By Sameer Manekar, Shashwat Awasthi and Clara Denina
(Reuters) -Rio Tinto <RIO.L> reported a 29% drop in first-half profit on Wednesday and more than halved its dividend, as the global miner was hurt by weaker iron ore prices due to cooling demand from top consumer China, higher costs and labour shortages.
It is still the second-highest interim payout ever, following on from the record payout dispensed last year when the global miner’s profits benefited from a surge in commodity prices.
Since then iron ore prices have come under pressure due to persistent demand worries from top steel producer China, with the country’s zero-COVID policy curtailing economic activity and weighing on ferrous markets.
Mining companies around the world have also been struggling due to a pandemic-related shortage of skilled workers and surging inflation, at a time when iron ore prices have come off their 2021 highs and are expected to remain subdued.
“While the pricing environment is becoming more challenging, the demand outlook remains positive,” CEO Jakob Stausholm told a media briefing after the results were released.
“I always said it will take time to build a stronger Rio Tinto. It does,” he added.
Rio, one of the world’s top iron ore producers, posted an underlying profit of $8.63 billion for the six months ended June 30, compared with a record $12.17 billion a year earlier and analysts estimates compiled by the company for $8.37 billion.
The company more than halved its interim dividend to $2.67 per share from $5.61 per share a year earlier. The dividend for the first half equates to $4.3 billion and was still Rio’s second-highest interim payout ever.
The company also cut its capital investment foreast for 2022 by $500 million to $7.5 billion.
The drop in profits and dividends sent Rio shares tumbling 3.7% in London.
“The combination of declining prices and rising costs led to weaker than expected 1H22 results for Rio,” Jefferies said in a note.
“We expect the declining trend in earnings and cash flow to continue in 2H with a trough not likely until 4Q.”
Citibank said in its note that the market’s focus in the near term would be commentary around capital management, China demand outlook and iron ore shipments for the rest of the year.
CHINA GROWTH FEARS
Rio said its operations and growth projects continue to be impacted by the high unplanned absences, tight labour markets, rising input costs and supply chain disruptions. (https://refini.tv/3OEkhaO)
Weakened demand in China and policy changes there have weighed heavily on the sentiment in the iron ore sector.
Beijing last week revealed plan to centralise iron ore purchases, further clouding the prospects for miners.
But, Stausholm said he was optimistic about China in the medium term.
“China has more means to fix their economy and that includes sorting out challenges that they have faced recently in the property market. In the medium term…I am very optimistic that China will find solutions to the different parts of the economy…,” he told reporters in the media briefing.
Rio said talks were underway with the Guinea government, which ordered all work at the Simandou project – the world’s largest undeveloped iron ore deposit – to stop.
“Our negotiation team …in Guinea are working with our joint venture partners (Chinese-backed consortium WCS) and the government of Guinea,” Stausholm said.
(Writing by Praveen Menon; editing by Shounak Dasgupta, Jason Neely & Simon Cameron-Moore)