* Iron ore output higher than many analysts expected
* Still selling some iron ore at spot or provisionally
* Keeps annual output target at 200 million tonnes.
(Adds analyst comment, shares)
By James Regan and Eric Onstad
SYDNEY/LONDON, July 15 (Reuters) - Global miner Rio Tinto posted a stronger-than-expected 8 percent rise in second-quarter output of iron ore, which accounts for the bulk of profit, but said on Wednesday global markets remained tough.
"Rio Tinto reported strong operating results for the second quarter in the business that will dominate the P&L," Macquarie Securities said in a note.
Rio Tinto is the world's second biggest producer of iron ore, which is expected to account for up to 80 percent of 2009 profit, analysts said.
Total production of 45.16 million tonnes of iron ore in the second quarter also marked a 43 percent rise over the first quarter, when output was cut due to reduced demand and heavy rains in the Pilbara region of western Australia, Rio said.
"There is some potential for production forecast upgrades thanks to better than expected iron ore and coal performances," Investec analyst Rebecca O'Dwyer said.
Rio Chief Executive Tom Albanese said markets were difficult and the firm would keep trying to hold down costs.
"Markets remained tough in the second quarter, as expected, particularly in aluminium," he said.
"We continue to press ahead with actions to reduce costs across the board, align production with demand and bring down levels of net debt."
Rio shares in London, which have surged 70 percent this year, gained 3.8 percent to 2,097 pence by 0952 GMT, outperforming a 2.6 percent increase in the UK mining index. In Sydney, shares rose 2.0 percent to A$50.08.
PRICE SETTLEMENTS?
Rio also said it was yet to reach final price settlements on iron ore sales to some customers, which includes steel mills in China, after reaching deals in Japan, Korea and Taiwan.
"Deliveries continue to other customers on a provisional price or spot sales basis," Albanese said.
Sources told Reuters, however, that Rio and BHP Billiton have secured agreement from Chinese steel mills to a 33 percent price cut in iron ore, effectively winning a long-running pricing battle that has become subsumed in a spying row between China and Australia.
About half of the iron ore that Rio Tinto has produced this calendar year has been sold on a spot basis as delivered iron ore spot prices go up in line with rising freight rates, Albanese said.
On an FOB basis, spot prices have remained relatively flat during the quarter, he added.
Albanese said a recovery in Chinese steel demand was expected to continue into the second half of 2009.
Rio repeated its iron ore production guidance for the global operations, including Australia, Canada and Brazil, at around 200 million tonnes in 2009.
Second-quarter refined copper output rose 23 percent from a year ago due to higher concentrate grades at the Kennecott Utah Copper division and higher cathode production at its Escondida joint venture in Chile, the company said. Mined output fell 1 percent.
In the aluminium unit, which some analysts expect to be loss-making, output fell 5 percent to 942,000 tonnes after Rio imposed production cutbacks due to weak demand and low prices.
Stronger currencies in Canada and Australia are expected to have a negative impact on profit in the aluminium unit -- Rio Tinto Alcan -- in the first half, Rio added.
Rio has acknowledged it probably overpaid when it acquired Alcan for $38 billion in cash in 2007 at the top of the commodity's boom.
The heavy debt burden from the takeover forced it to raise $15.2 billion in rights issue last month.
For a graphic on Rio's latest production report click on the link below;
http://graphics.thomsonreuters.com/079/AU_RIOPRDQ209.jpg
Fpr a table of second quarter production figures, see
For a TAKE A LOOK on China's detention of Rio staff, see. (Editing by James Thornhill and David Cowell)