Rio Tinto eyes $5bn savings by 2014 as coal and aluminium prices suffer

RIO TINTO was targeting savings of $5 billion (R44bn) by the end of 2014, while simultaneously boosting production at its iron ore, copper and alumina units, the mining giant said yesterday.

“We are taking further tough action to roll back the unsustainable cost increases of the past few years,” chief executive Tom Albanese said. “Our two most challenged businesses are aluminium and coal, and in particular Australian coal,” he said in a statement.

Rio Tinto plans to reduce operating and support costs by $5bn compared with expected costs this year, joining mining firms including BHP Billiton in seeking cost savings as well as curbing investment in new projects as metal demand wanes. The company said last month that it was delaying investment decisions in commodities such as coal while continuing to spend on its Australian iron ore expansion.

“Those two businesses [alumina and coal] are potentially loss-making where commodity prices currently are, which is clearly not sustainable,” Prasad Patkar at Platypus Asset Management said.

Australian coal mines are grappling with the dual pressures of falling prices and a strong Australian dollar.

The price of thermal coal, used to generate electricity, fell to a three-year low this month, Newcastle coal futures show.

While Rio Tinto was not ruling out shutting down businesses with poor cash flow, the $5bn cost savings programme was likely to focus on continuing operations, Albanese told investors. Phasing projects was an option to achieve the cost cutting target, he added.

Rio Tinto was continuing its review on the Gove bauxite and alumina operations in the north of Australia and might decide to halt the project should it fail to get cheaper natural gas to power the refinery, he said.

“Ten, 11 years of high commodity prices and focus exclusively on getting the product out irrespective of what the cost was, means that there should be plenty of opportunity to tighten the belt,” Patkar said. “Mine closures would absolutely be on the agenda. BHP has already done it with a couple of their coal mines.”

In October last year Rio Tinto said it planned to sell 13 aluminium assets to improve the group’s financial performance. Aluminium was its second-biggest unit by sales last year, generating 18 percent of revenue, while it accounted for just 2.7 percent of profit, data show.

Production capacity at iron ore mines, its most profitable unit, in Australia’s Pilbara had increased by 7 million tons to 237 million tons, Rio Tinto said. Planned expansion has been increased 7 million tons to 360 million tons by 2015.

Output of copper and alumina would also rise as the Oyu Tolgoi copper-gold mine in Mongolia started production in the first half of next year and the Yarwun 2 alumina refinery ramped up, Rio Tinto added.

Work at the $10bn Simandou iron ore project in Guinea was continuing, Albanese said. Simandou, scheduled to start production in 2015, was a high-grade project that would benefit the company because grades at ore-rich mines in South America were expected to start falling in coming years, he said.

Rio Tinto, which got 44 percent of sales from iron ore last year, posted a 22 percent drop in first-half net income after prices for the material fell along with copper and aluminium. The price of iron ore, the biggest revenue-generating unit for both Rio Tinto and BHP Billiton, so far this year is about 23 percent lower on average compared with a year earlier.

The commodity will fetch $125 a ton in the first quarter next year before rising to $132 a ton in the second quarter, according to a poll of nine analysts. It closed at $117.90 a ton yesterday. – Bloomberg