Rio Tinto to slash costs, steps up iron ore output

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Rio Tinto is the only global iron ore producer that has not slowed iron ore expansion plans, forging ahead with $21 billion in mine. (Reuters) Rio Tinto is the only global iron ore producer that has not slowed iron ore expansion plans, forging ahead with $21 billion in mine. (Reuters)
SummaryRio Tinto is the only global iron ore producer that has not slowed iron ore expansion plans, forging ahead with $21 billion in mine.

Rio Tinto aims to axe $7 billion in costs over the next two years as it faces weaker commodity prices, and despite cutting costs the global miner had managed to beef up production at its lucrative Australian iron ore operations. Rio Tinto 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 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 said.

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 the rest of 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 world's 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.

"I've been very concerned over the past few years that we've seen progressive escalation in our capital cost intensity," Albanese said.

"So we're just getting to a point now where we can't run as many major capital projects around the world as we might have been a couple of years ago with the same balance sheet." Despite the challenges of higher labour and service costs and the strong Aussie dollar, Albanese said Rio has boosted the efficiency at its iron ore operations, so it now expected to reach a production rate of 290 million tonnes a year by the end of 2013, up from a target of 283 million tonnes.

"GREEN SHOOTS IN CHINA"

Highlighting its advantage over rival iron ore producers, Rio said its cost per tonne of iron ore would fall from $47

delivered to China, including royalties, shipping and sustaining capital costs, once its infrastructure expansions are completed. While all iron ore producers are suffering from this year's drop in iron ore prices, which are now around $118 a tonne or more than 20 percent below this year's high, the revenue blow will be cushioned for Rio Tinto as it is producing more tonnes."There's no doubt any marginal tonnes they can produce from the Pilbara without a capex increase is a good thing," said Tim arker, a portfolio manager at BT Investment Management, which owns shares in Rio Tinto.

Rio was on track to reach 290 million tonnes a year by the fourth quarter of 2013 and expand capacity to 360 million tonnes by 2015, the company said, adding the project in Western Australia's Pilbara region remained on time and on budget. Rio remained cautiously optimistic about a pick-up in growth in China, its biggest customer, following a recent string of stronger-than-expected economic indicators. "More than a couple months ago, I'm cautiously optimistic about the fact that we're beginning to see green shoots in China," Albanese said.

As it shrinks to focus on its largest, highest-returning businesses, Rio Tinto has been looking to cast off its Pacific Aluminium unit and its diamonds business but has yet to decide how to get rid of those units.

It put the diamonds business on the block earlier this year soon after BHP Billiton, which managed to sell its Ekati diamond operation to Harry Winston earlier this month for $500 million. Harry Winston is a co-owner of Rio's Diavik diamond mine in Canada. Albanese said the sale of its units was still under review.

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