The deal transforms Yancoal into Australia’s largest, pure-play coal producer with expected pro-forma run of mine coal production of 71 million tonnes per annum and is also part of Rio Tinto’s exit strategy from coal in Australia. The future ownership of Rio's other Australian coal assets including its Kestrel longwall mine in Queensland is now uncertain.

The sale of Rio’s wholly-owned Australian subsidiary Coal & Allied Industries to Yancoal will be made up of an initial $1.95 billion cash payment, payable at completion and $500 million in aggregate deferred cash payments, payable as annual instalments of $100 million over five years following completion.

Coal & Allied owns and operates multiple, multi-seam open cut mines in the Hunter Valley. It has a 67.6% in the Hunter Valley Operations mine, an 80% interest in the Mount Thorley mine, a 55.6% interest in the Warkworth mine, a 36.5% interest in Port Waratah Coal Services (which owns a coal export terminal located at the Port of Newcastle) and other undeveloped coal assets, including various landholdings.

The Hunter Valley Operations and Mount Thorley Warkworth mines together produced 25.9 million tonnes of saleable thermal and semi-soft coking coal in 2016.

The net assets subject to the sale agreement with Yancoal had earnings before tax of $102 million in the year to December 31 2015, and a gross asset value attributable to them of $1,895 million as at June 30 2016.

Yancoal CEO Reinhold Schmidt said the transaction represents a significant expansion of Yancoal’s operational portfolio, providing Yancoal shareholders with exposure to world class thermal and semi-soft coking coal mines.

“Yancoal has successfully restructured its operations and reduced costs throughout the past three years and established itself as a leading coal producer committed to investing in the Australian resources sector,” he said.

“Post transaction, Yancoal will be the largest pure-play coal producer in Australia, with the ability to realise ongoing value from its combined low operating cost portfolio.”

Yancoal chairman Xiyong Li said the acquisition is “transformative and exciting” for Yancoal and will form the basis for its future growth and success as Australia’s largest pure-play coal company.

“Via the acquisition of Coal & Allied’s high quality asset portfolio, we will be delivering substantial cash flows to the company, quality coal products and long-term relationships with end-users in key global markets,” he said.

“The substantial cash flows from Coal & Allied’s assets, combined with the anticipated synergies and proposed equity raising will materially strengthen Yancoal’s balance sheet. The new Yancoal will be very well positioned to realise significant value for our shareholders in the years ahead.”

 

Synergies

Yancoal expects substantial operational synergies to be realised from blending Coal & Allied’s and Yancoal’s coal products to realise a higher overall coal product price;  corporate and administrative cost savings;  site and infrastructure efficiencies (including optimised asset management and maintenance); and procurement costs savings arising from the expanded operations

In addition to the sale consideration and potential royalties linked to the coal price, Rio Tinto will continue to benefit from earnings and cashflow generated by Coal & Allied until completion of the transaction.

The Coal & Allied operations will also continue to use Rio Tinto Marine freight services following completion of the transaction.

The transaction is subject to certain conditions precedent being satisfied, including approvals from the Australian Government, Chinese regulatory agencies and the NSW Government.

Rio Tinto has conducted a comprehensive market testing and price discovery process and has held extensive discussions with several potential acquirers of the asset but Yancoal Australia provided the only offer that represented compelling value for the assets.

“Rio Tinto has now announced or completed at least $7.7 billion of divestments since 2013,” the company said.

“These transactions include the sale of Rio Tinto’s interests in the Clermont coal mine, the Bengalla coal mine and the Mount Pleasant coal project. In addition, the restructuring of ownership of the Coal & Allied assets was completed with our joint venture partner Mitsubishi Development Pty Ltd in 2016.”

Prior to February 24 2017, Yancoal is entitled to elect an alternative purchase price structure of a single cash payment at completion of $2.35 billion.

After the sale is completed, Rio Tinto will also be entitled to potential royalties.