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Issues involved in supplying power to mining projects – a Rio Tinto perspective International Congress – Energy Day Lima 3 July 2012 Mark Grenning – Chief.

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Presentation on theme: "Issues involved in supplying power to mining projects – a Rio Tinto perspective International Congress – Energy Day Lima 3 July 2012 Mark Grenning – Chief."— Presentation transcript:

1 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

2 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 Tintos approach 2

3 Who we are We are a leading global business delivering value at each stage of 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 3

4 Rio Tinto – a world leader in mining 4 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

5 Where we operate 5 Key Mines and mining projects Smelters, refineries, power facilities and processing plants remote from mine Aluminium Copper Diamonds & Minerals Energy Iron Ore Europe South America Australasia Africa Asia North America

6 >85% of assets in OECD 6 1 Other Asia mainly relates to assets in India and Oman. Total assets are calculated from information extracted from the consolidation schedules of the Company for the year ended 31 December 2011, with adjustments for non-controlling interests, cash, current and deferred tax receivables and derivatives total assets = US$95 billion US 7% Canada 25% 3% South America 5% Europe 6% Africa Australia/NZ 46% 1% Indonesia 2% Other Asia 1 5% Mongolia

7 Rio Tintos global project pipeline provides options to invest 7 Key Mines and mining projects Smelters, refineries, power facilities and processing plants remote from mine Countries where Rio Tinto operates Aluminium Copper Diamonds & Minerals Energy Iron Ore

8 Our energy footprint was significant in 2011 Energy Costs $USb Electricity & Steam3.0 Diesel1.7 Anodes & Fuel Oil1.3 Natural Gas0.3 Coal0.1 Total$6.4 Power Stations HydroCoalGas/ Waste Steam Diesel /Fuel Oil Total Capacity (MW) 3,9721, ,114 Generation (TWh) Based on equity ownership Based on 100% of managed operations Power Consumption Based on equity ownership TWh Total74.7 Purchased42.0 Self-generated: - Total - Sold to 3 rd parties

9 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 9 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

10 Which can lead to a preference for self-generation 10 CRU 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 CRUs 17 th World Aluminium Conference May 2012

11 Rio Tintos 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 11

12 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 12

13 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 13

14 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 14

15 The example of the Benga Power Plant in Mozambique Rio Tinto purchased mining assets in 2011 Mine demand of MW, 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 MW Stakeholder management eg Government is off-taker and has right to up to 20% equity 15


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