Creating the world's largest moving robots to transport iron ore across the vast Australian Outback is proving more complex and time-consuming than expected for Rio Tinto Group, fueling doubts the technology can deliver promised returns as major rivals defer similar investments.
Rio, which gets more profit from iron ore than anything else, is already two years behind schedule with a $518 million effort to deploy automated trains on its 1,056 miles (1,700-kilometers) of track. While the system was designed to save money by expanding capacity and reducing labor costs, instead the delays mean the producer has cut output forecasts, and raised questions about whether the project is viable, according to Deutsche Bank AG.
"There was an underestimation of the mechanical work we had to actually do versus the reality," Andrew Harding, the chief executive officer of Rio's iron ore unit, said in a June 3 interview in Perth.
"The second issue is working our way through carefully implementing the various software upgrades as we go along." He declined to specify when the program may be completed, though he said he had no doubt it would.
Big mining companies like Rio are no strangers to automation in Australia, the world's biggest iron ore exporter. Many use driverless systems for trucks and drills at mines and remotely operated equipment at export terminals.
Winning savings on the trip between those two locations is proving more difficult, as the industry seeks methods to extend cost cuts as iron ore prices have tumbled 74 per cent from a record in 2011.
BHP Billiton, which in 2014 suggested it might start using automated trains, has "no immediate plans to adopt driverless trains," the company said in an e-mailed statement, adding that it's focused on improvements to signaling and wireless communications.
Billionaire Gina Rinehart's new $10 billion Roy Hill operation has yet to determine if returns on the technology are worth the investment risk, while Fortescue Metals Group, said in an e-mailed statement that it has "no plans to introduce" the automated trains.
London-based Rio said in 2012 that its automated-train project would be finished by 2014, ushering in 2.3-kilometer-long convoys that would essentially be the world's largest moving robots, overseen by an operating center about a 90-minute flight away in Perth. The producer forecast in September the work would be finished by mid-2016, and says it will give Rio a decade of competitive advantage over rivals who didn't have the technology.
"It's been disappointing that it's taken as long as it has," said Andy Forster, a senior investment officer with Argo Investments Ltd., which manages about A$5 billion ($3.6 billion) in Australia and holds Rio and BHP shares. "There is a risk, as has been seen, associated with going down this path."
When you look at the technology challenges of going to the next step, you really are taking some risk with the returns.
While Rio hasn't specified precise details for the delays, the issues likely relate to communication and connectivity with the locomotives and being able to control and respond to issues on the track, according to Emilie Ditton, Sydney-based research director at IDC Energy Insights. It's much easier for new entrants such as Roy Hill to build infrastructure with capabilities for automation than to retrofit existing railways, she said.
Automating Rio's railroad will allow the producer to recover two hours of running time per train per day by removing the need to stop to change drivers. It will also help expand capacity without the need to invest in more locomotives or cars and reduce energy costs, according to the company. Rio hasn't set out specific estimates of savings. Eventually, the system could cut the wage bill for drivers by half, according to a 2013 estimate from Credit Suisse Group AG.
"When you look at the technology challenges of going to the next step, you really are taking some risk with the returns," said Bruce Brymer, manager of rolling stock maintenance at Roy Hill, which began exports in December and uses some automation and remote operating. "It's a matter of making sure that the value proposition is solid and that the return on investment is going to be real -- and we are not there yet."
There are some teething issues, but it's a blip in the long-term story.
When the potential returns aren't so clear "it's a much more complicated task to convince investors or boards to make such investments now," said Kieron Hodgson, a London-based analyst at Panmure Gordon & Co. "I'd hesitate to say that many others will happen."
Last year, Rio's cash cost for iron ore fell 24 per cent to $14.90 a metric ton.
Producers are winning savings mainly because of a stronger dollar and cheaper freight rates, according to Citigroup Inc. Rail costs typically account for about $2 a ton, meaning Rio is targeting "quite small incremental gains," said Clarke Wilkins, a Citigroup analyst in Sydney. "The big and easy cost savings have been done," he said.
Even with delays, the introduction of rail automation can help producers to further reduce costs, according to Randal Jenneke, head of Australian equities at T. Rowe Price Group Inc. "This is the right way to address the cost-structure issues," Jenneke said.
"There are some teething issues, but it's a blip in the long-term story."