Hogsback on asset sales

HOGSBACK wonders if Rio Tinto boss Jean-Sebastien Jacques would recognise a piece of high quality Queensland hard coking coal if it hit him on the head.
Hogsback on asset sales Hogsback on asset sales Hogsback on asset sales Hogsback on asset sales Hogsback on asset sales

Lou Caruana

His company owns one of the highest performing longwalls in Australia at Kestrel that contributed to an incredible turnaround in its Energy and Minerals group and all he can do is crow about how he sold the Coal & Allied Hunter Valley assets.

Underlying earnings for Rio Tinto’s Energy and Minerals group for the six months to June 2017 rose a stellar 695% compared to the previous corresponding period.

This leaves a lot of the other Rio Tinto darlings such as iron ore and aluminium – whose underlying earnings rose by 87% and 101% respectively – in the shade.

When you drill down into the figures for the Energy and Minerals group, the contribution made by Rio Tinto Coal Australia for the 2017 half year is even more impressive. The company’s Aussie coal operations reported a staggering $395 million in net earnings compared to the $30 million for the 2016 half.

For those of you without a calculator, that is a more than 10-fold increase. 

Hard coking coal production was 4% higher in 2016 at 8.1 million tonnes and fourth quarter volumes were 15% higher than the same quarter of 2015 due to longwall and plant outperformance at the Kestrel mine.

In the most recent June quarter hard coking coal production was 14% below the second quarter of 2016, however, that was due to the impact of Cyclone Debbie on Hail Creek, where pit access was restricted by water.

Kestrel insiders tell Hogsback there has been a procession of prospective buyers and assorted tyre kickers parading through the operation, despite no official word from the company on the sale of the mine.

Credit Suisse is believed to have been retained by Rio Tinto for the sale of Kestrel and Hail Creek, which are expected to be sold for $2 billion each.   

It seems J-S remains determined to put Kestrel and Rio’s other Queensland coal operations on the block.

“We believe our focus on capital discipline, maximising cash flow from operations, driving productivity and portfolio shaping will continue to support the delivery of strong cash generation and shareholder returns,” he said.

Hogsback would have thought a 10-fold increase in underlying earnings was a good deal for shareholders.  

The furious bidding between Yancoal and Glencore for the company’s Hunter Valley Coal & Allied assets should have provided ample proof that the industry’s major players are preparing for an upturn in the industry and are willing to pay top dollar to get their hands on good assets.

Anglo American has realised this and decided not to sell its Moranbah North and Grosvenor flagship mines in Queensland’s Bowen Basin, despite its CEO Mark Cutifani previously signaling the company’s intention to exit the coal business.

Hogsback reckons mining companies such as Rio Tinto should stick with quality coal assets and they will eventually pay very handsome dividends.