June 20, 2012 / 5:43 AM / in 5 years

Rio Tinto approves $3.7 billion Australia iron ore expansion

SYDNEY (Reuters) - Rio Tinto (RIO.AX) (RIO.L) will spend $3.7 billion to increase iron ore output in Australia by a further 25 percent to 353 million tonnes a year tonnes by 2015, shrugging off forecasts of waning demand and a looming global supply glut.

Rio Tinto, the world’s second-largest miner of iron ore after Brazil’s Vale (VALE5.SA), currently runs its mines at an annual rate of 230 million tonnes and had already put in place work to take output to 283 million tonnes.

Rio Tinto’s board approval for the latest expansion, which will cost $5.2 billion all up, with $1.5 billion coming from joint venture partners in the mines, comes despite pressures mounting in the sector to curb capital spending and return more cash to shareholders jittery over slowing global growth.

At a rate of 353 million tonnes, Rio’s Australian mines would be supplying nearly a third of the world trade in iron ore.

“We are mindful of short-term uncertainties, and remain fully committed to a balanced approach to investment, while maintaining a single A credit rating and a progressive dividend policy,” Rio Tinto Chief Executive Tom Albanese said in a statement.

Rio Tinto also said it had committed a further $501 million to fund its share of infrastructure development at its Simandou iron ore prospect in Guinea, a joint venture with China’s Chinalco.

Iron ore is gold for mining companies, which have found a ready market in Asia for all they can mine and get to a port. The ore sells for around $135 a tonne .IO62-CNI=SI but for Rio costs only $30 to produce, delivering hefty profit margins.

Rio is pushing ahead at the same time that BHP Billiton (BHP.AX)(BLT.L) and Fortescue Metals (FMG.AX) have major expansions underway in Western Australia’s Pilbara region and a raft of smaller miners are trying to develop projects, which has spawned worries the market will be oversupplied within the next two years.

Reporting by James Regan; Editing by Lincoln Feast

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