Rio Tinto Ltd/Plc , the world's second-largest miner, is poised for a comeback after posting a record drop in half-year profit and selling off shares and assets to slash debt.

First-half underlying earnings slumped 54 percent, in line with market forecasts, as metals prices and demand collapsed, and Rio slid to a loss in its aluminum business, which it expanded two years ago with an ill-timed takeover of Alcan.

But Rio said it was more confident about the future after cutting 16,000 jobs, or 15 percent of its workforce, which was more than it targeted last December, cutting production at its higher cost operations and paying off nearly 40 percent of its debt.

The worst is definitely over, just from where their debt position has come from and where it is today ... and where commodity prices have moved, said Tim Schroeders, a portfolio manager with Pengana Capital.

The group has a lot more flexibility in being able to adjust to whatever market conditions confront it in the future.

Rio Tinto, which has eased its debt woes with recent asset sales and a $15.2 billion share sale, forecast that cost cuts would pay off in the second half and, in a sign of its confidence, said it expected to pay a final dividend this year.

Rio Tinto is now a stronger, fitter business and we can now look to the future with a higher level of confidence, Chief Executive Tom Albanese told reporters.

However it was cautious about a recent rally in metals prices.

If current markets are any indication, I expect to see more stable and possibly stronger trading conditions in the second half, Albanese said.

That echoed the outlook given last week by bigger rival and former suitor BHP Billiton after a slump in metals prices triggered its first profit decline in seven years.

Analysts said then that BHP was the low risk alternative for investors looking to take a position in the diversified mining sector given its strong balance sheet, ability to raise its dividend and its commodity and geographical diversification.

Following the Rio Tinto results, Mark Taylor, senior resources analyst at Morningstar, said Rio looked a better bet based on its current share price.

Rio Tinto is much cheaper than BHP at the moment, the shares are at a much greater discount to valuations. I would probably recommend Rio at the moment just because of the greater share price discount, he said.

Rio shares rose 2 percent in early London trading on Thursday after easing 0.3 percent in Australia ahead of the results. The stock has nearly doubled this year, outperforming BHP's 21 percent gain.

MENDING CHINA FENCES

The key challenge for Rio Tinto is to resolve a stalemate with Chinese steel mills on price talks for iron ore, its biggest earner, amid tension with the Chinese government over the arrest of four staff in Shanghai on suspicion of bribery.

While concerned about the detained staff, Albanese said they were all in good health and Rio was relieved that the grounds for their arrest were not as serious as the spying allegations first made.

Albanese said while there was no settlement yet with Chinese steel mills, Rio was continuing to sell iron ore to them, provisionally at the same price as agreed with Japanese mills, down 33 percent from last year. Production was running well ahead of last year, he said.

Rio this week flagged it would not cave in to selling iron ore at the price set by Australia's No.3 miner, Fortescue Metals Group , for Chinese mills, which was slightly cheaper than the 33 percent price cut.

From an overall perspective, I am committed to building our relationship with China, which of course, is of great importance to Rio Tinto, Albanese said.

Rio is still pushing for more asset sales to bolster its balance sheet, damaged by the costly takeover of Alcan two years ago at the peak of the commodities boom.

With the $2 billion sale of most of its remaining Alcan packaging businesses to Australia's Amcor Ltd agreed this week, Rio has passed the half-way mark on its target to sell $15 billion worth of assets in two years.

Underlying January-June earnings fell to $2.565 billion from $5.526 billion a year ago, matching analysts' forecasts.

Rio's bottom line was hit by writedowns and a $195 million break fee paid to Chinalco for spurning the Chinese state-owned group's planned $19.5 billion tie-up in June. Rio instead launched a rights offer and lined up an iron ore joint venture with BHP.

First-half iron ore earnings fell by a third, while coal earnings rose 48 percent.

Rio's aluminum division posted a loss of $689 million.

(Editing by Ian Geoghegan)

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