Rio Tinto results in line, agrees funding to Turquoise Hill - UPDATE

8th Aug 2013 07:30

Rio Tinto has made progress in its cost cutting and volume growth plans by the interim stage and has agreed to provide Turquoise Hill Resources with financing for the development of the Oyu Tolgoi mine in Mongolia.Underlying earnings fell 18% to $4.2bn, which reflected lower average market prices and a higher effective tax rate, partly offset by record iron ore shipments and cost savings momentum. With strong cash flows from operations, driven by cost savings programmes, the dividend continued to rise as planned, up 15% to 83.5 cents per share.Chairman Jan du Plessis said: "Our strategy to invest in and operate large, long-life, low-cost, expandable operations remains unchanged."He added that Chief Executive Sam Walsh and his team were seeking to simplify the portfolio through the divestment of non-core assets where shareholder value can be realised.A total of $1.5bn of costs were taken out in the first half, with $977m from operating cost savings and $483m from lower exploration and evaluation spending, reducing unit costs 9% year-on-year and with the potential to fall further due to ongoing cost-reduction initiatives, volume growth, and the weaker Australian dollar. Despite weaker market prices, the savings led to strong operating cash flows on a par with the first half of 2012. The FTSE 100 group's near-term growth projects are on track and on budget, including the expansion of the Pilbara iron ore project in Western Australia beginning its ramp-up in September to 290m tonnes per year (mtpa) and with further investment to ultimately expand to 360mtpa depending on demand outlook.Analysts at broker Jefferies said there were no surprises in the results. "We expect volume growth, unit cost reductions and declining capex to lead to free cash flow growth and dividend growth for Rio even as the price of iron ore likely falls. We have confidence in this management team."The Turquoise Hill funding package also announced on Thursday will see Rio provide 50.8%-owned Turquoise a $600m bridge funding facility, to be used initially to refinance all amounts outstanding under an existing $225m short term funding facility provided by Rio in June 2013, and thereafter for the continued ramp up of phase one of the Oyu Tolgoi mine development. Rio has agreed to extend the short term funding facility until August 28th 2013 and to permit funds repaid by Turquoise from the proceeds of the sale of its 50% interest in Altynalmas Gold to be redrawn. Jefferies noted the price of iron ore, a metal that accounted for 89% of Rio's first-half underlying earnings, had been more resilient than anticipated, with a restocking cycle in China having proved helpful. "We continue to expect a seasonal decline in iron ore demand to lead to short-term weakness in the iron ore price this quarter, but it now appears that this decline will be less severe than we had previously anticipated."Shares in Rio Tinto were up 1.4% to 2,995p at 15:11 on Thursday.RD, OH