Rio prepares for recovery after second-half profit tumbles

Rio Tinto, the world's second-largest miner, positioned itself for a comeback on Thursday after posting a record drop in half-year profit and selling off shares and assets to slash debt. Rio said it was more confident about the future after cutting a greater-than targeted 16,000 jobs, or 15 percent of its workforce, reducing production at its higher cost operations and paying off almost 40 percent of its debt.
A key remaining challenge for Rio Tinto, however, is to resolve a stalemate with Chinese steel mills on price talks for iron ore, its biggest earner, amid tension with the Chinese government over the arrest of four staff in Shanghai on suspicion of bribery.
Chief Executive Tom Albanese told reporters he didn't want to say anything that would adversely affect the four. "Rio Tinto is now a stronger, fitter business and we can now look to the future with a higher level of confidence," he said. "The worst is definitely over, just from where their debt position has come from and where it is today ... and where commodity prices have moved," said Tim Schroeders, a portfolio manager with Pengana Capital.
"The group has a lot more flexibility in being able to adjust to whatever market conditions confront it in the future." First-half underlying profit fell 54 percent to $2.565 billion, matching analysts' forecasts, as metals prices and demand collapsed. Its aluminium business, which it expanded two years ago with the costly take-over of Alcan, slid to a loss of $689 million.
Rio Tinto, which lightened its debt burden with recent asset sales and a $15.2 billion share sale, said cost cuts would pay off in the second half and, in a sign of its confidence, said it expected to pay a final dividend. Albanese said he expected some recovery in western demand in 2010. Rising demand from China, the biggest consumer of many industrial metals, had lifted metal prices from 2008 lows.
"If current markets are any indication, I expect to see more stable and possibly stronger trading conditions in the second half," Albanese said. That echoed the outlook given last week by bigger rival and former suitor BHP Billiton after it announced its first profit decline in seven years.