Miner-trader Glencore (GLEN.L) on Friday said it had offered $2.55 billion cash for coal mines owned by Rio Tinto (RIO.L) (RIO.AX) in Hunter Valley, Australia, outbidding a previous offer from Chinese-owned Yancoal.
The large-scale, long-life assets are next to mines already owned by Glencore, which has predicted continued demand for coal, especially in Asia, despite environmental opposition to the most polluting form of fossil fuel.
In January, Rio said it was selling its interest in Coal & Allied Industries Limited (C&A) to Yancoal Australia Limited (YAL.AX) for $2.45 billion.
The terms allowed Rio to engage in negotiations with another party if it made a better offer.
Glencore's proposal is $100 million higher and fully funded, but Rio Tinto has to give Yancoal the chance to make a counter offer, opening the way for a bidding war.
Rio said in a statement it had received the offer and would respond "in due course".
Analysts say Glencore has long been interested in the assets and predicted its offer could succeed.
"We cannot see Rio refusing unless it feels it will hurt its cosy China relationships," Hunter Hillcoat of Investec said.
Glencore's bid, made up of $2.05 billion upfront and $0.5 billion in instalments over five years, will automatically expire on June 26 if a binding sales agreement has not been reached.
If the deal is completed, Glencore is also offering to buy minority stakes in Hunter Valley operations from Mitsubishi for $920 million cash.
Glencore also said it will stick to a pledge to limit its net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) to a maximum of 2:1.
It would therefore sell assets worth $1.5 billion, possibly including up to 50 percent of its stake in the C&A mines, it said.
Following a deal, Glencore's combined portfolio would have production capacity of 81 million tonnes per year of high-energy coal, which would meet Asian demand, Glencore said, adding it already had regulatory approval from the Japanese anti-trust authorities.
Coal asset sales stalled last year when coal prices hit nearly five-year highs and miners raised their expectations on bids for their assets.
Agreeing deals has also been complicated by climate change concerns and shareholders have questioned the long-term financial sustainability of mining portfolios.
Glencore says it reviews the sustainability of its assets and has said it sees continued demand for high-quality coal that can still be the cheapest form of baseload power.
Japan has been forced to burn more coal following the Fukushima disaster, which led to the shut down of nuclear capacity.
David Neuhauser, managing director at U.S. hedge fund Livermore Partners, which owns Glencore shares, said the offer was strategic.
"In the past, they tried to gain producing assets at any cost. Today they're targeting deals that are very prudent, opportunistic and move the needle in terms of their cash flow," he said.
(additional reporting by John Tilak in Toronto; Editing by Elaine Hardcastle)