Rio Tinto Predicts a Chinese Recovery

LONDON -- Rio Tinto (LSE: RIO.L  ) (NYSE: RIO.L  ) shares rose 30 pence (1%) to 3,160 pence in early London trading after its half-year profits beat analysts' expectations.

The FTSE 10 (UKX) miner said its underlying earnings fell by a third from $7.8 billion to $5.2 billion. This didn't come as any surprise, though, as other companies in the sector, such as BHP Billiton, are expected to post similar falls. Others, such as Xstrata, have even seen their earnings decline by more than 40%.

Drops in commodity prices were responsible for $1.9 billion of Rio Tinto's profit decrease, with volume decreases and input-price advances making up most of the difference. Rio Tinto said it had experienced price declines in almost all of the commodities it produces, the main exceptions being gold and thermal coal.

Iron ore remains by far and away Rio Tinto's most important product, accounting for some four-fifths of its profits. With demand being driven by China, Rio's comments on this economy are scrutinized closely.

In its outlook statement released along with today's results, Rio said:

Although sentiment remains negative in Europe and the US recovery is still fragile, our order books are full and we expect Chinese GDP growth to be around 8% in 2012. We expect to see signs of improvements in Chinese economic activity by the end of the year, with growth picking up more strongly as Government stimulus measures announced in the second quarter begin to flow through to infrastructure investment.

This upbeat view on China is obviously why Rio Tinto is happy to maintain its planned capital expenditure for this year at $16 billion. This massive spend has been pushing up the company's net debt recently -- it rose from $8.5 billion at the end of last year to $13.2 billion as at June 30. That said, the average maturity of Rio's borrowings stands at nine years, and the company is able to generate huge amounts of cash each year.

There was a chunky dividend increase for investors, with the interim payout rising 40% from 33.14 pence to 46.43 pence per share. This increase wasn't entirely unexpected, however, as Rio now has a policy of setting its interim dividend at half the level of the previous year's full-year total.

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