24th Jan 2017 13:11
LONDON (Alliance News) - Rio Tinto PLC on Tuesday said it has struck a deal to sell its Australian subsidiary, Coal & Allied Industries, to Yancoal Australia Ltd for up to USD2.45 billion and possible future royalties.
Rio Tinto shares were trading 4.7% higher on Tuesday at 3,638.05 pence per share, rising over 15% since the start of 2017. Rio Tinto was the second best performer on the FTSE 100, only beaten by peer Anglo American PLC, which reported positive results from its De Beers diamond unit.
Coal & Allied is the holding company for Rio Tinto's thermal coal business in the Hunter Valley region of New South Wales. The subsidiary holds 67.6% of the Hunter Valley Operations mine, 80% of the Mount Thorley mine, 55.6% of Warkworth and 36.5% of the owner of a coal export terminal at the Port of Newcastle named Port Waratah Coal Services.
Collectively, those assets generated earnings before tax of USD102 million in 2015 and the gross assets held a value of USD1.90 billion at the end of June, 2016.
The Hunter Valley Operations, Mount Thorley and Warkworth produced 25.9 million tonnes of saleable thermal and semi-soft coking coal in 2016, of which 17.1 million tonnes was net to Rio Tinto.
Importantly, Rio Tinto released a separate statement simultaneously with the sale agreement that reported a rise in ore reserves at both Mount Thorley and Warkworth.
"The updates are based on a rigorous examination of leases that included a reinterpretation of the geological model, employment of new datasets and adopting improved Mineral Resource estimation methods," said Rio Tinto.
Mount Thorley's mineral resources increased to 322 million tonnes from the previous 114 million tonne estimate while mineral resources at Warkworth increased to 966 million tonnes from 613 million tonnes. Those resources are on a gross basis and are exclusive of ore reserves, the miner said.
The consideration owed by Yancoal Australia is comprised of a USD1.95 billion upfront cash payment and USD500 million in deferred cash payments that will be paid in annual instalments of USD100 million over the first five years after the transaction has been finalised.
However, Yancoal Australia can lower the total consideration by opting to pay one lump sum of USD2.35 billion once the deal is closed, as long as it is before February 24, 2017.
"Rio Tinto will use the consideration received for general corporate purposes. In the near term, completion of the transaction will reduce the net indebtedness of Rio Tinto. Completion of the transaction is not expected to have a material impact on Rio Tinto's earnings per share," said Rio Tinto.
Rio Tinto said it would be entitled to "potential royalties" after the deal, which it said would be linked to the coal price. Rio Tinto would receive USD2 per tonne of coal sold, excluding sales to "certain customers". The royalty would be paid for 10 years and is only enforced when the Newcastle benchmark thermal coal price is over USD75 per tonne, subject to an annual Australian Consumer Price Index adjustment.
In addition to the consideration and royalties, Rio Tinto said it will be entitled to all earnings and cashflow from Coal & Allied until the deal is formally completed. Yancoal will acquire the assets on a debt free basis, assume Rio Tinto's coal supply obligations and continue to use Rio Tinto Marine's freight services for the sea freight component of certain coal supply agreements.
Mitsubishi is the owner of the other 32.4% stake in the Hunter Valley Operations and Yancoal will also make a "tag offer" to acquire that stake as well as the interest held by Rio Tinto, allowing it to take full control of the operation.
"Yancoal Australia and Mitsubishi are obliged to try to agree on the fair market value of the participating interest and, if no agreement is reached, the parties must nominate their assessment of the fair market value of the participating interest," said Rio Tinto.
"Once the fair market value has been determined, Mitsubishi may ultimately elect to accept or reject any tag-along offer," Rio Tinto added.
Australian-listed Yancoal is owned 78% by Yanzhou Coal Mining Co Ltd, which is listed in Hong Kong, Shanghai and New York. Yanzhou, in turn, is 56% owned by Yankuang Group Co Ltd, an entity controlled by China state-owned Assets Supervision & Administration Commission of Shandong Province.
Yancoal Australia operates a portfolio of seven mines, projects under feasibility study, a suite of exploration assets and infrastructure shareholdings across New South Wales, Queensland and Western Australia.
Yancoal Australia intends to fund the transaction by way of a capital raising and pro-rata renounceable rights issue of shares. The rights issue should be launched in the second quarter of 2017, once it has sought shareholder approval for the deal. Controlling shareholder Yankuang Group has already committed to supporting the deal.
Notably, Rio Tinto said the deal will be classed a related party transaction due to the shareholding levels of various Chinese state-owned entities in Chinalco, otherwise known as Aluminium Corp of China. Chinalco owns 10.1% of Rio Tinto.
In addition, the transaction is conditional upon BLCP Power Ltd, a Thai power generator, agreeing to transfer all the rights and obligations held by Rio Tinto under the coal supply agreement signed with FTSE 100 constituent to Yancoal.
"Rio Tinto may waive the novation condition precedent if an alternative commercial approach can be implemented," said the company, which expects the deal to close in the second half of 2017.
"Rio Tinto will convene extraordinary general meetings of the independent Rio Tinto shareholders to vote on the transaction, and these meetings are expected to be held during the second quarter of 2017," Rio Tinto added.
Rio Tinto will push up its total divestment proceeds since 2013 to USD7.70 billion once the deal is completed, building upon previous sales of the Clermont and Bengalla coal mines, the Mount Pleasant coal project and the restructuring of ownership of the Coal & Allied assets last year under a deal signed with Mitsubishi.
Peer Glencore PLC launched an asset sale programme in September 2015 to help reduce its large debt pile that had built up as part of the merger with Xstrata. Late last year, Glencore called time on its sale efforts after offloading USD6.30 billion worth of assets in just over one year.
"The sale of Coal & Allied represents the culmination of an extensive assessment of all strategic options for these assets. Rio Tinto has conducted a comprehensive market testing and price discovery process and has held extensive discussions with several potential acquirers of the asset but Yancoal Australia provided the only offer that represented compelling value for the assets," said Rio Tinto.
Rio Tinto holds its other Australian operations outside of Coal & Allied under its other subsidiary, Rio Tinto Coal Australia.
That subsidiary operates the Hail Creek and Kestrel mines located in the Bowen Basin region in Queensland. Together the mines supply more than 10 million tonnes of coking and thermal coal for export annually.
By Joshua Warner; [email protected]; @JoshAlliance
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