Rio Tinto - 20-F annual report

Our business performed well in 2012, generating strong cash flows and underlying earnings of US$9.3 billion. Although lower than last year, principally due to lower commodity prices and higher costs, these results demonstrate the quality of our assets and the sustainable cash-generating abilities of our underlying businesses.

However, as foreshadowed at the beginning of the year, we recorded impairments of US$14.4 billion, resulting in the Group reporting a net loss of US$3 billion for 2012. These write-downs are deeply disappointing. In particular the substantial impairment of our Mozambique coal business is unacceptable.

Following these impairments, Tom Albanese stood down from the board by mutual agreement, recognising his accountability as chief executive for these impairments. On behalf of the board, I would like to acknowledge Tom’s contribution and dedication to the company over his 30 years of service.

The board’s objective is to ensure that the business delivers sustainable growth in value to you, our shareholders. Your directors are confident that Sam Walsh, who succeeded Tom Albanese as chief executive, will lead a renewed and focused organisation to do just this and we are working closely together with this objective in mind.

Disciplined capital management

Your board aims to unlock greater value for our shareholders through investing in the best opportunities to deliver attractive returns that are well above our cost of capital.

Recent events demonstrate that there is a need for greater discipline across our business, particularly in the way we manage and allocate capital. Under Sam’s leadership, we will be simplifying and strengthening our systems in this area, and seeking greater accountability for decision-making across the organisation.

Your board regularly evaluates opportunities put forward by the business against all competing uses for cash, striving to achieve the right balance between disciplined investment, strengthening our balance sheet and returning cash to investors.

Our commitment to a strong balance sheet, ensures discipline and flexibility in our investment approach, helping us to build a robust and strongly performing business over the long term.

Our confidence is reflected in the 15 per cent increase in our annual dividend in 2012. Our cash returns to shareholders totalled US$4.5 billion in 2012, including completion of the Group’s US$7 billion share buy-back programme as well as the ordinary dividend payment.

Focus of the board

One of the primary roles of Rio Tinto’s board is to provide oversight of strategy development and delivery, while maintaining the highest standards of corporate governance.

The board conducted its annual strategy review with the executive team in September, reaffirming our commitment to invest in and operate large, long-term, expandable, low-cost mines and businesses. The board also took the opportunity in 2012 to visit a number of the Group’s operations in Australia and Southern Africa to gain a deeper understanding of the strategic issues at play.

Amidst continuing volatility in the global economy and major structural shifts affecting the sector, improvements need to be made in how we execute this strategy. The board has tasked Sam Walsh and his executive team with ensuring we improve capital allocation, deliver our growth projects and improve productivity at all of our sites, while building on our industry leading capabilities in areas such as stakeholder engagement and sustainable development.

As geopolitical risks continue, we have continued to look for new ways to form more effective relationships and partnerships around the world. Rio Tinto has always taken its role as a responsible business very seriously.

We believe earning the trust of our host communities and governments is vital in creating sustainable shareholder value. As the company enters its 140th year of operation this year, we recognise we wouldn’t still be in business without the support of our many stakeholders.

In 2012, considerable time was spent engaging with investors on issues ranging from our capital allocation methodology to executive remuneration. More recently, we undertook an assessment of board effectiveness and, for the first time, the board’s annual evaluation was conducted by an independent expert. Considerable attention will be given to the outcomes of our shareholder engagement and this evaluation exercise in the year to come.

In my letter last year, I commented on the importance of succession planning. My goal is to make sure the board combines a broad set of skills and international experience. Rio Tinto’s board should be diverse in the widest sense with the best blend of appropriately skilled and experienced people from our industry, but also outside of it.

We announced last year that Guy Elliott will step down from the board at the end of 2013. I would like to thank Guy for his invaluable contribution over 33 years with the company. Chris Lynch, who joined the board as a non-executive director in 2011, will formally succeed Guy as chief financial officer on 18 April at the conclusion of the Rio Tinto plc annual general meeting. We are fortunate to have appointed someone so well-qualified to take over from Guy.

As well as succession planning, the board committees have always played an important oversight role, freeing the board to focus on strategic matters. All of our committees have been very active this year and have dealt with a number of challenges. I would like to record my personal appreciation to all of the directors who have been unstinting in their considerable support in a challenging year.

Our Remuneration Committee has taken a fresh look at our reward structures to ensure we recruit, motivate and retain the best talent, but not at any cost. I believe our approach to rewarding our people must balance the company’s priorities of driving financial performance, meeting our expectations as a corporate citizen and creating greater value for our shareholders.

Looking ahead

The wider world did not stand still in 2012. The macroeconomic environment remained volatile, and prices for our products were generally lower than the year before. However, the global economy ended the year in a healthier state than forecast, with a recovery in China, and greater confidence in a recovery in the Organisation for Economic Co-operation and Development (OECD) countries.

We remain very positive about the long-term future of our business. As billions of people move from rural to urban areas over the coming decades, there will be increased demand for the metals and minerals we produce.

This is a great company, pursuing a consistent strategy with a renewed executive team and excellent people. I thank you and all of our employees for your continued support. When I report back to you on Rio Tinto’s progress at this point next year, I am sure I will be reporting on an even stronger and safer organisation focused on delivering value for each of you, our shareholders.

Jan du Plessis

Chairman

6 March 2013

Introduction to Rio Tinto

Rio Tinto is a leading international mining group that focuses on finding, mining and processing the Earth’s mineral resources in order to maximise shareholder value. We have a diverse portfolio and a global presence: our 71,000 people work in more than 40 countries.

To deliver superior returns to shareholders over time, we take a long-term and responsible approach to our activities. This means concentrating on developing first-class orebodies into large, long-life and efficient low-cost operations, capable of providing competitive returns through business cycles.

Sustainable development is integrated into everything we do. Our operations give us the opportunity to bring long-lasting positive change to the communities, regions and countries in which we work, and our metals and minerals are transformed into end products that contribute to higher living standards.

Our responsible approach to mineral development ensures we gain and maintain our licence to operate. It means we provide confidence to our stakeholders, and improve our access to the mineral resources, people and capital we need. Our five product groups summarised below are supported by our Exploration and Technology & Innovation groups (also see pages 22 to 31).

Aluminium product group

Building on more than a century of experience and expertise, Rio Tinto Alcan is a global leader in the aluminium industry. Our fully-integrated facilities include high-quality bauxite mines, large-scale alumina refineries, and some of the world’s lowest-cost, most technologically-advanced primary aluminium smelters.

Bauxite production (2012 vs 2011)

+11%

Products

Bauxite

Bauxite is the natural ore used to make aluminium. It is refined into alumina which is smelted into aluminium metal. Our wholly-owned and joint venture bauxite mines are located in Australia, Brazil and Guinea.

Alumina

Alumina (aluminium oxide) is extracted from bauxite via a refining process. Approximately four tonnes of bauxite are required to produce two tonnes of alumina, which in turn makes one tonne of aluminium metal. Our wholly-owned and joint venture alumina refineries are located in Australia, Brazil and Canada.

Aluminium

Aluminium is a unique and versatile modern metal. Light, strong, flexible, non-corrosive and infinitely recyclable, aluminium is one of the most widely-used metals. Its largest markets are transportation, machinery and construction. Our smelters are mainly concentrated in Canada. We also have plants in France, Cameroon, Iceland, Norway, the UK and the Middle East.

Key strengths

Full operating review on page 22.

Copper product group

Rio Tinto’s Copper group has a global presence and holdings in some of the world’s largest copper mines. We are among the world’s largest producers of copper, gold and molybdenum, and are uniquely positioned to deliver exceptional long-term value due to our high-quality assets, leading technology and a keen focus on managing costs and improving efficiency.

Mined copper production (2012 vs 2011)

+6%

Products

Copper

The world uses more than 19 million tonnes of copper every year. Copper’s malleability, strength and conductivity make it useful in a broad range of building, construction and electrical applications. Copper is found in nearly every home and vehicle and is a critical element of today’s industrialised world.

Gold

Gold’s conductivity and non-corrosive properties make it a vital fabrication material in technology, electronics, jewellery, space exploration and dentistry. Rio Tinto is currently one of the top 15 gold producers in the world, and the largest among the diversified miners. We have interests in two of the largest gold resources, at Oyu Tolgoi and Grasberg. The latter contains the largest gold reserves in the world.

Silver

Silver has very good electrical and thermal properties. It is used in many electrical and electronic applications, such as photovoltaic cells, and is the principal ingredient of x-ray film. Silver is also regarded as a precious metal used as an investment and to make jewellery.

Molybdenum

Molybdenum is a metallic element frequently used to produce stainless steel and other metal alloys. It enhances the metal’s toughness, high temperature strength and corrosion resistance.

Key strengths

Full operating review on page 24.

Diamonds & Minerals product group

The Diamonds & Minerals group comprises mining, refining and marketing operations across four sectors. Rio Tinto Diamonds is one of the world’s leading diamond producers, active in mining, sales and marketing. Rio Tinto Minerals is a world leader in borates, with mines, processing plants, commercial and research facilities. Dampier Salt is one of the world’s largest producers of seaborne salt. Rio Tinto Iron & Titanium is an industry leader in high grade titanium dioxide feedstocks. The Diamonds & Minerals group also includes the Simandou iron ore project in Guinea.

Titanium dioxide production (2012 vs 2011)

+11%

Products

Diamonds

Diamonds share a role with gold as an important component in jewellery that ranges from top-end jewellery through to more affordable diamond jewellery accessories. Rio Tinto is able to service both established and emerging markets as it produces the full range of diamonds in terms of size, quality and colour distribution.

Borates

Refined borates are used in hundreds of products and processes. They are a vital ingredient of many home and automotive applications, and are essential nutrients for crops. They are commonly used in glass and ceramic applications including fibreglass, television screens, floor and wall tiles, and heat-resistant glass.

Salt

Salt is one of the basic raw materials for the chemicals industry and is indispensable to a wide array of automotive, construction and electronic products, as well as for water treatment, food and healthcare.

Titanium dioxide

The minerals ilmenite and rutile, together with titanium dioxide slag, can be transformed into a white titanium dioxide pigment or titanium metal. The white pigment is a key component in paints, plastics, paper, inks, textiles, food, sunscreen and cosmetics. Titanium metal’s key properties of light weight, chemical inertness and high strength make it ideal for use in medical applications and in the aerospace industry.

Other products include high purity iron, metal powders, zircon and rutile.

Key strengths

Full operating review on page 26.

