Rio Tinto, BHP Billiton to cut spending

May 3, 2012

Escalating costs, questions about future demand and pressure from shareholders have prompted mining giants Rio Tinto and BHP Billiton to announce that they plan to cut costs and focus on high-margin projects.

Tom Albanese, Rio Tinto’s chief executive officer spoke at a conference in Sydney, Australia and said Rio Tinto will prioritize its projects and focus on high margin project such as the expansion of its iron ore operations in Western Australia. The company will also push back, or even delay, new developments, The Financial Times reported.

One project under immediate threat, according to The Financial Times, is the $2 billion Mount Pleasant coal project in New South Wales, where a decision on whether to build the mine will be taken later this year. Others that could be delayed include expansion of the Simandou iron ore development in Guinea as well as the extension of the Weipa bauxite mine in Queensland.

BHP Billiton announced similar plans and is re-evaluating its investment plans.

BHP Billiton said it will “stagger” and slow development of three mega projects, including the $20 billion expansion of the Olympic Dam Mine in South Australia.

Concerns about spending and growing uncertainty about demand from China have dogged the mining sector in recent months. But analysts believe the new focus on capital discipline could drive a rerating of mining stocks.

In a speech to an equities conference organized by Macquarie, Albanese highlighted some of the difficulties of doing business in Australia.
“Coal is an increasingly difficult business here in Australia. Labor rates, capital costs, the carbon tax make it really hard to take that business forward,” he said. Rio recently withdrew from a $9 billion project to develop the Abbot Point coal terminal, also in Queensland.

Analysts estimate the capital, or start-up costs, for the Mount Pleasant project, which would create about 350 jobs and produce 10.5 Mt/a (11.5 million stpy) of thermal coal, have doubled from $800 million to $1.6 billion over the past four years.

The Financial Times reported that Rio Tinto remained committed to the $10 billion expansion of its iron ore operations in Western Australia, where it is looking to increase output to 353 Mt/a (389 million stpy) a year, up from 283 Mt/a (312 million stpy), which has already been approved.
“We see this as by far the most attractive iron ore expansion opportunity in the world and we have stress tested it in every direction,” Albanese said.

Rio is able to take a “phased” approach to the expansion of its operations in Pilbara unlike BHP, which will have to finance the construction of a new outer harbor at Port Hedland to increase output.

Analysts said Rio will also go ahead with a phased expansion of Oyu Tolgoi, the Mongolian copper-gold mine and complete existing projects.



Related article search: