Rio iron ore output up 8 percent

By James Regan and Eric Onstad

SYDNEY/LONDON (Reuters) - Global miner Rio Tinto (RIO.L) posted a stronger-than-expected 8 percent rise in second-quarter output of iron ore, which accounts for the bulk of profit, but said on Wednesday global markets remained tough.

"Rio Tinto reported strong operating results for the second quarter in the business that will dominate the P&L," Macquarie Securities said in a note.

Rio Tinto (RIO.AX) is the world's second biggest producer of iron ore, which is expected to account for up to 80 percent of 2009 profit, analysts said.

Total production of 45.16 million tonnes of iron ore in the second quarter also marked a 43 percent rise over the first quarter, when output was cut due to reduced demand and heavy rains in the Pilbara region of western Australia, Rio said.

"There is some potential for production forecast upgrades thanks to better than expected iron ore and coal performances," Investec analyst Rebecca O'Dwyer said.

Rio Chief Executive Tom Albanese said markets were difficult and the firm would keep trying to hold down costs.

"Markets remained tough in the second quarter, as expected, particularly in aluminium," he said.

"We continue to press ahead with actions to reduce costs across the board, align production with demand and bring down levels of net debt."

Rio shares in London, which have surged 70 percent this year, gained 3.8 percent to 2,097 pence by 0952 GMT (10:52 a.m. British time), outperforming a 2.6 percent increase in the UK mining index .FTNMX1770. In Sydney, shares rose 2.0 percent to A$50.08.

PRICE SETTLEMENTS?

Rio also said it was yet to reach final price settlements on iron ore sales to some customers, which includes steel mills in China, after reaching deals in Japan, Korea and Taiwan.

"Deliveries continue to other customers on a provisional price or spot sales basis," Albanese said.

Sources told Reuters, however, that Rio and BHP Billiton (BLT.L) (BHP.AX) have secured agreement from Chinese steel mills to a 33 percent price cut in iron ore, effectively winning a long-running pricing battle that has become subsumed in a spying row between China and Australia.

About half of the iron ore that Rio Tinto has produced this calendar year has been sold on a spot basis as delivered iron ore spot prices go up in line with rising freight rates, Albanese said.

On an FOB basis, spot prices have remained relatively flat during the quarter, he added.