Rio Tinto Annual Report 2007 - Group income statement

Group income statement

Years ended 31 December
	Note	2007 US$m	2006 US$m
Gross sales revenue (including share of equity accounted units) (a)		33,518	25,440
Consolidated sales revenue		29,700	22,465
Net operating costs (excluding line items shown separately)	3	(20,750)	(13,650)
Impairment (charges)/reversals	5	(58)	396
Exploration and evaluation costs (b)	12	(321)	(237)
Operating profit		8,571	8,974
Share of profit after tax of equity accounted units	6	1,584	1,378
Profit before finance items and taxation		10,155	10,352
Finance items
Net exchange gains on external net debt and intragroup balances	24	194	46
Net gains on currency and interest rate derivatives not qualifying for hedge accounting		57	35
Interest receivable and similar income	7	134	106
Interest payable and similar charges	7	(538)	(160)
Amortisation of discount		(166)	(139)
		(319)	(112)
Profit before taxation		9,836	10,240
Taxation	8	(2,090)	(2,373)
Profit for the year		7,746	7,867
- attributable to outside equity shareholders		434	429
- attributable to equity shareholders of Rio Tinto (Net earnings)		7,312	7,438
Basic earnings per ordinary share	9	568.7c	557.8c
Diluted earnings per ordinary share	9	566.3c	555.6c
Dividends paid during the year (US$m)	10	1,507	2,573
Dividends per share: paid during the year
- regular dividends	10	116.0c	81.5c
- special dividend	10	-	110.0c
Dividends per share: proposed in the announcement of the results for the year
- final dividends	10	84.0c	64.0c

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(a) Gross sales revenue includes the sales revenue of equity accounted units of US$3,818 million (2006: US$2,975 million) in addition to Consolidated sales revenue, which relates only to subsidiary companies and jointly controlled assets.

(b) Exploration and evaluation costs are stated net of gains on disposal of undeveloped properties totalling US$253 million (2006: US$46 million).

Note 3 - Net operating costs

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	Note	2007 US$m	2006 US$m
Raw materials and consumables		6,096	3,207
Amortisation of intangible assets	12	114	27
Depreciation of property, plant & equipment	13	2,001	1,482
Employment costs	4	3,827	2,459
Repairs and maintenance		1,393	1,257
Shipping costs		1,874	1,149
Other freight costs		509	333
Decrease/(increase) in inventories		110	(139)
Royalties		1,093	1,004
Amounts charged by jointly controlled entities mainly for toll processing		1,362	1,196
Other external costs		2,346	1,936
Provisions	27	308	60
Research and development		69	15
Costs included above qualifying for capitalisation		(78)	(69)
Other operating income		(274)	(267)
Net operating costs (excluding items shown separately)		20,750	13,650


Notes
Total net operating costs includes the impact of Alcan for the period 24 October 2007 to 31 December 2007, totalling US$3,691 million. Information on auditors' remuneration is included in note 44.

Note 5 - Impairment (charges)/reversals

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	Pre-tax 2007 US$m	Taxation 2007 US$m	Outside interests 2007 US$m	Net amount 2007 US$m	Net amount 2006 US$m
Cash generating unit
Argyle Diamonds (a)	(466)	138	-	(328)	(289)
Palabora (b)	272	(99)	(73)	100	(2)
Tarong coal mine (c)	166	(32)	-	134	(152)
Kennecott Utah Copper (KUC) (d)	-	-	-	-	381
Iron Ore Company of Canada (IOC) (e)	-	-	-	-	111
Other	(30)	11	-	(19)	(5)
	(58)	18	(73)	(113)	44


