Rio's Record, Confident About China

Sydney, Aug 27, 2008 (ABN Newswire) - Rio Tinto is nothing but optimistic about its future and the future for China, much like the way BHP Billiton management is optimistic about its future and the future for China.

A week ago it was BHP meeting expectations with a huge $US15.4 billion, late yesterday it was Rio reporting a record interim profit which was up 112.5% at $US6.91 billion ($A8.01 billion in current exchange rates), compared with the $US3.25 billion ($A3.77 billion) earned in the first half of 2007.

Rio said that underlying profit, or earnings before interest and tax (EBIT), rose 55% to $US5.47 billion ($A6.34 billion) which was broadly in line with analysts' forecasts.

"The group continues to perform strongly, and the outlook remains positive," Rio Tinto chairman Paul Skinner said in a statement to exchanges in Australia and London.

BHP CEO, Marius Kloppers voiced optimism about China's growth and how it would continue at high levels, despite fears that it was slowing. And hours before the Rio result was released, the Financial Times in London reported optimistic comments from Rio's chief economist about China.

"A surge in demand from China could cause a bounce in commodities prices as restrictions on industrial activity around Beijing are eased after the Olympics.

"Vivek Tulpule, chief economist of the mining group Rio Tinto which is due to announce half-year results on Tuesday, said the region affected by the restrictions, which were introduced to try to improve air quality, contributes more than a quarter of China's gross domestic product.

"The Olympics have accentuated the usual summer slowdown in commodities demand," said Mr Tulpule in an interview with the Financial Times. "When activity is allowed to start around Beijing, there will be a post-Olympics jump."

That's just what some in the markets want to hear, including BHP.

Rio shares rose $1.76 to $124.06 ahead of the results in Australia; BHP's shares were up 75 cents at $40.75.

Rio said that first half earnings before interest, taxes, depreciation and amortisation (EBITDA) rose 73% to $US11.41 billion ($A13.23 billion), with Rio Tinto's iron ore division the biggest earner for the group, contributing underlying earnings of $US2.88 billion ($A3.34 billion), a rise of nearly 162%.

Rio said it saw a 145% increase in underlying earnings from its aluminium division to $US995 million ($A1.15 billion) after the $US44 billion Alcan acquisition last year.

Underlying earnings at Rio's energy division, (which comprises its coal and uranium assets) rose 83.5% to $US679 million ($A787.34 million).

But Rio copper division suffered a drop in earnings to $US1.69 billion ($A1.96 billion).

Rio Tinto said it was on track to divest $US10 billion ($A11.6 billion) in assets this year to help pay-down debt after the Alcan purchase.

"We continue to make good progress with the integration of the Alcan assets that we acquired in 2007," chief executive Tom Albanese said in a statement.

"We are on track to deliver annual synergies of $US1.1 billion ($A1.28 billion) after tax from the end of 2009, considerably higher than our initial estimate of $US600 million ($A695.73 million)."

Rio Tinto said it had the capacity to grow the company from its existing base and saw modest impact on the business from the global slowdown.

The company declared a final dividend of 68 US cents per share, up 31% on the first half of last year and the company promised shareholders this payout would rise this half and in 2009..

The federal government this week cleared the way for Aluminium Corporation of China Ltd (Chinalco) to increase its nine per cent stake in the dual-listed Rio Tinto to 11 per cent.

In a statement accompanying the results, Rio chairman Paul Skinner said, "The 55 per cent increase in the Group's half year underlying earnings to $5.5 billion clearly demonstrates the quality of Rio Tinto's portfolio and the strength of our existing markets, operations and management. The Group continues to perform strongly, and the outlook remains positive.

"The benefits of the Alcan acquisition in 2007 continue to show through in line with the investment thesis supporting this strategic move to create the global aluminium leader. Rio Tinto Alcan's large source of secure, hydro-based power supply is a major competitive advantage given emerging energy shortages around the world, including China.

"We continue to develop our strong pipeline of growth projects, which remains a significant competitive strength. 

"During the year we have announced further expansions of our iron ore operations in the Pilbara region of Western Australia, expansions of our Brazilian and Canadian iron ore operations, and funding for the pre-feasibility studies for our Resolution copper project in Arizona in the US.

"Unlike many companies in the resources sector, we have the capacity to grow strongly from our existing base and create added value for shareholders over the decade ahead.

"Although we have seen some moderation in global growth rates from tightened availability of credit, the impact on our markets has been modest. 

"The driver of demand for our products is urbanisation and industrialisation in heavily populated countries like China and India, and these economies continue to grow strongly. Prices for our products remain high by historic standards.

"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.

"We increased our 2008 interim dividend by 31 per cent in line with our policy of paying an interim dividend that is half of the total dividend (expressed in US dollars) for the previous year. We are committed to increase the full year dividend by at least 20 per cent in 2008, and again in 2009.

Rio Tinto's chief executive, Tom Albanese said that the company's earnings performance in the first half of 2008 "easily eclipsed the same period in 2007, which was itself a record. 

"There is no question that we are living in an era of unprecedented demand for minerals and metals, and we believe rapid demand growth and supply side challenges will be maintained.

"In this environment, the importance of having long life reserves and resources is critical, and Rio Tinto is particularly advantaged in this regard. When demand and prices are strong, growth options become increasingly valuable, and we have these in abundance.

"The Group set a half year production record in iron ore of 79 million tonnes on an attributable basis, as we deliver on our capital investment plans. Half year records were also established for bauxite, alumina, aluminium, borates, titanium dioxide and thermal coal (on a like for like basis).

"We continue to make good progress with the integration of the Alcan assets that we acquired in 2007. We are on track to deliver annual synergies of $1.1 billion after tax from the end of 2009, considerably higher than our initial estimate of $600 million. 

"As we have now become more familiar with the company, I am delighted by the quality of Alcan's assets and its people. "We have created an aluminium industry leader with an outstanding bauxite resource, a competitive refining position, sustainable hydro power, and industry leading smelting technology.

"We are currently studying a doubling of our bauxite production at Weipa in Australia, we are expanding our refinery capacity and examining a number of exciting smelter expansion opportunities in Canada and around the world. The Sohar smelter project in Oman was recently completed on time and on budget.

"Globally, the Group has plans to increase iron ore production to over 600 million tonnes per annum, including growth in Canada, Brazil and Guinea. While there has been a challenge to Rio Tinto's tenure of the Simandou project in Guinea, we believe our legal title is clear and we and our partner the International Finance Corporation (a division of the World Bank) are working with the Guinean authorities to clarify the situation. We believe there is no better company than Rio Tinto to deliver this project for the benefit of all parties.

"In copper, we have announced additional resources of 628 million tonnes at Kennecott Utah Copper and substantial resources of over 1 billion tonnes at Resolution in the USA and 2.8 billion tonnes at La Granja in Peru (refer to press releases dated 16 May 2008 and 29 May 2008). 

"Rio Tinto is in great shape, and is getting stronger. My personal commitment is to drive the business to deliver all the shareholder value of which it is capable, based on its outstanding assets, growth options and people."


 

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