SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549
FORM 20-F
(Mark One)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
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:
Only (i) the information in this document that is referenced in the answers to the Items of this Form 20-F, and (ii) the Exhibits, shall be deemed to be filed with the Securities and Exchange Commission for any purpose, including incorporation by reference into the Registration Statement on Form F-3 (File No. 333-13558), which was filed by Rio Tinto Finance (USA) Limited, Rio Tinto plc and Rio Tinto Limited, and any other documents, including any documents filed by Rio Tinto Finance (USA) Limited, Rio Tinto plc or Rio Tinto Limited pursuant to the Securities Act of 1933, as amended, which purport to incorporate by reference this Form 20-F. Any information herein which is not referenced in the answers to the Items of this Form 20-F, or the Exhibits themselves, shall not be deemed to be so incorporated by reference. The information contained in the 2002 Annual report and the 2002 Annual report – Appendix has not materially changed since 20 February 2003.
Rio Tinto
Rio Tinto is a leading international mining group, combining Rio Tinto plc and Rio Tinto Limited in a dual listed companies structure as a single economic entity, nevertheless both Companies remain as separate legal entities with separate share listings and registrars, and with separate ADR programmes.
Rio Tinto 2002 Form 20-F 1
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RIO TINTO
PART I
Item 1. Identity of Directors, Senior Management and AdvisorsNot applicable.
Item 2. Offer Statistics and Expected TimetableNot applicable.
Item 3. Key Information
Selected consolidated financial dataThe following selected consolidated financial data are derived from the consolidated financial statements of the Rio Tinto Group presented elsewhere herein, which have been audited by our independent auditors, PricewaterhouseCoopers LLP, Chartered Accountants and Registered Auditors, London and PricewaterhouseCoopers, Chartered Accountants, Perth, 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 consolidated financial statements and notes thereto included elsewhere in this Annual Report. The consolidated financial statements are prepared in accordance with UK GAAP which differs in certain respects from US GAAP. Details of the principal differences between UK GAAP and US GAAP are set out on pages A-58 to A-72 of the 2002 Annual report - Appendix.
Rio Tinto 2002 Form 20-F 2
Rio Tinto 2002 Form 20-F 3
Diluted earnings per share figures are approximately US 0.2 cents lower than the basic earnings per share figures shown above for 2002 and approximately US 0.1 cents lower than the basic earnings per share figures for the other years shown above.
Rio Tinto 2002 Form 20-F 4
Exchange rates The following tables show, for the periods and dates indicated, the exchange rates for the pound sterling and the Australian dollar, based on the Noon Buying Rates from the Federal Reserve Bank of New York as indicated by Bloomberg, expressed in US dollars per £1.00 and per A$1.00. The Noon Buying Rate on such dates differs slightly from the rates used in the preparation of Rio Tinto’s consolidated financial statements as of such dates. No representation is made that the pound sterling and Australian dollar amounts have been, could have been or could be converted into US dollars at the Noon Buying Rate on such dates or on any other dates.
Risk factorsRisk factors have been discussed on page 7 of the 2002 Annual report.
Cautionary statement about forward looking statements In order to invoke the 'Safe Harbor' provisions of the United States Private Securities Litigation Reform Act of 1995, Rio Tinto is providing the following cautionary statement: This document contains certain forward looking statements with respect to the financial condition, results of operations and business of the Rio Tinto Group.These statements may generally, but not always, be identified by the use of words such as “believes”, “expects”, “may”, “should”, “will”, or similar expressions, used in connection with estimated reserves, anticipated production or construction commencement dates, costs, outputs and productive lives of assets or similar factors. Such forward looking statements involve known and unknown risks, uncertainties and other factors beyond the Group’s control. For example, future reserves will be based in part on market prices that may vary significantly from current levels. These may materially affect the timing and feasibility of particular developments. Other factors include the ability to produce and transport products profitably, the impact 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. The Group cannot guarantee that its forward looking statements will not differ materially from actual results.
Rio Tinto 2002 Form 20-F 5
Item 4. Information on the Company Information on the Rio Tinto Group has been set out on pages 8 to 20 and on pages 24 to 29 of the 2002 Annual report and on pages A-33 to A-38 in the 2002 Annual report – Appendix. A description of Rio Tinto’s dual listed companies structure has been set out on pages 68 to 69 of the 2002 Annual report and its principal subsidiaries have been listed in note 31 on page 116 of the 2002 Annual report.
Governmental regulations Rio Tinto is subject to extensive governmental regulations that affect all aspects of its operations, and consistently seeks to apply best practice in all of its activities. Due to Rio Tinto’s product and geographical spread there is unlikely to be any single governmental regulation that could have a material effect. Native title has since 1992 been accepted as a part of Australia’s common law. The Native Title Act 1993 provides, amongst other things, a framework for the validation of title, including mining tenements, that might be affected by the existence of native title; the determination of native title claims; a ‘right to negotiate’ process with respect to the grant of new exploration and mining tenements and certain compulsory acquisitions of land; and the negotiation and registration of indigenous land use agreements. US based operations are subject to local environmental legislation. The South African Department of Mines has recently published a ‘scorecard’ by which companies will be judged to have made progress with black economic empowerment and the attainment, for value, of the target for 26% ownership in ten years. In addition, new royalty payments are to be introduced that will be calculated on a gross sales value basis in relation to any minerals extracted.
Marketing channels Each business within each Product group is responsible for the marketing and sale of their respective metal and mineral production. Rio Tinto therefore has numerous marketing channels which vary depending on the individual business and the type of products and markets involved. In general, Rio Tinto’s businesses contract their metal and mineral production direct to end users under long term supply contracts and at prevailing market prices. Typically, these contracts specify annual volume commitments and an agreed mechanism for determining prices, for example, businesses producing non-ferrous metals and minerals reference their sales prices to the London Metal Exchange (‘LME’) or other metal exchanges such as the Commodity Exchange Inc (‘Comex’). Businesses producing coal and iron ore would typically reference their sales prices to annually negotiated industry benchmarks. In markets where international reference market prices do not exist or are not transparent, businesses negotiate product prices on an individual customer basis. Rio Tinto’s marketing channels include a network of regional sales offices worldwide. Some products in certain geographical markets are sold via third party agents or to major trading companies. A description of Rio Tinto plc’s and Rio Tinto Limited’s principal markets, a breakdown of revenue by category of activity and geographic market has been set out on pages A-33 to A-39 of the 2002 Annual report – Appendix.
Item 5. Operating and Financial Review and Prospects
Individual listed company information: Rio Tinto plc and Rio Tinto Limited - parts of Rio Tinto Group The Rio Tinto Group’s Operating and Financial review and Prospects have been set out on pages 30 to 49 of the 2002 Annual report. An update on recent developments at the Palabora Mining Company (Palabora) has been set out below. The economic interests of Rio Tinto plc and Rio Tinto Limited were merged in December 1995 as a result of the Dual Listed Companies ('DLC') merger. The DLC merger has the effect that shareholders can be regarded as having interests in a single economic enterprise that is under common control and management. Accordingly, the Group financial statements and the Operating and Financial Review and Prospects have been presented on a combined basis in the 2002 Annual report. Provided below are separate discussion and analyses relating to Rio Tinto plc and Rio Tinto Limited respectively, as a supplement to the discussion of the Rio Tinto Group set out on pages 30 to 49 of the 2002 Annual report.
Rio Tinto plc - part of Rio Tinto Group
2002 compared with 2001 Rio Tinto plc's net sales revenue (referred to as consolidated turnover in the financial statements) was US$3,929 million in 2002, six per cent higher than in 2001. The increase primarily reflected higher volumes at Utah Copper and higher average prices at Kennecott Energy. Profit on ordinary activities before interest and tax was US$910 million compared with US$1,253 million in 2001. Exceptional asset write downs reflected in this number were US$639 million in 2002 against US$671 million in 2001. US$480 million of the write downs in 2002 and US$531 million of the write downs in 2001 related to Utah Copper. 2002 exceptional asset write downs also included US$89 million relating to Rio Tinto Limited's write down of the Iron Ore Company of Canada Inc. The remainder of the write downs in 2001 related to gold producing assets. In addition, in 2002, there was an exceptional charge of US$116 million relating to environmental remediation works at Utah Copper. None of these exceptional charges would qualify as extraordinary items under US GAAP. In addition to the above exceptional items, the reduction in profit before interest and tax reflected the absence of the US$54 million gain on disposal of Norzink in 2001, adverse exchange rates, inflation and adverse changes in other corporate items including pension costs.
Rio Tinto 2002 Form 20-F 6
Interest rates for the majority of Rio Tinto plc's borrowings are based on 3 month LIBOR, which averaged 1.8 per cent in 2002 and 3.8 per cent in 2001. Net interest payable was US$69 million lower than in 2001 as the lower interest rate more than offset the effect of increased net debt in the year. The effective tax rate was 30.7 per cent (2001: 30.1 per cent) before exceptional charges and 61.8 per cent (2001: 38.5 per cent) after exceptional charges. The 2001 effective tax rate before exceptional charges benefited from the US$54 million non taxable gain on the sale of Norzink. Net earnings of US$195 million (2001: US$491 million) were reduced in both years by the exceptional charges referred to above. Adjusted net earnings at US$934 million (2001: US$1,042 million) exclude the exceptional charges and are lower as a result of the factors noted above. Total cash flow from operations was US$1,976 million compared with US$1,532 million in 2001. Reductions in working capital in the period largely reversed the increases in 2001. Dividends from associates increased, reflecting a US$146 million dividend paid by Rio Tinto Limited to Rio Tinto plc on the DLC Dividend Share. Capital expenditure and financial investment remained around the same level as in 2001. However, 2002 includes the purchase of US$304 million of US treasury bonds held as security for the deferred consideration on the North Jacobs Ranch reserves acquired during the period, which is payable over the next four years. A net US$87 million of funds were advanced to Rio Tinto Limited companies in 2002 which compares with an advance of US$399 million in 2001. The net cash inflow from acquisitions and disposals of US$104 million in 2002 included the remittance of US$115 million from Rio Tinto Limited in relation to the buyback of some of its shares from Rio Tinto plc in 2000. Dividends paid to shareholders were US$108 million higher than in 2001 as a result of the change in policy for weighting of interim and final dividends announced in 2001. Net debt increased from US$2,311 million at 31 December 2001 to US$2,625 million at 31 December 2002 primarily reflecting the cash outflow before management of liquid resources and financing of US$235 million discussed above. Shareholders' funds were US$5,899 million at the end of 2002 compared with US$5,902 million at the end of 2001. Retained losses of US$444 million were offset by positive exchange rate changes, primarily on the Australian dollar, and the impact of the dividend on the DLC Dividend Share.
2001 compared with 2000 Rio Tinto plc's net sales revenue was US$3,723 million in 2001 compared with US$3,993 million in 2000, a seven per cent decrease. The decrease reflected lower copper prices and a decline in borate and titanium volumes. Profit on ordinary activities before interest and tax was US$1,253 million (2000: US$2,022 million) after exceptional asset write downs of US$671 million. The exceptional asset write-down of US$644 million included in Rio Tinto plc group operating profit related to Utah Copper which produces both copper and gold. The exceptional asset write down did not qualify as an extraordinary item under US GAAP. The decrease in profit on ordinary activities before interest and tax reflected the exceptional asset write downs and the lower sales discussed above. Interest rates for the majority of Rio Tinto plc's borrowings are based on 3 month LIBOR, which averaged 3.8 per cent in 2001 and 6.5 per cent in 2000. Rio Tinto plc's interest charges reduced in 2001 as the benefit of lower average interest rates offset the effect of the increase in net debt. The effective tax rate was 30.1 per cent (2000: 31.8 per cent) before exceptional asset write downs and 38.5 per cent (2000: 31.8 per cent) after exceptional asset write downs. The tax rate benefited from the lower tax rate in Australia where 2001 earnings were taxed at 30 per cent compared with 34 per cent in 2000. Net earnings of US$491 million (2000: US$1,064 million) were reduced by exceptional asset write downs. Adjusted net earnings at US$1,042 million (2000: US$1,064 million), which are stated after adding back exceptional asset write downs of US$551 million, were US$22 million lower than in 2000 as a result of the factors noted above. Total cash flow from operations was US$1,532 million in 2001 compared with US$1,665 million in 2000. This was attributable to the lower operating profit and an increase of US$97 million in inventories. The inventory increase reflected a measured response to cyclical changes in market demand. Capital expenditure and financial investment of US$1,214 million was US$628 million higher than in 2000. This increase included expenditure on the Diavik development, an advance to a Rio Tinto Limited company to fund capital expenditure, the purchase of an investment in the Labrador Iron Ore Royalty Income Fund and a loan to a Rio Tinto Limited company of US$270 million. Acquisitions of US$221 million included the purchase by Kennecott Energy of Pacificorp's interest in a coal supply agreement. Disposals of US$96 million included the disposal of Rio Tinto plc's interest in the Norzink smelter. The sale realised a gain of US$54 million on which no tax was payable. Disposals also included the receipt of US$120 million which resulted from buybacks by Rio Tinto Limited in prior years of share capital previously held by Rio Tinto plc. Shares issued of US$13 million included US$6 million for shares issued as consideration for acquisitions by Rio Tinto Limited for which payment was received from Rio Tinto Limited. Net debt increased from US$1,760 million at the end of 2000 to US$2,311 million at the end of 2001, primarily reflecting the net cash outflow before management of liquid resources and financing of US$635 million, discussed above. Shareholders' funds decreased from US$6,325 million at the end of 2000 to US$5,902 million at the end of 2001. The decrease included retained losses of US$137 million and exchange losses of US$299 million on the revaluation of Australian, South African and Namibian assets to year end rates.
Rio Tinto 2002 Form 20-F 7
PalaboraInformation on Palabora is given on page 42 of the 2002 Annual Report. Full production from the underground project is now expected by the end of 2003. Palabora has advised the market that it will seek to refinance its debt and has been provided with interim financing of up to US$50 million by Rio Tinto on commercial terms.
Rio Tinto Limited - part of Rio Tinto Group
2002 Compared with 2001Rio Tinto Limited's net sales revenue was US$4,514 million in 2002, 2 per cent higher than in 2001. The effect of higher volumes at Argyle and the commencement of West Angelas operations more than offset the absence of sales from the Forestry operations which were disposed of in 2001. Profit on ordinary activities before interest and tax was US$1,180 million compared with US$1,745 million in 2001. This fall included the impact of US$433 million of exceptional asset write downs in 2002 compared with US$71 million of exceptional asset write downs in 2001. The 2002 exceptional asset write down related primarily to the Iron Ore Company of Canada Inc (IOC). The 2001 asset write down related to some of Rio Tinto Limited's gold producing assets. The exceptional asset write downs do not qualify as extraordinary items under US GAAP. The decrease in profit on ordinary activities before interest and tax also reflected the strengthening of the Australian dollar against the US dollar, which increased costs, and lower prices for iron ore and coal. The interest charge of US$124 million is US$66 million lower than in 2001. Interest rates for the majority of Rio Tinto Limited's borrowings are based on 3 month LIBOR which averaged 1.8 per cent in 2002 and 3.8 per cent in 2001. The effective tax rate was 31.7 per cent (2001: 33.7 per cent) before exceptional asset write downs and 40.9 per cent (2001: 34.0 per cent) after exceptional asset write downs. The effective rate before exceptional asset write downs in 2002 benefited from reductions in deferred tax provisions brought forward from prior years. There was a credit of US$126 million for amounts attributable to outside shareholders in 2002 compared to a charge in 2001 of US$72 million. Profits attributable to outside interests for 2002 are reduced by US$166 million as a result of exceptional asset write downs. Lower profits at partly owned operations reduced the amount attributable to outside interests in addition to this impact from exceptional asset write downs. Net earnings at US$736 million were US$206 million below 2001 which reflects the exceptional asset write downs of US$225 million after tax and minorities in 2002. Total cash flow from operations increased to US$2,043 million from US$1,992 million in 2001. Lower operating profits were offset by other favourable movements including a reduction in inventories as West Angelas came into production and as a result of an IOC shut down in August. Capital expenditure and financial investment remained at around the same level as 2001 as increased spending on the Comalco Alumina Refinery and Hail Creek compensated for the suspension of expenditure on IOC's Sept-Iles pellet plant and the completion of West Angelas. There were net disposals of US$138 million in 2002. The disposals largely related to units acquired with Peabody's Australian coal businesses in 2001. Acquisitions primarily related to an increase in the Group's interest in lines 1 and 2 at Boyne Smelters. Dividends paid in 2002 included a dividend of US$146 million paid to Rio Tinto plc in relation to the DLC Dividend Share. Rio Tinto Limited received loans of US$87 million from Rio Tinto plc during the year and repaid US$115 million of the consideration outstanding for 91,000,000 of its shares repurchased from Rio Tinto plc in 2000. Net debt decreased from US$3,400 million at 31 December 2001 to US$3,122 million at 31 December 2002 reflecting the cash flow during the period. Rio Tinto Limited completed the sale of its 25 per cent interest in Minera Alumbrera Limited, Argentina together with its wholly owned Peak Gold Mine in New South Wales, Australia for US$210 million on 19 March 2003.
2001 compared with 2000Rio Tinto Limited's net sales revenue was US$4,429 million in 2001, 14 per cent higher than in 2000. This was mainly due to the full year impact of the North companies purchased in August 2000. The lower aluminium price and lower volumes at Argyle Diamonds offset the effect of higher coal prices. Profit on ordinary activities before interest and tax was US$1,745 million compared with US$1,456 million in 2000. This mainly reflected the acquisition of the North companies and Rio Tinto Limited's share of the joint venture profits contributed by the Peabody coal operations purchased by Coal & Allied in January 2001. Profit on ordinary activities before interest and tax also included US$71 million of exceptional asset write downs relating to some of Rio Tinto Limited's gold producing assets. The exceptional asset write downs did not qualify as extraordinary items under US GAAP. The interest charge of US$190 million was US$59 million higher than in 2000, reflecting a full year's cost of financing the 2000 acquisitions partly offset by lower average interest rates. Interest rates for the majority of Rio Tinto Limited's borrowings are based on 3 month LIBOR, which averaged 3.8 per cent in 2001 and 6.5 per cent in 2000. The effective tax rate was 33.7 per cent (2000: 34.6 per cent) before exceptional asset write downs and 34.0 per cent (2000: 34.6 per cent) after exceptional asset write downs. The tax rate benefited from the lower tax rate in Australia where 2001 earnings were taxed at 30 per cent compared with 34 per cent in 2000. This was partly offset by an increase in the amount of non-tax deductible depreciation and amortisation. Net earnings at US$942 million (2000: US$771 million) are stated after charging exceptional asset write downs of US$52 million. The increase of US$171 million was a result of the factors noted above.
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Total cash flow from operations increased to US$1,992 million from US$1,909 million in 2000 as a result of higher operating profits. Capital expenditure and financial investment was US$763 million, US$443 million higher than in 2000. There was increased investment at Robe, including West Angelas, and at IOC, including the Sept Iles project. Acquisitions and disposals involved a net cash outlay of US$541 million. Acquisitions of US$744 million included the purchase by Coal & Allied, Rio Tinto Limited's 72.7 per cent subsidiary, of the Australian coal operations of the Peabody Group, and an additional 8.3 per cent equity share in Queensland Alumina purchased by Comalco. Disposals of US$203 million included the sale of the forestry operations and certain other assets acquired with North Limited in 2000. These disposals had no earnings effect as the fair values ascribed to these assets on acquisition were adjusted during 2001, to reflect the sales proceeds, as part of the finalisation of the purchase price allocation. Rio Tinto Limited received loans of US$399 million from Rio Tinto plc during the year. Net debt increased to US$3,400 million from US$3,290 million at 31 December 2000 primarily as a result of the debt acquired with the Peabody operations. Shareholders' funds increased from US$1,420 million at 31 December 2000 to US$1,828 million at 31 December 2001. Retained profits for 2001 were US$648 million but there was a reduction of US$241 million as a result of the revaluation of Australian assets at closing rates of exchange.
Critical accounting policiesFor both Rio Tinto plc and Rio Tinto Limited, the discussion and analysis of financial condition and results of operations presented above are based upon their consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United Kingdom (‘UK GAAP’). Principal accounting policies are given in note 1 to the consolidated financial statements on pages A-9 to A-11 of the 2002 Annual report - Appendix. Critical accounting policies are discussed on page 33 of the 2002 Annual report. Additional information on the Group's accounting policy relating to deferred stripping costs is given below. In open pit mining operations, it is necessary to remove overburden and other waste materials to access ore from which minerals can economically be extracted. The process of mining overburden and waste materials is referred to as stripping. During the development of a mine, before production commences, it is generally accepted that stripping costs are capitalised as part of the investment in the construction of the mine. Stripping of waste materials continues during the production stage of the mine. Some mining companies expense these production stage stripping costs as incurred, while others defer such stripping costs. Those mining companies that expense stripping costs as incurred, will report greater volatility in the results of their operations from period to period. Rio Tinto defers stripping costs for those operations where this is the most appropriate basis for matching revenue and costs, and the effect is material. The relationship between the ‘stripping ratio’ in the period and that planned for the life of the particular mine is important in determining the amount, if any, of stripping costs that are deferred. The stripping ratio is generally calculated by dividing the tonnage of waste mined by the tonnage of ore mined during the relevant period. In these cases, deferral of stripping costs does not impact on the reported ore grade. The costs to be deferred (or accrued) are those relating to the excess (or shortfall) of the current period stripping ratio compared with that for the life of the mine. The life of mine stripping ratio is based on the proven and probable reserves of the operation. In some operations, there are distinct periods of new development during the production stage of the mine. These may, for example, relate to a separate ore body or discrete section of the ore body. The new development will be characterised by a major departure from the life of mine stripping ratio. Excess stripping costs during such periods are deferred and subsequently amortised pro-rata, generally to the tonnage of ore mined in the remaining life of the operation. In operations that experience material fluctuations in the stripping ratio on a year by year basis over the life of the mine, deferral of stripping costs is designed to smooth the cost of stripping allocated to individual reporting periods generally in relation to the tonnage of ore mined. Stripping costs incurred in the period are deferred to the extent that the stripping ratio exceeds the life of mine stripping ratio. Such deferred costs are then charged against reported profits to the extent that, in subsequent periods, the stripping ratio falls short of the life of mine stripping ratio. Deferred stripping costs form part of the total investment in the relevant income generating unit, which is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable. During 2002, production stage stripping costs incurred by subsidiaries and equity accounted operations exceeded the amounts charged against pre tax profit by US$56 million. The amount of such costs carried forward in property, plant and equipment and in investments in joint ventures and associated companies at 31 December 2002 was US$524 million. These amounts are net of asset impairment write downs of US$41 million. Amortisation of deferred stripping costs is included in depreciation of property, plant and equipment or in the Group's share of the results of its equity accounted operations as appropriate. Information about the stripping ratios of the Business units that account for the majority of the deferred stripping balance at 31 December 2002 is set out in the following table:
Rio Tinto 2002 Form 20-F 9
Operation (and year in which deferredstripping is expected to be fullyamortised)
In addition, Escondida, Rio Tinto’s 30 per cent owned joint venture, defers stripping costs based on the ratio of waste to pounds of copper. The actual stripping ratios were 2002: 0.1458 , 2001: 0.1476 , 2000: 0.1428. The life of mine stripping ratios were 2002: 0.1094, 2001: 0.1094, 2000: 0.087. The deferred stripping balance is expected to be fully amortised in 2029.
Trend informationRio Tinto helps to meet the global need for minerals and metals which contribute to essential improvements in living standards, so changes in the demand for its products are closely aligned with changes in global GDP. Changes in the GDP of developing countries will have a 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 will have a greater impact on industrial minerals that can be used in consumer products. Trends in total turnover, earnings, cash flow, debt, equity, total capital are set out on pages 2 to 6 of the 2002 Annual report. Trends in the production of the Group’s minerals and metals are set out in the Operational review on pages 34 to 49 of the 2002 Annual report.
Item 6. Directors, Senior Management and EmployeesDetails of the Group’s directors, senior management and employees have been set out onpages 50 to 52 of the 2002 Annual report, the Remuneration report has been set out on pages 53 to 59 of the 2002 Annual report and board practices have been explained under Corporate governance on pages 60 to 61 of the 2002 Annual report. Note 41 on pages 121 to 124 of the 2002 Annual report sets out details of post retirement benefits. Analyses of the average number of employees have been set out in Note 30 on page A-46 of the 2002 Annual report – Appendix. The tables of the directors’ beneficial interests in shares and their awards under long term incentive plans and options have been updated to the latest practicable date and are reproduced as follows:
Beneficial interests in ordinary shares1
Rio Tinto 2002 Form 20-F 10
Awards to directors under long term incentive plans
4 Apr2003
Rio Tinto 2002 Form 20-F 11
Directors’ options to acquire Rio Tinto plc and Rio Tinto Limited shares1&2
Rio Tinto 2002 Form 20-F 12
Sir Robert Wilson, chairman of Rio Tinto, will retire from the boards of Rio Tinto at the end of October 2003, two months after reaching his normal retirement age of 60. Sir Robert joined the board of Rio Tinto plc in 1987 and was chief executive from 1991 until his appointment as chairman in 1997. He remained as chief executive following the 1995 dual listed companies merger of Rio Tinto plc and Rio Tinto Limited and also became chairman of Rio Tinto Limited in 1999. The boards have appointed Mr Paul Skinner to succeed Sir Robert as chairman. Mr Skinner joined the Rio Tinto boards as a non executive director in 2001. He will retire from his current positions as a Managing Director of The “Shell” Transport and Trading Company, plc and Group Managing Director of the Royal Dutch/Shell Group in September 2003. Mr Leigh Clifford, Rio Tinto’s chief executive, will assume Sir Robert’s executive responsibilities when he retires.
Item 7. Major Shareholders and Related Party Transactions
Major shareholdersAs far as is known to Rio Tinto plc, it is not directly or indirectly owned or controlled by another corporation or by any government, and as of 4 April 2003 it was not aware of any persons owning more than three per cent of its Shares. Rio Tinto plc does not know of any arrangements, the operation of which may result in a change in its control. As of 4 April 2003 the total amount of the voting securities owned by the directors of Rio Tinto plc as a group was 286,444 Ordinary shares of 10p each representing less than 1% of the number in issue. As far as is known to Rio Tinto Limited, with the exception of the arrangements described under Dual listed companies structure on pages 68 to 69 of the 2002 Annual report, it is not directly or indirectly owned or controlled by another corporation or by any government. As of 4 April 2003 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 187,439,520 shares, representing 37.6%. Rio Tinto Limited does not know of any arrangements, the operation of which may result in a change in its control. As of 4 April 2003 the total amount of the voting securities owned by the directors of Rio Tinto Limited as a group was 286,723 shares representing less than 1% of the number in issue. As at 4 April 2003 there were 228 US registered shareholders holding 152,029 shares in Rio Tinto plc, and 188 US registered shareholders holding 301,468 shares in Rio Tinto Limited.
Related party transactionsDetails of the Group’s material related party transactions are set out in note 38 on page A-51 of the 2002 Annual report – Appendix. As stated in the Financial review on page 30 of the 2002 Annual report the Group’s financial statements show the full extent of the Group’s financial commitments including debt and similar exposures. It has never been the Group’s practice to engineer financial structures as a way of avoiding disclosure. Substance rather than form is a fundamental principle of Rio Tinto’s reporting.
Item 8. Financial Information
Legal proceedingsNeither Rio Tinto plc nor Rio Tinto Limited nor any of their subsidiaries is a defendant in any proceedings which the directors believe will have a material effect on either Company’s financial position and results of operations. Rio Tinto’s 2001 Form 20-F included discussion of a dispute involving PT Kaltim Prima Coal the resolution of which has been discussed on page 9 of the 2002 Annual report.
Rio Tinto 2002 Form 20-F 13
DividendsThe Group’s policy on dividend distributions is set out under ‘Shareholder information’ on page 65 of the 2002 Annual report.
Post balance sheet eventsThere have been no significant post balance sheet events.
Item 9. The Offer and ListingShare prices and details of the markets on which the Group’s shares are traded are set out under Shareholder information on pages 65 to 66 of the 2002 Annual report. The tables of the high and low share prices for Rio Tinto plc and Rio Tinto Limited shares have been updated to the latest practicable date and are reproduced as follows:
Item 10. Additional information
Memorandum and Articles of AssociationRio Tinto plc adopted new Articles of Association by Special Resolution passed on 11 April 2002 and Rio Tinto Limited amended its Constitution by Special Resolution on 18 April 2002. These resolutions dealt with the creation of a new special purpose share in each Company to be called a “DLC Dividend Share”. The objective of these shares is to provide improved internal funds management flexibility to the Rio Tinto Group by allowing dividends to be paid between the two parts of the Group. Neither of theses shares has any rights attaching to it, other than the right to dividends as declared by the boards. These resolutions also dealt with some relatively minor technical amendments.
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The new Articles of Association adopted by Rio Tinto plc and the amended Constitution adopted by Rio Tinto Limited are attached as exhibits 1.1 and 1.2., and summaries are as set out below.
IntroductionAs explained on pages 68 to 69 of the 2002 Annual report under the terms of the dual listed companies merger (‘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 include descriptions of certain material rights of the shareholders of both Rio Tinto plc and Rio Tinto Limited and are qualified in their entirety by reference to the Memorandum of Association and Articles of Association of Rio Tinto plc and to the Constitution of Rio Tinto Limited, copies of which have been filed as exhibits 1.1 and 1.2 to this Annual report on Form 20-F, and also by reference to the UK Companies Acts and the Australian Corporations Law. Where no qualifications are given, the Memorandum and Articles of Association 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 ACN Number 004458404. No holder of shares, which may be held in either certificated or uncertificated form, will be required to make any additional contributions of capital.
ObjectsThe 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.
Rio Tinto plc’s objects include provisions:
Rio Tinto 2002 Form 20-F 15
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 Company’s 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. Directors are required to retire in accordance with statutory age limits. Directors who were elected or reelected 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 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 become or were last re-elected directors on the same day those to retire shall (unless they otherwise agree amongst themselves) be determined 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 any members of their body.
Rights attaching to SharesUnder 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.
Rio Tinto 2002 Form 20-F 16
The necessary quorum for a Rio Tinto plc general meeting is three persons and for a Rio Tinto Limited general meeting 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:
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 provision 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.
Limitations on Voting and Shareholding There are no limitations imposed by either law or Rio Tinto plc's Memorandum or Articles of Association or Rio Tinto Limited's Constitution on the right of non-residents or foreign persons to hold or vote the ordinary shares or ADSs, other than the limitations that would generally apply to all shareholders and those that arise from the DLC merger. There are no restrictions under Rio Tinto plc’s Memorandum and Articles of Association or under English law that limit the right of non resident or foreign owners to hold or vote its shares. Nor are there any restrictions under Rio Tinto Limited’s constitution or under Australian law that limit the right of non residents to hold or vote its shares, except than under the Foreign Acquisitions and Takeovers Act 1975, see Shareholder information on page 68 of the 2002 Annual report for details. A description of the change in control provisions triggered by significant share ownership is set out under Shareholder information on page 69 of the 2002 Annual report.
Exchange controls At present, there are no exchange controls or other restrictions that affect remittance of the Group’s dividends to US residents, but see Shareholder information on page 68 of the 2002 Annual report for controls on remittances from Australia to certain very specific territories.
Rio Tinto 2002 Form 20-F 17
Documents on display Rio Tinto plc and Rio Tinto Limited file reports and other information with the SEC. You may read and copy any document we file at the SEC’s public reference rooms in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room and its copy charges.
Item 11. Quantitative and Qualitative Disclosures about Market Risk The Rio Tinto Group's policies for currency, interest rate and commodity price exposures, and the use of derivative financial instruments are discussed in the Financial review on pages 31 and 32 of the 2002 Annual report. In addition, the Group's quantitative and qualitative disclosures about market risk are set out in note 28 of the 2002 Annual report - Appendix. The discussion regarding market risk contains certain forward looking statements and attention is drawn to the Cautionary statement on page 5.
2002 compared with 2001 Currency hedges of trading transactions which matured during 2002 have not been replaced by new hedges. The sensitivity of the Group's earnings to currency movements has therefore increased slightly.
Exchange rates In any particular year, currency fluctuations may have a significant impact on Rio Tinto's financial results. A strengthening of the Australian dollar would have an adverse effect on Rio Tinto's net earnings. The approximate effect on the Group's net earnings of a ten per cent movement from the 2002 full year average Australian dollar value of 54 US cents would be US$115 million (2001: ten per cent movement from the full year average Australian dollar value of 52 US cents would have been US$95 million). This is based on 2002 prices, costs and volumes and assumes all other variables remain constant. This sensitivity allows for the effect of US$/A$ hedges maturing in the following year, as disclosed in note 28 of the 2002 Annual report - Appendix.
Interest rates Based on the Group's net debt at 31 December 2002 and with other variables unchanged, the approximate effect on the Group's net earnings of a one percentage point increase in US dollar LIBOR interest rates would be a reduction of US$40 million (2001: US$40 million based on the Group's net debt at 31 December 2001).
Rio Tinto 2002 Form 20-F 18
Commodity prices In 2002 approximately 35 per cent (2001: 35 per cent) of Rio Tinto's net earnings from operating businesses came from products whose prices were terminal market related and the remainder came from products priced by direct negotiation. The approximate effect on the Group's net earnings of a ten per cent change from the full year average market price for the following metals would be:
Item 12. Description of Securities other than Equity Securities Not applicable
PART II
Item 13. Defaults, Dividend Arrearages and DelinquenciesNone.
Item 14. Material Modification 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 Under the supervision and with the participation of the management of each of Rio Tinto plc and Rio Tinto Limited, including their respective Chief Executive Officer and Chief Financial Officer, each of Rio Tinto plc and Rio Tinto Limited has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-14(c) within 90 days of the filing date of this annual report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of each of Rio Tinto plc and Rio Tinto Limited have concluded that these disclosure controls and procedures are effective. In designing and evaluation the disclosure controls and procedures of each of Rio Tinto plc and Rio Tinto Limited, the management of each of Rio Tinto plc and Rio Tinto Limited, including their respective Chief Executive Officer and Chief Financial Officer, recognised that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the management of each of Rio Tinto plc and Rio Tinto Limited necessarily was required to apply its judgement in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within each of Rio Tinto plc and Rio Tinto Limited have been detected. There were no significant changes in the internal controls or in other factors that could significantly affect internal controls of each of Rio Tinto plc and Rio Tinto Limited subsequent to the date of their most recent evaluation.
Item 16. [Reserved] Not applicable.
PART III
Item 17. Financial Statements Not applicable.
Item 18. Financial Statements The financial statements for the Rio Tinto Group have been set out on pages 73 to 138 of the 2002 Annual report and the separate financial statements for Rio Tinto plc and Rio Tinto Limited have been set out on pages A-2 to A-72 of the 2002 Annual report – Appendix.
Rio Tinto 2002 Form 20-F 19
Item 19. Exhibits
Index
ExhibitNumber Description
Rio Tinto 2002 Form 20-F 20
Rio Tinto 2002 Form 20-F 21
Rio Tinto 2002 Form 20-F 22
SIGNATURE
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.
Rio Tinto 2002 Form 20-F 23
CERTIFICATION
I, R P Wilson, certify that:
Rio Tinto plc (Registrant)
/s/ R P WilsonChief Executive Officer
Date: 23 April 2003
Rio Tinto 2002 Form 20-F 24
I, G R Elliott, certify that:
/s/ G R Elliott Chief Financial Officer
Rio Tinto 2002 Form 20-F 25
Rio Tinto Limited (Registrant)
Rio Tinto 2002 Form 20-F 26
Rio Tinto 2002 Form 20-F 27
Rio Tinto is subject to the US Securities and Exchange Commission (SEC) reporting requirements for foreign companies. A Form 20-F incorporating by reference most of the information disclosed in this Annual report will be filed with the SEC. This and other filings can be viewed on the SEC website at www.sec.gov.The attention of readers is drawn to the Risk factors and Cautionary statement about forward looking statements on page 7.
Dear Shareholder
We held out few hopes for much improvement in business conditions for 2002 and, overall, our caution proved to be well founded. Nevertheless, against a poor market environment for most of our products, our adjusted earnings at US$1,530 million fell by only eight per cent from the record 2001 level and remained the second highest ever. Net earnings, after exceptional charges, were US$651 million. Cash flow from operations was a record US$3,743 million in 2002, a ten per cent increase over the previous year. Dividends equivalent to 60 US cents per share have been declared for 2002 as a whole compared with 59 cents in 2001. This also means the 2003 interim dividend payable in September can be predicted to be 30 US cents per share.
The market in 2002 Market conditions in the US, Europe and Japan were all relatively weak in 2002 but the same was not true of China. China’s growth, with its heavy focus on infrastructure development, has become a major influence in the market for many of our products. China now accounts for 17 per cent of global copper consumption, 16 per cent of aluminium consumption and nearly 23 per cent of global steel consumption. In recent years, China’s consumption of metals has been rising by over ten per cent annually and, for the time being, rapid growth seems likely to continue. This is leading to a major redistribution of global demand over a relatively short period of time. Since the majority of Rio Tinto’s productive assets are close to the Pacific Basin, we are particularly well placed to benefit. Rio Tinto has been a supplier of iron ore into China for a long time. We have reinforced our existing strong links with Chinese customers in 2002.
Consistency and simplicity Our strategy to add value over time is characterised by consistency and simplicity. It has been substantially unchanged for well over a decade. The underlying principle is very simple: we are in business to create value for our shareholders. For this purpose, we define value as the net present value of Rio Tinto shares. By its
nature, this is a long term optimisation exercise and not focused on the near term share price nor, necessarily, one year’s earnings. We assume that if we make the right decisions to maximise the long term value of the business, then this will ultimately be reflected in our share price, even though short term share price movements sometimes seem to contradict this. The evidence supports our confidence in this approach. We have a consistent record of outperforming our sector in total shareholder returns. We make a very thorough assessment of investment decisions, which occasionally leads people to think of us as conservative. This is not accurate. Our philosophy is a risk aware approach to value creation. Adhering to our strategy and implementing it effectively has benefited shareholders for many years. Our portfolio of world class assets, which has long been diverse in terms of product range and location, provides a degree of stability and a resilience to economic and political change. We focus on mining large high quality orebodies and managing them efficiently. As we again demonstrated in 2002, our cost competitive operations generate strong cash flows even in weak markets. If I were to express this differently, I would say our purpose remains to be the best performer in our industry.
Corporate responsibilityAt a time when the reliability of companies’ published accounts is under greater scrutiny, Rio Tinto’s corporate governance measures ensure transparency and fidelity. Our business, founded on proven mineral reserves, physical assets, and the movement of quantifiable products, is straightforward and ascertainable. Mining is necessarily an intrusive activity with the potential to damage the environment and disrupt local communities. To achieve success in the long term, and consistent with our goal of being the best in the world, we address these issues as part of our business strategy. We took a leadership position in the Global Mining Initiative, an industry programme to develop a sustainable development model for mining and metals and to put in place the mechanisms to implement our contribution. Senior executives took part in the
business delegation to the World Summit on Sustainable Development, ensuring the mining perspective was heard. Rio Tinto currently chairs the new industry body on sustainable development, the London based International Council on Mining and Metals. We made progress to align our business with the principles of sustainable development. Greater focus is being encouraged by positioning sustainable development as a framework in which to address a range of cross-cutting issues; economic, social and environmental. There are many who would say we provide the industry benchmark in management of these issues, as we do in financial performance. Measures we have introduced in recent years include requiring operations to prepare five year community plans with disengagement strategies on closure of operations. We have for several years included safety as a component of executive incentive plans and are now adding environmental performance into our reward systems. We are developing strategies and partnerships with conservation organisations to protect biodiversity and manage greenhouse gas emissions. The way we work, our statement of business practice, is being revised to reflect changing circumstances, best practice and society’s expectations. Our safety record continues to improve towards our goal of zero injuries. Now that all our businesses produce their own social and environment reports for local purposes, we are increasing communities’ involvement in these reports. For the second year in a row, Rio Tinto was ranked as sector leader in the Dow Jones Sustainability (DJSI) World and STOXX indices. In the DJSI World Index we were ranked first in the mining industry group, while in the STOXX Sustainability Index we were ranked first in the basic resources market sector. The United Nations Environment Programme and SustainAbility ranked us fifth in the world, across all industry sectors, in their corporate sustainability reporting survey.
Rio Tinto’s people The Group’s consistent high performance is possible only through the constant effort of our people around the world. I would like to pay tribute to their unstinting commitment and broad skills, which enable us to embrace the challenges our industry faces with such confidence and enthusiasm.
To strengthen the independent element of the board, we welcomed two new non executive directors. Andrew Gould, chairman and chief executive officer of Schlumberger Limited, a technology and oilfields services company, joined the board in December 2002. David Clementi, chairman of Prudential plc and former deputy governor of the Bank of England, joined in January 2003. Two of our directors will be leaving us shortly. Jonathan Leslie, an executive director since 1994, who has worked in many parts of our Group, will depart at the end of March. We thank him for his contribution and wish him every success in his new career. Raymond Seitz, who has been a non executive director since 1996, will retire from the board at the end of the annual general meetings. Inter alia, he has chaired the board Committee on social and environmental accountability and contributed importantly to our efforts in that field.
OutlookWith little sign of any improvement in Europe or Japan, the performance of the US and Chinese economies in 2003 will be critical. The Chinese economy is only 12 per cent of the size of that of the US and is too small to lead the world out of recession. However, the same is not true for the mining and metals industries. China already consumes more steel and more copper than does the US. In 2002, China’s demand for most commodities rose by ten per cent or more and shows no sign of slowing. If it continues to grow at anything like its current rate, it will begin to place pressure on the mining and metals industries to keep up with the level of demand. It is difficult to forecast the Chinese economy with confidence and we have to recognise that, if there were to be a sudden slowdown there, it could have a marked adverse effect on our markets. At a global level, we remain of the view that economic recovery is going to be a slow process. The influence of China on our markets suggests, though, that the mining and metals industries might move ahead of other sectors.
Sir Robert WilsonChairman
We have achieved consistently favourable earnings performance over recent years despite the relative weakness of commodity markets. Our results in 2002 again reflect our commitment to quality orebodies, continuous productivity improvement, and cost reduction. With China’s demand for metals and minerals growing, we are poised to enjoy benefits from our considerable investment programme
Operating performanceProduct group earnings were US$1,788 million, before exceptional charges of US$879 million, compared with US$1,906 million in 2001, when there was also an exceptional charge of US$583 million. Market conditions remained extremely difficult for most of our commodities. We responded by reducing production at some operations whilst continuing to focus on productivity. Efficiency improvements were reflected in the results, particularly at our operations in Australia. There, Hamersley Iron and Blair Athol coal are outstanding examples in this regard. There has been an excellent improvement in labour productivity at these businesses over the last decade and this has been achieved with limited capital investment While in 2002 most markets were flat, demand for iron ore and gold remained strong, especially sales of iron ore into China, which contributed strongly to our performance.