Notes
The impairment of Argyle in 2006 followed adverse changes in assumptions about future prices, capital and operating costs. The value in use was assessed by reference to cash flows forecast in real terms and discounted at a pre-tax rate of 8 per cent. The 2006 impairment provision included goodwill of US$223 million. Further deterioration in value during the first half of 2007, relating mainly to large increases in the estimated capital cost of Argyle's underground project, triggered another assessment of its recoverable amount. Impairment of property, plant and equipment was assessed by reference to fair value less costs to sell. The determination of fair value less costs to sell was based on the estimated amount that would be obtained from sale in an arm's length transaction between knowledgeable and willing parties. This estimate was derived from discounting projections of cash flows, using valuation assumptions that a buyer might be expected to apply. The US dollar amount of the impairment is US$14 million higher than reported at the half year as a result of retranslation from Australian dollars at the average exchange rate for the full year. An increase in the Group's long term copper price assumption triggered an assessment of the recoverable amount of Palabora. The value in use was based on cash flows forecast in real terms and discounted at a pre-tax rate of 12 per cent. This led to a full reversal of the remainder of the impairment provision recognised in 2004. During 2006, a continuation of operating losses triggered an assessment of the recoverable amount of Tarong, one of the Group's coal mines in Australia. The value in use was based on cash flows forecast in real terms and discounted at a pre-tax rate of 8 per cent. During 2007, the sale of Tarong was announced for an amount that led to full reversal of the remainder of the provision recognised in the previous year. In 2006, an increase in the Group's long term copper price assumption triggered an assessment of the recoverable amount of KUC. The value in use was based on cash flows forecast in real terms and discounted at a pre-tax rate of 8 per cent. This led to a full reversal of the remainder of the impairment provision recognised in 2002. In 2006, an increase in the Group's long term iron ore price assumption triggered an assessment of the recoverable amount of IOC. The value in use was based on cash flows forecast in real terms and discounted at a pre-tax rate of 8 per cent. This led to a full reversal of the impairment provision recognised in 2002, which had aligned the carrying value with the value negotiated between shareholders during that year as part of a financial restructuring exercise.
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Note 6 - Share of profit after tax of equity accounted units

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	2007 US$m	2006 US$m
Sales revenue (a)	3,818	2,975
Operating costs	(1,261)	(771)
Profit before finance items and taxation	2,557	2,204
Exchange gains on external net debt	7	3
Losses on currency and interest rate derivatives not qualifying for hedge accounting	(5)	-
Net interest payable	(49)	(45)
Amortisation of discount	(9)	(14)
Profit before taxation	2,501	2,148
Taxation	(917)	(770)
Profit for the year (Rio Tinto share)	1,584	1,378


Notes
The sales revenue of equity accounted units excludes charges by jointly controlled entities to Rio Tinto Group subsidiaries.
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Note 7 - Interest receivable and payable

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	Note	2007 US$m	2006 US$m
Interest receivable and similar income from:
- Equity accounted units		28	27
- Other investments (a)		101	69
		129	96
Other interest receivable		5	10
Total interest receivable and similar income		134	106
Interest payable and similar charges (b)		(660)	(220)
Amounts capitalised	13	122	60
Total Interest payable and similar charges		(538)	(160)


Notes
Interest income from other investments comprises US$80 million (2006: US$58 million) of interest income from bank deposits and US$21 million (2006: US$11 million) from other financial assets. Interest payable and similar charges comprises US$685 million (2006: US$175 million) of interest on bank loans and other borrowings and US$25 million gain (2006: US$45 million loss) from interest rate swaps.
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Note 8 - Tax on profit

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	Note	2007 US$m	2006 US$m
UK taxation
Corporation tax at 30%
- Current		98	86
- Deduct: relief for overseas taxes		(98)	(72)
- Deferred		(150)	27
		(150)	41
Australian taxation
Corporation tax at 30%
- Current		1,396	1,517
- Deferred		(18)	(97)
		1,378	1,420
Other countries taxation
- Current		897	896
- Deferred		(35)	16
		862	912
Total taxation charge
- Current		2,293	2,427
- Deferred	18	(203)	(54)
		2,090	2,373

Prima facie tax reconciliation
Profit before taxation		9,836	10,240
Deduct: share of profit after tax of equity accounted units		(1,584)	(1,378)
Parent companies' and subsidiaries' profit before tax		8,252	8,862
Prima facie tax payable at UK and Australian rate of 30%		2,476	2,659
Impact of items excluded in arriving at underlying earnings (c)		(28)	201

Other permanent differences
Additional recognition of deferred tax assets (a)		-	(335)
Utilisation of previously unrecognised deferred tax assets		-	(140)
Adjustments to deferred tax liabilities following changes in tax rates (b)		(392)	(46)
Other tax rates applicable outside the UK and Australia		271	242
Resource depletion and other depreciation allowances		(173)	(187)
Research, development and other investment allowances		(81)	(21)
Other		17	-
Total taxation charge		2,090	2,373

Notes

The 'Additional recognition of deferred tax assets' of US$335 million in 2006 reflected improved prospects for future earnings from the Group's US operations.
The 'Adjustments to deferred tax liabilities following changes in tax rates', totalling US$392 million (2006: US$46 million), result largely from a reduction in Canadian tax rates.

