Rio Tinto plans to reduce costs, boost asset sales

Written by Reuters | Melbourne/Sydney | Updated: Dec 1 2012, 01:52am hrs
Rio Tinto aims to axe $7 billion in costs over the next two years and sell more assets to cushion against weaker commodity prices, while at the same time beefing up output in its lucrative iron ore business.

The firm is the only global iron ore producer that has not slowed iron ore expansion plans, forging ahead with $21 billion in mine, port and rail work to boost its Australian capacity. But like its peers, Rio Tinto has been cutting costs, reviewing other projects and closing coal mines in Australia due to depressed commodity prices, soaring costs and the persistently strong Australian dollar.

For me the theme for this year, next year and probably the extended period beyond that in this volatile environment will be everything having to do about cost control, Rio chief executive Tom Albanese told reporters ahead of an investor seminar.

With the efficiency drive, the firm has managed to find ways to lift its iron ore capacity just by tweaking mine, rail and port operations, and said it expected to find further gains without big licks of capital. With our available spot tonnage growing significantly with our expansions, outselling others will bring substantial business value, Rio Tintos iron ore chief, Sam Walsh, said.

For some, Rio Tintos dependence on its iron ore business, making up 83% of the groups underlying earnings last year, is seen as a weakness, next to the more diversified base of top global miner BHP Billiton.

But Albanese and his lieutenants waved off concerns, highlighting the superior margins Rio reaps from iron ore, despite uncertainty over the near term outlook for demand from the biggest consumer, China.

I do believe we have an iron ore business without peer, Albanese said. I will never apologise for the quality of our iron ore business.

Rios cost per tonne of iron ore would fall to just over $35.50 from $47 delivered to China, including royalties, shipping and sustaining capital costs, once its infrastructure expansions are completed, said iron ore chief Walsh. On todays selling prices around $118 a tonne, that would give it a massive profit of $82.50 a tonne.

Despite the challenges of higher labour and service costs and the strong Aussie dollar, Rio said it has boosted the efficiency at its iron ore operations, so it now expects to reach a production capacity of 290 mt a year by the end of 2013, up from a target of 283 mt.

The company said it is aiming to cut more than $5 billion of operating and support costs by the end of 2014, and would cut spending on exploration and evaluation projects by $1 billion over 2012 and 2013.

Much of the cost cuts would come in its coal and aluminium assets, Albanese said, adding that support costs in Australia had become the most expensive in the world, compared with five years ago when they were among the cheapest.

It also plans to cut spending on sustaining operations by more than $1 billion in 2013.

In August, the worlds no.2 iron ore miner had said it expected capital spending on all its projects to peak in 2012 at $16 billion, with its share of that at $13.6 billion, as it looked to focus on fewer big projects.

Ive been very concerned over the past few years that weve seen progressive escalation in our capital cost intensity, Albanese said.

So were just getting to a point now where we cant run as many major capital projects around the world as we might have been a couple of years ago with the same balance sheet.

While all iron ore producers are suffering from this years drop in prices, which are now more than 20% below the 2012 high, the revenue blow will be cushioned for Rio Tinto as it is producing more tonnes.

Theres no doubt any marginal tonnes they can produce from the Pilbara without a capex increase is a good thing, said Tim Barker, a portfolio manager at BT Investment Management, which owns shares in Rio Tinto.

Rio was on track to reach 290 mt a year by Q4 of 2013 and expand capacity to 360 mt by 2015, the company said, adding the project in Western Australias Pilbara region remained on time and on budget. Rio remained optimistic about a pick-up in growth in China, following recent stronger-than-expected economic data.

More than a couple of months ago, Im cautiously optimistic about the fact that were beginning to see green shoots in China, Albanese said.