Picture: BLOOMBERG
Rio Tinto’s Hamersley Iron ship is loaded with iron ore in Western Australia in this undated company handout photo. Picture: BLOOMBERG

MELBOURNE — In the decimated mining sector, Anglo-Australian Rio Tinto is set to be the last man standing for investors, as sliding commodities prices force its peers to slash dividends, in a reversal of fortunes against arch rival BHP Billiton.

BHP used to brag that its oil and gas business, its second-biggest earner behind iron ore up to 2014, made it more resilient than its mining rivals, but bad bets on shale in the US and collapsing oil and gas prices have turned petroleum into a big drag.

Rio Tinto, long seen as a one-trick pony reliant on iron ore, is now favoured by investors over BHP, as it is expected to be able to maintain its dividend for at least another year, while BHP is widely expected to cut its payout in February or August.

"Rio’s our preferred pick, though we haven’t got a big exposure to either. It’s the lowest cost producer. Its balance sheet is stronger," said Paul Xiradis, CEO of Ausbil Investment Management, which owns shares in BHP and Rio. "BHP’s dividend is definitely under question."

Rio and BHP are releasing their quarterly operational results this week. BHP has said it will comment on its dividend at its financial results in February. Rio has said it is committed to its "progressive" dividend policy.

While both companies have suffered from plunging iron ore, copper and coal prices, BHP has had the extra headwind of a 75% drop in oil prices since June 2014 to 12-year lows.

"So whereas BHP previously enjoyed the benefit of a premium for the diversification it offered, that premium has been neutralised," said Hunter Hillcoat, an Investec analyst in London.

BHP’s shares have underperformed Rio Tinto’s over the past year, hurt by the oil pain plus the woes from a dam disaster in Brazil in November at a mine it half-owns. Its Australian stock has dropped 38% over the past year, against a 27% fall for Rio.

Brokers’ buy recommendations in Australia on Rio Tinto now outweigh hold or sell recommendations by about 2:1, while for BHP the buy and sell ratings are roughly evenly split, according to Thomson Reuters data.

It is a reversal of fortune for Rio, which was on its knees in 2009, reeling from an ill-timed $38bn takeover of aluminium company Alcan two years earlier, and forced into raising $15.2bn in the depths of the global financial crisis.

The problem facing both BHP and Rio is that they have long promised to maintain or increase their dividend every year, which is hard to justify in a world of tumbling commodity prices.

In BHP’s case it means that this year it would have to borrow to fund a payout of at least $6.5bn, the sum it paid out for the year to June 2015, if it sticks to that policy.

Rio Tinto, which in 2014 paid out $3.7bn in dividends, should be able to maintain that level for 2015, but continuing it beyond this year could strain its balance sheet.

As a result, investors do not expect Rio’s advantage to last long, as commodity prices are seen remaining weak for a few more years, with China’s growth slowing and supply gluts expected to persist.

"Obviously BHP is in a far worse position at this point in time, but I don’t think Rio’s that far behind," said Andy Forster, portfolio manager at Argo Investments, which owns both BHP and Rio shares.

Reuters