Rio Tinto: Turning Iron Ore Into Gold (RTP, BHP)

London-based Rio Tinto (NYSE:RTP) reported earnings for the first six months of 2008, and the numbers were very impressive. Net earnings reached $6.9 billion, up 113% from the first half of 2007. The company’s revenues from iron ore were up 114% and its revenues from aluminum were up a gigantic 611%.

Rio’s 2007 acquisition of Canada’s Alcan accounts for the huge increasein aluminum revenues. The rise in iron ore comes from increased demand,particularly from China. The company’s weighted average increase iniron ore prices jumped by 85.7% for the first half of 2008. Coalprices, especially for metallurgical coal, were also strong.

The company’s earnings were reduced by $253 million year-over-year dueto US dollar weakness compared with the Australian dollar and the Euro.Energy costs were also up $132 million y-o-y.

A couple other interesting things: the net profit on aluminum was 7.9%;on iron ore, the net profit amounted to 35.6%. While revenues were downin the copper and diamonds group, net profit reached 36%. Low yieldsfrom the company’s Kennecott copper operations in Utah were to blamefor the lackluster revenues.

Still, as we noted in our review of BHP Billiton’s (NYSE:BHP) earnings, the big newsfor Rio is the spurned take-over offer worth north of $140 billion fromBHP. Rio’s chairman noted the offer, saying that the company "rejectedthis offer on the basis that it undervalued the company and itsprospects and we now await the outcome of the EU and other importantregulatory reviews. In the meantime the Group’s performance in thefirst half, together with our growth potential, supports the Boards’view that Rio Tinto presents a very strong standalone value propositionfor shareholders."

It’s pretty hard to argue with that, given how well Rio has performedin the first half of the year. A combined Rio Tinto-BHP would controlmore than a third of the world’s supply of iron ore. The EuropeanUnion, which must give anti-trust approval of the deal, is not verylikely to give the merger the go-ahead.

And it’s also hard to imagine that Rio shareholders would approve.Rio’s earnings growth is much stronger than BHP’s. Finally, China’sChinalco recently received approval from the Australian government toincrease its stake in Rio to about 11%. That’s not enough by itself toderail BHP’s bid, but it is enough to gum up the deal.

Paul Ausick
August 26, 2008