Global miner Rio Tinto posted a better-than-expected 55 percent rise in first-half profit, boosted by its take-over of Alcan and strong Chinese demand for industrial minerals, and gave an upbeat outlook.
At a time when economists have been slicing their forecasts for commodity prices, Rio Tinto, like its hostile suitor BHP Billiton Ltd/Plc, was confident the upside in the commodities cycle had further to run. "While the equity markets are currently focused on downside risks, we believe there are potential offsets on the upside based on continued strength in commodity demand, low inventory levels and a supply side which continues to face multiple constraints," Rio Tinto Chairman Paul Skinner told a media teleconference from London on Tuesday. "The group continues to perform strongly, and the outlook remains positive," he said.
This was outweighed for the stock market by mounting concerns of a drop in global commodities demand that left Rio, BHP and others vying for a bigger share of the one bright spot in the market, China, however. These concerns sent Rio Tinto's shares down 3.2 percent, with BHP down 3.8 percent and Xstrata down 4.5 percent.
"Whilst the results were good, it appears they weren't good enough to drive the share price to perform materially differently from the rest of the sector," said Simon Toyne, an analyst at Numis Securities in London.
Underlying earnings excluding one-offs rose to $5.474 billion in January-June from $3.529 billion a year earlier. Analysts on average had expected underlying earnings of $5.133 billion, according to Reuters Estimates. Rio raised its interim dividend by 31 percent to 68 cents per share and reaffirmed it would boost its full-year payout in 2008 and 2009 by at least 20 percent in each year.
The result was powered by a near tripling in operating earnings from Rio's iron ore division to $2.9 billion, with the outlook even stronger given recent price hikes to customers.
BHP last week reported a 30 percent rise in net profit to $9.37 billion for January-June. The group is defending itself against a $150 billion take-over bid from bigger rival BHP, which is awaiting clearance from Australia's competition watchdog, due in October, and from the European Commission, due in December, before formally launching the offer.
Australia has signalled concerns that combining the two giants would lead to higher iron ore prices, which would hurt Australian steelmakers. Rio shares are trading about 10 percent below the value of BHP's offer of 3.4 of its shares for each Rio share.
Skinner reiterated the group's view the offer is too low. "The group's performance in the first half, together with our growth potential, supports the boards' view that Rio Tinto presents a very strong standalone value proposition for shareholders," he said.
The Australian government this week also cleared the way for Chinese aluminium giant Chinalco to raise its stake in the London-listed arm, Rio Tinto Plc, to 14.99 percent, or 11 percent of the dual-listed group as a whole.
"We're not in a position to forecast whether Chinalco will avail themselves of the flexibility that they've now been given, so we'll just have to wait and see," Skinner said. Skinner said the global credit crunch and economic downturn had had only minor effects so far on commodity demand.
"Although we have seen some moderation in global growth rates from tightened availability of credit, the impact on our markets has been modest," Skinner said. In China, which has been driving global commodities demand, imports of iron ore were running 20 percent above last year, Chief Executive Tom Albanese told reporters.
Skinner said he still believed a targeted $10 billion worth of assets sales could be by hit by the end of this year. Rio has already sold stakes in the Cortez gold mine and Greens Creek silver mine, and its Kintyre uranium deposit, and sales slated for this year could include Alcan's packaging business, he said.
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