The Group uses a number of key performance indicators (“KPI”s) to monitor financial performance. These are summarised and discussed in the Key performance indicators section of this report.

Net earnings and underlying earnings

In order to provide additional insight into the performance of its business, Rio Tinto presents underlying earnings.

2009 underlying earnings of US$6,298 million and net earnings of US$4,872 million were US$4,005 million below and US$1,196 million above the comparable measures for 2008. The principal factors explaining the movements are set out in the table above.

Prices

The effect of price movements on all major commodities in 2009 was to decrease earnings by US$6,879 million compared with 2008. Prices declined for nearly all of Rio Tinto’s major commodities: average copper and aluminium prices were 28 per cent and 35 per cent lower, respectively, while average molybdenum prices were 65 per cent lower than 2008. Gold prices in 2009 were 11 per cent higher than 2008. Diamond prices were severely impacted by the global economic downturn.

During 2009, Rio Tinto settled 2009 iron ore supply contracts with customers in Japan, Korea and Taiwan, with prices for fines declining 33 per cent and prices for lump declining 44 per cent on the prior year. Approximately half of the iron ore that Rio Tinto produced in the first six months of 2009 was sold on a spot market basis. In the second half of the year, deliveries to Chinese customers were priced primarily on a provisional basis in line with settlements with other Asian customers.

Thermal coal contracts for 2009 were settled in the US$70-72 per tonne range, a decrease of approximately 44 per cent on the record levels of the previous year. Coking coal contracts for 2009 were settled in the US$115-130 per tonne range, a decline of approximately 60 per cent on the record levels of 2008.

Exchange rates

There was significant movement in the US dollar in 2009 relative to the currencies in which Rio Tinto incurs the majority of its costs. Compared with 2008, on average, the US dollar strengthened by eight per cent against the Australian dollar and by six per cent against the Canadian dollar. The effect of all currency movements was to increase underlying earnings relative to 2008 by US$484 million.

Volumes

Higher sales volumes from the expansion of iron ore capacity in the Pilbara region of Western Australia and higher copper and gold grades at Kennecott Utah Copper and Grasberg were partly offset by production cutbacks at Rio Tinto Alcan, Alcan Engineered Products, Diamonds, Iron & Titanium and Minerals in response to the economic downturn. The overall impact of volume movements was an increase in underlying earnings of US$652 million relative to 2008.

Energy, other cash costs and exploration

A reduction in cash costs during 2009 increased underlying earnings by US$742 million compared with 2008. Controllable operating cost savings of US$2.6 billion were achieved in 2009, exceeding the target set in December 2008 and delivered one year in advance. Lower unit costs in the Copper group, notably at Kennecott Utah Copper, were driven by higher production and a bottom-up cost reduction programme. The Iron Ore group benefited from lower unit cash costs in line with higher sales volumes and a reduction in contractor and maintenance costs. Decreased costs at Rio Tinto Alcan were driven by the major cost cutting initiatives undertaken in response to the global financial crisis including reduction of all non-critical, discretionary spending along with programmes to reduce operating costs across the production sites.

Lower energy costs across the Group boosted underlying earnings by a further US$318 million, reflecting the impact of a lower oil price. Evaluation work at many of the Group’s advanced projects was scaled back in 2009 and the central exploration budget was reduced by 60 per cent, which, together with the divestment of some exploration and evaluation properties, resulted in a favourable impact to underlying earnings of US$890 million compared with 2008. In line with Rio Tinto’s exploration policy, the US$797 million gain on disposal of the undeveloped potash properties in Argentina and Canada has been recognised within underlying earnings. This is reflected in the exploration variance in the table below net of the US$483 million gain on disposal of the undeveloped Kintyre uranium project in 2008.

Interest, tax, other

The effective tax rate on underlying earnings, excluding equity accounted units, was 24.8 per cent compared with 31.6 per cent in 2008. The decrease largely related to the one-off non taxable profit on disposal of the potash assets which was recognised in 2009. The Group interest charge was US$452 million lower than in 2008, mainly reflecting a decline in interest rates, and lower debt in 2009 following completion of the rights issues.

Exclusions from underlying earnings

	2009 US$m	2008 US$m
Underlying earnings	6,298	10,303
Items excluded from underlying earnings
Profits on disposal of interests in businesses	499	1,470
Net impairment charges2	(1,552)	(8,406)
Exchange differences and gains/(losses) on derivatives	28	843
Chinalco break fee1	(182)	–
Restructuring/severance costs from global headcount reduction	(231)	(57)
Other	12	(477)
Net earnings	4,872	3,676

1. 1 The Chinalco break fee was US$195 million pre-tax
2. 2 Net impairment charges include impairment charges of US$1,103 million (2008: US$7,579 million) and loss after tax of discontinued operations of US$449 million (2008: US$827 million)

In 2009, the Group completed the divestments of its interests in the Ningxia aluminium smelter, the Corumbá iron ore operation, the Jacobs Ranch coal mine, Alcan Composites and the sale of 52 per cent of the Group’s interest in Cloud Peak Energy Resources LLC. Net gains on these transactions totalling US$0.5 billion have been excluded from underlying earnings as divestments of interests in businesses are considered to be outside the underlying activities of the Group.

The sale of the majority of the Alcan Packaging businesses to Amcor was completed on 1 February 2010. The sale of the Alcan Packaging Food Americas division to Bemis Company, Inc for a total all cash consideration of US$1.2 billion was completed on 1 March 2010. The sale of Maules Creek to Aston Resources was completed on 18 February 2010. The sale of the Alcan Packaging Medical Flexibles operations remains subject to regulatory approvals and other customary closing conditions. These divestments have not been reflected in the 2009 results, and will be reflected in the period in which the sales are completed.

Of the Group’s total post-tax impairment charge of US$1.6 billion, US$0.5 billion relates to Alcan Engineered Products, US$0.5 billion relates to Alcan Packaging, US$0.2 billion relates to the Group’s upstream aluminium businesses and US$0.4 billion relates to the Group’s diamond businesses. All impairments have been measured based upon an assessment of fair value less costs to sell. These impairments have been caused by continued weakness in the economic environment.

In 2009, Rio Tinto paid a break fee of US$195 million (US$182 million post-tax) to Chinalco which has been excluded from underlying earnings.

During 2009, the Group incurred restructuring and severance costs of US$231 million associated with its global headcount reduction programme.

Group financial results by product group

	2009 US$m	2008 US$m
Iron Ore	4,126	6,017
Aluminium	(578)	1,271
Copper	1,866	1,597
Energy	1,420	2,581
Diamonds & Minerals	800	474
Other operations	(188)	(133)
Inter–segment transactions	(28)	25
Other items	(547)	(366)
Central exploration and evaluation	5	(133)
Net interest	(578)	(1,030)
Group underlying earnings	6,298	10,303
Exclusions from underlying earnings	(1,426)	(6,627)
Net earnings	4,872	3,676

Guy Elliott
Chief financial officer