LONDON Miners Rio Tinto (RIO.AX) (RIO.L) and Glencore Xstrata (GLEN.L) 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 metric ton (1.1023 tons) since May 2012, even as labor and other costs soar in Australia. Both Rio and Glencore have large thermal coal mines in the Hunter Valley region of New South Wales.
"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 organizationally, 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 metric ton 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 (BHP.AX) (BLT.L) 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 Chris Drew.
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 neighboring Queensland.
(Additional reporting by Jackie Range in SYDNEY and Sonali Paul in MELBOURNE; Editing by Kenneth Barry and Miral Fahmy)