UPDATE 1-Rio Tinto to axe costs, cautiously optimistic on China growth

Wed Nov 28, 2012 5:41pm EST

* Rio says to cut $5 bln in costs by end 2014

* Iron ore expansion on budget for 360 mln t/yr by 2015

* Guardedly optimistic on China demand

MELBOURNE/SYDNEY Nov 29 (Reuters) - Global miner Rio Tinto will slash costs by $5 billion over the next two years as commodity prices tumble, but said it was cautiously optimistic on China's outlook and was sticking with plans to expand its lucrative Australian iron ore operations.

Rio Tinto is the only global iron ore producer that has not slowed iron ore expansion plans, forging ahead with $21 billion in mine, port and rail work to boost its Australian capacity.

But like its peers, Rio has been cutting costs, reviewing other projects and closing coal mines in Australia due to slumping commodity prices, soaring costs and the persistently strong Aussie dollar.

"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," Rio Chief Executive Tom Albanese said in notes for an investor seminar.

Rio said it is aiming to cut more than $5 billion of operating and support costs by the end of 2014, and would cut spending on exploration and evaluation projects by $1 billion over the rest of 2012 and 2013.

Much of the cost cuts would come in its coal and aluminium assets, Albanese told reporters.

It also plans to cut spending on sustaining operations by more than $1 billion in 2013.

In August, the world no.2 iron ore miner had said it expected capital spending on all its projects to peak in 2012 at $16 billion, with its share of that at $13.6 billion.

Highlighting its advantage over other iron ore producers, Rio said its cost per tonne of iron ore would fall from $47 a tonne delivered to China, including royalties, shipping and sustaining capital costs, once its infrastructure expansions are completed.

While all iron ore producers are suffering from this year's drop in iron ore prices, which are now around $118 a tonne or more than 20 percent below this year's high, the revenue blow will be cushioned for Rio Tinto as it is producing more tonnes.

Rio was on track to reach 290 million tonnes a year by the fourth quarter of 2013 and expand capacity to 360 million tonnes by 2015, the company said, adding the project in Western Australia's Pilbara region remained on time and on budget.

Rio remained cautiously optimistic about a pick-up in growth in China, its biggest customer, following a recent string of stronger-than-expected economic indicators.

"The short-term macroeconomic outlook remains volatile, with major uncertainties around future U.S. and European economic growth. However, Rio Tinto is guardedly optimistic on China's prospects," Rio said.

As it shrinks to focus on its largest, highest-returning businesses, Rio Tinto has been looking to cast off its Pacific Aluminium unit and its diamonds business but has yet to decide how to get rid of those units.

It put the diamonds business on the block earlier this year soon after BHP Billiton, which managed to sell its Ekati diamond operation to Harry Winston earlier this month for $500 million. Harry Winston is a co-owner of Rio's Diavik diamond mine in Canada.

Albanese said the sale of its units was still under review.

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