Here is how Rio Tinto intends to cut costs by $1 billion

Here is how Rio Tinto intends to cut costs by $1 billion

The world's second largest mining company is making deeper cost cuts and slashing spending after a massive fall in half year profit revealed last week.

Mining giant Rio Tinto (LON, NYSE:RIO) shook the market last week after announcing it was targeting savings of $1bn in 2015, an increase of $250 million on its previous goal, because of the tough market conditions.

To achieve such goal, the miner is watching every single expense, including those related to safety equipment.

In an interview with Australian Financial Review (subs. required), the miner’s iron ore boss, Andrew Harding, revealed that Rio has began placing safety glasses and gloves in vending machines that require a staff access card to withdraw them.

"There is no restriction on them – it's safety equipment,” Harding was quoted as saying. “But instead of someone going 'this is unlimited, what the hell' kind of thinking, it reminds people that it's an important item, contributing to cost reductions.”

The plan has reduced safety equipment use between 15% and 20% at some iron ore operations, Harding noted, while almost halving usage of some items at others. "That saves Rio millions of dollars each year," the executive said.

The Melbourne-based company is also cutting overtime and pushing out truck equipment component life.

In the first six months of the year, Rio reported last week underlying earnings of $2.9bn, down from $5.1bn over the same period in 2014. This was driven by a 50% in underlying earnings from iron ore the company’s most important division by far.

Here is how Rio Tinto intends to cut costs by $1 billion

Source: Rio Tinto.

To give an idea of just how reliant it has become on the fortunes of the steel making material, Rio calculated that every 10% movement in iron ore price has a $1 billion impact on Rio's underlying earnings. The same ratio for copper is only $183 million.

Rio Tinto is also betting on lower energy prices and a further weakening of the Australian and Canadian dollars to help it reduce capital expenditure to $5.5bn this year and $6bn in 2016. Previous guidance was for spending of about $7bn in both years.

Still, the figures represent less than half what Rio was spending as recently as 2012 as it looked to meet a seemingly insatiable demand from China by bringing new projects on stream.