Anglo-Australian mining giant Rio Tinto today struck a deal to sell its Australian subsidiary Coal & Allied Industries Ltd to China's state-controlled Yancoal Australia Ltd for up to $2.45 billion in cash.
Under the terms of the deal, Yancoal will make an initial $1.95-billion cash payment, payable at completion, and $500 million in deferred cash payments as annual installments of $100 million over five years following completion.
Prior to 24 February 2017, Yancoal Australia can opt for an alternative purchase price structure of a single cash payment at completion of $2.35 billion.
Post closing, Rio Tinto will also be entitled to potential royalties of $2 a tonne as long as the thermal coal price is over $75 a tonne.
In addition to the sale price and potential royalties, Rio Tinto will continue to benefit from earnings and cash flow generated by Coal & Allied until closing of the transaction.
The Coal & Allied operations will also continue to use Rio Tinto Marine freight services following completion of the transaction.
"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," Rio Tinto CEO Jean-Sébastien Jacques said in a statement.
Coal & Allied is the holding company for Rio Tinto's thermal coal business in the Hunter Valley region of New South Wales. It owns and operates multiple, multi-seam open cut mines in the Hunter Valley.
It has a 67.6-per cent interest in the Hunter Valley Operations mine, an 80-per cent interest in the Mount Thorley mine, a 55.6-per cent interest in the Warkworth mine, a 36.5-per cent interest in Port Waratah Coal Services (which owns a coal export terminal located at the Port of Newcastle) and other undeveloped coal assets, including various landholdings.
The Hunter Valley operations and Mount Thorley Warkworth mines together produced 25.9 million tonnes of saleable thermal and semi-soft coking coal in 2016 (17.1 million tonnes Rio Tinto share).
The net assets subject to this sale agreement had earnings before tax of $102 million in the year to 31 December 2015, and a gross asset value attributable to them of $1,895 million as at 30 June 2016.
Rio Tinto said that the sale represents the culmination of an extensive assessment of all strategic options for these assets.
Rio Tinto has conducted a market testing and price discovery process and has held extensive discussions with several potential acquirers of the asset but Yancoal Australia offer was the best.
Rio Tinto has now announced or completed at least $7.7 billion of divestments since 2013. These transactions include the sale of Rio Tinto's interests in the Clermont coal mine, the Bengalla coal mine and the Mount Pleasant coal project. In addition, the restructuring of ownership of the Coal & Allied assets was completed with its joint venture partner Mitsubishi Development Pty Ltd in 2016.
78 per cent of Yancoal is controlled by Yanzhou Coal Mining Co of China, which is in turn controlled by Shandong Province's State-owned Assets Supervision and Administration Commission, while Hong Kong commodities trader Noble Group holds a 13.3 per cent share.