Tuesday's agreement will see Yancoal take ownership of Rio's 67.6 per cent stake in the Hunter Valley Operations mining complex (HVO) in New South Wales as well as Rio's interests in the nearby Mt Thorley Warkworth mine.

Mt Thorley Warkworth is comprised of two open cut mines, with Rio owning 80 per cent of the Mt Thorley part and 56 per cent of the Warkworth mine.

The sales continue a divestment phase that has now seen Rio sell more than $US7 billion worth of assets since 2013.

The deal is a major statement of commitment to the Australian coal sector from Yancoal's ultimate parent, Chinese state-owned company Yankuang Group, given the massive losses Yancoal has endured since its boom time acquisitions of Felix Resources in 2009, Syntech Resources and Wesfarmers Premier Coal mine in 2011 and Gloucester Coal through a merger in 2012.

Yancoal is 78 per cent owned by Hong Kong listed Yanzhou Coal, which itself is 56 per cent owned by Yankuang.

Yancoal will pay $US1.95 billion upfront, and make a $US100 million installment in each of the subsequent five years.

The Chinese dominated company can get the asset for $US2.35 billion if it pays that full amount before February 24, 2017.

Yancoal said it was in discussions with Mitsubishi over the possible acquisition of the 32.4 per cent stake the Japanese firm owns in HVO, but Mitsubishi is yet to decide whether it will exercise its right to sell.

Yancoal has not reported an annual profit since 2012 and Tuesday's acquisition agreement will significantly improve the quality of its asset portfolio and more than double the production it achieved in 2016.

Yancoal is expected to fund the acquisition via a rights issue and share placement later this year.

Rio said it would continue to earn royalties from the sale for ten years if the thermal coal price was higher than $US75 per tonne, and Yancoal has agreed to use Rio Tinto's shipping subsidiary to ship certain coal cargoes.

Rio shareholders will get a chance to vote on the proposal between April and June. The deal is also subject to approval from Australian and Chinese government regulators, Yancoal shareholders and the New South Wales Government.

Yancoal can terminate the deal if it cannot source the funding or if the market value of the assets declines by $US250 million before finalisation, and in such a case Yancoal would face a $23.5 million break fee.

"This sale delivers outstanding value for our shareholders and is consistent with our strategy of reshaping our portfolio to ensure the most effective use of capital," said Rio Tinto chief executive Jean-Sebastien Jacques.

Deutsche Bank was the sole advisor to Rio on this, and several of the company's previous Australian coal sales.

Yancoal chairman Xiyong Li said the deal would recapitalise the company and turn it into Australia's biggest pure-play coal miner.

"This is a transformative and exciting acquisition for Yancoal shareholders and will form the basis for our future growth and success as Australia's largest pure-play coal company," he said.

JP Morgan and Morgan Stanley advised Yancoal on the deal.

HVO produced 9.92 million tonnes of thermal coal in 2016 and 3.72 million tonnes of higher margin semi-soft coking coal, and is widely considered to have operating costs within the first quartile of the cost curve.

Mt Thorley and Warkworth are often considered as a single mine these days, and combined they produced 10 million tonnes of thermal coal and 2.25 million tonnes of semi-soft.

Mt Thorley Warkworth is believed to have operating costs in the second or third quartile. 

In recent years Rio has sought to blend the thermal coal from its various Hunter Valley mines and sell it as a consistent product called Hunter Blend.

Hunter Blend has in recent years sold at a premium to the benchmark thermal coal price, and Yancoal said it planned to blend coal from its own mines with that from the Rio mines.

Rio has is typically exported its Hunter Valley coal through Port Waratah near Newcastle, which it owns 36.5 per cent of. That port stake will transfer to Yancoal under Tuesday's agreement.

Rio has traditionally sold Hunter Valley thermal coal to Japanese and Korean power utilities, and in a geopolitical sense, Tuesday's deal gives China a larger influence over Japan and Korea's energy production.

On that note, the Korean Fair Trade Commission is one of the organisations that must provide approvals for the deal, while a Thai power generator must also agree for its long term supply agreement with Rio to pass to Yancoal.

The sale price may be adjusted at a later time if Rio Tinto leaves debt within the subsidiary that holds the assets, Coal and Allied, working capital of less than $161 million or if mine approvals are not granted.

Prices for high quality thermal coal from Newcastle slumped to around $US50 per tonne in January 2016 before rallying on supply cuts in China.

The price peaked at $US109 per tonne in November and has since fallen back to $US81.52 per tonne since the Chinese government relaxed the supply limits.

Academia Capital chief investment officer Ivan Szpakowski said China would likely reinstate some level of supply limits in 2017 to ensure its domestic miners did not produce too much coal.

"(Production) is not going to be allowed to surge in the way it did in the past, it is going to be kept under control to avoid a repeat of the very low prices we saw a year ago," he said.

But Mr Szpakowski noted that coal's share of power generation in China was declining and he expects it to continue declining longer-term in China and many other nations.

"China is continuing to be very aggressive at reducing coal's share of power generation, even for how bullish 2016 was for thermal coal prices, coal's share of power generation fell in China and you had massive growth in nuclear, wind and solar and that is only going to continue," he said.

"It is structurally challenged in that respect."

The latest sales mean Rio's coal division is now heavily weighted toward Queensland coking coal; a commodity in shorter supply than thermal coal and which attracts a higher price. 

Many analysts believe Rio will soon try to divest its coking coal mines Kestrel and Hail Creek as well, assuming decent offers are forthcoming.

Numerous other Australian coal mines remain on the market, with Anglo American yet to sell its two best coking coal mines in Queensland, while Brazilian miner Vale and American miner Peabody Energy are also expected to sell more mines.

The thermal coal assets sold by Rio on Tuesday were hotly pursued by Glencore through 2013 and 2014, as the Swiss miner sought synergies with its own Hunter Valley assets.

The HVO mine shares a rail loop with Glencore's Liddell mine while Mt Thorley Warkworth shares a railway with Glencore's Wambo and Bulga mines.

But an agreement on price between the partners could not be struck, and Tuesday's deal with Yancoal appears to have permanently scuppered Glencore boss Ivan Glasenberg's grand plan to create a unified coal force in the Hunter Valley.

Rio shares rallied strongly on Tuesday amid bullish iron ore futures in China, and the stock closed $2.36 higher on at $64.76; the stock's highest price since March 2015.

Yancoal shares have also been trading at multi-year highs in recent months, and the stock closed steady on Tuesday at 48 cents.