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Operations & financial report

Grasberg joint venture

(Rio Tinto: 40 per cent)

Grasberg, located in the province of Papua in Indonesia, is one of the world's largest copper and gold mines in terms of reserves and production. It is owned and operated by Freeport Indonesia (PTFI), the principal and 91 per cent owned subsidiary of the US based Freeport-McMoRan Copper & Gold Inc. (FCX). The Government of Indonesia owns the remaining nine per cent of PTFI. The joint venture gives Rio Tinto a 40 per cent share of production above specific levels until 2021 and 40 per cent of all production after 2021, as well as representation on operating and technical committees.

The joint venture operates under an agreement with the Government of Indonesia, which allows the joint venture to conduct exploration, mining and production activities in a 10,000 hectare area (Block A). Exploration activities are conducted in an approximate 200,000 hectare area (Block B). All of the proved and probable mineral reserves and current mining operations are located in Block A. Rio Tinto and PTFI also have joint ventures in other entities which have exploration rights in areas covering 690,000 hectares in addition to Blocks A and B. Rio Tinto has the right to 40 per cent of the exploration potential in all areas outside of Block A.

In meeting the mine's social obligations to local communities, at least one per cent of Grasberg's net sales revenues are committed to support village based programmes. In addition, two trust funds were established in 2001 in recognition of the traditional land rights of the local Amungme and Komoro tribes. In 2007, PTFI contributed US$48 million (net of Rio Tinto portion) and Rio Tinto US$4.5 million in total to the funds.

As a result of training and educational programmes, Papuans represented more than a quarter of PTFI's approximately 10,776 strong workforce by the end of 2007.

2007 operating performance

In mid 2007, the Deep Ore Zone expansion to 50,000 tonnes per day was completed, and a further expansion to 80,000 tonnes per day is under way. Ninety per cent of the tunnelling on the Common Infrastructure Project was completed, which will provide access to large undeveloped orebodies through a tunnel system 400 metres below existing workings. Feasibility studies for Grasberg block cave operations are well advanced and mine development activities will commence in the first half of 2008. The Big Gossan development will reach full production rates by the end of 2010. The high pressure grinding rolls project which involves new energy saving technology for treating ore in the mill was completed during 2007.

Rio Tinto's share of metal is 40 per cent of the production in excess of a level specified in the joint venture agreement (the Product Schedule). This means that Rio Tinto's share is leveraged to relatively small variations in total production. Rio Tinto's 2007 share of production showed considerable variation from 2006 - volumes of payable copper decreased to 60 million pounds in 2007 from 99 million pounds in 2006, offset by an increase in the volume of payable gold from 94,000 ounces in 2006 to 411,000 ounces in 2007. The sequencing in mining areas with varying ore grades causes fluctuations in the timing of ore production, resulting in varying annual production of copper and gold. This continuing variation in production will continue year on year. It is expected that in the first half of 2008 mining will be in a relatively low grade section of the Grasberg open pit.

The current mine plan reflects a transition from the Grasberg open pit to the Grasberg underground block cave orebody in mid 2015. PTFI, as manager, continually analyses its longer range mine plans to assess the optimal design of the Grasberg open pit and the timing of development of the Grasberg underground block cave orebody. The review in 2006 resulted in changes to the expected final Grasberg open pit design which will result in a section of high grade ore previously expected to be mined in the open pit to be mined in Grasberg's underground block cave operations.

Principal operating statistics for PTFI 2005-2007
2005 2006 2007
Ore milled ('000 tonnes) 78,907 83,716 77,593
Head grades:
Copper (%) 1.13 0.85 0.82
Gold (g/t) 1.65 0.85 1.24
Silver (g/t) 4.88 3.84 3.53
Production of metals in concentrates
Copper ('000 tonnes) 793.9 610.8 569.4
Gold ('000 ounces) 3,546 1,880 2,689
Silver ('000 ounces) 7,531 5,609 5,238

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