Rio Tinto expands iron ore production on increased demand from China

on Jun 21, 2012

Rio Pinto (RIO) is the second largest exporter of iron ore in the world, only behind Brazil’s Vale SA, and the company is actively seeking to explore new opportunities that will allow it to solidify its status of one of the industry leaders. The company believes that the Chinese market still presents an opportunity to support expansion and are planning to make a pretty substantial bet on that. A $4.2 billion bet.

A substantial part of the investment – $3.7 billion – will be spent on expanding a mine in Western Australia and building new port berths and extending railroads in the same region, in attempt to boost production output to 353 million metric tons per year by 2015. Another $501 million will go for building rail and a port at the Simandou development project in Guinea.

!m[](/uploads/story/152/thumbs/pic1_inline.png)There are some strong reasons supporting such investment. China is currently the world’s largest steel producer and it’s very likely that its share will increase in the future. According to Rio’s estimations China’s urbanization will boost iron ore output to 1 billion tons (a 43 percent increase) per year by 2030. These predictions provide a solid base for future investment and the company is planning on spending at least $15.6 billion this year. But Rio intends to also spend wisely.

“We are directing investment to projects that will generate the most attractive returns for shareholders and are resilient under any probable macroeconomic scenario,” said Tom Albanese, Chief Executive Officer of the company.
Wise spending is essential, because the last twelve months have been rough for the industry. Concerns about the negative effects of global economic instability on commodity demand have caused mining company valuations to drop by 24 percent. Iron price has also dropped by 21 percent for the same period. The good news for Rio Pinto is the company managed to stop its 25% share price decline of the past year to 25% gaining 1.7 percent to A$57.72 at the close in Sydney trading. Yet, choosing carefully in what projects to invest is still very necessary.

Yesterday, June 20, Rio said that it would reduce its capital spending, joining BHP Billiton Ltd. (BHP) in rationing cash as prices tumbled. This comes as a follow up to a previous statement made on June 16 in which the company revealed that it is conducting an organisational review that may lead to job cuts and staff relocation in Australia to cut costs.

Another indication for Rio’s commitment to rationing spending was the company’s withdrawal from talks to participate in a A$9 billion ($9.2 billion) port expansion in Queensland. Higher costs and economic volatility were pointed to as the main reasons for the company’s decision.
Rio Pinto clarified that the approved projects will be within the $16 billion frame that the company have planned for capital spending for this year.


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