Mining Industry Costs and Prices: A Long Run Perspective

Neal BrewsterGeneral Manager Forecasting, Rio Tinto

MEMS, Bolder, Co19th April 2007

2

For the purposes of the Forward-Looking Statements Safe Harbor

provisions of the US securities laws

This presentation contains statements which constitute forward-looking statements within the meaning of the US securities laws. Such statements include, but are not limited to, statements with regard to capacity, future production and grades, projections for sales growth, estimated revenues and reserves, targets for cost savings, the construction cost of new projects, projected capital expenditures, the timing of new projects, future cash flow and debt levels, the outlook for minerals and metals prices, the outlook for economic recovery and trends in the trading environment and may be (but are not necessarily) identified by the use of phrases such as “will”, “expect”, “anticipate”, “believe” and “envisage”.

By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future and may be outside Rio Tinto’s control. Actual results and developments may differ materially from those expressed or implied in such statements because of a number of factors, including levels of demand and market prices, the ability to produce and transport products profitably, the impact of foreign currency exchange rates on market prices and operating costs, operational problems, political uncertainty and economic conditions in relevant areas of the world, the actions of competitors, activities by governmental authorities such as changes in taxation or regulation and those factors set out under Risk Factors in Rio Tinto’s Annual Report on Form 20-F for the year ended 31 December 2004 filed with the U.S. Securities and Exchange Commission.

Outline

• Recent industry cost escalation

• Long run cost and price relationships

4

Prices in competitive commodity markets tend to have a strong relationship to cash operating costs over the long run – but trends can change over time

Copper Price, Median Industry Costs and Margins

0

100

200

300

400

500

600

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

USc

/lb in

200

6 te

rms

-60%

-40%

-20%

0%

20%

40%

60%

Mar

gin

(per

cent

)

PriceMedian industry costs

25 year average operating margin

Source: CRU, Rio Tinto

Industrialisation, war

Boom, bust, war, …

Reconstruction, development,

growth

Oil crises,stagflation, pessimism

Asian development,

…

5

Change in Unit Costs 2003-6 H1(1)

0

20

40

60

80

US ThermalCoal

Gold AustralianThermal coal

Copper Australian IronOre

Perc

ent

USD termsLocal currency terms

(1) Revenue minus EBITDA (total cash costs) divided by volume Source: Company Reports, Rio Tinto

• Generally 30-60% rise in industry cost increases since 2003 of which around half is exchange rate related

• Direct energy cost changes are significant component of increase

• $5/bbl increase in long run oil price directly raises mining costs by 1%

• Comparable 90c/MMBU rise in the gas price would ads $10/tonne to alumina refining

• Cost rises from stretching capacity and constraints on availability of manufactured inputs should dissipate

• But increased royalties, some labour costs and higher energy prices may be baked in for the longer term

Industry operating costs have recently risen though a combination of volume stretch and exchange rate effects

6

Cost rises have been exacerbated at the margin and could fall by 25% compared to 2006 levels in the case of aluminium as cyclical factors unwind

• Cost changes are across the industry cost curve but have been exacerbated at the margin

• In many markets have seen the emergence of new high cost production, much of it in China

• If cyclical factors (eg energy and alumina) are taken out marginal industry costs might fall by 25% in the case of aluminium but this would still leave them significantly above 2003 levels

Source: CRU, Rio Tinto

Global cost curves

500

1000

1500

2000

2500

3000

0 5000 10000 15000 20000 25000 30000 35000 400002005 curve 2004 curve2003 curve 2006 curve

2007 $/t

kt

Global Aluminium Cost Curve

7

The capital intensity of developing projects has increased by even more than operating costs due to a combination of higher input costs and more complexity

• Capital spending by nonferrous producers in 2006 was US$45 billion, almost double 2002 levels in real terms

• Analysis of capital cost escalation difficult as projects vary and it region specific but generally observe a 40-80% in capex costs since 2003 due to:

– Raw material costs (concrete, steel, etc.) (+85% 2003-6)

– Labour rates (Australian “all-in” rate rose 64% between 2002-6)

– Capital equipment (+50% for certain types over 2 years)

– Exchange rates (20-30%)