Energy product group

We are a leading seaborne supplier of thermal and coking coal to Asian customers and are one of the world’s largest uranium producers, serving electric power utilities worldwide. The Rio Tinto Energy product group has operations, exploration and development projects in Australia, southern Africa and Canada.

Thermal coal production (2012 vs 2011)

+16%

Products

Coal

Coal is abundant, relatively inexpensive and safe and easy to transport. We are a large supplier to the export thermal coal market. Thermal coal is used for electricity generation in power stations. We also produce higher-value coking, or metallurgical, coal which, when mixed in furnaces with iron ore, produces steel.

Uranium

Uranium is one of the most powerful natural energy sources known, used in the production of clean, stable, base-load electricity. After uranium ore is mined, it is milled into uranium oxide – the mine product that is sold for processing into fuel rods for use in nuclear power stations.

Key strengths

Full operating review on page 28.

Iron Ore product group

We are the second-largest producer supplying the global seaborne iron ore trade. After a decade of rapid expansion in Australia, and more recent growth in Canada, we are well positioned to benefit from the continuing strong demand in China and other Asian markets. We are driving performance through effective project management and value-adding operational efficiencies.

Iron ore production (2012 vs 2011)

+4%

Products

Iron ore

Iron is the key ingredient in the production of steel, one of the most fundamental and durable products for modern-day living, with uses from railways to paperclips. Our iron ore mines are located in Australia and Canada.

Key strengths

Full operating review on page 30.

I am proud to be leading your company and am committed to building a stronger business focused on pursuing greater value for you, our shareholders.

My more than 20 years’ experience with Rio Tinto, including as a member of the board for the past four years, has shown me that we have great assets, outstanding people and the right strategy. We will now have a single-minded focus on how we deliver this strategy in every market in which we operate, everywhere around the world.

I place the highest importance on upholding our values and ensuring safety is paramount in everything we do.

In 2012, while we did experience safety improvements, there were two fatalities at our managed operations and, earlier this year, a fatality at our La Granja project in Peru. I will never let up in my constant efforts to improve safety, to reinforce our strong safety culture, and to ensure that every employee and contractor plays their part in making our workplaces safer.

Highlights of 2012

The pattern of market uncertainty and volatility we have seen since the global financial crisis continued in 2012. Yet despite this, our underlying financial results were solid, indicating the fundamental strength of our businesses.

This was mainly driven by a strong operational performance from some of our businesses. Our iron ore business delivered record production and shipments, and our copper business showed a second half recovery in copper volumes.

We also experienced production increases in bauxite, alumina, thermal coal and titanium dioxide feedstock.

The mining sector has experienced unacceptable levels of cost increases over the past five years. During 2012 all of our management teams were focused on improving productivity to ensure our assets are at the lower end of the total cost curve.

We are continuing to see the benefits of cost savings from our aluminium transformation programme and through the review of support and service costs across the business – but clearly much more remains to be done.

We are taking a more aggressive approach to assets in our portfolio that no longer fit our strategy. We achieved further cash proceeds from our divestment programme in 2012, with the sale of several non-core businesses including Lynemouth Power Station, the North American and Chinese portions of the Alcan Cable business, our Specialty Alumina division, and we secured a binding agreement to sell our interest in Palabora. We also made good progress on exploring options for our Pacific Aluminium and Diamonds businesses. This focus will continue in 2013.

Growth programme

Our total capital expenditure for 2012 was US$17.4 billion, reflecting investment in the high value growth of our business, in particular our world-leading iron ore operations in the Pilbara and the greenfield copper-gold project, Oyu Tolgoi, in Mongolia.

We also continued to invest in a number of other growth projects throughout 2012, such as our iron ore project in Guinea, our aluminium smelting project in Kitimat, and a project to extend the life of the Group’s Kennecott Utah Copper mine.

2012 was our peak capital expenditure year and, given our commitment to greater capital discipline, we are reviewing all capital commitments in 2013.

Delivering our strategy

Under my watch, our strategy will not change – but how we deliver it will. We will consistently execute our strategy in all of our markets with a focus in three key areas in 2013:

Prioritise our capital expenditure on the highest quality projects and improve the way we manage capital. In addition, we are taking a more aggressive portfolio approach to divest assets that no longer fit our strategy.

Our immediate priority is to improve performance at our existing businesses by unlocking productivity improvements, aggressively reducing operating and support costs, controlling sustaining capital spend and leveraging our expertise across all stages of our operations. We are targeting cumulative cash cost savings of over US$5 billion over the next two years, which will see an annual run rate improvement of US$3 billion by the end of 2014.

During 2013, we continue to focus on delivering our two significant growth projects – our Iron Ore business in Australia and our Oyu Tolgoi copper-gold project in Mongolia – in a risk-managed, value-enhancing manner. See page 6 for more detail on what you can expect from us in 2013. In my drive to increase accountability, I have made some changes to my executive team. I welcome two new members – Jean-Sébastien Jacques and Chris Lynch – and congratulate Andrew Harding on his move to head our iron ore business. I have also announced some further streamlining of my executive team, reducing my direct reports from 11 to nine.

Ongoing commitment

We expect market uncertainty and price volatility to persist in 2013, but there are positive signs emerging. In China specifically, momentum is growing under its new leadership, and we expect to see Chinese GDP growth above eight per cent in 2013.

China will remain important to us, but I also expect to see strong demand growth from India, Indonesia and other South East Asian countries as they also urbanise and industrialise. It is this outlook that gives us confidence to invest in high-value growth projects, and underpins our expectation of strong future cash generation.

The company has a renewed and strong leadership team, supported by outstanding people. I would like to thank our 71,000 employees around the world for their dedication and resilience. In many parts of our operations we faced some testing times and there will be more to come.

I remain fully confident in the long-term prospects of the business. We have the right strategy to deliver sustainable growth over the long term to meet the world’s resourcing needs. In the short term, I am certain of what needs to be done and we are taking decisive steps with a clear plan to build a stronger, more accountable business.

Finally, I would like to thank you, our shareholders, for your continued support. I am committed to making a real difference – building on Rio Tinto’s strong foundations to put us firmly on the path of delivering greater shareholder value.

Sam Walsh

Chief executive

6 March 2013

Global economy

The global economy continues to deal with the aftermath of the global financial crisis (GFC) and associated volatility. European policymakers held successive summits during 2012 to tackle tensions from excessive sovereign debt levels in the eurozone, and debate the balance between austerity and growth policies.

In the US, employment remained below 2008 levels, forcing the Federal Reserve to launch a third round of quantitative easing to further stimulate a recovery.

In contrast, the Chinese government maintained policies to control inflation and other effects from the 2009 stimulus and excess liquidity. This led to a sharper slowdown than expected during the third quarter of 2012 in China, contributing to fears that the global economy was heading for a new recession.

Political leadership transition in China added to the perception of uncertainty in 2012, forcing markets towards greater risk aversion. This was felt strongly in commodity markets, with prices for some metals and minerals experiencing large fluctuations during the year. On average, prices for most commodities were ten to 20 per cent lower than in 2011, although they remained at high levels in the longer historical context. Cost escalations, project delays and other supply constraints continued, in many cases, to offset a weaker and more uncertain demand growth environment.

Towards the end of 2012, several encouraging developments started to emerge. In Europe, action from the European Central Bank, combined with the release of bailout funds for Greece, reduced the likelihood of a Greek departure from the eurozone in 2013. It also provided European governments with more time to work towards further integration and greater resilience.

Economic activity started to pick-up again in China in the final quarter of 2012, alleviating fears of a hard-landing. Although liquidity controls in China are expected to remain in place, we would expect positive momentum to be carried into 2013, with Chinese GDP growth for the year moving back to just above eight per cent.

There remain many risks that could derail a stabilisation and improvement in global activity, including continued tensions in the Middle East. We expect volatility to remain a feature of our markets in 2013.

Our belief in the underlying and longer-term trend of rising prosperity in Asia remains unchanged. This will ultimately contribute to support and sustain an elevated level of global economic growth over the next couple of decades. While recognising that the commodity-intensive growth in China is maturing, the industrialisation and urbanisation forces associated with the economic development of emerging countries will continue to support demand for commodities.

Commodity markets

Commodity markets started 2012 relatively positively, with prices for most metals and minerals making a continued recovery from the declines experienced in the second half of 2011. However, prices largely peaked during the first quarter of 2012, sliding downwards throughout the rest of the year, with a sharp correction in the third quarter in the iron ore market. The price trends and volatility reflected the OECD macro-uncertainties described above and concerns from the market that China’s slowdown was signalling the end of investment-led, steel-intensive growth.

China is entering an important and necessary transition phase to rebalance its economy towards consumption-led growth. The near-term reform agenda remains unclear and is likely to generate volatility and uncertainty. Reforms and a rebalancing of the economy will ultimately be a positive development for the sustainability of growth in China. Overall, we expect a falling level of demand intensity for early development phase commodities, but absolute demand growth should remain strong over the next two decades and new opportunities will arise for late-cycle

commodities such as titanium dioxide and other industrial minerals. Our view remains that China’s steel demand will peak at around one billion tonnes per annum towards 2030. Over this timeframe, India and countries in South East Asia are expected to become increasingly important sources of demand for commodities, including steel.

Increasing capital intensity for mining projects was a persistent trend in 2012. This was a reflection of continued real labour cost escalation, declining resource grades and increased mining projects complexity. Through 2012 the mining industry also continued to face increased stakeholder pressures, highlighting the importance of proactive stakeholder engagement and good track records in sustainable development. Nevertheless, rising threats of resource nationalism, greater rent extraction by governments, or simply increased uncertainty, have implications for the economics and feasibility of projects across the industry.

Combined with significant price volatility and stronger calls from investors for near-term returns over long-dated options, these supply challenges are resulting in further investment delays and deferrals. Iron ore and copper projects are being particularly impacted.

Largely due to the supply-side challenges, copper prices remained at levels equivalent to pre-GFC prices throughout 2012. This is in sharp contrast with the aluminium market, where capacity and production in China continue to match the rapid pace of demand. Even so, physical market premia for aluminium reached new records in 2012. The availability of profitable financing deals continued to lock in access to surplus metal. Thermal coal was another market with less favourable supply and demand dynamics in 2012. Prices came under constant pressure throughout the first half of the year. Finally, following continued strong upward momentum at the start of 2012, rutile and zircon prices faced heavy downward pressures during the second half of the year from reduced Chinese buying.

Lower prices and continued cost escalations have put increasing pressure on margins across the mining industry. This is particularly true in Australia where the dollar has remained resilient to falling commodity prices. The country has attracted money-flows from investors reallocating funds away from Europe. The industry in general is starting to respond to the squeeze on margins through a renewed focus on productivity.

