On the even of releasing its 2011 profit later today, Rio Tinto has confirmed that it is determined to continue growing its highly profitable iron ore business, despite a nasty blowout in costs in the past four months.

Rio said that the cost of the expansion was up 10% or $US300 million ($A278 million) for the latest stage of its planned iron ore expansion in Western Australia's Pilbara region.

Rio said it will spend $US3.4 billion ($A3.16 billion) expanding its iron ore operations - up from the $US3.1 billion estimate last October.

One of the projects will boost output from around 238 million tonnes in 2011 to 240 million at the end of 2013. The other is early work to lay the base for a surge in output well past the 300 million tonne mark.

"Today, we are announcing another significant milestone in our drive towards a more than 50 per cent increase in the size of iron ore operations in Western Australia," Rio's iron ore chief executive Sam Walsh said in yesterday's statement.

"The program remains on track and we are bringing new iron ore production on stream at a time when demand from Asian markets is forecast to grow strongly, while industry supply growth remains constrained."

Rio said $US2.2 billion would be spent on extending the life of its Nammuldi mine and $US1.2 billion on early works needed for the expansion of the Cape Lambert port and rail facilities.

The project would increase production capacity to 283 million tonnes of iron ore per annum by the second half of next year.

That increase is unchanged from October's statement.

The Nammuldi project would extend existing mining below the water table, increasing the mine's life by 14 years.

The expansion of the Cape Lambert port and rail infrastructure was in the feasibility study stage, and a final investment decision was expected later in 2012, the company said yesterday.

The Port Lambert project is part of the planned capacity expansion to 353 million tonnes a year.

Rio said this expansion project "is in final feasibility study, with a final investment decision expected later this year".

The various works and plans remained subject to a number of joint venture and regulatory approvals, including environmental clearances, expected later in 2012, Rio said.

Comment: Giving an idea of the high and rising costs of the expansion, Rio said it "expects capital intensity of expansion from 220 Mt/a to 353 Mt/a to be around mid-US$150s per tonne, on a 100% basis (Rio Tinto share around mid-US$130s per tonne)".

Seeing world spot iron ore prices are around $US140 a tonne at the moment, the miner is starting to run up against a cost/price constraint.

BHP is in a similar position in its rapid expansion plans (450 million tonnes is the aspirational target out around 2020).

Both miners though have vast low cost mining and shipping operations in their books at virtually nil cost and therefore highly profitable.

These low cost facilities allow both miners to reduce the average mined cost of each tonne of iron ore and to maintain profits, even at levels under the current world price.

That's why both miners can continue expanding deeper into iron ore, and why this is a strategy designed to deliver iron ore at costs significantly lower than the tonnage now coming on stream or about to come on stream in Australia, China, Africa, India or elsewhere.

Vale, the huge Brazilian miner, is expanding on the same basis.

Rio Tinto said its schedule for expanding its integrated Pilbara operations is:

  • 225 Mt/a - current operating capacity
  • 230 Mt/a by end of Q1 2012 - Dampier port incremental (in implementation)
  • 283 Mt/a by end of H2 2013 - Cape Lambert 53 Mt/a increment (in implementation)
  • 353 Mt/a by end of H1 2015 - Cape Lambert 70 Mt/a increment (in feasibility study)

Copyright Australasian Investment Review.
AIR publishes a weekly magazine. Subscriptions are free at www.aireview.com.au