Buyers punt on coal rebound as Rio sells another project

Rio Tinto's push to sell Australian coal assets is gathering pace with the latest deal delivering Indonesia's powerful Salim group the company's Mount Pleasant mine development in NSW for $US244 million ($347 million).

As recently as 18 months ago when the thermal coal price was holding at around $US100 a tonne, Rio Tinto was touting Mount Pleasant as one of a slew of "growth options" which included expanding Bengalla and pursuing underground expansions at other of its NSW thermal coal mines.

The halving of the coal price has led to Rio Tinto dumping its expansion plans for Mount Pleasant.
The halving of the coal price has led to Rio Tinto dumping its expansion plans for Mount Pleasant. Photo: Rob Homer

But the halving of the coal price subsequently has seen Rio Tinto's expansion plans dumped as it now seeks to sell much of its NSW coal assets.

Rio has had government approvals in hand to develop Mount Pleasant since 1999 but has failed to commit to the project.

The deal comes as controversial coal mine owner Nathan Tinkler must finalise a $US25 million payment by Monday if he is to complete the deal to buy Anglo American's Dartbrook coal mine after his earlier plan to acquire US miner Peabody Coal's Wilkie Creek mine in Queensland for $80 million failed when he couldn't raise the money.

Both of the Mount Pleasant and Dartbrook projects produce thermal coal, which is primarily used to generate electricity.

Concerns about carbon emissions from power stations coupled with a deep global glut in thermal coal production has pushed the spot thermal coal price to long term lows at around $US50 ($72) a tonne, resulting in a lengthening line of mine closures and production cuts, particularly in North America and Indonesia.

The Salim group is to pay $US244 million ($350 million) for Mount Pleasant, along with paying a 2 per cent a tonne royalty once the thermal coal price tops $US72.50 ($104) a tonne, which is significantly above the present price.

Its plan to acquire Rio coal assets was first reported in the Australian Financial Review's Street Talk column.

The Salim Group is controlled by one of Indonesia's richest families, and over the years has had assets spanning food, shipping, finance, healthcare and and beyond. It owns Indofood, which some claim is the world's largest maker of instant noodles.

Under the terms of the deal with Rio, which is subject to Foreign Investment Review Board approval, it is to pay $US83 million ($119 million) on settlement with two further payments of $US58 million over the next 16 months and a further $US25 million ($36 million) conditional payment, which is believed to be linked to when the mine actually enters production, which will require significant further investment.

The Salim family has signalled the purchase of more Australian coal assets, stating its corporate strategy "is to achieve its vision is to pursue the acquisition of advanced tier one coal mining assets in Australia that produce high quality coals that are in high demand as the world transitions to a low emissions economy and are low cost, long life and near production".

Mount Pleasant is the second sale by Rio of NSW thermal coal assets in recent months, and it follows the sale for $US606 million ($869 million) of its 40 per cent stake in the Bengalla mine to New Hope Corp. Rio's larger Mount Thorley Warkworth and its Hunter Valley operations mines are also said to be on the market.

"The cash from the sale will give a modest boost to Rio's balance sheet, which needs it given we forecast a cash burn of $US1.9 billion [$2.72 billion] in 2016, although this would fall to about $US0.5 billion [$717 million] at spot commodity prices (higher iron ore prices the key benefit)," Citi told clients following the sale.

Along with the other Rio assets on the market, Anglo American has sold two small mines, Dartbrook and Callide, with speculation surrounding Peabody's plans for some of its local coal mines.

"There have been only few deals done," Paterson Securities analyst Matthew Trivett said of asset sales in the sector. ""The thermal coal price is still languishing and there still hasn't been a huge supply response globally, and NSW is definitely contributing to that with not many people pulling back production.

"It won't be until the market rebalances before we can see any real change. It's difficult to justify looking at too many names or putting money into the sector until at least the price stabilises."

At current prices few mines in the Hunter Valley are profitable.

"The benchmark Newcastle export price is at $US50 a tonne which is making it hard for some coal producers and raising questions over Asciano's Pacific National's coal freight arm," another analyst said, in the wake of recent comments by Aurizon about prospects for its bulk commodities rail freight arm.

A spokesman for Mr Tinkler said he has nothing to say about the status of the plans to fund the Dartbrook acquisition.