Rio to Cut Spending by Half to $8 Billion on Price Decline

Rio Tinto Group, the world’s second-biggest mining company, will cut capital spending to about $8 billion in 2015, less than half its outlay last year, as mineral producers conserve cash after prices fell.

“Our capex is reducing, and will come down further,” Sam Walsh, chief executive officer of London-based Rio, said today in a statement. “From where I stand, we continue to see market fragility and volatility.”

Rio’s cutback underlines efforts by the world’s largest mining companies to rein in spending as a decade-long boom in metal prices wanes. Vale SA, the biggest iron ore producer, yesterday slashed its investment budget for a third straight year to $14.8 billion, the lowest since 2010.

“The capital allocation appears to have fundamentally changed with essential sustaining capex and the progressive dividend ranking ahead of growth,” Deutsche Bank AG analyst Rob Clifford wrote today in a report. “This is a dramatic (positive) change for Rio, if the path is followed.”

The stock fell 1 percent to close at 3,200 pence in London trading. BHP Billiton Ltd., the world’s biggest mining company, declined 1.1 percent at the same time. Rio earlier dropped 0.6 percent to close at A$65.49 in Sydney trading.

“Over the longer term, I remain optimistic about demand for our products,” Walsh said according to the statement. “China’s urbanization will continue and the development of other economies as they continue to grow at pace, such as India, Vietnam, Indonesia, the Philippines, the Middle East, the former Soviet Union, South America and Africa, will also contribute to ongoing demand.”

Shareholder Returns

The cut in spending on new projects and expansions will help Rio strengthen its balance sheet and cut net debt that rose to about $22 billion at June 30, Chief Financial Officer Chris Lynch said today during an investor briefing in Sydney. Reducing debt will be a priority for next year, he said.

“This will result in a very strong balance sheet which will allow the board to make decisions around returns to shareholders and other allocations of capital,” Lynch said. Rio is targeting a net debt reduction to the “mid-teen billions,” he said.

Rio paid a dividend of 83.5 cents in the six months to June 30, up 15 percent on the same period a year ago, the company said in August. It completed a $7 billion share buyback program during the first half of last year.

Pilbara Expansion

Rio, the world’s second-biggest iron ore exporter, last week said an expansion of its operations in Australia’s Pilbara will cost $3 billion less than previously expected to meet its goal of increasing capacity by about 25 percent to 360 million metric tons. Liberum Capital Ltd. estimated spending on the iron ore expansion had dropped to about $2 billion from $5 billion.

“You can see where the cuts are coming from, and that’s really anything outside of iron ore -- they have no interest in ramping up their aluminum or their coal spending,” Evan Lucas, a Melbourne-based markets strategist at IG Ltd., said by phone.

Rio is deferring the A$1.4 billion ($1.3 billion) South of Embley bauxite mine in north Queensland as the company is focusing capital spending on its iron ore and copper business, Walsh told reporters in Sydney. The aluminum, energy coal and industrial minerals units are targeting “improving the cost base” rather than receiving capital allocations for new projects, he said.

Positive Outlook

Talks for an investment framework with Guinea’s government for the development of the $20 billion Simandou iron ore project may conclude late next year or early 2015, Walsh said. He held talks with “finance agencies” in Japan last month as well as the Middle East as the company seeks a third party to help build a rail and port for Simandou.

Rio in August reached an agreement with Guinea that would allow a third party to fully fund the transport links.

Iron ore, Rio’s biggest-earning unit with 91 percent of income last year, entered a bull market in July as users in China replenished stockpiles that shrank in March to the lowest level since 2009.

The market’s supply and demand outlook is positive as producers globally struggle to deliver new tons and demand in China continues to grow strongly, Rio’s iron ore CEO Andrew Harding said during the briefing. Chinese steel demand is set to increase 7.5 percent this year to 700 million tons, Rio said today in presentation slides.

Walsh, who took over in January, completed $3.3 billion in asset sales this year, according to Rio. He plans to cut $5 billion of total costs by 2014 as lower commodity prices trim revenue.

Rio is on track to deliver on its target to cut operating cash costs by $2 billion this year, according to the statement. Rio cut staff by 3,800 employees since June 2012 and another 3,000 jobs have left the business along with divested assets, it said in the statement.

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