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Rio Tinto Targets $5 Billion Spending Cuts, Output Lift

Rio Tinto Group, the world’s second-largest mining company, said it’s targeting savings of $5 billion by the end of 2014, while simultaneously boosting production at its iron ore, copper and alumina units.

“We are taking further tough action to roll back the unsustainable cost increases of the past few years,” Tom Albanese, chief executive officer of the London-based company, said today in a statement. “Our two most challenged businesses are aluminum and coal, and in particular Australian coal,” he later told reporters in Sydney.

Rio Tinto plans to cut the $5 billion in operating and support costs compared with expected costs this year, joining mining companies including BHP Billiton Ltd. in seeking cost savings as well as curbing investment on new projects as metal demand wanes. Rio last month said it’s delaying investment decisions in commodities such as coal while continuing spending on its Australian iron ore expansion.

“Those two businesses are potentially loss-making where commodity prices currently are, which is clearly not sustainable,” Prasad Patkar, who helps manage about A$1.1 billion at Sydney-based Platypus Asset Management Ltd., said by phone. “Banking on a sharp recovery would be foolish at this stage so the only thing managements can do is to aggressively take costs out.”

Rio rose 0.9 percent to A$57.18 at the close of trading in Sydney as the benchmark S&P/ASX 200 index gained 0.7 percent.

Phasing Projects

Australian coal mines are grappling with the dual pressures of falling prices and a high Australian dollar, rendering their product less competitive for export. The price of thermal coal, used to generate electricity, fell to a three-year low this month, Newcastle coal futures show.

While Rio isn’t ruling out shutting down businesses with poor cash flow, the $5 billion cost savings program will likely focus on continuing operations, Albanese said separately in a briefing with investors in Sydney. Phasing projects is an option to achieve the cost cutting target, he added.

Rio is continuing its review on the Gove bauxite and alumina operations in Australia’s Northern Territory and may decide to halt the project should it fail to ensure the supply of cheaper natural gas to power the refinery, Albanese said.

“Ten, 11 years of high commodity prices and focus exclusively on getting the product out irrespective of what the cost was, means that there should be plenty of opportunity to tighten the belt,” said Patkar. “Mine closures would absolutely be on the agenda. BHP has already done it with a couple of their coal mines.”

Asset Sales

Rio in October last year said it planned to sell 13 aluminum assets to improve the group’s financial performance. Aluminum was Rio’s second-biggest unit by sales last year, generating 18 percent of revenue, while it accounted for 2.7 percent of profit, data compiled by Bloomberg shows.

Production capacity at iron ore mines, Rio’s most profitable unit, in Australia’s Pilbara has increased by 7 million metric tons to 237 million tons, Rio said in the statement. Planned expansion has been increased 7 million tons to 360 million tons by 2015. Output of copper and alumina will also rise as the Oyu Tolgoi copper-gold mine in Mongolia starts production in the first half of next year and the Yarwun 2 alumina refinery ramps up, Rio said in the statement.

Work at the $10 billion Simandou iron ore project in Guinea is continuing, Albanese told reporters. Simandou, scheduled to start production in 2015, is a high-grade project that would benefit the company because grades at ore-rich mines in South America are expected to start falling in coming years, he said.

Profit Drop

Rio, which last year got 44 percent of sales from iron ore, posted a 22 percent drop in first-half net income after prices for the material fell along with copper and aluminum. The price of iron ore, the biggest revenue generating unit for both Rio and BHP, so far this year is about 23 percent lower on average compared with a year earlier.

The commodity will fetch an average of $125 a metric ton in the first quarter next year before rising to $132 a ton in the quarter after that, according to the average of nine estimates compiled by Bloomberg. It closed yesterday at $117.90 a ton, according to data from the Steel Index Ltd.

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