Rio sells Bengalla stake to New Hope

Rio Tinto has offloaded its 40 per cent stake in the Bengalla coal mine to New Hope for US$606 million (approximately $865 million).

The sale comes just months after the operation was granted approvals to extend the mining lease beyond 2017, for an additional 24 years.

The sell-off was also aided by a recent simplification of the joint venture structure of the Coal & Allied operated mine with co-owner Mitsubishi Development.

Under the recently concluded agreement, Rio Tinto will assumed 100 per cent ownership of Coal & Allied, while Mitsubishi Development moved from holding a 20 per cent stake in Coal & Allied to holding a direct 32.4 per cent stake in the Hunter Valley Operations mine.

The Bengalla operation is the smallest of Rio’s three operations in the Hunter Valley, producing only of 8.6 million tonnes last year; however the extension will allow it to lift output to around 15 million tonnes of coal per annum.

However according to New Hope is plants to increase production around 12 million tonnes per annum.

This latest divestment represents around US$4.5 billion of divestments for Rio Tinto since 2013.

Rio Tinto copper & Coal chief executive Jean-Sébastien Jacques said “this sale [of Bengalla] will deliver value for our shareholders as we remain focused on continuing to develop the strongest core portfolio of assets in the mining industry”.

“It demonstrates our commitment to further strengthening our balance sheet, maintaining a disciplined approach to allocating capital across the Group and delivering strong returns for shareholders through the cycle.

“Bengalla mine is a robust, well-managed business with a productive workforce and we believe it will have a positive future under the new owner with different capital allocation priorities. We expect the business to make a significant and ongoing contribution to the New South Wales economy. Rio Tinto will ensure high safety and environmental standards are maintained through the transition to the new owners.”

Speaking on the acquisition, New Hope managing director Shane Stephan said the operation is competitively positioned on the global export thermal coal cost curve, with around 218 million tonnes of marketable coal reserves.

“This offer demonstrates New Hope’s positive long-term outlook for the global export thermal coal market driven by increasing demand across Asia,” Stephan said.

New Hope is now working to acquire 100 per cent of the operation from the remaining joint venture partners.

This divestment by Rio Tinto marks the latest round of a new era of M&A in mining.

In April Alamos Gold and AuRico announced a merger worth $1.5 billion. This is all while broad speculation continues that former Xstrata boss Mick Davis is looking to finally deploy his $5.6 billion war chest held by his company, X2 Resources.

Carl Ichan has bought an 8 per cent stake in Freeport McMoran, the operators of the Grasberg mine; while George Soros has grabbed a chunk of Barrick Gold.

So why is the M&A market heating up?

According to JP Morgan, because it has nowhere else to drop after the hammering commodities have endured.

“In price relative terms, mining is back to its levels from 10 years ago, when the Chinese commodity super-cycle was just starting,” it said.

The World Bank is also predicting a new round of M&A, seeing mid-sized operators as the main targets.

These companies “may take the lead in mergers and acquisitions or become interesting targets for the more capitalized companies of the sector that are looking for growth that isn’t more exploration or greenfield projects,” World Bank manager for energy and extractive industries Paulo de Sa told Bloomberg.

Rio Tinto’s latest deal with New Hope is expected to conclude in the first half of 2016.