Following financial and construction difficulties, the routes from Strata Florida to Llanidloes via Devil's Bridge and branch to Aberystwyth were not built, instead in 1865 the Manchester and Milford Railway built an easier route via the Ystwyth valley to Aberystwyth. This left the Rheidol Valley and lead ore mines without a railway.

Gradually an alternative scheme was planned using a narrow gauge line to serve the Rheidol Valley was developed. Initially a 2 ft 3 in (686 mm) gauge was planned to be used similar to the nearby Plynlimon and Hafan Tramway. Following closure of this tramway, the gauge was changed to 1 ft 11+3⁄4 in (603 mm) instead. After submitting an Act of Parliament in 1897, it was not possible to raise finance as quickly as expected, and construction commenced in 1901.

By the time the railway was ready to open in 1902, lead mining in Ceredigion was in steep decline. However a significant growth in tourism was under way, and the carriage of passengers soon became the principal traffic of the railway. It opened for mineral traffic in August 1902 and for passengers on 22 December 1902.