UPDATE 2-Rio hangs on to loss-making aluminium as profit falls
* Pacific Aluminium to be reintegrated into Rio Tinto Alcan
H1 group underlying earnings down 18 percent to $4.23 bln
* CEO says has cut costs by $1.5 bln in first half
By Sonali Paul and Clara Ferreira-Marques
MELBOURNE/LONDON, Aug 8 (Reuters) - Mining group Rio Tinto Ltd/Plc has scrapped efforts to sell its loss-making Pacific Aluminium business, blaming poor market conditions as weaker iron ore, copper and coal prices dragged first-half profit down 18 percent.
Rio - which has put a handful of assets on the block as it concentrates on core operations and battles a $22 billion debt burden - said in 2011 it could hive off Pacific Aluminium, known as Pac Al. But it said on Thursday it had not found a buyer and would not pursue a spin-off to shareholders.
Instead it will bring Pac Al back into the fold of Rio Tinto Alcan.
"I'm a realist," said Chief Executive Sam Walsh. "Let's get on with life. Running two aluminium businesses within one organisation - that's not all that productive."
Some analysts said it was a negative that the group had been forced to scrap a sale so soon after shelving the sale of its diamond assets, and as questions grow over its ability to sell larger operations like Canadian iron ore.
But others welcomed a decision not to sell at all costs.
"It's a clear indication that while ... all of the majors see an opportunity to try to bolster their balance sheets by getting rid of their non-core assets, it's not the ideal market to be selling assets in," said analyst Hunter Hillcoat at brokerage Investec in London.
Rio is still carrying the burden of its $38 billion takeover of Canada's Alcan, a poorly timed 2007 deal which has racked up $30 billion in writedowns, with the mining group booking losses in aluminium as demand slumped and Chinese output soared.
To help address such issues, in 2011 it put Pac Al into a separate business, which analysts at Credit Suisse had valued at between $2 billion and $3 billion, and considered selling, closing or spinning off the business to shareholders.
Underlying earnings for the group fell 18 percent to $4.23 billion in the six months through June from $5.15 billion a year earlier, exactly in line with the consensus of analysts' forecasts.
Net profit fell to $1.7 billion, hit by a non-cash exchange loss of $1.9 billion and a $300 million write-off due to damage from a landslide at its Bingham Canyon copper mine in the United States in April.
In iron ore, the key driver for Rio's business, underlying earnings fell 14 percent - at the lower end of expectations. But the group said it was on track with its expansion in Australia's Pilbara mines to capacity of 290 million tonnes a year, up from forecast production of 265 million in 2013.
Rio will decide on a further push to production capacity of 360 million tonnes later this year. "If you look at market fundamentals, they're strong," Walsh said.
On its closely watched campaign to slash $5 billion in costs over two years, Rio said it had cut $1.5 billion in the first half of this year at its operations and in exploration spending, putting it on track to hit a $2 billion 2013 target.
It said it would raise its dividend 15 percent to 83.5 cents, the lowest increase since it cut the payout after the financial crisis.
Rio's Australia-listed shares have fallen 10 percent this year against a 9 percent gain in the broader market, on worries about slowing growth in China, a potential oversupply of iron ore and its loss-making aluminium operations.
At 0730 GMT, Rio's London shares were up 0.7 percent at 2,974 pence, underperforming a 1.5 percent rise in the sector.