Mining giant Rio Tinto Ltd has posted a 14.3 per cent drop in first half net profit, after cost pressures took a toll on its business.

Net profit for the six months ended June 30 slipped to $US3.523 billion ($A4.12 billion).

Underlying earnings also slipped, by 5.9 per cent to $US3.529 billion ($A4.13 billion), missing the consensus analyst forecast for $US3.70 billion ($A4.33 billion).

Rio Tinto said high costs, excluding inflation, had shaved about $US503 million ($A588.27 million) off its earnings.

It said mining industry constraints are unlikely to ease in the near-term.

But the company also said its financial position was strong, and that it sees no material short-term impact due to credit markets volatility, particularly in the US.

Rio Tinto declared an interim dividend of 52 US cents, up from 40 US cents last year.

Among Rio Tinto’s businesses experiencing higher costs, Rio Tinto Coal Australia was one of the worst hit.

“Rio Tinto Coal Australia experienced intense cost pressures from infrastructure constraints and increased contractor and equipment hire charges while cyclones in the Pilbara raised contractor and transportation rates at the iron ore operations,” the company said.

“Higher non-cash costs reduced earnings by $US76 million ($A88.9 million).”

This was mostly attributable to the impairment reversal at Kennecott Utah Copper in 2006 which is now being depreciated.

“New chief executive Tom Albanese also said growth in Chinese demand for iron ore would require more investment. He reiterated that the company plans to increase its production capacity of the steel ingredient in the Pilbara region of WA to 320 million tonnes a year.

It is currently on track to achieve 220 million tonnes a year by 2009.

“The long term growth trend in Chinese iron ore import demand will require continuing investment by the group, and will open up further supply opportunities outside Australia, such as our high quality resource at Simandou in Guinea, where we are looking at developing a 70 million tonne per annum operation,” Mr Albanese said.

Mr Albanese also commented on the group’s $US38.1 billion ($A44.56 billion) recommended bid for Canadian aluminium producer Alcan, which will make it the number one global producer of aluminium and bauxite.

Rio Tinto will undertake a strategic review of the assets following the acquisition.

“The proceeds of any disposals, which are expected to exceed $US10 billion ($A11.7 billion), will be used to de-leverage our balance sheet,” he said.

“Our ongoing investment in common systems across Rio Tinto will accelerate the integration of Alcan into the wider group,” he said.

“Following completion, we will be a bigger group and will be undertaking a strategic review to determine which of our businesses have the long term competitive position to be part of the enlarged Rio Tinto.”

Mr Albanese said that in the first six months of 2007, Rio Tinto had pushed its existing businesses to respond to strong market conditions by maximising production.

“At Argyle we have taken an impairment reflecting the impacts of industry cost pressures in Western Australia and difficult ground conditions,” he said.

“The revised capital budget of the project is now likely to be of the order of $US1.5 billion ($A1.8 billion).”

Last year, Rio Tinto said the budget was $US910 million.

But he said that while all businesses had performed well, costs pressures persisted, notably in Western Australia and in Queensland.

“Our iron ore business has experienced higher contractor and transportation costs particularly following the cyclones earlier this year, whilst infrastructure related costs at Rio Tinto Coal Australia have impacted margins in the energy group,” he said.

“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.”

Chairman Paul Skinner said that aluminium demand is forecast to be strong and the company was experiencing no major fall-out from US credit market jitters.

“We believe that the outlook for aluminium demand, and indeed demand for our other products, will remain positive while global economic growth remains strong,” he said.

“While there are concerns about the state of the credit markets, particularly in the USA, we do not anticipate that these will have a material short term impact on our markets.”

Rio Tinto shares closed down $2.48 or 2.72 per cent at $88.72.

AAP

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