Global miner Rio Tinto first-half profit fell 6%, hurt by higher costs and unfavorable exchange rates despite selling its copper, iron ore, and other industrial commodities at sharply higher prices.
Rio, which is bidding $38.1 billion for aluminum maker Alcan,said its copper and iron ore divisions remained the biggest income earners in the half year, thanks to strong market prices.
"Operationally, the first six months of 2007 were demanding as we again pushed our existing businesses to respond to strong market conditions by maximizing production," Rio's chief executive, Tom Albanese said in a statement.
Half-year underlying profit dipped to $3.53 billion from $3.75 billion a year earlier, falling short of analysts' forecasts for about $3.70 billion.
In the first half of 2007, there were no abnormal boosts to earnings, unlike in the first half of last year when Rio recognized $211 million in tax benefits.
At the same time, mine labor and equipment costs, notably in Australia, are rising, reducing underlying earnings by $503 million, Albanese said.
"On balance, all our businesses have performed well, but we are alert to continuing industry-wide cost pressures, notably in Western Australia and Queensland," Albanese said.
The weaker U.S. dollar cut a further $118 million in underlying earnings.
Rio is the world's third largest mining house by market capitalization after BHP Billiton and CVRD.
Earlier on Thursday, Rio said it would help fund 50% of a $350 million expansion project to mine millions of tonnes more of iron ore annually in the Australian outback to better capture swelling demand from steel makers.
Analysts predict that prices Rio and others charge steel mills for iron ore will rise as much as 20% or more in the next shipping year, which would mark the sixth straight year of price hikes.
Rio's profits from its iron ore division could top $3 billion in 2007, maintaining its status as the company's second-largest income getter after copper, according to JP Morgan, which had pegged a first-half profit of $3.75 billion.
Rio did not shed any light on expectations it will divest some non-core assets to help pay for Alcan, whose offer price topped a rival bid by Alcoa by more than $9 billion.
Rio, betting on a positive outlook for aluminum and other metals markets, said it did not see a material short term impact from concerns clouding credit markets.
With Alcan under its belt, Rio will be crowned the world's biggest aluminum maker, easily eclipsing other sector giants United Company Rusal, Aluminum Corp. of China and Alcoa in size.
In the first half, Rio saw a 13% rise in copper prices versus first half 2006, while aluminum showed a 10% gain.
Rio shares have risen about 22% since January, trailing a 42% gain by close rival BHP Billiton