Rio Tinto Reduces Costs, Eyes $5B Savings

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By Esther Tanquintic-Misa | November 29, 2012 5:08 PM EST

With global prices of commodities still on a downslide, and the proverbial gold at the end of the rainbow still way out of sight, global mining giant Rio Tinto has announced it will reduce unnecessary costs to generate a $5 billion savings by the end of 2014.

"We are taking further tough action to roll back the unsustainable cost increases of the past few years and are maintaining a relentless focus on improving productivity," Tom Albanese, Rio chief, said in a statement to the Australian stock exchange.

Mr Albanese likewise said the company will cut budget allotted for exploration and evaluation projects by $1 billion over the remainder of 2012 and 2013.

"We are investing in the highest returning opportunities, delivering major projects on time and are taking advantage of the inbuilt flexibility in our phased investment programmes," he added.

"We have the ability to respond to changing market conditions and I am confident we have the right strategy to maximise shareholder value in the long term."

Rio Tinto, along with other mining giants such as BHP Billiton Ltd., has been establishing coping mechanisms in light of the falling commodities market prices. The company has delayed a number of investment decisions, halted or closed a number of mines as well as reduced its global manpower.

"Those two businesses are potentially loss-making where commodity prices currently are, which is clearly not sustainable," Prasad Patkar said in Bloomberg News. "Banking on a sharp recovery would be foolish at this stage so the only thing managements can do is to aggressively take costs out."

Analysts expect Rio will diminish capital expenditure spending in 2013 to $14 billion, which is a number of billion dollars below this year's spending.

"There's no doubt any marginal tonnes they can produce from the Pilbara without a capex increase is a good thing," portfolio manager Tim Barker said in Reuters News.

"Ten, 11 years of high commodity prices and focus exclusively on getting the product out irrespective of what the cost was, means that there should be plenty of opportunity to tighten the belt," Mr Patkar said. "Mine closures would absolutely be on the agenda. BHP has already done it with a couple of their coal mines."

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