Daily Letter | 1

19 January 2007

Rio Tinto plc
RIO : LSE : £25.51

HOLD ↓ Target: £26.00 ↓

Damien Hackett 44.20.7050.6641 damien.hackett@canaccordadams.com Nicholas Pickens 44.20.7050.6646 nicholas.pickens@canaccordadams.com

COMPANY STATISTICS:
Recommendation: 12-month target price: Price: 52-week Range: Market Capitalization (Million): Hold £26.00 £25.51 £23.52-£33.22 £26,081 2007E 27,366 14,005 7,723 6.68 5.70 0.95 4.9 9.0 13.0 9.2 1.8 51.2 44.3 -22.3 35.1 29.9 2.8 2008E 25,154 11,707 6,275 5.92 4.63 1.00 5.4 11.1 11.5 7.8 1.9 46.5 39.0 -39.7 22.6 23.5 2.3

Metals and Mining -- Senior Diversifieds

TARGET PRICE REDUCED
Event
Rio Tinto will announce preliminary financial results for the full year to December 2006 on 1 February 2007. We expect attributable profit excluding exceptional items of US$7,832 million (US$5.78/share), a downward change of 3% following the release of a quarterly operations review earlier this week. We have also revised our commodity price forecast assumptions going forward resulting in a downgrade to our profit estimates for 2007 from US$6.05/share to US$5.70/share.

EARNINGS SUMMARY:
FYE Dec Sales EBITDA Net profit adj. Free cash (1) EPS Dividend EV / EBITDA PER Free cash yield Yield after capex Dividend yield EBITDA margin EBIT margin Gearing (2) ROE (3) ROIC (4) Price to book $USM $USM $USM $US/sh $US/sh $US/sh x x % % % % % % % % x 2006E 25,963 13,556 7,832 5.27 5.78 0.90 5.0 8.1 11.2 6.8 1.9 52.2 45.4 1.7 46.4 33.8 3.4

Action
We have downgraded our rating to HOLD from Buy, with a target price of £26.00/share (previously £36.00). We believe investors should hold this stock over the near term to benefit from what we see as likely substantial capital returns.

Rationale
In our view, Rio Tinto may have reached a peak in earnings in 2006 against our revised commodity price assumptions, and we believe the momentum in earnings growth seen in preceding years is unlikely to be maintained. The stock is currently trading at 9 times earnings for 2007E while EV is priced at 4.9 times EBITDA, well below the historical trading range for this company based on consensus estimates of 12month forward earnings, Figure 7. Consequently, we believe the current share price is likely to be supported by PE expansion into a period of weaker earnings - we note that the stock is priced at 15 times earnings in 2009E, indicating to us that there is room for PE expansion for the next two years back to historical mid-cycle levels.

1. Operating cash flow before investment and financing. 2. Net debt over total capital. 3. Adjusted earnings pre exceptionals and goodwill over shareholder equity. 4. Adjusted net income over PP & E plus working capital.

SHARE PRICE PERFORMANCE:
3400 3200

3000

2800 2600 2400

2200 2000 Jan-06

Investment risks
Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07

Source: Datastream All amounts in £ unless otherwise noted. Share price data COB 18 January 2007.

There are risks associated with metal prices not matching our forecasts and with the share price achieving our target price.

Canaccord Adams is the global capital markets group of Canaccord Capital Inc. (CCI : TSX|AIM) The recommendations and opinions expressed in this Investment Research accurately reflect the Investment Analyst’s personal, independent and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For important information, please see the Important Disclosures section in the appendix of this document or visit or visit http://www.canaccordadams.com/research/Disclosure.htm.

Daily Letter | 2
19 January 2007

Full year results preview
Rio Tinto will be announcing preliminary financial results for the full year to December 2006 on Thursday 1 February 2007 and we have updated our earnings forecasts for the period, following the company’s recent operations results. We expect attributable profit excluding exceptional items of US$7,832 million (US$5.78/share), or US$4,081million (US$3.01/share) for the half year and 2% lower than the consensus1 forecast. This represents a 3% downward adjustment to our previous forecast and would be a year-onyear increase of 58% over earnings for 12-months to December 2005. Figure 1: Financial summary table
FYE Dec US$ million Group turnover EBITDA EBIT (1) Attributable profit (2) Attributable EPS Dividend Reconciliation Attributable profit (2) Exceptional items Reported profit (3) US$M US$M US$M US$M US cents US cents US$M US$M US$M US$M Jun-04 6,805 2,284 1,600 993 72.0 32.0 Dec-04 7,725 2,657 1,379 1,279 92.8 45.0 Jun-05 9,439 4,063 3,280 2,087 151.9 38.5 Dec-05 11,303 5,269 4,428 2,868 211.6 41.5 Jun-06 12,111 6,174 5,348 3,751 277.0 40.0 Dec-06E 13,852 7,382 6,448 4,081 301.4 50.0 Jun-07E 13,799 7,181 6,248 3,980 293.9 45.0 Dec-07E 13,567 6,825 5,872 3,743 276.4 50.0 Jun-08E 12,875 6,181 5,229 3,346 247.1 47.5 Dec-08E 12,279 5,526 4,574 2,929 216.3 52.0

