Operations & financial report

STRATEGIC OVERVIEW

From 1 June 2007 the number of product groups in which Rio Tinto is organised was reduced to five from six by combining the Industrial Minerals group with the Diamonds group to form Diamonds and Industrial Minerals. The structuring better reflects the size of the Diamonds and Industrial Minerals businesses in the context of the broader Rio Tinto. Diamonds and Industrial Minerals report to the product group heads of Copper and Energy respectively.

Diamonds comprises Rio Tinto’s 60 per cent interest in the Diavik Diamonds mine located in the Northwest Territories of Canada, the wholly owned Argyle mine in Western Australia, Rio Tinto’s 78 per cent interest in the Murowa mine in Zimbabwe and diamond sales and representative offices in Antwerp, Belgium and Mumbai, India.

Within the global diamond industry, Rio Tinto Diamonds is well positioned as a leading supplier to the market with a clear focus on the upstream portion of the value chain. The group’s differentiated approach to marketing has enabled it to capture higher prices.

The group’s strategy is to compete in the diamond business and strive to build further value through operational excellence and continued development of new and existing resources. The focus is on the mining, recovery and sale of rough natural diamonds. In keeping with Rio Tinto’s values, the group is a leading proponent of a number of programmes and partnerships that help improve social and environmental standards of partners, suppliers and customers.

Rio Tinto sells diamonds from all three operations through its marketing arm according to a strict chain of custody process ensuring all products are segregated according to mine source.

The Industrial Minerals part of the group is made up of Rio Tinto Minerals (RTM), a global leader in borates, talc and salt supply and science, and Rio Tinto Iron & Titanium (RTIT), a major producer of titanium dioxide feedstock. Industrial minerals markets include automotive, construction, telecommunications, agriculture and consumer products industries. Market differentiation depends on technical and marketing expertise and the group maintains R&D facilities in Europe, Canada and the US to develop new products and support customers.

The Industrial Minerals strategy is to create value by directing resources toward high value growth sectors in mature and emerging markets. To support this, the group focuses on meeting customers’ needs for consistent quality, on time delivery and responsiveness; setting and meeting aggressive business improvement targets; expanding high grade titanium dioxide feedstock capacity; and establishing stock points to supply demand growth in emerging economies. The Industrial Minerals operating strategy is market driven and focuses on optimising volumes and product mix.

Business improvement targets set in 2004 have largely been met resulting in the lowering of the sustainable cost base of Industrial Minerals. As part of a business optimisation exercise two talc operations were sold and two more were decommissioned in 2007. The Canadian RTIT metal powders plant has been integrated into the other RTIT operations to improve operating synergies. Operational excellence programmes continue to deliver improvements through systematically eliminating waste, reducing process variability, and engaging and empowering the workforce.

Commercial and operating excellence is the foundation for growth, with acquisitions of sufficient scale serving to complement the existing portfolio. Greenfields projects are under way in potash and soda ash. RTIT is operating its assets at maximum capacity while maximising returns from co-products. Volume growth in the high grade titanium dioxide feedstock market will be underpinned by the commissioning and expansion of the Madagascar deposit.

During 2007 negotiations at Richards Bay Minerals (RBM) were progressed to an advanced stage to divest 26 per cent of the business to historically disadvantaged groups as part of the legal requirement in South Africa to convert mineral rights. Rio Tinto marginally increased its share in its salt operations by buying out minority shareholders. At the end of 2007 a Group wide review of assets was conducted to determine the long term value of retaining these assets within Rio Tinto. Based on the outcome of this review the RTM borates and talc businesses are being considered for divestment.

At 31 December 2007, Diamonds and Minerals accounted for seven per cent of the Group’s operating assets and contributed approximately 12 per cent of Rio Tinto’s gross turnover and seven per cent of underlying earnings in 2007. Approximately 8,000 people were employed in 2007.

Andrew Mackenzie was appointed chief executive, Diamonds and Minerals on 1 June. In November he left the Group. Responsibility for the Industrial Minerals portfolio was assumed by Preston Chiaro, chief executive, Energy, while Bret Clayton, chief executive, Copper, is responsible for Diamonds.

*A reconciliation of the net earnings with underlying earnings for 2005, 2006 and 2007 as determined under EU IFRS is set out on page 15. Adjusted earnings for 2003 have been determined under UK GAAP. All amounts presented by the product groups exclude net interest and other centrally reported items.