Iron oreOur iron ore shipments were at an all time high. Iron ore shipments into China reached record levels in 2002 and this growth looks set to continue over the medium to long term. Rio Tinto delivered more than 30 million tonnes of iron ore to China, resulting in a market share of 27 per cent. We concentrate on developing long term customer relationships, not only in China, through Hamersley Iron’s long standing Channar joint venture and the Baosteel agreement completed in 2002, but also with customers in Japan, Korea and Taiwan. We welcome progress made in 2002 towards greater consolidation of the worldwide steel industry. In 2002, we commissioned Robe River’s West Angelas project in Western Australia,
with sales commencing in July. West Angelas is the first stand alone Marra Mamba iron ore mine to be developed. Its construction, on time and under budget, is a credit to the project team. The Iron Ore Company of Canada has been hit by the downturn in the US steel industry, yet its strengths make it a fundamentally sound business. IOC is undergoing a process of renewal to improve its performance. It has a broad range of high quality products and a very large resource. After 20 years of technology development, Rio Tinto is expanding its HIsmelt®test plant into a commercial scale operation outside Perth in Western Australia, through a strategic joint arrangement. The technology has the potential to revolutionise iron making. Construction has commenced and operations are set to start up in 2004. We see this technology as a means, through licensing agreements, of building our iron ore and coal mining businesses, rather than a step towards becoming an iron and steel producer ourselves.
Diamonds The Diavik diamond mine in Canada started production in early 2003, ahead of schedule and within budget. With its high quality gems complementing Australian production from Argyle, we will be able to offer customers a varied suite of diamond product. With our continuing emphasis on diamonds in exploration, they are fast becoming another major product for Rio Tinto.
Aluminium In aluminium, our main focus is the development of our alumina business. This is an attractive business as the barriers to entry are high due to the requirement for a quality bauxite deposit and the high initial capital cost of a refinery. The new Comalco alumina refinery in Australia, which is well underway, will come on stream at a rate of 1.4 million tonnes per year in 2005. It will have the capability of expansion in stages. Ultimately, our total alumina production could grow to six million tonnes per year.
Energy A key development in our Energy group is the expansion of our hard coking coal capacity from just less than two million tonnes to over
seven million tonnes. This reflects the addition of Hail Creek, which is on track for start up late in the third quarter of 2003 with a subsequent ramp up to 5.5 million tonnes per year. The reserves will allow at least 25 years of production. Elsewhere in the energy portfolio, there remains significant value to be realised from our coal assets in New South Wales, Australia and at Jacobs Ranch in the US Powder River Basin.
Copper We made significant improvements in productivity at the smelter and refinery at Kennecott Utah Copper in the US following the outsourcing of maintenance in the first quarter of the year. Negotiation of a new labour agreement in the second half of the year was linked to the need to improve flexibility of work practices in order to improve productivity and lower costs. Following 41 days of bargaining, KUC reached an impasse with the unions and implemented its final offer. Negotiations continue while new safety and production records have been set under the new arrangements. The completion of Escondida’s Phase 4 development in Chile lifts the capacity of the mine to 1.2 million tonnes of copper per year and will allow us to respond quickly to any improvement in the copper market. There remain further options for expansion at Escondida.
Industrial MineralsThe performance of the Industrial Minerals group is particularly sensitive to the economic environment. Market conditions in 2002 were very difficult. Borax’s profitability has been adversely affected, including by product substitution in detergents and increased competition. In titanium dioxide feedstocks, we are in a period of sustained oversupply. Both QIT and Richards Bay Minerals cut back production in 2002. We believe existing and committed capacity is sufficient to meet projected demand until at least 2007.
Exceptional chargesOver the last 18 months, we have taken decisive action to improve the financial returns from two of our assets that have underperformed: Kennecott Utah Copper and the Iron Ore Company of Canada. However,
the impact of our revised assumptions about future markets for these businesses has more than offset the benefits from these improvements. It has necessitated writing down the carrying value of these assets by US$480 million and US$235 million, respectively (after tax and minorities). I should emphasise that these impairment charges, which are required to conform with UK accounting standards, are non cash in nature. Moreover, the market value of Rio Tinto is about three times its net book value, underlining the world class quality of our assets. Rio Tinto also took a charge of US$116 million for environmental remediation work at Kennecott Utah Copper, for costs that will be incurred over a number of years on treatment of contaminated groundwater.
Safety, health, environment and communitiesWe place the utmost importance on health and safety in the workplace. Our policies show our commitment; our standards set clear expectations; audits assure implementation; and, in 2002, we inaugurated an annual chief executive’s award to reward safety excellence. Luzenac North America’s Yellowstone talc operation and Richards Bay Minerals in South Africa were the 2002 winners of the award. Despite these strenuous efforts, I am very sad to have to report the deaths of six employees at operations we manage during 2002. Many of these fatalities were related to vehicles and driving. We are reinforcing the need for our businesses to achieve full implementation of the Rio Tinto safety standards to prevent any fatality. There were 487 lost time incidents during the year, a 33 per cent decrease from 2001. For the last few years, we have set an annual target of a 50 per cent reduction in the lost time injuries frequency rate. In 2002, the frequency rate was 0.85 compared with 1.26 in 2001. While not 50 per cent, this result represents significant improvement. Our goal, nevertheless, remains to eliminate all injuries. By the end of 2002, 72 per cent of our managed operations had implemented the ISO 14001 environmental standard or an equivalent environmental management system. Full compliance is expected in 2003. To increase our focus on this area, we have
started to highlight further priorities. Performance targets are set for 2003, including energy and water use efficiency, and greenhouse gas emissions. Performance in these areas will also be linked to the executive incentive plan. We made progress in finding ways to integrate sustainable development practices and approaches into our activities. Most businesses have appointed cross functional teams to develop a sustainable development framework appropriate to local circumstances and efforts are under way to formalise the incorporation of criteria into key business decisions.
OpportunitiesThe integration into our businesses of the US$4 billion of acquisitions from 2000 will continue to add significantly to earnings and cash flow over the next few years. The key to a healthy future is the constant attention to the creation of options which we can feed into the project pipeline. For most of our commodities we have opportunities to increase capacity as markets demand. We are, therefore, capable of responding to market circumstances. Rio Tinto has a number of high quality greenfield projects under construction that represent a significant increase in the Group’s exposure to several commodities. However, we do not limit ourselves to any single path to profitable growth. In the last three years, we have also achieved success through acquisition and through identifying options for internal development projects. Our Exploration group continues to develop a portfolio of strong opportunities for the future. Diavik Diamonds, Hail Creek and the Comalco alumina refinery represent the next major tranche of developments. These are high margin projects in businesses we know well. Additionally, we are the leading minerals supplier to China. Whatever the economic conditions, we will remain focused on achieving growth in shareholder value through the business cycle.
Leigh Clifford Chief executive
Risk factors and cautionary statement
RISK FACTORS The following describes some of the risks that could affect Rio Tinto. In addition, some risks may be unknown to Rio Tinto and other risks, currently believed to be immaterial, could turn out to be material. All of these could significantly affect the Group’s business and financial results. They should also be considered in connection with any forward looking statements in this document and the cautionary statement below.
Economic conditionsCommodity prices, and demand for the Group’s products, are influenced strongly by world economic growth, particularly that in the US and China. The Group’s normal policy is to sell its products at prevailing market prices. Commodity prices can fluctuate widely and could have a material and adverse impact on the Group’s asset values, revenues, earnings and cash flows. Further discussion can be found on page 10, Business environment, and on page 32, Commodity prices.
Exchange ratesThe Group’s assets, earnings and cash flows are influenced by a wide variety of currencies due to the geographic diversity of the Group’s sales and the countries in which it operates. The US dollar is the currency in which the majority of the Group’s sales are denominated. The Australian and US dollars are the most important currencies influencing costs. Currencies can fluctuate widely and could have a material and adverse impact on the Group’s revenues, earnings and cash flows. Further discussion can be found on page 31, Exchange rates, reporting currencies and currency exposure.
AcquisitionsThe Group has grown partly through the acquisition of other businesses. There are numerous risks commonly encountered in business combinations and Rio Tinto cannot ensure that management will be able effectively to integrate businesses acquired, or generate the cost savings and synergies anticipated. Failure to do so could have a material and adverse impact on the Group’s costs, earnings and cash flows.
Exploration and new projects The Group seeks to identify new mining properties through an active exploration programme. However, there is no guarantee that such expenditure will be recouped or that the existing mineral reserves will be replaced. Failure to do so could have a material and adverse impact on the Group’s financial results and prospects. The Group develops new mining properties and expands its existing operations as a means of generating shareholder value. However, there are increasing regulatory, environmental and social approvals required that can potentially result in significant increases in construction costs and/or significant delays in construction. These increases could materially and adversely impact upon a
project’s economics, the Group’s asset values, costs, earnings and cash flows.
Reserve estimation There are numerous uncertainties inherent in estimating ore reserves and estimates that are valid at the time of estimation may change significantly when new information becomes available. Fluctuations in the price of commodities, increased production costs or reduced recovery rates may render lower grade reserves uneconomic and may, ultimately, result in a restatement. A significant restatement could have a material and adverse impact on the Group’s asset values, costs, cash flows and earnings.
Political and community The Group has operations in some countries where varying degrees of political instability exists. Political instability can result in civil unrest, expropriation, nationalisation, renegotiation or nullification of existing contracts, mining leases and permits or other agreements, changes in laws, taxation policies or currency restrictions. Any of these can have a material adverse impact upon the profitability or, in extreme cases, the viability of an operation. Some of the Group’s current and potential operations are located in or near communities that may now, or in the future, regard such an operation as having a detrimental effect on their social and economic circumstances. Should this occur, it might have a material adverse impact upon the profitability or, in extreme cases, the viability of an operation. In addition, such an event may adversely affect the Group’s ability to enter into new operations.
TechnologyThe Group has invested in and is involved with information system and operational initiatives. Several technical aspects of these initiatives are still unproven and the eventual commercial outcomes cannot be assessed with any certainty. Accordingly, the costs and benefits from participating and investing in new technologies and the consequent effects on the Group’s future earnings and financial results may vary widely from present expectations.
Land and resource tenure The Group operates in several countries where title to land and rights in respect of land and resources (including indigenous title) are sometimes unclear and disputes may arise over resource development. Such disputes could disrupt some mining projects and/or impede the Group’s ability to develop new mining properties.
Health, safety and environment Rio Tinto operates in an industry that is subject to numerous health, safety and environmental laws and regulations and community expectations. Evolving regulatory standards and expectations can result in increased litigation and/or increased capital, operating, compliance and remediation costs, all of which can have a material and adverse
impact on earnings and cash flows.
Mining operationsMining operations are vulnerable to a number of circumstances beyond the Group’s control, including transport disruption, weather and other natural disasters such as cyclones and flooding, unexpected maintenance problems, collapse or damage to pit walls, unexpected geological variations and industrial actions. These can affect costs at particular mines for varying periods. Mining, smelting and refining processes also rely on key inputs, for example fuel and electricity. Appropriate insurance can provide protection from some, but not all, of the costs that may arise from unforeseen events. Disruption to the supply of key inputs, or changes in their pricing, may have a material and adverse impact on the Group’s costs, earnings and cash flows.
RehabilitationCosts associated with rehabilitating land disturbed during the mining process and addressing environmental, health and community issues are estimated based on the most current information available and dealt with before an operation is sold or closed. However, there is a risk that estimates may be insufficient and/or further issues may be identified. Any underestimated or unidentified rehabilitation costs will reduce earnings and could materially and adversely affect the Group’s financial results and cash flows.
Non managed operationsRio Tinto cannot guarantee that local management of mining assets where it does not have managerial control will comply with the Group’s standards or objectives.
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. These statements may generally, but not always, be identified by the use of words such as “believes”, “expects”, “may”, “should”, “will”, or similar expressions, used in connection with estimated reserves, anticipated production or construction commencement dates, costs, outputs and productive lives of assets or similar factors. Such forward looking statements involve known and unknown risks, uncertainties and other factors beyond the Group’s control. For example, future reserves will be based in part on market prices that may vary significantly from current levels. These may materially affect the timing and feasibility of particular developments. Other factors include the ability to produce and transport products profitably, the impact 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. The Group cannot guarantee that its forward looking statements will not differ materially from actual results.
About Rio Tinto
INTRODUCTIONRio Tinto Limited and Rio Tinto plc operate as one business organisation, referred to in this report as Rio Tinto, the Rio Tinto Group or, more simply, the Group. These collective expressions are used for convenience only since both Companies and the individual companies in which they directly or indirectly own investments are separate and distinct legal entities. “Limited”, “plc”, “Pty”, “Inc”, “Limitada”, or “SA” has generally been omitted from Group company names, except to distinguish between Rio Tinto plc and Rio Tinto Limited. Except where indicated, financial data are derived from, and should be read in conjunction with, the Rio Tinto Group’s consolidated financial statements which are in United States dollars (US$). Solely for convenience, pound sterling (£) and Australian dollar (A$) amounts not derived from the financial statements have been translated at the rates shown at the end of this document. Rio Tinto Group turnover, profit before tax, net earnings, and operating assets for 2001 and 2002 attributable to the Group’s products and geographical areas, are shown in notes 26 and 27 to the Financial statements on pages 100 to 104. In the Operational review, operating assets, turnover and net earnings are consistent with the financial information by business unit on pages 127 and 128. The tables on pages 11 to 22 show production for 2000, 2001 and 2002 and include estimates of proved and probable reserves and mineral resources. The weights and measures used are mainly metric units; conversions into other units are shown on page 143. Words and phrases, often technical, have been used which have particular meanings; definitions of these terms are on pages 143 to 145. Throughout this report, the financial and operating data reflect the composition of each product group for the year to31 December 2002. The results by product group for 2001 have been restated accordingly.
AN OVERVIEW OF RIO TINTO Rio Tinto is a leading international mining group, combining Rio Tinto plc and Rio Tinto Limited in a dual listed companies (DLC) structure as a single economic entity. Nevertheless, both Companies remain legal entities with separate share listings and registers. Rio Tinto plc is incorporated in England and Wales and Rio Tinto Limited is incorporated in Australia. Rio Tinto’s international headquarters is in London whilst the Australian representative office in Melbourne provides support for operations, undertakes external and investor relations and fulfils statutory obligations there. For legal purposes, Rio Tinto’s US agent is Ms S Crompton, Secretary of Rio Tinto’s US holding companies, 1343 South 1800 East, Salt Lake City, UT 84108. Investor relations in the US are provided by Makinson Cowell US Limited, One Penn Plaza, 250 W 34th St, Suite 1935, New York, NY 10119. Rio Tinto’s address and telephone
details are shown on the inside back cover of this report.
Objective, strategy and management structure Rio Tinto’s fundamental objective is to maximise the overall long term return to its shareholders by operating responsibly and sustainably in areas of proven expertise where the Group has competitive advantage. Its strategy is to maximise the net present value per share by investing in large, long life, cost competitive mines. Investments are driven by the quality of opportunity, not choice of commodity. Rio Tinto’s substantial mining interests are diverse both in geography and product. The Group consists of wholly and partly owned subsidiaries, joint ventures, associated companies and joint arrangements, the principal ones being listed in notes 31 to 34 of the Financial statements on pages 116 to 118. Rio Tinto’s management structure is designed to facilitate a clear focus on business performance and the Group’s objective. The management structure, which is reflected in this report, is based on principal product and global support groups:• Iron Ore• Energy• Industrial Minerals• Aluminium• Copper• Diamonds & Gold• Exploration, and• Technology.The chief executive of each group reports to the chief executive of Rio Tinto.
2002 FINANCIAL SUMMARY On 31 December 2002, Rio Tinto plc had a market capitalisation of £13.2 billion (US$21.2 billion) and Rio Tinto Limited had a market capitalisation of A$16.9 billion (US$9.6 billion). The combined Group’s market capitalisation in publicly held shares at the end of 2002 was US$27.2 billion. At 31 December 2002, Rio Tinto had consolidated operating assets of US$13.2 billion; 49 per cent were located in Australia and New Zealand and 36 per cent in North America. Group turnover, or sales revenue, in 2002 was US$10.8 billion (or US$8.4 billion excluding Rio Tinto’s share of joint ventures’ and associates’ turnover). After exceptional charges related to the impairment of carrying values and environmental remediation costs at Kennecott Utah Copper, net earnings in 2002 were US$651 million. Excluding the exceptional charges, adjusted earnings in 2002 were US$1,530 million.
HistoryRio Tinto plc was formed in 1962 by the merger of two English companies, The Rio Tinto Company and The Consolidated Zinc Corporation. At the same time, the Australian interests of these two companies were also merged to form Rio Tinto Limited. The Rio Tinto Company was formed in 1873 to mine ancient copper workings at Rio Tinto in southern Spain. The Consolidated
Zinc Corporation was incorporated in 1905, initially to treat zinc bearing mine waste at Broken Hill, New South Wales, Australia. Between 1962 and 1995, Rio Tinto plc and Rio Tinto Limited discovered important mineral deposits, developed major mining projects and also grew through acquisition. Their DLC merger in 1995 was structured to ensure that, as far as possible, the shareholders of both Companies are in substantially the same economic position as if they held shares in a single enterprise which owns all the Companies’ assets. A more detailed description of the DLC can be found on page 68. Following the DLC merger, Rio Tinto has continued to invest in developments and acquisitions in keeping with its strategy.
RECENT DEVELOPMENTSShare buybacks and issues 2002 In April 2002, Rio Tinto plc shareholders renewed approvals for the buyback of up to ten per cent of its own shares. Rio Tinto Limited is authorised by shareholder approvals obtained in 1999 to buy back up to 100 per cent of Rio Tinto Limited shares held by Tinto Holdings Australia Pty Limited (a wholly owned subsidiary of Rio Tinto plc) plus, on-market, up to ten per cent of the publicly held capital in any 12 month period. Rio Tinto plc and Rio Tinto Limited will seek renewal of their existing shareholder approvals at their respective annual general meetings in 2003. The number of shares, if any, which may be bought back under these authorities will continue to be determined by the directors, based on what they consider to be in the best interests of the continuing shareholders. In the year to 31 December 2002, neither Rio Tinto plc nor Rio Tinto Limited purchased publicly held shares for cancellation in either Company. However, a further 887,000 Rio Tinto plc and 360,000 Rio Tinto Limited shares were issued in respect of the Companies’ employee share plans. During the year, options for a further 2,605,000 Rio Tinto plc and 2,249,000 Rio Tinto Limited shares were granted under Rio Tinto’s share plans.
Share buybacks and issues 2000-2001 In 2000, 3.2 million Rio Tinto plc shares and 2.1 million Rio Tinto Limited shares were issued in connection with the acquisition of Comalco’s publicly held shares. Rio Tinto Limited and Rio Tinto plc also issued 400,000 and 40,000 shares respectively in connection with the acquisition of Ashton Mining. A further 398,000 Rio Tinto plc and 10,000 Rio Tinto Limited shares were issued in connection with the Ashton Mining acquisition in 2001. During 2000, Rio Tinto plc purchased and cancelled 1.2 million of its shares at an average price of £10.35 per share and Rio Tinto Limited purchased and cancelled 0.74 million of its shares at an average price of A$25.13 per share. Within the DLC, Rio Tinto Limited also purchased ‘off market’ and cancelled a further 91 million of its shares held by Tinto Holdings Australia at an average price
of A$25.43 per share. As a consequence, the public interest in Rio Tinto Limited rose from 52.6 per cent to 62.4 per cent. In 2001, neither Rio Tinto plc nor Rio Tinto Limited purchased publicly held shares for cancellation in either Company. An additional 681,000 Rio Tinto plc and 79,000 Rio Tinto Limited shares were issued in respect of the Companies’ employee share plans. Rio Tinto extended a share savings plan to subsidiary companies worldwide. At the same time, Rio Tinto Limited established its own all employee international share savings plan. In aggregate, approximately 24 per cent of eligible employees took out a savings contract for a fixed monthly amount over periods of up to five years and were granted options for 1.0 million Rio Tinto plc shares and 1.4 million Rio Tinto Limited shares during 2001. Rio Tinto plc converted its share warrants to bearer to registered ordinary shares in June 2001 and the former were then delisted.
Operations acquired and divested 2002 In January 2002, Kennecott Energy (KEC) purchased the North Jacobs Ranch coal reserves for US$380 million, payable in installments over a five year period. The reserves are adjacent to KEC’s existing Jacobs Ranch operation and provide a basis for low cost expansion in line with market demand. Following the purchase of outstanding units in the Western Australian Diamond Trust, Rio Tinto’s interest in Argyle Diamonds increased from 99.8 per cent to 100 per cent. In August, Comalco completed the acquisition of an additional 9.5 per cent interest in reduction lines 1 and 2 of the Boyne Island Smelter for US$78.5 million. This increases Comalco’s share in lines 1 and 2 of the world class, low cost smelter to 59.5 per cent from 50 per cent. The interest in line 3 remains unchanged at 59.25 per cent. During the first half of 2002, Coal & Allied Industries completed the sale of its interest in the Moura Joint Venture for US$166 million and in Narama and Ravensworth for US$64 million. These were classified as assets held for resale and consequently their disposal had no effect on net earnings. In September, Rio Tinto acquired for cash in the market 2,597,000 ordinary shares in Coal & Allied to bring its shareholding to 75.7 per cent from 72.7 per cent. Under its 1982 Coal Agreement with the Indonesian Government, Kaltim Prima Coal (KPC), in which Rio Tinto has a 50 per cent interest, is required to offer up to 51 per cent of its shares to Indonesian participants. Agreement was reached with the Indonesian Government on the value of the shares for the current offer, but the offer, due to be made by March 2002, was prevented by attachment orders granted by the District Court of South Jakarta over KPC’s shares. In August 2002, the Government of Indonesia and KPC reached agreement to finalise the divestment of 51 per cent of KPC shares to the Government and assignment of those shares to Indonesian interests. The
agreement was conditional on all litigation associated with the divestment process being removed. In August the civil case against KPC which gave rise to the attachment order was withdrawn, clearing the way for KPC formally to make the offer of the 51 per cent interest to the Government of Indonesia for US$419 million. The divestment process continues to be protracted and is not yet completed due largely to the current investment and political environment in Indonesia. As a result of a refinancing in December 2002, in which the Labrador Iron Ore Royalty Income Fund (LIORIF) chose not to participate, Rio Tinto’s interest in Iron Ore Company of Canada increased from 56.1 per cent to 58.7 per cent. In January 2003, Rio Tinto signed a non binding letter of intent for the divestment of its 25 per cent interest in Minera Alumbrera, Argentina, together with its wholly owned Peak Gold Mine in Australia for US$210 million. The transaction is subject to agreement of terms as well as a number of conditions. Development projects have been funded using the US commercial paper market, the 2002 bond issue, the European medium term note facility and internally generated funds.
Operations acquired and divested 2000-2001 In January 2000, the Group’s one third interest in Carbones del Cerrejon in Colombia was sold to the other partners and an after tax profit of US$55 million realised. In July, Comalco became wholly owned as a result of Rio Tinto’s A$9.50 cash per share offer with a scrip alternative for the approximately 155 million publicly held shares. The acquisition involved the payment of some US$0.8 billion in cash and the issue of Rio Tinto plc and Rio Tinto Limited shares. Rio Tinto’s A$4.75 per share cash offer for North, which closed in August, was also successful and cost US$2.0 billion. Rio Tinto’s unconditional A$2.20 per share cash offer with a scrip alternative was accepted by Ashton Mining’s shareholders in November. As a result, the Group’s interest in the Argyle Diamond mine increased to 99.8 per cent. The acquisition of Ashton Mining cost US$418 million in cash and the issue of 400,000 Rio Tinto Limited shares and 40,000 Rio Tinto plc shares. Coal & Allied acquired the Lemington coal mine for US$134 million in December 2000. In January 2001, Coal & Allied acquired the Peabody Group’s Australian coal businesses for US$455 million and the assumption of US$100 million in debt. Rio Tinto acquired an additional 1.83 per cent interest in Coal & Allied on market for US$15 million in March, 2001. In April, 2001 Rio Tinto’s 50 per cent share of the Norzink smelter was sold for an after tax gain of US$54 million. Rio Tinto sold North Forest Products for US$171 million in May 2001. Following a review, Rio Tinto also sold its 34.8 per cent interest in Aurora Gold as well as other minority interests acquired with Ashton
Mining whilst increasing its interest in Ashton Mining of Canada to 63.8 per cent. Rio Tinto’s offer resulted in it purchasing, for US$56 million, units representing 20.3 per cent of the Labrador Iron Ore Royalty Income Fund. In July, Rio Tinto purchased additional shares in Palabora Mining, increasing its interest by some 0.7 per cent to 49.2 per cent. Dampier Salt acquired Cargill Australia’s Port Hedland operation for US$95 million and contingent performance payments not exceeding US$15 million in aggregate. With effect from September 2001 Comalco acquired an additional 8.3 per cent in Queensland Alumina for US$189 million, taking its overall interest to 38.6 per cent. Rio Tinto acquired the Three Springs talc mine in Western Australia for US$28 million in the same month.
Development projects 2002Rio Tinto invested US$1.4 billion in 2002 on development projects around the world. The Diavik diamond project in the Northwest Territories, Canada, was completed early and under budget. Initial production has commenced and the process plant was commissioned. 2003 will be a year of production build up with Rio Tinto’s share of production of over 3.6 million carats projected for 2005. Construction of the US$76 million second block cave at the underground Northparkes copper-gold mine in New South Wales, Australia was delayed by ground control problems. Production from the first underground block cave ceased in early 2003 to be replaced by the Lift 2 block cave which will commence production in 2004. Construction of Palabora’sUS$410 million underground copper mine in South Africa was completed. The open pit mine was closed and commercial scale underground mining commenced in April. Work on the US$1.0 billion Phase 4 expansion at the Escondida copper mine in Chile was completed. Freeport Indonesia continued to develop the DOZ underground block cave. This achieved design capacity of 25,000 tonnes of ore per day in 2002, a year earlier than originally projected. Pacific Coal continued development of the US$255 million Hail Creek coking coal project in Queensland, Australia. The mine will produce 5.5 million tonnes annually following start up in 2003. Work on the Robe River Joint Venture’s US$450 million West Angelas iron ore mine and port facilities in Western Australia was completed and the first shipments made. Construction began in January 2003 on an expanded US$200 million HIsmelt® plant at Kwinana in Western Australia. The plant is expected to be commissioned in late 2004 and reach full production of 800,000 tonnes per year in 2006. Construction of Comalco’s US$750 million alumina refinery at Gladstone, Queensland, proceeded on schedule with US$175 milion spent in 2002. Initial
Rio Tinto 2002 Annual report and financial statements 9
About Rio Tinto continued
shipments from the 1.4 million tonne per year plant are expected in 2005. Further detail on these investments and projects is provided in the Operational review on pages 34 to 39.
Development projects 2000-2001 At QIT’s upgraded slag plant in Canada, equipment modifications to achieve a rated annual capacity of 250,000 tonnes were introduced in 2000. Construction of the second block cave at the underground Northparkes copper-gold mine in New South Wales, Australia began in 2001. In the US, Kennecott Utah Copper closed its North Concentrator in December 2001. Pacific Coal began development of the Hail Creek coking coal project in Queensland, Australia. Work on the Robe River Joint Venture’s West Angelas iron ore mine and port facilities in Western Australia continued. The Robe River partners agreed to share rail infrastructure with Hamersley Iron, resulting in a capital cost saving of US$110 million. The Iron Ore Company of Canada suspended reconditioning of its pellet plant in Sept-Iles, Quebec, due to market deterioration.
BUSINESS ENVIRONMENT AND MARKETS Rio Tinto produces a broad range of metals and minerals, sold in a variety of markets, which now include electronic marketplaces, with differing characteristics and pricing mechanisms. Non ferrous metals are generally sold under contract, often long term, at prices determined by reference to prevailing prices on terminal markets such as the London Metal Exchange and COMEX in New York. Fluctuations in these prices, particularly for aluminium, copper and gold, inevitably affect Rio Tinto’s financial results. Prices for many of the Group’s other products, such as coal, iron ore and industrial minerals, are directly negotiated under contract and are less susceptible to short term variation. In commodity businesses, especially where there are terminal markets, excess capacity often results in prices falling to levels which may make some producers periodically unprofitable. After slowing sharply in 2001, the global economy managed only a sluggish recovery in 2002, with world GDP growing 2.5 per cent. World trade growth of two per cent, while up on the flat performance in 2001, was well below the average of six per cent for the previous 20 years. The US economy started 2002 stronger than might have been expected given the disruption from the terrorist attacks of 11 September 2001, with consumer spending bolstered by a buoyant housing market. However, with the corporate sector still weighed down with too much capacity as a result of the bursting of the technology bubble and with the stock market shaken by
poor profitability, a series of corporate scandals and geopolitical uncertainties in the Middle East, the economy lost momentum in the second half of the year despite further reductions in interest rates by the Federal Reserve. Europe started the year more slowly but appeared to be picking up speed when weakening stock markets and the slowing of world trade undermined its recovery.Germany in particular struggled with the monetary and fiscal constraints imposed on it by membership of the euro zone. Japan, still suffering from weak consumer and investment demand, recorded negative growth for the second year in succession. The rest of Asia, and particularly China, was much the most dynamic part of the world economy in 2002. High levels of investment and exports, stimulated by its entry into the World Trade Organisation in late 2001, enabled China’s economy to grow by over eight per cent in 2002. Its similarly fast growing imports gave a boost to producers in other parts of emerging Asia. Although, overall, these conditions did not provide a very helpful backdrop for mineral commodity markets in 2002, the performance of individual markets varied widely reflecting differences in the pattern of regional growth. Iron ore had a particularly strong year as a result of surging demand from China. Although contract prices for ore were reduced by 2.4 to 5.0 per cent as a result of weak market conditions in 2001 after the longest negotiations in history, the market tightened as the year progressed, testing the industry’s capacity to deliver. Steam coal producers also had to accept a cut in the contract price for their product. However, following production cutbacks and a slowdown in exports out of China, the market tightened in the second half of the year and spot prices of coal edged back up. Stronger still was the performance of gold which saw its price surge to an average of US$309 per ounce following US$271 in 2001. Increased geopolitical uncertainty played a part in this turnaround but just as important appears to have been the fact that lower interest rates and a weaker US dollar made producer forward selling of gold less attractive. For most other commodities, it was a slower year. Industrial minerals, such as borates and titanium minerals, have a high proportion of their demand in North America and Europe and consequently experienced little growth. Global demand for copper grew around 2.5 per cent, with virtually all of this growth accounted for by China. Although producer cutbacks helped stabilise stocks in the second half of the year, permitting a modest rally in prices, the average price for the year, 70.6 US cents per pound, was still below the 71.6 US cents recorded in 2001. Demand for aluminium was rather stronger than that for copper, growing 4.5 per cent during the year. However, in contrast to copper, aluminium did not have
the benefit of much producer restraint, with western smelter output rising around 3.5 per cent, while China emerged for the first time as a net exporter of aluminium. Accordingly, the annual average price of aluminium slipped from 65.5 US cents per pound in 2001 to 61.2 US cents in 2002.
A discussion of the financial results for the two years to 31 December 2002 is given in the Financial review on pages 30 to 33. Comments on the financial performance of the individual product groups for the three years to 31 December 2002 are included in the Operational review on pages 34 to 49. Details of production, reserves and resources, and information on Group mines and smelters are given on pages 11 to 22 and 24 to 29, respectively.
10 Rio Tinto 2002 Annual report and financial statements
Metals and minerals production
Rio Tinto 2002 Annual report and financial statements 11
Metals and minerals production continued
12 Rio Tinto 2002 Annual report and financial statements
Rio Tinto 2002 Annual report and financial statements 13
14 Rio Tinto 2002 Annual report and financial statements
Ore reserves
Estimates of ore reserves and mineral resources in this report (for Rio Tinto managed operations) were produced in accordance with the Australasian Code for Reporting of Mineral Resources and Ore Reserves, September 1999 (the JORC Code) as required by the Australian Stock Exchange (ASX). Codes or Guidelines similar to JORC with only minor regional variations have been adopted in South Africa, Canada, US, UK, Ireland and Europe and together these represent current best practice for reporting Ore Reserves and Mineral Resources. The JORC Code envisages the use of reasonable investment assumptions, including the use of projected long term commodity prices, in calculating reserve estimates. It has come to the Group’s attention that the US Securities and Exchange Commission (the SEC) have recently been pressing for the use of historical average commodity prices when determining reserves in accordance with SEC Industry Guide 7. If the Group were to apply this approach for reporting purposes, its reserves might differ from those reported below. Ore reserve and mineral resource information in this report is based on information compiled by Competent Persons (as defined by JORC), or ‘recognised mining professionals’ as defined by the ASX, most of whom are full time employees of Rio Tinto or related companies. Each has had a minimum of five years relevant estimation experience and is a member of a recognised professional body whose members are bound by a professional code of ethics. Each Competent Person consents to the inclusion in this report of information they have provided in the form and context in which it appears. A register of the names of the Competent Persons who are responsible for the estimates is maintained by the company secretaries in London and Melbourne and is available on request. The estimated ore reserve figures in the following tables are as of 31 December 2002. Summary data for year end 2001 are shown for comparison. Metric units are used throughout. The figures used to calculate Rio Tinto’s share of reserves are often more precise than the rounded numbers shown in the tables, hence small differences might result if the calculations are repeated using the tabulated figures.
Rio Tinto 2002 Annual report and financial statements 15
16 Rio Tinto 2002 Annual report and financial statements
Rio Tinto 2002 Annual report and financial statements 17
Ore reserves continued
18 Rio Tinto 2002 Annual report and financial statements
Rio Tinto 2002 Annual report and financial statements 19
Mineral resources
As required by the Australian Stock Exchange pages 20-22 of the 2002 Annual report and financial statements disclose additional data in relation to mineral resources but these pages have been intentionally omitted from the 2002 Form 20-F because they conflict with the SEC Industry Guide 7.
20 Rio Tinto 2002 Annual report and financial statements
Rio Tinto 2002 Annual report and financial statements 23
24 Rio Tinto 2002 Annual report and financial statements
Rio Tinto 2002 Annual report and financial statements 25
Information on Group mines continued
26 Rio Tinto 2002 Annual report and financial statements
Rio Tinto 2002 Annual report and financial statements 27
Information on Group smelters, refineries and processing plants
28 Rio Tinto 2002 Annual report and financial statements
Rio Tinto 2002 Annual report and financial statements 29
Financial review
Financial risk managementThe Group’s policies with regard to risk management are clearly defined and consistently applied, and are a fundamental tenet of the Group’s long term strategy. The Group’s business is mining and not trading. The Group only sells commodities it has produced. 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. 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 where the Group operates provides further natural protection. In addition, the Group’s policy of borrowing at floating US dollar interest rates helps to counteract the effect of economic and commodity price cycles. The Group’s financial statements and disclosures show the full extent of the Group’s financial commitments including debt and similar exposures. The Group’s share of the net debt of joint ventures and associates is also disclosed. It has never been the Group’s practice to engineer financial structures as a way of avoiding disclosure. The risk factors to which the Group is subject that are thought to be of particular importance are summarised on page 7. The effectiveness of internal control procedures continues to be a high priority in the Rio Tinto Group. A statement on this is included in Corporate governance on page 61. The Group’s policies with regard to currencies, commodities, interest rates and treasury management are discussed below.
Group operating performance 2002 compared with 2001Adjusted earnings of US$1,530 million were US$132 million below the corresponding period of last year. After the exceptional charges described below, net earnings at US$651 million compared with US$1,079 million reported for 2001. Changes in selling prices and exchange rates reduced earnings by US$74 million. Average gold prices were 14 per cent higher than 2001, but aluminium prices averaged eight per cent lower. Average copper prices were slightly down but there was a benefit from provisionally priced copper. Benchmark prices for iron ore and seaborne thermal coal fell. North American domestic coal prices improved with market fundamentals, as the California crisis in early 2001 flowed into contract prices. The negative variance due to exchange rate movements is principally a result of the Australian dollar being stronger relative to the US dollar. Higher volumes increased earnings by US$85 million. Demand for iron ore was extremely strong with Hamersley Iron achieving record shipments and production from the West Angelas mine beginning to ramp up. Diamond sales volumes were also higher than 2001. There were lower gold volumes from the Group’s interest in Grasberg as a result of lower grades, particularly in the first half of the year.
Excluding the effect of inflation, changes in costs benefited earnings by US$54 million. However, cost inflation more than offset this benefit, reducing earnings by US$76 million. The Group’s policy of having predominantly floating rate debt has allowed it to benefit from lower prevailing interest rates. The interest charge on the Group’s debt in 2002 was US$72 million lower than in 2001 although the level of debt has not changed significantly. Other variances reduced earnings by US$193 million compared with 2001. Of this, US$54 million results from the gain that was included in 2001 earnings as a result of the disposal of Norzink. There were also adverse variances on other corporate items, including pension costs. 2002 earnings suffered from the reduced value of pension fund assets associated with falling stock markets and from a reduction in the expected return on pension fund equity investments compared with that applied in previous years. Excluding exceptional items, the effective tax rate at 31.2 per cent was broadly in line with the previous year. 2002 exceptional charges of US$879 million, net of tax and outside shareholder interests, comprise provisions for the write down of asset carrying values of US$763 million and a charge relating to environmental remediation works at Kennecott Utah Copper (KUC) of US$116 million. US$480 million of the asset write downs relates to KUC and US$235 million relates to the Iron Ore Company of Canada. Over the last 18 months, major changes have been set in train to improve the cost performance and productivity of these operations. However, the impact of revised assumptions about the future markets for these businesses, particularly in relation to price, has necessitated reductions in their carrying values. In the valuation used for measuring the impairment of KUC, Rio Tinto has used a copper price rising to a peak of 82 US cents per pound in 2005 and declining in real terms thereafter. The increase in the expected cost of environmental remediation results from a significant change in the planned methodology for treatment of contaminated groundwater in the vicinity of the Bingham Canyon mine. KUC has been investigating this issue since before 1989, when Rio Tinto acquired the business. The provision relates to costs that will be incurred over a number of years. The 2001 exceptional charge comprised provisions for the write down of asset carrying values.
2001 compared with 2000Adjusted earnings increased by US$155 million or ten per cent to US$1,662 million, compared with US$1,507 million in 2000. Net earnings of US$1,079 million, compared with US$1,507 million in 2000, include an exceptional charge of US$583 million, after tax, relating to the impairment of asset carrying values, of which US$531 million related to KUC. The impairment provision at KUC was triggered
by reductions in the Group’s long term metal price assumptions. The increase in adjusted earnings was achieved despite the adverse impact of lower quoted metal prices, which reduced earnings by US$280 million. Average copper prices were 13 per cent below the 2000 average, and average aluminium prices were down six per cent. Improvements in bulk commodity prices benefited earnings by US$121 million. Favourable movements in exchange rates benefited earnings by US$140 million. The ten per cent reduction in the average value of the Australian dollar and the 14 per cent reduction in the South African rand strengthened the margins of those operations whose costs are denominated in these currencies and whose selling prices are US dollar based. Higher volumes contributed US$119 million to the increase in earnings. This reflected the full year benefit of the acquisitions made in 2000 and early 2001, principally North, the minority interests in Comalco, Ashton, the Lemington mine and Peabody’s Australian coal operations. These acquisitions contributed over US$210 million to earnings before interest and some US$120 million after interest charges. Sales volumes from the Freeport joint venture increased significantly with higher gold grades. Offsetting this, borate and titanium dioxide volumes declined and diamond sales were substantially lower. Real terms reductions in cash costs, excluding fuel and other energy costs, were US$57 million but these only partly offset the effects of inflation and higher energy prices, totalling US$89 million. Overall, higher costs, including increases in non cash costs, reduced earnings by US$46 million. Adjusted earnings include the US$54 million gain on disposal of the Group’s 50 per cent interest in Norzink. In 2000, there was a gain of a similar amount resulting from the sale of the Group’s Colombian coal interests. Interest charges increased by US$29 million after tax, with the effects of increased debt, following the acquisitions in 2000 and 2001, partly offset by lower interest rates. The Group’s effective tax rate was 31.5 per cent, excluding exceptional items, compared with 32.6 per cent in 2000. The tax charge benefited from the lower tax rate in Australia, where 2001 earnings were taxed at 30 per cent compared with 34 per cent in 2000.
Cash flow2002 compared with 2001Cash from operating activities together with dividends from joint ventures and associates totalled US$3,743 million, an increase of ten per cent compared with 2001. Tight control of working capital was reflected in reductions in accounts receivable and inventories totalling US$243 million, which largely reversed increases reported in 2001. Net investment in property, plant and equipment of US$1,417 million was at a similar level to that in 2001. The major areas
30 Rio Tinto 2002 Annual report and financial statements
of expansionary investment in 2002 were the Diavik diamond mine, the West Angelas iron ore mine, the Hail Creek coking coal development, Comalco’s alumina refinery and the first instalment on the purchase of additional coal reserves at North Jacobs Ranch. Disposals of businesses net of acquisitions generated US$127 million. This largely related to units acquired with Peabody’s Australian coal business in 2001, which the Group sold on as planned. Purchases of other investments absorbed a further US$323 million of cash. These investments included US$304 million of US treasury bonds held as security for the deferred consideration on the North Jacobs Ranch reserves acquired during the period, which is payable over the next four years. Dividends paid were US$145 million higher than 2001 as a result of the change in policy for weighting of interim and final dividends announced in 2001. The net cash inflow before management of liquid resources and financing was US$29 million, which compares with an outflow of US$590 million in 2001.
2001 compared with 2000Cash flow from operating activities, together with dividends from joint ventures and associates, totalled US$3,415 million compared with US$3,440 million in 2000. An increase in dividends from joint ventures and associates largely offset the reduction in cash flow from operating activities. The reduction in operating cash flow includes increases of US$227 million in inventories and US$126 million in accounts receivable. The inventory increase reflected a measured response to cyclical changes in market demand. The increase in receivables included the effect of higher selling prices for coal and iron ore, and changes in customer mix in response to weakening demand. Expenditure of US$1,351 million on property, plant and equipment was US$533 million higher than for 2000, reflecting investment in the iron ore projects acquired with North and in the Diavik diamond project. Acquisitions net of disposals involved a cash outlay of US$659 million, compared with US$3,191 million in 2000. Acquisitions in 2001 included the purchase of Peabody’s Australian coal operations for US$455 million, an increased stake in the Queensland Alumina refinery, and the purchase of the Port Hedland salt and Three Springs talc businesses. Disposals included the North forestry operations and the Group’s interest in the Norzink smelter. As a result of these further acquisitions and investment in current operations, the net cash outflow before management of liquid resources and financing was US$590 million.
Balance sheetShareholders’ funds increased by US$419 million to US$7,462 million as a result of an uplift of US$579 million from exchange rate changes. Most important of these was the strengthening of the Australian dollar by 11 per cent.
Net debt increased by US$36 million to US$5,747 million. The other investments of US$304 million, referred to above, generate interest income but are not deducted in arriving at net debt. The ratio of net debt to total capital decreased from 42.1 per cent, at 31 December 2001, to 41.1 per cent at 31 December 2002. The balance sheet remains strong with interest covered 13 times, before taking account of exceptional charges. As detailed in note 18 to the Financial statements, some US$3,366 million, 55 per cent of the Group’s borrowings at the end of 2002, will mature in 2003. Of this, US$1,749 million took the form of commercial paper, mainly raised through markets in the US. Under UK accounting rules, this is regarded as short term debt even though all of it is backed by bank standby facilities expiring after one year. Under Australian and US accounting practices, commercial paper backed in this way would be grouped with non current borrowings, and the Group regards it as such in managing the maturity profile of its debt. At the year end, medium and long term borrowings (excluding the above commercial paper), totalled US$2,708 million. A total of US$1,833 million was drawn under the US$2 billion European Medium Term Notes facility, US$674 million of which is repayable within one year. In addition to the above, the Group’s share of the third party net debt of joint ventures and associates totalled US$1,309 million at 31 December 2002, as detailed in note 14 to the Financial statements. Save for US$16 million, this debt is without recourse to Rio Tinto.
