Rio Tinto Ltd. (RTP) said Wednesday it will stop producing diamonds from its Argyle mine in Western Australia state for three months and slow work on the US$1.5 billion development of an underground operation at the mine in response to global market conditions.

The move is the latest in a steady stream of cutbacks the miner is making in a drive to cut 14,000 jobs and reduce capital spending by US$5 billion as it acts to pay down some of its US$38.9 billion debt and respond to sagging demand for commodities.

The underground project is to be slowed to only critical development activities, resulting in a workforce reduction and a demobilization of contractors.

"Given global market conditions, we will also reduce diamond production by taking an extended maintenance shutdown of the diamond processing facilities for up to three months, commencing in March," said Kevin McLeish, chief operating officer of Rio Tinto subsidiary Argyle Diamonds.

The transformation of Argyle, in the remote Kimberley region of Western Australia, from an open pit to an underground mine was due for completion in December 2010 and designed to extend the life of the mine beyond 2018.

The mine, which is one of the world's biggest and produces about 20 million carats of diamonds a year, is acknowledged in Australia as a leader in providing employment to local indigenous people.

Rio Tinto would not say how many jobs would be lost at the mine but said the vast majority would be among contractors, with its employees to be redeployed to maintenance, training and other activities where possible.

Engineering contractor Macmahon Holdings Ltd. (MAH.AU), which is carrying out the work on the underground project, said it expects to have to cut its workforce at the mine to about 140 from about 360 currently.

A spokeswoman for Macmahon said it would also look to redeploy workers, but given the slowdown in the mining sector was expecting about 200 redundancies.

Macmahon said its contract will be realigned to take into account the revised development program now being pursued at Argyle and this will reduce its contract revenue to just under A$20 million a year from A$80 million a year, until development activities recommence.

News of the changes at Argyle saw Macmahon's shares fall 10% or 4 Australian cents to 36 Australian cents by 0435 GMT while Rio Tinto was up 0.6% at A$40.61.

Rio Tinto is due to release its fourth quarter production report Thursday and investors will be watching closely for any further announcements of cuts to production and spending on growth projects.

-By Alex Wilson, Dow Jones Newswires; 61-3-9671-4313; alex.wilson@dowjones.com

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