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New smelter power deal allows for faster closure

Thursday 8th August 2013

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The Tiwai Point aluminium smelter's major owner, Rio Tinto, has won the ability to close the plant more quickly than in the contracts it has managed to overturn in favour of a new deal announced today.

The previous contracts provided for a three year production "ramp-down" if a decision was made to close the 40-plus year old smelter, but the new contract allows for a complete shutdown as early as January 2017, or on 12 months' notice after that.

Meridian chief executive Mark Binns acknowledged the closure provisions were harsher than in the previously negotiated contract, but pointed to wins for Meridian in ensuring substantial guarantees from the smelter's ultimate owners, Rio and Japanese conglomerate Sumitomo.

That was stronger than previous guarantees and ensures the capacity to pursue compensation if any aspects of the new contract are broken.

Under the deal, the smelter is guaranteed to stay open for another three years and four months, to the end of December 2016. However, it could close from January 2017 onwards.

The owners would have to give 15 months' notice of intention to close at that date, and after Jan 1 2017 will only have to give 12 months' notice.

The new contracts also allow the smelter to reduce its load from 572 Megawatts to 400 MW, with Binns apparently expecting that to happen and for Meridian to be handed back the difference, 172MW of generation capacity, in 2016.

Binns acknowledged there would be a valuation writedown required on Meridian's balance sheet, which would make the company less valuable to partially privatise, but would not give details ahead of next Monday's full year financial results presentation.

The company was last valued at $6.5 billion in 2011, with sale process observers suggesting the new contracts could knock that by around $500 million.

The smelter consumes a seventh of New Zealand's total electricity, is worth 40 percent of Meridian's annual revenue, and employs directly or indirectly 2,000 to 3,000 people in Southland.

A solution to the smelter contracts was important not only to Meridian's and Southland's future, but also for the government's plans to float up to 49 percent of Meridian in a public share offer by the end of next month.

The government sweetened the deal by offering Pacific Aluminium, the Rio Tinto subsidiary that owns its 79.4 percent stake in the smelter, a one-off "incentive payment" of $30 million, which got the deal over the line, despite PacAl's continued complaint that the smelter won't be profitable at current metal prices.

Global aluminium prices are at a cyclical low point since the global financial crisis knocked demand and new Chinese smelting capacity has come on stream.

Shares in listed electricity companies Contact Energy, MightyRiverPower and TrustPower all rallied on the announcement in early trading, but were little changed or slightly lower by noon.

The Engineering, Printing and Manufacturing Union's Invercargill organiser Trevor Hobbs welcomed the smelter remaining open, but said "it's concerning that the agreement only guarantees the smelter will stay open for a few more years."

"Having received $30 million of taxpayer support, NZAS now has a strong obligation to keep the smelter operating for many more years to come," he said.

BusinessDesk.co.nz

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