Liquidity management Both Rio Tinto plc and Rio Tinto Limited continue to enjoy the strongest long term ratings of any mining or metals company from the two major credit rating agencies, Moody’s and Standard & Poor’s. 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. On 4 October 2002, Standard & Poor’s lowered the group’s long term credit rating from AA- (negative outlook) to A+ (stable outlook), and the Group’s short term rating from A-1+ to A-1. This action was in response to the slower than anticipated recovery in certain financial ratios following major acquisitions in 2000 and 2001 and subsequent high levels of capital expenditure on new projects during 2001 and 2002. The Group’s ratings from Moody’s, Aa3 (negative outlook) long term and P-1 short term, remain unchanged. These ratings provide financial flexibility and consistent access to the major debt capital markets and enable extremely competitive terms to be obtained on commercial paper issues. The lowering of the Standard & Poor’s rating, to what is still a strong rating category, had negligible impact on the Group’s funding costs. The Group’s commercial paper programme is fully backed by committed
bank standby facilities of US$2.8 billion, of which US$1.75 billion is on terms exceeding one year. These facilities can be drawn upon at any time in the unlikely event of disruption in the commercial paper market. The Group’s standby facilities are with a core of highly rated banking counterparties. The only financial undertaking contained within these facilities is that the Group’s consolidated income before interest and taxes for any annual accounting period shall be not less than three times consolidated interest payable for such period. The Group does not have any financial agreements that would be affected to any material extent by a reduction in the Group’s credit rating. At 31 December 2002, the Group had contractual cash obligations, other than short term debt in the form of commercial paper and bank borrowings repayable on demand, arising in the ordinary course of business, as follows:
Payments due by period
In the opinion of the directors, the Group has sufficient working capital for its present requirements.
Exchange rates, reporting currencies and currency exposureRio Tinto’s assets, earnings and cash flows are influenced by a wide variety of currencies due to the geographic diversity of the Group’s sales and the countries in which it operates. The US dollar, however, is the currency in which virtually all of the Group’s sales are denominated. Operating costs are influenced by the currencies of those countries where the Group’s mines and processing plants are located and also by those currencies in which the costs of imported equipment and services are determined. The Australian and US dollars are the most important currencies influencing costs.
In any particular year, currency fluctuations may have a significant impact on Rio Tinto’s financial results. A strengthening of the Australian dollar would have an adverse effect on Rio Tinto’s net earnings. The approximate effect on the Group’s net earnings of a ten per cent movement from the 2002 full year average Australian dollar value of 54 US cents would be US$115 million. This is based on 2002 prices, costs and volumes and assumes all
Rio Tinto 2002 Annual report and financial statements 31
Financial review continued
other variables remain constant. This sensitivity takes into account the effect of US$/A$ hedges maturing in 2003, as disclosed in note 28 to the Financial statements. These exchange rate sensitivities include the effect on operating costs of movements in exchange rates but exclude the impact through revaluation of foreign currency working capital. They should therefore be used with care. However, in the case of the Australian dollar there is a significant degree of natural protection against cyclical fluctuations, in that the currency tends to be weak, reducing costs in US dollar terms, when commodity prices are low, and vice versa. Given the dominant role of the US currency in the Group’s affairs, the US dollar is the currency in which financial performance is measured and in which financial results are presented both internally and externally. It is also the natural currency for borrowing and holding surplus cash. Modest amounts of cash are held in other currencies for short term operational reasons. The Group finances its operations primarily in US dollars, either directly or using currency swaps, and a significant proportion of the Group’s US dollar debt is located in subsidiaries having functional currencies other than the US dollar. Exchange gains and losses relating to US dollar debt, impact on the profit and loss accounts of such subsidiaries. However, such exchange gains and losses are excluded from the Group’s profit and loss account on consolidation with a corresponding adjustment directly to reserves. This means that financing in US dollars impacts in a consistent manner on the Group’s consolidated accounts irrespective of the functional currency of the particular subsidiary where the debt is located. Under US generally accepted accounting principles (GAAP), the above exchange differences must be charged against the profit for the year except to the extent that the US dollar debt is effective as a hedge of assets accounted for in US dollars in the particular companies in which the debt resides. This gives rise to an adjustment in the US GAAP reconciliation for 2002, increasing US GAAP earnings by US$177 million net of tax and outside shareholders’ interests; but no adjustment to US GAAP shareholders’ funds is required. 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 boards. As set out in note 28 to the Financial statements, as at 31 December 2002 there were forward contracts, including synthetic forwards, to purchase A$1,845 million, C$141 million and NZ$1,005 million in respect of future trading transactions. From the Group’s perspective, these forward contracts offset the impact of exchange rate variations on a portion of the local currency costs incurred by various subsidiaries. Much 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. In the last two years, the Group has also entered into forward currency contracts in respect of certain capital commitments and business acquisitions. As at 31 December 2002, it held contracts to purchase A$1,151 million and C$46 million in respect of future committed capital expenditure.
Interest ratesRio Tinto’s interest rate management policy is generally to borrow and invest cash at floating rates. Short term US dollar rates are normally lower than long term rates, resulting in lower interest costs to the Group. Furthermore, cyclical movements of interest rates tend to compensate, to an extent, for those of commodity prices. In some circumstances, an element of fixed rate funding may be considered appropriate. At the end of 2002, only 12 per cent of the Group’s net debt was fixed rate. Based on the Group’s net debt at 31 December 2002 and with other variables unchanged, the approximate effect on the Group’s net earnings of a one percentage point increase in US dollar LIBOR interest rates would be a reduction of US$40 million.
Commodity pricesThe Group’s normal policy is to sell its products at prevailing market prices. Exceptions to this rule are subject to strict limits laid down by the Rio Tinto boards and to rigid internal controls. Rio Tinto’s exposure to commodity prices is diversified by virtue of its broad commodity spread and the Group does not generally believe commodity price hedging would provide long term benefit to shareholders. Metals such as copper and aluminium are generally sold under contract, often long term, at prices determined by reference to prevailing market prices on terminal markets, such as the London Metal Exchange and COMEX in New York, usually at the time of delivery. Prices fluctuate widely in response to changing levels of supply and demand but, in the long run, prices are related to the marginal cost of supply. Gold is also priced in an active market in which prices respond to daily changes in quantities offered and sought. Newly mined gold is only one source of supply; investment and disinvestment can be important elements of supply and demand. Contract prices for many other natural resource products are generally agreed annually or for longer periods with customers, although volume commitments vary by product. Approximately 35 per cent of Rio Tinto’s 2002 net earnings from operating businesses came from products whose prices were terminal market related and the remainder came from products priced by direct negotiation. The approximate effect on the Group’s net earnings of a ten per cent change from the full year average market price in 2002 for the following metals would be:
The above sensitivities are based on 2002 volumes and give the estimated impact on net earnings of changes in prices, assuming that all other variables remain constant. The relationships between currencies and commodity prices is a complex one and movements in exchange rates can cause movements in commodity prices and vice versa. The sensitivities allow for the effect of the commodity hedges maturing in 2003, as disclosed in note 28 to the Financial statements.
Treasury management and financial instrumentsTreasury 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 boards and are subject to rigorous internal controls. Corporate funding and overall strategic management of Rio Tinto’s balance sheet is handled by the London based Group Treasury. Rio Tinto does not acquire or issue derivative financial instruments for trading or speculative purposes; and does not believe that it has exposure to such trading or speculative holdings through its investments in joint ventures and associates. Such instruments are used to separate funding and cash management decisions from currency exposure and interest rate management. The Group has used interest rate swaps in conjunction with longer term funds raised in the capital markets to achieve a floating rate obligation which is consistent with the Group’s interest rate policy. Currency swaps have been used to convert debt or investments into currencies, primarily the US dollar, which are consistent with the Group’s policy on currency exposure management. No material exposure is considered to exist by virtue of the possible non performance of the counterparties to financial instruments held by the Group. The derivative contracts in which the Group is involved have been valued for the purposes of the Financial instrument disclosures in the Financial statements by reference to quoted market prices, quotations from independent financial institutions or by discounting expected cash flows.
DividendsDividends paid on Rio Tinto plc and Rio Tinto Limited shares are equalised on a net cash basis; that is without taking into account any associated tax credits. Dividends are determined in US dollars. Rio Tinto’s progressive dividend policy aims to increase the US dollar value of dividends over time, without cutting them in economic downturns. Rio Tinto plc shareholders receive dividends in pounds
32 Rio Tinto 2002 Annual report and financial statements
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 policy from 2002 onwards is that the interim dividend for each year in US dollar terms will be equivalent to 50 per cent of the previous year’s total US dollar dividends.
Critical accounting policiesAs explained in detail in the ‘Outline of dual listed companies structure and basis of financial statements’, the consolidated financial statements of the Rio Tinto Group deal with the results and assets and liabilities of both of the dual listed companies, Rio Tinto plc and Rio Tinto Limited and their subsidiaries. They are prepared under UK GAAP and satisfy the obligations of Rio Tinto Limited, as laid down by the Australian Securities and Investments Commission. This Annual Report also includes reconciliation statements setting out the effect of the adjustments to net earnings and to shareholders’ funds for the Group that would be required, under Australian and under US GAAP. The US dollar is the principal currency used in these financial statements, as it most reliably reflects the Group’s global business performance, but pound sterling and Australian dollar figures are also given. The treatment of gains and losses on US dollar debt is described above in the section dealing with Exchange rates, reporting currencies and currency exposure. UK Financial Reporting Standard (FRS) 3 allows presentation of an adjusted measure of earnings. As presented by Rio Tinto, this excludes the effect of exceptional items of such magnitude that their exclusion is necessary in order that adjusted earnings fulfil their purpose of reflecting the Group’s underlying performance. 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 Mineral Resources and Ore Reserves of September 1999 (the JORC code). There are numerous uncertainties inherent in estimating ore reserves; and assumptions that are valid at the time of estimation may change significantly when new information becomes available. Changes in the forecast prices of commodities, exchange rates, production costs or recovery rates may change the economic status of reserves and may, ultimately, result in the reserves being restated. Such changes in reserves could impact on depreciation rates, asset carrying values and provisions for close down, restoration and environmental costs. Tangible and intangible fixed assets are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. In addition, goodwill is reviewed for impairment at the end of the first complete financial year after
the relevant acquisition and, where the goodwill is being amortised over a period exceeding 20 years, annually thereafter. When a review for impairment is conducted, the recoverable amount is assessed by reference to the net present value of expected future cash flows of the relevant income generating unit, or disposal value if higher. The discount rate applied is based upon the Group’s weighted average cost of capital with appropriate adjustment for the risks associated with the relevant unit. Estimates of future net cash flows are based on mineral reserves and resources for which there is a high degree of confidence of economic extraction, and forecasts of future commodity prices and exchange rates. Changes in these assumptions could impact on asset carrying values. Provision is made for environmental costs when the related environmental disturbance occurs, based on the net present value of estimated future costs. Where the ultimate cost of environmental disturbance is uncertain, there may be variances from these cost estimates, which could affect future financial results. Close down and restoration costs are a normal consequence of mining, and the majority of close down and restoration expenditure is incurred at the end of the life of the mine. Although the ultimate cost to be incurred is uncertain, subsidiary companies have estimated their respective costs based on feasibility and engineering studies using current restoration standards and techniques. Post retirement benefits are accounted for in accordance with Statement of Standard Accounting Practice 24, which requires gradual recognition of the surpluses and deficits which emerge as a result of variances from actuarial assumptions. The Accounting Standards Board has extended the transitional period before FRS 17 is required to be implemented. Under FRS 17, all deficits would be recognised in full and surpluses would be recognised to the extent that they are considered recoverable. FRS 17 transitional disclosures are included on pages 122 to 124. If FRS 17 had been applied in drawing up the 2002 financial statements, shareholders’ funds would have been US$602 million lower, reflecting the level of stock markets at 31 December 2002, and net earnings would have been US$15 million lower. In open pit mining operations, it is necessary to remove overburden and other waste materials to access mineral deposits. The costs of removing waste materials are referred to as stripping costs. During the development of a mine, before production commences, stripping costs are capitalised as part of the investment in construction of the mine. Removal of waste materials continues during the production stage of the mine. Some companies expense these production stage stripping costs as incurred, while others defer such stripping costs. Rio Tinto defers stripping costs for those operations where the effect is material as this is considered the most appropriate basis for matching revenues and costs.
When production stage stripping costs are deferred by Rio Tinto operations, the amount deferred and the subsequent recognition of such costs in the profit and loss accounts are based on the life-of-mine stripping ratio. This ratio is calculated by dividing the estimated total volume of production stage stripping by the estimated future ore production over the life of the operation. The ratio is then used to calculate the current period stripping cost charged against earnings by multiplying the stripping ratio by the quantity of ore mined during the period. During 2002, production stage stripping costs incurred by subsidiaries and equity accounted operations exceeded the amounts charged against pretax profit by US$90 million. The amount of such costs carried forward in property, plant and equipment and in investments in joint ventures and associated companies at 31 December 2002 was US$565 million. In 2002, the Group adopted FRS 19, the new UK accounting standard relating to deferred tax. This reduced shareholders’ funds at 1 January 2002 by US$133 million. The impacts on net earnings for 2002 and 2001 were not material and, accordingly, prior year earnings were not restated. Further details of the changes in accounting policy resulting from the introduction of this standard are included in note 1 to the Financial statements. Disclosure is made of material contingent liabilities unless the possibility of any loss arising is considered remote and of material contingent assets where the inflow of economic benefits is probable. Contingencies are disclosed on page 115.
Forward looking statementsForward looking statements are contained in this Financial review and attention is drawn to the ‘Cautionary statement: about forward looking statements’ on page 7.
Rio Tinto 2002 Annual report and financial statements 33
Operational review
Iron Ore group
Rio Tinto’s Iron Ore group wholly owns Hamersley Iron in Western Australia. Hamersley wholly owns five mines and also operates the 60 per cent owned Channar mine, a joint venture with an Australian subsidiary of the China Iron & Steel Industry & Trade Group Corporation. The Iron Ore group also includes Rio Tinto’s effective 53 per cent interest in Robe River Iron Associates’ two mines in Western Australia and Rio Tinto’s 59 per cent interest in the Iron Ore Company of Canada. Rio Tinto’s interest in IOC increased in December as a result of a refinancing. The Iron Ore group operates both enterprises, which were acquired in 2000. In addition, the Iron Ore group includes the HIsmelt® direct iron smelting technology developed in Western Australia. At 31 December 2002, the group accounted for 21 per cent of Rio Tinto’s operating assets, an increase of one per cent over the year. In 2002, the group contributed approximately 16 per cent of the Group’s turnover and 30 per cent of adjusted earnings, both in line with 2001. Chris Renwick, chief executive Iron Ore, is based in Perth, Western Australia.
FINANCIAL PERFORMANCE2002 compared with 2001The Iron Ore group’s contribution to 2002 earnings was US$458 million, US$44 million lower than in 2001, due largely to lower prices and exchange rate impacts. After a relatively slow start, and with considerable uncertainty surrounding the future outlook, the performance of the world iron and steel industry improved markedly throughout 2002. Reflecting the early uncertainty, global iron ore prices declined in 2002 by 2.4 per cent for fines, 5.0 per cent for lump and 5.5 per cent for pellets. However, as demand grew through the year, especially from China, shipments increased quarter by quarter, leading to some delays in loading vessels and consequent demurrage costs towards the end of the year. An exceptional charge of US$235 million after tax and minority interests relating to the impairment of asset carrying values at IOC was recorded in the fourth quarter.
2001 compared with 2000The Iron Ore group’s contribution to 2001 earnings was US$502 million, US$135 million higher than in 2000. As a result of the downturn in steel production in the second half of 2001, the Iron Ore group’s total shipments, including IOC and Robe on a full year basis, were down marginally to 110 million tonnes. Despite this, earnings were favoured by modest price increases in 2001, of 3.2 per cent for lump, 4.3 per cent for fines and 1.7 per cent for pellets, and significant operational improvements, including lower operating costs.
Hamersley Iron (Rio Tinto: 100 per cent) Hamersley Iron’s six mines in Western Australia, 630 kilometre dedicated railway,
and port and infrastructure facilities at Dampier are run as one operation. Hamersley has a system capacity approaching 74 million tonnes per year, making it one of the world’s largest exporters of iron ore. It employs approximately 2,000 people. In December 2002, approval was given to develop a new mine ten kilometres east of Paraburdoo, at a cost of US$64 million. The mine will come into production in 2004 and will service an unincorporated joint venture between Hamersley Iron and Shanghai Baosteel Group Corporation, China’s largest iron and steelmaker. The joint venture, in which Hamersley holds a 54 per cent equity share, will take ten million tonnes of standard Hamersley iron ore products per year over 20 years.
2002 operating performanceHamersley Iron’s total production in 2002 was 68.2 million tonnes, slightly lower than in 2001. Rio Tinto’s share of this production was 63.9 million tonnes. Shipments by Hamersley totalled a record 68.5 million tonnes, including sales through joint ventures. Hamersley’s shipments to China also reached a record level at 27.5 million tonnes, making China again the single largest destination for Hamersley ore. The Brockman mine produced limited tonnage in 2002 as it was closed from April for upgrade work. It is reopening in February 2003. Production from Yandicoogina reached a record 19.1 million tonnes, ensuring Hamersley’s total production was in line with record shipping demand. 2002 saw the formation of the Pilbara Rail Company, which commenced 1 April, effectively integrating the rail networks of Hamersley and Robe River into a single operation. While both mining companies retain ownership of their respective assets, including rail, locomotives and rolling stock, Pilbara Rail operates and maintains the system on their behalf, delivering ore from mine to port. Significant effort was expended in integrating the two networks, particularly in effecting a consolidated safety regime, and aligning Hamersley and Robe’s differing rolling stock, track, signal and communication functions. During 2002, new linking track was built where the two networks crossed near Karratha. A new 62 kilometre spur line to Robe’s West Angelas mine was also laid to allow export of West Angelas ore in the third quarter of 2002. Further new track will be built in 2003 to duplicate a 50 kilometre section of the main line, and additional locomotives and ore cars will be commissioned. Pilbara Rail is already delivering benefits through rolling stock, track maintenance and operational synergies, and further operating cost savings are expected in 2003. Other work included the extension of the Hamersley power grid to supply Robe’s West Angelas mine. Work continues in developing leadership, safety and communication throughout
34 Rio Tinto 2002 Annual report and financial statements
Hamersley Iron under the One Business programme to target sales, production, cost and safety benefits. Process improvement remains a major focus, and further improvements have been achieved in capacity, efficiency and reliability throughout the mine, rail and port operations with minimal cost or capital investment. Tools used include the Breakthrough programme, which seeks to find and implement fast solutions to problems through teamwork, short timeframes and stretch targets. In addition, good progress was made on a US$55 million structured cost saving programme begun in 2001, which will be complete by the end of 2003. Reflecting increased customer interest in high value in use products such as Yandi and Marra Mamba ores, Hamersley continued discussions with its customers on expanding Hamersley’s product range. Besides Hamersley’s existing premium blended bedded lump and fines and Yandi pisolitic fines, new blended products were also trialled, with the intention of making product available in line with demand. Ore reserves changed in line with delineation drilling to improve confidence, annual extraction and updated mine planning. Ore reserves are now expressed by material type to clarify their likely use. A significant change was also made to total resources to include 3.6 billion tonnes (Rio Tinto’s share: 2.2 billion) of previously unreported inferred mineral resources that have the potential to support an expanded product range.
Hamersley Iron’s total sales of iron ore to major markets in 2002
Note: This table includes 100 per cent of all sales through joint ventures.
Robe River Iron Associates (Rio Tinto:53 per cent)Robe River Iron Associates (Robe) is an unincorporated joint venture in which Mitsui (33 per cent), Nippon Steel (10.5 per cent) and Sumitomo Metal Industries (3.5 per cent) also have interests. Robe is the world’s fourth largest seaborne trader in iron ore. It employs approximately 800 people. Robe’s second mine, the US$450 million West Angelas project (Rio Tinto 53 per cent) was completed on time, on budget and with an outstanding safety record in 2002. Production began in April and commercial shipments in July. West Angelas comprises an open pit mine, ore processing plant producing lump and fines ore, stockpiles, reclaimers and train loading facilities. Production will rise from an initial seven million tonnes a year to about 20 million tonnes by 2006 depending on customer demand, lifting Robe’s capacity from 32 million tonnes to a nominal 50 million tonnes per year. West Angelas has large deposits of high grade Marra Mamba iron ore.
Mining activity is centred on Pannawonica, 1,400 kilometres north of Perth, which is connected by a 200 kilometre railway to Robe’s iron ore processing and port facilities at Cape Lambert. The Robe River participants share rail infrastructure with Hamersley Iron (see Hamersley discussion). Robe exports its production of Marra Mamba iron ore, pisolitic fines and pisolitic lump ore under medium and long term supply contracts with major integrated steel mill customers in Japan, Europe, Korea and the US, and under short term contracts in China.
2002 operating performanceRobe’s total production in 2002 was a record 35.9 million tonnes. A good recovery was made after an extended plant maintenance shutdown that affected production in the second quarter. Total shipments were 35.4 million tonnes with strong demand for Robe ore in all major markets, particularly Japan. Robe concluded five year contracts for the sale of West Angelas Marra Mamba iron ore to six Japanese steel mills, with the first commercial shipment on 31 July 2002. The introduction of West Angelas product was successful, with commercial shipments to all Japanese and Korean customers, and trial cargoes to China Steel, Baosteel and other Chinese and some European mills. Ore quality has matched or exceeded customer expectations. Sales of pisolitic lump, Robe's second highest margin product, increased to record levels, with volumes maximised in Asian markets. Customer acceptance is increasing and the outlook is strong. Robe embarked on a review of operations processes to optimise efficiency and productivity. The increased focus on a range of business improvement initiatives has achieved improvements in capacity and throughput. Robe continued its strong safety performance, halving its lost time injury frequency rate.
Robe’s total sales of iron ore to major markets in 2002
Iron Ore Company of Canada (Rio Tinto:58.7 per cent)Following a capital restructuring, Rio Tinto’s interest in Iron Ore Company of Canada (IOC) increased from 56.1 to 58.7 per cent in December 2002. Mitsubishi (26.2 per cent) and the Labrador Iron Ore Royalty Income Fund (15.1 per cent) are also shareholders in IOC, Canada’s largest iron ore pellet producer. IOC operates an open pit mine, concentrator and pellet plant at Labrador City, Newfoundland, together with a 420 kilometre railway to port facilities and a presently idle pellet plant at Sept-Iles, Quebec. Products are transported on IOC’s
Quebec North Shore and Labrador railway to Sept-Iles. The port is open all year and handles ore carriers of up to 255,000 tonnes. IOC exports its concentrate and pellet products to major North American, European and Asia Pacific steel makers. The Sept-Iles pellet plant remains closed, following the suspension in 2001 of a US$240 million refurbishment, in response to market conditions. IOC employs approximately 1,900 and in April 1999 signed a five year agreement with the United Steelworkers of America.
2002 operating performance2002 was a challenging year for IOC. Difficult market conditions continued in the North American steel industry and IOC also experienced operational difficulties, particularly in its mining activities. Despite this, sales volumes improved through the development of new markets and increased sales to existing customers. During 2002, IOC embarked on an ambitious improvement programme to reduce operating costs by C$100 million by the end of 2004. This aims to re-position IOC as an efficient and competitive producer of quality products. Workforce reductions through the accelerated retirement programme continued on target. Safety dramatically improved under the overall business improvement programme.
IOC’s total sales of iron ore to major markets in 2002
IRON ORE GROUP PROJECTS HIsmelt®(Rio Tinto: 100 per cent)Construction began in January 2003 on a US$200 million HIsmelt®plant at Kwinana in Western Australia, following the grant of environmental approval in November 2002. The HIsmelt®process is a revolutionary direct iron smelting technology developed largely by Rio Tinto that will convert fine ores 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 fine ores with higher levels of impurities, the current market for which is limited using standard blast furnace technology and operating techniques. The HIsmelt®project at Kwinana will operate as a joint venture between Rio Tinto (60 per cent interest through its subsidiary, HImet Corporation), US steelmaker Nucor Corporation (25 per cent), Mitsubishi Corporation (ten per cent), and Chinese steelmaker Shougang Corporation (five per cent). The plant is expected to reach full production capability of 800,000 tonnes per year by mid 2006.
Rio Tinto 2002 Annual report and financial statements 35
Operational review continued
Energy group
Rio Tinto Energy group’s coal interests are in Australia, Indonesia and the US. They supply internationally traded and domestic US and Australian markets. Following the disposal of Rio Tinto’s coal interest in Colombia in early 2000, acquisitions in late 2000 and early 2001 enhanced the existing interests in New South Wales, Australia. The group also includes Rössing in Namibia and Energy Resources of Australia. Both companies supply uranium oxide for use in electricity generation. At 31 December 2002, the Energy group accounted for 13 per cent of Group operating assets and, in 2002, contributed 22 per cent of Rio Tinto’s turnover and 23 per cent of adjusted earnings. Greg Boyce, chief executive Energy, is based in London.
FINANCIAL PERFORMANCE2002 compared with 2001The Energy group’s contribution to adjusted earnings was US$351 million, US$22 million lower than in 2001. A strengthening Australian dollar and higher costs associated with flooding and high wall instability at Cordero Rojo were the main components of the lower result.
2001 compared with 2000The Energy group’s earnings contribution in 2001 was 41 per cent higher than in 2000 at US$373 million. Integration of the Lemington and Peabody properties acquired by Coal & Allied, increased sales volumes at Kennecott Energy and higher coal prices were the primary contributors to the improved result.
Kennecott Energy (Rio Tinto: 100 per cent) Kennecott Energy (KEC) wholly owns and operates four open cut coal mines in the Powder River Basin of Montana and Wyoming, US, and has a 50 per cent interest in, but does not operate, the Decker mine in Montana. KEC also manages the Group’s interest in Colowyo Coal in Colorado, US and in total employs approximately 1,675 people. In January 2002, KEC purchased the North Jacobs Ranch coal reserves, adjacent to KEC’s existing Jacobs Ranch operation, for US$380 million payable in five instalments over a four year period. One of the largest US producers, KEC sells to electricity generators predominantly in mid-western and southern States. Sales are made under multiple year contracts and on a spot basis for one year or less. The domestic US market for low sulphur coal continues to grow due to its competitive cost per delivered energy unit and restrictions on sulphur emissions by utilities. In the longer term, continued strong demand for low sulphur coal is projected following the announcement of construction of new coal fired generating capacity in the US.
2002 operating performanceKEC’s production of 105 million tonnes of coal was one per cent lower than in 2001 as a result of highwall and flooding events at Cordero Rojo and lower demand for Spring Creek and Colowyo coals. Earnings of US$86 million compared favourably with
earnings of US$84 million in 2001 with higher average prices offset by reduced volumes.
Pacific Coal (Rio Tinto: 100 per cent)Pacific Coal manages the Group’s interests in Queensland, Australia, which include Blair Athol (Rio Tinto 71 per cent), Kestrel (Rio Tinto 80 per cent) and Tarong coal mines, the Hail Creek project (Rio Tinto 92 per cent) and the Clermont deposit (Rio Tinto 55 per cent). Around 60 per cent of Blair Athol thermal coal is sold under contracts extending to 2010 to its two Japanese joint venture partners. The rest is sold by long term and annual agreements to European, Southeast Asian and South American customers. Production from the wholly owned Tarong mine is sold to Tarong Energy Corporation, an adjacent State owned power utility. A ten year contract for up to seven million tonnes annually expires in 2011. Kestrel is an underground mine where thermal and metallurgical coal production recommenced in June 1999. Sales to customers in Japan, Southeast Asia, Europe and Central America are generally on annual agreements. Pacific Coal employs some 727 people.
2002 operating performancePacific Coal’s earnings of US$136 million was 16 per cent higher than in 2001 due to increased shipments by Blair Athol and higher coal prices at Tarong and Kestrel. Favourable factors were partly offset by lower internationally traded steaming coal prices and an unfavourable exchange rate. Total production at Blair Athol was 11.8 million tonnes while sales were 12.3 million tonnes. The rail and port capacity constraints experienced in 2001 did not recur in 2002. Kestrel increased production by 25 per cent to 4.1 million tonnes while shipments of 3.6 million tonnes of coking and thermal coal were in line with 2001. At Tarong, production increased to 5.7 million tonnes in line with increased demand at Tarong Energy Corporation. At Kestrel, the Queensland Government passed special legislation to validate the lease over an area found to have been affected by an administrative error at the time of the original grant. Compensation for surface rights was agreed between Kestrel and the landowner at the conclusion of evidence placed before the Land Resources Tribunal. Mining lease applications were lodged to extend the Kestrel lease. The Gordon Downs property was acquired to minimise any surface rights issues in the lease extension approval process. The Ti Tree project remains on schedule. Mining from the new area, predominantly for coking quality coal, will commence late in 2003. The unfair dismissal case involving 16 Blair Athol employees that commenced in 1998 was dismissed. The full bench of the Australian Industrial Relations Commission found that there was a business case for the retrenchment though some aspects of the selection process had been unfair. Blair Athol is reviewing its processes in the light of the decision.
Safety performance during 2002 again saw a dramatic improvement with lost time due to injury falling by more than 65 per cent.
Coal & Allied Industries (Rio Tinto: 75.7 per cent) Coal & Allied Industries (Coal & Allied) is publicly listed on the Australian Stock Exchange and had a market capitalisation of A$2.1 billion (US$1.2 billion) at 31 December 2002. In September 2002, Rio Tinto acquired an additional 2,597,000 ordinary shares in Coal & Allied, increasing its interest by three per cent to the current 75.7 per cent. Coal & Allied’s assets are all located within the Hunter Valley in New South Wales, Australia. It wholly owns Hunter Valley Operations, has an 80 per cent interest in Mount Thorley Operations and a 55.57 per cent interest in the contiguous Warkworth mine, and a 40 per cent interest in the Bengalla mine which abuts its wholly owned Mount Pleasant development project. Coal & Allied also has a 37 per cent interest in Port Waratah Coal Services. During the first half of 2002, Coal & Allied sold its Ravensworth, Narama and Moura interests for a total of US$230 million. Coal & Allied produces thermal and semi soft coal. Most of its thermal coal is sold under long term contracts to electrical or industrial customers in Japan, Korea and elsewhere in Asia. The balance is sold in Europe and in Australia. Coal & Allied’s semi soft coal is exported to steel producing customers in Asia and Europe under long term contracts.
2002 operating performanceEarnings in 2002 at US$68 million were down from US$102 million in 2001. This reduction in profit was primarily due to lower coal prices and the strengthening of the Australian currency against the US dollar. Rio Tinto’s share of coal production was 17.6 million tonnes, a reduction of eight per cent on 2001 as a result of the divestments. Safety performance during 2002 again saw a dramatic improvement with lost time due to injury falling by more than 60 per cent. To address market changes, Coal & Allied implemented a new approach to its regional sales organisation by locating managers in their respective market locations. A new marketing team was formed to provide support for the marketing efforts of Rio Tinto Energy. Coal & Allied also successfully launched a price marker initiative using the e-commerce platform, globalCoal, which assisted in providing liquidity and transparency to the spot market. During 2002, Coal & Allied reached agreement on terms for a settlement of actions before the Australian Industrial Relations Commission that followed the retrenchment of 190 former employees in 1998 and 1999. It made a total payment of approximately A$25 million (US$14 million) in a full and final settlement of these claims.
Kaltim Prima Coal (Rio Tinto: 50 per cent)PT Kaltim Prima Coal (KPC) mines high quality, low sulphur, thermal coal under a Coal Agreement with the Indonesian
Government that entitles the Government to 13.5 per cent of annual production. Some 80 per cent of KPC’s coal is sold under long term contracts with the balance sold on the spot market. Asia, predominantly Japan, Taiwan and Hong Kong, accounts for 75 per cent of sales with the rest mainly in Europe and the US. KPC has approximately 2,700 employees plus 4,000 contractors. Under its Coal Agreement, KPC is required to make an annual offer of shares to Indonesian participants in accordance with a specified schedule until 51 per cent of its shares have been divested. In August 2002, the Government of Indonesia and KPC concluded a Framework Agreement, enabling the 2001 offer of 51 per cent of KPC shares to proceed. The Framework Agreement detailed the assignment of rights to Indonesian participants and was conditional on litigation associated with the divestment process being removed. In August, a civil case against KPC and others whereby the East Kalimantan Provincial Government was seeking, amongst other things, damages of US$776 million in relation to KPC’s alleged failure to meet its obligations to offer its shares for sale, was withdrawn. This cleared the way for KPC’s two shareholders to formally make an offer of a 51 per cent interest to the Government of Indonesia for US$419 million. Although KPC’s shareholders continue to fulfil their obligations, the divestment process continues to be protracted and is not yet completed due largely to the current investment and political environment in Indonesia.
2002 operating performanceEarnings from KPC of US$26 million were 38 per cent lower than the previous year due primarily to lower prices. Rio Tinto’s share of production was 8.9 million tonnes, 14 per cent higher than in 2001. In September, development of the access road to the new Melawan pit commenced, with the first coal extracted by year end. Coal from this pit is central to KPC’s future mining strategy with production planned to increase to eight million tonnes per annum, or 40 per cent of total production, over the next three years.
Rössing Uranium(Rio Tinto: 68.6 per cent) Rössing produces and exports uranium oxide from Namibia to European, US and Asia Pacific electricity producers. Production has been lower than the 4,500 tonnes per year capacity for some years due to market conditions. Rössing employs approximately 800 people.
2002 operating performanceTotal production of 2,751 tonnes of uranium oxide was affected by mining limitations in the open pit and the matching of output to market demand in order to rationalise inventories. Initiatives to deliver cost savings continued, which, combined with a strong contract position, resulted in earnings of US$23 million, US$2 million more than in 2001.
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$0.3 billion (US$0.2 billion) at 31 December 2002. ERA employs approximately 260 people with 20 per cent of the operational workforce represented by Aboriginal people. ERA produces uranium oxide at the Ranger open pit mine, 260 kilometres east of Darwin in the Northern Territory. ERA also has title to the nearby Jabiluka mineral lease. Ranger has a 6,000 tonnes per year capacity and began production in 1981. Estimated ore reserves are sufficient for more than ten years at current mining rates. ERA’s operations have been progressively surrounded by, but remain separate from, the World Heritage listed Kakadu National Park and especially stringent environmental requirements and governmental oversight apply. Uranium oxide from Ranger is sold to base load electricity utilities in Japan, Korea, Europe and North America.
2002 operating performanceUranium oxide production was slightly above the previous year at a total of 4,486 tonnes in response to greater sales commitments. Increased sales volumes, stronger unit selling prices and tight controls over costs resulted in earnings of US$12 million, a US$5 million increase over 2001. Safety performance during 2002 again saw a dramatic improvement with lost time due to injury falling by more than 70 per cent.
ENERGY GROUP PROJECTS Hail Creek (Rio Tinto: 92 per cent)Following changes in supply and demand for metallurgical coal and further evaluation, development of Pacific Coal’s Hail Creek project in central Queensland commenced in 2001. The estimated cost is now US$255 million following the decision in July 2002 to purchase and operate mining equipment rather than use contractors in the early years of production. Due to delays in receiving clearances and approvals for rail access and cultural issues, construction of the rail line for the project started four months late. However, an accelerated programme has been put in place to recoup these delays. The mine is expected to start up late in 2003 and will produce 5.5 million tonnes a year of high quality coking coal.
Clermont Coal (Rio Tinto: 55 per cent)The Clermont deposit is near Pacific Coal’s Blair Athol mine. It is suited to open cut development. A prefeasibility study of the project was completed in 2002, including an option to integrate with Blair Athol. Discussions are taking place to align interests in the Blair Athol and Clermont joint ventures.
Mount Pleasant (Rio Tinto: 75.7 per cent) Development of the Mount Pleasant project continued with a prefeasibility study being undertaken in 2002.
Rio Tinto 2002 Annual report and financial statements 37
Industrial Minerals group
Rio Tinto’s Industrial Minerals group produces borates, industrial salt, talc and titanium dioxide feedstock. Rio Tinto Borax, Rio Tinto Iron & Titanium, Luzenac’s talc operations and Dampier Salt, its principal businesses, are leading suppliers of their respective products. The Industrial Minerals group employed approximately 7,200 people in 2002. At 31 December 2002, the Industrial Minerals group accounted for 16 per cent of the Group’s operating assets and contributed approximately 17 per cent of Rio Tinto’s turnover and 19 per cent of adjusted earnings in 2002. Tom Albanese, chief executive Industrial Minerals, is based in London.
FINANCIAL PERFORMANCE2002 compared with 2001 Industrial Minerals’ contribution to 2002 earnings was US$289 million, 11 per cent lower than in 2001, reflecting weaker market conditions and reduced pension credits. Rio Tinto Borax’s earnings were ten per cent lower at US$92 million. Cost improvements were more than offset by reduced pension credits on lower market returns and a higher effective tax rate. Rio Tinto Iron & Titanium earnings at US$157 million were 13 per cent lower than in 2001 due both to market conditions and the effect of reduced pigment demand in 2001.
2001 compared with 2000Industrial Minerals’ contribution to earnings in 2001 was US$323 million, similar to that in 2000 despite the generally difficult market conditions encountered. Rio Tinto Borax’s 2001 earnings was 14 per cent lower at US$102 million reflecting the downturn in most major markets. Rio Tinto Iron & Titanium (RIT) earnings at US$180 million in 2001 were four per cent higher with a robust performance benefiting from the decline of the rand.
Rio Tinto Borax (Rio Tinto: 100 per cent)Rio Tinto Borax’s Boron mine in California’s Mojave Desert is the world’s largest borate mine. Borates are used in the US for vitreous applications, such as fibreglass, glass wool, high temperature glasses and enamels. The perborate industry, a major market in Europe, uses borates as bleach in detergents. Other uses include ceramics, fertilisers, flame retardants, wood preservatives and corrosion inhibitors. Rio Tinto Borax’s US and UK research laboratories provide technical support and participate in collaborative projects with customers. A new, three year collective bargaining agreement reached in November 2001 with more than 600 Boron employees allows greater flexibility and efficiency in the operation.
2002 operating performanceEarnings from Rio Tinto Borax at US$92 million was ten per cent below the previous year. Production of borates was
six per cent lower than 2001 at 528,000 tonnes, despite boric acid production increases of 12 per cent. Sales were slightly ahead of 2001 primarily due to increased sales in Asia Pacific, strong North American construction activity, and a tightening of the boric acid market, partially offset by continued perborate substitution. The cost reduction programmes maintained their momentum but the effect on net earnings was more than offset by reduced pension credits and a higher effective tax rate.
Rio Tinto Iron & Titanium (Rio Tinto:100 per cent)Rio Tinto Iron & Titanium (RIT) comprises the wholly owned QIT-Fer et Titane (QIT) in Quebec, Canada and the 50 per cent interest in Richards Bay Minerals (RBM) in KwaZulu-Natal, South Africa. Both produce titanium dioxide feedstock used by customers to manufacture pigments for paints and surface coatings, plastics and paper, as well as iron and zircon co-products. QIT’s proprietary process technology enables it to supply both the sulphate and chloride pigment manufacturing methods. Its upgraded slag plant supplies the growing chloride sector and is designed for expansion in line with demand up to a capacity of 600,000 tonnes per year from its current level of 250,000 tonnes. RBM’s ilmenite has a low alkali content which makes its feedstock suitable for the chloride pigment process. RBM can sustain one million tonnes of feedstock production, annually.
2002 operating performanceEarnings from Rio Tinto Iron & Titanium (RIT) of US$157 million were 13 per cent lower than in 2001. This represents a creditable result in a difficult market environment. Although the result benefited from a generally weaker rand on average compared with the previous year, this was more than offset by exchange losses on US dollar debtors caused by the strengthening of the rand towards the end of 2002. Titanium dioxide pigment demand increased moderately year on year. The titanium dioxide feedstock side of the industry, however, continued to be affected by the oversupply of high grade feedstocks and persistent high feedstock inventory levels at some pigment producers. Consequently, RIT shipments of titanium dioxide feedstocks were lower, reflecting both market conditions and the effect of reduced pigment demand in 2001. Production at both QIT and RBM was curtailed accordingly. Demand for iron and steel co-products strengthened during the year, but market conditions remain very competitive. Zircon markets were resilient for most of 2002. RIT reached an out of court settlement in 2002 concerning intellectual property legal proceedings. As part of the agreement, RIT received US$10 million in December 2002; a further US$5 million is receivable in March 2003.
38 Rio Tinto 2002 Annual report and financial statements
Dampier Salt (Rio Tinto: 64.9 per cent) Dampier Salt (DSL), now the world’s largest salt exporter, produces industrial salt by solar evaporation at Dampier, Port Hedland and Lake MacLeod, and also mines gypsum at Lake MacLeod, in Western Australia. DSL acquired a three million tonne per year salt operation at Port Hedland, Western Australia in August 2001. The chemical industry in Asia is the principal customer for DSL’s salt whilst cement and wallboard manufacture is gypsum’s main use.
2002 operating performance Dampier Salt’s earnings were US$25 million in 2002. Production levels at Dampier, Lake MacLeod and Port Hedland benefited from favourable salt growing conditions throughout 2002. Total production for 2002 was 7.2 million tonnes (Rio Tinto share: 4.7 million tonnes) which was 0.7 million tonnes higher than in 2001. Efforts to diversify markets resulted in several shipments into China. These were the first substantial sales made into this market.
Luzenac Group (Rio Tinto: 99.9 per cent) The Luzenac Group operates talc mines, including the world’s largest in south west France, and processing facilities in Australia, Austria, Belgium, Canada, France, Italy, Mexico, Spain, the UK and the US. The Three Springs talc mine and processing plant in Western Australia was acquired in September 2001. The mine is capable of producing up to 200,000 tonnes of higher value talc annually and broadens Luzenac’s product range to Asia Pacific markets. Luzenac products are used internationally. Principal uses are in paper, paint and plastics.
2002 operating performance Earnings in 2002 were US$15 million. Luzenac’s production in 2002 was five per cent higher than 2001 at 1.33 million tonnes, with the increase attributable to production from the acquisition of the Three Springs mine in Australia. Sales volumes declined in Europe but revenues were maintained year on year, due to a favourable sales mix, with particular strength noted in coatings following customer re-formulations. The North American markets were affected by weak economic conditions in the traditional paper and pulp markets, but a sustained recovery occurred in other applications, notably in polymers and coatings. The Three Springs mine supported increased Asian sales. New cost reduction programmes helped offset the earnings effect of weaker demand and costs associated with some mine and plant closures.
INDUSTRIAL MINERALS GROUP PROJECTS QIT Madagascar Minerals(Rio Tinto: 80 per cent)RIT manages QIT Madagascar Minerals (QMM), in which an agency of the Government of Madagascar has a 20 per cent interest. QMM was formed to evaluate and, if appropriate, develop large mineral sand deposits in the south east of Madagascar. In November 2001, QMM was granted an environmental permit by the Government for the proposed minerals sands project. The permit requires QMM to comply with a full range of social and environmental obligations throughout the life of a project. Full feasibility studies were due to commence in early 2002, but political conditions in Madagascar during the year adversely impacted the project schedule. Project activity has now returned to normal and the feasibility study will be advanced as originally planned during 2003. RIT is working with the new Government, as well as all other interested and affected parties, with a view to developing the project.
