3rd UPDATE: Rio Tinto Cautious Near Term as Price Fall Hits Earnings

--Company's 1H net profit falls 22% to US$5.89 billion

--Holds on to capital expenditure plans, hikes dividend

--Chairman confident on long-term demand for commodities

(Adds company comment on coal operations in the third, fifth and 12th paragraphs)

 
   By Robb M. Stewart 
 

MELBOURNE--Rio Tinto PLC (RIO) said commodity markets are likely to remain volatile near term, after weaker prices pulled first-half earnings down 22%, but it stuck by a US$16 billion spending program this year even as rival miners cut or postpone investments.

The Anglo-Australian company, the world's second-largest iron ore producer by output after Brazil's Vale SA (VALE), said it expected Chinese growth to pick up modestly by the end of the year as billions of dollars pledged by Beijing on new infrastructure give the economy a shot in the arm.

This should translate into a recovery in demand for the steelmaking ingredient, supporting plans to considering greatly increase production in Western Australia, Chief Executive Tom Albanese told reporters.

However, a slump in prices for thermal coal used in power stations has prompted the company to close a mine in eastern Australia, cut jobs at another and defer a decision on a new mining project, Mr. Albanese said.

Large diversified miners are being squeezed between rising costs and lower prices as key consumer China's economy has cooled and concerns over the European Union's sovereign debt crisis continue to weigh on demand for raw materials.

A number of companies including Vale and BHP Billiton (BHP) have said they are reviewing or cutting capital expenditure plans as cash flow from operations has weakened following lower prices.

Rio Tinto is holding on to its spending plans for this year. Mr. Albanese said the company would prioritize those investment options that will offer a return "under any probable circumstances," while seeking to maintain a strong balance sheet and single A credit rating.

Rio Tinto's net profit fell to US$5.89 billion in the first six months of the year from a record US$7.59 billion a year earlier, while revenue dropped to US$25.34 billion from US$29.06 billion.

It said it would pay an interim dividend of 72.5 cents a share, up 34% on a year earlier.

The results were slightly ahead of consensus analyst forecasts, although flattered by a US$1 billion deferred tax asset from a levy on iron ore and coal profits that came into effect in Australia July 1.

China is the world's top consumer of the iron ore, much of it shipped from the remote Pilbara region of Western Australia where Rio Tinto and BHP Billiton are expanding operations. The Chinese economy grew 7.6% in the second quarter compared with a year earlier, the slowest rate since the financial crisis, which has led ed some analysts to predict the country's demand for steel will fall this year for the first time in 31 years.

"We continue to generate strong margins despite falling prices," said Mr. Albanese, adding the company's order books are full. "We are reaping the benefits of investing early in iron ore, which is producing consistently high returns."

Benchmark prices for iron ore, which accounted for roughly 70% of Rio Tinto's earnings in the half year, hit their lowest level in 31 months last week as China's economy slows, Europe struggles to resolve its debt crisis, and the U.S. economic recovery stutters. Rio Tinto said changes in prices knocked US$1.94 billion from its underlying earnings, as all major commodities other than gold fell from a year earlier.

"While we are mindful of short-term uncertainties, we remain convinced of the strength of the long-term demand outlook. We have taken a considered approach to investment, committing capital only to projects that will deliver value for shareholders under any probable macroeconomic conditions," Chairman Jan du Plessis said in a statement.

The company said it had reverted to earlier plans to close its Blair Athol coal mine in Queensland this year after almost 30 years of production, rather than seek to extend the life of the operation by mining poorer quality coal and harder-to-reach seams for a few more years.

Mr. Albanese said the company was seeking to cut costs and would review expansion plans in its thermal coal division. An investment decision on the proposed Mount Pleasant project in New South Wales state had been put off until after a review that is expected to run into 2013.

Xstrata PLC (XTA.LN) said Tuesday that it would defer US$1 billion of some US$8.2 billion in capital expenditure originally planned for this year and was seeking to cut costs.

Anglo American PLC (AAL.LN) late last month lowered its capital expenditure program for this year by US$500 million to $5.5 billion, although CEO Cynthia Carroll stressed it was a matter of delaying and not canceling projects altogether.

Write to Robb M. Stewart at robb.stewart@wsj.com