Outlook

As the world economy returns to the trend rate of growth, rising incomes and increased prosperity in developing countries – with associated industrialisation and urbanisation – will continue to drive demand for commodities. Looking to the future, our view remains that there will be high average demand growth in our markets while cost escalations and stakeholder pressures remain key challenges to grow future supply.

Financial performance

Figures above exclude aluminium assets identified for divestment or closure and that are now managed by the Business Support & Operations group.

Strategy and strategic priorities

The aluminium industry is likely to continue facing challenging market conditions for some years, as a structural shift has occurred, driven by the decoupling of the supply chain for bauxite, alumina and aluminium and the continued growth of the Chinese smelting industry. Against this backdrop, Rio Tinto Alcan is focused on a transformation strategy to improve the performance of the product group. This strategy has delivered improvements, but much more needs to be done in this market environment of depressed prices. Further action will be required to reduce costs, improve the productivity of the assets, and the returns that are generated on capital invested.

Rio Tinto Alcan is committed to achieving further significant performance improvements by delivering over US$1.6 billion of EBITDA improvement by the end of 2015 – from both strategic investments and business improvement initiatives. This will incorporate the Aluminium group’s contribution to Rio Tinto’s sustainable cost reduction targets by 2014. The annual run rate from sustainable business improvement initiatives is now exceeding US$460 million, with US$250 million delivered in 2012, as planned. Key elements of this ongoing second phase of Rio Tinto Alcan’s transformation include:

Safety

In 2012, the Aluminium product group’s all injury frequency rate deteriorated to 0.72, from 0.58 in 2011. Regrettably, in January there was one fatality, which resulted from an incident on the Roberval-Saguenay railway in Quebec, Canada. The product group’s ongoing priority is to implement the Zero Harm by Choice programme, as well as to continue deploying Rio Tinto HSE performance standards and risk management practices, to reach Rio Tinto Alcan’s ultimate goal of zero incidents. Process safety management has made significant progress, with reporting, investigation and analysis of significant potential incidents and completion of corrective actions as a main focus.

The Grande-Baie aluminium smelter in Quebec jointly won the 2012 Chief Executive Safety Award. Three Aluminium sites were recognised in other categories:

Greenhouse gas emissions

Rio Tinto Alcan accounted for 20 per cent of Rio Tinto’s total greenhouse gas emissions (GHG) in 2012, compared to 19 per cent in 2011. At year end, total GHG intensity was 24 per cent lower than 2008 baseline performance. The realised reductions made a significant contribution to the Rio Tinto Group’s overall total GHG intensity improvements. This sizeable reduction in emissions over the past several years is mainly related to the divestment or closure of non-core assets, as well as ongoing operational improvements that have combined to give Rio Tinto Alcan the lowest carbon footprint in the aluminium industry. Taking into account recent portfolio changes, 96 per cent of Rio Tinto Alcan’s power supply is carbon-free and falls into the lowest-cost quartile for energy. Aluminium produced using hydroelectricity – which currently represents some 83 per cent of the Aluminium product group’s power supply – has the lowest footprint with respect to primary energy consumption and climate change in lifecycle analysis studies.

Rio Tinto Alcan works closely with stakeholders to address sustainability concerns and help identify ways to foster greater transparency and sustainability throughout the aluminium industry.

During 2012, the Aluminium product group played a lead role as a co-founder of the Aluminium Stewardship Initiative (ASI), along with the International Union for Conservation of Nature and several other founding members. The mission of ASI is to define and deliver the first comprehensive global standard for the responsible production, use and re-use of aluminium. Rio Tinto Alcan also agreed to participate in Empreinte Carbone Québec, a pilot project launched by Quebec’s Ministry of Economic Development, Innovation and Export to develop a method for calculating carbon footprint.

Review of operations

Rio Tinto Alcan’s underlying earnings of US$3 million were US$439 million lower than in 2011, primarily from a significant deterioration in market conditions and the impact of the lock-out at the Alma smelter in Quebec. The combined impact of movements in prices and exchange rates, inflation and increasing prices for coke, pitch and caustic reduced underlying earnings by US$569 million year-on-year and lowered EBITDA margins by 11 per cent. This market impact was partially offset by controllable cash cost improvement initiatives which had a net positive impact of nearly four per cent on margins. The absence of the abnormal weather events that occurred in 2011 was outweighed by the impact of reduced operations from the lock-out at Alma.

Further deterioration in aluminium market conditions in 2012, together with strong currencies in certain regions and higher raw material costs, has had a negative impact on current market values in the aluminium industry. The annual impairment review for Rio Tinto Alcan and other aluminium businesses (including Pacific Aluminium)_(a) resulted in a post-tax impairment charge of US$11.0 billion, which includes goodwill impairment of US$6.0 billion.

The average aluminium market price in 2012 was US$2,018 per tonne, a decrease of 16 per cent from 2011. Rio Tinto Alcan’s average realised price for primary metal products in 2012 was US$2,383 per tonne, 12 per cent lower than US$2,715 in 2011.

Gross sales revenue for Rio Tinto Alcan decreased by 17 per cent compared with 2011. This was due to the combined effects of lower market prices across the product range and reduced production at Alma, offset by the Yarwun refinery expansion in Queensland, Australia.

Aluminium production decreased by nine per cent to 2.2 million tonnes in 2012. This was partly due to the lock-out at Alma – resolved through the signing of a new labour agreement. Two thirds of the smelter’s capacity was curtailed throughout the first half of the year. Alma was progressively returned to full production by January 2013. The new organisational design implemented after the negotiated labour agreement will enable productivity improvements and lower total operating costs. This new organisational design is now being deployed in other facilities and will contribute to further cost reductions in 2013.

Rio Tinto Alcan’s bauxite production was 31.4 million tonnes in 2012, 11 per cent higher than in 2011. Record production levels were achieved at Weipa in Queensland, Australia, as well as in Guinea. The increase in output was driven by production creep initiatives to supply requirements from the expanded Yarwun refinery, and increased third-party demand.

Alumina production increased 19 per cent to 7.0 million tonnes during 2012, as expanded refining capacity at Yarwun came on line. First bauxite was injected into the expanded Yarwun plant in July 2012. By September, the expanded refinery was operating at 90 per cent of its nameplate capacity of 3.4 million tonnes per annum. The ramp-up is on schedule to reach full capacity by the third quarter of 2013. Yarwun is moving the product group’s alumina production into the second quartile of the industry cost curve.

Development projects

Rio Tinto Alcan’s development pipeline is focused on developing its long-life Tier 1 assets, while strictly limiting growth in line with market conditions. Project characteristics include a low carbon footprint, low operating costs and attractive forecast returns on capital.

Feasibility and environmental impact studies are currently being completed for the South of Embley project. This would extend the life of the Weipa bauxite mine in Queensland, Australia by approximately 40 years, depending on production rates. The expansion would facilitate staged increases in production of up to 36 million dry product tonnes a year, from the current level of 23 million tonnes. It would enable the continuity of supply to Rio Tinto Alcan’s two Gladstone alumina refineries and capitalise on the rapidly-growing third-party market for seaborne bauxite.

Two major smelting projects under way in Canada are designed to leverage Rio Tinto Alcan’s clean, self-generated hydroelectricity and generate advantages from the latest AP™ smelting technology. In Quebec, the construction of the AP60 smelter is complete and is now in the commissioning phase. This 60,000 tonne plant is the first commercial-scale implementation of Rio Tinto Alcan’s newest smelting technology platform. Operating at an unprecedented 600 kiloamperes, the energy-efficient AP60 is designed to deliver a US$60 to US$90 per tonne full economic cost advantage over the existing benchmark. First metal at the AP60 smelter is expected in the first half 2013. Subsequent phases will be delayed until the aluminium market shows clear signs of recovery.

The Kitimat Modernisation Project in British Columbia will increase the smelter’s current production capacity by more than 49 per cent, to approximately 420,000 tonnes per year. The modernised aluminium smelter will be powered by self-generated hydroelectricity and use advanced AP40 technology to cut GHG emissions intensity by more than 50 per cent. Once completed at the end of 2014, Kitimat will be one of the lowest-cost smelters in the world, strategically located to supply key emerging markets in the Pacific Rim.

The modernisation of the ISAL aluminium smelter in Iceland is expected to increase production from 190,000 tonnes to 230,000 tonnes and includes a leading-edge casting facility to produce value-added billet. The new casting facility produced its first billet in the second quarter of 2012.

Outlook

Macroeconomic sentiment remains uncertain and continues to impact the group’s product prices – particularly for aluminium.

With a number of regional economies expected to improve, total primary demand for aluminium is forecast to increase by nearly six per cent in 2013. However, inventories are still high and warehousing transactions, driven by forward pricing estimates and low interest rates, remain attractive. Medium-term supply growth is currently forecast to match or exceed demand growth, resulting in a global market surplus for the industry in the near term.

Smelter grade alumina demand is underpinned by aluminium production, so alumina demand over the long term is directly tied to aluminium demand estimates.

Of Rio Tinto Alcan’s three core commodities, bauxite presents the best opportunities for attractive returns in the near term, given strong Chinese demand and supply uncertainty. The current focus of the traded bauxite market is on China’s sharply increased demand for imported product. Although shipments from a traditional key supplier in Indonesia have been recovering in the wake of bauxite export restrictions introduced in May 2012, the fundamentals for traded bauxite continue to look strong going forward.

On balance, while higher regional market premiums have helped partially offset prevailing low aluminium prices, the short-term outlook for aluminium markets remains challenging, with lingering economic uncertainty and continuing price volatility. This underscores the importance of the ongoing drive to transform Rio Tinto Alcan into a leaner, highly-efficient aluminium producer capable of generating solid returns throughout the economic cycle.

The longer-term outlook for aluminium remains robust and Rio Tinto Alcan believes strong returns will be available in the future for the well-positioned, low-cost operator.

Rio Tinto Alcan anticipates strong future demand in key sectors like transportation, infrastructure and consumer goods, spurred by the continued move to urbanisation and the growth of megacities, particularly in China and other emerging Asia-Pacific economies. A measure of the enormous potential is that per capita consumption of aluminium is currently just one kilogram in India and five kilograms in Brazil, well below the average of more than 20 kilograms per capita in industrialised countries.

Mature markets will also require significantly increased volumes of aluminium. A good example is the automotive industry, currently among the top-performing sectors in the economies of both the US and Germany.

