* Rio Tinto extends timetable to expand in iron ore
* Rio eyes 20 pct growth over 3 years
* New schedule will save $3 billion
* Rio's London shares climb 3 percent
* Australian boost seen hitting West Africa's iron ore ambitions
By James Regan and Clara Ferreira-Marques
PERTH/LONDON, Nov 28 (Reuters) - Miner Rio Tinto has delayed the expansion of its iron ore operations in Australia to 2017, slowing growth and cutting costs with a revised plan which it says will save $3 billion by working existing mines harder instead of digging new ones.
Rio, which makes the lion's share of its profits from iron ore, still plans to boost production, but more efficiently, at a time when heavyweight rivals BHP Billiton and Vale are doing the same.
Previously the company had been expected to increase its iron ore production capacity in Western Australia from around 260 million tonnes a year currently to 360 million tonnes by the end of the first half of 2015, but the plans were stalled after iron ore prices took a dive last year.
Under a new plan outlined on Thursday, management said its infrastructure could still be ready to handle an annual 360 million tonnes by 2015 but the full ramp-up in production would take longer as it has deferred development decisions on new mines in the region such as Silvergrass and Koodaideri, while lifting output from "brownfield" sites.
Ahead of two days of investor presentations, Rio said the newly approved plans will still increase production capacity by 20 percent by 2017 but much of the low-cost growth will come onstream by 2015, when annual output is expected to reach over 330 million tonnes.
That compares with a production run rate of 290 million tonnes per year in the first half of next year.
However, some Rio shareholders have expressed misgivings about a production boost, fearing it would flood the market with iron ore and hit prices if demand fails to keep up.
Analysts at Liberum said the 40 million tonnes of extra capacity in 2015 amounted to 3 percent of the seaborne market, and more than half of expected incremental Chinese growth that year.
But investors welcomed the cost-cutting plan on Thursday, sending Rio's shares up almost 3 percent to 3,229.5 pence in London morning trade, outperforming a 0.1 percent rise in the FTSE 100 index.
Like other major miners, Rio has come under pressure from investors to cut spending, slash debt and boost returns as commodity prices cool and has faced doubts over whether it should go ahead with riskier projects like its Simandou iron ore mine in Guinea, after facing hurdles in Mongolia.
"Whilst increased production could affect market dynamics, expanding existing facilities will be seen as far lower-risk capital expenditure compared to new greenfield adventures, such as the Guinea and Mongolian projects," said one of Rio's 10 largest investors.
The Australian expansion will deliver more than 60 million tonnes of output a year by 2017 from a base of 290 million tonnes, but Rio will still face tough competition from rivals. Vale is targeting 480 million tonnes a year by 2018, up from 306 million this year.
"They've been able to take a leaf out of BHP's book and squeeze the lemon," said UBS analyst Glyn Lawcock, referring to moves by Rio Tinto rival BHP to maximise its production.
Under the new plan Rio has approved $400 million of spending on plant equipment and additional heavy machinery to support the work in Australia's Pilbara iron ore belt as it boosts productivity while saving on new mine developments.
"The market will say that's $3 billion less to spend. That means debt will come down quicker and you start thinking about potential for capital management a little bit sooner," said Lawcock, referring to a potential dividend or share buyback.
Des Kilalea at RBC Capital Markets in London said the plan was unlikely to surprise many Rio watchers, but was bad news for emerging iron ore players and projects like Rio's own in Guinea, one of the largest untapped deposits in the world.
"BHP has an expansion prgramme, Fortescue too, and Vale - with all these expansion plans there is not an awful lot of room for anyone else in the next three to five years to put material tonnes on the market, particularly West Africa," he said.
"Iron ore is basically about getting a return on a logistics system. Rio may not have the best mines in the industry, but they have a Rolls Royce logistics system (in Australia)."
Iron ore prices hit a low of around $80 a tonne in 2012, but currently sells for $136 a tonne , giving Rio Tinto a cash profit margin of about $100 a tonne.
"By delivering these additional tonnes we will capture a greater share of demand and ensure we continue to enjoy the best returns in the industry," said Andrew Harding, Rio Tinto Iron Ore's chief executive.
Rio's chairman Jan du Plessis last week said the company held plans to mine iron ore in Australia until at least 2067 and expects to eventually become the world's biggest iron ore miner.