Rio Tinto promises big returns in February despite iron ore rout

* New mine deferred amid tough near-term outlook

* Rio underscores vow to "materially increase" returns

* Sees iron ore margins at 56 pct even in weak market

* Rio shares rise 1.8 pct in weaker market (Adds CEO comments)

By Sonali Paul

MELBOURNE, Nov 28 (Reuters) - Global miner Rio Tinto (Xetra: 855018 - news) deferred plans to build a $1 billion mine in Australia, stepping up cost cuts amid a plunge in iron ore prices so it can deliver on a vow to boost returns to shareholders.

The move to delay an investment decision on its proposed Silvergrass iron ore mine until at least the third quarter of 2015 follows a 50 percent slide in iron ore prices this year as Rio and its main rivals have flooded the market with new supply.

"While the long-term outlook remains sound, the near term is undoubtedly more challenging," Rio Tinto Chief Executive Sam Walsh said.

But he said that was not affecting Rio's promise to raise shareholder returns substantially come February 2015, when the company reports its full-year results.

Rio needs to keep shareholders happy in order to ward off a new approach from suitor Glencore Plc (Xetra: A1JAGV - news) , which is widely expected to make another play for the global miner after it was rebuffed in August. Investors have demanded higher returns following a spending binge on overpriced acquisitions and mine expansions over the last seven years.

"We have reduced our cost, we have reduced our debt, we have substantially reduced our capital, and that's put us in an incredibly good position to materially increase shareholder returns," Walsh told investors.

Rio's shares rose as much as 1.8 percent on Friday while the broader market fell 1.3 percent and arch rival BHP Billiton fell 3.4 percent, hurt by its exposure to sliding oil prices.

Walsh is eager to set Rio apart from BHP, which has been more cautious about the timing of returning cash to shareholders amid a commodity price slump.

Rio said total capital spending this year would be below $8.5 billion, compared with a previous forecast of around $9 billion and said its operating and exploration costs would be cut by $5.4 billion by the end of 2015 from 2012.

Those cost cuts will help it deliver iron ore to China for $35 a tonne by 2020, down from $47 a tonne in 2012, ensuring the company's biggest business, which made up 92 percent of earnings in the first half of 2014, remains hugely profitable. Iron ore delivered to China last traded at $69.70.

Rio said even against analysts' weak outlooks for iron ore prices over the next five years its profit margin would be around 56 percent.

"Against this background, Rio Tinto thrives. It's when our competitive advantages come into their own," Walsh said.

Despite deferring development of its new mine, Rio still expects to reach its iron ore expansion target of 350 million tonnes a year by 2017. (Reporting by Sonali Paul; Editing by Gunna Dickson and Richard Pullin)