MELBOURNE/LONDON Rio Tinto (RIO.L) has agreed to sell its majority stake in Australia's third-largest thermal coal mine to Glencore Xstrata and Japan's Sumitomo Corporation for just over $1 billion, pushing ahead with plans to focus on larger, core operations.
Rio put its 50.1 percent stake in the Clermont mine in Queensland on the block earlier this year, but appetite had been considered by industry advisers to be weak, given a poor outlook for coal prices and high costs in Australia.
The sale - for $1.015 billion in cash - will be a welcome boost for Rio's plan to sell down unwanted assets, as the world's third-largest miner pares debts of $22 billion, cuts costs and tries to meet shareholder demands for better returns.
Rio said on Friday it had announced or completed almost $3 billion of divestments this year, but its larger planned sales - including a stake in Canada's largest iron ore producer, Iron Ore Company of Canada (IOC) - have struggled. The miner has already scrapped the sale of its diamond unit and aluminum.
"It's not a bad price (for Rio), the market will be reasonably pleased," said analyst Des Kilalea at RBC Capital Markets. "But the one everyone is looking for is IOC."
Glencore (GLEN.L), the largest trader of seaborne thermal coal and a leading thermal coal producer, has slashed costs in its coal unit as it cuts back following the takeover of miner Xstrata. But it has also said it can benefit from increased blending and trading opportunities - as well as from a rise in thermal coal prices that it says are at unsustainable lows.
"Glencore is contrarian, this is the sort of deal that they do - buying up assets that no one else appears to want," one senior industry source said. "This is not huge money for them, and it is about controlling a bigger piece of production."
The deal will be financed by debt for around half the purchase price, meaning Glencore and partner Sumitomo will put in only just over $250 million in cash each.
Clermont, a large-scale open pit mine, is also relatively low cost, thanks to a low strip ratio - meaning less waste has to be removed to expose ore for mining - and the ability to sell 90 percent of coal without washing.
After this cash deal, Glencore and Sumitomo (8053.T) will each own half of the stake through GS Coal Pty, meaning an economic interest of 25.05 percent each. Glencore will assume Rio's role in managing the mine and marketing production.
Glencore and Rio have separately been discussing a possible combination of their coal assets in the Hunter Valley region of New South Wales, to help cut costs and shore up margins with thermal coal prices holding close to four-year lows.
But sources familiar with the matter have said those talks were progressing slowly.
Glencore is the top thermal coal exporter in Australia, while Rio Tinto is the largest thermal coal producer in Australia's Hunter Valley.
Glencore said in a presentation last month that a third of seaborne power-station coal production is loss-making, hit by oversupply. It has said the situation is unsustainable, as demand from new generating capacity in Asia increases.
Rio's co-owners in the Clermont mine are Mitsubishi Corp (8058.T), Japan's Electric Power Development Co Ltd (9513.T) and a consortium of Japanese power companies.
Dutch trader Trafigura and India's Adani Enterprises Ltd (ADEL.NS) had put in bids below $850 million for the Clermont stake, the Wall Street Journal reported earlier this month.
Deutsche Bank advised Rio Tinto on the sale.
(Reporting by Sonali Paul in MELBOURNE, Clara Ferreira-Marques in LONDON, Osamu Tsukimori and Yuka Obayashi in TOKYO; Editing by Ben Hirschler and Pravin Char)