The Motley Fool

Rio to focus on iron ore expansion

Finally.

After federal government delays of more than a year, Rio Tinto Limited (ASX: RIO) has received environmental approval for its US$1.5 billion plus South of Embley bauxite mining project in Cape York, Queensland.

The project was approved by the Queensland state government in May last year, but it took until today for the federal environment minister, Tony Burke to sign off on the project. The mine is subject to 76 strict conditions, mainly because of fears the bauxite will be shipped through the Great Barrier Reef. But Rio will not be able to go ahead just yet, as it needs final approval from the Queensland Land Court, after the Wilderness Society lodged an objection, because of the risk to endangered animals.

Rio’s board has also yet to give the project the green light. New chief executive Sam Walsh has emphasised that the miner is focused on cost discipline and evaluating alternative uses for cash, including higher payouts to shareholders. But he also says that the outlook for bauxite is far better than aluminium. Chinese refineries rely on imported bauxite and the largest supplier, Indonesia, has been clamping down on exports, with Chinese imports from Indonesia dropping by 56% last year.

Rio’s Weipa bauxite mine has seen falling grades and South of Embley is meant to extend the life of its bauxite operations by 40 years, according to the Australian Financial Review. Rio could postpone South of Embley, as it goes ahead with expansion of its iron ore operations in the Pilbara. The company has already approved US$5.9 billion of infrastructure spending, as the miner ramps up production to 360 million tonnes a year.

Despite the iron ore price falling to US$126.4 a tonne overnight, Rio and Fellow iron ore miner BHP Billiton (ASX: BHP) are amongst the lowest cost producers in the world, with production costs under US$40 a tonne. While Rio and BHP ramp up volume, the falling iron ore price could hit some of the smaller, higher-cost producers such as Fortescue Metals Group (ASX: FMG) and Mount Gibson Iron (ASX: MGX).

Foolish takeaway

Rio’s aluminium division (including bauxite) is relatively small compared to its iron ore business. The South of Embley project is unlikely to get the go ahead by Rio’s board in the short-term, as it focuses on its iron ore expansion.

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