Rio Tinto's spending heaven

Rio Tinto chief executive Tom Albanese would never publically admit that his company is a major beneficiary from the current minerals downturn.

But between the lines in the latest Rio Tinto profit report you can see enormous long-term benefits for the company coming from the downturn.

It is true that the lower mineral prices across the board pushed earnings in the first half of Rio Tinto's 2012 year down by 34 per cent and the current half year will not be a great deal better.

But Rio Tinto has the financial strength to complete most of the $20 billion dollars capital expenditure commitments that the group requires in the next two years.

Had mineral prices stayed higher there would have been an enormous volley of smaller projects that would have flooded both the iron ore and coal markets and depressed prices well into the future.

Now it seems that in Australia around $200 billion of new projects are to be mothballed, led by BHP Billiton's outer harbour expansion at Port Hedland.

Rio Tinto is spending over $14 billion on its base Pilbara expansion and the final stages of that expansion will not be completed until mid 2015. Rio Tinto's capital expenditure plans almost reflect what is happening to Australian mining expenditure – there are very few projects going beyond 2014.

BHP Billiton, on the other hand, is looking at much longer term projects. Olympic Dam requires digging for almost five or six years before the ore body is uncovered. There is no income during this stage (BHP Billiton's desperate Olympic race, July 30).

The outer harbour at Port Hedland will require an extended construction term. There has been a significant swing in the market views as institutions are becoming nervous about long-term projects and want greater rewards in a hurry.

This turns traditional mining strategies on their head but it so happens that Rio Tinto actually has projects that will be completed within two years, making it brilliantly placed for any upturn in commodity prices. At that time it will be a cash powerhouse and the directors will need to decide whether to push on with further projects or distribute the cash to shareholders.

Meanwhile, it is investing in automation to lower its operating costs and with the automation will come less vulnerability to union pressure. Rio Tinto wants to make sure that wherever possible its costs are at the bottom 25 per cent of miners. It's my belief that in iron ore its operating costs are lower than BHP and it is looking to increase the gap.