News: RIO BREAKINGVIEWS-Rio Tinto right to take China’s $2.7 bln and run

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Andy Critchlow LONDON, June 28 (Reuters Breakingviews) - Rio Tinto’s proposed $2.7 billion sale of thermal coal mines to China’s Yancoal has benefits beyond a quick payday. The Anglo-Australian miner could have accepted a slightly lower but potentially more secure bid from Swiss trading group Glencore for the pits. Selling to a less financially secure Chinese-backed entity could help to win friends in its biggest market, while still achieving the main goal of ditching dirty fuel assets.

Yancoal already raised its offer for the Hunter Valley mines to $2.7 billion, from the $2.5 billion initially agreed in January, after Glencore popped up with a counterbid. To give Rio more security, Yancoal’s parent Yankuang has more than doubled its break fee to $225 million in case financing for the deal falls through and agreed to pay the majority of the cash up front on completion. But $240 million of the offer will be delivered through payments linked to the coal price over five years. That means Rio is exposed to the risk that Yancoal, which is backed by the Chinese state, can’t or won’t honour its side of the bargain in future.

Although it wasn’t pre-approved by regulators, Glencore’s counter offer came with less baggage. However, the Switzerland-based resources conglomerate can’t offer the political advantages of picking the Chinese-backed bid. After all, China is Rio Tinto’s biggest customer.

Given the international push to cut emissions and the growing rejection of the industry amongst more ethical institutional investors, Rio has done well to offload the mines, which produced 17 million tonnes of the fuel last year, at a decent price. Granted, the pits being sold produce high quality grades of coal, but globally the fuel is in retreat. The International Energy Agency forecasts its share of overall power generation will drop to 36 percent by 2021, compared to 41 percent in 2014.

In Asia the fuel is set to remain a key part of the energy mix because it offers customers the most affordable option to power rapidly growing economies. Those fundamentals probably work better for Yancoal than Rio Tinto. Like many of its peers, the Anglo-Australian miner is increasingly focusing on resources like copper that are more closely aligned with a cleaner environment. China is giving it a push in that direction.

On Twitter http//twitter.com/baldersdale

CONTEXT NEWS - Rio Tinto’s investors in Australia are due to vote June 29 on whether to approve the sale of its Australian Hunter Valley coal mines to China-backed Yancoal.

- Yancoal increased its offer for Rio’s Coal & Allied unit to almost $2.7 billion from just under $2.5 billion after Swiss mining and trading group Glencore had submitted a counter-proposal.

- Rio Tinto confirmed on June 26 that Yancoal was the preferred bidder for the assets.

- Shares in Rio Tinto traded in London were down almost 1 percent to 31.33 pounds on June 28 at 0915 BST.

- For previous columns by the author, Reuters customers can click on [CRITCHLOW/]

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