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23. July 2007

Interview: Rio Tinto CEO Says "Cash Is King"

Last week, Rio Tinto successfully trumped Alcoa’s $27.7 billion bid for Alcan with a competing offer worth $38.1 billion. Resource Investor speaks with Rio Tinto CEO Tom Albanese about the deal, debt and aluminium market.

RESOURCE INVESTOR: I wanted to congratulate you on the deal with Alcan.

TOM ALBANESE: Thank you. I think it’s quite exciting, and we’re already in the process of doing our integration planning, and spent some time with the senior management team yesterday, and everyone’s looking forward to a pretty good opportunity.

RESOURCE INVESTOR: Yes, it sounds like a good deal. I guess I’ll get right to the chase since our time is short. My question is: You guys avoided shareholder dilution with giving an all-cash deal as opposed to issuing any shares. My question is what is your strategy or plan for paying off the long-term debt that will be acquired?

TOM ALBANESE: I think that we recognize, certainly in the North American M&A market, that cash is king and that there was a strong interest in the certainty associated with cash. We saw that as being part of what we identified as a compelling offer to the Alcan shareholders. So that caused us to look at this being an all-cash transaction. Of course this also allows us to see earnings accretive and cash accretive in the first year. As we look ahead, that does cause our [revenues] to increase to something north of 60%, say the 64% range, and we would be seeing employment of some considerable internal cash flows to pay down that debt, and we’ll certainly look at reviewing all parts of the Rio Tinto business for opportunities, if there are buyers out there that may see assets that are valued higher than we would see. And we have agreed with the Alcan management that we would be working together to sell the Alcan packaging business.

RESOURCE INVESTOR: Sure. Do you know are there other assets owned by Alcan that you may be looking to unload?

TOM ALBANESE: Well, with the larger Rio Tinto following this transaction, I think it’s fair to say that we will be looking at all parts of the new Rio Tinto business to see if there are any businesses or assets that may not have the same strategic fit or that feature a competitive advantage. We have always done this in Rio Tinto in the past, and it would just be complimentary with our strategy going forward. We are in a part of the market now where there’s considerable interest by smaller and intermediate-sized mining companies and metal companies in what we mostly refer to as intermediate-sized assets, and so we’ll certainly take them into account.

RESOURCE INVESTOR: Sure. I read a UBS report that said you might sell up to - I think the number was - $14.5 billion in assets upon your portfolio review. Is this number realistic?

TOM ALBANESE: Well, I think what we have said is that with the packaging business, with our other objectives of this review, we would expect that it would provide proceeds of double-digit billions, and we’ve also said that we wouldn’t be satisfied with only $10 billion.

RESOURCE INVESTOR: Okay, I see. Now with this deal, you obviously are very bullish on aluminium going forward. What do you feel are the driving fundamentals surrounding the market?

TOM ALBANESE: Well we see, in many ways, aluminium sharing the same positive demand drivers that we also see for steel, or in our case, iron ore and copper, and that is that China continues to grow at a robust clip. As a matter of fact, recent numbers out of China show that GDP growth in the prior quarter was again above expectations, and this is leading to continued industrialization, continued urbanization in China. All of these are factors which are friendly toward the continued demand growth in these metals, so I’d say that aluminium is in that same category. We haven’t seen, in aluminium, Chinese supply response, and that’s kept the price of aluminium from moving upward as much as we’ve seen in, say, iron ore and copper, and I think that’s presented us with what we would see as a buying opportunity as we measure these transactions on a long-term NPV value base.

RESOURCE INVESTOR: Have you guys set any aluminium price forecasts?

TOM ALBANESE: When we look at aluminium prices in the long term, we would assume that equilibrium prices for aluminium will be driven by the long-term marginal cost of production, and we are seeing quite clearly that the expansion of Chinese supply has increased the long-term supply curve, and that’s largely because the Chinese are in a deficit position, a natural geologic deficit position, on quality bauxite resources, and they’re increasingly finding that stranded, cheap power is dear to come by, and looking ahead, bauxite electricity will be even more expensive for the Chinese in the future, and that leads us to believe that this is a good time to be acquiring quality, low cost, long-life aluminium assets.

RESOURCE INVESTOR: Now, many analysts are calling the Chinese market a bubble right now. If it were to pop, this could have serious implications for base metal demand. What’s your opinion on this? Do you think the bubble could burst?

TOM ALBANESE: We’ve been involved with the Chinese market for a long time. We’ve been selling iron ore to China for well over 20 years, before it became fashionable, and I think we have a pretty good idea of what’s going on and what’s driving the China market. I think that the Chinese leadership has done a good job of steering what is a quite complex and large economy and navigating a complex path. In our own internal growth assumption, we assume China will grow about 9% year-on-year GDP to 2015, and that’s quite a bit lower than China’s currently growing at, and that itself provides us with a relatively robust demand profile in all these key metals.

RESOURCE INVESTOR: I have stats saying that China produced about 28% of the world’s aluminium last year and accounted for about 24% of demand, making it a net exporter, so do you believe this is going to change going down the road?

TOM ALBANESE: Well the net import/export balance for China aluminium is really a small number between two very large figures, and so we’ve seen shifts in that number over that past few years. As a matter of fact, this year - 2007 year-to-date - we’ve seen a sizeable decline in aluminium exports from China, and even more recently over the last couple days, we’ve seen the Chinese authorities working further to plant down Chinese exports with increased export taxes. In many ways, as you know, aluminium is seen as frozen electricity, it’s very power-consumptive, and as China continues to grow, it’s finding competing needs for power, and I think that policymakers see that continued exports of aluminium metal would not necessarily be beating all of the supply and demand.

RESOURCE INVESTOR: Okay, well I just have one more broad question for you. After this giant acquisition into the aluminium market, do you think that Rio might be branching out into different markets going forward at some time?

TOM ALBANESE: Well we’ve been in the aluminium market since the 1960s, and we grew our Australian and New Zealand aluminium assets around the growth of Japan and the industrialization of Japan during the ‘60s and ‘70s. In many ways, one could argue that what you’re seeing in China is a repeat performance of what happened back then in Japan. So I think it’s again become quite complementary of Rio Tinto’s history and Rio Tinto’s strategy.

RESOURCE INVESTOR: Well great, I thank you for your time.

TOM ALBANESE: Thank you, good talking to you, Jon.

RESOURCE INVESTOR: It was very nice talking to you, and good luck going forward.

Tom Albanese, 49, took over as chief executive from Leigh Clifford with effect from 1 May 2007.  He has been a director of Rio Tinto plc and Rio Tinto Limited since March 2006, elected by shareholders in 2006. He was appointed chief executive of the Industrial Minerals group in 2000, after which he became chief executive of the Copper group and head of Exploration in 2004.

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