For most miners, the period of runaway cost inflation is over. Cheaper oil, weaker producer-country currencies and industry-specific deflation point to lower operating and capital costs in 2015 and beyond. The lower cost curve and plentiful supply are also forces for lower prices. We've updated mid-cycle price estimates after revisiting long-term outlooks for a range of commodities. Our revised mid-cycle price for Brent oil is $75 per barrel (down from $100) while our revised mid-cycle price for US natural gas is $4 per thousand cubic feet, down from $5.40 per mcf (all in 2018 dollars). We also reduce mid-cycle prices for iron ore by 15% to $65 per tonne, metallurgical coal by 12% to $117 per tonne, copper by 2% to $2.45 per pound, aluminium by 25% to $0.85 per pound and nickel by 33% to $6.00 per pound, among others.
For Australian holders of 
BHP Billiton (BLT) and Rio Tinto (RIO) shares, the negatives are substantially offset by a reduction in the Australian dollar/US dollar exchange rate to 0.76; lower assumed operating costs courtesy of lower energy prices, labour costs and other key operating and capital inputs; and a focus on other cost-outs.
BHP Billiton – Hiking Valuation on UK Shares
BHP CEO Andrew Mackenzie has said the firm is reducing costs and improving productivity across the group faster than originally planned. Our Australian dollar fair value estimate remains AUD 40 per share, but our valuation declines 15% in US dollar terms to $30 and in British pounds rises to 2,365 pence per share (from 2,175p).
Our fiscal 2015 and 2016 earnings forecasts decline 12% and 15% to AUD 1.69 and AUD 1.75 per share, respectively, on reduced commodity prices. Our narrow moat and medium fair value uncertainty ratings remain and we still project a return to mid-double-digit returns on invested capital by 2020.
BHP is undervalued. The market underestimates the resilience of earnings and growth options that come from long-life, low-cost, expandable assets. Hence, the LSE listing carries a 5-star Morningstar rating signifying how undervalued the stock looks.
Rio Tinto – Hiking Valuation on UK Shares
Rio achieved $4.8 billion of sustainable cash cost improvements, of which just $1.5 billion was captured in 2014. It expects further cost improvements of $750 million in 2015, bringing annualised cost savings to $5.5 billion, and has guided capital expenditure to remain at just $7 billion for the next three years.
Our fair value estimate stands in Australian terms at AUD 60 per share, but declines 10% in US dollar terms to $45 per share, and rises in British pounds to 3,380 pence from 3,100p previously.
In the near term our fiscal 2015 and fiscal 2016 earnings forecasts decline 13% and 7% to AUD 3.58 and AUD 4.25 per share, respectively, on lower commodity prices. Rio Tinto's cost cuts do not improve the relative competitive position, as the whole industry curve is moving down. We maintain our narrow economic moat rating, founded on low-cost supply thanks to high quality geological deposits, and economies of scale. Fair value uncertainty remains high in recognition of outsized exposure to iron ore. At AUD 58, Rio Tinto is close to fairly valued, but the LSE listing currently trades at just 2,836p—well below our fair value estimate.
