Rio Tinto has agreed to sell coal assets it bought through a $4 billion acquisition of Riversdale in 2011 for just $50 million to an Indian joint venture, ending its ill-fated venture in Mozambique's coal sector.
The sale of Rio Tinto Coal Mozambique to International Coal Ventures Private Limited (ICVL), includes the Benga coal mine and other projects in Tete province, assets that had a value of $71 million as of March 31 in Rio's books.
In 2013, Rio Tinto sacked its chief executive and other executives directly involved in the acquisition of Riversdale and wrote off about $3.5 billion of the purchase price, partly owing to a failure to secure a permit to move coal by barge down Mozambique's Zambezi River.
Rio Tinto is only retaining one of the assets it got from the Riversdale acquisition: the Zululand Anthracite Colliery, a small coal mine in South Africa.
"It has clearly been a horrible experience for Rio Tinto," said Liberum analyst Richard Knights, saying that the sale price was lower than he expected and implied a further writedown.
"The assets clearly weren't as good as they thought but in order for them to be written down that aggressively they must have seen very little scope in the foreseeable future for the profitable export of coal from Mozambique."
A source familiar with the sale said Rio Tinto had been reviewing the division for the past 18 months.
"The sale is not overly surprising given the new management team has little interest in major greenfield projects where they don't have much experience and coal in general has also fallen out of favour," Nomura analysts said.
The buyer, ICVL, was set up by the Indian government to buy coal assets overseas to meet the needs of state-owned companies such as Steel Authority of India Limited, Coal India Limited, Rashtriya Ispat Nigam Limited <IPO-RASH.NS>, National Minerals Development Corporation Limited and National Thermal Power Corporation Limited.
This is the first acquisition by ICVL, some six years after its formation.
Rio Tinto's decision to quit the Mozambique coal sector is a blow to the country's ambition to become a major coal exporter. Rival mining company Vale is also looking to sell a stake in its coal operations, which include its Moatize mine in Mozambique and some assets in Australia.
In an interview at the weekend, Mozambique's transport minister Gabriel Muthisse said the government remained committed to developing the coal industry as a driver of economic growth.
With global prices for metallurgical and thermal coal in the doldrums because of oversupply and sluggish demand, major coal producers and analysts have been warning that Mozambique's coal sector, hurt by a shortage of railway and port infrastructure, is not competitive.
A source in the mining industry in Mozambique put Rio Tinto's decision down to the difficult business environment, the high cost of logistics and pending issues with the government, such as the tax payment for the Riversdale acquisition.
"The country needs to face reality and understand that they will not attract neither hold investments in coal if they are not competitive," he said.
While the global coal price outlook is seen remaining depressed for at least the next two years, India's expanding steel industry is expected to boost demand for coal in the medium term. Mozambique is counting on the Indian market to help its fledgling coal industry grow.
Apart from ICVL, state-owned Neyveli Lignite Corp is also looking to buy assets in Mozambique. Tata Steel , Coal India, Essar, JSW Steel and Jindal Steel and Power already own coal mines or stakes in coal mines there.
"Everybody in Mozambique views India as a logical market because of its proximity and the coal quality that is suited for India," Ajay Mathur, chief executive of ICVL, has said.
Jindal Steel and Power has been sending about 50,000 tonnes of coal a month to India from its Mozambique mine and hopes to raise it once port and other infrastructure are ramped up by 2016, deputy managing director VR Sharma said.
Rio Tinto said the sale to ICVL is subject to certain conditions and regulatory approvals and is expected to be completed in the third quarter this year.
(By Silvia Antonioli and James Regan; Additional reporting by Pascal Fletcher and Krishna Das; Editing by Jason Neely and David Clarke)