Corporate governance statement

Introduction

The directors of Coal & Allied Industries Limited ("Coal & Allied") consider that high standards of corporate governance are critical to business integrity and performance.

The board ensures that Coal & Allied meets the objectives of all its shareholders, while paying proper regard to the interests of employees and external stakeholders. The corporate governance structures and practices in place at Coal & Allied are substantially in compliance with the Australian Stock Exchange ("ASX") Corporate Governance Guidelines (the "ASX Guidelines").

Areas where the corporate governance practices do not follow the ASX Guidelines arise due to Rio Tinto's 75.71 per cent ownership and the management direction and services this provides.

The board has considered the ASX Guidelines and Coal & Allied do not follow the following recommendations:
• recommendations 2.1 and 2.2 - the board does not comprise a majority of independent directors or have an independent chairman;
• recommendation 2.4 - the board has not established a Nomination committee; and
• recommendation 9.2 - the board has not established a Remuneration committee.

Board responsibilities and charter

The board at all times recognises its over-riding responsibility to act honestly, fairly, diligently and in accordance with the law in serving the interests of Coal & Allied's stakeholders. The board charter underpins the strategic guidance and effective management oversight provided by the board. The charter is available on Coal & Allied's website.

The board charter defines the division of responsibilities by formal delegation and a system of board reserved powers.

The board reviews the charter on an annual basis.

The board approves strategy and business plans and monitors the performance of Coal & Allied against these plans. The directors also monitor compliance with policies prescribed by the board in areas such as health and safety, environment, business ethics, internal control and risk management. These policies are designed to ensure that Coal & Allied meets or exceeds the regulatory requirements governing its operations.

Board composition

The composition of the board is representative of the majority ownership position of Rio Tinto. It is considered appropriate that directors associated with the controlling shareholder constitute a majority of directors on the board. Notwithstanding this, the directors discharge their duties in the interests of all shareholders.

At the date of this report the board of directors of Coal & Allied consists of six directors, including the managing director and five non-executive directors.

The chairman, Mr Renwick, was appointed on 3 February 2005. Previously, Mr Renwick was an executive of Rio Tinto. While this is not in compliance with recommendation 2.2 of the ASX Guidelines, the board considers that Rio Tinto's 75.71 per cent shareholding warrants this position. Mr Champion (an executive of Rio Tinto) holds the position of managing director. This is consistent with recommendation 2.3 of the ASX Guidelines that the managing director and chairman be different people.

The other non-executive directors as at the date of the directors' report were Messrs Ritchie, Beeren, Davis and Yamanaka. Mr Ritchie is an executive of Rio Tinto. Messrs Davis and Beeren are independent non-executive directors. Mr Yamanaka is an executive of Mitsubishi Development Pty Ltd which holds a 10.2 per cent interest in Coal & Allied and which is a subsidiary of Mitsubishi Corporation.

During 2008 Mr Lenegan resigned as director of Coal & Allied. Mr Lenegan held office from 19 September 2006 and resigned as director on 29 January 2008.

Details of the directors, their qualifications and experience are set out in the directors' report. Qualification for board membership is related to the mix of skills and knowledge that the board considers will best serve the interests of Coal & Allied and all of its shareholders. Decisions relating to the appointment of directors are made by the board. Coal & Allied's constitution requires directors appointed by the board (other than the managing director) to submit themselves for election by shareholders at the annual general meeting following their appointment. There is no share ownership qualification for appointment as a director.

The directors (other than the managing director) are subject to retirement by rotation every three years in accordance with Coal & Allied's constitution, but may also offer themselves for re-election.

Independence

As stated above, the composition of the board recognises Rio Tinto's majority shareholding. The directors are required to, and do, act in accordance with their statutory duties of good faith and for a proper purpose. All related party transactions, including those with Rio Tinto, have been determined to be in the interests of the company.

Independent directors' committee

The Independent directors' committee was established in 2007, to further promote Coal & Allied's governance and compliance objectives. This committee comprises the two independent non-executive directors, Messrs Beeren and Davis. The committee provides a formal structure to review significant transactions between the company and Rio Tinto.

