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Rio Tinto's First Half Net Earnings Down 65% (posted 8/25/09)

August 25, 2009
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The Group achieved operating cost savings of $0.8 billion in the first half of 2009, including a global headcount reduction of around 16,000 roles.

Rio Tinto plc recently announced first half 2009 net earnings of $2.5 billion, 65% below the first half of 2008. The Group achieved operating cost savings of $0.8 billion in the first half of 2009 and believes that it is on target to achieve $2.5 billion in savings in 2010. Global headcount was reduced by around 16,000 roles in the first half of 2009, ahead of the target of 14,000.

“The Group has taken swift and decisive action in response to the global economic crisis and sharp falls in metals and minerals prices,” said Jan du Plessis, chairman. “As a result of our successful rights issues, we have reduced net debt by $14.8 billion. There is more work to do, but we are better-positioned with renewed financial strength and a leaner cost base. We are currently working closely with BHP Billiton to conclude binding agreements for the iron ore production joint venture that will cover our operations in Western Australia and which we believe will deliver substantial synergies.

”We remain cautious about the recent rally in prices. However, the expectation that development in emerging markets will generate underlying strength in metals and minerals demand over the long term remains broadly unchanged. Rio Tinto has a strong business with some of the best assets in the industry, and we will continue to take the actions necessary to ensure we are well-placed to deliver value for our shareholders whatever the timing of a recovery.”

According to Tom Albanese, chief executive, “Despite difficult markets, our businesses are running smoothly. We are on track to meet the commitments we made in December last year to reduce operating expenditure, and the capital expenditure estimate has been revised in line with market conditions.

“Rio Tinto Alcan was impacted by very tough trading conditions as a result of a dramatic decline in prices. We have acted aggressively to push costs down, including curtailing production at our higher-cost operations. The benefits of these steps are starting to emerge, but we expect the greatest effect to be felt in the second half of the year. High-cost alumina has been curtailed, and by the end of 2009 we expect approximately 12% of smelting capacity will have been idled, divested or shut down, representing 42% of our capacity in the top half of the cost curve. In addition, annual bauxite production at the Weipa mine has been cut by five million tones, following a sharp fall in alumina and aluminum demand in recent months.

“We have continued to make good progress on asset divestments, with $3.7 billion announced to date this year. All of these divestments were at fair values, given current market conditions, which demonstrate the quality of Rio Tinto’s assets. Rio Tinto is taking the right steps to emerge from this challenging period as a stronger, fitter business. We will continue to focus rigorously on operational excellence, delivering reliable supply to our customers and value to our shareholders, while preserving future growth options. We look to the future with confidence.”

The Group’s 2009 first half underlying earnings of $2,565 million and 2009 first half net earnings of $2,451 million were $2,961 million and $4,500 million, respectively, below the comparable measures for the first half of 2008. Higher sales volumes from the expansion of iron ore capacity in the Pilbara region of Western Australia and higher copper and gold grades at Kennecott Utah Copper and Grasberg were offset by production cutbacks at Rio Tinto Alcan, Alcan Engineered Products, Iron & Titanium, and Minerals in response to the economic downturn. The overall impact of volume movements was a decrease in underlying earnings of $294 million relative to the first half of 2008.

Management has implemented a widespread program of closures and curtailments to reduce the cost of production. Annual bauxite production has been reduced by 5 million metric tons, and high-cost alumina refining capacity has been cut as well. A total of approximately 450 thousand metric tons (12%) of smelting capacity is expected to have been divested, idled or shut down by the end of 2009, including the anticipated cessation of primary smelting operations at Anglesey, the Beauharnois closure, and production curtailments at higher-cost smelters in Europe and Canada.

In the first half of 2009, Rio Tinto Alcan generated a loss of $689 million, which was $1,731 million lower than 2008 first half earnings of $1,042 million. This was principally as a result of lower prices, which reduced earnings by $2,100 million compared with 2008 first half. Lower volumes following production cutbacks also had an impact on 2009 first half earnings.

Weaker local currencies relative to the U.S. dollar and a general reduction in cash costs increased earnings by $342 million and $150 million, respectively, compared with the first half of 2008. Corporate restructuring initiatives, lower freight and alloy costs, and a reduction in site production costs more than offset higher costs for caustic, pitch, and coke. Additional benefits from lower input costs and other cost reduction initiatives are expected to flow through in the second half of 2009.

Bauxite production in the first half of 2009 was 17% lower than the same period of 2008, with production at Weipa down 26%. In April 2009, Rio Tinto Alcan announced the curtailment of annual production of bauxite at Weipa to 15 million metric tons (from 20 million metric tons in 2008) due to the sharp fall in alumina and aluminum demand and prices in recent months. Rio Tinto Alcan’s share of global bauxite production in 2009 is expected to be approximately 31 million metric tons, a decline of 11% compared to 2008.

Alumina production in the 2009 first half was 4% lower than the same period of 2008. Following production cuts at the Vaudreuil and Gardanne alumina refineries, the annual alumina production rate has been reduced by 6% in 2009 compared with 2008.

In the Rio Tinto Minerals segment, earnings of $13 million were $37 million below the 2008 first half. Minerals production continued to be affected by lower demand in line with reduced economic activity across all major regions. The sale of the potash projects in Argentina and Canada in January 2009 generated a post-tax gain of $797 million. This has been recognized in Energy & Minerals earnings, in line with the Rio Tinto policy of including gains or losses on disposal of undeveloped properties within underlying earnings.

Additional details are available at www.riotinto.com.

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