Rio's Output Rise Fails To Shield Bottom Line

Sydney Morning Herald

Monday July 26, 1999

By BARRY FitzGERALD in Melbourne

Rio Tinto is expected to report on Thursday a June-half net profit of about $US475 million ($735 million), well down from $US551 million earned in the same period a year ago.

The lower profit reflects the impact of lower commodity prices, more than offsetting production increases in most of the group's key commodities in the latest June half.

With iron ore, Hamersley's June-quarter output surged to 15.7 million tonnes from 10.7 million tonnes a year ago, but the sharp rise served essentially to square the latest June-half iron shipments (26.37 million tonnes) with those in the previous corresponding period (25.87 million tonnes).

Output in other commodities also showed growth, although in the case of coal, gains recorded also reflected recent acquisitions.

Despite the forecasts of weak first-half earnings, with little improvement prospective through the full year, analysts suggest that continued cost cutting will help put a floor under full-year earnings.

For 1999, Merrill Lynch believes Rio will post a net profit after tax of $US889 million, up from $US839 million it forecast earlier, benefiting from higher-than-expected cost reductions.

It now expects Rio to take a further $US132 million in costs out of its businesses in 1999, well up from the $US100 million expected earlier.

Indications of further cost reductions would be a key focus of attention when Rio released June-half earnings, brokers said.

Rio's earnings will also benefit further out from expected improvements in base metal and other commodity prices.

In the case of aluminium, the price bounce seen in recent months came too late to significantly affect the June-half profit of Rio Tinto's aluminium subsidiary, Comalco.

Comalco, owned 72.4 per cent by Rio Tinto, reports its June-half profit today, with analysts forecasting the June-half net profit will be in the $90 million to $100 million range.

Coal and Allied Industries posted a June-half net profit of $39.4 million, with the South African-based Palabora earning a net profit of R212 million ($53.4 million), benefiting from a cut in the local tax rate.

In the June half last year, Comalco booked a net profit of $123.8 million, with its latest earnings also reflecting the impact of lower metal prices, which more than offset benefits from the group's cost-cutting program and higher production.

Despite the expected modestly weaker earnings at Comalco, sharemarket investors are more interested in an earnings surge that would come from a sustained rally in aluminium prices.

Comalco's profits are highly sensitive to movements in the aluminium price, with a US1c move affecting profits by about $15 million.

In the June half a year ago, the aluminium price averaged US64.1c a pound, dropping to average US56.73c a pound in the latest half. This month, aluminium has averaged US63.5c.