Rio Tinto's (RIO) $8 Billion in Spending Cuts Foreshadows Future for Big Miners

Michael Teague  |

Perhaps the clearest indicator yet of how the world’s largest mining companies are going to have  to deal with the projected oversupply in a number of hard commodities over the next few years, Rio Tinto Group (RIO) announced on Tuesday that it by 2015, it would be cutting its capital expenditures in half to $8 billion.

After at least a decade of higher prices for metals such as iron ore and copper resulting from the tremendous needs of a rapidly growing emerging economies, led of course by China. Miners have spent the better part of the last decade putting all of their efforts into increasing production of these materials, but have perhaps done too good a job. Rio Tinto and its peers such as Vale SA (VALE) have posted record numbers for iron ore and copper production in 2013, just in time for a supply glut that analysts say will send prices plummeting over the next year at least.

Currently, Rio is facing a debt burden upwards of $20 billion, has already sold off over $3 billion in assets and has reduced its staff by nearly 4,000 employees.

What capital spending does take place will be devoted mostly to iron ore production, which, despite the expected lower prices, will still remain the company’s bread and butter. Last year, the metal comprised about 90 percent of Rio’s income, and though lower prices are expected, the company still expects an uptick in demand from not only China, but a number of growing economies. Company CEO Sam Walsh provided an optimistic outlook for demand, saying  “China’s urbanization will continue and the development of other economies as they continue to grow at pace, such as India,Vietnam, Indonesia, the Philippines, the Middle East, the former Soviet Union, South America and Africa, will also contribute to ongoing demand.”

Share for Rio were trading slightly lower on the New York Stock Exchange by midday Tuesday, down 0.30 percent to $52.21. Other large mining firms like Vale SA and BHP Billiton (BHP) were down slightly as well.

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