Results

For the year ended 31 December 2006 the after tax profit was K3.7 million (AUD$1.6) compared with K0.1 million (AUD$0.04 million) the previous year. The increase in profit is due to higher dividend income of K0.9 million and reduced expenses principally due to lower expenditure on the tax dispute and a K1.4 million reduction in exchange losses.

In addition to retained profit of K3.7 million the Investment portfolio increased in value by K34 million resulting in Shareholder Funds growing by 11 per cent to K378.2 million.

The strategy to cover operating expenses from dividend income was achieved.

Investment Strategy

The strategic decision to place the company's investment funds in the Australian equities market again proved beneficial this year with the strong growth experienced by the Australian markets. The investment portfolio is predominately held in listed investment companies who by their very nature engage in diversified investments and provide an ideal investment vehicle at a low management cost.

The Investment Committee meets regularly to review the investment strategy and results; fine tuning the situation as the market conditions change. Investment performance for the year was pleasing.

Tax Dispute

The World Bank provided a loan to PNG to allow capacity building for the Government's mining sector. Parts of those funds were used to carry out tax audits in the mining sector. Although BCL has been unable to mine at Panguna for over a decade it was ‘selected' as the first resources company to be audited. The audit process took many months to complete and the company was required to spend considerable money and management time complying with the audit process. No monetary compensation was provided. Suspension of the mining activities in 1989 resulted in considerable losses to the company. In line with normal practice the company offset those losses against revenue as well as claiming depreciation of its remaining mine assets. Despite this approach being accepted by the Internal Review Commission (IRC) every year since 1989 the tax audit resulted in reassessments being issued. The basis for the re-assessment is that the IRC claims the company has no assets that can be depreciated. (See note 13 to the financial statements). In effect what was normal practice is being discarded by the IRC in a retrospective action.

BCL has taken expert advice and on the basis of that advice lodged formal objections to the amended assessments and has appealed the disallowance of those objections to the National Court . In the meantime the IRC has issued banks in PNG with notice that any BCL funds held by them be paid to the IRC. The company challenged the enforceability of these notices but in recent weeks the Supreme Court of Papua New Guinea has ruled in favour of the IRC, resulting in PNG held funds of K12.9 million being transferred to the IRC pending the outcome of the substantive appeal against the tax assessments which has not yet been heard. The company is currently relying on Rio Tinto to facilitate payments of its day to day expenses in PNG.

In the last Budget the Government referred specifically to BCL foreshadowing amendments to tax regulations aimed at making BCL subject to provisional tax on its earnings.

Review of the Bougainville Copper

Agreement (BCA)

There are many unresolved issues between the Government and the company resulting from the suspension of mining, tax being just one of them. The company has proposed to Government that all the outstanding issues, including claims by the company against the Government, be the subject of talks aimed at avoiding the need for protracted and expensive arbitration and litigation. I reported last year the Government has agreed to a formal re-negotiation of the BCA and it has agreed that the Autonomous Government of Bougainville and mine lease landowners being invited to join the negotiations.

Unfortunately the review process stalled in the early stages when the facilitator resigned. BCL is working to have the process recommenced as a matter of priority.

Dividend Policy

Although the profit was up on last years results they are insufficient to warrant a dividend being paid.

Bougainville

There have been press reports about a possible resumption of exploration and mining on Bougainville and mining companies who are said to have connections with the Autonomous Bougainville Government. There is a moratorium on new exploration and mining on Bougainville outside BCL's lease area. The National Government has agreed to review that moratorium but this has also stalled and requires reactivation of the Government's initiative.

Separately the Autonomous Bougainville Government has formally requested that mining powers on Bougainville be transferred to its jurisdiction. I understand that this requires a 12 month period of notice but the National Government may still not accede to the request if Bougainville cannot show capacity to administer these powers. BCL's rights under the Bougainville Copper Agreement Act will also need to be considered. At this stage the company has not been consulted on the matter. BCL's position will be formulated when the necessary information on the proposal is made available.

Litigation

The company is not a party to the class action litigation involving a group of Bougainville plaintiffs in the US Federal Court. Nonetheless the litigation does create uncertainty that the company cannot ignore. I have previously reported that at the court of first instance the case was dismissed in its entirety. The plaintiffs appealed and the matter was subsequently heard by three Federal Court of Appeals judges. A 2-1 decision of the Appeal Court reinstated the case. The defendants have petitioned the Federal Court to rehear the appeal decision. That could involve either rehearing by the same three judge panel or what is known as a rehearing en banc. The latter involves a large panel of judges, more than ten judges is possible. It is also possible the matter will ultimately go to the US Supreme Court. It is likely to be a considerable period before the matter is finally determined. An adverse finding in the US Court could be a major disincentive to future investment in PNG and Bougainville.

The Minister for Bougainville Affairs announced just prior to Christmas that a high level taskforce would consider the potential adverse investment consequences for PNG and Bougainville of this type of litigation. What is of particular concern is that US rather PNG law will be used to decide matters occurring wholly within PNG.

A separate claim against the company concerning landowner compensation is still pending however the plaintiffs in the case have expressed a willingness to bring their claims within Bougainville Copper Agreement renegotiation process.

Corporate Governance

BCL has governance reporting obligations to the Australian Stock Exchange and internally to Rio Tinto Limited its parent company. A statement on BCL compliance with the guidelines is contained in this report. In addition BCL has responded to the Rio Tinto governance questionnaire which incorporates the Group's comprehensive range of policy including safety, environment, financial management and many other risk management matters.

Safety

The Rio Tinto Group is particularly safety conscious and has in place comprehensive requirements to ensure its employees and contractors comply with best practice safety procedures. BCL complies with the requirements of the Rio Tinto safety policy.