Rio Tinto signals coal exit with Australia sale

Rio Tinto has sold most of its underperforming Australian coal assets to China-backed Yancoal in a deal worth up to US$2.45 billion as part of a divestment drive analysts expect will lead to a complete exit from the sector.

In the face of tumbling prices and wild volatility in commodities markets the Anglo-Australian firm, the world's number-two miner, has embarked on a cost-cutting programme and reduced spending to shore up its bottom line.

The latest deal will see Coal & Allied, operator of several mines in New South Wales, sold to Yancoal Australia, which is majority controlled by China's Yanzhou Coal, one of China's largest mining groups by market capitalisation.

The agreement would mean Rio has now sold more than US$7.7 billion in assets since early 2013.

Fat Prophets resources analyst David Lennox told AFP it was likely Rio would also sell its remaining coal assets, which are in Queensland state.

"If you have a look at the assets that are inside Coal & Allied, the profits that it generates, it's obviously not reaching the hurdle rate that Rio would have on its assets," he said.

"Hence they probably reckon it's probably better to... take the cash and deploy it elsewhere in the business. It's primarily a move away from that sector.

"It looks purely like Yancoal are wanting to get more critical mass in the industry," Lennox told AFP.

"They've seen a lift in the coal price from early last year and they believe that the Coal & Allied operations, which are very much near their own, would be a good match."

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

- 'Outstanding value' -

The agreement is subject to regulatory approval in Australia, China and New South Wales and is expected to be completed in the second-half of this year.

But Lennox said he did not expect authorities would block it as Yancoal already operates several mines across the country, including in New South Wales.

There has been growing concern in Australia about the purchase of local infrastructure and land by foreign interests, particularly China.

Canberra last year blocked the sale of Ausgrid to foreigners after rejecting a bid by China's State Grid Corp and Hong Kong's Cheung Kong Infrastructure Holdings in August.

And in 2015 concern about valuable assets passing into foreign hands led MPs to tighten scrutiny on overseas investment in agricultural land.

In a statement Rio chief executive Jean-Sebastien Jacques said: "This sale delivers outstanding value for our shareholders and is consistent with our strategy of reshaping our portfolio to ensure the most effective use of capital.

"Our world-class assets, strong balance sheet and relentless focus on cash will ensure that we deliver superior returns for our shareholders."

Shares in Rio rose 3.8 percent in Sydney, but Yancoal were flat having given back early gains. 

Rio reported in August underlying profits -- investors' preferred measure -- fell 47 percent year-on-year to US$1.56 billion in the six months ending June 2016, the lowest since 2004.