It Looks Like Rio Tinto plc Is Getting Ready to Jettison Coal

By Reuben Gregg

Rio Tinto plc (ADR) is one of the world's largest miners. It has its fingers in everything from iron ore to uranium to diamonds. But one place it seems to be avoiding lately is beaten-down coal. Is a recent coal mine sale a harbinger of things to come?

Diversification, but ...Rio Tinto is huge, with operations that span the globe. And beyond geographic diversification, the company also has a huge collection of commodities markets in which it competes. Iron ore is the big one, but Rio does a lot more, including diamonds, uranium, aluminum, copper, and coal, among many others. It's almost the antithesis of the reincarnated BHP Billiton Limited (ADR) (NYSE: BHP), which recently spun off South32.

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BHP with and without the South32 assets. Source: BHP Billiton.

The spinoff took on BHP's smaller businesses, leaving giant BHP focused on iron ore, metallurgical coal, copper, and oil. That was a strategic decision by BHP to focus on its most important and best-performing assets. Put simply, what was left after the spinoff were the higher-margin businesses with the longest resource lifespans. BHP's goal was basically to spend money where spending money made the most sense -- and get rid of the rest.

Rio Tinto stays diversifiedRio hasn't exactly followed along that path, because it's still widely diversified. But it recently agreed to sell a coal mine in Australia for around $600 million. It also restructured the ownership of a coal joint venture, so that it controls 100% of Coal & Allied, which itself owns or shares ownership of a number of other coal mines. So what?

In the news release about the sale of the Bengalla coal business, Rio Tinto's head of copper and coal division Jean-Sbastien Jacques, used some interesting words to describe the deal: "This sale will deliver value for our shareholders as we remain focused on continuing to develop the strongest core portfolio of assets in the mining industry." Also, "It demonstrates our commitment to further strengthening our balance sheet, maintaining a disciplined approach to allocating capital across the Group and delivering strong returns for shareholders through the cycle." And my favorite: "Bengalla mine is a robust, well-managed business with a productive workforce, and we believe it will have a positive future under the new owner with different capital allocation priorities."

Notice the repeated mention of capital allocation, either directly or indirectly. That's very similar to what BHP was saying about its South32 spin off. And if Rio is looking to jettison its weakest links, coal is probably a good starting point. After all, the fuel is heavily out of favor, and environmental concerns suggest it will remain so for some time. Coal is just not the same growth business it was when China was expanding at a breakneck pace.

A Rio Tinto mine in action. Source: Rio Tinto.

While Bengalla was the start, now that Rio owns 100% of Coal & Allied, don't be surprised to see another deal down the road. That's because it's much easier to sell something if you're the sole owner. If Rio wasn't looking to shop Coal & Allied, there would have been no point to altering its relationship with Mitsubishi Development, which used to own 20% of Coal & Allied but now owns 32.4% of just one of the mines Coal & Allied owns.

It's good businessWill Rio sell Coal & Allied? It sure looks like that's the plan, with the end goal of refocusing on businesses with better growth prospects. And that's just good business for Rio, which in many ways is really focused on capital allocation. Sure, it's a miner. But Rio oversees so many different businesses that it has to make sure the money it spends is going to the places that offer the most reward.

And while BHP made a sweeping change to do the same thing, Rio clearly isn't sitting still. It's just working in an incremental fashion. Which choice is better remains to be seen. But expect Rio to make more moves like this one as the commodity downturn lingers and cost cutting alone proves it's not enough to solve the top- and bottom-line problems miners are facing right now.

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