates", totalling US$46 million, result from
a reduction in Canadian tax rates.
(d)
The tax reconciliations for all years analyse
US tax on a regular tax basis. Previously, US taxes were analysed on an
AMT basis. The presentation for 2005 and 2004 has been restated accordingly.
An analysis of the impact on the
tax reconciliation of items excluded in arriving at Underlying earnings
is given below:
2006
2005
2004
US$m
US$m
US$m
Disposals of interests in businesses
—
(86
)
(336
)
Impairment charges and reversals
157
(1
)
50
Adjustment to environmental remediation
provision
(11
)
(26
)
—
Exchange
gains / losses on external debt, intragroup balances and derivatives not
designated as hedges
55
11
(23
)
201
(102
)
(309
)
(f)
This tax reconciliation relates to the parent
companies and subsidiaries. The Group's share of profit of equity accounted
units is net of tax charges of US$770 million (2005: US$361 million;
2004: US$262 million).
9
EARNINGS PER ORDINARY SHARE
2006
2005
2004
Weighted average number of ordinary
shares in issue (millions) (b)
1,333.4
1,364.1
1,379.2
Effect of dilutive securities (share
options)
5.4
4.4
2.2
Diluted weighted average number
of ordinary shares in issue (millions) (b)
1,338.8
1,368.5
1,381.4
Net earnings (US$m)
7,438
5,215
3,297
Basic
earnings per share attributable to ordinary shareholders of
Rio Tinto (US cents)
557.8
382.3
239.1
Diluted
earnings per share attributable to ordinary shareholders of
Rio Tinto (US cents)
555.6
381.1
238.7
Underlying earnings (US$m)
7,338
4,955
2,272
Basic
underlying earnings per share attiributable to ordinary shareholders of
Rio Tinto (US cents)
550.3
363.2
164.8
Diluted
underlying earnings per share attributable to ordinary shareholders of
Rio Tinto (US cents)
548.1
362.1
164.5
(a)
Underlying earnings per share are calculated
from underlying earnings, detailed information on which is given in note
2.
(b)
The weighted average number of shares is calculated
as the average number of Rio Tinto plc shares outstanding not held as treasury
shares (1,047.7 million) plus the average number of Rio Tinto Limited shares
outstanding not held by Rio Tinto plc (285.7 million).
Rio Tinto Limited previous year
Final dividend paid (b)
118
140
106
Rio Tinto Limited previous year
Special dividend paid (b)
312
—
—
Rio Tinto Limited Interim dividend
paid (b)
113
110
100
Dividends paid during the year
2,573
1,143
910
2006
2005
2004
2006
2005
2004
Dividends
Dividends
Dividends
Number
Number
Number
per share
per share
per share
of shares
of shares
of shares
(millions)
(millions)
(millions)
Rio Tinto plc previous year Final
and Special (b)
85.24
p
23.94
p
18.68
p
1,063.9
1,068.0
1,066.7
Rio Tinto plc Interim (b)
21.42
p
21.75
p
17.54
p
1,042.7
1,069.3
1,067.5
Rio
Tinto Limited previous year Final and
Special – fully franked at 30% (b)
200.28
c
58.29
c
44.68
c
285.7
311.9
311.6
Rio Tinto Limited Interim –
fully franked at 30% (b)
52.48
c
50.56
c
45.53
c
285.7
285.4
311.7
(a)
The dividends paid in 2006 are based on the
following US cents per share amounts: 2005 final – 41.5
cents, 2005 special – 110
cents, 2006 interim – 40.0
cents (2005 dividends paid: 2004 final – 45.0
cents, 2005 interim – 38.5
cents; 2004 dividends paid: 2003 final – 34.0
cents, 2004 interim 32.0 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.
The number of shares on which Rio Tinto plc dividends are based exclude
those held as treasury shares.
(c)
In addition, the directors of Rio Tinto announced
a final dividend of 64.0 cents per share on 1 February 2007. This is expected
to result in payments of US$0.9 billion (Rio Tinto plc: US$0.7 billion,
Rio Tinto Limited US$0.2 billion). The dividends will be paid on 13
April 2007 to Rio Tinto plc shareholders on the register at the close of
business on 9 March 2007 and to Rio Tinto Limited shareholders on the register
at the close of business on 14 March 2007.
(d)
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 2007.
(e)
The approximate amount of the Rio Tinto Limited
consolidated tax group's retained profits and reserves that could be distributed
as dividends and franked out of credits, that arose from net payments of
income tax in respect of periods up to 31 December 2006 (after deducting
franking credits expected to be utilised on the 2006 final dividend declared),
is US$4,470 million.
Impairment Tests for Goodwill
Goodwill is reviewed annually for impairment. The
amounts as at 31 December 2006 disclosed above include goodwil relating to Australian
Iron Ore of US$394 million and goodwill of US$231 million relating to
Rio Tinto Energy America (RTEA). Australian Iron Ore comprises the business
units located in the Pilbara region of Western Australia that mine iron ore,
namely Robe River and Hamersley Iron.
The recoverable
amounts of the goodwill relating to Australian Iron Ore and RTEA have been assessed
by reference to value in use. The valuations are based on cash flow projections
that incorporate best estimates of selling prices, ore grades, production rates,
future capital expenditure and production costs over the life of each mine.
In line with normal practice in the mining industry, the cash flow projections
are based on long term mine plans covering the expected life of each operation.
The projections therefore generally cover periods well in excess of five years.
The valuations are
particularly sensitive to changes in assumptions about selling prices, operating
costs, exchange rates, and discount rates.
Future selling prices
and operating costs have been estimated in line with the policy in note 1(i).
Long term average selling prices are forecast taking account of estimates of
the costs of the producers in each industry sector. To the extent that future
coal sales are subject to fixed price contracts, such contracted prices are
used. Forecasts of operating costs are based on detailed mine plans which take
account of all relevant characteristics of the ore body.
Exchange rate assumptions
are based on the spot rates as of the time of the annual goodwill impairment
review. For the Australian dollar, an exchange rate US$0.76 was used.
Discount
rates represent an estimate of the rate the market would apply having regard
to the time value of money and the risks specific to the asset for which the
future cash flow estimates have not been adjusted. The Group's weighted average
cost of capital is used as a start point for determining the discount rate with
appropriate adjustments for the risk profile of the individual cash generating
unit. Goodwill relating to Australian Iron Ore and RTEA has been reviewed applying
a discount rate of 6.5% to the post-tax
cash flows expressed in real terms.
Impact of Reasonably Possible Changes in Key Assumptions Australian Iron Ore It does not appear that any reasonably
possible change in the key assumptions on which Australian Iron Ore's recoverable
amount is based would cause its value to fall short of its carrying amount at
31 December 2006.
RTEA The recoverable amount of goodwill relating to
RTEA is similar to its carrying value at 31 December 2006. Thus, any significant
adverse change in the valuation assumptions would cause its carrying value to
exceed its recoverable amount.
Other Under IAS 36, goodwill is no longer
amortised but is reviewed annually for impairment. The Group's business relates
to the mining and processing of finite resources and it is therefore likely
that impairments of certain elements of the goodwill may occur at some stage
in the future as resources are depleted. For this reason, the value of the goodwill
related to RTEA is likely to fall short of its carrying value in the near future.
All of the net book value is related to intangible
assets with finite lives. The following useful lives have been determined
for the classes of intangible assets:
Exploration
and evaluation: useful life not determined until transferred to property,
plant & equipment
Other intangible assets: 2 to 20 years
(b)
There are no intangible assets either pledged
as security or held under restriction of title.
(c)
The estimated aggregate amortisation expense
for each of the next five years is generally consistent with that recognised
in 2006.
Exploration and evaluation expenditure
The charge for the year and the net amount of intangible
assets capitalised during the year are as follows:
2006
2005
US$m
US$m
Cash expenditure in year (net of
proceeds on disposal of undeveloped properties)
345
264
Changes in accruals (including non-cash
proceeds on disposal of undeveloped properties)
Capitalisation of additional closure costs (note 26)
619
—
—
—
619
Interest capitalised (b)
5
—
3
52
60
Other additions
436
194
986
2,278
3,894
Depreciation for the year
(392
)
(159
)
(891
)
—
(1,442
)
Impairment reversals less charges
(166
)
90
752
(2
)
674
Disposals
(25
)
(13
)
(50
)
(21
)
(109
)
Transfers and other movements (c)
165
321
950
(1,410
)
26
At 31 December 2006
6,127
2,540
10,839
2,701
22,207
cost
9,166
4,454
21,553
2,835
38,008
accumulated depreciation
(3,039
)
(1,914
)
(10,714
)
(134
)
(15,801
)
Fixed assets held under finance leases (d)
—
39
38
—
77
Other fixed assets pledged as security (e)
35
—
1,154
—
1,189
Mining
Land
Plant
Capital
properties
and
and
works in
Total
Year ended 31 December 2005
and leases (a)
buildings
equipment
progress (g)
US$m
Net book value
At 1 January 2005
5,195
2,048
7,854
1,624
16,721
Adjustment on currency translation
(206
)
(43
)
(306
)
(52
)
(607
)
Capitalisation of additional closure costs (note 26)
346
—
—
—
346
Interest capitalised (b)
2
—
7
19
28
Other additions
206
60
577
1,650
2,493
Depreciation for the year
(406
)
(109
)
(800
)
—
(1,315
)
Impairment charges
—
(2
)
—
—
(2
)
Disposals
—
(7
)
(39
)
—
(46
)
Transfers and other movements (c)
87
72
1,385
(1,542
)
2
At 31 December 2005
5,224
2,019
8,678
1,699
17,620
cost
7,686
3,824
19,382
1,838
32,730
accumulated depreciation
(2,462
)
(1,805
)
(10,704
)
(139
)
(15,110
)
At 1 January 2005
cost
7,285
3,809
18,605
1,760
31,459
accumulated depreciation
(2,090
)
(1,761
)
(10,751
)
(136
)
(14,738
)
Fixed assets held under finance leases (d)
—
16
140
—
156
Other fixed assets pledged as security (e)
44
—
804
—
848
(a)
Mining properties include deferred stripping costs of
US$778 million (2005: US$699 million).
(b)
Interest is capitalised at a rate based on the Group's cost of borrowing or at the rate on project specific debt, where applicable.
(c)
'Transfers and other movements' includes reclassifications between categories.
(d)
The finance leases under which these assets are held are disclosed in note 22.
(e)
Excludes assets held under finance leases. Fixed assets
pledged as security represent amounts pledged as collateral against US$339 million (2005: US$354
million) of loans, which are included in note
21.
(f)
At 31 December, the net balance sheet amount for land and buildings includes amounts as follows:
2006
2005
US$m
US$m
Freehold
2,445
1,889
Long leasehold
92
128
Short leasehold
3
2
2,540
2,019
(g)
Accumulated depreciation on 'Capital works in progress' at 1 January 2005 relates to an impairment charge made in 2002.
Further details of investments in jointly controlled entities and associates are set out in notes 36 and 37.
(b)
At 31 December 2006, the quoted value of associates
having shares listed on recognised stock exchanges was US$368 million
(2005: no such associates).
15
NET DEBT OF EQUITY ACCOUNTED UNITS (EXCLUDING
AMOUNTS DUE TO RIO TINTO)
Rio Tinto
Rio Tinto
Rio Tinto
share of
Rio Tinto
share of
percentage
net debt
percentage
net debt
2006
2006
2005
2005
%
US$m
%
US$m
Jointly controlled entities
Minera Escondida Limitada
30.0
300
30.0
260
Queensland Alumina Limited (QAL)
38.6
44
38.6
106
Associates
Tisand (Pty) Limited
49.0
100
49.0
119
Port Waratah Coal Services
27.6
122
27.6
91
Other equity accounted units
(107
)
(40
)
459
536
(a)
In accordance with IAS 28 and IAS 31, the Group includes its net investment in equity accounted units in its consolidated balance sheet. This investment is net of the Group's share of the net debt of such units, which
is set out above.
(b)
Some of the debt of equity accounted units is subject to financial and general covenants.
No inventories were pledged as security for liabilities at 31 December 2006 or 2005.
17
TRADE AND OTHER RECEIVABLES
Non-current
Current
Non-current
Current
2006
2006
2005
2005
US$m
US$m
US$m
US$m
Trade debtors
56
2,133
4
1,730
Amounts due from equity accounted units
—
156
1
95
Other debtors
35
479
21
546
Pension surpluses (note 46)
329
31
167
33
Prepayment of tolling charges to jointly controlled entities (a)
492
—
434
—
Other prepayments and accrued income
91
145
79
108
Provision for doubtful debts
(20
)
(6
)
(3
)
(24
)
983
2,938
703
2,488
(a)
Rio Tinto Aluminium has made certain prepayments to jointly controlled entities for toll processing of bauxite and alumina. These prepayments will be charged to Group operating costs as processing takes
place.
(b)
There is no material element of trade and other receivables that is interest bearing.
Deferred tax balances for which there is a right of offset within the same jurisdiction are presented net on the face of the
balance sheet as permitted by IAS12. The closing deferred tax liabilities and assets, prior to this offsetting of balances, are
shown below.
UK
Australian
Other
2006
2005
tax
tax
countries'
Total
Total
tax
US$m
US$m
Deferred tax liabilities arising from:
Accelerated capital allowances
2
1,422
1,757
3,181
2,096
Post retirement benefits
83
9
2
94
48
Unremitted earnings
—
—
226
226
219
Other temporary differences
3
118
—
121
388
88
1,549
1,985
3,622
2,751
Deferred tax assets arising from:
Capital allowances
—
—
(100
)
(100
)
(51
)
Provisions
(37
)
(147
)
(551
)
(735
)
(288
)
Post retirement benefits
(18
)
(2
)
(265
)
(285
)
(118
)
Tax losses
—
—
(301
)
(301
)
(50
)
Other temporary differences
—
—
(87
)
(87
)
(102
)
(55
)
(149
)
(1,304
)
(1,508
)
(609
)
(Credited)/charged to the income statement
Accelerated capital allowances
—
(63
)
343
280
191
Provisions
(1
)
9
(13
)
(5
)
(78
)
Post retirement benefits
2
(1
)
15
16
3
Tax losses
33
3
(316
)
(280
)
—
Tax on unremitted earnings
—
(2
)
—
(2
)
(1
)
Other temporary differences
(7
)
(43
)
(13
)
(63
)
(14
)
27
(97
)
16
(54
)
101
(a)
The amounts credited directly to the SORIE relate to the provisions for tax on exchange differences on intra-group loans qualifying for reporting as part of the net investment in subsidiaries, on cash flow hedges and
on actuarial gains and losses on pension schemes and post retirement healthcare plans.
(b)
'Other movements' include deferred tax recognised by subsidiary holding companies that is presented in these accounts as part of the tax charge on the profits of the equity accounted unit to which it
relates.
(c)
The deferred tax liability of US$2,339 million (2005: US$2,197 million) includes US$1,764 million (2005: US$1,678 million) due in more than one year. The deferred tax asset of US$225 million (2005:
US$55 million) includes US$139 million (2005 US$18 million) receivable
in more than one year.
(d)
US$763 million (2005: US$1,399 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, the
majority of which relate to capital losses, recovery of which depends on
realisation of capital gains in future years.
(e)
Deferred tax is not recognised on the unremitted earnings
of overseas subsidiaries and jointly controlled entities where the Group
is able to control the timing of the remittance and it is probable that
there will be no remittance in the foreseeable future. If these earnings
were remitted, tax of US$1,711 million (2005: US$1,099 million)
would be payable.
(f)
There is a limited time period for the recovery of US$nil (2005:US$5
million) of tax losses which have been recognised as deferred tax assets
in the accounts.
The Group has a US$3 billion European Medium Term Note programme for the issuance of debt, of which approximately US$1.6
billion was drawn down at 31 December 2006.
(b)
Certain fixed rate borrowings shown above are swapped to floating rates. Details of interest rate and currency swaps and of available standby credit are shown in note 32.
(c)
Of the Group's US$3.5 billion borrowings, some US$0.7 billion relates to non-recourse borrowings that are the subject of various financial and general covenants with which the respective borrowers are in
compliance as of 31 December 2006.
Exchange gains/(losses) on external net debt and intragroup balances
Exchange gains on external net debt
38
13
Exchange (losses) on intragroup balances
(5
)
(145
)
Exchange gain on settlement of dividend
13
4
Credited/(charged) to income statement
46
(128
)
(a)
Further information relating to the currency
and interest rate exposures arising from net debt and related derivatives
is given in note 32 on Financial Instruments.
24
TRADE AND OTHER PAYABLES
Non-current
Current
Non-current
Current
2006
2006
2005
2005
US$m
US$m
US$m
US$m
Trade creditors
—
1,291
—
1,055
Amounts owed to equity accounted units
—
143
—
199
Other creditors (a)
190
212
123
281
Employee entitlements
—
187
—
167
Royalties and mining taxes
—
264
—
218
Accruals and deferred income
107
595
106
268
Government grants deferred
65
1
40
2
362
2,693
269
2,190
(a)
'Other creditors' include deferred consideration of US$179 million (2005: US$179 million) relating to certain assets acquired. The deferred consideration is included at its net present value. The amortisation
of the discount applied in establishing the net present value is treated as a finance cost. All other accounts payable and accruals are non-interest bearing.
25
OTHER FINANCIAL LIABILITIES
Non-current
Current
Non-current
Current
2006
2006
2005
2005
US$m
US$m
US$m
US$m
Forward commodity contracts: hedges
214
162
93
57
Derivatives related to net debt
19
4
20
8
Other derivatives and embedded derivatives: non-hedge
—
27
—
21
233
193
113
86
(a)
Detailed information relating to other financial
liabilities is given in note 32.
The main assumptions used to determine the provision for pensions and post retirement healthcare and other information, including the expected level of future funding payments in respect of those arrangements, are
given in note 46.
(b)
The provision for other employee entitlements includes a provision for long service leave of US$86 million (2005: US$122 million), based on the relevant entitlements in certain Group operations.
(c)
The Group's policy on close down and restoration costs is described in note 1(k). 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 relevant operation. Remaining lives of mines and infrastructure range from 1 to over 50 years with an average, weighted by closure provision, of around 14 years (2005: 16 years). Although the ultimate cost to be incurred
is uncertain, the Group's businesses estimate their respective costs based on feasibility and engineering studies using current restoration standards and techniques. Provisions of US$3,359 million (2005: US$2,693 million) for close down and
restoration costs and environmental clean up obligations include estimates of the effect of future inflation and have been adjusted to reflect risk.
These estimates have been discounted to their present value at approximately 5 per cent (2005: 5.5 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, this provision is equivalent to some US$4.7 billion (2005: US$4.0 billion).
(d)
Some US$50 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 clean up 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 2007, on the remedial action.
The provision was reduced by US$37 million during 2006 (2005: US$84 million) following a reassessment of the expected cost of remediation and the expected timing of the expenditure to reflect recent experience.
The ultimate cost of remediation remains uncertain, being dependent on the responsiveness of the contamination to pumping and acid neutralisation.
(f)
Other provisions deal with a variety of issues and include US$22 million (2005: US$33 million) relating to amounts received from employees for accommodation at some sites which are refundable in certain
circumstances.
(g)
Provisions for close down, restoration and environmental obligations increased by US$279 million (2005: US$207 million) as a result of a reduction in the discount rate. Of this amount, US$221 million (2005:
US$172 million) is included in 'Amounts capitalised'.
1,265,570 Ordinary shares were issued, and 1,117,021 Ordinary shares reissued from treasury during the year resulting from the exercise of options under Rio Tinto plc employee share option schemes at contracted prices
between 808.8p and 1,925p (2005: 3,000,155 shares issued at prices between 809p and 1,459p).
(b)
At the 2006 annual general meeting, the shareholders renewed the general authority for the Company to buy back up to 10 per cent of its Ordinary shares of 10p each for a further period of 12 months. Rio Tinto is
seeking renewal of this approval at its annual general meeting in 2007. During the year to 31 December 2006, 46,340,000 shares were bought back and held in treasury (2005: 2,600,000) at an average buy back price of £27.27 per share (2005:
£22.47), and 800,000 (2005: nil) shares were bought back at an average buy back price of £27.36 (2005: nil) and cancelled. The total consideration paid was US$2,394 million (2005: US$103 million).
(c)
The aggregate consideration received for shares issued during 2006 was US$31 million (2005: US$66 million ). The aggregate consideration received for treasury shares reissued was US$24 million (2005: 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)
Information relating to share options and other share based incentive schemes is given in note 45 on share based payments.
In May 2006, shareholders authorised Rio Tinto Limited to buy back ordinary shares during the following 12 months whether on market or via off-market buy back tenders, but only to the extent that such purchases would
not exceed 28.5 million Rio Tinto Limited shares during that 12 month period. Rio Tinto Limited is also authorised to buy back Rio Tinto Limited shares held by Tinto Holdings Australia Pty Limited (a wholly owned subsidiary of Rio Tinto plc). Rio
Tinto Limited is seeking renewal of these approvals at its annual general meeting in 2007.
No shares were bought back during the years to 31 December 2006. During the year to 31 December 2005, 27,294,139 shares were bought back via an off-market buy back tender at a buy back price of A$36.70 per share.
The total consideration paid was US$774 million. Rio Tinto Limited also bought back 16,367,000 of its shares held by the above subsidiary of Rio Tinto plc at the same buy back price per share.
(b)
No new shares were issued during 2006. The aggregate consideration received for shares issued during 2005 was US$34 million.
(c)
Total share capital in issue at 31 December 2006 was 456.82 million plus one special voting share and one DLC dividend share (31 December 2005: 456.82 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)
Share options exercised during the year to 31 December 2006 under various Rio Tinto Limited employee share option schemes were satisfied by the on-market purchase of Rio Tinto Limited shares by a third party on the
Group's behalf. During the year to 31 December 2005, 1,138,006 shares were issued, of which 1,130,211 resulted from the exercise of share options under share option schemes at contracted prices between A$20.37 and A$39.87 , and 7,795 from
the vesting of shares under the Rio Tinto Mining Companies Comparative Plan.
(e)
Information relating to share options and other share based incentive schemes is given in note 45 on share based payments.
Employee share options charged to the income statement
23
—
23
Other movements
(4
)
18
14
Closing balance
18,232
1,153
19,385
Attributable
Outside
Total
to
Interests
Year ended
shareholders
31 December
of Rio Tinto
2005
Summary statement of changes in equity
US$m
US$m
US$m
Opening balance
11,967
733
12,700
Total recognised income for the year
4,877
219
5,096
Dividends (note 10)
(1,143
)
(169
)
(1,312
)
Own shares purchased from Rio Tinto shareholders:
Under capital management programme
(877
)
—
(877
)
Ordinary shares issued
100
—
100
Subsidiary company share issue
—
4
4
Employee share options charged to the income statement
24
—
24
Other movements
—
4
4
Closing balance
14,948
791
15,739
(a)
Shares bought back include US$288 million in respect of a commitment entered into before the financial year end to purchase from a bank, Rio Tinto plc shares that the bank could buy in the market during the period
up to the preliminary announcement of the Group's results, when the Group is unable to purchase its own shares.
CHANGES IN EQUITY, SHARE PREMIUM AND RESERVES
CONTINUED
2006
2005
Total
Total
US$m
US$m
Share premium account
At 1 January
1,888
1,822
Premium on issues of ordinary shares
31
66
At 31 December
1,919
1,888
Retained earnings
At 1 January
11,893
8,388
Parent and subsidiaries' profit for the year (a)
7,440
4,853
Equity accounted units' retained profit for the year
(2
)
362
Actuarial gains
338
179
Dividends
(2,573
)
(1,143
)
Own shares purchased from Rio Tinto shareholders under capital management programme
(2,658
)
(794
)
Employee share options charged to income statement
12
13
Tax recognised directly in SORIE
(45
)
35
Other movements
(4
)
—
At 31 December
14,401
11,893
Hedging reserves (b)
At 1 January
(77
)
29
Parent and subsidiaries' net cash flow hedge fair value losses
(178
)
(122
)
Equity accounted units' cash flow hedge fair value gains
—
6
Parent and subsidiaries' net cash flow hedge losses/(gains) transferred to the income statement
63
(18
)
Equity accounted units' cash flow hedge losses transferred to the income statement
—
18
Tax on the above
59
10
At 31 December
(133
)
(77
)
Available for sale revaluation reserves (c)
At 1 January
20
70
Gains on available for sale securities
14
32
(Gains) on available for sale securities transferred to the income statement
(4
)
(88
)
Tax on the above
1
6
At 31 December
31
20
Other reserves (d)
At 1 January
42
31
Own shares purchased from Rio Tinto shareholders to satisfy share options
(49
)
—
Employee share options: value of services
11
11
Tax on the above
4
—
At 31 December
8
42
Foreign currency translation reserve (e)
At 1 January
(9
)
322
Currency translation adjustments
748
(411
)
Exchange (losses)/gains
(8
)
75
Currency translation reclassified on disposal
4
—
Tax on exchange adjustments
—
5
At 31 December
735
(9
)
Total other reserves per balance sheet
641
(24
)
(a)
Retained profit and movements in reserves of subsidiaries include those arising from the Group's share of proportionally consolidated units.
(b)
The hedging reserve records gains or losses on cash flow hedges that are recognised initially in equity, as described in note 1(p).
(c)
The available for sale revaluation reserves record fair value gains or losses relating to available for sale securities, as described in note 1(p).
(d)
Other reserves record the cumulative amount recognised in respect of options granted but not exercised to acquire shares in Rio Tinto Limited less, where applicable, the cost of shares purchased to satisfy share
options exercised. The estimated effect of unexercised options to acquire shares in Rio Tinto plc are recorded in retained earnings.
(e)
Exchange differences arising on the translation of the Group's net investment in foreign controlled companies are taken to the foreign currency translation reserve, as described in note 1(d). Amounts are recognised in
the income statement when the investment is disposed of.
Consolidated profit before finance items and taxation
Iron ore
43.2
41.5
26.7
3,875
2,872
887
Energy (c)
9.0
15.4
13.7
807
1,067
455
Industrial minerals (c)
4.1
5.2
10.9
371
362
362
Aluminium
11.9
7.3
15.6
1,069
502
520
Copper (c),(d)
37.5
28.2
31.2
3,367
1,954
1,037
Diamonds
(0.2
)
6.6
9.3
(15
)
459
311
Exploration and evaluation
(2.1
)
(2.7
)
(3.5
)
(188
)
(193
)
(114
)
Other
(3.4
)
(1.5
)
(3.9
)
(312
)
(101
)
(131
)
Operating profit (segment result)
100.0
100.0
100.0
8,974
6,922
3,327
Share of profit after tax of equity accounted units
Copper
1,271
660
495
Other
107
116
28
Profit before finance items and taxation
10,352
7,698
3,850
Depreciation and amortisation (excluding share of
equity accounted units)
Iron ore (c)
26.3
23.6
16.8
387
315
289
Energy (c)
20.1
20.9
24.6
295
279
423
Industrial minerals (c)
11.7
11.9
9.4
172
159
162
Aluminium
9.7
9.1
4.9
143
121
85
Copper (c)
20.1
18.8
35.1
295
251
603
Diamonds (c)
9.9
12.2
6.3
145
163
108
Exploration and evaluation
0.2
0.2
0.1
3
3
2
Other
2.0
3.3
2.8
29
43
47
Product group total
100.0
100.0
100.0
1,469
1,334
1,719
(a)
The product groups shown above reflect the Group's management structure and are the Group's primary segments in accordance with IAS14. The analysis deals with: the sales revenue, profit before finance costs and
taxation, and depreciation and amortisation, for subsidiary companies and proportionally consolidated units. The amounts presented for each product group exclude equity accounted units, but include the amounts attributable to outside equity
shareholders. The classification is consistent with the financial information by business unit data included on pages A-67 and A-68. However, that information includes the results of equity accounted units and presents different financial
measures.
(b)
As detailed below, the analysis of profit before finance costs and taxation includes the profit on disposal of interests in businesses (including investments) and impairment (reversals)/charges, which are excluded from
Underlying earnings.
(c)
The above analysis of depreciation and amortisation includes the following impairment reversals and charges.
2006
2005
2004
Total
Total
Total
US$m
US$m
US$m
Impairment reversals less charges by product group
Iron Ore
298
—
—
Energy
(188
)
(13
)
(160
)
Industrial Minerals
(7
)
16
—
Copper
610
—
(398
)
Diamonds
(317
)
—
—
396
3
(558
)
(d)
For the year ended 31 December 2006, the operating
profit of the Copper group included the benefit of an exceptional reduction in
environmental provisions of US$37 million (2005: US$84 million; 2004:
US$nil).
PRIMARY SEGMENTAL ANALYSIS (BY PRODUCT GROUP) CONTINUED
2006
2005
2006
2005
%
%
US$m
US$m
Segment Assets (subsidiaries and proportionally consolidated units)
Iron ore
33.8
29.5
10,151
7,228
Energy
16.5
18.5
4,965
4,542
Industrial minerals
12.0
13.1
3,589
3,216
Aluminium
12.9
13.6
3,863
3,341
Copper
16.0
14.7
4,814
3,597
Diamonds
5.6
7.0
1,671
1,703
Other
3.2
3.6
959
869
Product group total
100.0
100.0
30,012
24,496
Equity accounted units (a)
Copper
58.0
53.5
1,385
1,063
Aluminium
36.8
42.7
878
849
Other
5.2
3.8
123
76
Total
100.0
100.0
2,386
1,988
Deferred tax assets
225
55
Current tax recoverable
214
152
Pension surpluses
360
200
Derivative assets
555
528
Cash and liquid resources
742
2,384
Total assets
34,494
29,803
(a)
The analysis of the Group's investment in equity accounted units includes loans to equity accounted units, which are shown separately on the face of the balance sheet.
2006
2005
2006
2005
%
%
US$m
US$m
Segment Liabilities (subsidiaries and proportionally consolidated units)
PRIMARY SEGMENTAL ANALYSIS (BY PRODUCT GROUP) CONTINUED
2006
2005
2004
2006
2005
2004
%
%
%
US$m
US$m
US$m
Capital additions (a)
Iron ore
48.4
44.0
37.3
2,303
1,291
1,039
Energy
12.4
20.6
11.5
591
604
321
Industrial minerals
8.4
8.5
8.8
400
249
245
Aluminium
5.3
5.0
22.9
253
147
640
Copper
15.9
11.5
9.3
758
337
259
Diamonds
6.0
6.5
8.5
288
192
236
Other
3.6
3.9
1.7
170
114
49
Total capital additions
100.0
100.0
100.0
4,763
2,934
2,789
Note
Analysis of capital additions
Property, plant & equipment - cash expenditure
3,800
2,523
2,246
Capitalised closure costs and other provisions
13
619
346
268
Capitalised interest
13
60
28
35
Intangible assets - cash expenditure
192
67
13
Finance leases taken out
2
64
—
Movement in payables for capital expenditure
90
(94
)
227
Capital additions per above
4,763
2,934
2,789
(a)
Capital additions represent the total cost incurred during the period to acquire the non-current assets shown above, measured on an accruals basis, in accordance with IAS 14. These figures exclude capital additions of
equity accounted units.
Gross sales revenue by destination (including share
of equity accounted units)
North America (a)
21.9
21.7
24.7
5,575
4,499
3,588
Europe
17.2
20.5
20.6
4,378
4,260
2,991
Japan
19.6
19.1
17.9
4,986
3,954
2,597
China
16.0
15.0
10.1
4,062
3,112
1,471
Other Asia
13.5
12.8
13.1
3,438
2,663
1,906
Australia and New Zealand
5.8
6.7
8.5
1,477
1,400
1,235
Other
6.0
4.2
5.1
1,524
854
742
100.0
100.0
100.0
25,440
20,742
14,530
Less: share of equity accounted units'
sales revenue
(2,975
)
(1,709
)
(1,576
)
Consolidated sales revenue
22,465
19,033
12,954
Consolidated sales revenue by destination
North America (a)
23.9
22.3
25.6
5,358
4,235
3,314
Europe
17.5
20.8
20.1
3,929
3,968
2,607
Japan
19.6
19.0
17.9
4,402
3,620
2,319
China
16.2
15.4
10.7
3,648
2,932
1,389
Other Asia
12.0
12.4
12.9
2,691
2,366
1,676
Australia and New Zealand
6.3
7.0
9.0
1,412
1,336
1,170
Other
4.5
3.1
3.8
1,025
576
479
Total
100.0
100.0
100.0
22,465
19,033
12,954
Gross sales revenue by country of origin (including
share of equity accounted units)
North America (a)
29.6
30.8
31.5
7,529
6,397
4,571
Australia and New Zealand
49.9
51.2
48.3
12,703
10,613
7,023
South America
10.5
6.3
7.8
2,679
1,302
1,131
Africa
5.7
5.5
5.8
1,461
1,149
850
Indonesia
1.6
3.4
2.2
396
702
314
Europe and other countries
2.7
2.8
4.4
672
579
641
Total
100.0
100.0
100.0
25,440
20,742
14,530
Less: share of equity accounted units'
sales revenue
(2,975
)
(1,709
)
(1,576
)
Consolidated sales revenue
22,465
19,033
12,954
Segment assets
Capital additions
2006
2005
2006
2005
2004
US$m
US$m
US$m
US$m
US$m
Assets and capital additions by location (excluding
equity accounted units)
North America (a)
10,302
8,254
1,430
830
613
Australia and New Zealand
17,097
13,850
2,993
1,914
1,985
South America
151
126
19
37
21
Africa
1,168
1,014
204
62
54
Indonesia
605
679
49
68
59
Europe and other countries
1,049
773
68
23
57
30,372
24,696
4,763
2,934
2,789
Investments in equity accounted units (b)
North America (a)
408
61
Australia and New Zealand
937
893
South America
993
1,000
Other countries
48
34
2,386
1,988
Deferred tax assets
225
55
Current tax recoverable
214
152
Derivative assets
555
528
Cash and liquid resources
742
2,384
Total assets
34,494
29,803
(a)
The United States of America and Canada have been combined to form the 'North America' Geographical segment, having regard to the similarity of economic and political conditions in these countries.
(b)
This analysis of investments in equity accounted units represents the Group's share of net assets plus loans to equity accounted units, which are shown separately on the face of the balance sheet.
Financial risk management The
Groups policies with regard to risk management are clearly defined and consistently applied. They are a fundamental tenet of the Groups
long term strategy.
The Groups 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 Groups policy
of borrowing at floating US dollar interest rates helps to counteract the effect
of economic and commodity price cycles.
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 Groups
interest rate policy. Currency swaps are used to convert debt or investments
into currencies, primarily the US dollar, which are consistent with the Groups
policy on currency exposure management.
Foreign exchange risk Rio
Tintos shareholders' equity, earnings and
cash flows are influenced by a wide variety of currencies due to the geographic
diversity of the Groups sales and the countries in which it operates. The
US
dollar, however, is the currency in which the great majority of the Groups
sales are denominated. Operating costs are influenced by the currencies of those
countries where the Groups 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 Canadian dollars are the most important currencies
(apart from the US dollar) influencing costs.
Details of the derivative financial instruments entered
into to manage the Group's exposure to currencies other than the US dollar are
provided in note A below.
Given the dominant role of the US currency in the Groups affairs, the US dollar is the currency in which financial results are presented both internally and externally. It is also the most appropriate currency
for borrowing and holding surplus cash, although a portion of surplus cash may also be held in other currencies, most notably Australian dollars, in order to meet short term operational and capital commitments and dividend payments.
The Group finances its operations primarily in US dollars, either directly or using currency swaps, and a substantial part of the Group's US dollar debt is located in subsidiaries having functional currencies other than the US dollar.
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 A below, as at 31 December 2006 there were forward contracts to sell US$581 million (2005: US$512 million) in respect of future trading transactions. 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 rate risk Rio
Tintos 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
in the long term, 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
2006,
US$1.2 billion (2005: US$1.1 billion) of the Groups debt was at
fixed rates after taking into account interest rate swaps and finance leases.
Based on the Groups net debt at 31 December 2006, and with other variables
unchanged, the
approximate effect on the Groups net earnings of a one percentage point
increase in US dollar LIBOR interest rates would be a reduction of US$6 million
(2005: US$4 million).
Commodity price risk The
Groups 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 Tintos
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. During 2005, forward contracts
to sell 509 million
pounds of copper at a fixed rand price per pound were entered into as a condition
of the refinancing of Palabora, for which cash flow hedge accounting is achieved
(of which 420 million pounds remain at 31 December 2006).
Credit risk No material exposure is considered to exist by virtue
of the possible non-performance of the counterparties to financial instruments,
other than trade and other receivables held by the Group.
Given the large number
of internationally dispersed customers the Group has limited concentration of
credit risk, with regard to its trade and other receivables, which is closely
monitored.
Implementation of IAS 32 'Financial instruments:
presentation and disclosure' The Group implemented IAS 32 at 1 January 2005 without
restatement of comparatives.
Implementation of IAS 39 'Financial instruments:
recognition and measurement' The Group implemented IAS 39 at 1 January 2005 without
restatement of comparatives. For 2004, financial instruments were not marked
to market except in the case of exchange rate derivatives that did not qualify
as
hedges under IAS 21.
The adoption of IAS 39 resulted in a US$90 million
increase in equity attributable to Rio Tinto shareholders at 1 January 2005.
This was net of consequential increases in deferred tax liabilities of US$24
million, and outside equity shareholders' interests of US$19 million.
This represented the net gain on the marking to market of qualifying hedges,
embedded derivatives, available for sale investments and certain derivatives
that did not qualify as
hedges.
The major balance sheet line items affected were
financial assets: increase of US$287 million, financial liabilities:
increase of US$66 million, and borrowings: increase of US$69 million.
The net impact on other balance sheet items was a reduction in total assets
of US$19 million.
Financial instrument disclosures Except where stated, the information given below
relates to the financial instruments of the parent companies and their subsidiaries
and proportionally consolidated units, and excludes those of equity accounted
units.
Trade and other
receivables/payables are included only in the currency analysis. The information
is grouped in the following sections:
A
– Derivative financial instruments
B
– Reporting currencies and currency exposures
C
– Interest rates
D
– Liquidity
E
– Fair values
A)
DERIVATIVE FINANCIAL INSTRUMENTS
The Group's derivatives, including embedded derivatives,
as at 31 December 2006, are summarised below:
a)
Forward contracts relating to trading transactions:
designated as cash flow hedges
Assets (note 19)
Buy currency
Sell
Weighted
Total fair
Total fair
amount
currency
average
value
value
amount
rate
2006
2005
Buy Australian dollar; sell US dollar
A$m
US$m
A$/US$
US$m
US$m
Less than 1 year
151
92
0.61
26
19
1 to 5 years
246
148
0.60
36
39
397
240
0.60
62
58
Commodity contracts
4
6
Total
66
64
The above currency forward contracts were acquired
with companies purchased in 2000 and were entered into by those companies
in order to reduce their exposure to the US dollar through forecast sales.
The above commodity contracts have been entered into in order to reduce exposure
to movements in the coal price.
Liabilities (note 25)
Sell
Sales
Total fair
Total fair
million
price
value
value
lbs of Cu
Rand/lb
2006
2005
Sell Copper
US$m
US$m
Less than 1 year
99.25
9.52
(149
)
(45
)
1 to 5 years
238.27
7.41
(184
)
(57
)
More than 5 years
82.60
7.14
(18
)
(29
)
(351
)
(131
)
Other commodity contracts
(25
)
(19
)
Total
(376
)
(150
)
The above copper forward contracts were entered into as a condition of the refinancing of Palabora in 2005, and result in a reduction in the Group's exposure to movements in the copper price. Other commodity contracts
have been entered into in order to reduce exposure to movements in the coal price.
Options relating to trading transactions:
designated as cash flow hedges
Assets (note 19)
Buy
Sell
Weighted
Total
Total
currency
currency
average
fair value
fair value
amount
amount
strike
2006
2005
rate
Bought A$ call options
A$m
US$m
A$/US$
US$m
US$m
Less than 1 year
94
66
0.70
8
3
1 to 5 years
59
42
0.71
4
7
153
108
0.71
12
10
The above currency option contracts were acquired with companies purchased in 2000 and were entered into by those companies in order to reduce their exposure to the US dollar forecast sales.
Reconciliation to Balance Sheet categories
–
non-current assets (note 19)
42
46
–
current assets (note 19)
36
28
–
current liabilities (note 25)
(162
)
(57
)
–
non-current liabilities (note 25)
(214
)
(93
)
Total derivatives designated as cash flow hedges, detailed above
(298
)
(76
)
c)
Forward contracts relating to trading transactions: not designated as hedges
Assets
Buy
Sell
Weighted
Total fair
Total fair
currency
currency
average
value
value
amount
amount
rate
2006
2005
Buy New Zealand dollar; sell US dollar
NZ$m
US$m
NZ$/US$
US$m
US$m
Less than 1 year
130
58
0.45
32
29
1 to 5 years
390
175
0.45
75
89
520
233
0.45
107
118
Commodity contracts
1
2
Embedded currency derivatives
10
13
Other currency forward contracts
4
5
Total assets relating to non hedge derivatives (note 19)
122
138
Liabilities
Commodity contracts
(1
)
(9
)
Embedded currency derivatives
(26
)
(11
)
Interest rate derivatives
—
(1
)
Total liabilities relating to non hedge derivatives (note 25)
(27
)
(21
)
The above New Zealand dollar currency forward contracts
were taken out to manage exposure on operating costs. These contracts are not
designated as hedges as they are not located in the entities with the exposure.
Currency and interest contracts relating
to non US dollar borrowings
Buy
Sell
Weighted
Total fair
Total fair
currency
currency
average
value
value
amount
amount
exchange
2006
2005
Assets
rate
US$m
US$m
Buy Euro: sell US dollars
US$m
Less than 1 year
Euro 850m
781
1.09
338
229
Buy Japanese yen: sell US dollars
Less than 1 year
Yen 5 billion
41
122
1
2
1 to 5 years
—
—
—
4
Buy Sterling: sell US dollars
Less than 1 year
£15
m
23
0.65
6
47
1 to 5 years
£200
m
390
0.51
3
3
Buy Swiss francs: sell US dollars
Less than 1 year
—
—
—
3
Liabilities
Buy Japanese yen: sell US dollars
1 to 5 years
Yen 5 billion
46
109
(4
)
(3
)
Total currency swaps
1,281
344
285
–
designated as hedges
1,171
341
229
–
not designated as hedges
110
3
56
Interest contracts relating to borrowings: assets
7
28
Interest contracts relating to borrowings: liabilities
(19
)
(25
)
Total derivatives related to net debt
332
288
–
non-current assets (note 19)
3
254
–
current assets (note 19)
352
62
–
current liabilities (note 25)
(4
)
(8
)
–
non-current liabilities (note 25)
(19
)
(20
)
332
288
These currency and interest rate contracts are used
to fix the US dollar value of non US dollar denominated external debt and to
convert certain fixed rate obligations to a floating rate. Contracts are not
designated as fair value hedges where the financial instrument swaps the debt
into a currency other than the functional currency of the individual entity that
holds the debt.
Currency exposures arising from the Group's
financial assets and liabilities (excluding non debt derivatives)
Certain financial assets and liabilities
are not held in the functional currency of the relevant subsidiary. This
results in an accounting exposure to exchange gains and losses as the
financial assets and liabilities are translated into the functional currency
of the subsidiary that accounts for those assets and liabilities. These
gains and losses are recorded in the Group income statement except to
the extent that they can be taken to equity under the Group's accounting
policy which is explained
in note 1.
After taking into account relevant derivative
instruments, almost all of the Group's net debt is either denominated
in US dollars or in the functional currency of the entity holding the
debt.
The tables below set out the currency exposures
arising from each of net debt, intragroup balances and other financial
assets and liabilities. These currency exposures are after taking into
account the effect
of currency swaps.
Net debt:
Net debt:
(before tax and minority interests)
(net of tax and minority interests)
Currency of exposure
Currency of exposure
United
Other
2006
2005
United
Other
2006
States
currencies
Total
Total
States
currencies
Total
dollar
dollar
US$m
US$m
US$m
US$m
US$m
US$m
US$m
Functional currency of entity:
United States dollar
—
(7
)
(7
)
11
—
(5
)
(5
)
Australian dollar (a)
(746
)
9
(737
)
(1,279
)
(516
)
6
(510
)
Canadian dollar (a)
(237
)
2
(235
)
(590
)
(106
)
1
(105
)
South African rand
(48
)
1
(47
)
(62
)
(19
)
—
(19
)
Other currencies
24
6
30
15
17
4
21
(1,007
)
11
(996
)
(1,905
)
(624
)
6
(618
)
Net debt denominated in subsidiaries' functional currencies
(1,441
)
592
Net debt (note 23)
(2,437
)
(1,313
)
(a)
Of the US$746 million of US dollar denominated
net debt in Australian functional currency companies, US$46 million has been
swapped to US$. The underlying currency is 5 billion yen. Similarly, of the
US$237 million of US dollar denominated net debt in Canadian functional currency
companies, US$64 million has been swapped to US$. The underlying currencies
are: £15 million and 5 billion yen.
Intragroup debt:
Intragroup debt:
(before tax and minority interests)
(net of tax and minority interests)
Currency of exposure
Currency of exposure
United
Other
2006
2005
United
Other
2006
States
currencies
Total
Total
States
currencies
Total
dollar
dollar
US$m
US$m
US$m
US$m
US$m
US$m
US$m
Functional currency of entity:
United States dollar
—
2,739
*
2,739
220
—
2,747
*
2,747
Australian dollar
(2,254
)
46
(2,208
)
(2,157
)
(1,522
)
31
(1,491
)
Canadian dollar
(355
)
—
(355
)
(432
)
(245
)
—
(245
)
South African rand
(116
)
(8
)
(124
)
(131
)
(38
)
(4
)
(42
)
Other currencies
(54
)
29
(25
)
(110
)
(38
)
20
(18
)
Total
(2,779
)
2,806
27
(2,610
)
(1,843
)
2,794
951
The above table deals with intragroup balances
that give rise to exchange differences in the income statement. Other
intragroup balances are in the functional
currency of the entity or they are quasi-equity
*
These amounts relate to intragroup debt denominated
in Australian dollars reported by subsidiaries with a US dollar functional
currency. They are shown as positive balances because they have the effect
of offsetting the exposures resulting from external and intragroup US
dollar liabilities in
Australian subsidiaries.
Currency exposures arising
from the Group's net receivables and payables
The table below sets out the currency exposures
arising from the Group's net receivables and payables, that are not denominated
in the functional currency of the relevant subsidiary. Gains and losses
resulting from such exposures are recorded in the income statement.
Net receivables less payables
Net receivables less payables
(before tax and minority interests)
(net of tax and minority interests)
Currency of exposure
Currency of exposure
United
Other
2006
2005
United
Other
2006
States
currencies
Total
Total
States
currencies
Total
dollar
dollar
US$m
US$m
US$m
US$m
US$m
US$m
US$m
Functional currency of entity:
Australian dollar
793
1
794
592
487
1
488
Canadian dollar
179
12
191
162
86
8
94
South African rand
72
17
89
74
26
5
31
Other currencies
135
27
162
101
95
19
114
1,179
57
1,236
929
694
33
727
Denominated in functional currencies of subsidiaries
(364
)
(277
)
Reconciliation to balance sheet categories
Net receivables less payables per above
872
652
– trade debtors (net of provision): non-current (note 17)
36
1
– trade debtors (net of provision): current (note 17)
2,127
1,706
– trade creditors: current (note 24)
(1,291
)
(1,055
)
C)
INTEREST RATES
i)
Interest bearing financial assets
and financial liabilities
The interest rate composition of the Group's
interest bearing financial assets and liabilities is shown below. This
table deals with the carrying values of the financial instruments in
the balance sheet, with the values of derivatives shown separately
At 31 December 2006
Floating
Fixed interest rates Amounts falling due in:
rate
1 year or
5 years
Total
less
1-2 years
2-3 years
3-4 years
4-5 years
or more
2006
US$m
US$m
US$m
US$m
US$m
US$m
US$m
Financial liabilities
Borrowings
(580
)
(1,230
)
(641
)
(40
)
(414
)
(38
)
(554
)
(3,497
)
Bank overdrafts
(14
)
—
—
—
—
—
—
(14
)
Interest rate swaps (a)
(1,753
)
1,193
292
(122
)
390
—
—
—
Derivatives related to net debt
(21
)
—
—
(2
)
—
—
—
(23
)
(2,368
)
(37
)
(349
)
(164
)
(24
)
(38
)
(554
)
(3,534
)
Financial assets
Loans to jointly controlled entities (b)
379
—
—
—
—
—
—
379
US Treasury bonds
—
20
—
—
—
—
—
20
Other investments
184
—
—
—
—
—
—
184
Derivatives related to net debt
355
—
—
—
—
—
—
355
Cash and cash equivalents and liquid resources
742
—
—
—
—
—
—
742
1,660
20
—
—
—
—
—
1,680
(a)
These are the notional principal amounts which swap the fixed rate liabilities into floating rate, and certain floating rate swaps into fixed rate.
