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Rio Tinto earnings sink on metals price plunge; deepens capex cuts

* Underlying earnings drop 43 percent, in line with analysts

* Rio increases cuts to capital spending

* CEO says iron ore market heading for "equilibrium" (Adds detail, comment from CEO and analysts)

By James Regan

SYDNEY, Aug 6 (Reuters) - Global miner Rio Tinto (LSE: RIO.L - news) on Thursday posted sharply lower first-half profits on sliding metal prices and pledged $1 billion in cost cuts this year.

The company's iron ore division was particularly hard hit, with underlying earnings in the section plunging 55 percent in the first half versus a year earlier despite a dramatic reduction in how much it spends to mine each tonne.

Rio Tinto Chief Executive Sam Walsh called the results "robust" in light of operating conditions, but warned the company was now facing price declines in nearly all the commodities it churns out.

Miners have been among the worst performers on London's FTSE index of blue-chip companies so far this year, hit by oversupply and slowing growth in major consumer China. The FTSE 350 mining index has fallen by about 20 percent since the start of the year.

"The next six months are likely to be an even more challenging period, given the price declines we have seen so far, with the anticipated oversupply of iron ore yet to fully play out," Investec (LSE: INVP.L - news) said in a note.

Rio's capital spending reduction target has been reset to $1 billion this year, raised from $750 million earlier, to help offset weak conditions, Walsh said on a media call.

Despite the dismal outlook, Rio lifted its interim dividend by 12 percent to $1.075 per share, keeping to board policy.

The diversified miner's net profit tumbled 82 percent to $806 million in the six months to June 30, while underlying earnings, which strips out the impact of one-off impairments, fell 43 percent to $2.9 billion, in line or slightly above most analyst forecasts.

Barclays (LSE: BARC.L - news) said the results were "very good" given market conditions, adding that it would remain equal weight on the stock.

In iron ore, which accounted for 72 percent of Rio Tinto's overall net earnings, Walsh said he was expecting roughly 120 million tonnes of unprofitable mining capacity to close this year, with 80 million tonnes coming from China's higher-cost operators.

"In terms of supply and demand, we are really seeing that the market has reached some sort of equilibrium," he said.

Walsh reiterated the company's 2015 production target of 340 million tonnes.

China's steel production, a key measure of iron ore demand, has been lower in 2015 than the year before, but Walsh is still expecting substantial long-term growth.

"The recovery will be characterised by slower commodity demand growth compared to the past decade and a likely continued focus on productivity and costs over capital project development," he said.

Spot iron ore hit a record low of $44.10 a tonne in early July after plunging through the first half of the year. Even (Taiwan OTC: 6436.TWO - news) with a modest recovery to $56.40 a tonne, they are down more than 22 percent this year. (Editing by Joseph Radford and Ed Davies)