Ron,
What you are seeing is the dust. When they grind the rail, besides starting fires, it puts fine particles of iron, rust and what ever in the air. Some where on the web, I saw a picture of a rail that had been freshly ground. Really an interesting pattern on the head of the rail. They have a dozen heads or so for each rail. That is how they get the proper shape back on the rail. Also, part of the dust would be the heads slowly disintegrating. Hope this explanation helps.
Greg Elems