* Record H1 profit just shy of consensus forecast
* Expands share buyback to $7 bln
* Guarded but positive outlook into 2012
* London shares down over 3 pct in falling market (Updates after analyst call, adds details)
By Mark Bendeich and Clara Ferreira-Marques
SYDNEY/LONDON, Aug 4 (Reuters) - Global miner Rio Tinto’s record first-half profit missed forecasts, as escalating costs and currency movements blunted the effect of robust metals prices.
Sales to China and strong prices at its key iron ore unit helped offset weaker volumes and propelled underlying group profit 35 percent higher to $7.8 billion, the company said on Thursday. Rio also expanded its closely watched share buyback programme by $2 billion.
But its warnings on costs and risks to the economic outlook, despite growth in China, held back its shares, down 3.6 percent in London at 1100 GMT at 3,872 pence, broadly in line with a sector battered by worries over future demand.
“It’s a slight miss — (on) costs, mostly. They have had stronger currencies, higher energy costs, higher labour costs, higher input costs,” Des Kilalea, analyst at RBC Capital Markets in London said.
“If this was a bull market (the miss) wouldn’t matter. But the warning on costs... is of concern to the market, global growth is of concern to the market and Rio, as with the other miners, is saying economic conditions are volatile.”
Cash costs, the impact of stronger exchange rates and higher energy prices took a $2.1 billion bite out of Rio’s underlying earnings. Lower volumes added a $444 million hit.
Rio Tinto joins major rivals Anglo-American Plc and Xstrata Plc in reporting first-half profit growth of a third or more while struggling to overcome spiralling costs and restive labour unions.
“We have obviously seen much higher labour settlements and salary increases.... And the input prices that are relevant to the mining industry are also very tight in many places,” Guy Elliott, chief financial officer, told reporters.
“This is especially the case in regions like Western Australia but also other parts of Australia and Canada are not immune from these ‘hot spot’ type features.”
He said the group would not be complacent and would continue to control costs.
In the Pilbara iron belt in Western Australia, Rio said it saw tough labour markets continuing into 2013, and said cushioning that impact was a key reason for accelerating expansion of its operations there.
Tight labour markets have spurred unions from Australia to Chile to take a hard line on wage talks, triggering strikes.
Rio owns a 30 percent stake in Chile’s Escondida, the world’s largest copper mine. Escondida, hit by a strike that has lasted almost two weeks, has been forced to declare force majeure and a deal is still proving elusive.
Rio’s underlying earnings came in at $7.8 billion, just below a consensus expectation of $8.03 billion. Underlying core earnings climbed 27 percent to $14.3 billion.
Rio, like its peers, forecast continuing strength in prices, thanks to robust demand and problems including tough financing for junior miners and long equipment lead times that have slowed plans to bring extra supply onstream.
Chief Executive Tom Albanese forecast higher average prices for the rest of 2011 and into 2012, “albeit with heightened price volatility”.
The group will fall short of earlier capital expenditure guidance of $13 billion for 2011, but said it saw “escalated” capital spend in the second half after just over $5 billion in the first six months, when projects were delayed by the weather. Albanese said the group had commitments for at least a further $6 billion to the end of the year.
Analysts had fretted over the impact of weather-hit sales on the bottom line at Rio’s key iron ore unit, which accounted for well over 70 percent of group earnings. Lofty prices helped offset lower volumes to lift core profit up 44 percent.
The iron ore unit was hit by cyclones, flooding and a train derailment as the La Nina weather phenomenon battered Pilbara operations at the start of the year and interrupted shipping.
Rio said its planned expansion of Pilbara capacity was on track and accelerated work meant it would reach expected capacity of 333 million tonnes per year in the first half of 2015, six months ahead of schedule.
Its copper unit saw underlying earnings again marginally below forecasts, but up 16 percent as higher prices helped offset lower volumes from key mines and lower grades.
Copper has also been a concern for investors, who point to production at the lowest levels in years at a time when prices of the commodity are close to record highs. Rio has been hit along with peers by the effect of lower ore grades.
Aluminium — where Rio is turning around a previously loss-making operation and has targeted a 40 percent EBITDA margin, or roughly double current levels — saw underlying earnings rise 4 percent. Rio said it was continuing the turnaround through investments, divestments and operational improvement.
Earnings from the energy division, which includes coal and uranium, tumbled 39 percent, partly reflecting flooding at its Australian collieries and at the operations of its Australian uranium subsidiary, Energy Resources of Australia .
Rio boosted its coal operations with the $4 billion acquisition of Riversdale earlier this year. The miner said it would continue to consider “small to mid-size” deals but pointed to a dearth of opportunities.
Rio Tinto also boosted its interim dividend to 54 U.S. cents per share from 45 cents a year earlier. Elliott said the group had considered a special dividend as a way of returning cash to shareholders, but considered a buyback more efficient.
It plans to buy back $7 billion of shares by March 2012. (Additional reporting by Michael Smith; Editing by Balazs Koranyi, Ed Davies and Sophie Walker)