Rio Tinto to Press Ahead with $5bn Iron Ore Expansion Plan

on May 7, 2013

**Pilbara Iron Ore Output To Be Increased by 70 Million Tonnes**

*The Financial Times* reported on Tuesday, May 7, that London-based miner Rio Tinto Group (LON:RIO, ASX:RIO) was set to proceed with a multibillion-dollar expansion plan. The world’s second biggest miner was ready to spend $5 billion to increase iron ore output in Western Australia, Rio’s Chief Executive Officer Sam Walsh had said, according to two sources present at a meeting with investors and analysts held in Sydney on Monday, May 6.

At the meeting, Walsh had told investors that a plan to increase annual output from Rio’s Pilbara mines to 360 million tonnes by 2015 would be put for approval before the company’s board later this year. The London-based miner has already approved spending to lift annual production at the Australian mines to 290 million tonnes by the third quarter of 2013 and has built port and rail facilities to handle the rise in output to 360 million tonnes.

According to the inside sources of the FT, who had asked not to be identified because the meeting they had attended was not open to the media, Walsh had added that unless there were significant changes to the global demand-supply situation, Rio’s board was likely to give the green light to the expansion plan. The FT quoted one of the sources as saying: “There would have to be a major structural change in the iron ore market or a black swan event for Rio not to push ahead with this project.”

**Analysts and Investors Question Move amid Iron Ore Surplus Concerns**
Iron ore mining is Rio Tinto’s most profitable business and it is expected to generate 85 percent of the group’s earnings before interest this year. But some analysts and investors have questioned the wisdom of going ahead with expansion plans at a time when the global iron ore market is expected to move into

On Tuesday, *Bloomberg* quoted JPMorgan Chase & Co. analysts as saying in a report: “Walsh did say shareholder feedback on whether or not to go ahead with the project is mixed, based on the potential impact on prices.” The CEO had told the gathering that the planned output boost was unlikely to result in a price decline of $20 a tonne.
Global iron ore inventory is set for its first surplus in at least a decade as output expands and concerns about slowing economic growth in China, the world’s biggest buyer of the steelmaking material, have pushed the benchmark iron ore price lower from the $159 a tonne reached in February. According to data from The Steel Index Ltd, iron ore last traded at $128.10 a tonne.
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Rio Tinto is expected to contribute to the surplus trend with its expansion plans unless a change in the supply-demand balance for iron ore occurs. Some analysts have been forecasting that a supply glut of as much as 120 million tonnes could surface by 2015 if expansions by Rio Tinto and other miners are completed. Rival Australian miners BHP Billiton (LON:BLT) and Fortescue Metals Group (ASX:FMG) have also disclosed plans to expand production from their iron ore mines in the Pilbara.
**Rio Tinto’s Share Price Up More Than 2%**
Following media reports about Rio Tinto’s expansion plans, the company stock gained more than two percent during early trading in London on Tuesday. As of 09:07 GMT on May 7, the Rio Tinto share price was 3,094.50p, 2.38 percent up on its previous trading day’s closing level. As of the same time, the miner’s Australian-listed shares were trading 2.12 percent higher at A$57.39.


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