Utah Negotiating to Purchase Marcona's Brazilian Interests Utah is now engaged in negotiations to provide suitable arrangements for Marcona to transfer to Utah its interest in the SAMARCO project, a Brazilian iron ore venture. Marcona owns a 49% interest in SAMARCO with 51% held by a Brazilian company. The SAMARCO project, which is now in the early construction stages, is scheduled to commence shipments in 1977 at the annual rate of five million tons of iron ore pellets and two million tons of pellet feed. The pellets are committed to U.S. and European steel producers, while the pellet feed is tentatively reserved for a proposed steel mill to be built in Saudi Arabia, a project in which Marcona has played a major developmental role. The proposed purchase by Utah includes the interest in the steel mill project, as well as the purchase of three of Marcona's combination ore-oil ships, to be utilized in the transport of Brazilian ore. Withdrawal from Proposed Purchase of Peabody Coal Interest We reported to you earlier that Utah had become a 25% participant in Utilities Group, Inc., an organization formed for the purpose of attempting to purchase Peabody Coal Company from Kennecott Copper Corporation. Past week, after an intensive review of Peabody in an effort to define the rewards and risks which would flow to Utah from such an investment, we advised Utilities Group that we wished to discontinue our participation. In our judgment it would not prove to be a suitable investment for Utah. Higher Coking Coal Prices and Australian Tax Changes Affect Utah Utah International's 89.2%-owned subsidiary, Utah Development Company, has recently negotiated substantial price increases for coking coal deliveries to Japanese purchasers. Utah Development Company owns and operates four coking coal mines in Queensland, Australia, with shipments primarily to Japanese and European customers. These extra-contractual price increases of approximately $15 per metric ton effective April 1, 1975, and an additional $1.50 per metric ton from July 1, 1975 onwards have increased coking coal prices more than 50% over prior levels. With the higher coking coal prices currently realized by Australian producers, the Australian government imposed an export duty on the shipment of high quality coking coal, effective August 19, 1975, at the rate of approximately $8 per metric ton. Since virtually all of Utah Development Company's production is exported, this new levy effective August 19 will detract somewhat from the favorable impact of the price increases. The Australian government also reduced the corporate tax rate from 45% to 42.5% which is favorable to Utah. As might be expected, the new export duty has stirred up considerable opposition from the coal mining industry in Australia. Its imposition is a disincentive for new investment and thus appears to be in direct conflict with the Labor government's recently stated objective to increase annual coking coal production in Australia by 20 million tons by 1980. Australian Coal Miners Industrial Dispute On August 26, 1975, Utah Development Company elected to suspend the miners at its Goonyella, Peak Downs and Saraji mines until such time as the miners' union lifts its ban on overtime (overtime is all work beyond a 35-hour week) and its ban on the employment of new labor. Utah's action was in line with similar measures taken by a great number of coal mining companies throughout Australia. The ban on overtime is in violation of existing labor rulings in Australia, and Utah has indicated that operations at the mines will not resume until the bans are lifted. The restrictions were imposed by the unions last June in support of claims for pay increases which have not yet been negotiated. These bans combined with intermittent strikes had adversely affected production and a continuation of such conditions would be detrimental to Australian coal producers. The greatest impact of the ban on overtime had been on Utah's ability to maintain equipment and to rail coal from the mines to the shipping ports, as rail loadings and maintenance normally continue during overtime periods. 2 The Blackwater mine continues to operate under the imposed bans. Utah's decision to continue operations at Blackwater was determined by the need to deliver steam coal from this mine to satisfy the needs of a power generating station serving the heavily populated part of Southeastern Queensland normally supplied by other coal producers. This generating facility has been operating with a dangerously low fuel supply as a result of the reduced availability of steam coal caused by the industry-wide labor problems. Utah's railing problems are complicated further at Blackwater as some rail cars normally used to transport coking coal are being diverted to carry the steam coal. Although the shutdown has introduced short-term uncertainties at our operations, we are hopeful that the action taken by Australian coal producers will result in an early resolution of the current problem and an improved operating climate in the Australian coal industry over the longer term. Meetings are currently being scheduled at the mines for the workers to vote on accepting a decision of the Coal Industry Tribunal and a return to work. Utah International's Outlook Viewing first the current year, we recently announced record earnings for the nine months ended July 31 amounting to $106,582,000, which becomes $87,511,000 after the extraordinary item from writing off Marcona's Peruvian investment. These figures respectively represent gains of 58% and 30% over the previous record for a nine-month period, realized in 1974. Under normal conditions we would expect very substantial gains in the current quarter as well. However, reduced coking coal shipments from Australia due to the overtime bans and the resulting shutdown at Goonyella, Peak Downs and Saraji mines will cause us to fall short of earlier expectations. The extent to which current quarter results will be adversely affected will depend largely upon the duration of the present industrial dispute. We have emphasized in this letter the areas that have been of the greatest and most immediate concern to shareholders. Although we are beset with these problems, we are confident that solutions will be developed and we continue to be optimistic as to Utah's future prospects. In the first nine months of 1975, earnings prior to the write-off of the Peruvian assets had already exceeded the earnings of the entire prior year, which was itself a record year for Utah by a wide margin. Barring prolonged labor disruptions, preliminary forecasts for 1976 indicate satisfactory earnings gains, despite the possibility of continued weakness in copper prices and general shipping markets. In our view Utah's success over the longer term will depend on management's sensitivity and accommodation to developing trends. Two of the more important such developments to Utah in recent years have been the continuing and conflicting trends of growing trade internationalization and rising economic nationalism throughout the world. In the area of trade internationalization, the minerals extraction industry as a whole, and Utah in particular, have taken on greatly expanded roles. The company has demonstrated a capability for identifying economically viable mineral deposits, mobilizing large sums of capital to develop the properties, and coordinating the technical, marketing and managerial skills needed to compete profitably in world markets. Nevertheless, Utah recognizes that any international company, and most particularly one dealing in natural resources, must work in close harmony with the aspirations of host countries. Those countries and companies that can develop a mutual respect and understanding from the recognition of these conflicting trends will be able jointly to maximize the social and economic benefits that are attainable. We submit that Utah International's record speaks well for the company's ability to adjust its operations to the changing scene, and we welcome the challenges that the future holds. Respectfully submitted, Ed Littlefield Chairman of the Board President 3