Rio Tinto committed to increasing its annual iron-ore output in Australia by around 25%, but said the expansion would cost less than originally planned and take longer than expected.
The move represents a bet on China's future demand for iron ore, despite its economy stuttering in recent months and analysts' forecasts for a steady fall in the price of the steelmaking commodity in coming years. China imports around 60 per cent of the world's iron ore to make steel for use in everything from the skyscrapers to luxury sedans.
Rio Tinto said it would focus on expanding existing mines as it looked to increase its production capacity in the Pilbara region to 360 million tons of iron ore a year. By targeting those mines first, Rio Tinto said it would save more than $US3 billion in costs compared to its original expansion plans.
Rio Tinto will spend $400 million to fund the expansion, which will increase mine production capacity by more than 60 million tonnes a year between 2014 and 2017.
The rapid expansion is expected to be achieved through boosted production at existing mines, productivity gains and the development of the Silvergrass mine.
"The majority of the low-cost growth will be delivered in the next two years with mine production of more than 330 million tonnes in 2015," Rio said in a statement.
Rio plans to reach a run-rate capacity of 290 million tonnes per annum (mtpa) by the end of the first half of 2014 after completing the first phase of its expanded port rail and mine operations.
The second phase of expansion of the port, rail and power infrastructure to get to 360 mtpa is expected to be completed in the first half of 2015.
Rio recently said it was confident of hitting its 2013 iron ore production target of 265 million tonnes.
But Rio has deferred an investment decision on Silvergrass until the third quarter of 2014, and a decision on the proposed Koodaideri mine has been deferred until 2016.
It comes after Rio targeted a reduction of $US5 billion ($A5.49 billion) in its overall operating cost cuts by the end of 2014.
Chief executive Sam Walsh said the expansion of the company's Pilbara operations represented the most attractive investment opportunity in the sector.
"It's in line with my commitment to be totally focussed on only allocating capital to opportunities that will generate the best returns to shareholders," Mr Walsh said in a statement.
Analysts were expecting $US5 billion to be allocated on an iron ore expansion to achieve 360 million tonnes a year.
The expansion is subject to government and joint venture approvals.
"This investment is driven by the attractive long-term fundamentals for iron ore which are underpinned by urbanisation and income growth in the developing world, particularly China," Andrew Harding, Rio Tinto's head of iron ore, said in a statement.
Rio Tinto has delayed investment decisions on its proposed Silvergrass mine until the third quarter of next year at the earliest, and said it wouldn't make a decision on its Koodaideri site until at least 2016.
Ahead of Thursday's decision, Rio has been investing US$3.5 billion on building more berths at its Cape Lambert port, and expanding rail lines in the Pilbara.
