Rio Tinto Group (RIO), 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, in line with the $4.16 billion average estimate of seven analysts surveyed by Bloomberg. Net income slumped 71 percent to $1.7 billion. The company shelved a planned sale of an aluminum unit.
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. (BLK:US) are pressuring new mining CEOs at Rio, BHP Billiton Ltd. (BHP) and Anglo American Plc (AAL) to boost returns to shareholders and defer building mines as waning demand and declining prices erode profits.
“We’ve seen cost-cutting, we’ve seen job reductions so he’s delivering on that aspect of it,” Paul Gait, a mining analyst at Sanford C. Bernstein Ltd. in London, said today. “There’s nothing in this set of results that really stands out as a significant validation of what Rio Tinto are trying to do here. It does feel like somewhat of a holding pattern.”
Rio’s sales slipped to $24.5 billion in the first half from $25.3 billion a year earlier, the company said in a statement.
The shares have lost 14 percent this year in London, where Rio is based. They climbed 2.1 percent to close at 3,016.5 pence today. The company raised its dividend 15 percent to 83.5 cents a share.
CEO Walsh is seeking to dispose of more mining operations after selling more than 20 assets for $12 billion to help cut debt. China Molybdenum Co. last month agreed to buy Rio’s Northparkes copper mine in Australia for $820 million, bringing total assets sales this year to $1.9 billion.
The company today shelved a 2011 plan to divest Australian and New Zealand aluminum assets, known as Pacific Aluminium. A sale “for value is not possible in the current environment,” Walsh said.
“It’s a lossmaking aluminum business in a massively oversupplied world so it’s hardly surprising they can’t sell this for value,” Bernstein’s Gait said. “Investors will be disappointed. Simply because most people don’t like aluminum as a commodity, they certainly don’t like lossmaking aluminum. Bringing that back into the portfolio is just a distraction.”
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. Net debt rose to $22.1 billion at the end of the first half from $19.2 billion as of Dec. 31.
“In a world where we’re seeing more volatility, you want to be resilient under any potential scenario,” Walsh told reporters today on a conference call. “I’d like to see the balance sheet strengthened. We do need to reduce the debt, and we are working on it.”
New mining 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.”
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.
Rio said today that it’s buying concentrate at Utah to meet customer commitments and expects to complete the removal of the landslide by the end of 2015.
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.
“Certainly if you look at the market fundamentals, they’re strong,” Walsh said. “We’ve always said we’d make a decision in relation to the mine in the latter part of this year. That continues to hold.”
A deferral of Rio’s iron-ore expansion would help keep the market for the material 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 grows and Chinese steel mills, the biggest buyers, raise output at the slowest pace in five years.
“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. “We are getting to the point where management are curtailing projects.”
Walsh told reporters in London that investor opinion on the expansion was largely split with those in Asia and Australia mostly positive and European, U.S. and U.K. shareholders preferring it to be slowed.
“You’ve got to be very careful you get a clear message from investors because some quite frankly are also holders of our competitors,” he said. “Quite frankly I’ve been a bit concerned that some of the messages have focused on what we’re doing,” rather than what rival producers are planning, he said.
Last month Rio made its first commercial copper shipment from its newest mine, the $6.6 billion Oyu Tolgoi project in Mongolia, which has been mired in a dispute with the landlocked nation’s government this year.
Rio is delaying work on a $5.1 billion underground expansion at the mine pending financial approval by Mongolia’s parliament, it said in a July 29 statement.
“There are a lot of new issues that are unfolding as we bring the project forward,” Walsh said today on the call. “We have made significant steps in terms of resolving issues that were of concern to the government of Mongolia.”
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