(b)
Loans to jointly controlled entities include amounts of US$228 million (2005: US$225 million), which are not expected to be repaid and so form part of the Group's net investment in the jointly controlled
entity.
(c)
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 5.36 per cent (2005: 4.5 per cent).
(d)
The above table excludes US$176 million (2005: US$72
million) of equity shares and quoted funds, which are not interest bearing.
Fixed rate liabilities not converted to floating
rate by means of interest rate swaps are summarised below.
Principal
Average
2006
Principal
Average
2005
fixed
(Excess) of
fixed
Excess of
rate
fair value
rate
fair value
over
over
principal
principal
Maturity
US$m
% p.a.
US$m
US$m
% p.a.
US$m
Less than 1 year
(37
)
7.3
(3
)
(23
)
7.4
(3
)
1 to 5 years
(575
)
4.3
11
(504
)
4.0
16
More than 5 years
(554
)
6.0
(29
)
(558
)
6.3
(32
)
Fixed rate liabilities
(1,166
)
5.3
(21
)
(1,085
)
5.3
(19
)
(a)
As a consequence of acquisitions during 2000, the Group holds a number of interest rate swaps to receive US$ floating rates and pay US$ fixed rate which have been included in the total of fixed rate liabilities
shown above.
(b)
The Group has US$121 million of finance leases (2005: US$112 million), the largest of which has a principal of US$52 million, a maturity of 2018 and a floating interest rate.
(c)
The Group's fixed rate debt after interest rate
swaps has a weighted average time to maturity of six years (2005: seven
years).
(iii)
Fixed rate assets
Total fixed rate financial assets for the Group
at 31 December 2006 were US$20 million, with a fair value of US$20
million (2005: US$109 million with a fair value of US$108 million).
The average fixed rate per annum for 2006 was 5.1 per cent (2005: 3.5 per
cent).
The maturity profile of the Group's financial
liabilities and financial assets, other than trade and other receivables
and payables, is as follows:
Borrowings
Derivatives
Other
Total
Total
before
related to
financial
2006
2005
swaps
net debt
liabilities
US$m
US$m
Financial liabilities
Within 1 year,
or on demand
(1,504
)
(3
)
(213
)
(1,720
)
(1,373
)
Between 1 and
2 years
(723
)
(15
)
(182
)
(920
)
(1,298
)
Between 2 and
3 years
(107
)
(2
)
(79
)
(188
)
(762
)
Between 3 and
4 years
(478
)
(3
)
(27
)
(508
)
(140
)
Between 4 and
5 years
(68
)
—
(25
)
(93
)
(80
)
After 5 years
(631
)
—
(56
)
(687
)
(710
)
(3,511
)
(23
)
(582
)
(4,116
)
(4,363
)
Cash and
Derivatives
Other
Total
Total
liquid
related to
financial
resources
net debt
assets
US$m
US$m
Financial assets
Within 1 year, or on demand
742
350
142
1,234
2,814
Between 1 and 2 years
—
—
152
152
411
Between 2 and 3 years
—
—
54
54
54
Between 3 and 4 years
—
5
42
47
44
Between 4 and 5 years
—
—
13
13
36
After 5 years
—
—
556
556
393
742
355
959
2,056
3,752
As at 31 December 2006, a total of US$1,281
million after swaps (2005: US$1,255 million) is outstanding under
the US$3 billion European Medium Term Notes facility, of which US$845
million after swaps (2005: US$331 million) is repayable within one
year.
As at 31 December 2006, the Group had unutilised
standby credit facilities totalling US$2.3 billion. These facilities,
which are summarised below, are for back-up support for the Groups
commercial paper programmes and for general corporate purposes:
The carrying values and the fair values of Rio Tinto's
financial instruments, other than trade and other receivables and payables, a
31 December are shown in the following table. Fair
value is the amount at which a financial instrument could be exchanged in an
arm's length transaction between informed and willing
parties. Where available, market values have been used to determine fair
values. In other cases, fair values have been calculated
using quotations from independent financial institutions, or by discounting
expected cash flows at prevailing market rates. The
fair values of cash, short term borrowings and loans to equity accounted units
approximate to their carrying values, as a result of their short maturity or because they carry floating rates of interest
2006
2005
Carrying
Fair
Carrying
Fair
value
value
value
value
US$m
US$m
US$m
US$m
Primary financial instruments held or issued to finance the Group's operations:
US Treasury bonds (note 19)
20
20
109
108
Equity shares and quoted funds (note 19)
176
176
72
72
Other investments (note 19)
184
184
275
275
Cash and cash equivalent assets (note 20)
736
736
2,379
2,379
Other liquid resources
6
6
5
5
Short term borrowings and bank overdrafts
(1,504
)
(1,507
)
(1,202
)
(1,205
)
Medium and long term borrowings (note 21)
(2,007
)
(2,025
)
(2,783
)
(2,799
)
Loans to jointly controlled entities (Section C (i))
379
379
384
384
Deferred consideration (note 24)
(179
)
(179
)
(179
)
(179
)
(2,189
)
(2,210
)
(940
)
(960
)
Derivative financial instruments held to manage interest rate and currency profile (excludes embedded derivatives):
Forward contracts: cash flow hedge (Section A (a))
(310
)
(310
)
(86
)
(86
)
Option contracts: cash flow hedge (Section A (b))
12
12
10
10
Forward contracts and embedded derivatives (Section A (c))
95
95
117
117
Currency swaps hedging non US dollar debt (Section A (d))
344
344
285
285
Interest rate swap agreements and options (Section A (d))
Capital commitments (excluding
those related to joint ventures and associates)
Contracted capital
expenditure: property, plant and equipment
1,912
1,004
Other commitments
163
93
Capital commitments relating
to joint ventures and associates (a)
Capital commitments
incurred by the Group
155
7
Capital commitments incurred jointly
with other venturers (Rio Tinto share)
183
218
Operating leases The aggregate amount of minimum lease payments
under non-cancellable operating leases are as follows:
2006
2005
US$m
US$m
Within 1 year
62
74
Between 1 and 5 years
123
95
After 5 years
242
29
427
198
Unconditional purchase obligations The aggregate amount of future payment commitments
under unconditional purchase obligations outstanding at 31 December was:
2006
2005
US$m
US$m
Within 1 year
903
935
Between 1 and 2 years
713
691
Between 2 and 3 years
498
575
Between 3 and 4 years
343
438
Between 4 and 5 years
317
329
After 5 years
826
1,096
3,600
4,064
Unconditional purchase obligations relate to commitments
to make payments in the future for fixed or minimum quantities of goods or
services at fixed or minimum prices. The future payment commitments set out
above have not been discounted and mainly relate to commitments under 'take
or pay' power and freight contracts. They exclude unconditional purchase
obligations of jointly controlled entities apart from those relating to the
Group's tolling
arrangements.
2006
2005
US$m
US$m
Contingent liabilities (excluding those relating to joint ventures and associates)
Indemnities and other performance guarantees
79
61
Contingent liabilities relating to joint ventures and associates (a)
Share of contingent liabilities of joint ventures
5
4
Incurred in relation to interests in joint ventures
372
284
Incurred in relation to other venturers' contingent liabilities
45
35
(a)
Amounts disclosed include those arising as
a result of the Group's investments in both jointly controlled assets and
jointly controlled entities.
(b)
There are a number of legal claims currently
outstanding against the Group. No material loss to the Group is expected
to result from these claims.
Employee numbers, which represent the average for the year, include 100 per cent of employees of subsidiary companies. Employee numbers for proportionally consolidated and equity accounted units are proportional to the
Group's interest.
Average employee numbers include a part year effect
for companies acquired or disposed of during the year.
(b)
Part-time employees are included on a full time equivalent basis. Temporary employees are included in employee numbers.
Titanium dioxide feedstock;
high purity iron and steel
Common shares
100
100
Class B preference
shares
100
100
France
Talc
de Luzenac S.A.
Mining,
refining and marketing of talc
E
15.25
100
100
Indonesia
P.T.
Kelian Equatorial Mining
Gold
mining
Ordinary
US$1
90
90
Namibia
Rössing
Uranium Limited (c)
Uranium
mining
BN$1
71.16
}
68.58
CN10c
70.59
Papua New Guinea
Bougainville
Copper Limited (d)
Copper
and gold mining
Ordinary
1 Kina
53.58
53.58
South Africa
Palabora
Mining Company Limited
Copper
mining, smelting and refining
R1
72.03
57.67
Richards Bay Iron
and Titanium
Titanium dioxide
feedstock; high purity
R1
50.5
50
(Pty) Limited
iron
United States
of America
Kennecott
Holdings Corporation (including Kennecott
Utah Copper, Kennecott Minerals, Kennecott
Land and Kennecott Exploration)
Copper
and gold mining, smelting and refining,
land development and exploration
activities
Common
US$0.01
100
100
Rio Tinto Energy
America Inc.
Coal mining
Common US$0.01
100
100
U.S. Borax Inc.
Mining, refining
and marketing of borates
Common US$1
100
100
(a)
This entity is unincorporated.
(b)
Queensland Coal Pty Limited is the main legal
entity that owns the assets of the Tarong mine and also owns the shares
shown in note 38 of Hail Creek, Blair Athol and Kestrel.
(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 44.
(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 companies operate mainly in the countries
in which they are incorporated.
The Group has joint control of the above operations which, except as disclosed in note (d) below, are independent legal entities. It therefore includes them in its accounts using the equity accounting
technique.
(b)
Leichhardt has a 31.4 per cent interest in the Blair Athol joint venture. As a result, the Group has a further beneficial interest of 14 per cent in addition to its direct interest of 57.2 per cent, which is owned via
a subsidiary of Rio Tinto Limited. The Blair Athol joint venture is disclosed as a jointly controlled asset in note 38.
(c)
The year end of Minera Escondida is 30 June. However, the amounts included in the consolidated financial statements of Rio Tinto are based on accounts of Minera Escondida that are coterminous with those of the
Group.
(d)
This operation is unincorporated. The joint venture agreement creates an arrangement that is similar in form to a partnership, and is therefore classified as a jointly controlled entity.
(e)
The Group comprises a large number of operations 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
operating assets of the Group.
(f)
The Group's principal jointly controlled entities are held by intermediate holding companies and not directly by Rio Tinto plc or Rio Tinto Limited.
(g)
All jointly controlled entities operate mainly in the countries in which they are incorporated.
37
PRINCIPAL ASSOCIATES
At 31 December 2006
Name and country
Principal activities
Number of
Class of
Proportion
Group
of incorporation/operation
shares held
shares held
of class held
interest
by the Group
%
%
Canada
Ivanhoe Mines Ltd (a)
Copper and gold mining
37,089,883
Common
9.95
9.95
South Africa
Tisand (Pty) Limited
Ilmenite, rutile and zircon mining
7,353,675
R1
49.0
50.0
United States of America
Cortez
Gold mining
(b)
40
(a)
Ivanhoe Mines Ltd is accounted for as an associated company having regard to Rio Tinto's representation on its Board of Directors and on the technical committee that will be responsible for its Oyu Tolgoi
project.
(b)
This operation is unincorporated.
(c)
The Group's principal associates are held by intermediate holding companies and not directly by Rio Tinto plc or Rio Tinto Limited.
(d)
The Group comprises a large number of operations 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
operating assets of the Group.
(e)
With the exception of Ivanhoe Mines Ltd, the core assets of which are located in Mongolia, all associates operate mainly in the countries in which they are incorporated.
PRINCIPAL JOINTLY CONTROLLED ASSETS AND OTHER PROPORTIONALLY CONSOLIDATED UNITS
At 31 December 2006
Name and country
Principal activities
Group
of operation
interest
Australia
Bengalla
Coal mining
30.3
Blair Athol Coal (b)
Coal mining
71.2
Hail Creek
Coal mining
82
Kestrel
Coal mining
80
Mount Thorley
Coal mining
60.6
Warkworth
Coal mining
42.1
Northparkes Mine
Copper/gold mining and processing
80
Gladstone Power Station
Power generation
42.1
Robe River Iron Associates
Iron ore mining
53
Hope Downs Joint Venture
Iron ore mining
50
HIsmelt®
Iron technology
60
Canada
Diavik
Mining and processing of diamonds
60
Indonesia
Grasberg expansion
Copper and gold mining
40
United States of America
Greens Creek
Silver, gold, zinc and lead mining
70.3
(a)
The Group comprises a large number of operations,
and it is not practical to include all of them in this list. The list therefore
only includes those proportionally consolidated units that have a more significant
impact on the profit or operating assets of the Group.
(b)
The Group has a direct interest of 57.2 per
cent in Blair Athol Coal, and an additional 14 per cent interest through
its investment in Leichhardt Coal Pty Limited, which is disclosed as a jointly
controlled entity in note 36.
(c)
The Group's proportionally consolidated units
are held by intermediate holding companies and not directly by Rio Tinto
plc or Rio Tinto Limited.
SALES AND PURCHASES OF SUBSIDIARIES,
JOINT VENTURES, ASSOCIATES AND OTHER INTERESTS IN BUSINESSES
2006 Acquisitions
Name of operation
Location
Principal activities
Ownership
acquired
Date of
%
acquisition
Associates
Ivanhoe Mines
Canada
Copper and gold mining
9.95
18 October 2006
Proportionally consolidated units
Hope Downs Joint Venture
Australia
Iron ore mining
50
16 March 2006
2006 Disposals
Name of operation
Location
Principal activities
Ownership
Date of
disposed
disposal
Jointly Controlled Entities
Eurallumina SpA
Italy
Alumina production
56.16
2 November 2006
(a)
The aggregate profit on disposal of interests in businesses
in 2006 was US$5 million (US$3 million net of tax). These gains
have been excluded from Underlying earnings, as shown in note 2.
(b)
The Cash flow statement includes the following relating to acquisitions and disposals of interests in businesses:
–
US$279 million in '(Acquisitions) / disposals of subsidiaries, joint ventures and associates', comprising US$303 million paid for acquisitions, net of US$24 million of disposal proceeds. In accordance with
IAS 7, these proceeds were stated net of US$17 million cash and cash equivalents
transferred on sale of subsidiaries.
–
US$167 million included in 'purchase of financial assets'.
(c)
Non-cash disposal proceeds of US$23 million were
received during the year.
2005 Disposals
Name of operation
Location
Principal activities
Ownership
disposed
Date of
%
disposal
Associates
Lihir Gold Limited
Papua New Guinea
Gold mining
14.46
30 November 2005
Other investments
Labrador Iron Ore Royalty
Income Fund
Canada
Investing
19
30 March 2005
(a)
The aggregate profit on disposal of interests in businesses
in 2005 was US$322 million (US$311 million net of tax). These gains
were excluded from underlying earnings.
(b)
The Cash flow statement included proceeds from disposals of interests in businesses as follows:
–
US$323 million included in 'Disposals of subsidiaries,
joint ventures and associates (less acquisitions)' which comprised
US$295 million in respect of associates and
US$28 million in respect of subsidiaries.
–
US$133 million included in 'sales of other financial
assets'.
Aggregate remuneration, calculated
in accordance with the Companies Act 1985, of the directors of the parent
companies was
as follows:
2006
2005
2004
US$000
US$000
US$000
Emoluments
9,569
7,523
9,992
Long term incentive plans
255
2,298
57
9,824
9,821
10,049
Pension contributions: defined contribution plans
60
58
87
Gains made on exercise of share options
1,260
5,763
2,414
For 2006, a total of US$3,576,100 (2005: US$8,024,100;
2004: US$4,190,900) 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 lump sum entitlement
for the highest paid director was US$12,124,400 (2005: US$712,100
annualised pension value; 2004: US$712,400 annualised pension value).
The
aggregate remuneration incurred by Rio Tinto plc in respect of its directors
was US$7,151,400 (2005: US$12,270,000;
2004: US$7,756,000). There were no pension contributions made (2005 and
2004: 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$3,992,900 (2005: US$3,372,000; 2004: US$4,794,000).
The aggregate pension contribution to defined contribution plans was US$60,000
(2005: US$58,000; 2004: US$87,000 to defined contribution plans).
During 2006, three directors (2005: three; 2004:
four) accrued retirement benefits under defined benefit arrangements, and
one director (2005: one; 2004: two) accrued retirement benefits under defined
contribution arrangements.
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 95 to
121.
Aggregate compensation, representing the expense
recognised under EU IFRS, of the Group's key management, including directors,
was as follows:
2006
2005
2004
US$000
US$000
US$000
Short-term employee benefits and costs
20,380
19,204
22,501
Post-employment benefits
3,444
2,325
2,354
Other long-term benefits
737
737
1,325
Termination benefits
—
1,129
—
Share-based payments
1,631
12,154
10,134
26,192
35,549
36,314
The figures for 2005 and 2004 have been restated to include compensation for 2005 and 2004 of an individual who became part of the Group's key management in 2006.
More detailed information concerning remuneration
of key management is shown in the Remuneration report, including Tables 1 to
5, on pages 95 to 121.
Audit services pursuant to legislation – fees payable
– the audit of the Group's annual accounts
2.8
2.0
1.5
– the audit of the accounts of the Group's subsidiaries (b)
8.0
6.3
5.0
10.8
8.3
6.5
Other services
– other services supplied pursuant to legislation
(c)
2.4
3.0
1.1
– taxation services (d)
0.8
1.6
1.8
– other services (e)
0.9
2.4
1.9
4.1
7.0
4.8
Fees in respect of pension scheme audits
0.1
0.2
0.2
15.0
15.5
11.5
Remuneration payable to other accounting firms (f)
Non-Audit Services
– the auditing of accounts of the Group's subsidiaries pursuant to legislation
0.3
0.2
0.4
– taxation services
2.8
3.1
3.0
– financial systems design and implementation
0.3
1.2
1.6
– internal audit
4.2
3.3
3.7
– litigation services
0.1
—
—
– other services (g)
7.1
9.7
2.4
14.8
17.5
11.1
Fees in respect of pension scheme audits
0.2
—
—
15.0
17.5
11.1
30.0
33.0
22.6
Remuneration of auditors is required to be presented
in accordance with the requirements of The Companies (Disclosure of Auditor
Remuneration) Regulations 2005 ('the legislation') for the first time in
2006.
Comparative amounts for 2005 and 2004 have been restated on this basis.
(a)
The remuneration payable to PricewaterhouseCoopers, the Group Auditors, is approved by the Audit committee. The committee sets the policy for the award of non-audit work to the auditors and approves 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, together with the Group's
share of the payments made by proportionally consolidated units.
(b)
Fees payable for the 'audit of the accounts of the Group's subsidiaries pursuant to legislation' includes the statutory audit of subsidiaries and other audit work performed to support the audit of the Group financial
statements.
(c)
'Other services supplied pursuant to legislation' primarily relates to preparatory work relating to compliance with the Sarbanes-Oxley Act.
(d)
'Taxation services' includes tax compliance and advisory services, involving the preparation or review of returns for corporation, income, sales and excise taxes; advice on acquisitions; advice on transfer pricing and,
in 2005 and 2004, dealing with tax returns for expatriates.
(e)
'Other services' includes advice on accounting matters (including the IFRS restatement in 2005) and assurance services in relation to issues of loan notes.
(f)
'Remuneration payable to other accounting firms' does not include fees for similar services payable to suppliers of consultancy services other than accountancy firms.
(g)
'Other services' in respect of other accounting firms includes pension fund and payroll administration, advice on accounting matters, secondments of accounting firms' staff, forensic audit, advisory services in
connection with Section 404 of the Sarbanes-Oxley Act and other consultancy.
Information about material related
party transactions of the Rio Tinto Group is set out below:
Subsidiary companies and proportionally consolidated units Details of investments in principal subsidiary
companies are disclosed in note 35.
Information relating to proportionally consolidated
units can be found in note 38.
Equity accounted units Transactions and balances with equity accounted units are summarised below. Purchases relate largely to amounts charged by jointly controlled entities for toll processing of bauxite and alumina. Sales relate largely to
charges for supply of coal to jointly controlled marketing entities for onsale to third party customers.
2006
2005
2004
Income statement items
US$m
US$m
US$m
Purchases from equity accounted units
(1,364
)
(1,259
)
(1,078
)
Sales to equity accounted units
1,497
1,296
692
Balance sheet items
US$m
US$m
Investments in equity accounted
units (note 14)
2,235
1,829
Loans to equity accounted units
151
159
Loans from equity accounted
units
(65
)
(14
)
Trade and other receivables:
amounts due from equity accounted units (note 17)
648
530
Trade and other payables: amounts
due to equity accounted units (note 24)
(143
)
(199
)
Cash flow statement items
US$m
US$m
US$m
(Funding of)/repayments from equity accounted
units
(47
)
17
9
Pension funds Information relating to pension fund arrangements is disclosed in note 46.
Directors and key management Details of directors' and key management remuneration are set out in note 40 and in the remuneration report on page xx to xx.
43
EXCHANGE RATES IN US$
The principal exchange rates used
in the preparation of the 2006 financial statements are:
Annual average
Year end
2006
2005
2004
2006
2005
2004
Sterling
1.84
1.82
1.83
1.96
1.73
1.93
Australian dollar
0.75
0.76
0.73
0.79
0.73
0.78
Canadian dollar
0.88
0.83
0.77
0.86
0.86
0.83
South African rand
0.148
0.157
0.155
0.143
0.158
0.177
44
BOUGAINVILLE COPPER LIMITED ('BCL')
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$1 million for the financial year (2005:
US$nil; 2004: US$1 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 2006 was US$129 million (2005:
US$112 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 2006, the
number of shares in BCL held by the Group, multiplied by the share
price, resulted in an amount of US$119 million.
Rio Tinto plc and Rio Tinto Limited
have a number of share-based payment plans, which are described in detail
in the Remuneration Report. These plans have been accounted for in accordance
with the fair value recognition provisions of IFRS 2, 'Share-based Payments',
which means that IFRS 2 has been applied to all grants of employee share-based
payments that had not vested as at 1 January 2004.
The compensation cost that has been recognised
in income for Rio Tinto's share-based compensation plans, and related liabilities,
are set out in the table below.
Expense recognised for
the period
Liability at end of
period
2006
2005
2004
2006
2005
US$m
US$m
US$m
US$m
US$m
Equity-settled plans
25
26
31
Cash-settled plans
7
22
9
43
39
Total
32
48
40
43
39
Lattice-based option valuation model The fair value of share options is estimated
as at the date of grant using a lattice-based option valuation model. The significant
assumptions used in the valuation model are disclosed below. Expected volatilities
are based on the historical volatility of Rio Tinto's share returns under the
UK and Australian listings. Historical data were used to estimate employee turnover
rates within the valuation model. Under the Share Option Plans, it is assumed
that after options have vested, 20 per cent p.a. of participants will exercise
their options when the market price is at least 20 per cent above the exercise
price of the option. Participants in the Share Savings Plans are assumed to
exercise their options immediately after vesting. The implied lifetime of options
granted is derived from the output of the option valuation model and represents
the period of time that options granted are expected to be outstanding. The
risk-free rate used in the valuation model is equal to the yield available on
UK and Australian zero-coupon government bonds (for plc and Limited options
respectively) at the date of grant with a term equal to the expected term of
the options.
Summary of options outstanding A summary of the status of the Companies'
fixed share option plans at 31 December 2006, and changes during the year ended
31 December 2006, is presented below.
Number
Weighted
Weighted
Aggregate
Aggregate
average
average
intrinsic
intrinsic
exercise
remaining
value
value
price
contractual
life
2006
2005
Options outstanding at 31 December 2006
(years)
US$'m
US$'m
Rio Tinto plc share savings plan £8 - £21
1,497,463
14.26
2.1
37
41
Rio Tinto plc share option plan £8 - £27.25
5,185,847
16.33
6.8
110
142
Rio Tinto Limited share savings plan A$25 - A$57
2,748,026
36.00
2.3
83
78
Rio Tinto Limited share option plan A$23 - A$72
3,540,588
43.53
6.9
86
95
316
356
Options exercisable at 31 December 2006
Rio Tinto plc share savings plan £12 - £18
84,150
12.64
0.0
2
—
Rio Tinto plc share option plan £8 - £18
2,363,000
12.84
5.3
67
62
Rio Tinto Limited share option plan A$23 - A$40
1,531,393
34.02
5.2
49
36
118
98
As at 31 December 2006 and 2005 there were no options
exercisable under the Rio Tinto Limited share savings plan.
Share Savings Plans Awards under these plans are settled in
equity and accounted for accordingly. The fair value of each award on the day
of grant was estimated using a lattice-based option valuation model, including
allowance for the exercise price being at a discount to market price. The key
assumptions used in the valuation are noted in the following table.
Share option plans
The Group has a policy of settling these awards in
equity, although the directors at their discretion can offer a cash alternative.
The awards are accounted for in accordance with the requirements applying to
equity-settled share-based payment transactions. The performance conditions
in relation to Total Shareholder Return have been incorporated in the measurement
of fair value for these awards by modelling the correlation between Rio Tinto's
TSR and that of the index. The relationship between Rio Tinto's TSR and the
index was simulated many thousands of times to derive a distribution which,
in conjunction with the lattice-based option valuation model, was used to determine
the fair value of the options. The key assumptions are noted in the following
table.
A summary of the status of the Companies' performance-based
share option plans at 31 December 2006, and changes during the year ended
31
December 2006, is presented below.
Rio Tinto plc – share option plan
2006
2006
2005
2005
2004
2004
Number
Weighted
Number
Weighted
Number
Weighted
average
average
average
exercise
exercise
exercise
price
price
price
£
£
£
Options outstanding at 1 January
6,290,155
13.45
8,053,292
12.33
7,662,925
11.93
Granted
931,418
27.11
979,593
18.26
1,134,053
13.29
Forfeited
(63,713
)
25.16
(71,312
)
14.96
(159,423
)
13.09
Exercised
(1,972,013
)
11.95
(2,671,418
)
11.80
(584,263
)
8.69
Options outstanding at 31 December
5,185,847
16.33
6,290,155
13.45
8,053,292
12.33
Weighted average fair value of options
granted during the
year (£)
7.40
4.09
2.81
Share price at date of grant for
options
granted during the
year (£)
26.89
18.25
12.76
Estimated weighted average share
price
of options exercised
during the year (£)
29.01
20.37
15.22
In addition to the equity-settled share option
plan grants shown above there were 118,125 cash-settled share option plan
awards
outstanding as at 31st December 2006. The total liability for these awards
as at 31st December 2006 was US$1 million.
Rio Tinto Limited – share option
plan
2006
2006
2005
2005
2004
2004
Number
Weighted
Number
Weighted
Number
Weighted
average
average
average
exercise
exercise
exercise
price
price
price
A$
A$
A$
Options outstanding at 1 January
3,959,472
36.17
4,073,599
34.24
3,602,137
33.58
Granted
716,318
71.06
669,731
47.04
796,683
34.41
Forfeited
(89,041
)
53.64
(48,880
)
37.60
(128,613
)
34.91
Exercised
(1,043,766
)
33.65
(734,978
)
35.30
(196,608
)
22.25
Expired
(2,395
)
39.87
—
—
—
—
Options outstanding at 31 December
3,540,588
43.53
3,959,472
36.17
4,073,599
34.24
Weighted average fair value of options
granted during the
year (A$)
17.09
8.93
6.17
Share price at date of grant for
options
granted during the
year (A$)
70.85
46.89
33.17
Estimated weighted average share
price
of options exercised
during the year (A$)
76.64
49.86
38.28
In addition to the equity-settled share
option plan grants shown above there were 57,396 cash-settled share option
plan awards
outstanding as at 31st December 2006. The total liability for these awards
as at 31st December 2006 was US$2 million.
Share Ownership Plan
The fair values of awards of Matching and Free Shares made by Rio Tinto are taken to be the market value of the shares on the date of purchase. These awards are settled in equity. The total fair value of shares awarded
during the year was £988,000 (2005: £877,000; 2004: £873,000).
Mining Companies Comparative Plan
Awards under this plan are accounted for in accordance
with the requirements applying to cash-settled share-based payment transactions.
If any awards are ultimately settled in shares, the liability is transferred
direct to equity as the consideration for the equity instruments issued. The
grant date fair value of the awards is taken to be the market value of the shares
at the date of award reduced by 50 per cent for anticipated relative TSR performance.
In addition, for the valuations after 2005 the market value is reduced for non-receipt
of dividends between measurement date and date of vesting (excluding post-2003
awards for Executive Directors and Product Group CEOs). Forfeitures are assumed
prior to vesting at three per cent p.a. of outstanding awards. In accordance
with the method of accounting for cash settled awards, fair values are subsequently
remeasured each year to reflect the number of awards expected to vest based
on the current and anticipated TSR performance.
Description of plans
The Group operates a number of pension and post-retirement
healthcare plans around the world. Some of these plans are defined contribution
and some are defined benefit, with assets held in separate trustee administered
funds. Valuations of these plans are produced and updated annually to 31 December
by independent qualified actuaries.
Pension
plans
The majority of the Group's pension obligations are
in the UK, US, Canada and Australia.
In the UK, the main
pension arrangement is the Rio Tinto Pension Fund, a funded tax-approved plan.
The plan has defined benefit and defined contribution sections; the defined
benefit section of the plan gives benefits related to final average pay and
was closed to new entrants on 1 April 2005. New employees are admitted to the
defined contribution section.
In Australia, the Rio
Tinto Staff Superannuation Fund is the only significant plan. This plan principally
contains defined contribution liabilities but also has defined benefit liabilities.
The defined benefits are linked to final average pay and are typically paid
in lump sum form.
A number of defined
benefit pension plans are sponsored by the US and Canadian entities, typically
with separate provision for salaried and hourly paid staff. Benefits for salaried
staff include benefits linked to final average pay and benefits determined according
to an accumulated cash balance. Benefits for hourly paid staff are reviewed
in negotiation with unions.
The Group also operates
a number of unfunded defined benefit plans, which are included in the figures
below.
Post retirement healthcare plans
Certain subsidiaries of the Group, mainly in the US and Canada, provide health and life insurance benefits to retired employees and in some cases to their beneficiaries and covered dependants. Eligibility for cover is
dependent upon certain age and service criteria. These arrangements are unfunded.
Plan assets
The proportions of the total fair value of assets in the pension plans for each asset class at the balance sheet date were:
2006
2005
Equities
67.2
%
66.4
%
Bonds
25.2
%
24.5
%
Property
4.3
%
2.8
%
Other
3.3
%
6.3
%
100.0
%
100.0
%
The plans do not invest directly in property occupied
by the Group or in the Group's own financial instruments.
Main assumptions (rates per annum)
The main assumptions for the valuations of the plans
are set out below:
Other
(mainly
UK
Australia (a)
US
Canada
Africa) (b)
At 31 December 2006
Rate of increase
in salaries
5.1
%
5.1
%
3.9
%
3.8
%
6.8
%
Rate of increase in pensions
3.1
%
3.1
%
—
—
4.8
%
Discount rate
5.2
%
5.0
%
5.9
%
5.0
%
7.4
%
Inflation
3.1
%
3.1
%
2.4
%
2.3
%
4.8
%
At 31 December
2005
Rate of increase in salaries
4.8
%
4.8
%
3.9
%
4.3
%
6.5
%
Rate of increase
in pensions
2.8
%
2.8
%
—
—
4.5
%
Discount rate
4.8
%
4.4
%
5.6
%
4.8
%
7.3
%
Inflation
2.8
%
2.8
%
2.4
%
2.6
%
4.5
%
(a)
The discount rate assumed for Australia is
after tax.
(b)
The assumptions vary by location for the 'Other'
plans. Assumptions shown are for Southern Africa.
The main financial assumptions used for the healthcare
plans, which are predominantly in the US, were: discount rate: 5.8%
(2005: 5.6%), medical trend rate: 8.2% reducing to
5.2% by the year 2011 broadly on a straight line basis (2005: 9.4%, reducing
to 4.9% by the year 2011), claims cost based on individual company experience.
For both the pension and healthcare arrangements
the post-retirement mortality assumptions allow for future improvements in mortality.
The mortality tables used for the main arrangements imply that a male aged 60
at the balance sheet date has an expected future lifetime of 24 years (2005:
24 years).
Long term rate of return
expected at 1 January 2006
Equities
7.3
%
6.8
%
6.9
%
7.1
%
9.0
%
Bonds
4.3
%
4.6
%
4.9
%
4.3
%
7.3
%
Property
5.7
%
5.6
%
5.7
%
5.6
%
8.2
%
Other
4.0
%
3.2
%
3.4
%
3.6
%
5.5
%
Long term rate of return
expected at 1 January 2005
Equities
7.9
%
7.2
%
7.7
%
7.7
%
9.0
%
Bonds
4.8
%
4.7
%
5.1
%
5.1
%
8.5
%
Property
6.2
%
5.9
%
6.3
%
6.3
%
8.8
%
Other
4.5
%
3.2
%
3.7
%
4.0
%
5.0
%
(a)
The assumptions vary
by location for the 'Other' plans. Assumptions shown are for Southern Africa.
The
expected rate of return on pension plan assets is determined as management's
best estimate of the long term returns of the major asset classes – equities,
bonds, property and other – weighted by the actual allocation of assets among
the categories at the measurement date. The expected rate of return is calculated
using geometric averaging. The expected rates of return shown have been reduced
to allow for plan expenses including, where appropriate, taxes incurred within
pension plans on investment returns.
The
sources used to determine management's best estimate of long term returns are
numerous and include country-specific bond yields, which may be derived from
the market using local bond indices or by analysis of the local bond market,
and country-specific inflation and investment market expectations derived from
market data and analysts' or governments' expectations as applicable.
Total expense recognised in
the income statement
2006
2005
2004
Pension
Other
Total
Total
Total
benefits
benefits
US$m
US$m
US$m
Current employer service cost for
Defined Benefits ("DB")
(93
)
(9
)
(102
)
(90
)
(80
)
Current employer service cost for
Defined Contribution benefits within DB plans
(74
)
—
(74
)
(69
)
(53
)
Current employer service cost for
Defined Contribution plans
(21
)
—
(21
)
(13
)
(11
)
Interest cost
(288
)
(26
)
(314
)
(308
)
(286
)
Expected return on assets
326
—
326
306
263
Past service cost
(6
)
(1
)
(7
)
(1
)
(19
)
Gains on curtailment and settlement
3
—
3
8
35
Total expense
(153
)
(36
)
(189
)
(167
)
(151
)
The above
expense is included as an employee cost within net operating costs.
Total amount recognised in the Statement of Recognised
Income and Expense
2006
2005
2004
US$m
US$m
US$m
Actuarial gain/(loss)
373
178
(203
)
Cumulative amount recognised in
the Statement of Recognised Income and Expense at 31 December
348
(25
)
(203
)
Surpluses/(deficits) in the plans
The following amounts were measured in accordance
with IAS 19:
2006
2005
2004
Pension
Other
Total
Total
Total
benefits
benefits
US$m
US$m
US$m
Total fair value
of plan assets
6,031
—
6,031
5,115
4,777
Present value of obligations – funded
(5,847
)
—
(5,847
)
(5,315
)
(5,118
)
Present value
of obligations – unfunded
(136
)
(461
)
(597
)
(596
)
(649
)
Present value
of obligations – Total
(5,983
)
(461
)
(6,444
)
(5,911
)
(5,767
)
Unrecognised past service cost
—
3
3
—
—
Aggregate surplus/(deficit)
to be shown in the balance sheet
48
(458
)
(410
)
(796
)
(990
)
Comprising:
– Deficits
(312
)
(458
)
(770
)
(996
)
(1,069
)
– Surpluses
360
—
360
200
79
Net surpluses/(deficits) on pension
plans
48
48
(324
)
(450
)
Unfunded post
retirement healthcare obligation
(458
)
(458
)
(472
)
(540
)
The surplus amounts shown above are included in the
balance sheet as Trade and Other Receivables. Deficits are included within Provisions.
Contributions to plans
Contributions to pension plans totalled US$172
million (2005: US$192 million; 2004: US$162 million). These contributions
include US$12 million (2005: US$8 million; 2004: US$7 million) for
plans providing purely defined contribution benefits. These contributions are
charged against profits, and are included in the figures for "current employer
service cost" shown above. In addition, contributions of US$14 million (2005:
US$12 million; 2004: US$11 million) were made to 401k plans in the US.
In addition, contributions of US$9 million (2005: US$5 million; 2004: US$4
million) were made to an industry-wide arrangement that is principally defined
contribution in nature.
Contributions for other benefits totalled US$19 million (2005: US$26 million; 2004: US$26
million).
Contributions to pension plans for 2007 are estimated
to be around US$8 million higher than for 2006. Healthcare plans are unfunded
and contributions for future years will be equal to benefit payments and therefore
cannot be predetermined.
Movements in the present value of the defined benefit obligation and in the fair value of assets
The amounts shown below include, where appropriate, 100 per cent of the costs, contributions, gains and losses in respect of employees who participate in the plans and who are employed in operations that are
proportionally consolidated or equity accounted. Consequently, the costs, contributions, gains and losses do not correspond directly to the amounts disclosed above in respect of the Group. Pure defined contribution plans and industry-wide plans are
excluded from the movements below.
2006
2005
Pension
Other
Total
Total
benefits
benefits
US$m
US$m
Change in present value of obligation:
Present value of obligation at start of the year
(5,439
)
(472
)
(5,911
)
(5,767
)
Current employer service cost
(197
)
(9
)
(206
)
(174
)
Interest cost
(288
)
(26
)
(314
)
(308
)
Contributions by plan participants
(113
)
—
(113
)
(35
)
Experience gain/(loss)
(98
)
9
(89
)
139
Changes in actuarial assumptions gain/(loss)
105
19
124
(180
)
Benefits paid
342
19
361
348
Inclusion/removal of arrangements
42
—
42
—
Past service cost
(6
)
(4
)
(10
)
(1
)
Settlement gains
—
—
—
8
Curtailment gains
3
—
3
—
Currency exchange rate (loss)/gain
(334
)
3
(331
)
59
Present value of obligation at end of the year
(5,983
)
(461
)
(6,444
)
(5,911
)
Gains and losses on obligations
2006
2005
2004
Experience gains and (losses): (i.e. variances between
the estimate of obligations and the subsequent outcome) (Loss)/gain (US$m)
(89
)
139
(148
)
As a percentage of the present value of the obligations
-1
%
2
%
-3
%
Change in assumptions gain/(loss) (US$m)
124
(180
)
(429
)
2006
2005
Pension
Other
Total
Total
benefits
benefits
US$m
US$m
Change in plan assets:
Fair value of plan assets at the start of the year
5,115
—
5,115
4,777
Expected return on plan assets
326
—
326
306
Actuarial gain on plan assets
338
—
338
223
Contributions by plan participants
113
—
113
35
Contributions by employer
170
19
189
207
Benefits paid
(342
)
(19
)
(361
)
(348
)
Inclusion/removal of arrangements
(41
)
—
(41
)
—
Assets refunded to the employer
—
—
—
(12
)
Currency exchange rate gain/(loss)
352
—
352
(73
)
Fair value of plan assets at the end of the year
6,031
—
6,031
5,115
Actual return on plan assets
664
529
2006
2005
2004
Difference between the expected and actual return on plan assets:
Post-retirement healthcare – sensitivity
to changes in assumptions
An increase of 1 per cent in the assumed medical
cost trend rates would increase the aggregate of the current service cost
and interest cost components of the post-retirement healthcare expense by US$6m (2005 and
2004: US$6m), and increase the benefit obligation for these plans by US$73m (2005: US$67m; 2004: US$66m). A decrease of 1 per cent in the assumed medical cost trend rates would decrease the aggregate of the current service cost and
interest cost components of the post-retirement healthcare expense by US$5m (2005 and 2004: US$5m), and decrease the benefit obligation for these plans by US$62m (2005: US$56m; 2004: US$54m).
Less: share of equity accounted units sales revenue
(2,975
)
(1,709
)
(1,576
)
Total
22,465
19,033
12,954
12,566
9,739
6,111
7,438
5,215
3,297
Depreciation and amortisation in subsidiaries (i)
(1,509
)
(1,334
)
(1,171
)
Impairment reversals less charges
396
3
(548
)
Depreciation and amortisation in equity accounted units
(275
)
(281
)
(228
)
Taxation and finance items in equity accounted units
(826
)
(429
)
(314
)
Profit on ordinary activities before finance costs and tax
10,352
7,698
3,850
(a)
Gross sales revenue includes 100 per cent of subsidiaries' sales revenue and the Group's share of the sales revenue of equity accounted units.
(b)
EBITDA of subsidiaries and the Group's share of equity accounted units represents profit before: tax, net finance items, depreciation and amortisation.
(c)
Net earnings represent profit after tax for the year
attributable to the Rio Tinto Group. Earnings of subsidiaries are stated before
finance items but after the amortisation of the discount related to provisions.
Earnings attributable to equity accounted units include interest charges and
amortisation of discount. Earnings attributed to business units exclude amounts
that are excluded in arriving at Underlying earnings.
(d)
Includes Rio Tinto's 75.7 per cent interest in Coal & Allied, which is managed by Rio Tinto Coal Australia, a 100 per cent subsidiary of Rio Tinto.
(e)
Includes Rio Tinto's interests in Anglesey Aluminium (51 per cent) and Rio Tinto Aluminium (100 per cent).
(f)
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.
(g)
Business units have been classified according to the Groups management structure. Generally, this structure has regard to the primary product of each business unit but exceptions exist. For example, the Copper
group includes certain gold operations.
(h)
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 Grasberg joint venture.
RIO TINTO FINANCIAL INFORMATION
BY BUSINESS UNIT CONTINUED
Capital expenditure (i)
Depreciation &amortisation (j)
Operating assets(k)
Employees
2006
2005
2004
2006
2005
2004
2006
2005
2004
2006
2005
2004
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
Iron Ore
Hamersley (inc. HIsmelt®)
1,696
935
757
231
174
158
4,321
2,555
2,234
4,161
2,926
2,581
Robe River
104
160
109
90
89
83
1,593
1,487
1,640
678
553
527
Iron Ore Company of Canada
151
98
51
58
47
41
651
451
521
1,886
1,752
1,528
Rio Tinto Brasil
18
36
18
8
5
7
97
81
50
522
449
975
1,969
1,229
935
387
315
289
6,662
4,574
4,445
7,247
5,680
5,611
Energy
Rio Tinto Energy America
262
204
162
116
85
86
1,097
908
810
2,297
1,958
1,771
Rio Tinto Coal Australia
251
171
73
170
164
167
1,397
1,147
1,282
2,462
2,228
1,999
Rössing
38
3
2
6
16
15
68
66
40
936
831
814
Energy Resources of Australia
31
34
7
32
40
35
201
180
179
366
330
273
582
412
244
324
305
303
2,763
2,301
2,311
6,061
5,347
4,857
Industrial Minerals
360
235
248
189
172
173
2,682
2,311
2,209
6,744
6,698
6,575
Aluminium
236
242
505
266
274
190
3,607
3,361
3,521
4,347
4,296
4,077
Copper
Kennecott Utah Copper
295
164
69
151
136
90
1,789
1,144
1,075
1,744
1,571
1,418
Escondida
155
229
113
96
69
54
792
812
594
1,072
840
851
Freeport
—
—
—
—
—
3
—
—
—
—
—
—
Grasberg joint venture
45
45
30
43
35
43
412
321
397
1,781
1,729
1,783
Palabora
18
17
30
40
32
41
104
226
360
1,811
1,796
1,734
Kennecott Minerals
111
34
36
26
32
27
198
129
135
409
388
372
Northparkes
16
12
34
48
33
10
89
152
177
182
174
193
Other copper
—
—
14
—
—
13
—
—
—
—
—
274
640
501
326
404
337
281
3,384
2,784
2,738
6,999
6,498
6,625
Diamonds
Argyle
120
77
89
68
78
44
405
523
632
772
817
809
Diavik
105
121
49
109
79
64
639
548
574
430
362
377
Murowa
4
5
14
4
5
—
12
14
16
152
81
76
229
203
152
181
162
108
1,056
1,085
1,222
1,354
1,260
1,262
Other Operations
48
31
19
3
34
47
551
167
179
365
223
1,587
4,064
2,853
2,429
1,754
1,599
1,391
20,705
16,583
16,625
33,117
30,002
30,594
Other items
174
45
(1
)
30
16
556
(36
)
(322
)
(939
)
2,128
1,852
1,832
Less: equity accounted units
(322
)
(382
)
(213
)
(275
)
(281
)
(228
)
Total
3,916
2,516
2,215
1,509
1,334
1,719
20,669
16,261
15,686
35,245
31,854
32,426
Less: net debt
(2,437
)
(1,313
)
(3,809
)
Rio Tinto shareholders' equity
18,232
14,948
11,877
(i)
Capital expenditure comprises the net cash outflow on purchases less disposals of property, plant and equipment and intangible assets other than exploration. The details provided include 100 per cent of subsidiaries'
capital expenditure and Rio Tinto's share of the capital expenditure of equity accounted units. Amounts relating to equity accounted units not specifically funded by Rio Tinto are deducted before arriving at total capital expenditure for the
Group.
(j)
Depreciation figures include 100 per cent of subsidiaries' depreciation and amortisation and include Rio Tinto's share of the depreciation and amortisation of equity accounted units. Amounts relating to equity
accounted units are deducted before arriving at the total depreciation and amortisation charge.
Depreciation and amortisation includes US$40 million relating to deferred stripping costs which are included in 'Other items' in the Group cash flow statement.
(k)
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 (i.e. net of such
companies' debt). For equity accounted units, Rio Tinto's net investment is shown.
Profit excluding amounts attributable to outside shareholders under IFRS
7,438
5,215
3,297
Increase / (decrease) before tax in respect of:
Effect of purchase accounting for DLC combination - depreciation
(c)
(93
)
(140
)
(125
)
Amortisation of intangibles
(30
)
(40
)
(44
)
Additional amounts attributed to assets on acquisition under US GAAP
(41
)
(37
)
(30
)
Mark to market of derivative contracts
(8
)
(4
)
(8
)
Adjustments to asset carrying values
(769
)
—
(5
)
Pensions / post retirement benefits
(64
)
(68
)
(25
)
Evaluation costs capitalised under IFRS
(91
)
(69
)
(62
)
Depreciation
based on proven & probable ore reserves
(119
)
(163
)
(68
)
Effect of price
assumptions specified for determination of ore reserves on depreciation & amortisation
12
(5
)
(90
)
Effect of changes in functional currency
(16
)
(32
)
—
Stripping costs deferred under IFRS
(44
)
—
—
Other
(197
)
33
(110
)
Taxation:
Tax effect of the above adjustments
(c)
511
130
124
Other tax adjustments
6
45
(119
)
Outside shareholders' interests in the above adjustments
(c)
180
28
19
Share of US GAAP adjustments of equity accounted units
(a)
(26
)
(19
)
(16
)
Net income under US GAAP (revised for 2005 and 2004)
(c)
6,649
4,874
2,738
Basic earnings per ordinary share under US GAAP (revised for 2005 and 2004)
(c)
498.6
c
357.3
c
198.5
c
Diluted earnings per ordinary share under US GAAP (revised for 2005 and 2004)
(c)
496.6
c
356.2
c
198.2
c
(a)
'Share
of US GAAP adjustments of equity accounted units' comprises:
Amortisation
of intangibles
(2
)
(4
)
(6
)
Additional
amounts attributed to assets on acquisition under US GAAP
(10
)
(5
)
(5
)
Effect
of price assumptions specified for determination of ore reserves on depreciation & amortisation
(1
)
(3
)
(4
)
Stripping
costs deferred under IFRS
(1
)
—
—
Other
(12
)
(7
)
(1
)
Share
of US GAAP adjustments of equity accounted units
(26
)
(19
)
(16
)
(b)
There are no differences between International Financial Reporting Standards
(IFRS) and IFRS as adopted by the European Union (EU IFRS) that would impact
on the financial statements of the Rio Tinto Group for the years ended 31
December 2004, 2005 and 2006.
(c)
Net income under US GAAP and basic and diluted earnings per ordinary share
under US GAAP have been revised to reflect the application of purchase accounting
to the formation of the DLC structure in 1995. See pages A-71 and A-72 for
further details.
