Rio Tinto plans to reduce costs, boost asset sales

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SummaryRio 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.

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 Tinto’s iron ore chief, Sam Walsh, said.

For some, Rio Tinto’s dependence on its iron ore business, making up 83% of the group’s 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.”

Rio’s 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 today’s 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.

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