Rio Tinto sells 40 percent of its stake in Bengalla coal mine in Australia; Big price defies sector’s gloomy outlook

Global miner Rio Tinto on Wednesday announced that it would sell 40 percent of its stake in the Bengalla coal mine in Australia to New Hope Corp for US$606 million (AU$859 million).

The deal marks the latest shuffle in Australian coal assets, where the sector is hit by a severe downturn. Bengalla is the smallest of three coal mines in the Hunter Valley, which is located near Sydney. It produced 8.6 million tonnes of coal in 2014.

Rio’s plans

Rio was on the lookout for offloading its less profitable businesses to fund its dividends payout and reorient towards iron ore and copper mining segments. The down turn in commodities prices followed the slowing of Chinese economy with a steep drop in demand.

The buyer, New Hope, is capitalised at AU$1.37 billion and was scouting for acquisitions after it reported a 25 percent rise in the annual profit.

Analysts at Macquarie and Morgan Stanley hailed the deal as good and noted that Rio has fetched a strong price for the Bengalla stake. It had put up all its coal stakes in New South Wales for sale. Other bidders in the fray, eyeing Rio’s coal assets include Glencore, which has mines in the same area and is keen on combining with Rio’s to cut costs.

Along with the sale, Rio also reworked a deal with Japan's Mitsubishi Corp to disband a joint venture in coal at the Hunter Valley and take direct stakes in mines previously owned via the venture. This is to enable Rio in selling its holdings easily.

Mitsubishi did not specify whether it has plans to sell the stakes in the Hunter Valley Operations and Warkworth mines, but its spokesman said energy coal demand will grow in the medium to long term, Reuters reported.

Great price

Meanwhile, the price extracted by Rio Tinto for its 40 percent stake in the Hunter Valley coal mine brought cheer in the sector as it defied gloomier predictions about the future of energy coal.

Many analysts have been taken by surprise given the fact that Bengalla is the smallest of the Hunter Valley mines in which Rio has an interest. Though Rio may have been helped by the minority character of its stake by virtue of other shareholders like Wesfarmers with pre-emptive rights, the price is hailed as great. It is well above the reigning rate of energy coal and the capacity of the mine.

At the rate of the deal price, the price per tonne is equivalent to nearly US$180 (AU$255), whereas the coal price is currently trading at US$55 (AU$77) a tonne. Certainly, Rio is exiting at a very attractive price, noted Stephen Bartholomeusz in his column in the Australian.

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