RIO TINTO GROUP NOTES TO FINANCIAL STATEMENTS – (continued)
48
RECONCILIATION TO US ACCOUNTING
PRINCIPLES CONTINUED
2006
2005
US$m
US$m
Total equity under
IFRS
19,385
15,739
Less attributable
to outside equity shareholders
(1,153
)
(791
)
Equity excluding
amounts attributable to outside shareholders under IFRS
18,232
14,948
Increase / (decrease)
before tax in respect of:
Effect
of purchase accounting for DLC combination
(b
)
2,173
2,097
Goodwill
1,420
1,394
Intangibles
132
156
Additional
amounts attributed to assets on acquisition under US GAAP
937
917
Mark to
market of derivative contracts
(29
)
(17
)
Adjustments
to asset carrying values
(387
)
387
Pensions
/ post retirement benefits
(107
)
376
Evaluation
costs capitalised under IFRS
(385
)
(226
)
Depreciation
based on proven and probable ore reserves
(503
)
(329
)
Effect
of price assumptions specified for determination of ore reserves on depreciation
& amortisation
(148
)
(173
)
Effect
of changes in functional currency
139
157
Provision
for closedown and restoration costs
(83
)
40
Stripping
costs deferred under IFRS
(701
)
—
Provision,
under IFRS, for shares to be repurchased
288
—
Other
(127
)
(109
)
Taxation:
Tax effect
of the above adjustments
(b
)
(102
)
(918
)
Other tax
adjustments
64
124
Outside shareholders'
interests in the above adjustments
(b
)
(83
)
(286
)
Share of US GAAP adjustments
of equity accounted units
(a
)
61
139
Shareholders' funds
under US GAAP (revised for 2005)
(b
)
20,791
18,677
(a)
'Share of US GAAP adjustments of
equity accounted units' comprises:
Goodwill
3
5
Intangibles
18
32
Additional amounts
attributed to assets on acquisition under US GAAP
132
110
Mark to market
of derivative contracts
6
5
Evaluation costs
capitalised under IFRS
—
(10
)
Effect of price
assumptions specified for determination of ore reserves on depreciation
& amortisation
(12
)
(11
)
Provision for closedown
and restoration costs
—
8
Stripping costs
deferred under IFRS
(95
)
—
Other
9
—
Share of US GAAP adjustments of equity
accounted units
61
139
(b)
Shareholders' funds under US GAAP
have been revised to reflect the application of purchase accounting to the
formation of the DLC structure in 1995. As of 31 December 2006, the adjustment,
before the effects of taxation and outside shareholders' interests, would
be allocated US$2,005 million to property, plant and equipment and US$168
million to goodwill. See pages A-71 and A-72 for further details.
RIO TINTO GROUP NOTES TO FINANCIAL STATEMENTS – (continued)
48
RECONCILIATION TO US ACCOUNTING PRINCIPLES
CONTINUED
A.
Differences Between IFRS and US GAAP
The Groups financial statements
have been prepared in accordance with the Standards and Interpretations
included within International Financial Reporting Standards ('IFRS') as
adopted by the European Union, which differ in certain respects from those
in the United States ('US GAAP'). These differences relate principally to
the following items, and the effect of each of the adjustments to net earnings
and Rio Tinto shareholders' funds that would be required under US GAAP is
set out on the preceding pages.
Effect of purchase accounting for DLC combination As
described in Outline of Dual Listed Companies
structure and basis of financial statements on page A-6, the Group has
revised the presentation of its financial statements included in Form 20-F.
The formation of the DLC is now accounted for as a business combination. Separate
financial statements for Rio Tinto plc and Rio Tinto Limited are no longer
presented.
Instead, the financial statements consist of the Rio Tinto Group representing
one combined economic entity.
Whereas merger accounting
is applied in the Groups IFRS financial statements, for the purposes of
US GAAP reporting, the Group now accounts for the formation of the DLC using
the purchase method. In so doing it follows the guidance that was applicable
at the time of the formation of the DLC, which was APB Opinion No. 16 'Business
Combinations'. Accordingly, the combined financial information under US GAAP
has been restated for all periods presented.
The purchase price
of the additional 51% of Rio Tinto Limited accounted for as acquired by Rio
Tinto plc has been determined by reference to the average market price of the
shares in the period from two days before until two days after October 9, 1995.
This was the date that Rio Tinto plc and Rio Tinto Limited agreed to the terms
and announced the formation of the DLC. The purchase price has been allocated
to the assets and liabilities of Rio Tinto Limited based on their estimated
fair values at that time, as follows (in
US$ millions):
Purchase
Book
accounting
Fair
value
adjustment
value
Current assets
934
—
934
Property, plant and
equipment
1,818
4,057
5,875
Other non current assets
423
247
670
Goodwill
159
184
343
Total assets acquired
3,334
4,488
7,822
Current liabilities
(381
)
—
(381
)
Medium and long term
borrowings
(465
)
—
(465
)
Other long term liabilities
(148
)
—
(148
)
Deferred tax liability
(271
)
(1,458
)
(1,729
)
Attributable to outside
equity shareholders
(249
)
(441
)
(690
)
Total liabilities assumed
(1,514
)
(1,899
)
(3,413
)
Net assets acquired
1,820
2,589
4,409
The increase in equity
attributable to Rio Tinto shareholders represents the difference between the
historical book value and fair value of 51% of Rio Tinto Limited. In prior years,
the Group presented financial information on a combined basis with no adjustment
for fair values. The increase in shareholders funds is attributable to
the application of the purchase method of accounting. The information presented
below reflects the incremental effect of this increase in net assets as a result
of using the purchase method over the amounts that were presented in the combined
financial statements using historical cost.
The properties would
have been depreciated on a units of production basis over periods not exceeding
40 years and goodwill would have been amortised over a period of 40 years until
December 31, 2001, when amortisation ceased on the introduction of SFAS 141
'Business Combinations'.
From the date of the business combination in December
1995, through December 31, 2003, the Group would have recorded cumulative additional
income statement amounts as follows:
US$m
Depreciation of property, plant
and equipment
(1,128
)
Amortisation of goodwill
(24
)
Impairment charges
(35
)
Loss on sale of properties
(273
)
Deferred tax benefit
580
Attributable to outside equity shareholders
60
Total additional expense
(820
)
Excluding any impairment charges and gains/losses
on sales of properties, the additional depreciation relating to property, plant
and equipment before tax and outside shareholder interests related to each year
ranged from US$96 million to US$230 million.
The adjustments to
the combined income statement information previously reported are as follows:
RIO TINTO GROUP NOTES TO FINANCIAL STATEMENTS – (continued)
48
RECONCILIATION TO US ACCOUNTING
PRINCIPLES CONTINUED
A.
Differences Between IFRS and
US GAAP Continued
2005
2004
Basic earnings per share
As previously reported
364.3
c
204.7
c
Adjustment
(7.0
)c
(6.2
)c
As revised
357.3
c
198.5
c
Fully diluted earnings per share
As previously reported
363.1
c
204.4
c
Adjustment
(6.9
)c
(6.2
)c
As revised
356.2
c
198.2
c
The adjustment to the combined balance sheet information
previously reported at December 31, 2005 is determined as follows:
US$m
Increase in shareholders' funds
on formation of the DLC
2,589
Additional expense 1995 to 2003
(820
)
Additional expense 2004
(85
)
Additional expense 2005
(95
)
Currency translation adjustment
(126
)
Increase in shareholders funds
at 31 December 2005
1,463
Shareholders funds as previously
reported
17,214
Shareholders funds as revised
18,677
This adjustment would be allocated among the following
assets and liabilities in the balance sheet at December 31, 2005:
US$m
Property, plant and equipment
1,943
Goodwill
154
Deferred tax liability
(594
)
Attributable to outside equity shareholders
(40
)
Increase in shareholders equity
1,463
Goodwill and indefinite lived intangible assets
Goodwill included in the Group's opening IFRS balance sheet in respect of acquisitions made prior to 1 January 2004 is stated at its carrying amount on that date under UK GAAP ('previous GAAP'). Goodwill on
acquisitions in 1997 and previous years was eliminated against reserves under the previous GAAP and was not reinstated on transition to IFRS. Goodwill on acquisitions between 1998 and 2003 inclusive was capitalised and amortised over its expected
useful economic life and any amortisation charged up to 1 January 2004 was not reversed under IFRS. From 2004, under IFRS, goodwill and indefinite lived intangible assets are capitalised and tested annually for impairment but are not subject to
amortisation. Under US GAAP, goodwill is capitalised and, until 2001, was amortised by charges against income over the period during which it was expected to be of benefit, subject to a maximum of 40 years. Goodwill eliminated against reserves under
IFRS is therefore added back under US GAAP. From 1 January 2002, goodwill and indefinite lived intangible assets are no longer amortised under US GAAP but are reviewed annually for impairment under SFAS 142 'Goodwill and Other Intangible Assets'.
Intangible assets
The implementation of SFAS 141 'Business Combinations' resulted in the reclassification of US$340 million from goodwill to finite lived intangible assets at 1 January 2002 under US GAAP. The accumulated cost
relating to these intangible assets at 31 December 2006 was US$701 million and accumulated amortisation was US$539 million. This reclassification, which relates to acquisitions prior to 1 January 2004, has not been recognised under IFRS. The
total amortisation expense for 2006 in respect of the amounts reclassified under US GAAP was US$32 million, of which US$11 million is related to the amortisation of goodwill previously eliminated against reserves and classified as finite
lived intangible assets under US GAAP. The remaining US$21 million relates to the amortisation of assets classified as goodwill on the IFRS balance sheet but classified as finite lived intangible assets under US GAAP. The estimated incremental
amortisation charge under US GAAP relating to intangible assets is US$32 million per year.
Additional amounts attributed to assets on acquisition under US GAAP
IFRS requires the recognition of a provision for deferred tax on all fair value adjustments arising on acquisition other than those recorded as goodwill. On first application of IFRS, this resulted in an additional
provision for deferred tax in respect of acquisitions prior to 1 January 2004 which was charged against retained earnings and gave rise to a reduction in IFRS shareholders' funds. For acquisitions post 1 January 2004, these deferred tax provisions
give rise to a corresponding increase in amounts attributable to acquired assets and/or goodwill. Under US GAAP, provision for deferred tax on acquisitions produces a corresponding increase in the amounts attributed to acquired assets and/or
goodwill and therefore has no effect on shareholders' funds. This results in an additional amount attributed to assets under US GAAP in respect of acquisitions prior to 1 January 2004. This also means that an additional charge arises under US GAAP
in respect of depreciation of the amounts attributed to acquired assets.
Mark to market of derivative contracts
The Group is party to derivative contracts designed to reduce exposures related to assets and liabilities, firm commitments or anticipated transactions. From 1 January 2005, under IAS 39 'Financial Instruments:
Recognition and Measurement', all derivatives are initially recognised at their fair value on the date the derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss
depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. The Group designates certain derivatives as either hedges of the fair value of recognised assets or liabilities or a firm
commitment (fair value hedges) or hedges of highly probable forecast transactions (cash flow hedges).
RIO TINTO GROUP NOTES TO FINANCIAL STATEMENTS – (continued)
48
RECONCILIATION TO US ACCOUNTING PRINCIPLES
CONTINUED
The US standard, SFAS 133 'Accounting for Derivative
Instruments and Hedging Activities', is similar but not identical to IAS 39.
In 2006 and 2005, respectively, additional losses of US$8 million (US$5
million after tax and minorities) and US$4 million (US$1 million gain
after tax and minorities) were recognised in US GAAP earnings primarily as a
result of the recognition at fair value of additional embedded derivatives for
US GAAP. For IFRS, the currency exposures in these contracts are not recognised
in the balance sheet because the currency of the contract is considered to be
'commonly used' in the counterparty's country of operation.
Adjustments to asset carrying values Impairment of fixed assets under IFRS is
recognised and measured by reference to the discounted cash flows expected to
be generated by a Cash Generating Unit or fair value less costs to sell if higher.
Under US GAAP, impairment, other than that relating to goodwill and equity accounted
investments, is recognised only when the anticipated undiscounted cash flows
are insufficient to recover the carrying value of the asset group.
However, where an asset
group is found to be impaired under US GAAP, its carrying value is written down
to fair value. Fair value is normally assessed by reference to the discounted
cash flows expected to be generated from the asset group, generally using the
same assumptions and bases as those applicable under IFRS. For example, the
evaluation is on a pre-tax and pre-debt basis. The amount of such impairment
is, therefore, generally similar under US GAAP to that computed under IFRS,
except where the US GAAP carrying value is different from that under IFRS. This
may result from additional goodwilll carried in the balance sheet under US GAAP.
Under IFRS, impairment
provisions, except those relating to goodwill, may be written back in a subsequent
year if the expected recoverable amount of the Cash Generating Unit increases.
Any credits to IFRS earnings resulting from such write backs are reversed in
the reconciliation to US GAAP because the writing back of impairment provisions
is not permitted under US GAAP. For additional information on amounts written
back under IFRS during 2006, see note 5.
Pensions/post retirement benefits
For UK and Australian reporting, Rio Tinto reports pensions and post retirement benefits in accordance with IAS 19. The annual pension cost comprises the estimated cost of benefits accrued during the period, plus the
interest cost on the obligation less the expected return on plan assets, plus the full impact of any prior service costs, curtailments and settlements. Actuarial gains and losses are recognised immediately in the period in which they occur but are
taken through the Statement of Recognised Income and Expense ('SORIE'), not the Income Statement. For US GAAP reporting, following the adoption of SFAS 158 'Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans' in 2006,
actuarial gains and losses are recognised initially in the year in which they occur in other comprehensive income ('OCI'). However, unlike IFRS, US GAAP requires that these amounts recognised in OCI be amortised into the pension cost in profit and
loss in subsequent years. The closing balance sheet position under US GAAP differs from that under IFRS largely because the pension fund assets are valued as at 30 September in each year for US GAAP purposes, whereas for IFRS they are valued as at
the end of the financial year. For further discussion of the impact of adopting SFAS 158 during 2006, see C. Post Retirement Benefits.
Evaluation costs capitalised under IFRS
Under IFRS, evaluation expenditure on a project can be carried forward after it has reached a stage where there is a high degree of confidence in its viability. Under US GAAP, exploration and evaluation expenditure is
expensed as incurred.
Depreciation based on proven & probable reserves
Under IFRS, mining assets are fully depreciated over their economic lives or the remaining life of the mine if shorter. In some cases, mineralised material that does not yet have the status of reserves is taken into
account in determining depreciation and amortisation charges, where there is a high degree of confidence that it will be mined economically. For US GAAP, only 'proven and probable reserves' are taken into account in the calculation of depreciation
and amortisation charges. As a result, adjustments have been made to depreciation and amortisation, which reduce US GAAP earnings.
Effect of price assumptions specified for determination of ore reserves for US GAAP depreciation & amortisation
For UK and Australian reporting, the Groups ore reserve estimates are determined in accordance with the JORC code and are based on forecasts of future commodity prices. During 2003, the SEC formally indicated
that, for US reporting, historical price data should be used to test the determination of reserves. The application of historical prices to test the reserve estimates led to reduced ore reserve quantities for US reporting purposes for certain of the
Groups operations in previous years, which resulted in lower earnings for US reporting, largely as a result of higher depreciation charges. The reduced ore reserves also had the effect of increasing the present value of provisions for closure
obligations for certain of the Group's operations.
Effect of change in functional currency
At 1 January 2005, the functional currency of two business units was determined to have changed from the US dollar to their local currencies. Under IFRS, the change in functional currency was recognised by converting
the US dollar balances to the local currencies using the exchange rates at 1 January 2005. Under US GAAP, SFAS 52 'Foreign Currency Translation' requires that such a change in functional currency should be dealt with using values based on the
historical cost of the non-monetary assets, in local currency, at the date of acquisition. The cumulative adjustment attributable to translating the non-monetary assets of these business units at the historical rate rather than the current rate was
reported in other comprehensive income. Additional charges/credits arise under US GAAP in respect of depreciation and other movements in the underlying assets because their carrying values under US GAAP are different from IFRS as a consequence of
the different treatment described above.
RIO TINTO GROUP NOTES TO FINANCIAL STATEMENTS – (continued)
48
RECONCILIATION TO US ACCOUNTING PRINCIPLES
CONTINUED
A.
Differences Between IFRS and US GAAP Continued
Provisions for close down and restoration costs In accordance with SFAS 143 'Accounting
for Asset Retirement Obligations', provision is made in the accounting period
when the related environmental disturbance occurs, based on the net present
value of estimated future costs. The costs so recognised are capitalised and
depreciated over the estimated useful life of the related asset. In each subsequent
year, the discount applied to the provision 'unwinds', resulting in a charge
to the income statement for the year and an increase in the present value of
the provision. This accounting treatment is broadly similar to Rio Tinto's policy
under IFRS with a few exceptions. In particular, the effect of price assumptions
specified for the determination of ore reserves for US GAAP has had the impact
of reducing the ore reserves for certain of the Group's operations and consequently
increasing the present value of provisions for closure obligations.
Stripping costs deferred under IFRS
Under IFRS, stripping (i.e. overburden and other
waste removal) costs incurred in the development of a mine or pit before production
commences are capitalised as part of the cost of constructing the mine. Such
pre-production stripping costs are subsequently amortised over the life of the
operation.
Under IFRS,
the Group defers stripping costs incurred during a mine's (or pit's) production
phase for those surface mines where deferral is considered the most appropriate
basis for matching costs against the related economic benefits. Additional information
is given in note 1, (h) Deferred stripping.
In 2006, the
Group adopted EITF Issue No. 04-06 'Accounting for Stripping Costs Incurred
during Production in the Mining Industry' ('EITF 04-06') for US GAAP. Under
EITF 04-06, the Group includes as a component of production cost those stripping
costs incurred during the production phase of a mine, except to the extent they
can be attributed to inventory in accordance with normal inventory valuation
principles.
Under IFRS,
where a mine operates several open pits and those pits are regarded as separate
operations, the Group capitalises the pre-production stripping costs incurred
in the development of second and subsequent pits where it is probable that the
associated future economic benefits will flow to the Group and where the costs
can be measured reliably. These stripping costs are pre-production mine development
that is necessary to access ore from the second and subsequent pits and generate
economic benefits over the lives of such pits. Such costs, therefore, are capitalised
and amortised over the production from such pits under EITF 04-06 as well as
under IFRS.
If, however,
the pits are highly integrated, the second and subsequent pits are regarded
as extensions of the first pit in accounting for stripping costs. In such cases,
the initial stripping of the second and subsequent pits is considered production
phase stripping relating to the combined operation and would be deferred under
IFRS if this is considered to be the most appropriate basis for matching costs
against the related economic benefits. However, under US GAAP such costs are
expensed because they are production phase stripping.
The Group’s
determination of whether multiple pit mines are considered separate or integrated
operations depends on each mine’s specific circumstances and is the same
for IFRS and US GAAP. The following factors would point towards the stripping
costs for the individual pits being accounted for separately:
–
If mining of the second and subsequent pits
is conducted consecutively with that of the first pit, rather than concurrently.
–
If separate investment decisions are made
to develop each pit, rather than a single investment decision being made
at the outset.
–
If the pits are operated as separate units
in terms of mine planning and the sequencing of overburden and ore mining,
rather than as an integrated unit.
–
If expenditures for additional infrastructure
to support the second and subsequent pits are relatively large.
–
If the pits extract ore from separate and
distinct ore bodies, rather than from a single ore body.
This additional factor
would point to an integrated operation in accounting for stripping costs:
–
If the designs of the second and subsequent
pits are significantly influenced by opportunities to optimise output from
the several pits combined, including the co-treatment or blending of the
output from the pits.
The relative importance
of each of the above factors is considered in each case to determine whether,
on balance, the stripping costs should be attributed to the individual pit or
to the combined output from the several pits. As this analysis requires judgment,
another company could make the determination that a mine is separate or integrated
differently than the Group, even if the fact pattern appears to be similar.
To the extent the determination is different, the resulting accounting would
also be different.
As of 31 December
2006 and 2005, the net book values of capitalised stripping costs incurred in
the development of second and subsequent pits at multiple pit mines where pits
are considered separate operations were US$53 million and US$57 million, respectively.
On adoption
of EITF 04-06 at 1 January 2006, a cumulative adjustment of US$651 million (US$415
million net of taxation) attributable to subsidiaries was recognised directly
in US GAAP equity. A further US$94 million net of taxation related to equity
accounted units was recognised directly in US GAAP equity. Both of these amounts
are included in the adjustments for deferred stripping, which form part of the
reconciliation to Rio Tinto shareholders' funds.
Provision, under IFRS, for shares to be repurchased
Under IFRS, the Group is required to recognise a liability
in respect of irrevocable commitments made to purchase Rio Tinto plc shares
that a counterparty has been authorised to buy in the market at the counterparty's
discretion during the period up to the preliminary announcement of the Group's
results, when the Group is unable to purchase its own shares. A corresponding
reduction in shareholders' funds is also recorded.
Under US GAAP, the commitment is not recorded
as a liability where the counterparty has not purchased the shares at the balance
sheet date as there is no fixed price or fixed number of shares.
RIO TINTO GROUP NOTES TO FINANCIAL STATEMENTS – (continued)
48
RECONCILIATION TO US ACCOUNTING PRINCIPLES
CONTINUED
A.
Differences Between IFRS and US GAAP Continued
Other
Other adjustments include amounts relating to differences between IFRS and US accounting principles in respect of profit on sale of operations, higher cost of sales resulting from acquisition accounting and
restructuring costs.
Profit on sale of operations – The
profit on sale of operations may be different under US GAAP when the book
values under US GAAP include goodwill, which is not reinstated under IFRS,
or other GAAP adjustments, which increase or decrease the carrying value
of operations sold.
Higher cost of sales resulting from acquisition accounting – Under IFRS, the inventories of acquired companies are valued at the lower of replacement cost and net realisable value. Under US GAAP, such inventories are recognised at the time of acquisition on the basis of expected net sales
proceeds.
Retructuring costs – Under US GAAP, SFAS 146 'Accounting for Costs Associated with Exit or Disposal Activities' requires that the timing of recognition of a liability for
one-time termination benefits depends on whether employees are required to render service until they leave the company in order to receive the termination benefits. In 2005 an adjustment was made to pre-tax earnings and shareholders' funds to
reverse a US$20 million liability for one-time termination benefits recognised under IFRS which instead is being recognised over the future service period of the employees under US GAAP.
Share-based payment
The Group adopted the fair value recognition provisions of IFRS 2, 'Share-based Payments' with effect from 1 January 2004. As permitted by IFRS 2, on the basis that the fair value of the awards had been previously
disclosed, the Group has applied IFRS 2 to all grants of employee share-based payments that had not vested as at 1 January 2004. A cumulative adjustment was recognised as at 1 January 2004 to reflect the compensation cost that would have been
recognised had the recognition provisions of IFRS 2 been applied to such awards in prior periods. The fair values used for grants of awards in prior periods under IFRS are similar to those determined under US accounting standard SFAS 123 'Accounting
for Stock-Based Compensation'. The Group adopted the fair value recognition provisions of SFAS 123 in 2002, and as a result, under US GAAP, all periods presented reflect the compensation cost recognised as if SFAS 123 had been applied to all awards
granted to employees after 1 January 1995.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), which requires all share-based payments to employees, including grants of employee stock options, to be recognised in the financial statements based on
their fair values beginning with the first annual period after 15 June 2005. The Group has applied the provisions of SFAS 123R for 2006. The adoption of SFAS 123R has not had any impact on its financial position, results of operations or cash flows
because since 1 January 2004 the provisions of SFAS 123 have been applied in a manner which is consistent with the new requirements of SFAS 123R.
Other tax adjustments
In 2004 a valuation allowance of US$114 million was recorded against a deferred tax asset that existed in the opening US GAAP balance sheet, resulting in a non-recurring charge against earnings. No such asset was
recognised on transition to IFRS.
Under IFRS, no provision for deferred tax is recognised in respect of the depreciation of capitalised amounts of asset retirement obligations except where such obligations are recognised in accounting for a business
combination. Under US GAAP, full provision is made for such temporary differences, resulting in the recognition of tax relief on such depreciation.
Under FAS 123(R), the measurement of the deferred tax asset is based on an estimate at the time the options are granted of the future tax deduction, if any, for the amount of compensation cost recognised for book
purposes. Changes in the share price do not impact the deferred tax asset. Under IFRS 2, the measurement of the deferred tax asset is based on an estimate of the future tax deduction, if any, for the award updated at the end of each reporting
period. Changes in the share price impact the deferred tax asset to the extent that they affect the expected future tax deduction.
Consolidated statement of cash flows
The consolidated statement of cash flows prepared in accordance with International Accounting Standard 7 (IAS 7) presents substantially the same information as that required under US GAAP. Under US GAAP, however, there
are certain differences from IFRS with regard to the classification of items within the cash flow statement and with regard to the definition of cash and cash equivalents. Under IFRS, cash for the purposes of the cash flow statement comprises cash
on hand, deposits held on call with banks, short-term, highly liquid investments that are readily convertible into known amounts of cash and that are subject to insignificant risk of changes in value, and bank overdrafts that are payable on demand.
An investment usually qualifies as a cash equivalent under IFRS when it has a short maturity of, say, three months or less from the date of acquisition. Under US GAAP, cash equivalents comprise cash balances and current asset investments with an
original maturity of less than three months and exclude bank overdrafts repayable on demand.
Underlying earnings
As permitted under IFRS, 'Underlying earnings' as defined in note 2 to the Financial statements, has been presented to provide greater understanding of the underlying business performance of the operations of the
Group. This is in addition to the presentation of Profit for the year attributable to equity shareholders of Rio Tinto (Net earnings). US GAAP net earnings has been presented, with no additional measure of Underlying earnings because such additional
measures are not permitted under US GAAP.
Guarantor's accounting
Material guarantees issued by the Group relate to its own future performance. These include counter-indemnities to financial institutions that have guaranteed to third parties that the Group will perform certain
obligations. Examples of such obligations include restoration and environmental remediation activities during mine and refinery operations and after mine closure, agreements to supply products to certain customers and agreements with certain
governmental agencies to build processing facilities. Where appropriate, provisions already exist in the balance sheet for these obligations.
Variable Interest Entities
Under FIN 46(R) Consolidation of Variable Interest Entities, a variable interest entity (VIE) is consolidated by the 'primary beneficiary' of the entity. The primary beneficiary is generally defined as the
party exposed to the majority of the risks and rewards arising from the VIE. The Group currently has VIEs that would be consolidated for US GAAP which are equity accounted under IFRS. Additional information on these VIEs is provided in section F of
note 48.
RIO TINTO GROUP NOTES TO FINANCIAL STATEMENTS – (continued)
48
RECONCILIATION TO US ACCOUNTING PRINCIPLES
CONTINUED
B.
New US Accounting Standards
In June 2006, FASB Interpretation
No. 48, 'Accounting for Uncertainty in Income Taxes, an Interpretation
of FASB Statement No. 109' ('FIN 48') was issued. FIN 48 prescribes bases
for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 requires tax benefits
from an uncertain position to be recognised only if it is 'more likely
than not' that the position is sustainable upon audit, based on its technical
merits. The interpretation also requires qualitative and quantitative disclosures,
including discussion of reasonably possible changes that might occur in
recognised tax benefits over the next 12 months, a description of open
tax years by major jurisdiction and a roll-forward of all unrecognised
tax benefits. FIN 48 first applies for the Groups financial year
beginning 1 January 2007. The Group is currently assessing the impact of
adopting FIN 48.
In February 2006, the FASB issued SFAS 155, 'Accounting for Certain Hybrid Financial
Instruments, an amendment of FASB Statements No. 133 and 140'. The Statement
resolves issues addressed in Statement 133 Implementation Issue No. D1, 'Application
of Statement 133 to Beneficial Interests in Securitized Financial Assets.' SFAS
155 permits fair value remeasurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation. SFAS
155 is effective for all financial instruments acquired or issued by the Group
beginning 1 January 2007. The Group is currently assessing the impact of SFAS
155.
In September 2006, the FASB issued SFAS 157, 'Fair Value Measurements', which
defines fair value, establishes a framework for measuring fair value under US
GAAP and expands disclosures about fair value measurements. SFAS 157 applies
under other accounting pronouncements that require or permit fair value measurements;
accordingly, it does not require any new fair value measurements but may change
current practice. SFAS 157 is effective for the Groups financial year beginning
1 January 2008. The Group is currently assessing the impact of adopting SFAS
157.
In September 2006, the FASB issued SFAS 158. SFAS 158 requires companies that
sponsor single-employer defined benefit plans to recognise their overfunded or
underfunded status as an asset or liability in the statement of financial position
and to recognise changes in that funded status in the year in which changes occur,
as a component of other comprehensive income. The Statement also requires disclosure
of additional information about certain effects on earnings for the subsequent
fiscal year arising from the delayed recognition in earnings of amounts initially
recognised as a component of other comprehensive income. The Group adopted the
recognition and disclosure provisions of SFAS 158 as of the end of its fiscal
year ending 31 December 2006. The Group is required to adopt the measurement
provisions of SFAS 158 for the Groups financial year ending 31 December
2008. The Group is currently assessing the impact of adopting the measurement
provisions of SFAS 158.
In February 2007, the FASB issued SFAS 159 'The Fair Value Option for Financial
Assets and Financial Liabilities, Including an amendment of FASB Statement No.
115', which permits entities to choose to measure many financial instruments
and certain other items at fair value. SFAS 159 is effective for the Group as
of 1 January 2008. The Group is currently assessing the impact of adopting SFAS
159.
RIO TINTO GROUP NOTES TO FINANCIAL STATEMENTS – (continued)
48
RECONCILIATION TO US ACCOUNTING PRINCIPLES
CONTINUED
C.
Post Retirement Benefits
Information in respect of the
net periodic benefit cost and related obligation determined in accordance
with US Statements of Financial Accounting Standards 87, 88, 106, 132R
and 158 is given below. The measurement date used to establish year end
asset values and benefit obligations was 30 September 2006. The previous
measurement date, used to determine 2006 costs, was 30 September 2005.
Benefits under the major pension plans are principally determined by years of
service and employee remuneration. The Groups largest defined benefit pension
plans are in the UK, Australia, the US and Canada and a description of the investment
policies and strategies followed is set out below.
In the UK and North America, the investment strategy
is determined by the pension plan trustee and investment committees respectively,
after consulting the company. Agreed investment policies aim to ensure that the
objectives are met in a prudent manner, consistent with established guidelines.
The investment objectives include generating a return that exceeds consumer price
and wage inflation over the long term. Ranges for the proportions to be held
in each asset class have been agreed; a substantial proportion of the assets
is invested in a spread of domestic and overseas equities, with a smaller proportion
in fixed and variable income bonds, cash and real estate. Risk is managed in
various ways, including identifying investments considered to be unsuitable and
placing limits on some types of investment.
In Australia, the majority of investments are in
respect of defined contribution funds. The investments reflect the various defined
benefit and defined contribution liabilities and are primarily in Australian
and overseas equities and fixed interest
stocks.
The Group's defined benefit plans do not invest
directly in property occupied
by the Group or in the Group's own financial instruments.
At 30 September 2006, funded pension plans held
assets invested in the following
proportions:
UK target
US target (a)
Canada target
Group Actual
2006
2005
2006
2005
2006
2005
2006
2005
Equities
45%-85
%
45%-85
%
65
%
65
%
65
%
65
%
67
%
65
%
Debt securities
10%-40
%
15%-45
%
30
%
30
%
35
%
35
%
26
%
25
%
Real estate
—
—
5
%
5
%
—
—
3
%
3
%
Other
0%–10
%
0% – 10
%
—
—
—
—
4
%
7
%
(a)
plus or minus 5%.
The expected rate of return on pension plan assets
is determined as managements best estimate on the long term return
of the major asset classes equity, debt, real estate and other weighted
by the actual allocation of assets among the categories at the measurement
date.
Pension plan contributions are determined through regular funding valuations
in line with local funding requirements. Contributions to be paid in 2007
are expected to be around US$8m higher than for 2006.
A refund of US$26 million is expected to be received by the Group in 2007,
as part of the distribution of surplus to members and the employer relating to
South African plans.
Assumptions used to determine the net periodic benefit cost and the end of year
benefit obligation for the major pension plans are within the ranges shown below.
The average rate for each assumption has been weighted by the relevant benefit
obligation. The assumptions used to determine the end of year benefit obligation
are also used to calculate the following years cost.
2006 Cost (a)
Year end benefit
obligation
Discount rate
4.8% to 8.0% (Average:
5.1%
)
4.7% to 8.4% (Average:
5.3%
)
Long term rate of return
on plan assets
5.9% to 7.6% (Average:
6.2%
)
6.4% to 10.5% (Average:
6.9%
)
Increase in compensation
levels
4.1% to 6.3% (Average:
4.6%
)
3.9% to 7.8% (Average:
4.6%
)
(a)
31 December 2005 year end benefit obligations
were measured on the same assumptions as the 2006 cost.
The actuarial calculations in respect of the UK
plans assume a rate of increase of pensions in payment of 3.0 percent per
annum at the year end. This assumption is consistent with the inflation rate
included in the expected rates of return and salary increase assumptions
in the respective valuations. Appropriate assumptions were made for plans
in other countries.
Discount rates have been set based on the yields available on AA rated corporate
bonds in the appropriate currency, or government bonds where there is no deep
market in AA rated corporate bonds. The discount rate reflects the weighted average
yield over the term of the liabilities.
The expected average remaining service life in the major plans ranges from 6
to 15 years with an overall average of 11 years.
Other post retirement benefits are provided to
employees who meet the eligibility requirements, and their beneficiaries and
dependants, through unfunded self-insurance arrangements. The majority of these
plans are for employees in the United States. The plans are non-contributory,
although
some contain an element of cost sharing such as deductibles and co-insurance.
In the US, the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 provides an employer subsidy, which began in 2006.
The Group's post retirement
medical plans are eligible for this employer
subsidy.
The weighted average assumptions used in determining
the costs and year end benefit obligation for the major post retirement benefit
plans other than pension plans
were as shown below:
RIO TINTO GROUP NOTES TO FINANCIAL STATEMENTS – (continued)
48
RECONCILIATION TO US ACCOUNTING
PRINCIPLES CONTINUED
C.
Post Retirement Benefits Continued
2006 Cost (a)
Year end benefit obligation
Discount rate
4.8% to 8.0% (average 5.6%
)
4.7% to 8.4% (average 6.0%
)
Average healthcare cost trend rate
– trend in first year
6.3% to 9.6% (average 9.1%
)
5.5% to 10.8% (average 8.4%
)
– reducing to long term rate by 2011 broadly on a straight-line basis
5.1% to 6.8% (average 5.4%
)
4.9% to 8.3% (average 5.4%
)
(a)
31 December 2005 year end benefit obligations were measured on the same assumptions as the 2006 cost.
The components of net benefit expense under
US GAAP are detailed in the table below.
2006
2005
2004
Pension benefits
US$m
US$m
US$m
Service cost
(197
)
(152
)
(133
)
Interest cost on benefit obligation
(279
)
(274
)
(238
)
Expected return on plan assets
298
289
250
Net amortisation and deferral:
– transitional obligation
1
1
5
– recognised losses
(42
)
(41
)
(32
)
– prior service cost recognised
(21
)
(24
)
(22
)
Total net amortisation and deferral
(62
)
(64
)
(49
)
Net periodic benefit cost
(240
)
(201
)
(170
)
Curtailment and settlement credit/(charge)
2
(1
)
37
Net benefit expense
(238
)
(202
)
(133
)
The 2006 pension cost shown above includes
US$21 million (2005: US$8 million; 2004: US$6 million) in
relation to defined contribution plans. In addition, contributions of
US$14 million (2005: US$12
million; 2004: US$11 million) were paid to 401k plans in the US.
2006
2005
2004
Other benefits
US$m
US$m
US$m
Service cost
(10
)
(10
)
(10
)
Interest cost on benefit obligation
(26
)
(28
)
(32
)
Net amortisation and deferral:
– recognised gains
5
4
1
– prior service cost recognised
—
1
(3
)
Total net amortisation and deferral
5
5
(2
)
Net periodic benefit cost
(31
)
(33
)
(44
)
Curtailment and settlement credit
—
—
3
Net benefit expense
(31
)
(33
)
(41
)
The funded status of the Group's principal
schemes is summarised in the table below.
2006
2005
Pension benefits
US$m
US$m
Benefit obligation at end of year
(5,846
)
(5,109
)
Fair value of plan assets
5,808
4,978
Funded status
(38
)
(131
)
Unrecognised prior service cost
108
112
Unrecognised net loss
362
469
Unrecognised transitional asset
(3
)
(5
)
Company contributions in fourth quarter
16
22
Net amount recognised at end of year (before implementation of SFAS 158)
445
467
Comprising (before implementation of SFAS 158):
– benefit prepayment
407
394
– benefit provision
(251
)
(327
)
– intangible asset
40
45
– amount recognised through accumulated other comprehensive income
249
355
Net amount recognised (before implementation of SFAS 158)
RIO TINTO GROUP NOTES TO FINANCIAL STATEMENTS – (continued)
48
RECONCILIATION TO US ACCOUNTING PRINCIPLES CONTINUED
C.
Post Retirement Benefits Continued
In accordance with SFAS 158, all unrecognised
amounts were recognised in OCI on 31 December 2006. The amounts recognised
in the
balance sheet are as follows:
2006
US$m
Non current assets
287
Current liabilities
(6
)
Non current liabilities
(319
)
Total
(38
)
As of 31 December 2006, after implementation
of SFAS 158, amounts recognised in accumulated OCI consist of:
2006
US$m
Net loss
362
Prior service cost
108
Transitional asset
(3
)
Adjustment in respect of contributions in fourth quarter
16
Total
483
The aggregate benefit obligations and aggregate
fair values of plan assets for plans with benefit obligations in excess
of plan assets as at 30 September 2006 are summarised in the table below.
These benefit
obligations include an allowance for future salary increases.
2006
2005
Pension benefits
US$m
US$m
Benefit obligation at end of year
(2,019
)
(2,006
)
Fair value of plan assets
1,694
1,588
Benefit obligations in excess of plan assets
(325
)
(418
)
The aggregate accumulated benefit obligations
and aggregate fair values of plan assets for plans with accumulated benefit
obligations (i.e. with no allowance for future salary increases) in excess
of plan assets as at
30 September 2006 are summarised in the table below.
2006
2005
Pension benefits
US$m
US$m
Accumulated benefit obligation at end of year
(1,536
)
(1,916
)
Fair value of plan assets
1,289
1,588
Accumulated benefit obligations in excess of plan assets
(247
)
(328
)
The funded status of the Group's principal
schemes other than pensions is summarised in the table below.
2006
2005
Other benefits
US$m
US$m
Benefit obligation at end of year
(491
)
(493
)
Unrecognised prior service cost
3
(1
)
Unrecognised net gain
(67
)
(54
)
Company contributions in fourth quarter
5
6
Net amount recognised at end of year (before implementation of SFAS 158)
(550
)
(542
)
Comprising (before implementation of SFAS 158):
– benefit provision
(550
)
(542
)
Net amount recognised (before implementation of SFAS 158)
(550
)
(542
)
In accordance with SFAS 158, all unrecognised
amounts were recognised in OCI on 31 December 2006. The amounts recognised
in the balance sheet are as follows:
2006
US$m
Current liabilities
(22
)
Non current liabilities
(469
)
Total
(491
)
As of 31 December 2006, after implementation
of SFAS 158, amounts recognised in accumulated OCI consist of:
2006
US$m
Net gain
(67
)
Prior service cost
3
Adjustment in respect of contributions in fourth quarter
RIO TINTO GROUP NOTES TO FINANCIAL STATEMENTS – (continued)
48
RECONCILIATION TO US ACCOUNTING PRINCIPLES
CONTINUED
C.
Post Retirement Benefits Continued
Change in benefit obligation
The amounts shown below include, where appropriate, 100 per cent of the costs, contributions, gains and losses in respect of employees who participate in the plans and who are employed in operations that are
proportionally consolidated or equity accounted. Consequently, the costs, contributions, gains and losses do not correspond directly to the amounts disclosed above in respect of the Group. Pure defined contribution plans and industry-wide plans are
excluded from the movements below.
2006
2005
Pension benefits
US$m
US$m
Benefit obligation at start of year
(5,109
)
(4,817
)
Service cost
(184
)
(151
)
Interest cost
(279
)
(274
)
Contributions by plan participants
(106
)
(36
)
Actuarial losses
(160
)
(213
)
Benefits paid
344
343
Newly consolidated
(13
)
—
Plan amendments
(8
)
(12
)
Settlement loss
—
(1
)
Curtailment gain
3
—
Currency adjustments
(334
)
52
Benefit obligation at end of year
(5,846
)
(5,109
)
The benefit obligation
shown above includes an allowance for future salary increases, where applicable;
the accumulated benefit obligation does not include this allowance. The accumulated
benefit obligations for pension plans at 30 September 2006 amounted to US$5,557
million (30 September 2005: US$4,921 million).
2006
2005
Other benefits
US$m
US$m
Benefit obligation at start of year
(493
)
(538
)
Service cost
(10
)
(10
)
Interest cost
(26
)
(28
)
Actuarial gains
19
60
Benefits paid
21
23
Plan amendments
(4
)
—
Currency adjustments
2
—
Benefit obligation at end of year
(491
)
(493
)
Change in plan assets
2006
2005
Pension fund assets
US$m
US$m
Fair value of plan assets at start
of year
4,978
4,515
Actual return on plan assets
551
658
Contributions by plan participants
106
36
Contributions by employer
159
182
Benefits paid
(344
)
(343
)
Newly consolidated
15
—
Currency and other adjustments
343
(70
)
Fair value of plan assets at end
of year
5,808
4,978
2006
2005
Other benefit plan assets
US$m
US$m
Fair value of plan assets at start
of year
—
—
Contributions by employer
21
23
Benefits paid
(21
)
(23
)
Fair value of plan assets at end
of year
—
—
Change in additional minimum liability before
tax (before application of SFAS158)
RIO TINTO GROUP NOTES TO FINANCIAL STATEMENTS - (continued)
48
RECONCILIATION TO US ACCOUNTING PRINCIPLES
CONTINUED
C.
Post Retirement Benefits Continued
Incremental effect of applying SFAS 158 on individual balance sheet line items
Adoption of the recognition provisions of SFAS 158 required the recognition of the funded status of each single-employer defined benefit plan on the balance sheet as of 31 December 2006, with offsetting amounts
recognised as components of accumulated OCI. Additional minimum pension liabilities (AML) and related intangible assets were also derecognised upon adoption of SFAS 158. The effect of the derecognition of the AML prior to the adoption of SFAS158 and
the impact of the initial adoption of SFAS 158 on individual balance sheet accounts is as follows:
Prior to
Post
adjustment for
adjustment for
AML and
Adjust
Adjust
AML and
SFAS 158
AML
SFAS 158
SFAS 158
Prepaid post-retirement costs
407
140
(260
)
287
Post-retirement provision
(801
)
149
(164
)
(816
)
Intangible asset
40
(40
)
—
—
Accumulated other comprehensive
income
249
(249
)
424
424
The adoption of SFAS
158 also resulted in a decrease in the net deferred tax liability of US$54
million and a decrease in equity attributable to outside equity shareholders'
of US$12 million.
Sensitivity to change in healthcare trend
Changing the healthcare cost trend rates by 1% would
result in the following effects:
1% Increase
1% Decrease
US$m
US$m
2006
(Increase)/decrease
in service cost plus interest cost
(6
)
5
(Increase)/decrease in benefit obligation
at 30 September
(74
)
62
2005
(Increase)/decrease
in service cost plus interest cost
(6
)
5
(Increase)/decrease in benefit obligation
at 30 September
(66
)
55
2004
(Increase)/decrease
in service cost plus interest cost
(6
)
5
Expected benefit payments
US$m
Pension benefits
Expected benefit payments in 2007
382
Expected benefit payments in 2008
385
Expected benefit payments in 2009
390
Expected benefit payments in 2010
402
Expected benefit payments in 2011
415
Expected benefit payments from 2012
to 2016
2,205
Other benefits
Expected benefit payments in 2007
22
Expected benefit payments in 2008
23
Expected benefit payments in 2009
24
Expected benefit payments in 2010
25
Expected benefit payments in 2011
26
Expected benefit payments from 2012
to 2016
139
The amounts in accumulated
other comprehensive income expected to be recognised in net periodic benefit
cost in 2007 are as follows:
RIO TINTO GROUP
NOTES TO FINANCIAL STATEMENTS – (continued)
48
RECONCILIATION TO US ACCOUNTING
PRINCIPLES CONTINUED
D.
Accumulated Foreign Currency
Translation Gains and (Losses) Recorded Directly in Shareholders' Funds
under US GAAP
US$m
At 1 January 2006
280
Current period change
986
At 31 December 2006
1,266
At 1 January 2005
814
Current period change
(534
)
At 31 December 2005
280
At 1 January 2004
200
Current period change
614
At 31 December 2004
814
(a)
The amounts above for 2005 and 2004 have been
revised to reflect the application of purchase accounting to the formation
of the DLC structure in 1995. See pages A-71 and A-72 for a detailed discussion
of the impact on amounts presented under US GAAP.
E.
Deferred Stripping
Information about the stripping
ratios of the Business Units, including equity accounted units, that account
for the majority of the deferred stripping balance under IFRS at 31 December
2006, along with the year in which deferred stripping is expected to be
fully amortised (as shown in brackets), is set out in the following table:
Actual annual
strip ratio
Life of mine strip
ratio
2006
2005
2004
2006
2005
2004
Kennecott Utah
Copper (2019) (a) (b)
2.04
2.02
1.83
1.36
1.51
1.24
Argyle Diamonds (2009) (a)
4.00
6.60
6.70
4.40
4.40
4.91
Grasberg Joint
Venture (2015) (a)
3.01
3.12
3.39
2.63
2.43
2.43
Diavik (2008) (c)
0.89
1.21
1.47
0.96
0.91
0.94
Escondida (2042)
(d)
0.08
0.09
0.11
0.12
0.12
0.11
(a)
Strip ratios shown are waste to ore.
(b)
Kennecott's life of mine strip ratio decreased
as the latest mine plan provides for the pit walls to be made steeper in
an area within the mine, which resulted in adding ore without adding waste.
(c)
Diavik's strip ratio is disclosed as bank cubic
metre per carat.
(d)
Escondida's strip ratio is based on waste tonnes
to pounds of copper mined.
Borax capitalised
stripping costs as part of a distinct period of new development during the production
stage of the mine. Capitalisation stopped in 2004. The capitalised costs will
be fully amortised in 2034.
F.
Equity Method Investments (IFRS)
The aggregated profit and loss accounts
and balance sheets on a 100 per cent basis for entities that are accounted
for under IFRS using the equity method are as follows:
2006
2005
2004
US$m
US$m
US$m
Profit and loss account
Sales revenue
(a)
11,562
7,103
6,655
Cost of sales
(4,474
)
(3,402
)
(3,836
)
Operating profit
7,088
3,701
2,819
Profit of equity accounted companies
—
—
1
Gains/(losses)
on derivatives and debt
5
(31
)
(8
)
Net interest
(136
)
(118
)
(157
)
Profit before
tax
6,957
3,552
2,655
Taxation
(2,541
)
(1,160
)
(872
)
Net profit on
ordinary activities (100 per cent basis)
4,416
2,392
1,783
2006
2005
US$m
US$m
Balance sheet
Intangible fixed assets
16
2
Property, plant and equipment
7,292
6,851
Investments
185
15
Working capital
1,010
1,604
Net cash less current debt
476
(351
)
Long term debt
(2,306
)
(2,072
)
Provisions
(1,349
)
(1,504
)
Aggregate shareholders' funds (100
per cent basis)
5,324
4,545
(a)
Sales revenue includes US$1,693
million (2005: US$1,712 million; 2004: US$1,444 million) charged
by equity accounted companies to their investors.
RIO TINTO GROUP NOTES TO FINANCIAL STATEMENTS – (continued)
48
RECONCILIATION TO US ACCOUNTING
PRINCIPLES CONTINUED
F.
Equity Method Investments Continued
(b)
Included in the disclosures above
are certain entities that have entered into sales arrangements with their
shareholders wherein the prices are designed
to recover costs. Because of these arrangements, the entities are considered
to be VIEs under FIN 46(R) and are consolidated under
US GAAP. The full consolidation of these VIEs, whose principal activities
are aluminium smelting, would affect the Group's US GAAP balance
sheet and profit and loss accounts as follows:
2006
2005
US$m
US$m
Balance sheet
Increase in property, plant and
equipment
1,542
1,522
Decrease in investments in equity
accounted units
(583
)
(588
)
Decrease in other non-current assets
(362
)
(375
)
Increase in current assets
224
220
Increase in current liabilities
(156
)
(60
)
Increase in provisions and other
non-current liabilities (c)
(370
)
(457
)
Increase in equity attributable
to outside equity shareholders
(295
)
(262
)
Impact on Rio Tinto shareholders'
funds
—
—
2006
2005
2004
US$m
US$m
US$m
Profit and loss account
Increase in sales revenue
316
310
267
Increase / (decrease) in share of
profit after tax of equity accounted units
3
(74
)
28
(Decrease) / increase in share of
profit after tax of subsidiaries
(3
)
74
(28
)
Impact on net earnings
—
—
—
(c)
Includes amounts due to other shareholders;
however, these entities have no other debt.
