The board of Rio Tinto (ASX: RIO), Australia's number-one exporter of our most lucrative product, has approved a plan to grow its Pilbara iron ore production rate by 35% in coming years.
Once it reaches a production rate of 290 million tonnes per year by the first half of 2014, the company's strategy is to increase it by more 60 million tonnes a year between 2014 and 2017. It hopes to deliver 330 million tonnes in 2015.
The deal will make Rio the biggest iron ore exporter in the world and enable it to do so at a very low cost. "The additional production will be achieved at a world-class all-in capital intensity of US$120-130 a tonne (low-US$100s a tonne Rio Tinto share), including the cost of infrastructure growth and mine capacity." It has approved $400 million of capital expenditure for machinery and equipment and modification.
CEO Sam Walsh, who has been strictly cutting costs from non-core assets, said the increased production makes sense. "Expanding our world-class, low-cost, high-margin Pilbara operations represents the most attractive investment opportunity in the sector and is in line with my commitment to be totally focussed on only allocating capital to opportunities that will generate the best return to shareholders."
Despite many investors being quite bearish on the level of demand for steel coming from China over the next decade, Rio's ability to make the expansion so cheap is a massive positive for faithful shareholders.
Rio's iron ore boss, Andrew Harding, said the investment cements its position as one of the best miners in the industry but the growth is underpinned by strong fundamentals, "This investment is driven by the attractive long-term fundamentals for iron ore which are underpinned by urbanisation and income growth in the developing world, particularly China. By delivering these additional tonnes we will capture a greater share of demand and ensure we continue to enjoy the best returns in the industry."
Foolish takeaway
Rio's decision to expand was expected but it suddenly transforms the company from one of damage control to exciting growth prospect, albeit risky. However recent resilience in the iron ore price reaffirms Rio's expectations that China will not witness a rough landing. In addition, the increased production targets and share price gains witnessed from other iron ore miners like Fortescue (ASX: FMG) and BHP (ASX: BHP) seems to reinforce the bullish sentiment of iron ore miners.