993 618 1,611

1,279 407 1,686

2,087 78 2,165

2,868 182 3,050

3,751 45 3,796

4,081 0 4,081

3,980 0 3,980

3,743 0 3,743

3,346 0 3,346

2,929 0 2,929

1) Figure 2 below shows divisional contribution to EBIT and includes FX translation effect 2) excluding exceptional items. 3) including exceptional contributions and NML translation Source: Company data, Canaccord Adams estimates

Looking further forward, we have also adjusted our 2007 earnings estimates downward based on our revised commodity price assumptions (Figure 3). We now estimate attributable profit for 2007 at US$7,723 million (US$5.70/share). Contributions from the various product sector groups as shown in Figure 2. Figure 2: EBIT by product sector group
US$ million Iron ore Energy Industrial minerals Aluminium Copper Diamonds Other operations Product Group Earnings Other items Exploration and evaluation Rio Tinto Group EBIT Jun-04 419 218 166 244 553 151 24 1,775 -119 -56 1,600 Dec-04 468 391 200 254 669 160 12 2,154 -687 -88 1,379 Jun-05 1,126 485 228 296 1,176 169 14 3,494 -149 -65 3,280 Dec-05 1,661 652 163 285 1,678 286 -13 4,712 -156 -128 4,428 Jun-06 1,491 552 223 548 2,588 151 17 5,570 -135 -87 5,348 Dec-06E 2,211 382 284 935 2,542 338 2 6,694 -146 -100 6,448 Jun-07E 2,283 278 275 1,053 2,257 309 10 6,463 -140 -75 6,248 Dec-07E 2,259 320 275 850 2,095 309 6 6,115 -143 -100 5,872 Jun-08E 2,002 289 275 713 1,849 310 8 5,446 -142 -75 5,229 Dec-08E 1,776 286 275 606 1,557 310 7 4,816 -142 -100 4,574

Source: Company data, Canaccord Adams estimates

1

Mean IBES consensus forecasts of ten analysts provided by Bloomberg

Daily Letter | 3
19 January 2007 Figure 3: Key input variables
average for the period Rand / US$ rate A$ / US$ rate Oil price WTI Copper price Aluminium price Thermal coal Iron ore lump
(1)

Dec-04E 0.73 134.5 US$ / bbl Usc / lb Usc / lb US$ / t US$ / t Usc / dltu 417.4 80.0 55.3 57.2 45.9 0.73

Jun-05 0.77 151.0 427.8 83.7 51.5 91.1 62.3 0.77

Dec-05 0.75 182.6 463.1 88.7 43.7 125.0 78.8 0.75

Jun-06 0.74 277.4 627.3 115.2 49.3 119.5 86.3 0.74

Dec-06 0.76 335.0 617.8 118.1 48.3 114.0 93.7 0.76

Jun-07E 0.80 253.8 637.5 122.5 51.3 105.0 98.2 0.80

Dec-07E 0.80 246.3 662.5 112.5 52.5 96.0 102.6 0.80

Jun-08E 0.78 232.5 637.5 105.0 52.5 86.6 92.4 0.78

Dec-08E 0.78 205.0 612.5 100.0 52.5 86.6 92.4 0.78

Coking coal (2)

(1) Spot price from South Africa; 2) Contract price of Goonyella brand. Source: Company data, Canaccord Adams estimates

