Date: August 09 2012
RIO Tinto's underlying $US5.2 billion profit for the June half was down from $US7.8 billion a year earlier but ahead of estimates by about $US300 million, and its iron ore sector is still a superstar. Rio's vertically integrated aluminium division is the doppelganger: even after big write-downs, it is a $US27 billion nightmare.
Weaker commodity prices cut $US1.94 billion from Rio's earnings, but the iron business is still supremely profitable.
Iron ore revenue edged down from $US13.7 billion a year ago to $US12.4 billion, and net earnings fell from $US5.95 billion to $US4.75 billion - but Rio's total sales fell by more, and iron ore's revenue share actually rose, from 43.5 per cent to 44.6 per cent. The division swamped Rio's other divisions for earnings, contributing almost 81 per cent of the total.
Iron ore prices fell from around $US170 a tonne to $US134 a tonne during the year, but Rio is still selling ore for about $US80 a tonne more than it is spending to mine it, from its Pilbara open-cut in north-western Australia primarily.
It produced 120 million tonnes of iron ore in the June half alone, and aims to get to 353 million tonnes a year by 2015, and its plans are underpinned by the dual port and rail network it created 12 years ago with its $3.5 billion takeover of North Ltd.
BHP Billiton has one port, at Port Hedland. It aims to boost production from about 155 million tonnes this year to 220 million tonnes by 2016, and to 240 million tonnes a year after it eliminates bottlenecks, but that is Port Hedland's current capacity limit, and a $US20 billion plan to construct an outer harbour is under review, and likely to be deferred in response to softer demand and weaker prices.
Weaker prices were also behind a halving of the earnings of Rio's copper division to $US731 million in the six months to June, but the big hole in the result was the aluminium division that Rio bulked-up five years ago with its $US38 billion acquisition of Alcan.
It earned a paltry $US24 million, down from $US344 million a year earlier.
Aluminium is a chronic problem. Rio has sold assets and cut costs, has more assets up for sale and booked a $US8.9 billion write-down on the business last February.
Its crucial assumption when it bought Alcan - that prices would rise over time - has not been borne out as Chinese smelting capacity expands, and even after the February write-down it has almost $US27 billion invested in a division that is earning next to nothing.
Iron ore, on the other hand, is an $US18.5 billion business with annualised earnings of $US9.5 billion, based on this half-year result. That's a return on funds invested of 51 per cent.
Rio set itself a target of extracting a 40 per cent profit margin from the expanded aluminium business after it acquired Alcan, but if China maintains its presence in the market that is not possible.
The real question will be when Rio will announce more write-downs, and, ultimately, whether it should be in the business at all.
Asked yesterday what the fate of the vertically integrated aluminium division would be, chief executive Tom Albanese gave a binary answer. It was the right thing to keep them open if they remained viable, he said, but ''if they cannot be viable, we have difficult decisions to make.''
Those difficult decisions get closer with every awful result the aluminium division posts.
THE NBN company's new corporate plan shifts the financial and operational goal-posts a bit, but doesn't radically change the politics.
It's a slightly more enormously expensive and ambitious project than it was in December 2010 when the first corporate plan lobbed, in its physical reach, its design and its funding, and it's running nine months late.
Peak funding was estimated at $40.9 billion in December 2010, and is now estimated to be $44.1 billion. The government's equity contribution is up from $27.5 billion to $30.4 billion, but NBN Co is still expected to return 7.1 per cent on funds invested, up from an estimate of 7 per cent in the first corporate plan.
The federal election that is due in a year's time almost certainly renders it all academic, however.
The opposition's plan to downsize the network to a fibre-to-the-neighbourhood node design won't be easy to execute, because Telstra still owns the copper wires that would make the final connection to homes: it will demand compensation.
The delayed rollout was already known, and it makes the politics easier, however. The first plan expected 1.22 million homes to have been passed by June 30 next year, with 419,000 of them using the network.
The new plan predicts that only 661,000 houses will be passed by that time, and that only 92,000 will be active.
The rollout gets back on track by 2015, but that's too late, politically. When the election is held next year the NBN will still be an embryonic network, and a second-order political issue.
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