Rio Tinto may have pleased investors by beating forecasts, but a reduction in prices did some significant damange to the miner's underlying first-half earnings.
A decline in price was seen in nearly all of Rio's major commodities, with the exception of gold, pushing underlying earnings lower by $2,627m compared with 2011 first half. This meant earnings came in at $5.2bn against a consensus forecast of $4.9bn and 34% lower than the same period the previous year.
Copper prices were down 14% to 367 cents per pound, aluminium prices averaged 15% lower at $2,081 per tonne and molybdenum was 17% lower to $14.8 per pound. The average Platts price for 62% Pilbara fines declined by 21% compared with 2011 first half.
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Average thermal coal prices were higher in the 2012 first half compared with 2011 first half, although the 2012/13 Japanese fiscal year contract price, applicable from April 2012, is lower than the previous contract price.
Total gross revenue from iron ore fell from $13.76m to $12.46m year-on-year, while total copper gross revenue declined from $4.15m to $3.22m. Aluminium gross revenue dropped from $6.37m to $5.02m.
Higher energy costs across the group also pushed underlying earnings lower, contributing $12m more to the loss than in the same period the previous year. In the six month period many operations were impacted by higher fuel, diesel and power rates, the firm said.
Other cash costs were also higher during the first half, decreasing underlying earnings by $388m compared with 2011 due to a combination of fixed production cost inefficiencies associated with lower volumes due to grade, higher maintenance costs and costs associated with operational readiness for the Pilbara expansion of iron ore production.
The Chief Executive, Tom Albanese, was keen to underline the low cost nature of its businesses which helped push margins higher, but did admit that across the sector miners are facing increasing costs, something Rio has had to take steps against, saying it "remains a major area of focus as we continually seek to enhance our operational and financial performance.
He added: "We are placing a high priority on productivity improvements at our operations, where around 90% of our costs are incurred, and are implementing a programme to improve the efficiency and effectiveness of our support and service functions across the business."
Evidently the company isn't too concerned though, having increased its dividend payments by 34 cents to 72.5 cents, in line with its policy.
Albanese continued: "We expect to see signs of improvements in Chinese economic activity by the end of the year, with growth picking up more strongly as government stimulus measures announced in the second quarter begin to flow through to infrastructure investment. Around 500 of these investment projects are slated to start later this year and in 2013."
Net debt increased from $8.5bn at December 31st to $13.2bn at June 30th as strong operating cash inflows were offset by outflows relating to capital expenditure, acquisitions, the increase in the dividend and the share buy-back programme.
In line with the group's own outlook, the Investor Chronicle says it remains a buyer of the stock on a long-term view.
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