Production review
This week, Rio Tinto released a fourth quarter operations review for the period ending December 2006. Iron ore production during the fourth quarter was 35 million tonnes, 2% lower compared with the previous quarter, primarily due to the impact of maintenance activities. Yearon-year production increased 7% to 132.8 million tonnes, reflecting expansions in response to strong global demand. We estimate the draw on inventories at Hamersley, Robe River and IOC in the final quarter were 2.1, 0.4 and 1.4 million tonnes respectively. Mined copper production increased to 209,800 tonnes during the period, 15% higher than the third quarter as a result of industrial action at Escondida. Grasberg also benefited from access to higher grades than the preceding three quarters. Year-on-year, total copper mined in 2006 increased by 2%, over a period that saw the average copper price increase by 84%. Figure 4: Group EBIT 2007E Refined copper production for the quarter was 29% lower than the third quarter mainly due to the effects of scheduled maintenance shutdown at the Kennecott Utah Copper smelter. Kennecott Utah also produces molybdenum and production declined by 11% compared with the third quarter due to lower grades and recoveries. Bauxite production in the fourth quarter was 10% higher than the previous quarter due to a high level of equipment availability and minimal plant downtime. Furthermore, production for the full year to December 2006 increased to record levels of 16.1 million tonnes. Yarwun (the renamed Comalco Alumina Refinery) reached design capacity during the final quarter and achieved a production record for the quarter and the year. Total alumina production for 2006 increased 10% to 3.2 million tonnes, while aluminium production declined 1% to 844,700 tonnes. US coal production set quarterly and annual production records as the capacity expansions at several mines ramped up. Production of hard coking coal declined by 12% compared with the third quarter, attributable to lower volumes at Kestrel from operating in the zone of a known fault line. In other business groups, titanium dioxide feedstock production increased by 12% compared with the previous quarter, reflecting strong demand and the successful completion of the expansion of the UGS plant. Uranium production declined 13% year-

Fe ore 31%

Alum 17%

Copper 24% Ind min 10% Energy 14% Diam. 4%

Source: Canaccord estimates

Daily Letter | 4
19 January 2007 on-year, largely as a result of production disruptions in the second quarter brought about by heavy rains.
Production report highlights industry supply difficulties

In our view, this production report highlights industry supply difficulties. Generally production increases year-on-year were modest compared to the surge in demand seen through 2006. This relatively weak increase in production from one of the biggest and most efficient producers underscores our belief in the sustainability of some commodity markets. We note that in 2006, Rio Tinto delivered 11% less copper than it did five years ago into a global market that is now demanding around 16% more2. Rio Tinto also asserted that input shortages are maintaining cost pressures, especially in the iron ore business. We estimate full cash costs of iron ore production have risen steadily from US$8.70/t in the December quarter of 2003 to US$19.3/t for the December quarter of 2006. Currently these costs have been masked by higher prices, but we expect all producers will have a major task in front of them when, as we believe, commodity prices weaken.

Figure 5: Key operations production report
'000 tonnes unless specified (attributable) Alumina Aluminium Copper in concentrate Copper cathode Nickel Zinc in concentrate Iron ore (including pellets) Metallurgical coal Energy coal Crude oil and condensate. Total hydrocarbons Diamonds '000 bbl '000 boe '000 cts Dec-04 1,201 419 380 795 7,374 16,635 81,985 3,186 290 2,401 725 615 Jun-05 1,489 412 378 880 7,466 20,689 77,303 3,051 268 2,774 689 649 Dec-05 1,474 447 414 895 6,720 14,947 76,338 3,533 292 2,730 673 662 Jun-06 1,633 408 389 429 6,058 15,531 79,627 2,507 272 2,649 726 697 Dec-06 1,616 442 416 563 7,142 19,632 82,796 2,918 282 2,753 664 718 Jun-07E 1,737 389 398 751 7,250 19,363 84,497 3,150 300 2,596 699 640 Dec-07E 1,737 389 395 768 7,115 19,381 85,698 3,150 300 2,596 699 640 Jun-08E 1,737 389 394 772 7,093 19,386 85,645 3,150 300 2,596 699 640 Dec-08E 1,737 389 394 772 7,093 19,387 85,694 3,150 300 2,596 699 640

Source: Company reports, Canaccord Adams estimates

Valuation
In our view, Rio Tinto may have reached a peak in earnings in 2006 – we are estimating US$7.8 billion (US$5.70/share) against our revised commodity price assumptions and believe the momentum in earnings growth seen in the preceding years is unlikely to be maintained. In our opinion, risks to the downside on our estimates are limited; only a period of global economic slowdown substantially greater than our forecast would result in a significant reduction in volumes and prices across the commodities. Conversely, we believe the possibility of unexpected supply disruptions in the industry may continue to offer upside to commodity prices and earnings forecasts. The stock is currently trading at 9 times earnings for 2007 while EV is priced at 4.9 times EBITDA, on our estimates. These multiples are below the low end of the historical trading range for this company based on our analysis of the share price against

2

Brook Hunt figures for global copper consumption in 2001 was 14.8Mt versus 2006E of 17.8Mt.