Rio Tinto 2002 Annual report and financial statements 39
Aluminium group
Rio Tinto’s Aluminium group encompasses its wholly owned, integrated aluminium subsidiary, Comalco. Rio Tinto acquired the publicly held 27.6 per cent of Comalco in 2000. At 31 December 2002, the Aluminium group accounted for 18 per cent of Rio Tinto’s operating assets and in 2002 contributed 13 per cent of Group turnover and 17 per cent of adjusted earnings. Sam Walsh, chief executive Aluminium, is based in Brisbane, Queensland.
FINANCIAL PERFORMANCE2002 compared with 2001 Comalco’s contribution to 2002 earnings was US$256 million, a decrease of 18 per cent. Lower prices reduced earnings by US$44 million with the average three month aluminium price in 2002 at 61 US cents per pound compared with 66 US cents in 2001. The strengthening Australian and New Zealand currencies reduced Comalco’s earnings by US$13 million.
2001 compared with 2000 Comalco’s contribution to 2001 earnings was US$313 million compared with US$338 million in 2000, a decrease of seven per cent. Lower prices reduced earnings by US$67 million with the average three month aluminium price in 2001 some six per cent lower than the 70 US cents in 2000.Continued weakness in the Australian and New Zealand currencies, however, benefited Comalco’s earnings by US$16 million and US$22 million, respectively.
Comalco (Rio Tinto: 100 per cent) Comalco is a major, Australian based supplier of bauxite, alumina and primary aluminium to world markets. It employs some 3,400 people. Approximately 90 per cent of the bauxite from Comalco’s wholly owned Weipa bauxite mine is shipped to alumina refineries at Gladstone, Queensland and Sardinia, Italy. Comalco is also entitled to four per cent of bauxite output from the Boké mine, Guinea, West Africa. Comalco has a 56.2 per cent consortium interest in Eurallumina and increased its interest in Queensland Alumina Limited (QAL) from 30.3 to 38.6 per cent for US$189 million in September 2001. In January 2002, Comalco began to construct a wholly owned, US$750 million alumina refinery to produce 1.4 million tonnes annually at Gladstone, Queensland. In July 2002, Comalco completed the acquisition of an additional 9.5 per cent of lines 1 & 2 at Boyne Island smelter for US$78.5 million. This increases Comalco’s overall ownership of the Boyne Island smelter from 54.2 per cent to 59.4 per cent. In addition to the Boyne Island smelter, smelters at Bell Bay (100 per cent) and Tiwai Point (79.4 per cent), New Zealand, produce Comalco’s primary aluminium. More than 75 per cent of Comalco’s aluminium is exported to Asia, the US and Europe.
2002 operating performance Bauxite production at Weipa was 11.2 million tonnes, slightly lower than in 2001. The world traded bauxite market remained stagnant in 2002 with global supply more than adequate to meet the demand from non integrated alumina refineries. Weipa bauxite shipments at 11.1 million tones increased slightly compared with 2001 levels, due to higher production levels at the QAL refinery in Australia, and higher sales to independent customers. Production at QAL was close to record levels although a disruption of power supply affected production towards year end. Eurallumina production was less than planned due to intermittent equipment and process problems during the year. At Gladstone in Australia, drought conditions resulted in the application of water restrictions by the local water authority. All Comalco related operations achieved a required 25 per cent cutback in water use with no interruption to production. Comalco’s share of aluminium production from its three smelters at 724,000 tonnes was 30,000 tonnes above 2001 production. This resulted from improved production efficiency and cell availability together with the additional 9.5 per cent ownership of lines 1 & 2 at the Boyne Island aluminium smelter. Sales in 2002 showed some regional changes compared with 2001. Attributable metal shipments of 718,000 tonnes generally moved away from delivery to Europe and the US back to Asia and Australia. The Six Sigma programme was adopted by Comalco in 2001 as its primary performance improvement initiative. It delivered improvements to the business of some US$5 million during the year. All Comalco managed sites achieved certification to the international environmental management standard ISO14001 during 2002.
ALUMINIUM GROUP PROJECTSComalco alumina refinery(Rio Tinto: 100 per cent) Following approval in October 2001 and ground work preparation in December, large scale construction of the US$750 million first stage of a new greenfield alumina refinery at Gladstone began in January 2002. The refinery will enable Comalco to add further value to the Weipa bauxite deposit and strengthen both Comalco’s and Australia’s positions in the world alumina market. The majority of the refinery’s output will go into Comalco smelters. The balance will be placed in the traded alumina market and is an available option for possible expansion of Comalco’s smelting capacity. Comalco will, however, become a more significant player in the traded alumina market after the 1.4 million tonnes per year refinery comes into production. With work on schedule at the end of 2002, initial shipments are expected in 2005 and full capacity by the end of 2006. There is potential for the refinery capacity to increase to over four million tonnes per year when market conditions allow.
40 Rio Tinto 2002 Annual report and financial statements
Copper group
In 2002, Rio Tinto’s Copper group comprised 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 Alumbrera in Argentina, as well as the Anglesey Aluminium smelter in the UK, the Peak Gold mine in Australia, the Zinkgruvan zinc mine in Sweden, and the Atlantic Copper Smelter in Spain. Rio Tinto’s interests in Northparkes (80 per cent) and Alumbrera (25 per cent) as well as the wholly owned Zinkgruvan zinc mine resulted from the acquisition of North in 2000. Peak Gold and Anglesey Aluminium were transferred from the Diamonds & Gold group at the end of 2000. A non binding letter of intent was signed in January 2003 for the sale of the Alumbrera and Peak Gold interests for US$210 million. At 31 December 2002, the Copper group, which also produces gold as a significant co-product, accounted for 22 per cent of the Group’s operating assets and, in 2002, contributed approximately 22 per cent of Rio Tinto’s turnover, of which 12 per cent was from copper and the remainder mostly from gold. It accounted for 19 per cent of adjusted earnings in 2002. Oscar Groeneveld, chief executive Copper, is based in London.
FINANCIAL PERFORMANCE2002 compared with 2001 The Copper group’s contribution to earnings was US$290 million, US$28 million higher than in 2001. The average price of copper was 71 US cents per pound compared to 72 US cents in 2001. The average gold price of US$309 per ounce increased by 14 per cent. Kennecott Utah Copper’s contribution to earnings of US$78 million was broadly in line with 2001. Adjusted earnings are stated before the effect of exceptional charges relating to asset writedowns and a provision for environmental remediation. A downward revision to the Group’s long term copper price assumption resulted in an exceptional charge relating to the impairment of asset carrying values of US$480 million. KUC has been investigating the treatment of contaminated groundwater in the vicinity of the Bingham Canyon mine since before 1989, when Rio Tinto acquired the business. As a result of changes to the treatment plan an additional provision of US$116 million was raised during the year. This provision relates to costs that will be incurred over a number of years. Earnings at Escondida decreased 22 per cent to US$32 million as output was constrained in response to weak market demand. Escondida will continue to operate below its expanded capacity for at least the first half of 2003. Freeport’s earnings contribution increased US$40 million to US$132 million as a result of higher copper grades and recoveries, and higher gold prices partly offset by lower gold volumes. Earnings at Palabora decreased marginally to US$13 million in 2002. The positive effect of the weaker rand was more
than offset by lower volumes and higher costs as the operation moved from the open pit to the underground. Alumbrera earnings benefited from the stronger gold price, commissioning of the third mill grinding line, and the positive tax effect related to exchange losses on the peso equivalent of US dollar project debt.
2001 compared with 2000 The Copper group’s earnings in 2001 were US$262 million compared with US$323 million in 2000. The average copper price was 72 US cents per pound, a decrease of 13 per cent from 2000. The average gold price of US$271 per ounce decreased by three per cent. Kennecott Utah Copper’s contribution to earnings in 2001 was down 19 per cent at US$81 million mainly due to lower prices. An exceptional charge of US$531 million relating to the impairment of asset carrying values was recorded during 2001. Earnings at Escondida decreased by 58 per cent to US$41 million due to lower copper production and prices. Grasberg’s earnings contribution increased 26 per cent to US$92 million as a result of higher gold grades and recoveries. Earnings at Palabora were broadly in line with 2000 as the weakness of the rand against the US dollar offset the impact of declining copper prices.
Kennecott Utah Copper (Rio Tinto: 100 per cent) Kennecott Utah Copper (KUC) operates the Bingham Canyon mine, Copperton concentrator and Garfield smelter complex, near Salt Lake City, US. KUC supplies more than ten per cent of annual US refined copper requirements and employs approximately 1,600 people. KUC’s six year labour contract expired on 30 September 2002 without agreement being reached on a new contract. Having reached an impasse, KUC began implementing its final offer which contains a significant number of work practice changes. The process of negotiation is now subject to mediation while operations continue normally. Large scale underground mining is expected to extend the mine’s life by 15 years after open pit reserves are exhausted around 2013. KUC provides some management services to the wholly owned Barneys Canyon gold mine due to its proximity to Bingham Canyon. Mining and milling at Barneys Canyon ended in 2001 but gold production continues until 2005. The operation employs about 20 people. KUC as the owner of 53 per cent of undeveloped land in the Salt Lake Valley of Utah, has formed Kennecott Land to develop about 16,000 hectares of the 37,200 hectares owned. The initial 1,800 hectare Sunrise project site lies in the path of expanding residential areas. Kennecott Land has the right to build roads, make utility connections and prepare the land for sale to builders who will construct houses for 30,000 people. Rio Tinto is initially investing US$50 million with revenues expected to start in 2004.
Rio Tinto 2002 Annual report and financial statements 41
2002 operating performance Mining activity continued in the south side of the Bingham Canyon open pit and yielded harder ore, which reduced production performance in both mine and mill. Higher copper recovery in the mill in 2002 reflects the implementation of a number of concentrator improvement initiatives. A much improved smelter performance, assisted by the outsourcing of maintenance work, resulted in higher than plan refined metal sales.
Freeport (Rio Tinto: 40 per cent of joint venture plus 15 per cent of the balance through its interest in FCX)Grasberg, in Papua, Indonesia, is one of the world’s largest copper and gold mines in terms of reserves and production. It is owned and operated by Freeport Indonesia (PTFI), the principal and 91 per cent owned subsidiary of the US based Freeport-McMoRan Copper & Gold (FCX). Rio Tinto has a 16.5 per cent direct interest in FCX. At least one per cent of Grasberg’s sales revenues has been committed to support village based programmes. In addition, two new trust funds were established in 2001 in recognition of the traditional land rights of the local Amungme and Komoro tribes. In 2002, PTFI contributed US$15.6 million (net of Rio Tinto portion) and Rio Tinto US$3.8 million in total to the funds. As a result of training and educational programmes, Papuans represented more than a quarter of PTFI’s approximately 9,000 workforce by the end of 2002.
2002 operating performance Improved copper grades and mill recoveries resulted in a 15 per cent increase in copper production compared with 2001. Gold production was lower due to a 12 per cent decrease in gold grade.
Rio Tinto’s overall share of copper production increased by 36 per cent to 255,500 tonnes, but for gold decreased by 20 per cent to 1,017,000 ounces. Production from the DOZ (deep ore zone) achieved design capacity of 25,000 tonnes per day in the third quarter, one year earlier than anticipated, and has exceeded capacity since then. Expansion of production to more than 35,000 tonnes per day is progressing.
Escondida (Rio Tinto: 30 per cent)The low cost Escondida copper mine in Chile is one of the largest copper mines in the world, with a mine life expected to exceed 30 years at current rates of production. The mine is 57.5 per cent owned and managed by BHP Billiton. Work on the US$1.0 billion Phase 4 expansion project was completed in 2002, increasing production capacity by an average of 400,000 tonnes. Production was projected to be 1.2 million tonnes of copper in concentrate per year over the next five years, of which 1.05 million tonnes would have been in concentrate. In response to market conditions, however, a decision to process lower grade ore from November 2001 until the third quarter of 2002 curtailed copper output by approximately ten per cent. A further curtailment of 200,000 tonnes of copper in 2003 was announced in late 2002 and will be reviewed in the middle of the year. The Escondida oxide plant was expanded by eight per cent to 150,000 tonnes per year capacity from March 2001. Escondida employs approximately 2,350 people directly together with 1,775 contractor personnel.
2002 operating performance Total rock mined was affected by problems with mobile equipment performance but this did not affect mill throughput. The Phase 4 project to expand mill throughput by 110,000 tonnes per day was handed to operations in October. It is expected that the new concentrator will achieve proportionate capacity in the first quarter of 2003.
Palabora (Rio Tinto: 49.2 per cent) Palabora Mining Company (Palabora) is publicly quoted with a market capitalisation of Rand 2 billion (US$229 million) at 31 December 2002. Rio Tinto acquired an additional 0.7 per cent interest in Palabora through the market in July 2001. Palabora has developed a US$410 million underground mine, full production from which is expected in the second half of 2003.Approximately 1.6 million tonnes of copper are expected to be produced over its 20 year life. Palabora supplies most of South Africa’s copper needs and exports the balance. It employs approximately 2,000 people and labour agreements are negotiated annually.
2002 operating performance Mining from the open pit ceased at the end of April 2002 as part of the transition to underground production. Scavenging of ore from the ramps of the open pit commenced in May and is anticipated to continue to April 2003 to supplement underground production. By the end of 2002, three crushers had been commissioned in the underground mine and it is expected that production capacity of 30,000 tonnes per day will be achieved during the third quarter of 2003.
Neves Corvo (Rio Tinto: 49 per cent) Sociedade Minera de Neves-Corvo (Somincor) owns and operates the high grade Neves Corvo copper and tin mine in Portugal. While a buyer for Rio Tinto’s ownership interest was identified in 2002, the sale was not completed. It is anticipated that the process to sell Rio Tinto’s ownership interest will recommence in 2003.
42 Rio Tinto 2002 Annual report and financial statements
2002 operating performance Programmes to improve operational efficiency were successful in reducing operating costs. Employee numbers decreased from over 1,000 at the end of 2001 to fewer than 840 by the end of 2002. The recovery of tin from copper/tin ores declined during the year due to decreasing tin grades.
Alumbrera (Rio Tinto: 25 per cent) Rio Tinto’s interest in Minera Alumbrera resulted from the acquisition of North. The other shareholders in Minera Alumbrera are MIM Holdings (50 per cent) and BHP Billiton (25 per cent). Minera Alumbrera was formed in 1993 to develop and operate an open pit copper and gold mine and processing facilities at Alumbrera, a 316 kilometre concentrate slurry pipeline to a filter plant and rail loading facilities near Cruz del Norte and port facilities at San Martin in Argentina. Commercial production began in early 1998. The mine is operated under an agreement with an Argentine statutory authority that owns the property and is entitled to 20 per cent of net profits after costs. Construction of a third mill line and pebble crusher was completed in October 2002 at a cost of US$26 million, US$13 million under budget. This increases installed capacity of the mine by 30 per cent to 101,000 tonnes of ore per day. Concentrates are shipped to international smelters under long term contracts that provide for periodic negotiation of certain charges. Alumbrera’s main markets are in the Far East (44 per cent), Europe (49 per cent) and the Americas (7 per cent). Alumbrera employs 940 people and 400 contractor personnel. In January 2003, Rio Tinto signed a non binding letter of intent for the sale of its interest.
2002 operating performance Slightly lower copper and gold grades were compensated for by higher processing recoveries, resulting in production of contained copper being over six per cent better than in 2001. The devaluation of the Argentinian peso, plus improvements in operational efficiencies continued to result in low operating costs.
Northparkes (Rio Tinto: 80 per cent) Rio Tinto’s interest in the Northparkes copper-gold mine resulted from the acquisition of North. Northparkes is a joint venture with the Sumitomo Group (20 per cent). Following an initial open pit operation at Northparkes in central New South Wales, Australia, underground block cave mining has been undertaken since 1997. With present and future developments, the operation has a life of 14 years at current production rates. The copper concentrate produced is shipped under long term contracts, that provide for periodic negotiation of certain charges, as well as spot sales, to smelters in Japan (67 per cent), Australia (14 per cent) other countries (19 per cent). Northparkes employs approximately 160 people together with 140 permanent contractors.
2002 operating performance Production from the first underground block cave will cease in early 2003 to be replaced by the Lift 2 block cave which will commence production in 2004. Progress with mine development for Lift 2 has been hampered by high rock stresses.
Peak Gold (Rio Tinto: 100 per cent) Peak Gold in New South Wales produces gold bullion which is sold through bullion banks in Australia. Development of Peak’s US$20 million New Occidental deposit was completed in early 2002. Development of the Perseverance area started in 2002. Peak employs approximately 150 people. Rio Tinto signed a non binding letter of intent for the sale of Peak in January 2003.
2002 operating performance Production from the original Peak section of the mine reduced significantly during the year and is being replaced by ore from the Occidental and Perseverance areas. A small low grade open pit is also active which will
supply gold ore to the processing plant until 2007.
Anglesey Aluminium(Rio Tinto: 51 per cent) Anglesey Aluminium has extended its power contract for its smelter at Holyhead, UK to 2009. Its energy efficiency projects support a voluntary greenhouse gas abatement agreement with the UK Department of Environment, Transport and the Regions. Anglesey Aluminium employs approximately 550 people.
2002 operating performance In 2002, Anglesey produced 139,300 tonnes of aluminium, the same as in 2001. During the year, the focus was on improving maintenance performance and equipment reliability.
Zinkgruvan (Rio Tinto: 100 per cent) Rio Tinto’s ownership of the Zinkgruvan underground zinc, lead and silver mine resulted from the acquisition of North Limited. Zinkgruvan is located in south central Sweden and employs approximately 300 people. The mine has been in continuous production for 140 years. It produces a high quality zinc concentrate as well as a lead and silver concentrate which are sold to European smelters.
2002 operating performance Difficulties were experienced with blockage of drillholes into the mine used to introduce paste to backfill stope voids. These problems have been overcome and the backlog of paste filling is being steadily reduced. The blockages resulted in a secondary problem of hanging wall collapse in some key production stopes due to rock stress. The effect on production was to decrease output of zinc by 22 per cent and lead by one per cent.
Rio Tinto 2002 Annual report and financial statements 43
Diamonds & Gold group
Rio Tinto’s Diamonds & Gold group includes diamond interests in Australia, Canada and Zimbabwe, diamond sales offices in Belgium and India, gold mines in Brazil, Indonesia, Papua New Guinea, the US and Zimbabwe, a silver, zinc, and gold mine in Alaska, iron ore and nickel mines in Brazil, and a nickel refinery in Zimbabwe. At 31 December 2002, Diamonds & Gold accounted for ten per cent of the Group’s operating assets and, in 2002, contributed eight per cent of Rio Tinto’s turnover and nine per cent of adjusted earnings. Jonathan Leslie, chief executive Diamonds & Gold, has resigned effective March 2003 and organisational changes regarding Diamonds & Gold are pending.
FINANCIAL PERFORMANCE2002 compared with 2001Diamonds & Gold contributed US$144 million to adjusted earnings, up US$11 million from 2001. Average prices for gold increased 14 per cent to US$309 per ounce. The adverse effects from the stronger Australian dollar were largely offset by the weaker Brazilian real. High diamond and gold volumes benefited earnings. Poor mining conditions at Fortaleza and the absence of profit on the sale of two small coal deposits reduced earnings from Rio Tinto Brasil.
2001 compared with 2000 The Diamonds & Gold group’s adjusted earnings in 2001 were US$133 million, down US$30 million from 2000. Lower average prices for gold, silver, nickel and zinc, and reduced diamond sales, decreased earnings by US$78 million. Earnings benefited from the continued weakness of the Australian dollar and Brazilian real, and lowering of the Australian corporate tax rate.
DIAMONDSArgyle Diamonds(Rio Tinto: 100 per cent)Rio Tinto owns and operates the Argyle diamond mine in Western Australia. Production from Argyle’s major resource, the AK1 open pit mine, is expected to continue until 2007. Approval has been given for a feasibility study into underground mining. This will lead to a decision, expected in 2005, relating to mine closure or further mine development. An exploration decline will be developed to assist in confirming design criteria. The range of statutory approvals required for underground operation is being identified and will include environmental and social impact assessment. Argyle employs approximately 725 people. A decision has been taken at the Merlin diamond mine in Australia to cease operations due to the depletion of economic resources. Rehabilitation work has commenced and will be completed by the end of 2003.
2002 operating performanceRough diamond production for 2002 was up 28 per cent on 2001 with 33.5 million carats received in Perth for sorting. The bulk of
production was from the southern domain of the AK1 pit. Alluvial mining was suspended during 2002.
GOLDRio Tinto’s primary gold mining interests include Kennecott Minerals in the US, Kelian in Indonesia, Lihir in Papua New Guinea, Morro do Ouro in Brazil, and Rio Tinto Zimbabwe. Rio Tinto’s share of their 2002 production totalled 1.3 million ounces, 32,000 ounces more than in 2001.
Kennecott Minerals(Rio Tinto: 100 per cent) Kennecott Minerals in the US manages the Greens Creek mine (Rio Tinto: 70 per cent) in Alaska and the Rawhide mine (Rio Tinto: 51 per cent) in Nevada. It also holds the Group’s interest in Cortez/Pipeline (Rio Tinto: 40 per cent), also in Nevada. Ore extraction from Rawhide was completed in October 2002 and reclamation work has started. Processing of stockpiles will continue until April 2003. At the former Flambeau, Wisconsin, copper mine, groundwater monitoring continues following the 1999 rehabilitation and replanting programme. In 2002, an agreement was reached for the reclaimed Ridgeway, South Carolina, gold mine to be used for environmental education and research. Kennecott Minerals employs approximately 300 people.
2002 operating performanceOverall gold production was down seven per cent mainly due to lower head grades at Cortez Pipeline and reduced throughput at Rawhide, but partially offset by a 17 per cent increase in gold production at Greens Creek. Net earnings of US$38 million were US$5 million above 2001, benefiting from the higher gold prices.
Kelian (Rio Tinto: 90 per cent)Kelian Equatorial Mining (Kelian) operates an open pit gold mine in East Kalimantan, Indonesia. It is the largest of Rio Tinto’s primary gold mines. Kelian is required to offer for sale up to 51 per cent of its equity to Indonesian interests according to a specific schedule under the terms of its Contract of Work with the Indonesian Government. Kelian’s offer to sell 41 per cent in 2002 was again not taken up. Mining at Kelian will cease in 2003 with production from stockpiled ore planned for a further year. A mine closure consultative process is under way. Decisions have been made regarding classification of the mining area as protected forest after closure, environmental criteria, alluvial mining and the use of site assets. Kelian employs approximately 800 people of whom 45 are expatriates. A two year collective agreement, with a one year extension and redundancy provisions, became effective in July 2001.
2002 operating performanceRio Tinto’s share of Kelian’s gold production was 485,000 ounces in 2002, 19 per cent
44 Rio Tinto 2002 Annual report and financial statements
above last year as higher grades combined with higher throughput.
Lihir(Rio Tinto: 16.3 per cent)Lihir Gold is a publicly quoted company formed to finance and develop the Lihir mine in Papua New Guinea. Lihir Gold at 31 December 2002, had a market capitalisation of A$1.64 billion (US$932 million). Lihir directly employs approximately 970 people, of whom 91 per cent are Papua New Guineans and 39 per cent are Lihirians. Some 1,100 are also employed by contractors of whom a large proportion is Lihirian.
2002 operating performanceGold production at Lihir was six per cent lower than 2001 due to lower head grades.
Morro do Ouro (Rio Tinto: 51 per cent)Rio Tinto Brasil manages the Group’s interest in the Morro do Ouro mine in the state of Minas Gerais. Morro do Ouro employs approximately 570 people directly and 140 contractors, most of them from the nearby town of Paracatu.
2002 operating performanceGold production at Morro do Ouro was 20 per cent higher than in 2001 due to higher throughput and improved head grades.
Rio Tinto Zimbabwe (Rio Tinto: 56 per cent)Rio Tinto Zimbabwe is a publicly quoted company having a significant local shareholding. Its interests include the Renco and Patchway gold mines as well as the Empress nickel refinery. In total, Rio Tinto Zimbabwe employs approximately 1,800 people.
2002 operating performanceGold production was down at both Renco and Patchway due to lower throughput and poor head grades. Operating in Zimbabwe became much more of a challenge during 2002 with multiple factors affecting the operations, the most serious of which were acute food and fuel shortages, and the incidence of HIV. An uncertain fiscal exchange policy also created a very difficult operating environment.
OTHER MINERALSGreens Creek(Rio Tinto: 70.3 per cent)In addition to gold, the Kennecott Greens Creek mine on Admiralty Island in Alaska, produces silver, zinc and lead.
2002 operating performanceMill throughput at Greens Creek was 11 per cent higher than 2001 resulting in zinc production up by 15 per cent, and lead by ten per cent. However, silver production was static due to a corresponding drop in head grades.
Fortaleza(Rio Tinto: 100 per cent)Rio Tinto Brasil manages the Fortaleza nickel mine and smelter which is also in the state of
Minas Gerais. The transition from open pit to underground mining has now been completed. Fortaleza employs approximately 520 people, including 135 contractors.
2002 operating performanceNickel production was 38 per cent lower than in 2001 mainly due to lower than anticipated mine production and excessive stope dilution. Deteriorating ground conditions resulted in the suspension of operations for two months. In the last quarter of 2002, production and head grades improved considerably.
Corumbá(Rio Tinto: 100 per cent)Rio Tinto Brasil owns the Group’s interest in Mineracao Corumbaense Reunida (Corumbá). Corumbá’s iron ore is barged along the Paraguay River to South American and European customers.
2002 operating performanceProduction of lump iron ore was 34 per cent higher than in 2001.
DIAMOND & GOLD GROUP PROJECTSDiavik Diamonds (Rio Tinto: 60 per cent)Diavik Diamond Mines (DDMI) owns Rio Tinto’s interest in and manages the unincorporated Diavik Diamonds joint venture in the Northwest Territories of Canada. The project was completed well ahead of schedule and under budget. Initial production has commenced and the process plant commissioned. Production will build up over the next two years with Rio Tinto’s share of production, of over 3.6 million carats per year, projected for 2005. DDMI continues to comply with all permits and licenses. DDMI’s commitment to work with aboriginal communities was formally concluded in five participation agreements, providing training, employment and business opportunities. Procurement contracts for the operating phase were negotiated with aboriginal businesses. An agency relationship between DDMI and Rio Tinto Diamonds for marketing DDMI’s share of diamond production was concluded in 2002.
Murowa(Rio Tinto: 78 per cent)Rio Tinto and Rio Tinto Zimbabwe are continuing preparations to allow the Murowa diamond project to proceed. The feasibility study completed at the end of 2000 confirmed that three kimberlite pipes, near Zvishavane in southern Zimbabwe, represent a mining reserve of 16.5 million tonnes of ore at a grade of 0.9 carats per tonne.
OTHERSBougainville Copper (Rio Tinto: 53.6 per cent).Bougainville Copper (BCL) is a Papua New Guinea company listed on the Australian Stock Exchange with a market capitalisation of A$52 million (US$30 million) at 31 December 2002. Operations at BCL’s Panguna mine on Bougainville Island were suspended in 1989 following periods of disruption resulting from civil unrest. At 31 December 1991, a full provision of US$195 million was made in Rio Tinto’s financial statements for its investment in BCL. Peace has been restored on most of Bougainville Island. However, the mine site is still under the control of elements that deny access to the area. An agreement has been signed between the National Government and Bougainville leaders providing for increased autonomy for Bougainville. Towards the end of 2000, two ‘class actions’, since consolidated, were filed in the US District Court in California claiming unspecified damages against Rio Tinto arising out of the mining operation at Panguna and the civil unrest leading to and following mine closure. The Court dismissed the claims but an appeal is pending. The outcome of the appeal is not expected to be known before the end of 2003. BCL is not a party to this action. Rio Tinto believes the claims are wholly without merit and the action is being contested vigorously.
Rio Tinto 2002 Annual report and financial statements 45
Exploration group
Rio Tinto Exploration seeks to discover or identify mineral resources that will contribute to the growth of the Rio Tinto Group. The discovery of new resources is essential to replace deposits as they are mined and to help meet the increasing global demand for minerals and metals. The Exploration group is opportunistic in approach and its resources are deployed on projects that show the best chance of delivering a world class deposit to Rio Tinto. Mineral exploration is a high risk activity. Rio Tinto’s statistics show that an average of only one in 350 mineral prospects that are drill tested result in a mine for the Group. Rio Tinto believes in having a critical mass of projects, selected through a rigorous process of prioritisation. The Exploration group is organised into four geographically based teams and a fifth team that looks for industrial minerals on a global basis. Additionally, a small focused project generation team covers the world for new opportunities. At the end of 2002, Rio Tinto was exploring in 30 countries for a broad range of commodities including copper, diamonds, nickel, industrial minerals, gold, bauxite, iron ore and coal. Exploration employs 190 geologists and geophysicists around the world and has a total staff of 681 people. David Klingner, head of Exploration, is based in London.
2002 operating performanceExploration in 2002 focused on advancing the most promising targets across the spectrum of grassroots, generative, drill test stage, and near mine programmes. Good results were obtained from a number of locations. In the US, drilling at the Resolution project in Arizona continued to delineate strong copper and molybdenum porphyry style mineralisation at depth adjacent to the historical Magma mine. At Marcona in Peru, significant oxide and sulphide copper ore was discovered in close proximity to the Shougang Hierro iron ore mine. A sizeable body of gold mineralisation was encountered at Dashkasan, near Hamadan in Iran. Investigations including metallurgical test work continue. Extensions to the previously discovered gold mineralisation at Çöpler in Turkey were intersected by drilling and studies are underway on various engineering aspects to determine economic viability. The potential of the high grade haematite resources at Simandou in Guinea were confirmed at more than one billion tonnes. A convention was signed with the Government of Guinea which covers the conditions attached to the future possible development of the deposit. Closely spaced drilling was undertaken at the La Sampala nickel laterite resource in Indonesia to test continuity and confirm grade. In Mozambique, substantial deposits of titanium bearing heavy mineral sands were discovered. Results suggest a potential
resource of 120 million tonnes of contained ilmenite. The deposits occur near to the coast, are amenable to conventional dredging methods and have a low slimes content. Diamond exploration continued in Canada, Southern Africa, West Africa, Brazil and India. New diamond bearing kimberlite pipes were discovered in a number of locations and follow up test work is planned to gauge economic potential. The Exploration group was active in the search for industrial mineral deposits in a number of parts of the world including North and South America, Europe and Turkey. The Exploration group continued to support brownfield work at a number of Rio Tinto operations. Exploration of the sub surface extensions of the Argyle diamond deposit continued. In the US and Argentina, active programmes were conducted in the orbit of the Boron and Tincalayu mines. In Indonesia, exploration in and around the Grasberg mine led to the addition of further copper reserves. Safety performance continued to improve at all exploration operations in 2002, with 15 lost time injuries and medical treatment cases reported compared with 22 in 2001. The severity of lost time injuries also showed a significant decline. There were no significant environmental or community incidents during 2002.
FINANCIAL PERFORMANCE 2002 compared with 2001Cash expenditure on exploration in 2002 was US$124 million and the pre-tax charge to earnings was US$130 million, similar to the corresponding figures for 2001.
2001 compared with 2000Cash expenditure on exploration in 2001 was US$132 million and the pre-tax charge to earnings was US$130 million. The decline on 2000 figures mainly reflected restructuring of activity to focus on a smaller number of higher quality programmes.
46 Rio Tinto 2002 Annual report and financial statements
Technology group
The Technology group provides technical assistance to Rio Tinto’s product groups and their businesses, supports corporate policy development, and advises executive management. A key focus is to identify and implement best practices to improve performance, maximise efficiency and add value across Rio Tinto. Technology staff include experienced professionals covering all the main industry related disciplines while the Office of Rio Tinto’s Chief Technologist manages the Group’s involvement in external and collaborative research. With the increased focus on sustainable development, and the close linkages between health, safety, environment (HSE), and community issues and communications, the corporate staff in these areas now report to the head of Communication and Sustainable Development, effective January 2003. The transfer of the HSE group, involving 24 staff, leaves the total staff in the Technology group virtually unchanged from 2001, at some 260, due to increases in other areas, particularly Asset Utilisation. John O’Reilly, head of Technology, is based in London.
2002 operating performanceTechnical ServicesTechnical Services continued to provide high level support to the operating businesses, including important contributions at non managed operations. Activity over the year was at record levels and a number of Group wide initiatives were launched including: excellence in water management, targeted at reducing unit water consumption; energy efficiency; haul road design, construction and maintenance; and a review of Group procedures and practice on closure planning and implementation. Technical Services has a strong environmental unit that also manages the majority of the reviews and audits of Group businesses on behalf of HSE, as required by corporate policy. Current development projects are targeted at adding value in the short term by delivering innovative solutions and include mineralogical techniques to aid exploration effectiveness and process selection. In addition, a comprehensive programme of studies links with a suite of external research programmes. Rio Tinto continues to be a major contributor to the collaborative industry programme, the International Network for Acid Prevention (INAP) which is now in its fifth year.
Office of the Chief Technologist The Office of the Chief Technologist is responsible for the identification and the transfer of technology based opportunities for the Group. The external research portfolio covers a broad range of industry related initiatives. Projects continue from 2001 while new ones launched in 2002 include a range of metallurgical initiatives; in-situ “barrier” technology, focussing on the use of precipitation inhibitors; and the potential for a step change reduction in the energy
requirements in crushing and grinding. New opportunities are being explored in areas such as hydrogen production and storage, and reducing carbon dioxide emissions. In November, the Rio Tinto Sustainable Minerals Industry Foundation was launched as an initiative with the Australian Government to improve sustainable practices in the industry.
Technical Evaluation and Project ManagementTechnical Evaluation provided independent review of all major investment proposals considered by the Group. The unit also conducts post investment reviews which focus on identifying the key learnings and experiences from investments for the benefit of both existing and future projects. The Project Management unit continued to support major project teams across Rio Tinto, both for projects in execution and those still in the feasibility stage. Updated comprehensive guidelines for project development were issued early in the year. This was followed by the introduction of more formalised and rigorous procedures regarding risk assessment and management, with a particular emphasis on their application to major projects.
Asset UtilisationAsset Utilisation was set up in 2000 with the objective of guiding and assisting Group businesses to achieve significant improvement in the performance of their assets, with an initial focus on improved maintenance strategies. The success of the pilot programmes led to a major expansion of activity in 2002. Current areas of focus include process control, operational readiness, warranty management, and the formulation and implementation of maintenance standards and audits.
Health, Safety and Environment (HSE) The HSE unit continued to provide corporate policy guidance and support the ongoing improvement of standards and performance across the Group. Further information on these and social aspects is provided on page 48.
Financial performance The charge for the Technology group against earnings was US$17 million compared with US$14 million in both 2001 and 2000.
Rio Tinto 2002 Annual report and financial statements 47
Society andenvironment
Taking long term responsibility Due to the long term nature of Rio Tinto’s mining assets, it is crucial to our business that we practice sound social and environmental responsibility. Our goal is to maximise the overall long term return to our shareholders by operating responsibly and sustainably in areas of proven expertise where the Group has competitive advantage. Our approach to achieving this is through implementation of the policies described in The way we work, our statement of business practice, at all levels of the business. During 2002, we were involved in a range of sustainable development initiatives as part of our policy to ensure that Rio Tinto businesses, operations and products contribute to the global transition to sustainable development. We also commenced a review and update of The way we work to reflect current best practice and ensure procedures meet changed requirements. Rio Tinto has adopted the Association of British Insurers’ 2001 disclosure guidelines on social responsibility in preparing this report. However, details of the Group’s overall and its individual businesses’ social and environmental performance continue to be published on the Rio Tinto web site: http://www.riotinto.com
Board responsibilitiesThe directors of Rio Tinto, and of Group companies, are responsible for monitoring financial, legal, human resources, social, health, safety and environmental risks and performance. Assurance for performance in these areas involves checking, reviewing and reporting each businesses’ implementation of Group 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 pages 60 and 61, the directors meet regularly, have a formal schedule of matters specifically reserved for their decision, have access to information, advice and services of both company secretaries and independent professional advice at the Companies’ expense. Induction of new directors includes coverage of appropriate matters. The executives’ annual cash bonus plan incorporates stretching targets for personal, financial and safety performance. Environmental parameters are also being introduced. The boards’ Committee on social and environmental accountability reviews the effectiveness of policies and procedures. Its five, non executive director members meet three times annually with the chairman, chief executive and heads of Technology, Health, Safety and Environment and Communication and Sustainable Development. Reports for the Committee summarise significant matters identified through Rio Tinto’s assurance activities. These include four yearly reviews of each business to assess the ability to meet evolving
requirements; biennial safety audits against Rio Tinto standards; annual risk engineering audits for insurers; risk reviews for specific concerns, such as cyanide management and smelter operations; procedures and systems for reporting critical and significant issues and incidents; and, completion of annual questionnaires by all Group business leaders covering financial, social, health and safety and environment matters. In addition, assurance activities undertaken by Group businesses at a minimum include health, safety and environment audits, including regulatory compliance; social audits; and biennial tailings facility inspections by independent experts.
Policies, procedures and verificationImplementation of the policies in The way we work is discussed in the following sections. Known risks arising from social and environmental (HSE) matters and their management in Group businesses are described in the relevant Group operations section.
Health, safety and the environmentBuilding from a foundation of compliance with applicable HSE laws, regulations and commitments, we seek to improve our performance through target setting, implementation of management systems and standards and use of best available practices. Our goal is zero injuries in the workplace and the elimination of occupational disease. In 2002, we regret to report that there were six deaths at operations we manage; all were Group employees and none were contractors. There were 487 lost time incidents during the year, a 33 per cent decrease from 2001. In 2002 there were 120 new cases (2001: 106) of occupational health conditions per 10,000 employees. Fines for infringement of occupational health and safety regulations involved 12 operations and totalled US$80,000 (2001: 15 operations and US$50,000). The environmental aspects of mining relate to stewardship of the resources we use and of our products. We seek to manage our impacts through the implementation of environmental management systems. Our target for 2002 was for all managed operations to have implemented ISO 14001 or an equivalent environmental management system. We did not meet this target but 72 per cent of operations have implemented, and all others are implementing, an environmental management system.Full compliance is expected in 2003. Standards for the management of the HSE aspects of our business are either in place or are being developed. In addition, targets have been set to drive HSE performance improvement. Fines for infringement of environmental regulations involved two operations and totalled US$2,000 (2001: 11 operations and US$450,000). While this is a significant decrease from previous years, resolution of a number of infringements is still pending.
48 Rio Tinto 2002 Annual report and financial statements
Two environmental incidents reported in 2002 were classified by Rio Tinto as critical. Both occurred at Energy Resources of Australia in February. Neither was considered by the authorities to have any detrimental impact on the surrounding environment. However, Rio Tinto regards these incidents as critical due to the concern raised within the local community. ERA has committed to implementing an environmental management system achieving ISO 14001 standards by mid 2003.
CommunitiesWherever the Group operates, good relations with our neighbours are fundamental to long term success. Knowing that each local community is different, our policy requires that every operation strives to understand and interact constructively with its local communities and to assist their development in ways which apply the principles of mutual respect, active partnership and long term commitment. Now that all our businesses produce their own social and environment reports for local communities, we are increasing community involvement in these reports. This provides an opportunity for engagement with the community on their views of programmes sponsored by our operations. In 2002, we again distinguished between contributions that are charitable gifts, community involvement, commercial initiatives and management costs. Based on this approach the contributions for 2002, which relate to managed businesses, totalled US$48 million (2001: US$44 million). Of this, US$12 million were direct payments made under legislation or an agreement with a local community.
Human rights Rio Tinto supports the UN Secretary General’s Global Compact, the US/UK Voluntary Principles on Security and Human Rghts and the Global Sullivan Principles. Our human rights policy states that while we look for opportunities to support positive efforts to promote broader understanding of international human rights values, especially where they assist local communities, we have no mandate to intervene in areas which are inconsistent with our business role. OurHuman rights guidance for managers is designed to assist managers in implementing our policy in complex local situations. The guidance covers four areas: communities, employees, security and difficult issues, including different ways to express concern or the question of withdrawal from a country. There are procedures and a checklist of questions to help guide managers.
Access to land Rio Tinto’s policy is to ensure that the economic, environmental and social factors of our current and potential future activities are thoroughly evaluated. In 2002, work continued on our biodiversity strategy which aims to ensure that biodiversity is integrated into all of our
management and decision making processes.
EmployeesRio Tinto’s objective is to develop and maintain systems and processes that facilitate attracting, retaining and motivating employees at all levels by providing a challenging work environment with opportunities for promotion and personal development; offering highly competitive levels of remuneration for superior performance; and maintaining a reputation as a highly responsible corporate citizen and employer. In 2002, Group companies employed 29,000 people (30,000 in 2001) and together with Rio Tinto’s proportionate share of those employed by joint ventures and associates, the total was 36,000. Australia and New Zealand (10,000), North America (10,000) and Africa (6,000) remained the principal locations. Wages and salaries paid in 2002 totalled US$1.3 billion, five per cent more than in 2001. Retirement payments and benefits to dependants are provided in accordance with local conditions and good practice. The total pension and other benefits paid in 2002 was US$211 million (2001: US$208 million).
Business integrity and political involvementWe conduct Rio Tinto’s business with integrity, honesty and fairness at all times, building from a foundation of compliance with the relevant laws and regulations wherever we operate. We avoid 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. A business integrity guidance addressing issues of bribery, corruption and political involvement is being finalised. This also covers issues relating to compliance and implementation; gifts and entertainment; the use of agents and intermediaries; and “facilitation” payments.
Verification and assuranceOur external assurance process in 2002 included an investigation by Environmental Resources Management, environmental consultants, of the extent to which our policies and programmes are reflected by the activities at our businesses and in our Social and environment review. Work also continued on our data quality standard and our environmental performance data were externally verified by ICF Consulting. The results of both these exercises are available in our Social and environment review. We continue to encourage Group businesses to liaise directly with local communities regarding the content of their local social and environmental reports.
Rio Tinto 2002 Annual report and financial statements 49
Oscar L Groeneveld became a director of Rio Tinto in 1998. A mining engineer with qualifications in engineering, science and management, he joined the Group in 1975 and has since held a series of management positions, including head of Technology, before being appointed chief executive of the Copper group in 1999. He is a director of Freeport-McMoRan Copper & Gold Inc. Mr Groeneveld is 49.
Jonathan C A Leslie was appointed a director of Rio Tinto plc in 1994 and of Rio Tinto Limited in 1995. A barrister, he joined the Group in 1977. In the years leading up to his appointment as mining director in 1994, he held a variety of posts, including managing director of Rössing Uranium. Prior to becoming chief executive of the Diamonds & Gold group in 1999 he was chief executive of the Copper group. Mr Leslie will be resigning from the boards with effect from the end of March 2003.
Christopher R H Bull served as finance director until he retired from the boards in April 2002.
Rio Tinto 2002 Annual report and financial statements 51
Senior management
Tom Albanese joined Rio Tinto in 1993 on Rio Tinto’s acquisition of Nerco. He holds a BS in mineral economics and an MS in mining engineering. He held a series of management positions before being appointed chief executive of the Industrial Minerals group in 2000.Mr Albanese is 45.
