Modelling Rio Tinto Alcan
Rio Tinto PLC
16 January 2008
Date: 16 January 2008
Ref: PR597g
Modelling Rio Tinto Alcan
Following Rio Tinto's successful acquisition of Alcan Inc. ('Alcan') in the
fourth quarter of 2007, Rio Tinto will report its 2007 full year financial
results inclusive of Alcan with effect from 24 October 2007.
As an interim step, Alcan's contribution to Rio Tinto's 2007 full year financial
results will be reported as a separate line in the financial information by
business unit. Rio Tinto's other aluminium businesses will be reported
separately and in a format that is consistent with previous financial results
announcements.
For 2008 and beyond, Rio Tinto intends to report Rio Tinto Alcan as three
separate business units - Bauxite & Alumina, Primary Metal and Engineered
Products. The Packaging business unit will be classified for accounting purposes
as an asset held for sale. As previously announced on 26 November 2007, the
Group is exploring options for the divestment of the Engineered Products
business unit taking into account broad stakeholder interests.
Salient points
• Annual post tax synergies of $940 million are expected from the end of
2009*.
• Estimated $372 million pre-tax interest cost in respect of the $40 billion
Alcan acquisition facility for the period to 31 December 2007.
• Rio Tinto is continuing with the sale process for the Packaging business
and is exploring options for the divestment of Engineered Products as part
of the overall $15 billion asset divestment target. $10 billion of this
total is targeted for 2008.
• Packaging will be shown as an asset held for sale in the 2007 accounts.
• The approximate long-term effective tax rate on underlying earnings for
Rio Tinto Alcan, before one-off items and excluding the impact of foreign
exchange rate movements, is expected to be 31%.
This release provides some clarification on key issues relating to the modelling
of Rio Tinto Alcan assets.
The financial information contained in this release is unaudited.
It should be noted that the provisional values for the purchase price
adjustments incorporated in the 2007 financial statements will be subject to
revision within 12 months of the date of acquisition as permitted by the
relevant accounting standard, IFRS 3, 'Business Combinations and Goodwill'.
* Further analysis of the $940 million synergies was provided at the 26 November
2007 Investor Seminar, available on the Rio Tinto website.
All dollars are US dollars unless otherwise stated.
Rio Tinto Alcan business units
Rio Tinto Alcan is currently organised into four business units:
1. Bauxite & Alumina
Encompassing Rio Tinto Alcan's bauxite mining and alumina refining operations,
the Bauxite & Alumina business unit operates five bauxite mines and six smelter
grade alumina refineries. The business also produces specialty alumina from a
number of facilities. This is used in a variety of industrial and consumer
product applications. Reserves and resources data for Alcan bauxite mines will
be published in the Rio Tinto Annual Report on 17 March 2008.
Bauxite mines
Asset Location Rio Tinto Alcan Rio Tinto Alcan share
interest % of capacity (m
tonnes)
Weipa Australia 100.0 18.2
Gove Australia 100.0 6.9
Porto Trombetas Brazil 12.0 2.1
Sangaredi Guinea 22.9 6.2
Awaso Ghana 80.0 1.0
Total 34.4
Smelter grade alumina refineries
Asset Location Rio Tinto Alcan Rio Tinto Alcan share
interest % of capacity (m
tonnes)
Yarwun Australia 100.0 1.4
Gove Australia 100.0 2.0*
QAL Australia 80.0 3.2
Sao Luis (Alumar) Brazil 10.0 0.15
Jonquiere Canada 100.0 1.3
Gardanne France 100.0 0.2
Total 8.3
*The Gove alumina refinery is undergoing a 1.8mtpa expansion, with capacity
expected to reach 3.8mtpa by the end of 2008.
Key business attributes
Pricing and freight
In general it may be assumed that Rio Tinto Alcan smelter grade alumina is
priced based on a percentage of the three month LME price for aluminium, with a
one to three month lag. As a reference point, the benchmark Australian export
price has typically averaged between 12 per cent and 13 per cent of the 3-month
LME aluminium price over the long term. Rio Tinto Alcan's smelter-grade alumina
is typically sold on a Free-On-Board (FOB) basis.