Audit committee

The Audit committee is appointed by the board and comprises three non-executive directors of whom two are required to be independent. Two directors constitute a quorum. The present members of the Audit committee are Messrs Beeren (chairman), Davis and Renwick.

Details of these directors' qualifications and attendance at Audit committee meetings are set out in the directors' report.

The Audit committee charter sets out the role and terms of reference of the Audit committee and is reviewed at least every two years.

The committee provides a formal structure for reviewing Coal & Allied's financial statements, accounting policies, control systems and liaising with the external and internal auditors. The committee also monitors and assesses the Company's risk management system.

The committee advises the board of any matters that might have a significant impact on the financial condition of Coal & Allied and has the authority to investigate any matters within the terms of reference, having full access to the information and resources of Coal & Allied to fulfil its function.

Any work to be conducted by the external auditor other than audit work must be approved by the Audit committee.

Health, safety and environment committee

The Health, safety and environment committee was established in 2007. The members of this committee are Messrs Davis and Renwick. Management attend by invitation. The committee assists the board with monitoring performance and compliance with policies in the areas of health, safety and the environment.

Risk identification and management

Coal & Allied has in place a range of policies and procedures to manage the risks associated with its operating activities. These policies have been adopted by the board to ensure that potential business risks are identified and appropriate action taken. The management of risk is an integral part of the responsibility of both the board and management and is carried out through an integrated risk management assurance process. Coal & Allied benefits from the knowledge, policies and practices adopted by Rio Tinto to manage its diverse business activities covering a variety of commodities and operation locations.

The board has in place a number of systems to identify and manage risk. These include:
• the identification and regular review of all of the significant business risks facing the company;
• the provision of information by management to the board, on a periodic basis, as to the status of any plans, controls, policies and/or procedures to manage the significant business risks;
• guidelines for ensuring that capital expenditure and revenue commitments exceeding certain approved limits are placed before the board for approval;
• limits and controls for all financial exposures, including the use of derivatives;
• a regulatory compliance programme; and
• safety, health and environment policies supported by a set of standards and management systems which recognise the company's commitment to achieving high standards of performance in all its activities in these areas.

Each year the managing director and chief financial officer are required to state in writing to the board that:
• the financial reporting and operational results are founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the board; and
• Coal & Allied's risk management and internal compliance and control system is operating efficiently and effectively in all material respects.
The directors believe that through this evaluation process, the Company complies with the requirements of recommendation 7 of the ASX Guidelines.

Independent professional advice

Directors may seek independent professional advice, both individually and collectively, at Coal & Allied's expense. Directors are required to give prior notice to the chairman of their intention to seek independent professional advice and provide the names of any professional advisers they propose to instruct together with a brief summary of the subject matter. Any advice obtained by a director must be made available to the other directors.

Management

During 2008, Coal & Allied continued a Management Services Agreement with RTCA that had commenced on 1 February 2004.

The managing director of RTCA has accountability for the provision of services under the agreement. A chief operating officer, chief financial officer and a team of RTCA general managers report to the managing director and provide operational management and support. Following the resignation of Mr van Dalsen as managing director on 26 November 2008, Mr Champion was appointed as managing director on 1 January 2009. From 1 January 2009, the team included:

W H Champion - managing director
M D Coulter - general manager corporate development
G B Gageler - general manager Hunter Valley Operations
C Halfpenny - general manager Mount Thorley Warkworth Operations
R S Light - chief financial officer
A Sutton - general manager Bengalla Operations
K R Tromans - general manager marketing
D R Yeates - chief operating officer

Executives' remuneration

The remuneration of executives is set by reference to the wider Rio Tinto context and determined following review by the Rio Tinto Remuneration committee. Executive remuneration and other terms of employment are reviewed annually by Coal & Allied and Rio Tinto having regard to performance against goals set at the start of the year, relevant comparative information and independent expert advice. As well as base salary, remuneration packages include superannuation, retirement and termination entitlements, performance-related bonuses and fringe benefits.

