APPENDIX 20
Memorandum submitted by Rio Tinto
Rio Tinto is a leader in finding, mining and
processing the earth's mineral resources. The Group's worldwide
operations supply essential minerals and metals that help to meet
global needs and contribute to improvements in living standards.
Rio Tinto encourages strong local identities and has a devolved
management philosophy, entrusting responsibility with accountability
to the workplace.
Rio Tinto takes a long-term and responsible
approach to the Group's business. We concentrate on the development
of first class ore bodies into large, long life and efficient
operations, capable of sustaining competitive advantage through
business cycles.
Rio Tinto comprises wholly owned subsidiaries
such as Rio Tinto Iron Ore, Borax, Comalco, Rio Tinto Coal Australia,
Kennecott and Rio Tinto Iron & Titanium, partly owned subsidiaries
and non-managed, joint ventures, in which public shareholders,
other companies or governments are partners.
Major products include iron ore, aluminium,
copper, diamonds, energy products (coal and uranium), industrial
minerals (borax, titanium dioxide, salt, talc and zircon), and
gold. The Group's activities span the world but are most strongly
represented in Australia and North America in which about 90%
of our operating assets are located. However, we also have significant
businesses and future projects in South America which include:
— a 100% interest in the Mineração
Corumbaense Reunida (Corumbá) iron ore operation in the
state of Mato Grosso do Sol, Brazil;
— a 30% interest in Escondida,
Chile, one of the world's largest copper mines;
— Borax Argentina, a subsidiary
of Rio Tinto, which operates three borates mining operations and
a processing facility in Argentina;
— Potasio Rio Colorado, a subsidiary
of Rio Tinto, which is evaluating the development of a large scale
potash project in Argentina;
— an advanced feasibility study
into the La Granja copper project in Peru; and
— substantial exploration programmes
throughout South America, including Brazil.
Rio Tinto has been operating in Brazil for 34
years and specifically at the Corumbá iron ore mine for
the last 13 years. Although Rio Tinto sold its Brazilian gold
and nickel assets recently, this does not reflect any loss of
confidence in Brazil as a place in which to invest. We have plans
to expand the Corumbá mine to a size that will contribute
significantly to both the Brazilian economy, particularly in the
border region near Corumbá and to Rio Tinto. The first
phase of this mine expansion would involve an investment of about
US$650 million more and would support the development of a steel
production facility by third party investors.
The nub of the investment barriers that confront
us in Brazil are:
(a) that the 1979 Brazilian Border Zone Law
contains provisions that prevent foreign companies from holding
majority shares in mining operations in what is defined as the
"border area", which covers the locale of the Corumbá
mine;
(b) that Rio Tinto was nevertheless authorised
in 1998 by the Federal Government of Brazil to increase its voting
share in its Brazilian partner company which holds the Corumbá
iron ore asset to a majority 80% shareholding;
(c) that many interlocutors in the Brazilian
Federal Government recognise that the Border Zone law needs to
be amended in order to give foreign companies the security required
to make major investments in mining and steel production in Brazil;
and
(d) that, in February 2005, the then Minister
for Mines and Energy, in the presence of Brazilian President Lula,
signed a Memorandum of Understanding with Rio Tinto and the regional
government concerned to introduce the necessary legal changes
to the Border Zone law.
Since that time matters have proceeded very
slowly. However, a new law to remove the restrictions on foreign
investment in the Brazilian border areas was drafted and signed
off by the Minister of Mines and Energy earlier this year and
now rests with the other interested Ministries of Defence and
Justice. However, the Brazilian Congress has a large backlog of
legislation to address and the uncertainty surrounding Rio Tinto's
Corumbá asset remains.
The net effect on Brazil is that the country
risks losing what should be a major inward investment success
story (some potential steel producers are already looking elsewhere),
and risks attracting the sort of adverse publicity in the international
business community which will serve only to undermine the efforts
that the Brazilian government is making elsewhere to promote foreign
direct investment.
The Corumbá mine expansion and the steel
production facility is potentially a very large investment and
will be a major success story for Brazil if it goes ahead, but,
there are significant investment risks for Rio Tinto which the
Brazilian government should have moved ahead energetically to
exclude.
SUMMARY
— Rio Tinto has been operating
in Brazil for 34 years and at the Corumbá iron ore operations
for 13 years. Although Rio Tinto recently sold nickel and gold
assets in Brazil, this does not reflect a loss of confidence in
Brazil as a place in which to invest.
— On the contrary, Rio Tinto plans
to expand its Corumbá iron ore mine to a size that will
contribute significantly to Rio Tinto and to the Brazilian economy,
bringing increased prosperity to the border region near Corumbá.
Our target is 15Mt/pa sales of iron ore to a range of local, regional
and international customers. If proven feasible, the inward investment
would be approximately US$1billion.
— Rio Tinto acknowledges the Brazilian
Government's desire for value addition to its raw material extraction.
Although Rio Tinto is not a steel-maker, it is promoting Corumbá
to its customers as a site for processing and value addition based
on the local availability of iron ore and natural gas. Rio Tinto's
commitments have been documented in a Memorandum of Understanding
with the State and Federal Governments, signed in February 2005.
— Whilst the world is experiencing
an unprecedented boom in steel making, a number of steel-makers
have shown interest and visited the site. Rio Tinto is supporting
them with studies for iron and steel making, mine expansion, pelletising
and product transport logistics. Currently, fifteen steelmakers
have signed confidentiality agreements to review Rio Tinto's studies.
Rio Tinto has retained the IFC to provide technical advice, to
help ensure that the developments are sustainable and, potentially,
to help provide finance.
— The total investment at Corumbá
for production of 2.0 Mt/pa of steel would be approximately US$1
billion, which excludes the cost of expansion of the mine iron
ore production to support the steel manufacturing project. Investment
figures will depend upon the number of steel projects and the
design of each.
— Three key factors will determine
if the steel-makers invest at Corumbá:
— the long-term cost and availability
of natural gas from Bolivia, relative to other potential processing
locations in the world,
— the long-term cost and reliability
of iron ore supply, and
— reliability and cost of transport
logistics for products from this remote location.
— Rio Tinto appreciates the steps
being taken by the Brazilian Government to negotiate gas supply
arrangements with Bolivia. As an alternative to gas-based processes,
Rio Tinto has also studied application of its innovative coal-based
HIsmelt technology at Corumbá.
— For existing and expanded iron
ore supply, the proposed removal of the restriction on foreign
ownership of mines in Brazilian border areas will provide Rio
Tinto with the necessary confidence to enable it to make the substantial
investment in mine expansion and transport logistics at Corumbá
and to engage in long-term contracts with steel-makers.
— Failure to remove the investment
barriers indicated in this Submission will not only adversely
affect a potential major inward investment project but Brazil's
ability to attract foreign direct investment more generally.
September 2006
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