Remuneration report
The Remuneration committee consists of Sir Richard Sykes (chairman), Mr D C Clementi, Mr A F J Gould and Mr J P Morschel, who are all independent non executive directors. Sir Richard Giordano resigned from the committee with effect from 18 September 2002. The committee’s responsibilities include reviewing and determining the remuneration of executive directors and product group chief executives. The committee also reviews management’s strategy for remuneration and conditions of employment for senior managers. The committee’s meetings are normally attended by the chairman, Sir Robert Wilson, in an advisory capacity, for part of the meeting. Mrs A V Lawless, the company secretary of Rio Tinto plc, acts as secretary to the committee. Part of the committee’s role is to monitor developments within the remuneration field on an ongoing basis. To fulfil that role and make informed decisions, the committee draws on several external sources of data, including publications by remuneration consultants Towers Perrin, Watson Wyatt and Monks Partnership, as well as The Chairmen’s Group. The committee also received internal advice from the head of Human Resources and was assisted by the chairman and the chief executive in determining appropriate performance measures for the respective executives reporting to them. The Companies’ remuneration policy was approved by shareholders at the 2002 annual general meetings.
Remuneration policy The Group competes for the limited resource of internationally mobile top quality managers. Both the structure and level of remuneration is designed to be competitive in this market. In particular, total remuneration is increasingly related to performance through the use of annual bonuses and long term incentives. To ensure Rio Tinto remains competitive, the committee reviews the Group’s executive remuneration policy to create the flexibility needed to reflect both local practices and international competition in its operations. In view of the evolving debate, in the UK and elsewhere, concerning remuneration systems, the committee has decided that it will be appropriate over the next year to look at the overall architecture and components of the Group’s remuneration structure. It is envisaged that shareholders will be asked to approve the share related components of the revised remuneration structure at the 2004 annual general meetings. For 2003, the policy on base salaries for executive directors and senior executives is consistent with market practice for companies with a similar geographical spread and complexity of business. The annual cash bonus plan provides a target bonus of 60 per cent of salary and incorporates stretching targets relating to personal, financial and safety performance. Two share based incentive plans were approved by shareholders in 1998; the Share Option Plan (SOP) and the Mining
Companies Comparative Plan (MCCP), details of which are set out below. These plans were designed to align the interests of directors and senior executives with those of shareholders. Under the existing arrangements, executive directors and senior executives continue to be eligible to receive annual conditional awards under the MCCP of up to 70 per cent of salary. Under the SOP, executive directors and product group chief executives are potentially eligible to receive options with an exercise value of up to five times annual salary. The committee believes that with the challenging performance targets incorporated into both share based plans, the combination of these plans, salary and annual bonus reward exceptional performance and should enable Rio Tinto to retain key talent.
Directors’ remuneration In 2002, executive directors’ remuneration comprised salary and a cash bonus based on personal and corporate annual performance measures, with a target bonus of up to 60 per cent of salary. It also included performance related long term incentive share awards under the MCCP, with conditional awards of up to 70 per cent of salary, and participation in share option plans at up to five times salary. Other remuneration items include health benefits, membership of the appropriate Company pension/superannuation arrangements and a car allowance. Housing and children’s education assistance are provided for directors living outside their home country. Excluding allowances, the proportion of variable remuneration, through bonus, SOP and MCCP, is approximately 70 per cent for the chairman and chief executive and 64 per cent for the other executive directors, with fixed remuneration making up 30 per cent and 36 per cent respectively of total remuneration. Full details of the directors’ annual remuneration before tax and excluding pension contributions are set out in Table 1 on page 56. Details of long term incentive plans and option plans are set out on pages 58 and 59.
Service contracts and compensation payments At its meeting in January 2003, the committee noted that existing service contracts had been in place, as amended, since 1992. The decision was therefore taken to update the contracts to reflect current practice. Consequently, in 2003, all executive directors, except Mr Leslie, entered into new contracts, all of which have a one year notice period. Under current pension arrangements, directors are normally expected to retire at the age of 60. In the event of early termination, the Group’s policy is to act fairly in all circumstances and the duty to mitigate would be taken into account. Compensation would not reward poor performance. As at 31 December 2002, two directors had service contracts with two years’ notice period. The remainder all had a one year
notice period. Non executive directors do not have service contracts. Of the directors proposed for election or re-election at the forthcoming annual general meetings, only Mr Adams has a service contract with a subsidiary of Rio Tinto plc. This contract is terminable by one year’s notice as, following the above review, Mr Adams agreed to a reduction in his notice period from two years to one year, without compensation. Mr Davis, Mr Mayhew, Mr Gould and Mr Clementi do not have service contracts.
Pension and Superannuation arrangementsUK executive directors are, like all UK staff, eligible to participate in the non contributory Rio Tinto Pension Fund, a funded, Inland Revenue approved, final salary occupational pension scheme. The Fund provides a pension from normal retirement age at 60 of two thirds final pensionable salary, subject to completion of 20 years’ service. Spouse and dependants’ pensions are also provided. Proportionally lower benefits are payable for shorter service. Members retiring early may draw a pension reduced by approximately four per cent a year for each year of early payment from age 50 onwards. Under the rules of the Rio Tinto Pension Fund, all pensions are guaranteed to increase annually in line with increases in the UK Retail Price Index subject to a maximum of ten per cent per annum. Increases above this level are discretionary. When pensionable salary is limited by the UK Inland Revenue earnings ‘cap’, benefits are provided from unfunded supplementary arrangements. Cash contributions were not paid in 2002 as the Rio Tinto Pension Fund remains fully funded and in surplus. Following the publication in December 2002 by the UK Government of the Green Paper “Simplicity, security and choice: working and saving for retirement”, a review will be undertaken during 2003 of Rio Tinto plc’s UK pension arrangements. Australian executive directors are eligible for membership of the Rio Tinto Staff Superannuation Fund, a funded superannuation fund regulated by Australian legislation, that provides both defined benefit and defined contribution benefits. The Australian executive directors are not required to pay contributions. They are defined benefit members, accruing lump sums payable on retirement after age 57 of 20 per cent of final basic salary for each year of service. Retirement benefits are limited to a lump sum multiple of seven times final basic salary at age 62. For retirement after 62, the benefit increases to 7.6 times average salary at age 65. Death in service and disablement benefits are provided as lump sums and are equal to the prospective age 65 retirement benefit. Proportionate benefits are also payable on termination of employment for ill health or resignation.
Rio Tinto 2002 Annual report and financial statements 53
Remuneration report continued
Annual awards under the Short Term Incentive Plan are pensionable up to a maximum value of 20 per cent of basic salary. The percentage of total remuneration which is dependent on performance is substantial and has risen over recent years. In view of this, the committee considers it appropriate that a proportion of such pay should be pensionable. Details of directors’ pension and superannuation entitlements are set out in Table 2 on page 56.
Non executive directors’ fees The boards as a whole determine non executive directors’ fees. They are set to reflect the responsibilities and time spent by the directors on the affairs of Rio Tinto. Non executive directors are not eligible to vote on any increases of their fees. The boards reviewed these fees in January 2002 and, in the light of directors’ increased workload and market developments, the decision was taken to increase basic fees. Non executive directors do not participate in the Group’s incentive plans, pension/superannuation arrangements or any other elements of remuneration provided to executive directors.
Directors’ share interestsThe beneficial interests of directors in the share capital of Rio Tinto plc and Rio Tinto Limited are set out in Table 3 on page 57. Executive directors and product group chief executives are expected to build up a shareholding equal to two times salary over time.
External appointmentsRio Tinto recognises that executive directors are likely to be invited to become non executive directors of other companies and that such appointments can broaden their experience and knowledge, to the benefit of the Group. Where such directorships are unlikely to give rise to conflicts of interests, the boards will normally give consent to the appointment, with the director permitted to retain the fees earned.
Incentive plansRio Tinto’s incentive plans aim to align the interests of the directors and senior executives interests with those of the shareholders by linking rewards to Group performance. These plans are described below, together with appropriate descriptions of their performance criteria.
Short Term Incentive PlanThis plan extends to executive directors and executives. Payments are based on short term goals relevant to each participant, including the achievement of earnings and safety targets. The committee reviews the criteria annually. Awards in respect of 2002, payable in 2003, are included as annual bonus in Table 1 on page 56.
Mining Companies Comparative Plan (MCCP)Under this plan, a conditional right to receive shares is granted annually but the shares only
vest if performance conditions approved by the committee are satisfied. Awards are not pensionable. Senior executives also participate in the plan at appropriate levels of award. The current performance condition, which was chosen to ensure that performance is rewarded where it is measured against a meaningful peer group, compares Rio Tinto’s total shareholder return (TSR) over a four year period with the TSR of a comparator group of 15 other international mining companies over the same period. The composition of this comparator group is reviewed regularly by the committee to provide continued relevance in a consolidating industry. The current members of this group are listed at the bottom of the table below. TSR is widely seen as the most appropriate measure of a company’s performance for the purpose of share based long term incentive plans, and was therefore adopted as the measure for the MCCP. The following table shows the percentage of each award which may actually be received by directors depending on the comparator group ranking, as well as the historical ranking of Rio Tinto in relation to comparator companies.
Ranking of Rio Tinto versus comparator companies
Going forward, following the reorganisation of WMC into WMC Resources Limited and Alumina Limited, WMC will be replaced by Xstrata PLC. Prior to awards being released to participants, the Group’s quartile performance is examined and verified by the external auditors. Awards will be released to participants in the form of Rio Tinto plc or Rio Tinto Limited shares or an equivalent amount in cash, as appropriate. Such shares may be acquired by purchase in the market, by subscription or, in the case of Rio Tinto Limited, by procuring
that Tinto Holdings Australia Pty Limited transfers existing shares to participants. The committee will withhold all or part of the award if it considers that the performance of the participant or the Group is inadequate.
Share Option Plan (SOP) An annual grant of options to purchase shares in the future at current market prices is made to executive directors and eligible senior executives. The committee decides the level of grants for each year, taking into consideration local market practice and personal performance. The exercise of options is conditional on the Group exceeding stretching growth targets set by the committee. Currently, two thirds of options granted will vest when the Group’s adjusted earnings per share growth for a three year performance period is at least nine percentage points higher than US inflation over the same period, as measured by the US Consumer Price Index. The balance of the grant will vest when growth of at least 12 percentage points above US inflation has been achieved. The choice of the US Consumer Price Index as a measure of performance is consistent with the presentation of financial data in US dollars and reflects the importance of the US economy to the Group. The committee considers this measure to be an appropriate method to ensure options vest only when the Group has performed relative to its most pertinent economic factors. Prior to awards being released to participants, the Group’s performance against the criteria relevant to the SOP is examined and verified by the external auditors. Under the rules of the SOP, option holders are entitled to retain their options when they leave the Group in specified circumstances, including retirement. Share options granted to directors are included in Table 5 on page 59.
Other share plans UK executive directors are eligible to participate in both the Rio Tinto Profit Sharing Scheme 1987, which enables employees of participating companies to receive an annual award of Rio Tinto shares equal to a maximum of ten per cent of salary, subject to a cap of £8,000, and in the Rio Tinto plc Share Savings Plan, a savings related plan which is open to all employees and under which employees may buy shares on potentially favourable terms. Following the introduction of new legislation, no further awards may be made under the Profit Sharing Scheme after April 2002. A new, UK Inland Revenue approved, share incentive plan named the Rio Tinto Share Ownership Plan was approved by shareholders at the 2001 annual general meeting and introduced in 2002. Under this plan, eligible employees may 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. From April 2003, the free share element of the legislation will be introduced, allowing eligible employees to receive an
54 Rio Tinto 2002 Annual report and financial statements
annual award of Rio Tinto shares up to a maximum of five per cent of salary, subject to a cap of £3,000. The first award will therefore be in respect of 2002. Australian executive directors are eligible to participate in the Rio Tinto Limited Share Savings Plan introduced in 2001, which is similar to the Rio Tinto plc Share Savings Plan.
Expiring incentive plans The MCCP and the SOP replaced the Mining Plan and the FTSE Plan, both share based plans. No awards have been made under these plans since the introduction of the MCCP and the SOP. No further shares will vest to directors in respect of the Mining Plan. No awards under these old plans form part of pensionable earnings for directors. The expiring FTSE Plan compares total shareholder return on Rio Tinto plc shares with that of the top 47 companies listed on the London Stock Exchange over a four year period, with an additional two year vesting period if the performance criteria are not met after year four. The benchmark numbers of shares allocated to directors under previous conditional awards and still outstanding are contained in Table 4 on page 58. The last conditional award under the Plan was made in 1997. Under the rules of the plan, a proportion of the allocation will vest to directors, as set out in Table 4, because Rio Tinto plc’s quartile position increased to the second quartile and the remainder of the conditional awards have now expired. No further shares will vest under the FTSE Plan.
Performance of Rio Tinto To illustrate the performance of theCompanies relative to their markets, graphs showing the performance of Rio Tinto plc compared to the FTSE 100 index and Rio Tinto Limited compared to the ASX All Ordinaries Index are reproduced below. A comparative graph showing Rio Tinto’s performance relative to the HSBC Global Mining Index is also included to illustrate the performance of the Companies relative to other mining companies. Shareholders will be asked to vote on this Remuneration report at the Companies’ forthcoming annual general meetings.
By order of the Board
A V Lawless Secretary Remuneration committee 20 February 2003
Rio Tinto 2002 Annual report and financial statements 55
Tables 1, 2, 4 and 5 comprise the ‘auditable part’of the remuneration report, being the information required by part 3 of schedule 7a to the Companies Act 1985.
Table 1 –Directors’remuneration –Annual remuneration of the directors of the parent Companies before tax and excluding pension contributions
Table 2 – Directors’ pension and superannuation entitlements
56 Rio Tinto 2002 Annual report and financial statements
Rio Tinto 2002 Annual report and financial statements 57
Table 4 –Awards to directors under long term incentive plans
58 Rio Tinto 2002 Annual report and financial statements
Table 5 – Directors’ options to acquire Rio Tinto plc and Rio Tinto Limited shares1 and 2
Corporate governance
Rio Tinto is committed to high standards of corporate governance, for which the directors are accountable to shareholders. Rio Tinto plc and Rio Tinto Limited have adopted a common approach to corporate governance. Both Companies have, for the whole of the period under review, applied the principles contained in Part 1 of the Combined Code on best practice in corporate governance appended to the Listing Rules published by the UK Listing Authority. The detailed provisions of Section 1 of the Code have been complied with as described below. Both Companies also support the initiative of the Australian Stock Exchange (ASX) on disclosure of corporate governance practice. In addition, Rio Tinto has voluntarily adopted the recommendations of the US Blue Ribbon Committee in respect of disclosures to shareholders, as detailed in the Audit committee’s statement on page 61. The boards are monitoring developments in the corporate governance area in our three principal share markets. A statement relating to directors’ responsibilities for preparation of the financial statements and going concern is on page 61.
The boardsThe Companies have common boards of directors, which currently consist of six executive and ten non executive directors. Of the non executive directors, eight are independent. Two of them have connections with the Companies: Mr Davis is a former chief executive of the Group and Mr Mayhew is chairman of one of Rio Tinto plc’s stockbrokers. Collectively, the non executive directors provide broadly based knowledge and experience to the boards’ deliberations and are vital for corporate accountability. The directors meet regularly and have a formal schedule of matters specifically reserved for their decision. A procedure has been established for directors to obtain independent professional advice at the Companies’ expense in furtherance of their duties as directors. All directors have full and timely access to the information required to discharge their responsibilities fully and effectively. They also have access to the advice and services of both company secretaries. All directors are elected by shareholders at the annual general meetings following their appointment and, thereafter, are subject to re-election at least once every three years. Non executive directors are normally expected to serve at least two, three year terms and, except where special circumstances justify it, would not normally serve more than three such terms. Both Companies have policies in place to govern the dealing in Rio Tinto securities that are no less stringent than the Model Code set out in the UK Listing Rules. Directors and employees are prohibited from dealing when in possession of price sensitive information. Directors and designated employees are prohibited from dealing during a ‘close period’ which is the period of two months before a profit announcement. Directors and designated employees are also
prohibited from dealing at any time on considerations of a short term nature.
Board committees The directors have established four committees which are fundamental for good corporate governance in the Group. Regular reports of their activities are given to the boards and minutes are circulated to all directors.Committee members, shown on pages 50 and 51, are all non executive directors, except for the Nominations committee, which includes the chairman of Rio Tinto. The Audit committee’smain responsibilities include the review of accounting principles, policies and practices adopted in the preparation of public financial information; the review with management of procedures relating to financial and capital expenditure controls, including internal audit plans and reports; the review with external auditors of the scope and results of their audit; and the nomination of auditors for appointment by shareholders. Its responsibilities also include the review of corporate governance practices of Group sponsored pension funds. The external auditors, the finance director, the Group controller and Group internal auditor attend meetings. The Audit committee’s charter is on page 62. The Remuneration committee is responsible for determining the broad policy for executive remuneration and for the individual remuneration and benefits of executive directors. Full disclosure of all elements of directors’ remuneration is set out in the Remuneration report on pages 53 to 59. The Nominations committee’smain responsibility is for nominating candidates to fill board vacancies and for recommending board composition and balance. The Committee on social and environmental accountability is responsible for reviewing the effectiveness of management policies and procedures in delivering the standards set out in The way we work, Rio Tinto’s statement of business practice, which do not fall within the remit of other board committees and in particular, those relating to health, safety and the environment and social issues. The overall objective of the Committee is to promote the development of business practices throughout the Group consistent with the high standards expected of a responsibly managed company, and to develop the necessary clear accountability on these practices.
Statement of business practice The way we work provides the directors and all Group employees with a summary of the principal policies procedures in place to help ensure that high standards are met. Policies are adopted by the directors after wide consultation, both externally and within the Group. Once adopted they are communicated to operating companies worldwide, together with guidance and support on implementation. Operations are then required to devote the necessary effort at management level to implement and report on these policies. The way we work is being reviewed and
updated to reflect best practice and procedures introduced to meet changed requirements. The following policies are currently in place: health, safety and the environment; communities; human rights; access to land; employees; business integrity; bribery and corruption; code of ethics covering the preparation of financial statements and political involvement. These policies apply to all subsidiary companies. In line with best practice, the Group has introduced a Group wide “whistle blowing” programme entitled Speak-OUT. It is intended to encompass all employees who are encouraged to report any concerns, including any suspicion of a violation of the Group’s financial reporting and environmental procedures, without fear of recrimination. In the case of business partners, such as joint ventures and associated companies, where the Group does not have operating responsibility, Rio Tinto’s policies are communicated to them and they are encouraged to adopt similar policies of their own. Practical advice is offered wherever appropriate. In 2001, the Association of British Insurers issued its guidelines relating to socially responsible investment. Rio Tinto’s report on social and environmental matters follows these guidelines and can be found on pages 48 and 49 of this report and on pages 22 to 25 of the 2002 Annual review. However, details of the Group’s overall and individual businesses’ social and environmental performance continue to be published on Rio Tinto’s website: www.riotinto.com
Responsibilities of the directors The directors are required by UK and Australian company law to prepare financial statements for each financial period which give a true and fair view of the state of affairs of the Group as at the end of the financial period and of the profit or loss and cash flows for that period. To ensure that this requirement is satisfied the directors are responsible for establishing and maintaining adequate internal controls and procedures for financial reporting throughout the Group. The directors consider that the financial statements have been prepared in accordance with applicable accounting standards, using the most appropriate accounting policies for Rio Tinto's business and supported by reasonable and prudent judgments. Except as indicated in note 1 to the financial statements, the accounting policies have been consistently applied. The directors, senior management, senior financial managers and other members of staff who are required to exercise judgement in the course of the preparation of the financial statements have been required to conduct themselves with integrity and honesty and in accord 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 as amended by the Australian
60 Rio Tinto 2002 Annual report and financial statements
Securities and Investment Commission order dated 9 April 2001, and have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Companies, and to prevent and detect fraud and other irregularities.
Going concern The Financial statements have been prepared on the going concern basis. As required by the Combined Code, the directors report that they have satisfied themselves that the Group is a going concern since it has adequate financial resources to continue in operational existence for the foreseeable future.
Boards’ statement on internal control Rio Tinto’s overriding corporate objective is to maximise long term shareholder value through responsibly and sustainably investing in mining and related assets. The directors recognise that creating shareholder value is the reward for taking and accepting risk. The directors are responsible for the Group’s system of internal control and for reviewing its effectiveness in providing shareholders with a return on their investments that is consistent with a responsible assessment and mitigation of risks. This includes reviewing financial, operational and compliance controls, and risk management procedures. Because of the limitations inherent in any such system this is designed to manage rather than eliminate risk. Accordingly, it provides reasonable but not absolute assurance against material misstatement or loss. The directors have established a process for identifying, evaluating and managing the significant risks faced by the Group. This process was in place during 2002 and up to and including the date of approval of the 2002 Annual report and financial statements. The process is reviewed annually by the directors and accords with the guidance set out in Internal Control: Guidance for Directors on the Combined Code. The Group’s management committees review information on the Group’s significant risks, with relevant control and monitoring procedures, for completeness and accuracy. This information is presented to the directors to enable them to assess the effectiveness of the internal controls. In addition, the boards and their committees monitor the Group’s significant risks on an ongoing basis. Assurance functions, including internal auditors and health, safety and environmental auditors, perform reviews of control activities and provide regular written and oral reports to directors and management committees. The directors receive and review minutes of the meetings of each board committee, in addition to oral reports from the respective chairmen, at the first board meeting following the relevant committee meeting. Certain risks, for example natural disasters, cannot be mitigated to an acceptable degree using internal controls. Such major risks are transferred to third parties in the international insurance markets, to the extent considered appropriate. Each year, the leaders of Group businesses and administrative offices complete an internal control questionnaire
that seeks to confirm that adequate internal controls are in place and operating effectively. The results of this process are reviewed by the chief executive of each product group and are then presented to the boards as a further part of their review of the Group’s internal controls. This process is continually reviewed and strengthened as appropriate. In 2002, the Group also established aDisclosure and Procedures committee which was tasked with reviewing the adequacy and effectiveness of Group controls and procedures over the public disclosure of financial and related information. The committee has been presenting the results of this process to executive management and directors and will continue to do so. The Group has material investments in a number of joint ventures and associated companies. Where Rio Tinto does not manage these investments, the Group can influence, but not control, management practices. Accordingly, the review of their internal controls is less comprehensive than that for the Group’s managed operations.
CommunicationsCommunications with shareholders are given high priority. In addition to statutory documents, eg the Annual report and financial statements, Annual review and Half year report, Rio Tinto produces documents on a wide range of subjects, including corporate social responsibility, which are available on request. Further details are set out in the Shareholder information on page 65. Rio Tinto maintains a comprehensive website, www.riotinto.com, from which its reports and other publications can be freely downloaded and through which shareholders can gain secure online access to their shareholding details. It is also linked to websites maintained by Group operations, thus offering easy access to a wealth of detailed information about the Group. Results presentations and other significant events are also available as they happen and as an archive on the website. Full use is made of the annual general meetings to inform shareholders of current developments through appropriate presentations and to provide opportunities for questions. Significant matters affecting both Companies are dealt with under the joint voting procedure, detailed on page 68. Votes, which are cast on a poll, are announced after the close of the later of the two annual general meetings. The Companies also respond to individual queries on many issues.
Audit committee: US Blue Ribbon Compliance statement The Audit committee meets the membership requirements of the Combined Code in the UK and the Blue Ribbon Report in the US. The Group also meets the disclosure requirements in respect of audit committees required by the Australian Stock Exchange. The Audit committee is governed by a written charter approved by the boards, which the Audit committee reviews and re-assesses each year for adequacy. A copy of this charter is reproduced on page 62.
The Audit committeecomprises the five members set out below. The members, with the exception of Mr Mayhew, are independent and are free of any relationship that would interfere with impartial judgement in carrying out their responsibilities. Mr Mayhew is not deemed to be technically independent by virtue of his professional association with the Company in his capacity as chairman of Cazenove Group PLC, a stockbroker and financial adviser to Rio Tinto plc. However, the boards have determined that, in their business judgement, the relationship does not interfere with Mr Mayhew’s exercise of independent judgement and believe that his appointment is in the best interests of the Group because of the substantial financial knowledge and expertise he brings to the committee.
Report of the Audit committeeThe Audit committee met six times in 2002. We monitor developments in corporate governance in the US, the UK and Australia. We do so to ensure the Group continues to apply high and appropriate standards relevant to the jurisdictions in which we operate. Many of the new US requirements have long been best practice and are incorporated into the committee’s Charter, reproduced on page 62. The Charter is subject to regular discussion and will be reviewed in the light of emerging legislation, regulation and best practice. We have also produced a set of procedures, including budgetary guidelines and for the appointment of the external auditor to undertake non audit work. This will be operated in conjunction with the Group’s global procurement initiative, which aims to provide the best possible goods and services at the most advantageous price.
2002 Financial statementsWe have reviewed and discussed with management the audited financial statements for the year ended 31 December 2002. We have discussed with the external auditors matters described in the American Institute of Certified Public Accountant Auditing Standard No. 90, Audit Committee Communications, and in the UK Statement of Auditing Standard No 610, Communication of audit matters to those charged with Governance (SAS 610), including their judgements regarding the quality of the Group’s accounting principles and underlying estimates. We have discussed with the external auditors their independence, and received and reviewed their written disclosures, as required by the US Independence Standards Board’s Standard No. 1, Independence Discussions with Audit Committees and SAS 610. Based on the above, we have recommended to the boards of directors that the 2002 Financial statements be included in this annual report.
Sir Richard V Giordano (Chairman)A F J GouldD L MayhewP D SkinnerLord Tugendhat
Rio Tinto 2002 Annual report and financial statements 61
Audit committee charter
Scope and authority The primary function of the Audit committee is to assist the boards of directors in fulfilling their responsibilities by reviewing:
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:
Composition The Audit committee shall comprise three or more non executive directors, at least three of whom shall be independent. The boards will determine each director’s independence having regard to any past and present relationships with the Group which, in the opinion of the boards, could influence the director’s judgment. All members of the committee shall have a working knowledge of basic finance and accounting practices. At least one member of the committee will have accounting or related financial management expertise, as determined by the boards. A quorum will comprise any two independent directors. The committee may invite members of the management team to attend the meetings and to provide information as necessary.
Meetings The committee shall meet not less than four times a year or more frequently as circumstances require. Audit committee minutes will be confirmed at the following meeting of the committee and tabled as soon as practicable at a meeting of the boards. The Company’s senior financial management, external auditors and internal auditor shall be available to attend all meetings. As part of its responsibility to foster open communication, the committee should meet with management, the external auditors and the internal auditor, at least annually, to discuss any matters that are best dealt with privately.
Responsibilities The boards and the external auditors are accountable to shareholders. The Audit committee is accountable to the boards. The internal auditor is accountable to the Audit committee and the finance director. To fulfil its responsibilities the committee shall:
CharterReview and, if appropriate, update this Charter at least annually.
Financial reporting and internal financial controls Review with management and the external auditors the Group’s financial statements, stock exchange and media releases in respect of each half year and full year. Review with management and the external auditors the accounting policies and practices adopted by the Companies and their compliance with accounting standards, stock exchange listing rules and relevant legislation. Discuss with management and the external auditors management’s choice of accounting principles and material judgments, including whether they are aggressive or conservative and whether they are common or minority practices. Recommend to the boards that the annual financial statements reviewed by the committee (or the chairman representing the committee for this purpose) be included in the Group’s annual report. Review the regular reports prepared by the internal auditor including the effectiveness of the Group’s internal financial controls.
External auditorsRecommend to the boards the external auditors to be proposed to shareholders. Review with the external auditors the planned scope of their audit and subsequently their audit findings including any internal control recommendations. Periodically consult with the external auditors out of the presence of management about the quality of the Group’s accounting principles, material judgments and any other matters that the committee deems appropriate. Review the performance of the external auditors. Review and approve the fees and other compensation to be paid to 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 Companies to determine their independence.
Internal auditor Review the qualifications, organisation, strategic focus and resourcing of internal audit. Review the internal audit plans. Periodically consult privately with the internal auditor about any significant difficulties encountered including restrictions on scope of work, access to required information or any other matters that the committee deems appropriate.
Other matters The committee shall also perform any other activities consistent with this Charter that the committee or boards deem appropriate. This will include but not be limited to review of the corporate governance practices of Group sponsored pension funds.
62 Rio Tinto 2002 Annual report and financial statements
Directors’ report for the year ended 31 December 2002
Dual listed companiesRio Tinto plc and Rio Tinto Limited were unified under a dual listed companies structure in 1995, and the directors’ report has been prepared as a joint report of both Companies. For a full description of the structure, please see page 68.
Activities and review of operationsA detailed review of the Group’s activities during 2002, post balance sheet events and likely future developments are given in the chairman’s letter on pages 2 and 3, the chief executive’s report on pages 4 and 5 and the Operational review on pages 34 to 49.
Corporate governanceA report on Corporate governance and compliance with The Combined Code appended to The Listing Rules of the UK Listing Authority, as well as the guidelines of the Australian Stock Exchange, is set out on pages 60 and 61.
Directors Details of the directors are set out on pages 50 and 51. Mr C R H Bull retired with effect from the conclusion of the Rio Tinto Limited annual general meeting on 18 April 2002, when Mr G R Elliott succeeded him as finance director. Mr A F J Gould and Mr D C Clementi were appointed non executive directors on4 December 2002 and 28 January 2003, respectively. Mr Gould and Mr Clementi, neither of whom have service contracts, will retire and offer themselves for election at the 2003 annual general meetings. Under the articles of association of Rio Tinto plc and the Rio Tinto Limited constitution, directors are required to retire from the boards and offer themselves for re-election at least every three years. The following directors retire by rotation and being eligible, offer themselves for re-election: Mr R Adams, who has a service contract with a subsidiary of Rio Tinto plc which is terminable on one year’s notice by either party; and Mr L A Davis and Mr D L Mayhew, neither of whom have service contracts. The Hon R G H Seitz, who has served two, three year terms, also retires by rotation and will not be offering himself for re-election. The interests of the directors and their families in shares and other securities of Group companies are shown on pages 57 to 59.
Dividends Details of dividends are set out on page 65.
Share capital At the annual general meetings of Rio Tinto plc and Rio Tinto Limited held in April 2002, shareholders approved the creation of a new special purpose share, the ‘DLC Dividend Share’, in each Company, by increasing the authorised share capital of Rio Tinto plc by the nominal value of the DLC Dividend Share and by creating a new class of share in Rio Tinto Limited. Rio Tinto plc and Rio Tinto
Limited issued their respective DLC Dividend Share on 27 August 2002 and 2 September 2002. Details of the changes in the issued share capital of both Companies, the number of shares reserved for issue and options outstanding at the year end, are given in note 21 to the 2002 fnancial statements. At the annual general meeting of Rio Tinto plc held in April 2002, the authorities for Rio Tinto plc to buy its own shares and for Rio Tinto Limited to buy shares in Rio Tinto plc were renewed and extended until October 2003. These authorities enable Rio Tinto plc to buy back up to ten per cent of its publicly held shares in any 12 month period. Under the Australian Corporations Act 2001, Rio Tinto Limited is currently permitted to buy back up to ten per cent of its shares on-market in any 12 month period without seeking shareholder approval. In addition, Rio Tinto Limited is authorised by shareholder approvals obtained in 1999 to buy back up to all the Rio Tinto Limited shares held by Tinto Holdings Australia Pty Limited (a wholly owned subsidiary of Rio Tinto plc) plus, on-market, up to ten per cent of the publicly held capital in any 12 month period. During 2002, neither Company purchased shares under the relevant authorities given to them. Details of disclosable interests in the share capital of both Companies are given on page 71.
Employment policiesGroup companies, together with the Group’s share of joint ventures and associates employed approximately 36,000 (2001: 37,000) people worldwide, with around 10,000 in Australia and New Zealand and 1,000 in the United Kingdom. Rio Tinto’s employment policy, which reflects its overall philosophy of decentralisation, is set out in the statement of business practice, The way we work. Rio Tinto is committed to equality of opportunity and encourages each operating company to develop its own policies and practices to suit individual circumstances. Management development and succession planning are regularly reviewed. Group companies employ disabled people and accept the need to maintain and develop careers for them. If an employee becomes disabled whilst in employment and, as a result, is unable to perform his or her duties, every effort is made to offer suitable alternative employment and to assist with retraining. Rio Tinto respects the right of employees worldwide to choose for themselves whether or not they wish to be represented collectively. Group companies recognise their obligations to comply with health and safety legislation and, through training and communication, encourage employee awareness of the need to create and secure a safe and healthy working environment. For further information about Group staff and health and safety initiatives, please see pages 48 and 49.
Retirement payments and benefits to dependants are provided by Rio Tinto and its major subsidiaries in accordance with local conditions and good practice in the countries concerned.
Policy regarding payment of trade creditors It is the policy of both Companies to abide by terms of payment agreed with suppliers. In many cases, the terms of payment are as stated in the suppliers’ own literature. In other cases, the terms of payment are determined by specific written or oral agreement. Neither Company follows any published code or standard on payment practice. At 31 December 2002, there were 31 days’ purchases outstanding in respect of Rio Tinto Limited costs and eight days’ purchases outstanding in respect of Rio Tinto plc costs, based on the total invoiced by suppliers during the year ended 31 December 2002.
DonationsWorldwide expenditure on community programmes by Rio Tinto managed businesses amounted to US$48 million (2001: US$44 million). Donations in the UK during 2002 amounted to £2.3 million of which £0.6 million was for charitable purposes as defined by the Companies Act 1985 and £1.7 million for other community purposes. As in previous years, no donations were made in the EU during 2002 for political purposes as defined by the UK Companies Act 1985 as amended by the Political Parties, Elections and Referendums Act 2000. Total community spending in Australia amounted to A$44.4 million. Again, no donations were made for political purposes.
Value of landGroup companies’ interests in land consist mainly of leases and other rights which permit the working of such land and the erection of buildings and equipment thereon for the purpose of extracting and treating minerals. Such land is mainly carried in the financial statements at cost. It is not practicable to estimate the market value since this depends on product prices over the next 20 years or longer, which will vary with market conditions.
Exploration, research and developmentCompanies within the Group carry out exploration, research and development necessary to support their activities. Grants are also made to universities and other institutions which undertake research on subjects relevant to the activities of Group companies. A description of some aspects of the work currently being undertaken and expenditure involved is provided in the Operational review. Expenditure during the year, excluding that of joint ventures and associated companies, was US$124 million for exploration and evaluation and US$25 million for research and development.
Auditors Following the conversion of the UK firm of
Rio Tinto 2002 Annual report and financial statements 63
Directors’ report continued
PricewaterhouseCoopers to a Limited Liability Partnership (LLP) on 1 January 2003, PricewaterhouseCoopers resigned as auditor of Rio Tinto plc on 27 January 2003 and the directors appointed its successor PricewaterhouseCoopers LLP, as auditor. A resolution to reappoint PricewaterhouseCoopers LLP as auditor of Rio Tinto plc will be proposed at the annual general meetings. The Australian arm of PricewaterhouseCoopers continues in office as auditor of Rio Tinto Limited in accordance with Section 327 of the Australian Corporations Act 2001.
Annual general meetingsThe notices of the 2003 annual general meetings are set out in separate letters to shareholders of each Company. These include a resolution at the Rio Tinto plc annual general meeting for the renewal of the authority for Rio Tinto plc and Rio Tinto Limited to purchase Rio Tinto plc shares, and a resolution at the Rio Tinto Limited annual general meeting for the renewal of the authorities for Rio Tinto Limited to buy back its shares.
Income and Corporation Taxes Act 1988The close company provisions of the UK Income and Corporation Taxes Act 1988 do not apply to Rio Tinto plc.
64 Rio Tinto 2002 Annual report and financial statements
Shareholder information
DIVIDENDSBoth Companies have paid dividends on their shares every year since incorporation in 1962. The rights of Rio Tinto shareholders to receive dividends are explained under the description of the Dual Listed Companies Structure on page 68.
Dividend policyThe aim of Rio Tinto’s long standing progressive dividend policy is to increase the US dollar value of dividends over time, without cutting them in economic downturns. From 2002 the rate of the total annual dividend, in US dollars, is reviewed when determining the final dividend in the light of the results for the past year and the outlook for the current year. The interim dividend is set at one half of the total dividend for the previous year. Under the progressive dividend policy the final dividend for each year is expected to be at least equal to the previous interim dividend.
Dividend determinationAs the majority of the Group’s sales are transacted in US dollars it is the most reliable currency in which to measure the Group’s financial performance and is its main reporting currency. So the US dollar is the natural currency for dividend determination. Dividends determined in US dollars are translated at exchange rates prevailing two days prior to announcement and are then declared payable in sterling by Rio Tinto plc and in Australian dollars by Rio Tinto Limited. Australian shareholders of Rio Tinto plc can elect to receive dividends in Australian dollars and UK shareholders of Rio Tinto Limited can elect to receive dividends in sterling. Contact Computershare for further details.
2002 dividendsThe 2002 interim and final dividends were determined at 29.5 US cents and at 30.5 US cents per share and the applicable translation rates were US$1.563 and US$ 1.6398 to the pound sterling and US$0.5457 and US$0.5880 to the Australian dollar. Final dividends of 18.6 pence per share and of 51.87 Australian cents per share will be paid on 7 April 2003. A final dividend of 122.0 US cents per ADR (each representing four shares) will be paid by The Bank of New York to the ADR holders of both Companies on 8 April 2003. The tables below set out the amounts of interim, final and total cash dividends paid or payable on each share or ADS in respect of each financial year, but before deduction of any withholding tax.
Rio Tinto Group – US cents per share
Rio Tinto Limited – Australian cents per share
Dividend reinvestment plan (DRP)Rio Tinto offers shareholders a DRP which provides the opportunity to use cash dividends to purchase Rio Tinto shares in the market, free of commission. Please see Taxation on page 66 for an explanation of the tax consequences. The DRP can only be made available to shareholders whose names are recorded on the respective Company’s register and due to local legislation cannot be extended to shareholders in the US, Canada and certain other countries. Please contact Computershare for further information.
MARKET LISTINGS AND SHARE PRICESRio Tinto plcThe 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 index), 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 75,000 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 available during the day on the Rio Tinto and
other websites. Share prices are also available on CEEFAX and TELETEXT and can be obtained through the Cityline service operated by the Financial Times in the UK: telephone 0906 843 3880; calls are currently charged at 60p per minute. Rio Tinto plc has a sponsored American Depositary Receipt (ADR) facility with The Bank of New York under a Deposit Agreement, dated as of 13 July 1988, as amended as of 11 June 1990, and as further amended and restated as of 15 February 1999. The ADRs evidence Rio Tinto plc American Depositary Shares (ADS), with each ADS representing four ordinary shares. The shares are registered with the US Securities and Exchange Commission, 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 plc’s shares on the LSE based on the LSE Daily Official List, and the highest and lowest sale prices of the Rio Tinto plc ADSs as reported on the NYSE composite tape.
As at 14 February 2003, there were 70,104 holders of record of Rio Tinto plc’s shares. Of these holders, 232 had registered addresses in the US and held a total of 161,639 Rio Tinto plc shares, representing 0.015 per cent of the total number of Rio Tinto plc shares issued and outstanding as at such date. In addition, 68.8 million Rio Tinto plc shares were registered in the name of a custodian account in London. These shares were represented by 17.2 million Rio Tinto plc ADSs held of record by 392 ADS holders. In addition, certain accounts of record with registered addresses other than in the US hold shares, in whole or in part, beneficially for US persons.
Rio Tinto LimitedRio Tinto Limited shares are listed on the Australian Stock Exchange (ASX) and the Stock Exchange of New Zealand. The ASX is
Rio Tinto 2002 Annual report and financial statements 65
Shareholder information continued
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 on the LSE. Closing ASX share prices are published in most Australian newspapers and are available during the day on the Rio Tinto and other websites. Rio Tinto Limited also has an ADR facility with The Bank of New York under a Deposit Agreement, dated as of 6 June 1989, as amended as of 1 August 1989, and as amended and restated as of 2 June 1992. The ADRs evidence Rio Tinto Limited’s ADSs, each representing four shares and are traded in the over the counter market under the symbol ‘RTOLY’. The following tables set out for the periods indicated the high and low closing sale prices of Rio Tinto Limited shares based upon information provided by the ASX and the highest and lowest trading prices of Rio Tinto Limited ADSs, as advised by The Bank of New York. There is no established trading market in the US for Rio Tinto Limited’s shares or ADSs.
As at 14 February 2003, a total of 309,383 Rio Tinto Limited shares were held of record by 187 persons with registered addresses in the US, which represented approximately 0.062 per cent of the total number of Rio Tinto Limited shares issued and outstanding as of such date. In addition, an aggregate of 284,747 Rio Tinto Limited ADSs were outstanding (representing 1.1 million Rio Tinto Limited shares) and were held of record by 31 persons with registered addresses in the US, which represented less than one per cent of the total number of Rio Tinto Limited shares issued and outstanding. In addition, nominee accounts of record with registered addresses other than in the US may hold Rio Tinto Limited shares, in whole or in part, beneficially for US persons.
ADR holders ADR holders may instruct The Bank of New York as to how the shares represented by their ADRs should be voted.
Registered holders of ADRs will have the Annual reviewand Interim report mailed to them at their record address. Brokers or financial institutions, which hold ADRs for shareholder clients, are responsible for forwarding shareholder information to their clients and will be provided with copies of the Annual review and Interim report for this purpose. Rio Tinto is subject to the US Securities and Exchange Commission (SEC) reporting requirements for foreign companies. A Form 20-F incorporating by reference most of the information in the 2002 Annual report and financial statements, will be filed with the SEC. The Form 20-F corresponds with the Form 10-K that US public companies are required to file with the SEC. Rio Tinto’s Form 20-F and other filings can be viewed on the SEC website at www.sec.gov
Investment warningPast performance of shares is not necessarily a guide to future performance. The value of investments and any income from them is not guaranteed and can fall as well as rise depending on market movements. You may not get back the original amount invested.
Credit ratingsRio Tinto has strong international credit ratings:
The ratings by Standard & Poor’s Corporation were downgraded during 2002, but are on a ‘stable’ outlook. The ratings by Moody’s Investor Services were maintained, but are on a ‘negative’ outlook.
TAXATIONUK resident individualsTaxation of dividendsDividends carry a tax credit equal to one ninth of the dividend. Individuals who are not liable to income tax at the higher rate will have no further tax to pay. Higher rate tax payers are liable to tax on UK dividends at 32.5 per cent which, after taking account of the tax credit, produces a further tax liability of 25 per cent of the dividend received.
Reclaiming income tax on dividendsTax credits on dividends are no longer reclaimable. However, tax credits on dividends paid into Personal Equity Plans or Individual Savings Accounts will continue to be refunded on dividends paid prior to 6 April 2004.
Dividend reinvestment plan (DRP)The taxation effect of participation in the DRP will depend on individual circumstances. Shareholders will generally be liable for tax on dividends reinvested in the DRP on the same basis as if they had received the cash and arranged the investment. The dividend should therefore be included in the annual tax return in the normal way. The shares acquired should be added to shareholdings at the date and at the net cost shown on the share purchase advice. The
actual cost of the shares (for Rio Tinto plc shareholders including the stamp duty/stamp duly reserve tax) will form the base cost for capital gains tax purposes.
