Rio Tinto’s profit falls sharply

The miner has still managed to meet analyst expectations, while further reducing its debt.

Analysts were expecting underlying earnings to be well down from a year earlier.

Rio Tinto has reported a sharp drop in half-year earnings, but still managed to match analyst forecasts as iron ore prices bounced off 10-year lows.

The mining giant also slashed its interim dividend as expected, while largely reaffirming cost and production guidance for the full-year despite expressing caution about the outlook for the sector.

Traders delivered a muted response to the report, with the company’s UK-listed shares climbing 0.3 per cent in early deals. Ahead of the release its ASX-listed shares had closed steady.

For the six months to June 30, Rio Tinto (RIO) reported an underlying net profit of $US1.56 billion, in line with analyst estimates and serving as its weakest first-half in 12 years.

The number fell 47 per cent shy of last year’s corresponding earnings of $US2.92bn.

The group’s net profit more than doubled to $US1.71bn, as it was not afflicted by the heavy exchange rate and derivative losses seen last year, while pre-tax earnings slumped 27 per cent to $US5.36bn, marginally falling short of expectations for a slide to $US5.38bn.

The majority of its pre-tax profit came from its flagship iron ore operation, which recorded a 14 per cent slide in pre-tax earnings to $3.44bn.

Rio Tinto said its net debt fell 6 per cent to $US12.9bn, comfortably beating market projections for a modest rise to $US13.8bn. Its gearing ratio fell one percentage point to 23 per cent.

The positive reduction in debt came against a backdrop of weaker commodity prices compared to the same period last year, despite signs of recovery for some commodities.

The miner said adverse movements in commodity prices cut $US1.9bn from its underlying earnings, with this number only partially offset by a $US241m gain from currency movements and a $US410m boost from lower cash costs.

Rio Tinto was guarded on the outlook for prices moving forward as a transition period is seen in the Chinese economy.

“Growth in China has stabilised, but it is on a long transition path of slower and less commodity-intensive growth,” the miner said.

“Meanwhile the global economy seems stuck in a subdued low-productivity growth pattern which would indicate that continued caution is required for the second half of 2016.”

The miner did, however, note the positive turnaround in market sentiment through the first-half, even if some commodities were left out of the rebound.

“The credit-fuelled bounce in Chinese construction activity has had a positive impact on commodity markets in the first half of 2016, but its impact has been uneven, benefiting most steel raw materials,” Rio said, adding markets were continuing to “rebalance”.

The results serve as the first major earnings release for new chief executive Jean-Sebastien Jacques, who assumed the top job from Sam Walsh on July 1 after being tapped for the position in March.

Mr Jacques said the company’s focus on cost-cutting was “unrelenting” and would reap benefits regardless of the market conditions.

“Our balance sheet strength and Tier 1 assets provide a stable foundation in these uncertain and volatile markets, which is fundamental in a cyclical and capital-intensive industry,” he said.

“We will generate cash at every opportunity, which we will then allocate in a disciplined way to deliver returns to shareholders, while also investing in compelling growth.”

The miner said its production guidance had not changed since last month’s second-quarter production report, aside from a tweak to its copper outlook after joint venture partner Freeport updated the outlook for the giant Grasberg mine.

Rio now expects copper production in a range of 545,000 to 595,000 tonnes, down 30,000 tonnes from its July 19 projection.

The group has retained its plan to cut pre-tax operating costs by $US2bn over 2016 and 2017, while its capital expenditure is still expected to hit $US4bn this year despite only reaching $US1.32bn in the first-half.

Its capex outlook is also unchanged for 2017 and 2018.

Rio declared an interim payout of US45c a share, well down on last year’s corresponding number of $US1.075 after it abandoned its controversial progressive dividend policy at its full-year results in February.

The average analyst had been expecting a US55c a share payout, Bloomberg figures show, although Deutsche had tipped a maximum dividend of US40c ahead of the release.

Mr Jacques reaffirmed the miner’s full-year payout will come to at least $US1.10 a share.