– Project delays

• Shift to more complex greenfield projects (eg Pilbara iron ore expansions now require increased port, rail and other infrastructure upgrades)

• Some costs have scope to unwind but others are more permanent (eg a recent Australian study estimated that the number of employees in the major Australian mining sectors will rise from 92,000 in 2005 to 162,00 in 2015)

8

Item Normal lead time Current (months) (months)

Grinding mills 20 44

Draglines 18 36

Barges 24 32

Locomotives 12 26

Power generators 12 24

Wagons 12 24

Rope shovels 9 24

Reclaimers 18 24

Tyres 0-6 24

Large haul trucks 0-6 24

Crushers 16 24

Ship loaders 8 22

Acute shortages are constraining the supply side and leading to supply disruptions

Source: Hatch, Rio Tinto

9

Need to think about multiple events as underpinning the development of industry costs and thereby prices beyond short run cycles

Real Molybdenum Price

1900 1920 1940 1960 1980 2000

$/to

nne

(200

5 te

rms)

30

50

80

150

200

300

500

800

1500

100

1000Strong

military use

Sub by nickel and tungsten

Floatation process

developed Persistent weak demand, price affected substitution,

rising mine stocks

General inflation, oil pipe demand,

falling by-product output

New uses, new mines,

govt stockpiling

Rising by-production

Fast supply growth (Climax) matches

rising demand

Wartime price controls

Lack of civilian uses Over-capacity,

industry mergers

Mine disruptions, restricted Chinese

exports

Move from US producer pricing to traded global market

1. Capital and resource drivers

2. Productivity and input cost drivers

3. Technological developments

4. Demand drivers

5. Competition and regulation

6. Macroeconomic relationships

Source: Rio Tinto

10

Can rationalise these cost and price drivers into their influence two key components

• Real resource pressure– This depends on the rate of underlying demand growth in relation to the current availability,

future discovery and ability to economically develop resources

– Can have a strong technical element

– Also depends on willingness or ability of companies to invest in new supply so can be influenced by industry consolidation and industry barriers to entry

• (Relative) productivity

– The ability of the mining industry to achieve improvements in its operating performance and to deliver cost savings or for costs to rise

– Relative cost issue that depends on productive efficiency of the mining sector and its supplier markets (and the strength of conflicting drivers) and similar trends in other sectors of the economy

11

Productivity and input cost drivers were the dominant force behind falling price trends between 1979 and 2002

• Increased mine size and economies of scale

• Improved and lower cost inputs

• Labour flexibility and better management

• Transport costs

• Labour rates

• Work intensity (strip ratio, haul distances, etc.)

• HS&E costs

• Changing grades

• Energy costs

Share of Copper Produced by Size of Mine(Size ranked by ore milled)

1971 1976 1981 1986 1991 1996 20010%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%f

under 1mtpy

1-2Mtpy

2-10Mtpy 10-30Mtpy

over 30Mtpy

Hamersley (Costs and Lost Time (percent))

1975 1980 1985 1990 1995 20000

5

10

15

20

25

0

5

10

15

20

25

f

Real Aus $ cost

Lost time

Source: Rio Tinto

12

Recent focus has been on real resource pressure generated by faster demand growth

Index of Demand (2000 = 100)

30

50

70

90

110

130

150

1970 1980 1990 2000

AluminiumCopperSteelOilSeaborne iron ore

Trends in World Consumption (% yoy)

1990-2000

2000-2006 Change

Aluminium 2.8 5.9 +3.1

Copper 3.5 2.8 -0.7

Steel 1.1 5.9 +4.8

Oil 1.4 1.8 +0.5

Nickel 3.2 3.4 +0.2

Seaborne iron ore 2.6 7.8 +5.2

Relatively poor performance of copper and nickel reflects demand substitution (and particular effect of dot.com recession in case of copper)Source: WBMS, CRU, Brook Hunt, Rio Tinto

13

Cost and Price trends 1973-2005

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%

Demand trend (percent per annum)

Pric

e tre

nd (p

erce

nt p

er a

nnum

)

Cross sectional analysis suggests a weak relationship between long run demand and price trends

