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COMMENTARY

Coal clearout puts Rio Tinto on path to greener deals

Singapore

RIO Tinto is on a path to greener deals. The Anglo-Australian miner has raised US$4.2 billion this month getting out of coal. That implies more buybacks, and fewer environmental concerns, helping lift a modest valuation. It can also focus on future growth, including investments in battery ingredients.

The exit from coal stems from the dismal US$3.7 billion acquisition of Mozambique-focused Riversdale Mining in 2011. Had that deal worked out, coal might have become a core business for Rio, but after it was sold for a pittance, Rio started looking elsewhere. The exit accelerated under Jean-Sébastien Jacques, who took over as chief executive in 2016. Rio left thermal coal last year, selling Coal & Allied, and is now out of steelmaking coal.

The retreat has proven lucrative: Rio has garnered better offers than the market had anticipated, thanks to sturdy coal prices. The sale of a majority stake in the Kestrel Mine to Indonesian miner Adaro Energy and private equity firm EMR Capital, unveiled on Tuesday, was at US$2.3 billion, or 6.6 times last year's EBITDA. That looks good, considering dedicated coal miners traded at an average 4.5 times EBITDA over the course of 2017, according to BMO analysts.

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As with Coal & Allied, the sale is likely to mean more cash for shareholders, once the current financial year ends. And Rio becomes the only major miner without coal, a bonus for environmentally minded investors. That should help lift its shares - good news for Jacques, who aims to rebuild the premium Rio enjoyed in the 1990s under the "two Bobs", Bob Wilson and Bob Adams. Rio trades at just under 6 times forward EBITDA, compared to BHP and Glencore at just over 6 times.

Still, shedding coal makes Rio the least diversified of the mining heavyweights, focused largely on just three areas: aluminium, iron ore and copper. Rio has already set up a unit to look into resources geared to the new economy. Among other things, this means lithium and other minerals that are vital for the batteries that power electric vehicles, store solar energy and so on. So Rio could recycle some proceeds from coal into a greener future. REUTERS