Rio Tinto's Ore Mining: Making Hay from Water

Abstract

When the Rio Tinto mining company decided to increase its output of iron ore by 25% in its Marandoo location, it had to deal with an unexpected problem: an excess of water in the deep reaches of the mine. Because freshwater is a scarce resource in this region of Australia, Rio Tinto's challenge was to come up with a comprehensive water strategy for the region. This case is used in Darden's Economics of course elective. Excerpt UVA-GEM-0130 Rev. Aug. 17, 2016 Rio Tinto's Ore Mining: Making Hay from Water When contemplating Rio Tinto's phase-two plans for the Marandoo mine in Western Australia, one could only be reminded of Tom Albanese, former CEO of Rio Tinto, and his outspoken view that for Rio Tinto, water was a strategic issue and first and foremost an enabler for mining. In one of the driest places on Earth, the second-largest iron ore producer was grappling with a major water problem: an excess of water. In an aggressive effort to increase output and ride the wave of China's appetite for raw materials, Rio Tinto had chosen, among others, the Marandoo mine in remote Pilbara to increase its overall capacity to 360 million tons, up from 290million tons (see Exhibit 1). Considering the ever-decreasing amount of readily accessible iron ore, Rio Tinto wanted to drill deeper and was aiming for the vast stores of ore underneath the water table, which were often hundreds of meters below the earth's surface. The ambitious undertaking came, however, with particular challenges. Being able to operate the mine under such circumstances meant being able to dispose of the surplus water, a process often referred to as dewatering. It was an open question whether Rio Tinto was developing a template for iron ore mining in the 21st century by its approach to the Marandoo expansion project. The Changing Mining Landscape The mining industry had been booming in Australia and elsewhere since early 2000. Commodity prices were rising higher and for a more extended period of time than during the previous boom period of the 1970s. Rapid growth in Asia and especially in China was driving demand for commodities, particularly in steel and energy generation. The landscape was very different from that of the lackluster 1980s and 1990s with Japan's “lost decade” and the Asian Financial Crisis. The rise in commodity prices this time was accompanied by a shift in resources toward mining, which triggered a large increase in the real exchange rate of the Australian dollar. The latter challenged the competitiveness of both the export- and import-competing industries, to such an extent that some economists started talking about “Dutch Disease” in the context of Australia. Rio Tinto expected continued strong fundamentals, especially in iron ore demand, despite some slowdown in Chinese economic growth (see Exhibit2). . . .