JOHANNESBURG (miningweekly.com) – Mining major Rio Tinto has agreed to sell its Coal & Allied subsidiary to Yancoal Australia for up to $2.45-billion.

The binding agreement allows for an initial $1.95-billion cash payment upon the completion of the transaction in the second half of 2017, followed by $500-million in deferred cash payments to be settled in five yearly instalments of $100-million.

The agreement also allows Yancoal Australia to elect, before February 24, an alternative purchase price structure of a single cash payment of $2.35-billion.

“The sale of Coal & Allied represents the culmination of an extensive assessment of all strategic options for these assets. Rio Tinto has conducted a comprehensive market testing and price discovery process and has held extensive discussions with several potential acquirers of the asset, but Yancoal Australia provided the only offer that represented compelling value for the assets,” Rio CEO Jean-Sébastien Jacques said on Tuesday.

Yancoal CEO Reinhold Schmidt added that the transaction represents a significant expansion of Yancoal’s operational portfolio and will transform the company into Australia’s largest pure-play coal producer with expected run-of-mine coal production of 71-million tonnes a year.

Coal & Allied is the holding company for Rio’s thermal coal business in the Hunter Valley region of New South Wales. It holds a 67.6% stake in the Hunter Valley Operations mine, an 80% stake in the Mount Thorley mine and a 55.6% stake in the Warkworth mine, as well as a 36.5% interest in Port Waratah Coal Services, which owns a coal export terminal at the Port of Newcastle.

Yancoal will fund the transaction through a capital raising and a pro rata entitlement offer of ordinary shares.

Meanwhile, under the terms of the deal, Rio will also be entitled to quarterly coal price-linked royalties from Coal & Allied for a ten-year period, starting on the third anniversary of the completion of the transaction.

Coal & Allied’s operations will continue to make use of Rio Tinto Marine freight services following the completion of the transaction, as well as assume Rio Tinto’s coal supply obligations in relation to certain coal supply contracts.

The transaction remains subject to all approvals and other conditions precedent, including approvals from the Australian government, Chinese regulatory agencies and the New South Wales government, as well as a majority of independent Rio Tinto shareholders.

This deal brought the value of Rio’s divestments since 2013 to over $7.7-billion, including the sale of Rio’s interests in the Clermont coal mine, the Bengalla coal mine and the Mount Pleasant coal project.

Rio will use the proceeds from the sale for general corporate purposes.