Capital gains taxShareholders who have any queries on capital gains tax issues are advised to consult their financial adviser. A leaflet which includes details of relevant events since 31 March 1982 and provides adjusted values for Rio Tinto plc securities as at that date is available from the company secretary.
Australian resident individualsDividend imputation systemThe basis of the Australian dividend imputation system is that when Australian resident shareholders receive dividends from Rio Tinto Limited, they may be entitled to a credit for the tax paid by the Company in respect of that income, depending on the tax status of the shareholder. The application of the system results in tax paid by the Company being allocated to shareholders by way of imputation 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 imputation credits attached to the dividend are shown in the dividend statement provided to shareholders. The extent to which a company will frank a dividend depends on the credit balance in its franking account. Credits to this account can arise in a number of ways, including when a company pays company tax or receives a franked dividend from another company. The dividend is required to be included in a resident individual shareholder’s assessable income. In addition, an amount equal to the imputation 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 imputation credit amount included in their income. 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 Company’s policy to pay fully franked dividends whenever possible.
Dividend reinvestment plan (DRP)Shareholders will generally be liable for tax on dividends reinvested in the DRP on the same basis as if they had received the cash and arranged the investment. The dividend should therefore be included in the annual tax return in the normal way.
66 Rio Tinto 2002 Annual report and financial statements
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, will form, part of the cost base or reduced cost base of the shares for capital gains tax purposes.
Capital gains taxThe Australian capital gains tax legislation is complex. Shareholders are advised to seek the advice of an independent taxation consultant on any possible capital gains tax exposure. If shareholders have acquired shares after 19 September 1985 they may be subject to capital gains tax on the disposal of those shares.
US resident individualsThe following is a summary of the principal UK tax, Australian tax and US Federal income tax consequences of the ownership of Rio Tinto plc ADSs, Rio Tinto plc shares, Rio Tinto Limited ADSs and Rio Tinto Limited shares (‘the Group’s ADSs and Shares’) by a US holder (as defined below). It is not intended to be a comprehensive description of all the tax considerations that are relevant to all classes of taxpayer. Future changes in legislation, including the new income tax convention between the US and the UK that was published during 2001, but remains to be ratified, may affect the tax consequences of the ownership of the Group’s ADSs and Shares. It is based in part on representations by The Bank of New York 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. A ‘US holder’ is a beneficial owner of securities who, for purposes of the income tax conventions between the US and both the UK and Australia (‘the Conventions’), is a resident of the US and is not a US corporation owning directly or indirectly ten per cent or more of the stock issued by either of the Companies. For the purposes of the Conventions and of the US Internal Revenue Code of 1986, as amended, (‘the Code’) US holders of ADSs are treated as the owners of the underlying shares.
UK taxation of shareholdings inRio Tinto plcDividendsUS 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, which is available to be offset against a US holder’s US Federal tax liability on the dividend. Although a US holder may qualify for a refund of the tax credit it would be eliminated by UK withholding tax that would become payable on the gross dividend and since the current rate of UK withholding tax
of 15 per cent of the net dividend plus the tax credit exceeds the tax credit of ten per cent the amount of the repayment would be zero (it cannot go negative).
Capital gainsA 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 taxUnder 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 holder’s death or on a transfer during the holder’s lifetime unless the ADSs and shares form part of the business property of a permanent establishment in the UK or pertain to a fixed base situated in the UK used in the performance of independent personal services. In the exceptional case where ADSs or shares are subject both to UK inheritance tax and to US Federal gift or estate tax, the UK Estate Tax Treaty generally provides for tax payments to be relieved in accordance with the priority rules set out in the Treaty.
Stamp duty and stamp duty reserve taxTransfers 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 of, 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 inRio Tinto LimitedDividendsUS 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 gainsUS 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 taxAustralia does not impose any gift, estate or inheritance taxes in relation to gifts of shares or upon the death of a shareholder.
Stamp dutyAn issue or transfer of Rio Tinto Limited ADSs or a transfer of Rio Tinto Limited shares does not require the payment of Australian stamp duty.
US Federal income tax DividendsDividends on the Group’s ADSs and shares will generally be treated as dividend income for purposes of US Federal income tax. In the case of dividends paid by Rio Tinto plc the income will be the net dividend plus the tax credit and in the case of Rio Tinto Limited the income will be the net dividend plus, in the event of a dividend not being fully franked, the withholding tax. Dividend income will not be eligible for the dividends received deduction allowed to US corporations. US holders eligible to benefit from the Conventions will be able to claim the tax credit in the case of dividends from Rio Tinto plc and any withholding tax in the case of dividends from Rio Tinto Limited as a US foreign tax credit for purposes of US Federal income tax. To qualify for such a credit, a US holder must make an election on Form 8833 (Treaty Based Return Position Disclosure), which must be filed with the holder’s tax return, in addition to any other filings that may be required. Under the new UK income tax treaty published in 2001, but not yet ratified, US holders would not be entitled to claim the tax credit and accordingly there would be no deemed UK withholding tax and so no associated US foreign tax credit. The new UK income tax treaty would generally be effective, in respect of taxes withheld at source, for amounts paid or credited on or after the first day of the second month after it is ratified. Other provisions of the new UK income tax treaty would generally become effective on 1 January after it is ratified. A US holder would, however, be entitled to elect to defer the provision of the new UK income tax treaty in their entirety for a period of 12 months from when they become effective. Dividends will be dealt with as income from sources from outside the US but will, for US foreign tax credit limitation purposes, generally be ‘passive income’ or ‘financial services income’.
EXCHANGE CONTROLSRio Tinto plcAt present, there are no UK foreign exchange control or other restrictions on the export or import of capital or on the payment of dividends to non resident holders of Rio Tinto plc shares or the conduct of Rio Tinto plc’s operations. There are no restrictions under Rio Tinto plc’s memorandum and articles of association or under English law that limit the right of non resident or foreign owners to hold or vote Rio Tinto plc’s shares.
Rio Tinto 2002 Annual report and financial statements 67
Rio Tinto LimitedUnder existing Australian legislation, the Reserve Bank of Australia does not restrict the import and export of funds, and no permission is required by Rio Tinto Limited for the movement of funds into or out of Australia, except that restrictions apply to certain transactions relating to the following:
Members of the general public are also required to report the sending of A$10,000 or more in currency out of Australia to the Australian Transaction and Reports Analysis Centre. Rio Tinto Limited must also deduct withholding tax from foreign remittances of dividends (to the extent that they are unfranked) and of interest payments. There are no limitations, either under the laws of Australia or under the constitution of Rio Tinto Limited, on the right of non residents, other than the Foreign Acquisitions and Takeovers Act 1975 (‘the Takeovers Act’). The Takeovers Act may affect the right of non Australian residents, including US residents, to acquire or hold Rio Tinto Limited shares but does not affect the right to vote, or any other right associated with, any Rio Tinto Limited shares held in compliance with its provisions. Under the Takeovers Act, a foreign person must notify the Treasurer of the Commonwealth of Australia of a proposal to acquire a “substantial shareholding” in an Australian corporation, which involves a person, together with associates, holding 15 per cent or more of the issued shares or voting power of the corporation. In addition, acquisition or issue of shares (including an option to acquire shares) in a corporation that carries on an Australian business (such as Rio Tinto Limited) which would result in foreign persons “controlling” the corporation, or a change in the foreign persons “controlling” it, is also subject to prior notification to, and review and approval by, the Treasurer, who may refuse approval if satisfied that the result would be contrary to the Australian national interest. A foreign person will “control” a corporation if it, together with associates, holds 15 per cent or more of the issued shares or voting power, and the Treasurer is satisfied that it is in a position to determine the policy of the corporation, and a number of foreign persons will “control” a corporation if it, together with associates, holds 40 per cent or more of the issued shares or voting power, and the Treasurer is satisfied that it is in a position to determine the policy of the corporation. In the context of the Takeovers Act, a ‘foreign person’ is:
is an interest of 15 per cent or more in the ownership of voting power by a single foreign interest either alone or together with associates, or an interest of 40 per cent or more in aggregate in the ownership or voting power by more than one foreign interest and the associates of any of them. If a single foreign interest (either alone or together with associates) holds a beneficial interest in 15 per cent or more of the capital or income of a trust, or if two or more foreign interests (and any associates) together hold 40 per cent or more, there will be a substantial foreign interest in the trust. A beneficiary under a discretionary trust is deemed, for this purpose, to hold a beneficial interest in the maximum percentage that could be distributed to the beneficiary. In addition to the Takeovers Act, there are statutory limitations in Australia on foreign ownership of certain businesses, such as banks and airlines, not relevant to Rio Tinto Limited. There are no other statutory or regulatory provisions of Australian law or ASX requirements that restrict foreign ownership or control of Rio Tinto Limited.
DUAL LISTED COMPANIES STRUCTUREOn 20 December 1995, Rio Tinto shareholders approved the terms of the dual listed companies merger (‘the DLC merger’) which was designed to place the shareholders of both Companies in substantially the same position as if they held shares in a single enterprise owning all of the assets of both Companies. As a condition of its approval of the DLC merger, the Australian Government required Rio Tinto plc to reduce its shareholding in Rio Tinto Limited to 39 per cent by the end of 2005. The current holding is approximately 38 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:
Dividend rightsThe 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 either 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.
Voting rightsIn 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. 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. 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 by the relevant special purpose company at the parallel meeting of the other Company.
68 Rio Tinto 2002 Annual report and financial statements
In exceptional circumstances, certain public shareholders of the Companies can be excluded from voting at the respective Company’s general meetings (because they have acquired shares in one Company in excess of a given threshold without making an offer for all the shares in the other Company). If this should occur, the votes cast by the special purpose companies will disregard the votes of excluded shareholders. Following the Companies general meetings the overall results of the voting on Joint Decisions and the results of voting on separate decisions will be announced to the stock exchanges, published on the Rio Tinto website and advertised in the Financial Times and The Australian newspapers as soon as they are known. The results of the 2003 annual general meetings may also be obtained on the appropriate shareholder helpline (Rio Tinto plc: Freephone 0800 435021, and Rio Tinto Limited toll free 1800 813 292).
Rio Tinto plcAt 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 public shareholders of Rio Tinto Limited 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 LimitedAt a Rio Tinto Limited shareholders’ meeting at which a Joint Decision will be considered, each Rio Tinto Limited share will carry one vote and the holder of its Special Voting Share will carry one vote cast, for and against, by the public shareholders of Rio Tinto plc in their parallel meeting. The holder of the Special Voting Share is 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 public shareholders of Rio Tinto plc 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 rightsIf 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. The Sharing Agreement does not grant any enforceable rights to the shareholders of either Company upon liquidation of a Company.
Limitations on ownership of shares and merger obligations The laws and regulations of the UK and Australia impose certain restrictions and obligations on persons who control interests in public quoted companies in excess of certain thresholds that, under certain circumstances, include obligations to make a public offer for all of the outstanding issued shares of the relevant company. The threshold applicable to Rio Tinto plc under UK law and regulations is 30 per cent and to Rio Tinto Limited under Australian law and regulations is 20 per cent. Following 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. The articles of association of Rio Tinto plc and the constitution of Rio Tinto Limited impose restrictions on any person who controls, directly or indirectly, 20 per cent or more of the votes on a Joint Decision. If, however, such a person only has an interest in Rio Tinto Limited or Rio Tinto plc, then the restrictions will only apply if they control, directly or indirectly, 30 per cent or more of the votes at their general meetings. If one of the thresholds specified above is breached then, subject to certain limited exceptions and notification by the relevant Company, such persons (i) may not attend or vote at general meetings of the relevant Company; (ii) may not receive dividends or other distributions from the relevant Company; and (iii) may be divested of their interest by the directors of the relevant Company. These restrictions will continue to apply until such persons have either made a public offer for all of the publicly held shares of the other Company or have reduced their controlling interest below the thresholds specified or have acquired through a permitted means at least 50 per cent of the voting rights of all the shares held by the public shareholders of each company. These provisions are designed to ensure that offers for the publicly held shares of both Companies would be required to avoid the restrictions set forth above, even if the interests which breach the thresholds are
only held in one of the Companies. 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.
GuaranteesOn 21 December 1995, each Company entered into a Deed Poll Guarantee in favour of creditors of the other Company. Pursuant to the Deed Poll Guarantees, each Company guaranteed the contractual obligations of the other Company (and the obligations of other persons which are guaranteed by the other Company), subject to certain limited exceptions. Beneficiaries under the Deed Poll Guarantees may make demand upon the guarantor thereunder without first having recourse to the Company or persons whose obligations are being guaranteed. The obligations of the guarantor under each Deed Poll Guarantee expire upon termination of the Sharing Agreement and under other limited circumstances, but only in respect of obligations arising after such termination and, in the case of other limited circumstances, the publication and expiry of due notice. The shareholders of the Companies cannot enforce the provision of the Deed Poll Guarantees.
SUPPLEMENTARY INFORMATION General shareholder enquiriesComputershare Investor Services PLC and Computershare Investor Services Pty Limited are the registrars for Rio Tinto plc and Tinto Limited, respectively. All enquiries and correspondence concerning your shareholding (other than shares held in ADR form) should be directed to the respective registrar. Their addresses and telephone numbers are given under Useful addresses on the inside back cover. Shareholders should notify Computershare promptly in writing of any change of address. All enquiries concerning shares held in ADR form should be directed to the Bank of New York, whose address and telephone number is also given under Useful addresses. Shareholders can obtain details about their own shareholding on the internet. Full details, including how to gain secure access to this personalised enquiry facility, are given on the Computershare website: www.computershare.com
Consolidation of share certificatesIf your certificated shareholding in Rio Tinto plc is represented by several individual share certificates, you may wish to have these replaced by one consolidated certificate; there is no charge for this service. You should send your share certificates to Computershare together with a letter of instruction.
Share certificates – name changeShare certificates in the name of The RTZ Corporation PLC remain valid notwithstanding the name change to Rio Tinto plc in 1997.
Share warrants to bearerAll outstanding share warrants to bearer of Rio Tinto plc have been converted into registered ordinary shares under the terms of a Scheme of Arrangement sanctioned by the Court in 2001. Holders of any outstanding share warrants to bearer should contact the company secretary, Rio Tinto plc for an application form in order to obtain their rights to registered ordinary shares.
Low cost share dealing serviceStocktrade operates the Rio Tinto low cost share dealing service which provides Rio Tinto plc shareholders with a simple telephone facility for buying and selling their Rio Tinto shares. Basic commission is 0.5 per cent up to £10,000, reducing to 0.2 per cent thereafter (subject to a minimum commission of £15). Further information is available from Stocktrade, a division of Brewin Dolphin Securities which is authorised and regulated by the Financial Services Authority, whose details are given under Useful addresses. Some transactions may be subject to the money laundering regulations and you may be required to provide certain personal details to Stocktrade prior to any purchase or sale of shares.
Individual Savings Account (ISA)Stocktrade offers an ISA for UK residents wishing to hold Rio Tinto plc shares in an ISA account. Existing PEPs or ISAs may also be transferred to Stocktrade. Further information on ISAs can be obtained from Stocktrade whose details are given under Useful addresses.
Corporate nominee serviceComputershare in conjuction with Rio Tinto plc, have introduced a corporate nominee service for private individuals. Further information can be obtained from Computershare.
Publication of financial statements Shareholders wishing to receive theAnnual report and financial statements and/or theAnnual review in electronic rather than paper form should register their instruction on the Computershare website.
Unsolicited mail Rio Tinto is aware that some shareholders have had occasion to complain of the use, for their own purposes, by outside organisations information obtained from the Companies’ share registers. Rio Tinto, like other companies, cannot by law refuse to supply such information provided that the organisation concerned pays the appropriate statutory fee.
If you are resident in the UK and wish to stop receiving unsolicited mail then you should register with The Mailing Preference Service, telephone: 020 7291 3310 or you may prefer to write to:The Mailing Preference ServiceFreepost 22, London W1E 7EZ
70 Rio Tinto 2002 Annual report and financial statements
Other Disclosures
Major Shareholders and Related Party Transactions Major shareholdersAs far as is known, Rio Tinto plc is not directly or indirectly owned or controlled by another corporation or by any government, and as of 14 February 2003 it was not aware of any persons owning more than three per cent of its shares. Rio Tinto plc does not know of any arrangements which may result in a change in its control. As of 14 February 2003, the total amount of the voting securities owned by the directors of Rio Tinto plc as a group was 284,370 Ordinary shares of 10p each representing less than one per cent of the number of shares in issue. As far as is known, Rio Tinto Limited, with the exception of the arrangements described under the “Dual Listed Companies Structure” on page 68, is not directly or indirectly owned or controlled by another corporation or by any government. As of 14 February 2003, the only person known to Rio Tinto Limited as owning more than five per cent of its shares was Tinto Holdings Australia Pty Limited with 187,439,520 shares, representing 37.6 per cent. Rio Tinto Limited does not know of any arrangements which may result in a change in its control. As of 14 February 2003, the total amount of the voting securities owned by the directors of Rio Tinto Limited as a group was 197,047 shares representing less than one per cent of the number in issue.
Related party transactionsDetails of the Group’s material related party transactions are set out in note 38 on page 120 of the financial statements. As stated on page 30 the Group’s financial statements show the full extent of the Group’s financial commitments including debt and similar exposures. It has never been the Group’s practice to engineer financial structures as a way of avoiding disclosure. Substance rather than form is a fundamental principle of Rio Tinto’s reporting.
Financial informationLegal proceedingsNeither Rio Tinto plc nor Rio Tinto Limited nor any of their subsidiaries is a defendant in any proceedings which the directors believe will have a material effect on either Company’s financial position and results of operations.
DividendsThe Group’s policy on dividend distributions is set out under Shareholder information on page 65.
The Offer and listingShare prices and details of the markets on which the Group’s shares are traded are set out under Shareholder information on page 65.
Additional informationMemorandum and articles of associationRio Tinto plc adopted new articles of association by Special Resolution passed on 11 April 2002 and Rio Tinto Limited amended its Constitution by Special Resolution on 18 April 2002. These resolutions dealt with the creation of a new special purpose share in each Company called the “DLC Dividend Share”. The objective of these shares is to provide improved internal funds management flexibility to the Rio Tinto Group by allowing dividends to be paid between the two parts of the Group. Neither share has any rights attaching to it, other than the right to dividends as declared by the boards. The resolutions also dealt with some relatively minor technical amendments.
Exchange controlsAt present, there are no exchange controls or other restrictions that affect remittance of the Group’s dividends to US residents, but see Shareholder information on page 67 for controls on remittances from Australia to certain specific territories. There are no restrictions under Rio Tinto plc’s memorandum and articles of association or under English law that limit the right of non resident or foreign owners to hold or vote its shares. Nor are there any restrictions under Rio Tinto Limited’s constitution or under Australian law that limit the right of non residents to hold or vote its shares, except than under the Foreign Acquisitions and Takeovers Act 1975, see Shareholder information on page 68 for details.
TaxationSee Shareholder information on page 67 for information regarding the tax consequences of holding the Group’s ADSs and shares by US residents.
Quantitative and Qualitative Disclosures about Market RiskThe Rio Tinto Group’s policies for currency, interest rate and commodity price exposures, and the use of derivative financial instruments are discussed in the Financial review on pages 31 and 32. In addition, the Group’s quantitative and qualitative disclosures about market risk are set out in note 28 to the Financial statements on page 105.
Defaults, Dividend Arrearages and DelinquenciesThere are no defaults, dividend arrearages or delinquencies.
Material Modification to the Rights of Security Holders and Use of ProceedsThere are no material modifications to the rights of security holders.
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72 Rio Tinto 2002 Annual report and financial statements
Profit and loss accountYears ended 31 December
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74 Rio Tinto 2002 Annual report and financial statements
The financial statements on pages 73 to 128 were approved by the directors on 20 February 2003 and signed on their behalf by
Rio Tinto 2002 Annual report and financial statements 75
Diluted earnings per share under Australian GAAP are 0.1 US cents (2001: 0.1 US cents) less than the above earnings per share figures.
Net earnings under the generally accepted accounting principles in the United Kingdom (UK GAAP), are stated after exceptional charges of US$879 million relating to asset write downs and environmental remediation. In 2001, there was an exceptional charge for asset write downs of US$583 million. Under the generally accepted accounting principles in Australia (Australian GAAP), these items total US$898 million (2001: US$583 million). However, the concept of Adjusted earnings does not exist under Australian GAAP.
The Group’s financial statements have been prepared in accordance with UK GAAP which differ in certain respects from Australian GAAP. These differences relate principally to the following items, and the effect of each of the adjustments to net earnings and shareholders’ funds that would be required under Australian GAAP is set out above.
GoodwillFor 1997 and prior years, UK GAAP permitted the write off of purchased goodwill on acquisitions directly against reserves. Under Australian GAAP, goodwill is capitalised and amortised by charges against income over the period during which it is expected to be of benefit, subject to a maximum of 20 years. Goodwill previously written off directly to reserves in the UK GAAP financial statements has been reinstated and amortised for the purpose of the reconciliation statements.
For acquisitions in 1998 and subsequent years, goodwill is capitalised under UK GAAP, in accordance with Financial Reporting Standard 10 (FRS 10). Adjustments are required for Australian GAAP purposes where such capitalised goodwill is amortised over periods exceeding 20 years in the UK GAAP accounts.
TaxationRio Tinto has implemented FRS 19, the new UK accounting standard on deferred tax. This has resulted in a prior year adjustment under UK GAAP, which reduced shareholders’ funds at 1 January 2001 by US$133 million. Of this amount, US$46 million results from the requirement under FRS 19 to provide in full for deferred taxation on most timing differences. These additional provisions were already recognised under Australian GAAP.
Asset write downsUnder Australian GAAP, asset write downs are US$19 million higher because the relevant carrying values include goodwill that was eliminated directly against reserves in the year of acquisition for UK GAAP purposes.
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Outline of dual listed companies structure and basis of financial statements
The Rio Tinto GroupThese 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 UK and Australian legislation and regulations.
Accounting standardsThe financial statements have been drawn up in accordance with UK accounting standards. The merger of economic interests is accounted for as a merger under FRS 6.
United Kingdom Companies ActIn order to present a true and fair view of the Rio Tinto Group, in accordance with FRS 6, the principles of merger accounting have been adopted. This represents a departure from the provision of the UK Companies Act 1985 which sets out the conditions for merger accounting based on the assumption that a merger is effected through the issue of equity shares. The main consequence of adopting merger rather than acquisition accounting is that the balance sheet of the merged Group includes the assets and liabilities of Rio Tinto Limited at their carrying values prior to the merger, subject to adjustments to achieve uniformity of accounting policies, rather than at their fair values at the date of the merger. In the particular circumstances of the merger, the effect of applying acquisition accounting cannot reasonably be quantified. In order that the financial statements should present a true and fair view, it is necessary to differ from the presentational requirements of the UK Companies Act 1985 by including amounts attributable to both Rio Tinto plc and Rio Tinto Limited public shareholders in the capital and reserves shown in the balance sheet and in the profit for the financial year. The UK Companies Act 1985 would require presentation of the capital and reserves and profit for the year attributable to Rio Tinto Limited public shareholders (set out in note 25) as a minority interest in the financial statements of the Rio Tinto Group. This presentation would not give a true and fair view of the effect of the Sharing Agreement under which the position of all public shareholders is as nearly as possible the same as if they held shares in a single company.
78 Rio Tinto 2002 Annual report and financial statements
Notes to the 2002 financial statements
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Notes to the 2002 financial statements continued
80 Rio Tinto 2002 Annual report and financial statements
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82 Rio Tinto 2002 Annual report and financial statements
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8 DIVIDENDS
9 EARNINGS PER ORDINARY SHARE
84 Rio Tinto 2002 Annual report and financial statements
10 GOODWILL
11 EXPLORATION AND EVALUATION
Rio Tinto 2002 Annual report and financial statements 85
12 PROPERTY, PLANT AND EQUIPMENT
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13 FIXED ASSET INVESTMENTS
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90 Rio Tinto 2002 Annual report and financial statements
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92 Rio Tinto 2002 Annual report and financial statements
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21 DEFERRED TAXATION
94 Rio Tinto 2002 Annual report and financial statements
21 DEFERRED TAXATION CONTINUED
Rio Tinto 2002 Annual report and financial statements 95
23 NET DEBT
96 Rio Tinto 2002 Annual report and financial statements
24 SHARE CAPITAL – RIO TINTO PLC
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24 SHARE CAPITAL – RIO TINTO LIMITED
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Amounts attributable to Rio Tinto Limited public shareholdersThe consolidated shareholders’ funds of the DLC include US$1,688 million (2001: US$1,592 million) and profit for the financial year includes US$147 million (2001: US$244 million) attributable to the economic interests of shareholders in Rio Tinto Limited other than Rio Tinto plc.
The Group figures on page 100 include the following amounts for joint ventures:
27 GEOGRAPHICAL ANALYSIS CONTINUED
104 Rio Tinto 2002 Annual report and financial statements
28 FINANCIAL INSTRUMENTS
The Group’s policies with regard to currency, interest rate and commodity price exposures, and the use of derivative financial instruments, are discussed in the following sections on pages 31 and 32 of the Financial review:A – Exchange rates, reporting currencies and currency exposureB – Interest ratesC – Commodity pricesD – Treasury management and financial instruments
Except where stated, the information given below relates to the financial instruments of the parent companies and their subsidiaries and excludes joint ventures and associates. The information provided is as at the end of the financial year. Short term debtors and creditors are included only in the currency analysis.
Financial instruments held by companies acquired are marked to market as part of the adjustment of assets and liabilities acquired to fair value. Where appropriate, these fair value adjustments are shown in the disclosures below.
A) CurrencyThe Group’s material currency derivatives are itemised below:
a) Forward contracts hedging trading transactions
28 FINANCIAL INSTRUMENTS CONTINUED
b) Options hedging trading transactions The Group acquired a series of bought call options with companies purchased in 2000. No further options have been taken out since that time. The majority of these bought call options are matched by sold puts creating synthetic forwards. In the event that the Australian dollar strengthens above predetermined levels, the put options are ‘knocked out’, ie cancelled.
The following sold A$ put options (knock out puts) will be cancelled should, at any time during their term, the Australian dollar strengthen above a predetermined barrier rate. Details are shown below.
106 Rio Tinto 2002 Annual report and financial statements
e) Currency exposures arising from the Group’s net monetary assets/(liabilities)After taking into account the effect of relevant derivative instruments, almost all the Group’s net debt is either denominated in US dollars or in the functional currency of the entity holding the debt. The table below sets out the currency exposures arising from net monetary assets/(liabilities), other than net debt, which are not denominated in the functional currency of the relevant business unit. Gains and losses resulting from such exposures are recorded in the profit and loss account. This table reflects the currency exposures before adjusting for tax and outside interests.
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110 Rio Tinto 2002 Annual report and financial statements
In accordance with FRS 4, all commercial paper is classified as short term borrowings though the US$1,749 million outstanding at 31 December 2002 is all backed by medium term facilities (2001: commercial paper of US$2,889 million of which US$1,900 million was backed by medium term facilities). Under US and Australian GAAP, the US$1,749 million would be grouped within non current borrowings at 31 December 2002. Further details of available facilities are given on page 112.
Rio Tinto 2002 Annual report and financial statements 111
At 31 December 2002, the Group had unutilised standby credit facilities totalling US$2.8 billion. These facilities, which are summarised below, are for back up support for the Group’s commercial paper programmes and for general corporate purposes:
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Gains and losses on hedges
Changes in the fair value of derivatives used as hedges of trading transactions, capital expenditure and interest rate exposures, including changes relating to derivatives held by companies acquired during 2000 and 2001, are not recognised in the financial statements until the hedged position matures.
There are a number of legal claims arising from the normal course of business which are currently outstanding against the Group. No material loss to the Group is expected to result from these claims. In 2002, the Australian Tax Office issued assessments of approximately A$500 million (which amount includes penalties and interest) in relation to certain transactions undertaken by the Australian group in a prior year. (These assessments would equate with US$283 million or £176 million at year end exchange rates). The Group has lodged objections to the assessments but these have not yet been determined. This dispute may result in litigation but, based on Counsels’ opinion, the directors believe that the assessments are not sustainable under the Australian law prevailing at the time of the transactions. Accordingly, the directors believe that no material loss will arise. In accordance with Australian tax law and practice, payment of all or part of the disputed tax assessments may be required pending resolution of the dispute. Any such payments will be subject to recovery with interest if, as is believed, the Group is successful in challenging the assessments.
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The Group has joint control of the above ventures and therefore includes them in its accounts using the gross equity accounting technique.
See footnotes on page 118
Rio Tinto 2002 Annual report and financial statements 117
Acquisitions On 6 June 2002, the Group acquired an additional 9.5 per cent interest in reduction lines 1 and 2 at Boyne Smelters at a cost of US$78 million. The Group also increased its interest in Coal & Allied from 72.71 to 75.71 per cent on 17 September 2002, for a consideration of US$29 million. On 20 December 2002, the Group contributed additional equity to IOC, increasing its shareholding from 56.1 to 58.7 per cent. The goodwill arising has been capitalised and is being amortised over the economic lives of the relevant assets, some of which exceed 20 years. The tables below show the additional assets and liabilities consolidated by the Group in respect of the increase in Rio Tinto’s interest in Boyne Smelters, a joint arrangement. They also reflect the reduction in the outside shareholders’ interests of Coal & Allied and IOC resulting from the above transactions.
118 Rio Tinto 2002 Annual report and financial statements
Mining properties, included within tangible fixed assets and investments in joint ventures, were revalued by reference to the net present values of the projected cash flows for each business acquired, based on circumstances existing at the date of acquisition; less the estimated fair values of other separately identifiable assets and liabilities. Revaluation adjustments to other tangible fixed assets were based on depreciated replacement cost or, where appropriate, the asset’s recoverable amount. The fair values attributed to the mining properties and joint ventures of the Australian coal operations of the Peabody Group, acquired in 2001, in the balance sheet reported at 31 December 2001 were provisional. These fair values have been updated during 2002 to take account of updated estimates of the future cash flows for the businesses acquired, based on a closer examination of the potential of these businesses at the date of acquisition, a further analysis of tax and other liabilities and the proceeds of the disposals referred to below. This has resulted in an increase in the fair values ascribed to the retained joint ventures of US$55 million, an increase in current tax liabilities of US$46 million, an increase in tangible fixed assets of US$15 million, an increase in provisions of US$12 million and a decrease in assets held for resale (see below) of US$12 million.
DisposalsTotal disposal proceeds for the sale of subsidiaries, joint ventures and associates were US$233 million. The Group disposed of the Moura joint venture and Ravensworth and Narama thermal coal complex which were acquired with the Australian coal operations of the Peabody Group in 2001. This disposal had no earnings effect as the fair values ascribed to these assets on acquisition were adjusted during 2002 to reflect the sale proceeds. This involved a decrease in the fair value ascribed to assets held for resale of US$12 million.
For 2002, a total of £3,467,688 (A$9,701,754), (2001: £2,030,214 (A$5,719,166)) was attributable to the highest paid director in respect of the aggregate amounts disclosed in the above table, including gains made on exercise of share options. The accrued pension entitlement for the highest paid director was £656,000 (A$1,812,528), (2001: £579,000 (A$1,642,452)). The aggregate remuneration, including pension contributions and other retirement benefits, incurred by Rio Tinto plc in respect of its directors was £7,333,000 (2001: £5,384,000). There were no pension contributions. The aggregate remuneration, including pension contributions and other retirement benefits, incurred by Rio Tinto Limited in respect of its directors was A$11,756,000 (2001: A$9,841,000). The aggregate pension contribution was A$119,232 (2001: A$7,200). During 2002, seven directors (2001: six) accrued retirement benefits under defined benefit arrangements. Shares awarded last year in respect of the MCCP 1998 performance period vested after the publication of the 2001 Annual report and financial statements and the value of awards provided therein were estimated based on share prices of 1,399p and A$39.594. The actual share prices on 1 March 2002 when the awards vested were 1,420p and A$39.30 and the above 2002 figures for long term incentive plans have been adjusted accordingly. Further details are given in the Remuneration report on page 58. 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 56 to 59.
Information about material related party transactions of the Rio Tinto Group is set out below:
Subsidiary companies:Details of investments in principal subsidiary companies are disclosed in note 31.
Joint ventures and associates:Information relating to joint ventures and associates can be found in the following notes:Note 5 – Net interest payable and similar chargesNote 6 – Amortisation of discountNote 7 – Taxation charge for the yearNote 13 – Fixed asset investmentsNote 16 – Accounts receivable and prepaymentsNote 19 – Accounts payable and accrualsNote 25 – Share premium and reservesNote 26 – Product analysisNote 27 – Geographical analysisNote 32 – Principal joint venture interestsNote 33 – Principal associatesNote 35 – Purchases and sales of subsidiaries, joint arrangements, joint ventures and associates
Information relating to joint arrangements can be found in note 34 – Principal joint arrangements.
Pension funds: Information relating to pension fund arrangements is disclosed in note 41.
Directors: Details of directors’ remuneration are set out in note 36 and in the Remuneration report on pages 53 to 59.
Leighton Holdings Limited (Leighton)In 2001, Mr Morschel became a director and, subsequently, the chairman of Leighton, Australia’s largest project development and contracting group. A number of Rio Tinto companies in Australia and Indonesia have, in the ordinary course of their businesses, awarded commercial contracts to subsidiaries of Leighton. The board does not consider the value of these contracts to be material to the business of either Leighton or the Rio Tinto Group.
The Panguna mine remains shut down. Access to the mine site has not been possible and an accurate assessment of the condition of the assets cannot be determined. Considerable funding would be required to recommence operations to the level which applied at the time of the mine’s closure in 1989 and these funding requirements cannot be forecast accurately. The directors do not have access to reliable, verifiable or objective information on BCL and the directors have therefore decided to exclude BCL information from the financial statements. BCL reported a net profit of US$2 million for the financial year (2001: profit of US$3 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 2002 was US$76 million (2001: US$79 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 2002, the market value of the shareholding in BCL was US$16 million.
The main financial assumptions used for the health care schemes, which are predominantly in the US, were: discount rate 6.2 per cent (2001: seven per cent), Medical Trend Rate: eight per cent reducing to five per cent by the year 2009 (2001: Medical Trend Rate: 8.5 per cent reducing to five per cent by the year 2009), claims cost based on individual company experience.
*The equity return assumptions applied in determining the impact of FRS 17 on the profit and loss account for 2002 have been reduced by approximately one per cent on average from those quoted in the 2001 Annual report and financial statements.
Scheme assetsThe assets in the schemes and the contributions made were:
In addition, there were contributions of US$16 million (2001: US$13 million) in respect of unfunded health care schemes in the year. Since these schemes are unfunded, contributions for future years will be equal to benefit payments and therefore cannot be pre determined.
In relation to pensions, it is expected that there will be no regular employer or employee contributions to the UK plan in the period before the next full valuation. There are no pre-agreed rates outside the UK, Canada and Australia for periods beyond 2003. Cash contributions to the main Australian plan recommenced in December 2002 at rates set by the actuary to the plan and are primarily to defined contribution arrangements. In the US, contributions are agreed annually in nominal terms. Contribution rates for the Canadian schemes vary between the plans from zero to 6.5 per cent, although additional contributions will be paid in 2003 to meet a funding shortfall in one plan. The most recent full valuation of the UK schemes was at 31 March 2000. The most recent full valuation of the Australian schemes was at 30 September 2002. For both the US and Canadian schemes, the most recent full valuation was at 1 January 2002.
Surpluses/(deficits) in the plansThe following amounts were measured in accordance with FRS 17:
If the above amounts had been recognised in the financial statements, the Group’s shareholders’ funds at 31 December would have been as follows:
41 POST RETIREMENT BENEFITS CONTINUED
Movements in surplus/(deficit) during the yearThe net post retirement surplus/(deficit) under FRS 17 would have moved as follows during 2002:
If the above amounts had been recognised in the financial statements, the Group’s reported net earnings for 2002 would have decreased by US$15 million.
The following amounts would have been recognised within the Statement of Total Recognised Gains and Losses (STRGL) under FRS 17:
124 Rio Tinto 2002 Annual report and financial statements
42 PARENT COMPANY BALANCE SHEETS
The accounts on pages 73 to 128 were approved by the directors on 20 February 2003 and signed on their behalf by
Rio Tinto 2002 Annual report and financial statements 125
43 OTHER PARENT COMPANY DISCLOSURES
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Financial information by business unit
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Financial information by business unit continued
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Report of the Independent Auditors
To the members of Rio Tinto plc and Rio Tinto Limited.
We have audited the financial statements of the Rio Tinto Group which comprise the Group profit and loss account, the balance sheets, the Group cash flow statement, the Group statement of total recognised gains and losses, the reconciliation with Australian GAAP, and the related notes. We have also audited the disclosures required by Part 3 of Schedule 7A to the United Kingdom Companies Act 1985 contained in the directors’ remuneration report (‘the auditable part’).
Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual Report, the directors’ remuneration report and the financial statements in accordance with applicable United Kingdom law and accounting standards and Australian law are set out in the Statement of directors’ responsibilities in respect of the financial statements.
Our responsibility is to audit the financial statements and the auditable part of the directors’ remuneration report in accordance with relevant legal and regulatory requirements and United Kingdom Auditing Standards issued by the Auditing Practices Board. This report, including the opinion, has been prepared for and only for each company’s members as a body in accordance with Section 235 of the United Kingdom Companies Act 1985 (in respect of Rio Tinto plc) and Section 308 of the Australian Corporations Act 2001 (in respect of Rio Tinto Limited) and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the auditable part of the directors’ remuneration report have been properly prepared in accordance with the United Kingdom Companies Act 1985 and the Australian Corporations Act 2001 as amended by the Australian Securities and Investments Commission order dated 9 April 2001. We also report to you if, in our opinion, the directors’ report is not consistent with the financial statements, if the companies have not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and transactions is not disclosed.
We read the other information contained in the Annual Report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. The other information comprises only the items listed in the contents section of the Annual Report, excluding the 2002 audited financial statements and the auditable part of the directors’ remuneration report.
We review whether the corporate governance statement reflects Rio Tinto plc’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the companies’ or Group’s corporate governance procedures or their risk and control procedures.
Basis of audit opinionWe conducted our audit in accordance with United Kingdom Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the auditable part of the directors’ remuneration report. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the auditable part of the directors’ remuneration report are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.
Rio Tinto 2002 Annual report and financial statements 129
Supplementary information for United States investors
RECONCILIATION WITH US GAAP
The Group’s financial statements have been prepared in accordance with generally accepted accounting principles in the United Kingdom (UK GAAP), 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 shareholders’ funds that would be required under US GAAP is set out above.
It has come to the Group’s attention that the US Securities and Exchange Commission (the SEC) have recently taken a position on certain accounting issues unique to the mining industry. The issue that is likely to affect the Group most significantly, if the position taken by the SEC is applied, relates to the commodity prices used for the determination of reserves for accounting purposes. The Group’s financial statements are based on reserve estimates calculated in accordance with the JORC Code, whereas the SEC have recently been pressing for the use of historical average commodity prices when determining reserves. It may be necessary for the Group to revise the US GAAP information presented in this section of the Annual report and financial statements for the relevant 2002 Form 20-F filings once it has obtained clarification of the SEC’s position on these matters.
130 Rio Tinto 2002 Annual report and financial statements
RECONCILIATION WITH US GAAP CONTINUED
Goodwill For 1997 and prior years, UK GAAP permitted the write off of purchased goodwill on acquisition, directly against reserves. For acquisitions in 1998 and subsequent years, goodwill is capitalised and amortised over its expected useful life under UK GAAP. 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 previously written off directly to reserves in the UK GAAP financial statements was therefore reinstated and amortised, 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 FAS 142 ‘Goodwill and Other Intangible Assets’. Goodwill amortisation of US$90 million charged against UK GAAP earnings for 2002 is added back in the US GAAP reconciliation. No impairment write downs were required on the initial introduction of FAS 142. Implementation of FAS 141 ‘Business Combinations’ resulted in the reclassification of US$340 million from goodwill to finite lived intangible assets.
Exchange differences taken to earnings under US GAAP The Group finances its operations primarily in US dollars and a significant proportion of the Group’s US dollar debt is located in its Australian operations. Under UK GAAP, this debt is dealt with in the context of the currency status of the Group as a whole and exchange differences reported by the Australian operations are adjusted through reserves. US GAAP permits such exchange gains and losses to be taken to reserves only to the extent that the US dollar debt hedges US dollar assets in the Australian Group. Exchange gains of US$240 million pre tax (2001: losses of US$216 million), US$177 million net of tax and minorities (2001: US$148 million net of tax and minorities), on US dollar debt that do not qualify for hedge accounting under US GAAP have therefore been recorded in US GAAP earnings.
Mark to market of derivative contracts The Group is party to derivative contracts in respect of some of its future transactions in order to hedge its exposure to fluctuations in exchange rates against the US dollar. Under UK GAAP, these contracts are accounted for as hedges: gains and losses are deferred and subsequently recognised when the hedged transaction occurs. However, certain of the Group’s derivative contracts do not qualify for hedge accounting under FAS 133 ‘Accounting for Derivative Instruments and Hedging Activities’, principally because the hedge is not located in the entity with the exposure. Unrealised pre tax gains of US$157 million (2001: losses of US$48 million) US$111 million after tax and minorities (2001: US$26 million after tax and minorities), on such derivatives have therefore been taken to US GAAP earnings.
Asset write downsFollowing the implementation of FRS 11 in 1998, impairment of fixed assets under UK GAAP is recognised and measured by reference to the discounted cash flows expected to be generated by an income generating unit. Under US GAAP, impairment is recognised only when the anticipated undiscounted cash flows are insufficient to recover the carrying value of the income generating unit. Where an asset is found to be impaired under US GAAP, the amount of such impairment is generally similar under US GAAP to that computed under UK GAAP, except where the US GAAP carrying value includes additional goodwill. The asset write downs in 2002, under US GAAP, include amounts recognised in 2001 under UK GAAP and also an adjustment for goodwill. The 2002 US GAAP impairment write down was US$1,067 million pre tax (US$1,060 million net of tax and minorities). This is US$89 million pre tax (US$297 million net of tax and minorities) above the charge of US$978 million pre tax (US$763 million net of tax and minorities) included under UK GAAP.
Pensions/post retirement benefitsUnder UK GAAP, post retirement benefits are accounted for in accordance with Statement of Standard Accounting Practice 24. The expected costs under defined benefit arrangements are spread over the service lives of employees entitled to those benefits. Variations from the regular cost are spread on a straight line basis over the expected average remaining service lives of relevant current employees. Under US GAAP, the annual pension cost comprises the estimated cost of benefits accruing in the period adjusted for the amortisation of the surplus arising when FAS 87, ‘Employers’ Accounting for Pensions’, was adopted. The charge is further adjusted to reflect the cost of benefit improvements and any surpluses/deficits that emerge as a result of variances from actuarial assumptions. For US purposes, only those surpluses/deficits outside a ten per cent fluctuation ‘corridor’ are spread. The reduction in shareholders’ funds at 31 December 2002 and 2001 also includes the effect of the US GAAP requirement to make immediate provision for pension fund deficits through other comprehensive income. The provision reflects the reduction in equity values over the past two years.
Exploration and evaluationUnder UK GAAP, 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. US GAAP does not allow expenditure to be carried forward unless the viability of the project is supported by a final feasibility study. In addition, under UK GAAP, provisions made against exploration and evaluation in prior years can be reversed when the project proceeds to development to the extent that the relevant costs are recoverable. US GAAP does not allow such provisions to be reversed.
