-- Rio Tinto commits a further $4.2 billion to expanding its iron ore operations
-- Continues to forecast strong medium- to long-term demand for iron ore
-- Takes steps to reduce and re-phase capital expenditure
-- Plans for $16 billion in capital expenditure in 2012 are unchanged
(Recasts the first paragraph, adds detail on Rio Tinto's plans in the second-third, fifth-sixth and eighth-10th paragraphs, and background throughout.)
By Robb M. Stewart
MELBOURNE--Rio Tinto PLC (RIO) shrugged off concerns about faltering demand for iron ore and committed Wednesday to spending a further US$4.2 billion on the expansion of its mining operations in Guinea and Australia's remote Pilbara region.
The investment in iron ore, which will reach US$6.2 billion all in with contributions from joint venture partners, doesn't change plans for capital expenditure to hit US$16 billion this year, although Rio Tinto said it is tightly managing its investment program and is taking steps to reduce and reschedule spending as appropriate.
The money will go toward boosting Rio Tinto's mining capacity in Western Australia to 353 million metric tons a year by mid-2015, and on rail and port infrastructure at the Simandou project being developed in southeastern Guinea with Aluminium Corp. of China Ltd. (ACH).
The Anglo-Australian company, the world's second-largest producer of iron ore after Vale SA (VALE), has consistently held to forecasts for strong demand for the steelmaking commodity despite a fall in the price of iron ore from last year's highs as demand from Chinese steel companies has faltered with a slowdown in the country's economic growth. Concerns over demand have prompted investors to demand Rio Tinto and other major mining companies curtail expansion plans and reduce spending.
"We are directing investment to projects that will generate the most attractive returns for shareholders and are resilient under any probable macroeconomic scenario," said Tom Albanese, chief executive of London-based Rio Tinto.
"Our superior Pilbara iron ore business has one of the highest margins in the industry, low capital intensity of investment and a strong track record of completing projects on time and budget," Mr. Albanese said.
Iron ore is the main earnings driver for Rio Tinto and its Australian competitor BHP Billiton PLC (BHP), and both have plans to invest billions of dollars expanding mining and export capacity in the Pilbara region where they are the number one and two producers. BHP's board is due to decide toward the end of the year on whether to proceed with the development of its Port Hedland port facilities.
"We continue to see positive prospects for medium- to long-term iron ore demand, driven by ongoing growth in Chinese consumption," said Sam Walsh, chief executive of Rio Tinto's iron ore division. "Our Pilbara expansion is already well underway, positioning us to capture the opportunities of this market environment."
Mr. Walsh said annual Chinese steel production is forecast to grow to about 1 billion tons a year toward 2030 from about 700 million tons currently. As demand is rising, however, several projects from competitors have recently been delayed or postponed, he said.
The company said it will spend US$3.7 billion more in the Pilbara to complete port and rail infrastructure over the next four years, build a new gas-fired power station at Cape Lambert and to extend the life of its Yandicoogina mine to 2021. In Guinea, US$501 million will be invested in design studies, early work and buying some items for the rail and port for the Simandou project that is expected to begin producing in 2015, it said.
Write to Robb M. Stewart at email@example.com