Rio profit slumps as charges mount

Heavy losses from its enlarged aluminium business and a host of asset impairment and restructuring charges have dragged Rio Tinto's June-half profit sharply lower. And like BHP Billiton before it, Rio has sounded a note of caution about the recent rally in metal prices, even if its faith in the ability of China and India to underpin long-term demand growth for commodities remains intact. Rio's underlying profit for the June half was $US2.56 billion ($3.13 billion), down 54 per cent of the record $US5.52 billion previously. The declared profit compares with market consensus for a profit of $US2.67 billion - within a range of $US2.45 billiton to $US2.86 billion. Profit on a net earnings basis almost fell to a third of last year's record $US6.95 billion, sinking to $US2.45 billion. The latest results includes a profit of $US797 million from the sale of Rio's potash interests in the period. Stripping out the potash sale profit - its inclusion above the line has been the subject of debate in the market - pulls back the bottom line profit to $US1.65 billion. As previously flagged by Rio, no dividend has been declared. There was a US68 cents a share interim dividend in the previous corresponding period. Rio officials, though, signalled dividends will return this business year, cheering some analysts. "In terms of the chairman's comments talking about the reinstatement of the dividend and paying at least what they paid in 2008, in 2010 that is good news for shareholders,'' said Tim Schroeders, portfolio manager at Pengana Capital. "The worst is definitely over, just from where their debt position has come from and where it is today ... and where commodity prices have moved,'' he said. ''The group has a lot more flexibility in being able to adjust to whatever market conditions confront it in the future." Beyond Alcan The focus for the group has, and will continue to be, on debt reduction. After the ill-timed $US38.1 billion cash Alcan acquisition in 2007, Rio's debt blew out to as much as $US45 billion ahead of the mid-September start to last year's global financial crisis. It has been on scramble mode ever since, flogging non-core assets and raising $US15 billion in equity from shareholders in preference to the aborted refinancing deal with China's state-owned Chinalco. Proceeds from recent asset sales and the rights issue to shareholders are expected to see Rio's debt load slide to a more manageable $US15 billion by the end of the year. The wild card for Rio in the months ahead is its leverage to aluminium price rises. In the last six months, aluminium has risen from US60 cents a pound to more than US83 cents a pound. The rise is due in part to rising confidence that the worst of the global financial crisis has passed and that resumed (cohesive) economic growth in the main economies will reverse the big over-supply situation in the light metal. The loss of 500,000 tonnes of annual production in Russia because of a recent explosion at a hydro-electric plant, and a reticence by China to bring back its high-cost production, has heightened expectations of the supply/demand situation in aluminium moving back in to balance. That was not the case in the June half. Rio reported a loss from its aluminium division of $US689 million. leaving it to its iron ore, copper and energy businesses to carry the day. Profit from iron ore dominated the result, contributing $US1.9 billion. Iron ore won't be as strong for the rest of the year because of the fall in iron ore prices from last year's record levels. Rio has settled with its non-Chinese customer base for a 33 per cent price reduction in Japan's March 31 fiscal year but has yet to convince the Chinese steel industry - the world's biggest - to the same price. Efforts by Rio to extend the price settlement to China was undercut earlier this week in a deal between Andrew Forrest's Fortescue Metals and the Chinese on a bigger price cut which was tied to a proposed $US6 billion financing deal for Fortescue's iron ore expansion plans in the Pilbara. Rio has said that it does not see the Fortescue as being a benchmark settlement that should apply to all sales in to China. Rio's stand-off with the Chinese follows the July 5 arrest on commercial espionage charges of its chief iron ore price negotiator in China, Australian national, Stern Hu. Three Chinese nationals from Rio's Shanghai office were also arrested. Rio's profit was announced after the close of local trade. But anticipation of the heavy aluminium losses saw its shares close 17 cents lower at $58.03. That was down from the intra-day high of $58.90 but off the low of $57.39. In contrast, BHP Billiton closed 42 cents higher at $37.13.