Rio Tinto Rejects Glencore's $2.5 Billion Offer in Favor of Yancoal

Rio Tinto PLC rebuffed a $2.5 billion offer by Glencore PLC for its Australian coal assets and recommended that shareholders approve a previous bid by a Chinese company.

Rio Tinto said Tuesday that its board considered a number of factors related to both proposals, including the size of both bids, and decided to stick with a $2.45 billion offer that Yancoal Australia Ltd. made in January, in part because it expects to complete the deal faster than one with Glencore.

The British-Australian mining giant is trying to shed much of its coal operations, especially thermal coal, the type burned to make electricity.

The sale includes Rio's giant coal operation in Australia's Hunter Valley, Coal & Allied Industries Ltd., which Rio has been trying to unload for years. Glencore's surprise counteroffer two weeks ago, set to expire next Monday, briefly threw Rio's plans into turmoil. Glencore Chief Executive Ivan Glasenberg has long coveted the Australian coal assets, which sit aside large Glencore coal operations.

A Glencore spokesman said the company is reviewing the announcement and "will respond in due course."

Following Glencore's bid, Yancoal revised its offer to make its $2.45 billion payment upfront, rather than in a series of installments. The company is a subsidiary of Chinese coal giant, Yanzhou Coal Mining Co.

"We believe Yancoal's offer to purchase our thermal coal assets...offers the best value and greater transaction certainty for shareholders," Rio Tinto Chief Executive Jean-Sebastien Jacques said.

The bidding contest highlights renewed interest in thermal coal, which is used to generate electricity. Thermal coal prices plunged in 2015 followed by a sharp rally last year amid signs of solid demand in China. Thermal coal prices have softened this year, and analysts expect demand to remain subdued as countries switch to cleaner burning fuels.

Glencore, the world's biggest trader of thermal coal, expects demand for the fossil fuel to remain solid in Southeast Asia, since thermal coal is one of the cheapest fuels for electricity generation.

Mr. Jacques said Yancoal's revised offer also is more attractive because it can meet the timeline set for the transaction and is more likely to get regulatory approval, including from the Chinese government. Although the Rio Tinto assets are in Australia, China is a major coal consuming country and its regulators often insert themselves into mining deals.

Under U.K. and Australian listing rules, the transaction with Yancoal requires the approval of Rio Tinto shareholders. London-listed Rio Tinto PLC has called a general meeting for June 27 to vote on the deal and Rio Tinto Ltd. in Australia for June 29.

The transaction with Yancoal is expected to be completed in the third quarter of 2017.