Not the most positive start to the 2007 earnings season with mining giant Rio Tinto revealing a disappointing 14.3% drop in first half net profit, thanks to higher cost pressures and lower returns from copper and coal.
Net profit for the six months to June 30 fell to $US3.253 billion ($A3.81 billion at current exchange rates).
Underlying earnings also fell, by almost 6% to $US3.529 billion ($A4.13 billion), missing most analyst forecasts for $US3.70 billion ($A4.33 billion).
Rio Tinto said high costs, excluding inflation, had shaved about $US503 million ($A588.27 million) off its earnings.
The company's production report last month revealed that copper output was down; coal had disruptions in NSW from storms, floods and port congestion in June and other months.
The Australian dollar was higher, which was a negative, and cost pressures remain a problem for RIO as it does for others in resources, here and in other countries.
The poor returns took the close off a tentative recovery and the shares fell $2.48 in late trading to $88.72, eliminating most of the gains from the assault on Alcan last month. The share price is now back to where it was in early May.
And seeing the results were not out to 4 pm, when trading finished, someone was in the know with that sharp price fall.
Rio said the main points from the quarter were:
• Cash flow from operations was at record levels for a first half, at $5,641 million, 11 per cent higher than the first half of 2006.
• Underlying EBITDA* was a record $6,613 million, seven per cent above the first half 2006 level of $6,174 million.
• Underlying earnings* of $3,529 million were six per cent below the corresponding period of 2006, which included $257 million from recognition of additional net tax assets.
• Net earnings* were $3,253 million, down 14 per cent on the 2006 level of $3,796 million, mainly as a result of an impairment of Argyle.
• Increased volumes from investment in additional capacity, particularly in iron ore, contributed $302 million to earnings.
• Rising prices and strong demand for most products increased underlying earnings by $513 million.
• Industry-wide cost pressures impacted the business in the first half, reducing underlying earnings by $503 million, adjusted for inflation.
• The Group's extensive organic growth pipeline led to record first half capital expenditure of $1.9 billion in 2007. The major iron ore expansions in Western Australia are on track, and studies are underway targeting further significant growth.
• The approval in July of a two million tonne per annum expansion of the Yarwun alumina refinery in Queensland will strengthen the Group's position in alumina.
• The accelerated expansion of the Hope Downs mine development to 30 million tonnes per annum was approved.
The company didn't mention that it has lost out on plans, previously publicised, to participate in a big mining project in Alaska.
Anglo-South, the African mining group, beat Rio to win the Pebble project by securing the right to earn a 50% stake in the copper-molybdenum project in Alaska in return for a staged investment of $US1.4 billion.
Rio had acquired a 19.9% stake in Pebble's owner, Canadian-listed Northern Dynasty Minerals, and was talking up the project in presentations, but was gazumped, it would seem, by Dynasty.
Pebble featured prominently in presentations at Rio's annual meetings earlier this year.
The miner also warned that the mining industry constraints are unlikely to ease in the near-term.
Chairman Paul Skinner said in the profit statement: "On the supply side, even though the mining industry is now into the fifth year of a broad cyclical upswing, its ability to meet that demand is still constrained by a scarcity of critical mining inputs and, in some cases, a lack of infrastructure and quality ore bodies."
But the company also said its financial position was strong, and that it sees no material short-term impact due to credit market volatility, particularly in the US.
Rio Tinto declared an interim dividend of 52 US cents, up from 40 US cents last year.
Among the Rio Tinto businesses experiencing higher costs, Rio Tinto Coal Australia was one of the worst hit (see the Coal and Allied story below).
"Rio Tinto Coal Australia experienced intense cost pressures from infrastructure constraints and increased contractor and equipment hire charges while cyclones in the Pilbara raised contractor and transportation rates at the iron ore operations", the company said.
"Higher non-cash costs reduced earnings by $US76 million ($A88.9 million).
"This was mostly attributable to the impairment reversal at Kennecott Utah Copper in 2006 which is now being depreciated."
New chief executive Tom Albanese also said growth in Chinese demand for iron ore would require more investment.
He emphasised that the company plans to increase its production capacity of the steel ingredient in the Pilbara region of Western Australia to 320 million tonnes a year.
It is currently on track to achieve 220 million tonnes a year by 2009.
"The long term growth trend in Chinese iron ore import demand will require continuing investment by the group, and will open up further supply opportunities outside Australia, such as our high quality resource at Simandou in Guinea, where we are looking at developing a 70 million tonne per annum operation," Mr Albanese said.
Mr Albanese also commented on the group's $US38.1 billion ($A44.56 billion) recommended bid for Canadian aluminium producer Alcan, which will make it the number one global producer of aluminium and bauxite.
Rio Tinto will undertake a strategic review of the assets following the acquisition.