G.
Joint Arrangements Equity Accounted
for under US GAAP
The Group accounts for
two joint arrangements using proportional consolidation under IFRS for which
the equity method of accounting would be applied under US GAAP. The difference
in treatment between proportional consolidation and the equity method of
accounting has no impact on shareholders' funds or net income. Condensed
financial information relating to the Group's proportionate interest in
the joint arrangements that would be equity accounted under US GAAP is as
follows:
2006
2005
2004
US$m
US$m
US$m
Profit and loss account
Operating (loss)
/ profit
(69
)
3
5
Net (loss) / income
(46
)
(2
)
7
Cash flow statement
Net cash flow
(used in)/from operating activities
(36
)
(9
)
19
Net cash flow from / (used in) investing
activities
4
(31
)
(97
)
Net cash flow
from financing activities
23
48
80
Balance sheet
Current assets
87
62
Non-current assets
514
459
Current liabilities
(27
)
(27
)
Non-current liabilities
(661
)
(535
)
H.
Property, plant and equipment
by location (IFRS)
The following supplements
segmental information provided elsewhere in this report to provide additional
information required under US GAAP:
2006
2005
2006
2005
%
%
US$m
US$m
North America (a)
35.7
35.1
7,924
6,192
Australia and New Zealand
58.2
57.1
12,923
10,056
South America
0.4
0.5
93
86
Africa
2.7
2.9
608
517
Indonesia
2.2
2.8
498
496
Europe and other countries
0.8
1.6
161
273
100.0
100.0
22,207
17,620
(a)
North American property, plant and
equipment includes US$4,972 million in the United States (2005: US$3,720
million).
I.
Additional Share Options Information
The related tax benefit
recognised in income in relation to share plans for 2006 was US$9
million (2005: US$8 million; 2004: US$4 million). The actual tax
benefit realised for the tax deductions from the exercise of options and
the vesting of shares totalled US$18 million, US$11 million and
US$8 million for the years ended 31 December 2006, 2005 and 2004,
respectively. No compensation cost was capitalised as the cost of an asset.
At 31 December
2006, the total compensation cost related to the equity-settled share
option plans not yet recognised was US$42 million and that cost is
expected to be recognised over a weighted-average period of 2.3 years.
At the same date, the total compensation cost related to the cash-settled
share option plans not yet recognised was US$49 million and that cost
is expected to be recognised over a weighted-average period of 2.5 years.
Cash received from the exercise of options under all share-based payment
plans for the years ended 31 December 2006, 2005 and 2004 was US$84
million, US$92 million and US$19 million respectively.
RIO TINTO GROUP NOTES TO FINANCIAL STATEMENTS – (continued)
48
RECONCILIATION TO US ACCOUNTING
PRINCIPLES CONTINUED
I.
Additional Share Options Information
Continued
Share option exercises
under the Rio Tinto plc Share Option Plan are usually satisfied by the issue
of shares from Treasury. Exercises under the Rio Tinto plc Share Savings
Plan are satisfied by the issue of new shares. Exercises under the Rio Tinto
Ltd Share Option Plan and Rio Tinto Ltd Share Savings Plan are satisfied
by the purchase of shares in the market. As a result of this policy, the
Group expects to purchase approximately 0.8 million shares during 2007 based
upon the assumptions used for valuing the awards. The rules of the share
option plans contain various restrictions on the number of shares that may
be authorised for awards of share options. In particular, the number of
shares that may be allocated for share option awards when added to shares
allocated in the previous 10 years may not exceed 10% of ordinary share
capital.
Share savings plans
The key assumptions used in the valuation of the 2004
and 2005 grants are noted in the following table.
Risk-free
Expected
Dividend
Employee
Implied
interest
volatility
yield
turnover
option
rate
rate
lifetime
%
%
%
%
(years)
Year ended 31 December 2005
– Rio Tinto plc
4.2
32.0
1.9
10.0
2.0-5.2
– Rio Tinto Limited
5.3
26.0
1.8
10.0
3.2-5.2
Year ended 31 December 2004
– Rio Tinto plc
4.7-4.8
32.0
2.3
10.0
2.2-5.4
– Rio Tinto Limited
5.3-5.4
26.0
2.3
10.0
3.4-5.4
Share option plans
The key assumptions used in the valuation of the 2004 and 2005 grants are noted in the following table.
Risk-free
Expected
Dividend
Employee
Implied
interest
volatility
yield
turnover
option
rate
rate
lifetime
%
%
%
%
(years)
Year ended 31 December 2005
– Rio Tinto plc
4.9
32.0
2.2
3.0
5.5
– Rio Tinto Limited
5.6
26.0
2.1
3.0
6.2
Year ended 31 December 2004
– Rio Tinto plc
4.9
32.0
3.0
5.0
4.7
– Rio Tinto Limited
5.7
26.0
2.8
5.0
5.0
The total intrinsic value of options exercised
during the year
2006
2005
2004
Rio Tinto plc – share savings
plan (£'000)
6,885
2,554
4,743
Rio Tinto plc – share option
plan (£'000)
33,637
22,894
3,815
Rio Tinto plc – executive share
option scheme (£'000)
—
—
128
Rio Tinto Limited – share savings
plan (A$'000)
20,090
6,519
248
Rio Tinto Limited – share option
plan (A$'000)
44,863
10,701
3,152
Details as at 31 December 2006 for vested options
and options expected to vest
Based on the number of outstanding awards and the
assumptions used in the valuation of those awards, the number of awards vested
or expected to vest is as follows:
Number
Weighted
Weighted
Aggregate
of
average
average
intrinsic
options
exercise
remaining
value
price
contractual
life
(years)
'000s
Rio Tinto plc – share savings plan
1,264,290
£13.95
2.0
£16,727
Rio Tinto plc – share option plan
3,725,556
£15.42
6.4
£43,813
Rio Tinto plc – mining companies
comparative plan
995,925
n/a
2.1
£27,069
Rio Tinto Limited – share savings
plan
2,293,235
A$34.76
2.1
A$90,675
Rio Tinto Limited – share option
plan
2,409,571
A$40.71
6.3
A$80,937
Rio Tinto Limited – mining companies
comparative plan
RIO TINTO GROUP NOTES TO FINANCIAL STATEMENTS – (continued)
48
RECONCILIATION TO US ACCOUNTING PRINCIPLES
CONTINUED
J.
SFAS 131 Segmental Disclosures (IFRS)
(a)
(b)
(d)
(e)
(f)
(g)
Year to 31 December 2006
Gross
Depreciation &
Tax
Underlying
Capital
Operating
US$m
sales revenue
amortisation
charge
earnings
expenditure
assets
Iron Ore
6,938
387
1,066
2,279
1,969
6,662
Energy
4,240
324
240
711
582
2,763
Industrial Minerals
2,623
189
85
243
360
2,682
Aluminium
3,493
266
319
746
236
3,607
Copper
7,079
404
309
3,562
640
3,384
Diamonds
838
181
86
205
229
1,056
Other operations
229
3
4
33
48
551
Other items
27
(55
)
(261
)
169
(152
)
Exploration and evaluation
3
(20
)
(163
)
77
116
Net interest
(18
)
(17
)
Total before reconciling items
25,440
1,784
2,016
7,338
4,310
20,669
Reconciling items
(2,975
)
(275
)
357
100
(318
)
(2,437
)
Totals per the financial statements
22,465
1,509
2,373
7,438
3,992
18,232
(a)
(b)
(d)
(e)
(f)
(g)
Year to 31 December 2005
Gross
Depreciation &
Tax
Underlying
Capital
Operating
US$m
sales revenue
amortisation
charge
earnings
expenditure
assets
Iron Ore
5,497
315
859
1,722
1,229
4,574
Energy
3,867
305
314
733
412
2,301
Industrial Minerals
2,487
172
115
187
235
2,311
Aluminium
2,744
274
156
392
242
3,361
Copper
4,839
337
403
2,020
501
2,784
Diamonds
1,076
162
160
281
203
1,085
Other operations
232
34
1
40
31
167
Other items
13
(128
)
(202
)
41
(304
)
Exploration and evaluation
3
(16
)
(174
)
42
(18
)
Net interest
(17
)
(44
)
Total before reconciling items
20,742
1,615
1,847
4,955
2,936
16,261
Reconciling items
(1,709
)
(281
)
(33
)
260
(346
)
(1,313
)
Totals per the financial statements
19,033
1,334
1,814
5,215
2,590
14,948
(a)
(b)
(d)
(e)
(f)
Year to 31 December 2004
Gross
Depreciation &
Tax
Underlying
Capital
US$m
sales revenue
amortisation
charge
earnings
expenditure
Iron Ore
3,009
289
259
565
935
Energy
3,008
303
129
431
244
Industrial Minerals
2,126
173
84
243
248
Aluminium
2,356
190
139
331
505
Copper
3,033
281
77
860
326
Diamonds
744
108
117
188
152
Other operations
254
47
8
56
19
Other items
6
(99
)
(205
)
2
Exploration and evaluation
2
(8
)
(128
)
Net interest
(30
)
(69
)
Total before reconciling items
14,530
1,399
676
2,272
2,431
Reconciling items
(1,576
)
(228
)
(57
)
1,025
(172
)
Totals per the financial statements
12,954
1,171
619
3,297
2,259
Rio Tinto's management structure is based on the principal product groups shown above. The product groups represent the Group's segments for the purposes of SFAS 131 'Disclosures about segments of an enterprise and
related information'. The chief executive of each product group reports to the chief executive of Rio Tinto. Generally, business units are allocated to product groups based on their primary product. The Energy group includes both coal and uranium
businesses. The main products of the industrial minerals group are borates, talc, salt and titanium dioxide feedstock. The Copper group includes certain gold operations in addition to copper operations.
a)
Gross sales revenue
Product group gross sales revenue includes
100 per cent of subsidiaries' sales revenue and the Group's share of
the sales revenue of equity accounted units. There are minimal sales
between product groups. The reconciling item is Rio Tinto's share of
the sales revenue of equity accounted units, which is deducted in arriving
at consolidated sales revenue as shown on the income statement.
b)
Depreciation and amortisation
Product group totals of depreciation include
100 per cent of subsidiaries' depreciation and amortisation and include
Rio Tinto's share of the depreciation and amortisation of equity accounted
units. The reconciling item is Rio Tinto's share of the depreciation
and amortisation charge of equity accounted units. This is deducted in
arriving at the depreciation and amortisation charge for the Group which
is shown in note 3 to the financial statements. These figures exclude
impairment charges, which are included in c), below.
c)
Items excluded from Underlying earnings
Product group pre tax totals for significant
non cash items excluded from Underlying earnings in 2006 comprise net
impairment reversals of US$396 million and an exceptional reduction
in environmental provisions of
US$37 million. In 2005, product group pre tax totals for significant non
cash items excluded from Underlying earnings comprise net impairment reversals
of US$3 million and an exceptional reduction in environmental provisions
of US$84
million. In 2004, there were net impairment charges of US$558 million, of
which US$548 million related to accelerated depreciation. Other items excluded
from Underlying earnings are gains on disposals of businesses.
RIO TINTO GROUP NOTES TO FINANCIAL STATEMENTS – (continued)
48
RECONCILIATION TO US ACCOUNTING PRINCIPLES CONTINUED
J.
SFAS 131 Segmental Disclosures (IFRS) Continued
Other
Other
Other
significant
significant
significant
non cash
Other
non cash
Other
non cash
Other
items
exclusions
Total
items
exclusions
Total
items
exclusions
Total
2006
2006
2006
2005
2005
2005
2004
2004
2004
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
Iron Ore
298
298
85
85
Energy
(188
)
(188
)
(13
)
(13
)
(160
)
64
(96
)
Industrial Minerals
(7
)
(7
)
16
16
Aluminium
5
5
11
11
4
4
Copper
647
647
84
30
114
(398
)
976
578
Diamonds
(317
)
(317
)
433
5
438
87
126
213
(558
)
1,044
486
Other gains on disposal
196
196
136
136
Exchange gains and losses excluded from Underlying
earnings
83
83
(191
)
(191
)
224
224
Pre tax total excluded from Underlying
earnings
433
88
521
87
131
218
(558
)
1,404
846
Tax on items excluded from Underlying
earnings
(357
)
33
57
Outside interests on items excluded from
underlying earnings
(64
)
9
122
Total excluded from underlying earnings
100
260
1,025
d)
Tax charge
The reconciling item is the tax on amounts that
are excluded in arriving at Underlying Earnings. These amounts excluded
in arriving at Underlying Earnings are included in (c) above. Within product
groups, tax of subsidiaries is stated before tax on finance items but after
tax on the amortisation of the discount related to provisions. The tax
charge excludes tax on the earnings of equity accounted units.
Due to improved prospects for future earnings
from the Group's US operations, the Group recongised in 2006 additional
deferred tax assets of US$335 million, of which US$303 million
was allocated to the copper
product group and US$32 million was allocated to other product groups.
e)
Underlying earnings
The reconciling items are the amounts shown in
note c) above, post tax and minority interests. These amounts are excluded
from Underlying earnings attributable to product groups. The total after
reconciling items is net earnings, which is shown on the face
of the income statement.
Product group earnings include earnings of subsidiaries
stated before finance items but after the amortisation of the discount
related to provisions. Earnings attributable to equity accounted units
include interest
charges and amortisation of discount.
Rio Tinto's share of the profit after tax of
equity accounted units of US$1,378 million is shown on the income statement.
This amount is attributable US$1,271 million to the copper product
group and US$107 million to other product groups and is included in
product group underlying earnings (2005: US$660 million to the copper
group and US$116 million to other product groups; 2004: US$495
million to the copper group and US$28 million to
other product groups).
f)
Capital expenditure
Product Group capital expenditure comprises
the net cash outflow on purchases less disposals of property, plant and
equipment and intangible assets other than capitalised exploration, which
is attributed to the exploration and evaluation product group. The product
group totals include 100 per cent of subsidiaries' capital expenditure
and Rio Tinto's share of the capital expenditure of equity accounted units.
The reconciling item is the net of Rio
Tintos share of the capital expenditure of equity accounted units, which
is excluded in arriving at the outflow for purchase of property, plant & equipment
and intangible assets in the cash flow statement, and US$37 million (2005:
US$36 million; 2004: US$41 million) for the proceeds of disposals of
property, plant and equipment and intangible assets which are shown separately
in the cash flow statement.
g)
Operating assets
Product group totals of operating assets include
the net assets of subsidiaries before deducting net debt, less outside
shareholders' interests, which are calculated by reference to the net assets
of the relevant companies (i.e. net of such companies' debt). For equity
accounted units, Rio Tinto's net investment is included. The reconciling
item is the Group's net debt which is deducted in arriving at the net assets
attributable to Rio Tinto shareholders in the balance sheet. In 2006, Rio
Tinto's share of investment in equity accounted units is attributable US$1,385
million to the copper product group, US$878 million to the aluminium
product group and US$123 million to other product groups
(2005: US$1,063 million to the copper product group, US$849 million to
the aluminium product group and US$76 million to other product groups).
Australian Corporations Act — summary
of ASIC relief
Pursuant to section 340 of the Corporations
Act 2001 ("Corporations Act"), the Australian Securities and Investments
Commission issued an ordered dated 27 January 2006 (as amended on 22
December 2006) that granted relief to Rio Tinto Limited from certain
requirements of the Corporations Act in relation to the Company's financial
statements and associated reports. The order essentially continues the
relief that has applied to Rio Tinto Limited since the formation of the
Group's Dual Listed Companies ("DLC") structure in 1995. The order applied
to Rio Tinto Limited's financial reporting obligations for financial
years and half-years ending between 31 December 2005 and 31 December
2009 (inclusive)
In essence, instead of being required under
the Corporations Act to prepare consolidated financial statements covering
only itself and its controlled entities, the order allows Rio Tinto Limited
to prepare consolidated financial statements in which it, Rio Tinto plc
and their respective controlled entities are treated as a single economic
entity. In addition, those consolidated financial statements are to be
prepared:
–
in accordance with the principles and requirements
of International Financial Reporting Standards as adopted by the European
Union ("EU IFRS") rather than the Australian equivalents of International
Financial Reporting Standards ("AIFRS") (except for one limited instance
in the case of any concise report), and in accordance with United Kingdom
financial reporting obligations generally;
–
on the basis that the transitional provisions
of International Financial Reporting Standard 1 "First-time Adoption
of International Financial Reporting Standards" should be applied using
the combined financial statements previously prepared for Rio Tinto Limited,
Rio Tinto plc and their respective controlled entities under Generally
Accepted Accounting Principles in the United Kingdom, under which the
DLC merger between Rio Tinto Limited and Rio Tinto plc was accounted
for using "merger", rather than "acquisition", accounting (reflecting
that neither Rio Tinto Limited nor Rio Tinto plc was acquired by, or
is controlled by, the other, and meaning that the existing carrying amounts,
rather than fair values, of assets and liabilities at the time of the
DLC merger were used to measure those assets and liabilities at formation);
–
on the basis that Rio Tinto Limited and Rio
Tinto plc are a single company (with their respective shareholders being
the shareholders in that single company); and
–
with a reconciliation, from EU IFRS to AIFRS,
of the following amounts: consolidated profit for the financial year,
total consolidated recognised income for the financial year and total
consolidated equity at the end of the financial year (see page A-5).
Those
consolidated 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), except that the order allows Rio Tinto Limited to prepare
a separate Remuneration report that is merely cross-referenced in the directors'
report, instead of including in the Directors' report the Remuneration report
otherwise required by the Corporations Act. The separate Remuneration report
(see pages 95 to 121) must include all the information required to be included
in a remuneration report under the Corporations Act, as well as the information
required by AIFRS (namely, AASB 124) dealing with compensation of directors
and executives who are "key management personnel", and certain other disclosures.
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 those consolidated
financial statements (including any concise financial statements), the
auditor's report and the directors' report. The separate Remuneration
report is also required to be lodged with the Australian Securities and
Investments Commission at the same time as the consolidated financial
statements, and Rio Tinto Limited must not distribute or make available
the Remuneration report without the consolidated financial statements
and directors' report. At the Company's AGM, it is required to allow
shareholders to vote on a non binding resolution to adopt the Remuneration
report, on the same basis as would otherwise be required for a Remuneration
report under the Corporations Act.
Rio Tinto Limited is not required to prepare
separate consolidated financial statements solely 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 AIFRS (other
than in respect of key management personnel compensation disclosures
under AASB 124, which as noted above are instead incorporated into the
separate Remuneration report), and to have those statements audited.
Those financial statements are not required to be laid before the Company's
AGM or distributed to shareholders as a matter of course.
However, Rio Tinto Limited must:
–
include in the consolidated financial statements
for the Group, as a note, Rio Tinto Limited's parent entity balance sheet,
income statement, statement of changes in equity and statement of cashflows,
prepared in accordance with AIFRS; and
–
make available the full parent entity financial
statements 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.
Report of Independent Registered Public Accounting Firms
To the Boards of Directors and Shareholders of Rio Tinto plc and Rio Tinto Limited:
We have completed an integrated audit of the Rio Tinto Groups 31 December 2006 consolidated financial statements and of its internal control over financial reporting as of 31 December 2006 and an audit of its 31
December 2005 and 31 December 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated income statements and the related consolidated balance sheets, consolidated statements of cash flows and consolidated statements of recognised income and expense present
fairly, in all material respects, the financial position of the Rio Tinto Group at 31 December 2006 and 31 December 2005 and the results of their operations and cash flows for each of the three years in the period ended 31 December 2006, in
conformity with International Financial Reporting Standards (IFRS) as adopted by the European Union. These financial statements are the responsibility of Rio Tinto Group's management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.
IFRS as adopted by the European Union vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such
differences is presented in Note 48 to the consolidated financial statements.
As discussed under the heading "Basis of preparation" on page A-7 in Note 1 to the consolidated financial statements, as a result of adopting IAS 21, IAS 39 and IFRS 5 on 1 January 2005, the Group changed its method of
accounting for financial instruments and non-current assets held for sale. In line with the relevant transitional provisions, the prior period comparatives have not been re-stated.
Internal control over financial reporting
Also, in our opinion, managements assessment,
included in the accompanying "Management's Report on Internal Control over Financial
Reporting as set out in item 15 on page 147, that the Rio Tinto Group
maintained effective internal control over financial reporting as of 31 December
2006 based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the Rio Tinto Group maintained,
in all material respects, effective internal control over financial reporting
as of 31 December 2006, based on criteria established in "Internal Control –
Integrated Framework" issued by the COSO. The Groups management is responsible
for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on managements assessment and
on the effectiveness of the Groups internal control over financial reporting
based on our audit.
We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting standards and principles. A companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting standards and principles, and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorised acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
PricewaterhouseCoopers
Chartered Accountants
Chartered Accountants
London, United Kingdom
Perth, Australia
27 June 2007
27 June 2007
In respect of the Board of Directors and Shareholders
of Rio Tinto plc
In respect of the Board of Directors and Shareholders
of Rio Tinto Limited
We have audited the accompanying balance sheets of
Minera Escondida Limitada as of June 30, 2006 and 2005, and the related statements
of income, equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements
are free of material misstatement. An audit includes consideration of internal
control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Minera Escondida Limitada as of June 30, 2006 and 2005, and the results of its operations
and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Notes to Financial Statements
June 30, 2006 and 2005
(in thousands of USD)
(1)
Description of Business
Minera Escondida Limitada (the Company or Escondida)
is a mining company engaged in the exploration, extraction, processing,
and marketing of mineral resources. The Company is currently exploiting
the Escondida copper ore body located in the Second Region of the Republic
of Chile, 170 kilometers southeast of the city of Antofagasta at an altitude
of 3,100 meters above sea level. The Company produces copper concentrates
and copper cathodes through an open-pit mining operation and cathode
treatment plants at the mine site. The concentrate also includes gold
and silver. The concentrate is transported by pipeline to the port facility
in Coloso near Antofagasta where it is filtered and shipped to the customers.
The copper cathodes are produced at an Oxide Plant, a heap leaching and
SX/EW facility, located at the mine site. The copper cathodes are transported
by rail to the port of Antofagasta for shipment to
customers.
The Company was
formed by public deed on August 14, 1985 as a partnership. As of June 30, 2006
and 2005, the Owners are as follows:
Percentage of
Equity %
BHP Escondida Inc.
57.5
Rio Tinto Escondida Limited
30.0
JECO Corporation
10.0
International Finance Corporation
2.5
Total
100.0
The company has completed several expansions. The Phase I expansion was completed in 1993, Phase II in 1994 and Phase III in 1998. On December 1, 1998, Escondida commissioned its Oxide Leach Plant, a heap leaching
operation and SX/EW plant. In January 1999, the Phase III.5 expansion was completed. The Phase IV expansion was completed in October 2002. On October 1, 2002, Minera Escondida Limitada merged with its related company Sociedad Contractual Minera
Escondida, which until that date, held the mining rights over the Escondida copper ore body.
Notes to Financial Statements
June 30, 2006 and 2005
(in thousands of USD)
(2)
Summary of Significant Accounting Policies
and
Practices
(a)
General
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The Company maintains accounting records in United States dollars,
the Companys functional currency, as authorized by the Companys Foreign Investment Contract with the Chilean government. Transactions in other currencies are recorded at actual rates realized. Year-end balances in Chilean pesos and other
currencies are translated at the applicable closing exchange rates.
(b)
Cash Equivalents
Cash equivalents of $12,077 and $152,140 at June 2006 and 2005, respectively, consist of short term investments with an initial term of less than one month in financial instruments issued by Commercial Banks
and Central Bank of Chile Papers. For the purpose of the statement of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
(c)
Trade Accounts Receivable
The accounts receivable balances at June 30, 2006 and 2005 include provisional invoices issued for copper concentrate and copper cathode shipments. Such invoices are based on the Companys weights and assays,
which are subject to review and final agreement by the customers. Under the terms of the sales contracts, the final prices to be received will also depend on the prices fixed for copper by independent metal exchanges, including the London Metal
Exchange, during the future quotation periods applicable to each delivery. At June 30, 2006 and 2005, the sales under provisional invoicing arrangements have been valued based on forward price. Refining, treatment and shipping charges are netted
against operating revenues in accordance with industry practices. Gold and silver revenues are deducted from the cost of products sold. The Company has not recorded an allowance for doubtful accounts, as management considers all accounts and notes
receivable are collectible.
(d)
Inventory
Minerals in process (including stockpile inventory), copper concentrate and copper cathodes are valued at the lower of cost or market value. Mining and milling costs and non cash costs are included in the value of the
inventories, as well as the allocated costs of central maintenance and engineering and the on-site general and administrative costs including all essential infrastructure support. Materials and supplies are valued at the lower of average cost and
estimated net realizable value.
(e)
Financial Instruments
The Company accounts for derivatives
and hedging activities in accordance with FASB Statement N° 133, Accounting
for Derivative Instruments and Certain Hedging Activities as amended,
which requires that all derivate instruments be recorded on the balance
sheet at their respective fair value. Derivatives, including those embedded
in other contractual arrangements but separated for accounting purposes
because they are not clearly and closely related to the host contract, are
initially recognized at fair value on the date the contract is entered into
and are subsequently remeasured at their fair value. The resulting gain
or loss on remeasurement is recognized in the income statement. The measurement
of fair value is based on quoted market prices. Where no price information
is available from a quoted market source, alternative market mechanisms
or recent comparable transactions, fair value is estimated based on the
Companys views on relevant prices.
The
Companys financial instrument policy is designed to achieve sales at
the average annual LME price shifted forward by one month and three months,
for cathodes and concentrates respectively, for all tonnes of copper shipped
in a given calendar year. In the case where copper is sold with a different
quotation period than our targeted standard price or shipments are not distributed
evenly over the year, paper adjustments will be made.
Financial instruments in revenue see note 2(q). Financial instruments in treatment charges see note 24.
MINERA ESCONDIDA LIMITADA
Notes to Financial Statements
June 30, 2006 and 2005
(in thousands of USD)
(f)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Cost includes capitalized interest incurred during the construction and development period and during subsequent expansion periods.
Plant and equipment with a useful life of less than the life of the mine are depreciated on a straight-line basis over the respective useful lives, ranging from 3 to 11 years. The remaining items of plant and equipment
are depreciated on a units-of-production basis over the life of the proven and probable copper reserves.
Mine development is depreciated on a units-of-production basis over the life of the proven and probable copper reserves. Land is not subject to depreciation.
Changes in estimates are accounted for over the estimated remaining economic life or the remaining commercial reserves of the mine as applicable.
Total depreciation and amortization for the years ended June 30, 2006 and 2005 was $280,324 and $209,040, respectively, and is included as a cost of the production of inventories.
Expenditures for replacements and improvements are capitalized when the assets standard of performance is significantly enhanced or the expenditure represents a replacement of a component of an overall tangible
fixed asset which has been separately depreciated.
(g)
Mining Property
At June 30, 2006 and 2005, the
Company has recognized certain costs relating to mining property as property,
plant and equipment. These include:
i)
Costs incurred in delineating and developing the Escondida copper ore body and neighboring mineral areas of interest (in areas which have been subject to feasibility studies), together with the cost of drilling
programs aimed at determining the extent of the mineral body, obtaining other technical data, and related direct expenses.
ii)
Other expenditure incurred in the pre-operating stage of the project.
(h)
Exploration
Exploration expenditures incurred in search of mineral deposits and the determination of the commercial viability of such deposits are charged against income as incurred until project feasibility is attained, from
which time onward such costs are capitalized.
At June 30, 2006 and 2005 there where no capitalized exploration expenditure.
(i)
Intangible Assets
This corresponds to the fair value of the water right at the date of acquisition. This asset is amortized on a units-of-production basis over the life of proven and probable copper reserves.
(j)
Other Assets
Other assets consist of medium-grade ore stockpile, deferred borrowing expenses, spare parts and other minor assets.
The medium-grade ore stockpiled for future use is valued at the lower of average production cost or market value.
Borrowing expenses corresponding to the issuance of debt are capitalized and amortized based on the interest method over the period of the debt.
Spare parts are assets that will not be consumed within one year from balance sheet date, and are stated at cost and net of a provision for inventory obsolescence.
MINERA ESCONDIDA LIMITADA
Notes to Financial Statements
June 30, 2006 and 2005
(in thousands of USD)
(k)
Deferred Stripping
Deferred stripping includes waste removal costs which are necessary to access the mineral resources to obtain economic benefits over future periods.
As of June 30, 2006 and 2005, the following costs have been recognized as deferred stripping:
i)
Stripping costs through October 1990.
ii)
Costs incurred in post-production mine development.
Pre stripping costs through October 1990 are included as part of property, plant and mine development. Post-production mine development costs are recorded in a long term deferred stripping account which is debited by
all the mining costs exclusively associated to the waste removal. Credits or amortization to the account is made based on a proportion of the specific period production in relation to the life of mine production. Inventory valuation is calculated
under weighted average price. Tonnes extracted have been defined as the unit of measure.
Amortization is calculated using the ratio of total estimated tonnes of waste to be removed to estimated tonnes of contained copper metal in the ore to be mined over the mine life (the strip ratio). The
contained copper metal and waste is defined in base to Ore Reserve Policy under Life of Mine at least every year, with this the company determines the absorption ratio (Waste / Contained copper metal) which Deferred Stripped is translated to
cost.
Our accounting for stripping cost smoothes the cost of waste-rock removal over the life of the mine, rather than expensing the actual waste removal cost incurred in each period.
Accounting practices in the mining industry vary for deferred stripping with some companies recognizing the total cost of waste removal expenditure in the period they occur. Such a policy, if followed, may result in
greater volatility in the period to period results of operations.
The waste to ore ratio for the mining activities in Escondida was 2.84 for the year 2005 and 2.89 for year 2006. These ratios were obtained from the life of mine plan for the respective year.
The criteria for defining ore and waste is based on material moved every month. Waste is defined as the material below the cut-off copper grade and not commercially exploitable by the existing technology.
Deferred stripping unamortized expenses are presented in the balance sheet as part of the Other non current Assets. Amortized expenses are reported as part of the cost of sales.
(l)
Income Taxes
Pursuant to its Foreign Investment Agreement with the Chilean government, the Company has opted to pay income taxes based on the generally applicable rate in effect, instead of the fixed rate set forth in such
agreement. As a result, current income taxes are calculated in accordance with existing Chilean tax legislation.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
MINERA ESCONDIDA LIMITADA
Notes to Financial Statements
June 30, 2006 and 2005
(in thousands of USD)
(m)
Reclamation and Environmental Costs
The Company provides for the costs of mine reclamation activities as required by various Chilean governmental agencies and Escondida owners regarding required minimum environmental business conduct. Certain reclamation
costs are incurred and expensed as part of ongoing mining operations where no current or future benefit is discernible. For other reclamation costs the estimated future cost of decommissioning and restoration, discounted to its net present value, is
provided and capitalized as part of the cost of each project. The capitalized cost is amortized over the life of the project and the increase in the net present value of the provision is treated as an operating expense.
Liabilities
for loss contingencies, including environmental remediation costs not within
the scope of FASB Statement No. 143, Accounting for Asset Retirement
Obligations, arising from claims, assessments, litigation, fines, and
penalties and other sources are recorded when it is probable that a liability
has been incurred and the amount of the assessment and/or remediation can
be reasonably estimated. Legal costs incurred in connection with loss contingencies
are expensed as incurred. Recoveries of environmental remediation costs
from third parties, which are probable of realization, are separately recorded
as assets, and are not offset against the related environmental liability,
in accordance with FASB Interpretation No. 39, Offsetting of Amounts
Related to Certain Contracts.
(n)
Severance Indemnities
The Company has an agreement with its employees to pay severance indemnities on termination of labor contracts. Provision has been made on the basis of one months remuneration per year of service, calculated on
the latest months remunerations.
(o)
Use of Estimates
The preparation of the financial statements requires the management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimation and assumptions include the carrying amount of property,
plant and equipment, mining property, exploration and intangibles; valuation allowances for receivables, inventories and deferred income tax assets; environmental liabilities; and obligations related to employee benefits. Actual results could differ
from those estimates.
(p)
Impairment of Long-Lived Assets
In accordance with FASB Statement
No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets,
long-lived assets, such as property, plant, and equipment (including mining
property and exploration), and purchased intangibles subject to amortization,
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying
amount of an asset to estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds
its estimated future cash flows, an impairment charge is recognized being
the amount by which the carrying amount of the asset exceeds the fair value
of the asset. Assets to be disposed of are separately presented in the balance
sheet and reported at the lower of the carrying amount or fair value less
costs to sell, and are no longer depreciated. The assets and liabilities
of a disposal group classified as held for sale are presented separately
in the appropriate asset and liability sections of the balance sheet.
(q)
Revenue Recognition
Revenue is recognized when title to Copper Concentrate and Copper Cathode passes to the buyer when the ships depart from the loading port. The passing of title to the customer is based on the terms of the sales
contract.
Under our copper concentrate sales contracts with smelters, final prices are set on a specified future quotational period, typically three months after the month of arrival. For copper cathode sales contracts, final
prices are typically one month after the month of arrival. Revenues are recorded under these contracts at the time title passes to the buyer based on the forward price for the expected settlement period. The contracts, in general, provide for a
provisional payment based upon provisional assays and quoted metal prices. Final settlement is based on the average applicable price for a specified future period, and generally occurs from four to six months after shipment in copper concentrates
and two months for copper cathodes. Final sales are settled using smelter weights, settlement assays (average of assays exchanged and/or umpire assay results) and are priced as specified in the smelter contract. The Companys provisionally
priced sales contain an embedded derivative that is required to be separated from the host contract for accounting purposes. The host contract is the receivable from the sale of concentrates measured at the forward price at the time of sale. The
embedded derivative does not qualify for hedge accounting. The embedded derivative is recorded as a receivable on the balance sheet and is adjusted to fair value through revenue and cost of sales (for the smelting and refining charges of the sales)
each period until the date of final copper settlement. The form of the material being sold, after deduction for smelting and refining is in an identical form to that sold on the London Bullion Market. The form of the product is metal in flotation
concentrate, which is the final process for which the company is responsible.
MINERA ESCONDIDA LIMITADA
Notes to Financial Statements
June 30, 2006 and 2005
(in thousands of USD)
(r)
Recently Issued Accounting Standards
In March 2005, the Emerging Issues
Task Force (EITF) of the FASB reached a consensus in Issue No. 04-6 Accounting
for Stripping Costs Incurred During Production in the Mining Industry
(EITF 04-6) that stripping costs incurred during the production phase of
a mine are variable production costs. As such, stripping costs incurred
during the production phase are treated differently to stripping costs incurred
during the development stage. This consensus is applicable for the financial
year beginning after 15 December 2005. The Company in adopting EITF 04-6
will retrospectively adjust the 2006 financial year to record a credit to
the income statement of $51,422 and a reduction to retained earnings
at 1 July 2005 of $492,533. For the 2007 year all ongoing stripping
costs will be recorded as production costs.
In
March 2006, the EITF of the FASB reached a consensus in Issue No. 06-3 How
Taxes Collected From Customers and Remitted to Governmental Authorities
Should be Presented in the Income Statement (That is, Gross versus Net Presentation)
(EITF 06-3). The disclosure required by the consensus will be applicable
for annual reporting periods after December 15, 2006. This permits companies
to elect to present on either a gross or net basis based on their accounting
policy. This applies to sales and other taxes that are imposed on and concurred
with individual revenue producing transactions between a seller and a consensus
would not apply to tax systems that are based on gross receipts or total
revenues. The Company is currently assessing the impact of EITF 06-3.
In
June 2006, the FASB Interpretation No. 48 Accounting for Uncertainty
in Income Taxes An Interpretation of FASB Statement No. 109 (FIN
48) was issued. FIN 48 required tax benefits from an uncertain position
to be recognized only if it is more likely than not that the position is
sustainable, based on its technical merits. The interpretation also requires
qualitative and quantitative disclosures, including discussion of reasonably
possible changes that might occur in recognized tax benefits over the next
12 months, a description of open tax years by major jurisdiction, and a
roll-forward of all unrecognized tax benefits. FIN 48 first applies for
the Groups financial year beginning 1 July 2007. The Company is currently
assessing the impact of adopting FIN 48.
In
February 2006, the FASB issued Statement of Financial Accounting Standard
No.155 Accounting for Certain Hybrid Financial Instrument (SFAS 155).
SFAS 155 provides entities with relief from having to separately determine
the fair value of an embedded derivate that would otherwise have to be bifurcated
from its host contract in accordance with SFAS 133. SFAS 155 allows an entity
to make an irrevocable election to measure such a hybrid financial instrument
at fair value in its entirety, with changes in fair value recognized in
earnings. Additionally, SFAS 155 requires that interest in securitized financial
assets be evaluated to identify whether they are freestanding derivatives
or hybrid financial instruments containing an embedded derivative that requires
bifurcation (previously these were exempt from SFAS 133). SFAS 155 is effective
for all financial instruments acquired, issued or subject to a remeasurement
event occurring after the beginning of an entitys first fiscal year
that begins after 15 September 2006. The Company is currently assessing
the impact of adopting SFAS 155.
In September 2006, the SEC issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements (SAB
108). SAB 108 provides interpretive guidance on how the effects
of prior-year uncorrected misstatements should be considered when quantifying
misstatements in the current year financial statements. SAB 108 requires
registrants to quantify misstatements using both an income statement
(rollover) and balance sheet (iron curtain) approach
and evaluate whether either approach results in a misstatement that,
when all relevant quantitative and qualitative factors are considered,
is material. If prior year errors that had been previously considered
immaterial now are considered material based on either approach, no restatement
is required so long as management properly applied its previous approach
and all relevant facts and circumstances were considered. If prior years
are not restated, the cumulative effect adjustment is recorded in opening
accumulated earnings (deficit) as of the beginning of the fiscal year
of adoption. SAB 108 is effective for fiscal years ending on or after
November 15, 2006, with earlier adoption encouraged. The Company is currently
in the process of assessing the impact the adoption of SAB 108 will have
on its financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting
for Servicing of Financial Assets An Amendment of FASB Statement
No. 140 (SFAS 156). SFAS 156 requires that all separately
recognized servicing assets and servicing liabilities be initially measured
at fair value, if practicable. The statement permits, but does not require,
the subsequent measurement of servicing assets and servicing liabilities
at fair value. SFAS 156 is effective as of the beginning of the first
fiscal year that begins after September 15, 2006, with earlier adoption
permitted. The Company does not believe the adoption of SFAS 156 will
have a significant effect on its financial statements.
In September 2006, the FASB issued SFAS No.
157, Fair Value Measurements (SFAS 157). SFAS
157 defines fair value, establishes a framework for measuring fair value
and expands disclosure of fair value measurements. SFAS 157 applies under
other accounting pronouncements that require or permit fair value measurements
and accordingly, does not require any new fair value measurements. SFAS
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. The Company is currently in the process of assessing
the impact the adoption of SFAS 157 will have on its financial statements.
Notes to Financial Statements
June 30, 2006 and 2005
(in thousands of USD)
(7)
Other Current Assets, Continued
(a)
Prepayment and deferred expenses.
Details
of this account include:
2006
2005
Prepayment for Power line
9,834
10,493
Prepayment for Mineral Rights
1,551
1,297
Deferred borrowing expenses
1,881
4,259
Derivative asset (price participation in refining)
41,430
—
Total
54,696
16,049
(8)
Property, Plant and Mine Development
Property, plant and mine development is summarized as follows:
2006
2005
Land
4,252
4,252
Mining development costs (pre-production)
238,379
238,379
Machinery, vehicles and installations
4,030,912
3,640,934
Construction in progress
1,070,663
736,223
Sub total
5,344,206
4,619,788
Accumulated depreciation and amortization
(1,965,525
)
(1,697,339
)
Total
3,378,681
2,922,449
Depreciation and amortization expense amounted to $274,740 for the year ending June 30, 2006 and $204,290 for the year ending June 30, 2005.
Interest capitalized for
the years ending June 30,
2006 and 2005 was $39,359 and $12,328, respectively.
The asset retirement obligation included in property,
plant and mine development, net of accumulated amortization was $42,083 in 2006 and $19,679
for 2005.
Notes to Financial Statements
June
30, 2006 and 2005
(in thousands of USD)
(9)
Deferred Stripping, net
Deferred stripping is summarized as follows:
2006
2005
Post-production mine development expenditures at beginning of year
492,533
463,100
Deferred expenditure incurred during the year
340,342
301,758
Charged to production cost during the year
(391,764
)
(272,325
)
Post-production mine development expenditures at end
of year
441,111
492,533
The stripping waste/ore ratio according to life
of mine applicable for year 2005 and 2006 was 2.84 and 2.89, respectively.
The variance in year 2006 is due to changes to the new life of mine plan
(LOM plan) which moves
more waste to obtain the same level of ore tonnes.
The deferred stripping
absorption rate in line with the life of mine for year 2005 was 11.54%. This
ratio was increased
for year 2006 to 11.88% because of the new LOM plan.
(10)
Intangible Assets, net
Intangible assets are summarized as follows:
2006
2005
Water rights – at cost
75,886
75,886
Accumulated amortization
(18,917
)
(13,332
)
Total intangible assets, net
56,969
62,554
The above water rights were acquired from Minera
Zaldívar in November 2000 and are related to operations of Phase IV
of the mining project.
Aggregate amortization
expense for amortizing intangible assets was $5,584 and $4,750 for
the years ended June 30, 2006 and 2005, respectively. For each of the next
5 years amortization expenses for
intangibles
is expected to be $3,748 in 2007, $3,528 in 2008, $3,390 in 2009, $3,298
in 2010 and $3,298 in 2011 approx.
(11)
Other Assets, net (Non current)
Other assets are summarized as follows:
2006
2005
Medium-grade ore stockpile (a)
86,419
75,808
Deferred borrowing expenses (b)
832
2,553
Spare parts (c)
33,734
23,015
Other assets (d)
13,720
11,499
Total
134,705
112,875
(a)
Medium-grade ore stockpile
During mining operations the portion of ore mined below
a specific copper grade is stockpiled in the medium-grade ore stockpile for future
use. This ore is valued as described in note 2(j).
(b)
Deferred borrowing expenses
The amortization expense for the periods ending June 30, 2006 and 2005 amounts to $1,721 and $2,975, respectively, calculated as described in note 2(j).
(c)
Spare parts
Corresponds to spare parts that will not be consumed within one year from balance sheet date.
(d)
Other assets
2006
2005
Recoverable withholding taxes (*)
4,938
5,497
Notes receivable employee housing program and Other
8,782
6,002
Total other assets
13,720
11,499
(*)
The Chilean Internal Revenue Service allows for the recovery of withholding taxes relating to technical service contracts over the tax life of the related asset. The non-current portion of recoverable withholding taxes
has been included under other assets.
Notes to Financial Statements
June 30, 2006 and 2005
(in thousands of USD)
(13)
Income Taxes
(a)
Current income taxes payable
Income tax expense attributable to income from continuing operations of $1,029,557 and $389,713 for the years ended June 30, 2006 and 2005, respectively, differed from the amounts computed by applying the
Chilean income tax rate of 18.09% (17% for period to 31 December; 18.66% for period 1 January to 30 June) in 2006, (tax rate for the year ended June 30 2005 is 17%), to pretax income from continuing operations as a result of the
following:
2006
2005
Computed expected tax expense
997,710
386,447
Increase (reduction) in income taxes resulting from:
Adjustment to deferred tax assets and liabilities from increase in tax rate
36,692
—
Other, net
(4,845
)
3,266
Computed effective tax expense
1,029,557
389,713
On 1 January 2006 the Chilean tax
rate for the Company increased from 17% to 18.66% (Calendar year 2006 & 2007)
and to 20.32% (from calendar year 2008 to 2018), following the introduction
of a mining tax. The effect of this on current income tax from 1 January
2006 is included in Computed expected tax expense.
(b)
Income tax charge for the year
The income tax charge for the year
is summarized as follows:
2006
2005
Current income taxes provision
935,722
361,050
Deferred income taxes
93,835
28,663
Total
1,029,557
389,713
All income tax expense is domestic tax. There is no foreign income tax expense.
In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future
taxable income, and tax planning strategies in making this assessment. In order
to fully realize the deferred tax asset, the Company will need to generate future
taxable income of US$275,650. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely than
not that the Company will realize the benefits of these deductible differences.
The amount of the deferred
tax asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carry forward period are reduced.
Notes to Financial Statements
June 30, 2006 and 2005
(in thousands of USD)
(14)
Accrued Liabilities and Withholdings
Accrued liabilities
and withholdings are summarized
as follows:
2006
2005
Accrued liabilities and withholdings for employee compensation
36,888
29,871
Accrued project and vendor costs
47,342
71,528
Other
2,785
2,759
Total
87,015
104,158
(15)
Accruals and Reclamation Reserve
Details of this account
include:
2006
2005
Restoration and Rehabilitation (a)
86,892
61,654
Deferred customs duties and other
9,776
10,821
Total
96,668
72,475
(a)
Provision for restoration and rehabilitation
movements
are summarized:
2006
2005
Opening balance
61,654
59,924
Accretion
2,171
2,097
Increases to the provision
24,161
—
Payments
(1,094
)
(367
)
Closing balance
86,892
61,654
The estimated undiscounted value of the restoration
& rehabilitation provision is US$171,000 for the period ending 30 June
2005 and US$287,080 for June 2006. The discount rate applied to the cash
flows is 3.5% and 3.72% respectively and it is not expected to have relevant
payments in the next five years.
The provision for restoration & rehabilitation
includes the dismantling of all the mine site facilities, including Los Colorados
and Laguna Seca plant, the Cathode oxide plant, Cathode Sulphide Leach plant,
a portion of the Coloso port facilities and the rehabilitation of the Salar
de Punta Negra environment. Refer to note 8 for details of asset retirement
obligation.
(16)
Short Term Debt
At the close of 2006
and 2005, the Company records
short term debt as follows:
Notes to Financial Statements
June 30, 2006 and 2005
(in thousands of USD)
(17)
Long Term Debt
The balances of long-term debt
outstanding are summarized as follows:
(a)
Senior unsecured debt
The balances of the senior unsecured debt outstanding
(including the short-term position) are summarized as follows:
Current rate
2006
2005
BNP Paribas (1998)
**L +0.25
%
275,000
275,000
The Bank of Tokyo - Mitsubishi Ltd. (2001)
**L+0.175
%
87,500
112,500
Japan Bank for International Cooperation (2001)
**L +0.25
%
262,500
297,500
Kreditanstalt für Wiederaufbau (2001)
**L +0.275
%
137,500
162,500
The Bank of Tokyo - Mitsubishi Ltd. (2005)
**L +0.275
%
45,000
45,000
Japan Bank for International Cooperation (2005)
**L +0.20
%
105,000
105,000
Sub total
912,500
997,500
Less:
Short term portion
(85,000
)
(85,000
)
Total
827,500
912,500
(**)
L: LIBOR 30 days
On June 12, 1998 the Company entered into
an unsecured loan agreement for the amount of $275 million with BNP
Paribas. As at June 30, 2006 the interest rate is LIBOR + 0.25%. The
loan is due for repayment
in June 2008 (full amount).
On September 14, 2001, the Company entered
into a loan agreement for the amount of $500 million, of which $350
million is with Japan Bank for International Cooperation, and $150
million with a syndicate of banks, with The Bank of Tokyo-Mitsubishi
Ltd. being the agent bank. At June 30, 2003, the total loan had been
drawn down. The loan with Japan Bank for International Cooperation is
payable in 20 semi-annual payments commencing March 1, 2004 and bears
interest at LIBOR (180-day) plus 0.25%. The syndicate loan with The Bank
of Tokyo-Mitsubishi Ltd. as lead bank is payable in 12 semi-annual payments
commencing March 1, 2004, and at commencement bore interest at LIBOR
(180-days) + 0.9%. On March 2006 the interest rate was renegotiated and
decreased to LIBOR (180 days) + 0.175%. The outstanding balance as of
June 30, 2006 was $350 million (June 30, 2005: $410
million).
