Fire and Emergency New Zealand staff are understood to be dealing with an incident at a facility in Mataura which stores potentially poisonous ouvea premix.
The substance - a byproduct of production at New Zealand Aluminium Smelters' Tiwai Point facility - can create a toxic ammonia gas cloud when mixed with water.
A Fenz spokeswoman said a sprinkler had been activated after appearing to have broken because of frost.
Mataura firefighters were investigating further this afternoon and a hazmat unit from Invercargill was also responding.
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State Highway 93 has been closed between Clinton and Mataura.
Mataura residents contacted by the Otago Daily Times were aware of the incident, but unsure whether they would be evacuated as a result.
Mataura Community Board chairman Alan Taylor, who lives rurally outside the town, said he understood a fire had occurred in the paper mill where the ouvea premix is stored, which had since been extinguished by firefighters.
He did not know whether the premix had come into contact with water.
Fellow board member Steve Dixon, who lives about 200m south of the mill, said residents had not been contacted by officials at this stage, or alerted to any possible evacuation.
"There's a northerly wind right now, so we're downwind of the mill, but I can't smell anything untoward. Let's keep our fingers crossed."
Dixon said he understood brigades from Lumsden, Invercargill and Mataura were in attendance, and several local roads had also been blocked off.