Rio profit dives but in line with expectation

Rio Tinto's first half underlying earnings dropped 18%, exactly as expected.

Rio Tinto (RIO) has flagged further economic volatility in the medium term and is pushing ahead with its aggressive cost cutting drive.

The company reported a 71% drop in first-half profit to $1.72 billion following a $1.85 billion charge on exchange rate differences for its debt and derivatives. Rio Tinto posted a $5.88 billion profit in the previous interim period.

After one-offs, Rio Tinto’s operating profit was in line with expectations, reporting an 18% drop in underlying earnings to $US4.2 billion in the period.

Chief executive Sam Walsh said the cost cutting drive was "gathering momentum", with $1.5 billion in reductions taken in the first half and a further $500 million flagged for the six months to December.

Gross revenue dropped three% to $24.5 billion, with revenue at its flagship Hamersley mining venture down four% and revenues from its coal operations plunging 12%.

Mr Walsh said the medium-term economic outlook remained volatile, "with a broader range of outcomes now possible".

"Chinese economic growth has decelerated so far this year and is unlikely to recover significantly in the second half, but we do not expect a hard landing," he said.

Mr Walsh said the $1.5 billion in cost cuts made in the first half included $977 million in operating costs, $483 million from lower exploration and evaluation spend and the culling of 2,200 staff since 30 June last year.

He was targeting operating cash cost savings of $2 billion in 2013 and a further $1 billion in 2014. Rio Tinto was also aiming to reduce its exploration and evaluation spending of $750 million in 2013, compared with 2012.

The iron ore miner shaved capital expenditure by nine% to $7 billion in the half, with full-year capex tipped to come in at $14 billion, 20% lower than the peak capex of 2012.

Net profit also took a hit on a $300 billion write-off of waste stripping costs and damaged equipment at Kennecott Utah Copper after a pit wall slide at Bingham Canyon in April.

Iron ore again delivered the bulk of the company's earnings, while cost savings helped to offset some of the impacts of a higher tax rate and lower commodity prices.

The company has also announced it has abandoned its attempted sale of its unwanted aluminium assets, which will now be integrated back into its Alcan group.

Rio's cost cutting included 4,000 job cuts, but staff numbers are down by 2,200 as 1,800 new jobs were created to support its Pilbara iron ore expansion.

Mr Walsh said he was pleased with the cost savings, that were part of a cultural change at Rio including a revamp of incentive schemes.

"I spent the past six months on the ground either in the office in London or in Australia focussing on delivering the messages so that people get it first hand," he told reporters.

"We are seeing greater discipline in the system ... it is getting to basics, what we have done here is get the fundamentals right, get people aligned and give them clear tasks."

The medium term economic outlook remains volatile, with a broader range of outcomes now possible, Mr Walsh said.

"Chinese economic growth had decelerated so far this year and is unlikely to recover significantly in the second half, but we do not expect a hard landing," he said.

The company aims to cut capital expenditure this year by 20% to $US14 billion as it tries to cut debt.

It has an ambitious target of $US5 billion in operating cost cuts by the end of 2014, and is yet to decide on a further $US5 billion iron ore expansion to 360 million tonnes a year.

Morningstar analyst Mark Taylor said he thought that the abandoned aluminium sale was responsible from Rio as it was not accepting a low price in a weak aluminium market.

Rio's underlying earnings - when one-off costs are stripped out - was down 18% from the first half of 2102 to $US4.23 billion ($A4.72 billion), in line with analysts expectations.

Iron ore dominated Rio Tinto's performance, while the coal division posted a loss.

Mr Walsh defended the situation, saying Rio was a diversified miner that just happened to make most of its earnings in iron ore at this point in time because it was in demand.

An increase in Rio Tinto's tax rate to 38% from 27% had an adverse impact on earnings of $US353 million ($A394.15 million).

The company partly blamed that on the mining tax.

Rio will pay an interim fully-franked interim dividend of 93 cents, an increase of 37% on the 68.51 cents issued in the previous corresponding period.

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