Rio Tinto quits Mozambique, puts thermal coal in ‘too hard’ basket

Rio Tinto has announced the sale of the sale of their Mozambique coal assets to an Indian joint venture called International Coal Ventures (ICVL) for $US50 million, cementing in the more than $3 billion in writedowns taken last year on this failed coal acquisition and expansion.

ICVL is a JV company in India, set up by mandate of the government of India exclusively for the purpose of the acquisition of coal mines and coal assets in overseas territories, primarily to meet the coal requirements of the promoter companies of ICVL.

The promoter companies of ICVL are: Steel Authority of India Limited, Coal India Ltd, Rashtriya Ispat Nigam Limited, National Minerals Development Corp. and National Thermal Power Corporation Ltd.

This decision is newsworthy not for just the rapid shareholder wealth destruction since 2011, but it means Rio Tinto now has zero exposure to coal mining outside of Australia – refer our note in Renew Economy earlier this week.

Like BHP, Anglo American and other global diversified mining companies, RIO’s move away from thermal coal is gaining momentum. Rio Tinto’s Energy Group is estimated to contribute less than 1% of earnings over the 2013-2016 period.

This second divestiture by Rio Tinto of previously core global growth projects in coal in the last two months runs in distinct contrast to the very bullish statements from Rio Tinto’s head of energy, Harry Kenyon-Slaney as recently as March 2014, as published in the Sydney Morning Herald under the headline: “Rio Tinto touts coal future over climate ‘idealism’”.

The article paraphrased comments to Mr Kenyon-Slaney as saying: “‘Idealistic discussions” about climate change should be abandoned and Australians should recognise that coal will remain an important energy source for decades.’[ii]

This followed on from a front page article in the Australian Financial Review earlier in March 2014 with the headline “Coal is still the way of the future, says BHP’s Mackenzie”.

BHP’s Chief Executive Andrew Mackenzie went on to claim renewable energy was not cost competitive and that Asian economic growth would underpin robust growth in coal demand for the next few decades.

It will be interesting to see in which vehicle BHP dumps its non-Queensland thermal coal assets as and when the demerger proceeds: one of the four strategic pillars of the future, or non-core? BHP has also said it won’t invest in growth projects if a division is not delivering its 20% cost of capital hurdle – clearly BHP will not be investing in thermal coal any time soon.

The traditionally conservative International Energy Agency (IEA)’s central estimate for coal is for global coal demand to grow by 12.5% from 2012-2035 or 0.5% pa (as published in their World Energy Investment Outlook report of March 2014).

However, the IEA has also materially revised down its GDP growth assumptions for China and India in April 2014, and so will likewise be revising its coal demand projections materially for America following on from President Obama’s Clean Energy Plan of June 2014.

The new IEA global energy report is due for release at the end of August 2014 and will detail the full implications of these changes – but suggests the old 12.5% growth estimate for 2012-2035 will be revised down to growth of below 10% or less than 0.3% pa.

The IEA has consistently been revising down its growth forecasts for coal for the last decade because it has underestimated energy efficiency gains, as well as underestimating hydro, gas, wind and solar electricity cost competitiveness and hence global installation rates.

We again would suggest looking at what these global corporate leaders are doing rather than what they are saying.