August 8, 2013 / 12:19 PM / 4 years ago

Rio fails to sell loss-making aluminium as profit falls

A Rio Tinto logo is displayed on the front of a wall panel during a news conference in Sydney November 29, 2012.Tim Wimborne

MELBOURNE/LONDON (Reuters) - Mining group Rio Tinto (RIO.AX) has scrapped efforts to sell its loss-making Pacific Aluminium business, blaming poor market conditions as weaker iron ore, copper and coal prices dragged first-half profit down 18 percent.

Rio (RIO.L) - which has put a handful of assets on the block as it concentrates on core operations and battles $22 billion of debt - said in 2011 it could hive off Pacific Aluminium, known as Pac Al. But it said on Thursday it had not found a buyer and would not pursue a spin-off to shareholders.

Chief Executive Sam Walsh said there had been a number of offers for the business, but all had been below the price Rio wanted. Instead it will bring Pac Al back into the fold of Rio Tinto Alcan, its main aluminium business.

"I'm a pragmatist," said Walsh. "It doesn't make sense to give things away just so you can tick the box."

The world's biggest miners, under pressure from investors to refocus sprawling portfolios, tackle debt and even return cash, have put billions of dollars of unwanted assets up for sale, and buyers are scarce.

"It's a clear indication that while ... all of the majors see an opportunity to try to bolster their balance sheets by getting rid of their non-core assets, it's not the ideal market to be selling assets in," said analyst Hunter Hillcoat at brokerage Investec in London.

Some analysts took a negative view of Rio's decision to scrap a sale so soon after shelving the divestment of its diamond assets, and as doubts grow over its ability to sell larger operations, like Canadian iron ore.

Rio has so far this year announced or completed $1.9 billion of sales, but these have been copper mines and projects where demand has been stronger.

Rio is still carrying the burden of its $38 billion takeover of Canada's Alcan, a poorly timed 2007 deal which has racked up $30 billion in writedowns, with the mining group booking losses in aluminium as demand slumped and Chinese output soared.

To help address such issues, in 2011 it put Pac Al into a separate business, which analysts at Credit Suisse had valued at between $2 billion and $3 billion.

COST CAMPAIGN

Underlying earnings for the group fell 18 percent to $4.23 billion in the six months from $5.15 billion a year earlier, exactly in line with the consensus of analysts' forecasts. Weaker prices, particularly a dip in iron ore, took $1.3 billion off underlying earnings.

Net profit fell to $1.7 billion, hit by a non-cash exchange loss of $1.9 billion and a $300 million write-off after a landslide at Bingham Canyon copper mine in the United States.

Rio's rivals have also reported weaker earnings. Vale (VALE5.SA) on Wednesday posted an 84 percent drop in net income alongside operating numbers that pointed to a tougher environment after a decade of growth. Only BHP Billiton (BLT.L) is expected to see a profit increase in the first half.

In iron ore, the main driver for Rio's business, underlying earnings fell 14 percent - at the lower end of expectations. But the group said it was on track with its expansion in Australia's Pilbara mines to capacity of 290 million tonnes a year, up from forecast production of 265 million in 2013.

Rio will decide on a further push to production capacity of 360 million tonnes later this year, but Walsh told analysts the "robust" project would go ahead: "The issue is timing".

On its closely watched campaign to slash $5 billion in costs over two years, Rio said it had cut $1.5 billion in the first half of this year at its operations and in exploration spending, including $977 million from operating cost savings - putting it on track to hit a $2 billion 2013 target.

Spending for the year though, is expected to be around $14 billion, 20 percent below 2012's peak but above some forecasts.

It raised the dividend 15 percent to 83.5 cents, the lowest increase since it cut the payout after the financial crisis.

Rio's Australia-listed shares have fallen 10 percent this year against a 9 percent gain in the broader market , on worries about slowing growth in China, a potential oversupply of iron ore and its loss-making aluminium operations.

At 8:07 a.m. ET, Rio's London shares were up 0.6 percent at 2,970.5 pence, underperforming a 1.8 percent rise in the sector.

Additional reporting by Jemima Kelly in London; Editing by David Holmes and Erica Billingham

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