The two mining giants BHP Billiton (LSE: BLT) (NYSE: BBL.US) and Rio Tinto (LSE: RIO) (NYSE: RIO.US) have fallen out of favour with the market during the past year. Indeed, global economic uncertainty, volatile commodity prices and falling profits are all factors that have combined to scare investors away from these two behemoths of the resource sector.
However, the outlook for both BHP and Rio appears to be improving as the global economic recovery is starting to get back on track. Additionally, both miners have recognised the need to cut costs and reduce capital spending, two factors that should improve profits for shareholders.
Improving outlook
What’s more, both Rio and BHP should benefit from a rising iron ore price, as both companies generate a large amount of their income from mining the commodity.
In particular, after a year of poor performance, the price of iron ore hit a nine-month high last week of $139.40 per ton. This high came as steel mills within China imported a record amount of ore. Actually, iron ore’s rising price is even more impressive considering the fact that the iron ore market will be oversupplied for the next few years.
In particular, City analysts expect the iron ore market to be oversupplied by around 71 million tons during 2014.
Furthermore, despite concerns about a slow-down in China, the country’s steel output is set to reach a record level this year, 10% higher than 2012 as the construction boom continues.
Slashing costs
However, it’s not just the rising price of iron ore that gives me reason to be upbeat about the prospects of BHP and Rio. I’m also impressed by both companies’ drive to slash capital spending costs and seek out quality over quantity. For example, Rio recently revealed plans to slow development of the company’s iron ore mines within Australia. This slowdown will save the company $3 billion in costs by will still lead to a 35% increase in output.
Meanwhile, BHP recently announced plans to cut its projected capital spending for 2014 by 32%, to $15 billion, down from the $22 billion it spent during the last financial year. Nonetheless, despite this reduction in capital spending, BHP remains committed to quality projects. Specifically, the company is spending $4 billion to develop its shale oil projects within the US, which are expected to generate $3 billion in cash annually by 2020 — a great return on investment.
As part of its cost cutting plan, BHP is cutting executive pay.
Foolish summary
So overall, while BHP and Rio have had a tough year so far things could be improving for the miners. Lower capital spending costs and the rising price of iron ore should be two factors that when combined, lead to wider margins and greater profits.
