Rio Tinto Slashes Costs as Iron-Ore, Coal Output Hit Records

Rio Tinto Group, the world’s second-largest mining company, beat its 2013 cost-cutting targets as fourth-quarter iron ore production advanced to a record on increased Chinese demand.

Output climbed 7 percent to 55.5 million metric tons last quarter from 52 million tons a year earlier, London-based Rio said today in a statement, in-line with the 55.7 million-ton median estimate of five analysts surveyed by Bloomberg.

Rio cut cash costs by more than $2 billion and halved exploration spending across its suite of commodities to $948 million last year, beating the targets set by Chief Executive Officer Sam Walsh after he replaced Tom Albanese in February following failed aluminum and coal deals. The cuts came even as production of iron ore, thermal coal and bauxite rose to records, Walsh said.

“What Rio is trying to articulate is that it’s delivering on its promises, it has a very solid business and it’s leveraged to the iron ore price,” said Peter Esho, chief market analyst at Invast Financial Services Pty. in Sydney.

About 4,000 jobs have been cut since June 2012, contractor agreements are being renegotiated to lower labor costs and replacement parts for some equipment are being sought from cheaper suppliers in emerging markets rather than original manufacturers, Chief Financial Officer Chris Lynch said last month in a meeting with investors. Rio had 71,000 employees globally in 2012.

China Demand

China, the world’s biggest buyer of raw materials, increased iron-ore imports 10 percent last year, peaking at a monthly record in November as demand held up amid slowing economic growth. Walsh that month approved a 25 percent expansion of iron-ore operations in Western Australia that Liberum Capital Ltd. estimated would cost $2 billion.

Rio advanced 2.1 percent to A$65.58 in Sydney, leaving it little changed over the past year. The price of iron ore for delivery to the Chinese port of Tianjin increased 2.1 percent in the fourth quarter from a year earlier, averaging $134.85 a dry ton.

The price fell to a six-month low on Jan. 14, dropping below $130 a ton for the first time since August on expectations Chinese demand will slow before the Lunar New Year holiday and as Goldman Sachs Group Inc. forecast further declines. Walsh said in an interview last month he expects prices to drop this year.

Iron Ore

A surplus of supply will emerge in the second quarter as production outweighs demand, Goldman Sachs said Jan. 12, predicting prices will average $108 a ton this year. Credit Suisse Group AG said Jan. 6 it expects a “significant correction” as miners including Rio and Fortescue Metals Group Ltd. push the worldwide glut to 42 million tons this year.

Rio is the biggest exporter of the steelmaking ingredient after Brazil’s Vale SA, generating $24 billion in sales of the raw material in 2012 primarily at its Australian operations.

China is the biggest buyer of iron ore, representing about 60 percent of global demand. The nation’s gross domestic product may have expanded 7.6 percent in 2013, the slowest pace in 14 years, according to a State Council report in late December. Growth may fall to 7.4 percent in 2014, the median estimate of 48 economists in a Bloomberg News survey showed last month.

Walsh told investors in London last month that Rio had completed a drive a month ahead of schedule to trim annual costs by $2 billion. The initiative is part of a wider objective to reduce expenses $5 billion over two years, a plan where Rio now has “rolling momentum,” Walsh said in a December interview.

Production Records

“These actions, together with lower capital expenditure in 2013 and beyond, will ensure that Rio Tinto is well positioned to deliver greater value to shareholders,” he said today in the statement.

Rio’s attributable thermal coal production was a record 26.8 million tons in 2013, up 12 percent from the year before. Production of bauxite, used to make aluminum, climbed 10 percent to a record 43.2 million tons.

Rio produced 173,000 tons of mined copper in the quarter, up 5 percent on a year earlier, beating the 139,000-ton median estimate of three analysts surveyed by Bloomberg. Refined copper output fell 6 percent to 81,000 tons.

Recovery of operations at the Bingham Canyon copper mine in Utah is progressing “better than originally planned,” after the site suffered a pit wall failure in April, the company said.

The world’s largest mining company is BHP Billiton Ltd.