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Rio Tinto Expects $3 Billion Saving on Iron Ore Expansion

Rio Tinto iron ore mine
Rio Tinto Group's West Angelas iron ore mine in the Pilbara region in Western Australia. Photographer: Ian Waldie/Bloomberg

Nov. 28 (Bloomberg) -- Rio Tinto Group, the world’s second-biggest mining company, said it will cost $3 billion less than previously expected to meet its goal of increasing iron-ore production capacity in Western Australia by about 25 percent.

Annual capacity will rise by more than 60 million metric tons between 2014 and 2017 to reach 360 million tons, from a base run-rate of 290 million tons by the end of the first-half of next year, London-based Rio said today in a statement.

Rio, the biggest exporter of the steel-making raw material after Vale SA, is expanding to feed recovering demand from China. Mining companies are seeking to cut costs after a decade-long boom in prices waned, crimping revenue. While Rio gave no investment figure, only the projected saving, Liberum Capital Ltd. estimated spending on the expansion had dropped to about $2 billion from $5 billion.

“While promoting a flood of new supply is not encouraging for the iron ore price longer-term, the reality is, in our view, that if Rio doesn’t do it, others will,” Investec Plc analyst Hunter Hillcoat wrote today in a report. “Rio is in the best position to capture market share through its low-cost, world-class assets.”

Rio advanced 3.9 percent to close at 3,261 pence in London trading. It earlier gained 0.2 percent to A$64.42 in Sydney.

Lower Price

“The faster-than-anticipated ramp up makes us more cautious around iron ore in 2015,” Liberum said in a note to clients. The additional production from Rio is equivalent to about 3 percent of global exports and may cut the price by $16 a ton, it said.

Liberum has forecast an average iron ore price of $110 a ton in 2014 and $120 a ton in 2015. The price of 62 percent iron-content ore for immediate delivery at Tianjin port was little changed at $136 a ton yesterday, according to The Steel Index Ltd.

Rio will achieve the expansion primarily by raising production at existing mines and cost improvements through its technology program, together with the proposed future development of the Silvergrass mine, it said in the statement.

“This investment is driven by the attractive long-term fundamentals for iron ore,” Andrew Harding, chief executive officer of Rio’s iron ore unit, said in the statement. “By delivering these additional tons we will capture a greater share of demand.”

The expansion of port, rail and power infrastructure is underway and scheduled for completion in the first half of 2015, Rio said in an e-mail.

To contact the reporters on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net; Jesse Riseborough in London at jriseborough@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net

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