The global demand picture outlined above would translate into a need for around 40 million tonnes of modernised aluminium production (net of inventory reductions) between now and 2025, along with 75 million additional tonnes of alumina and, very importantly, around 230 million additional tonnes of bauxite. Despite this positive outlook for demand, it is ultimately supply growth that will determine whether, or when, the aluminium industry returns to a more balanced market in the long term.

block cave project will come on line in 2017, when the current open pit mine will be depleted, and is expected to ramp up to full capacity by 2022, reaching 160,000 tonnes of ore produced per day. In addition, Grasberg has begun construction on the Deep Mill Level Zone block cave mine, which will produce an additional 80,000 tonnes of ore per day at full capacity, expected in 2021. Together, these two projects will supply ore to the mill at 240,000 tonnes per day by 2022.

Technological innovations

Technology continues to be a primary lever to improve productivity and cost performance by increasing recoveries, enabling the processing of low-grade material, as well as optimising underground and capital development.

In 2014, Kennecott will commission its Moly Autoclave Process (MAP), which will process lower grade molybdenum concentrate more efficiently than conventional roasters and will improve recovery rates by eight per cent.

Kennecott has also completed construction and commissioning of a pilot ore sorting facility. The new technology, Copper NuWaveTM, has the potential to upgrade marginal ore and waste material by rejecting barren material from the mill pebble recycle stream.

Northparkes began commissioning of a new tunnel boring technology in October 2012. This technology is one pathway to reduce up-front capital costs and decrease construction time for underground operations. Initial tests have demonstrated a 40 per cent increase in the speed at which tunnelling occurs. Additionally, in August 2012, the Rio Tinto Block Cave Knowledge Centre officially opened at the Northparkes mine, providing employees from across the Group with the highest standard of technical and safety training for underground block caving operations.

Greenfield projects

Rio Tinto is focused on developing greenfield projects that can deliver the highest potential returns. The Group approaches each project with world-class environmental standards, and with a goal of creating sustainable economic benefits for all stakeholders.

Oyu Tolgoi (Rio Tinto: 51 per cent interest in Turquoise Hill Resources)

In a span of 34 months, the Oyu Tolgoi copper and gold mine in Mongolia has gone from the planning stage to near completion as a world-class operation and is the flagship of the Copper product group’s growth portfolio. At the end of 2012, the project was 99 per cent complete for the open pit, and the group has signed a binding agreement with a Chinese power company for the supply of electricity.

Commercial production of copper concentrate is expected in 2013, and Oyu Tolgoi is set to be a top five copper producer once fully developed. Over its life, it will deliver an average annual production of 425,000 tonnes of copper and 460,000 ounces of gold, and will have net unit cash costs in the first quartile of the industry cost curve.

Oyu Tolgoi contains a 1.5 billion tonne reserve and substantial additional copper mineralisation. The deposit provides opportunities for further expansions that could see production continuing for more than 50 years. In addition, Oyu Tolgoi is in a highly prospective region with further exploration potential.

La Granja (Rio Tinto: 100 per cent)

The La Granja project in northern Peru has the potential to be one of the Group’s highest value opportunities. La Granja could be the largest undeveloped greenfield copper project in Latin America, and has the potential to be a very large, long-life operation.

In 2012, Rio Tinto launched a prefeasibility study to mine copper from an open pit, with low technical risk, and using a leaching process to maximise recovery of copper. To date, 168,000 metres of drilling has been completed and further drilling will be ongoing during 2013.

The current plan is to develop the project using a staged, three-phase approach, in which the group will develop an initial leach operation, expand the operation and then construct a concentrator on site. Employing this phased approach will defer significant capital investment until after production begins, with operating cash flows supporting further expansions. Rio Tinto’s knowledge of La Granja’s orebody – and of the broader region – continues to evolve. Developing La Granja will provide access to an attractive orebody and will allow the Group to establish a positive presence in a part of the world with significant mineral potential.

Eagle (Rio Tinto: 100 per cent)

Located in Michigan, US, the Eagle copper/nickel mine is scheduled to begin operation in 2014. The mine will produce an average of 16 thousand tonnes and 13 thousand tonnes per year of nickel and copper metal respectively over seven years. Eagle Mine is also located in a highly prospective region where Rio Tinto currently holds significant tenements.

Resolution Copper (Rio Tinto: 55 per cent)

The Resolution Copper project, located in Arizona, US, is ranked among the top ten undeveloped copper assets in the world, and is expected to be a major underground block cave operation.

Resolution Copper has mining tenements covering the identified orebody. However, to realise the full potential of the project, Resolution Copper requires access to public land where mining is currently prohibited. Resolution Copper continues to seek legislative approval in the US Congress to acquire full legal title to all needed land including the adjacent public land. In exchange for that title, the project would give the public more than 2,400 hectares of high-quality Arizona conservation lands. Permitting of the project will start in 2013 with submission of the General Plan of Operations (GPoO) to the United States Forest Service, a Federal Government agency. Submission of the GPoO will initiate the process of assessing the project’s environmental impacts and applying appropriate mitigation. This will be done through the generation of an Environmental Impact Statement (EIS), written by the Federal Government, per the National Environmental Policy Act (NEPA). In parallel, work continues on the prefeasibility study, with a timeline that has been extended to allow for a more complete evaluation of mining and processing options and to determine the optimal path forward.

Outlook

Rio Tinto is confident in the fundamentals of the industry and the long-term future of the copper market. While the Group expects continued volatility in the short term, the copper market’s robust long-term fundamentals remain intact.

With roughly 60 per cent of copper used as an electrical conductor, the electrification and urbanisation of emerging markets, primarily China, followed by India and South East Asia, will drive copper demand growth through the next several decades. While new mine supply is due to come on line in 2013 as a result of higher prices in the past few years, Rio Tinto has exceptional copper assets and is well positioned to make the most of these market conditions.

The Copper product group is keenly focused on managing costs across its business, and maximising the technological innovations that can lower the cost of developing new mines and improving the productivity of existing operations.

Through a strategic approach of carefully prioritising work and organising key projects into phases, the Copper product group will continue to be flexible and focused on making investments that create the most value.

Financial performance

Following changes to Rio Tinto’s management announced in July 2012, the Simandou iron ore project is now reported within Diamonds & Minerals to reflect management responsibility. Prior year comparatives have been restated.

Strategy and strategic priorities

Demand growth for diamonds and industrial minerals typically follows peak requirements for commodities such as iron ore and copper. The Diamonds & Minerals product group intends to capitalise on this trend by strengthening its portfolio and securing opportunities for valuable growth. The product group strategy is to:

Safety

The product group continues to focus on fostering a culture of accountability and awareness among employees and improving contractor safety. The product group’s all injury frequency rate (AIFR) increased slightly to 0.57 in 2012 from 0.55 in 2011.

The product group faces some unique challenges in health and safety. The workforce spans multiple nationalities, ethnicities, languages and cultures in developing countries. In response, management is employing innovative strategies and visible safety leadership to educate the workforce. The product group is committed to eliminating risks of fatalities and permanent injuries, particularly in the large development projects under way. At Diavik, where the transition to underground mining was recently completed, the mine rescue team came third at the 8th International Mine Rescue Competition held in Donetsk, Ukraine, a significant achievement at the highest possible skill level.

Greenhouse gas emissions

Overall greenhouse gas (GHG) emission intensity improved across the product group due to higher production levels and the implementation of more efficient equipment and technology. GHG emissions per tonne of product were marginally higher at Rio Tinto Minerals in 2012 as a result of lower production, and intensity decreased by 8.4 per cent across Rio Tinto Iron & Titanium’s operations, reflecting efficiencies associated with higher production levels and new technology. GHG emission intensities improved across all Rio Tinto Diamonds operations. In 2012 Diavik commissioned its wind farm which will reduce diesel consumption by approximately ten per cent and lower greenhouse gas emissions by approximately six per cent. The Diavik wind farm is the largest wind diesel hybrid system in the world and the first wind generation facility for Rio Tinto.

Review of operations

Diamonds & Minerals’ underlying earnings of US$119 million include evaluation costs in respect of Simandou of US$262 million. Excluding Simandou expenditure, underlying earnings of US$381 million were 52 per cent higher than in 2011. The group benefited from higher prices for titanium dioxide feedstocks and borates. The acquisition of BHP Billiton’s interests in Richards Bay Minerals also contributed to the increase in earnings. This was offset by lower prices for diamonds and higher depreciation at Diavik following an impairment reversal in 2011.

Rio Tinto Minerals (RTM)

RTM (100 per cent interest) supplies over 30 per cent of the world’s refined borates from its world-class deposit in Boron, California. RTM also has borates refineries and shipping facilities in China, France, Malaysia, the Netherlands, Spain and the US.

Borates production of 463,000 tonnes boric oxide equivalent was eight per cent lower than in 2011, reflecting current global economic market conditions. The sale of Borax Argentina which historically contributed around four per cent of RTM’s borates production completed in August 2012. Despite a weakening in demand during the year, RTM achieved a one per cent improvement in refined borates revenues. Earnings of US$140 million were six per cent higher than 2011, excluding the contribution from talc in the prior period.

Rio Tinto Iron & Titanium (RTIT)

RTIT is the largest producer of titanium dioxide feedstocks. RTIT mines ilmenite at its wholly-owned Rio Tinto Fer et Titane (RTFT) operation in Quebec; its managed operation Richards Bay Minerals (RBM) in South Africa (74 per cent interest); and its QIT Madagascar Minerals (QMM) operation (80 per cent interest). RTIT produces high-quality titanium dioxide feedstocks at its world-class metallurgical complexes as well as co-products including high purity iron, steel, metallic powders, zircon and rutile.

In September 2012, Rio Tinto doubled its holding in Richards Bay Minerals to 74 per cent following the acquisition of BHP Billiton’s entire interests. The purchase price paid by Rio Tinto on completion was US$1.7 billion. The acquisition was triggered in February 2012 by BHP Billiton exercising a put option agreed with Rio Tinto as part of RBM’s restructuring in 2009. The price was determined through a previously-agreed expert valuation process.

In 2012, titanium dioxide feedstock production increased by 11 per cent year-on-year to 1.6 million tonnes. This reflects higher production at RTFT which completed a furnace rebuild in 2011 and an increase in attributable volumes at RBM resulting from Rio Tinto doubling its stake in September. Production was negatively impacted by the furnace rebuild at RBM that commenced in May 2012.

RTIT increased its revenues by 41 per cent due to higher prices for titanium dioxide feedstocks and the RBM transaction. RTIT continued to replace its multi-year sales contracts with alternative pricing mechanisms, increasing the exposure to current market prices. The impact of improved pricing more than offset increased input costs resulting in a 163 per cent increase in year-on-year earnings to US$397 million, including the higher contribution from RBM.

