By Peter Ker
Rio Tinto will spend $3.7 billion to increase iron ore output in the Pilbara by a further 25 per cent to 353 million tonnes a year tonnes by 2015, shrugging off forecasts of waning demand and a looming global supply glut.
The extra spending comes despite recent comments by Rio about the rising costs and other obstacles of doing business in Australia.
The spending - part of a $US4.2 billion ($4.1 billion) global package announced yesterday. The remainder of the money will be spent developing Rio’s iron ore interests in West Africa.
The spending ear-marked for Australia follows a $US3.4 billion tranche of spending in February, and will deliver railway duplication, expansion to port berths and an extension of the mine life at the Yandicoogina mine.
On a recent trip to Australia, Rio chief executive Tom Albanese flagged that the company would pause once it reached its 353 million-tonne annual target, rather than pushing on immediately to 450 million tonnes.
Rio’s continued faith in iron ore comes as BHP Billiton mulls whether it should spend $US20 billion building an outer harbour expansion at Port Hedland.
Rio is far more depending on iron ore than BHP, with the commodity used in steel making responsible for more than three-quarters of Rio’s revenues.
Expansion plans
Rio, the world's second-largest miner of iron ore after Brazil's Vale, currently runs its Pilbara mines at an annual rate of 230 million tonnes and had already put in place work to take output to 283 million tonnes.
Rio's board approval for the latest expansion, which will cost $5.2 billion all up, with $1.5 billion coming from joint venture partners in the mines, comes despite pressures mounting in the sector to curb capital spending and return more cash to shareholders jittery over slowing global growth.
At a rate of 353 million tonnes, Rio's Australian mines would be supplying nearly a third of the world trade in iron ore.
"We are mindful of short-term uncertainties, and remain fully committed to a balanced approach to investment, while maintaining a single-A credit rating and a progressive dividend policy," Rio Tinto chief executive Tom Albanese said in a statement.
Rio Tinto also said it had committed a further $US501 million to fund its share of infrastructure development at its Simandou iron ore prospect in Guinea, a joint venture with China's Chinalco.
Iron ore is gold for mining companies, which have found a ready market in Asia for all they can mine and get to a port. The ore sells for around $US135 a tonne but for Rio costs only $US30 to produce, delivering hefty profit margins.
Rio is pushing ahead at the same time that BHP and Fortescue Metals have major expansions underway in the Pilbara region and a raft of smaller miners are trying to develop projects, which has spawned worries the market will be oversupplied within the next two years.
With Reuters