Rio to proceed with $5bn iron ore expansion despite looming surplus Rio Tinto intends to press ahead with a multibillion-dollar expansion of its iron ore mines in Western Australia barring a significant change to the supply-demand balance for the steelmaking commodity or a further increase in production costs. Sam Walsh, chief executive, told institutional investors at meetings in Sydney this week that a $5bn plan to increase annual output from its Pilbara mines to 360m tonnes by 2015 would be put before the board of the Anglo-Australian resources group for approval later this year, according to two people present at the briefing. "Rio management are going to be very pragmatic," said one person who attended the meetings. They will stop or delay projects if the figures don't add up. The world's second-biggest iron ore miner has already approved spending to lift annual output in the Pilbara to 290m tonnes by the third quarter of this year and has built port and rail facilities to handle the increase in capacity to 360m tonnes. "There would have to be a major structural change in the iron ore market or a black swan event for Rio not to push ahead with this project," said another person in attendance. But some fund managers and analysts have questioned whether Rio should go ahead with the expansion to 360m tonnes at a time when the iron ore market is expected to move into surplus. Iron ore is Rio's most profitable business and is expected to generate 85 per cent of group earnings before interest this year. Rival Australian miners BHP Billiton and Fortescue Metals Group are also planning to expand production from their iron ore mines in the Pilbara. According to Citigroup, the steelmaking commodity is set for a small surplus in 2014, growing to around 70m tonnes in 2015. Concerns about slowing economic growth in China, the world's biggest buyer of commodities, and increasing supply has seen the benchmark iron ore price drift lower since reaching $159 a tonne in February. It is currently at $128.10. Mr Walsh, who took control of Rio in January, has promised an "unrelenting focus" on shareholder value and has called on employees to run the business as "owners not managers." Rio plans to strip $2bn of costs out of its business this year and a further $3bn in 2014. The miner is also looking to sell non-core assets in an effort to retain a single-A credit rating. Deutsche Bank analyst Paul Young said much of the recent debate around Rio's expansion plan had been misplaced. "On our analysis Rio's Pilbara expansion has one of the highest returns of any large mining project in the world," he said. We do believe, however, that pursuing a brownfields mine expansion rather than greenfield could be more value enhancing to shareholders. By expanding existing mines, or brownfield sites, Rio could cut project costs by $3bn, Mr Young said, adding that the rest of the expansion could be funded by deferring a $2.2bn modernisation of the group's Kitimat aluminium smelter in Canada. Shares in Rio were up 2 per cent mid-afternoon on Tuesday in Sydney.