RIO TINTO TAKES A PAUSE FOR BREATH

UNCLAS SECTION 01 OF 03 PRETORIA 002586

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TAGS: EMIN EPET ENRG EINV EIND ETRD SENV SF
SUBJECT: RIO TINTO TAKES A PAUSE FOR BREATH

REF: A) Pretoria 2250
B) Maputo 1051


1. (SBU) SUMMARY: Rio Tinto's Africa Office in Johannesburg told
Minerals/Energy Officer and Specialist that Rio Tinto was well
positioned to withstand the current global commodity downturn given
its long-term reserves, technological expertise, and exploration
prowess. They were bullish on doing business in South Africa and
Africa, touting new strategy and projects in Madagascar and Guinea.
Rio Tinto is developing new mining projects, extending the life of
old ones, and looking for new projects in Africa, particularly in
southern Africa. The Rio Tinto managers claimed that BHP Billiton's
hostile offer for Rio Tinto did not make sense and would likely
founder on EU competition concerns. BHP subsequently withdrew its
offer due to the recent decline in global commodity prices. End
Summary.

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Cautiously Positive on Chinese Demand
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2. (SBU) Minerals/Energy Officer and Specialist met November 21
with some of Rio Tinto's Africa team based in Johannesburg. Rio
Tinto Vice President - Africa Guy Larin, Exploration Manager -
Southern Africa Jonte Beswick, and Principal Advisor Community
Relations Africa Lisa Dean led the Rio Tinto - Africa team that
described the company's views of opportunities and challenges on the
continent. They quoted CEO Tom Albanese's reference to the current
global and Chinese downturn as a "pause for breath". Albanese was
quoted in the press: "Both China and India have large populations
and significant trends towards urbanization and industrialization
and will continue to be the main drivers for what we would view as a
strong, positive story for metals demand in the future." The Rio
Tinto team noted that India and China were seeking to acquire assets
such as coking coal in Mozambique's Tete Province (Ref B),although
the current downturn has caused a "collective pause for breath".
Beswick said Rio Tinto's forte is exploration and the company
expected to continue meeting its goal of garnering one "tier one"
(world-class) discovery per year. He noted that Albanese said that
Rio Tinto was reviewing its projects, but remained in an expansion
mode, albeit at a slower pace.

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BHP's Hostile Offer
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3. (SBU) The Rio Tinto staff was dismissive of BHP Biliton's
hostile offer (since withdrawn) to acquire the company, asserting
that it under-valued the company's assets and strengths. They cited
Rio Tinto's strength in exploration and its control of
infrastructure associated with iron ore reserves and production.
Moreover, Beswick cited EU anti-competitive concerns, particularly
in iron ore. Again quoting Rio Tinto's CEO, Beswick said, "BHP
needs Rio more than Rio needs BHP." Dean said that Rio Tinto had
reached a decision to be more active in making its case to the press
and analyst communities. Industry press widely covered Albanese's
Qand analyst communities. Industry press widely covered Albanese's
upbeat and positive comments made in Madagascar about Rio's staying
power. Albanese also noted that biodiversity was poised to become
the future emerging issue of the global mining community, citing the
higher expectations mining companies were encountering as they
sought to attract mine capital of gain access to land for mining.



4. (SBU) Rio Tinto is committed to mining production and processing
in both South Africa and Africa in a diverse number of minerals and
countries. Marin and Beswick were bullish on Rio Tinto's projects
and prospects in Africa. The company continues to extend the
life-of-mine at the work-horse Rossing uranium mine in Namibia.
Dean noted that it was a new strategy for Rio Tinto to operate in
more difficult environments in developing countries, but this
recognized that the "low-hanging fruit" elsewhere had already been

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harvested. The net present value analysis must still make sense,
including bearish prices and public service commitments. Dean cited
the QIT Madagascar Minerals Sand project, which included working
with the World Bank and the Madagascar government to develop a
substantial port. The Simandou Iron Ore project in Guinea involves
partnering with the IFC to build a dedicated 900 kilometer rail
line. Rio Tinto is now willing to consider power projects as part
of mining ventures. Marin said the company was deeply involved in
discussions for the Grand Inga hydroelectric project in the DRC to
power a potential associated aluminum smelting project. In
addition, Rio Tinto has a 78 percent interest in the Murowa diamond
mine in Zimbabwe. Dean said Rio had worked successfully with USAID
in Madagascar and elsewhere. She emphasized that commitment to
social and environmental programs was fully embraced by the
corporation, noting that she had moved from a long career at social
NGOs.

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South Africa's Operating Environment
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5. (SBU) In South Africa, Rio Tinto plans to expand its magnetite
and vermiculite production at its Palabora mine (Ref A) and is
looking for coal mining opportunities. Richards Bay Minerals'
mineral sands operation and smelter are a 50 percent joint venture
with BHP. The Rio Tinto team noted some clear challenges to
operating in South Africa. They highlighted infrastructure and rail
constraints, noting capacity problems at the Richards Bay port and
rail ingress. Providing private infrastructure like rail remains a
challenge in South Africa given parastatal Transnet's resistance to
competition. They said implementation of new mining legislation had
been difficult, but the Department of Minerals and Energy was now
doing a better job in converting and issuing licenses. Dean said
Black Economic Empowerment (BEE) imperatives were a reasonable
transformation goal and cost of doing business in South Africa.
They accept the fact that Rio Tinto would effectively never exceed
74 percent shareholding in South African projects (leaving 26
percent for BEE partners). Moreover, South Africa's approach was a
model for establishing the social license to operate elsewhere in
Africa.

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Coega Shelved for Three Years
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6. (SBU) Marin said Rio Tinto's proposed 1000 MW aluminum smelter
at Coega on the Indian Ocean was on hold for three years to 2011
waiting for improvement in the power situation. He described the
decision as internally mandated from an analysis of inadequate
uninterrupted power reserve with resolution dependent on some of the
mega coal power plants coming on line and/or SAG approval to
proceed. Marin said that the project now envisioned starting in
2011 with the first metal from Phase One in 2013 and the first metal
from Phase Two in 2015. The new schedule envisions compressing
Qfrom Phase Two in 2015. The new schedule envisions compressing
development of the two phases. He noted that the aluminum smelter
(inherited from the AlCan acquisition) would provide competition to
BHP's aluminum operations in southern Africa, as long as they are
separate entities. Marin claimed that Rio Tinto's technology was
premier for aluminum and titanium processing.


7. (SBU) COMMENT: On November 25, subsequent to the Embassy's
meeting with Rio Tinto, BHP withdrew its hostile bid to combine the
two mining giants due to the decline in global commodity prices.
Rio Tinto's shares subsequently lost 46 percent of their value, but
this is a natural and perhaps temporary reaction to a major bidder's
decision to walk away from a substantial block of shares. It will
take more time for the market to assess the value of the industry's
remaining independents in a bearish and volatile commodities market
environment. The Minerals/Energy team was impressed with Rio
Tinto's commitment to social development and being a public service

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provider in its new African markets. End Comment.

BOST