Full steam ahead

25 January 2017 By Quentin Webb

Chinese-backed Yancoal will pay up to $2.6 bln for Rio’s thermal coal unit. Getting this transformational deal past regulators and raising the necessary capital will take some doing. A full price tag looks brave, too, given a big run-up in prices and an uncertain sector outlook.

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Rio Tinto, the Anglo-Australian miner, said on Jan. 24 it agreed to sell subsidiary Coal & Allied Industries to Yancoal Australia for as much as $2.45 billion in cash.

Yancoal can either pay $1.95 billion upfront, followed by five annual payments of $100 million, or can choose to pay $2.35 billion in one go. Rio will also collect royalties for the next 10 years, provided Newcastle benchmark thermal coal prices stay above $75 a tonne. Contracts for future delivery through April are currently pricing around $84.

In addition, the deal assumes Coal & Allied will have A$161 million of negative working capital.

Rio expects the sale of the business, which owns and operates thermal coal mines in Australia's Hunter Valley, to close in the second half. It requires approval from independent Rio shareholders. Thermal coal is used to fuel power stations.

Yancoal, with a market value of A$477 million ($362 million), expects to fund the takeover through a rights issue. The group is 78 percent owned by Yanzhou Coal Mining, whose stock trades in Hong Kong, Shanghai and New York, and which is ultimately controlled by the provincial government of Shandong in China. Noble Group, a Singaporean commodity trader, owns another 13 percent.

Rio Tinto's London-listed shares rose 4 percent on Jan. 24 to 3,614.5 pence. By late morning in Sydney on Jan. 25, Yancoal shares stood 4.2 percent higher at A$0.50.

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