Rio profit hides problems

Rio Tinto’s bumper 2006 profit result announced last week may have highlighted the boom in commodity markets, but it also hid a few shockers in its Australian operations.

Rio reported a 48 per cent leap in net profit to $9.6 billion on the back of stronger contributions from its copper, iron ore and aluminium business units.

The disappointments included lower profits from its uranium and diamond businesses, and an increased loss at its HIsmelt pig iron plant at Kwinana.

The uranium market has been extremely strong in recent years, with the spot price soaring to more than $US70 per pound as low stockpiles were run down and demand increased from new reactors, particularly in China.

However, Rio was locked into long-term sales contracts set when the market was much softer.

Despite gradually replacing the legacy contracts, its average realised price last year was just $US18.36/pound.

It was also adversely affected by higher costs for consumables, particularly lime, acid and diesel, and the impact of cyclones.

The end result was that its Energy Resources of Australia subsidiary, which operates the Ranger uranium mine in the Northern Territory, reported a profit of $17 million, down from $24 million in 2005.

In contrast, Rio’s Rossing uranium mine in Africa lifted earnings to $27 million as it was able to gain more benefit from higher spot prices.

Rio chief executive Leigh Clifford said the group expected a bigger contribution in future from uranium.

“We are extremely well placed in the uranium market,” he said.

“I wouldn’t be surprised to see our uranium contribution increase in the coming years.”

The group’s growth opportunities include the Kintyre deposit in WA, but that will be developed only if the state government lifts its ban on uranium mining.

Rio’s Argyle diamond subsidiary, which operates in WA’s Kimberley region, reported a profit of $64 million, down from $117 million in the previous year.

Argyle said it held more than $100 million of surplus rough diamonds in inventory at the end of 2006 as a result of softer markets.

Specifically, it said consumer demand for diamond jewellery remained strong but the supply chain had been affected by high levels of indebtedness, rising interest rates and flood-related factory closures in the main Indian cutting centres.

Despite the weaker result, Rio is currently investing $910 million at Argyle to convert the open-cut mine into an underground mine and extend its economic life.

Meanwhile, Rio said its HIsmelt subsidiary, which is commissioning a revolutionary new technology for iron making, reported a net loss of $30 million, up from $19 million.

Production of pig iron at Kwinana increased to 89,000 tonnes but the plant was not operating at capacity, resulting in a high unit cost of production.

On a positive note, Rio announced last week it would proceed with the third major expansion of its Pilbara port facilities to cope with booming iron ore exports.

The capacity of the Cape Lambert port would be increased to 80 million tonnes at a cost of $1.1 billion.