Operating costs
As a broad guide (based on CRU 2006 data) the industry average key operating
cost components for an alumina refinery are:
• Bauxite and related costs - 29 per cent;
• Energy - 32 per cent;
• Caustic soda - 13 per cent;
• Labour - 10 per cent; and
• Other - 16 per cent.
Production and shipping
In general it may be assumed that there is relatively little timing difference
between production and shipping. Over the longer term these timing differences
even out hence from a value perspective there is no impact.
Revenues and shipments
In order to obtain a more complete picture of the Bauxite & Alumina business
unit, the substantial inter-segment sales of smelter grade alumina made to the
Primary Metal business unit should be factored into any analysis.
The Bauxite & Alumina business unit maintains a commercial sub-unit for the
purpose of maximising logistical efficiencies with respect to Rio Tinto Alcan's
smelter system and, as a result, published revenues (intersegment and third
party) may not accurately reflect underlying production or operating
performance. Analysts should ensure that total alumina shipments and revenues
are used if attempting to infer revenue per tonne. Total smelter grade and
specialty alumina shipments and revenues for 2006, 2005 and 2004 may be found at
page 61 of Alcan's 2006 Form 10-K filing. It should be noted that total
shipments will be higher than production due to the activities of the commercial
sub-unit.
Other businesses
In addition to the sale of smelter grade alumina, the Bauxite & Alumina business
unit also sells bauxite, speciality alumina, technology and engineering
services. While these are important businesses, they are far smaller in scale
than the smelter grade alumina business which comprises the vast majority of
Bauxite & Alumina's activity.
Key projects
Project Location Rio Tinto Commissioning Project capacity Capex
Alcan
interest % timeframe (Rio Tinto Alcan (Rio Tinto Alcan
share) share)
Gove III Australia 100 2007/08 1.8mtpa $2.3bn
Alumar expansion Brazil 10 2009 0.2mtpa $0.2bn
Yarwun expansion Australia 100 2010/11 2.0mtpa $1.8bn
Ma'aden Saudi Arabia 49 2012 0.8mtpa Pre-feasibility
Guinea Guinea 50 2013 0.8mtpa Pre-feasibility
Ghana Ghana 51 2014 0.75mtpa Conceptual stage
Madagascar Madagascar 51 2014 0.8mtpa Conceptual stage
2. Primary Metal
Rio Tinto Alcan's Primary Metal business unit operates twenty five aluminium
smelters, thirteen power facilities and a number of complementary businesses,
including the manufacture and sale of anodes and cathodes, as well as smelting
technology and equipment sales, and engineering services.
Aluminium smelters
Asset Location Rio Tinto Alcan Rio Tinto Alcan
interest % share of capacity
(kt)
Bell Bay Australia 100.0 178
Boyne Australia 59.4 330
Tomago Australia 51.6 268
Alucam (Edea) Cameroon 46.7 47
Alma Canada 100.0 415
Alouette Canada 40.0 229
Arvida Canada 100.0 166
Beauharnois Canada 100.0 52
Becancour Canada 25.1 101
Kitimat Canada 100.0 277
Grande-Baie Canada 100.0 207
Laterriere Canada 100.0 228
Shawinigan Canada 100.0 99
Ningxia(Qingtongxia) China 50.0 76
Dunkerque France 100.0 259
Lannemezan* France 100.0 50
St Jean de-Maurienne France 100.0 135
ISAL (Reykjavik) Iceland 100.0 179
Tiwai Point New Zealand 79.4 281
SORAL (Husnes) Norway 50.0 82
Sohar** Oman 20.0 -
Anglesey UK 51.0 74
Lochaber UK 100.0 43
Lynemouth UK 100.0 178
Sebree United States 100.0 196
Total 4,150
*Sohar to be commissioned in 2008.
