The shares of Rio Tinto Limited (ASX: RIO) have climbed to a 52-week high of $66.63 today after the market responded positively to news that it has agreed to sell its Coal & Allied Industries business to Yancoal Australia Ltd (ASX: YAL).
Chinese government-controlled Yancoal will pay $1.95 billion in cash up front, followed by five $100 million annual instalments taking the total price up to $2.45 billion.
Furthermore, according to the release, Rio Tinto will be entitled to a quarterly coal price linked royalty calculated as $2 per tonne of attributable saleable production, excluding certain customer tonnes from Coal & Allied.
The royalty is payable if the Newcastle benchmark thermal coal price exceeds $75 per tonne and will be for 10 years. It will commence on the third anniversary of the completion of the deal.
Whilst the deal is dependent on shareholder approval, I can't see there being any issues there. As a result, I feel confident the transaction will complete on schedule in the second half of 2017.
I think this was a smart move by Rio Tinto. The mining giant has taken advantage of the extraordinary rally in the coal price to offload this non-core asset for a good price.
Shareholders of Yancoal appear to be pleased with the deal as well. Its share price is up 4% today, compared to rival coal miner Whitehaven Coal Ltd (ASX: WHC) which is mostly flat.
After a meteoric rise in 2016, I'd be surprised to see coal prices climb significantly higher from here. But ultimately a lot will depend on the actions Chinese regulators take. If regulators restrict output further, prices could easily rise more.
But I wouldn't be in a rush to invest in either of the miners. The future direction their respective share prices go will be dependent on where coal and iron ore prices go.
As I'm bearish on both commodities, I expect there could be considerable pressure on their shares in the next 12 months. Because of this I just don't believe it is worth the risk.
