(Corrects Hope Downs approval date in eighth paragraph.)

Aug. 3 (Bloomberg) -- Rio Tinto Group, the world's third- largest mining company, said first-half profit rose 34 percent to a record as output and prices for iron ore and metals increased.

Net income rose to $2.2 billion, or $1.573 a share, in the six months ended June 30, from $1.6 billion, or $1.167 a share, a year earlier, London-based Rio said in a statement to the Australian Stock Exchange. Five analysts surveyed by Bloomberg had a median profit estimate of $1.99 billion.

Higher commodity prices for raw materials increased underlying earnings by $1 billion. Chairman Paul Skinner said demand in China, which accounted for 13 percent of first-half sales, remains strong, inventories are low and that markets will be tight in the short-to-medium term.

``The iron ore results were very strong, as well as aluminum and copper,' said Jim Reid, senior fund manager at AMP Capital Investors' Value Plus Fund, who helps manage more than A$2 billion ($1.5 billion), including Rio's shares. ``The Chinese economy is still strong and growth in the U.S. continues, which all bodes well for commodities volumes and prices.''

Shares of Rio Tinto rose 74 cents, or 1.5 percent, to close at A$49.91 on the Australian Stock Exchange. Rio's shares in London rose as much as 37 pence, or 1.9 percent, to 1952, and traded 1.5 percent higher to 1944 at 8:17 a.m. local time.

The world's second-largest exporter of iron ore said on July 20 that most of its operations produced at or near capacity in the second-quarter. China, the world's largest metals consumer, posted economic growth of 9.5 percent in the period.

Higher Sales

Sales rose 44 percent to $8.7 billion. Rio said it will pay a dividend of 38.5 cents a share, compared with 32 cents a year ago.

The company's Hope Downs iron ore project in Western Australia may cost $1.5 billion to develop and approval may be given as early as this year, Chief Executive Leigh Clifford said at a briefing.

Rio said in a separate statement it will spend $775 million on a titanium dioxide project in Madagascar and Canada. It will invest $585 million in a new mine and port in Madagascar, the biggest development project in the country's history, and a further $190 million expanding a processing plant in Quebec. The mine will start production in late 2008 at an initial capacity of 750,000 tons of ilmenite a year.

Industrial minerals such as titanium dioxide feedstock accounted for 6 percent of underlying earnings.

Costs Rise

``Although the rate of growth in the major economies slowed somewhat in the first half of this year, we are still seeing strong markets for our products,'' said Chairman Skinner in the statement. ``In particular, demand from China remains strong.''

The company also said commodity prices in 2006 will remain ``above average'' due to tight supplies.

Operating costs rose to $5.8 billion from $4.8 billion a year ago, the company said. Surging demand has led to ``cost pressures in the industry,'' as miners compete for labor, steel and other mining-related supplies, the company said.

``Costs may increase further next year, and that's going to be a concern,'' said Michael Birch, who manages the equivalent of $80 million, including shares of Rio at Wallace Funds Management in Sydney. ``The outlook comments are consistent with what the company has been saying. We expect Chinese demand to be strong.''

Copper earnings, the largest contributor to earnings, more than doubled to $834 million in the first-half from a year ago. Rio owns stakes in the two biggest copper mines.

Copper Price

Prices for copper, used in pipes and wire, are 18 percent higher in the first six months of the year, compared with the previous year on the London Metal Exchange.

Rio owns 40 percent of a venture with New Orleans-based Freeport-McMoRan Copper & Gold Inc. that runs part of Indonesia's Grasberg, the world's largest gold mine and second-biggest copper mine. Copper output from Grasberg more than tripled in the first half from a year ago. It also holds 30 percent of Escondida in Chile, the world's largest copper mine.

Net income from Rio's iron ore unit more than tripled to $681 million. It accounted for 31 percent of its profit, making it the second largest contributor to earnings. Rio and its partners are spending $1.84 billion increasing iron ore production.

Iron Ore

Rio's iron ore output rose 16 percent in the first half of the year, compared with the previous period, as benchmark annual prices rose 71.5 percent to a record from April 1. Coking coal, another steelmaking ingredients, also posted a 120 percent gain in prices due to surging demand from China. Rio's coking coal output rose 17 percent in the half.

Rio is China's biggest supplier of iron ore, accounting for one quarter of imports. China's steelmakers increased imports of iron ore by 34 percent in the first half of the year. China accounted for 9 percent of Rio's sales in the first half of 2004.

China's steel demand has risen 20 percent a year on average since 2000 as consumers buy more cars and refrigerators and the country builds in preparation for the 2008 Beijing Olympic Games.

To contact the reporter on this story: Tan Hwee Ann in Melbourne at hatan@bloomberg.net; Simon Casey in London at scasey4@bloomberg.net

Last Updated: August 3, 2005 03:49 EDT