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A Revolution in Mining Is Underway

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A revolution in mining is currently under way. Caterpillar (NYSE: CAT  ) is leading the field in automated mining equipment, which is driving down costs, boosting output and improving safety.

The last year has been a landmark year for automation within the mining industry as, back in July, a fleet of fully automated mining trucks was deployed for the first time. This space-age tech was deployed in Australia, where a fleet of 45 self-directed 240-ton Caterpillar mining trucks took the field and their deployment sent shivers around the industry.

The truck in question is Caterpillar's 793F off-highway truck, famed as one of the lowest cost per ton trucks available to the mining industry. Traditionally, these trucks would require four drivers in four shifts to operate at maximum efficiency 24 hours a day. So, Caterpillar's initial test fleet of 45 trucks would require 180 drivers, each on a salary of more than $100,000 per year; with automation there is no need for this high-cost labor.

This kind of automation and cost cutting is exactly what the mining industry needs as it grapples with rising costs and falling revenues. Actually, one of the industry's most concerning factors is the rapidly rising cost of skilled labor. Specifically, the cost of building an iron ore mine in Australia has almost doubled over the past five years to almost $195 per tonne, mostly due to rapidly rising wages.

This kind of automation and regeneration is also exactly what Caterpillar needs. In particular, as capital spending within the mining industry slows, Caterpillar's contracting revenue is falling rapidly. However, as mines upgrade their old trucks to newer, automated systems in an attempt to reduce costs, Caterpillar should see some strength in its order book.

One of many benefits
Nonetheless, falling labor costs are only one of many benefits that the mining industry will get from automation. Reduced incident rates, less down time, fewer mistakes, fuel efficiency and reduced wear and tear are all added benefits of using an automated fleet without human mistakes. Still, the fleet will need to be controlled, and this is done from a control center, but the trucks are programmed to operate in the most cost-effective and efficient way.

Rio Tinto (NYSE: RIO  ) is the leader in autonomous mining with one of the largest autonomous truck fleets working across three mines within Australia. The speed at which Rio has deployed these fleets highlights how desperate the industry is to use this tech.

Rio claims that the biggest success of the Autonomous Haulage System, or AHS, is that the trucks can work 24 hours a day with a much higher level of safety, as they never get distracted or tired, like human drivers. Additionally, the company states that its decision to use the system was supported by fact that the company would no longer need to deal with the hassle of moving human drivers back and forth between the remote mines.

The AHS is a key component in Rio's strategy of employing next-generation technology to increase efficiency, reduce costs, and improve health and safety. Rio has already reported a 10% improvement in utilized time with the AHS at its Pilbara mine in Australia. In the multi-billion dollar world of megamining a 10% improvement in utilization can add hundreds of millions to the company's bottom line.

Shifting oil
(NYSE: SU  ) is another company planning to introduce an AHS. If we factor in the 10% improvement that Rio has seen, we can gauge how beneficial this will be to Suncor's investors.

At present, Suncor's overall production cost per barrel of oil is around $35 and the company's year-to-date average barrel per day production from oil sands is 347,000. A 10% increase after the introduction of an AHS would lead to an average daily production of 382,000 barrels per day from oil sands. In effect this would add an extra $3.5 million a day, $1.3 billion a year to the company's top line. That's only a 3.3% boost to 2012 revenue. However, these numbers are only estimates and it is likely that the company would note lower costs from the transition as well, improving profit margins.

Foolish summary
The age of automation is just beginning within the mining industry, and it should lead to lower costs and larger profits. Caterpillar, as one of the pioneers behind this technology, should see a huge boost to sales as miners' clock onto the cost savings that can be achieved by using this technology. Thankfully, this comes at a time when the company is struggling due to poor levels of mine capital spending. However, I feel that this technology is something that miners will want to spend their hard-earned cash on.

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Related Tickers

9/29/2016 11:06 AM
CAT $88.08 Up +1.49 +1.73%
Caterpillar CAPS Rating: ***
RIO $34.02 Up +0.28 +0.83%
Rio Tinto CAPS Rating: ***
SU $27.77 Up +0.62 +2.28%
Suncor Energy CAPS Rating: ****