SYDNEY (Reuters) - Rio Tinto (RIO.AX) is pushing ahead with plans to boost iron ore output over the next 18 months, as it counts on demand from Chinese steel mills holding up, but the miner is assessing if it can meet the target using existing mines to control costs.
The plans show global miners such as Rio Tinto (RIO.L) and rival BHP Billiton (BHP.AX), while focused on costs, feel the risks to the iron ore operations from a slowing Chinese economy are manageable and that their low operating costs will keep the business profitable even in a downturn.
Rio Tinto said on Tuesday infrastructure work was “currently underway” to expand its iron ore production capability to 360 million tonnes a year by the end of 2014, estimated by analysts to carry a $5 billion (3.3 billion pounds) price tag.
The extra iron ore, could come from either new mines, or from extra tonnes out of existing mines, Rio said in its second-quarter production report. It had previously been expected to look only at digging new mines to reach that output level.
Like all miners, Rio Tinto is under pressure to reduce spending as prices of commodities cool and the so-called ‘mining boom’ fades. The company has earmarked up to $5 billion in cost savings over the next two years.
“With the way markets for mining are going, Rio Tinto will be looking at working the assets it already has up and running much harder,” said Gavin Wendt, an analyst for MineLife in Sydney. “Why take on the added costs of digging new mines in this environment?”
Rio Tinto posted its first ever net loss in 2012 of almost $3 billion after writing down the value of aluminium and coal assets by $14 billion.
BHP BLT.L and Fortescue Metals Group (FMG.AX) are also pushing ahead with plans to boost iron ore output in Australia.
Rio Tinto and BHP are among the most efficient iron ore producers in the world. At prices of around $120 a tonne, each enjoys a margin of around $70 per tonne.
Spot iron ore prices .IO62-CNI=SI this week edged up to two-month highs, backed by Chinese steel mills replenishing inventories, although the pace of restocking may have slowed, suggesting a two-week rally may soon end.
Rio Tinto, the world no. 2 producer of the steelmaking raw material, said it was proceeding with expansion work in Australia to lift annual operating capacity to 290 million tonnes by the end of September.
Production guidance for calendar 2013 was unchanged at 265 million tonnes, taking into account additional ore from the expansion in the fourth quarter.
The Anglo-Australian miner’s optimism comes even though China’s economy cooled further in the second quarter, leading to June iron ore imports by the world’s top user dropping 9.1 percent to a four-month low.
A Reuters poll this month pointed to a shaky Chinese economy and greater global supplies of iron ore pushing down spot prices in the second half of 2013, driving the annual average to its lowest since 2009.
Taking into account joint ventures, Rio Tinto’s iron ore output rose 7 percent to 66 million tonnes in the three months to the end of June versus a year ago.
Shipments, however, rose just 1 percent over the period to 61 million tonnes due to a temporary breakdown of a conveyor system at a loading dock, and unseasonable rains slowed operations further.
Heavy rains drenched large tracts of Australia’s iron ore-rich Pilbara region in June, with some parts experiencing the wettest June in more than 70 years, according to weather data.
RBC Capital Markets termed the quarterly figures “sound” and slightly ahead of consensus.
Rio’s shares rose in Sydney and in London on Tuesday, with Britain’s FTSE 100 nudging higher on easing concerns about the mining sector on the back of the production data and outlook.
Iron ore generates about two-thirds of Rio Tinto’s revenue. Copper is the next biggest revenue generator.
BHP Billiton is also expected to post a slowdown in quarterly iron ore production gains on Wednesday due to the rains, offset to some degree by its own expansion work.
Rio Tinto also said a faster-than-expected recovery was underway at its Bingham Canyon copper mine in the United States after a landslide, with projected full-year mined and refined copper yields improving by 25,000 tonnes over previous estimates.
Editing by Muralikumar Anantharaman