**Lannemezan is in the process of being closed.
Power facilities
Asset Location Rio Tinto Alcan Rio Tinto Alcan Type
interest % share of capacity
(MW)
Gladstone Australia 42.0 706 Coal
Quebec (6 stations) Canada 100.0 2,687 Hydro
Kemano Canada 100.0 896 Hydro
Daba China 21.8 261 Coal
Vigelands Norway 100.0 26 Hydro
Lynemouth UK 100.0 420 Coal
Highlands (2 stations) UK 100.0 80 Hydro
Total 5,076
Key business attributes
Pricing and freight
In general, it may be assumed that Rio Tinto Alcan aluminium is priced based on
the three month forward LME price for aluminium, with a one month lag. From 1
January 2008 Rio Tinto Alcan will be adopting the Rio Tinto policy on hedging.
All fixed forward price sales realised from 1 January 2008 will be exposed to
floating LME market pricing. There is no current intention to swap the fixed
price position inherited on acquisition back to floating rate.
Pricing usually includes a product and market premium for value added product.
Observation of past period ingot realisations compared to relevant LME pricing
will derive a net premium which also includes the effect of past hedging
activities. As an example, the 2006 ex-Alcan net premium was around 2.8 per
cent above three month forward LME with a one month lag.
Rio Tinto Alcan's aluminium is generally sold on an FOB basis to European
customers and on a delivered basis to North American and Asian customers.
Operating costs
As a broad guide (based on CRU 2006 data) the key operating cost components of
an industry average aluminium smelter are:
• Alumina and related costs - 45 per cent;
• Electricity - 26 per cent;
• Consumables (mainly coke and pitch) - 10 per cent;
• Labour - 8 per cent; and
• Other - 11 per cent.
Due to Rio Tinto Alcan's high proportion of self-owned electricity generation
capacity, exposure to cost escalation in respect of electricity is relatively
modest. In 2006, approximately 10 per cent of the cost of energy consumed by Rio
Tinto Alcan's smelters was linked to the LME price.
Power
The electricity produced by Rio Tinto Alcan is for smelting, however excess
power, when available, may be sold to third parties. Rio Tinto Alcan's ability
to do this in respect of its hydropower facilities is unpredictable and depends
on precipitation and regional water levels.
Production
Rio Tinto Alcan's aluminium smelters operated at close to capacity in 2007, with
the exception of the Edea smelter in Cameroon which operated at levels in the
region of 85 per cent due to power constraints.
Revenues and shipments
Unlike the Bauxite & Alumina business unit, the Primary Metal business unit does
not maintain a commercial sub-unit.
Other businesses
Aside from primary aluminium, the business unit sells smelting material (cathode
blocks and anodes), smelting technology and equipment and engineering services,
and electricity. Total revenue in 2006 from these other businesses was $881
million.
Key projects
Project Location Rio Tinto Commissioning Project capacity Est. capex
Alcan
interest % timeframe (Rio Tinto Alcan (Rio Tinto Alcan
share) share)
Sohar Oman 20 2008 74ktpa $340m
Coega South Africa 80 2010 588ktpa $2.6bn
Quebec Canada 100 2010/12 450ktpa $2.1bn
Kitimat Canada 100 2010/11 395ktpa $1.6bn
Abu Dhabi Abu Dhabi 50 2011/12 375ktpa Pre-feasibility
ISAL Iceland 100 2011+ 280ktpa $1.4bn
Ma'aden Saudi Arabia 49 2011/12 360ktpa Pre-feasibility
Sarawak Malaysia 60 2011 450ktpa Pre-feasibility
Alucam (Edea) Cameroon 46.7 2012+ 285ktpa Pre-feasibility
3. Engineered Products
The Engineered Products business unit is a portfolio of engineered and
fabricated aluminium businesses that provide high value added solutions to a
range of customers. Sub-business units include aerospace, cable, composites,
extruded products, engineered and automotive solutions, specialty sheet and a
selling and sourcing business called AIN.
Key business attributes
Costs
Engineered Products' main cost is aluminium, followed by labour.
Seasonality
The Engineered Products business unit has a significant seasonal component as
European businesses close down for summer.
Divestment
As previously announced, the Group is exploring options for the divestment of
the Engineered Products business unit taking into account broad stakeholder
interests.
