Why Is Rio Tinto Selling Off Coal & Allied?

13 February 2017

Rio Tinto announced the signing of a binding agreement for the sale of its wholly-owned coal mining subsidiary, Coal & Allied Industries Ltd., towards the end of last month. The sale is likely to be completed in the second half of 2017.  The sale of Coal & Allied accounted for around three-fourths of Rio Tinto’s thermal coal production and around one-thirds of its metallurgical coal production (considering Rio Tinto’s share of production from its mines) in 2016, as illustrated below. Thus, the sale of these coal mining assets is likely to substantially lower Rio Tinto’s coal production going forward.

The sale of the mine is consistent with Rio Tinto’s philosophy under CEO Jean-Sebastian Jacques, who took over in the middle of last year. Under the new CEO, the company has made disciplined capital allocation a major part of its strategy. The company has embarked upon a more focused investment strategy, deploying the proceeds of non-core asset sales into more profitable avenues for investment. The company has been progressively shedding its coal mining assets since 2013, partly driven by weak coal prices amid oversupplied global markets. Coal prices recovered sharply in the latter part of 2016 as the Chinese government restricted operating days for Chinese coal mines in order to tackle overcapacity in the industry and tropical cyclones negatively impacted coal production in Australia. The Chinese government limited operating days for coal mines in the country to 276 per year from the previous limit of 330 days per year, prompting concerns over a supply crunch. However, the easing of the same curbs towards the end of 2016 has resulted in a sharp decline in prices. The following chart illustrates the trajectory of metallurgical coal prices over the past few months.

Given the uncertain pricing environment prevailing in the coal market, the sale of Coal & Allied is Rio Tinto’s latest step in its systematic divestment of its coal portfolio. The company is redeploying its capital into its more profitable iron ore, aluminum, and copper mining operations, as reflected in the company’s ongoing development of the Silvergrass, Amrun, and Oyu Tolgoi mines. Thus, the company is firmly putting its philosophy of disciplined capital allocation into practice.

Source – Nasdaq