Prime Minister John Key has called Anglo-American mining giant Rio Tinto's bluff, saying the government will offer no more than the short-term subsidy offered last week to keep the Tiwai Point aluminium smelter open.

Key told the TV3 and Newstalk ZB networks that Rio, which owns just on 80 percent of the 41 year-old smelter, had rejected the short term subsidy over Easter weekend, saying it needed a long term deal and was returning to talks with its supplier, Meridian Energy.

"We have put our best foot forward, put our only card on the table," Key told TV3's Firstline. "We have no interest in a long term subsidy. If it can't stand on its own two feet, it shouldn't be there."

He confirmed the smelter contracts lock Rio into paying for power for the next three years, whether they use it or not, and that there is a two and a half year wind-down period.


"They could do things faster, but it would cost (Rio) an awful lot of money," Key said.

The smelter directly employs around 750 people, accounts for about 10.5 per cent of economic activity in Southland, and contributes export earnings from the shipment of high grade aluminium from the port of Bluff to international markets.

The stalemate effectively returns negotiations to where they were last Thursday morning, when Meridian chief executive Mark Binns announced Meridian thought a new deal with Rio Tinto "unlikely", while the Rio subsidiary which controls the smelter, Pacific Aluminium, said it remained hopeful a deal could be struck.

Rio signed a new electricity supply contract in 2007, to start from Jan 1 this year, and with a lifespan of up to 18 years. In the middle of last year, Rio told Meridian it wanted to renegotiate because tumbling aluminium prices were cutting profitability.

Rio's Pacific Aluminium comprises a group of ageing Australasian smelters, including Tiwai Point, and has managed to garner subsidies from Australian state governments which Key said were worth "billions of dollars" to keep smelters open.

The smelters are being packaged for sale, with Rio seeking to extract maximum value from its suppliers as it scours the world for buyers in a depressed market and seeks to extricate itself from substantial losses caused by over-investment globally in the aluminium sector. That over-investment cost long-time Rio chief executive Tom Albanese his job earlier this year.

The hands-off approach by Wellington is understood to have frustrated Rio, which is used to governments buckling to the pressure it can exert as a major global industrial player. It is currently wrangling with the Mongolian government, which has sought to raise royalties on mining operations in breach, Rio argues, of a 2009 investment agreement.

Key told TV3 it was still possible a deal would be reached.

"Who knows where things will go?" he said, claiming Pacific Aluminium gave every sign of wanting to keep the asset open in preparation for eventual sale.

"I'm not as convinced as others may be that they will walk away."

Labour's state-owned enterprises spokesman Clayton Cosgrove said the government were "acting like amateurs" and desperate to maintain its asset sales programme, starting with the sale of 49 per cent of electricity company MightyRiverPower next month.