Share option plansUnder UK GAAP, no cost is accrued where the option scheme applies to all relevant employees and the intention is to satisfy the share options by the issuance of new shares. Prior to 2002, under US GAAP the Group accounted for share option plans under the recognition and measurement provisions of APB Opinion No. 25, ‘Accounting for Stock Issued to Employees’, and related Interpretations. In 2002, the Group adopted the fair value recognition provisions of FAS 123, ‘Accounting for Stock-Based Compensation’, which is considered by the SEC to be a preferable accounting method for share based employee compensation. As permitted by FAS 148, ‘Accounting for Stock-Based Compensation – Transition and Disclosure’, all prior periods presented have been restated to reflect the compensation cost that would have been recognised had the recognition provisions of FAS 123 been applied to all awards granted to employees after 1 January 1995. An adjustment is therefore required to reflect the increased cost of the schemes under US GAAP compared to UK GAAP. Fair value is determined using an option pricing model.
Higher cost of sales resulting from acquisition accounting Under UK GAAP, 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. Earnings for 2001 were lower under US GAAP as a result of the higher cost of sales relating to inventories that were held at the date of acquisition. There is no effect on 2002 earnings.
Rio Tinto 2002 Annual report and financial statements 131
Supplementary information for United States investors continued
Proposed dividendsUnder UK GAAP, ordinary dividends are recognised in the financial year in respect of which they are paid. Under US GAAP, such dividends are not recognised until they are formally declared by the board of directors or approved by the shareholders.
Other Other adjustments to earnings include amounts related to differences between UK and US accounting principles in respect of depreciation of mining assets, revenue recognition, start up and close down and restoration costs (see below).
Depreciation of mining assets Under UK GAAP, mining assets are fully depreciated over their economic lives or the remaining life of the mine if shorter. In some cases, mineral resources that do not yet have the status of reserves are taken into account in determining depreciation charges, where there is a high degree of confidence that they will be mined economically. For US GAAP, only ‘proven and probable reserves’ are taken into account in the calculation of depreciation, depletion and amortisation charges. As a result, adjustments have been made in 2002 to depreciation included in Other that reduced US GAAP pre tax earnings by US$10 million (2001: US$6 million).
Revenue recognitionStaff Accounting Bulletin No. 101 (SAB 101) ‘Revenue Recognition in Financial Statements’ has the result that, in some cases, sales recorded as revenue under UK GAAP are deferred and are not recognised as revenue under US GAAP until a future accounting period. Occasionally, sales of goods recorded as revenue for UK GAAP purposes may be kept in store by Rio Tinto at the request of the buyer. Under US GAAP, such transactions cannot be recognised as revenue unless the goods are physically segregated from the supplier’s other inventory and certain additional criteria are met. Also, under UK GAAP, certain sales contracts are recognised as revenue when the goods are delivered to the ship for export to the customer; but do not qualify for recognition under US GAAP until they have reached the destination specified by the customer in the sales contract and title has passed. In 2002, such timing differences resulted in an adjustment, included in Other, that increased US GAAP pre tax earnings by US$4 million (2001: US$5 million increase).
ProvisionsAdditional provisions were recognised for UK GAAP purposes on implementation of FRS 12 in 1999. There was no corresponding change in US accounting standards. The additional provisions are therefore reversed in the calculation of shareholders’ funds under US GAAP.
Start up costsUnder US GAAP, Statement of Position 98-5, ‘Reporting on the Costs of Start up Activities’, requires that the costs of start up activities are expensed as incurred. Under UK GAAP, some of these start up costs qualify for capitalisation and are amortised over the economic lives of the relevant assets.
Taxation Rio Tinto has implemented FRS 19, the new UK accounting standard on deferred tax. This has resulted in a prior year adjustment under UK GAAP, which reduced shareholders’ funds at 1 January 2001 by US$133 million. Of this amount, US$46 million results from the requirement under FRS 19 to provide in full for deferred taxation on most timing differences. These additional provisions were already recognised under US GAAP. The remaining US$87 million of the prior year adjustment relates to features of FRS 19 that give rise to new variations from US GAAP. Accordingly, this element of the prior year adjustment has been reversed in arriving at US GAAP shareholders’ funds. These variations, which also affect the determination of earnings under US GAAP, relate principally to the following:
Deferred tax on acquisitionsUnder UK GAAP, deferred tax is not provided in respect of upward fair value adjustments to tangible fixed assets and inventories made on acquisitions. Under US GAAP, deferred tax must be provided on all fair value adjustments to non monetary assets recorded on acquisition with a consequential increase in the amount allocated to mining properties or goodwill as appropriate.
Consolidated statement of cash flows The consolidated statement of cash flows prepared in accordance with FRS 1 (revised) presents substantially the same information as that required under US GAAP. Under US GAAP, however, there are certain differences from UK GAAP with regard to the classification of items within the cash flow statement and with regard to the definition of cash and cash equivalents. Under US GAAP, tax paid and interest would form part of operating cash flow. Under UK GAAP, cash for the purposes of the cash flow statement is defined as cash in hand and deposits repayable on demand with any qualifying financial institution, less bank borrowings from any qualifying financial institution repayable on demand. Deposits are repayable on demand if they can be withdrawn at any time without notice and without penalty or if a maturity or period of notice of not more than 24 hours or one working day has been agreed. Under US GAAP, cash equivalents comprise cash balances and current asset investments with an original maturity of less than three months and exclude bank borrowings repayable on demand.
Unrealised holding gains and losses UK GAAP permits current asset investments to be valued at the lower of cost and net realisable value. Under US GAAP, FAS 115 requires that unrealised holding gains and losses on investments classified as ‘available for sale’ are excluded from earnings and reported instead within a separate component of shareholders’ funds until realised.
132 Rio Tinto 2002 Annual report and financial statements
New US accounting standardsIn July 2001, the US Financial Accounting Standards Board (‘FASB’) issued FAS 143, ‘Accounting for Obligations Associated with the Retirement of Long-Lived Assets’. FAS 143 will be effective for the financial year ending 31 December 2003. The standard requires that the obligation for close down and restoration costs is capitalised at the time of recognition. The asset is subsequently amortised over its useful life and the discount on the liability is unwound. In July 2002, the FASB issued FAS 146, ‘Accounting for Costs Associated with Exit or Disposal Activities’. The statement requires companies to recognise costs associated with certain exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. FAS 146 will be applied by the Group prospectively to applicable exit or disposal activities initiated after 31 December 2002. The adoption of FAS 143 and FAS 146 is not expected to have a material effect on the reported financial position, results of operations or cash flows of the Rio Tinto Group.
New UK Accounting StandardsMandatory implementation of FRS 17 – ‘Retirement Benefits’ has been delayed until 2005 but additional disclosures are required for 2001 and 2002 which are included in note 41 to the financial statements.
POST RETIREMENT BENEFITSInformation in respect of the net periodic benefit cost and related obligation determined in accordance with FAS 87, 106 and 132 is given below. Benefits under the major pension schemes are principally determined by years of service and employee remuneration. Pension scheme funding policy is based on annual contributions at a rate that is intended to fund benefits as a level percentage of pay over the working lifetime of the scheme’s participants. The assets of the UK scheme are invested primarily in UK and overseas equities and UK fixed interest stocks. The assets of the Australian schemes are invested primarily in Australian and overseas equities and fixed interest stocks. The assets of the most significant pension schemes outside the UK and Australia are invested primarily in common stocks, corporate and treasury bonds, real estate or real estate investment funds, under the direction of investment managers. 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 US. The plans are non contributory, although some contain an element of cost sharing such as deductibles and co-insurance. Assumptions used to determine the net periodic benefit cost and the year end benefit obligation for the major pension schemes varied between the limits shown below. The average rate for each assumption has been weighted by benefit obligation. The assumptions used to determine the year end benefit obligation are also used to calculate the following year’s cost.
The actuarial calculations in respect of the UK plans assume a rate of increase of pensions in payment of 2.5 per cent per annum. The actuarial calculations in respect of Australian plans assume a rate of increase of pensions in payment of 2.5 per cent per annum. These assumptions are consistent with the expected rates of return and salary increase assumptions in the respective valuations. Appropriate assumptions were made for plans in other countries. The weighted average discount rates used in determining the benefit obligation for the major post retirement benefit plans other than pension schemes were 7.5 per cent and 6.5 per cent as of 30 September 2001, and 30 September 2002, respectively. A healthcare cost trend rate of 8.5 per cent, decreasing to 5.0 per cent by the year 2009, was used for 2002 costs. A healthcare cost trend rate of 8.0 per cent, decreasing to 5.0 per cent by the year 2009 was used to determine the benefit obligation at 30 September 2002.
Components of net benefit expense
Rio Tinto 2002 Annual report and financial statements 133
Sensitivity to change in healthcare trend
The healthcare cost trend rate assumption has a significant effect on the amounts reported. Changing the healthcare cost trend rates by one per cent would result in the following effects:
134 Rio Tinto 2002 Annual report and financial statements
The weighted average remaining contractual lives of options outstanding at 31 December 2002 for the Rio Tinto plc Share Savings Plan, the Rio Tinto plc Share Option Plan, the Rio Tinto Limited Share Option Plan and the Rio Tinto Limited Share Savings Plan are two, three, four and three years respectively. The weighted average fair value of share options at the date of grant was US$5.45 (2001: US$4.87).
ADDITIONAL SEGMENTAL INFORMATIONThe following supplements segmental information provided elsewhere in this report to provide additional information required under US GAAP.
CovenantsOf the Rio Tinto Group’s medium and long term borrowings of US$2.7 billion, some US$0.6 billion relates to the Group’s share of non recourse borrowings which are the subject of various financial and general covenants with which the respective borrowers are in compliance.
Rio Tinto 2002 Annual report and financial statements 135
ADDITIONAL US GAAP CASH FLOW INFORMATIONA summary of Rio Tinto’s operating, investing and financing activities classified in accordance with US GAAP is presented below:
UNREALISED HOLDING GAINS AND LOSSESUnder FAS 115, unrealised holding gains and losses on investments classified as available for sale are excluded from earnings and reported instead within a separate component of shareholders’ funds until realised.
The following table shows the Group’s investments in debt and equity securities which are held as available for sale in accordance with FAS 115.
INTANGIBLE ASSETS UNDER US GAAPThe implementation of FAS 141 resulted in the reclassification of US$340 million from goodwill to finite lived intangible assets at 1 January 2002. The accumulated cost relating to these intangible assets at 31 December 2002 was US$714 million and accumulated amortisation was US$394 million. The total amortisation expense was US$68 million of which US$20 million is related to the amortisation of goodwill previously written off to reserves under UK GAAP now reclassified as finite lived intangible assets under US GAAP. The remaining US$48 million relates to the amortisation of goodwill included as an asset on the UK GAAP balance sheet but now reclassified as finite lived intangible assets under US GAAP. The estimated amortisation charge relating to intangible assets for each of the next five years is US$68 million.
136 Rio Tinto 2002 Annual report and financial statements
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIESDuring 2002, the following movements, pre tax and minorities, took place in Other comprehensive income (OCI) and earnings in relation to net derivative liabilities:
DEFERRED TAX CREDIT/(CHARGE)The credit/(charge) for deferred taxation arises as follows:
FIXED ASSET INVESTMENTSThe aggregates of the profit and loss accounts and balance sheets of equity and gross equity accounted companies on a 100 per cent basis are set out below:
Rio Tinto 2002 Annual report and financial statements 137
138 Rio Tinto 2002 Annual report and financial statements
Rio Tinto 2002 Annual report and financial statements 139
Definitions
NON MINING DEFINITIONS
Throughout this document, the collective expressions Rio Tinto, Rio Tinto Group and Group are used for convenience only. Depending on the context in which they are used, they mean Rio Tinto plc and/or Rio Tinto Limited and/or one or more of the individual companies in which Rio Tinto plc and/or Rio Tinto Limited directly or indirectly own investments, all of which are separate and distinct legal entities.
Unless the context indicates otherwise, the following terms have the meanings shown below:
140 Rio Tinto 2002 Annual report and financial statements
Rio Tinto 2002 Annual report and financial statements 141
Definitions continued
142 Rio Tinto 2002 Annual report and financial statements
Exchange ratesThe following tables show, for the periods and dates indicated, certain information regarding the exchange rates for the pound sterling and Australian dollar, based on the Noon Buying Rates for pounds sterling and Australian dollars expressed in US dollars per £1.00 and per A$1.00.
Note*The Noon Buying Rate on such dates differed slightly from the rates used in the preparation of Rio Tinto’s consolidated financial statements as of such date. No representation is made that pound sterling and Australian dollar amounts have been, could have been or could be converted into dollars at the Noon Buying Rate on such dates or at any other dates.
Rio Tinto 2002 Annual report and financial statements 143
Financial calendar
Publications
The following publications may be obtained from Rio Tinto: 2002 Annual report and financial statements2002 Annual review 2002Rio Tinto Data book2002 Rio Tinto Social and environment review The way we work – Rio Tinto’s statement of business practiceReview magazine – Rio Tinto’s quarterly magazine
Copies of the 2002 annual reports for the following listed Rio Tinto Group companies are also available on request: Bougainville Copper LimitedCoal & Allied Industries LimitedEnergy Resources of Australia LimitedPalabora Mining Company LimitedRio Tinto Zimbabwe Limited
Rio Tinto on the web Information about Rio Tinto is available on our website: www.riotinto.com Many of Rio Tinto’s publications may be downloaded in their entirety from this site and access gained to Group company and other websites.
General enquiries If you require general information about the Group please contact the External Affairs department. For all other enquiries please contact the relevant company secretary or Computershare.
144 Rio Tinto 2002 Annual report and financial statements
Useful addresses
ShareholdersPlease contact the respective registrar if you have any queries about your shareholding
Rio Tinto plc Computershare Investor Services PLC P O Box 82 The Pavilions Bridgwater Road Bristol BS99 7NH
Telephone: +44 (0) 870 702 0000 Facsimile: +44 (0) 870 703 6119 UK residents only, Freephone: 0800 435021 Website: www.computershare.com
Rio Tinto Limited Computershare Investor Services Pty Limited Level 12 565 Bourke Street Melbourne Victoria 3000
Telephone: + 61 (0) 3 9615 5970 Facsimile: +61 (0) 3 9611 5710 Australian residents only, Toll free: 1 800 813 292 Website: www.computershare.com
Holders of American DepositaryReceipts (ADRs) Please contact the ADR administrator if you have any queries about your ADRs
ADR administrator The Bank of New York Depositary Receipts Division 620 Avenue of the Americas 6th Floor New York, NY 10011
Telephone: +1 888 269 2377 Website: www.bankofny.com
US investor relations consultantMakinson Cowell (US) Limited One Penn Plaza 250 West 34th Street Suite 1935 New York, NY 10119
Telephone: +1 212 994 9044 Website: www.mackinson.cowell.com
Low cost share dealing service &Individual Savings Account (ISA) (for Rio Tinto plc shareholders only)
Stocktrade P O Box 1076 10 George Street Edinburgh EH2 2PZ
Low Cost Share Dealing ServiceTelephone: +44 (0) 131 240 0101 UK residents only: 0845 840 1532 Website: www.stocktrade.co.uk
Individual Savings Account (ISA) Telephone. +44 (0) 131 240 0623 Website: www.stocktrade.co.uk
Registered OfficesRio Tinto plc 6 St James’s Square London SW1Y 4LD Registered in England No. 719885
Telephone: +44 (0) 20 7930 2399Facsimile: +44 (0) 20 7930 3249 Website: www.riotinto.com
Rio Tinto LimitedLevel 33 55 Collins Street Melbourne, Victoria 3000 ACN: 004 458 404
Telephone: +61 (0) 3 9283 3333Facsimile: +61 (0) 3 9283 3707Website: www.riotinto.com
Cover picture of malachite, a copper carbonate, by Dirk Wiersma. Design consultants Tor Pettersen & Partners.Printed in England by St Ives Westerham Press on paper granted the Nordic Swan award for environmental credentials. The paper is manufactured to ISO 14001 environmental standards using fibres from sustainable sources and pulps which are totally chlorine free. Printed in Australia by PMP Print. © Rio Tinto plc and Rio Tinto Limited.
REPORT OF THE INDEPENDENT AUDITORS
To the members of Rio Tinto plc and Rio Tinto Limited
We have audited the financial statements of the Rio Tinto Group ("the Group") and of the Rio Tinto plc and Rio Tinto Limited parts of the Group (see "Accounting Presentation" on page A-7) set out on pages A-2 to A-72, which are expressed in US dollars. These consolidated financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these financial statements based on our audits. As detailed in the statement of accounting policies, the Group has changed its accounting policy for deferred tax in 2002 following the adoption of Financial Reporting Standard 19 'Deferred Tax' under generally accepted accounting principles in the United Kingdom.
We conducted our audits in accordance with Auditing Standards generally accepted in the United Kingdom and Auditing Standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements set out on pages A-2 to A-72 present fairly, in all material respects, the financial position of the Rio Tinto Group and of the Rio Tinto plc and Rio Tinto Limited parts of the Group at 31 December 2002 and 2001 and their results of operations and cash flows for the years ended 31 December 2002, 2001 and 2000 in conformity with accounting principles generally accepted in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in certain significant respects from those generally accepted in the United States of America. The application of the latter would have affected the determination of consolidated net income for each of the three years in the period ended 31 December 2002 and the determination of consolidated shareholders' funds at 31 December 2002, 2001 and 2000 to the extent summarised in Note 42 to the consolidated financial statements.
A-1
RIO TINTO PLC - RIO TINTO LIMITED
PROFIT AND LOSS ACCOUNTS FOR THE YEARS ENDED 31 DECEMBER
A-2
CASH FLOW STATEMENTS FOR THE YEARS ENDED 31 DECEMBER
The notes on pages A-7 to A-72 form part of these accounts. Material variations from accounting principles generally accepted in the United States are set out on pages A-58 to A-72.
A-3
BALANCE SHEETS AT 31 DECEMBER
The separate financial statements for Rio Tinto plc and 100 per cent of Rio Tinto Limited shown above are prepared on the basis of the legal ownership of the various operations within each part of the Group. The distinction between the legal and economic interests represented by Rio Tinto plc and Rio Tinto Limited shareholdings is explained on page A-7. The amounts of the consolidated shareholders' funds attributable to the economic interests of Rio Tinto plc shareholders and the shareholders of Rio Tinto Limited other than Rio Tinto plc are as follows:
The notes on pages A-7 to A-72 form part of these accounts. Material variations from accounting principles generallyaccepted in the United States are set out on pages A-58 to A-7
A-4
RECONCILIATION WITH AUSTRALIAN GAAP AT 31 DECEMBER 2002
Net earnings under the generally accepted accounting principles in the United Kingdom (UK GAAP) are stated after exceptional charges of US$879 million relating to asset write downs and environmental remediation. In 2001 there was an exceptional charge for asset write downs of US$583 million. Under the generally accepted accounting principles in Australia (Australian GAAP), these items total US$898 million (2001: US$583 million). However, the concept of Adjusted earnings does not exist under Australian GAAP.
The remaining US$87 million of the prior year adjustment relates to features of FRS 19 that give rise to new variations from Australian GAAP. Accordingly, this element of the prior year adjustment has been reversed in arriving at Australian GAAP shareholders’ funds. These variations, which also affect the determination of earnings under Australian GAAP, relate principally to the following:
(a) Under FRS 19, provision for the taxes arising on remittances of earnings can only be made if the dividends have been accrued or if there is a binding agreement for the distribution of the earnings. Under Australian GAAP, provision must be made for tax arising on expected future remittances of past earnings.
(b) Under FRS 19, tax benefits associated with goodwill charged directly to reserves, in 1997 and previous years, must be accumulated in the deferred tax provision. This means that the tax benefits are not included in earnings until the related goodwill is charged through the profit and loss account on disposal or closure. For Australian GAAP, no provision is required for such deferred tax because the goodwill that gave rise to these tax benefits was capitalised and gives rise to amortisation charges against profit.
Asset write downs Under Australian GAAP, asset write downs are US$19 million higher because the relevant carrying values include goodwill that was eliminated directly against reserves in the year of acquisition for UK GAAP purposes.
A-5
RIO TINTO PLC - RIO TINTO LIMITED STATEMENTS OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEARS ENDED 31 DECEMBER
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS FOR YEARS ENDED 31 DECEMBER
A-6
RIO TINTO PLC - RIO TINTO LIMITED OUTLINE OF DUAL LISTED COMPANIES STRUCTURE AND BASIS OF FINANCIAL STATEMENTS
The Rio Tinto Group Set out on pages A-2 to A-72 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, together with separate financial statements for the Rio Tinto plc and Rio Tinto Limited parts of the Group. The financial statements of the Group have been 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.
Rio Tinto is involved in the exploration and extraction of mineral resources. Product and geographic analyses of the Group's operations are shown in notes 26 and 27 respectively.
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:
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 presentation Under United Kingdom generally accepted accounting principles, the DLC merger is a business combination that was accounted for as a merger on the basis that it has created a single economic enterprise for operating and financial reporting purposes.
For the purposes of its filings in the United States under the requirements of the Securities and Exchange Commission, the primary financial statements of the Rio Tinto plc and Rio Tinto Limited parts of the Group, respectively, are their separate consolidated financial statements prepared on the basis of the legal ownership of the various operations within each part of the Group. Accordingly the consolidated financial statements for the Rio Tinto Limited part of the Group consolidate Rio Tinto Limited with the companies in Rio Tinto Limited's legal ownership. The consolidated financial statements for the Rio Tinto plc part of the Group consolidate Rio Tinto plc with the companies in Rio Tinto plc's legal ownership; Rio Tinto Limited is included on an equity basis that reflects Rio Tinto plc's average 38 per cent (2001: 38 per cent) ownership of Rio Tinto Limited during the year.
The DLC merger between Rio Tinto plc and Rio Tinto Limited has the effect that their shareholders have substantially the same economic interests as if they held shares in a single enterprise which owned all of the assets of both companies. Management therefore considers that the combined financial statements of the Rio Tinto Group provide the most meaningful financial representation of the effects of the DLC merger.
The financial statements are presented in US dollars as most Group revenues are denominated in US dollars, as are many of the Group's costs. In explaining key features and trends of Group financial performance, the US dollar provides a more consistent view which should correspond more closely to underlying business performance.
A-7
RIO TINTO PLC - RIO TINTO LIMITED OUTLINE OF DUAL LISTED COMPANIES STRUCTURE AND BASIS OF FINANCIAL STATEMENTS (continued)
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 on 9 April 2001. The main provisions of the order are that the financial statements are:
United Kingdom Companies Act In order to present a true and fair view of the Rio Tinto Group, in accordance with United Kingdom Financial Reporting Standard 6, the principles of merger accounting have been adopted. This represents a departure from the provision of the UK Companies Act 1985 which sets out the conditions for merger accounting based on the assumption that a merger is effected through the issue of equity shares.
The main consequence of adopting merger rather than acquisition accounting is that the balance sheet of the merged Group includes the assets and liabilities of Rio Tinto 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.
In the particular circumstances of the merger, the effect of applying acquisition accounting cannot reasonably be quantified.
In order that the financial statements should present a true and fair view, it is necessary to differ from the presentational requirements of the UK Companies Act 1985 by including amounts attributable to both Rio Tinto plc and Rio Tinto Limited public shareholders in the capital and reserves shown in the balance sheet and in the profit for the financial year. The UK Companies Act 1985 would require presentation of the capital and reserves and profit for the year attributable to Rio Tinto Limited public shareholders (set out on pages A-4 and A-2) as a minority interest in the financial statements of the Rio Tinto Group. This presentation would not give a true and fair view of the effect of the Sharing Agreement under which the position of all public shareholders is as nearly as possible the same as if they held shares in a single company.
A-8
RIO TINTO PLC - RIO TINTO LIMITED NOTES TO FINANCIAL STATEMENTS
1 Principal accounting policies
(a) Basis of preparation- FRS 19 - 'Deferred Tax' has been adopted in 2002. Prior to the adoption of FRS 19, Rio Tinto provided for deferred tax where, in the opinion of the directors, it was probable that a timing difference would reverse within the foreseeable future. Under FRS 19, full provision is made for deferred taxation on all timing differences that have arisen but not reversed at the balance sheet date, except in limited circumstances.
The main exceptions are as follows: - Tax payable on the future remittance of the past earnings of subsidiaries, associates and joint ventures is provided only to the extent that dividends have been accrued or there is a binding agreement to distribute such past earnings (where previously the Group recognised such deferred tax to the extent that it was probable that a liability would crystallise).- Deferred tax is not recognised on revaluations of non monetary assets arising on acquisitions unless there is a binding agreement to sell the asset and the gain or loss expected to arise from the disposal has been recognised (where previously the Group recognised deferred tax in respect of such adjustments).- FRS 19 requires that provisions for deferred tax are made in respect of tax benefits related to goodwill that was charged directly to reserves on acquisitions made prior to 1998. Such provisions are released when the related goodwill is charged through the profit and loss account on disposal or closure. Under the previous accounting policy, such tax benefits were taken up in the profit and loss account in the year in which they were received.
The balance sheet at 31 December 2001 has been restated following the implementation of FRS 19, which has reduced shareholders' funds by US$133 million. The effect of the restatement is shown in the Statement of Total Recognised Gains and Losses on page A-6. The restatement also included an increase in deferred tax provisions of US$57 million, an increase in the investment in associates of US$10 million and a reduction of US$86 million in property, plant and equipment. The application of FRS 19 did not impact significantly on net earnings for either 2002, 2001 or 2000. Accordingly, prior year earnings have not been restated.
The Group's accounting policies comply with applicable UK accounting standards and, except for the implementation of FRS 19 as described above, are consistent with last year. As explained in the section headed Outline of dual listed companies' structure and basis of financial statements, the accounting policies depart from the requirements of the UK Companies Act in order to provide a true and fair view of the merger between Rio Tinto plc and Rio Tinto Limited.
(b) Basis of consolidation -The financial statements of the Rio Tinto Group consist of the consolidation of the accounts of Rio Tinto plc and Rio Tinto Limited and their respective subsidiary undertakings ('subsidiaries').The financial statements of the Rio Tinto plc part of the Group consist of the consolidation of the accounts of Rio Tinto plc and its subsidiaries. Within these financial statements Rio Tinto plc equity accounts for its 37.6 per cent interest in Rio Tinto Limited. The financial statements of the Rio Tinto Limited part of the Group consist of the consolidation of the accounts of Rio Tinto Limited and its subsidiaries.They are prepared on the historical cost basis, with no revaluations of fixed assets. The Group's shares of the assets, liabilities, earnings and reserves of associated undertakings ('associates') and joint ventures are included in the Group financial statements using the equity and gross equity accounting methods respectively. The Group consolidates its own share of the assets, liabilities, income and expenditure of joint arrangements that are not entities.
(c) Turnover- Turnover comprises sales to third parties at invoiced amounts, with most sales being priced ex works, free on board (fob) or cost, insurance and freight (cif). A large proportion of Group production is sold under medium to long term contracts and is included in sales when deliveries are made. Gross turnover shown in the profit and loss account includes the Group's share of the turnover of joint ventures and associates. By product revenues are included in turnover.
(d) Currency translation- Transactions in foreign currencies are translated at the exchange rate ruling at the date of transaction or, where foreign currency forward contracts have been arranged, at contractual rates. Monetary assets and liabilities denominated in foreign currencies are retranslated at year end exchange rates, or at a contractual rate if applicable.
On consolidation, profit and loss account items are translated into US dollars at average rates of exchange. Balance sheet items are translated into US dollars at year end exchange rates. Certain non-United States resident companies, whose functional currency is the US dollar, account in that currency.
The Group finances its operations primarily in US dollars and a significant proportion of the Group's US dollar debt is located in subsidiaries having functional currencies other than the US dollar. Exchange gains and losses relating to US dollar debt impact on the profit and loss accounts of such subsidiaries. However, such exchange gains and losses are excluded from the Group's profit and loss account on consolidation, with a corresponding adjustment to reserves. This means that financing in US dollars impacts in a consistent manner on the Group's consolidated accounts irrespective of the functional currency of the particular subsidiary where the debt is located. Exchange differences on the translation of the net operating assets of companies with functional currencies other than the US dollar, less offsetting exchange differences on net debt in currencies other than the US dollar financing those net assets, are dealt with through reserves.All other exchange differences are charged or credited to the profit and loss account in the year in which they arise, except as set out below in note o relating to derivative contracts.
A-9
1 Principal accounting policies (continued)
(e) Goodwill and intangible assets - Goodwill represents the difference between the cost of acquisition and the fair value of the identifiable net assets acquired. Goodwill and intangible assets arising on acquisitions after 31 December 1997 are capitalised in accordance with FRS 10. These assets are amortised over their useful economic lives, which may exceed 20 years. Amortisation is charged on a straight line or units of production basis as appropriate. In 1997 and previous years, goodwill was eliminated against reserves in the year of acquisition as a matter of accounting policy. Such goodwill was not reinstated on implementation of FRS 10; but on sale or closure of a business, any related goodwill eliminated against reserves is charged in the profit and loss account.
(f) Exploration and evaluation - During the initial stage of a project, full provision is made in respect of the costs thereof by charge against profits for the year. Expenditure on a project after it has reached a stage at which there is a high degree of confidence in its viability is carried forward and transferred to tangible fixed assets if the project proceeds. If a project does not prove viable, all irrecoverable costs associated with the project are written off. If an undeveloped project is sold, any gain or loss is included in operating profit, such transactions being a normal part of the Group's activities. Where expenditure is carried forward in respect of a project which may not proceed to commercial development for some time, provision is made against the possibility of non-development by charge against profits over a period of up to seven years. When it is decided to pro ceed with development, any provisions made in previous years are reversed to the extent that the relevant costs are recoverable.
(g) Tangible fixed assets -The cost of a tangible fixed asset comprises its purchase price and any costs directly attributable to bringing it into working condition for its intended use. Costs associated with a start up period are capitalised where the asset is available for use but incapable of operating at normal levels without a commissioning period. Net interest before tax payable on borrowings related to construction or development projects is capitalised until the point when substantially all the activities that are necessary to make the asset ready for the use are complete. Once a mining project has been established as commercially viable, expenditure other than that on buildings, plant and equipment is capitalised under mining properties and leases together with any amount transferred from exploration and evaluation. Such expenditure is amortised against profits, applying the same principles as for other tangible fixed assets.
(h) Deferred Stripping costs - Stripping (i.e. overburden and other waste removal) costs incurred in the development of a mine, before production commences, are capitalised as part of the investment in the construction of the mine and subsequently amortised, generally over the ore production during the life of the operation.
Rio Tinto defers stripping costs incurred during the production stage of its operations for those operations where this is the most appropriate basis for matching revenue and costs, and the effect is material.
The stripping ratio is generally calculated by dividing the tonnage of waste mined by the tonnage of ore mined during the relevant period. The costs to be deferred (or accrued) are those relating to the excess (or shortfall) of the current period stripping ratio compared with that for the life of the mine. The life of mine stripping ratio is based on the proven and probable reserves of the operation.
In some operations, there are distinct periods of new development during the production stage of the mine. These may, for example, relate to a separate ore body or discrete section of the ore body. The new development will be characterised by a major departure from the life of mine stripping ratio. Excess stripping costs during such periods are deferred and subsequently amortised pro-rata, generally to the tonnage of ore mined in the remaining life of the operation.
In operations that experience material fluctuations in the stripping ratio on a year by year basis over the life of the mine, deferred stripping costs are subsequently charged against reported profits to the extent that, in subsequent periods, the stripping ratio falls short of the life of mine stripping ratio.
(i) Depreciation and carrying values of fixed assets - Depreciation of tangible fixed assets is calculated on a straight line or units of production basis, as appropriate. Assets are fully depreciated over their economic lives, or over the remaining life of the mine if shorter. Depreciation rates for the principal assets of the Group vary from two and a half per cent to ten per cent per annum.
Tangible and intangible fixed assets are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. In addition, goodwill is reviewed for impairment at the end of the first complete financial year after the relevant acquisition and, where the goodwill is being amortised over a period exceeding 20 years, annually thereafter. When a review for impairment is conducted, the recoverable amount is assessed by reference to the net present value of expected future cash flows of the relevant income generating unit, or disposal value if higher. The discount rate applied is based upon the Group's weighted average cost of capital with appropriate adjustment for the risks associated with the relevant unit. Estimates of future net cash flows are based on ore reserves and mineral resources for which there is a high degree of confidence of economic extraction.
(j) Determination of ore reserves - 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 Mineral Resources and Ore Reserves of September 1999 (the JORC code)). Reserves, and for certain mines resources determined in this way are used in the calculation of depreciation, amortisation, impairment and close down and restoration costs.
A-10
RIO TINTO PLC - RIO TINTO LIMITEDNOTES TO FINANCIAL STATEMENTS
(k) Provisions for close down and restoration and for environmental clean up costs - Both for close down and restoration and for environmental clean up costs, provision is made in the accounting period when the related environmental disturbance occurs, based on the net present value of estimated future costs.
The amortisation or 'unwinding' of the discount applied in establishing the net present value of provisions is charged to the profit and loss account in each accounting period. The amortisation of the discount is shown as a financing cost rather than as an operating cost.
For close down and restoration costs, which include the dismantling and demolition of infrastructure, removal of residual materials and remediation of disturbed areas, movements in provisions other than the amortisation of the discount, such as those resulting from changes in the cost estimates, lives of operations or discount rates, are capitalised and depreciated over future production.
(l) Inventories- Inventories are valued at the lower of cost and net realisable value. Cost for raw materials and stores is purchase price and for partly processed and saleable products is generally the cost of production, including the appropriate proportion of depreciation and overheads. Inventories are valued on a first in, first out ('FIFO') basis.
(m) Deferred tax - Full provision is made for deferred taxation on all timing differences that have arisen but not reversed at the balance sheet date, except in limited circumstances. The main exceptions are as follows: - Tax payable on the future remittance of the past earnings of subsidiaries, associates and joint ventures is provided only to the extent that dividends have been accrued or there is a binding agreement to distribute such past earnings.
- Deferred tax is not recognised on revaluations of non-monetary assets arising on acquisitions unless there is a binding agreement to sell the asset and the gain or loss expected to arise from the disposal has been recognised.
- Deferred tax assets are recognised only to the extent that it is more likely than not that they will be recovered.
Provisions for deferred tax are made in respect of tax benefits related to goodwill that was charged directly to reserves on acquisitions made prior to 1998. Such provisions are released when the related goodwill is charged through the profit and loss account on disposal or closure.
Deferred tax balances are not discounted to their present value.
(n) Post retirement benefits- In accordance with SSAP 24, the expected costs of post retirement benefits under defined benefit arrangements are charged to the profit and loss account so as to spread the costs over the service lives of employees entitled to those benefits. Variations from the regular cost are spread on a straight line basis over the expected average remaining service lives of relevant current employees. Costs are assessed in accordance with the advice of qualified actuaries.
(o) Financial instruments- The Group's policy with regard to 'Treasury management and financial instruments' is set out in the Financial review on page 32 of the Annual report and financial statements. When the Group enters into derivative contracts these transactions are designed to reduce exposures related to assets and liabilities, firm commitments or anticipated transactions, and are therefore accounted for as hedges. Amounts receivable and payable in respect of interest rate swaps are recognised as an adjustment to net interest over the life of the contract. Gains or losses on foreign currency forward contracts and currency swaps relating to financial assets and liabilities are matched against the losses or gains on the hedged items, either in the profit and loss account or through reserves as appropriate. Gains and losses on financial instruments relating to firm commitments or anticipated transactions for revenue items are deferred and recognised when the hedged transaction occurs. Gains and losses on financial instruments relating to firm commitments or anticipated transactions for capital expenditure are capitalised and depreciated in line with the underlying asset.The cash flows from these contracts are classified in a manner consistent with the underlying nature of the related transaction.
A-11
RIO TINTO PLC - RIO TINTO LIMITEDNOTES TO FINANCIAL STATEMENTS - (continued)
A-12
The exceptional charges analysed above are added back in arriving at adjusted earnings and adjusted earnings per share.
The exceptional charges of US$879 million recognised in 2002, comprise provisions of US$763 million for the impairment of asset carrying values and a charge of US$116 million relating to environmental remediation works at Kennecott Utah Copper ('KUC'). Of the impairment charge, US$480 million relates to KUC and US$235 million relates to the Iron Ore Company of Canada ('IOC').
In 2001, exceptional asset write-downs of US$583 million after tax included US$531 million relating to KUC, which produces both copper and gold. The remainder related to gold producing assets.
Most of the impairment provisions have been calculated so as to ensure that the carrying value of the relevant assets are the same as the present value of the expected future cash flows relating to those assets. The discount rates used in calculating the present value of expected future cash flows were derived from the Group's weighted average cost of capital, with appropriate risk adjustments, and are consistent with 2001. When adjusted to include inflation and grossed up at the Group's average tax rate for 2002, before exceptional items, the discount rate applied to the relevant income generating units was equivalent to 10 per cent, except for gold production for which a rate equivalent to 7 per cent was used. The impairment provision against IOC aligns the carrying value with the value negotiated between shareholders during 2002 as part of a financial restructuring exercise.
A-13
A-14
7 Taxation charge for the year (continued)
A-15
RIO TINTO PLC - RIO TINTO LIMITED NOTES TO FINANCIAL STATEMENTS - (continued)
9 Earnings per ordinary share
10 Goodwill
A-16
11 Exploration and evaluation
12 Property, plant and equipment
A-17
12 Property, plant and equipment (continued)
A-18
Details of deferred stripping costs are set out in the following table:
A-19
A-20
13 Fixed asset investments (continued)
(a) The Group's share of joint venture liabilities set out above excludes US$177 million (2001: US$191 million) due to the Group. These excluded liabilities correspond with the loans to joint ventures that are presented earlier in this note as an asset of the Group. Including these loans, the Group's share of the total liabilities of joint ventures was US$1,365 million (2001: US$1,316 million).
(b) Of the US$893 million of liabilities due after more than one year, US$554 million relates to long term debt, which matures as follows: US$173 million between 1-2 years; US$166 million between 2-3 years; US$75 million between 3-4 years; US$91 million between 4-5 years and US$49 million after 5 years.
(a) The Group's share of associate liabilities set out above excludes US$76 million (2001: US$72 million) due to the Group. These excluded liabilities correspond with the loans to associates that are presented earlier in this note as an asset of the Group. Including these loans, the Group's share of the total liabilities of associates was US$1,210 million (2001: US$1,124 million).
(b) Of the US$789 million of liabilities due after more than one year, US$578 million relates to long term debt which matures as follows: US$48 million between 1-2 years; US$111 million between 2-3 years; US$210 million between 3-4 years; US$66 million between 4-5 years and US$143 million after 5 years.
(a) Other investments include listed investments with a market value of US$70 million (2001: US$63 million). The Group owns 20.3 per cent of the Labrador Iron Ore Royalty Income Fund which itself owns 15.1 per cent of Iron Ore Company of Canada Inc. This investment is not equity accounted because the Group has no involvement in its management.
(b) Further information on the net debt of joint ventures and associates is shown in note 14.
A-21
14 Net debt of joint ventures and associates
15 Inventories
A-22
16 Accounts receivable and prepayments
Amounts falling due after more than one year of US$641million (2001: US$675 million) for the Rio Tinto Group relate to pension prepayments US$551 million (2001: US$598 million), other debtors US$36 million (2001: US$45 million), amounts owed by associates US$nil million (2001: US$17 million), tax recoverable US$10 million (2001: US$15 million) and deferred tax assets US$44 million (2001: US$nil). Amounts falling due after more than one year of US$1,602 million (2001: US$1,625 million) for Rio Tinto plc relate to pension prepayments US$521 million (2001: US$524 million), other debtors US$8 million (2001: US$15 million), tax recoverable US$5 million (2001: US$12 million), deferred tax assets of US$2 million and US$1,066 million (2001: US$1,074 million) owed by Rio Tinto Limited for shares bought back during 2000. Amounts falling due after more than one year of US$105 million (2001: US$124 million) for Rio Tinto Limited relate to pension prepayments US$30 million (2001: US$74 million), other debtors US$28 million (2001: US$30 million), amounts owed by associates US$nil million (2001: US$17 million) and tax recoverable US$5 million (2001: US$3 million) and deferred tax assets of US$42 million (2001: US$nil). Amounts owed to Rio Tinto plc by associates includes US$441 million (2001: US$267 million) relating to a loan to Rio Tinto Limited and US$1,192 million (2001: US$1,185 million) relating to other balances between the two parts of the Group. In addition, a loan of US$77 million (2001: US$129 million) to Rio Tinto Limited is included within investments in associates (note 13). Other debtors for Rio Tinto Limited include US$127 million (2001: US$90 million) due from Rio Tinto plc. Movements on pension prepayments are included in Other items in the cash flow.
17 Current asset investments, cash and liquid resources
(a) Current asset investments of Rio Tinto plc and Rio Tinto Group include US$304 million relating to US treasury bonds that are not regarded as liquid assets because they are held as security for the deferred consideration on certain assets acquired during 2002. (b) Information on cash and cash equivalents under US GAAP is given in note 42 Reconciliation to US Accounting Principles.
A-23
18 Short term borrowings
In accordance with FRS 4, all commercial paper is classified as short term borrowings though the US$1,749 million outstanding at 31 December 2002 is all backed by medium term facilities (2001: commercial paper of US$2,889 million of which US$1,900 million was backed by medium term facilities). Under US and Australian GAAP, the US$1,749 million would be grouped within non-current borrowings at 31 December 2002. Further details of available facilities are given in note 28.
19 Accounts payable and accruals
A-24
20 Provisions for liabilities and charges
A-25
20 Provisions for liabilities and charges (continued)
21 Deferred taxation
A-26
21 Deferred taxation (continued)
A-27
22 Medium and long term borrowings
A-28
23 Net debt
A-29
24 Share capital - Rio Tinto plc
Further information on share options is given in note 42 'Reconciliation to US Accounting Principles'.
A-30
A-31
A-32
26 Product analysis - Rio Tinto Group
A-33
26 Product analysis - Rio Tinto Group (continued)
Notes
A-34
A-35
See notes on page A-37.
A-36
27 Geographical analysis - Rio Tinto Group (continued)
A-37
A-38
28 Financial Instruments
The Group's policies with regard to currency, interest rate and commodity price exposures, and the use of derivative financial instruments, are discussed in the following sections on pages 31 and 32 of the Financial review included in the Annual report and financial statements:
Exchange rates, reporting currencies and currency exposure
A) CurrencyThe Group's material currency derivatives are itemised below:
A-39
28 Financial Instruments (continued)
b) Options hedging trading transactionsThe Group acquired a series of bought call options with companies purchased in 2000. No further options have been taken out since that time. The majority of these bought call options are matched by sold puts creating synthetic forwards. In the event that the Australian dollar strengthens above pre-determined levels, the put options are 'knocked-out', i.e. cancelled.
The following sold A$ put options (knock-out puts) will be cancelled should, at any time during their term, the Australian dollar strengthen above pre-determined barrier rate. Details are shown below.
* These fair values comprise only the currency element of the swaps. The fair value of the interest element is presented in the summary interest rate swaps.
