Citi says Rio Tinto’s earnings outlook is healthier than that of rival BHP Billiton. Photo: Peter BraigRio Tinto has beatenBHP BillitonasCiti’s preferred pick among the big miners, retaining its “buy” ratingdespite a heavy reliance on iron ore.
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Rio, which is currently trading at $52.23, has been given a target price of $58 by Citi.

“Rio trades on significantly lower earnings multiples than BHP on both our forecasts and spot prices,” said Citi.”Combined with a stronger balance sheet this makes buy-rated Rio our preferred diversified mining stock.”

Under the heading “tables turned”, Citi noted that Rio’s 2015 first half earnings were higher than BHP’s for the first time since the BHP and Billiton merger.

Citisaid that Rio’s underlying earnings would be higher than BHP’s for the next two-and-a-half years, aided by the South32 demerger and ongoing pressure on the prices of oil and coking coal, part of BHP’s energyportfolio.

Citi admittedits predictions for Rio, which is more exposed to iron ore than BHP,was”somewhat surprising” given Citi’sown forecasts for iron ore.

Citi expect Rio to deliver higher earnings than BHP through until 2017.

Iron ore, which has just dipped below $US50, willtrade around $US40 per tonne for the nextthree years, the bank said.

Although the iron price “appeared already priced in” for Rio, Citiconceded that “headwinds are never easy to run into”.

The key risk to the forecast was that “iron ore continues to slide into year-end driven by continued growth in seaborne production, falling cost curve and the negative steel spread.”

BHP, currently trading at $23.98, was given a $24 price target by Citi. It retained its “neutral” rating.

In terms of the medium-term outlook, Citi said that at current forecasts “we expect Rio to deliver higher earnings than BHP through until 2017, before BHP briefly regains the upper hand for two-and-a-half years.”

But following that, “Rio once again takes the title as iron ore and aluminium prices recover.”