Rio Tinto Slashes Spending Plans amid Tough Market Environment

on Nov 29, 2012
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Rio Tinto (LON:RIO, ASX:RIO), the world’s second-largest mining company, announced on Wednesday that is targeting $7 billion (£4.3 billion) in spending cuts and savings by the end of 2014, while simultaneously boosting production — the latest move by the miner to help profit margins at a time of rising costs and weak commodity prices.
At an investor seminar in Sydney, Rio Tinto announced that it plans cumulative savings of more than $5 billion (£3.1 billion) of operating and support costs by the end of 2014, compared to expected costs in 2012. The Anglo-Australian mining giant also said that its planned spending on exploration and evaluation projects will be reduced by $1 billion (£624,376) over the remainder of 2012 and 2013, while sustaining capital expenditure will be cut by more than $1 billion in 2013.

Rio Tinto’s chief executive, Tom Albanese, remarked that much of the cost cuts would come in its weakly performing coal and aluminium assets, adding that support costs for these units in Australia had become the most expensive in the world, compared with five years ago when they were amongst the cheapest.
**Aluminium Charge at end of 2012**
Separately from its saving strategy, Rio Tinto announced that due to the tough aluminium market conditions it may take a further write-down on its aluminium business at the end of this year. The company’s chief financial officer Guy Elliott said on Wednesday’s investor seminar in Sidney: “It’s possible there will be some revisions this year, notably in aluminium.”

Rio Tinto bought its Alcan aluminium assets for $38 billion (£23.7 billion) at the top of the market five years ago, taking on debt that nearly brought the company to its knees, and has been writing down the value of the business ever since.
**Volatile Market Environment Pressures Miners**
Ahead of the investor seminar, Rio Tinto’s CEO Mr Albanese told reporters: “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.”

The recent tough economic environment, struggling commodity prices and rising operating costs have forced many resource firms to retrench over the past year. Big miners like Rio Tinto have dismissed workers, postponed ambitious projects and closed offices in an effort to shield their balance sheets.
!m[Anglo-Australian Miner Targets Production Boost and £4.3bn in Spending Cuts and Savings by 2014](/uploads/story/927/thumbs/pic1_inline.png)“We are taking further tough action to roll back the unsustainable cost increases of the past few years, and are maintaining a relentless focus on improving productivity,” Mr Albanese said. “We have the ability to respond to changing market conditions and I am confident we have the right strategy to maximise shareholder value in the long term,” he added.

**Upbeat Outlook on China**
Mining companies such as Rio Tinto have benefited from China’s rapid expansion over the past few years, which have seen the country grow into one of the world’s largest commodities markets. Yet growth in China has slowed significantly, hitting a three-year low in the July to September quarter. That has led to concerns that demand for commodities from China may tail off and further impact prices and hurt company profits.
However, following recent stronger-than-expected economic data and China’s infrastructure development plans, Rio Tinto said it expects growth in China to rebound in the coming months. The company’s CEO Mr Albanese said: “I’m cautiously optimistic about the fact that we’re beginning to see green shoots in China.”
After its upbeat outlook on China and cost-cutting pledges, Rio Tinto’s shares rose 0.7 per cent to A$57.11 in yesterday’s Sydney trading.

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