Rio Tinto opens wallet wide for asset upgrades

Rio Tinto (RIO-N, RIO-L, RIO-A) will spend billions of dollars to advance and upgrade some of its highest-profile assets.

At its sprawling Pilbara iron-ore operation Western Australia, the company has committed US$3.7 billion to boost capacity, with its partners chipping in another US$1.5 billion to the total project  spending.

Rio’s ongoing expansion program will see production more than double from 170 million tonnes of iron ore in 2009 to 353 million tonnes by 2015. Capacity to produce 230 million tonnes per year was already achieved in this year’s first quarter.

The latest capital commitments include US$3.5 billion on a 100% basis over four years to complete port and rail infrastructure expansion, including two berths on the new Cape Lambert jetty and wharf, replacement of the rail-car dumper and significant rail-track duplication and rolling stock improvements. A further US$570 million will go towards a more efficient and less polluting gas-fired power plant at Cape Lambert. US$1.7 billion will go towards extending the life of the Yandicoogina mine to 2021 and expanding its annual capacity from 52 million tonnes to 56 million tonnes.

In February Rio made further capital commitments to Pilbara, including US$2.2 billion to extend the life of its Nammuldi iron ore mine, and US$700 million, or US$1.2 billion on a 100% basis, for early work on the Cape Lambert port and rail expansion.

Rio’s Pilbara operations include 13 mines, with Rio’s ownership share ranging between 50% and 100% for each mine. The Pilbara network also includes three shipping terminals, two ports and 1,400 km of rail networks.

Rio has also committed US$501 million — with partners putting up a further US$500 million — to advance the Simandou iron-ore project in Guinea. Rio is developing the mine with the Aluminum Corp. of China (Chalco) (ACH-N), which, having made an earn-in payment of US$1.35 billion, now controls 47% of the joint venture and 44.65% of the Simandou project. Rio holds the rest of the joint venture and 50.35% of the project, while International Finance Corp. holds the remaining 5%. The government of Guinea has the right to take a stake of up to 35% in the project and a 51% stake in a company that controls the rail and port infrastructure.

The $1 billion in spending is planned to go largely towards a new deepwater port and 650-km rail network needed for the project, while also covering more detailed studies and long-lead items. Rio plans to have the mine in production by mid-2015, with anticipated capacity of 95 million tonnes of iron ore per year. Rio is expecting a total investment exceeding US$10 billion to bring the operation on stream.

In making the commitments to its iron-ore projects, Rio Tinto Iron Ore chief executive Sam Walsh stated that the company sees continued strong demand for the metal in China. Rio has forecast that China steel production will grow from its current 700 million tonnes a year to 1 billion tonnes a year towards 2030.

As for its non-ferrous assets, Rio has committed to spend US$660 million over the next seven years to extend the life of the Bingham Canyon mine in Utah from 2018 to 2029. Rio will spend the money pushing back the south wall to extract more ore from the area, which will allow production of 180,000 tonnes copper, 185,000 oz. gold and 13,800 tonnes of molybdenum per year from 2019 to 2029. Along with the pit extensions, Rio continues to study underground options to extend the life of the mine, which has been in operation for more than 100 years.

In northern B.C., Rio is moving forward with its US$3.3-billion modernization of the Kitimat aluminum smelter. Last December the company gave the green light for US$2.7 billion in spending on the project, which should allow the company to complete the project in 2014. The upgraded smelter should have 48% more capacity at 420,000 tonnes per year.

Other recent capital commitments by Rio include US$1.5 billion in bridge financing and US$1.8 billion in a standby-rights offering to keep the Oyu Tolgoi copper-gold mine in Mongolia moving forward until project financing is in place, with US$478 million for its driverless train system at its Pilbara operations and US$1.4 billion for two projects that will increase production at its 30%-owned Escondida copper mine in Chile.

All told, Rio expects to spend US$16 billion this year on capital expenditures.