Rio Tinto Cautious Near Term As Price Fall Hits Earnings
08/08/2012| 05:16am US/Eastern
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--1H net profit falls 22% to US$5.89 billion
--Company holds to its capital expenditure plans and raises its dividend
--Chairman confident in long-term demand for commodities
(Adds company comment in second paragraph, analyst reaction in seventh-eighth paragraphs)
By Robb M. Stewart
MELBOURNE--Rio Tinto PLC (>> Rio Tinto plc) said commodity markets are likely to remain volatile near term, after reporting a 22% drop in first-half earnings, but it stuck by a US$16 billion spending program this year even as rival miners cut or postpone investments.
Rio Tinto, the world's second-largest iron ore producer by output after Brazil's Vale SA (>> Vale SA), said it expected Chinese growth to pick up by the end of the year as billions of dollars pledged by Beijing on new infrastructure give the economy a shot in the arm. This should translate into a recovery in demand for iron ore, Chief Executive Tom Albanese told reporters in a conference call from London.
China is the world's top consumer of the steelmaking commodity, much of it shipped from the remote Pilbara region of Western Australia, where Rio Tinto and BHP Billiton (>> BHP Billiton Limited) are spending vast sums to expand production.
However, the Chinese economy grew 7.6% in the second quarter compared with a year earlier, the slowest rate since the financial crisis. This sluggish economic performance has prompted some analysts to predict that China's demand for steel will fall this year for the first time in 31 years.
"We continue to generate strong margins despite falling prices," said Mr. Albanese, adding the company's order books are full. "We are reaping the benefits of investing early in iron ore, which is producing consistently high returns."
Rio Tinto's net profit fell to US$5.89 billion in the first six months of the year from a record US$7.59 billion a year earlier, while revenue dropped to US$25.34 billion from US$29.06 billion. It said it would pay an interim dividend of 72.5 cents a share, up 34% on a year earlier.
The results were slightly ahead of consensus analyst forecasts, although flattered by a US$1 billion deferred tax asset from a levy on iron ore and coal profits that came into effect in Australia July 1.
Chris LaFemina, an analyst at Jefferies International Ltd. in London, said some investors may be disappointed that Rio Tinto is holding to its spending plans, given the uncertainty in commodities markets.
Mining companies are tightening their focus on cost control, and several of the largest diversified miners including BHP Billiton and Vale have recently cautioned that they were reviewing or cutting capital expenditure plans as cash flow from operations has weakened with the fall in prices.
Benchmark prices for iron ore, which accounted for roughly 70% of Rio Tinto's earnings in the half year, hit their lowest level in 31 months last week as China's economy slows, Europe struggles to resolve its debt crisis, and the U.S. economic recovery stutters.
Rio Tinto said changes in prices knocked US$1.94 billion from its underlying earnings, as all major commodities other than gold fell on year. The average price for benchmark iron ore was 21% lower.
"Whilst we are mindful of short-term uncertainties, we remain convinced of the strength of the long-term demand outlook. We have taken a considered approach to investment, committing capital only to projects that will deliver value for shareholders under any probable macroeconomic conditions," Chairman Jan du Plessis said in a statement.
Xstrata PLC (>> Xstrata PLC) said Tuesday that it would defer US$1 billion of some US$8.2 billion in capital expenditure originally planned for this year and was seeking to cut costs. Anglo American PLC (>> Anglo American plc) late last month lowered its capital expenditure program for this year by US$500 million to $5.5 billion, although CEO Cynthia Carroll stressed that it was a matter of delaying and not cancelling projects altogether.
Write to Robb M. Stewart at robb.stewart@wsj.com
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