Operations & financial report
Financial performance
2007 compared with 2006
The Copper group's contribution to 2007 underlying earnings was US$3,479 million, similar to 2006 record earnings. Higher prices and volumes offset higher costs and the absence of 2006 tax benefits. The average price of copper was 324 US cents per pound during 2007, six per cent higher than in 2006. The average gold price of US$691 per ounce increased by 15 per cent. The average price of molybdenum was US$29.92 per pound compared with US$24.60 per pound in 2006. Higher volumes were achieved across all operations except Northparkes, with the largest increases at Escondida due to a full year's sulphide leach production, and at KUC due to the absence of the 2006 smelter shutdown. Higher operational costs were due to increased truck numbers resulting from longer haul profiles at KUC, increased diesel power costs due to natural gas restrictions at Escondida and the premature shutdown of Lift 2 at Northparkes. Evaluation projects also impacted cash costs due to higher spending at Resolution, La Granja, the Keystone project at KUC and the share of spending on the Oyu Tolgoi project.
KUC's contribution to underlying earnings of US$1,649 million was US$161 million lower than 2006, primarily through the absence of the US$289 million tax credit recognised in the prior year, a higher tax rate due to the shift from the Alternative Minimum Tax accounting basis in the US group and increased depreciation following the impairment reversal during 2006. As well as increased prices, offsetting these decreases in earnings were higher refined copper and gold volumes as smelter performance improved following the extended shutdown in late 2006 as well as a reduction in the environmental liability following a re-assessment of the acid plume clean-up rate.
Rio Tinto's share of underlying earnings from Escondida was US$1,525 million, an increase of US$275 million from the prior year. This was achieved through higher prices and increased copper volumes as a result of the continued ramp up of the sulphide leach plant and a higher ore grade which more than compensated for higher energy and material costs.
The Grasberg joint venture contributed US$159 million to underlying earnings, US$37 million above 2006. This was due to significant increases in gold volumes due to improved grade offset by a fall in copper volumes as grade and mill throughput both fell.
Palabora's 2007 earnings of US$58 million were US$6 million above the prior year, as increasing volumes achieved through improved underground production and ore grade and also higher copper rod premiums all benefited earnings.
Northparkes contributed US$137 million to underlying earnings, a fall of US$92 million from 2006. Performance was dominated by the premature shutdown of the Lift 2 underground area during the first half of the year, resulting in the processing of low grade open pit stockpiles and increased costs.
Kennecott Minerals earnings of US$106 million were US$1 million above the prior year, with higher prices and increased gold volumes from Cortez offset by the absence of the US$14 million tax credit from the prior year and the resulting higher effective tax rate in 2007.
The impact on earnings of expenditure on evaluation projects was US$155 million in 2007, an increase of US$125 million from the prior year as activities increased on a number of projects. Activities included pre-feasibility studies at Resolution Copper and La Granja and early construction work at Oyu Tolgoi in anticipation of the signing of an Investment Agreement with the Mongolian government.
2006 compared with 2005
The Copper group's contribution to underlying earnings was US$3,538 million, US$1,551 million higher than in 2005. The average price of copper was 306 US cents per pound during 2006, 84 per cent higher than in 2005. The average gold price of US$602 per ounce increased by 36 per cent. The average price of molybdenum was US$24.60 per pound compared with US$30.70 per pound in 2005.
KUC's earnings of US$1,810 million were US$767 million higher than in 2005, with the operation benefiting from higher prices and volumes and a tax credit of US$289 million following recognition of deferred tax assets. Record molybdenum production was achieved during the year, offsetting the impact of lower refined copper production due to a scheduled smelter shutdown in the second half of 2006. An increase in the group's long term copper price assumption triggered an assessment of the amount of recoverable copper at KUC. As a result, impairments recorded in 2001 and 2002 were reversed in 2006.
Rio Tinto's share of earnings from Escondida increased by US$648 million to US$1,250 million. Higher prices and the commencement of sulphide leaching counterbalanced higher mining costs and input prices.
The Grasberg joint venture contributed US$122 million to underlying earnings, US$110 million below 2005. Lower grades of copper, gold and silver, the result of mine sequencing, led to significantly lower production of all three metals.
Palabora's 2006 earnings of US$52 million were US$33 million above the prior year, benefiting from higher copper prices and sales volumes and the sale of some smelter stocks.
Northparkes' earnings of US$229 million represents a US$172 million increase from 2005. In addition to higher prices, better grades, increased throughput and improved recoveries all contributed to a 54 per cent increase in production of copper contained in concentrates.
Kennecott Minerals' 2006 earnings of US$105 million were US$32 million above 2005. The effect of higher gold and zinc prices and the recognition of a US$14 million deferred tax asset were offset by higher costs and lower sales volumes from Cortez, due to lower grades.
