Rio Tinto confirms spending plans

Published Aug 9, 2012

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London - Global miner Rio Tinto 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 mining majors Anglo-American and Vale in reporting earnings battered by commodity price drops and stubbornly high costs.

Rio said underlying profit fell 34 percent to $5.2-billion, as a sharp drop in iron ore prices, weakness in aluminium and lower copper volumes took their toll. That was above market expectations of a sharper drop to $4.9-billion.

Prices for steelmaking 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 consumer of the commodity, eases.

Like its peers, Rio 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 spending plans for 2012.

Arguably the most China-dependent of the majors given its focus on iron ore, Rio on Wednesday 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 said its order books were full, despite weak sentiment in Europe and a fragile US recovery.

“We are still selling at full volume,” Chief Executive Tom Albanese said. He is sticking to a growth forecast of around eight percent for China this year as the impact of measures to revive the economy would start to filter through.

China's economy grew by an annual 7.6 percent in the second quarter, the slowest pace in three years.

“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,” he said.

The rosy outlook and above-forecast numbers helped Rio's shares, trading up 2.7 percent at 12h30 GMT at 32.14 pounds, outperforming a 0.7 percent rise in the sector.

Rio added to optimism with what it said were signs that stifling cost pressures on miners were starting to cool, echoing Australia's Fortescue, which said severe skills shortages in mining hotspots were also easing.

“Cash costs took seven or eight percent of earnings which is quite a hit - not unexpected, but it just shows you the cost pressures that these guys are under,” RBC analyst Des Kilalea said.

Rio committed in June to spending $4.2-billion to expand its iron ore operations, including growing its Pilbara operations in Australia to 353 million tons of iron ore per year by 2015 as it battles to lead the race to feed China's appetite for steel ingredients before growth there eases, flattening after 2030.

It signalled no change from that plan on Wednesday, though the miner said it was taking a “rigorous approach” to new projects, including a potential further Pilbara expansion phase that would take the operations to 450 million tons annually.

Analysts had been watching for news on Rio's major Guinea iron ore project, Simandou - eyed by the market as a prime candidate for delays given the country's instability. But Rio said it 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, with an agreement on power supply with China seen “shortly”.

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 market has also welcomed increased diversification for a miner that currently takes 80 percent of earnings from iron ore at peak prices.

Rio, refocusing its portfolio, announced a major retreat from its aluminium business last year, putting an estimated $8 billion of assets up for sale. It later said it was also reviewing and could sell, spin off or list its diamond arm.

Both sets of assets had received interest, Chief Financial Officer Guy Elliott said. He agreed, however, that rock-bottom aluminium prices - Rio's own aluminium division saw first-half profit halve - had not helped the sale of that suite of assets.

Elliott also dismissed market speculation that Rio could join its Canadian diamond mine Diavik with BHP Billiton's nearby EKATI, also on the block, saying there were no current talks. - Reuters

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