There are several important points to be taken from yesterday’s sale by Rio Tinto (RIO) of its 40% stake in the Bengalla coal mine in the Hunter Valley region of NSW.
First up it was a good price – indeed there doesn’t seem to be any sign of distressed asset values in the deal which saw cashed up New Hope Group (NHC) buy the 40% stake for $US606 million (around $A860 million).
That means Rio Tinto has now announced or completed $US4.5 billion of divestments since the start of 2013.
That sold price was despite all the gloomy news about coal, especially thermal coal, which is the main product of the mine and has seen a 60% slide in its global price in the past year (and a similar fall for coking coal).
Secondly, the market was understandably happy with Rio selling out and getting a price above book value – the shares rose 4.47% to $48.60 million in yesterday’s muted rebound from the harsh sell-off on Tuesday.
And the market was also content with New Hope buying the mine with its shares up 7% to $1.765.
RIO 1Y – Rio restructures coal exposure
It was only nine days ago that New Hope made it clear it was on the lookout for a big purchase to use up some of the more than $1 billion of cash on its balance sheet.
That is perhaps the most interesting market reaction as you might have expected a sell-off of New Hope shares by investors unhappy the money was being spent on buying a minority stake in a thermal coal mine – which would not be top of the tops for most investors these days.
As well, some investors might have thought a better price for New Hope seeing it is a buyer’s market these days.
Perhaps the only quibble some analysts had was New Hope’s purchase of the 40% stake in Bengalla which the deal values at just over $1.5 billion. Wesfarmers owns another 40%, Taipower of Taiwan and Mitsui of Japan have 10% each and pre-emptive rights, but are not thought ready to exercise them.
The market is also pleased for another reason – not only was it a good price, but Rio revealed a restructuring in ownership of its remaining coal assets in the Hunter Valley which will make it easier to sell the remaining mines in one group.
Bengalla is the smallest of three Hunter Valley coal mines in which Rio holds stakes, the others being Mount Thorley Warkworth, and the Hunter Valley Operations (the old Coal and Allied mines), which are next to each other in the Upper Hunter and could be bundled together in a sale.
Bengalla is separate and 45 minutes further up the Valley. It produced 8.6 million tonnes in 2014, mostly thermal coal.
It was also the only mine operation where Rio did not have have a controlling interest. Rio’s three Hunter operations were housed under its joint venture with Mitsubishi and Coal & Allied.
But in yesterday’s announcement, Rio said it had restructured Coal & Allied to take full ownership. That was done by Mitsubishi swapping its 20% in Coal & Allied for a top-up to its stake in Hunter Valley Operations mines of Coal and Allied from 20% to 32.4%.
After the restructure Rio will own the balance of Hunter Valley Operations – 67.6% – and controlling stakes in the Mount Thorley Warkworth mine whose expansion is the subject of a continuing controversy in the Hunter Valley between Rio, local residents, horse studs and wine grape growers and makers.
The deal will also give Rio 100% of the Mount Pleasant coal project next to Bengalla, which is under review.