On January 31, 2005 the company entered into
an unsecured loan agreement for the amount of $300 million of which $210
million is with Japan Bank for International Cooperation and $90
million with a syndicate of banks, with The Bank of Tokyo-Mitsubishi
Ltd being the agent bank. The loan with Japan Bank for International
Cooperation bears interest at LIBOR (180 days) + 0.20% and will mature
after 12 years commencing 31 January 2010. The syndicate loan with The
Bank of Tokyo-Mitsubishi Ltd as lead bank bears interest at LIBOR (180
days) + 0.275% and will mature in 5 years. The balance outstanding as
of June 30 2006 was $150 million
(June 30, 2005: $150 million).
On September 14, 2001, the Company entered
into a loan agreement for the amount of $ 200 million with Kreditanstalt
für Wiederaufbau. The loan is payable in 16 semi-annual payments
commencing April 1, 2004. At commencement the loan bore interest at LIBOR
(180 days) + 0.75% . On December 2005 the interest rate was renegotiated
and decreased to a rate of LIBOR (180 days) + 0.275% . The maturity of
the loan did not change. The balance outstanding at June 30,
2006 was $137.5 million (June 30, 2005 $162.5 million).
(b)
At June 30, 2006, the Company maintains unused lines of credit with Banco de Chile, Banco Scotiabank, Banco Santander Santiago, Banco Bice, Banco del Estado and Banco BCI totaling $60 million. These lines of credit
are not committed.
The above loans in (a) and (b) are subject to
certain
covenants, the most restrictive of which require that:
i)
the total debt to Earnings Before
Interest, Tax, Depreciation and Amortization (EBITDA) ratio be no greater
than 2.75 to 1.0 at June 30, 2001, 3.50 to 1.0 at June 30, 2002, 3.00
to 1.0 at June 30, 2003 and 2.75 to 1.0 thereafter; and,
ii)
the net worth of the Company may
not be less than US$900 million.
The senior unsecured debt ranks pari passu
with
any other senior unsecured debt.
The Company was in compliance with all debt
covenants
as of June 30, 2006 and June 30, 2005.
Notes to Financial Statements
June
30, 2006 and 2005
(in thousands of USD)
(17)
Long Term Debt, Continued
(c)
Subordinated Owners debt
2006
2005
Lender
International Finance Corporation
10,250
11,262
Rio Tinto Finance PLC
123,000
135,150
JECO Corporation
41,000
45,050
BHP International Finance Corporation
235,750
259,038
Sub total
410,000
450,500
Less:
Short term portion
(48,000
)
(40,500
)
Total long-term portion
362,000
410,000
Drawdowns of subordinated Owners debt have
been made as follows:
•
US$295 million during December 1998, payable
in 30 semi-annual payments commencing on June 15, 1999. Interest accrues
at LIBOR plus 4% and is payable semi-annually on June 15 and December
15.
•
US$200 million during May and June 2000,
payable in 30 semi-annual payments commencing on December 15, 2000. Interest
accrues at LIBOR plus 4% and is payable semi-annually on June 15 and
December 15.
•
US$150 million on May 11, 2001, grace period
of 5 years for principal payable in 20 semi-annual payments commencing
on June 15, 2006. Interest accrues at
LIBOR plus 4% and is
payable semi-annually on June 15 and December 15.
Under the terms of the subordinated loan agreement,
the borrower can elect to capitalize interest due on each payment date to existing
debt. Interest payable is shown as a current liability until such time as
the election is made or until such interest is paid.
No interest was capitalized for the years ended June 30, 2006 and 2005.
The subordinated debt is unsecured.
Notes to Financial Statements
June
30, 2006 and 2005
(in thousands of USD)
(17)
Long Term Debt, Continued
(d)
Scheduled principal payments on long-term debt (including short-term portion) at June 30, 2006 are as follows:
Senior
Subordinated
Total
Unsecured debt
owners debt
Principal payments during the year ending June 30
2007
85,000
48,000
133,000
2008
360,000
48,000
408,000
2009
85,000
48,000
133,000
2010
124,062
48,000
172,062
2011
73,125
48,000
121,125
2012 and after
185,313
170,000
355,313
Total
912,500
410,000
1,322,500
(18)
Bonds
Bond obligations at June 30, 2006
and 2005 are as follows:
2006
2005
Total nominal value
200,000
200,000
Discount at issue
(6,510
)
(6,510
)
Net proceeds
193,490
193,490
Accumulated amortization of discount
5,088
4,329
Sub total
198,578
197,819
Less:
Principal repaid as of June 30
(140,000
)
(100,000
)
Current portion of principal outstanding
(40,000
)
(40,000
)
Total long-term portion
18,578
57,819
On October 22, 1999 the Company registered a Chilean
bond issuance (N°218) with the Chilean Superintendence of Stock Corporations
and Insurance Companies (SVS). The issuance was made as follows:
Number of
Bond value
Total nominal
Outstanding
Bonds
value at issue
nominal value
Series
A1
1,000
10
10,000
3,000
A2
400
100
40,000
12,000
A3
100
500
50,000
15,000
A4
100
1,000
100,000
30,000
1,600
200,000
60,000
Each series of bonds is being amortized over 5 years in 10 semi-annual installments commencing May 15, 2003. Interest accrues at 7.5% and payments are made semi-annually on May 15 and November 15. The Company had
accrued interest of $552 and $921 at June 30, 2006 and 2005, respectively. No guarantees have been given.
The bonds are subject to certain restrictive financial covenants:
i)
The ratio of debt to Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) for the last twelve months must not exceed 6, based on the Chilean GAAP Financial Statements at December 31 of each
year that the bonds are outstanding.
ii)
The Companys net worth must not be less than $800 million.
The Company was in compliance
with all bond covenants as of June 30, 2006 and June 30, 2005.
Notes to Financial Statements
June
30, 2006 and 2005
(in thousands of USD)
(19)
Sundry Creditors Long-Term
Sundry Creditors are summarized
as follows:
2006
2005
Liability outstanding for water rights acquired
59,582
63,326
Less:
Short-term portion (included in
Sundry creditors-current)
(4,055
)
(3,744
)
Total
55,527
59,582
The water rights purchased from Compania Minera
Zaldivar is payable in 15 annual installments of $9,000 commencing
July 1, 2001. Interest is calculated using the imputed interest method
using a discount rate of 8.3%.
(20)
Interest Expense
Interest expense is summarized as
follows:
2006
2005
Interest incurred
(96,750
)
(80,878
)
Interest capitalized in fixed assets
39,359
12,328
Total
(57,391
)
(68,550
)
(21)
Capital
Capital has been contributed as
follows:
Initial capital (*)
65,727
Capitalization of retained earnings
by public deed dated:
July 27, 1988
1,497
October 7, 1988
22,877
February 6, 1989
6,110
April 7, 1989
6,013
March 30, 2001
161,000
December 21, 2001
196,700
December 19, 2002
54,578
December 30, 2003
16,700
December 30, 2004
16,700
Capital as of June 30, 2005
547,902
Capitalization of retained earnings
by public deed dated:
December 30, 2005
50,000
Capital as of June 30, 2006
597,902
(*)
The Companys initial capital of $65,727 was contributed by the former partners Minera Utah de Chile Inc. and Getty Mining (Chile) Inc., and relates to property, plant and equipment, cash advances and
exploration costs.
According to the Foreign Investment Contract between the state of Chile and the Minera Escondida Owners, the financial debt / equity ratio must not be lower of 75% - 25% by the end of every calendar year. The
compliance by the Foreign Investors with the referred percentage is verified by the Executive Vice Presidency of the Foreign Investment Committee on December 31 of each year. To comply with this legal requirement, the company has capitalized the
retained earnings mentioned above.
Notes to Financial Statements
June 30, 2006 and 2005
(in thousands of USD)
(22)
Fair Value of Financial Instruments
The Companys
financial instruments are composed of cash and cash equivalents, other
receivables, recoverable taxes, accounts payable, other payables, due to
and from related companies and accrued expenses (non
derivatives). In managements opinion, the carrying amount approximate the
fair value due to their short-term nature of this instrument. In addition, the
long-term debt does not present a significant difference between its carrying
amount and its fair value, based on the re-negotiation performed and the current
market rates.
(23)
Commitments and Contingencies
(1)
At June 30, 2006, the Company had entered into long-term contracts for the sale of approximately 9.5 million dry metric tons of concentrates in total, in predetermined annual amounts through the year 2015. Under the
terms of the contracts, annual prices are based upon prevailing market prices.
(2)
Minera Escondida Limitada (MEL) entered into a Sales Agency Agreement for export tonnage with BHP Billiton Marketing A. G., a related party. This agreement, dated 1 January 2002, replaces the Sales Agency Agreement
between MEL and BHP Billiton Minerals International Inc., originally signed in October 1985 between MEL and Utah International Inc., and amended in 1995.
The sales commission is variable and can be up to 0.5% of monthly sale volumes.
Shipping operations for export tonnage are covered by a Shipping Agency Agreement
between Minera Escondida Limitada and BHP Billiton Marketing A.G. dated 1 January
2002, with a rate of US$68/wmt. Sales and shipping operations of Escondida
within Chile are covered by a Domestic Marketing Services Agreement signed between
Minera Escondida Limitada and BHP Chile Inc., dated 1 January 2002, with a rate
of 0.125% of sales volumes.
(3)
On October 2004, Minera Escondida Limitada was sued by Mr. Juan Cabezas who alleges that Escondida infringed his intellectual property rights and breached confidentiality in relation to the installation of certain acid
fog collection devices at Escondidas Oxide plant in Chile. The devices are being installed in the Oxide plant by contractor SAME Limited.
The amount in dispute is approximately US$27 million.
The trial is in its first instance, the discussion period has ended and now is in the evidentiary period. As at June 30, 2006 there is no provision recorded.
On March 2005, Minera Escondida Limitada (MEL) was sued by Thai Copper Industries Public Company Limited (TCI) who alleges that MEL has breached its obligation to sell quantities of copper concentrates to TCI on a
yearly basis. The marketing contract was entered into on 23 March 1998 for a term of 5 years, commencing 1 January 1999. TCI was to take delivery of the copper concentrate at its smelter (which was not yet built) in Thailand. The contract was
amended on December 17, 1998 to delay the commencement date to January 1, 2000 as TCIs smelter was not built and could not take any deliveries. The amendment provided that if TCI notified MEL that the completion of the smelter was to be later
than January 1, 2001, MEL could elect to terminate the marketing contract. TCI notified MEL on February 5, 2003 that it expected production at its new smelter to commence in the 2nd quarter of 2004. MEL terminated the marketing contract by letter
dated April 2, 2003. TCI alleges that MEL had no right to terminate the contract and seeks recovery of US$30 million in alleged damages.
The dispute is being heard by the International Centre for Dispute Resolution in New York. The hearing will take place on December 11, 12 and 13, 2006. As at June 30, 2006 there is no provision recorded.
MEL is currently in conversations with TCI in order to end this trial. The settlement will have no obligations for Escondida and merely entails TCI to withdraw the litigation.
(24)
Financial Instruments
The Company is exposed
to movements in the prices of the products it produces which are generally
sold as commodities on the world market. Relevant information on the Companys
material cash-settled commodity contracts, which have been recognized at
fair value in the income statement, is provided below:
Buy fixed/sell
Sell fixed/buy
Forwards
floating
floating
Volume (000 tonnes)
70
125
Average price of fixed contract (US$)
7
7
Term to maturity (years)
0-1
0-1
Notional amount of fixed contract (US$M)
479
854
Price participation clauses are part of the
TC/RC (treatment and refining charges) element of concentrate sales contracts.
These price participation clauses include an embedded derivative, and
as such have been marked to fair value for the reporting period. The
impact of this adjustment can be found in the income statement under Unrealized
fair value change derivatives, while the balance sheet impact
is recorded under Financial Liabilities.
Supplementary Information – Unaudited
June 30, 2006 and 2005
(in thousands of USD)
Mining Operations Information
BHP Billiton owns 57.5% of Minera Escondida. The other
42.5% is owned by the affiliates of Rio Tinto plc (30%): JECO, a subsidiary of
Mitsubishi Corporation (10%) a consortium represented by Mitsubishi Corporation
(7%), Mitsubishi Materials Corporation (1%), Nippon Mining and Metals (2%) and
the International Finance Corporation, (2.5%).
Minera Escondida Limitada holds
a mining concession from the Chilean state that remains valid indefinitely
(subject to
payment of annual fees).
The mine is accessible
by public / private road.
Original construction
of the operation was completed in 1990. The project has since undergone four
phases of expansions at an additional cost of $2,125 million plus $451
million for the construction of an oxide
plant.
In October 2005, the Escondida Norte expansion
was completed at a cost of $431 million.
In
June 2006, the Escondida Sulphide Leach copper project achieved first production.
The approved cost for the project was $870 million.
Escondida has two processing streams: two concentrator plants in which high quality copper concentrate is extracted from sulphide ore through a floatation extraction process; and a solvent extraction plant in which
leaching, solvent extraction and electrowinning are used to produce copper cathode.
Nominal production capacity is 3.2 Mtpa of copper concentrate and 150,000 tonnes per annum of copper cathode.
Escondida Sulphide Leach copper plant has the capacity to produce 180,000 tonnes per annum of copper
cathode.
Separate transmission circuits provide
power for the Escondida mine facilities. These transmission lines, which are
connected to Chiles northern power grid, are company-owned and are sufficient
to supply Escondida post Phase IV. Electricity is purchased under contracts with
local generating companies.
Ore Reserves
The
ore reserves tabulated are all held within existing, fully permitted mining tenements.
The Companys minerals leases are of sufficient duration (or convey a legal
right to renew for sufficient duration) to enable all reserves on the leased
properties to be mined in accordance with current production schedules.
All of the ore reserve figures presented represent estimates at 30 June 2006. All tonnes and grade information presented have been rounded; hence small differences may be present in the totals. In addition, all reserve
tonnages and grades include dilution and are quoted on a dry basis, unless otherwise stated.
No third party audits have been carried out specifically for the purpose of this disclosure.
The reported reserves contained in this annual report do not exceed the quantities that, it is estimated, could be extracted economically if future prices were at similar levels to the average historical prices for
traded metals for the three years to 31 Dec 2005. Current operating costs have been matched to the average of historical or long term contract prices in accordance with Industry Guide 7.
The three year historical average prices used for each commodity to estimate, or test for impairment of, the reserves of traded metals contained in this annual report are as follows:
Supplementary Information - Unaudited
June 30, 2006 and 2005
(in thousands of USD)
Notes
to previous table
1)
% TCu per cent total copper,
%SCu per cent soluble copper
2)
Approximate drill hole spacing used
to classify the reserves is:
Deposit
Proven Reserve
Probable Ore Reserve
Escondida
Sulphide: 60m x 60m
Sulphide: 100m x 100m
Sulphide leach: 60m x 60m
Sulphide leach: 105m x 105m
Oxide: 45m x 45m
Oxide: 50m x 50m
Escondida Norte
Sulphide: 60m x 60m
Sulphide: 100m x 100m
Sulphide leach: 60m x 60m
Sulphide leach: 110m x 110m
Oxide: 45m x 45m
Oxide: 50m x 50m
3)
Metallurgical recoveries for the operations are:
Deposit
%Cu
Escondida:
Sulphide
85% of TCu;
Sulphide Leach
34% of TCu;
Oxide
75% of TCu
Escondida Norte:
Sulphide
85% of TCu;
Sulphide Leach
34% of TCu;
Oxide
75% of TCu
4)
Changes in the Escondida and Escondida Norte reserves
from 2005 include an updated geological model using new data, updated cost
and price estimates, full valuation of sulphide leach ore in ultimate pit
limits, and variable cut-off grade of sulphide mill ore. Oxide ore scheduled
for mining after closure of oxide leach plant has been reclassified and
reported as Sulphide Leach. Part of the Sulphide Leach stockpile has been
removed from Reserve classification
due to uncertainty in tonnage, grade and metallurgical properties, pending additional
study. In future reserve reports, the two mines will be combined into a
single reportable reserve. For this years reporting both mines are reported with the
combined total. Economic and metallurgical studies are being conducted to evaluate optimal sulphide leach cut-off grades, which may lead to revision in the reserve. The price used for Escondida and Escondida Norte was Cu =
US$1.26/lb.
5)
Escondida production rate and mine life estimate is based on the current life-of-mine plan which uses a future variable production rate from both the Escondida and Escondida Norte pits. The current combined nominal
production rate available to the operation is 216 million tonnes per annum.
Proven reserves in stockpiles
Proven reserves in stockpiles at June 30, 2006
are:
Millions of dry
Escondida Copper
metric tonnes
% TCu
% SCu
Sulphide Ore
16.3
1.12
—
Sulphide Leach
164.7
0.51
—
Oxide Ore
61.1
0.72
0.68
These reserves will be used as follow:
Sulphide Ore
13 Years
Sulphide Leach
13 Years
Oxide Ore
8 Years
No stockpiles existed at June 30,
2006 for Escondida Norte.
Incorporated 30th March, 1962 (New Articles of Association adopted
by Special Resolution
passed on 11th April 2002 and amended on
14 April 2005 and 13 April 2007)
RIO
TINTO
No. 719885 The Companies Act 1985
MEMORANDUM
AND ARTICLES OF
ASSOCIATION OF
Rio Tinto plc
Incorporated 30th March, 1962 (New Articles of Association adopted
by Special Resolution
passed on 11th April 2002 and amended on
14 April 2005 and 13 April 2007)
(passed on 11 April 2002, 14 April 2005 and 13 April 2007)
RIO TINTO PLC
RESOLUTION
(passed on 11 April 2002)
The following resolution proposed at the fortieth Annual General Meeting of the Company duly convened and held on 11 April 2002 at the Queen Elizabeth II Conference Centre, Broad Sanctuary, London SW1 was duly passed as an Ordinary Resolution on that day by Rio Tinto plc shareholders and became effective on 18 April 2002 following the Annual General Meeting of Rio Tinto Limited held on that date:
Resolution 4
That
(a)
subject to the passing of resolution 5, the authorised share capital of the Company be increased from £142,123,283.20 to £142,123,283.30 by the creation of one DLC Dividend Share of 10p, having the rights and subject to the restrictions set out in the new articles of association of the company referred to in paragraph (a) of resolution 5 below; and
(b)
subject to the passing of resolution 5, Rio Tinto Limited be authorised to create and issue a new class of share, entitled a “DLC Dividend Share”, having the rights and subject to the restrictions proposed to be incorporated into the constitution of Rio Tinto Limited referred to in paragraph (b) of resolution 5 below.
The following resolutions proposed at the fortieth Annual General Meeting of the Company duly convened and held on 11 April 2002 at The Queen Elizabeth II Conference Centre, Broad Sanctuary, London SW1 were duly passed as Special Resolutions on that day by Rio Tinto plc shareholders and became effective on 18 April 2002 following the Annual General Meeting of Rio Tinto Limited held on that date:
Resolution 5
That
(a)
subject to the passing of resolution 4, the articles of association contained in the document submitted to the meeting, marked ‘B’ and initialled by the Chairman for the purpose of identification, be adopted as the articles of association of the Company in substitution for and to the exclusion of the existing articles of association of the Company; and
(b)
subject to the passing of resolution 4, the amendments to the constitution contained in the document submitted to the meeting, marked ‘C’ and initialled by the Chairman for the purpose of identification, be approved and such amendments be made to the constitution of Rio Tinto Limited, provided that, if resolution 6 is passed, such new articles of association and amended constitution shall also incorporate the amendments made by resolution 6.
Resolution 6
That
(a)
the authority and power conferred on the directors by Article 75 of the Company’s articles of association be amended so that, subject to the exceptions set out in that Article, the ordinary remuneration of the directors, shall not (when aggregated with any fees received by the directors in their capacity as directors of Rio Tinto Limited) exceed £750,000 per annum in aggregate and so that Australian dollar amounts shall be converted at the rate of £1=A$2.75; and
(b)
Rule 89 of the Rio Tinto Limited constitution be amended by deleting the conversion rate “£1=$2.10” and replacing it with “£1=$2.75”.
At the forty-third Annual General Meeting of the Company duly convened and held on 14 April 2005 at The Queen Elizabeth II Conference Centre, Broad Sanctuary, London SW1, the following resolutions were duly passed as Special Resolutions:
Resolution 2
That the authority and power conferred on the directors in relation to rights issues and in relation to the Section 89 Amount by paragraph (B) of Article 9 of the Company’s articles of association be renewed for the period ending on the date of the annual general meeting in 2006 or on 13 April 2006, whichever is the later, and for such period the Section 89 Amount shall be £6.90 million.
Resolution 3
(a)
That Rio Tinto plc, Rio Tinto Limited and any subsidiaries of Rio Tinto Limited be and are hereby authorised to purchase ordinary shares of 10p each issued by Rio Tinto plc (“RTP Ordinary Shares”), such purchases to be made, in the case of Rio Tinto plc, by way of market purchase (within the meaning of Section 163 of the Companies Act 1985), provided that this authority shall be limited
(i)
so as to expire on 13 October 2006;
(ii)
so that the number of RTP Ordinary Shares which may be purchased pursuant to this authority shall not exceed 106.8 million RTP Ordinary Shares (representing approximately ten per cent of the issued share capital of the Company as at 14 February 2005);
(iii)
so that the maximum price payable for each such RTP Ordinary Share shall be not more than five per cent above the average of the middle market quotations for RTP Ordinary Shares as derived from the London Stock Exchange Daily Official List during the period of five business days immediately prior to such purchase; and
(iv)
so that the minimum price payable for each such RTP Ordinary Share shall be 10p;
(b)
That Rio Tinto plc be and is hereby authorised to purchase off-market from Rio Tinto Limited and any of its subsidiaries any RTP Ordinary Shares acquired under the authority set out under (a) above on the terms set out in the proposed agreement between Rio Tinto plc and Rio Tinto Limited (a draft of which has been produced to the meeting and is for the purpose of identification marked ‘A’ and initialled by the chairman), such authorisation to expire on 13 October 2006 and such proposed agreement be hereby approved for the purpose of Section 165 of the Companies Act 1985.
The following resolutions proposed at the forty-third Annual General Meeting of the Company duly convened and held on 14 April 2005 at the Queen Elizabeth II Conference Centre, Broad Sanctuary, London SW1 were duly passed as Special Resolutions on that day by Rio Tinto plc shareholders and became effective on 29 April 2005 following the Annual General Meeting of Rio Tinto Limited held on that date:
Resolution 4
That, subject to the consent in writing of the holder of the Special Voting Share, approval is hereby given to buy-backs by Rio Tinto Limited of fully paid ordinary shares in Rio Tinto Limited (“RTL Ordinary Shares”) in the 12 month period following this approval:
(a)
under one or more off-market buy-back tender schemes in accordance with the terms described in the Explanatory notes which accompany this Notice (“the Buy-Back Tenders”), but only to the extent that the number of RTL Ordinary Shares bought back under the Buy-Back Tenders, together with the number of RTL Ordinary Shares bought back on-market by Rio Tinto Limited, does not exceed in that 12 month period ten per cent of the minimum number of RTL Ordinary Shares on issue (excluding from the calculation of that minimum number for all purposes those RTL Ordinary Shares held by or on behalf of Tinto Holdings Australia Pty Limited (“THA”) or any other subsidiary of Rio Tinto plc during such period; and
(b)
following any Buy-Back Tender, from THA upon the terms and subject to the conditions set out in the draft buy-back agreement between Rio Tinto Limited and THA (entitled ‘THA Matching Buy-Back Agreement’), a draft copy of which has been produced to the meeting and for the purposed of identification, market ‘B’ and initialled by the Chairman.
Resolution 5
That, subject to the consent in writing of the holder of the Special Voting Share and subject to the passing of resolution 6, Article 33(A)(iii) of the Company’s articles of association and Rule 7(a)(iii) of Rio Tinto Limited’s constitution each be amended by adding after the words “of its own ordinary shares”, the following:
“(except for such a purchase at, around or below prevailing market prices for those shares where the purchase occurs in accordance with Applicable Regulation).”
That, subject to the consent in writing of the holder of the Special Voting Share and subject to the passing of resolution 5, approval is hereby given for the following amendments to the DLC Merger Sharing Agreement dated 21 December 1995 (the “Sharing Agreement”) between the Company and Rio Tinto Limited:
(a)
adding the following words to the end of Clause 5.1.2 (b) of the Sharing Agreement:
“(except for such a purchase at, around or below prevailing market prices for those shares where the purchase occurs in accordance with Applicable Regulation)”; and
(b)
amending paragraph 3 of Schedule 1 of the Sharing Agreement by deleting the words “at or around prevailing market prices” and inserting in their place the words “at, around or below prevailing market prices for the shares being purchased”.
At the forty-fifth Annual General Meeting of the Company duly convened and held on 13April 2007 at The Queen Elizabeth II Conference Centre, Broad Sanctuary, London SW!, the following resolutions were duly passed as Special Resolutions and became effective on 27April 2007 following the Annual General Meeting of Rio Tinto Limited held on that date:
Resolution 2
That the authority and power conferred on the directors in relation to rights issues and in relation to the Section 89 Amount by paragraph (B) of Article 9 of the Company’s articles of association be renewed for the period ending on the later of 12 April 2008 and the date of the annual general meting in 2008, being no later than 15 months from the date of this resolution, and for such period the Section 89 Amount shall be £6,514,000.
Resolution 3
(a)
That Rio Tinto plc, Rio Tinto Limited and any subsidiaries of Rio Tinto Limited be and are hereby authorised to purchase ordinary shares of 10p each issued by Rio Tinto plc (“RTP Ordinary Shares”), such purchases to be made, in the case of Rio Tinto plc, by way of market purchase (within the meaning of Section 163 of the Companies Act 1985), provided that this authority shall be limited:
(i)
so as to expire on the later of 12 April 2008 and the date of the annual general meeting in 2008, being not later than 15 months from date of this resolution, unless such authority is renewed prior to that time (except in relation to the purchase of RTP Ordinary Shares, the contract for which was concluded before the expiry of such authority and which might be executed wholly or partly after such expiry);
(ii)
so that the number of RTP Ordinary Shares which may be purchased pursuant to this authority shall not exceed 101,700,000 RTP Ordinary Shares (representing approximately ten per cent of the issued, publicly held, ordinary share capital of the Company as at 9 February 2007);
(iii)
so that the maximum price payable for each such RTP Ordinary Share shall be not more than five per cent above the average of the middle market quotations for RTP Ordinary Shares as derived from The London Stock Exchange Daily Official List during the period of five business days immediately prior to such purchase; and
(iv)
so that the minimum price payable for each such RTP Ordinary Share shall be 10p:
(b)
That Rio Tinto plc be and is hereby authorised for the purpose of Section 164 of the Companies Act 1985 to purchase off-market from Rio Tinto Limited and any
of its subsidiaries any RTP Ordinary
Shares acquired under the authority set out under (a) above pursuant to
one or more contracts between Rio Tinto plc and Rio Tinto Limited on
the terms of the form of contract (a draft of which has been produced to
the meeting and is for the purpose of identification marked ‘A’
and initialled by the chairman) (each, a “Contract”) and such
Contracts be hereby approved, provided that:
(i)
such authorisation shall expire
on the later of 12 April 2008 and the date of the annual general meeting
in 2008, being no later than 15 months from date of this resolution:
(ii)
the maximum total number of RTP Ordinary Shares to be purchased pursuant to Contracts shall be 101,700,000 RTP Ordinary Shares; and
(iii)
the purchase price for RTP Ordinary Shares pursuant to a Contract shall be an aggregate price equal to the average of the middle market quotations for RTP Ordinary Shares as derived from the London Stock Exchange Daily Official List during the period of five business days immediately prior to such purchase multiplied by the number of RTP Ordinary Shares the subject of the Contract or such lower aggregate price as may be agreed between the Company and Rio Tinto Limited, being not less than one penny.
Resolution 4
That, subject to the consent in writing of the holder of the Special Voting Share, Article 64 of the Company’s articles of association be deleted in its entirety and Article 64 as set out in the document which has been produced to the meeting (and is for the purpose of identification marked ‘B’ and initialled by the chairman) be substituted therefore and Rule 143 of Rio Tinto Limited’s constitution be deleted in its entirety and Rule 145 as set out in the document which has been produced to the meeting (and is for the purpose of identification marked ‘C’ and initialled by the chairman) be substituted therefore.
(Reprinted to reflect amendments up to 13 April 2007)
(1) The name of the Company is “THE RTZ CORPORATION PLC”.1
(2) The Company is to be a public company.
(3) The Registered Office of the Company will be situated in England.
(4) The objects for which the Company is established are:-
(A) To enter into, operate and carry into effect an Agreement with CRA Limited (“CRA2”) known as the DLC Merger Sharing Agreement and a Deed known as the Rio Tinto Deed Poll Guarantee with full power to:
(i) agree any amendment or termination of all or any of the terms of that Agreement or Deed in accordance with the terms thereof;
(ii) enter into, operate and carry into effect any further or other agreements or arrangements with or in connection with CRA2; and
(iii) do all such things as in the opinion of the Directors of the Company are necessary or desirable for the furtherance of this object or for the furtherance, maintenance or development of the relationship with CRA2 constituted by or arising out of any agreement or arrangement mentioned in or made in accordance with this sub-clause.
(B) To carry on business as an investment holding company.
(C) To subscribe for, underwrite, purchase or otherwise acquire shares, stock, debentures, debenture stock, bonds, obligations or other securities or investments of any kind whatsoever and wheresoever created or issued, and to hold the same with a view to investment, or to sell, exchange or otherwise dispose of the same for reinvestment purposes or otherwise in the ordinary course of management of the Company’s investments.
(D) To purchase or otherwise acquire for any estate or interest any property or assets which may appear to be necessary or convenient.
(E) To borrow and raise money and to secure or discharge any debt or obligation of or binding on the Company in such manner as may be thought fit and in particular by mortgages and charges upon the undertaking and all or any of the property and assets (present and future) and the uncalled Capital of the Company, or by the creation and issue on such terms and conditions as may be thought expedient of debentures, debenture stock or other securities of any description.
(F) To draw, make, accept, endorse, discount, negotiate, execute, and issue, and to buy, sell and deal with bills of exchange, promissory notes, and other negotiable or transferable instruments.
(G) To amalgamate with and to co-operate in any way with or assist or subsidise any company, firm, or person, and to purchase or otherwise acquire and undertake all or any part of the business, property and liabilities of any person, body or company carrying on any business which this Company is authorised to carry on or possessed of any property suitable for the purposes of the Company.
(H) To promote or concur in the promotion of any company, the promotion of which shall be considered desirable.
(I) To lend money to and guarantee or give security for the performance of the contracts or obligations of any company, firm or person, and the payment and repayment of the capital and principal of, and dividends, interest or premiums payable on, any stock, shares and securities of any company, whether having objects similar to those of this Company or not, and to give all kinds of indemnities.
(J) To sell, lease, grant licences, easements and other rights over, and in any other manner deal with or dispose of the undertaking, property, assets, rights and effects of the Company or any part thereof for such consideration as may be thought fit, and in particular for stocks, shares or securities of any other company whether fully or partly paid up.
(K) To procure the registration of the Company in or under the laws of any place outside England.
(L) To subscribe or guarantee money for any national, charitable, benevolent, public, general or useful object or for any exhibition, or for any purpose which may be considered likely directly or indirectly to further the objects of the Company or the interests of its members.
(M) To grant pensions or gratuities to any employees or ex-employees and to officers and ex-officers (including Directors and ex-Directors) of the Company or its predecessors in business, or the relations, connections or dependants of any such persons, and to establish or support schemes, associations, institutions, clubs, funds and trusts which may be considered calculated to benefit any such persons (with or without others) or otherwise advance the interests of the Company or of its members, and to establish and contribute to any scheme for the purchase by trustees of shares in the Company to be held for the benefit of the Company’s employees, and to lend money to the Company’s employees to
enable them to purchase shares of the Company and to formulate and carry into effect any scheme for sharing the profits of the Company with its employees or any of them.
(MM)
(i) To purchase and maintain insurance for or for the benefit of any persons who are or were at any time directors, officers, employees or auditors of the Company, or of any other company which is its holding company or in which the Company or such holding company has any interest whether direct or indirect or which is in any way allied to or associated with the Company, or of any subsidiary undertaking of the Company or of any such other company, or who are or were at any time trustees of any pension fund in which any employees of the Company or of any such other company or subsidiary undertaking are interested, including (without prejudice to the generality of the foregoing) insurance against any liability incurred by such persons in respect of any act or
omission in the actual or purported execution and/or discharge of their duties and/or in the exercise or purported exercise of their powers and/or otherwise in relation to their duties, powers or offices in relation to the Company or any such other company, subsidiary undertaking or pension fund; and
(ii)
To such extent as may be permitted by law otherwise to indemnify or to exempt
any such person against or from any such liability. For the purposes of
this clause “holding company” and “subsidiary undertaking”
shall have the same meanings as in the Companies Act 1989.
(N) To do all or any of the things and matters aforesaid in any part of the world, and either as principals, agents, contractors, trustees or otherwise, and by or through trustees, agents or otherwise, and either alone or in conjunction with others.
(O) To do all or any of the things as may be considered to be incidental or conducive to the above objects or any of them.
And it is hereby declared that the objects of the Company as specified in each of the foregoing paragraphs of this clause (except only if and so far as otherwise expressly provided in any paragraph) shall be separate and distinct objects of the Company and shall not be in anywise limited by reference to any other paragraph or the order in which the same occur or the name of the Company.
(5) The liability of the members is limited.
(6) The Share Capital of the Company is £1003, divided into 200 shares of 10s (50p) each.
Notes:-
1:
By Special Resolution passed on 21st May, 1997, the name of the Company was changed from “The RTZ Corporation PLC” to “Rio Tinto plc”.
2:
By Special Resolution passed
on 21st May, 1997, the name of CRA Limited was changed to Rio Tinto Limited.
3:
(i) By Special Resolution passed
on 2nd July, 1962, the authorised share capital was increased from £100
to £50,000,000 divided into 7,732,967 4 per cent. ‘A’
Cumulative Preference Shares of £1 each, 3,143,750 5 per cent. ‘B’
Cumulative Preference Shares of £1 each and 78,246,566 Ordinary Shares
of 10s (50p) each.
(ii) By Ordinary Resolution passed
on 15th May, 1965, the authorised share capital was increased from £50,000,000
to £60,000,000 by the creation of 20,000,000 additional Ordinary Shares
of 10s (50p) each.
(iii) By Ordinary Resolution
passed on 16th May, 1968, the authorised share capital was increased from
£60,000,000 to £70,000,000 by the creation of 20,000,000 additional
Ordinary Shares of 10s (50p) each.
(iv) By Ordinary Resolutions
passed on 20th May, 1970, each of the 118,246,566 Ordinary Shares of 10s
(50p) (whether issued or unissued) was sub-divided into two Ordinary Shares
of 5s (25p) each and the authorised share capital was increased from £70,000,000
to £75,000,000 by the creation of an additional 20,000,000 Ordinary
Shares of 5s (25p) each.
(v) By Special Resolution passed
on 16th May, 1973, the 4 per cent. ‘A’ Cumulative Preference
Shares of £1 each were re-designated as 3.325 per cent. ‘A’
Cumulative Preference Shares of £1 each and the 5 per cent. ‘B’
Cumulative Preference Shares of £1 each were re-designated as 3.5
per cent. ‘B’ Cumulative Preference Shares of £1 each.
(vi) By Special Resolution passed
on 17th October, 1973, each of the unissued Ordinary Shares of 25p each
of the Company became Unclassified Shares of 25p each available for issue
as either Ordinary Shares or Accumulating Ordinary Shares.
(vii) By Ordinary Resolution passed on 21st May, 1975, the authorised share capital was increased from £75,000,000 to £90,000,000 by the creation of 60,000,000 Unclassified Shares of 25p each.
(viii) By Ordinary Resolution
passed on 27th May, 1981, the authorised share capital was increased from
£90,000,000 to £100,000,000 by the creation of 40,000,000 Unclassified
Shares of 25p each.
(ix) By Ordinary Resolution passed
on 26th May, 1983, the authorised share capital was increased from £100
million to £110 million by the creation of 40 million Unclassified
Shares of 25p each.
(x) By Ordinary Resolution passed
on 24th May, 1984, the authorised share capital was increased from £110
million to £125 million by the creation of 60 million Unclassified
Shares of 25p each.
(xi) By Ordinary Resolution passed
on 4th June, 1987, the authorised share capital was increased from £125
million to £130 million by the creation of 20 million Unclassified
Shares of 25p each.
(xii) By Special Resolution passed
on 22nd October, 1987, each of the Ordinary Shares and Accumulating Ordinary
Shares of 25p each was sub-divided into five Ordinary (or, as the case might
be, Accumulating Ordinary) Shares of 5p each and every two of the resulting
Ordinary Shares or Accumulating Ordinary Shares of 5p each were consolidated
into one Ordinary Share or Accumulating Ordinary Share of 10p, and the Unclassified
Shares in the unissued capital were similarly sub-divided and consolidated.
(xiii) By Resolution of the Directors
passed on 2nd June, 1988, the whole of the Accumulating Ordinary Shares
(being less than 5 per cent. of the number of Ordinary Shares in issue)
were converted into Ordinary Shares with effect from 1st July, 1988.
(xiv) By Ordinary Resolution,
passed on 15th June, 1989, the authorised share capital was increased from
£130 million to £142 million by the creation of 120 million
Ordinary Shares.
(xv) By Ordinary Resolution passed
on 10th May, 1995, the authorised share capital was increased from £142
million to £153 million by the creation of 110 million Ordinary Shares.
(xvi) By Special Resolution passed
on 20th December, 1995 the authorised share capital was increased from £153
million to £153,000,000.20 by the creation of one Equalisation Share
of 10p and one Special Voting Share of 10p.
(xvii) By Special Resolution
passed on 12th May, 1999 and confirmed by the High Court on 23rd June, 1999
the authorised share capital was reduced from £153,000,000.20 to £142,123,283.20
by the cancellation and extinguishing of all the 7,732,967 3.325 per cent
‘A’ Cumulative Preference Shares and all the 3,143,750 3.5 per
cent ‘B’ Cumulative Preference Shares.
(xviii) The capital of Rio Tinto
plc was by virtue of a Special Resolution and with the sanction of an Order
of the High Court of Justice dated 23rd June 1999 reduced from £153,000,000.20
divided into 7,732,967 3.325 per cent ‘A’ Cumulative Preference
Shares of £1 each, 3,143,750 3.5 per cent ‘B’ Cumulative
Preference Shares of £1 each, one Special Voting Share of 10p, one
Equalisation Share of 10p and 1,421,232,830 Ordinary Shares of 10p each
to £142,123,283.20 divided into one Special Voting Share of 10p, One
Equalisation Share of 10p and 1,421,232,830 Ordinary Shares of 10p each.
At the date of registration of this Minute the said Special Voting Share
and 1,060,962,100 of the said Ordinary Shares have been issued and are deemed
to be fully paid up and the Equalisation Share and the remainder of the
Ordinary Shares are unissued.
(xix) By Ordinary Resolution passed on 11 April, 2002 the authorised share capital was increased from £142,123,283.20 to £142,123,283.30 by the creation of one DLC Dividend Share of 10p.
We, the several persons whose names and addresses are subscribed, are desirous of being formed into a Company, in pursuance of this Memorandum of Association, and we respectively agree to take the number of shares in the Capital of the Company set opposite our respective names.
Names,
addresses and descriptions of subscribers
Number of Shares taken by each
Subscriber
John W. Mayo,
One
Barrington House, 59/67 Gresham
Street, London EC2
Solicitor
C. Hilary Scott,
One
18 Austin Friars, London EC2
Solicitor
Total Shares taken . . .
Two
Dated the 22nd day of March, 1962.
Witness to the above Signatures:
F. E. Farres,
Barrington House, 59/67 Gresham Street, London EC2
Clerk
21
The Companies Act 1985
ARTICLES OF ASSOCIATION
OF Rio Tinto plc
(Adopted by Special Resolution passed on 11th April 2002 and amended on 14 April 2005 and 13 April 2007)
PRELIMINARY
1
The regulations in Table A in The Companies (Tables A to F) Regulations 1985 and in any Table A applicable to the Company under any former enactment relating to companies shall not apply to the Company.
2
In these Articles (if not inconsistent with the subject or context) the words and expressions set out in the first column below shall bear the meanings set opposite to them respectively:-
“Act”
means the Companies Act 1985;
“Aggregate Publicly-held Ordinary Shares”
means all of the Publicly-held Rio Tinto Ordinary Shares and all of the Publicly-held RTL Ordinary Shares from time to time;
“Alternate Director”
means a person appointed from time to time as an Alternate Director in accordance with these Articles;
“Applicable”
means, in the case of RTL, applicable Australian law and regulations (including listing rules) and, in the case of the Company, applicable English laws and regulations (including listing rules and guidelines with which companies listed on the London Stock Exchange customarily comply), in each case for the time being in force and taking account of all waivers or variations from time to time applicable (in particular situations or generally) to RTL or, as the case may be, the Company;
“Articles”
means these Articles of Association as from time to time altered;
“Auditor”
means the auditor or auditors appointed by the Company from time to time;
“Australian dollars”
means the lawful currency from time to time of Australia;
“Australian Stock Exchange”
means the Australian Stock Exchange Limited (ACN 008 624 691) or any successor to that body;
“Board of RTL”
means the board of directors of RTL (or a duly appointed committee of that board) from time to time;
means a day on which banks are ordinarily open for business in both London and Melbourne, excluding Saturdays and Sundays;
“Class Rights Action”
means, in relation to the Company or RTL, any of the actions listed in Article 33(A);
“Companies Act Subsidiary”
has the meaning ascribed to the term “subsidiary” in Section 736 of the Companies Act 1985 (as in force at the date of adoption of these Articles) and when used in relation to a company means any subsidiary of that company from time to time;
“Corporations Act”
means the Corporations Act 2001 (Cth) of Australia;
“Corporations Act Subsidiary”
has the meaning given to “subsidiary” in Section 9 of the Corporations Act as at the date of the Sharing Agreement and when used in relation to a body corporate means any subsidiary of that body corporate from time to time;
“Corporations Law”
means the Corporations Law as at the date of the Sharing Agreement as defined by Section 13(2) of the Corporations (Victoria) Act 1990 of Victoria, Australia as at that date and includes a reference to the Corporations Regulations referred to in that section as at that date;
“Deed Poll Guarantee”
means the deed executed by the Company for the benefit of certain present and future creditors of RTL as amended from time to time;
“Director”
means a person appointed or elected from time to time to the office of Director of the Company in accordance with these Articles and includes any Alternate Director duly acting as a Director;
“DLC Dividend Share”
means the dividend share of 10p in the Company, issued in accordance with Article 8A, until it is cancelled, redeemed or otherwise ceases to exist or until it converts to an Ordinary Share in accordance with these Articles;
“Equalisation Fraction”
means the Equalisation Ratio expressed as a fraction with the numerator being the number relating to the RTL Ordinary Shares and the denominator being the number relating to the Ordinary Shares;
“Equalisation Ratio”
means the ratio of the dividend, capital and voting rights per RTL Ordinary Share to the dividend, capital and voting rights per Ordinary Share as set out in the Sharing Agreement and as adjusted from time to time in accordance with the Sharing Agreement;
“Equalisation Share”
means the equalisation share of 10p in the Company;
means any person who is a Relevant Person (other than a Permitted Person) both as defined in the RTL Constitution on whom a notice has been served by the Directors of RTL pursuant to Rule 145D of the RTL Constitution which has not been complied with to the satisfaction of the RTL directors or withdrawn;
“in writing”
means written or produced by any substitute for writing or partly one and partly another and shall include, except where otherwise expressly specified in these Articles or the context otherwise requires, and subject to any limitations, conditions or restrictions contained in or the provisions of the Statutes, any representation of words in some visible form, whether in a physical document or in an electronic communication or form or otherwise howsoever;
“Joint Decision”
means in relation to a General Meeting a resolution put to the vote of the meeting on a Joint Decision Matter;
“Joint Decision Matter”
means any of the following:-
(i) the appointment or removal of a Director of the Company and/or a director of RTL;
(ii) the receipt or adoption of the annual accounts of the Company and/or RTL (if shareholders are to be asked to vote on the receipt or adoption of such accounts);
(iii) a change of name by the Company and/or RTL;
(iv) any proposed acquisition or disposal and any proposed transaction with a substantial shareholder, director or other related party which (in any case) is required under Applicable Regulation to be authorised by shareholders;
(v) the appointment or removal of the Auditors of the Company and/or the auditors of RTL;
(vi) the creation of a new class of shares (or securities convertible into, exchangeable for or granting rights to subscribe for or purchase shares of a new class) in the Company or RTL;
(vii) a change of the corporate status of or reregistration of the Company or RTL;
(viii) a matter referred to in Clause 9.2 of the Sharing Agreement; and
(ix) any other matter which the Directors (or a duly constituted committee of the Directors) of the Company and the Board of RTL agree (generally or in a particular case) should be decided upon by Joint Decision;
“Limiting Restriction”
refers to the limit (if any) on offers for cash (otherwise than pro rata by way of rights to existing holders of Ordinary Shares or RTL Ordinary Shares) of shares or other securities existing under restrictions for the time being applicable to RTL or the Company under Applicable Regulation, and for the purpose of ascertaining the most Limiting Restriction at any time in any situation:-
(a) a restriction applicable to RTL shall be treated as also applicable to the Company (converting the restrictions, expressed in terms of a number of RTL shares, into a number of shares in the Company by application of the Equalisation Ratio), and vice versa in relation to a restriction applicable to the Company;
(b) a restriction expressed in terms of a nominal amount of the Company’s equity share capital shall be treated as if it related to the number of Ordinary Shares represented by that nominal amount and then converted into a number of RTL Ordinary Shares by application of the Equalisation Ratio and any restriction in relation to RTL shall be similarly treated;
(c) a restriction (when expressed as a number of RTL Ordinary Shares or Ordinary Shares) that, under Applicable Regulation, has been derived by application of a percentage to a number or nominal amount of RTL Ordinary Shares and/or number or nominal amount of Ordinary Shares rather than to the number of the Aggregate Publicly-held Ordinary Shares (taking into account the application of the Equalisation Ratio as described in (a) and (b) above) shall be adjusted to the number that would have been derived from the application of such percentage to the number of the Aggregate Publicly-held Ordinary Shares (after so taking into account the application of Equalisation Ratio); and
(d) any restriction which under Applicable Regulation comes into force in relation to either RTL or the Company after the date of the Sharing Agreement which does not fall within (a), (b) or (c) above shall be applied to the Aggregate Publicly-held Ordinary Shares in the way which the Directors (or a duly constituted committee of the Directors) and the Board of RTL agree best reflects the rationale underlying paragraphs (a), (b) and (c) of this definition;
“Liquidation Exchange Rate”
means, as at any date, the closing mid-point spot Australian dollar-sterling exchange rate on the Business Day before such date (as shown in the London Edition of the Financial Times, or such other point of reference as the liquidator and the auditor (or, as the case may be, liquidator) of RTL may determine);
“London Stock Exchange”
means London Stock Exchange Ltd or any successor to that body;
“Market Value”
means, in respect of an issue of a relevant share or security, the weighted average sale price derived from the Australian Stock Exchange (in the case of RTL) and the middle market quotation derived from the London Stock Exchange Daily Official List (in the case of the Company) in each case on the dealing day immediately preceding the date on which any such issue is publicly announced except that in the case of an allotment of Ordinary Shares pursuant to Article 128 it shall mean the value of an Ordinary Share as defined in Article 128(D) and in the case of an allotment of RTL Ordinary Shares by way of dividend it shall mean the weighted average sale price of a RTL Ordinary Share derived from the Australian Stock Exchange over the five business
days (being trading days on the Australian Stock Exchange) prior to the books closing date in respect of that dividend;
“Matching Offers”
means offers by way of rights either by both RTL and the Company to their respective ordinary shareholders or by RTL on its own or by the Company on its own to both the holders of Ordinary Shares and the holders of RTL Ordinary Shares which, so far as is practicable, take place contemporaneously and which the auditors of RTL have certified do not materially disadvantage a holder of a RTL Ordinary Share in comparison with a holder of an Ordinary Share and which the Auditors have certified do not materially disadvantage a holder of an Ordinary Share in comparison with a holder of a RTL Ordinary Share;
means the registered office of the Company for the time being;
“Operator”
means CRESTCo Limited or such other person as may for the time being be approved by H.M. Treasury as Operator under the Regulations;
“Operator-instruction”
means a properly authenticated dematerialised instruction attributable to the Operator;
“Ordinary Shares”
means the ordinary shares of 10p each in the Company from time to time;
“Paid”
means paid or credited as paid;
“participating security”
means a security title to units of which is permitted by the Operator to be transferred by means of a relevant system;
“Publicly-held RTL Ordinary Shares”
means RTL Ordinary Shares the beneficial owners of which are not members of the Rio Tinto Group;
“Publicly-held Ordinary Shares”
means, in relation to the Company, Publicly-held Rio Tinto Ordinary Shares and, in relation to RTL, Publicly-held RTL Ordinary Shares;
“Publicly-held Rio Tinto Ordinary Shares”
means Ordinary Shares the beneficial owners of which are not members of the RTL Group;
“Publicly-held Rio Tinto Voting Shares”
means Ordinary Shares the beneficial owners of which are not members of the RTL Group;
“Publicly-held Shares”
means, in relation to the Company, Publicly-held Rio Tinto Voting Shares and, in relation to RTL, Publicly-held RTL Ordinary Shares;
“relevant period”
when used in Article 33 refers to the period by reference to which any Limiting Restriction applies;
“relevant system”
means a computer-based system, and procedures, which enable title to units of a security to be evidenced and transferred without a written instrument pursuant to the Regulations;
“Register”
means the register of members of the Company;
“Regulations”
means the Uncertificated Securities Regulations 2001 (SI 2001 No.2001/3755);
“Rio Tinto Entrenched Provision”
means any of the following provisions:-
(a) Clause 4(A) of the Company’s Memorandum of Association as in force at the date of adoption of these Articles;
(b) any of the following provisions of the Company’s Articles of Association as in force at the date of adoption of these Articles:- the definitions in this Article 2 of “Aggregate Publicly-held Ordinary Shares”, “Applicable Regulation”, “Australian dollars”, “Board of RTL”, “Class Rights Action”, “Companies Act Subsidiary”, “Corporations Act, “Corporations Act Subsidiary”, “RTL”, “RTL Deed Poll Guarantee”, “RTL Entrenched Provision”, “RTL Equalisation Share”, “RTL Group”, “RTL Constitution”, “RTL Ordinary Shares”, “RTL Shareholder SVC”, “RTL
Shareholder Voting Agreement”, “RTL Special Voting Share”, “Deed Poll Guarantee”, “Equalisation Fraction”, “Equalisation Ratio”, “Equalisation Share”, “Excluded RTL Holder”, “Joint Decision”, “Joint Decision Matter”, “Limiting Restriction”, “Liquidation Exchange Rate”, “Market Value”, “Matching Offers”, “Ordinary Shares”, “Publicly-held RTL Ordinary Shares”, “Publicly-held Ordinary Shares”, “Publicly-held Rio Tinto Ordinary Shares”, “Publicly-held Rio Tinto Voting Shares”, “Publicly-held Shares”, “relevant period”, “Rio Tinto Entrenched Provision”,
“Rio Tinto Group”, “RTP Shareholder SVC”, “Rio Tinto Shareholder Voting Agreement”, “Sharing Agreement”, “Special Voting Share” and “sterling” and the paragraph defining procedural resolutions; the provisions of Article 3 (so far as it relates to the Special Voting Share or the Equalisation Share); Article 9(B)(iv)(a)(iii); Article 31; Article 33; Article 36(C); Article 55; Article 56(A) (so far as it relates to or affects the rights of the holder of the Special Voting Share or the requirement that polls be held on matters on which such holder is entitled to vote); Article 59; Article 60; Article 64; Article 69; the third sentence of Article 80; Article 82; Article 83; paragraph (E) and the following sentence of
Article 84; Article 86(B) and the last sentence of Article 86; Article 88; Article 89(vii); the proviso in brackets in Article 90; Article 97 and Article 105;
“Rio Tinto Group”
means the Company and its Companies Act Subsidiaries and a member of the Rio Tinto Group means any of them;
means Rio Tinto Limited (ACN 004 458 404), a company incorporated in Victoria, Australia with its registered office at 55 Collins Street, Melbourne, Victoria, Australia;
“RTL Constitution”
means the Constitution of RTL as amended from time to time;
“RTL Deed Poll Guarantee”
means the deed executed by RTL for the benefit of certain present and future creditors of the Company as amended from time to time;
“RTL Entrenched Provision”
has the meaning given to it in the RTL Constitution;
“RTL Equalisation Share”
means the equalisation share in RTL;
“RTL Group”
means RTL and its Corporations Act Subsidiaries;
“RTL Ordinary Shares”
means the issued ordinary shares in RTL from time to time;
“RTL Shareholder SVC”
means RTL Shareholder SVC Limited, a company incorporated in England with registered number 3115178 whose registered office is at Princes House, 95 Gresham Street, London EC2V 7LY or such other company as replaces RTL Shareholder SVC Limited pursuant to the RTL Shareholder Voting Agreement;
“RTL Shareholder Voting Agreement”
means the agreement entered into between RTL Shareholder SVC, The Law Debenture Trust Corporation p.l.c., RTL and the Company relating, inter alia, to how the Special Voting Share is to be voted, as amended from time to time;
“RTL Special Voting Share”
means the special voting share in RTL;
“RTP Shareholder SVC”
means RTP Shareholder SVC Pty Limited (ACN 070 481 908), a company incorporated in Victoria, Australia, whose registered office is at 27th Floor, 530 Collins Street, Melbourne, 3000, Victoria, Australia or such other company as replaces RTP Shareholder SVC Pty Limited pursuant to the terms of the Rio Tinto Shareholder Voting Agreement;
“RTP Shareholder Voting Agreement”
means the Agreement entered into between RTP Shareholder SVC, The Law Debenture Trust Corporation p.l.c., the Company, Rio Tinto Australian Holdings Limited and RTL relating, inter alia, to how the RTL Special Voting Share and the RTL Ordinary Shares held by Tinto Holdings Australia Pty Limited (ACN 004 327 922) or beneficially owned by any other member of the Rio Tinto Group are to be voted, as amended from time to time;
means an official seal kept by the Company by virtue of Section 40 of the Act;
“Share Warrant”
means a warrant to bearer issued by the Company in respect of its shares;
“Sharing Agreement”
means the agreement entered into between RTL and the Company headed “DLC Merger Sharing Agreement” as amended from time to time;
“Special Voting Share”
means the special voting share of 10p in the Company;
“Statutes”
means the Act, the Regulations and every other statute for the time being in force applying to or concerning companies and affecting the Company;
“sterling”
means the lawful currency from time to time of the United Kingdom;
“Transfer Office”
means the place where the Register is situate for the time being;
“UK Listing Authority”
means the Financial Services Authority in its capacity as competent authority under the Financial Services and Markets Act 2000;
“United Kingdom”
means Great Britain and Northern Ireland;
“wholly owned subsidiary”
in relation to a body corporate, means a body corporate none of whose members is a person other than the first mentioned body corporate, a wholly owned subsidiary of the first mentioned body corporate or a nominee of the first mentioned body corporate or its wholly owned subsidiary; and
“Year”
means calendar year.
