At a time when iron ore prices are falling like tears, Rio Tinto PLC (NYSE: RIO) has just received approval from the Australian state government to expand one of its iron ore mines, boosting output from 53 million tons to 60 million tons. The company said the expansion will cost $1.8 billion.

Colin Barnett, Western Australia’s Premier said:

The iron ore industry will remain a major driver of investment and employment in [Western Australia] into the future. As well as creating hundreds of construction jobs, this proposal will add eight years to the life of the Yandicoogina project, providing continued employment for about 1,000 people.

Earlier this week, Cliffs Natural Resources Inc. (NYSE: CLF) announced that it would temporarily close some production in Minnesota and Michigan and suspend an expansion project in Canada.

Steelmakers worldwide have been battered by the slowdown in Chinese demand for steel, of which iron ore is the chief component. And there are no solid reasons to believe that steel demand will pick up significantly any time soon.

And that is why Rio’s move may not make sense until we consider how long this expansion project is likely to take. The full expansion likely will not affect production for about three years. Of course the economics may not be any better then than they are now, but if they are and Rio cannot meet demand, the company will lose serious money. That is why now is a good time to begin this project.

Shares of Rio’s stock are trading down about 0.7% in the premarket this morning, at $47.64 in a 52-week range of $41.59 to $63.18.

Paul Ausick

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.