Rio Tinto Diamonds (RTD)

RTD is a leading producer of rough diamonds with a product portfolio that provides a presence in all major markets. Rio Tinto’s diamond assets currently comprise the Argyle Diamond Mine in Australia (Rio Tinto: 100 per cent), the Diavik Diamond Mine in Canada (60 per cent), Murowa Diamonds in Zimbabwe (78 per cent) and the Bunder diamond project in India (100 per cent). RTD sells its share of production through its centralised marketing office in Belgium and has a niche cutting and polishing factory in Australia, where it cuts and polishes the high-end pink diamonds from the Argyle mine, and sells them to an international customer base.

In March 2012, Rio Tinto announced a strategic review of its diamond business that includes exploring a range of options for the potential divestment of its diamonds interests.

RTD produced 13.1 million carats in 2012, a 12 per cent increase from 2011 that reflected increased grades, higher ore throughput and the absence of adverse weather interruptions which impacted 2011. Revenue in 2012 was two per cent higher than in 2011, as the effect of higher volumes was largely offset by lower prices. RTD reported a loss of US$43 million in 2012, compared to earnings of US$10 million in 2011, reflecting lower prices and higher depreciation.

A post-tax impairment of US$460 million was recognised relating to the Argyle diamond mine. An impairment review of Argyle was triggered by the announcement of the Diamonds strategic review as well as changes to the forecast ramp-up date for the underground mine. This is not included in underlying earnings.

Construction of the Argyle underground mine is proceeding and production is scheduled to commence in the first half of 2013, with ramp up to full operation to be completed by 2015, extending the life of mine until at least 2020. Production from Diavik’s underground mine commenced in early 2010 in parallel with open pit operations. The transition to a fully underground operation was completed in 2012 and will sustain Diavik production well past 2020.

Dampier Salt (DSL)

Dampier Salt Limited, the world’s largest salt exporter, produces industrial salt by solar evaporation of sea water at Dampier and Port Hedland, and from underground brine at Lake MacLeod, all in Western Australia. Salt is sold principally to the base chemical industry markets in Asia. During the year, DSL moved within the Diamonds & Minerals organisational structure. Salt production of 6.8 million tonnes (Rio Tinto share) increased three per cent year-on-year.

Development projects

In 2011, Diamonds & Minerals re-entered the potash business through an exploration joint venture with North Atlantic Potash Inc. a subsidiary of JSC Acron. Acron is a world leader in fertiliser production and holds multiple potash exploration permits in Saskatchewan, Canada, home to about half the world’s potash reserves. Drilling results indicate encouraging potash grade and thickness. Higher nutritional standards, population growth and limited arable land make potash a critical factor in maintaining global food security, and a natural complement to RTM’s existing borate fertiliser business.

Large diameter drilling was conducted and resource assessment and planning also progressed at the group’s Jadar lithium-borate deposit in Serbia. If developed, the deposit has the potential to supply more than 20 per cent of global lithium demand. Lithium carbonate’s fastest-growing application is in batteries that provide clean power to industrial systems and electric and hybrid cars.

Good progress was made on RTIT’s TIO4 project aimed at expanding its mining and smelting capabilities in Canada and Africa. However, in January 2013, against a backdrop of weaker market conditions for its products and the need to manage and reduce its costs, RTIT has reviewed the economic viability of the project and suspended prefeasibility studies in Canada and Madagascar. The Zulti South mine expansion at RBM and exploration programme in Mozambique continue.

Following the announcement in 2011 of TiO₂₀₅₀ – a proposed investment of C$800 million over five years to enhance mining and processing operations – RTFT commenced investment in 2012 to upgrade its water filtration system at its steel plant, acquire a new crusher at its mining operation and begin a furnace rebuild.

The Bunder diamond project is currently more than halfway through its prefeasibility studies, which began in July 2010. These studies have confirmed the economic potential of the orebody and work is well under way to define the best development option. In January 2012, Rio Tinto

received a Letter of Intent from the Government of Madhya Pradesh to issue the mining lease for Bunder, following approval in principle from the Government of India.

During 2012, the Simandou iron ore project in Guinea also moved within Diamonds & Minerals, as it remains the responsibility of the group’s new chief executive, Alan Davies, appointed in September. Simandou is a key pillar in Rio Tinto’s long-term growth strategy, involving one of the largest known undeveloped iron ore resources in the world. The concession will enable the development of the largest mine and infrastructure project ever undertaken in Africa. This will include the progressive development of a 95 million tonne per annum mine, a 650-kilometre trans-Guinean railway and a new deep-water port.

The project is adopting a “stage gate” approval process allowing for studies to be finalised in parallel with early works, and for investment to be made in line with Government of Guinea approvals and financing processes.

The year saw significant progress, with Rio Tinto and Chinalco’s listed subsidiary, Chalco, completing the formation of the Simandou Joint Venture for the development and operation of the project. In June, the project committed a further investment of US$1 billion (Rio Tinto share: US$501 million) for detailed design studies, and early works and long-lead items, primarily for developing the rail and port infrastructure.

Rio Tinto, with the support of Soguipami, the State Mining Company, submitted the Social and Environmental Impact Assessment to the Government of Guinea for review and approval. The Republic of Guinea also issued a presidential decree declaring the Simandou infrastructure a “Project of National Interest” (PIN) in October 2012, protecting the area of land needed to develop the rail and port infrastructure from any acquisition or development by third parties.

Outlook

Diamonds & Minerals businesses serve a range of different industries, but are linked through their track record of creating and defining new and profitable markets for their products. Demand softened in these markets in 2012 in response to broader economic trends, and the outlook for 2013 remains uncertain. However, the medium- to long-term outlook continues to be positive across all products as urbanisation and rising standards of living drive higher levels of demand.

In the borates marketplace, RTM will seek to capture profitable growth in emerging economies and maintain its position in its established markets. Planned supply chain improvements will facilitate speed and flexibility in shifting supply to promising sectors and regions. RTM will focus on increasing refined borates capacity to meet higher than GDP demand growth while achieving world-class safety performance and improving its cost position.

Demand for titanium dioxide feedstock is expected to continue to grow in the medium- to long-term, in line with improving global economic conditions, urbanisation and demand growth in emerging markets. In response to current weak demand and in order to reduce operating costs, RTIT is taking action at a number of its operations. RBM will place its zircon and rutile processing operations on care and maintenance, while maintaining production at the core ilmenite mining and smelting operations. RTFT is taking its upgraded slag (UGS) production facility temporarily offline.

The medium- to long-term fundamentals for the diamond industry are positive and expected to support sustainable future price growth. The global mineral reserve base is steadily declining, compounded by limited exploration investment and success, and expected reductions in supply over the medium to longer-term. Demand in India and China is expected to continue to grow, and to represent nearly 50 per cent of global diamond consumption by 2020. Demand in mature markets is expected to grow in line with GDP.

Ranger mine finished open-cut mining in December 2012 after 31 years. Uranium production will continue by processing previously stockpiled lower grade material while studies proceed to assess the feasibility of underground operations at Ranger.

In January 2013, a suite of agreements covering the Ranger Project Area were executed by ERA, the Mirarr Traditional Owners, the Northern Land Council and the Commonwealth Government.

Key features of the agreements include the Mirarr Traditional Owners receiving an increased share of the financial benefits from the Ranger mine, the creation of a regional Sustainability Trust which will deliver social initiatives in the local region, and an agreed approach to increasing opportunities for local Aboriginal participation in business development, training and employment.

The finalisation of these agreements is a significant achievement and reflects a strengthening in the relationship between ERA and the Gundjeihmi Aboriginal Corporation representing the Mirarr Traditional Owners.

Rio Tinto Coal Mozambique (Rio Tinto: 100 per cent)

Rio Tinto Coal Mozambique (RTCM) manages the Zambeze Project (100 per cent); Tete East Project (100 per cent); Benga Mine (65 per cent); and the Zululand Anthracite Colliery (74 per cent).

RTCM holds mining and exploration licences in the Moatize Basin in the Tete province of Mozambique. The Benga Mine was officially opened in May 2012 with first coal exported in June 2012. An impairment charge of US$2.86 billion post-tax was recognised relating to Energy’s coal business in Mozambique. The development of infrastructure in Mozambique to support the undeveloped coal asset is more challenging than initially anticipated which, combined with a downward revision to estimates of recoverable coking coal volumes, has led to a reassessment of the overall scale and ramp up schedule of RTCM and consequently to the assessment of its fair value less costs to sell (FVLCS).

Benga Mine commercial production in 2012 was 460 thousand tonnes. Near-term sales volumes will reflect the availability of rail and port capacity.

Rössing Uranium (Rio Tinto: 68.58 per cent)

Rössing Mine is located near Arandis in Namibia’s Erongo Region. Improving costs and efficiencies continued to be a focus at Rössing in 2012. Benefits from the business improvement strategies that were initiated in 2011 are now being realised and this work will continue in 2013. Rössing is evaluating options to expand operations and extend the mine life beyond 2023.

Rio Tinto acquired its interest in Namibia-based Rössing Uranium Limited (Rössing) in 1970. The Iranian Foreign Investments Company (IFIC) acquired its original minority shareholding in Rössing in 1975. IFIC’s interest predates the establishment of the Islamic Republic of Iran and the U.S. economic sanctions targeting Iran’s nuclear, energy and ballistic missile programs. IFIC acquired and continues to own a minority shareholding in Rössing in accordance with Namibian law.

Rössing is neither a business partnership nor joint venture between Rio Tinto and IFIC. Rössing is a Namibian limited liability company with a large number of shareholders, including Rio Tinto with 68.7 per cent, IFIC with 15.3 per cent, the Industrial Development Corporation of South Africa with 10 per cent, local individual shareholders with a combined interest of 3 per cent and the Government of the Republic of Namibia with 3 per cent but with an additional 51 per cent vote at a general meeting of Rössing on matters of national interest.

As a shareholder in Rössing, Rio Tinto has no power or authority to divest IFIC’s holding in Rössing. However, Rössing and the Namibian Government have taken several recent steps to limit IFIC’s future involvement in Rössing.

On 1 October 2010, Namibia reported to the United Nations, pursuant to Article 31 of the United Nations Security Council Resolution 1929 (UN SCR 1929), that it had reached an agreement with the Islamic Republic of Iran that IFIC will not participate in any future investments nor will it acquire any further shares in Rössing. It was also agreed that the Government of Iran will not acquire interests in any commercial activity in Namibia involving uranium mining, production, or use of nuclear materials and technology, as required under UN SCR1929, until such time as the United Nations Security Council determines that the objectives of the Resolution have been met.

