Rio Tinto posts annual loss; new CEO vows to cut costs

MELBOURNE Thu Feb 14, 2013 6:31am EST

A Rio Tinto logo is displayed on the front of a wall panel during a news conference in Sydney November 29, 2012. REUTERS/Tim Wimborne

A Rio Tinto logo is displayed on the front of a wall panel during a news conference in Sydney November 29, 2012.

Credit: Reuters/Tim Wimborne

MELBOURNE (Reuters) - Rio Tinto's (RIO.L) new chief flagged he would slash costs, focus on selling weak assets, and spend capital more carefully after the world's no.3 miner reported a $3 billion loss, its first ever full-year loss.

Chief Executive Sam Walsh was anointed last month when his predecessor was sacked for misjudged aluminum and coal acquisitions that led to $14.4 billion in writedowns and left the company in the red.

"We can do better and I will improve this great company further," Walsh told reporters, saying he would take a more aggressive approach to selling assets that no longer fitted with the company's goals.

Rio reported a 47 percent plunge in half-year underlying profit, its worst since 2009 due to sharp falls in commodity prices, although the result was slightly better than expected and the company raised its dividend more than expected.

Underlying profit, which excludes writedowns, fell to $4.149 billion for July-December 2012 from $7.768 billion a year earlier, based on Reuters calculations. Analysts on average had forecast a half-year underlying profit of $3.93 billion.

Investors were generally upbeat about the result.

"The dividend is better and the company is showing a renewed focus on pleasing its shareholders through better capital discipline," said Tim Schroeders, portfolio manager at Pengana Capital. "Managing costs is going to be a challenge, in terms of meeting their prescribed targets," he added.

Ahead of his first outing as chief executive, investors said the biggest tasks facing Walsh are to decide what to do with the group's Pacific Aluminium and diamonds businesses, both stuck on the auction block for over a year, and how to drive growth outside its powerhouse iron ore business, which generates nearly all of Rio's profits.

The company is considering selling the Pacific Aluminium business, with assets in Australia and New Zealand, as a whole or in parts, or floating it on the Australian stock market, but has yet to make a decision.

"I'm not a person that knee-jerk reacts, and I'm not a person that's going to give assets away below their expected value," Walsh said.

COST CUTS

Walsh, 63, led the iron ore unit for nine years, slashing costs, securing stakes in high quality deposits, and automating operations with driverless trucks and trains run from a high-tech center 1,500 kilometers (940 miles) away from the mines.

Cost-cutting is high on his agenda, and he flagged the company would rip out more than $5 billion in costs by the end of 2014. Investors are eager to hear how exactly it plans to meet that goal.

"The new CEO Sam Walsh has come out with fighting words. It's really kind of laying down the law and it's a very stoic, serious strategy of focusing on cost-cutting, driving only projects with superior returns from investment capital," said Mark Taylor, senior resources analyst at Morningstar.

Under pressure from investors concerned that big miners wasted cash during the boom times and should have rewarded shareholders more generously, Rio raised its full year dividend by 15 percent to $1.67, topping analysts' forecasts around $1.60.

Rio Tinto (RIO.AX), like bigger rival BHP Billiton (BHP.AX), has a "progressive" dividend policy that calls for it to steadily increase dividends in good times and bad, a policy that analysts say should be scrapped.

Chief Financial Officer Guy Elliott, however, said that was not on the cards.

The iron ore business, which Walsh led until January, made up 99 percent of Rio Tinto's second-half underlying earnings, with higher volumes partly offsetting a drop in prices, cushioning losses in aluminium operations.

With iron ore prices having nearly doubled from a trough around $87 a tonne last September to the current price around $155, the iron ore business is likely to dominate again in the first half of 2013.

Rio's full-year loss of $2.99 billion reflected writedowns on its Alcan aluminium takeover in 2007 and a coal acquisition in Mozambique, where transport challenges have slowed development and coal output estimates have been cut.

Rio's shares touched a one-year high in Australia of A$72.30 ahead of the result. The stock has climbed nearly 30 percent over the past six months, outperforming the broader market .AXJO as metals demand in China has picked up.

(Reporting by Sonali Paul; Editing by Richard Pullin)