The Rio Tinto Limited (ASX: RIO) share price will be one to watch on Wednesday after the mining giant announced that it has signed a binding agreement with Glencore for the sale of its entire interests in the Hail Creek coal mine and the Valeria coal development project in Queensland.
According to the release, Rio Tinto and Glencore have agreed a fee of $1.7 billion for the transaction, which is still subject to customary conditions precedent being satisfied, including the receipt of regulatory approvals.
Subject to all regulatory approvals and other conditions precedent being satisfied, completion is expected in the second half of 2018.
Rio Tinto chief executive Jean-Sébastien Jacques believes that the sale delivers compelling value for shareholders and continues its strategy of strengthening its portfolio and focus on high-returning assets.
In addition, Mr Jacques believes the sale further improves the company's balance sheet and will allow it to allocate capital to the highest value opportunities.
Rio Tinto anticipates that Australian income tax will be payable on sale proceeds which are in excess of the cost base of the assets at completion. This is estimated to be approximately $300 million, though the tax payable will ultimately depend on the final proceeds after taking into account working capital adjustments, the tax cost base at completion, and also the total of capital gains and losses realised by the company at December 31 2018.
There is still a separate process underway to sell the company's remaining Australian coal assets and management intends to update the market on this process when necessary.
This could be a disappointing development for Whitehaven Coal Ltd (ASX: WHC) which had been tipped to be a buyer of some of Rio Tinto's assets and Hail Creek in particular.
A deal had been expected to be highly accretive to Whitehaven's earnings, so investors may want to look out for a negative reaction to this news on Wednesday.
Should you invest in Rio Tinto?
While I still have a preference for BHP Billiton Limited (ASX: BHP) ahead of Rio Tinto, I do think that this is a big positive for the company and could create significant value for shareholders. This could make it a good option for investors that are bullish on commodity demand and prices.
