Issues involved in supplying power to mining projects – a Rio Tinto perspective

International Congress – Energy Day Lima 3 July 2012

Mark Grenning – Chief Advisor Energy Management

Presentation outline

• Some background on Rio Tinto

• Why energy is important to us

• What we look for in power markets

• The challenges of OECD and non-OECD countries

• Some specific examples of Rio Tinto’s approach

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Who we are

• We are a leading global business delivering value at each stageof mineral and metal production

• We employ approximately 68,000 people in over 40 countries

• We fulfil vital consumer needs and improve living standards

• Our commitment to safety is fundamental to the way we do business

• Sustainable development is at the heart of everything we do

• Underlying earnings in 2011 were a record US$15.5 billion

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Rio Tinto – a world leader in mining

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Aluminium

#1 in bauxite#2 in aluminium#3 in alumina

Diamonds & Minerals#1 in titanium dioxide#2 in borates#5 in diamonds

Copper

#5 in copper#7 in molybdenum

Energy

#4 in uranium#6 in export coking coal #9 in export thermal coal

Iron Ore

#2 in seaborne iron ore#1 in seaborne salt

2010 data

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Where we operate

KeyMines and mining projectsSmelters, refineries, power facilities and processing plants remote from mine

Aluminium Copper Diamonds & MineralsEnergyIron Ore

Europe

SouthAmerica

Australasia

Africa

Asia

NorthAmerica

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>85% of assets in OECD

1 Other Asia mainly relatesto assets in India and Oman.

Total assets are calculated from information extracted from the consolidation schedules of the Company for the year ended31 December 2011, with adjustmentsfor non-controlling interests, cash, current and deferred tax receivables and derivatives.

2011 total assets = US$95 billion

US 7%

Canada 25%

3% SouthAmerica

5%Europe

6%

Africa

Australia/NZ 46%

1% Indonesia

2%

Other Asia1

5%Mongolia

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Rio Tinto’s global project pipelineprovides options to invest

KeyMines and mining projectsSmelters, refineries, power facilities and processing plants remote from mineCountries whereRio Tinto operates

Aluminium Copper Diamonds & MineralsEnergyIron Ore

Our energy footprint was significant in 2011

Energy Costs

$USb

Electricity & Steam 3.0

Diesel 1.7

Anodes & Fuel Oil 1.3

Natural Gas 0.3

Coal 0.1

Total $6.4

Power Stations Hydro Coal Gas/

Waste Steam

Diesel/Fuel Oil

Total

Capacity (MW)

3,972 1,301 564 277 6,114

Generation (TWh)

28 6 4 1 39

Based on equity ownership

Based on 100% of managed operations

Power Consumption

Based on equity ownership

TWh

Total 74.7

Purchased 42.0

Self-generated: - Total- Sold to 3rd parties

39.06.4

What we need is an active contract market: • Long term contracts where prices

reflecting long run generation costs

• Sharing the risk on fuel costs with active hedging markets available to consumers

• Pricing of monopoly poles and wires reflecting efficient, benchmarked cost levels

• High level of grid reliability and security

• Carbon cost reflecting the scope of international climate agreement and the carbon intensity of their generation source

A gap between what large consumers need from electricity markets and what they tend to get in OECD countries

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What we tend to get in OECD countries:

• Initially lower prices from market liberalisation replaced by rising prices

• Market power exercised by supply side

• Government owned participants pressured to maintain high dividends to their shareholders

• Government intervention to distort market eg retail price caps, mandatory renewables obligations

• Decreased reliability as we are seen as the most politically acceptable to be interrupted

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Which can lead to a preference for self-generationCRU forecasts (May 2012) continuing spread between purchased and self-generated power for aluminium smelting

Source - Kelly Driscoll “How power tariffs are causing the geographical centre of gravity to shift in primary aluminium smelting” CRU’s 17th World Aluminium Conference May 2012

Rio Tinto’s approach in OECD countries varies

• Aluminium smelting favours self-supply or some control over power source

• Remote mining operations with low demand tend to be self supplied diesel but looking at some offsetting with renewables

• Iron ore operations in Australia

• Alumina refining in Australia

• Coal operations in Australia

• Copper mining and smelting in the USA

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Our approach to electricity supply to new projects – irrespective of location

• Work closely with the mine project team to understand the demand profile

• Conduct a design workshop to look at options to minimise the energy/carbon footprint

• Examine supply options – existing grid?− If yes what are its characteristics eg La Granja study – will it

supply reliable competitive power?− If no what fuel options for developing our own base load

generation?

• If no grid or insufficient grid capacity how should the self-supply be structured eg should Rio Tinto build, own and operate or should it bring in an IPP or should there be some mix?

• It generally takes longer to build a power station than a mine

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Important “big picture” issues in developing countries

• Improving the operational performance of the electricity sector

• Supporting the development of robust institutional and governance structures supporting overall energy strategy and operation of the market

• Providing independent analysis to ensure value based energy infrastructure decisions

• Facilitating the investment of private sector providers whether they be IPP or in country industries that are able to supply surplus self-generated power to the community

• Gradually reduce the high incidence of energy subsidies and support for cost based pricing wherever possible

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In evaluating building generation facilities in developing countries we aim to set some boundaries

1. We are prepared to consider

• Joint development proposals with the local electricity authority on arms length commercial terms

• Selling spare output to local electricity authority at a price that maintains the economic viability of the power station

• Foster the local skill development in operating and maintaining power stations

2. But we wish to exercise caution to not:

• End up effectively displacing the host government as the energy supplier to all customers because we are not skilled to do so

• Be seen by the host government as an excuse not to build its own infrastructure, or

• Be seen by the host government as the interruptibility supplier ie that the mining company can be cut off at any time to make up for shortfalls elsewhere in the system

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The example of the Benga Power Plant in Mozambique

• Rio Tinto purchased mining assets in 2011

• Mine demand of 30-200MW, depending on development profile, requires new generation capacity

• Government owned electricity (EDM) entity does not have the balance sheet to provide, so Rio Tinto has to build capacity or facilitate a third party

• Benga Power Station business case – coal supply, export transmission capacity into the South African Power Pool, Rio Tinto PPA off-take, completed EIS, close to water supply

• Now running a process to select a Strategic Equity Partner to take over completion of the feasibility study, build, operate and be an equity participant

• Potential size of 500-600MW

• Stakeholder management eg Government is off-taker and has right to up to 20% equity

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