According to The Australian Financial Review today, Rio Tinto has started mining at its undeveloped $US1 billion ($1.4 billion) Silvergrass iron ore project in the Pilbara (Western Australia) ahead of the board making an investment decision next year on whether to build a new mine at the site.
Silvergrass must be built if Rio is to hit its ultimate expansion target of 360 million tonnes a year, which it has not yet put a date on.
Rio started mining some of the high-grade Silvergrass iron ore resource this month and ferrying it off to a nearby mine to prop up its flagship Pilbara blend, making sure it maintains its current quality as the industry benchmark.
Deutsche mining analyst Paul Young expects the board to approve the project by this June, and says it can be built for "well under" its $US1 billion price tag, for $US700 million to $US800 million.
The second, larger phase is still subject to board approval next year but Rio chief executive Sam Walsh told analysts that production had started.
Mr Young said a key driver of the capex cuts was "a smarter, capital-light development", which can be built in nine months.
Silvergrass is "one of the highest returning options available to Rio" Mr Young said, and would deliver an internal rate of return of more than 20 per cent at an iron ore price of $US45 a tonne.
That IRR would rise to 60 per cent at Deutsche's long-run iron ore price of $US66 a tonne, against a current price of about $US55.
"This should be a good news story: lower capex, hitting the 360 production target in 2017, increasing project returns and maintaining the Pilbara blend," Mr Young said.
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