Rio plans to limit expansion costs
Rio Tinto Limited (ASX:RIO) will utilise capital efficiency measures and productivity boosts to keep its Pilbara iron ore expansion costs under $22 billion and ward off the impact of the strong Australian dollar.PT0M54S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-2ahd0 620 349 November 29, 2012
RIO Tinto has delivered a blunt warning to unions and workers that its drive to cut $US5 billion ($A4.8 billion) in spending will involve tough pay negotiations over the next two years.
But the plan to cut even deeper into the company's cost structures will not be restricted to labour costs alone, with the company declaring it will look ''absolutely everywhere'' across its business for savings.
The $US5 billion plan, which builds on $US500 million worth of savings already achieved during 2012, will be complemented by a ''more aggressive'' approach to divestment of non-core assets, with action likely on laggard divisions like aluminium and boutique businesses like diamonds.
No small target: Rio Tinto chief executive Tom Albanese wants $5 billion in savings. Photo: Tamara Voninski
Both have been earmarked for divestment for some time, and Rio chief financial officer Guy Elliott said they may not be the only assets sold over the next year.
''There will be further divestments to come as we optimise the portfolio in addition to the sales we've already announced, and we expect substantial cash proceeds in 2013,'' he said.
The $US5 billion savings target is set for the end of 2014, and is pegged against Rio's expected costs in 2012.
Another $US1 billion will be cut from Rio's exploration budget for 2013 and the company warned sustaining capital expenditure will also fall more than $US1 billion in 2013.
Importantly, the $US5 billion plan assumes a continuation of current market conditions, currency rates and stable workforce relations without any significant strike action.
Rio would not say how many jobs will be cut, and Mr Elliott conceded relations with the company's workforce could be tested by the regime.
''I think we are going to have some difficult discussions with labour,'' he said. ''It's true that coal and aluminium will be a focus, but nobody is immune. The escalation of cost that we have seen well above the rate of inflation in most countries and particularly Australia, is going to have to stop.''
Rio has had a tense relationship with Australian unions in recent years, highlighted by Australian Workers Union boss Paul Howe's declaration in February 2011 that Rio and Mr Albanese were ''sucking out the blood, sweat and tears of blue-collar workers''.
Rio has already axed hundreds of Australian jobs in 2012 and decided to close its corporate office in Sydney in August.
But amid the austerity drive, billions will continue to be pumped into expansion plans for Rio's flagship iron ore business in Western Australia.
Iron ore boss Sam Walsh said an extra 7 million tonnes of export capacity had already been achieved through efficiency measures, lifting the company's expansion target to 360 million tonnes a year by the first half of 2015.
At current iron ore prices, the extra 7 million tonnes are worth more than $US800 million in revenue.
A final investment decision on the iron ore mines to feed the ''360'' plan will be made in the 2014 financial year, but Mr Walsh indicated they would likely win approval as they were ''the most robust projects this company has''.
The company revealed for the first time that its cost of delivering iron ore into China was $US47 a tonne. That puts Rio at the lowest part of the iron ore cost curve, with costs about half that of Fortescue Metals Group. Shares in Rio Tinto rose 48¢ to close at $57.18.