Rio's First-Half Profit Falls 14% on Rising Costs

Rio Tinto Group, the world's third- largest mining company, said first-half profit fell more than analysts estimated after costs rose and copper production and Australian coal sales declined. Net income dropped to $3.25 billion, or $2.51 a share in the six months to June 30, from $3.8 billion, or $2.82, a year earlier, the London-based company said today in a statement. That missed the $3.7 billion median estimate of six analysts surveyed by Bloomberg. Sales rose 15 percent to $13.9 billion. Chief Executive Officer Tom Albanese, who took over in May, has been struggling to buoy Rio's earnings after storms hit coal operations in Australia and U.S. and Indonesian copper output dropped. A weakening dollar has dented earnings while record prices for raw materials such as iron ore and copper, driven by China, have served to increase mining-equipment and labor costs. "Cost pressures continue to make life difficult for the mining fraternity, and Rio didn't escape," said Neil Boyd Clark, who helps manage the equivalent of $3.5 billion at ABN Amro Asset Management in Sydney. "This is another reason why we have commodity prices where they are, as mining companies can't deliver what's needed at the planned costs." Shares of Rio fell 110 pence, or 3.2 percent, to 3,335 pence at the close in London. They have risen 19 percent in the past year, compared with a 38 percent gain for BHP Billiton Ltd., the world's largest mining company, and a 22 percent increase for Anglo American Plc, the second-biggest. Rail Congestion The drop in first-half profit was the first in four years for Rio. Higher production costs cut earnings by $503 million while exchange-rate fluctuations lost a further $118 million, the company said. A one-off tax gain of more than $250 million in the same half last year wasn't repeated. Rio said its interim dividend will be 52 cents share, from 40 cents. "The cost increases have put pressure on our operations, particularly in Australia," Albanese said today on a conference call. "We should not assume that we should just accept them or become complacent and we are taking steps to reduce them." Higher costs were partly offset by rising demand from China for metals such as copper, aluminum and iron ore, Albanese said. The Chinese economy is "motoring ahead," showing "no signs of slowing" and surpassing the company's expectations in the first half. This year will be a "record year" for aluminum demand growth in China, Albanese added. The metal is used in cars, planes and beverage cans. Alcan `Ready to Go' Albanese wants Rio to expand output of aluminum, copper and iron ore, materials that are "vital" to China. Rio offered $38.1 billion last month for Alcan Inc. to boost aluminum output and surpass Russia's United Co. Rusal as the world's largest producer of the lightweight metal. "Everything is lined up and ready to go" for the takeover, Albanese said in a separate interview in London today. A review of the combined business, which will yield more than $10 billion in asset sales to help reduce the company's debt, will be completed early next year, Albanese added. Copper is the biggest contributor to Rio's earnings, accounting for 48 percent in 2006 and iron ore is second, making up 31 percent. Mined copper output fell 10 percent to 186,400 metric tons as less metal was retrieved from ore at the company's Kennecott unit in the U.S., Rio said July 18. Coal & Allied Industries Ltd., an Australian coal producer controlled by Rio, said July 31 that first-half profit fell 53 percent as flooding and port and rail congestion limited sales. Iron-Ore Expansion The cost of extending the life of the Argyle diamond mine in Western Australia has risen to $1.5 billion, compared with last year's estimate of $910 million, Rio said. Rio approved a $350 million expansion of its Hope Downs iron-ore project in Western Australia, it also said today. The mine will produce 30 million tons of the steelmaking ingredient by 2009, up from an initial 22 million tons announced earlier. Increased demand from China, the world's biggest steel producer and consumer, has driven the price of iron ore to records following five successive years of gains. It may rise another 25 percent next year, according to Credit Suisse Group. Rio wants to expand Australian iron-ore output to 320 million tons a year, up from the 220 million tons it had expected to have by 2009.