An analysis of the impact on the tax reconciliation of items excluded in arriving at Underlying earnings is given below:

	2007 US$m	2006 US$m
Impairment (charges)/reversals	(1)	157
Exchange gains/losses on US dollar net debt, intragroup balances and derivatives not designated as hedges	(19)	55
Other exclusions	(8)	(11)
	(28)	(201)

This tax reconciliation relates to the parent companies, subsidiaries and proportionally consolidated units. The Group's share of profit of equity accounted units is net of tax charges of US$917 million (2006: US$770 million).

Note 9 - Earnings per ordinary share

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	2007 Earnings US$m	2007 Weighted average number of shares (millions)	2007 Per share amount (cents)	2006 Earnings US$m	2006 Weighted average number of shares (millions)	2006 Per share amount (cents)
Basic earnings per share attributable to ordinary shareholders of Rio Tinto	7,312	1,285.8	568.7	7,438	1,333.4	557.8
Effect of dilutive securities (share options) (c)	-	5.5	-	-	5.4	-
Diluted earnings per share attributable to ordinary shareholders of Rio Tinto	7,312	1,291.3	566.3	7,438	1,338.8	555.6
Underlying earnings per share attributable to ordinary shareholders (a)
- Basic	7,443	1,285.8	578.9	7,338	1,333.4	550.3
- Diluted	7,443	1,291.3	576.4	7,338	1,338.8	548.1


Notes
Underlying earnings per share is calculated from underlying earnings, detailed information on which is given in note 2. The weighted average number of shares is calculated as the average number of Rio Tinto plc shares outstanding not held as treasury shares of 1,000.1 million (2006: 1,047.7 million) plus the average number of Rio Tinto Limited shares outstanding not held by Rio Tinto plc of 285.7 million (2006: 285.7 million). For the purposes of calculating diluted earnings per share, the effect of dilutive securities is added to the weighted average number of shares described in (b) above. This effect is calculated under the treasury stock method.
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Note 10 - Dividends

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	2007 US$m	2006 US$m
Rio Tinto plc previous year Final dividend paid (b)	646	442
Rio Tinto plc previous year Special dividend paid (b)	-	1,171
Rio Tinto plc Interim dividend paid (b)	518	417
Rio Tinto Limited previous year Final dividend paid (b)	198	118
Rio Tinto Limited previous year Special dividend paid (b)	-	312
Rio Tinto Limited Interim dividend paid (b)	145	113
Dividends paid during the year	1,507	2,573

	2007 Number of shares (millions)	2006 Number of shares (millions)
Rio Tinto plc previous year Final and Special (b)	1,007.3	1,063.9
Rio Tinto plc Interim (b)	996.7	1,042.7
Rio Tinto Limited previous year Final and Special - fully franked at 30% (b)	285.7	285.7
Rio Tinto Limited Interim - fully franked at 30% (b)	285.7	285.7


Notes
The dividends paid in 2007 are based on the following US cents per share amounts: 2006 final - 64.0 cents, 2007 interim - 52.0 cents (2006 dividends paid: 2005 final - 41.5 cents, 2006 special - 110 cents, 2006 interim - 40.0 cents). The number of shares on which the Rio Tinto Limited dividends are based excludes those shares held by Rio Tinto plc, in order that the dividends shown represent those paid to public shareholders. The number of shares on which Rio Tinto plc dividends are based excludes those held as treasury shares. In addition, the directors of Rio Tinto announced a final dividend of 84 cents per share on 13 February 2008. This is expected to result in payments of US$1.1 billion (Rio Tinto plc: US$0.8 billion, Rio Tinto Limited US$0.3 billion). The dividends will be paid on 11 April 2008 to Rio Tinto plc shareholders on the register at the close of business on 22 February 2008 and to Rio Tinto Limited shareholders on the register at the close of business on 26 February 2008. The proposed Rio Tinto Limited dividends will be franked out of existing franking credits or out of franking credits arising from the payment of income tax during 2008. The approximate amount of the Rio Tinto Limited consolidated tax group's retained profits and reserves that could be distributed as dividends and franked out of credits, that arose from net payments of income tax in respect of periods up to 31 December 2007 (after deducting franking credits expected to be utilised on the 2007 final dividend declared), is US$7,759 million.

