An undated handout photograph shows a bucket wheel operating at Rio Tinto Group's Pilbara iron ore mine in Western Australia, provided to the media on Tuesday, Aug. 3, 2010. Rio Tinto Group, the world's third-largest mining company, said second-quarter iron ore production fell 2 percent on scheduled shutdowns during the period.

Rio Tinto is pushing ahead with a long-awaited expansion of its flagship iron ore mining operations in Australia, saying it plans to spend $3bn less than it once intended.

Rio Tinto’s original “Pilbara 360” plans would have lifted its production from some of the world’s lowest-cost iron ore deposits from 290m tonnes annually to 360m tonnes. The expansion is a significant part of its growth ambitions and had been expected to cost around $5bn. Iron ore provides the vast majority of Rio’s earnings.

The Anglo-Australian miner said on Thursday that under the revised plans for the project, mine production capacity would increase by more than 60m tonnes by 2017 and reach more than 330m tonnes in the next two years.

Sam Walsh, Rio’s chief executive, called the plans a “breakthrough pathway” for Pilbara’s growth, combining brownfield expansions with low-cost productivity gains. “We will deliver the expansion at an estimated capital cost of more than $3bn below previous expectations,” he said.

Rio and other miners have been at pains this year to stress their cautious approach to investment after huge capital spending in the latter stages of the resources boom.

Rio had been widely expected to make the commitment to expand its Pilbara operations, where it ramped up from 220m tonnes of capacity to 290m tonnes and where it enjoys one of the industry’s lowest costs of production and shipping ore.

Demand for iron ore, as for most commodities, has been driven by China’s growth and has been surprisingly strong this year, shoring up the iron ore price and easing the dilemma over Rio’s spending commitments in the mining complex in Western Australia.

Mr Walsh, who headed up Rio’s iron ore operations before he took over as chief executive, said the Pilbara expansion was the “most attractive investment opportunity in the sector”.

Analysts at Citi said Rio’s guidelines for the so-called “capital intensity” of the expansion project, at between $120 and $130 per tonne of capacity, was lower than their $145 forecast and would also ramp up faster than they had expected.

Liberum analysts suggested the capital spending from Rio would now likely be about $2bn. “The faster than anticipated ramp up makes us more cautious around iron ore [prices] in 2015,” they said.

Shares in Rio rose by nearly 4 per cent to £32.61 on Thursday, leaving them about a quarter higher than their 52-week low of just under £26 hit in June.

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