Glencore will purchase Rio’s 82% stake in the Hail Creek coal mine and its majority interest in the Valeria resource in Australia for $1.7bn in cash, the companies said yesterday. Rio separately said it will also buy back as much as $2.25bn of bonds as part of a plan to reduce debt.
The coal deal will leave London-based Rio owning just one operating coal mine, while Glencore, already the top supplier of coal to global markets, will expand its footprint in a commodity where some investors are calling for miners to cut their exposure.
Glencore said in July that it agreed to acquire 49% of the Hunter Valley Operations, assets that were previously held by Rio.
Coal, which generates about 40% of the world’s electricity, has become a flashpoint for a growing movement of investors. Among those, Norway’s sovereign wealth fund doesn’t invest in firms that make 30% of their sales from the fuel, while the Church of England sets the limit at 10%.
Hail Creek is 120 kilometres (75 miles) southwest of Mackay and last year produced about 9.4mn metric tons of coal for export. Nippon Steel Australia has an 8% stake in the mine, Marubeni Coal holds 6.67% and Sumisho Coal Development has the remaining 3.33%, Glencore said in a statement.
The remaining Hail Creek partners have the right to sell their share in the mine to Glencore through a “tag-along” right, which could result in a further spend of as much as $340mn.
Rio’s share of the mine’s earnings before interest, tax, depreciation and amortisation was $408mn last year, according to Glencore.
Following the sale of Hail Creek and Valeria, Rio’s only remaining coal assets will be the Kestrel mine and Winchester South development project in Queensland. The company said there’s a separate process underway to sell those assets.
The cash from the coal sale “is very likely to bolster cash returns at the half year, something which should be seen favourably in the short term,” Tyler Broda, an analyst at RBC Capital Markets, said in a note. “With the balance sheet in a strong position, the question for Rio is becoming when (or if) the company switches from selling assets to buying assets?”
Rio also yesterday announced plans to redeem about $1.4bn of dollar-denominated bonds due in 2021 and 2022 and launched a tender offer for about $850mn equivalent of euro-denominated notes maturing in 2020 and 2024. The firm completed $10bn of redemptions in 2016 and 2017, it said.
Glencore’s earlier deal for the Hunter Valley assets had already raised concerns among some buyers. Jera Co, one of Japan’s biggest coal purchasers, told the country’s antitrust regulator that that deal may hurt competition by increasing the miner’s market dominance, Bloomberg reported in December.
The deal for Hail Creek is the latest in a deal spree from Glencore. Last year, it announced acquisitions worth more than $4bn in copper, oil and zinc as well as coal, and told investors last month that it had plenty of firepower for further acquisitions.
Glencore’s strong balance sheet means it could yet pursue more deals, according to Edward Sterck, a metals and mining analyst at BMO Capital Markets. “We do not see this acquisition as precluding further transactions of scale being pursued by the company,” he said in a note.
Glencore and Rio said that the sale of Hail Creek and Valeria was expected to complete in the second half of this year, subject to regulatory approvals.
Related Story