4. Packaging
As previously announced, the Packaging business unit of Rio Tinto Alcan is to be
divested and as such, will be treated as an asset held for sale.
Accounting for and financing the Alcan acquisition
Fair value accounting
The Rio Tinto group will include Alcan in its consolidated financial statements
for 2007 from the close of business on 23 October 2007, which was the date of
acquisition.
Rio Tinto has commissioned expert valuation consultants to advise on the fair
values of Alcan's assets. As required under International Financial Reporting
Standards (IFRS), the tangible and intangible assets of the acquired business
will be uplifted to fair value. The residue of the purchase price that is not
allocated to specific assets and liabilities will be attributed to goodwill. The
fair value of net assets excluding goodwill does not necessarily represent net
present value. For example, the purchase price allocation for tangible fixed
assets (including smelters and refineries) is based on the lower of depreciated
replacement cost and the net present value of the asset.
The valuation is a detailed and lengthy process. The provisional values
incorporated in the 2007 financial statements will be subject to revision within
12 months of the date of acquisition as permitted by the relevant accounting
standard, IFRS 3.
The uplift in the balance sheet values of tangible and intangible assets is
expected to give rise to a large increase in the depreciation and amortisation
charge against Rio Tinto Alcan's earnings. For the period ended 31 December
2007, this additional depreciation and amortisation is expected to be around
$100 million (pre-tax). The incremental depreciation and amortisation on the
fair value uplift for the year ended 31 December 2008 is estimated to be around
$500 million (pre-tax) based on the provisional purchase price allocation.
Alcan's Packaging business will be reported in the 2007 financial statements as
an 'Asset held for sale'. Therefore no operating profit will be taken up by Rio
Tinto from this segment of the Alcan group.
Alcan one-off items in 2007
Excluded from underlying earnings will be the impact of the requirement to
uplift finished goods and work in progress inventories to fair value at the date
of acquisition based on selling prices. This considerably reduces the profit
margin in the two to three months immediately after the acquisition, when the
inventory is sold. Inventories subsequently produced are valued at cost, in the
normal way.
Also excluded from underlying earnings will be the non-recurring costs of
integrating Alcan with the Rio Tinto Group.
Format of 2007 reporting
Alcan's contribution to the Group's 2007 results will be reported in total but
separately from the Rio Tinto Aluminium business. In 2008, information will be
reported for Rio Tinto Alcan incorporating a full year's results of aluminium,
alumina and bauxite and Engineered Products production from the newly acquired
Alcan businesses combined with Rio Tinto Aluminium.
Debt and interest
In support of its acquisition of 100 per cent of Alcan's common shares, Rio
Tinto arranged $40 billion of term loan and revolving credit facilities, fully
underwritten and subsequently syndicated. The $40 billion term loan and
revolving credit facilities are divided into four tranches with maturities
ranging from 364 days (with an option to extend for an additional year at the
borrower's option) out to five years and one business day.
The total amount drawn under the facility as at 31 December 2007 was $37.9
billion. It is estimated that the total interest cost in respect of the facility
from the date of acquisition to 31 December 2007 was $372 million with a
weighted average interest rate including margin of 5.3 per cent.
Rio Tinto accounting for Rio Tinto Alcan businesses
The following table lists the non-wholly owned upstream Rio Tinto Alcan
businesses that will be consolidated into the Rio Tinto accounts. Note that
Alouette, Boyne, QAL, Tiwai Point and Tomago are 'tolling entities'. All 100 per
cent owned operations listed in the preceding tables are fully consolidated.
