Rio Tinto: Coal & Allied annual results 2007 – Coal & Allied profit affected by infrastructure constraints and adverse weather

Summary

Profit before tax was $79.3 million compared with $270.3 million in 2006
Profit after tax was $109.8 million compared with $207.6 million in 2006
2007 production of 23.9 million tonnes was 17 per cent lower than 2006
Final dividend has been maintained at 25 cents per ordinary share.
Commenting on the full year results, Coal & Allied’s Managing Director, Hubie van Dalsen, said; “Coal & Allied’s profit in 2007 was disappointing and was adversely affected by infrastructure constraints and Hunter Valley Coal Chain performance. This was exacerbated by severe flooding in the Hunter Valley in June following a severe weather event. Domestic sales were also lower.

“The profit after tax benefited from a one-off tax credit of $46 million, which was reported in the announcement of results for the half year to June 2007.

“Demurrage costs were substantially higher than 2006 because of the extended queue of ships awaiting loading and consequent delays at the port of Newcastle during the year.

“In 2007, Coal & Allied suffered a number of port allocation cutbacks, which prevented it from maximising its production capabilities in a market experiencing strong global demand and buoyant prices for thermal coal.

“In response to these cutbacks, Coal & Allied had to reduce production at its three operations. Coal & Allied is well placed to take advantage of the strong market conditions when capacity becomes available in the Hunter Valley Coal Chain.”

Mr van Dalsen said the Capacity Balancing System was approved by the Australian Consumer and Competition Commission (ACCC) to manage allocations of port capacity to producers.

“After both the shipping queues and demurrage fees rose, producers later agreed to reinstate a revised Capacity Balancing System, which remains in place today,” Mr van Dalsen said.

“Coal & Allied has always maintained that a long term sustainable commercial framework is required to underpin investment and provide certainty in the Hunter Valley. We welcome the appointment of the former Premier of the State of New South Wales, Nick Greiner, as facilitator in finding a resolution to the Hunter Valley Coal Chain constraint issues. We look forward to a speedy and effective resolution to this critical infrastructure problem.”

Summary of performance

Coal & Allied’s results for 2007 are shown below, along with comparative results for 2006.

Year to 31 December Change
2007 2006 %

Revenue ($ millions) 1,374.5 1,415.0 (2.9)
Profit before tax 79.3 70.3 (70.7)

Profit after tax ($ millions) 109.8 207.6 (47.1)
Operating cash flow ($ millions) 76.3 127.5 (40.2)
Final dividend (cents per share) 25.0 25.0 –
Coal production1 (million tonnes) 23.9 28.8 (16.9)
Coal shipments1 (million tonnes) 25.5 27.6 (7.6)

1 Production and shipments are on a 100% basis. Shipments exclude purchased coal. Details of full production and shipments are shown in the Financial and Operating Statistics appendix.

Profit
Profit before tax was $79.3 million, which was 70.7 per cent lower than 2006. Despite higher US dollar coal prices, the main reasons for the reduced profit before tax in 2007 were lower sales volumes, the adverse effects of a stronger Australian dollar, higher demurrage costs resulting from extended ship queues off the coast of Newcastle during the year and higher interest costs on higher debt levels. In addition, due to port allocation constraints it has been necessary to purchase coal at spot prices to satisfy 2007 contractual commitments. These coal purchases resulted in an approximate $20 million reduction in 2007 profit before tax.

Profit after tax was $109.8 million and benefited from a $46 million one-off credit to income tax that was announced at the release of results for the June 2007 half year.

Revenue
Revenue was 2.9 per cent lower than in 2006. However, Free-on-Board coal sales revenue was 5.2 per cent lower, with coal shipments being adversely affected by Hunter Valley coal chain infrastructure constraints throughout 2007 and severe weather conditions in June 2007. US dollar denominated coal prices were higher by seven per cent, but were offset by the adverse effects of the stronger Australian dollar which averaged 11 per cent higher in 2007.