Note 12 - Intangible assets

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Year ended 31 December 2007	Exploration and evaluation (a) US$m	Trademarks, patented and non patented technology US$m	Contract based intangible assets (b) US$m	Other intangible assets US$m	Total US$m
Net book value
At 1 January 2007	196	-	-	188	384
Adjustment on currency translation	9	12	7	22	50
Acquisition of subsidiary (note 41)	9	579	6,867	12	7,467
Expenditure during year	194	-	-	209	403
Amortisation for the year	-	(8)	(28)	(78)	(114)
Impairment	-	-	-	(21)	(21)
Disposals, transfers and other movements	(256)	-	(1)	(2)	(259)
At 31 December 2007	152	583	6,845	330	7,910
- cost	152	591	6,874	566	8,183
- accumulated amortisation	-	(8)	(29)	(236)	(273)

Year ended 31 December 2006	Exploration and evaluation (a) US$m	Trademarks, patented and non patented technology US$m	Contract based intangible assets (b) US$m	Other intangible assets US$m	Total US$m
Net book value
At 1 January 2006	113	-	-	107	220
Adjustment on currency translation	5	-	-	10	15
Expenditure during year	72	-	-	118	190
Amortisation for the year	-	-	-	(27)	(27)
Disposals, transfers and other movements	6	-	-	(20)	(14)
At 31 December 2006	196	-	-	188	384
- cost	196	-	-	310	506
- accumulated amortisation	-	-	-	(122)	(122)
At 1 January 2006
- cost	113	-	-	327	440
- accumulated amortisation	-	-	-	(220)	(220)


Notes
Exploration and evaluation: useful life not determined until transferred to property, plant & equipment. The Group acquired Alcan Inc. on 23 October 2007. Alcan Inc. benefits from certain intangible assets including power supply contracts, customer contracts and water rights. The water rights are expected to contribute to the efficiency and cost effectiveness of operations for the foreseeable future: accordingly, these rights are considered to have indefinite lives and are not subject to amortisation. These water rights constitute the majority of the amounts in the column of the above table entitled 'Contract based intangible assets'. The intangible assets with indefinite lives have been valued based on the advice of expert valuation consultants, and no diminution in their value is considered to have occurred since the date of acquisition. There are no intangible assets either pledged as security or held under restriction of title.

Exploration and evaluation expenditure

The charge for the year and the net amount of intangible assets capitalised during the year are as follows:

	2007 US$m	2006 US$m
Cash expenditure in year (net of proceeds on disposal of undeveloped properties) (a)	576	345
Changes in accruals (including non-cash proceeds on disposal of undeveloped properties)	(61)	(36)
Amount capitalised during year	(194)	(72)
Charge for year	321	237


Notes
Exploration and evaluation costs are stated net of gains on disposal of undeveloped properties totalling US$253 million (2006:US$46 million).

Note 24 - Consolidated net debt

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	2007 Net debt US$m	2006 Net debt US$m
Analysis of changes in consolidated net debt
At 1 January	(2,437)	(1,313)
Adjustment on currency translation	(223)	(56)
Exchange gains credited to the income statement	136	38
Gains on derivatives related to net debt	11	44
Debt of acquired companies	(5,465)	-
Cash movements excluding exchange movements	(37,332)	(1,146)
Other movements	158	(4)
At 31 December	(45,152)	(2,437)

Reconciliation to balance sheet categories
Borrowings (note 22)	(46,723)	(3,497)
Bank overdrafts repayable on demand (note 21)	(104)	(14)
Cash and cash equivalents (note 21)	1,645	736
Other liquid resources (note 20)	6	6
Derivatives related to net debt (note 34)	24	332
Balances per above	(45,152)	(2,437)

	2007 US$m	2006 US$m
Exchange gains on US dollar net debt and intragroup balances
Exchange gains on US dollar net debt	163	38
Exchange gains/(losses) on intragroup balances	11	(5)
Exchange losses on loans from equity accounted units	(2)	-
Exchange gain on settlement of dividend	22	13
Credited to income statement	194	46

Notes
Further information relating to the currency and interest rate exposures arising from net debt and related derivatives is given in note 34 on Financial Instruments.