Operations & financial report

STRATEGIC OVERVIEW

Rio Tinto's Iron Ore group conforms with the larger Group's overall strategy of pursuing the world's best natural resources, wherever they are located, using the best technologies, and operating them safely. RTIO seeks to do this by being faster and better at producing iron ore, supported by an unmatched capacity and capability to develop key infrastructure.

RTIO is geographically well placed to take advantage of the exceptionally strong market conditions and outlook in Asia, with a massive mineral resource base close to an integrated production platform in the Pilbara of Western Australia. This enables a rapid expansion of production in the short and medium term. RTIO's large mineralisation position in Australia and Guinea, west Africa, together with an established project execution capability, provides potential for a global iron ore production capacity of more than 600 million tonnes per annum.

As new competitors and constraints emerge, RTIO's strategy to meet the industry challenges is focused on achieving "industry leadership" in global iron ore. The strategy is centred on rapidly expanding the business, both globally and in the Pilbara, and delivering maximum value from RTIO's operations by developing a world class production platform.

RTIO's portfolio of operations is international, including Australia, Canada and Brazil, a major development project in Guinea at Simandou, and the Orissa project in India. It also includes the HIsmelt® plant in Australia, which applies revolutionary technology to convert iron ore fines with significant impurities into high quality pig iron.

RTIO Asia was established in Singapore in November 2007 to provide an integrated sales, marketing, distribution and logistics service for Hamersley Iron products in the Asia Pacific. It aims to maximise Hamersley's share of forecast growth in the region.

At 31 December 2007, the Iron Ore group accounted for 13 per cent of Rio Tinto's operating assets, and in 2007 contributed 26 per cent of the Group's gross sales revenue and 36 per cent of underlying earnings.

At year end 2007 RTIO employed 6,520 people in Western Australia and 8,630 worldwide. In a highly contested market, the recruitment effort was exceptional, with 1,951 new starters in 2007.

Environmental initiatives included development of a strategic approach to water for the Pilbara, to ensure long term security of supply at the ports and in the management of dewatering discharge associated with the increasing requirement for below water table mining across the Pilbara, and recognising the importance of this issue for traditional land owners of the region.

A major milestone was reached with the completion of the Phase B upgrade of the port of Dampier, now ramping up towards its new capacity of 140 million tonnes per annum (Mt/a). Work has commenced on the Cape Lambert upgrade to 80 Mt/a from 55 Mt/a, which will be completed in early 2009. Two new mines were approved for development - Brockman 4 (22 Mt/a) and Mesa A/Warramboo (25 Mt/a) - at a combined total cost of US$2.4 billion, of which Rio Tinto's share is US$2.0 billion. Both mines will replace tonnages from deposits nearing the end of their mine life.

Rio Tinto's 50:50 joint venture with Hancock Prospecting is progressing well. In November, Hope Downs 1 (22 Mt/a), began production - a full quarter ahead of schedule, and the stage 2 expansion to 30 Mt/a has been brought forward one year, with production planned to commence at the start of 2009. In December approval was given for a US$71.4 million feasibility study into the development of a Hope Downs 4 mine (15-20 Mt/a).

RTIO's growth strategy has seen more than US$7 billion committed to port, rail, power and mine assets since 2003, resulting in a world class, integrated iron ore network. A feasibility study into expanding Pilbara capacity to 320 Mt/a by 2012 is well advanced and a decision will be made in early 2009. Cape Lambert has been identified as the preferred site for port expansion.

In late November 2007 Rio Tinto senior management outlined an aggressive expansion programme designed to capitalise on RTIO's global spread of assets and markets. This included a conceptual framework towards establishing a Pilbara production capacity of 420 Mt/a and an expansion at Simandou in Guinea of up to 170 Mt/a.

During the year, RTIO was inducted into the Australian Export Hall of Fame, was twice honoured at the Australian Business Arts Foundation awards and won a 2007 Water Award for its re-injection project at Yandicoogina.

Sam Walsh, chief executive Iron Ore, is based in Perth, Western Australia.

*A reconciliation of the net earnings with underlying earnings for 2005, 2006 and 2007 as determined under EU IFRS is set out in the Group financial performance. 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.