RIO Rio Tinto Plc

By Scott Patterson and David Winning 

LONDON -- Rio Tinto PLC, capitalizing on last year's sharp rally in commodity prices, sold a major piece of its coal business for $2.45 billion to a Chinese company, the biggest move yet in the British-Australian mining giant's move to shed its coal assets.

The sale of subsidiary Coal & Allied Industries Ltd. includes Rio's giant coal operation in Australia's Hunter Valley, which the company has been attempting to unload for years. The buyer, Yancoal Australia Ltd., will give Rio Tinto an initial payment of $1.95 billion upon completion and a further $500 million in equal installments over the next five years, Rio Tinto said.

The deal comes amid a red-hot market for coal. Prices surged in 2016 on the back of a cutback in Chinese production and a boost in demand sparked by a massive infusion of stimulus in China.

Still, thermal coal, used to generate electricity, has become a less attractive asset for cost-averse miners despite the recent rally in prices. Even as demand remains strong in China, analysts expect thermal-coal prices to remain subdued as countries switch to cleaner-burning fuels.

In all, the operations sold to Yancoal accounted for about 60% of Rio Tinto's coal production. The sale also rids Rio of nearly all of its thermal coal, though it still produces significant amounts of metallurgical coal, an ingredient in steel.

Rio Tinto will also be entitled to potential royalties linked to the price of coal, once the sale of Coal & Allied has completed.

"We see this as a very good deal for Rio," RBC Capital Markets analyst Tyler Broda wrote in a note. RBC values the assets at $2.2 billion, based on current coal prices.

The purchase by Yancoal highlights how Chinese-controlled businesses continue to snap up coal assets even as the country moves to bring down pollution levels. In November, China's National Energy Administration unveiled a five-year plan for electricity production that included plans to raise coal-fired power capacity from around 900 gigawatts to as high as 1,100 gigawatts by 2020. The 200 gigawatt increase is more than the total power capacity of Canada.

Coal would make up 55% of China's electricity mix by 2020, down from about two-thirds in recent years.

The deal also marks another big move by Chinese businesses into Australia.

Chinese buyers unveiled a record 60 acquisitions in Australia last year, worth a total of $3.7 billion. Several other big deals involving Chinese buyers were blocked by the Australian government, including the sale of a controlling stake in Ausgrid--the country's biggest electricity distribution network--to State Grid Corp. of China and a sale of S Kidman & Co., Australia's largest cattle rancher.

On Monday, Australia said it would set up a new body to assess security risks tied to foreign investment in assets including energy infrastructure. Deals are currently examined by the Foreign Investment Review Board, which then makes a recommendation to the government.

The sale to Yancoal is subject to a number of conditions being satisfied, including regulatory approvals in China and Australia. It's expected to complete in the second half of this year.

Yancoal Australia is a legacy of earlier tensions over Chinese investment in Australia, particularly large deals led by state-backed companies.

In 2009, Canberra approved Yanzhou Coal Mining Co.'s 3.5 billion Australian dollar takeover of Felix Resources Ltd. only after it shackled the deal with conditions like listing the unit on the Australian Securities Exchange. At the time, the deal was the biggest Chinese takeover of an Australian company.

Write to Scott Patterson at scott.patterson@wsj.com and David Winning at david.winning@wsj.com

(END) Dow Jones Newswires

January 24, 2017 10:10 ET (15:10 GMT)

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