By Rhiannon Hoyle 

SYDNEY-- Rio Tinto PLC approved a $1.9 billion bauxite project in northeastern Australia, bucking a trend among major resources companies that have largely delayed new mines to protect profits from low commodity prices.

The Anglo-Australian mining company, already the world's biggest supplier of bauxite into China, aims to capture a predicted surge in demand by developing its Amrun project, the biggest investment approved by the board of London-based Rio Tinto this year.

Rio Tinto said the planned Amrun operation, formerly known as South of Embley, on the Cape York Peninsula of Queensland state would open in 2019 and initially churn out 22.8 million metric tons of bauxite a year. Bauxite is a raw material that is used to make alumina, a key ingredient in the manufacturing of aluminum.

Much of the early output from Amrun will offset declining production from another mine on the Cape York peninsula--East Weipa--where ore reserves are running out. The region supplies the bauxite used to produce roughly 10% of the world's aluminum.

Rio Tinto aluminum chief executive Alfredo Barrios, however, said the new investment wasn't a defensive play to keep its market share from shrinking.

"This is about growing the business," he said in an interview. "The strategy is to grow and capture an opportunity that we see in the coming years."

Mr. Barrios said Rio Tinto expects China's annual imports of bauxite to surge to 145 million tons by 2030, from around 45 million a year now. That is underpinned by a decline in good-quality, local resources of the raw material in China, the world's top aluminum producer.

Production from the Amrun mine could be expanded to 50 million tons a year, Rio Tinto said.

"Aluminum is a product with specific characteristics that make it ideal for the future, in terms of lightness, recyclability and so forth," Mr. Barrios said. Auto makers and aircraft manufacturers are eager to make their products lighter to improve fuel efficiency.

"That demand that we see from China, in keeping up with the growth in aluminum consumption, requires bauxite as a raw material," he said.

On Thursday, fellow executive Jean-Sébastien Jacques--Rio Tinto's copper and coal chief--said bauxite, along with copper and iron ore, was one of the commodities the company is most excited about for the future.

Some analysts are more wary. "Increased bauxite supply into the traded market to feed the ongoing growth in China alumina and aluminum capacity is one of the reasons we remain cautious" on those markets, Citigroup said in a client note.

Mining companies including Rio Tinto have been selling assets, slowing spending and cutting production of some commodities to shield profits from weak prices. The downturn in global commodity markets largely reflects slowing demand from China, which is the world's biggest buyer of everything from iron ore to zinc.

Rio Tinto reported a net profit of $806 million for the six months through June, down from $4.4 billion a year earlier. It slashed its budget for major projects to roughly $5.5 billion for 2015 from more than $17 billion three years ago.

The company invested billions expanding its network of iron-ore pits and infrastructure in Australia's west in recent years and has since been criticized for becoming too reliant on the steelmaking ingredient, which trades at its lowest price in nearly a decade.

Still, Mr. Jacques on Thursday said it wasn't Rio Tinto's strategy to diversify for the sake of it. "Diversification has not proven to, necessarily, be a hedge against bad times, as many had previously thought," he said.

Instead, he said that the company was focused on "tier-one assets" and that its optimistic long-run outlook on bauxite gave management "the confidence to invest."

There are a handful of other investments awaiting signoff by Rio Tinto's board, including the development of an underground mine at Oyu Tolgoi in Mongolia and the proposed Silvergrass iron-ore mine in Western Australia.

However, Rio Tinto has previously also promised materially increased returns for investors after years of heavy spending--a pledge followed up with a $2 billion share buyback this year. Mr. Barrios said he couldn't comment on whether the Amrun investment reduced the likelihood the company would repurchase more shares in the year ahead.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com

 

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(END) Dow Jones Newswires

November 27, 2015 04:26 ET (09:26 GMT)

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