* Rio plans to boost output to 360 mln tonnes/yr by 2015
* CEO set to tell AGM that it's full speed ahead on iron ore
* Plans add to worries about a global glut in iron ore
* Australian March exports to China hit record, led by iron ore
By James Regan and Sonali Paul
SYDNEY/MELBOURNE, May 7 (Reuters) - Rio Tinto (Xetra: 855018 - news) , the world's No.2 iron ore miner, is set to press on with plans to boost production at its Australian mines by a quarter in 2015, shrugging off pressure to slow spending and conserve cash as the commodity boom cools.
In spite of forecasts of a looming global supply glut, shareholders expect Chief Executive Sam Walsh to tell the firm's annual general meeting in Sydney on Thursday that it's full speed ahead with a 70 million tonnes-per-year increase that will take output to 360 million tonnes annually by 2015.
The plan means that a major additional chunk of iron ore production will enter the world market in the next few years and will add to concerns about increased supply that could weigh on a recovery in prices.
"They should continue to expand what is a high margin, high returning project, one of the best returning mining projects in the world, because growth now will mean yield in the future," said Ben Lyons, who helps manage A$400 million ($409.42 million)at ATI Asset Management, which holds Rio shares.
Rio Tinto's board is not expected to make a final decision on the expansion plans, estimated to cost up to $5 billion, until later this year.
Walsh was named chief executive in January as part of a management shake up after a string of disastrous investments - crowned by the $38 billion acquisition of Alcan in 2007 just before aluminium prices crashed - drove Rio Tinto to its first annual loss ever in 2012.
Under Walsh, Rio Tinto has already cut hundreds of jobs and marked copper, coal and aluminium operations for sale or closure. None of them have been sold so far, though Walsh has said there is strong interest in its Pacific Aluminium division, a grouping of 13 assets marked for sale.
Analysts estimate the sale of Pacific Aluminium could bring in several billion dollars.
But despite some analysts questioning whether Rio Tinto should put the brakes on investment in iron ore, the sector appears sacrosanct for now.
Iron ore has been gobbled up by Chinese steel mills at a rate of nearly 1 billion tonnes a year, with latest data indicating demand from the key consumer remains resilient.
Australian exports to China surged to a record high in March of an unadjusted A$7.4 billion, led by iron ore shipments that jumped as much as 36 percent by volume, data from the Australian Bureau of Statistics showed.
But there are concerns China will need less of the steelmaking raw material in coming years as its mills struggle with overcapacity.
Some analysts are forecasting a supply glut of as much as 120 million tonnes could surface by 2015 if expansions by Rio Tinto and other miners are completed.
FIREPOWER INTO IRON ORE
Unlike rival BHP Billiton (NYSE: BBL - news) , which is more diversified in its commodities spread and can rely on oil and gas for added revenue, Rio Tinto derives the lion's share of its earnings from iron ore.
"Rio's got little choice other than to put all the firepower they can into iron ore," said a fund manager who owns Rio Tinto stock but did not want to be named. "The alternative would be to rely on loss-making businesses they are trying to discard."
Apart from BHP, Rio's other main competitor in iron ore is Vale of Brazil, the world's biggest producer.
Iron ore prices have gone from boom to bust and partly back again - hitting a high above $190 a tonne in 2011 and a low under $90 in 2012 - in the three years since the sector switched from once-a-year fixed pricing to a spot market.
At current prices of around $128 a tonne, Rio Tinto enjoys a margin of around $80 per tonne, among the highest in the sector.
"If you're one of the lowest cost producers and you think you can actually grow your capacity and still be the lowest cost producer, that is the best protection in the long run," said Paul Xiradis, managing director of Ausbil Dexia, among the top 20 holders of Rio's Australian-listed shares.
Underscoring the global reverberations of Rio Tinto's expansion in ore, analysts at Liberum Capital forecast a delay by just one year of the plans could lift iron ore prices by $18 tonne in 2015.
A price rise of this proportion would have the added incentive of translating into an additional $3.7 billion in EBITDA to Rio Tinto, according to Liberum.
Still, Walsh is expected to use the annual meeting to reassure shareholders that Rio is still eyeing growth in profitable businesses, such as iron ore and copper, and only selling businesses that no longer fit.
He will also need to make it clear efforts are underway at the board level to maintain the company's single-A credit rating, currently on negative watch by Standard & Poor's.
Deutsche Bank (Xetra: 514000 - news) analysts believe finishing the expansion to 360 million tonnes on time in the first half of 2015 represents the project that will best generate earnings at Rio Tinto.
Delaying the ramp-up could have a number of detrimental effects including encouraging other producers to fill the gap, Deutsche warned in a research note this week.
Rio Tinto's Australian-listed shares were trading at around A$57 on Tuesday, about 20 percent down on their 2013 peak.