Rio Tinto delays iron ore operations expansion to 2017

Iron ore mine Image credit: flickr User: nporiord

Rio Tinto has announced lowering growth and cutting costs with a revised plan to save $3 billion by focusing on existing mines instead of digging new ones.

Iron ore mine Image credit: flickr User: nporiord
Iron ore mine
Image credit: flickr User: nporiord

According to the news release featured on Reuters, the company still plans to boost production, but in a more efficient manner. This decision comes at a time when rivals BHP Billiton and Vale are doing exactly the same thing.

Rio Tinto’s iron ore production capacity in Western Australia was expected to increase from around 260 million tonnes a year currently to 360 million tonnes by the end of the first half of 2015.

However, the plans fell through after iron ore prices took a dive last year.

A new plan was reportedly outlined last Thursday, when management said infrastructure could still be ready to handle an annual 360 million tonnes by 2015.

However, the full increase of production is said to take longer as it has delayed development decisions on new mines in regions such as Silvergrass and Koodaideri.

The newly approved plans are set to increase production capacity by 20% by 2017 but much of the low-cost growth is expected by 2015, when annual output is set to reach over 330 million tonnes.

Some of Rio Tinto’s shareholders doubt the production boost, fearing it will flood the market with iron ore and affect prices if demand fails to keep up.

Investors welcomed the cost-cutting plan last Thursday, which resulted in a rise in Rio’s shares of almost 3% to 3,229.5 pence in London morning trade.

“Whilst increased production could affect market dynamics, expanding existing facilities will be seen as far lower-risk capital expenditure compared to new greenfield adventures, such as the Guinea and Mongolian projects,” said one of Rio Tinto’s 10 largest investors.

Rio Tinto has approved $400 million of spending on plant equipment and additional heavy machinery to support the work in Australia’s Pilbara iron ore belt as it boosts productivity while saving on new mine developments.

Iron ore currently sells for $136 a tonne, giving Rio Tinto a cash profit margin of about $100 a tonne.

“By delivering these additional tonnes we will capture a greater share of demand and ensure we continue to enjoy the best returns in the industry,” said Andrew Harding, Rio Tinto Iron Ore’s chief executive.

Jan du Plessis, Rio Tinto’s Chairman, last week said the company plans to mine iron ore in Australia until at least 2067 and expects to become the world’s biggest iron ore miner.