Rio Tinto CEO Jean-Sebastien Jacques: conditions challenging

Rio Tinto has warned that commodities markets will remain volatile, as the miner’s first-half profit fell 47 per cent.

Rio Tinto CEO Jean-Sebastien Jacques, right, with CFO Chris Lynch in London yesterday.

Rio Tinto (RIO) chief Jean-Sebastien Jacques has warned that recent Chinese iron ore and steel demand strength is being fuelled by cheap credit and may not be sustained, predicting that commodities markets will remain volatile as lower prices knocked $US1.9 billion ($2.5bn) off the miner’s first-half profit.

Mr Jacques, who last month took over the top job from Sam Walsh, last night released his first profit report, overseeing a 47 per cent drop in underlying first-half profit and the company’s worst interim result since 2004, despite an unexpectedly strong iron ore price in recent months.

First-half underlying profit of $US1.56bn was down from $US2.92bn a year earlier, and was slightly lower than last year’s ­second-half result of $US1.62bn, ­despite an improvement in benchmark iron ore prices. But the result was in line with market expectations.

Lower commodities prices knocked $US1.9bn from under­lying earnings compared with a year earlier, but Rio clawed back $US410 million (after tax) of this with more impressive cost improvements, which have been the focus for three years.

Mr Jacques advised investors not to get too excited by a recent run-up in iron ore prices, which ­averaged $US52 a tonne in the first half and as of last night had since risen to $US62.

“Steel capacity has been running at a very high run rate in the second quarter, but I would be slightly cautious, because the bulk of the demand was underwritten by credit availability,” he said.

“From our perspective, we expect conditions to remain challenging and volatile.”

The big miner’s fortunes are to some extent linked to that of the nation, with iron ore, Australia’s biggest export, being Rio’s largest and most profitable business.

Rio’s West Australian iron ore operations held up well compared with the rest of the group, with net profit falling 17 per cent to $US1.74bn and making up 83 per cent of underlying group profits before interest, exploration and other items of $US2.1bn.

Rio reported first-half dividends of US45c a share, slightly higher than some had expected but in line with its commitment to a full-year dividend of $US1.10 or more, which would be more weighted to the final dividend.

Analysts saw no surprises in Mr Jacques’ first report. “The result looks very much in line with expectations and there is very little to get excited about, which is probably a good thing,” Arnhem Investment Management partner Neil Boyd-Clark said.

Rio reported first-half statutory net profit of $US1.71bn, more than double the $US806m net profit a year earlier, which was hit by $US1.7bn of exchange losses and impairments.

The 2016 result included $US496m of post-tax impairments because of take-or-pay Queensland coal port and rail contracts it does not expect to use. Net debt was reduced to $US12.9bn, from $US13.78bn, bringing the gearing ratio down one percentage point to 23 per cent.

“The market was happy with the overall direction of the company and there is little discernible change from the old to new CEO here with Rio again delivering reliable earnings,” Credit Suisse ­analysts said.

Mr Jacques played a dead bat to questions of asset purchase and ­divestments. He repeated Rio’s line that there was a list of assets Rio would like, but that it was hard to get them at good value.

On divestments, if someone offered a good price, Rio would look at most assets. But he quashed speculation that Rio may boost its exposure to the Oyu Tolgoi copper and gold mine in Mongolia by acquiring more shares in its subsidiary Turquoise Hill, which owns 66 per cent of the mine. “There is no plan to increase our equity stake in Turquoise Hill,” he said.

Rio’s full-year ­copper production guidance was cut by 30,000 tonnes to between 545,000 and 595,000 tonnes because of lower forecast production at the Grasberg mine in Indonesia.

Mr Jacques gave no indication of when he expected Rio’s WA mines and railways to be in a position to match the 360 million- tonnes-per-year capacity of its expanded Pilbara ports. Last month, Rio said Pilbara production would be restricted to 330-340 million tonnes because of delays to its driverless train program, which was needed to boost rail capacity to match the port.

Mr Jacques said some progress had been made but would not say when or if he expected the glitches to be overcome. “We will progress (to 360 million tonnes) at the right pace, driven by value,” he said.

“We do look at the influence of volume and what the impact on the market could be, so we do a lot of simulation, a lot of gaming.

“But it’s complex because you don’t know what your competitors are going to do as well, so we need to be very clear that when we take a decision the value is there.”

Rio shares closed flat on the ASX at $49.42 before the results were announced.