* Weak outlook for coal drives talks
* Savings seen mostly from working mines together
* Port and rail savings seen limited
By Clara Ferreira-Marques
LONDON, June 11 Miners Rio Tinto
and Glencore Xstrata have held early-stage
talks to consider a plan that could combine thermal coal assets
in Australia as they battle low prices and high costs, two
sources familiar with the plan said.
Benchmark coal prices touched three-year lows last year and
have languished below $100 a tonne since May 2012, even as
labour and other costs soar in Australia. Both Rio and Glencore
have large thermal coal mines in the Hunter Valley region of New
"It makes a lot of sense. Both parties think the
intermediate outlook looks challenging," one of the sources said
on Tuesday, cautioning talks were at a very early stage.
"It is something that has logic, but organisationally, Rio
may not quite be ready."
Both Rio and Glencore declined to comment for this story.
A coal joint venture would help the companies reduce their
workforce and avoid costlier underground operations, but these
savings would do little to offset the increase in costs which is
partly due to the strong Australian dollar.
RBC Capital Markets, in a report issued on Wednesday, said
Rio Tinto Coal Australia's unit costs have more than quadrupled
to $133 a tonne since 2005, with about a third of the increase
due to the rise in the Australian dollar.
Combining Rio and Glencore's port and rail capacity could
also raise competition concerns, said Andrew Harrington, an
analyst at Patersons Securities. Antitrust authorities in China
took a dim view when Rio and rival BHP Billiton
mulled a similar iron ore joint venture.
"To me with the kind of balance sheet focus that Rio has,
selling the assets would be a more sensible approach rather than
merging the coal operations," said RBC Capital Markets analyst
Rio's 80-percent-owned Coal & Allied business is the biggest
producer in the Hunter Valley, while Glencore is the biggest
exporter of coal that fuels power stations in Asia.
Reaching an agreement may also be tough as Rio is more
conservative than Glencore. "Glencore throws a tremendous amount
of spaghetti at the wall. Rio likes to approach these things
much more cautiously," one of the sources said.
Bankers said the two sides have looked at combining
operations before, but this time the pressure of costs and
rock-bottom prices may result in a deal, and pave the way for
more consolidation in the mining sector.
Glencore last month halted work on its Balaclava Island
export terminal in eastern Australia, blaming the poor outlook
for Australian coal.
Rio, which has vowed to slash costs, sell non-core
businesses and tackle a $19 billion net debt burden, is also
considering the sale of a stake in coal assets in New South
Wales as well as additional mines in neighbouring Queensland.