Rio Tinto Ltd. (RIO.AU) reported Thursday its first-half net
profit more than tripled from a earlier as commodity prices
improved and announced that it will invest US$12 billion on capital
spending over the next 18 months to improve the company's position
in the iron ore market.
"Growth is the first priority for our cash flows," Chief
Executive Tom Albanese said.
The comments suggest that Rio Tinto, Australia's second-biggest
miner, is emerging from a downturn last year when the company had
cut spending and cancelled its dividend as the plunge in global
commodities prices from 2008's record levels left it with heavy
debt and expenditure overhangs.
Chief Financial Officer Guy Elliott said Thursday along with
capital spending, the company would consider mergers and
acquisitions, particularly of small and medium sized projects.
Rio Tinto said net profit for the six months ended June 30 rose
to US$5.84 billion from US$1.62 billion a year earlier.
Consolidated revenue for the first half rose 34% to US$25.21
billion from US$18.85 billion a year earlier.
The rise in profit was also helped by an accounting change which
caused the US$2.45 billion net profit recorded in its 2009 first
half results to be restated down to US$1.62 billion.
Record operating cash flows of US$9.9 billion in the first half
of the year helped Rio reduce its net debt to US$12 billion from
US$39 billion a year earlier, freeing up capital for expansion
projects.
Rio on Tuesday announced US$790 million of spending on upgrading
its iron ore mining operations in Western Australia's Pilbara
region, bringing total spending proposed this year to nearly US$1
billion.
The company wants to expand the operation to produce 330 million
tons of ore per year, around 50% above its current level and worth
around US$43 billion at current spot market prices.
Rio also last week signed an agreement with China's listed and
state-controlled miner Aluminum Corp. of China Ltd. (ACH), or
Chalco, over development over Guinea's Simandou iron ore province,
and announced a further US$170 million of investment in the
project.
Albanese said the spending would focus on the southern blocks of
the project.
Rio's rights to the two northern blocks are the subject of a
dispute with the Guinean government, which stripped the rights off
the Anglo-Australian miner in 2008 under the regime of late
dictator Lansana Conte.
The company is also investing in the development of Mongolia's
Oyu Tolgoi mine, the world's biggest undeveloped copper-gold
deposit, via its relationship with the project's 70% owner Ivanhoe
Mines Ltd. (IVN).
Elliott said that investors had underestimated the company's
growth ambitions.
"There are some quite unique opportunities in the mining sector
now, and given our long-term view (on commodities prices) we should
be putting our capital into these projects," he said.
Albanese said that a "large portion" of the US$9 billion
spending slated for next year would be in Rio's iron ore business,
including the Pilbara and Simandou.
But money would also be spent on Canada's Kitimat aluminum
smelter, Michigan state's Kennecott Eagle nickel mine, and copper
and coal projects, he said.
A further US$3 billion of other capital spending will be carried
out over the next six months, the company said.
One of the company's largest deals, its planned joint venture
with BHP Billiton Ltd. (BHP.AU) in the Pilbara, remains tied up in
regulatory approvals.
Albanese offered no timetable for resolution of that situation.
"This was set up in a way that could be taken through the various
regulatory processes," he said.
"Getting (regulatory approvals) completed is the key right now
and we will respect that process."
Some analysts have argued that Rio would benefit most if the
joint venture failed to win approval, arguing that the agreed price
to equalize their stakes is more in BHP's favor than Rio's.
Commodity price improvements raised Rio's underlying net profit
by US$3.77 billion during the first half of the year, accounting
for the vast majority of the overall US$4.22 billion increase, the
company said.
It saw copper and molybdenum prices rise 78%, aluminum by 50%,
and gold by26%.
Prices for thermal coal for use in power stations were up 38%
with contracts settled in the high US$90 per tonne, Rio said, while
coking coal settled in the US$187/ton-US$225/ton range.
Spot iron ore prices, which have ticked up in recent weeks to
around US$130/ton, were indicating a return of steel demand in
China, the company's biggest market, Albanese said.
"We saw incredible strength (in iron ore demand) up to April and
it's certainly softened up in the last few months," he said.
The improving spot price may be reflecting consolidation of
China's steelmaking sector, he said.
As expected, the interim dividend was reinstated at 45 U.S.
cents per share.
The company skipped its half-year payout last year in the wake
of the global financial crisis, although the company declared a
final dividend of 45 U.S. cents per share in its 2009 full-year
results.
-By David Fickling, Dow Jones Newswires; +61 2 8272 4689;
david.fickling@dowjones.com
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