Rio Tinto Sells Australian Thermal Coal Asset For $1 Billion

Rio Tinto (NYSE:RIO) has reached an agreement with Glencore Xstrata and Sumitomo to sell them its 50.1% stake in the Clermont thermal coal mine in Australia for $1.05 billion. The mine will be sold to GS Coal, a joint venture between Glencore Xstrata and Sumitomo. ^[1]

Although Glencore will operate the Clermont mine, the majority ownership is now in the hands of Japanese companies. Rio’s existing partners in the mine are Mitsubishi, J-Power, and Japanese Coal Development.

Rio regards the sale part of its efforts to divest non-core assets to generate substantial proceeds. The funds generated are expected to be used to cut down its $22 billion debt to maintain the company’s single-A credit rating.

We have a Trefis price estimate of $55 for Rio Tinto, which represents 5% upside to the current market price.

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The Clermont Mine

Clermont is Australia’s third largest thermal coal mine. Thermal coal is used primarily in power production as opposed to coking coal which is used by steel manufacturers. ^[2]

The mine was acquired by Rio Tinto and its partners in 2007 for $950 million, of which Rio’s share was $475 million. The production started in 2010 and annual production capacity was ramped up to 12 million tonnes recently. While the mine is a non-core asset for Rio, Glencore believes that thermal coal prices are currently at unsustainable lows and will rise going ahead because of the expected demand from new power generation plants in Asia. ^[3]

The acquisition will be financed by debt for half the purchase price and cash will be paid for the remaining amount. Therefore, by paying $250 million in cash upfront, Glencore has gained full marketing rights and operational control for Clermont. ^[4]

Why Rio Has Put Some Assets On The Block

Rio’s performance in 2012 was very weak. It reported a net loss of $3 billion, down from a profit of $5.8 billion in 2011. This was largely due to the hefty $14 billion impairments it had to take on account of writedowns in the aluminum and Mozambican coal businesses. Underlying earnings in 2012 stood at $9.3 billion compared to $15.5 billion in 2011. This was due to a combination of lower prices of iron ore, aluminum and copper and a net negative effect from the variance in volumes. ((Rio Tinto 2012 Annual Report, Rio Tinto Website))

At the time of announcing the results, management had said that the key priorities going ahead will be to achieve cost savings of $5 billion over the next two years and generate significant cash from the sale of non-core assets and businesses. At the same time, Rio is likely to go ahead with major expansion plans in the Pilbara iron ore region of Australia. This will require capital and unless Rio can maintain its credit rating by cutting down on existing debt, it will be expensive for the company to raise new debt at reasonable yields in the future.

More Sales To Happen Soon?

With the sale of Clermont mine, Rio Tinto has announced or completed almost $3 billion worth of asset sales in 2013. This includes a binding agreement for the sale of its interest in the Northparkes copper mine and the recently completed sales of Palabora and Eagle copper mines.

For quite some time, Rio has been trying to sell its Iron Ore Company of Canada assets for more than $3.5 billion, but so far it hasn’t found a buyer willing to pay that price. Also on the block are Mozambican coking coal assets whose value had to be written down by $3 billion after the 2012 annual results.

Rio has decided not to sell its diamond business as well as the Pacific Aluminum division which had previously been put up for sale. The company was not happy with the valuations being offered for these assets and has decided to retain them in its portfolio for now.

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1. Rio Tinto agrees sale of interest in Clermont Mine, Rio Tinto News Release [↩]
2. Rio Tinto signs $1b deal to sell Clermont coal mine share, ABC News [↩]
3. Glencore buys Rio’s Clermont for $1bn, The Australian [↩]
4. Glencore and Sumitomo to buy Australian coal mine from Rio Tinto, Financial Times [↩]