Rio Tinto Group, the world’s second-largest mining company, said first-half profit dropped 18 percent as slowing economic growth in China sapped demand for raw materials, dragging down prices.
Underlying profit fell to $4.2 billion from $5.2 billion a year earlier, Rio said today in a statement. That compares with the $4.16 billion average estimate of seven analysts surveyed by Bloomberg. Net income slumped 71 percent to $1.7 billion.
Chief Executive Officer Sam Walsh is seeking to cut $5 billion of costs, sell assets and slow spending to counter lower prices. Investors including BlackRock Inc. are pressuring new mining CEOs at Rio, BHP Billiton Ltd. and Anglo American Plc to boost returns to shareholders and defer building mines as waning demand and declining prices erode profits.
The CEOs “have made promises to the market around lack of M&A, operating-cost reduction, capital-cost reduction as well, and increased returns to shareholders,” Evy Hambro, manager of BlackRock’s $7 billion World Mining Fund, said yesterday in an interview. “We are aware metals prices haven’t been as strong as they would’ve expected but some continuity on those themes and delivery to promises are going to be absolutely key.”
Rio’s sales slipped to $24.5 billion in the first half from $25.3 billion a year earlier. The London-based company raised its dividend 15 percent to 83.5 cents a share. The stock has lost 15 percent this year in the city. It rose 1 percent to 2,982 pence as of 8:18 a.m. local time today.
Rio is seeking to dispose of more mining operations after selling more than 20 assets for $12 billion to help cut debt. China Molybdenum Co., the nation’s second-biggest producer of the steelmaking material, last month agreed to pay Rio $820 million for its Northparkes copper mine. Rio has sold $1.9 billion of assets this year.
The company shelved a 2011 plan to divest Australian and New Zealand aluminum assets, known as Pacific Aluminium, according to Walsh, who said today that a sale “for value is not possible in the current environment.”
Growth in China, Rio’s biggest customer, eased in the second quarter as gains in factory output slowed. Prices on the London Metals Exchange have dropped 12 percent this year, according to an index of six metals. Lower prices for all of Rio’s commodities except diamonds trimmed earnings by $1.3 billion from a year earlier, the company said today.
“The medium-term economic outlook remains volatile with a broader range of outcomes now possible,” Walsh said in the statement. “Chinese economic growth has decelerated so far this year and is unlikely to recover significantly in the second half, but we do not expect a hard landing.”
The company has cut $1.5 billion in costs and reduced employees by 2,200 since June 30, 2012. Spending on projects is estimated at $14 billion this year, 20 percent below the 2012 peak, Rio said.
The decline in net income was partly attributed to $1.9 billion of “non-cash exchange losses” and a write-off of $300 million relating to a landslide at a copper mine in Utah.
Iron ore is the biggest contributor to Rio’s results, followed by copper. Iron provided 78 percent of earnings before interest, taxes, depreciation and amortization last year.
The company is studying an expansion of capacity in Australia’s Pilbara region to 360 million metric tons of iron ore a year from 290 million tons, and is evaluating options for the estimated $5 billion project. It may develop new mines or extend existing sites, Rio said today.
“The first goal for us is to stop the excessive investment that’s been taking place in many of the last few years,” BlackRock’s Hambro said. Rio is the biggest holding in his World Mining Fund. “We are getting to the point where management are curtailing projects.”
A deferral would help keep the iron-ore market stable until 2018, underpinning prices, according to a Citigroup Inc. report in May. Iron ore is set for its first global surplus in at least a decade as production expands and Chinese steel mills, the biggest buyers, boost output at the slowest pace in five years.