Mick Davis, the former head of Xstrata, is in “serious” talks with Rio Tinto about a multibillion-dollar offer to buy some of the global miner’s Australian coal assets, people familiar with the matter said.
A sale of Rio’s thermal coal assets in New South Wales would be the largest divestment by the miner under Sam Walsh, chief executive for the past two and a half years.
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Such a move would mark a substantial restructuring of Rio, ending its investments in thermal coal — the fossil fuel burnt in power stations.
The approach comes as Mr Davis hunts for his first significant acquisition since launching his investment vehicle, X2 Resources, for which he has raised $5.6bn from investors and received significant debt backing from at least one leading bank.
A person familiar with the talks said they were “reasonably serious discussions but at an early stage . . . it is reasonably solid interest on both sides”.
Discussions could extend to include Rio’s metallurgical coal assets in Queensland, which yield a different grade of coal that is used in steelmaking, this person added.
Rio declined to comment, while X2 did not respond to a request for comment.
Mr Davis and X2 have been seeking assets for two years. Last year, he approached BHP Billiton, Rio’s larger mining rival, with an offer to buy a collection of its non-core mines but BHP stuck to a plan to spin off the non-core assets into a newly listed company.
South 32, as that company is known, began trading in May and has a market capitalisation of A$9.26bn ($7.1bn), which is thought to be less than the figure Mr Davis offered for the assets.
Mr Davis told the Financial Times in April that this year was likely to be one when deals were done by X2, given the way commodity prices had dipped to multiyear lows. He said thermal coal was “at the lowest ebb in terms of investor confidence . . . yet there are assets there in the right geographies, that can supply the right markets, which could well be interesting”.
Mr Davis is one of the highest-profile mining executives, having run Xstrata until it was bought by Glencore in 2013. He previously served as chief financial officer of Billiton, the mining company that in 2001 merged with BHP to form the world’s largest natural resources group by market capitalisation.
Global miners have been put under pressure to improve productivity and sell marginal assets by the commodities downturn, but Mr Walsh — who last year rebuffed an informal merger approach from Glencore — has insisted Rio will not sell assets cheaply.
A move by Mr Davis for Rio’s thermal coal assets could be countered by Glencore. The Swiss commodities group owns several mines in the same region and could afford to pay a higher price because of the potential to cut costs.
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Rio runs three thermal coal mines in the Hunter Valley, NSW, and the miner has previously held talks with Glencore over the potential for joint ventures, but the two sides have not been able to reach an agreement.
Rio did sell another Australian coal mine, Clermont, to Glencore in 2013 and sold coal assets in Mozambique — the fruits of one of the miner’s most ill-starred acquisitions — for just $50m.
Rio also restructured its coal management this year, with its head of coal departing and responsibility for running the coal assets being handed to Jean-Sebastien Jacques, also the group head of copper. The restructuring was depicted as a cost-cutting measure.
Thermal coal, which is used to generate 40 per cent of the world’s electricity, has dropped sharply in recent years as global demand has slowed and new supply has hit the market. The price of benchmark Australian coal has dropped 50 per cent since 2011 and is at present trading at about $60 a tonne.
Coal accounted for just 7 per cent of Rio’s revenues last year. Although Rio has slashed costs its net earnings from its Australian coal business, including its mines in Queensland, dropped to just $21m in 2014 from $367m a year earlier, reflecting the drop in coal prices.
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