Rio’s first-half profit drops 22%

Rio Tinto Group (RIO), the world’s third- largest mining company, said first-half profit dropped 22 percent after prices for iron ore, copper and aluminum fell and costs gained.

Net income declined to $5.9 billion from $7.6 billion a year earlier, London-based Rio said today in a statement. That compares with the $5.04 billion average of 11 analyst estimates compiled by Bloomberg. Profit was boosted by a deferred tax asset of $1 billion after the introduction of Australia’s Mineral Resource Rent Tax on July 1.

The biggest mining companies including BHP Billiton Ltd. (BHP), Rio and Xstrata Plc (XTA) face the dual headwinds of rising costs and lower prices as waning global growth slows demand for raw materials. Xstrata, the largest power-station coal exporter, reported a 33 percent drop in first-half profit yesterday. Rio increased its interim dividend 34 percent to 72.5 cents a share.

Rio Tinto, the largest ore-exporter behind Rio de Janeiro- based Vale SA (VALE), advanced 0.9 percent to 3,160 pence in London trading by 8:02 a.m. It earlier rose 0.1 percent to A$54.89 in Sydney. Rio reported a 34 percent drop in underlying earnings to $5.2 billion.

A reliance on iron ore is Rio’s “Achilles’ heel,” Credit Suisse Group AG analysts wrote in a July 12 report. Rio’s iron ore unit is expected to generate about 86 percent of its underlying earnings this year, Credit Suisse said Aug. 2.

The price of iron ore for immediate delivery to the Chinese port of Tianjin averaged about $141 a ton in the half, 21 percent lower than a year earlier. It has dropped a further 13 percent since June 29.

Rio has estimated spending of $16 billion this year to expand mines and build new operations, including a project to boost annual iron-ore output in Australia’s Pilbara region to 353 million tons by mid-2015 from 230 million tons.

The price of aluminum has declined 21 percent in the past year, hurting producers such as United Co. Rusal and Alcoa Inc. (AA), which last month posted $2 million net loss for the second quarter. Rio’s February writedown related to the $38 billion acquisition in 2007 of Alcan Inc., the biggest completed mining takeover.

Rio could report additional impairment charges on the assets, JPMorgan Chase & Co. analyst Lyndon Fagan wrote in a July 31 report, adding that Rio values its aluminum assets at $26 billion, nearly double the bank’s $13 billion estimate.