Glencore to buy Rio Tinto coal mine for $1.7bn

Glencore has agreed to buy Rio Tinto's 82% interest in the Hail Creek coal mine in Australia for $1.7bn.

As part of the deal, it will also buy the adjacent coal resources and Rio's 71.2% interest in the Valeria coal resource in central Queensland. Hail Creek is located 120km south-west of Mackay and in 2017 produced about 9.4m tonnes of coal for export from the Dalrymple Bay Coal Terminal.

The remaining 18% of Hail is owned by Nippon Steel Australia, Marubeni Coal and Sumisho Coal. Each joint venture partner has the right to sell its share to Glencore, which could result in additional consideration of up to $340m.

The acquisition is expected to complete in the second half of this year, subject to regulatory approvals.

As at the end of December 2017, Hail Creek had Joint Ore Reserve Committee resources of 794m tonnes, with proven and probable reserves of 142m tonnes. The Valeria thermal coal deposit, which is located 265km west of Rockhampton, has JORC resources of 762m.

At 1450 GMT, Glencore shares were up 0.5% to 371.10p and Rio was up 1.4% to 3,663.50p.

RBC Capital Markets said that from Glencore’s perspective, this increases the coking coal exposure, nearly doubling the bank's current 2018 forecasted 5.8mt of coking coal to be produced.

"There should be marketing and blending synergies on the thermal side as well. This will likely require further anti-trust approval. However there shouldn't be an issue from coking coal. We would expect the deal to close towards the end of the year. We calculate Glencore will generate group free cash flow of $6,549m in 2018, making this transaction affordable and what we see as a reasonable price for the 794m tonne resource + the optionality on Valeria.‎"

For Rio Tinto, RBC said it marks another step in its portfolio streamlining.

"The sale of Hail Creek without Kestrel could ‎see some questions posed about the eventual monetisation of the shorter life Kestrel asset, however Rio has realised a price ahead of our current estimate. We value its coal assets at $1.7bn, which implies the deal is positive from a current NPV perspective (and is heavily dependent on long-term coking coal prices... at $150/t we would value the division at $2.6bn). This cash is very likely to bolster cash returns at the half year, something which should be seen favourably in the short term. With the balance sheet in a strong position, the question for Rio is becoming when (or if) the company switches from selling assets to buying assets?"