Regression has R2 of 0.23

Gold

Silver

Lead

Nickel

SteelSeaborne iron ore

Aluminium

CopperZinc

Source: Rio Tinto Economics Department

Source: Rio Tinto

14

Copper prices and pressure of demand

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

Dem

and Indicator

-80

-60

-40

-20

0

20

40

60

Copper P

rice 2005 $/tonne

2000

3000

4000

5000

600070008000

1000

10000Reversion of

demand growth to trend

Demand indicator (LHS)Prices (RHS)

Accelerating underlying

demand growth

Slowing demand growth

Volatile underlying demand growth

Longitudinal analysis suggest a stronger relationship but still has poor level of significance

Source: Rio Tinto

15

Exploration Spending

0

1

2

3

4

5

6

7

8

93 94 95 96 97 98 99 00 01 02 03 04 05 06

US

$ bi

llion

in 2

006

term

s

GoldOtherDiamondsBase metals

Stronger prices are leading to increased investment and exploration activity

Metals Prices and Nonferrous Producer Capex

10

20

30

40

50

78 82 86 90 94 98 02 06

Cap

ex (

US

$ bi

llion

in 2

006

term

s)

0

20

40

60

80

100

120

140

160

180

200

Eco

nom

ist M

etal

s In

dex

(199

5 =

100)

Source: CRU (MICA), The Economist, Metals Economics Group, Rio Tinto

Capex Prices

16

69

170 497

61

250

53

4436024

19105

50

191616

28

0

200

400

600

800

1000

NorthAmerica

SouthAmerica

Europe Asia Africa Oceania Other World

Additional resourcesProven and probable reserves

There is generally no shortage of metals and minerals resources in the ground to meet demand over the longer run

World copper reserves and resources*Millions of tons contained copper

Mine production 2005 2.2 6.6 1.7 2.7 0.7 1.1 15.00.0

Implied years of P&P reserves at current production

31.4 25.8 29.4 38.8 27.1 21.8 31.3n/a

Other regions is a term used by USGS which includes countries included in the 6 major world regions, but which are not specified Source: USGS, WBMS, Rio Tinto

17

Year

# Kim

berlit

e Bod

ies D

iscov

ered

/Yr

20001990198019701960195019401930192019101900189018801867

250

200

150

100

50

0

… but the ease of discovery may be declining

Actual

5 Yr Moving Avg

Extensive Russianpipes discovered

Widespread application of airborne geophysics

Extensive northern Canadian pipes found

Kimberlite Body Discovery Rate

Source: Rio Tinto

18

Long Term Metals

Surplus

Long Term Metals Deficit

Does the need/potential for developing projects in more difficult regions provide an opportunity or a threat?

Global metal reserves and population

Source: USGS, Rio Tinto Note: A basket of base & ferrous metal ores, USGS reserve estimates, evaluated at 5 year historical average prices

> $60 000 per person

> $20 000 per person

> $10 000 per person

> $5 000 per person

> $2 000 per person

> $1 000 per person

Distribution of Metals per capita

19

Possible to think of “alternative futures”

Relative productivityR

esou

rce

p

ress

ure

Scenario 1ResourceShortages

Scenario 2Persistent

priceDecline

Scenario 3Balanced

Forces

1973-2000

1950-72

Weak relative productivity gains

Rising effective resource constraints

Strong relative productivity gains

Source: Rio Tinto

Declining effective resource constraints

20

Conclusions

• The mining industry has seen a 30-40+% rise in operating costs since 2003; capital costs have risen 40-80%

• Around 20% of this rise is exchange rate driven and a significant proportion of the remaining cost increase reflects cyclical rises in input prices

• There is a residual element of structural change related to the impact of faster underlying demand growth and the balance of drivers that pulled prices downwards over the previous 30 years has shifted

• It is important to recognise these different elements. As/when investment by the industry catches up with demand prices will adjust to long run cost-based realities.

• Awareness of the broader drivers that will drive these cost trends is important in forecasting prices and for strategic investment decisions in the industry

Mining Industry Costs and Prices: A Long Run Perspective

Neal BrewsterGeneral Manager Forecasting, Rio Tinto

MEMS, Bolder, Co19th April 2007