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BHP and Rio defy mining trend, continue growth

Despite the heavy headwinds facing the mining sector, resource heavyweights BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) are continuing to grow their businesses, electing to take the risk of further capital investment as opposed to succumbing to pressure from investors.

Investors have been pressuring resources companies worldwide to slow down on capital spending to instead focus on increasing productivity and reducing costs in order to improve long-term sustainability. Whilst there are strong signs that growth in China is slowing down significantly and commodity prices will weaken, it seemed that this argument was very justifiable.

Earlier in the year, BHP and Rio both confirmed that cutting costs and increasing shareholder returns would be primary focuses moving forward. In their respective earnings reports released over the last few weeks, both companies stated that massive capital expenditure would be made on expanding existing projects.

BHP announced that a further US$2.6 billion would be spent on its Jansen potash project, despite investors urging that it slow down investments or reconsider the project’s potential. It is estimated the project will cost a total of US$15 billion. Meanwhile, Rio announced that production of iron ore could eventually be pushed to 360 million tonnes per year, which would apply significant downwards pressure on the price of the commodity.

In BHP’s case, analysts and investors are beginning to come around to the Jansen decision. Whilst it did not sit well with many immediately following the announcement, CEO Andrew Mackenzie has explained that he believes the long-term potential for potash is outstanding. He said, “we strongly believe that over decades to come, this has the potential to deliver significant returns to our shareholders.” Furthermore, he is also looking for partners to share in the development of the project, which would ultimately spread the risk and financial burden involved.

Foolish takeaway

Although the companies have announced that heavy investment in potash (BHP) and iron ore (Rio) will continue, it should be noted that each has made significant progress in cutting costs and capital spending in other areas. For instance, BHP cut its costs by US$2.7 billion for the full year and promised that a “lot more” savings were still to come.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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