Why iron ore prices don't worry Rio Tinto

Rio Tinto's Andrew Harding

Despite a tumbling iron ore price and troubles in China, Rio Tinto’s Andrew Harding is not losing sleep at night. The mining giant’s head of iron ore explains why.

Andrew Harding is a strategic thinker who plays a long game. That’s a good thing, considering he’s the head of iron ore at British-Australian mega miner Rio Tinto and the price that the mineral is currently fetching on global markets has fallen significantly from its soaring highs of the past decade.

Those iron ore revenues generated by Rio Tinto and its local competitor, BHP Billiton, have largely carried the Australian economy through the global financial crisis. The commodity accounts for roughly A$1 in every A$5 of Australian exports. However, the iron ore price has plummeted about 60 per cent in the past year, dipping to US$45 a tonne versus a high of US$98 in July 2014, when surging output was blamed by some on increased production by the likes of Rio, BHP, Australia’s Fortescue and Brazil’s Vale.

The miners’ revenues have also been hit. BHP Billiton reported that its 2015 full-year revenue was down 22.2 per cent to US$52.3 billion, while Rio Tinto’s US$47.7 billion 2014 full-year revenue was down by US$5.4 billion.

In April 2015, BHP Billiton announced it was taking a slower path to reach its iron ore production targets. Two small iron ore firms have recently shut mines in Australia because of low prices, and analysts suggest other second-tier miners with unsustainable costs are at risk of closure.

“We looked at other industries – oil and gas, aeronautics, logistics – to get ideas that can actually change the business.”

Rio Tinto unequivocally says that, with a 60 per cent profit margin and customers for every last tonne of its iron ore, the company won’t be following suit.

Harding says he’s not losing sleep, because his business line, like the miner itself, is in for the long haul. He reasons that populations will continue to grow and develop, and iron ore will be needed to serve their needs. In September, Rio Tinto said its modelling showed that the world would need three billion tonnes of iron ore by 2030.

“It can make you happy when the price goes up and sad when it goes down, but it’s not something that I actually lose sleep about,” he says.

“If you look at the history of mining globally – go back to the early 1900s – most of the time, the commodity space was like it is today. The last decade was actually abnormal. The iron ore price got today, when you’re seeing the price of iron ore at about US$56, if you look at a 20-year average price, it’s US$49.”

These are confident words for a man whose business is so heavily invested in the Chinese market, which in the weeks surrounding our interview was in all sorts of bother.

But analysts say Rio Tinto has always been ahead of the game. Some say its early and continued investment in transformative technology sets it five, even eight, years ahead of its rivals.

Harding agrees. Ten years ago, he says, Rio Tinto recognised the rapidly increasing wealth in China and saw that it needed a plan for how to service and capitalise on that wealth and subsequent demand. The population would need cutlery, washing machines, cars, schools, bridges.

“[We said] we simply won’t do the same thing that we’re doing now and just replicate it multiple times,” explains Harding. “We actually had an opportunity to change the way we do business. Plus, there was some necessity driving it, because Australia is not a cheap place to do business.”

Transformative technology

So Rio Tinto headed down the technology path. However, analysing how the world’s miners do things was simply a reflection of what had been happening for a century.

“Looking at a competitor wasn’t a very sensible thing to do to learn how to do better,” says Harding. “We looked at other industries – oil and gas, aeronautics, logistics ... and delivery firms – to get ideas that can actually change the business.”

Rio Tinto's world-first initiatives include automation of trucks and rail.

Rio Tinto's world-first initiatives include automation of trucks and rail.

As Harding says, this was more than just management; this was about leadership and “recognising you wouldn’t break the business”. 

“Every investment was going to be thoughtful and was going to add value, but at the same time, you looked at the risk profile and thought, ‘if this doesn’t work, the business isn’t going to suffer overly’, so you take that risk and you manage it.”

That investment in technology has famously taken the shape of automated trucks, remote operations and three-dimensional mapping in Rio Tinto’s Mine of the Future initiative. The company is a world leader in this area and it is yielding profitable results.

The iron ore division now operates 69 automated trucks in its total fleet of 360. These massive machines can move millions of tonnes of iron ore every year (Mt/a). They respond to GPS directions and deliver loads 24 hours a day, supervised by remote operators (the only human part of the process). The goal is a production rate of 360 Mt/a, which the company expects to achieve once its heavy-haul rail line is automated – another world first.

A significant milestone was reached just last year at the Yandicoogina mine in Western Australia’s Pilbara region when the trucks autonomously delivered the ore to a crusher, making it the first autonomous mine in Australia.

The automation has increased productivity while cutting operating costs, because bottlenecks can be identified more quickly, variation in operations is minimised and schedules are more efficient. Similarly, managing the trucks more closely using big data, which we discuss later, has also allowed Rio Tinto to get more life from its machinery by diagnosing more precisely when they need a service, new parts or to be retired.

Late last year, the company launched its three-dimensional mapping technology. Using data from automated trucks and drills, the technology more precisely identifies the size, location and quality of iron ore, all in real time.

Described as akin to reading an ultrasound image, remote operators can for the first time measure and analyse pit activities as they happen. The result is more accurate drill blasting, fewer explosives, better dig rates and improved waste classification.

