Jesse Riseborough London
RIO TINTO said yesterday that first-half profit rose 30 percent, trailing analyst estimates as higher costs and currency swings hurt earnings.
The shares fell to the lowest in almost five months.
Net income for the second-largest mining company climbed to $7.6 billion (R51.4bn) in the six months to June, from $5.8bn a year earlier, the London-based company said.
Underlying profit rose 35 percent to $7.8bn. Rio Tinto expanded its share buyback by $2bn to $7bn.
Global mining companies are battling rising wage, raw material and energy costs as well as gains in the Australian and Canadian dollar. Currency swings cut underlying earnings in the first half by $810 million from a year earlier, Rio Tinto said.
“The potential for a miss on earnings was highlighted in the recent operating update, with a point to strengthening foreign exchange and input cost inflation, offsetting some of the price increases during the period,” Numis Securities analysts said yesterday. “Despite the warning, the numbers may disappoint some.”
Rio Tinto fell as much as 2.7 percent to £39.06 (R431.70) yesterday, the lowest since March 16, in early trading in London. The shares dropped 1.3 percent to A$76.58 (R556) at the close of Sydney trading yesterday, before the earnings announcement.
Rio Tinto declared an interim dividend of 54 US cents, compared with 45c a year earlier. The company’s own average estimate of underlying profit from 18 analysts was for $8.03bn.
The expanded share buyback will be completed by the end of the first quarter of 2012. When the plan was announced in February, the company said that it intended to complete it by the end of next year.
Profit was “a mild disappointment, missing consensus”, Liberum Capital said. The increase in the buyback “will likely be taken as a small positive, but is far from aggressive”, Liberum said.
Compared with the first half of 2010, the US dollar weakened by an average 16 percent against the Australian dollar and by 5 percent against the Canadian dollar, Rio Tinto said. The company records many of its costs in the currencies of the countries where it operates, while sales are priced in dollars.
Higher energy costs cut earnings by $95m, increases in input costs decreased income by $384m and severe weather in Australia during the period also drove up expenses and trimmed $245m off earnings, Rio Tinto said.
“We are facing, I think, a series of higher-than-inflation sector pressures in the mining sector that are following apace with the high commodity prices,” chief executive Tom Albanese said on a call with reporters from London.
Higher costs associated with project expansions cut earnings by $353m while other production-related expenses including maintenance and additional labour reduced earnings by $182m, the company said.
“We’ve obviously seen much higher labour settlements and salary increases than local inflation in most places,” chief financial officer Guy Elliot said.
“The input prices that are relevant to the mining industry are also very tight in many places,” Elliot said.
Even so, Albanese has presided over an almost fivefold increase in profit since the first half of 2009 as raw material prices advanced. That has allowed Rio Tinto to slash debt and boost spending on expansions and cash returns to shareholders. Iron ore provided almost two-thirds of the company’s 2010 earnings before interest, tax, depreciation and amortisation.
The price of the ore, a key steelmaking ingredient, may average $170 a ton in 2011, up from $122 a ton last year, according to Morgan Stanley.
The price of copper on the London Metal Exchange averaged $9 403 a metric ton during the half, up from $7 161 a ton a year earlier. Aluminium averaged $2 573 a ton, compared with $2 162.
In February, Rio Tinto announced the share buyback and a 40 percent increase in its dividend as 2010 net income tripled to $14.3bn. It did not pay an interim dividend in 2009 and instead pursued a $15.2bn rights offer as it grappled with almost $40bn in debt after taking over Alcan in 2007.
Rio Tinto has worked to repair its balance sheet after debt ballooned 19-fold with the purchase of Alcan. The company has sold more than 20 assets since 2008, raising more than $11bn.
The company’s two biggest development projects are the copper and gold Oyu Tolgoi mine in Mongolia, where commercial production is expected in the first half of 2013, and the Simandou iron ore project in Guinea. – Bloomberg