Costs
The Hunter Valley infrastructure constraints and subsequent production cutbacks by Coal & Allied resulted in each of the company’s three mines standing down equipment to match production capacity with its port allocation. Accordingly, contractor costs and other variable production costs were lower than 2006. Demurrage costs had a $50 million adverse impact on 2007 profit before tax compared with the corresponding period. As a result of a substantial net drawdown of coal inventory (C&A share 2.2 million tonnes), the charge to profit was $60 million higher compared with 2006.

Administration and other mining costs were higher, primarily due to feasibility studies for the Mount Pleasant project and Lower Hunter Land project, as well as higher insurance costs and contributions to COAL21 Clean Coal research funds.

Production
Managed production of saleable coal declined by 4.9 million tonnes to 23.9 million tonnes. This decline was consistent with Coal & Allied’s reduced port allocation of coal sales through the Port of Newcastle and a lower level of domestic contracted coal sales.

Capital expenditure
Total capital expenditure for the year was $122.4 million compared with $147.9 million in 2006. Expenditure related predominantly to sustaining purposes, including replacement of heavy mobile equipment and major maintenance to plant and equipment.

Cash flow
Net operating cash flow was $76.3 million compared with $127.5 million in 2006 because of lower profits. Capital expenditure was lower by $25.5 million resulting in a free cash outflow of $38.5 million compared with $15.7 million in 2006.

Debt
Net debt of $311.6 million at the end of 2007 was higher when compared with $278.1 million in 2006, because of lower free cash flow, with interest costs rising by $9 million. Gearing (net debt to net debt + equity) was 28.0 per cent at 31 December 2007, compared with 25.7 per cent at 31 December 2006.

Dividends
Final dividend has been maintained at 25 cents per ordinary share.

Infrastructure
In March 2007, a revised capacity balancing system was reinstated with the approval of the ACCC. A severe weather event in June 2007 led to increased shipping queues in the second quarter and very significant loading delays.

Following the severe weather in June, which caused extensive damage to the rail network, the queue of ships awaiting loading at Newcastle peaked at 79 vessels. The extent of the queue resulted in cut backs to port allocations for all producers in the Hunter Valley.

Throughout 2007, coal producers engaged in discussions with the aim of agreeing a methodology for allocating coal chain capacity in 2008. In the absence of agreement by producers, the providers of port and rail infrastructure for the Hunter Valley Coal Chain developed a Vessel Queue Management System (VQMS) based on their actual contracts with the coal producers. In November 2007, an application was made to the ACCC to have the system authorised. The ACCC did not grant interim authorisation for the VQMS, but did grant interim authorisation to continue the existing Capacity Balancing System.

Hunter Valley coal producers will be required to work constructively to maximise efficiencies in the coal chain. Coal & Allied supports the appointment of an independent facilitator, Nick Greiner, to help resolve short-to-medium term allocation issues. While these shorter term issues need to be addressed, coal producers also need to achieve a long-term resolution to the coal chain capacity issues. Coal & Allied believes that the State Government of New South Wales must allow Port Waratah Coal Services (PWCS) to enter into fixed and firm long term contracts with coal producers, which will allow all coal producers to realise their growth potential. A long term commercial framework to underpin investment and provide security to customers and producers is critical to this objective.

PWCS has commenced an expansion to increase nominal annual capacity to 113 million tonnes from the current level of 102 million tonnes. The cost of this expansion is expected to total $458 million, with incremental output scheduled for availability in the final quarter of 2009. The additional port capacity is expected to be available ahead of the corresponding rail capacity.

Market conditions
During 2007, the growth in demand for thermal coal was driven by imports from the Asia Pacific basin. Japanese coal demand was stronger than 2006 (by about 3.3 million tonnes), while Korean import levels grew solidly in 2007 (up 5.7 million tonnes) due to the demand by new coal-fired capacity.
Taiwanese import growth was relatively weak in 2007, up 1.4 million tonnes on 2006 levels, while there was negative growth in most importing Atlantic countries due to the milder winter. There was continued strength in the semi-soft coking coal market during 2007. China’s net exports of coal continued to fall dramatically in 2007, largely offsetting Indonesia’s coal export growth.

