Despite headlines of records, Rio Tinto's (RIO) first-half underlying earnings fell well short of forecasts, up 35% to $7.8 billion. Record first-half underlying earnings before interest, tax, depreciation, and amortization were up 27% to $14.3 billion and earnings were up 35% to $7.8 billion, reflecting higher prices. Record first-half cash flow rose 24% to $9.7 billion. However, volume is still recovering from extreme first-quarter weather, and higher costs including labor are being further inflated by adverse exchange rate movements.
The sum of these is only a partial offset to pricing. The iron ore and energy segments performed to expectations, but copper and aluminum divisions underwhelmed. The iron ore and energy segments performed to expectations, but copper and aluminum divisions underwhelmed. Compared with the previous corresponding period, iron ore EBITDA rose 47% to $9.8 billion, or 70% of the group total. This is in line with the second half of 2010, when it also constituted 70%. It's fine while the music keeps playing and if it's an iron ore major you're chasing. But for those who thought they owned a diversified major with the stable earnings stream that such a structure affords, BHP Billiton BHP increasingly appears to be the preferred play.
The weaker-than-expected result caused our fiscal 2011 and fiscal 2012 earnings forecasts to decline 7% and 3%, respectively. Our fair value estimate declines 5%.
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