Rio Tinto Nears Exit From Coal With $2.45 Billion China Deal (3)

(Bloomberg) -- Rio Tinto Group moved closer to an exit from thermal coal after the world’s second-biggest miner agreed to sell most of its mines to a company controlled by China’s Yanzhou Coal Mining Co. for $2.45 billion. Shares in both companies rose Wednesday.

The sale, which includes Rio’s biggest Australian coal operation in the Hunter Valley region, leaves the company with only two producing coal mines in the country that was once the cornerstone of its energy business.

“It was kind of getting to the point where thermal was irrelevant, they’re an iron ore, copper, aluminum and industrial-minerals business,” said Richard Knights, a mining analyst at Liberum Capital Ltd. in London. “Now is a fantastic time to offload coal assets.”

Thermal coal prices surged last year after China introduced mining restrictions. Output by the world’s biggest producer and consumer of the fuel fell 9.4 percent in 2016, while imports reversed two years of declines to gain 25 percent, the biggest increase since 2012. Australia’s Newcastle coal, an Asian thermal benchmark, surged more than 80 percent in 2016, snapping five years of declines.

Rio advanced 3 percent to A$66.69 a share by 3:34 p.m. in Sydney, after closing at the highest since March 2015 on Tuesday. Yanzhou Coal Mining gained 0.5 percent to HK$5.88, after jumping the most in six weeks on Tuesday.

The deal is the first major transaction by Rio under Chief Executive Officer Jean Sebastien Jacques, who took over from Sam Walsh in July. Prior to being made CEO, Jacques headed the copper business. A company restructuring in 2015 led to coal being incorporated into the unit led by him.

Payment Terms

The sale to Yancoal Australia Ltd. includes an initial $1.95 billion cash payment and $500 million in annual installments of $100 million following completion. Yancoal, which is 13 percent owned by Asian commodity trading giant Noble Group Ltd., said Tuesday the acquisition would make it Australia’s largest pure-play producer of the commodity. Chinese state-owned Yanzhou Coal owns 78 percent of the Australian Securities Exchange-listed company.

The deal requires the approval of Australia’s Foreign Investment Review Board and Hans Hendrischke, a professor of Chinese business and management at the University of Sydney Business School, expects it to clear the regulatory hurdle.

“There is no basis to assume it will not win approval,” Hendrischke said by phone Wednesday. “A deal like this, of this size and importance, would not be announced without Rio Tinto and Yancoal having touched base with Canberra,” he said, referring to Australia’s capital.

Yancoal Australia jumped as much as 4.2 percent to 50 Australian cents, while Noble Group was steady at 17.3 Singapore cents. Rio Tinto and Yancoal shareholders need to approve the deal which is expected to be completed in the September quarter.

Yancoal will also make an offer to Mitsubishi Development Pty, which owns a 32.4 percent stake in the Hunter Valley coal assets, according to the statement Tuesday.

Mitsubishi Corp. is considering whether or not to sell its share in the mine, said a spokesman who declined to elaborate and asked not to be identified, citing company policy. The parent added 0.6 percent to 2,601.5 yen in Tokyo trading.

Rio has sold at least $7.7 billion in assets since 2013 as it sought to weather a downturn in commodities sparked by China’s slowing growth and a glut of raw materials. It has been shedding Australian coal assets since dismantling its energy division in 2015.

Other Businesses

After divesting its Mount Pleasant project and completing the sale of a 40 percent stake in the Bengalla venture to New Hope Corp. last year, the sale of its Coal & Allied Industries Ltd. unit to Yancoal leaves Rio with the Hail Creek and Kestrel mines, both of which are primarily producers of coking coal, used to make steel. The two mines produced a combined 8.1 million metric tons of coking coal and about 3.7 million tons of thermal coal last year.

Rio’s coal business was already dwarfed by output from operations such as iron ore and aluminum, with the unit contributing less than 10 percent of its $34.8 billion in sales for 2015. Rio will report 2016 earnings on Feb. 8.

The sale won’t have a material impact on earnings per share, the miner said.

Its retreat from coal comes against a backdrop of investor and regulatory scrutiny on the potential for untapped fossil fuel assets to be left stranded as governments adopt stricter climate change policies. Norway’s $870 billion sovereign wealth fund, the largest of its type in the world, last year moved to ban investment in companies that base at least 30 percent of their business on coal or revenue from the fuel.

For more on the sale and what it means for Yancoal, click here

The sale may be a boon for Rio investors in the form of future dividends, Liberum’s Knights suggested.

“I don’t think they’re going to be hoarding the cash,” he said. “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.”

Rio said its shareholders will be required to vote on the transaction because Yancoal is considered a related party due to the fact Aluminum Corp. of China, which is also state-owned, is a 10 percent shareholder in Rio.

(Updates with government approval condition in eighth paragraph.)

--With assistance from Rebecca Keenan Aibing Guo Jing Yang and Ichiro Suzuki To contact the reporters on this story: Jesse Riseborough in London at jriseborough@bloomberg.net, Brett Foley in Melbourne at bfoley8@bloomberg.net, Thomas Biesheuvel in London at tbiesheuvel@bloomberg.net. To contact the editors responsible for this story: Ramsey Al-Rikabi at ralrikabi@bloomberg.net, Liezel Hill, Keith Gosman

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