Expansion to cement Rio's position as No1 in iron ore

RIO TINTO will spend a further $US3.4 billion ($3.15 billion) cementing its position as Australia's biggest producer of iron ore.

By InvestSMART · 9 Feb 2012

By InvestSMART ·
9 Feb 2012

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RIO TINTO will spend a further $US3.4 billion ($3.15 billion) cementing its position as Australia's biggest producer of iron ore.

Expansion funding for the company's most lucrative division came as Rio's locally listed shares rose strongly on the ASX ahead of tonight's full-year financial results.

A sharp afternoon rally came amid speculation Rio may do better than analysts predictions of a $US15.3 billion profit for the year to December 31.

The 75? rise to $71.76 was also aided by speculation the company may seek to differentiate itself from BHP Billiton today by offering another round of share buybacks.

Tonight's results will again be dominated by Rio's iron ore business, which has in recent times contributed close to three-quarters of the company's profits.

That exposure will only increase under the $US3.4 billion plan, which will first raise Rio's iron ore exports to 283 million tonnes per year and will help start preparations for a jump to 353 million tonnes a year.

A portion of the money had been previously announced in October 2010, but the bulk of it - particularly a $US2.2 billion spend on extending the life of the Nammuld mine - was newly announced yesterday.

The money will also cover preparations for expansion at Rio's Cape Lambert port and rail complex.

It is owned by Robe River Iron Associates, a Rio Tinto-controlled joint venture with Japanese firms Mitsui Iron, Nippon Steel and Sumimoto Metal, and the spending plan is subject to further approvals.

Rio's Iron Ore boss, Sam Walsh, said production should rise from the current 220 million tonnes a year to 283 million tonnes by late next year. A rise to 353 million tonnes is scheduled to be finished by June 2015.

Rio also announced yesterday that John Varley would join its board as a senior independent director of both its local and London-listed stocks.

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Frequently Asked Questions about this Article…

What is Rio Tinto's US$3.4 billion expansion and why does it matter to investors?

Rio Tinto announced a US$3.4 billion (about $3.15 billion) expansion aimed at cementing its position as Australia’s biggest iron ore producer. For investors this matters because the spending boosts production capacity, increases exposure to the company’s most profitable division, and could influence earnings, dividends or capital returns.

How will the US$3.4bn plan change Rio Tinto's iron ore production targets?

Under the plan Rio Tinto expects to raise iron ore exports from the current 220 million tonnes a year to 283 million tonnes by late next year, with preparations underway to further lift capacity to 353 million tonnes a year by June 2015.

What specific projects will the expansion funding be used for?

The package covers previously announced work plus new spending, notably a US$2.2 billion program to extend the life of the Nammuldi mine and preparations to expand the Cape Lambert port and rail complex. Part of the funding was first flagged in October 2010 and the broader plan is subject to further approvals.

How did investors react to the expansion news and Rio Tinto's upcoming results on the ASX?

Rio Tinto’s locally listed shares rose strongly on the ASX ahead of the full‑year results, reaching $71.76. The rally was driven by speculation the company might beat analysts’ profit forecasts and by talk of possible further capital returns.

Is Rio Tinto likely to announce more share buybacks?

The article notes market speculation that Rio Tinto may offer another round of share buybacks—partly to differentiate itself from peers such as BHP Billiton—but this was not confirmed and would remain a company decision.

How important is iron ore to Rio Tinto’s overall profits?

Iron ore has been dominant for Rio Tinto recently, contributing close to three‑quarters of the company’s profits. The new expansion would further increase that exposure to the iron ore business.

Who owns the projects targeted by the expansion and who are the joint venture partners?

Some of the assets are owned by Robe River Iron Associates, a Rio Tinto‑controlled joint venture that includes Japanese partners Mitsui Iron, Nippon Steel and Sumimoto Metal. The spending plan is subject to further approvals by the joint venture.

Who joined Rio Tinto’s board during the announcement and what is their role?

Rio Tinto announced that John Varley would join its board as a senior independent director for both its local (ASX) and London‑listed stocks, providing additional independent oversight at board level.