The expressions “debenture” and “debenture
holder” shall respectively include debenture stock and debenture stockholder.
The expressions “notice”, “instrument”
and “document” and similar terms shall include, except where
otherwise expressly specified in these Articles, where the context requires
or permits and subject to the provisions of the Statutes, any representation
of words in visible form delivered or communicated electronically or by
other data transmission process or otherwise howsoever; provided, however,
that the Directors may require any evidence they think appropriate to satisfy
themselves as to the authenticity of any notice, instrument or document
delivered or communicated to them or to the Company in electronic form or
by other data transmission process and no provision of these Articles requiring
a physical signature or signatures shall, except where otherwise expressly
specified in these Articles, apply to any such notice, instrument or document.
The expression “in physical form” and similar expressions shall
mean that a physical document must be used.
The expressions “communication” and “electronic communication” shall have the same respective meanings as in the Electronic Communications Act 2000, the latter including, without limitation, e-mail, facsimile, CD-Rom, audio tape and telephone transmission and (in the case of electronic communication by the Company in accordance with Article 138A(A)) publication on a web site.
The expression “address” shall include, in relation to electronic communication, any number or address used for the purposes of such communication.
The expressions “recognised clearing house” and “recognised investment exchange” shall mean any clearing house or investment exchange (as the case may be) granted recognition under the Financial Services and Markets Act 2000.
The expression “Secretary” shall include any person appointed by the Directors to perform any of the duties of the Secretary including, but not limited to, a joint, assistant or deputy Secretary.
The expression “shareholders’ meeting” shall include both a General Meeting and a meeting of the holders of any class of shares of the Company.
All such of the provisions of these Articles as are applicable to paid-up shares shall apply to stock, and the words share and shareholder shall be construed accordingly.
Words denoting the singular shall include the plural and vice versa. Words denoting the masculine shall include the feminine. Words denoting persons shall include bodies corporate and unincorporated associations.
References to any statute or statutory provision of the United Kingdom or Australia shall unless the context otherwise requires be construed as relating to any statutory modification or re-enactment thereof for the time being in force (whether coming into force before or after the adoption of these Articles).
Subject as aforesaid any words or expressions defined in the Act or the Regulations shall (if not inconsistent with the subject or context) bear the same meanings in these Articles.
A Special or Extraordinary Resolution shall be effective for any purpose for which an Ordinary Resolution is expressed to be required under any provision of these Articles.
In these Articles references to an “equivalent resolution” considered by holders of Publicly-held RTL Ordinary Shares mean the resolution considered at the most nearly contemporaneous general meeting of RTL which bears a close relationship to the relevant resolution being considered at a General Meeting of the Company. For example, but without limitation, a resolution to appoint or remove an individual as a director of RTL, to appoint or remove the auditors of RTL or to receive and adopt the accounts of RTL would, if no resolution considering such matters in relation to the Company were put to the RTL general meeting, be the “equivalent resolution” to a resolution relating to the appointment or removal of the same
individual as a Director of the Company, the appointment or removal of the same international firm of auditors as the Company’s Auditors or the receipt or adoption of the Company’s accounts as the case may be.
References to procedural resolutions comprise all resolutions put to a General Meeting which were not included in the notice of such meeting but which nevertheless fall to be considered by that meeting.
References to offers by way of rights include offers which are subject to such exclusions or other arrangements as the Directors or (where relevant) the directors of RTL may deem necessary or expedient in relation to fractional entitlements or legal or practical problems under the laws of, or the requirements of, any recognised regulatory body or any stock exchange in, any territory.
References to a share (or to a holding of shares) being in certificated or uncertificated form are references, respectively, to that share being a certificated or an uncertificated unit of a security.
INCOME AND CAPITAL RIGHTS
3
(A) The share capital of the Company is £142,123,283.30 divided into one Special Voting Share of 10p, one Equalisation Share of 10p, one DLC Dividend Share of 10p and 1,421,232,830 Ordinary Shares of 10p each.
(B) The rights, as regards participation in the profits of the Company, attaching to the said Shares are as follows:-
(i) Subject to the special rights for the time being attached to shares having a preferred right to participate as regards dividends up to but not beyond a specified amount in a distribution, but in priority to the payment of dividends on all other classes of share, the Special Voting Share shall entitle its holder to a fixed dividend of 1p per annum payable annually in arrears on the 1st day of July.
(ii) Subject to the special rights for the time being attached to shares having a preferred right to participate as regards dividends up to but not beyond a specified amount in a distribution and the Special Voting Share but in priority to the payment of any dividends on all other classes of share, the Equalisation Share shall carry such dividends as are declared or paid on the Equalisation Share in accordance with Schedule 1 and 2 to the Sharing Agreement.
(iii) Subject to the special rights for the time being attached to other classes of share, the profits of the Company available for distribution and resolved to be distributed shall subject to the provisions of the Statutes be distributed by way of dividend among the holders of the Ordinary Shares and the Equalisation Share.
(C) The rights, as regards participation in the assets of the Company, attaching to the said Shares are as follows:-
Subject to the rights of shares having a preferred right to participate as regards capital up to but not beyond a specified amount in a distribution, on a return of assets on liquidation the assets of the Company remaining available for distribution among the members, after giving effect to such rights and to any provision made under Section 187 of the Insolvency Act 1986, shall be applied first in paying to the holder of the Special Voting Share the nominal amount paid up on such Share and then in paying to the holder of the Equalisation Share the nominal amount paid up thereon and then in paying any amounts standing to the credit of the holder of the Equalisation Share in any reserve set up in the books of the Company pursuant to paragraph
3.6.2(a) of Schedule 2 to the Sharing Agreement and then in paying to the relevant holders of the Ordinary Shares any amounts standing to the credit of any reserve for their benefit set up in the books of the Company pursuant to paragraph 3.6.2(b) or (c) of Schedule 2 to the Sharing Agreement and any surplus remaining after application of the assets in accordance with the above shall be applied in making payments to the holder of the Equalisation Share and/or the holders of the Ordinary Shares, in accordance with their entitlements, which shall be determined as follows:-
(a) The liquidator of the Company shall determine as at the earliest date (the “Reference Date”) on which the liquidator is able to make a final distribution to members and creditors of the Company the gross amount which would be available for distribution to the holders of Ordinary Shares on the liquidation of the Company after payment in full of any amount standing to the credit of:-
(I) the holder of the Equalisation Share in any reserve set up in the books of the Company pursuant to paragraph 3.6.2(a) of Schedule 2 to the Sharing Agreement; and
(II) the holders of Ordinary Shares in any reserve set up in the books of the Company under paragraph 3.6.2(b) or 3.6.2(c) of Schedule 2 to the Sharing Agreement
and to calculate the amount thereof available for distribution to holders of Publicly-held Rio Tinto Ordinary Shares or the amount (expressed as a negative sum) of the shortfall which would need to be obtained before the holders of Publicly-held Rio Tinto Ordinary Shares would receive any payment by way of distribution (in either case the “Company’s Own Distribution Amount”), on the assumption that distribution to the Company’s creditors and members took place on the Reference Date. The liquidator of the Company shall certify the result of such calculation to RTL.
(b) Whether or not proceedings have been commenced for the liquidation of RTL, RTL shall be required under the Sharing Agreement to instruct the Relevant Officer for the time being of RTL to draw up accounts as at the Reference Date of all assets (valued as if RTL was in liquidation and those assets were to be realised by a liquidator of RTL in an orderly manner) and liabilities which would be admissible to proof if RTL were in liquidation on the Reference Date (other than the asset or liability represented by any Equalisation Payment as defined in paragraph 4.1 of Schedule 2 to the Sharing Agreement to be made in accordance with the Sharing Agreement or any payment on the RTL Equalisation Share under Rule 143(d)(v)
or (vi) of the RTL Constitution) to show the gross amount which would be available for distribution to holders of RTL Ordinary Shares on the liquidation of RTL (if it were to occur on the Reference Date) after payment in full of any amount standing to the credit of
(I) the holder of the RTL Equalisation Share in any reserve set up in the books of RTL pursuant to paragraph 3.6.2(a) of Schedule 2 to the Sharing Agreement; or
(II) the holders of RTL Ordinary Shares in any reserve set up in the books of RTL under paragraph 3.6.2(b) or 3.6.2(c) of Schedule 2 to the Sharing Agreement
and to calculate the amount thereof available for distribution to holders of Publicly-held RTL Ordinary Shares or the amount (expressed as a negative sum) of the shortfall which would need to be obtained before the holders of Publicly-held RTL Ordinary Shares would receive any payment by way of distribution (in either case, the “RTL Own Distribution Amount”), on the assumption that the distribution to RTL’s creditors and members on liquidation took place on the Reference Date. RTL is obliged under the Sharing Agreement to instruct the Relevant Officer of RTL to certify the result of such calculation to the Company.
(c) The liquidator of the Company shall make, and certify to RTL, the results of the following calculation as at the Reference Date and agree such calculation with the Relevant Officer of RTL, which calculation shall be expressed in sterling, with any Australian dollar amounts being converted to sterling at the Liquidation Exchange Rate as at the Reference Date:-
(COD
+ RTLD) x
COS
(RTLOS x EF) + COS
where:-
COD = the Company’s Own Distribution Amount;
RTLD = the RTL Own Distribution Amount;
COS = the number of Publicly-held Rio Tinto Ordinary Shares in issue on the Reference Date;
RTLOS = the number of Publicly-held RTL Ordinary Shares in issue on the Reference Date; and
EF = the Equalisation Fraction.
The result of such calculation is referred to below as the “Adjusted Company Distribution Amount”.
(d) If the Adjusted Company Distribution Amount is equal to or more than the Company’s Own Distribution Amount, then the assets remaining available for distribution (which shall include any distribution made on the RTL Equalisation Share pursuant to Rule 143(d)(v) or (vi) of the RTL Constitution, any amounts paid by RTL under paragraph 4.1.4 of Schedule 2 to the Sharing Agreement and any amounts paid by RTL from reserves set up in the books of RTL under paragraph 3.6.2(a) of Schedule 2 to the Sharing Agreement) shall belong to and be distributed among the holders of Ordinary Shares rateably according to the numbers of Ordinary Shares held by them.
(e) If the Adjusted Company Distribution Amount is equal to or more than zero, but is less than the Company’s Own Distribution Amount, the liquidator of the Company shall pay out of the assets available for distribution an amount by way of return of capital on the Equalisation Share in priority to any amounts payable to the holders of Ordinary Shares such that (taking account of any tax payable on the making or receipt of the distribution of that amount, after allowing for any offsetting tax credits, losses or deductions) the ratio of the amount available for distribution on each Publicly-held RTL Ordinary Share:-
(I) apart from in each case any undistributed amounts resulting from the payment by RTL to a member of the Rio Tinto Group or the Company to a member of the RTL Group of any reserves under paragraph 3.6.2(a) of Schedule 2 to the Sharing Agreement or any amounts credited to any reserve in the books of the Company for the benefit of holders of Ordinary Shares or any amounts credited to any reserve in the books of RTL for the benefit of holders of RTL Ordinary Shares, in each case under paragraphs 3.6.2(b) and 3.6.2(c) of Schedule 2 to the Sharing Agreement; and
(II) on the assumption that distribution to the Company’s members and creditors and RTL’s members and creditors took place on the Reference Date; and
(III) after taking into account the amounts available for distribution on each Publicly-held RTL Ordinary Share prior to such payment
to the amount available for distribution on each Publicly-held Rio Tinto Ordinary Share (converting Australian dollar amounts to sterling by application of the Liquidation Exchange Rate as at the Reference Date) is equal to the Equalisation Ratio (and the balance of the assets of the Company available for distribution remaining after any such payment on the Equalisation Share shall belong to and be distributed among the holders of Ordinary Shares rateably according to the numbers of Ordinary Shares held by them).
(f) If the Adjusted Company Distribution Amount is zero or a negative amount and the Company’s Own Distribution Amount is a positive amount then the liquidator of the Company shall pay out of the assets available for distribution an amount by way of return of capital on the Equalisation Share in priority to any amounts payable to the holders of Ordinary Shares such that (taking account of any tax payable on the making or receipt of the distribution of that amount after allowing for any offsetting tax credits, losses or deductions) the amount available for distribution to holders of Publicly-held Ordinary Shares, on the assumption that distribution to the Company’s members and creditors took place on the
Reference Date, is zero.
(g) If the Company’s Own Distribution Amount is zero or a negative amount and the RTL Own Distribution Amount is zero or a negative amount, then no distribution shall be made by the liquidator of the Company on the Equalisation Share or to holders of Ordinary Shares.
(h) In making the calculations referred to in this paragraph (ii), the Relevant Officer of RTL and the liquidator shall take into account the distributions which fall to be made on those Ordinary Shares and those RTL Ordinary Shares which are not Publicly-held Ordinary Shares it being acknowledged that for each company the per share distributions on the Publicly-held Ordinary Shares will be the same as the distributions on that company’s non-Publicly-held Ordinary Shares.
(i) In this paragraph “Relevant Officer” of RTL means the auditor of RTL or if RTL is in liquidation, the liquidator of RTL.
(j) In this paragraph “the gross amount which would be available for distribution” to shareholders means such amount ignoring any distribution on the Equalisation Share or RTL Equalisation Share or any Equalisation Payment (as defined in paragraph 4.1 of Schedule 2 to the Sharing Agreement) made in accordance with the Sharing Agreement and any tax payable on the making or receipt of the Equalisation Payment or distribution and both “the gross amount which would be available for distribution” and “the amount available for distribution” refer to such amount before deduction of any amount in respect of tax required to be deducted or withheld from the distribution to ordinary
shareholders by or on behalf of the company paying or making the distribution but net of any tax payable by that company on the distribution to its ordinary shareholders.
(k) The certificates which the liquidator of the Company and the Relevant Officer of RTL are required to produce under this paragraph (ii) and the Relevant Officer of RTL is required to produce under the Sharing Agreement (the “Certificates”) shall be in physical form and shall be produced within 6 weeks after the Reference Date and the Company shall procure that all necessary instructions are given to the liquidator to ensure that such certificates are produced within that time. The liquidator of the Company and the Relevant Officer of RTL shall then agree the calculations in such Certificates within 4 weeks of the date on which all such Certificates are produced. If the liquidator of the Company and
the Relevant Officer of RTL are unable to agree to the calculations in the Certificates within such time, then the dispute shall be referred to an independent firm of accountants agreed by the liquidator of the Company with the Relevant Officer of RTL (or failing agreement within 7 days of the end of that 4 week period, appointed, on the application of either the Company or RTL, by the President for the time being of the Institute of Chartered Accountants in England). The firm so appointed shall act as experts and not as arbitrators and shall be instructed to make its determination within 4 weeks of its appointment. The costs of such firm are to be borne as such firm decides. Once the calculations in the Certificates have been agreed by the liquidator of the Company with the Relevant
Officer of RTL or determined by the independent accountants, they shall be conclusive and binding.
(l) If RTL shall go into liquidation after the Company has gone into liquidation but before the liquidator has made a distribution under any of paragraphs (e), (f) or (g), then the Reference Date shall be the later of (i) the earliest date on which the liquidator of RTL is able to make a final distribution to creditors and the members of RTL, and (ii) the earliest date on which the liquidator of the Company is able to make a final distribution to creditors and members of the Company; and the Relevant Officer of RTL shall be the liquidator of RTL and not the auditor of RTL.
ALTERATION OF SHARE CAPITAL
4
Increase of share capital
The Company may from time to time by Ordinary Resolution increase its capital by such sum to be divided into shares of such amounts as the resolution shall prescribe. All new shares shall be subject to the provisions of the Statutes and of these Articles with reference to allotment, payment of calls, lien, transfer, transmission, forfeiture and otherwise.
5
Consolidation, subdivision and cancellation
(A)
The Company may by Ordinary Resolution:-
(i)
consolidate and divide all or any of its share capital into shares of larger amount than its existing shares;
(ii)
cancel any shares which, at the date of the passing of the resolution, have not been taken, or agreed to be taken, by any person and diminish the amount of its capital by the amount of the shares so cancelled;
sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the Memorandum of Association (subject, nevertheless, to the provisions of the Statutes), and so that the resolution whereby any share is sub-divided may determine that, as between the holders of the shares resulting from such sub-division, one or more of the shares may, as compared with the others, have any such preferred, deferred or other special rights, or be subject to any such restrictions, as the Company has power to attach to unissued or new shares.
(B)
Whenever as a result of a consolidation of shares any members would become entitled to fractions of a share, the Directors may, on behalf of those members, sell the shares representing the fractions for the best price reasonably obtainable to any person (including, subject to the provisions of the Act, the Company) and distribute the net proceeds of sale in due proportion among those members, and the Directors may authorise some person to transfer the shares to, or in accordance with the directions of, the purchaser. The transferee shall not be bound to see to the application of the purchase money nor shall his title to the shares be affected by any irregularity in or invalidity of the proceedings in reference to the sale so far as the Statutes allow, the
Directors may treat shares of a member in certificated form and in uncertificated form as separate holdings in giving effect to subdivisions and/or consolidations and may cause any shares arising on consolidation and representing fractional entitlements to be entered in the Register as shares in certificated form where this is desirable to facilitate the sale thereof.
6
Purchase of own shares
Subject to the provisions of the Statutes, and the provisions of Article 33, the Company may purchase, or may enter into a contract under which it will or may purchase, any of its own shares of any class (including any redeemable shares) but so that if there shall be in issue any shares convertible into equity share capital of the Company of the class proposed to be purchased, then the Company shall not purchase, or enter into a contract under which it will or may purchase, such equity shares unless either:-
(a) the terms of issue of such convertible shares include provisions permitting the Company to purchase its own equity shares; or
(b) the purchase, or the contract, has first been approved by an Extraordinary Resolution passed at a separate meeting of the holders of such convertible shares.
7
Reduction of capital
Subject to the provisions of the Act and the provisions of Article 33, the Company may by Special Resolution reduce its share capital or any capital redemption reserve, share premium account or other undistributable reserve in any way.
SHARES
8
Rights attaching to shares on issue
Without prejudice to any special rights previously conferred on the holders of any shares or class of shares for the time being issued, but subject to the provisions of Article 33 any share in the Company may be issued with such preferred, deferred or other special rights, or subject to such restrictions, whether as regards dividend, return of capital, voting or otherwise, as the Company may from time to time by Ordinary Resolution determine (or, in the absence of any such determination, as the Directors may determine) and subject to the provisions of the Statutes the Company may issue any shares which are, or at the option of the Company or the holder are liable, to be redeemed.
Without limiting Article 8 but notwithstanding any other provision to the contrary in these Articles, the Directors may issue a DLC Dividend Share in the capital of the Company to RTL or a wholly owned subsidiary of RTL on the following terms:
(a) the DLC Dividend Share does not confer on its holder any right:
(i)
to vote or to attend or be heard at any General Meeting;
(ii)
to redemption or, in a winding-up, to repayment of capital; or
(iii) subject
to Article 8A(b), to participate in assets or profits of the Company; or
(iv) to
receive notices of any General Meeting;
(b) the holder of the DLC Dividend Share shall not be entitled to receive a dividend on the share unless and until the following conditions have been satisfied:
(i) the Directors in their absolute discretion resolve to pay the dividend on the DLC Dividend Share;
(ii) the legal and beneficial owner of the DLC Dividend Share at the time of payment and declaration of the dividend is RTL or a wholly owned subsidiary of RTL;
(iii) in the case of the first dividend to be paid on the DLC Dividend Share, there has been at least one dividend paid on Ordinary Shares since the date of issue of the DLC Dividend Share;
(iv) in the case of subsequent dividends paid on the DLC Dividend Share, there has been at least one dividend paid on Ordinary Shares since the date of payment of the last dividend on the DLC Dividend Share; and
(v) the amount of the dividend on the DLC Dividend Share shall not exceed the prescribed percentage of the aggregate amount of the last dividend paid on Ordinary Shares.
For the purposes of this Article, the prescribed percentage shall be 100% or such lower percentage as the Board resolves at the date of issue of the DLC Dividend Share; and
(c)
upon the earlier of:
(i)
the registration of a transfer of the DLC Dividend Share to a person other
than RTL or a wholly owned subsidiary of RTL; and
(ii)
a person other than RTL or a wholly owned subsidiary of RTL becoming the
beneficial owner of the DLC Dividend Share,
the DLC Dividend Share will
convert to an Ordinary Share,
and the Directors may, at their absolute discretion, issue such a DLC Dividend Share from time to time provided that, at any one time, there is only one DLC Dividend Share in the capital of the Company in issue.
9
Directors’ power to allot
(A) Subject to the provisions of the Statutes relating to authority, pre-emption rights and otherwise and of any resolution of the Company in General Meeting passed pursuant thereto, all unissued shares shall be at the disposal of the Directors and they may allot (with or without conferring a right of renunciation), grant options over or otherwise dispose of them to such persons, at such times and on such terms as they think proper.
(B) (i)The Directors shall be generally and unconditionally authorised pursuant to and in accordance with Section 80 of the Act to exercise for each prescribed period all the powers of the Company to allot relevant securities up to an aggregate nominal amount equal to the Section 80 Amount.
(ii) During each prescribed period the Directors shall be empowered to allot equity securities wholly for cash pursuant to and within the terms of the said authority:-
(a)
in connection with a rights issue; and
(b)
otherwise than in connection with a rights issue, up to an aggregate nominal
amount equal to the Section 89 Amount;
as if Section 89(1) of the Act
did not apply to any such allotment.
(iii)
By such authority and power the Directors may during such period make offers
or agreements which would or might require the allotment of securities after
the expiry of such period.
(iv) For
the purposes of this Article:-
(a)
“rights issue” means an offer of securities open for acceptance
for a period fixed by the Directors to (i) holders on a record date fixed
by the Directors of registered Ordinary Shares in proportion to their respective
holdings and (ii) (if the Directors so decide but not otherwise) holders
on a record date fixed by the Directors of RTL Ordinary Shares in proportion
to their respective holdings of RTL Ordinary Shares and so that the ratio
of the entitlement per RTL Ordinary Share to the entitlement per Ordinary
Share shall (as nearly as practicable) equal the Equalisation Ratio and
(iii) other persons so entitled by virtue of the rights attaching to any
other securities held by them, but subject in all such cases to such exclusions
or other arrangements as the Directors may deem necessary or expedient in
relation to fractional entitlements or legal or practical problems under
the laws of, or the requirements of any recognised regulatory body or any
stock exchange in, any territory;
(b) “prescribed period” means in the first instance the period from the date of the adoption of these Articles to the date of the Annual General Meeting in 2007 or to 10 April 2007, whichever is the earlier, and shall thereafter mean any period (not exceeding 5 years on any occasion) for which the authority and power conferred by sub-paragraphs (i) and (ii) above are renewed by a Special Resolution of the Company stating the Section 80 Amount and Section 89 Amount for such period;
(c) “the Section 80 Amount” shall for the first prescribed period be £34.87 million and for any other prescribed period shall be that stated in the relevant Special Resolution or, in either case, any increased amount fixed by Resolution of the Company in General Meeting;
(d) “the Section 89 Amount” shall for the first prescribed period be £6.87 million and for any other prescribed period shall be that stated in the relevant Special Resolution; and
(e) the nominal amount of any securities shall be taken to be, in the case of rights to subscribe for or to convert any securities into shares of the Company, the nominal amount of such shares which may be allotted pursuant to such rights.
10
Commissions on issue of shares
The Company may exercise the powers of paying commissions conferred by the Statutes to the full extent thereby permitted. The Company may also on any issue of shares pay such brokerage as may be lawful.
11
Renunciation of allotment
The Directors may at any time after the allotment of any share but before any person has been entered in the Register as the holder:-
(A) recognise a renunciation thereof by the allottee in favour of some other person and may accord to any allottee of a share a right to effect such renunciation and/or
(B) allow the rights represented thereby to be one or more participating securities in each case upon and subject to such terms and conditions as the Directors may think fit to impose.
12
Trust etc. interests not recognised
Except as required by law, no person shall be recognised by the Company as holding any share upon any trust, and the Company shall not be bound by or compelled in any way to recognise any equitable, contingent, future or partial interest in any share, or any interest in any fractional part of a share, or (except only as by these Articles or by law otherwise provided) any other right in respect of any share, except an absolute right to the entirety thereof in the holder.
SHARE CERTIFICATES
13
Issue of share certificates
Every person (except a person to whom the Company is not required by law to issue a certificate) whose name is entered in the Register in respect of shares in certificated form shall upon the issue or transfer to him of such shares be entitled without payment to a certificate therefor (in the case of issue) within one month (or such longer period as the terms of issue shall provide) after allotment or (in the case of a transfer of fully-paid shares) within five business days after lodgement of the transfer or (in the case of a transfer of partly-paid shares) within two months after lodgement of the transfer.
Every share certificate shall be in physical form and shall be executed by the Company in such manner as the Directors may decide (which may include use of the Seal or Securities Seal (or, in the case of shares on a branch register, an official seal for use in the relevant territory) and/or manual or facsimile signatures by one or more Directors) and shall specify the number and class of shares to which it relates and the amount paid up thereon. No certificate shall be issued representing shares of more than one class.
15
Joint holders
In the case of a share held jointly by several persons in certificated form the Company shall not be bound to issue more than one certificate therefor and delivery of a certificate to one of the joint holders shall be sufficient delivery to all.
16
Replacement of share certificates
(A) Any two or more certificates representing shares of any one class held by any member may at his request be cancelled and a single new certificate for such shares issued in lieu without charge.
(B) If any member shall surrender for cancellation a share certificate representing shares held by him and request the Company to issue in lieu two or more share certificates representing such shares in such proportions as he may specify, the Directors may, if they think fit, comply with such request.
(C) If a share certificate shall be damaged or defaced or alleged to have been lost, stolen or destroyed, a new certificate representing the same shares may be issued to the holder upon request subject to delivery up of the old certificate or (if alleged to have been lost, stolen or destroyed) compliance with such conditions as to evidence and indemnity and the payment of any exceptional out-of-pocket expenses of the Company in connection with the request as the Directors may think fit.
(D) In the case of shares held jointly by several persons any such request may be made by any one of the joint holders.
CALLS ON SHARES
17
Power to make calls
The Directors may from time to time make calls upon the members in respect of any moneys unpaid on their shares (whether on account of the nominal value of the shares or, when permitted, by way of premium) but subject always to the terms of allotment of such shares. A call shall be deemed to have been made at the time when the resolution of the Directors authorising the call was passed and may be made payable by instalments.
Each member shall (subject to receiving at least 14 days notice specifying the time or times and place of payment) pay to the Company at the time or times and place so specified the amount called on his shares. The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof. A call may be revoked or postponed as the Directors may determine.
19
Interest on overdue amounts
If a sum called in respect of a share is not paid before or on the day appointed for payment thereof, the person from whom the sum is due shall pay interest on the sum from the day appointed for payment thereof to the time of actual payment at such rate (not exceeding 15 per cent. per annum) as the Directors determine but the Directors shall be at liberty in any case or cases to waive payment of such interest wholly or in part.
20
Other sums due on shares
Any sum (whether on account of the nominal value of the share or by way of premium) which by the terms of allotment of a share becomes payable upon allotment or at any fixed date shall for all the purposes of these Articles be deemed to be a call duly made and payable on the date on which by the terms of allotment the same becomes payable. In case of non-payment all the relevant provisions of these Articles as to payment of interest and expenses, forfeiture or otherwise shall apply as if such sum had become payable by virtue of a call duly made and notified.
21
Power to differentiate between holders
The Directors may on the allotment of shares differentiate between the holders as to the amount of calls to be paid and the times of payment.
22
Payment of calls in advance
The Directors may if they think fit receive from any member willing to advance the same all or any part of the moneys (whether on account of the nominal value of the shares or by way of premium) uncalled and unpaid upon the shares held by him and such payment in advance of calls shall extinguish pro tanto the liability upon the shares in respect of which it is made and upon the money so received (until and to the extent that the same would but for such advance become payable) the Company may pay interest at such rate as the member paying such sum and the Directors may agree.
FORFEITURE AND LIEN
23
Notice on failure to pay a call
(A) If a member fails to pay in full any call or instalment of a call on or before the due date for payment thereof, the Directors may at any time thereafter serve a notice on him requiring payment of so much of the call or instalment as is unpaid together with any interest which may have accrued thereon and any expenses incurred by the Company by reason of such non-payment.
(B) The notice shall name a further day (not being less than seven days from the date of service of the notice) on or before which and the place where the payment required by the notice is to be made, and shall state that in the event of non-payment in accordance therewith the shares on which the call has been made will be liable to be forfeited.
24
Forfeiture for non-compliance
If the requirements of any such notice as aforesaid are not complied with, any share in respect of which such notice has been given may at any time thereafter, before payment of all calls and interest and expenses due in respect thereof has been made, be forfeited by a resolution of the Directors to that effect. Such forfeiture shall include all dividends declared in respect of the forfeited share and not actually paid before forfeiture. The Directors may accept a surrender of any share liable to be forfeited hereunder.
25
Disposal of forfeited shares
A share so forfeited or surrendered shall become the property of the Company and may be sold, re-allotted or otherwise disposed of either to the person who was before such forfeiture or surrender the holder thereof or entitled thereto or to any other person upon such terms and in such manner as the Directors shall think fit and at any time before a sale, re-allotment or disposal the forfeiture or surrender may be cancelled on such terms as the Directors think fit. The Directors may, if necessary, authorise some person to transfer a forfeited or surrendered share to any such other person as aforesaid.
26
Holder to remain liable despite forfeiture
A member whose shares have been forfeited or surrendered shall cease to be a member in respect of the shares (and shall, in the case of shares held in certificated form, surrender to the Company for cancellation the certificate for such shares) but shall notwithstanding the forfeiture or surrender remain liable to pay to the Company all moneys which at the date of forfeiture or surrender were presently payable by him to the Company in respect of the shares with interest thereon at 15 per cent. per annum (or such lower rate as the Directors may determine) from the date of forfeiture or surrender until payment but the Directors may at their absolute discretion waive payment in whole or in part.
27
Tax liabilities
Whenever any law for the time being of any country, state or place imposes or purports to impose any immediate or future or possible liability upon the Company to make any payment or empowers any government or taxing authority or government official to require the Company to make any payment in respect of any shares registered in any of the Company’s registers as held either jointly or solely by any member or in respect of any dividends, bonuses or other moneys due or payable or accruing due or which may become due or payable to such member by the Company on or in respect of any shares registered as aforesaid or for or on account or in respect of any member and whether in consequence of:-
(A) the death of such member;
(B) the non-payment of any income tax or other tax by such member;
(C) the non-payment of any estate, probate, succession, death, stamp or other duty by the executor or administrator of such member or by or out of his estate;
(D) any other act or thing;
the Company in every such case:-
(i) shall be fully indemnified by such member or his executor or administrator from all liability;
(ii) shall have a lien upon all dividends and other moneys payable in respect of the shares registered in any of the Company’s registers as held either jointly or solely by such member for all moneys paid or payable by the Company in respect of the same shares or in respect of any dividends or other moneys aforesaid thereon or for or on account or in respect of such member under or in consequence of any such law together with interest at the rate of 15 per cent. per annum thereon from date of payment to date of repayment and may deduct or set off against any such dividends or other moneys payable as aforesaid any moneys paid or payable by the Company as aforesaid together with interest as
aforesaid;
(iii) may recover as a debt due from such member or his executor or administrator wherever constituted any moneys paid by the Company under or in consequence of any such law and interest thereon at the rate and for the period aforesaid in excess of any dividends or other moneys as aforesaid then due or payable by the Company;
(iv) may if any such money is paid or payable by the Company under any such law as aforesaid refuse to register a transfer of any shares by any such member or his executor or administrator until such money and interest as aforesaid is set off or deducted as aforesaid or in case the same exceeds the amount of any such dividends or other moneys as aforesaid then due or payable by the Company until such excess is paid to the Company.
Nothing herein contained shall prejudice or affect any right or remedy which any law may confer or purport to confer on the Company and as between the Company and every such member as aforesaid, his executor, administrator, and estate wheresoever constituted or situate, any right or remedy which such law shall confer or purport to confer on the Company shall be enforceable by the Company.
28
Lien on partly-paid shares
The Company shall have a first and paramount lien on every share (not being a fully-paid share) for all moneys (whether presently payable or not) called or payable at a fixed time in respect of such share and the Directors may waive any lien which has arisen and may resolve that any share shall for some limited period be exempt wholly or partially from the provisions of this Article.
29
Sale of shares subject to lien
(A) The Company may sell in such manner as the Directors think fit any share on which the Company has a lien, but no sale shall be made unless some sum in respect of which the lien exists is presently payable nor until the expiration of 14 days after a notice in writing demanding payment of the sum presently payable and giving notice of intention to sell the share in default of payment shall have been given to the holder for the time being of the share or the person entitled thereto by reason of his death or bankruptcy or otherwise by operation of law.
(B) The net proceeds of such sale after payment of the costs of such sale shall be applied in or towards payment or satisfaction of the amount in respect whereof the lien exists so far as the same is then payable and any residue shall, upon surrender, in the case of shares held in certificated form, to the Company for cancellation of the certificate for the shares sold and subject to a like lien for sums not presently payable as existed upon the shares prior to the sale, be paid to the person entitled to the shares at the time of the sale. For the purpose of giving effect to any such sale the Directors may authorise some person to transfer the shares sold to, or in accordance with the directions of, the
purchaser.
30
Evidence of forfeiture
A statutory declaration in writing that the declarant is a Director or the Secretary and that a share has been duly forfeited or surrendered or sold to satisfy a lien of the Company on a date stated in the declaration shall be conclusive evidence of the facts therein stated as against all persons claiming to be entitled to the share. Such declaration shall (subject to the relevant share transfer being made if the same be required) constitute a good title to the share and the person to whom the share is sold, re-allotted or disposed of shall not be bound to see to the application of the consideration (if any) nor shall his title to the share be affected by any irregularity or invalidity in the proceedings relating to the forfeiture, surrender,
sale, re-allotment or disposal of the share.
VARIATION OF RIGHTS
31
Manner of variation of rights
(A) Whenever the share capital of the Company is divided into different classes of shares, the special rights attached to any class may, subject to the provisions of the Statutes and the provisions of Article 33, be varied or abrogated either with the consent in writing of the holders of three-fourths of the issued shares of the class or with the sanction of an Extraordinary Resolution passed at a separate meeting of the holders of the shares of the class (but not otherwise) and may be so varied or abrogated either whilst the Company is a going concern or during or in contemplation of a winding-up.
(B) To every such separate meeting all the provisions of these Articles relating to General Meetings and to the proceedings thereat shall mutatis mutandis apply, except that the necessary quorum shall be two persons at least holding or representing by proxy at least one-third in nominal amount of the issued shares of the class (but so that if at any adjourned meeting a quorum as above defined is not present, any two holders of shares of the class present in person or by proxy shall be a quorum) and that any holder of shares of the class present in person or by proxy may demand a poll and that every such holder shall on a poll have one vote for every share of the class held by him.
(C) The foregoing provisions of this Article shall apply to the variation or abrogation of the special rights attached to some only of the shares of any class as if the shares concerned and the remaining shares of such class formed two separate classes the special rights whereof are in each case to be varied.
The special rights attached to
any class of shares having preferential rights shall not unless otherwise
expressly provided by the terms of issue thereof be deemed to be varied
by the creation or issue of further shares ranking as regards participation
in the profits or assets of the Company in some or all respects pari
passu therewith but in no respect in priority thereto.
33
Separate approvals of Class Rights Actions
(A) The following matters shall constitute Class Rights Actions if undertaken by either the Company or RTL:-
(i) the offer to holders of its existing ordinary shares generally of shares or other securities for subscription or purchase:-
(a) by way of rights (otherwise than by Matching Offers), where the proposed offer (when aggregated with (I) any previous offers by either company of shares or other securities for cash by way of rights or otherwise but not under Matching Offers, (II) any sales other than intra Rio Tinto Group sales by a member of the Rio Tinto Group of RTL Ordinary Shares and (III) any sales, other than intra RTL Group sales, by a member of the RTL Group of Ordinary Shares, in each case in the relevant period) exceeds the then most Limiting Restriction that for the time being would be applicable were shares or other securities of the description proposed to be offered in fact offered for cash otherwise than pro rata by way of
rights to existing shareholders of the relevant class either by RTL or by the Company; or
(b) otherwise than by way of rights, at below Market Value;
(ii) the reduction or redemption of the company’s ordinary share capital by way of a capital repayment to holders of its ordinary shares or a cancellation of unpaid ordinary share capital;
(iii) the purchase by the company of its own ordinary shares (except for such a purchase at, around or below prevailing market prices for those shares where the purchase occurs in accordance with Applicable Regulation);
(iv) the voluntary liquidation of the company;
(v) an adjustment to the Equalisation Ratio otherwise than in accordance with paragraph 5 of Schedule 2 to the Sharing Agreement;
(vi) the amendment to the terms of, or termination of, the Sharing Agreement, the Rio Tinto Shareholder Voting Agreement or the RTL Shareholder Voting Agreement other than, in the case of the RTL Shareholder Voting Agreement or the Rio Tinto Shareholder Voting Agreement, an amendment to conform such agreement with the terms of the Sharing Agreement or, in any case, by way of formal or technical amendment which is not materially prejudicial to the interests of the shareholders of either company or is necessary to correct any inconsistency or manifest error or is by way of an amendment agreed between the companies pursuant to Clause 17.6 of the Sharing Agreement or the equivalent provisions of any other such
document;
(vii) any amendment to, or removal of, or the alteration of the effect of (which for the avoidance of doubt shall be taken to include the ratification of any breach of), any Rio Tinto Entrenched Provision;
(viii) any amendment to, or removal of, or alteration of the effect of (which for the avoidance of doubt shall be taken to include the ratification of any breach of), any RTL Entrenched Provision; and
(ix) the doing of anything which the Directors of the Company (or a duly constituted committee of the Directors) and the Board of RTL agree (either in a particular case or generally) should be treated as a Class Rights Action.
(B) Any Class Rights Action by the Company (apart from those specified in sub-paragraph (vii) of paragraph (A) of this Article) shall be deemed to be a variation of the rights of the Special Voting Share and shall accordingly be effective only with the consent in writing of the holder of the Special Voting Share and without such consent shall not be done or caused or permitted to be done.
(C) Any Class Rights Action of a type specified in sub-paragraph (vii) of paragraph (A) of this Article shall be effective only with the approval of a Special Resolution on which the holder of the Special Voting Share shall be entitled, and bound, to vote in accordance with Article 60(B)(i) and the RTL Shareholder Voting Agreement. Any other Class Rights Action by the Company shall (in addition to the consent required under paragraph (B)) be effective only with such approval of the shareholders of the Company (apart from the holder of the Special Voting Share) as is required by Applicable Regulation and the Sharing Agreement.
TRANSFER OF SHARES
34
Form of transfer
(A) All transfers of shares, which are in certificated form may be effected by transfer in writing (which must be in physical form) in any usual or common form or in any other form acceptable to the Directors and may be under hand only. The instrument of transfer shall be signed by or on behalf of the transferor and (except in the case of fully-paid shares) by or on behalf of the transferee. The transferor shall remain the holder of the shares concerned until the name of the transferee is entered in the Register in respect thereof.
(B) All transfers of shares which are in uncertificated form may be effected by means of a relevant system.
35
Balance certificate
Where some only of the shares comprised in a share certificate are transferred the old certificate shall be cancelled and, to the extent that the balance is to be held in certificated form, a new certificate for the balance of such shares issued in lieu without charge.
36
Right to refuse registration
(A) The Directors may decline to recognise any instrument of transfer relating to shares in certificated form unless it is in respect of only one class of share and is lodged (duly stamped if required) at the Transfer Office accompanied by the relevant share certificate(s) and such other evidence as the Directors may reasonably require to show the right of the transferor to make the transfer (and, if the instrument of transfer is executed by some other person on his behalf, the authority of that person so to do). In the case of a transfer of shares in certificated form by a recognised clearing house or a nominee of a recognised clearing house or of a recognised investment exchange the lodgment of share certificates
will only be necessary if and to the extent that certificates have been issued in respect of the shares in question.
(B) The Directors may, in the case of securities in certificated form in their absolute discretion and without assigning any reason therefor, refuse to register any transfer of shares (not being fully-paid shares) provided that, where any such shares are admitted to the Official List maintained by the UK Listing Authority, such discretion may not be exercised in such a way as to prevent dealings in the shares of that class from taking place on an open and proper basis. The Directors may also refuse to register an allotment or transfer of shares (whether fully-paid or not) in favour of more than four persons jointly. If the Directors refuse to register a transfer they shall within two months after the date on
which:
(i) the instrument of transfer was lodged (in the case of shares held in certificated form); or
(ii) the Operator-instruction was received by the Company (in the case of shares held in uncertificated form),
send to the transferee notice of the refusal.
(C) The Directors shall decline to register any transfer of the Special Voting Share unless the transfer is to a new RTL Shareholder SVC in accordance with the RTL Shareholder Voting Agreement. The Directors shall decline to register any transfer of the Equalisation Share unless the transfer is to a member of the RTL Group or a trustee for the benefit of a member or members of the RTL Group.
37
Retention of transfers
All instruments of transfer which are registered
may be retained by the Company.
38
No fee on registration
No fee will be charged by the Company in respect of the registration of any transfer or other document relating to or affecting the title to any shares or otherwise for making any entry in the Register affecting the title to any shares.
39
Closure of Register
The registration of transfers may be suspended at such times and for such periods (not exceeding 30 days in any year) as the Directors may from time to time determine and either generally or in respect of any class of shares, except that, in respect of any shares which are participating Securities, the Register of Members shall not be closed without the consent of the Operator.
40
Branch Register
Subject to and to the extent permitted by the Statutes, the Company, or the Directors on behalf of the Company, may cause to be kept in any territory a branch register of members resident in such territory, and the Directors may make and vary such regulations as they may think fit respecting the keeping of any such register.