The Rössing board also took steps in 2012 to terminate IFIC’s involvement in the governance of Rössing. As a shareholder in Rössing, IFIC was entitled under Namibian law to attend general meetings of Rössing. IFIC was previously represented on the board of Rössing by two directors. While this level of board representation did not provide IFIC with the ability to influence the conduct of Rössing’s business on its own, the Rössing board nonetheless determined that, in light of international economic sanctions, it would be in the best interest of Rössing to terminate IFIC’s involvement in board activity. Therefore, on 4 June 2012, at the annual general meeting of Rössing, the shareholders of the company, including Rio Tinto, voted not to re-elect the two IFIC board members. This ended IFIC’s participation in Rössing board activities. IFIC accordingly is not represented on the Rössing board, nor does it have the right to attend board meetings or receive any board information

Dividends:

While IFIC is entitled to its pro rata share of any dividend that the majority of the board may declare for all shareholders in Rössing, IFIC has not received such monies since early 2008. Simply by maintaining its own shareholding in Rössing, Rio Tinto is not engaging in any activity intended or designed to confer any direct or indirect financial support for IFIC. Further, the Rössing board determined no dividends will be paid for the year 2012.

Uranium off-take and technology:

Rössing is the world’s third largest uranium mine. It sells approximately 40 percent of its uranium to U.S. power companies and most of the remainder to Canada and other key U.S. trading partners in Europe and Asia. As a minority shareholder, IFIC has no uranium product off-take rights. Neither IFIC nor other Government of Iran entities have any supply contracts in place with Rössing and receive no uranium from Rössing. IFIC also does not have access to any technology through its investment in Rössing or rights to such technology.

While Rio Tinto does not view itself as actively transacting or entering into business dealings with an instrumentality of the Government of Iran, this information has been provided to ensure transparency regarding the passive, minority shareholding in Rössing currently held by the IFIC. Rio Tinto has disclosed the IFIC shareholding matter to the United States Government and has periodically updated the U.S. Department of State as to the same.

Development projects

Rio Tinto completed the acquisition of Hathor Exploration, a junior Canadian uranium exploration company with assets in the Athabasca Basin region of Saskatchewan, in January 2012. The new entity was renamed Rio Tinto Canada Uranium (RTCU).

Its assets give the Energy product group access to a significant high-grade uranium deposit and further highly prospective exploration tenements in an area of Canada that currently supplies approximately 20 per cent of global uranium. RTCU’s Roughrider Project is located in an area that hosts all of Canada’s producing uranium mines.

Rio Tinto has commenced an environmental baseline programme for the Roughrider Project and engagement with local communities and stakeholders is also well under way. Rio Tinto is continuing to work with the governments of Saskatchewan and Canada to promote the growth of the uranium mining industry.

In Queensland, RTCA’s Kestrel Mine Extension project is well advanced and scheduled to start production in mid-2013. The project will incrementally increase production by one million tonnes per annum, extend the life of the current mine to 2032 and reduce unit operating costs.

In Mozambique, work to refresh the development strategy is being expedited in light of the non-cash impairments announced in January 2013. The Energy product group continues to engage with the Government of Mozambique on a range of transport infrastructure options, the success of which remains the key to unlocking the full value of coal tenements in the Moatize Basin.

At ERA, the Ranger 3 Deeps orebody contains an estimated 34,000 tonnes of uranium oxide making it one of the most significant recent uranium discoveries anywhere in the world. Construction of a A$120 million exploration decline started in May 2012 with exploration drilling expected to commence in Q2 2013.

Following a successful exploration programme, Rössing Uranium is considering mining the Z20 orebody. In order to access the orebody, an infrastructure corridor would need to be established linking Z20 to the existing Rössing mine.

Outlook

With European and American economies continuing to experience low-growth conditions, subdued prices for coal and uranium are expected to continue in the short to medium term. Notwithstanding the near-term outlook, long-term demand for coal and uranium is expected to remain strong.

Under even the most ambitious climate change policy scenarios, Rio Tinto expects demand for energy to increase significantly with future global growth dominated by Asia. The International Energy Agency’s most recent scenario shows China alone representing 43 per cent of global energy growth over the period 2010 to 2020. In the same scenario in the period 2010 to 2035, Asia accounts for 67 per cent of global growth, with India and other countries accelerating as China’s growth profile starts to flatten.

Many countries seek a diversified energy mix to safeguard energy security, while looking to minimise costs and manage the various environmental impacts of energy use including carbon emissions. This challenging three-way balance means that coal will continue to be an important baseload fuel for decades to come and nuclear power will provide additional energy security with low emissions. Similarly, global steel demand is expected to grow at two per cent per annum to 2050, underpinning the demand for high-quality metallurgical coal.

Financial performance

Strategy and strategic priorities

The Iron Ore product group’s strategy is to:

Safety

Following the three fatalities that regrettably occurred in 2011, a comprehensive examination of Iron Ore’s approach to safety was launched. This resulted in key safety improvement initiatives that were implemented in 2012. Integral to improved performance will be the strong commitment to safety improvement at all levels of the organisation and a focus on critical risk management, safety leadership, employee development, hazard awareness and safety systems simplification.

Critical risk monitoring programmes continue to be enhanced, and include increasing leadership capability and accountability. Initiatives designed to comprehensively reduce Iron Ore’s overall risk profile included the phased introduction of a safer 5-star ANCAP

(Australasian New Car Assessment Program) rated light vehicle fleet and the implementation of the Nine Lifesaving Commitments hazard awareness programme.

Iron Ore maintained a major focus on health issues, particularly emerging issues impacting on the mental health of its workforce. This included embedding a mental health strategy with a focus on depression.

In 2012, the Iron Ore group’s all injury frequency rate was 0.74, compared with 0.65 in 2011. Several significant potential incidents were also recorded in 2012. These shortcomings highlighted the need to embed better safety programmes and improvement initiatives throughout 2013.

Greenhouse gas emissions

A number of measures were implemented during the year to ensure that Rio Tinto’s iron ore business applied best practice to its environmental performance. From a regulatory perspective, several programmes produced greenhouse gas (GHG) improvements. All federal government requirements for the National Greenhouse and Energy Reporting System and Energy Efficiency Opportunities Act were met. Pilbara operations also produced savings of 479 TJoules (1.4 per cent of the total energy footprint for the iron ore business). The Iron Ore group’s total greenhouse gas emission intensity has improved 4.1 per cent from 2008.

Review of operations

Iron Ore achieved its stated production target of 250 million tonnes in 2012, overcoming volatile weather and market challenges along with a fast-tracked expansion schedule to increase overall group production to 253 million tonnes. Rio Tinto’s share of production was 198.9 million tonnes, a 3.7 per cent increase over the previous year.

This evidenced a great recovery from what was a particularly difficult first quarter, when the seasonal weather conditions in the Pilbara produced three tropical cyclones. However, satisfactory operating performance was maintained, with inland mining and in-load facilities continuing to operate in a limited but functional capacity throughout the events.

The second half in particular demonstrated the integrated Pilbara system’s enhanced operational efficiency, with operational capacity re-rated at 237 million tonnes per year (Mt/a) in November with minimal capital investment. The business set, and met, the challenge of reaching a 260Mt/a run-rate towards the end of the year.

As in 2011, a volatile iron ore market produced wide and rapid swings in spot prices, across which most contract prices were based, highlighting the sales and marketing team’s sustained achievement in placing tonnes to the best effect. Relevant index prices reached higher than US$150 per tonne and as low as around US$80 per tonne, before settling in the US$120-130 range through the fourth quarter as demand recovered and stabilised. The dynamic nature of the market was highlighted with broad variations in customers’ responses to peaks and lows in demand, resulting in fragmented price referencing models across major markets.

Marketing strategy remained focused on achieving high recognition for the superior value-in-use of Rio Tinto’s iron ore products, matching them with particular markets where optimal value could be realised. Despite the volatile conditions, sales increased each quarter through the year.

Operational improvement throughout the year was directed to achieving productivity gains, particularly through minimising or eliminating bottlenecks across the Pilbara rail network. Additional sidings were constructed to reduce delays.

A US$518 million investment (Rio Tinto share US$478 million) was announced to reinstate Iron Ore’s AutoHaul™ automated train programme. Scheduled for completion in 2015, this will result in the world’s first automated long-distance heavy-haul rail network. AutoHaul™ will enable Rio Tinto to expand capacity without making a substantial investment in additional trains. The programme involves a number of safety initiatives to ensure current safety levels are not compromised.

The year’s operational efficiency gains often involved small but valuable improvements in asset deployment. For example, two additional ore cars were added to all 234-car trains, increasing annual ore throughput capacity by approximately 500,000 tonnes.

Rio Tinto’s longstanding commitment to the Mine of the Future™ programme was reflected in a number of decisions, leading towards the first fully autonomous large-scale mining operation in the Pilbara. The Operations Centre (OC) in Perth has become the nerve centre for the Pilbara business. Most management and oversight functions formerly based in the Pilbara have been brought into the OC. Construction began on Stage 3 of the OC, which will enable more roles and responsibilities to be based there in 2013.

The five original Autonomous Haulage System (AHS) driverless trucks were transferred from West Angelas mine to Yandicoogina, where they were joined by five new autonomous trucks. They now comprise the entire fleet in the Junction South East pit, hauling about 30 million tonnes of high-grade ore a year. They will be progressively joined by 150 more AHS trucks over the next three to four years, to be initially deployed at the expanded Nammuldi mine and the new Hope Downs 4 mine.

The 40-year-old Cape Lambert power station was decommissioned during 2012 and dismantling commenced. The HIsmelt^®plant in Kwinana has also been decommissioned and preparation for dismantling and potential sale of some equipment has begun.

The ongoing challenge to recruit the workforce of the future was met with a number of activities including commencement and consolidation of regional fly-in fly-out (FIFO) hubs, introduction of the national FIFO programme, recruitment of record numbers of apprentices and graduates, utilisation of five dedicated regional training facilities, and the funding of 43 mining-related scholarships to the University of Western Australia.

Negotiations for participation agreements with Traditional Owners continued, augmenting the five agreements reached in 2011. This featured a strong commitment to finalising regional standards, incorporating mutual obligations to deliver commitments on employment, financial compensation, education and training, heritage surveys and practices, environmental care and land use.

