Bloomberg News

Rio Tinto Swings to Second-Half Loss After Aluminum Charge

February 09, 2012

(Updates with Rio’s London shares in fifth paragraph.)

Feb. 9 (Bloomberg) -- Rio Tinto Group, the world’s third- largest mining company, swung to a second-half loss, its first in four years, after taking an $8.9 billion one-time charge on the value of its aluminum business.

The loss was $1.76 billion in the six months ended Dec. 31, London-based Rio said today in an e-mailed statement. That compares with a record profit of $8.5 billion a year earlier. Deutsche Bank AG estimated on Feb. 6 the company would take a charge of $6 billion on the unit.

Aluminum has declined 12 percent in the past year, hurting producers such as United Co. Rusal and Alcoa Inc., which last month booked its first loss in two years. Rio Chief Executive Officer Tom Albanese said he won’t take an annual bonus because of the charge related to the $38 billion acquisition in 2007 of Alcan Inc., the biggest mining takeover before the Glencore International Plc-Xstrata Plc combination proposed this week.

“The impairment charges were bigger than expected,” said Ric Ronge, who helps manage the equivalent of $1.3 billion in stocks, including Rio and BHP Billiton Ltd., at Pengana Global Resources Fund in Melbourne.

Rio dropped as much as 2.7 percent in London trading and was 1.1 percent lower at 3,831.5 pence at 8:34 a.m. The FTSE 350 Mining Index was 0.1 percent lower. Before today, the stock had gained 24 percent this year. The company’s Sydney-traded shares dropped 0.2 percent to A$71.60 before the announcement.

‘Admitted Defeat’

Rio reported a 59 percent drop in full-year profit to $5.8 billion. Underlying earnings rose 11 percent to a record $15.5 billion, supported by the performance of its biggest-earning iron ore unit, Rio said. Second-half underlying earnings were $7.8 billion, according to an e-mail from the company.

The results “are a mixed bag driven by impressive performance from the group’s iron ore business; however the group has finally admitted defeat on Alcan amid low prices and soaring input costs,” Charles Cooper, a London-based mining analyst at Oriel Securities Ltd., said today in a note.

Rio’s final dividend of 91 cents compared with a Bloomberg estimate of 76 cents. UBS had forecast a final dividend of 67 cents a share and Deutsche Bank AG 95 cents. Rio had scope to increase its dividend by as much as 50 percent, Citigroup Inc. said.

“The operating performance of the assets themselves seems to be pretty good,” Pengana’s Ronge said. “The full-year number is better than expected. The dividend looks to be better than consensus, as well.”

No New Buyback

The full-year dividend rose 34 percent to 145 cents. Rio has no plans for a further share buyback after the completion of its current $7 billion plan, Chief Financial Officer Guy Elliott said today on a call with reporters from London. Rio will continue to review further buybacks, he said.

Rio in October said it planned to sell 13 aluminum assets, including smelters and alumina plants in Australia, the U.S. and U.K., to improve its finances. It has cut debt after borrowings ballooned to $40 billion with its purchase of Alcan.

The sale, which may draw bids from Chinese buyers according to Deutsche Bank, is taking place within “tough conditions” and the company is considering various options including an initial public offering, Elliott said.

There are “uncertain macroeconomic conditions, together with stronger currencies in some regions and high raw material costs,” Albanese said today, reiterating comments made in November when the company flagged likely impairments to its aluminum assets. “As the acquisition of Alcan happened on my watch, I felt it only right not to be considered for an annual bonus this year.”

Aluminum Falls ‘Sharply’

While the price of aluminum, used in cars, packaging and houses, averaged 10 percent higher in 2011 than a year earlier, it dropped “sharply” in the fourth quarter, Rio said, adding that the industry has been in surplus for the past five years. Rio’s aluminum unit was unprofitable in the second-half, Elliott said.

BHP Billiton Ltd., the world’s largest mining company, yesterday reported a 5.5 percent drop in first-half profit, its first decline since 2009, as rising costs and lower output and prices halved base metals earnings. The aluminum industry has had a “structural profitability downturn,” BHP CEO Marius Kloppers said on a call with reporters yesterday.

“The industrywide phenomenon of high cost inflation has continued in a number of mining hot-spots in which we operate,” Albanese said in the statement. “These pressures, together with the strengthening of the Australian and Canadian currencies, escalating raw material prices, the impacts of adverse weather conditions and lower grades squeezed our margins in 2011.”

Glencore’s $37.6 billion all-share offer for Xstrata would create the fourth-biggest mining company, increasing rivalry with BHP, Rio and Vale SA. BHP’s Kloppers yesterday said his company has the firepower to keep making acquisitions.

--With assistance from Jesse Riseborough in London. Editors: John Viljoen, Tony Barrett

To contact the reporters on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net; Soraya Permatasari in Melbourne at soraya@bloomberg.net

To contact the editors responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net; John Viljoen at jviljoen@bloomberg.net


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