(adds details, analyst comments)
By Wendy Pugh
MELBOURNE, July 31 (Reuters) - The world's second-largest diversified miner, Rio Tinto Ltd/Plc, posted a surprisingly weak first half profit on Thursday as strong iron ore sales were more than offset by a high Australian dollar and weaker coal earnings.
Despite emerging signs of global economic upturn, the miner said it still believed a recovery in western markets was unlikely to be rapid.
"A rally in the world economy towards the end of the year should provide additional support for markets, but a full recovery of prices still requires a broader-based and more sustainable boost to demand than currently seems likely," Rio Tinto Chief Economist David Humphreys said in a statement. Rio Tinto reported a first half profit of $641 million, nine percent below the $702 million reported in the first half of 2002. This was also below analysts' forecasts, which had ranged from $660 million to $802 million.
China's booming demand for steel drove strong earnings from the iron ore division, but the company's earnings were hurt by a rise in value of the Australian dollar against the U.S. currency and a weak steaming coal market.
Most of its products are sold in U.S. dollars, but most of the costs of mining these products are incurred in Australian, South African and Canadian dollars, which have all risen more than 10 percent in the first half from a year earlier.
Rio Tinto shares fell two percent in London to 1,273 pence in early trade as traders and mining analysts voiced disappointment at the results.
John Meyer of brokerage Numis Securities said the energy and industrial minerals businesses had both fallen short of his expectations and that aluminium was also weak.
"The energy division was exceptionally poor," he said.
But he said Rio Tinto could do better in the second half, with a weaker U.S. dollar likely to support commodity prices for the rest of this year and next. "Once you start looking into the second half and next year, you see signs of a recovery," Meyer said.
IRON ORE EXPANSION
The company said it was mulling an expansion of its Western Australian Hamersley iron ore operation to 114 million tonnes.
Rio said its industrial minerals and aluminium division were weaker during the half while copper was stronger.
Rio Tinto's shares, which closed down 0.9 percent at A$31.80, have lost 6.8 percent since December 31 compared to a 3.6 percent slide in the shares of rival BHP Billiton Ltd/Plc and a 3.7 percent rise in the overall market.
Analysts have said commodity mixes between the two miners were currently working in favour of BHP Billiton, which has a petroleum division that is profiting from oil prices currently around $30 a barrel.
BHP Billiton also had more commodities reaping the benefit of surging demand for steel in China, where its car making industry doubled output in the first half of the year and is on track to produce two million vehicles in 2003.
($1=A$1.54)
(Additional reporting by Mark Bendeich and Sonali Paul)