Resources: Rio Tinto Disappoints

The market had been looking for an interim profit of just over $US8 billion for the six months to June from Rio Tinto.

In any event the mining giant told stock exchanges yesterday afternoon that it had fallen a bit short of expectations.

Rio is the world's third-biggest miner after BHP Billiton, which reports its 2011 full year figures later this month (August 24) and Vale of Brazil, which reported its interim figures last week (see below).

Rio revealed yesterday that it had raised its planned share buyback by $US2 billion to $US7 billion as its latest earnings rose 30% to $US7.59 billion ($A7.1 billion), short of the $US8.36 billion expected by analysts, according to Bloomberg.

Reuters said analysts they had surveyed had been looking for earnings around $US8.03 billion.

In any event, the actual result was around $US400 million to $US1 billion short of market expectations.

Rio said its profit result was $US8.078 million, but $US491 million of that was attributable to non-controlling interests, with $US7.587 million attributable to its shareholders.

Most of the higher profit came from increased prices for commodities like iron ore, coal, copper, gold and other minerals.

The company posted record first-half underlying earnings before interest, taxes, depreciation, and amortisation (EBITDA) of $US14.3 billion, 27% above the 2010 first-half result.

Revenue rose 19% to more than $31.7 billion from the $26.24 billion in the first half of 2010.

Higher prices were the major driver for the result as Rio said yesterday: "The effect of price movements on all major commodities in 2011 first half was to increase underlying earnings by $4,997 million compared with 2010 first half.

"Prices improved for nearly all of Rio Tinto's major commodities: copper prices were up 31 per cent, molybdenum prices were up 13 per cent, gold prices were up 26 per cent and aluminium prices were 20 per cent higher than 2010 first half.

"Demand and prices for diamonds and minerals improved significantly, reflecting strength in Asian markets."

The company though said it would increase its planned share buyback to $US7 billion from an earlier announced $US5 billion target.

Around $3 billion of the original buyback has been completed, so the increase is a bit of a sop to big investors who would have been unhappy with the lower than expected result.

The results came out after the Australian share market closed yesterday.

Rio shares ended the day down $A1.02, or 1.3%, to $A76.58, a drop in line with the overall market's fall.

Rio reported that underlying earnings for the six months to June 30, 2011 were up 35% to $US7.78 billion. Cashflow increased 31% to $US12.88 billion.

The company said it would pay an interim dividend in line with expectations of 54 USc a share, up 20%.

Rio Chairman Jan du Plessis said in the statement, "Market conditions have remained favourable over the past six months due to strong Asian demand, although the volatile economic environment that we highlighted eighteen months ago continues to exist, driven by significant macro economic imbalances.

"We continue to believe that the creation of shareholder value over the long term requires a balanced approach to investing in high quality growth and returning excess cash to our shareholders.

"In February, we announced a $5 billion capital return to be completed by the end of 2012. We have already completed $3 billion of this. Our continued strong financial performance means we are able to maintain this pace and we have therefore increased our share buy-back by $2 billion to $7 billion, subject to market conditions.

"This still allows us to be flexible and to take advantage of any new opportunities."

Chief executive Tom Albanese said in the statement, "Rio Tinto's consistently high-performing operations are reflected in these latest results.

"We largely recovered from the severe weather conditions in the first quarter and, although volumes were lower than 2010 first half, we were able to take advantage of higher prices for our products.

"This performance translated into record first half underlying earnings of $7.8 billion, a 35 per cent increase on the first half of 2011.

"In a period of rapid investment across the industry we are experiencing high cost inflation in certain mining hotspots.

"Coupled with the increasing strength of the Australian and Canadian dollars, this has put pressure on our cost base.

"Nevertheless, through our industry-leading investment in technology and innovation and our track record of superior operational performance, we expect to mitigate some of these cost increases.

"We have some of the best quality growth projects in iron ore, copper and coking coal.

"These projects are on track and, as we finalise our studies for the expansion of our industry-leading Pilbara iron ore operations to 333 Mt/a, we have accelerated the timeline by six months to the first half of 2015.

"We have secured further growth options in new territories, notably the successful Riversdale acquisition which delivers both thermal and coking coal opportunities in Mozambique, one the world's premier coal basins.

"We also reached an agreement with the Government of Guinea, paving the way for first shipment of iron ore from Simandou by mid- 2015.

"Market expectations are for global growth of around 3.5 per cent this year and we expect Chinese GDP to expand by 9.5 per cent.

"We remain positive for the remainder of 2011 and into 2012, in particular given the context of the industry struggling to bring new production onstream.

"However there are important risks to this outlook related to the pace of credit tightening in developing countries and the threat of financial crises arising from sovereign debt problems in Europe and the United States which could destabilise commodity markets.

"Looking further ahead, our view remains that our markets will continue to experience higher than average growth but they will be characterised by elevated volatility and scope for discontinuities.

"The strength of our balance sheet has enabled us to continue to invest in disciplined growth from tier one projects whilst boosting returns to shareholders. We believe that our high quality asset base and superior growth options together with our increased investment in technology and exploration, positions Rio Tinto advantageously over the longer term," Mr Albanese said.

