Rio to Spend $3.1 Billion on Australian Ore Expansion

Rio Tinto Group, the world’s third- largest mining company, approved a $3.1 billion expansion of its Australian iron ore operations, two days after scrapping a joint venture with BHP Billiton Ltd. to combine their ore mines.

The expansion will raise iron ore capacity in Western Australia’s Pilbara region to 283 million metric tons in 2013, the London-based company said today in a statement. Melbourne- based BHP, which is also expanding output, today reported a 6 percent gain in first-quarter iron ore production.

The two companies, the second-and third-largest exporters of iron ore, are pressing ahead with separate plans to boost production after being forced to abandon the venture because of opposition from regulators in Asia and Europe. They are seeking to meet demand from steel mills in China, where usage of the alloy is forecast by Rio to double by 2020 from 2008 levels.

“They’ve got clarity that the joint venture is not going to go ahead, so they will be rolling out these expansion plans pretty quickly,” Mark Pervan, Melbourne-based head of commodity research at Australia & New Zealand Banking Group Ltd., said by phone today. “The iron ore market is clearly the best market to be leveraged towards Chinese growth.”

BHP declined 1 percent to A$40.75 at 1:42 p.m. Sydney time on the Australian stock exchange. Rio fell 2.2 percent.

10 Cities

China will build 10 cities larger than New York by 2025 and will need to import more steel, iron ore, coal, aluminum and copper, Rio’s Chief Economist Vivek Tulpule said this month. The nation’s economic growth will reach 10 percent in 2011, the Caijing Magazine reported this month, citing a report issued by the Chinese Academy of Social Sciences.

Rio today also approved a study to expand capacity 50 percent to 333 million tons by the second half of 2015. It expects to approve more spending in the next year to build mines and housing for the initial expansion to 283 million tons.

“This is the largest mining project ever undertaken in Australia and highlights the quality of our growth options,” Rio’s Chief Executive Officer of Iron Ore and Australia Sam Walsh said in the statement. It confirms “our confidence in the long-term outlook for iron ore demand,” he said.

Rio approved $1.3 billion in spending last quarter to lift capacity to 230 million tons from 220 million tons. It has now approved $6 billion of spending on the Pilbara operations since July, it said. The spending announced today will be used to build new wharves, stockyards and buy car dumpers, stackers and trains, it said.

Germany, Japan

BHP is working on a near-doubling of iron ore production to 240 million tons by 2013. It’s spending $4.8 billion on the fifth part of the so-called Rapid Growth Projects that will add 50 million tons. The fourth stage of the expansion program boosted output in the quarter, it said today.

BHP and Rio scrapped their joint venture, which aimed to save $10 billion in costs, after the regulators sought changes, including assets sales, which were unacceptable to both companies. Antitrust authorities in Germany and Japan last week said they opposed the deal.

The European Commission was also likely to raise formal objections, two people familiar with the plan said last week. The companies were informed of the results of the commission’s preliminary investigation on Oct. 15.

A so-called “Plan B,” based on a separate agreement with the state of Western Australia to allow the companies to share infrastructure and blend ore is unlikely to proceed, UBS AG analysts led by Glyn Lawcock said today in a report. The legislation allowing such co-operation is expected to be introduced by the end of the year, the state’s premier Colin Barnett said after the deal collapsed.