Rio Tinto on an Investment Spree - Analyst Blog

Rio Tinto Plc (RIO) is on an investment spree to enhance production driven by the gradual market recovery. In July 2010, Rio Tinto announced an investment plan of $5.1 billion over five years in the Pilbara region to boost the production capacity by more than 50%. The production capacity is supposed to increase to 333 million tons per annum (Mt/a) in five years.

Rio Tinto recently, announced plans to invest $1.2 billion in its Brockman 4 and Western Turner Syncline mines in the Pilbara region to enhance their production capacity to 283 million Mt/a by the end of fiscal 2011.

Brockman 4 mine's annual capacity will increase by 18 Mt/a to 40 Mt/a and the latter will be enhanced by 7 Mt/a to 15 Mt/a.

A month back, Rio Tinto decided to invest $2.1 billion for the development of its Pilbara iron-ore mine and another $140 million over and above $347 million to increase production of billets at its plant in Straumsvik, Iceland.

Rio Tinto has queued up a massive investment plan, including $800 million for the completion of the underground block cave project at the Argyle Diamond Mine in Australia, $1.6 billion investment for development of the Hope Downs 4 iron ore project, expected to be operational by 2013 with an annual capacity of 15 million tons, a $563 million MoU with Aluminum Corporation of China Limited – Chinalco (ACH) for the development and operation of the Simandou iron ore project in Guinea, etc.

Increased investment plans will decrease cash in hand, but investment in various growth projects will enable Rio Tinto to feed the long-term demand for its commodities.

With its long-life, low-cost assets, and a strong pipeline of attractive growth projects, Rio Tinto has assets that can generate positive cash flow under difficult market conditions. Though commodity demand from China and other emerging economies has slowed in the last couple of months, management is confident that industrialization and urbanization will continue in these markets, thereby strengthening the demand for Rio's products.

Chinais expected to grow by 9% in 2010. Chinese steel consumption is expected to increase 6.7% to 579 million tons in 2010. China is expected to remain the largest consumer of metals in the years to come. Hence, the medium-term outlook for metal commodities remains encouraging.

Management expects the global demand for its key products such as iron ore, copper and aluminum to double by 2022, primarily driven by China, India and the emerging markets bloc. Rio Tinto's investment in various growth projects will enable it to capitalize on long-term demand.