THE world's third largest miner Rio Tinto has posted a 14% fall in first half net profit from the corresponding period in 2006, despite strengthening demand for its products during the period.
A ship being loaded with iron ore at Rio Tinto's Dampier port in Western Australia.
The group's net earnings fell from $US3.8 billion to $3.25 billion for the first half this year with industry wide cost pressures reducing earnings by $503 million.
The drop in first half net profit was below the $3.7 billion figure tipped by the six analysts surveyed by Bloomberg News.
In a release to the market this afternoon, Rio Tinto chief executive Tom Albanese said operationally, the first six months of 2007 were demanding as the company pushed its existing businesses to respond to strong market conditions by maximising production.
"On balance, all our businesses have performed well, but we are alert to continuing industry-wide cost pressures, notably in Western Australia and in Queensland," he said.
"Our iron ore business has experienced higher contractor and transportation costs particularly following the cyclones earlier this year, while infrastructure related costs at Rio Tinto Coal Australia have impacted margins in the Energy group.
"We are putting in place measures to mitigate the future impact of costs through productivity improvements, the sharing of best practice and a review of our functional and support costs."
The group's net earnings were negatively impacted by a $314 million impairment of its Argyle diamond mine in Western Australia's Kimberley region, reflecting the impact of industry cost pressures in the state and difficult ground conditions.
The revised capital budget of the project was now likely to be some $1.5 billion up from an earlier forecast capital budget of $910 million.
Despite the increase in costs, higher volumes particularly in iron ore contributed $302 million to earnings while higher prices and strong demand for most products increased underlying earnings by $513 million.
The group's cash flow from operations was at $5.6 billion for the first half, an 11% increase on the previous corresponding period. The group also posted record first half capital expenditure of $1.9 billion.
"Rio Tinto has an industry leading pipeline of organic growth opportunities with in excess of $9 billion of committed projects across our portfolio and further significant projects under consideration," Albanese said.
Albanese said its program of investment in organic growth continued in the first half of 2007, with particular emphasis on the expansion of its iron ore business.
"We are on target and schedule to reach 220 million tonnes per annum of managed iron ore production in the Pilbara in 2009 and are now undertaking studies into the potential to increase annual production capacity to 320Mt," he said.
Rio Tinto chairman Paul Skinner said the demand for the company's products strengthened during the period, supported by a continued positive growth trend in the global economy and favourable demand conditions particularly in China.
However, Skinner stressed the ability to meet demand was still constrained by a scarcity of mining inputs and in some cases a lack of infrastructure and quality orebodies.
"Against this background, the Group's operations performed well, although continuing industry-wide cost pressures impacted our margins and we remain focused on this key area," he said.
Rio declared an interim dividend of 52c per share, up from 40c per share in the corresponding period last year.
Rio, which is bidding $US38.1 billion for aluminium maker Alcan earlier today announced a $A410 million fast-tracked expansion to the Hope Downs iron ore project in Western Australia.
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