Back in 2008, as iron ore prices were on the brink of booming, Rio Tinto launched a major mine automation program.
It’s one strategy which has placed the company in a good position as the commodity price falls to pre-boom levels amid contracting demand from China. The company has been unapologetic about its ongoing high-output strategy which some say has contributed to iron ore price falls, squeezing smaller producers’ margins. But the groundwork for this period was laid almost eight years ago.
“We knew, really from a timing perspective, we weren’t going to fully automate our fleet and railway in time for the top of the cycle. It very much was timed to make sure we’re resilient on the downside,” Rio Tinto group executive of technology and innovation, Greg Lilleyman told Business Insider.
This chart shows the timing.
The Mine of the Future program has since seen the company open a remote operations centre in Perth that can manage its mines, ports and rail systems from one location. It incorporates real-time monitoring right across its supply chain, meaning Rio can adjust its Pilbara operations to meet market, environmental and staffing requirements on the fly.
It has invested in 53 self-driving trucks moving around its WA iron ore operations and has spent $US518 million on autonomous trains for its Pilbara rail network, which is being commissioned this year.
“The two sites that we have that are fully autonomous with trucks are certainly the two sites with the highest equipment utilisation in Rio Tinto and the lowest unit cost in operation of that haulage system,” Lilleyman said. The unit cost on its Hope Downs 4 site in Western Australia has improved about 10% with the technology. IN 2014, the company’s average cost per tonne of iron ore was $19.50.
Lilleyman said that back in 2007 and 2008 the company wasn’t making the investment for the boom – it was about improving the performance of the group in the long-run.
“It’s always tougher to get access to capital where you need to be making capital investments as part of your innovation program when the cashflow is lower then it is in the good times, which is why you do need to be thinking of these things in advance,” he said.
“[The investment] was not to capture the upside of the boom, although that was a partial benefit, it really was to think about as the inevitable cycle turns – and they do – that we think for the long run about how we position ourselves better than our competitors for the inevitable downturn.”
Shoring up a beast like Rio Tinto required not only technology investment, but innovation in new ways of thinking about operations and calling on historical data to help determine how long the cycle might run.
“We knew that, despite the fact that there was increased demand coming out of China, that inevitably, the cycles do turn and we position ourselves for that long-term to make the benefits out of the upside as well as be resilient through the dips in the cycle,” Lilleyman said.
As commodity prices increased, the company did lock in some higher costs, especially around labour, in order to take advantage of the buoyant market.
“We had to be prepared to strip those out fairly quickly, we need to be prepared to respond fundamentally and structurally to our businesses to make sure that whatever the price setting is, we are well positioned,” Lilleyman said.
Rio also tapped big data to help it make smarter operational decisions. It opened a data analytics centre in India back in March this year, to assess massive volumes of data captured by hundreds of sensors fixed to equipment around its sites.
“In the past it used to be tradesmen doing inspections of a truck to look for tell-tale signs of things that might need to be done in a future service. We can do a lot of that online,” Lilleyman said.
Hiring a number of data scientists, the company is now using predictive mathematics, machine learning and advanced modelling to identify a range of problems before they occur in the hope maintenance bills can be both predicted and cut, as well as reduce labour requirements.
“We’re starting to have some good results understanding what might happen in a few months time with haul truck engines,” Lilleyman said.
Challenging operational norms has been another way Rio has positioned itself as one of the lowest-cost iron ore producers in the world. As the boom started to slip away, Lilleyman explained the company started playing with stockpile sizes and inventory levels to reduce its working capital.
“We deliberately built up stocks and then deliberately drew down on all that stock to maximise the total throughput and then minimise the total inventories,” he said.
“We’re focussing very efficiently on making sure that we’re not building up stocks of material anymore in advance than we need to, to put it on a ship and sell it overseas or whatever the commodity may be.”
Being in a stronger fiscal position naturally makes you more resilient during downturns and by running productivity and automation programs while prices were strong Rio was able to strip out unnecessary costs as commodity prices started to slide.
Over the past two years the company has worked hard to cut costs by $US4.8 billion, halved capital expenditure to $US8.2 billion and lowered net debt almost by half to $US12.5 billion.
Throughout 2015, Rio aims to cut operating cash costs by $US750 million.
As for how it will innovate during a time when prices do look to be balancing at a lower level, Lilleyman said the company will look at projects which don’t require big capital injections, including data analytics to determine smarter ways to reduce spend.