Rio Tinto’s Debt Gamble, BHP Builds

- October 2nd, 2009

Arch Coal has completed the acquisition of Rio Tinto’s Jacobs Ranch coal mine for $764 million. For Rio Tinto, under tremendous pressure to reduce its $42-billion debt, the selling spree has just got underway. Meanwhile, rival BHP Billiton is sitting pretty with $18 billion in cash, and is eyeing 5 acquisitions. So is Western Coal.

By Kishori Krishnan Exclusive To Coal Investing News

Rio Tinto (NYSE:RTP) is at it again. The company which has been selling assets since February 2008, has announced asset sales of US$7 billion, including the Jacobs Ranch transaction.

Arch Coal has completed the acquisition of Rio Tinto’s Jacobs Ranch coal mine for a purchase price of approximately $764 million, which includes an estimate for working capital adjustments.

In 2008, Jacobs Ranch produced 42.1 million tons of sub-bituminous coal for sale to the US power generators.  The acquisition includes 381 million tons of low-sulfur coal reserves (as of December 31, 2008) that are contiguous to Arch’s Black Thunder mine (NYSE:ACI).

Additionally, Jacobs Ranch has 35 million tons of production committed and priced in 2010 and 21 million tons of production committed and priced in 2011 under existing sales contracts.

Steven Leer, chairman and CEO of Arch, said: “We are enthusiastic about completing the acquisition of Jacobs Ranch. This transaction further expands Arch’s size, scale and strategic position in the Powder River Basin – the largest, fastest growing and most cost-competitive coal supply region in the nation.

“Arch plans to integrate Jacobs Ranch – which is the third largest coal mine in the US based on 2008 production – into the company’s existing Black Thunder mine, creating what we believe will be the largest single coal-mining complex in the world.”

Arch estimates synergies from the transaction of between $45m and $55m annually, beginning in 2010. Arch financed the acquisition with a combination of new debt and equity offerings completed in August.

Rio Tinto sales

In addition to the Jacobs Ranch deal, Rio Tinto (ASX:RIO) received a binding offer from Amcor in August 2009 for US$2.025 billion for Alcan Packaging global pharmaceuticals.

During 2008, Rio Tinto announced divestments totalling US$2.9 billion. Agreed sales in 2009 comprise the group’s interest in the Ningxia aluminum smelter in China for US$125 million, the Potasio Rio Colorado potash project in Argentina and the Regina exploration assets in Canada to Vale for US$850 million, Alcan Packaging Food Americas to Bemis Inc for US$1.2 billion, 56 per cent of the Alcan Engineered Products cable division to Platinum Equity for an undisclosed amount, the Corumbá iron ore mine in Brazil and associated river logistics to Vale for US$750 million and Alcan Engineered Products Composites division to Schweiter Technologies for US$349 million.

Massive debt

Why is the global miner selling its assets? The firm is under tremendous pressure to reduce its $42-billion debt . The global recession, which led to a sharp decline in the demand for minerals, dug a deep hole in the world’s third largest mining company. The company is looking to sell some of its assets in order to reduce its balloning debt by $10 billion during the course of this year. Analysts at ABM AMRO had said that the easiest assets to sell in a bear market were those that were generating cash.

Earnings drop

The Anglo-Australian mining giant reported first-half net earnings of $2.5 billion, 65 per cent below first-half 2008, a direct result of metal and mineral prices diving with the economy and companies letting their inventories shrink.

However, asset sales, 16,000 job cuts, a $15.2 billion rights issue, a joint venture with fellow Aussie mining behemoth BHP Billiton Ltd (NYSE:BHP) and recent signs of stability in commodity prices has put the company in a much better position than where it was just a few months ago. Rio has said synergy benefits from its BHP JV will reach $10 billion.

Mining into mergers

Rio Tinto’s rival BHP Billiton is on a different track altogether. The cash-rich mining giant is scouting for acquisitions. The firm’s chief commercial office Alberto Calderon is the man who is keen to sign on the dotted line.

Though a broader economic recovery is slow to come, BHP wants to buy companies before targets have more reason to fight for higher valuation. The timetable for favorably priced deals is shrinking.

Calderon told The Wall Street Journal, “We have no pressure to do it. But I can tell you we have done a lot of work.” The report said BHP, which has about $18 billion in cash, identified four or five opportunities, all large mining, oil or gas companies. BHP is looking to grow in iron ore, copper, coking coal, petroleum and potash.

Yet another coal major, Western Coal Corp (TSX:WTN) has also announced it is “aggressively” seeking to grow the company through acquisitions, while at the same time continuing to sell non-core assets.

John Byrne, chairman of the company, formerly known as Western Canadian Coal Corp, said there are buying opportunities close to its current operations in British Columbia and West Virginia.

“There are companies near us that are hoping to get into production, but the barriers to entry are huge,” Byrne said in an interview after the company’s annual shareholders meeting in Vancouver.

In August, Western Coal raised nearly $60 million in a bought deal financing. In July, the company closed its deal to buy UK-based Cambrian Mining PLC (LSE:CBM), its largest shareholder, in a transaction valued at about $120 million.

The deal boosted the company’s reserves by 39 per cent and its resource base by 50 per cent and doubled its production. Western Coal is currently operating just above 50 per cent of its capacity of seven million tonnes of metallurgical coal, which is used in steelmaking.

Reports out

Despite a decrease in coal sales volumes brought about by lower demand for steel, Calgary-based Grande Cache Coal Corporation (TSX: T.GCE) reported a 70 per cent increase in its fiscal 2009 revenue over last year to $248.6 million, mainly because of higher coal prices.

The stock was down to $3.75 on October 1, following its previous close of $3.97.

The company says its coal sales volumes during the fiscal year were 1.06 million tonnes sold at an average price of $234 per tonne, compared to annual sales volumes of 1.65 million tonnes at an average price of $89 per tonne in the previous fiscal year.

The company’s fiscal 2009 revenue increased 70 per cent over last year to $248.6 million, mainly because of higher coal prices. Fourth quarter revenue was $38.7 million. Net income was $106.2 million, or $1.18 per basic share during fiscal 2009, including $18.9 million, or 20 cents per share, during the fourth quarter. This compares to net losses of $15.5 million, or 24 cents per share last year, and $1.2 million, or two cents per share in last year’s Q4.

Meanwhile, Indonesia plans to set up a coal exchange to create a benchmark for coal prices which would help in pricing exports, Bob Kamandanu, chairman of the Indonesian Coal Producers Association, said on Tuesday.

Most Indonesian coal traders currently use international coal price indexes such as Australia’s globalCOAL weekly index as a pricing reference.

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