Aluminium likely to be Rio Tinto highlight

SMH reported that iron ore is always the focus of Rio Tinto's financial results but the long suffering aluminium division could provide one of the more interesting tales when the diversified miner reports its half year results.

While the aluminium division is predicted to supply just USD 347 million of the USD 4.7 billion half year earnings result tipped by UBS, such a result would be an improvement on the USD 123 million worth of earnings the business delivered in the H1 of 2013.

The aluminium division has suffered close to USD 28 billion worth of impairments over recent years as rampant production by rivals in China dragged down prices for the versatile and lightweight metal, which is widely used in the aviation industry.

But aluminium producers that control their own supply of bauxite and alumina  such as Rio Tinto and Alcoa are becoming increasingly confident about their future prospects.

Demand for aluminium is improving from vehicle manufacturers, while high cost smelters have been shut down and an export ban in Indonesia has interrupted China's most important supply of bauxite, which is the prime ingredient in the production of alumina and aluminium.

All those factors are helping to turn around the aluminium sector; contract prices for the metal have risen by about 12% in 2014 and there are expectations a decade long surplus of aluminium could slide into a deficit within one year.

As one of the world's top five producers of aluminium by volume, and the owner of more than 20 assets tied to the aluminium production cycle, a sustained improvement in aluminium markets would be cause for optimism at Rio, which has been criticised for being too reliant on iron ore.

Indeed, UBS expects iron ore to deliver close to 89% of group earnings at the half year. UBS's forecast for Rio's net earnings to come in at USD 4.7 billion is higher than the USD 4.56 billion tipped by a consensus of analysts surveyed by Bloomberg.

Both RBC Capital Markets and UBS expect Rio will stick with its policy of returning half of the previous year's full year dividend to shareholders at the August results. That should see Rio return USD 96 cents per share, which is 15% higher than was returned in August 2013.

Mr Sam Walsh CEO of Rio Tinto hinted in February that he and chief financial officer Mr Chris Lynch would most likely be focused on debt reduction in 2014, which would set the company up to unleash a special round of shareholder returns in 2015.

With iron ore prices dipping lower since those comments was made, it would be a surprise to see Rio launch into special shareholder returns this week. Investors will also watch for updates on the cost reduction campaign, with Rio promising to pull a further USD 1 billion worth of annualised costs out of its business during 2014.

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