Rio Tinto First-Half Profit Trails Estimates as Costs Rise

Rio Tinto Group, the second-largest mining company, reported first-half profit that missed analyst estimates as costs and currency gains in Australia and Canada hurt earnings. The shares fell the most in more than 13 months.

Underlying profit rose 35 percent to $7.8 billion, below the $8.3 billion mean estimate of nine analysts compiled by Bloomberg. Net income climbed 30 percent to $7.6 billion in the six months ended June 30, from $5.8 billion a year earlier, the London-based company said today in a statement. Rio expanded its share buyback by $2 billion to $7 billion.

Global mining companies are battling rising wages, raw material and energy bills as well as currency gains in producing countries that drive up their costs. Foreign exchange movements cut underlying earnings in the first-half by $810 million, Rio said today. Chief Financial Officer Guy Elliott forecast further increases in expenses.

“Market expectations missed the impact of rising input costs on Rio’s performance,” Charles Kernot, a London-based analyst at Evolution Securities Ltd., said today in an e-mailed note. “The strong Australian dollar and Canadian dollar particularly have adversely impacted operating costs. High energy costs, fixed costs at low output Australian mines and various other input cost pressures have squeezed margins.”

Rio fell 5.4 percent to 3,796.5 pence, the biggest one-day slump since June 29, 2010 and the lowest close since Oct 5. The FTSE 350 Mining Index slipped 5.8 percent.

‘Mild Disappointment’

Rio declared an interim dividend of 54 cents, up 20 percent from a year earlier. The payout for the second half will be “closely reviewed” in February, Elliott said today. The company’s own average estimate of underlying profit from 18 analysts was for $8.03 billion.

The expanded share buyback will be completed by the end of the first quarter of 2012. When the plan was announced in February, Rio said it intended to complete it by the end of next year.

Profit was “a mild disappointment, missing consensus,” Liberum Capital Ltd. said in an e-mailed note. 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 U.S. dollar weakened by an average 16 percent against the Australian dollar and by five percent against the Canadian dollar, Rio said. The company records many of its costs in the currencies of the countries where it operates, while sales are priced in dollars.

Cost Pressures

Higher energy costs cut earnings by $95 million, increases in input costs decreased income by $384 million and severe weather in Australia during the period also drove up expenses and trimmed $245 million off earnings, Rio 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 Officer Tom Albanese said today on a call with reporters from London.

Higher costs associated with project expansions cut earnings by $353 million while other production-related expenses including maintenance and additional labor reduced earnings by $182 million, Rio said. Because of gains in the Australian dollar, the cost of existing iron ore and alumina expansion projects has increased $2.4 billion, the company said.

“We’ve obviously seen much higher labor settlements and salary increases than local inflation in most places,” Elliot said on a call today with reporters.

Critical Raw Materials

“Looking forward, we should expect to see continued inflation in production costs and in input prices, in particularly labor cost in locations such as Australia and in Canada and certain critical raw materials,” he later told analysts on a webcast from Sydney.

Even so, Albanese has presided over an almost fivefold increase in profit since the first half of 2009 as raw-material prices advanced. That’s allowed Rio to slash debt and boost spending on expansions and cash returns to holders. Iron ore provided almost two-thirds of Rio’s 2010 earnings before interest, tax, depreciation and amortization.

The price of the ore, a key steelmaking ingredient, may average $170 a metric 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. Aluminum averaged $2,573 a ton, compared with $2,162.

‘Elevated Volatilities’

“Although volumes were lower than 2010 first half, we were able to take advantage of higher prices for our products,” Albanese said in the statement. “Our view remains that our markets will continue to experience higher-than-average growth, but they will be characterized by elevated volatility and scope for discontinuities.”

In February, Rio announced the share buyback and a 40 percent increase in its dividend as 2010 net income tripled to $14.3 billion. Rio didn’t pay an interim dividend in 2009 and instead pursued a $15.2 billion rights offer as it grappled with almost $40 billion in debt after taking over Alcan Inc. in 2007.

Rio is the world’s second-largest mining company by sales, trailing BHP Billiton Ltd. (BHP) Brazil’s Vale SA is the third- largest.

To contact the reporter on this story: Jesse Riseborough in London at jriseborough@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net

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