Diversified global miner Rio Tinto PLC (RIO) has been looking for ways to divest some less-profitable assets in 2013 as a means to cut into debt that mushroomed to nearly $19 billion in 2012. Namely, Rio has been trying to sell an iron ore mine in Canada and its interest in coal mines in Australia and Mozambique as prices for coking, or metallurgical, coal have plunged in the past year and a half.
The plan to sell assets was put in motion by Sam Walsh after he assumed the role of chief executive in January as a means to improve profits by focusing on its bigger mines and return value to shareholders. Walsh’s scheme involves the company cutting costs by $5 billion by the end of 2014.
In July, Rio sold its majority stake in the Northparkes copper mine in Australia to China Molybdenum Co. Ltd. for $820 million.
When prices for coking coal, which is heavily used in steel manufacturing, were soaring in 2011 to hit $330 per metric ton in the second quarter, demand was high in Europe and China. Since then, coking coal prices have been more than halved on growth concerns, cutting into producers’ profits.
In April, The Australian reported that Rio was looking to sell its 50.1-percent stake in the Clermont coal mine for $1 billion and also looking to sell its neighboring Blair Athol coal mine in Queensland. Rio was also reported to be looking to slash its 80-percent interest in Coal & Allied Industries Limited by 29 percent. In November 2011, Rio and Japan’s Mitsubishi Development Pty Ltd. bought the 10.2-percent stake in Coal & Allied that they didn’t already own for $3.13 billion.
Finding buyers at the asking price has been a challenge for Rio, even though coal prices are trying to eke upward. Japanese steelmaker Nippon Steel Y Sumitomo Metal Corp. recently set its fourth quarter contract price for prime hard grade coking coals with Australian miners at $152 per metric ton, up by $7 from the third quarter. Conversely, some analysts argue that abundance in supply will drive prices lower going forward.
The Wall Street Journal reported three days ago that Rio has fielded a few offers to buy its majority stake in the Clermont mine from three bidders, India’s Adani Enterprises, Australia’s New Hope Corporation and Dutch trading house Trafigura, but the highest offer has been $850 million, well short of the $1-billion asking price.
Today WSJ says that Rio is close to selling the Blair Athol coal mine to Brisbane, Australia-based, diversified energy company Linc Energy, according to a source close to the matter. Financial terms of the deal were not disclosed. Shares of Linc, which trade on the Australian exchange under the ticker “LNC” fell about 10 percent in Wednesday trading.
Shares of Rio Tinto are trading marginally ahead Wednesday at $46.67, up 15 cents in early action. Shares have far underperformed the main indices in 2013, down by about 12 percent since the start of January, but investors will be looking for final news of a deal as it represents another solid step in some restructuring that could improve future share value.
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