Cutting costs

In the wake of the sliding iron ore price and the contracting global economy, it was incumbent upon Rio Tinto to consider its costs across the whole business, and Harding says that has produced a significant strategy focused on being a more efficient miner.

Mining has its fair share of fixed costs, he says, “so the more tonnes you spread the fixed cost over, you actually get a cost benefit as well”.
Automated rail

Automated rail

Rio Tinto now carries the mantle as being the most cost-efficient producer of iron ore in the world. Harding says that pinnacle was reached on the back of decisions taken across many decades. More recently, it’s due to an efficiency drive in response to a drop in demand, an oversupply as infrastructure investments (made to meet growing demand) came online, plus sinking commodity prices.

Given these factors, the company turned to its biggest resource – its global workforce of 60,000 – to help boost efficiency and cut costs through what it calls high-value initiatives and high-performance teams. 

“High-value initiatives are a team-based process,” says Harding.

“When we’ve got interesting step changes that we want to pursue or improvements to how the business works, rather than using hierarchy and bureaucracy to make decisions, what we do is have a cross-functional sweep of people, usually the highest performers at multiple business levels, and we put them around something.

High-performance teams are all about emphasising the value of ‘team working’: providing leaders ... and team members with the tools for great teamwork.”

Making operations more cost-effective was another strategy. Analysts point to Rio Tinto’s investment in its Western Australian Cape Lambert port facility, finished ahead of schedule and A$400 million under budget in 2013, as a significant point in the company’s iron ore strategy and one that has fed its cost-efficiency drive.

The facilities were readily and cheaply expandable and, when coupled with the automated trucks, remote operations and heavy-haul rail line, have allowed Rio Tinto to increase its production and shipping capacity. 

“You’ve got to produce the right products so that people will pay you a premium for them,” explains Harding.

“So, that expansion program was designed to provide the products industry wanted. We knew, and know, population in the world is increasing.”

Harding says the company brought higher volumes of its Pilbara blend (known for its consistent quality) onto the market to meet that increasing demand, and expanding  the Cape Lambert port to accommodate that increased volume cut operating costs while margins held firm.

Finally, Harding says there’s always a place for “good old-fashioned cost management-type activities”, and that the whole package of efficiency strategies has led Rio Tinto to be in what it considers to be the best position in the industry.

“I also think we have very little venture capital support in Australia.”

Mining big data

Next on the horizon for the mega miner is better use of the vast  quantity of data it receives from its operations in 40 countries. In Australia alone, the company’s iron ore division has 15 mines, 1700km of rail line and four port facilities producing more than 300 Mt/a. The computers that control the automation of the trucks and remote operations collect reams of data each day. 

Rio Tinto has opened an analytics centre in Pune, India, staffed by people skilled in predictive mathematics and fluent in statistics. The aim is to reduce maintenance costs and production losses from unplanned breakdowns. The miner concedes it is using only a small percentage of the full data stream available, and Harding notes that typical analytics can use the data to push out the life of the company’s machinery, as mentioned earlier.

Yet it is “diving into the information, looking for patterns for questions we don’t even know to ask, so you’re actually responding to the data itself” where Harding sees the potential.“But to do all that without having the other stuff in place would be doing it in a trivial way, whereas we can actually do it in a meaningful way,” he adds. “It’s part of us staying the best iron ore producer in the world.”

Clear thinker

Andrew Harding has a secret weapon that helps to keep him at the top of his game: meditation.

“I meditate every day, and I’ve been doing it for years now … I think it absolutely puts me in a fabulous place,” he reveals. Harding also looks to other renowned leaders and thinkers for inspiration. 

“I love a statement by [former GE boss] Jack Welch about giving feedback to an employee when it’s too late. So I’m pretty strong on making sure that people get appropriate feedback.” 

He believes Italian historian Machiavelli is misunderstood. “If you take part of what he suggests ... you get some useful guides to managing and leading people.” 

The Asia strategy

The transformation underway in Chinese society, with hundreds of millions of people still moving from rural to urban living, provides a sound basis for optimism for a global mining giant like Rio Tinto.

“There is still a long way to go in the China story, despite all the short-term hiccups,” says Andrew Harding.

“I’m incredibly optimistic about development in Asia from an infrastructure point of view and growth in housing ... which all drives use of iron ore. You’ve got a few good decades of strong development in the Asia regions, and that’s good for us.”

Innovation: Australia's challenge

Harding, who works across Australia and in the company’s headquarters in London, says government support for innovation in Europe and Australia is strong. However, Australia doesn’t compare so well when it comes to the culture surrounding innovation.

It’s not about the generation of ideas, says Harding, noting Australia’s strong innovation history, from simple things such as the Hills Hoist to the complex cochlear hearing implants.

"It’s about the implementation, and I think it’s cultural,” he says, pointing to the tall poppy syndrome that he grew up with in Australia and which he believes can discourage achievement. 

“I also think we have very little venture capital support in Australia. I just don’t think people back things with high risk.”

Harding says places such as Silicon Valley attract strong start-up support, not because there’s a higher proportion of new ideas emerging there but because people are willing to get nine things wrong to have one success – “and I think that’s a challenge for Australia”.

“In China, you have vastly more confident venture capitalism taking place than we have here.”

Read next: What will happen to Australia when the mining boom ends?

November 2015
November 2015

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