A-40
e) Currency exposures arising from the Group's net monetary assets/(liabilities)After taking into account the effect of relevant derivative instruments, almost all the Group's net debt is either denominated in US dollars or in the functional currency of the entity holding the debt. The table below sets out the currency exposures arising from net monetary assets/(liabilities) other than net debt, which are not denominated in the functional currency of the relevant business unit. Gains and losses resulting from such exposures are recorded in the profit and loss account. This table reflects the currency exposures before adjusting for tax and outside interests.
The table below shows the Rio Tinto share of the above currency exposures after tax and outside interest
B) Interest rates
(i) Financial liabilities and assets including the effect of interest rate and currency swapsThis table analyses the currency and interest rate composition of the Group's financial assets and liabilities
A-41
(ii) Fixed rate liabilities and assets, presented gross, and interest rate and currency swapThe US$685 million (2001: US$822 million) of fixed rate liabilities shown in (i) above comprise gross liabilities of US$2,539 million (2001: US$1,793 million) less the interest rate swaps of US$1,854 million (2001: US$971 million) shown below:
A-42
C) CommoditiesThe Group's material commodity derivatives are itemised below:
D) LiquidityThe maturity profile of the Group's net debt is discussed in the Balance Sheet section of the Financial review on page 31 of the Annual report and financial statements.
Financial assets and liabilities are repayable as follows:
In addition, of the remaining US$60 million net provision for the mark to market valuation of the hedge books held by companies acquired in 2000 and 2001, US$15 million matures in 2003, US$39 million in 2004 to 2007 and US$6 million thereafter. There are other financial assets totalling US$122 million of which US$86 million have no fixed maturity and US$36 million which has a maturity greater than one year.In accordance with FRS 4, all commercial paper is classified as short term borrowings though the US$1,749 million outstanding at 31 December 2002 is all backed by medium term facilities (2001: commercial paper of US$2,889 million of which US$1,900 million was backed by medium term facilities). Under US and Australian GAAP, the US$1,749 million would be grouped within non-current borrowings at 31 December 2002. Further details of available facilities are given below.As at 31 December 2002, a total of US$1,833 million is outstanding under the US$2 billion European Medium Term Notes facility, of which US$674 million is repayable within one year. A US$500 million five year bond was issued in 2001 from a possible US$1 billion which the Group is able to issue under the SEC shelf registration filed in that year, subject to market conditions and termsAt 31 December 2002, the Group had unutilised standby credit facilities totalling US$2.8 billion. These facilities, which are summarised below, are for back-up support for the Group”s commercial paper programmes and for general corporate purposes:
A-43
E) Fair values of financial instrumentsThe carrying values and the fair values of Rio Tinto's financial instruments at 31 December are shown in the following table. Fair value is the amount at which a financial instrument could be exchanged in an arm's length transaction between informed and willing parties. Where available, market values have been used to determine fair values. In other cases, fair values have been calculated using quotations from independent financial institutions, or by discounting expected cash flows at prevailing market rates. The fair value of cash, short term borrowings and loans to joint ventures and associates approximates to the carrying value, as a result of their short maturity or because they carry floating rates of interest.
If Rio Tinto's financial instruments were sold at the fair values shown, tax of US$37 million would become recoverable (2001: US$117 million). The maturity of the financial instruments is shown in the notes above.
Gains and losses on hedgesChanges in the fair value of derivatives used as hedges of trading transactions, capital expenditure and interest rate exposures, including changes relating to derivatives held by companies acquired during 2000 and 2001, are not recognised in the financial statements until the hedged position matures.
A-44
29 Contingent liabilities and commitments
Included above are operating lease commitments falling due within one year of US$26 million (2001: US$30 million).
Unconditional purchase obligationsThe aggregate amount of future payment commitments under unconditional purchase obligations outstanding at 31 December 2002 was US$2,539 million. The amounts payable in each of the next 5 years are as follows: 2003: US$209 million, 2004: US$213 million, 2005: US$215 million, 2006: US$187 million and 2007: US$193 million. These future payment commitments mainly consist of take or pay contracts for the supply of power.
Pursuant to the DLC merger both Rio Tinto plc and Rio Tinto Limited issued deed poll guarantees by which each guaranteed contractual obligations incurred by the other or, to the extent guaranteed by the other, any person. The amounts shown above for Rio Tinto plc and Rio Tinto Limited do not reflect these deed poll guarantees.
There are a number of legal claims arising from the normal course of business which are currently outstanding against the Group. No material loss to the Group is expected to result from these claims.
In 2002, the Australian Tax Office issued assessments of approximately A$500 million (which amount includes penalties and interest) in relation to certain transactions undertaken by the Australian group in a prior year. (This assessment would equate with US$283 million at the year end exchange rate). The Group has lodged objections to the assessments but these have not yet been determined. This dispute may result in litigation but, based on Counsels’ opinion, the directors believe that the assessments are not sustainable under the Australian law prevailing at the time of the transactions. Accordingly, the directors believe that no material loss will arise. In accordance with Australian tax law and practice, payment of all or part of the disputed tax assessment may be required pending resolution of the dispute. Any such payment will be subject to recovery with interest if, as is believed, the Group is successful in challenging the assessment. These assessments relate to the Rio Tinto Limited part of the Rio Tinto Group and therefore are also relevant to the Rio Tinto Group and the Rio Tinto plc part of the Group.
A-45
30 Average number of employees
A-46
31 Principal subsidiaries at 31 December 2002
A-47
32 Principal joint venture interests at 31 December 2002
33 Principal associates at 31 December 2002
34 Principal joint arrangements at 31 December 2002
A-48
35 Purchases and sales of subsidiaries, joint arrangements, joint ventures and associates
AcquisitionsOn 6 June 2002, the Group acquired an additional 9.5 per cent interest in reduction lines 1 and 2 at Boyne Smelters at a cost of US$78 million. The Group also increased its interest in Coal & Allied from 72.71 to 75.71 per cent on 17 September 2002, for a consideration of US$29 million. On 20 December 2002, the Group contributed additional equity to IOC, increasing its shareholding from 56.1 to 58.7%. The goodwill arising has been capitalised and is being amortised over the economic lives of the relevant assets, some of which exceed 20 years.
The table below shows the additional assets and liabilities consolidated by the Group in respect of the increase in Rio Tinto's interest in Boyne Smelters, a joint arrangement. It also reflects the reduction in the outside shareholders' interests of Coal & Allied and IOC resulting from the above transactions.
Mining properties, included within tangible fixed assets and investments in joint ventures, were revalued by reference to the net present values of the projected cash flows for each business acquired, based on circumstances existing at the date of acquisition, less the estimated fair values of other separately identifiable assets and liabilities. Revaluation adjustments to other tangible fixed assets were based on depreciated replacement cost or, where appropriate, the asset's recoverable amount.
The fair values attributed to the mining properties and joint ventures of the Australian coal operations of the Peabody Group, acquired in 2001, in the balance sheet reported at 31 December 2001 were provisional. These fair values have been updated during 2002 to take account of updated estimates of the future cash flows for the businesses acquired, based on a closer examination of the potential of these businesses at the date of acquisition, a further analysis of tax and other liabilities and the proceeds of the disposals referred to below. This has resulted in an increase in the fair values ascribed to the retained joint ventures of US$55 million, an increase in current tax liabilities of US$46 million, an increase in tangible fixed assets of US$15 million, an increase in provisions of US$12 million and a decrease in assets held for resale (see below) of US$12 million.
The ownership of Itallumina was transferred from a Rio Tinto Limited subsidiary to a Rio Tinto plc subsidiary during 2002 for a consideration of US$13 million.
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36 Directors' remunerationAggregate remuneration of the directors of the parent Companies was as follows:
For 2002, a total of £3,467,688 (A$9,701,754) (US$5,389,636), (2001: £2,030,214 (A$5,719,166)(US$2,937,132) was attributable to the highest paid director in respect of the aggregate amounts disclosed in the above table, including gains made on exercise of share options. The accrued pension entitlement for the highest paid director was £656,000 (A$1,812,528) (US$984,000), (2001: £579,000 (A$1,642,452) (US$840,129)).
The aggregate remuneration, including pension contributions and other retirement benefits, incurred by Rio Tinto plc in respect of its directors was £7,333,000 (US$11,492,000) (2001: £5,384,000 (US$7,786,000)). There were no pension contributions.
The aggregate remuneration, including pension contributions and other retirement benefits, incurred by Rio Tinto Limited in respect of its directors was A$11,756,000 (US$6,557,000) (2001: A$9,841,000 (US$5,059,000)). The aggregate pension contribution was A$119,232 (US$64,730) (2001: A$7,200 (US$3,723)).
During 2002, seven directors (2001: six) accrued retirement benefits under defined benefit arrangements.
Shares awarded last year in respect of the MCCP 1998 performance period vested after the publication of the 2001 Annual Report and financial statements and the value of awards provided therein were estimated based on share prices of 1,399p and A$39.594. The actual share prices on 1 March 2002 when the awards vested were 1,420p and A$39.30 and the above 2002 figures for long term incentive plans have been adjusted accordingly. Further details are given in the Remuneration report on page 58 of the 2002 Annual Report and Financial Statements.
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 56 to 59 of the 2002 Annual Report and Financial Statements.
37 Auditors' remuneration
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38 Related party transactions
Subsidiary companies: Details of investments in principal subsidiary companies are disclosed in note 31.
Joint ventures and associates: Information relating to joint ventures and associates can be found in the following notes
Information relating to joint arrangements can be found in note 34 - Principal joint arrangements.
Pension funds: Information relating to pension fund arrangements is disclosed in note 40
Directors: Details of directors' remuneration are set out in note 36 and in the remuneration report on pages 53 to 59 of the 2002 Annual Report and Financial Statements.
Leighton Holdings Limited (Leighton)In 2001, Mr Morschel became a director and, subsequently, the chairman of Leighton, Australia's largest project development and contracting group. A number of Rio Tinto companies in Australia and Indonesia have, in the ordinary course of their businesses, awarded commercial contracts to subsidiaries of Leighton. The Board does not consider the value of these contracts to be material to the business of either Leighton or the Rio Tinto Group.
Transactions between the Rio Tinto plc part of the Group and the Rio Tinto Limited part of the GroupThese are eliminated on the consolidation of the Rio Tinto Group. Transactions during the year included the following:
39 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$2 million for the financial year (2001: profit of US$3 million, 2000: profit of US$6 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 2002 was US$76 million (2001: US$79 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 2002, the market value of the shareholding in BCL was US$16 million.
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40 Post retirement benefits
a) Description of schemesThe Group operates a number of pension plans around the world. Whilst some of these plans are defined contribution, the majority are of the defined benefit type, with assets held in separate trustee administered funds, which are reviewed by independent qualified actuaries. A triennial actuarial valuation of the Group's UK plan was made at 31 March 2000 using the projected unit method. The main financial assumptions used for the independent actuarial review as at 31 December 2002 were: rate of return on investments 6.5 per cent (2001: 7.0 per cent), rate of earnings growth 4.8 per cent (2001: 5.0 per cent) plus promotional salary scale, rate of pension increase 2.3 per cent (2001: 2.5 per cent). Assets were measured at market value, smoothed over a one year period (2001: smoothed market value).
Based on an average of market prices for the four quarters to 31 December 2002, the value of the assets in the UK pension plans was sufficient to cover 129 per cent (2001: 154 per cent) of the benefits that had accrued to members after allowing for expected increases in earnings. The smoothed market value of the assets was US$1,358 million (2001: US$1,417 million).
In Australia, whilst Group companies sponsor or subscribe to a number of pension plans, the Rio Tinto Staff Superannuation Fund is the only significant plan. This plan principally contains defined contribution liabilities but also has defined benefit liabilities. Independent actuarial valuations are made annually using the projected unit method. The main financial assumptions used for the valuation as at 30 September 2002 were: rate of return on investments (after tax) 6.5 per cent (2001: 6.5 per cent), rate of earnings growth 4.0 per cent (2001: 4.0 per cent) plus promotional salary scale, rate of pension increase 2.5 per cent (2001: 2.5 per cent). Assets were measured at smoothed market value (2001: smoothed market value).Based on an average of the market prices for the four quarters to 31 December 2002, the value of the assets in the Australian pension plans was sufficient to cover 103 per cent (2001: 115 per cent) of the benefits that had accrued to members after allowing for expected increases in earnings. The smoothed market value of the assets was US$600 million (2001: US$586 million).
A number of defined benefit pension plans are sponsored by the US entities, typically with separate provision for salaried and hourly paid staff. Independent actuarial valuations are made annually using the projected unit method. The main financial assumptions used for the valuation as at 30 September 2002 were: rate of return on investments 6.7 per cent (2001: 7.5 per cent), rate of earnings growth, where appropriate, 3.25 per cent (2001: 3.5 per cent). Assets were measured at smoothed market value (2001: smoothed market value).
Based on an average of the market prices for the four quarters to 31 December 2002, the value of the assets in the US plans was sufficient to cover 81 per cent (2001: 103 per cent) of the benefits that had accrued to members after allowing for expected increases in earnings. Within the total there were plans which had deficits of US$136 million (2001: US$67 million). The smoothed market value of the assets was US$551 million (2001: US$613 million). Contributions will be paid, if necessary, to ensure that the plans meet statutory US funding levels.A number of defined benefit pension plans are sponsored by entities in Canada. Independent actuarial valuations are made annually using the projected unit method. The main financial assumptions used for the valuation as at 30 September 2002 were: rate of return on investments 6.5 per cent (2001: 7.75 per cent), rate of earnings growth, where appropriate, 3.7 per cent (2001: 5.0 per cent). Assets were measured at smoothed market value (2001: smoothed market value).
Based on an average of the market prices for the four quarters to 31 December 2002, the value of the assets in the Canadian plans was sufficient to cover 82 per cent (2001: 105 per cent) of the benefits that had accrued to members after allowing for expected increases in earnings. Within the total there were plans which had deficits of US$134 million (2001: US$27 million). The smoothed market value of the assets was US$538 million (2001: US$557 million). Additional contributions will be paid in 2003 to meet a funding shortfall in one Canadian plan.
The main defined benefit plans outside the UK, Australia and North America were assessed at various dates during 2001 and 2002. The total market value of the assets at the assessment dates was US$202 million (2001: US$224 million). The actuarial value of the total assets of these plans was sufficient to cover 141 per cent (2001: 137 per cent) of the benefits that had accrued to members after allowing for expected increases in earnings. The expected average remaining service life in the major plans ranges from 10 to 20 years with an overall average of 12 years.
The main pension plans providing purely defined contribution benefits held assets, equal to their liabilities, of US$101 million as at 31 December 2002. The Group's contributions to these plans are charged against profits.
The Group uses asset values smoothed over a one year period in arriving at its pension costs under SSAP 24. Pension costs for 2003 are expected to be higher than in 2002 as a result of changes in stock market values.
Certain subsidiaries of the Group, mainly in the US, provide health and life insurance benefits to retired employees and in some cases their beneficiaries and covered dependants. Eligibility for cover is dependent upon certain age and service criteria. These arrangements are unfunded. On 30 September 2002, the unfunded accumulated post retirement benefits obligation and annual cost of accrual of benefits were determined by independent actuaries using the projected unit method. In the US, the main financial assumptions were: discount rate 6.5 per cent (at 30 September 2001: 7.5 per cent), Medical Trend Rate 8.0 per cent reducing to 5.0 per cent by the year 2009 (at 30 September 2001 initially 8.5 per cent reducing to 5.0 per cent by the year 2009), claims cost based on individual company experience. The assumptions were consistent with those adopted for determining pension costs. At 30 September 2002, the unfunded accumulated post retirement benefits obligation (excluding associates and joint ventures) was US$437 million (at 30 September 2001: US$362 million).
b) FRS 17 Transitional disclosures for 2002Mandatory implementation of FRS 17 - 'Retirement Benefits', which deals with accounting for post retirement benefits, has been delayed until the year ending 31 December 2005 but additional disclosures are required for the current year, which are shown below. The standard requires pension deficits, and surpluses to the extent that they are considered recoverable, to be recognised in full. Annual service cost and net financial income on the assets and liabilities of the schemes are recognised through earnings. Other fluctuations in the value of the surpluses/deficits are recognised in the Statement of Total Recognised Gains and Losses (STRGL).
Details of post retirement benefit scheme assets and liabilities at 31 December 2002 and 2001, valued on a projected unit basis in accordance with FRS 17, are set out below:
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40 Post retirement benefits (continued)
The main financial assumptions used for the health care schemes, which are predominantly in the US, were: discount rate 6.2% (2001: 7%), Medical Trend rate: 8% reducing to 5% by the year 2009 (2001: Medical Trend rate: 8.5% reducing to 5% by the year 2009), claims cost based on individual company experience.
* The equity return assumptions applied in determining the impact of FRS 17 on the profit and loss account for 2002 have been reduced by approximately 1 per cent on average from those quoted in the 2001 Annual report and financial statements.
In addition, there were contributions of US$16 million (2001: US$13 million) in respect of unfunded health care schemes in the year. Since these schemes are unfunded, contributions for future years will be equal to benefit payments and therefore cannot be pre-determined.
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In relation to pensions, it is expected that there will be no regular employer or employee contributions to the UK plan in the period before the next full valuation. There are no pre-agreed contribution rates outside the UK, Canada and Australia for periods beyond 2003. Cash contributions to the main Australian plan recommended in December 2002 at rates set by the actuary to the plan and are primarily to defined contribution arrangements. In the US, contributions are agreed annually in nominal terms. Contribution rates for the Canadian schemes vary between the plans from zero to 6.5 per cent, although additional contributions will be paid in 2003 to meet a funding shortfall in one plan.
The most recent full valuation of the UK schemes was at 31 March 2000. The most recent full valuation of the Australian schemes was at 30 September 2002. For both the US and Canadian schemes, the most recent full valuation was at 1 January 2002.
If the above amounts had been recognised in the financial statements, the Group's shareholders' funds at 31 December would have been as follows:
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If the above amounts had been recognised in the financial statements, the Group's reported net earnings for 2002 would have decreased by US$15 million.
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41 Rio Tinto financial information by business unit
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41 Rio Tinto financial information by business unit (continued)
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42 Reconciliation to US Accounting PrinciplesReconciliation with US GAAP
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42 Reconciliation to US Accounting Principles (continued)
The Group’s financial statements have been prepared in accordance with generally accepted accounting principles in the United Kingdom ('UK GAAP'), 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 shareholders' funds that would be required under US GAAP is set out on this and the preceding page.
GoodwillFor 1997 and prior years, UK GAAP permitted the write off of purchased goodwill on acquisition, directly against reserves. For acquisitions in 1998 and subsequent years, goodwill is capitalised and amortised over its expected useful life under UK GAAP. 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 previously written off directly to reserves in the UK GAAP financial statements was therefore reinstated and amortised, 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 FAS 142 'Goodwill and Other Intangible Assets'. Goodwill amortisation of US$90 million charged against UK GAAP earnings for 2002 is added back in the US GAAP reconciliation. No impairment write-downs were required on the initial introduction of FAS 142. Implementation of FAS 141 'Business Combinations' resulted in the reclassification of US$340 million from goodwill to finite lived intangible assets.
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Mark to market of derivative contracts The Group is party to derivative contracts in respect of some of its future transactions in order to hedge its exposure to fluctuations in exchange rates against the US dollar. Under UK GAAP, these contracts are accounted for as hedges: gains and losses are deferred and subsequently recognised when the hedged transaction occurs. Under US standard FAS 52, which applied prior to 1 January 2001, some of these transactions did not qualify for hedge accounting, principally because they were not yet contractual commitments. Provision for unrealised pre-tax losses of the Rio Tinto Group of US$103 million, Rio Tinto plc US$53 million, Rio Tinto Limited US$88 million (Rio Tinto Group US$67 million net of tax and minorities) on derivatives relating to such transactions was therefore recognised in earnings under US GAAP at 31 December 2000. Under FAS 133 ' Accounting for Derivative Instruments and Hedging Activities', which applies to Rio Tinto f rom 1 January 2001, all derivative instruments are included in the balance sheet as assets or liabilities measured at fair value. Certain of the Group's derivative contracts do not qualify for hedge accounting under FAS 133, principally because the hedge is not located in the entity with the exposure. Unrealised pre-tax gains for the Rio Tinto Group of US$157 million (2001: losses of US$48 million), US$111 million after tax and minorities (2001: US$26 million after tax and minorities), on such derivatives have therefore been taken to US GAAP earnings.
Asset write downs Following the implementation of FRS 11 in 1998, impairment of fixed assets under UK GAAP is recognised and measured by reference to the discounted cash flows expected to be generated by an income generating unit. Under US GAAP, impairment is recognised only when the anticipated undiscounted cash flows are insufficient to recover the carrying value of the income generating unit. Where an asset is found to be impaired under US GAAP, the amount of such impairment is generally similar under US GAAP to that computed under UK GAAP, except where the US GAAP carrying value includes additional goodwill. The asset write downs for the Rio Tinto Group in 2002, under US GAAP, include amounts recognised in 2001 under UK GAAP of US$445 million and excludes asset write downs recognised in 2002 under UK GAAP of US$235 million. The 2002 Rio Tinto Group US GAAP asset write downs also include an adjustment for goodwill. The 2002 US GAAP impairment write-down for the Rio Tin to Group was US$1,067 million pre-tax (US$1,060 million net of tax and minorities). This is US$89 million pre-tax (US$297 million net of tax and minorities) above the charge of US$978 million pre-tax (US$763 million net of tax and minorities) included under UK GAAP.
The asset write downs for Rio Tinto plc in 2002, under US GAAP, include amounts recognised in 2001 under UK GAAP of US$445 million. The 2002 Rio Tinto plc asset write downs also include an adjustment for goodwill. The 2002 US GAAP impairment write-down for Rio Tinto plc was US$1,059 million pre-tax (US$1,052 million net of tax and minorities). This is US$420 million pre-tax (US$429 million net of tax and minorities) above the charge of US$639 million pre-tax (US$623 million net of tax and minorities) included under UK GAAP.
The asset write downs for Rio Tinto Limited in 2002, under US GAAP, exclude asset write downs recognised in 2002 under UK GAAP of US$212 million. The 2002 US GAAP impairment write-down for Rio Tinto Limited was US$13 million pre-tax (US$13 million net of tax and minorities). This is US$420 million pre-tax (US$212 million net of tax and minorities) below the charge of US$433 million pre-tax (US$225 million net of tax and minorities) included under UK GAAP. The 2001 US GAAP impairment write-down is US$243 million pre tax for the Rio Tinto Group, US$199 million pre tax for Rio Tinto plc and US$71 million pre tax for Rio Tinto Limited (Rio Tinto Group: US$183 million net of tax and minorities). For the Rio Tinto Group and for Rio Tinto plc this is US$472 million pre-tax (Rio Tinto Group: US$400 million net of tax and minorities) below the charges of US$715 million and US$671 million pre-tax included under UK GAAP for the Rio Tinto Group and Rio Tinto plc respectively (Rio Tinto Group: US$583 million net of tax and minorities). The net difference of US$468 million related to asset write-downs for the Rio Tinto Group and Rio Tinto plc comprises the above US$472 million, offset by US$4 million (Rio Tinto Group: US$3 million net of tax and minorities) of additional current year amortisation related to US GAAP adjustments made in previous years.
Exploration and evaluation Under UK GAAP, 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. US GAAP does not allow expenditure to be carried forward unless the viability of the project is supported by a final feasibility study. In addition, under UK GAAP, provisions made against exploration and evaluation in prior years can be reversed when the project proceeds to development to the extent that the relevant costs are recoverable. US GAAP does not allow such provisions to be reversed.
Pensions/post retirement benefits Under UK GAAP, post retirement benefits are accounted for in accordance with Statement of Standard Accounting Practice 24. The expected costs under defined benefit arrangements are spread over the service lives of employees entitled to those benefits. Variations from the regular cost are spread on a straight line basis over the expected average remaining service lives of relevant current employees. Under US GAAP, the annual pension cost comprises the estimated cost of benefits accruing in the period adjusted for the amortisation of the surplus arising when FAS 87, 'Employers' Accounting for Pensions', was adopted. The charge is further adjusted to reflect the cost of benefit improvements and any surpluses/deficits that emerge as a result of variances from actuarial assumptions. For US purposes, only those surpluses/deficits outside a 10 per cent fluctuation 'corridor' are spread.
The reduction in shareholders' funds at 31 December 2002 and 2001 also includes the effect of the US GAAP requirement to make immediate provision for pension fund deficits through other comprehensive income. The provision reflects the reduction in equity values in the relevant years.
Higher cost of sales resulting from acquisition accounting Under UK GAAP, 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. Earnings for 2001 and 2000 are lower under US GAAP as a result of the higher cost of sales relating to inventories that were held at the date of acquisition.
Share option plans Under UK GAAP, no cost is accrued where the option scheme applies to all relevant employees and the intention is to satisfy the share options by the issuance of new shares. Prior to 2002, under US GAAP the Group accounted for share option plans under the recognition and measurement provisions of APB Opinion No. 25, 'Accounting for Stock Issued to Employees', and related Interpretations. In 2002, the Group adopted the fair value recognition provisions of FAS 123, ' Accounting for Stock-Based Compensation', which is considered by the SEC to be a preferable accounting method for share based employee compensation. As permitted by FAS 148, 'Accounting for Stock-Based Compensation - Transition and Disclosure' , all prior periods presented have been restated to reflect the compensation cost that would have been recognised had the recognition provisions of FAS 123 been applied to all awards granted to employees after 1 January 1995. An adjustment is therefore re quired to reflect the increased cost of the schemes under US GAAP compared to UK GAAP. Fair value is determined using an option pricing model.
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OtherOther adjustments to earnings include amounts related to differences between UK and US accounting principles in respect of depreciation of mining assets, revenue recognition, start up and close down and restoration costs (see below).
Depreciation of mining assets Under UK GAAP, mining assets are fully depreciated over their economic lives or the remaining life of the mine if shorter. In some cases, mineral resources that do not yet have the status of reserves are taken into account in determining depreciation charges, where there is a high degree of confidence that they will be mined economically. For US GAAP, only 'proven and probable reserves' are taken into account in the calculation of depreciation, depletion and amortisation charges. As a result, adjustments have been made in 2002 to depreciation included in 'Other' that reduced Rio Tinto Group US GAAP pre tax earnings by US$10 million (2001: US$6 million), increased Rio Tinto plc pre tax earnings by US$3 million (2001: US$3 million) and reduced Rio Tinto Limited's pre tax earnings by US$20 million (2001: US$15 million).
Revenue recognitionStaff Accounting Bulletin No. 101 (SAB 101) 'Revenue Recognition in Financial Statements' has the result that, in some cases, sales recorded as revenue under UK GAAP are deferred and are not recognised as revenue under US GAAP until a future accounting period. Occasionally, sales of goods recorded as revenue for UK GAAP purposes may be kept in store by Rio Tinto at the request of the buyer. Under US GAAP, such transactions cannot be recognised as revenue unless the goods are physically segregated from the supplier's other inventory and certain additional criteria are met. Also, under UK GAAP, certain sales contracts are recognised as revenue when the goods are delivered to the ship for export to the customer; but do not qualify for recognition under US GAAP until they have reached the destination specified by the customer in the sales contract and title has passed. In 2002, such timing differences resulted in an adjustment, included in 'Other', that increased US GAAP pre-tax earnings of the Rio Tinto Group by US$4 million, Rio Tinto plc's pre-tax earnings by US$2 million and Rio Tinto Limited's pre-tax earnings by US$4 million (2001: increased US GAAP pre-tax earnings of the Rio Tinto Group by US$5 million, Rio Tinto plc US$4 million, Rio Tinto Limited US$1 million), (2000: reduced US GAAP pre tax earnings of the Rio Tinto Group by US$16 million, Rio Tinto plc US$11 million, Rio Tinto Limited US$9 million).
Start up costsUnder US GAAP, Statement of Position 98-5, 'Reporting on the Costs of Start-up Activities', requires that the costs of start up activities are expensed as incurred. Under UK GAAP, some of these start up costs qualify for capitalisation and are amortised over the economic lives of the relevant assets.
ProvisionsAdditional provisions were recognised for UK GAAP purposes on implementation of FRS 12 in 1999. There was no corresponding change in US accounting standards. The additional provisions are therefore reversed in the calculation of shareholders' funds under US GAAP.
TaxationRio Tinto has implemented FRS 19, the new UK Accounting Standard on deferred tax. This has resulted in a prior year adjustment under UK GAAP, which reduced shareholders’ funds at 1 January 2001 by US$133 million. Of this amount, US$46 million results from the requirement under FRS 19 to provide in full for deferred taxation on most timing differences. These additional provisions were already recognised under US GAAP. The remaining US$87 million of the prior year adjustment relates to features of FRS 19 that give rise to new variations from US GAAP. Accordingly, this element of the prior year adjustment has been reversed in arriving at US GAAP shareholders’ funds. These variations, which also affect the determination of earnings under US GAAP, relate principally to the following:(a) Under FRS 19, provision for taxes arising on remittances of earnings can only be made if the dividends have been accrued or if there is a binding agreement for the distribution of the earnings. Under US GAAP, provision must be made for tax arising on expected future remittances of past earnings. (b) Under FRS 19, tax benefits associated with goodwill charged directly to reserves in 1997 and previous years must be accumulated in the deferred tax provision. This means that the tax benefits are not included in earnings until the related goodwill is charged through the profit and loss account on disposal or closure. For US GAAP, no provision is required for such deferred tax because the goodwill that gave rise to these tax benefits was capitalised and gives rise to amortisation charges against profit.
Deferred tax on acquisitions Under UK GAAP, deferred tax is not provided in respect of upward fair value adjustments to tangible fixed assets and inventories made on acquisitions. Under US GAAP, deferred tax must be provided on all fair value adjustments to non monetary assets recorded on acquisition with a consequential increase in the amount allocated to mining properties or goodwill as appropriate.
Profit contribution from equity accounted operations Under US GAAP, investments in affiliates are accounted for using the equity method, and the reporting entity's share of the after tax profits and losses of its affiliates is included in the income statement as a single line item. Under UK GAAP, the reporting entity's share of the trading results of its associates and joint ventures is split in the profit and loss account between its share of their operating profits/losses, interest receivable/payable and taxation. The Group's share of the after tax profits and losses of associates and joint ventures is shown in its 'Statement of Total Recognised Gains and Losses'.
Consolidated statement of cash flows The consolidated statement of cash flows prepared in accordance with FRS 1 (revised) presents substantially the same information as that required under US GAAP. Under US GAAP, however, there are certain differences from UK GAAP with regard to the classification of items within the cash flow statement and with regard to the definition of cash and cash equivalents. Under US GAAP, tax paid and interest would form part of operating cash flow. Similarly, deferred stripping costs which are shown as capital expenditure under UK GAAP are included in operating cash flow for the purposes of the US GAAP cash flow disclosure. Under UK GAAP, cash for the purposes of the cash flow statement is defined as cash on hand and deposits repayable on demand with any qualifying financial institution, less bank borrowings from any qualifying financial institution repayable on demand. Deposits are repayable on demand if they can be withdrawn at any time without notice and without penalty or if a maturity or period of notice of not more than 24 hours or one working day has been agreed. Under US GAAP, cash equivalents comprise cash balances and current asset investments with an original maturity of less than three months and exclude bank borrowings repayable on demand.
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Unrealised holding gains and losses UK GAAP permits current asset investments to be valued at the lower of cost and net realisable value. Under US GAAP, FAS 115 requires that unrealised holding gains and losses on investments classified as 'available for sale' are excluded from earnings and reported instead within a separate component of shareholders' funds until realised.
Adjusted earningsAs permitted under UK GAAP, adjusted earnings and adjusted earnings per share have been presented excluding the impact of exceptional charges to provide a measure that reflects the underlying performance of the Group. This is in addition to the presentation of earnings and earnings per share, which include the exceptional charges. In accordance with US GAAP, earnings and earnings per share have been presented based on US GAAP earnings, without adjustment for the impact of exceptional charges. Such additional measures of underlying performance are not permitted under US GAAP.
New US accounting standards In July 2001, the Financial Accounting Standards Board ('FASB') issued FAS 143, 'Accounting for Obligations Associated with the Retirement of Long-Lived Assets'. FAS 143 will be effective for the financial year ending 31 December 2003. The standard requires that the obligation for close down and restoration costs is capitalised at the time of recognition. The asset is subsequently amortised over its useful life and the discount on the liability is unwound. The Group is currently evaluating the impact of this statement on its results of operations and financial position, however, the expectation is that the current GAAP difference relating to closure provisions made under the UK standard FRS 12 will be largely eliminated.
In July 2002, the FASB issued FAS 146, 'Accounting for Costs Associated with Exit or Disposal Activities'. The statement requires companies to recognise costs associated with certain exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. FAS 146 will be applied by the Group prospectively to applicable exit or disposal activities initiated after 31 December 2002. The adoption of FAS 146 is not expected to have a material effect on the reported financial position, results of operations or cash flows of the Rio Tinto Group.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45) ‘Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others’. FIN 45 elaborates on the existing disclosure requirements for most guarantees and requires entities to recognise, upon issue of a guarantee, an initial liability for the fair value, or market value, of the associated obligation with disclosure of that information in its interim and annual financial statements. FIN 45 will be effective, on a prospective basis, to guarantees issued or modified after 31 December 2002. The adoption of FIN 45 is not expected to have a material effect on the reported financial position, results of operations or cash flows of the Rio Tinto Group.
The disclosure requirements of FIN 45 apply to these accounts and the following information is given in response to these.
Note 29 to the financial statements discloses indemnities and other performance guarantees totalling US$145 million on which no material loss is expected. This includes US$15 million relating to the Group's commitment to pay deferred consideration in relation to acquisitions of mining properties in 2002 and previous years. This does not include guarantees of payment of US$341 million entered into by the Group relating to deferred consideration arising from such acquisitions because the deferred consideration has been recognised as a liability within the Group's balance sheet. The disclosure in note 29 also includes guarantees for up to US$32 million relating to the costs of infrastructure financed by certain government authorities, which would be subject to reimbursement by the Group if the facilities are not completed or certain tests relating to the related project are not met. Of the remaining US$98 million disclosed in note 29, US$25 million would be s ubject to reimbursement by a third party in the event that the Group was required to make payment under the guarantees.
In addition to the above, the Group has issued guarantees and indemnities totalling US$546 million relating to its close down, restoration and environmental remediation obligations. These are not disclosed as contingent liabilities because the obligations are included in the amounts recognised in the balance sheet as provisions for liabilities and charges.
A Group company has guaranteed that the quality of product from a joint venture in which it participates will be in accordance with agreed specifications. It has also undertaken to make up any shortfalls from minimum ore reserve quantities over the life of the joint venture. Currently, no shortfalls are anticipated.
As explained in note 14 to the financial statements, the Group has a partnership interest in the Colowyo Coal Company and has undertaken, via a subsidiary company which entered into a management agreement, to cause the partnership to perform its obligations under certain coal supply contracts. The debt of US$173 million owed by the Colowyo Coal Company is to be serviced and repaid out of the proceeds of these contracts.
In January 2003, the FASB issued interpretation No. 46, 'Consolidation of Variable Interest Entities' (FIN 46). Under FIN 46, certain entities labelled “Variable Interest Entities” (VIE), must be 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. For VIE’s in which a significant variable interest is held that is not a majority interest, certain disclosures are required. Full implementation of this interpretation is required in the Group’s financial statements for the year to 31 December 2004; but certain disclosures are required in the meantime, which are set out below.
The Group has a 20% general partnership interest in the Colowyo limited partnership, which was acquired for US$25 million in December 1994. This joint venture may fall within the definition of a Variable Interest Entity set out in FIN 46. The Colowyo joint venture produces coal, which is sold under long-term contracts. Colowyo’s total sales revenues for 2002 were US$108 million and its total assets as at 31 December 2002 were US$101 million. It is included in the Group accounts on the equity accounted basis and the carrying value of the net investment at 31 December 2002 was US$8 million under US GAAP.
Colowyo has bonds in issue with outstanding capital of US$173 million at 31 December 2002. These are repayable by instalments up to 2016 with interest at rates between 9.56% and 10.19% per annum. The bonds are to be serviced and repaid exclusively out of the net revenues from certain specified sales contracts relating to coal supplies by Colowyo. The bondholders bear the risks of loss that might arise if the revenues are interrupted due to failure of the purchasers or force majeur. The Rio Tinto Group is responsible under a management contract in which it agreed, for the sole and exclusive benefit of the bondholders, to cause Colowyo to perform its obligations under the specified coal sales contracts.
New UK accounting standards Mandatory implementation of FRS 17 - 'Retirement Benefits' has been delayed until 2005 but additional disclosures are required for 2001 and 2002 which are included in note 40 to the financial statements.
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Post Retirement benefits
Information in respect of the net periodic benefit cost and related obligation determined in accordance with FAS 87,106 and 132 is given below.
Benefits under the major pension schemes are principally determined by years of service and employee remuneration.
Pension scheme funding policy is based on annual contributions at a rate that is intended to fund benefits as a level percentage of pay over the working lifetime of the scheme's participants. The assets of the UK schemes are invested primarily in UK and overseas equities and UK fixed interest stocks. The assets of the Australian schemes are invested primarily in Australian and overseas equities and fixed interest stocks.
The assets of the most significant pension schemes outside the UK and Australia are invested primarily in common stocks, corporate and treasury bonds, real estate or real estate investment funds, under the direction of investment managers.
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 US. The plans are non contributory, although some contain an element of cost sharing such as deductibles and co-insurance.
Assumptions used to determine the net periodic benefit cost and the year end benefit obligation for the major pension schemes varied within the limits shown below. The average rate for each assumption has been weighted by benefit obligation. The assumptions used to determine the end of year benefit obligation are also used to calculate the following year's cost.
The actuarial calculations in respect of the UK plans assume a rate of increase of pensions in payment of 2.5 per cent per annum. The actuarial calculations in respect of Australian plans assume a rate of increase of pensions in payment of 2.5 per cent per annum. These assumptions are consistent with the expected rates of return and salary increase assumptions in the respective valuations. Appropriate assumptions were made for plans in other countries.
The weighted average discount rates used in determining the benefit obligation for the major post retirement benefit plans other than pension schemes were 7.5 per cent and 6.5 per cent as of 30 September 2001, and 30 September 2002, respectively. A healthcare cost trend rate of 8.5 per cent, decreasing to 5.0 per cent by the year 2009, was used for 2002 costs. A healthcare cost trend rate of 8.0 per cent, decreasing to 5.0 per cent by the year 2009 was used to determine the benefit obligation at 30 September 2002.
The components of net benefit expense are detailed in the table below.
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Accumulated foreign currency translation gains and losses recorded directly in shareholders' funds under US GAAP
Additional US GAAP cash flow information
A summary of Rio Tinto's operating, investing and financing activities classified in accordance with US GAAP is presented below:
Funded status of the Group's principal schemes.
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The healthcare cost trend rate assumption has a significant effect on the amounts reported. Changing the healthcare cost trend rates by one per cent would result in the following annual effects:
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There was an exchange loss for the Rio Tinto Group of US$47 million, an exchange loss for Rio Tinto plc of US$28 million and for Rio Tinto Limited an exchange loss of US$19 million (2001: gain for the Group of US$1 million, gain for Rio Tinto plc US$2 million, loss for Rio Tinto Limited US$1 million) relating to US GAAP cash and cash equivalents during the year.
Deferred tax credit/(charge)
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Fixed asset investments
The aggregates of the profit and loss accounts and balance sheets of equity and gross equity accounted companies on a 100 per cent basis are set out below:
For Rio Tinto plc the above disclosures include 100 per cent of the profit and loss account and balance sheet of Rio Tinto Limited
AcquisitionsThe following information gives pro forma effect to the acquisitions of North, Ashton and the Comalco minority made by Rio Tinto Limited during 2000 as if those acquisitions had taken place on 1 January 2000 as required for the purposes of preparing the unaudited pro forma combined results ('the pro forma') for 2000. The pro forma contains the consolidated results of Rio Tinto Limited and its acquisitions after giving effect to certain adjustments. These adjustments include estimates of the effect on the pro forma of Rio Tinto Limited's accounting policies, as applied to the results of the acquisitions, the fair value adjustments calculated at the acquisition date; and the increased net interest expense, together with the associated tax effects, as a result of financing the acquisition. The pro forma does not necessarily reflect the results of operations as they would have been if Rio Tinto Limited and the acquired companies had constituted a single entity during 2000.
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Unrealised holding gains and lossesUnder FAS 115, unrealised holding gains and losses on investments classified as 'available for sale' are excluded from earnings and reported instead within a separate component of shareholders' funds until realised.
The following tables show the investments in debt and equity securities which are held as 'available for sale' in accordance with FAS 115 for the Rio Tinto Group, Rio Tinto plc and Rio Tinto Limited.
Share Option Plans
At 31 December 2002, Rio Tinto plc and Rio Tinto Limited have a number of share based option plans, which are described below:
Fixed Share Option Plans
Under these plans, the exercise price of each option equals the market price of the Company's shares on the date of grant less a 20% discount and the maximum term of the option is between 2 and 5 years.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2000, 2001 and 2002:
A summary of the status of the Companies’ fixed share option plans as at 31 December 2000, 2001 and 2002, and changes during the years ending on those dates is presented below:
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At 31 December 2001 and 31 December 2000 there were no options exercisable
At 31 December 2001 and 31 December 2000 there were no options exercisable.
Performance Based Share Option PlanUnder its 1998 Executive Share Option Scheme and Share Option Plan, the Company grants selected executives and other key employees share option awards vesting of which is contingent upon increases in the Company's earnings per share above certain predetermined target levels. The exercise price of each option, which has a 10-year life, is equal to the market price of the Company's shares on the date of grant.
A summary of the status of the Company's performance-based share option plan as of 31 December 2001 and 2002, and changes during the years ending on those dates is presented below:
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At 31 December 2001 there were 1 million (2000: nil) options exercisable with a weighted average exercise price of £8.20
At 31 December 2001 there were 0.2 million (2000: nil) options exercisable with a weighted average exercise price of A$20.14
As at 31 December 2002, Rio Tinto plc has 0.06 million performance options outstanding under the 1998 Executive Share Option Scheme with exercise prices between £6.89 and £8.61. These options have vested and have a weighted average remaining life of 1.3 years.
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42 Reconciliation to US Accounting Principles (continued) The following supplements segmental information provided elsewhere in this report to provide additional information required under US GAAP
Covenants Of the Rio Tinto Group's medium and long term borrowings of US$2.7 billion, some US$0.6 billion relates to the Group's share of non-recourse borrowings which are the subject of various financial and general covenants with which the respective borrowers are in compliance.
Intangible assets under US GAAP (Rio Tinto Group and Rio Tinto plc) The implementation of FAS 141 resulted in the reclassification of US$340 million from goodwill to finite lived intangible assets at 1 January 2002. The accumulated cost relating to these intangible assets at 31 December 2002 was US$714 million and accumulated amortisation was US$394 million. The total amortisation expense was US$68 million of which US$20 million is related to the amortisation of goodwill previously written off to reserves under UK GAAP now reclassified as finite lived intangible assets under US GAAP. The remaining US$48 million relates to the amortisation of goodwill included as an asset on the UK GAAP balance sheet but now reclassified as finite lived intangible assets under US GAAP. The estimated amortisation charge relating to intangible assets for each of the next five years is US$68 million.
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Accounting for derivative instruments and hedging activities
During 2002, the following movements, pre tax and minorities, took place in Other comprehensive income (OCI) and earnings in relation to net derivative liabilities:
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