February 13, 2008 / 6:12 AM / 12 years ago

Rio Tinto profit up on record production

SYDNEY (Reuters) - Global miner Rio Tinto (RIO.AX) (RIO.L) posted a 9 percent rise in half-year underlying profit, boosted by record iron ore production, and again rebuffed a hostile takeover bid by rival BHP Billiton (BHP.AX).

In this file photo Rio Tinto CEO Tom Albanese poses for a photograph before speaking at a news conference at the London Stock Exchange in London November 26, 2007. Rio reported a 1 percent rise in underlying earnings for the full year, boosted by record production of major commodities, despite higher costs. REUTERS/Luke MacGregor

Rio said there was “clear water” between BHP’s BLT.L sweetened $147 billion (75 billion pound) bid and Rio’s fair value.

“BHP Billiton’s offer, while improved, still fails to recognise the underlying value of Rio Tinto’s quality assets and prospects,” Rio Chairman Paul Skinner told reporters, adding there had been no contact with BHP since an earlier proposal was tabled in November.

Full-year underlying earnings — that strip out impairment charges, foreign exchange differences and one-off costs from last year’s acquisition of Canadian aluminium producer Alcan — nudged up 1 percent, just above analysts’ expectations.

Rio has rejected BHP’s offer of 3.4 of its shares for each Rio share as too cheap, stressing its own growth plans and the positive outlook for commodity markets.

Skinner said he was “flattered” by a $14 billion raid on 12 percent of Rio’s London shares by Chinese aluminium group Chinalco and U.S. firm Alcoa Inc (AA.N) this month, and dismissed suggestions the duo was arming for a counter offer.

Chinalco and Alcoa had quickly informed the Rio board they had no designs on taking a management role, but the two sides held open the possibility of collaboration.

“It is clear that there are potential opportunities for us to work together. I’m sure as we construct a relationship with Chinalco it may well be a part of it but we are still in the foothills of that discussion,” Skinner said.

EARNINGS MOMENTUM

Rio’s July-December underlying profit increased to $3.91 billion from $3.59 billion, while profit for the whole year edged up 1 percent to $7.44 billion, above analysts’ forecasts of $6.85 billion to $7.40 billion.

Full-year net profit fell 2 percent to $7.31 billion.

Rio’s 2008 net profit is forecast to increase by around a third to more than $9.5 billion, according to Reuters Estimates.

“We maintain that Rio Tinto earnings momentum remains far better than BHP Billiton’s, given the company’s spread of assets and planned expansions in key commodities,” Liberum Capital Mining Research said in a client note.

BHP last week reported its half-year underlying earnings, before interest and tax charges, rose 5.4 percent to $9.6 billion.

Analysts said Rio appeared to be keeping rising costs for everything from replacement bulldozer engines to cooks and cafeteria staff at mining camps to a minimum.

“This was a strong result, better than expected given the cost pressures the mining industry is facing right now,” said DJ Carmichael & Co analyst Paul Adams. “It looks as if their cost management efforts have come in ahead of expectations.”

Skinner said industry-wide constraints among miners in digging and shipping mineral commodities were keeping prices high for its main products such as copper, iron ore and coal.

STRONG DEMAND

In fact, prices may break through recent records and hit fresh peaks as buoyant demand for metals is little affected by a downturn in the United States, Rio said.

“Looking forward, it is entirely possible that some commodity prices have yet to reach their cyclical peaks,” said Rio’s chief economist Vivek Tulpule.

Analysts are tipping a big increase, of up to 50 percent, in prices for iron ore, Rio’s second-biggest earner after copper.

Rio said last month it produced a record 179 million tonnes of iron ore in 2007.

The company raised its annual dividend 31 percent to $1.36 and has committed to increase the payout over each of the next two years by at least 20 percent.

The contribution to earnings over nine weeks from the Alcan business was $424 million, helped by a favourable change in the Canadian tax rate.

Rio Tinto shares rose 0.63 percent to A$128.61 in Sydney and gained 0.2 percent to 55.34 pounds in London at 2:15 p.m., compared to a 0.2 percent fall in the UK mining index. The London stock has gained 27 percent since BHP proposed a takeover last November.

BHP shares gained 1.2 percent in Australia and added 0.1 percent percent in London to 15.57 pounds.

Additional reporting by Miyoung Kim and Eric Onstad in London; Editing by Ian Geoghegan/Elaine Hardcastle

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