Rio's income case is now compelling

Indeed, in a base case provided by analysts at Morgan Stanley, commodity prices are predicted to rise by 14 per cent next year, before accelerating by a further 19 per cent in 2017. If true, it would certainly firm up the income case for either of the Australian iron ore kings, but we actually think this still applies even in the event of a relatively subdued retracement.

Of the two, we would now plump for Rio Tinto based on its low-cost production profile, combined with expectations of solid free cash flow and cash profit margins sustained around the 30 per cent level. Admittedly, the dividend-cover ratio looks set to contract from 2.5 at the 2014 year-end and perhaps even dip below one in 2016 before earnings stage a recovery. But given Rio's falling capital demands and relatively modest net borrowings, we think the payout won't disappoint.

Management has deferred spending on non-core projects, while raising the full-year cost-saving target by a third to $1bn after reporting first-half cost savings of $641m. The group also recently hived off its 40 per cent stake in the Bengalla thermal coal mine for $606m - a pleasing price tag for Rio given conditions in that particular market.

Rio Tinto now expects to spend $5.5bn on capital commitments this year, down from $8.2bn in 2014. As a consequence, Rio should be able to fund its dividend without increasing net debt, so long as iron ore prices don't tank from current levels. And although the group's first-half operating cash flow fell 19 per cent to $4.4bn, it was still sufficient to cover sustaining capital expenditure and dividend payouts in the period of $3.4bn.

Iron ore generates the lion's share of Rio's underlying earnings, but the group is looking to diversify these streams through a large-scale investment in the Oyu Tolgoi copper mine in Mongolia. It took a month of Sundays to reach agreement with Mongolian officials on the best way to take the project forward, but the planned expansion will drive up mine life and open up 80 per cent of the available resources, rendering Oyu Tolgoi the world's third-largest mine for copper and gold. In keeping with Rio's existing iron ore assets, the sheer scale of the Oyu Tolgoi complex means that its cash operating costs are expected to fall towards the lower end of the cost spectrum.

Indeed, the question of benefits of scale is fundamental to the investment case for Rio. Evidence is mounting that the sharp fall-away in commodity prices is now forcing low-margin production out of the market. And yet Rio has continued to drive up capacity in Australia's Pilbara region despite the negative outlook on China. First-half production of 154m tonnes was 11 per cent up on the corresponding period in 2014.

The step up in production has enabled Rio to partially insulate its margins despite a marked top-line decline. But Rio's actions - along with BHP's - have exacerbated a hefty supply-side surplus at a time of faltering demand. Earlier this year, Andrew Forrest, chairman and founder of Australia's Fortescue Metals Group, likened the groups' actions to a "last man standing" policy. When business rivals make comments like that, you're probably doing something right.