Rio Tinto scraps Pacific Aluminium unit sale

Rio Tinto has given up trying to sell its lossmaking Pacific Aluminium subsidiary in a sign of the tough market conditions facing mining groups trying to offload underperforming assets during an industry downturn.

Sam Walsh, chief executive of Rio Tinto, said a "value-driven sale" of PacAl, which was carved out of the miner's struggling aluminium division, had not been possible.

"The market was aware PacAl wasn't going to sell," Mr Walsh said. "I am a realist. Let's get on with life. Running two aluminium businesses within one organisation . . . that's not all that productive."

Pacific Aluminium, which has high-cost smelters in New Zealand and Australia and an alumina refinery, was among assets put on the block by Rio as it looks to reduce net debt of $22bn and retain its single-A credit rating.

Big mining companies are being pressed by shareholders to sell assets, reduce costs and slow spending because of weaker commodity prices and a more uncertain outlook for growth in China.

Assets would not be sold at poor prices just to "tick boxes", said Mr Walsh, who earlier halted a plan to sell Rio's diamonds business. Rio has sold $1.9bn of assets this year and has pledged to cut operating costs by $2bn this year and a further $1bn in 2014.

Rio announced an 18 per cent decline in underlying earnings to $4.2bn in the six months to June, in line with market expectations.

Net earnings were down 71 per cent to $1.7bn, hit by losses on US dollar denominated debt and derivatives, while $340m was written off due to damage from a pit wall slide at Rio's Bingham Canyon copper mine in Utah. Rio will pay a dividend of $0.84 per share, up 15 per cent on a year ago.

"While the numbers were broadly in line, the market will be less pleased with the news that the PacAl business is now no longer for sale," an analyst at Nomura said. "The possible sale of PacAl would not have been in anyone's forecasts, but was a potential surprise positive catalyst for cash flow."

The decline in profits was largely a result of weaker commodity prices. Rio received $1.3bn less than in the same period a year ago from the sale of iron ore, copper, coal and aluminium. The impact was partly offset by $1.5bn in cost savings and lower exploration spending.

Rio expects $14bn of capital expenditure in 2013, around $1bn higher than some analysts expected but 20 per cent lower than what the company called last year's "peak".

The results highlighted Rio's dependence on its Australian iron ore mines, which generated more than 70 per cent of earnings before interest, tax, depreciation and amortisation in the period.

Mr Walsh said the iron ore market was strong and that Rio, the world's lowest cost producer, would decide this year on how to expand its Pilbara operations in Australia to lift output capacity from 290m tonnes this year to 360m. He said the project, dubbed Pilbara 360, "will happen, it will go ahead" but said Rio had "flexibility" in how to ramp up.

Analysts have said Rio could save up to $3bn by expanding existing mines rather than building new ones.

Shares in Rio rose 1.4 per cent to £29.95.

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