Directors' remuneration

At the 2001 annual general meeting, shareholders determined that the aggregate maximum remuneration for non-executive directors of Coal & Allied would be $900,000 per annum.

The following principles are considered in determining the amount of remuneration for non-executive directors:
• the amount of time required for directors to consider Coal & Allied board matters including preparation time;
• acknowledgement of the personal risk borne as a director;
• comparison with professional market rates of remuneration and those offered by comparative companies to remain competitive with the market having regard to companies of similar size and complexity;
• the desire to attract directors of a high calibre with appropriate levels of expertise and experience; and
• ensure sufficient provision is made to compensate directors for all services that may be required of them from time to time.

Purchase and sale of company securities

Coal & Allied has a formal share trading policy that reinforces to all directors, officers and employees the prohibition against insider trading. The policy is available for inspection on the company's website in compliance with recommendation 3.2 of the ASX Guidelines.

Under the policy:
• directors and senior managers must advise the chairman if they intend to purchase securities in the company or any other company with which Coal & Allied is conducting material business (other than Rio Tinto). In regard to his own dealings, the chairman is required to notify the chairman of the Audit committee; and
• no dealings in securities of the company may take place during the period 60 days immediately preceding the announcement of the company's annual results or half year results or if shorter, the period from the end of the relevant financial period up to and including the trading day following the announcement.

The "Rio Tinto Rules in respect of Dealings in Securities of Rio Tinto" apply to purchases and sales of Rio Tinto shares. A copy of these rules is set out in the "Rio Tinto Corporate Governance Standards" which can be found at http://www.riotinto.com/.
 

Particulars of directors' interests in shares and options

The particulars of the directors' interests including beneficial interests in shares and options as at the date of the directors' report are:

Each of the directors has given a general notice in accordance with the Corporations Act 2001 stating that he is a director, officer and/or member of certain specified corporations.

Performance self-assessment

The board conducts annual performance evaluations of itself and its committees' effectiveness and that of individual directors. Annual performance evaluations include:
• setting goals and objectives of the board for the upcoming year; and
• consideration of any improvements or changes to the board charter deemed necessary or desirable.

The directors believe that through this evaluation process, they comply with the requirements of recommendation eight of the ASX Guidelines.

Code of conduct

Coal & Allied has a code of conduct that must be adhered to by all employees, including directors. All employees (including RTCA management) are required to maintain high standards of ethical behaviour in the execution of their duties and comply with all applicable laws and regulations in Australia and in every other country in which Coal & Allied engages in business.

A code of conduct governs the Management Services Agreement and deals specifically with matters such as conflicts of interest.

The company's employees are also required to comply with Rio Tinto's statement of business practice - "The way we work" a copy of which is available on Coal & Allied's website.

The company has a confidential whistleblower programme known as "Speak-Out". Employees are encouraged to report any unethical or illegal practices.

Conflicts of interest

The board has a procedure in place for the disclosure and resolution of any matters that may give rise to actual or potential conflicts involving directors.

Public statements and continuous disclosure

Coal & Allied makes full and timely disclosures to its shareholders and the market in accordance with its legal and regulatory obligations. The "Coal & Allied Corporate Governance Policy" is in place to ensure that any matter that may have a material impact on the price or value of Coal & Allied's securities is reported to the market. The managing director, chief financial officer and company secretaries are responsible to the board for recommending such disclosures.

Shareholder communication

Coal & Allied acknowledges the importance of effective communication with shareholders and the general investment community, by ensuring that communications are co-ordinated, consistent and timely to meet the needs of market participants and others who use them. Coal & Allied discloses information that may have a material effect on its share price to the ASX in accordance with their requirements. In addition to statutory documents, Coal & Allied has a website featuring information on health, safety and the environment, as well as general investor information and Rio Tinto policies.

The external auditor, PricewaterhouseCoopers, attends the annual general meeting to answer shareholder questions about the conduct of the audit and the preparation and content of the audit report.