In case of the death of a member, the survivors or survivor where the deceased was a joint holder, and the executors or administrators of the deceased where he was a sole or only surviving holder, shall be the only persons recognised by the Company as having any title to his interest in the shares, but nothing in this Article shall release the estate of a deceased member (whether sole or joint) from any liability in respect of any share held by him.
42
Election by persons entitled by transmission
A person becoming entitled to a share in consequence of the death or bankruptcy of a member or otherwise by operation of law may (subject as hereinafter provided) upon supplying to the Company such evidence as the Directors may reasonably require to show his title to the share either be registered himself as holder of the share upon giving to the Company notice in writing to that effect or transfer such share to some other person. All the limitations, restrictions and provisions of these Articles relating to the right to transfer and the registration of transfers of shares shall be applicable to any such notice or transfer as aforesaid as if the notice or transfer were a transfer made by the member registered as the holder of any such
share.
43
Rights of persons entitled by transmission
Save as otherwise provided by or in accordance with these Articles, a person becoming entitled to a share in consequence of the death or bankruptcy of a member or otherwise by operation of law (upon supplying to the Company such evidence as the Directors may reasonably require to show his title to the share) shall be entitled to the same dividends and other advantages as those to which he would be entitled if he were the registered holder of the share except that he shall not be entitled in respect thereof (except with the authority of the Directors) to exercise any right conferred by membership in relation to shareholders’ meetings until he shall have been registered as a member in respect of the share.
SHARE WARRANTS
44
If the Company is required to issue any Share Warrants pursuant to the 1962 Scheme, the Directors shall, from time to time, determine the terms and conditions upon which such Share Warrants shall be issued. For the purposes of this Article, the “1962 Scheme” means the scheme of arrangement entered into by The Consolidated Zinc Corporation Limited and the Rio Tinto Company Limited in 1962 in conjunction with the merger of the two companies.
(A)The Company shall be entitled to sell at the best price reasonably obtainable at the time of sale the shares of a member or the shares to which a person is entitled by virtue of transmission on death or bankruptcy or otherwise by operation of law if and provided that:-
(i) during the period of 12 years prior to the date of the publication of the advertisements referred to in paragraph (ii) below (or, if published on different dates, the first thereof) at least three dividends in respect of the shares have become payable and no dividend in respect of those shares has been claimed; and
(ii) the Company shall on expiry of such period of 12 years have inserted advertisements in both a national newspaper and in a newspaper circulating in the area in which the last known postal address of the member or the address at which service of notices may be effected under these Articles is located giving notice of its intention to sell the said shares; and
(iii) during the period of three months following the publication of such advertisements the Company shall have received no communication from or on behalf of such member or person.
(B) To give effect to any such sale the Company may appoint any person to transfer, as transferor, the said shares and such transfer shall be as effective as if it had been carried out by the registered holder of or person entitled by transmission to such shares and the title of the transferee shall not be affected by any irregularity or invalidity in the proceedings relating thereto. The net proceeds of sale shall belong to the Company which shall be obliged to account to the former member or other person previously entitled as aforesaid for an amount equal to such proceeds and shall enter the name of such former member or other person in the books of the Company as a creditor for such amount which shall be a
permanent debt of the Company. No trust shall be created in respect of the debt, no interest shall be payable in respect of the same and the Company shall not be required to account for any money earned on the net proceeds, which may be employed in the business of the Company or invested in such investments (other than shares of the Company or its holding company if any) as the Directors may from time to time think fit.
GENERAL MEETINGS
46
Annual and Extraordinary General Meetings
An Annual General Meeting shall be held once in every year, at such time (within a period of not more than 15 months after the holding of the last preceding Annual General Meeting) and place as may be determined by the Directors. All other General Meetings shall be called Extraordinary General Meetings.
(A) The Directors may whenever they think fit, and shall on requisition in accordance with the Statutes, proceed with proper expedition to convene an Extraordinary General Meeting.
(B) In the case of any General Meeting the Directors or the chairman of the meeting may, notwithstanding the notice specifying the place of the meeting or adjourned meeting (the “principal place”), make arrangements for simultaneous attendance at and participation in (including by way of video link) the meeting or adjourned meeting at that or any other place by persons entitled to attend the meeting, provided that persons attending at any particular place shall be able to see and hear, and be seen and heard by, persons attending at the other place or places at which the meeting is convened.
(C) The Directors may, from time to time, make such arrangements for the purpose of ensuring that the level of attendance at any place at which any General Meeting takes place is consistent with the orderly conduct of the meeting as they shall, in their absolute discretion, consider appropriate, and may from time to time vary any such arrangements or make any new arrangements in place of them, provided that the entitlement of a member to attend a meeting or adjourned meeting shall be satisfied by his being given the entitlement to attend at such place (fulfilling the conditions specified in paragraph (B) of this Article) as may be specified by the Directors for the purposes of this Article.
(D)
For the purposes of all other provisions of these Articles any such meeting
shall be treated as being held and taking place at the principal place.
NOTICE OF GENERAL MEETINGS
48
Length of notice for General Meetings
An Annual General Meeting and any Extraordinary General Meeting at which it is proposed to pass a Special Resolution or (save as provided by the Statutes) a resolution of which special notice has been given to the Company, shall be called by 21 days’ notice in writing at the least and any other Extraordinary General Meeting by 14 days’ notice in writing at the least. The period of notice shall in each case be exclusive of the day on which it is served or deemed to be served and of the day on which the meeting is to be held and shall be given in manner hereinafter mentioned to all members other than such as are not under the provisions of these Articles entitled to receive such notices from the Company provided that the Company may
determine that only those persons entered on the Register at the close of business on a day determined by the Company, such day being no more than 21 days before the day that notice of the meeting is sent, shall be entitled to receive such a notice and provided also that a General Meeting notwithstanding that it has been called by a shorter notice than that specified above shall be deemed to have been duly called if it is so agreed:-
(A) in the case of an Annual General Meeting by all the members entitled to attend and vote thereat; and
(B) in the case of an Extraordinary General Meeting by a majority in number of the members having a right to attend and vote thereat, being a majority together holding not less than 95 per cent. in nominal value of the shares giving that right.
49
Contents of notice of General Meetings
(A) Every notice calling a General Meeting shall specify the place and the day and hour of the meeting, and there shall appear with reasonable prominence in every such notice a statement that a member entitled to attend and vote is entitled to appoint a proxy or proxies to attend and, on a poll, vote instead of him and that a proxy need not be a member of the Company.
(B) The notice shall specify the general nature of the business to be transacted at the meeting; and if any resolution is to be proposed as an Extraordinary Resolution or as a Special Resolution, the notice shall contain a statement to that effect.
(C) In the case of an Annual General Meeting, the notice shall also specify the meeting as such.
(D)
For the purposes of determining which persons are entitled to attend or
vote at a meeting and how many votes such person may cast, the Company may
specify in the notice of the meeting a time, not more than 48 hours before
the time fixed for the meeting, by which a person must be entered on the
Register in order to have the right to attend or vote at the meeting.
PROCEEDINGS AT GENERAL MEETINGS
50
Chairman
The Chairman of the Directors, failing whom a Deputy Chairman, shall preside as chairman at a General Meeting. If there is no such Chairman or Deputy Chairman, or if at any meeting neither is present within five minutes after the time appointed for holding the meeting and willing to act, the Directors present shall choose one of their number (or, if no Director is present or if all the Directors present decline to take the chair, the members present and entitled to vote shall choose one of their number) to be chairman of the meeting.
51
Quorum
No business other than the appointment of a chairman shall be transacted at any General Meeting unless a quorum is present at the time when the meeting proceeds to business. Three members present in person and entitled to vote shall be a quorum for all purposes.
52
Lack of quorum
If within five minutes from the time appointed for a General Meeting (or such longer interval as the chairman of the meeting may think fit to allow) a quorum is not present, or if during the meeting a quorum ceases to be present, the meeting, if convened on the requisition of members, shall be dissolved. In any other case it shall stand adjourned to such other day and such time and place as may have been specified for the purpose in the notice convening the meeting or (if not so specified) as the chairman of the meeting may determine, and if at such adjourned meeting a quorum is not present within five minutes from the time appointed for holding the meeting, the members present in person or by proxy shall be a quorum.
The chairman shall take such action as he thinks fit to promote the orderly conduct of the business of any General Meeting as laid down in the notice of the meeting and the chairman’s decision, made in good faith, on matters of procedure or arising incidentally from the business of the meeting shall be final as shall be his determination, acting in good faith, as to whether any matter is of such a nature.
54
Adjournment and notice of adjourned meeting
(A) The chairman may at any time without the consent of the meeting adjourn any General Meeting at which a quorum is present either sine die or to another time or place where it appears to him that (a) the members wishing to attend cannot be conveniently accommodated in the place appointed for the meeting, or (b) the conduct of persons present prevents or is likely to prevent the orderly continuation of business, or (c) an adjournment is desirable in view of the timing of a general meeting or adjourned general meeting of RTL, or (d) an adjournment is otherwise necessary so that the business of the meeting may be properly conducted. In addition, the chairman may at any time with the consent of any General
Meeting at which a quorum is present (and shall if so directed by the meeting) adjourn the meeting either sine die or to another time and place. When a meeting is adjourned sine die the time and place for the adjourned meeting shall be fixed by the Directors. No business shall be transacted at any adjourned meeting except business which might properly have been transacted at the meeting had the adjournment not taken place.
(B) When a meeting is adjourned for 30 days or more or sine die, not less than seven days’ notice of the adjourned meeting shall be given in like manner as in the case of the original meeting.
(C) Save as hereinbefore expressly provided, it shall not be necessary to give any notice of an adjournment or of the business to be transacted at an adjourned meeting.
55
Amendments to resolutions
If an amendment shall be proposed to any resolution under consideration but shall be ruled out of order by the chairman of the meeting, the proceedings on the substantive resolution shall not be invalidated by any error in the ruling. In the case of a resolution duly proposed as a special or extraordinary resolution, no amendment thereto (other than a mere clerical amendment to correct a patent error) may in any event be considered or voted upon. In the case of a resolution duly proposed as an ordinary resolution, no amendment thereto (other than a mere clerical amendment to correct a patent error or an amendment to conform such resolution to a resolution duly proposed at the nearly contemporaneous meeting of RTL) may be considered or voted upon
unless written notice (which must be in physical form) of such proposed amendment is given to the Office at least 48 hours prior to the time appointed for holding the relevant meeting or adjourned meeting or (in the absence of any such notice) the chairman of the meeting in his absolute discretion rules that the amendment shall be considered.
(A) Subject to paragraph (B) of this Article, at any General Meeting a resolution put to the vote of the meeting on which the holder of the Special Voting Share is entitled to vote (other than a resolution of a procedural nature) shall be decided on a poll (although the Chairman may first put the resolution to a show of hands) and any other resolution put to the vote of the meeting shall be decided on a show of hands unless a poll is (before, or on the declaration of the result of, the show of hands) demanded by:-
(i)
the chairman of the meeting;
(ii) not less than five members present in person or by proxy and entitled to vote;
(iii) a member or members present in person or by proxy and representing not less than one-tenth of the total voting rights of all the members having the right to vote at the meeting;
(iv) a member or members present in person or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the shares conferring that right; or
(v)
the holder of the Special Voting Share.
(B) On a question of adjournment, a poll may only be demanded by the chairman of the meeting.
(C) A demand for a poll may, before the poll is taken, be withdrawn but only with the consent of the chairman of the meeting. If a demand for a poll is so withdrawn:-
(i)
before the result of a show of hands is declared, the meeting shall continue
as if the demand has not been made; or
(ii) after the result of a show of hands is declared, the demand shall not be taken to have invalidated the result of that show of hands.
57
Procedure on a poll
A poll shall be taken in such manner (including the use of ballot or electronic voting or voting papers or tickets) as the chairman of the meeting may direct, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. The chairman of the meeting may (and if so directed by the meeting shall) appoint scrutineers (who need not be members) and may adjourn the meeting to some place and time fixed by him for the purpose of declaring the result of the poll.
58
Voting on a poll
On a poll votes may be given either personally or by proxy and a person entitled to more than one vote need not use all his votes or cast all the votes he uses in the same way.
A poll validly demanded on the choice of a chairman or on a question of adjournment shall be taken forthwith. A poll validly demanded on any other question shall be taken either immediately or at such subsequent time (not being more than 30 days from the date of the meeting) and place as the chairman may direct. A poll on a resolution on which the holder of the Special Voting Share is entitled to vote shall be taken either immediately or at such subsequent time (not being more than 30 days from the date of the meeting) and place as the chairman may direct and shall remain open for so long as the chairman may determine. Any poll may as the chairman shall direct close at different times for different classes of shareholder. No notice need be given
of a poll not taken immediately. The demand for a poll or requirement that a poll be taken shall not prevent the continuance of the meeting for the transaction of any business other than the question on which the poll has been demanded, or is required.
VOTES OF MEMBERS
60
Votes attaching to shares
(A) Subject to the provisions of these Articles with regard to any special rights or restrictions as to voting attached by or in accordance with these Articles to any class of shares and to Article 49(D), on a show of hands every member who is present in person shall have one vote and on a poll every member who is present in person or by proxy shall have one vote for every Ordinary Share of which he is the holder and the Specified Number (as defined in paragraph (B) below) of votes for the Special Voting Share of which he is the holder. The Equalisation Share shall not entitle its holder to attend or vote at any General Meeting.
(B) The holder of the Special Voting Share shall be entitled to attend at any General Meeting and, subject to the provisions below, to cast on a poll the Specified Number of votes some of which may be cast for and others against any resolution in such numbers as the holder may determine. The Specified Number of votes in relation to a resolution of the Company on a Joint Decision shall be the total number of votes attaching to Publicly-held RTL Ordinary Shares (excluding any Publicly-held RTL Ordinary Shares which to the Directors’ knowledge are held by or on behalf of an Excluded RTL Holder or by or on behalf of a member on whom a notice has been served pursuant to Article 64(E) or on whom a direction notice
under Article 63 has been served which in either case has not been complied with to the satisfaction of the Directors or withdrawn) which were cast on the poll on the equivalent resolution at the nearly contemporaneous general meeting of RTL multiplied by the Equalisation Fraction. The Specified Number of votes which may be cast in relation to a resolution of the Company which is not a Joint Decision shall be zero except that (i) on any resolution to approve a Class Rights Action by the Company falling within Article 33(A)(vii) and on any resolution to amend, remove or alter the effect of any provision of the Company’s Memorandum of Association or these Articles which the Directors (or a duly constituted committee of the Directors) and the Board of RTL agree should be treated as a
Class Rights Action, the Specified Number of votes shall be equal to 34 per cent., rounded up to the next higher whole number, of the aggregate number of votes attaching to all other classes of issued shares in the Company which could be cast on such resolution and such votes may only be cast by the holder of the Special Voting Share against such resolution and (ii) on any procedural resolution in relation to the Company put to a General Meeting at which a Joint Decision Matter is to be considered the Specified Number of votes which may be cast shall be the maximum number of votes attached to all Publicly-held RTL Ordinary Shares (excluding any Publicly-held RTL Ordinary Shares which to the Directors’ knowledge are held by or on behalf of an Excluded RTL Holder or by or on behalf of
a member on whom a notice has been served pursuant to Article 64(E) or on whom a direction notice under Article 63 has been served which in either case has not been complied with to the satisfaction of the Directors or withdrawn) which were cast on any resolution on a Joint Decision Matter at the nearly contemporaneous general meeting of RTL (or, if the nearly contemporaneous general meeting of RTL has not been held and such votes counted by the beginning of the relevant General Meeting of the Company, the maximum number of such votes as are authorised to be so cast upon proxies lodged with RTL by such time as the Chairman may determine) multiplied by the Equalisation Fraction and rounded up to the nearest whole number. The Special Voting Share shall not entitle its holder to vote on any
show of hands.
In the case of joint holders
of a share the vote of the senior who tenders a vote, whether in person
or by proxy, shall be accepted to the exclusion of the votes of the other
joint holders and for this purpose seniority shall be determined by the
order in which the names stand in the Register in respect of the share.
62
Chairman’s casting vote
In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting at which the show of hands takes place or at which the poll is demanded shall be entitled to a casting vote in addition to any other vote he may have.
63
Restriction on voting in particular circumstances
(A) No member shall, unless the Directors otherwise determine, be entitled in respect of any share held by him to vote either personally or by proxy at a shareholders meeting or to exercise any other right conferred by membership in relation to shareholders meetings if any call or other sum presently payable by him to the Company in respect of that share remains unpaid.
(B) If any member, or any other person appearing to be interested in shares held by such member, has been duly served with a notice under Section 212 of the Act and is in default for a period of 14 days in supplying to the Company the information thereby required, then the Directors may in their absolute discretion by notice (a “direction notice”) to such member direct that in respect of:-
(i) the shares comprising the shareholding account in the Register which comprises or includes the shares in relation to which the default occurred (all or the relevant number as appropriate of such shares being the “default shares”, which expression shall include any further shares which are issued in respect of such shares); and
(ii) any other shares held by the member,
the member shall not (for so long as the default continues) nor shall any transferee to whom any of such shares are transferred other than pursuant to an approved transfer or pursuant to paragraph (C)(ii) below be entitled to attend or vote either personally or by proxy at a shareholders’ meeting or to exercise any other right conferred by membership in relation to shareholders’ meetings.
(C) Where the default shares represent 0.25 per cent. or more of the issued shares of the class in question, the direction notice may also direct that:-
(i)
any dividend or part thereof or other money which would otherwise
be payable in respect of the default shares shall be retained by the Company
without any liability to pay interest thereon when such money is finally
paid to the member and the member shall not be entitled to elect to receive
shares in lieu of dividend; and/or
(ii) no transfer of any of the shares held by such member shall be registered unless the transfer is an approved transfer or:-
(a)
the member is not himself in default as regards supplying the information
required; and
(b) the transfer is of part only of the member’s holding and, when presented for registration, is accompanied by a certificate by the member in a form satisfactory to the Directors to the effect that after due and careful enquiry the member is satisfied that none of the shares the subject of the transfer are default shares provided that, in the case of shares in uncertificated form, the Directors may only exercise their discretion not to register a transfer if permitted to do so by the Regulations.
Any direction notice may treat shares of a member in certificated and uncertificated form as separate holdings and either apply only to the former or to the latter or make different provision for the former and the latter.
(D) The Company shall send to each other person appearing to be interested in the shares the subject of any direction notice a copy of the notice, but the failure or omission by the Company to do so shall not invalidate such notice.
(E) (i)Save as herein provided any direction notice shall have effect in accordance with its terms for so long as the default in respect of which the direction notice was issued continues and shall cease to have effect thereafter upon the Directors so determining (such determination to be made within a period of one week of the default being duly remedied with written notice thereof being given forthwith to the member).
(ii) Any direction notice shall cease to have effect in relation to any shares which are transferred by such member by means of an approved transfer or in accordance with paragraph (C)(ii) above.
(F) For the purposes of this Article:-
(i)
a person shall be treated as appearing to be interested in any shares if
the member holding such shares has been served with a notice under the said
Section 212 and either (a) the member has named such person as being so
interested or (b) (after taking into account the response of the member
to the said notice and any other relevant information) the Company knows
or has reasonable cause to believe that the person in question is or may
be interested in the shares; and
(ii) a transfer of shares is an approved transfer if:-
(a) it is a transfer of shares to an offeror by way or in pursuance of acceptance of a takeover offer (as defined in Section 428 of the Act); or
(b) the Directors are satisfied that the transfer is made pursuant to a bona fide sale of the whole of the beneficial ownership of the shares to a party unconnected with the member or with any person appearing to be interested in such shares including any such sale made through the London Stock Exchange or any other stock exchange outside the United Kingdom on which the Company’s shares are normally traded. For the purposes of this sub-paragraph any associate (as that term is defined in Section 435 of the Insolvency Act 1986) shall be included amongst the persons who are connected with the member or any person appearing to be interested in such shares.
(G) The provisions of this Article are in addition and without prejudice to the provisions of the Act.
64
Change of control
(A) The purpose of this Article is to place restrictions upon any person (other than a Permitted Person as defined below) who directly or indirectly owns or controls shares in the Company or RTL or both which would otherwise enable such person to cast on a poll (directly, or indirectly through the Special Voting Share) 20 per cent. or more of the votes generally exercisable on a Joint Decision at general meetings of the Company. If the person is only entitled to or interested in shares of the Company, the restrictions only apply if that person is able to cast on a poll 30 per cent. or more of the votes generally exercisable at General Meetings (excluding any votes attaching to the Special Voting Share).
(B) In this Article:-
(i)
“Accepting Shareholder” means any person who has, in respect
of the whole of that person’s Interest in Ordinary Shares or Entitlement
to RTL Shares, accepted or given irrevocable undertakings to accept offers
made under a takeover offer which complies with the Code or under a takeover
scheme or takeover announcement which complies with Chapter 6 of the Corporations
Act (or both);
(ii)
“Additional Interest” means any such interest as is referred
to in paragraph (ix)(b) below;
(iii) “ADR Depositary” means a custodian or depositary or his nominee, approved by the Directors, under contractual arrangements with the Company by which he or that nominee holds Ordinary Shares and he or another person issues American Depositary Receipts evidencing rights in relation to those shares or a right to receive them;
(iv) “Associate” means a person who is for the time being an associate of another person for the purposes of Part 1.2 Division 2 of the Corporations Law;
(v)
“concert parties” means persons for the time being acting in
concert within the meaning of the Code;
(vi) “Code” means The City Code on Takeovers and Mergers as from time to time modified or replaced;
(vii) “Entitlement”
in relation to shares in RTL means the entitlement in respect of shares
resulting through a person being entitled to those shares as that term is
defined in Section 609 of the Corporations Law;
(viii) “Holder”
is as defined in paragraph (K) below;
(ix) “Interest”
in relation to shares in the Company, means:-
(a) any interest in Ordinary Shares which would be taken into account in determining for the purposes of Part VI of the Original Act whether a person has a notifiable interest (including any interest which he would be taken as having for those purposes); and
(b) any interest in Ordinary Shares (an “Additional Interest”) mentioned in Section 209(1)(a), (b), (c), (d), (e), (f), (g) or (h) of the Original Act (except that of a bare trustee) or mentioned in Section 208(4)(b) of the Original Act (but on the basis that the entitlement there referred to could arise under an agreement within the meaning in Section 204(5) and (6) of that Act),
and “Interested” shall be construed accordingly;
(x) the “Original Act” means the Companies Act 1985 as in force at the date of adoption of this Article and notwithstanding any repeal, modification or re-enactment thereof after that date (including for the avoidance of doubt, any amendment, replacement or repeal by regulations made by the Secretary of State pursuant to Section 210A of that Act to the definition of relevant share capital in Section 198(2) or to the provisions as to what is taken to be an interest in shares in Section 208 or as to what interests are to be disregarded in Section 209 or the percentage giving rise to a notifiable interest in Section 199(2));
(xi) “Permitted Holding” means:-
(a) any Entitlement to RTL Ordinary Shares, arising as a result of two or more persons becoming Associates, in relation to the acquisition of which an exemption or declaration under Section 655A of the Corporations Act is in force, with the effect that the acquisition of such Entitlement would not breach Section 606 of the Corporations Act;
(b) any Interest in shares in the Company or an Entitlement to RTL Ordinary Shares held solely by a person as a bare trustee or by a person who, if the incidents of that person’s Interest or Entitlement were governed by the laws of England, would in the opinion of the Directors be regarded as a bare trustee in respect of that Interest or Entitlement;
(c) any Interest of a person in shares in the Company or any Entitlement of a person to any RTL Ordinary Shares which under arrangements approved by the Directors and the directors of RTL respectively have been allotted or issued with a view to that person (or purchasers from that person) offering the same to the public within a period not exceeding three months from the date of the relevant allotment or issue;
(d) any Interest of a person in shares in the Company or any Entitlement of a person to any RTL Ordinary Shares which the Directors are satisfied is held by virtue only of that person being entitled to exercise or control the exercise of 20 per cent. or more of the voting power at general meetings of a company which is a Permitted Person;
(e) any Interest or Entitlement of a Permitted Person, other than RTL Shareholder SVC or RTP Shareholder SVC;
(xii) “Permitted
Person” means:-
(a) any member of the Rio Tinto Group;
(b) any member of the RTL Group;
(c) RTL Shareholder SVC;
(d) RTP Shareholder SVC;
(e) an ADR Depositary, acting in his capacity as such;
(f) The Depositary Trust Company or any successor and/or its nominee acting in the capacity of a clearing agency in respect of dealings in American Depositary Receipts;
(g) a clearing house or a nominee of a recognised clearing house or of a recognised investment exchange who is designated as mentioned in Section 185(4) of the Original Act (a “recognised person”);
(h) a trustee (acting in that capacity) of any employees’ share scheme of the Company or of RTL;
(i) any person (an “Offeror”) who has made an offer to acquire all the outstanding RTL Ordinary Shares (other than those already owned by the Offeror) which may, if the Offeror so decides, be conditional upon an offer which has been made by the Offeror (or a subsidiary of, a parent company of, or a subsidiary of a parent company of the Offeror) on terms which satisfy each of subparagraphs (I), (II) and (III) of Rule 145(B)(x)(i) of the RTL Constitution) to acquire all the outstanding Ordinary Shares (other than those already owned by the Offeror or such subsidiary, parent company or subsidiary of a parent company) becoming unconditional and shall:-
(I) be unconditional when made or contain only such conditions as any such offer must contain pursuant to the Corporations Act;
(II) disclose the highest price paid or value of consideration given for Ordinary Shares by the Offeror or its concert parties and for RTL Ordinary Shares by the Offeror and its Associates since the beginning of the period commencing 12 months before the date on which the Offeror or any of its Associates or concert parties became a Relevant Person and include a cash offer (or an offer with a cash alternative) to acquire all the RTL Ordinary Shares (other than those already directly or indirectly owned by the Offeror) at a price per RTL Ordinary Share which (subject to paragraph (xix) below) is not less than the higher of:-
(aa) the highest price paid or value of consideration given for Ordinary Shares by the Offeror or its Associates since the beginning of the period commencing 12 months before the date on which the Offeror or any of its concert parties became a Relevant Person multiplied by the Equalisation Fraction as at the date of the offer and converted into Australian dollars. Such conversion shall be made at the closing mid-point spot Australian dollar-sterling exchange rate, on the date on which the Offeror or any of its concert parties became a Relevant Person as published in the Financial Times; and
(bb) the highest price paid or value of consideration given for RTL Ordinary Shares by the Offeror (or its Associates) in Australian dollars (or equivalent, converted into Australian dollars by a method comparable to that set out in (aa) above) since the beginning of the period commencing 12 months before the date on which the Offeror or any of its Associates became a Relevant Person;
provided that if no such shares have been acquired by the Offeror or any of its Associates or concert parties during that period the price (subject to paragraph (xix)) shall be not less than the higher of:-
(cc) the middle market quotation derived from the London Stock Exchange Daily Official List in respect of Ordinary Shares on the dealing day preceding the date on which the offer is announced, multiplied by the Equalisation Ratio as at that day and converted into Australian dollars at the closing mid-point Australian dollar-sterling exchange rate as at such date as published in the Financial Times; and
(dd) the weighted average sale price derived from the Australian Stock Exchange in respect of RTL Ordinary Shares on the Business Day preceding the date on which the offer is announced; and
(III) comply with the provisions of the Corporations Act as if it were an offer made under the Corporations Act;
provided that if the terms of any such offer would, at the time it would be required to be made, be illegal or contravene any applicable law or regulatory requirement (including the Corporations Act) then the offer shall be on such terms as may be necessary to comply with such applicable law or regulatory requirement but otherwise shall approximate as far as is possible the requirements set out in (I) to (III) above and provided further that references to the price paid for an Ordinary Share or a RTL Ordinary Share shall be deemed to include the price paid for an interest through an American Depositary Receipt representing such a share converted into sterling or Australian dollars as appropriate at the closing mid-point exchange rate of the
purchase currency and sterling or Australian dollars (as appropriate) on the date of acquisition of such interest obtained from the Financial Times (in the case of Ordinary Shares) or from the Australian Financial Review in the case of RTL Ordinary Shares;
(j) any person who (i) owns directly or indirectly Publicly-held Voting Shares in the Company which carry the right to cast more than 50 per cent. of the total votes attaching to all Publicly-held Voting Shares capable of being cast on a poll at a General Meeting and (ii) owns directly or indirectly Publicly-held RTL Ordinary Shares which carry the right to cast more than 50 per cent. of the total votes attaching to all Publicly-held RTL Ordinary Shares capable of being cast on a poll at a general meeting of RTL, and has reached that level of ownership by receiving acceptances under offers to acquire all the outstanding Ordinary Shares and RTL Ordinary Shares (other than those already owned by that person) or as a
result of a scheme of arrangement approved by the High Court or as a result of a compromise or arrangement approved by the relevant court of Australia under Part 5.1 of the Corporations Act or by any combination of these;
(xiii) “Relevant Holding” means an Interest in shares in the Company or an Entitlement to RTL Ordinary Shares or both (disregarding any part of that Interest or Entitlement which is a Permitted Holding) which together would otherwise entitle their holder to cast on a poll (either directly as a member of the Company or through any votes which may be cast by the holder of the Special Voting Share to reflect votes which the holder of the Relevant Holding is entitled to cast in respect of RTL Ordinary Shares) 20 per cent. or more of the total votes attaching to all share capital of the Company of all classes on a Joint Decision (assuming that all the Publicly-held RTL Ordinary Shares including those comprised in such Entitlement were
voted on the equivalent resolution at the nearly contemporaneous general meeting of RTL and counted in calculating the votes attached to the Special Voting Share on such decision) provided that if the Relevant Holding does not include any RTL Ordinary Shares, the Relevant Holding includes an Interest in shares in the Company (other than the Special Voting Share) which carry the right on a poll to cast 30 per cent. or more of the total votes attaching to all share capital of the Company of all Classes (apart from the Special Voting Share) taken as a whole and capable of being cast on a poll at a General Meeting;
(xiv) “Relevant Person” means any person (whether or not identified) who has, or who appears to the Directors to have, a Relevant Holding or who is deemed for the purposes of this Article to be a Relevant Person;
(xv) “Relevant Share Capital” means the relevant share capital (as defined in section 198(2) of the Original Act) of the Company;
(xvi) “Relevant Shares” means all the shares in which a Relevant Person or an Excluded RTL Holder has, or appears to the Directors to have, an Interest or which are deemed for the purposes of this Article to be Relevant Shares;
(xvii) “Required Disposal” means a disposal or disposals of such a number of Relevant Shares (or interests therein) as will cause a Relevant Person to cease to be a Relevant Person, not being a disposal to another Relevant Person (other than a Permitted Person) or a disposal which constitutes any other person (other than a Permitted Person) a Relevant Person;
(xviii) references to the Financial Times mean the London Edition, and includes, if that newspaper fails to be published or fails to publish the relevant information any other daily newspaper circulating in London nominated by the Board which does publish the relevant information and references to the Australian Financial Review include, if that newspaper ceases to be published or fails to publish the relevant information, any other daily newspaper circulating in Melbourne nominated by the Board which does publish the relevant information;
(xix) references in paragraph (xii)(i) to “price” or “value of consideration” mean such price or value:-
(a) adjusted to reflect the effect of any share consolidation or subdivision, allotment of shares, rights issue, issue of options, issue of convertible securities or reduction of capital which occurred after that price or consideration was paid or given and before the offer to acquire all the RTL Ordinary Shares referred to in that paragraph occurred; and
(b) adjusted to reflect the net amount of any dividend which had been declared or announced at the time the price or consideration was paid or given if the shares acquired were at that time trading cum-dividend and at the time of the offer the shares are trading ex-dividend or vice versa,
and the certificate of the Auditors stating the appropriate amount of an adjustment required by (a) or (b) shall be conclusive,
and, for the purposes of this Article, where the Directors resolve in good faith that they have made reasonable enquiries and that they are unable to determine:-
(c) whether or not a particular person has an Interest in any particular shares; or
(d) who is Interested in any particular shares,
the shares concerned shall be deemed to be Relevant Shares and all persons interested in them to be Relevant Persons.
(C) Subject to paragraphs (D), (K) and (L) below and without prejudice to Article 63, the provisions of Part VI of the Original Act shall apply in relation to the Company as if those provisions extended to Additional Interests and accordingly the rights and obligations arising under that Part shall apply in relation to the Company, its members and all persons Interested in Relevant Share Capital, as extended by this paragraph; but so that Additional Interests shall, when disclosed to the Company, be entered in a separate register kept by the Company for that purpose. The rights and obligations created by this paragraph in respect of Interests in shares (including, but not limited to, Additional Interests) are in
addition to and separate from those arising under Part VI of the Act.
(D) Sections 210(3) to (6), 211(10), 213(3) (so far as it relates to Section 211(10)), 214(5), 215(8), 216(1) to (4), 217(7), 218(3), 219(3) and (4), 454, 455, 732 and 733 of the Original Act shall not apply in respect of Additional Interests.
(E) If, to the knowledge of the Directors, any person other than a Permitted Person is or becomes (or appears to be or to be likely to become) a Relevant Person (including, without limitation, by virtue of being deemed to be one), the Directors shall give notice to that Relevant Person (other than persons referred to in paragraph (H) below) and to any other person who appears to the Directors to have Interests in the Relevant Shares and, if different, to the registered holders of those shares. The notice shall:-
(i) set out the restrictions referred to in paragraph (F) below;
(ii) state that the addressee of the notice is required to make a Required Disposal or procure that a Required Disposal is made by a time specified in the notice being such time as the Directors shall consider most appropriate not being less than 7 days nor more than 60 days after the date on which the notice is given to the addressee (the “Specified Time”) unless by that time either:
(a)
the Relevant Person has become a Permitted Person; or
(b)
the Directors have resolved in good faith that either the person stated in the notice to be a Relevant Person is not a Relevant Person or the addressee does not have an Interest in the shares which would otherwise have to be disposed of; and
(iii) set out such other requirements or restrictions as the Directors shall consider necessary to ensure that by the Specified Time there is no Relevant Person (other than a Permitted Person) in relation to the Relevant Shares concerned.
If the Relevant Shares are held by the ADR Depositary, the notice shall also state that:-
(a) a specified purchaser or purchasers (the “Relevant Purchaser(s)”) (excluding the ADR Depositary itself) or Holder or Holders (the “Relevant Holder(s)”), as the case may be, is or are believed or deemed to be Relevant Persons or is or are believed or deemed to be purchasers or Holders through which a Relevant Person or Relevant Persons has or have Interests in either case as specified in the notice; and
(b) the Directors believe that each Relevant Purchaser or Relevant Holder or the Relevant Person or Relevant Persons believed or deemed to have Interests through such Relevant Purchaser or Relevant Holder, as the case may be, is or are deemed to be Interested in a specific number of Relevant Shares.
The Directors may extend the period in which any such notice is required to be complied with by up to 30 days and may withdraw any such notice (whether before or after the expiration of the period referred to) if it appears to them that there is no Relevant Person in relation to the shares concerned.
(F) A holder of a Relevant Share on whom a notice has been served in accordance with paragraph (E) above shall not in respect of that share be entitled, until such time as the notice has been complied with to the satisfaction of the Directors or withdrawn:-
(a) to attend or vote at any general meeting of the Company or meeting of the holders of Relevant Share Capital or of any class thereof, or to exercise any other right conferred by membership in relation to any such meeting;
(b) to receive any dividend or other money which would otherwise be payable in respect of a Relevant Share, which shall be retained by the Company without any liability to pay interest when the money is finally paid to the member; or
(c) to elect to receive shares in lieu of any dividend referred to in (b) above.
If the requirements of any notice under paragraph (E) above have not been complied with by the Specified Time (or such later time as may be permitted pursuant to that paragraph) then the Directors shall take such action as is within their power to ensure that a Required Disposal is made as soon as is reasonably practicable and, for this purpose, they shall make such arrangements as they deem appropriate including, without limitation, appointing any person on behalf of the holder or holders of the Relevant Shares to execute any documents, to take such other action as that person may deem necessary or expedient and to receive and give good discharge for the purchase price. Brokerage, stamp duty and any other costs of the transfer shall be paid
out of the sale proceeds. The net proceeds of any sale under this paragraph shall be paid to the registered holder who held the Relevant Shares sold under this paragraph provided that the registered holder has delivered to the Company such documents or information as may be reasonably required by the Directors. Upon the name of the purchaser being entered in the Register in purported exercise of the powers under this paragraph, the validity of the sale by way of a Required Disposal shall not be challenged by any person. The Directors may not authorise a Required Disposal of any Ordinary Shares held by an Accepting Shareholder during a period in which offers for both Ordinary Shares and RTL Ordinary Shares remain open for acceptance.
(G) Without prejudice to the provisions of the Original Act and subject to paragraph (B)(vii) above, the Directors may assume without enquiry that a person is not a Relevant Person unless the information contained in the registers kept by the Company under Part VI of the Act or under Part VI of the Original Act (as applied and extended by this Article), including the separate register to be kept under paragraph (C) above, appear to the Directors to indicate to the contrary or the Directors have reason to believe otherwise, in which circumstances the Directors shall make reasonable enquiries to discover whether any person is a Relevant Person.
(H) The Directors shall not be obliged to give any notice required under this Article to be given to any person if they do not know either (i) his identity or (ii) his address. The absence of such a notice in those circumstances and any accidental error in or failure to give any notice to any person to whom notice is required to be given under this Article shall not prevent the implementation of, or invalidate, any procedure under this Article.
(I) If any Director has reason to believe that a person (not being a Permitted Person) is a Relevant Person, that Director shall inform the other Directors.
(J) Any resolution or determination of, or decision or exercise of any discretion or power by, the Directors or any Director or by the chairman of any meeting under or pursuant to the provisions of this Article shall be final and conclusive; and anything done, by or on behalf of, or on the authority of, the Directors or any Director pursuant to the foregoing provisions of this Article shall be conclusive and binding on all persons concerned and shall not be open to challenge, whether as to its validity or otherwise on any ground whatsoever. The Directors shall not be required to give any reasons for any decision, determination or declaration taken or made in accordance with this Article.
(K) Paragraph (C) shall not apply to an ADR Depositary when acting in that capacity. A person (a “Holder”) who has an Interest in shares of the Company evidenced by an American Depositary Receipt shall be deemed for the purposes of this Article to have an Interest in the number of shares in the Company in respect of which rights are evidenced by such Receipt and not (in the absence of any other reason why he would be so treated) in the remainder of the shares in the Company held by the ADR Depositary.
(L) Paragraph (C) of this Article shall not apply to a recognised person acting in its capacity as such. Where in that capacity Interests in shares in the Company are held by a recognised person under arrangements recognised by the Company for the purposes of this Article any person who has rights in relation to shares in the Company in which such a recognised person has an Interest shall be deemed to be Interested in the number of shares in the Company for which such a recognised person is or may become liable to account to him and any Interest which (by virtue of his being a tenant in common in relation to an Interest in shares in the Company so held by such a recognised person) he would otherwise be treated for
the purposes of this Article as having in a larger number of shares in the Company shall (in the absence of any other reason why he should be so treated) be disregarded.
(M) This Article shall apply notwithstanding any provision in any other of these Articles which is inconsistent with or contrary to it.
65
Voting by guardian
Where in England or elsewhere a guardian, receiver or other person (by whatever name called) has been appointed by any court claiming jurisdiction in that behalf to exercise powers with respect to the property or affairs of any member on the ground (however formulated) of mental disorder, the Directors may in their absolute discretion, upon or subject to production of such evidence of the appointment as the Directors may require, permit such guardian, receiver or other person on behalf of such member to vote in person or by proxy at any shareholders’ meeting or to exercise any other right conferred by membership in relation to shareholders’ meetings.
66
Validity and result of vote
(A) If:-
(i)
any objection shall be raised to the qualification of any voter; or
(ii) any votes have been counted which ought not to have been counted or which might have been rejected; or
(iii) any
votes are not counted which ought to have been counted,
the objection or error shall not vitiate the decision of the meeting or adjourned meeting on any resolution unless it is raised or pointed out at the meeting or, as the case may be, the adjourned meeting at which the vote objected to is given or tendered or at which the error occurs. Any objection or error shall be referred to the chairman of the meeting and shall only vitiate the decision of the meeting on any resolution if the chairman decides that the same may have affected the decision of the meeting. The decision of the chairman on such matters shall be conclusive.
(B) Unless a poll is taken a declaration by the chairman of the meeting that a resolution has been carried, or carried unanimously, or by a particular majority, or lost, and an entry to that effect in the minute book, shall be conclusive evidence of that fact without proof of the number or proportion of the votes recorded for or against such resolution.
PROXIES
67
Proxy need not be a member
A
proxy need not be a member of the Company.
68
Form of proxy
An instrument appointing a proxy shall be in writing in any form which the Directors have approved and which is permitted by the Statutes and:-
(A) in the case of an individual shall be signed by the appointor or his attorney; and
(B)
in the case of a corporation shall be either given under its common seal
or signed on its behalf by an attorney or a duly authorised officer of the
corporation.
The signature on such instrument
need not be witnessed. Where an instrument appointing a proxy is signed
on behalf of the appointor by an attorney, the letter or power of attorney
or a duly certified copy thereof must (failing previous registration with
the Company) be lodged in physical form with the instrument of proxy pursuant
to the next following Article, failing which the instrument may be treated
as invalid.
69
Deposit of form of proxy
Subject to the following sentence, an instrument appointing a proxy must be left at or delivered to such place or one of such places (if any) as may be specified for that purpose in or by way of note to or in any document accompanying the notice convening the meeting (or, if no place is so specified, at the Transfer Office) not less than 48 hours (or such lesser time as the Board may decide) before the time appointed for the holding of the meeting or adjourned meeting or (in the case of a poll taken otherwise than at or on the same day as the meeting or adjourned meeting) for the opening of the poll at which it is to be used, and in default shall not be treated as valid. A proxy received from the holder of the Special Voting Share will be valid
if it is received before the closing of the poll to which it relates. The instrument shall, unless the contrary is stated thereon, be valid as well for any adjournment of the meeting as for the meeting to which it relates. An instrument of proxy relating to more than one meeting (including any adjournment thereof) having once been so delivered for the purpose of any meeting shall not require again to be delivered for the purposes of any subsequent meeting to which it relates. When two or more valid but differing instruments of proxy are executed in respect of the same share for use at the same meeting, the one which is last executed shall be treated as replacing and revoking the others as regards that share. If the company is unable to determine which was last executed none of them shall
be treated as valid in respect of that share. Delivery of an instrument appointing a proxy shall not preclude a member from attending and voting in person at the meeting or poll concerned.
70
Rights of proxy
An instrument appointing a proxy shall be deemed to include the right to demand or join in demanding a poll but shall not confer any further right to speak at the meeting, except with the permission of the chairman of the meeting.
71
Revocation of proxy
A vote cast or demand for a poll made by proxy shall not be invalidated by the previous death or insanity of the member or by the revocation of the appointment of the proxy or of the authority under which the appointment was made unless written notice of such death, insanity or revocation shall have been received by the Company at the Transfer Office at least one hour before the commencement of the meeting or adjourned meeting or (in the case of a poll taken otherwise than at or on the same day as the meeting or adjourned meeting) the time appointed for the taking of the poll at which the vote is cast.
Any corporation which is a member of the Company may by resolution of its directors or other governing body authorise such person as it thinks fit to act as its representative at any shareholders’ meeting or in relation to any poll (whether held at a meeting or otherwise). The person so authorised shall be entitled to exercise the same powers on behalf of such corporation as the corporation could exercise if it were an individual member of the Company and such corporation shall for the purposes of these Articles be deemed to be present in person at any such meeting if a person so authorised is present thereat.
DIRECTORS
73
Number of Directors
Subject as hereinafter provided the Directors shall not be less than five in number. The Company may by Ordinary Resolution from time to time vary the minimum number and/or fix and from time to time vary a maximum number of Directors.
74
Share qualification
A Director shall not be required to hold any shares of the Company by way of qualification. A Director who is not a member of the Company shall nevertheless be entitled to attend and speak at shareholders’ meetings.
75
Directors’ fees
The ordinary remuneration of the Directors shall from time to time be determined by the Directors except that such remuneration shall not (when aggregated with any fees received by the Directors in their capacity as Directors of RTL) exceed £750,000 per annum in aggregate or such higher amount as may from time to time be determined by Ordinary Resolution of the Company and shall (unless such resolution otherwise provides) be divisible among the Directors as they may agree, or, failing agreement, equally, except that any Director who shall hold office for part only of the period in respect of which such remuneration is payable shall be entitled only to rank in such division for a proportion of remuneration related to the period during which
he has held office. For this purpose, Australian dollar amounts shall be converted at the rate of £1=A$2.75.
76
Other remuneration of Directors
Any Director who holds any executive office with the Company or RTL (including for this purpose the office of Chairman or Deputy Chairman whether or not such office is held in an executive capacity), or who serves on any committee of the Directors of the Company or RTL, or who otherwise performs services which in the opinion of the Directors are outside the scope of the ordinary duties of a Director, may be paid such extra remuneration by way of salary, commission or otherwise or may receive such other benefits as the Directors may determine.
The Directors may repay to any
Director and to any Alternate Director all such reasonable expenses as he
may incur in attending and returning from meetings of the Directors or of
any committee of the Directors or shareholders’ meetings or otherwise
in connection with the business of the Company.
78
Directors’ pensions and other benefits
The Directors shall have power to pay and agree to pay gratuities, pensions or other retirement, superannuation, death or disability benefits to (or to any person in respect of) any Director or ex-Director and for the purpose of providing any such gratuities, pensions or other benefits to contribute to any scheme or fund or to pay premiums.
79
Appointment and powers of executive Directors
(A) The Directors may from time to time appoint one or more of their body to be the holder of any executive office (including, where considered appropriate, the office of Chairman or Deputy Chairman) on such terms and for such period as they may (subject to the provisions of the Statutes) determine and, without prejudice to the terms of any contract entered into in any particular case, may at any time revoke or vary the terms of any such appointment.
(B) The appointment of any Director to the office of Chairman or Deputy Chairman or Chief Executive or Deputy Chief Executive or Managing or Joint Managing or Deputy or Assistant Managing Director shall automatically determine if he ceases to be a Director but without prejudice to any claim for damages for breach of any contract of service between him and the Company.
(C) The appointment of any Director to any other executive office shall not automatically determine if he ceases from any cause to be a Director, unless the contract or resolution under which he holds office shall expressly state otherwise, in which event such determination shall be without prejudice to any claim for damages for breach of any contract of service between him and the Company.
(D) The Directors may entrust to and confer upon any Director holding any executive office any of the powers exercisable by them as Directors upon such terms and conditions and with such restrictions as they think fit, and either collaterally with or to the exclusion of their own powers, and may from time to time revoke, withdraw, alter or vary all or any of such powers.
80
Alternate Directors
Each Director shall have power from time to time to appoint any person (including another Director) approved by a majority of co-Directors to act as an Alternate Director in the Director’s place, whether for a stated period or periods or until the happening of a specified event or from time to time, whenever by absence or illness or otherwise the Director is unable to attend to duties as a Director. The appointment shall be in writing and signed by the Director and a copy of the appointment shall be given by the appointing Director to the Company by forwarding or delivering it to the Office. The appointment shall take effect immediately upon receipt of the appointment at the Office and approval by a majority of co-Directors and upon his
appointment by the same person as an alternate director of RTL becoming effective. The following provisions shall apply to any Alternate Director:-
(i) the Alternate Director may be removed or suspended from office upon receipt at the Office of written notice from the Director by whom the Alternate Director was appointed to the Company;
(ii) the Alternate Director shall be entitled to receive notice of meetings of the Board and to attend and vote at the meetings if the Director by whom the Alternate Director was appointed is not present;
(iii) the Alternate Director shall be entitled to exercise all the powers (except the power to appoint an Alternate Director) and perform all the duties of a Director, in so far as the Director by whom the Alternate Director was appointed had not exercised or performed them;
(iv) the Alternate Director shall not, unless the Directors otherwise determine, (without prejudice to the right to reimbursement for expenses pursuant to Article 77) be entitled to receive any remuneration as a Director from the Company, and any remuneration (not including remuneration authorised by the Directors or reimbursement for expenses) paid to the Alternate Director by the Company shall be deducted from the remuneration of the Director by whom the Alternate Director was appointed;
(v) the office of the Alternate Director shall be vacated if the Director by whom the Alternate Director was appointed vacates office or dies;
(vi) the Alternate Director shall not be taken into account in determining the number of Directors or rotation of Directors; and
(vii) the Alternate Director shall, while acting as a Director, be responsible to the Company for the Alternate Director’s own acts and defaults and shall not be deemed to be the agent of the Director by whom the Alternate Director was appointed.
