London - Rio
Tinto Group agreed to sell its thermal coal assets in Australia’s Hunter Valley
for as much as $2.45 billion as the world’s second-biggest mining company
accelerates its move away from the fuel.
Rio will sell
its Coal & Allied Industries subsidiary to Yancoal Australia,
controlled by China’s Yanzhou Coal Mining, it said in a statement on
Tuesday. The deal, subject to Australian government approval, includes an
initial $1.95 billion cash payment and $500 million in annual installments of
$100 million over five years following completion. Yancoal said the
acquisition would make it Australia’s largest pure-play producer of the
commodity.
Rio has sold at
least $7.7 billion in assets since 2013 as it sought to weather the downturn in
commodities that was sparked by China’s slowing growth and a glut of raw
materials. It has been shedding its Australian coal assets since dismantling
its energy division in 2015 and the deal with Yancoal includes its biggest
accounted for more half of Rio’s coal production last year. It’s coal business
was already dwarfed by its operations such as iron ore and aluminium with
earnings contributing less than 10 percent of its $34.8 billion in sales last
year. Rio said the sale won’t have a material impact on its earnings per share.
“It was kind of
getting to the point where thermal was irrelevant, they’re an iron ore, copper aluminium
and industrial minerals business,” Richard Knights, a mining analyst at Liberum
Capital in London, said about Rio. “Timing wise it feels like now is a
fantastic time to offload coal assets.”
Thermal surge
Thermal coal
surged last year amid mining restrictions in China. Output by the world’s
biggest producer and consumer of the fuel fell 9.4 percent last year, while
imports reversed two years of declines and rose 25 percent, the fastest pace
since 2012. Australia’s Newcastle coal, an Asian thermal benchmark, surged more
than 80 percent in 2016, snapping five years of declines.
Prior to
February 24, Yancoal Australia is entitled to elect an alternative purchase
price structure of a single cash payment at completion of $2.35 billion. After
the sale is completed, Rio Tinto will also be entitled to potential royalties.
Yancoal is 13 percent owned by Asian commodity trading giant Noble Group,
which is backed by China’s sovereign wealth fund.
“This is a
transformative and exciting acquisition for Yancoal shareholders and will form
the basis for our future growth and success as Australia’s largest pure-play
coal company,” Yancoal Chairman Xiyong Li said in a statement.
Yancoal plans to
fund the deal through a capital raising and a share sale. It expects the purchase,
which is subject to Australian approvals as well as Chinese regulatory
agencies, to be completed by the third quarter of this year.
‘Quite positive’
“Yancoal made
the move probably because the profit outlook for thermal coal is quite positive
going forward,” Shi Yan, a Shanghai-based analyst at UOB-Kay Hian, said by
phone.
Listed in 1998
in Hong Kong, Shanghai and New York, state-owned Yanzhou Coal Mining is 56
percent owned by Yankuang Group, which is controlled by China’s state-owned
Assets Supervision and Administration Commission of Shandong Province.
Rio shares gained
3.8 percent to 3 608 pence by 10:42 a.m. in London. Rio said its shareholders
will be required to vote on the transaction given Yancoal is considered a
related party due to the fact Aluminium Corporation of China is a 10 percent
shareholder in Rio.
Last year Rio
divested its Mount Pleasant project and completed the sale of a 40 percent
stake in the Bengalla venture to New Hope for $617 million.
Read also: Management reshuffle for Rio Tinto
“I don’t think
they’re going to be hoarding the cash,” said Liberum’s Knights. “They are
making a tremendous amount of cash at the moment. They’re likely to pay a
dividend at the top end of the guidance and there’s clearly scope for a decent
sized special dividend.”
Coal &
Allied is the holding company for Rio Tinto’s thermal coal business in the
Hunter Valley region of New South Wales. Details of the assets include:
The Hunter
Valley Operations and Mount Thorley Warkworth mines together produced 25.9
million tons of saleable thermal and semi-soft coking coal last year, with 17.1
million tons being Rio’s share. Coal & Allied owns and operates open cut
mines in the Hunter Valley, with a 67.6 percent stake in the Hunter Valley
Operations mine, an 80 percent interest in Mount Thorley, 55.6 percent in the
Warkworth mine and a 36.5 percent interest in Port Waratah Coal Services, which
owns a coal export terminal at the Port of Newcastle, as well as other assets.