RIO Rio Tinto Plc

LONDON—Moody's Investors Service said on Friday it was reviewing the credit rating of mining giant BHP Billiton Ltd. for a possible downgrade, ratcheting up pressure on the world's largest diversified miner, amid tumbling commodities prices and a mining disaster at a BHP joint venture in Brazil.

The commodities rout has sent mining shares falling sharply, triggering moves by many to shore up cash through asset sales and dividend cuts. BHP, however, enjoys one of the industry's strongest balance sheets, and its low-cost operations have helped buoy earnings, compared with many peers.

It has long enjoyed a solid, investment-grade A1 rating from Moody's. The agency said on Friday, however, that it was reviewing whether to downgrade that to A2—still comfortably investment grade—after Moody's lowered price assumptions for BHP-produced commodities like oil, iron ore and coal.

"The review for downgrade reflects Moody's expectation that weak commodity prices will persist for the next several years, significantly reducing BHP Billiton's earnings and cash flow generation," said Matthew Moore, a senior credit officer at the agency.

BHP shares were up 6 pence, or 0.8%, at 705.7 pence a share in late-morning London trading, while the FTSE-350 mining index was flat, and shares of fellow Anglo-Australian peer Rio Tinto PLC were down 0.4% in London.

Moody's lowered its crude oil price assumption to $43 and $48 a barrel in 2016 and 2017, respectively, and forecast iron ore to average $40 and $45 a ton for those years. Oil and iron ore are BHP's biggest earnings drivers, with each dollar movement in those two commodities moving the company's bottom line by about $200 million this financial year, according to the company.

The credit scrutiny for BHP follows Moody's decision last week to downgrade Anglo American, the world's fifth-largest miner by market value, by a notch, due to weak commodity prices. Anglo American has responded vigorously to the fall in commodities, promising to shed assets and employees and suspending its dividend. Glencore PLC, a mining and trading giant, earlier this year made similar moves to bolster its balance sheet— suspending its dividend and promising big asset sales.

Moody's warned that, without "material countermeasures" taken by BHP, it would risk a downgrade. Moody's expects the miner's key credit ratio of adjusted debt to earnings before interest, taxes, depreciation and amortization, or Ebitda, to come in at 2.0 to 2.5 over the next 18 months, given BHP's current capital expenditure and dividend plans. That's just above the maximum 1.5 limit set for Moody's A1 credit rating.

A BHP spokesman declined to comment. Chairman Jacques Nasser didn't rule out a dividend cut at an investor meeting in November, saying "the one thing we never risk is the strength of the balance sheet through the cycle."

Further pressuring BHP is a mining disaster at a joint venture it owns with Vale SA. Last month, a dam burst at an iron-ore mine operated by Samarco Minerao SA, unleashing an avalanche of mud that killed at least 15 people, destroyed villages downstream, and polluted hundreds of miles of waterways in the Rio Doce basin. The Brazilian government has called on Samarco to set up a $20-billion Brazilian reais ($5.2 billion) fund to deal with the flood's social and environmental damage. BHP Billiton previously said it is committed to supporting Samarco rebuild the community and restore the environment.

Write to Alex MacDonald at alex.macdonald@wsj.com

(END) Dow Jones Newswires

December 18, 2015 08:05 ET (13:05 GMT)

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