Aboriginal employment remained a key priority of the Pilbara business, and the year saw a steady improvement in workforce numbers, boosted by the significant addition of contractors associated with the expansion programme. At the end of the year, total Aboriginal employment in the Western Australian iron ore business stood at more than 1,660 workers. The commitment to fostering Aboriginal business produced outstanding achievements. In the last three years more than A$1.6 billion in Pilbara contracts has been awarded to Aboriginal joint venture and direct contracts.

A number of regulatory and administrative arrangements were also resolved including the government approval of stage two for the Wickham residential sub-division supporting the Cape Lambert expansion.

Brockman 4 phase 2 expansion was successfully commissioned, lifting mine annual capacity to 40 million tonnes, as was the Hamersley Agricultural Project, using surplus water from the Marandoo mine extension to develop a year-round crop-growing capability.

In September, the High Court of Australia overturned earlier decisions by the Federal Court not to declare the Hamersley and Robe rail lines open for third-party access. The Australian Competition Tribunal reconsidered the matter, and, in February 2013, ruled that the lines not be opened up for other users.

The Iron Ore Company of Canada (IOC, Rio Tinto share 58.7 per cent) enjoyed a solid year, recovering from a difficult first few months to produce 9.7 million tonnes of pellets and 4.4 million tonnes of concentrate for sale. Sales were 9.9 million and 4.2 million tonnes respectively. During the year a number of improvements helped achieve efficiency gains, notably in the mobile equipment and operations sectors. A number of challenges remain as a result of the Concentrate Expansion Project (CEP) first stage, still in commissioning, which impacted concentrate production. Pellet production was stable through the year.

In March, IOC successfully secured a six-year labour contract with its unions without disruption. This agreement will enable IOC to be competitive, attract the necessary skills, and reward, attract and retain the right people to generate greater value.

During the year, the Dampier Salt business moved within the Diamonds & Minerals organisational structure, and is reported on page 27.

Development projects

A number of incremental improvements to the Pilbara integrated network, largely involving debottlenecking, resulted in a re-rating of the system’s current annual capacity in November 2012 to 237 million tonnes with minimal capital investment.

The expansion of Pilbara annual capacity to the revised target of 360 million tonnes remained on track in 2012, following a two-staged investment process and a successful year of project execution. All approvals for the expansion to 290 million tonnes capacity are in place, and all rail and port approvals for the 360 million tonne stage are completed except for immediate rail links to new mine developments still in study phase.

In February, a US$3.4 billion (Rio Tinto share US$2.9 billion) investment was approved, comprising US$2.2 billion to extend the life of the Nammuldi iron ore mine by 14 years and US$1.2 billion for early works

at Cape Lambert port and rail expansions. These early works include replacing an ageing car dumper with a new dual car dumper, increasing the port’s annual capacity by 20 million tonnes by 2015, and aligning in-loading capacity with current ship-loading capacity.

This was followed in June with a US$3.5 billion investment (Rio Tinto share US$2.0 billion), providing for an additional two berths and significantly increased rail capacity to support it.

Investment of US$570 million was allocated to construct a new energy-efficient gas-fired power station at Cape Lambert, producing significantly lower carbon emissions than its decommissioned predecessor.

A further US$1.7 billion (Rio Tinto share 100 per cent) of largely sustaining capital expenditure was approved to extend the life of the Yandicoogina mine to 2021 and boost nameplate capacity from 53Mt/a to 56Mt/a. A wet processing plant will also be added in order to maintain product specification levels and provide a platform for future potential expansion.

This is the largest integrated mining project in Australian history, and is on track to complete the announced schedule:

The milestone of 290Mt/a capacity was brought forward to Q3 2013, delivering greater shareholder value more quickly.

The planned installation of a wet plant at Brockman 4 was removed, saving US$1 billion in capital expenditure. Through such measures, capital intensity has been kept at the mid-US$150s per tonne, despite rising costs and currency movements.

In response to the increased demand for iron ore from traditional and new markets, IOC re-launched the CEP that will increase capacity from 18 million tonnes of iron ore concentrate per year to 23 million tonnes. The first stage of the CEP, comprising the construction of a new primary ore crusher, a 6km overland conveyor and a fourth autogenous grinding line to increase primary processing capacity, is being commissioned and will ramp up towards full production in 2013.

The second stage involves the addition of two new spiral lines to the gravity separation circuit which was being delivered to operations from late 2012. This is planned to be followed by the installation of a new magnetite grinding and processing circuit scheduled for commissioning by the end of 2013.

Further proposed expansions are being progressed through study stages.

During 2012, the Simandou iron ore project in Guinea (covered on page 27) moved within Diamonds & Minerals, as it remains the responsibility of that group’s chief executive, Alan Davies, appointed in September.

Outlook

Market softening since 2011 was a result of destocking following lower than expected Chinese steel demand, which in turn led to the final quarter rebound to levels above US$120 per tonne, moving higher into the new year. With European and American economies still suffering poor growth conditions, the market will continue to show volatility in the short to medium term.

Notwithstanding this volatility, Rio Tinto is confident of the strength of the long-term demand outlook for iron ore. Increasing global wealth is leading to billions of people moving through steel intensive phases of development. Global steel demand is expected to grow at two per cent per annum to 2050, driven by China out to 2030, with India and other South East Asian countries offsetting a potential flattening in Chinese demand growth thereafter.

Rio Tinto’s Technology & Innovation group (T&I) collectively seeks to maximise total shareholder value by partnering with the business to provide technical insights in operational improvements, technical assurance, project delivery, and innovation. T&I’s focus is on creating sustainable value by embedding fundamental changes in the way Rio Tinto operates.

T&I’s gross cost in 2012 was US$415 million, compared with US$343 million in 2011 and US$213 million in 2010.

The total number of employees in T&I increased from 925 at year end 2011 to 1,031 at year end 2012.

Strategy and strategic priorities

T&I’s strategy is to:

Safety

T&I is committed to the safe operation of its facilities and to employee safety. The all injury frequency rate for T&I in 2012 was 1.57 compared to 2.57 in 2011. The improvement in the rate was primarily attributed to improvements in existing safety efforts as well as the addition of the Rio Tinto Alcan Major Projects group to T&I Project Development and Implementation.

Performance

Innovation

Innovation is the research and development group within T&I. Its focus is on developing radically innovative technologies that can address the significant challenges facing the mining industry and drive increased production, efficiency and safety.

While Rio Tinto as a whole looks at continuous improvement, Innovation is focused on step-change technologies, including the Mine of the Future^TM programme. The Mine of the Future^TM programme is not a single mine site; it is an approach used across Rio Tinto to find advanced ways to find, extract, and process minerals from deep within the Earth while reducing environmental impacts and further improving safety.

The wealth of technical and project expertise within Innovation is leveraged through a network of key partnerships with organisations and institutions around the world – providing a vast and interconnected group of world-class experts to generate solutions.

The output of this work is protected by an intense focus on competitive advantage and developing tailored intellectual property protection strategies for each programme of work.

Mineral Technology Services

Mineral Technology Services (MTS) comprises a team of technology professionals based in seven offices in North America, Australia, South Africa and the UK, who partner with Rio Tinto’s business units in the delivery of large, measureable increases in earnings and value. MTS provides technical service in the areas of geology, mining, mineral processing, geotechnics, hydrometallurgy, process control and environmental management.

A key area of focus for MTS continues to be the Improving Performance Together programme launched in 2005. In 2012 the focus was aligning the work in processing, asset management and mining to provide support across the entire value chain with a focus on targeting the highest priorities for throughput, recovery and operating performance.

Mining and Asset Management Centre

The Asset Management Centre provides strategic direction on the effective selection and utilisation of the Group’s equipment for mining and processing. Working with businesses, the centre supports asset improvement initiatives through the use of global metrics and benchmarking, standards and guidelines. The work also includes developing capability through competency frameworks and formal training to support sustainable improvement and standard business processes with fit-for-purpose technical operating systems.

The focus of the Surface Mining team is to establish leading practice and develop, share and implement Group-wide solutions in core mining production processes. Other Surface Mining initiatives include payload management, load and haul efficiency improvements, increased orebody recovery, improved stockpile management, drill and blast, and off-road tyre demand reduction.

Mining Technology also includes a Strategic Production Planning (SPP) team that works with business units to develop comprehensive plans and valuations of strategic development options. Results from SPP provide a logical resource development framework for more detailed studies and investment decision-making.

Project Development & Implementation

Project Development & Implementation (PDI) is responsible for the implementation and delivery of major capital projects. PDI is made up of a centralised Project Management Office (PMO) and Project Delivery Hubs which are aligned by geographic location or commodity. The PMO is responsible for developing, promoting and supporting the implementation of the processes, standards and tools to achieve repeatable project success. The hubs are responsible for the delivery of major capital projects in partnership with product groups and business units.

PDI is delivering a significant proportion of Rio Tinto’s major projects within a newly developed Capital Projects Framework which is shaped around four key elements – project portfolio planning and reporting, project governance, practices, and people.

Technical Evaluation Group

The Technical Evaluation Group (TEG) is a team of internal professionals responsible for rigorously reviewing all major project proposals to ensure Rio Tinto’s Investment Committee is provided with independent technical assessments to support its decision-making.

Underground Technology Centre

The objective of the Underground Technology Centre is to create and develop a world-class team in technical aspects of underground mining that will provide Rio Tinto with a competitive advantage. The centre partners with the product groups on the technical aspects of design, construction and operation, including the delivery of fit-for-purpose technology.

Outlook

T&I will continue to maintain a culture that makes safety and safety improvements the highest priority. To support the business where technical expertise and external networks will have the largest benefit to Rio Tinto and its shareholders, T&I’s focus in 2013 will be on four main areas: partnering with product groups and functions on operational improvement, the safe and efficient development and implementation of projects, the pursuit of the Mine of the Future^TM programme and the development of innovative alliances and relationships, and technical assurance – all of which will create competitive advantage for the Group. T&I is reviewing the Group’s approach to due diligence and technical assurance processes.

2012 financial performance compared with 2011

In order to provide additional insight into the performance of our business, Rio Tinto presents underlying earnings.

2012 underlying earnings of US$9,303 million and net loss of US$2,990 million were US$6,246 million below and US$8,816 million below the comparable measures for 2011. The principal factors explaining the movements are set out in the table below.

Prices

The effect of price movements on all major commodities in 2012 was to decrease underlying earnings by US$5,315 million compared with 2011. Average prices declined from record highs experienced in 2011 for nearly all of Rio Tinto’s major commodities, with the exception of gold which was up six per cent on 2011, and minerals (mainly borates and titanium dioxide feedstocks).

