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Rio Tinto leaving the coal face

Glencore has agreed to buy two of Rio's coal assets in Queensland for $1.7bn
March 21, 2018

This week Rio Tinto (RIO) agreed to sell its interests in the Hail Creek coal mine and the Valeria coal project in Queensland to Glencore (GLEN). The deal, which will net Rio $1.7bn (£1.2bn) and follows last year’s $2.7bn auction of the Coal & Allied business, highlights two priorities for the iron-ore giant.

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First, Rio is on the brink of an exit from coal. Announcing the sale, the group confirmed what was already well known: that a separate process is under way to sell its last remaining coal asset, an 82 per cent stake in the Kestrel mine, a predominantly coking-coal-focused producer. This is important, not only because Rio has fetched a good price for its coal assets – the latest deal with Glencore implies a four times trailing cash profit multiple valuation for Hail Creek – but because increasingly, institutional investors and insurers are eschewing mining portfolios with this most carbon-intensive of commodities.

Second, the sale represents another leg of Rio’s strict capital management; ultimately a medium-term exercise in maximising cash flow and investor returns. Immediately following the sale, Rio launched a $2.25bn bond purchase and redemption plan, in a bid to further reduce its gross debt. Glencore, meanwhile, successfully and quickly tapped the market for $500m, through the sale of non-dilutive guaranteed convertible bonds due 2025.