Rio Said to Pursue $5 Billion Iron-Ore Project as Glut Looms

Rio Tinto Group, the world’s second-biggest miner, will probably pursue a $5 billion expansion of its iron ore output in Australia, Chief Executive Office Sam Walsh said, according to two people present at a meeting with investors and analysts.

The board is expected to approve in the fourth quarter an increase in annual production to 360 million metric tons from 290 million tons unless there are significant changes to the global demand-supply situation, Walsh told the gathering, the people said. Chief Financial Officer Chris Lynch in Sydney also attended, said the people, who asked not to be identified because the meeting yesterday wasn’t open to the media.

Iron ore is set for its first surplus in at least a decade as output expands and Chinese mills, the biggest buyers, boost production at the slowest pace in five years. A deferral of Rio’s expansion would help keep the iron-ore market stable until 2018, underpinning prices, according to a Citigroup Global Markets Ltd. report last week.

“Walsh did say shareholder feedback on whether or not to go ahead with the project is mixed, based on the potential impact on prices,” JPMorgan Chase & Co. analysts led by Lyndon Fagan said in a report after the meeting. The CEO told the meeting that the additional tonnage of 70 million tons was unlikely to result in a $20 ton price decline, they said.

Rio gained 2.1 percent to A$57.39 at the close of trading in Sydney. BHP Billiton Ltd., the world’s biggest mining company, rose 2.4 percent.

‘Unrelenting Focus’

David Luff, a Melbourne-based spokesman for Rio Tinto, declined to comment on the expansion. Rio held briefings in Sydney yesterday before the company’s Australian leg of its annual meeting on May 9.

Since Walsh, 63, took over in January, Rio has announced plans to sell assets and reduce $5 billion of costs as lower commodity prices cut revenue. Citigroup analysts Heath Jansen and Jon Bergtheil questioned Rio’s pursuit of the iron ore expansion after Walsh said in February that the London-based company would pursue an “unrelenting focus” to increase shareholder value.

The steelmaking ingredient was Rio’s most profitable unit last year, providing 78 percent of earnings before interest, tax, depreciation and amortization, according to data compiled by Bloomberg.

Emerging Surplus

Seaborne supply of iron ore will gain 9.1 percent and demand 8.3 percent in 2013, led by exporters from Perth-based Fortescue Metals Group Ltd. to Vale SA, Morgan Stanley forecasts. A surplus will emerge in 2014 and keep widening until at least 2018, the bank predicted in April.

Prices may decline to $115 a ton by the end of December, according to the median of 10 analyst estimates compiled by Bloomberg. Iron ore last traded at $128.10 a ton, according to data from The Steel Index Ltd.

“The conversation” about the expansion was “increasingly caveatted,” according to a May 6 report from analyst Adrian Wood at Macquarie Securities (Australia) Ltd. “From seemingly being a foregone conclusion only six months ago, it now appears that” the expansion “will go through a perhaps more onerous review process towards the end of the year with the outcome now more dependent on the iron ore market outlook,” he said.

An expansion of Rio’s iron-ore mines in Australia’s Pilbara region to 290 million tons a year is expected to be completed in the third quarter, the company said in February. The second increase to 360 million tons will be operational in the first six months of 2015, it said.

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