Rio Tinto On Track For $3.7B 1H Profit

Rio Tinto is expected to post an underlying profit of $3.7 billion for the first half, but analysts say the real focus at results time Thursday will be how the mining giant is dealing with the cost pressures affecting the resources industry. The global rush to take advantage of the China-driven commodities boom has seen a surge in the costs of labor and raw materials and, with real concerns emerging about the impact on profits, the market will be watching Rio Tinto’s results carefully for an indication of how bad the pressures have become. A $3.7 billion underlying profit would be just below the $3.75 billion posted by Rio Tinto in the first half of 2006 but 3% higher than the $3.59 billion it posted in the second half of 2006. UBS is forecasting underlying earnings of $3.6 billion, with a drop in earnings from the energy and diamonds divisions partially offset by an increase in iron ore earnings, compared with the first half of 2006. "We think the key focus will be on cost inflation with management indicating in the recent quarterly production report that maintenance and contractor costs are continuing to impact margins in the Pilbara," UBS analysts said. UBS expects the figures to show a deepening of Rio Tinto’s reliance on copper and iron ore for earnings, and forecasts the two divisions to contribute 86.8% of earnings, up from 79% in the first half of 2006. Rio Tinto has made a decisive move to diversify with its $38.1 billion bid for Canada’s Alcan, which it says will see its aluminum division contributing about 25% of earnings in the future, going some way to reducing its reliance on copper and iron ore prices. Macquarie Research Equities is forecasting first-half underlying earnings of about $3.7 billion, with solid increases in commodity prices offsetting rising costs.