Looking forward, the demand for thermal coal is robust and coal prices are expected to be higher compared with 2007.

Safety
At Coal & Allied, the Lost Time Injury Frequency Rate was slightly higher at 0.44 per million person hours in 2007 from 0.21 per million person hours in 2006. However, Coal & Allied sites recorded a number of significant safety achievements.

The Mount Thorley Warkworth Safety team reached the finals of the NSW Minerals Council Safety Innovation Awards with its collision avoidance system called ‘Duck In”.
Hunter Valley Operations was awarded the Rio Tinto Chief Executive Safety Award in 2007, following on from its Most Improved Safety Award in 2006.

Mount Pleasant
In 2006, Coal & Allied commenced a feasibility study on the Mount Pleasant thermal coal project located adjacent to the Bengalla coal mine near Muswellbrook in the Hunter Valley. Greater certainty surrounding coal chain infrastructure in the Hunter Valley is required before the feasibility study can be finalised.

Lower Hunter Land
In 2006, Coal and Allied signed a memorandum of understanding with the State Government of New South Wales to facilitate the provision of extensive land conservation corridors in the Lower Hunter Valley through the transfer of 80 per cent of the company’s land holdings after mining has been completed, on condition that the remaining 20 per cent of land holdings are developed. Extensive community consultation continued throughout 2007 with various options considered. Feasibility studies will be conducted in 2008 to finalise these options.

Climate Change
Coal & Allied is a long-term contributor to a range of projects that support the research, development and deployment of clean coal technologies, including a voluntary contribution of funds to the COAL21 levy. In 2007 Coal & Allied launched a climate change action plan. This plan is multi faceted and aims to create an enabling environment where all employees can contribute to the solution for climate change. Initiatives include metering and monitoring energy usage at Coal & Allied operations, and implementing energy improvement programmes across all sites.

Coal & Allied Financial and Operating Statistics

2007 2006
Production and shipments ‘000 tonnes ‘000 tonnes

Total saleable production 2
Hunter Valley Operations 10,094 12,025
Mount Thorley Operations 2,924 3,895
Bengalla 5,155 5,545
Total 23,949 28,806

Coal & Allied equity share of production
Hunter Valley Operations (100%) 10,094 12,023
Mount Thorley Operations (80%) 2,339 3,116
Bengalla (40%) 2,062 2,218
Warkworth (55.57%) 3,211 4,082
Total 17,706 21,439

Total shipments 1 25,522 27,634

Shipments by market 1
Japan 11,558 10,140
Asia (excluding Japan) 6,024 6,885
Europe 1,701 1,524
Americas 1,980 2,251
Domestic 1,588 4,257
Other 2,671 2,577
Total 25,522 27,634

Shipments by product 1
Export thermal 20,379 20,224
Domestic thermal 1,588 4,257
Coking 3,555 3,153
Total 25,522 27,634

Financial 2007 2006
$ million $ million
Total assets 1,899.8 1,864.9
Capital expenditure & investments 122 148
Depreciation and amortisation 101 96
Employees 1,417 1,355
Net debt to net debt + equity (%) 28.0 25.7
Earnings per share (cents) 126.8 239.7

1 Shipments are on a 100% basis and exclude purchased coal
2 Production is on a 100% basis

About Rio Tinto

Rio Tinto is a leading international mining group headquartered in the UK, combining Rio Tinto plc, a London listed company, and Rio Tinto Limited, which is listed on the Australian Securities Exchange.

Rio Tinto’s business is finding, mining, and processing mineral resources. Major products are aluminium, copper, diamonds, energy (coal and uranium), gold, industrial minerals (borax, titanium dioxide, salt, talc) and iron ore. Activities span the world but are strongly represented in Australia and North America with significant businesses in South America, Asia, Europe and southern Africa.

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