MELBOURNE. – Rio Tinto has given a go-ahead to a $1,9 billion project to build an Australian bauxite mine, defying a deepening commodities downturn. The investment is the largest that Rio has approved for more than two years, a period when global miners have slammed the brakes on spending following a surge in capital expenditure when they tried to take advantage of rising commodity prices.

The wave of mining investment that peaked in 2012 has left many parts of the industry struggling with excess supply and is putting pressure on commodity prices, which are also suffering because of a slowdown in Chinese demand.

Rio has more than halved its capital spending budget, from more than $17 billion in 2012 to less than $6 billion expected this year. The miner has taken a much more cautious approach to spending under Sam Walsh, the Australian who took over as chief executive early in 2013 when Tom Albanese was ousted over billions of dollars of write downs from a failed coal investment.

Last Friday Mr Walsh insisted that the Amrun mine — the largest Rio-led project to be approved since he took over — would “deliver significant benefits to all our stakeholders”.

Bauxite is the raw material used in making aluminium. While the aluminium sector is under pressure because of the growth in Chinese capacity, Rio executives think they should have an advantage in bauxite, which they think is akin to the miner’s vast Australian iron ore operation in terms of the logistical challenge of moving millions of tonnes of material annually.

Amrun is a new name for a project previously known by Rio as South of Embley, on the Cape York Peninsula in northern Queensland. Analysts have long expected that Rio would approve the project, which will replace production from Weipa, a depleting mine nearby.

“Aluminium prices are on their knees are the moment . . . However, if you produce good quality bauxite, and Weipa is very good quality, then you remain relatively unaffected and can generate a high margin throughout the cycle,” said analysts at Barclays.

“However, it does raise broader questions as to whether Rio should be incentivising more Chinese aluminium capacity, cannibalising their own smelting margins in the process, or increasing capex (and reducing dividend coverage) at this point in the cycle.”

Citi analysts said: “Increased bauxite supply into the traded market to feed the ongoing growth in China alumina and aluminium capacity is one of the reasons we remain cautious on the alumina/aluminium markets.” Mr Walsh said Rio was “establishing Cape York bauxite as the product of choice for the Chinese seaborne market . . . Amrun will be significant in helping to meet growing bauxite demand from China”.

Most of the capital spending on Amrun would be in 2017 and 2018 with shipping from the mine expected to start in 2019, Rio said. – Online.

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