There was further bad news for the embattled mining services sector last night with the news that Rio Tinto (RIO) has chopped its WA iron ore expansion output plans by nearly 10% and around $US3 billion in cost.
While good news for Rio shareholders, if the company can pull it off, the lower output target and lower spending plans is going to rattle the mining contractors and service groups which would have been hoping to grab a big share of the $US3 billion in savings.
It also means there will be $US3 billion cut from the national investment plans in the next four years (those figures were released yesterday by the Bureau of Statistics).
Rio says it is still planning to expand iron ore production at its WA mines to more than 300 million tonnes by 2017, but instead of costing around $US5 billion, it will be about $US3 billion cheaper. And Rio seems to be talking about reaching a new output target of 330 million tonnes instead of 360 million, as previously believed.
But Rio also says that the company’s mines won’t be in a position to supply ore at the 360 million tonnes a year rate until 2017, suggesting that the logistics will be expanded to the old maximum faster than the mines will be.
Before cutting its spending and costs last year, Rio had planned to reach its maximum capacity of 360 million tonnes a year output at its WA iron ore mines by the first half of 2015. And the estimated $US5 billion cost had concerned more and more of the company’s investors.
Now in an effort to meet those concerns and show it is committed to cutting costs, Rio has hauled back on the pace of the expansion meaning the 2015 deadline is out.
Now its 2017 – and probably later rather than sooner and this will be achieved by expanding existing mines bit by bit and postponing work on a major new mine until at least 2015.
Rio has already expanded production to an annual 290 million tonnes and it expects to export around 265 million tonnes this year.
RIO YTD – Rio Tinto’s $US3 billion spending cut is bad news for mining services sector
Rio said in a statement late yesterday that the expansion and lower cost will be achieved through a series of low-cost brownfield expansions which "will bring on early tonnes to feed the expanded infrastructure currently being developed.
"From a base run rate of 290Mt/a by the end of first half 2014, mine production capacity will increase by more than 60 million tonnes a year between 2014 and 2017. The majority of the low-cost growth will be delivered in the next two years with mine production of more than 330 million tonnes in 2015."
"This will be achieved primarily through a combination of expanding production at existing mines and securing further low-cost productivity gains, such as those delivered by Rio Tinto’s pioneering Mine of the Future programme, together with the proposed future development of the greenfield Silvergrass mine. Work continues on various further expansion options to optimise the next stage of the 360 programme."
In support of the brownfield expansions, Rio Tinto said that it yesterday approved $US400 million of capital spending for plant equipment and modification, and additional heavy machinery for use at various mine sites in the Pilbara. (The day before it was BHP spending more than $US300 million on two new shiploaders for Port Headland to replace two that are 40 years old, so investment is still happening).
And why is this Rio statement bad news for mining service and contractors?
Well, expansion of existing mines is cheaper than building new mines and therefore involves smaller contracts and workforces, so the work contracts will be smaller in value.
And much the $US3 billion in savings would have gone to the service companies in contract payments.
And the two year delay will mean more pain for many companies and those looking for a recovery might find that it’s not as solid as previously estimated.
So, good news for Rio Tinto shareholders and bottom line, bad news for the service and contracting companies, such as Forge, NRW, Monadelpheous and others.
Rio shares rose 12c to $64.42 yesterday.