Daily Letter | 5
19 January 2007 consensus estimates of 12-month forward earnings, Figure 7. Consequently, we believe the current share price is likely to be supported by PE expansion into a period of weaker earnings – we note that the stock is priced at 15 times earnings in 2009E, indicating to us that there is room for PE expansion for at least the next two years back to historical mid-cycle levels. To reflect the transition from mid-cycle to peak cycle, we have reduced our 12-month forward earnings multiple from 14 times to 10 times and 12-month forward EBITDA from 7.5 times to 6 times. This suggests a 12-month forward market price for the stock of £25.70/share. Consequently, we have reduced our target price for the stock from £36.00/share to £26.00/share and downgraded our recommendation from Buy to HOLD. With a free cash yield of 13% in 2007E, we expect the company to be cash rich as it was last year. We therefore recommend that investors hold this stock in anticipation of further returns. Figure 7: Pricing history for Rio Tinto

35

3500

15 year average price is 14.2x 12-month forward earnings Range shows + / - one standard deviation from mean PE
30 3000

25

2500

20

2000

17.4
15

14.2 11.1

1500

10

1000

5
Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

500

Rio Tinto plc 12-month forward PE (LHS)

Mean PE

Rio Tinto plc share price in pence (RHS)

Source: Company reports, Datastream

Our NPV for the stock now stands at £27.17/share based on the 1,354 million shares on issue, with cash flow discounted at 9% per annum (RFR at 4% per annum, MRP at 5% per annum and beta of 1.0) and with terminal growth rates across all the business of 3.5% per annum.

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19 January 2007

Investment risks
There are risks associated with the share price achieving our target price and our financial forecasts. In our opinion, risks to the downside on our estimates are limited; only a period of global economic slowdown substantially greater than our forecast would result in a significant reduction in volumes and prices across the commodities. Conversely, we believe the possibility of unexpected supply disruptions in the industry may continue to offer upside to commodity prices and earnings forecasts. In addition, metal prices may not match our forecasts; as with any mining company, there are operating risks involved in both underground and open pit mining operations; foreign currency exchange rate fluctuations will impact both the company’s operating costs and its revenues. There are also numerous technical and environmental risks associated with the operation of a mining company that could have an impact both upon the company’s valuation and our financial estimates.

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19 January 2007 APPENDIX: IMPORTANT DISCLOSURES Analyst Certification: Each authoring analyst of Canaccord Adams whose name appears on the front page of this investment

research hereby certifies that (i) the recommendations and opinions expressed in this investment research accurately reflect the authoring analyst’s personal, independent and objective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoring analyst’s coverage universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the authoring analyst in the investment research. An analyst has not visited the issuer's operations in the last 12 months.

Site Visit: Price Chart:*

* Price charts assume event 1 indicates initiation of coverage or the beginning of the measurement period.

Distribution of Ratings:
Global Stock Ratings (as of 1 January 2007) Rating Buy Speculative Buy Hold Sell

Coverage Universe # % 292 55.6% 64 12.2% 147 28.0% 22 4.2% 525 100.0%

IB Clients % 43.2% 65.6% 30.6% 9.1%

Canaccord Ratings System:

BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months. HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months. SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months. “Risk-adjusted return” refers to the expected return in relation to the amount of risk associated with the designated investment or the relevant issuer.

Risk Qualifier:

SPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in the stock may result in material loss.

Canaccord Adams Research Disclosures as of 19 January 2007
Company Rio Tinto plc Disclosure None

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19 January 2007 1
The relevant issuer currently is, or in the past 12 months was, a client of Canaccord Adams or its affiliated companies. During this period, Canaccord Adams or its affiliated companies provided the following services to the relevant issuer: A. investment banking services. B. non-investment banking securities-related services. C. non-securities related services. In the past 12 months, Canaccord Adams or its affiliated companies have received compensation for Corporate Finance/Investment Banking services from the relevant issuer. In the past 12 months, Canaccord Adams or any of its affiliated companies have been lead manager, co-lead manager or co-manager of a public offering of securities of the relevant issuer or any publicly disclosed offer of securities of the relevant issuer or in any related derivatives. 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The authoring analysts who are responsible for the preparation of this investment research are employed by Canaccord Adams, a securities broker-dealer with principal offices located in Vancouver, Calgary, Toronto, Montreal (all Canada), Boston, New York, San Francisco (all US) and London (UK). In the event that this is compendium investment research (covering six or more relevant issuers), Canaccord Adams and its affiliated companies may choose to provide specific disclosures of the subject companies by reference, as well as its policies and procedures regarding the dissemination of investment research. To access this material or for more information, please send a request to Canaccord Adams Research, Attn: Disclosures, P.O. Box 10337 Pacific Centre, 2200-609 Granville Street, Vancouver, BC, Canada V7Y 1H2 or disclosures@canaccordadams.com. The authoring analysts who are responsible for the preparation of this investment research have received (or will receive) compensation based upon (among other factors) the Corporate Finance/Investment Banking

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19 January 2007
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Daily Letter | 10
19 January 2007
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