Asset Location Rio Tinto Alcan Product Accounting treatment
interest %
Porto Trombetas Brazil 12.0 Bauxite Equity accounting
Sangaredi Guinea 22.9 Bauxite Equity accounting
Awaso Ghana 80.0 Bauxite Consolidation
QAL Australia 80.0 Alumina Equity accounting
Sao Luis (Alumar) Brazil 10.0 Alumina Proportionate
consolidation
Boyne Australia 59.4 Aluminium Equity accounting
Tomago Australia 51.6 Aluminium Proportionate
consolidation
Alucam (Edea) Cameroon 46.7 Aluminium Equity accounting
Alouette Canada 40.0 Aluminium Proportionate
consolidation
Becancour Canada 25.1 Aluminium Equity accounting
Ningxia China 50.0 Aluminium Equity accounting
(Qingtongxia)
Tiwai Point New Zealand 79.4 Aluminium Equity accounting
SORAL (Husnes) Norway 50.0 Aluminium Equity accounting
Sohar Oman 20.0 Aluminium Equity accounting
Anglesey UK 51.0 Aluminium Equity accounting
Further background on the respective accounting treatments can be found in note
1(b) to the 2006 financial statements ('Basis of consolidation') on page 103 of
the 2006 Annual Report.
Key Alcan reference documents
• 2006 Form 10-K
• Supplementary Information - second quarter 2007
These documents are available on the Rio Tinto Alcan website at:
http://www.alcan.com/web/publishing.nsf/content/Investors+-+Reports+and+Filings
About Rio Tinto
Rio Tinto is a leading international mining group headquartered in the UK,
combining Rio Tinto plc, a London listed company, and Rio Tinto Limited, which
is listed on the Australian Securities Exchange.
Rio Tinto's business is finding, mining, and processing mineral resources. Major
products are aluminium, copper, diamonds, energy (coal and uranium), gold,
industrial minerals (borax, titanium dioxide, salt, talc) and iron ore.
Activities span the world but are strongly represented in Australia and North
America with significant businesses in South America, Asia, Europe and southern
Africa.
Forward-Looking Statements
This announcement includes 'forward-looking statements' within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this announcement, including, without
limitation, those regarding Rio Tinto's financial position, business strategy,
plans and objectives of management for future operations (including development
plans and objectives relating to Rio Tinto's products, production forecasts and
reserve and resource positions), are forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
Rio Tinto, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Such forward-looking statements are based on numerous assumptions regarding Rio
Tinto's present and future business strategies and the environment in which Rio
Tinto will operate in the future. Among the important factors that could cause
Rio Tinto's actual results, performance or achievements to differ materially
from those in the forward-looking statements include, among others, levels of
actual production during any period, levels of demand and market prices, the
ability to produce and transport products profitably, the impact of foreign
currency exchange rates on market prices and operating costs, operational
problems, political uncertainty and economic conditions in relevant areas of the
world, the actions of competitors, activities by governmental authorities such
as changes in taxation or regulation and such other risk factors identified in
Rio Tinto's most recent Annual Report on Form 20-F filed with the United States
Securities and Exchange Commission (the 'SEC') or Form 6-Ks furnished to the
SEC. Forward-looking statements should, therefore, be construed in light of such
risk factors and undue reliance should not be placed on forward-looking
statements. These forward-looking statements speak only as of the date of this
announcement. Rio Tinto expressly disclaims any obligation or undertaking
(except as required by applicable law, the City Code on Takeovers and Mergers
(the 'Takeover Code'), the UK Listing Rules, the Disclosure and Transparency
Rules of the Financial Services Authority and the Listing Rules of the
Australian Securities Exchange) to release publicly any updates or revisions to
any forward-looking statement contained herein to reflect any change in Rio
Tinto's expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
Nothing in this announcement should be interpreted to mean that future earnings
per share of Rio Tinto plc or Rio Tinto Limited will necessarily match or exceed
its historical published earnings per share.
Subject to the requirements of the Takeover Code, none of Rio Tinto, any of its
officers or any person named in this announcement with their consent or any
person involved in the preparation of this announcement makes any representation
or warranty (either express or implied) or gives any assurance that the implied
values, anticipated results, performance or achievements expressed or implied in
forward-looking statements contained in this announcement will be achieved.
For further information, please contact:
Media Relations, Australia Media Relations, London
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Nancy Ives
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Investor Relations, North America
Jason Combes
Office: +1 (0) 801 685 4535
Mobile: +1 (0) 801 558 2645
Email: questions@riotinto.com
Website: www.riotinto.com
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