Rio's Profit Slumps 59% on Aluminum Impairment Charge

Rio Tinto's chief executive and chief finance officer will forgo their annual bonuses, after the miner reported a 59% drop in profit for last year.

Rio Tinto's 2011 earnings were hit by US$9.29 billion in impairment charges, mainly against the value of the company's aluminum business. The blow was softened by a 34% increase in the company's dividend.

CEO Tom Albanese said the Anglo-Australian company paid a heavy price for the US$38 billion acquisition of Canadian aluminum company Alcan Inc. at the top of the market in 2007. The deal increased Rio Tinto's debt and forced the company to sell businesses and slash costs in the wake of the global financial crisis.

"I am making a clear statement that this happened on my watch, even if it was early on in my tenure," Mr. Albanese said Thursday in a conference call. The company didn't disclose what the bonuses would have been.

Full-year net profit fell to US$5.83 billion from US$14.24 billion in 2010. Stripping out items such as the impairment charge, profit rose 11% to US$15.55 billion.

Revenue increased 9.7% to US$60.54 billion.

Rio Tinto said it will increase its full-year dividend 34% to US$1.45 a share, reflecting confidence in the long-term outlook.

The charges included US$8.86 billion to reflect a decline in the value of Rio Tinto's aluminum assets. Rio Tinto wrote down a smaller amount for its diamonds business, anticipating higher costs to complete development of a mine. The charges pushed Rio Tinto to a second-half loss of US$1.76 billion from a profit of US$8.39 billion a year

"The current environment in the aluminum industry is tough," Mr. Albanese said. The problems of low prices and rising costs have been compounded by industry surpluses over the past five years, he said. But, he said, growth in demand for the commodity remains strong, and Rio Tinto is restructuring its aluminum division.

Echoing rival BHP Billiton, Mr. Albanese said he is confident China's economy is headed for a "soft landing" as growth cools. China is the world's biggest consumer of several commodities, including iron ore, which drives earnings for both mining companies. BHP on Wednesday said profit fell 5.5% for its fiscal first half, hit by rising costs, production disruptions and falling prices.

"Today's results are a mixed bag driven by impressive performance from the group's iron-ore business," Oriel Securities said of Rio Tinto's earnings. "However, the group has finally admitted defeat on Alcan." Noting that the miner's cash flow from operations remained high, rising 16% to US$27.4 billion, Oriel said Rio Tinto remains undervalued and rated its shares a "buy."

Rio Tinto this week said it would increase investment in its Australian iron-ore operations by US$3.4 billion to boost production of the steel ingredient.

Mr. Albanese said that while steel consumption in China was cooling he expected it will remain strong. Meanwhile, market volatility and a tightening of credit was limiting some companies' ability to develop iron-ore mines.

Rio Tinto, No. 2 globally in iron-ore production behind Brazil's Vale SA, said its iron-ore earnings jumped to US$12.85 billion for the year from US$10.19 billion.

Rio Tinto in mid-October put 13 aluminum-related businesses up for sale, including a bauxite mine, an alumina refinery and several smelters in Australia and New Zealand that it transferred into to a new unit called Pacific Aluminum. Chief Financial Officer Guy Elliott said the company was considering an initial public offering, spinning off the assets to shareholders or an outright sale, either as one block or in pieces. Rio Tinto said the current market is tough for a sale, however, and is in no rush to unload the businesses.

The company said it expects to complete a US$7 billion share-buyback program by the end of next month, having already repurchased US$6.2 billion in shares.