Forsyth Barr takes another look at the power sector after Rio Tinto opts to keep the Tiwai Point aluminium smelter open until at least 2024. Photo / NZ Herald
Forsyth Barr takes another look at the power sector after Rio Tinto opts to keep the Tiwai Point aluminium smelter open until at least 2024. Photo / NZ Herald
Rio Tinto's decision to extend the life of the Tiwai Point aluminium smelter to at least the end of 2024 is seen as a significant positive for New Zealand's power generators, but some are expected to benefit more than others.
The Anglo-Australian metals and mining giant last week said ithad reached a deal with NZ Aluminium Smelters' (NZAS) biggest electricity provider, Meridian Energy, that will keep the facility open, after earlier threatening to close it by the end of August.
Contact Energy will also provide 100 megawatts of baseload electricity for the plant - which requires 572 megawatts - for the period.
The threat of Tiwai's closure has been hanging over the sector for more than a year, although electricity price futures have for some time been trading as if nothing was going to happen.
Likewise the share prices of the main power generators have been buoyant, even more so early this month after a wave of buying from exchange-traded funds (ETFs).
Meridian's Benmore Dam. Photo / NZ Herald
Forsyth Barr said with Meridian Energy providing the bulk of the discounted power to the smelter as part of the deal, it had the least upside, while Genesis Energy, which runs the coal and gas-fired Huntly Power Station, stood to gain the most.
"It [Genesis] is also our preferred electricity sector stock, being the only one with an 'outperform' rating as we are downgrading our Contact Energy rating to neutral following its recent strong share price performance," the broker said in a report on the sector.
"It has the largest mass-market retail customer base which will no longer be targeted by Meridian Energy and was long gas until the Kupe contract ends in 2024."
Rio's decision means there is more certainty around electricity sector dividend forecasts than there has been for about 15 months.
Forsyth Barr said Rio may well try to extend the deal beyond 2024, possibly on current terms.
The key task for Meridian and Contact was to find additional power demand in the lower South Island, should Tiwai eventually close.
Contact Energy's Clyde Dam. Photo / Grant Bradley
"We believe there is a good chance NZAS will remain open beyond 2024, with environmentally friendly aluminium becoming increasingly important," Forsyth Barr said.
Brokers have also noted a 14 per cent lift in aluminium prices over 2020, which may also influence Rio's thinking if it is sustained.
In a separate research note, Harbour Asset Management said Rio's move would provide the companies an element of certainty over cash and dividends which it expects further confirmation of in the February reporting round.
"The price movements of the sector and, in particular, Meridian and Contact Energy in the last six months has been principally driven by Clean Energy ETF fund flows rather than any change in the profitability of the companies," it said.
As such, share valuations in some sense had already captured a lot of the good news, it said.
