June 20, 2012 / 5:33 AM / 6 years ago

Rio Tinto approves $3.7 billion Australia iron ore expansion

SYDNEY (Reuters) - Rio Tinto (RIO.AX) (RIO.L) will spend $3.7 billion to boost its Australian output of iron ore, its most profitable business, shrugging off forecasts of waning demand and a looming global supply glut as Chinese manufacturing slows.

An employee talks to a visitor at the reception desk of the Rio Tinto Limited Shanghai Representative Office in Shanghai August 5, 2010. REUTERS/Stringer

The spending to increase iron ore production by 25 percent by 2016 is the lion’s share of $4.86 billion in capital outlays approved by Rio’s board and announced on Wednesday.

Rio, the world’s second-largest miner of iron ore after Brazil’s Vale VALE5.SA, currently runs its mines at an annual rate of 230 million metric tons (253.5 million tons) and had already put in place work to take output to 283 million metric tons.

At an expanded rate of 353 million metric tons, Rio’s Australian mines would be supplying nearly a third of the world trade in iron ore.

Board approval comes despite pressures mounting in the sector to curb capital spending and return more cash to shareholders jittery over slowing global growth.

“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,” Chief Executive Tom Albanese said in a statement.

The expansion will cost $5.2 billion all up, with $1.5 billion coming from joint venture partners in the mines.

Rio also said it had committed a further $501 million to fund its share of infrastructure development at its Simandou iron ore prospect in Guinea, a joint venture with China’s Chinalco. It is also spending $660 million to mine more copper at its Bingham Canyon mine in Utah.

HEFTY MARGINS

But it is iron ore that has become gold for mining companies. The ore sells for around $135 a metric ton .IO62-CNI=SI but for big producers like Rio Tinto costs only about $30 to produce, delivering hefty profit margins.

Rio is pushing ahead at the same time that BHP Billiton (BHP.AX)(BLT.L) and Fortescue Metals (FMG.AX) have major expansions underway nearby in the Pilbara iron belt.

Along with a raft of smaller miners trying to develop projects, this has spawned worries the market will be over-supplied within the next two years.

Mining companies such as Rio, BHP and Xstrata XTA.L have stressed a need to maintain investment in new projects even during downturns in commodities prices and demand cycles.

BHP last month scrapped a five-year, $80 billion capital spending plan, citing uncertain global economic conditions, but is yet to reveal which projects will get the chop.

Similar to Rio, BHP has long maintained that it is committed to keeping its single-A credit rating, another constraint on spending.

But even while indicating Rio is prepared to open its wallet wide to become an even bigger player in iron ore and copper, Albanese pointed to belt tightening as well by “retaining flexibility and taking steps to reduce and re-phase capital expenditure as appropriate.”

Longer-term expectations for iron ore are positive, Rio iron ore chief Sam Walsh said in the statement, avoiding assessment of short-term demand from China, both Rio’s and BHP’s single biggest buyer.

“We continue to see positive prospects for medium- to long-term iron ore demand driven by ongoing growth in Chinese consumption,” he said.

Reporting by James Regan; Editing by Lincoln Feast and Ryan Woo

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