Performance
Financial performance
2008 compared with 2007
The Copper & Diamonds group's 2008 sales revenue was US$6,669 million and its contribution to underlying earnings was US$1,758 million, US$1,993 million less than in 2007. Lower volumes and prices combined with increases in the cost of basic materials, fuel, explosives and labour, were the primary reasons for the decline in underlying earnings.
The average price of copper was 320 US cents per pound during 2008, compared with 324 US cents in 2007. The average gold price of US$872 per ounce, compared with US$691 per ounce in 2007. The average price of molybdenum was US$30.80 per pound compared with US$29.92 per pound in 2007. Copper and molybdenum prices declined significantly during the second half of 2008 as a result of weakening demand in the context of the global economic slowdown.
The overall impact of price changes on the Copper & Diamonds group, including the effect of provisional pricing movements, was to decrease underlying earnings by US$159 million. At 31 December 2008, the group had 183 million pounds of copper sales that were provisionally priced at 133 US cents per pound. The final price of these sales will be determined during the first half of 2009. This compares to 270 million pounds of open shipments at 31 December 2007 provisionally priced at 304 US cents per pound.
KUC's contribution to underlying earnings in 2008 of US$998 million was US$651 million lower than 2007. Earnings were impacted by lower copper, gold and molybdenum sales volumes and higher operating costs. The decrease in sales volumes was principally due to a scheduled smelter shutdown during the second half of 2008. Higher input prices, particularly for energy, lower molybdenum production and increased maintenance costs also adversely impacted underlying earnings in 2008.
Rio Tinto's share of underlying earnings from Escondida was US$836 million, US$689 million lower than 2007. The reduction reflects lower prices, lower volumes due to lower grades and reduced availability of the Laguna Seca concentrator, and higher cash costs. Provisional pricing adjustments at the end of 2008 also contributed to lower underlying earnings.
The Grasberg joint venture contributed US$4 million to underlying earnings, a decrease of US$155 million from prior year. As a result of an open pit failure, Rio Tinto's share of metal from 2008 production was greatly reduced as the production levels were just above the minimum thresholds set out in the joint venture metal strip agreement.
Palabora's 2008 earnings were US$49 million, US$9 million lower than prior year. Earnings were impacted by lower prices, lower volumes of finished copper sold and higher costs for personnel and consumables. The decrease was partially offset by increased by-product revenues.
Northparkes Mines made a loss of US$12 million, a decrease in underlying earnings of US$149 million from 2007 due to lower copper production after the closure of the E26 block cave in 2007.
Diamonds contributed US$137 million to Rio Tinto's underlying earnings in 2008, a decrease of US$143 million from 2007. Sales revenue for 2008 was US$840 million, US$180 million lower than in 2007. Decreased volumes at both Argyle and Diavik adversely affected earnings. An impairment charge of US$107 million after tax was recognised at Diavik to reduce its carrying value to an estimated recoverable amount. Rio Tinto Diamonds share of production decreased to 20.8 million carats in 2008, compared to 26.0 million carats in 2007 due to lower grades.
2007 compared with 2006
The Copper group's contribution to 2007 underlying earnings was US$3,479 million, compared to underlying earnings of US$3,538 million in 2006. 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 was 15 per cent higher than in 2006. 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 and switch to lower grade opencut stockpiles. 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.
Diamonds contributed US$280 million to Rio Tinto's underlying earnings in 2007, an increase of US$69 million over 2006. Sales revenue for 2007 was US$1,020 million, US$182 million higher than in 2006. Increased volumes from Diavik, a reduction in stocks at Argyle and tax credits in Australia and Canada contributed to earnings. An impairment charge of US$328 million after tax was recognised at Argyle, reflecting industry cost pressures and the difficult ground conditions encountered in the underground project.