The average Platts price for 62 per cent Pilbara fines declined by 24 per cent compared with 2011. Copper prices were down ten per cent, aluminium prices averaged 16 per cent lower and molybdenum was 17 per cent lower.

Commodity prices and other drivers of sales revenue of individual product groups are discussed further in the section on pages 37 to 38.

Exchange rates

Compared with 2011, on average, the US dollar depreciated by one per cent against the Australian dollar but strengthened by one per cent against the Canadian dollar, by seven per cent against the euro and by 14 per cent against the South African Rand. The effect of all currency movements was to increase underlying earnings relative to 2011 by US$154 million.

Volumes

Volume increases enhanced earnings by US$634 million compared with 2011. These were achieved primarily in iron ore, where sales volumes rose three per cent due to increased capacity at the Pilbara ports, and at Escondida in line with higher ore grades. Volume declines lowered earnings by US$943 million compared with 2011, reflecting lower mill throughput and gold grades at Kennecott Utah Copper and no metal share from Grasberg.

Energy, other cash costs and exploration

Industry-wide cost pressures continued during 2012, in particular at some of the mining hotspots where Rio Tinto has significant operations, such as New South Wales, Queensland and the Pilbara region of Western Australia. Rio Tinto has a clear focus on cost control and is targeting more than US$5 billion of cumulative cash cost savings over the next two years.

Higher energy costs across the Group lowered underlying earnings by US$23 million compared with 2011. In 2012, many operations were impacted by higher fuel, diesel and power rates.

Higher other cash costs during 2012 decreased underlying earnings by US$304 million compared with 2011 due to a combination of fixed production cost inefficiencies associated with lower volumes due to grade, higher maintenance costs and, costs associated with operational readiness for the Pilbara expansion of iron ore production.

In 2012, evaluation work progressed at many of the Group’s projects including the Resolution and La Granja copper projects and the Simandou iron ore project. Development costs relating to Simandou have been capitalised from 1 April 2012. During 2012, Rio Tinto divested various exploration properties, including interests in Extract Resources and Kalahari Minerals, resulting in net gains after tax on disposal of US$342 million for the Group. The impact from movements in exploration and evaluation expenditure net of gains realised from divestments was to increase underlying earnings by US$80 million compared with 2011.

Finance costs, tax, other

The effective corporate income tax rate on underlying earnings, excluding equity accounted units, was 30 per cent, unchanged from 2011. As in 2011, the effective corporate tax on net earnings, excluding equity accounted units, is significantly impacted by the impairment of goodwill, which is non-deductible for tax purposes.

Group net finance charges were US$124 million lower than in 2011, mainly reflecting an increase in capitalised interest.

2011 financial performance compared with 2010

2011 underlying earnings of US$15,549 million and net earnings of US$5,826 million were US$1,562 million above and US$8,412 million below the comparable measures for 2010. The principal factors explaining the movements are set out in the table below.

Prices

The effect of price movements on all major commodities in 2011 was to increase underlying earnings by US$6,675 million compared with 2010. Prices improved for nearly all of Rio Tinto’s major commodities: copper prices were up 18 per cent and gold prices were up 29 per cent. Although aluminium prices averaged ten per cent higher than 2010 they fell back sharply in the last quarter of the year. Spot iron ore prices traded 15 per cent above 2010 levels but ended the year 25 per cent below where they started, given price weakness in the fourth quarter driven by Chinese destocking.

Exchange rates

There was significant movement in the US dollar in 2011 relative to the currencies in which Rio Tinto incurs the majority of its costs. Compared with 2010, on average, the US dollar weakened by 12 per cent against the Australian dollar and by four per cent against the Canadian dollar. The effect of all currency movements was to decrease underlying earnings relative to 2010 by US$998 million.

Volumes

Lower volumes were primarily driven by lower copper and gold grades at Kennecott Utah Copper, Escondida and Grasberg. This was partly offset by higher iron ore volumes in line with the Group’s increased capacity at its Pilbara ports, despite the adverse weather conditions in the first half of the year. The net impact of volume movements was a decrease in underlying earnings of US$502 million relative to 2010.

Energy, other cash costs and exploration

Higher energy costs across the Group reduced underlying earnings by US$249 million compared with 2010. 2011 was impacted by the higher fuel, diesel and power rates affecting most operations. In 2010, Aluminium operations in the Saguenay were impacted by low snow and rainfall leading to reduced power generation and the need to purchase additional power from the provincial utility.

Higher other cash costs during 2011 decreased underlying earnings by US$2,096 million compared with 2010 due to a combination of higher input prices, fixed production cost inefficiencies associated with lower volumes due to weather events and grade, higher maintenance costs and costs associated with operational readiness.

Rising raw material and input prices decreased underlying earnings by US$514 million compared with 2010, particularly relating to coke, pitch and caustic prices in the aluminium businesses. In addition, underlying earnings were impacted by unit cost increases due to lower volumes caused by severe weather conditions (US$261 million) and lower grades (US$445 million), notably in the copper business. Additional costs of US$546 million were associated with a full year of operations at new mines and operational readiness preparations particularly in the Pilbara and Coal Australia. Other production and one-off costs lowered earnings by a further US$330 million.

In 2011, evaluation work progressed at many of the Group’s projects, including the Resolution and La Granja copper projects and the Simandou iron ore project. Two undeveloped coal properties were divested in 2010 resulting in a US$229 million gain on disposal. The impact from higher exploration and evaluation expenditure combined with lower gains realised from divestments was to lower underlying earnings by US$796 million compared with 2010.

Finance costs, tax, other

The effective corporate income tax rate on underlying earnings, excluding equity accounted units, was 30.0 per cent compared with 27.9 per cent in 2010. The effective corporate income tax rate on net earnings, excluding equity accounted units was 49.1 per cent compared with 27.3 per cent in 2010. The increase was due to the goodwill impairment charge being non-deductible for tax purposes.

Group net finance charges were US$245 million lower than in 2010, mainly reflecting an increase in capitalised interest in 2011.

Exclusions from underlying earnings 2010-2012

Earnings contributions from Group businesses and business segments are based on underlying earnings. Amounts excluded from net earnings in arriving at underlying earnings are summarised in the discussion of year-on-year results below.

2012

A pre-tax impairment charge of US$17,194 million, US$14,360 million post-tax, was recognised in 2012, of which US$12,643 million pre-tax, US$11,000 million post-tax, related to the Group’s aluminium businesses (including Pacific Aluminium). The valuation of Rio Tinto’s aluminium businesses for impairment testing is based on the Group’s assessment of fair value less costs to sell (FVLCS). During 2012, aluminium prices deteriorated further with strong Australian and Canadian currencies, high energy and raw material costs, and high volumes of London Metal Exchange (LME) inventory continuing to exert pressure on current market values in the industry. As in 2011, given the prevailing conditions in the aluminium market, FVLCS does not include the full value of the Group’s planned improvements in cash margins from its value enhancement programmes.

A post-tax impairment charge of US$2,860 million was also recognised relating to Rio Tinto Coal Mozambique (RTCM). The development of infrastructure in Mozambique to support the undeveloped coal asset is more challenging than initially anticipated which, combined with a downward revision to estimates of recoverable coking coal volumes, has led to a reassessment of the overall scale and ramp-up schedule of RTCM and consequently to the assessment of its FVLCS.

In addition, there were net post-tax impairments of US$460 million relating to the Group’s Argyle diamond mine and US$40 million in other net impairments. An impairment review of Argyle was triggered by the announcement during the year of the Diamonds strategic review as well as changes to the forecast ramp-up date for the underground mine.

Movements in gains and losses on consolidation and disposal of interests in businesses relate primarily to a gain of US$965 million arising on consolidation of Richards Bay Minerals (RBM) and a US$167 million loss on consolidation of Turquoise Hill Resources Ltd.

A deferred tax asset of US$1,043 million was recognised in the first half of 2012 following introduction of the Minerals Resource Rent Tax (MRRT) on 1 July 2012. At 31 December 2012, this amount was US$1,130 million. The legislation, which applies to companies with iron ore and coal operations in Australia, allows a deduction against future MRRT liability based on the market value of past investments in these mining assets as at 1 May 2010. Accordingly, a deferred tax asset has been recognised to reflect the deductibility for MRRT purposes of the market value of these mining assets to the extent recovery is probable.

2011

A post-tax impairment charge of US$9,290 million was recognised in 2011, of which US$8,855 million related to the Group’s aluminium businesses. Valuation of Rio Tinto’s aluminium businesses for impairment testing was based on an assessment of FVLCS derived from discounted future cash flows. The impairment was largely a result of the economic environment and related market volatility in aluminium prices in the second half of 2011 leading to declines in market values for aluminium assets.

In addition, there were net post-tax impairments of US$344 million relating to the Group’s diamond business and US$91 million in other net impairments.

Profits on the disposal of businesses in 2011 related principally to the sale of the Group’s talc business and Colowyo mine.

The deferred tax asset write-off in 2011 of US$342 million followed a change in French legislation which restricted the utilisation of tax losses.

2010

Rio Tinto consolidated Oyu Tolgoi LLC on 15 December 2010 following the signing of a new agreement with Ivanhoe Mines. The US$445 million gain arising on consolidation represented the excess of the fair value ascribed to the Group’s indirect share of the assets and liabilities of Oyu Tolgoi LLC over the historic cost of acquiring that share through its investment in Ivanhoe Mines.

The 2010 post-tax impairment charge of US$739 million related mainly to the Alcan Engineered Products businesses. The Group completed the divestment of 61 per cent of Alcan Engineered Products to Apollo Global Management, LLC and the Fonds Stratégique d’Investissement on 4 January 2011.

Profits on the disposal of businesses in 2010 relate primarily to the sale of the Group’s remaining 48 per cent interest in Cloud Peak Energy Inc.

Loss after tax from discontinued operations of US$97 million (inclusive of divestment costs) related to the completion of the disposal of Alcan Packaging global Pharmaceuticals, global Tobacco, Food Europe and Food Asia divisions to Amcor on 1 February 2010, and the Alcan Packaging Food Americas division to Bemis Company Inc. on 1 March 2010.

Net earnings and underlying earnings

Both net earnings and underlying earnings deal with amounts attributable to the owners of Rio Tinto. However, IFRS requires that the profit for the period reported in the income statement should also include earnings attributable to non-controlling interests in subsidiaries. The profit for the period is reconciled to net earnings and to underlying earnings as follows:

Group financial results by product group 2012-2010

Sales revenue

Prices