SYDNEY/LONDON (Reuters) - Global miner Rio Tinto (RIO.L) missed forecasts on Thursday despite a record first-half profit, as escalating costs and currency movements blunted the effect of robust metals prices.
Booming iron ore sales to China and strong prices offset weaker volumes and propelled underlying profit 35 percent higher to $7.8 billion. The group also expanded its closely watched share buyback program by $2 billion.
But its warnings on costs and risks to the economic outlook, despite growth in China, held back its shares, down 2.4 percent in London at 0810 GMT to 3,921 pence and marginally underperforming a 1.8 percent drop in the sector.
"It's a slight miss -- (on) costs, mostly. They have had stronger currencies, higher energy costs, higher labor costs, higher input costs," Des Kilalea, analyst at RBC Capital Markets in London said.
"If this was a bull market (the miss) wouldn't matter. But the warning on costs... is of concern to the market, global growth is of concern to the market and Rio, as with the other miners, is saying economic conditions are volatile."
Cash costs, the impact of stronger exchange rates and higher energy prices took a $2.1 billion bite out of Rio's underlying earnings. Lower volumes added a $444 million hit.
Rio Tinto joins major rivals Anglo-American Plc (AAL.AX) and Xstrata Plc XTA.L in reporting profit growth of a third or more over the past week while struggling to overcome spiraling costs and restive labor unions.
"We have obviously seen much higher labor settlements and salary increases.... And the input prices that are relevant to the mining industry are also very tight in many places," Guy Elliott, chief financial officer, told reporters.
"This is especially the case in regions like Western Australia but also other parts of Australia and Canada are not immune from these 'hot spot' type features."
Tight labor markets have spurred unions from Australia to Chile to take a hard line on wage talks, triggering strikes.
Rio owns a 30 percent stake in Chile's Escondida, the world's largest copper mine. Escondida, hit by a strike that has lasted almost two weeks, has been forced to declare force majeure and a deal is still proving elusive.
Rio's underlying earnings came in at $7.8 billion, just below a consensus expectation of $8.03 billion. Underlying core earnings climbed 27 percent to $14.3 billion, also just below expectations.
Rio, like its peers, forecast continuing strength in commodity prices, as miners struggle to bring more production onstream. Chief Executive Tom Albanese forecast stronger average prices for the rest of 2011 and into 2012.
Capital expenditure at the group was $5 billion in the first half and Albanese said the group had commitments for a further $6 billion to the end of the year.
Analysts had fretted over the impact of weather-hit sales on the bottom line at Rio's key iron ore unit, which accounts for 78 percent of group earnings, but lofty prices helped offset lower volumes to lift core profit up 44 percent.
The iron ore unit was hit by cyclones, flooding and a train derailment as the La Nina weather phenomenon battered Rio's key Pilbara operations in western Australia at the start of the year and interrupted ship-loading.
Rio said its planned expansion of Pilbara capacity was on track and accelerated work meant it would reach expected capacity of 333 million tonnes per year in the first half of 2015, six months ahead of schedule.
Its copper unit saw underlying earnings again marginally below forecasts, but up 16 percent as higher prices helped offset lower volumes from key mines and lower grades.
Copper has also been a concern for investors, who point to production at the lowest levels in years at a time when prices of the commodity are close to record highs. Rio has been hit along with the entire copper mining sector by the effect of lower ore grades.
Aluminum earnings rose 4 percent at an underlying level.
Earnings from the energy division, which includes coal and uranium, tumbled 39 percent, partly reflecting flooding at its Australian collieries and at the operations of its Australian uranium subsidiary, Energy Resources of Australia (ERA.AX).
Rio Tinto also boosted its interim dividend to 54 U.S. cents per share from 45 cents a year earlier.
Additional reporting by Michael Smith; Editing by Balazs Koranyi, Ed Davies and Sophie Walker