The great Rio Tinto crash diet continues with reports the company is looking to sell down part of its collection of coal mining assets in NSW to another big miner – Glencore, owners of Xstrata.
At the same time the mining giant has sold another unwanted asset as it continues cutting costs and is raising cash to pay down debt and make itself more efficient.
Media reports suggest that Glencore is now looking at combining its substantial Hunter Valley mining operations with those nearby controlled by Rio.
Rio has cut billions of dollars in costs from its iron ore, coal and aluminium business and is selling assets from exploration prospects to diamonds as it slims to concentrate on iron ore and copper.
It still has billions of dollars tied up in aluminium processing operations that have been on the market for two years, without attracting firm bids.
But while it has been cutting, it has been spending some money on expansion. The company is due to make its first shipment from its huge Mongolian mine called Oyu Tolgoi this weekend.
The $US6.2 billion mine is due to be officially opened tomorrow and will neatly underline the current approach from Rio management – it is looking to cut costs by $US5 billion, but has to keep investing in new mines and expansion of existing operations otherwise rivals such as BHP will take their sales.
This morning it announced that it had reached agreement to sell its Eagle project in the US to Lundin Mining Corporation for around $US325 million in cash. This sale is expected to be done in the next quarter. The Eagle project in the Upper Peninsula of Michigan in the US includes a high-grade underground nickel-copper mine and mill. Construction commenced in June 2010 and is approximately 55% complete.
The NSW coal deal is a cost cut because Rio says coal isn’t a key commodity for it – unlike BHP.
The deal will probably need approval from the competition regulator and the Chinese government may want a say as well seeing it is a major coal buyer.
The Chinese government previously opposed the attempted merging of the WA iron ore operations of Rio and BHP BIlliton, and it delayed approval of the Glencore-Xstrata takeover until it received certain assurances.
Both companies are understood to have held early talks about a possible deal, but the media reports say nothing has been settled.
Rio has hired Deutsche Bank to sell up to 29% of Coal and Allied to reduce its stake to as low as 51%. Rio is also studying the sale of its stakes in Clermont and Blair Athol mines in Queensland. The latter mines are due to be closed by Rio if they can’t be sold.
Glencore Xstrata owns the Ravensworth, Mount Owen and Liddell coal operations in the Hunter Valley.
They are near the key Coal and Allied mines and together would dominate production of thermal and soft coking coal, and the export of those coals through the port of Newcastle.
This would enable big cost savings, from fewer miners, plant and equipment, centralised processing and loading facilities and trains.
Glencore Xrata stopped work on the Balaclava Island coal export terminal last month in Queensland, blaming poor market conditions, overcapacity and concerns that the medium-term outlook would be negative for demand.
Weak prices for soft coking and thermal coal also played a part, along with a fall in Chinese imports this year.
Export prices at newcastle have fallen under $US90 a tonne, which is claimed by some analysts to be the break even level for Hunter Valley producers to make a profit.
Rio Tinto shares fell half a per cent yesterday to $52.74.
