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January 26, 2017

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Rio eyes coal exit with Aussie 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 No. 2 miner, has embarked on a cost-cutting program and cut 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 capitalization.

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 said 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 said.

“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.”

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.

Rio Chief Executive Jean-Sebastien Jacques said in a statement: “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.


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