Three-Dimensional Mapping Technology To Help Rio Tinto Control Operating Costs

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Rio Tinto (NYSE:RIO) is on a mission to boost its productivity and profitability. The company is launching three-dimensional mapping technology to reduce costs and enhance the efficiency of its mining operations. [1] Controlling costs and boosting efficiency has become vital for iron ore majors such as Rio Tinto, as weak iron ore prices are putting pressure on these companies’ margins. Three-dimensional mapping is the latest in a series of technological initiatives by Rio Tinto to boost the productivity of its mining operations.

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Boosting Productivity Through Technology

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The three-dimensional mapping technology will enable Rio Tinto to precisely identify the size, location and quality of ore in real time by retrieving data from automated trucks and drills operating in its mines. The software creates three-dimensional images of mine pit activities in real time, something that could not be done previously. ((Rio Tinto accelerates productivity drive with world-first technology to enhance mineral recovery, Rio Tinto Media Release)) The technology leads to greater ore recovery through sharper boundary identification, more accurate drill blasting, reduced explosives, improved waste classification and enhanced dig rates. This improves the efficiency of mining activity by ensuring it is tightly focused on removing high value ore, significantly reducing both waste and operational costs. Rio Tinto has deployed its three-dimensional technology at its West Angelas iron ore mine in Western Australia, and the company is also conducting trials at its copper, energy and diamond mining operations. ((Rio Tinto accelerates productivity drive with world-first technology to enhance mineral recovery, Rio Tinto Media Release))

The company’s West Angelas mine, where the three-dimensional mapping technology has been deployed, contributed roughly 10% of the 139.5 million tons of iron ore produced at the company’s mining operations in the first half of 2014. [2] Though Rio has not quantified the impact of the three-dimensional mapping technology in terms of cost savings, it estimates that the deployment of this technology in its iron ore operations has resulted in the company mining 250,000 tons more than it would have otherwise. [3]

The three-dimensional mapping technology is the latest in the company’s ‘Mine Of The Future’ technological innovation program. Previous innovations under this program include a fleet of auton0mous haulage trucks and the world’s first autonomous heavy haul rail system. In addition, the company’s Processing Excellence Centre uses Big Data analytics in order to optimize mineral processing across its operations. The company estimates that its Processing Excellence Centre helps the company realize $80 million in annualized cash savings. [4]

Cost Savings

Through its various efforts at controlling costs and boosting productivity, Rio Tinto made significant headway in its cost savings in 2013. Rio reported $2.3 billion in savings in operating cash costs over the previous year. [5] The company is targeting further reductions to its operating cash costs, targeting savings of around $3 billion in 2014, as compared to operating cash costs in 2012. ((Rio Tinto’s 2013 20-F, SEC)) These savings are vital, given the prevailing environment of weak iron ore prices.

Iron ore prices stood at $92.61 per dry metric ton (dmt) at the end of last month, around 32% lower than at the corresponding point of time last year. [6] This is primarily because of weak demand and an oversupply situation created as a result of expansion in iron ore production by major iron ore companies, despite the weakness in demand. [7]

The subdued demand for iron ore is primarily due to weakness in Chinese demand for the commodity. China accounts for over 60% of the global seaborne iron ore trade.((China Ore Stockpiles Rise to Record on Financing Deals, Bloomberg)) Iron ore is a major input in the production of steel. Chinese demand growth for steel is expected to slow to 3% and 2.7%,  in 2014 and 2015 respectively, as compared to 6.1% in 2013. [8] Overall, the Chinese market is characterized by an oversupply of steel, as Chinese demand for steel is estimated to be 721 million tons in 2014, with Chinese steel capacity estimated to be 1 billion tons.((Global Steel Demand  To Slow As Chinese Economy Cools, Financial Times)) Steel production stood at 779 million tons last year. [9]

With an oversupply situation and a subdued pricing environment for iron ore expected to continue in the near term, controlling costs will be vital for Rio Tinto. Technological innovations, such as the company’s three-dimensional mapping technology, will play a major role in achieving this objective.

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Notes:
  1. Rio Tinto accelerates productivity drive with world-first technology to enhance mineral recovery, Rio Tinto Media Release []
  2. Rio Tinto’s 1H 2014 Production Report, Rio Tinto Media Release []
  3. Rio Tinto Pins Profit Growth on 3D Mapping, Wall Street Journal []
  4. Bank of America Merrill Lynch 2014 Global Metals, Mining & Steel Conference Company Presentation, Rio Tinto Website []
  5. Rio Tinto’s 2013 20-F, SEC []
  6. Iron Ore Spot Prices, Y Charts []
  7. BHP, Rio Gamble With A Stacked Iron Ore Deck, Mineweb []
  8. Short Range Outlook for Apparent Steel Use, finished steel products (2013-2015), World Steel Association []
  9. China Steel Mills Have No Cash To Meet Standards-Industry Body, Reuters []