Why Has Rio Tinto Sold Off Its Mount Pleasant Coal Assets?

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Rio Tinto announced the completion of the sale of its Mount Pleasant coal assets earlier in the month, a move that is consistent with the company’s strategy of disciplined capital allocation. [1] Given the subdued commodity pricing environment, the company has stressed disciplined capital allocation as a cornerstone of its business strategy in recent months, especially post the appointment of John-Sebastian Jacques as CEO earlier in the year. Rio Tinto aims to remain profitable even at low points in the commodity cycle, hence the need for allocating capital to only the most profitable projects. [2] With coal prices declining continuously over the past five years, coal does not fit into the company’s capital allocation framework. Moreover, despite the short-term stabilization of prices this year, long-term demand and pricing are likely to remain subdued with China, the world’s largest consumer of the commodity, systematically shifting away from coal as a fuel in order to lower pollution in the country. [3]

The sale of the undeveloped Mount Pleasant thermal coal assets, located in the Hunter Valley region of New South Wales, Australia, will free up capital that can be deployed in more profitable projects or utilized in debt reduction. The sale of the Mount Pleasant assets follows closely on the heels of the sale of the company’s stake in the Bengalla coal joint venture earlier in the year, which accounted for around 14% of the company’s thermal coal production in 2015. [4] Due to these asset sales, the company’s coal production is expected to dip in 2016, as indicated by our estimates shown below.

Including the sale of the Mount Pleasant assets, the company has divested close to $4.7 billion worth of non-core assets since January 2013. ((Rio Tinto completes sale of Mount Pleasant thermal coal assets, Rio Tinto Website)) Focusing on more profitable businesses will prop up Rio Tinto’s margins at low points in the commodity cycle, helping the company achieve one of its strategic objectives.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Rio Tinto

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Editor’s Note:  Every day we wonder what our readers think, and we are inspired when our readers challenge us to answer questions, and conduct analyses that are relevant and critical to them.  Nothing delights me more than to hear about what is interesting to you.

So if you have any comments or suggestions on this article or on what type of articles you would like to see more of in the future, please let us know. Thank you.  Write:   doug.nathman@trefis.com

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Notes:

  1. Rio Tinto completes sale of Mount Pleasant thermal coal assets, Rio Tinto Website []
  2. Rio Tinto’s Q2 2016 Earnings Call Transcript, Seeking Alpha []
  3. Unloved Coal Seen Surging as China Cuts Collide With La Nina, Bloomberg []
  4. Rio Tinto’s 2015 20-F, SEC []