RIO Rio Tinto Plc

Rio Tinto PLC, facing an uncertain market outlook, said it would spend even less than anticipated on projects this year and step up a productivity offensive.

Chief Executive Jean-Sé bastien Jacques said Thursday that while he is cautiously optimistic on China—the world's top buyer of commodities such as iron ore and copper—reforms there to reduce capacity in industries such as coal and steel make the market less predictable.

The world's No. 2 miner by market capitalization said project spending in 2016 will be less than US$3.5 billion, down at least 13% from the previous forecast of around $4 billion—and a shadow of the more than $17 billion it spent in 2012, as a decadelong commodity-price boom turned bust. In the years since, mining companies have slashed spending on projects and exploration.

Still, 2016 should be the low for Rio Tinto. It retained forecasts of US$5 billion and US$5.5 billion for the coming two years, respectively.

The company is an outlier among global miners in planning new projects for the years ahead, hoping to be in pole position when markets recover. It is advancing iron-ore and bauxite developments in Australia and a copper mine in Mongolia.

Rio Tinto expects China to remain an engine of commodity demand for years to come.

"Everything being equal, the underlying Chinese economy is going well," said Mr. Jacques. "There is lots of cash put into the economy."

Government industrial-reform plans could end up being good or bad for steel-related commodities such as coal and iron ore, he said. After Beijing placed restrictions on coal miners there in April, prices for some types of coal more than tripled.

"We have been surprised by what the Chinese government did in the coking-coal market. Nobody saw it," said Mr. Jacques. "The big uncertainty we are facing today in relation to China is the pace of restructuring of the state-owned enterprises."

Since the price surge, Chinese authorities have been relaxing rules on miners to cool the market. Credit Suisse called the restrictions "an embarrassing own-goal" for policy makers in a Nov. 21 note.

Rio Tinto reaffirmed plans to return 40% to 60% of underlying earnings to shareholders over the long term as it doubles down on productivity.

The miner said it expects in the next five years to generate $5 billion of additional free cash flow—a measure of cash generated from operations minus investments—from a push to improve its operations. It recorded $2 billion in free cash flow in the first six months of this year.

Rio Tinto said the cash-flow drive was in addition to its effort to cut costs by $2 billion across this year and next, which Mr. Jacques said was on track. The company said it has been reducing costs by running trucks harder and making processing plants more efficient.

Speaking at an analyst briefing in Australia, Mr. Jacques declined to comment in depth on a probe into payments associated with a massive iron-ore deposit in Guinea called Simandou, which this month triggered the firing of two top executives.

"Recent events related to Simandou have been very challenging," he said, adding that "we cannot say any more than our public statements as it is now with the relevant authorities."

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com

(END) Dow Jones Newswires

November 24, 2016 00:05 ET (05:05 GMT)

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