Commodities Slump Slams Rio Tinto Earnings--Update

By Rhiannon Hoyle 

SYDNEY-- Rio Tinto PLC said first-half net profit plunged from a year earlier, as the Anglo-Australian miner grappled with a sharp slump in prices for commodities such as iron ore, coal and copper.

Rio Tinto, the world's second-largest producer of iron ore behind Brazil's Vale SA, said it was targeting cost cuts of $1 billion this year compared with an earlier target of $750 million. It also said it would spend less than it had expected on projects, paring its capital-expenditure budget for this year to around $5.5 billion from an earlier forecast of as much as $7 billion.

The resources giant Thursday reported a net profit of $806 million for the six months through June, down from $4.4 billion in the same period a year earlier. That was weighed by noncash exchange-rate and derivative losses of $1.3 billion and impairment charges of $400 million, mainly relating to its stake in Energy Resources of Australia, it said.

Underlying earnings, stripping out one-off charges, were down 43% at $2.92 billion, it said, above the $2.42 billion median of seven analysts' forecasts compiled by The Wall Street Journal.

An interim dividend of $1.075 a share was declared, up 12% from a year earlier, and in line with analysts' expectations.

Chief Executive Sam Walsh said the miner maintained its commitment to capital returns for investors despite challenging commodity markets.

Earlier this year, the miner said it would repurchase $2 billion of its shares in 2015--a clear shift toward higher investor returns for a company that had spent years investing heavily in new mines to meet a seemingly unstoppable rise in demand from China. The share buybacks also came after the company received an approach from Switzerland-based Glencore PLC in July 2014 about a potential tie-up.

While some analysts are skeptical Rio Tinto can afford to buy back more shares given weak prices, others say cost-cutting measures could open the door to another program of capital management as early as February.

Rio Tinto has in recent years made most of its earnings from mining iron ore in Australia's remote Pilbara region and Canada.

On Thursday, the company said underlying earnings from those operations dropped 55% year-over-year to $2.10 billion, underpinned by a near-40% fall in prices of the steelmaking material at the end of June compared with the same point in 2014.

Earnings declined despite a sharp rise in the volume of ore the miner ships, after an expansion of its Australian mining operations. The miner aims to export roughly 360 million tons annually from its Pilbara mines within the next few years, compared with 280.6 million tons in 2014.

Iron-ore prices have fallen as rising shipments from Rio Tinto and its rivals, such as BHP Billiton Ltd. and Fortescue Metals Group Ltd., overwhelmed demand. The spot value of iron ore slumped to as low as $44.10 a ton last month, down from a record above $190 a ton in 2011. China's appetite for iron ore has also slowed due to a cooling economy and property market downturn.

A slump in prices for other commodities Rio Tinto produces was also a drag on its earnings.

Rio Tinto said earnings from its copper-and-coal unit plunged to $393 million, compared with a profit of $658 million in the same period a year earlier. Coal prices have been languishing at multiyear lows, also due to slowing demand and oversupply from new and expanded mines. Copper prices have fallen sharply in recent months as well.

Write to Rhiannon Hoyle at [e-mail]

Subscribe to WSJ: http://online.wsj.com?mod=djnwires