After a protracted bidding war, Rio Tinto shareholders have finally decided to sell its NSW coal assets to China-backed miner Yancoal.
- Yancoal is a Chinese-backed mining company, with a subsidiary listed on the ASX
- Rio Tinto sold its Hunter Valley coal mines to Yancoal for $3.5 billion
- The majority of this coal is currently sold to South Korea and Japan
Yancoal will pay $US2.69 billion ($3.5 billion) for Coal & Allied, the Rio subsidiary which controls NSW’s Hunter Valley mines.
The assets include Rio’s Warkworth/Mount Thorley thermal and semi-soft coking coal mines and a major stake in the Port Waratah coal loading facility in Newcastle.
This is a very positive outcome for Rio, according to Glyn Lawcock, global head of mining equity research at UBS.
“Two years ago, you couldn’t sell them — you couldn’t give them away — and now all of a sudden, you’re climbing over yourself to get them,” he said.
Yancoal’s relationship with Rio is complicated.
Rio’s shareholders in the UK and Australia were called to vote on this deal because of Yancoal’s position of “influence” over Rio.
The Aluminum Corporation of China (also known as “Chalco”) is Rio’s largest shareholder, whereas Yancoal, is ultimately owned by the Chinese Government.
“Long-term, China has always been interested in acquiring energy assets outside of the country,” J Capital’s Tim Murray said.
“They’ve got a basic view of ‘why not use someone else’s resources before we use our own’.
Buying assets in foreign countries can be a complex process.
Fortunately for Yancoal, it has a local subsidiary — listed on the Australian stock exchange — which made it easier to meet Foreign Investment Review Board (FIRB) regulations.
Although China is investing heavily in renewables, the Yancoal-Rio deal shows the world’s second largest economy still wants to lock down coal assets.
Could more Australian coal be diverted to China?
The majority of the coal from the Hunter Valley is sold to South Korea and Japan, which is China’s strategic rival.
With Yancoal in control of the mines, it can decide who gets to buy the coal.
“I think there’s a distinct possibility that the output from these mines could be diverted to China,” Mr Murray said.
But if Yancoal starts selling coal to China for a cheaper price, it could fall foul of Australian law.
“Yancoal is still a listed company here in Australia, and it has an obligation to its shareholders to extract maximum rent for any product it sells,” Mr Lawcock said.
“So it’s very difficult for it to sell to one party at a lower price when another customer is offering you a much higher price.”
He also believes that under Yancoal ownership, the Hunter Valley coal mines will be worked even harder.
“Clearly if you’re going to spend over $2 billion buying something, you want to extract synergies,” he said.
“You want to maximise the revenue line as well — so yes, they’ll be worked harder.”
At the end of the day, Rio Tinto is probably the biggest winner from this deal.
“Rio would be rubbing its hands together thinking ‘thank God I finally got rid of those crappy thermal coal assets’,” Mr Murray said.
“It’s a great deal — if we can always sell our sort of crap assets, we need to recycle to Chinese SOEs (state-owned enterprises), why not?”
It certainly is a better deal than just giving them away.
By Carrington Clarke