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% in 2016, while imports reversed two years of declines to gain 25%, the biggest increase since 2012.
Australia’s Newcastle coal, an Asian thermal benchmark, surged more than 80% in 2016, snapping five years of declines.
Rio advanced 3.1% to A$66.76 a share by 1.31pm in Sydney, after closing at the highest since March 2015 on Tuesday. Yanzhou Coal Mining gained 0.7% to HK$5.89, 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.
The sale to Yancoal Australia Ltd. is subject to Australian government approval and includes an initial $1.95 billion cash payment and $500 million in annual installments of $100 million following completion.
Yancoal, which is 13% 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% of the Australian Securities Exchange-listed company.
Yancoal Australia jumped as much as 4.2% to 50 Australian cents, while Noble Group gained 0.6% to 17.4 Singapore cents.
Yancoal will also make an offer to Mitsubishi Development Pty, which owns a 32.4% 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% 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.
After divesting its Mount Pleasant project and completing the sale of a 40% 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% of its $34.8 billion in sales for 2015. Rio will report 2016 earnings on 8 February.
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% of their business on coal or revenue from the fuel.
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% shareholder in Rio. Bloomberg