Another reasonable result is expected for the six months to December 31. But with the global economy poised on the edge of a slump, you'd have to ask whether Rio management are fooling themselves by budgeting for a 3.5% rise in the global economy in 2011.

Except for China, Japan and the rest of the emerging economies, the global economy is slowing sharply at the moment (see separate stories). Hopefully China, Japan, South Korea and the rest of Asia will keep growing for the rest of this year and into 2012.

But it wasn't all good news from the Rio camp.

Its listed uranium mining subsidiary Energy Resources of Australia confirmed an already forecast first half loss thanks to the wet weather in January that forced it to suspend operations at its Ranger Mine in the Northern Territory.

The company yesterday posted a net loss of $121.75 million for the six months to June 30, against the profit of $22.68 million for the first half of 2010.

As a result, shareholders, led by Rio, will go without a dividend for another six months, taking to a year the time without a payment.

ERA directors yesterday said they had decided not to declare an interim dividend for the 2011 financial year, compared to the interim dividend of 8c per share the year before. No final dividend was paid for 2010.

Revenue increased 12% to $235.56 million, but some of that was for the sale of bought in uranium oxide by ERA to keep its contracted customers supplied.

ERA said its operating and financial results for the June 2011 half-year were "significantly impacted" by the suspension of processing operations at Ranger Mine announced on January 28.

"The suspension was taken in response to the significantly above average 2010/11 wet season encountered in the Northern Territory," the company said.

With the restart of the processing operations beginning on June 15, 2011, ERA expects its 2011 production of uranium oxide to be approximately 2,600 tonnes.

The company says in the short term, the uranium market "appears to be well supplied" due to adequate inventory coverage held by utilities along with increased production, especially from Kazakhstan.

Volatility in the spot price of uranium oxide was likely to continue until the nuclear situation in Japan becomes clearer and the outcomes of the safety reviews of nuclear power facilities in China are released.

The company says long-term demand is expected to continue to be driven by strong growth in the Chinese market.

"This is expected to significantly exceed any market contraction as a result of the Japan crisis," the company said.

"ERA continues to envisage a strong future for uranium including continued price and demand growth with long-term demand exceeding planned supply."

Despite this optimism, investors sold off the shares, which finished down 37c or 8.5% at $3.95.

Rio is of course not the only big miner riding the resources boom in China and playing higher commodity prices for all they can get.

Vale
The big Brazilian iron ore miner and number one in the world reported a surge in quarterly and half year earnings last week.

Net profit surged to $US6.45 billion in the second quarter from $US3.71 billion in the same three months of last year, with operating revenues rising to a record $US15.35 billion, up from $US9.93 billion.

For the six months to June, Vale earned a huge $US13.278 billion (More than Rio Tinto).

Revenues rose to nearly $US29 billion.

Interestingly, second half earnings of $US6.45 billion slipped 5.4% from the record $US6.826 billion recorded in the first quarter.

Xstrata
Another global giant, reported earnings before interest, tax, depreciation and amortisation (EBITDA) for the June 30 half year of $US5.82 billion for the half-year, up 30% and broadly in line with forecasts, while operating profit rose 31% to $US4.25 billion.

Revenue rose to $US16.8 billion from $US13.6 billion in the half year. Xstrata doesn't have iron ore in its portfolio as do BHP, Rio and Vale.

It is big in coal (coking and thermal), especially in Australia, copper, nickel, zinc, lead, silver and a bit of gold here and in the Pacific, South America, South Africa and North America.

Anglo American
The fourth-largest global diversified miner by market capitalisation, said operating profit came in at $6 billion, below a market forecast of $6.3 billion.

Underlying earnings climbed 41% to US$3.1 billion, from US$2.2 billion for the first half of 2010.

Revenue rose strong in the half, up around 20% to $US15.2 billion from $US12.6 billion.

Barrick
Is the world's biggest gold miner, with ambitions in copper. It reported first half earnings of $US2.160 billion, up 28% from the $US1.679 billion for the first half of last year.

Revenues jumped 25% to $US6.516 billion from $US5.202 billion.

Second quarter earnings jumped to $US1.159 billion from $US859 million. Revenues surged 30% to $US3.426 billion from $US2.621 billion as world gold prices hit a series of new highs during the June half (and have surged higher since).

Newmont
Is one of the world's biggest gold miners. Gold production fell from 2.63 million ounces in the first half of 2010 to 2.57 million ounces in the six months to June 2011.

The company reported an adjusted net income of $US445 million for the second-quarter of 2011, up 18% from the $US377 million for the same quarter of 2010.

For the first six months of this year, Newmont reported an adjusted net income of $US958 million, up from an adjusted net income of $US786 million for the same period of last year.

Grupo Mexico
is an emerging global copper giant, with most of its assets in the US and South America.

It reported net income for the Americas Mining Corporation, the parent company of Asarco and Southern Copper Corp of US$627.7 million for the second quarter up from $US326 million in the second-quarter 2010.

For the first six months of this year, Americas Mining reported a net income of $US1.12 billion, more than double the $US608.7 million reported during the first six months of last year.