If life at the coal face is tough, life shoveling iron ore isn't proving much easier.

The steelmaking ingredient has fallen about 40% in price this year to around $80 a metric ton. That leaves both the market and Rio Tinto, the Anglo-Australian miner that makes most of its money from iron ore, peering over the edge of a deep pit.

Iron ore has sunk below where it fell to in the summer of 2012 and is approaching levels last seen during the financial crisis. Two years ago, higher-cost production in China shut down, putting a floor under prices. As yet, it isn't clear that is happening this time round.

Rio's chief executive Sam Walsh has said 85 million metric tons of production has come off the market so far in 2014. But, notes HSBC, HSBA.LN +0.57% Chinese production was flat in August versus July and up 5% on the previous year. Chinese domestic prices have held up versus those for seaborne iron ore so one hope is that production slows as that gap closes.

Weakening demand from the Chinese property market plus abundant supply from the biggest global miners has shifted down the level at which iron ore prices find equilibrium. The capacity easiest to remove—tiny Chinese producers with costs over $100 a metric ton—is already toast. The next group, with costs of $80 to $100, will be tougher to shift.

Rio risks being backed into a corner. Under Mr. Walsh, the company's strategy rests on showing its low-cost mines can churn out cash regardless, funding payouts to shareholders. That apes the Rio of the 1990s: commodity prices were flat but the miner produced steady earnings growth and paid predictable dividends. For that it earned a premium valuation, with a dividend yield lower than the market's, notes Morgan Stanley.MS +1.26% Rio could still generate average annual free cash flow of more than $4 billion from 2015 to 2019 with iron ore at $70 a metric ton, reckons the bank, assuming annual investment at Rio's targeted $8 billion.

That would cover dividends but leave little room for further generosity on payouts. With some forecast investment unallocated, Rio has room to trim its spending budget further. But that reflects, in part, a paucity of substantial growth options. And cutting the budget could smack of borrowing from future growth to fund payouts, particularly as Mr. Walsh is expected to step aside as chief executive in the next two years.

Rio has got some credit this year: despite iron ore's slump, the stock is down about 8%. But its dividend yield is above the market's and has been rising. Indeed, it has rarely been higher over the past 15 years, except during the financial crisis. For now, Rio's numbers work. But, by full-year results in February, the miner needs to show the courage of its convictions, announcing even a small share buyback—or, embarrassingly, concede its strategy isn't ironclad after all.