August 8
Global miner Rio Tinto PLC stuck to its $16-billion spending plans, despite first-half profit falling by a third, predicting a modest pickup in the Chinese economy later this year that should stimulate demand for iron ore.
The world’s second-largest iron ore producer on Wednesday joined rival diversified miners Anglo-American and Vale, in reporting earnings hit by falling prices and stubbornly high costs.
Rio said underlying profit fell 34 per cent to $5.2-billion, as a sharp drop in iron ore prices took its toll despite steady volumes. That was above market expectations of a sharper drop to $4.9-billion, however, thanks to a better performance from its aluminum and energy divisions.
Vale, the world’s largest producer of iron ore, last month reported its worst second quarter since 2007, blaming slowing steel demand.
Prices for steel making ingredient iron ore have tumbled this year from 2011 highs, with benchmark prices touching their lowest in 2-1/2 years last week as demand from China, the world’s largest iron-ore consumer, eases. China’s economy grew by 7.6 per cent from a year earlier in the second quarter, the slowest pace in three years.
Rio, like its peers, is juggling bumper capital expenditure plans with volatile markets and an uncertain outlook. But while some rivals have begun to signal they could cut back, the miner has stayed firm on its own plans to date.
Arguably the most China-dependent of the majors given its focus on iron ore, Rio struck a more optimistic note than some rivals, pointing to a likely pickup in Chinese demand in the fourth quarter as government stimulus measures take effect.
The miner also said it saw signs that stifling cost pressures were starting to ease.
Chief executive office Tom Albanese stuck to a Chinese growth forecast of 8 per cent this year, broadly in line with economists’ predictions, and said order books were full – despite weak sentiment in Europe and a fragile U.S. recovery.
“We are still selling at full volume,” he said, adding the impact of measures to revive the economy would start to filter through. “We are seeing, and some of our customers would be anticipating, that as we move towards the latter part of the year, there would be some pickup in demand.”
Rio Tinto committed in June to spend $4.2-billion expanding its Pilbara iron ore operations in Australia and Mr. Albanese said on Wednesday that the group’s Guinean iron ore project Simandou – eyed by the market as a prime candidate for delays given the country’s instability – was on track for first commercial production in 2015.
Mongolian copper mine Oyu Tolgoi, potentially one of the world’s largest, is also on schedule, the miner said.
Rio’s growth projects are considered more incremental and therefore less contentious than those of rivals including BHP Billiton, which has said it is reviewing the sequence and pace of its major investments.
The optimistic outlook and above-forecast numbers helped Rio’s shares higher, trading up 1.8 per cent at around 0950 GMT at 31.88 pounds, outperforming a 0.6 per cent rise in the sector.
“The biggest two things that stand out are the price impact – the impact of lower prices reduced earnings by about $1.9-billion – and costs,” RBC analyst Des Kilalea said.
“Cash costs took 7 or 8 per cent of earnings which is quite a hit, not unexpected, but it just shows you the cost pressures that these guys are under.”
Costs, a bane for miners as they have failed to come down in line with price drops, remained a dent for Rio, particularly in mining “hotspots” like Western Australia and Queensland. But the miner said external pressures were starting to ease.
Rio, refocusing its portfolio, has put non-core aluminum assets and its diamond businesses up for review and potential sale. The miner said it was considering all options and had interest for both segments and the entire businesses.
“We are not going to be selling them from a position in a corner,” chief financial officer Guy Elliott said.
Elliott also dismissed market speculation that Rio could join its Canadian diamond mine Diavik with BHP Billiton’s nearby EKATI, also on the block.
