Rio hastens coal retreat with US$2.45b sale of mines

[SYDNEY] Rio Tinto agreed to sell its thermal coal assets in Australia's Hunter Valley for as much as US$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 Ltd subsidiary to Yancoal Australia Ltd, controlled by China's Yanzhou Coal Mining Co, it said in a statement on Tuesday. The deal, subject to Australian government approval, includes an initial US$1.95 billion cash payment and US$500 million in annual installments of US$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 US$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 producing mine, Hunter Valley Operations.

The assets 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 aluminum with earnings contributing less than 10 per cent of its US$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 aluminum and industrial minerals business," Richard Knights, a mining analyst at Liberum Capital Ltd in London, said about Rio. "Timing wise it feels like now is a fantastic time to offload coal assets." 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 per cent, the fastest pace since 2012. Australia's Newcastle coal, an Asian thermal benchmark, surged more than 80 per cent 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 US$2.35 billion. After the sale is completed, Rio Tinto will also be entitled to potential royalties. Yancoal is 13 per cent owned by Asian commodity trading giant Noble Group Ltd, 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."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 per cent owned by Yankuang Group Co, which is controlled by China's state-owned Assets Supervision and Administration Commission of Shandong Province.

Rio shares gained 3.8 per cent to 3,608 pence by 10.42 am 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 Aluminum Corp of China is a 10 per cent shareholder in Rio.

Last year Rio divested its Mount Pleasant project and completed the sale of a 40 per cent stake in the Bengalla venture to New Hope Corp. for US$617 million."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."

BLOOMBERG