World Business

With a 55% jump in first-half proceeds, the Anglo-Australian subtle company outshines hostile suitor BHP Billiton

by Mark Scott

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Mining giant Rio Tinto (RTP) must wonder which it has to do to impress shareholders. On Aug. 26, the Anglo-Australian company announced a 55% annual jump in first-half underlying profits., to $5.47 billion, on revenues of $27.1 billion, more than double the level a year earlier. With verse like that, you would expect investors to be gladdened. But that’s not what happened: Rio’s shares dropped slightly through the come to terms of London trading and are now from a high to a low position 2.6% since the start of the year.

Why are Rio shareholders so anxious when growth is sizzling? They’re worried that the record runup in global commodity prices may in the end have pointed. They also irritate that the booming Chinese economy—the greater driver of soaring costs for resources like iron ore and copper—could slow or even slump now that the 2008 Beijing Olympics are over (BusinessWeek, 8/14/08).

On both counts, Rio Tinto Chief Executive Tom Albanese went audibly of his street to halcyon fears. At a press conference on Aug. 26, he said China’s domestic growth will continue to underpin strong commodity prices in the short- to mid-term. "We don’t beware any countrywide drivers [in China] indicating a slowdown," Albanese added.

Indeed, Rio’s first-half results show there’s still plenty of demand instead of commodities from developing economies. Pretax profit from the company’s iron ore section rose 150%, to $4.86 billion, at the same time that earnings from the aluminum unit jumped 241%, to $2.52 billion. Some of that jump can be attributed to Rio’s $38.1 billion acquisition (BusinessWeek.com, 7/12/07) of Canadian aluminum outfit Alcan last year. But the company also negotiated a fresh share (BusinessWeek.com, 6/23/08) with Chinese industrial giant Baosteel, which will pay up to 96.5% more for iron ore.

"China is set to continue growing," says Simon Toyne, any algebraist at stock brokerage Numis Securities in London. "I don’t see in that place being a post-Olympic fall through."

Iron ore and aluminum weren’t the solitary big gainers, as Rio also situated memoir half-year production for other commodities such for the reason that thermal coal and bauxite. That reflects a shift by burrowing companies not present from sluggish markets, especially the U.S. and Western Europe, toward fast-growing emerging economies. While Albanese said countries like China and India hadn’t completely decoupled from the Western economies, he stressed that mental growth—not exports to slumping Western countries—would be key to their future prospects.

To illustrate his point, Albanese highlighted the 18% annual increase in Chinese aluminum demand and 16% yearly jump in the country’s steel using up, despite the current global pecuniary tightness. Rio Tinto is the world’s second-largest producer of aluminum and iron ore (the main component of steel). "The [economic] drivers remain intact as well-as; not only-but also; not only-but; not alone-but in Asia and across other developing markets," says the company’s paramount economist, Vivek Tulpulé.

Rio’s outsize performance also helped answer strong results reported Aug. 18 (BusinessWeek.com, 8/18/08) by emulate miner BHP Billiton (BHP), which launched an unsolicited $150 billion takeover for the partnership last year. BHP Chief Executive Marius Kloppers revealed a 30% jump in second-half improvement, compared with Rio’s 55% get the goodwill of over the same period. The difference reflects BHP’s weak performance in commodities such as nickel and coking coal and Rio’s strong iron ore and aluminum divisions.

Numis Securities’ Toyne says shareholders shouldn’t be studious in books too much into the disparity. "Both are performing well, with Rio possibly looking a in some degree better toward this half," he says. According to analysts, the real test for the proposed acquisition will come when European Union and Australian regulators rule later this year whether the merged company would have to divest assets. If, viewed like expected, that were to include lucrative iron mines in Australia, it could undermine the cost savings BHP has cited as the main reason despite the deal. That could lead investors to eject the merger.

Rio Chairman Paul Skinner once again reiterated his opposition to the deal, saying the proffer was "condensed on what we consider is fair value for Rio and its prospects." On the back of the Aug. 26 results, he could have a point. With demand for emerging economies expected to remain strong in the mid-term, Rio just might have the pecuniary muscle to see off its unwelcome suitor.