Rio Tinto Ltd/Plc , the world's second-largest miner, posted a record drop in first-half profit, in line with market forecasts, and said it was confident about the future after a tough 18 months.

The company, 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.

There is more work to do, but we are better positioned with renewed financial strength and a leaner cost base, Chairman Jan du Plessis said in a statement.

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.

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 Rio has offered.

We remain cautious about the recent rally in prices, du Plessis said.

Rio Tinto 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 year.

It said it had cut net debt by nearly 40 percent.

Underlying January-June earnings fell to $2.565 billion from $5.526 billion a year ago, matching analysts' forecasts for around $2.6 billion.

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 rival and former suitor BHP Billiton .

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

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

Rio shares closed at A$58.03 ahead of the results. The stock has nearly doubled this year, outperforming BHP's 21 percent gain.

BHP last week gave a guarded outlook for global commodity demand 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.

(Reporting by Sonali Paul; Editing by Ian Geoghegan)

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