Rio Tinto Sells Australian Coal Asset for $606 Million
Rio Tinto PLC’s sale of a 40% stake in an Australian coal mine marks the latest reshaping of the global coal industry, as big mining companies pare back their exposure to a commodity that has been roiled by slack demand and prices at multiyear lows.
The deal, worth US$606 million, would give the stake in the Bengalla mine in eastern Australia to New Hope Corp., one of the country’s biggest specialist coal miners. The price is less than what coal assets fetched several years ago when the commodity was hot. In October 2013, Rio Tinto agreed to sell a 50.1% stake in its Clermont coal mine for US$1.02 billion to a joint venture between Glencore and Japan’s Sumitomo Corp. The Clermont mine is a larger mine, producing 12.15 million tons of thermal coal in 2014 compared with Bengalla’s 8.6 million-ton output.
Coal assets from North America to Australia have been up for sale by the world’s biggest miners, which are seeking to protect profits from sharply lower commodity prices. Anglo American PLC is hunting for a buyer for several mines in Australia, while BHP Billiton Ltd. has signaled it may sell coal assets in the U.S. state of New Mexico.
Analysts have speculated that Rio Tinto may be taking steps toward an exit from coal entirely, after an overhaul earlier this year that lumped coal in with copper as one of four production groups and led to the departure of the head of its energy business.
Even if Rio Tinto retains its coal business, the Bengalla sale is a strategic shift compared with several years ago when companies including Rio Tinto were scrambling to buy coal assets on the back of a China-led boom in energy demand. As recently as 2013, coal was the world’s fastest-growing fossil fuel—outpacing everything from shale gas to crude oil—and its share of primary energy demand reached levels not seen since 1970.
Now, worries over the health of China’s economy are being compounded by broader concerns around future demand for thermal coal, which is used to generate electricity, as the U.S. and other countries act to curb pollution.
China’s coal consumption and production fell last year for the first time in 14 years. Last week, the U.S. and China introduced steps to combat climate change, including a pledge by China to start a program by 2017 to cap some emissions and put a price on carbon and to contribute US$3.1 billion to help poorer countries finance their own transition programs.
However, Big Mining’s retreat doesn’t signal an absence of buyers of coal assets. New Hope, which has a market value of 1.37 billion Australian dollars (US$960 million), says it sees an opportunity to bolster a portfolio of coal assets in eastern Australia that larger rivals no longer want. Resources-to-supermarkets conglomerate Wesfarmers—which owns a stake in the Bengalla mine—has previously said it is interested in more coal deals, despite the downturn in commodity prices.
Thermal coal was trading at US$54.50 a ton Tuesday, down about 60% from its peak four years ago.
Rio Tinto said the sale would deliver value to its shareholders as the company seeks to develop a strong core portfolio of assets.
“It demonstrates our commitment to further strengthening our balance sheet, maintaining a disciplined approach to allocating capital across the group and delivering strong returns for shareholders through the cycle,” said Jean-Sébastien Jacques, chief executive of Rio Tinto’s copper and coal business.
Analysts worry that Rio Tinto and BHP will find it harder to increase payouts to investors as weak commodity markets take a bite out of earnings. Earlier this week, Macquarie lowered its forecast for Rio Tinto to a compound average growth rate of 2% from 4%. Rio Tinto makes most of its profits from producing iron ore for export to China, but prices of that commodity have also fallen sharply.
On Wednesday, Rio Tinto also said it has taken full control of its Coal & Allied unit, which operates mines in the Hunter Valley region of New South Wales state, from Japanese trading house Mitsubishi Corp. Mitsubishi will effectively swap its 20% stake in Coal & Allied for a direct 32.4% stake in the Hunter Valley Operations mine.