Rio Tinto to cut costs, focus on iron ore business

November 29, 2012

In the face of weaker commodity prices Rio Tinto plans to cut costs by $7 billion and sell more assets over the next two years. However, Rio Tinto will continue to push ahead in its iron ore business with $21 billion planned in mine, port and rail work in Australia.

The firm is the only global iron ore producer that has not slowed iron ore expansion plans.

“For me the theme for this year, next year and probably the extended period beyond that in this volatile environment will be everything having to do about cost control,” Rio Chief Executive Tom Albanese told reporters ahead of an investor seminar, Reuters reported.

With the efficiency drive, the firm has managed to find ways to lift its iron ore capacity just by tweaking mine, rail and port operations, and said it expected to find further gains without big licks of capital.

“With our available spot tonnage growing significantly with our expansions, outselling others will bring substantial business value,” Rio Tinto's iron ore chief, Sam Walsh, said.

For some, Rio Tinto’s dependence on its iron ore business, making up 83 percent of the group’s underlying earnings last year, is seen as a weakness, next to the more diversified base of top global miner BHP Billiton.

But Albanese and his lieutenants waved off concerns, highlighting the superior margins Rio reaps from iron ore, despite uncertainty over the near term outlook for demand from the biggest consumer, China.

“I do believe we have an iron ore business without peer,” Albanese said. “I will never apologize for the quality of our iron ore business.”
Rio’s cost per tonne of iron ore would fall to just over $35.50 from $47 delivered to China, including royalties, shipping and sustaining capital costs, once its infrastructure expansions are completed, said iron ore chief Walsh.

Despite the challenges of higher labor and service costs and the strong Aussie dollar, Rio Tinto said it has boosted the efficiency at its iron ore operations, so it now expects to reach a production capacity of 290 Mt/a (320 million st) by the end of 2013, up from a target of 283 Mt/a (312 million stpy).

The company said it is aiming to cut more than $5 billion of operating and support costs by the end of 2014, and would cut spending on exploration and evaluation projects by $1 billion over the rest of 2012 and 2013.

Much of the cost cuts would come in its coal and aluminium assets, Albanese said, adding that support costs in Australia had become the most expensive in the world, compared with five years ago when they were among the cheapest. It also plans to cut spending on sustaining operations by more than $1 billion in 2013.


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