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Current as of 24/10/14 07:40PM NZST

Smelter contract talks resume

By Patrick Smellie

Meridian lays out parameters for possible changes.

The Tiwai Pt aluminium smelter uses about one-seventh of NZ's electricity. Photo / Supplied
The Tiwai Pt aluminium smelter uses about one-seventh of NZ's electricity. Photo / Supplied

New Zealand's largest electricity producer, Meridian Energy, has resumed talks with Rio Tinto Alcan, the majority owner of the Tiwai Pt aluminium smelter, over Rio's request for changes to 18-year power-supply contracts that kick in on January 1.

Meridian chief executive Mark Binns told the company's annual public meeting in Wellington that Rio had recently resumed discussions after Meridian set out what it was and was not prepared to renegotiate. The contracts, signed in 2007, account for about one-seventh of total electricity consumption in New Zealand.

Since then, world aluminium prices have fallen steeply while on the domestic front, Meridian and other generators are facing a sixth year of flat demand as the economy undergoes a sluggish recovery and industrial users contract, invest in efficiencies and seek alternative fuel sources.

"We have reviewed the contracts some time ago and have advised Rio Tinto of areas in which we are prepared to look at some amendments, and areas where are we not prepared to look at amendments," said Binns.

"I can't elaborate on where we have drawn the line."

The existing contracts have fixed and variable portions, with the electricity price influenced by a formula that takes into account international aluminium prices.

Rio Tinto Alcan, the Canada-based aluminium arm of the Anglo-Australian metals giant, is seeking to sell its interest in Tiwai Pt plus a clutch of relatively ageing smelters in Australia, and has packaged the assets as a new subsidiary, Pacific Aluminium.

Rio has indicated it does not expect a quick sale.

Binns would not confirm comments by Prime Minister John Key that the first three years of the contract arrangements were set in stone, except to say "the Prime Minister's not a silly man" and that there was no question the new contracts would come into force from January 1.

On criticism by competitors of Meridian's decision this year to build the Mill Creek wind farm behind Wellington, Binns conceded the project was "on the cusp" of commercial viability "in a negative scenario", but that the board and senior management were confident it would earn its cost of capital.

He took a poke at Dennis Barnes, chief executive of NZX-listed rival Contact Energy, saying Meridian could have questioned its decisions to build gas storage facilities in Taranaki and the new Te Mihi geothermal plant at Wairakei.

"I suppose the last guy who built the last power station will always criticise the next guy," he said. Meridian approved the $169 million, 26-turbine project in June.

As the largest and most valuable Government-owned electricity company, Binns said Meridian was ready for partial privatisation in the event the Government decided to proceed with a sale, and that it had established a permanent "due diligence room", allowing all relevant company records to be kept up to date.

In an update on Meridian's outlook, Binns confirmed that half-year profit to December 30 would be lower than last year's, as flagged, but not as low as originally thought.

He expected a few anxious months while Transpower commissioned the new Cook Strait electricity cable early next year, since any unforeseen outages could hit earnings.

- BusinessDesk

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