APPOINTMENT AND RETIREMENT OF
DIRECTORS
81
Age limit
Any provision of the Statutes which, subject to the provisions of these Articles, would have the effect of rendering any person ineligible for appointment or election as a Director or liable to vacate office as a Director on account of his having reached any specified age or of requiring special notice or any other special formality in connection with the appointment or election of any Director over a specified age, shall apply to the Company.
any Director who was elected or last re-elected a Director at or before the Annual General Meeting held in the third calendar year before the current year shall retire by rotation; and
(B)
such further Directors (if any) shall retire by rotation as would bring the number retiring by rotation up to one-third of the number of Directors in office at the date of the notice of meeting (or, if their number is not a multiple of three, the number nearest to but not greater than one-third).
83
Selection of Directors to
retire by rotation
The further Directors required
to retire by rotation in accordance with Article 82(b) shall be those of
the other Directors subject to retirement by rotation who have been longest
in office since their last re-election and so that as between persons who
became or were last re-elected Directors on the same day those to retire
shall (unless they otherwise agree among themselves) be determined by the
alphabetical order of their names. A retiring Director shall be eligible
for re-election.
84
Re-election of retiring Director
The Company at the meeting at which a Director retires under any provision of these Articles may by Ordinary Resolution fill the office being vacated by electing thereto the retiring Director or some other person eligible for election. In default the retiring Director shall be deemed to have been re-elected except in any of the following cases:-
(A) where at such meeting it is expressly resolved not to fill such office or a resolution for the re-election of such Director is put to the meeting and lost;
(B) where such Director has given notice in writing to the Company that he is unwilling to be re-elected;
(C) where the default is due to the moving of a resolution in contravention of the next following Article;
(D) where such Director has attained any retiring age applicable to him as Director; and
(E) where such Director has not been, or is not deemed to have been, re-elected as a director of RTL.
The retirement shall not have effect until the conclusion of the meeting (which for these purposes shall be deemed to be the announcement of the result of the poll to re-elect the Director) except where a resolution is passed to elect some other person in the place of the retiring Director or a resolution for his re-election is put to the meeting and lost and accordingly a retiring Director who is re-elected or deemed to have been re-elected will continue in office without a break.
85
Election of two or more Directors
A resolution for the election of two or more persons as Directors by a single resolution shall not be moved at any General Meeting unless a resolution that it shall be so moved has first been agreed to by the meeting without any vote being given against it, and any resolution moved in contravention of this provision shall be void.
No person other than a Director
retiring at the meeting shall, unless recommended by the Directors for election,
be eligible for election as a Director at any General Meeting unless within
the period referred to in Article 87 there has been lodged at the Office:-
(A) notice in writing signed by some member (other than the person to be proposed) duly qualified to attend and vote at the meeting for which such notice is given of his intention to propose such person for election; and
(B) notice in writing signed by the person to be proposed of his willingness to be elected as a Director of the Company and as a director of RTL.
The Directors shall nominate for election as a Director at a General Meeting of the Company any person duly nominated for election at the nearly contemporaneous General Meeting of RTL.
87
Period for Nomination of Directors for election
The period within which the notices referred to in Article 86 must be lodged at the Office is not less than 35 Business Days nor more than 55 Business Days (inclusive of the date on which the notice is given) before the earlier of the dates appointed for:
(i) the general meeting of the Company; and
(ii) the nearly contemporaneous general meeting of RTL,
provided that, if this would result in the latest date for lodgement of the notices being later than the latest date (the “ASX Date”) on which, in accordance with the Listing Rules of the Australian Stock Exchange, RTL is required to accept a nomination for election as a director at that general meeting of RTL, the latest time for lodgement of the notices shall be the ASX Date, and in this Article 87 “Business Day” has the same meaning as defined in the Listing Rules of the Australian Stock Exchange.
88
Election or appointment of additional Director
The Company may by Ordinary Resolution elect, and without prejudice thereto the Directors shall have power at any time to appoint, any person to be a Director either to fill a casual vacancy or as an additional Director, but so that (i) the total number of Directors shall not thereby exceed the maximum number (if any) fixed by or in accordance with these Articles and (ii) the appointment of such Director shall not take effect before such Director has been duly appointed as a director of RTL. Any person so appointed by the Directors (except for the directors of RTL appointed Directors by the Directors on or about the date of the Sharing Agreement) shall hold office only until the next Annual General Meeting and shall then be eligible for
election, but shall not be taken into account in determining the number of Directors who are to retire by rotation at such meeting.
The office of a Director shall
be vacated in any of the following events, namely:-
(i)
if he shall become prohibited by law from acting as a Director;
(ii) if he shall resign by writing under his hand left at the Office or if he shall offer to resign by notice in writing in physical form and the Directors shall resolve to accept such offer;
(iii) if
he shall have a bankruptcy order made against him or shall compound with
his creditors generally or shall apply to the court for an interim order
under Section 253 of the Insolvency Act 1986 in connection with a voluntary
arrangement under that Act;
(iv) if in England or elsewhere an order shall be made by any court claiming jurisdiction in that behalf on the ground (however formulated) of mental disorder for his detention or for the appointment of a guardian or for the appointment of a receiver or other person (by whatever name called) to exercise powers with respect to his property or affairs;
(v)
if he shall be absent from meetings of the Directors for six months without
leave and the Directors shall resolve that his office be vacated;
(vi) if a notice in writing in physical form is served upon him, signed by not less than three-quarters of the Directors for the time being, to the effect that his office as Director shall on receipt of such notice ipso facto be vacated, but so that if he holds an appointment to an executive office which thereby automatically determines such removal shall be deemed an act of the Company and shall have effect without prejudice to any claim for damages for breach of any contract of service between him and the Company; and
(vii)
if he shall cease to be a director of RTL.
90
Removal of Director
The Company may in accordance with and subject to the provisions of the Statutes by Ordinary Resolution of which special notice has been given remove any Director from office (notwithstanding any provision of these Articles or of any agreement between the Company and such Director, but without prejudice to any claim he may have for damages for breach of any such agreement) and elect another person in place of a Director so removed from office (provided that such person is also elected a director of RTL at the same time) and any person so elected shall be treated for the purpose of determining the time at which he or any other Director is to retire by rotation as if he had become a Director on the day on which the Director in whose place he is
elected was last elected a Director. In default of such election the vacancy arising upon the removal of a Director from office may be filled as a casual vacancy.
91
Convening of meetings of Directors
Subject to the provisions of these Articles the Directors may meet together for the despatch of business, adjourn and otherwise regulate their proceedings as they think fit. At any time any Director may, and the Secretary at the request of a Director shall, summon a meeting of the Directors. It shall not be necessary to give notice of a meeting of Directors to any Director who is for the time being neither in the United Kingdom nor in Australia. Any Director may waive notice of any meeting and any such waiver may be retroactive.
The quorum necessary for the
transaction of business of the Directors may be fixed from time to time
by the Directors and unless so fixed at any other number (not being less
than three) shall be three. A meeting of the Directors at which a quorum
is present shall be competent to exercise all powers and discretions for
the time being exercisable by the Directors.
93
Chairman
(A) The Directors may elect from their number a Chairman and a Deputy Chairman (or two or more Deputy Chairmen) and determine the period for which each is to hold office. If no Chairman or Deputy Chairman shall have been appointed or if at any meeting of the Directors no Chairman or Deputy Chairman shall be present within five minutes after the time appointed for holding the meeting, the Directors present may choose one of their number to be chairman of the meeting.
(B) If at any time there is more than one Deputy Chairman the right in the absence of the Chairman to preside at a meeting of the Directors or of the Company shall be determined as between the Deputy Chairmen present (if more than one) by seniority in length of appointment or otherwise as resolved by the Directors.
94
Casting vote
Questions arising at any meeting of the Directors shall be determined by a majority of votes. In the case of an equality of votes, the chairman of the meeting shall have a second or casting vote.
95
Number of Directors below minimum
The continuing Directors may act notwithstanding any vacancies, but if and so long as the number of Directors is reduced below the minimum number fixed by or in accordance with these Articles the continuing Directors or Director may act for the purpose of filling such vacancies or of summoning General Meetings, but not for any other purpose. If there be no Directors or Director able or willing to act, then any two members may summon a General Meeting for the purpose of appointing Directors.
96
Telephone Board Meetings
The Directors, and any committee of the Directors, shall be deemed to meet together if, being in separate locations, they are nonetheless linked by conference telephone or other communication equipment which allows those participating to hear and speak to each other. Such a meeting shall be deemed to take place at the place agreed upon by the Directors attending the meeting provided that at least one of the Directors present at the meeting was at that place for the duration of the meeting.
97
Written resolutions
A resolution in writing of which notice has been given to all Directors and which is signed by a majority of the Directors shall be as valid and effectual as a resolution duly passed at a meeting of the Directors and may consist of several documents in the like form each signed by one or more Directors. For the purposes of this Article the references to Directors include any Alternate Director for the time being present in the United Kingdom or Australia who is appointed by a Director not for the time being in the United Kingdom or Australia or who is unable by reason of illness to sign the resolution in question but do not include any other Alternate Director. Any document produced by mechanical or electronic means and bearing a signature of a
Director printed with that Director’s authority by mechanical or electronic means shall for the purposes of this Article 97 be deemed to be a document in writing signed by the Director.
All acts done by any meeting
of Directors, or of any committee or sub-committee of the Directors, or
by any person acting as a Director or as a member of any such committee
or sub-committee, shall as regards all persons dealing in good faith with
the Company, notwithstanding that there was some defect in the appointment
of any of the persons acting as aforesaid, or that any such persons were
disqualified or had vacated office, or were not entitled to vote, be as
valid as if every such person had been duly appointed and was qualified
and had continued to be a Director or member of the committee or sub-committee
and had been entitled to vote.
99
Directors may have interests
Subject to the provisions of the Statutes, and provided that he has disclosed to the Directors the nature and extent of any interest of his, a Director notwithstanding his office:-
(i) may be a party to, or otherwise interested in, any contract, transaction or arrangement with the Company or in which the Company is otherwise interested;
(ii) may
be a director or other officer of, or employed by, or a party to any contract,
transaction or arrangement with, or otherwise interested in, any body corporate
promoted by the Company or in which the Company is otherwise interested;
(iii) may
(or any firm of which he is a partner, employee or member may) act in a
professional capacity for the Company (other than as Auditor) and be remunerated
therefor; and
(iv) shall
not, save as otherwise agreed by him, be accountable to the Company for
any benefit which he derives from any such contract, transaction or arrangement
or from any such office or employment or from any interest in any such body
corporate or for such remuneration and no such contract, transaction or
arrangement shall be liable to be avoided on the grounds of any such interest
or benefit.
100
Restriction on voting
(A) Save as herein provided, a Director shall not vote in respect of any contract or arrangement or any other proposal whatsoever in which he has any material interest otherwise than by virtue of interests in shares or debentures or other securities of, or otherwise in or through, the Company. A Director shall not be counted in the quorum at a meeting in relation to any resolution on which he is not entitled to vote.
(B) Subject to the provisions of the Statutes, a Director shall (in the absence of some other material interest than is indicated below) be entitled to vote (and be counted in the quorum) in respect of any resolution concerning any of the following matters, namely:-
(i)
the giving of any security, guarantee or indemnity in respect of:-
(a) money lent or obligations incurred by him or by any other person at the request of or for the benefit of the Company or any of its subsidiary undertakings; or
(b) a debt or other obligation of the Company or any of its subsidiary undertakings for which he himself has assumed responsibility in whole or in part under a guarantee or indemnity or by the giving of security;
(ii) any proposal concerning an offer of shares or debentures or other securities of or by the Company or any of its subsidiary undertakings in which offer he is or may be entitled to participate as a holder of securities or in the underwriting or sub-underwriting of which offer he is to participate;
(iii) any proposal concerning any other body corporate in which he is interested, directly or indirectly and whether as an officer or shareholder or otherwise, provided that he (together with persons connected with him within the meaning of Section 346 of the Act) does not have an interest (as that term is used in Sections 198 to 211 of the Act) in one per cent. or more of the issued equity share capital of any class of such body corporate (or of any third company through which his interest is derived or of the voting rights available to members of the relevant body corporate (any such interest being deemed for the purpose of this Article to be a material interest in all circumstances);
(iv) any proposal relating to an arrangement for the benefit of the employees of the Company or any of its subsidiary undertakings which does not award him any privilege or benefit not generally awarded to the employees to whom such arrangement relates;
(v)
any proposal concerning insurance which the Company proposes to maintain
or purchase for the benefit of Directors or for the benefit of persons who
include Directors.
(C) Where proposals are under consideration concerning the appointment (including fixing or varying the terms of appointment) of two or more Directors to offices or employments with the Company or any body corporate in which the Company is interested, the proposals may be divided and considered in relation to each Director separately and in such case each of the Directors concerned (if not debarred from voting under paragraph (B)(iii) of this Article) shall be entitled to vote (and be counted in the quorum) in respect of each resolution except that concerning his own appointment.
(D) If a question arises at any time as to the materiality of a Director’s interest or as to his entitlement to vote and such question is not resolved by his voluntarily agreeing to abstain from voting, such question shall be referred to the chairman of the meeting and his ruling in relation to any Director other than himself shall be final and conclusive except in a case where the nature or extent of the interest of such Director has not been fairly disclosed.
(i) a general notice given to the Directors that a Director is to be regarded as having an interest of the nature and extent specified in the notice in any contract, transaction or arrangement in which a specified person or class of persons is interested shall be deemed to be a disclosure that the Director has an interest in any such contract, transaction or arrangement of the nature and extent so specified;
(ii) an interest
of a person who is connected (within the meaning of Section 346 of the Act)
with a Director shall be treated as an interest of the Director; and
(iii) an interest
(whether of his or of such a connected person) of which a Director has no
knowledge and of which it is unreasonable to expect him to have knowledge
shall not be treated as an interest of his.
COMMITTEES OF THE DIRECTORS
102 Appointment
and constitution of committees
The Directors may delegate any of their powers or discretions (including without prejudice to the generality of the foregoing all powers and discretions whose exercise involves or may involve the payment of remuneration to or the conferring of any other benefit on all or any of the Directors) to committees. Any such committee shall, unless the Directors otherwise resolve, have power to sub-delegate to sub-committees any of the powers or discretions delegated to it. Any such committee or sub-committee shall consist of one or more Directors and (if thought fit) one or more other named persons or persons to be co-opted as hereinafter provided. Insofar as any such power or discretion is delegated to a committee or sub-committee, any reference in
these Articles to the exercise by the Directors of the power or discretion so delegated shall be read and construed as if it were a reference to the exercise thereof by such committee or sub-committee. Any committee or sub-committee so formed shall in the exercise of the powers so delegated conform to any regulations which may from time to time be imposed by the Directors. Any such regulations may provide for or authorise the co-option to the committee or sub-committee of persons other than Directors and may provide for members who are not Directors to have voting rights as members of the committee or sub-committee but so that (a) the number of members who are not Directors shall be less than one-half of the total number of members of the committee or sub-committee and (b) no resolution of
the committee or sub-committee shall be effective unless a majority of the members of the committee or sub-committee present throughout the meeting are Directors.
103 Proceedings
of committee meetings
The meetings and proceedings of any such committee or sub-committee consisting of two or more persons shall be governed mutatis mutandis by the provisions of these Articles regulating the meetings and proceedings of the Directors, so far as the same are not superseded by any regulations made by the Directors under the last preceding Article.
The business and affairs of the Company shall be managed by the Directors, who may exercise all such powers of the Company as are not by the Statutes or by these Articles required to be exercised by the Company in General Meeting subject nevertheless to any regulations of these Articles, to the provisions of the Statutes and to such regulations as may be prescribed by Special Resolution of the Company, but no regulation so made by the Company shall invalidate any prior act of the Directors which would have been valid if such regulation had not been made. The general powers given by this Article shall not be limited or restricted by any special authority or power given to the Directors by any other Article.
105
Powers and obligations in relation to the Sharing Agreement
The Company having entered into the Sharing Agreement and the Deed Poll Guarantee, the Directors are authorised and directed to carry into effect the provisions of the Sharing Agreement and the Deed Poll Guarantee and any further or other agreements or arrangements contemplated by such Agreement and Guarantee and nothing done by any Director in good faith pursuant to such authority and obligation shall constitute a breach of the fiduciary duties of such Director to the Company or to the members of the Company. In particular, but without limitation to the generality of the foregoing (i) the Directors are authorised to provide RTL and any officer, employee or agent of RTL with any information relating to the Company; and (ii) subject to the terms
of the Sharing Agreement, the Directors are authorised to do all or any of the matters referred to in sub-paragraphs (A)(ii) and (iii) of Clause 4 of the Memorandum of Association.
106
Local boards
The Directors may establish any local boards or agencies for managing any of the affairs of the Company, either in the United Kingdom or elsewhere, and may appoint any persons to be members of such local boards, or any managers or agents, and may fix their remuneration, and may delegate to any local board, manager or agent any of the powers, authorities and discretions vested in the Directors, with power to sub-delegate, and may authorise the members of any local boards, or any of them, to fill any vacancies therein, and to act notwithstanding vacancies, and any such appointment or delegation may be made upon such terms and subject to such conditions as the Directors may think fit, and the Directors may remove any person so appointed, and may
annul or vary any such delegation, but no person dealing in good faith and without notice of any such annulment or variation shall be affected thereby.
The Directors may from time to time and at any time by power of attorney or otherwise appoint any company, firm or person or any fluctuating body of persons, whether nominated directly or indirectly by the Directors, to be the attorney or attorneys of the Company for such purposes and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Directors under these Articles) and for such period and subject to such conditions as they may think fit, and any such appointment may contain such provisions for the protection and convenience of persons dealing with any such attorney as the Directors may think fit, and may also authorise any such attorney to sub-delegate all or any of the powers, authorities and
discretions vested in him.
108 Signature
on cheques etc.
All cheques, promissory notes, drafts, bills of exchange, and other negotiable or transferable instruments, and all receipts for moneys paid to the Company, shall be signed, drawn, accepted, endorsed, or otherwise executed, as the case may be, in such manner as the Directors shall from time to time by resolution determine.
109 Borrowing
powers
(A) Subject as hereinafter provided and to the provisions of the Statutes the Directors may exercise all the powers of the Company to borrow money, and to mortgage or charge its undertaking, property (present or future) and uncalled capital or any part or parts thereof, and to issue debentures and other securities, whether outright or as collateral security for any debt, liability or obligation of the Company or of any third party.
(B) The Directors shall restrict the borrowings of the Company and exercise all voting and other rights and powers of control exercisable by the Company in relation to its subsidiaries so as to secure that the aggregate amount for the time being remaining undischarged of all moneys borrowed by (1) the Company and any of its subsidiaries and (2) RTL and any of its Corporations Act Subsidiaries (exclusive of moneys borrowed by any company in the Rio Tinto Group from and for the time being owing to any other company in the Rio Tinto Group or any company in the RTL Group or by any company in the RTL Group from and for the time being owing to any other company in the RTL Group or any company in the Rio Tinto Group) shall
not at any time without the previous sanction of an Ordinary Resolution of the Company exceed one and a half times the Unified Group Share Capital and Reserves.
(C) No person dealing with the Company shall by reason of the foregoing provision be concerned to see or inquire whether this limit is observed, and no debt incurred or security given in excess of such limit shall be invalid or ineffectual unless the lender or the recipient of the security had at the time when the debt was incurred or security given express notice that the limit hereby imposed had been or would thereby be exceeded.
(D) For the purposes aforesaid:-
(i) the expression “Unified Group Share Capital and Reserves” means at any time:-
(a) the amount standing to the credit of the unified share capital account (by whatever name called) of the Company and RTL; plus
(b) the aggregate amount standing to the credit of the unified reserves (including any share premium account or capital redemption reserve and the unified profit and loss account of the Company and its subsidiary undertakings and RTL and its controlled entities), all as shown in the latest published audited unified balance sheet of the Company and its subsidiary undertakings and RTL and its controlled entities, which in this Article shall have the meaning given to that expression in the Corporations Act but (i) adjusted as may be necessary and appropriate to take account of any increase in or reduction of the issued and paid-up share capital of the Company or RTL since the date to which the said unified balance
sheet shall have been made up and any distributions (other than dividends paid out of profits earned since such date) in cash or in specie made from such reserves or profit and loss account since such date; (ii) excluding any sums set aside for taxation and any share capital or reserves derived from any writing-up by way of revaluation after the date of adoption of these Articles of the Company or any of its subsidiary undertakings or RTL or any of its controlled entities (or, in the case of a company becoming a subsidiary undertaking of the Company or a controlled entity of RTL after that date, the date on which such company became such a subsidiary undertaking or controlled entity) of the book values of any fixed assets; (iii) deducting any amount for goodwill or any other
intangible asset shown as an asset in such unified balance sheet; (iv) not including any amounts attributable to minority interests in subsidiary undertakings of the Company or in controlled entities of RTL; and (v) after making such adjustments as the Auditors may consider appropriate (including without prejudice to the generality of the foregoing any adjustments considered appropriate in respect of any shares or other securities or any business or undertaking or part thereof acquired in whole or in part in exchange for or out of the proceeds of issue of any shares of the Company or RTL or in respect of any subsidiary undertaking of the Company or controlled entity of RTL not dealt with by the said unified balance sheet);
(ii) moneys borrowed for the purpose of and within four months applied in repaying other borrowed moneys falling to be taken into account shall not themselves be taken into account until such application;
(iii) there shall be excluded from moneys borrowed by any company in the Rio Tinto Group or any company in the RTL Group any such moneys borrowed which is a Project Finance Borrowing. The expression “Project Finance Borrowing” means moneys borrowed to finance a project:-
(a) which is borrowed by a single purpose company (being a company in the Rio Tinto Group or the RTL Group) whose principal assets and business are constituted by such project and whose liabilities in respect of such moneys borrowed are not the subject of a guarantee, indemnity or any other form of assurance, undertaking or financial support from another company in the Rio Tinto Group or the RTL Group except as expressly provided for in sub-paragraph (b)(3) below; or
(b) in respect of and in connection with which the lender or lenders making such moneys borrowed available to the relevant borrower (being a company in the Rio Tinto Group or the RTL Group) have no recourse whatsoever to a company in the Rio Tinto Group or the RTL Group for the repayment of or payment of any sum relating to such moneys borrowed other than:-
(1) recourse to the borrower for amounts limited to the aggregate cash flow or net cash flow (other than historic cash flow or historic net cash flow) from such project; and/or
(2) recourse to the borrower for the purpose only of enabling amounts to be claimed in respect of such moneys borrowed upon an enforcement of a security interest given by the borrower over the assets comprised in such project and/or by any shareholder or the like in the borrower over its shares or the like in the capital of the borrower to secure such moneys borrowed and/or any recourse permitted by (3) below, provided that (A) the extent of such recourse to the borrower is limited solely to the amount of any recoveries made on any such enforcement, and (B) such person or persons are not entitled, by virtue of any right or claim arising out of or in connection with such moneys borrowed, to commence proceedings for
the winding-up or dissolution of the borrower or to appoint or procure the appointment of any receiver, trustee or similar person or official in respect of the borrower or any of its assets (save for the assets the subject of such security interest); and/or
(3) recourse to the borrower, or another company in the Rio Tinto Group or the RTL Group under a guarantee, indemnity or other form of assurance, undertaking or financial support, which in any case (A) is limited to a claim for damages for breach of an obligation (not being a payment obligation) of the person against whom such recourse is available, and/or (B) entitles the creditor for such moneys borrowed, upon default by the borrower, such person or any other person, to require a payment to be made (whether to or for the benefit of such creditor, the borrower or another person) provided that, in the case of (B), where such payment is capable of being for an amount which is material either alone or as a percentage
of the moneys borrowed financing the project, such recourse is capable of being called on only during the period prior to practical completion of the project or of that proportion of the project being financed by such moneys borrowed;
(iv) the certificate of the Auditors as to the amount of the Unified Group Share Capital and Reserves at any time shall be conclusive and binding on all concerned.
SECRETARY
110
The Secretary shall be appointed by the Directors on such terms and for such period as they may think fit. Any Secretary so appointed may at any time be removed from office by the Directors, but without prejudice to any claim for damages for breach of any contract of service between him and the Company. If thought fit two or more persons may be appointed as Joint Secretaries. The Directors may also appoint from time to time on such terms as they may think fit one or more Deputy and/or Assistant Secretaries.
(A) The
Directors shall provide for the safe custody of the Seal and any Securities
Seal and neither shall be used without the authority of the Directors or
of a committee authorised by the Directors in that behalf. The Securities
Seal shall be used only for sealing securities issued by the Company and
documents creating or evidencing securities so issued.
(B) Every instrument to which the Seal or the Securities Seal shall be affixed (other than a certificate for or evidencing shares, debentures or other securities (including options) issued by the Company) shall be signed autographically by one Director and the Secretary or by two Directors.
(C)
The Company may exercise the powers conferred by the Statutes with regard
to having an official seal for use abroad and such powers shall be vested
in the Directors.
(D) Any
instrument in physical form signed under hand by one Director and the Secretary
or by two Directors and expressed to be executed by the Company shall have
the same effect as if executed under the Seal, provided that no instrument
which makes it clear on its face that it is intended to have effect as a
deed shall be so signed without the authority of the Directors or of a committee
authorised by the Directors in that behalf.
AUTHENTICATION OF DOCUMENTS
112
Any Director or the Secretary or any person appointed by the Directors for the purpose shall have power to authenticate any document affecting the constitution of the Company and any resolution passed at a shareholders meeting or at a meeting of the Directors or any committee, and any book, record, document or account relating to the business of the Company, and to certify copies thereof or extracts therefrom as true copies or extracts; and where any book, record, document or account is elsewhere than at the Office the local manager or other officer of the Company having the custody thereof shall be deemed to be a person appointed by the Directors as aforesaid. A document purporting to be a copy of any such resolution, or an extract from the minutes of any such
meeting, which is certified as aforesaid shall be conclusive evidence in favour of all persons dealing with the Company upon the faith thereof that such resolution has been duly passed or, as the case may be, that any minute so extracted is a true and accurate record of proceedings at a duly constituted meeting.
PROFITS AND RESERVES
113 Establishment
of reserves
The Directors may from time to time set aside out of the profits of the Company and carry to reserve such sums as they think proper which, at the discretion of the Directors, shall be applicable for any purpose to which the profits of the Company may properly be applied and pending such application may either be employed in the business of the Company or be invested. The Directors may divide the reserve into such special funds as they think fit and may consolidate into one fund any special funds or any parts of any special funds into which the reserve may have been divided. The Directors may also without placing the same to reserve carry forward any profits. In carrying sums to reserve and in applying the same the Directors shall comply with the
provisions of the Statutes.
Subject to the provisions of
the Statutes, where any asset, business or property is bought by the Company
as from a past date the profits and losses thereof as from such date may
at the discretion of the Directors in whole or in part be carried to revenue
account and treated for all purposes as profits or losses of the Company.
Subject as aforesaid, if any shares or securities are purchased cum dividend
or interest, such dividend or interest may at the discretion of the Directors
be treated as revenue, and it shall not be obligatory to capitalise the
same or any part thereof.
DIVIDENDS
115 Dividends
If and so far as in the opinion of the Directors the profits of the Company justify such payments, the Directors may pay dividends on shares of any class of such amounts and on such dates and in respect of such periods as they think fit. Provided the Directors act in good faith they shall not incur any liability to the holders of any shares for any loss they may suffer by the lawful payment, on any other class of shares having rights ranking after or pari passu with those shares, of any such dividend as aforesaid.
116 Distribution
in specie
The Company may upon the recommendation of the Directors by Ordinary Resolution direct payment of a dividend in whole or in part by the distribution of specific assets (and in particular of paid-up shares or debentures of any other company) and the Directors shall give effect to such resolution. Where any difficulty arises in regard to such distribution, the Directors may settle the same as they think expedient and in particular may issue fractional certificates, may fix the value for distribution of such specific assets or any part thereof, may determine that cash shall be paid to any member upon the footing of the value so fixed in order to adjust the rights of members and may vest any assets in trustees.
117
No dividend except out of profits
No dividend shall be paid otherwise than out of profits available for distribution under the provisions of the Statutes.
Unless and to the extent that
the rights attached to any shares or the terms of issue thereof otherwise
provide, all dividends shall (as regards any shares not fully paid throughout
the period in respect of which the dividend is paid) be apportioned and
paid pro rata according to the amounts paid on the shares during any portion
or portions of the period in respect of which the dividend is paid. For
the purposes of this Article no amount paid on a share in advance of calls
shall be treated as paid on the share.
119 Manner
of payment of dividends
(A) Any dividend or other moneys payable on or in respect of a share shall be paid to the member or to such other person as the member (or, in the case of joint holders of a share, all of them) may in writing direct. Such dividend or other moneys may be paid (i) by cheque sent by post to the payee or, where there is more than one payee, to any one of them, or (ii) by inter-bank transfer to such account as the payee or payees shall in writing direct, or (iii) using the facilities of a relevant system, or (iv) by such other method of payment as the member (or in the case of joint holders of a share, all of them) may agree to. Payment of a cheque by the bank upon whom it is drawn, or any transfer or payment within (ii)
or (iii) above, shall be a good discharge to the Company and every such cheque shall be sent at the risk of the person or persons entitled to the money represented thereby.
(B) Subject to the provisions of these Articles and to the rights attaching to any shares, any dividend or other moneys payable on or in respect of a share may be paid in such currency as the Directors may determine.
120 Uncashed
dividend cheques
The Company may cease to send any cheque, warrant or order by post for any dividend on any shares which is normally paid in that manner if in respect of at least two consecutive dividends payable on those shares the cheque, warrant or order has been returned undelivered or remains uncashed but, subject to the provisions of these Articles, shall recommence sending cheques, warrants or orders in respect of the dividends payable on those shares if the holder or person entitled by transmission claims the arrears of dividend and does not instruct the Company to pay future dividends in some other way.
121
Joint holders
If two or more persons are registered as joint holders of any share, or are entitled jointly to a share in consequence of the death or bankruptcy of the holder or otherwise by operation of law, any one of them may give effectual receipts for any dividend or other moneys payable or property distributable on or in respect of the share.
122
Record date for dividends
Any resolution for the declaration or payment of a dividend on shares of any class, whether a resolution of the Company in General Meeting or a resolution of the Directors, may specify that such dividend shall be payable to the persons registered as the holders of such shares at the close of business on a particular date, notwithstanding that it may be a date prior to that on which the resolution is passed, and thereupon the dividend shall be payable to them in accordance with their respective holdings so registered, but without prejudice to the rights inter se in respect of such dividend of transferors and transferees of any such shares.
No dividend or other moneys payable
on or in respect of a share shall bear interest as against the Company.
124 Retention
of dividends
(A) The Directors may retain any dividend or other moneys payable on or in respect of a share on which the Company has a lien and may apply the same in or towards satisfaction of the moneys payable to the Company in respect of that share.
(B) The Directors may retain the dividends payable upon shares in respect of which any person is under the provisions as to the transmission of shares hereinbefore contained entitled to become a member, or which any person is under those provisions entitled to transfer, until such person shall become a member in respect of such shares or shall transfer the same.
125 Unclaimed
dividend
The payment by the Directors of any unclaimed dividend or other moneys payable on or in respect of a share into a separate account shall not constitute the Company a trustee in respect thereof and any dividend unclaimed after a period of 12 years from the date on which such dividend was declared or became due for payment shall be forfeited and shall revert to the Company.
126 Waiver
of dividend
The waiver in whole or in part of any dividend on any share by any document (whether or not executed as a deed) shall be effective only if such document is in physical form and is signed by the shareholder (or the person entitled to the share in consequence of the death or bankruptcy of the holder or otherwise by operation of law) and delivered to the Company and if or to the extent that the same is accepted as such or acted upon by the Company.
CAPITALISATION OF PROFITS AND
RESERVES
127
(A) Subject
to the provisions of Article 33, the Directors may, with the sanction of
an Ordinary Resolution of the Company, capitalise any sum standing to the
credit of any of the Company’s reserve accounts (including any share
premium account, capital redemption reserve or other undistributable reserve)
or any sum standing to the credit of profit and loss account.
(B) Such capitalisation shall be effected by appropriating such sum to the holders of Ordinary Shares on the Register at the close of business on the date of the resolution (or such other date as may be specified therein or determined as therein provided) in proportion to their then holdings of Ordinary Shares and applying such sum on their behalf in paying up in full unissued Ordinary Shares (or, subject to any special rights previously conferred on any shares or class of shares for the time being issued, unissued shares of any other class) for allotment and distribution credited as fully paid up to and amongst them as bonus shares in the proportion aforesaid.
(C) The Directors may do all acts and things considered necessary or expedient to give effect to any such capitalisation, with full power to the Directors to make such provisions as they think fit for any fractional entitlements which would arise on the basis aforesaid (including provisions whereby fractional entitlements are disregarded or the benefit thereof accrues to the Company rather than to the members concerned). The Directors may authorise any person to enter on behalf of all the members interested into an agreement with the Company providing for any such capitalisation and matters incidental thereto and any agreement made under such authority shall be effective and binding on all concerned.
SCRIP DIVIDENDS
128
(A) Subject
to the provisions of Article 33, and as hereinafter provided, the Directors
may offer to shareholders the right to receive, in lieu of dividend (or
part thereof), an allotment of new Ordinary Shares credited as fully paid.
(B) The Directors shall not make such an offer unless so authorised by an Ordinary Resolution passed at any General Meeting, which authority may extend to dividends declared or paid prior to the fifth Annual General Meeting of the Company occurring thereafter.
(C) The Directors may either offer such rights of election in respect of the next dividend (or part thereof) proposed to be paid; or may offer such rights of election in respect of that dividend and all subsequent dividends, until such time as the election is revoked; or may allow shareholders to make an election in either form.
(D) The basis of allotment on each occasion shall be determined by the Directors so that, as nearly as may be considered convenient, the value of the Ordinary Shares to be allotted in lieu of any amount of dividend shall equal such amount. For such purpose the value of an Ordinary Share shall be the average of the middle market quotations of an Ordinary Share in registered form on the London Stock Exchange, as derived from the Daily Official List, on each of the first five business days on which such Ordinary Shares are quoted ex the relevant dividend.
(E) If the Directors determine to offer such rights of election they shall give notice in writing to ordinary shareholders of such rights or shall advertise such offer in one leading daily newspaper published in London, and in such other newspapers (if any) as they shall think fit, and shall specify the procedures to be followed in order to exercise such rights Provided that they need not give such notice to a shareholder who has previously made, and has not revoked, an earlier election to receive Ordinary Shares in lieu of all future dividends, but instead shall send him a reminder that he has made such an election, indicating how that election may be revoked in time for the next dividend proposed to be paid, or
shall advertise such reminder in one leading daily newspaper in London, and in such other newspapers (if any) as they shall think fit.
(F) On each occasion the dividend (or that part of the dividend in respect of which a right of election has been accorded) shall not be payable on Ordinary Shares in respect of which an election under this Article has been duly exercised and has not been revoked (the elected Ordinary Shares) and in lieu thereof additional shares (but not any fraction of a share) shall be allotted to the holders of the elected Ordinary Shares on the basis of allotment determined as aforesaid. For such purpose the Directors shall capitalise, out of such of the sums standing to the credit of reserves (including any share premium account or capital redemption reserve fund) or profit and loss account as the Directors may determine, a sum
equal to the aggregate nominal amount of additional Ordinary Shares to be allotted on that occasion on such basis and shall apply the same in paying up in full the appropriate number of unissued Ordinary Shares for allotment and distribution to and amongst the holders of the elected Ordinary Shares on such basis.
(G) The additional Ordinary Shares so allotted on any occasion shall rank pari passu in all respects with the fully-paid Ordinary Shares then in issue save only as regards participation in the relevant dividend.
(H) Article 127 shall apply (mutatis mutandis) to any capitalisation made pursuant to this Article.
(I)
No fraction of an Ordinary Share shall be allotted. The Directors may make
such provisions as they think fit for any fractional entitlements including,
without limitation, provisions whereby, in whole or in part, the benefit
thereof accrues to the Company and/or under which fractional entitlements
are accrued and/or retained and in either case accumulated on behalf of
any ordinary shareholder.
(J)
The Directors may determine that rights of election shall not be made available
to any ordinary shareholders with registered addresses in any territory
where in the absence of a registration statement or other special formalities
the circulation of an offer of rights of election would or might be unlawful,
and in such event the provisions aforesaid shall be read and construed subject
to such determination.
(K) In relation to any particular proposed dividend the Directors may in their absolute discretion decide (i) that shareholders shall not be entitled to make any election in respect thereof and that any election previously made shall not extend to such dividend or (ii) at any time prior to the allotment of the Ordinary Shares which would otherwise be allotted in lieu thereof, that all elections to take shares in lieu of such dividend shall be treated as not applying to that dividend, and if so the dividend shall be paid in cash as if no elections had been made in respect of it.
ACCOUNTS
129
Accounting records
Accounting records sufficient to show and explain the Company’s transactions and otherwise complying with the Statutes shall be kept at the Office, or at such other place as the Directors think fit, and shall always be open to inspection by the officers of the Company. Subject as aforesaid no member of the Company or other person shall have any right of inspecting any account or book or document of the Company except as conferred by statute or ordered by a court of competent jurisdiction or authorised by the Directors.
A copy of every balance sheet
and profit and loss account which is to be laid before a General Meeting
of the Company (including every document required by law to be comprised
therein or attached or annexed thereto) shall not less than 21 days before
the date of the meeting be sent to every member of, and every holder of
debentures of, the Company and to every other person who is entitled to
receive notices of meetings from the Company under the provisions of the
Statutes or of these Articles. Provided that this Article shall not require
a copy of these documents to be sent to any member to whom a summary financial
statement is sent in accordance with the Statutes nor to more than one of
joint holders nor to any person of whose postal address the Company is not
aware, but any member or holder of debentures to whom a copy of these documents
has not been sent shall be entitled to receive a copy free of charge on
application at the Office.
131 Validity
of Auditor’s acts
Subject to the provisions of the Statutes, all acts done by any person acting as an Auditor shall, as regards all persons dealing in good faith with the Company, be valid, notwithstanding that there was some defect in his appointment or that he was at the time of his appointment not qualified for appointment or subsequently became disqualified.
132 Auditor’s
right to attend General Meetings
An Auditor shall be entitled
to attend any General Meeting and to receive all notices of and other communications
relating to any General Meeting which any member is entitled to receive
and to be heard at any General Meeting on any part of the business of the
meeting which concerns him as Auditor.
NOTICES
133
Service of notices
(A) Any notice or document (including a share certificate) may be served on or delivered to any member by the Company either personally or by sending it by post in a pre-paid cover addressed to such member at his registered address, or (if he has no registered address within the United Kingdom or Australia) to the address, if any, within the United Kingdom or Australia supplied by him to the Company as his address for the service of notices, or by delivering it to such address addressed as aforesaid. Any notice or document (excluding a share certificate) may also be served on or delivered to any member by the Company either by facsimile to a facsimile number supplied by him to the Company or by other electronic
means determined by the Directors to an electronic address supplied by him to the Company. In the case of a member registered on a branch register any such notice or document may be posted either in the United Kingdom or Australia or in the territory in which such branch register is maintained.
(B) Where a notice or other document is served or sent by post, service or delivery shall be deemed to be effected at the expiration of 24 hours (or, where second-class mail is employed, 48 hours) after the time when the cover containing the same is posted and in proving such service or delivery it shall be sufficient to prove that such cover was properly addressed, stamped and posted.
(C) Subject to the Statutes, where a notice or other document is served or sent by facsimile transmission or other electronic means, service or delivery shall be deemed to be effected two hours after the notice or other document is sent and in providing such service or delivery it shall be sufficient to prove that such notice or document was properly sent.
(D) The accidental failure to send, or the non-receipt by any person entitled to, any notice of or other document relating to any meeting or other proceeding shall not invalidate the relevant meeting or other proceeding.
134
Joint holders
Any notice given to that one of the joint holders of a share whose name stands first in the Register in respect of the share shall be sufficient notice to all the joint holders in their capacity as such. For such purpose a joint holder having no registered address in the United Kingdom or Australia and not having supplied an address within the United Kingdom or Australia for the service of notices shall be disregarded.
135 Deceased
and bankrupt members
A person entitled to a share in consequence of the death or bankruptcy of a member or otherwise by operation of law upon supplying to the Company such evidence as the Directors may reasonably require to show his title to the share, and upon supplying also an address within the United Kingdom or Australia for the service of notices, shall be entitled to have served upon or delivered to him at such address any notice or document to which the said member would have been entitled, and such service or delivery shall for all purposes be deemed a sufficient service or delivery of such notice or document on all persons interested (whether jointly with or as claiming through or under him) in the share. Save as aforesaid any notice or document delivered
or sent by post to or left at the address of any member in pursuance of these Articles shall, notwithstanding that such member be then dead or bankrupt or in liquidation, and whether or not the Company has notice of his death or bankruptcy or liquidation, be deemed to have been duly served or delivered in respect of any share registered in the name of such member as sole or first-named joint holder.
136 Overseas
members
A member who (having no registered address within the United Kingdom or Australia) has not supplied to the Company an address within the United Kingdom or Australia for the service of notices shall not be entitled to receive notices from the Company.
If on two consecutive occasions
notices or other documents have been sent in physical form through the post
to any member at his registered address or his address for service of notices
but have been returned undelivered, or returned to the Company in circumstances
where the Company may reasonably assume that notices and communications
sent to the registered address will not be received by the member, such
member shall not from then on be entitled to receive notices or other documents
from the Company until he shall have communicated with the Company and supplied
in writing a new registered address or address within the United Kingdom
or Australia for the service of notices.
138 Suspension
of postal services
If at any time by reason of the suspension or curtailment of postal services within the United Kingdom or Australia the Company is unable effectively to convene a shareholders’ meeting by notices sent through the post, such meeting may be convened by a notice advertised on the same date in at least one national newspaper in the United Kingdom and in Australia and such notice shall be deemed to have been duly served on all members entitled thereto on the day when such advertisements appear (or, if they appear on different dates, then on the later of such dates). In any such case the Company may still, where applicable, serve notice by electronic communication and shall send confirmatory copies of the notice by post to members to whom it was
not sent by electronic communication if at least seven days prior to the meeting the posting of notices to addresses throughout the United Kingdom or Australia again becomes practicable.
138A
Electronic communication
(A)
Any member may notify the Company of an address for the purpose of his receiving
electronic communications from the Company, and having done so shall be
deemed to have agreed to receive notices and other documents from the Company
by electronic communication of the kind to which the address relates. In
addition, if a member notifies the Company of his e-mail address, the Company
may satisfy its obligation to send him any notice or other document by:
(i) publishing such notice or document on a web site; and
(ii) notifying him by e-mail to that e-mail address that such notice or document has been so published, specifying the address of the web site on which it has been published, the place on the web site where it may be accessed, how it may be accessed and (if it is a notice relating to a shareholders’ meeting) stating (a) that the notice concerns a notice of a company meeting served in accordance with the Act, (b) the place, date and time of the meeting, (c) whether the meeting is to be an annual or extraordinary general meeting and (d) such other information as the Statutes may prescribe.
(B) Any amendment or revocation of a notification given to the Company under this Article shall only take effect if in writing, signed by the member and on actual receipt by the Company thereof.
(C) An electronic communication shall not be treated as received by the Company if it is rejected by computer virus protection arrangements.
(A) Any notice required to be given by the Company to members and not expressly provided for by these Articles shall be sufficiently given if given by advertisement. Any notice required to be or which may be given by advertisement shall be advertised once in one leading national daily newspaper in the United Kingdom and in Australia and shall be taken as given on the day on which such advertisements appear (or, if they appear on different dates, then on the later of such dates).
(B) Nothing in this or any of the preceding seven Articles shall affect any requirement of the Statutes that any particular offer, notice or other document be served in any particular manner.
WINDING UP
140
Directors’ power to petition
The Directors shall have power in the name and on behalf of the Company to present a petition to the Court for the Company to be wound up.
141 Distribution
of assets in specie
Subject to the provisions of
Article 3, if the Company shall be wound up (whether the liquidation is
voluntary, under supervision, or by the Court) the Liquidator may, with
the authority of an Extraordinary Resolution, divide among the members in
specie or kind the whole or any part of the assets of the Company and
whether or not the assets shall consist of property of one kind or shall
consist of properties of different kinds, and may for such purpose set such
value as he deems fair upon any one or more class or classes of property
and may determine how such division shall be carried out as between the
members or different classes of members. The Liquidator may, with the like
authority, vest any part of the assets in trustees upon such trusts for
the benefit of members as the Liquidator with the like authority shall think
fit, and the liquidation of the Company may be closed and the Company dissolved,
but so that no contributory shall be compelled to accept any shares or other
property in respect of which there is a liability.
DESTRUCTION OF DOCUMENTS
142
Subject to compliance with
the requirements of any relevant system applicable to shares of the Company
in uncertificated form, the Company shall be entitled to destroy:-
(A) all instruments of transfer or other documents which have been registered or on the basis of which registration was made at any time after the expiration of seven years from the date of registration thereof;
(B) all Share Warrants (including coupons or talons detached therefrom) which shall have been cancelled at any time after the expiration of seven years from the date of cancellation thereof;
(C) all registered share certificates and dividend mandates which have been cancelled or have ceased to have effect at any time after the expiration of three years from the date of such cancellation or cessation; and
(D) all notifications of change of name or address after the expiration of one year from the date of recording thereof;
and it shall conclusively be presumed in favour of the Company that every entry in the Register purporting to have been made on the basis of an instrument of transfer or other document so destroyed was duly and properly made and every instrument of transfer so destroyed was a valid and effective instrument duly and properly registered and every share certificate, Share Warrant, coupon or talon so destroyed was a valid and effective document duly and properly cancelled and every other document hereinbefore mentioned so destroyed was a valid and effective document in accordance with the recorded particulars thereof in the books or records of the Company. Provided always that:-
(i) the provisions aforesaid shall apply only to the destruction of a document in good faith and without notice of any claim (regardless of the parties thereto) to which the document might be relevant;
(ii) nothing herein contained shall be construed as imposing upon the Company any liability in respect of the destruction of any such document earlier than as aforesaid or in any other circumstances which would not attach to the Company in the absence of this Article;
(iii) references herein to the destruction of any document include references to the disposal thereof in any manner; and
(iv)
the provisions aforesaid shall not apply so as to prevent the destruction
of a document after the expiration of one year from the relevant date if
a complete record of that document has been stored on a data storage medium,
from which an exact reproduction of that document may in principle be obtained,
and the records so stored are retained by the Company for at least the period
imposed by the above provisions in respect of the original document.
INDEMNITY
143
(A)Subject to the provisions
of and so far as may be consistent with the Statutes, every Director, Secretary
or other officer of the Company shall be indemnified by the Company out
of its own funds against and/or exempted by the Company from all costs,
charges, losses, expenses and liabilities incurred by him in the actual
or purported execution and/or discharge of his duties and/or the exercise
or purported exercise of his powers and/or otherwise in relation to or in
connection with his duties, powers or office.
(B) Without prejudice to paragraph (A) of this Article the Directors shall have power to purchase and maintain insurance for or for the benefit of any persons who are or were at any time Directors, officers or employees of any Relevant Company (as defined in paragraph (C) of this Article) or who are or were at any time trustees of any pension fund or employees’ share scheme in which employees of any Relevant Company are interested, including (without prejudice to the generality of the foregoing) insurance against any liability incurred by such persons in respect of any act or omission in the actual or purported execution and/or discharge of their duties and/or in the exercise or purported exercise of their
powers and/or otherwise in relation to their duties, powers or offices in relation to any Relevant Company, or any such pension fund or employees’ share scheme.
(C) For the purpose of paragraph (B) of this Article Relevant Company shall mean the Company, any holding company of the Company or any other body, whether or not incorporated, in which the Company or such holding company or any of the predecessors of the Company or of such holding company has or had any interest whether direct or indirect or which is in any way allied to or associated with the Company, or any subsidiary undertaking of the Company or of such other body and shall include RTL and any controlled entity of RTL (within the meaning of the Corporations Act).
FURTHER PROVISION ON SHARES IN
UNCERTIFICATED FORM
144
(A) Subject
to the statutes and the rules (as defined in the Regulations), the Directors
may determine that any class of shares may be held in uncertificated form
and that title to such shares may be transferred by means of a relevant
system or that shares of any class should cease to be held and transferred
as aforesaid.
(B) The provisions of these Articles shall not apply to shares of any class which are in uncertificated form to the extent that such Articles are inconsistent with:-
(i) the holding of shares of that class in uncertificated form;
(ii) the
transfer of title to shares of that class by means of a relevant system;
or