Questions linger over Tiwai Pt smelter value

If leave for the appeal is granted, the smelter's argument will focus on the interpretation of the Holidays Act. Photo / Supplied

The Tiwai Point almunium smelter is back to running a profitable operation, though uncertainties about its outlook have left question marks over its intrinsic value, according to majority owner Rio Tinto.

The smelter "is currently profitable as a result of high regional and product premiums and operational cost improvements," Rio Tinto said in its 2014 annual report, confirming electricity supplier Meridian Energy's analysis last month that the plant should be running a cash surplus.

The smelter makes up part of Rio Tinto's Pacific Aluminium unit, which reversed some US$1 billion of earlier impairment charges in the 2014 financial year as aluminium prices turned around, and because of the repeal of Australia's carbon tax.

Rio Tinto's average realised price for primary metal products in the aluminium segment rose to US$2,395 per tonne in 2014 from US$2,249/tonne a year earlier.

However, that turnaround in the Pacific Aluminium unit's writedowns didn't extend to the New Zealand smelter, as "operational uncertainties indicate that the impairment losses previously recognised are yet to reverse."

In 2012, Rio Tinto's local holding company slashed the value of its 79 per cent stake in the New Zealand smelter to just $14.8 million from $606.9 million

The Tiwai Point smelter produced 327,000 tonnes of aluminium in calendar 2014, slightly up from 324,000 a year earlier, though still below full capacity of 365,000 tonnes of production.

The company renegotiated its contract with Meridian in 2013 when Rio Tinto threatened closure ahead of the electricity generator-retailer's initial public offering.

The revamped contracts kept the price it paid for power at pre-2013 levels, and gave the smelter's owner an option to terminate its contract on July 1 this year, with shutdown by the end of 2016, or a longer, staged rampdown.

Those negotiations also included a $30 million sweetener from the government to keep the smelter running, given its importance to the Southland economy.

New Zealand Aluminium Smelters, the entity running the facility, has been seeking alternative suppliers to Meridian in recent months as it mulls its options for continued operations at Bluff.

The smelter consumes about a seventh of the nation's electricity, meaning its closure would flood the market with supply and potentially put thermal generation, which has higher marginal costs, under pressure.