Rio Tinto emerged from the commodity market crash of 2015-16 with the strongest balance sheet among major miners, but concerns about rising inflation and reliance on iron ore for the bulk of its profits are denting confidence in its shares.

Underlying earnings for the six months to June 30 grew to $4.42 billion as higher iron ore output overcame lower prices. That was below forecasts of $4.53 billion, according to estimates in an independent survey of 15 analysts.

By 1209 GMT, Rio's shares in London were 3.5 percent lower and helped push the broader mining sector down 2.8 percent.

Outgoing Chief Financial Officer Chris Lynch said old alumina contracts cost the company "a couple of hundred million" dollars as it missed out on exposure to big price gains in alumina - a raw material used to make aluminium - after the United States imposed sanctions on Russia's Rusal in April.

Inflation, however, was a concern, Lynch said as oil prices have climbed over the past year, driving up fuel costs for miners, and the cost of hiring contractors has also risen amid higher demand.

Frances Hudson, an investment director at Aberdeen Standard, which holds Rio Tinto shares, said rising oil prices and mostly weakening metals prices meant the "profit picture is less favourable from both sides" for a miner like Rio.

Rio's high exposure to iron ore was also unhelpful "in a context where Chinese growth is softening", she said.

Bankers and analysts increasingly say Rio needs to buy assets to diversify its portfolio.

Rio declared a half-year dividend of $1.27 a share, equivalent to $2.2 billion, up 15 percent from a year ago.

The increase in funds for share buybacks follows asset sales worth $5 billion announced this year that have left the world's No. 2 iron ore miner with a cash pile in excess of the $5.5 billion outlined for planned capital expenditure in 2018.

RBC Capital Markets last week downgraded Rio's stock to "underperform" and reiterated the rating on Wednesday, saying it expected the company's exposure to iron ore to "cause significant compression of profitability".

Analysts and miners favour copper's long-term demand prospects. Rio Tinto is striving to develop a massive underground copper mine extension in Mongolia, but geopolitical risk there is an ongoing concern.

Rio is seen as all the more dependent on the Mongolian mine after it outlined this month the terms of the sale of its 40 percent stake in Grasberg, the world's second biggest copper mine, to an Indonesian government-owned holding firm for $3.5 billion.

(Reporting by Melanie Burton; Additional reporting by Sonali Paul in Melbourne, Aaron Saldanha in Bengaluru and Barbara Lewis in London; Editing by Richard Pullin, Kenneth Maxwell and Susan Fenton)

By Melanie Burton