Meridian, MRP shares gain ahead of Monday's Tiwai decision

A decision to keep the Tiwai Point aluminium smelter open appears increasingly likely, with shares of Meridian Energy [NZX:MEL] and MightyRiverPower [NZX: MRP] gaining ahead of Monday's scheduled announcement on the future of the Bluff industrial plant that uses 13% percent of all the electricity generated in New Zealand.

Both Meridian and MRP shares climbed about 3% today. Meridian is presumed to be a winner from whatever is announced because it could expect to sell the 572 Megawatts of electricity it currently provides to Tiwai Point at a price better than the discounted level it renegotiated in 2013 ahead of its partial privatisation.

The smelter's majority owner, Rio Tinto Alcan, will drive the decision on whether to keep the ageing smelter open based on a complex mix of six-year lows in global aluminium prices, offset by a strongly falling New Zealand dollar, its ability to negotiate a new electricity contract for 172MW of the 572MW currently supplied by Meridian, and the cost of up to $400 million it would immediately face to clean up the Bluff site if it were to close the plant.

The remediation costs are widely regarded as one of the main reasons Rio Tinto is expected to try to keep the smelter running, even if it struggles to be cashflow positive, let alone profitable. Efforts to date to sell the New Zealand Aluminium Smelters business, part of the wider Australasian unit of ageing aluminium assets packaged up as Pacific Aluminium, have so far proven unsuccessful.

Industry sources suggest a decision is likely to be announced early on Monday morning, the deadline for a decision after NZAS sought an extra month's extension from July 31, when it was to have announced its way forward with the smelter.

The decision automatically reduces its contract with Meridian for 572MW of supply to 400MW, which Meridian is known to want to sell elsewhere. The smelter owners could choose to run the smelter at less than full capacity on the 400MW entitlement or contract with any electricity supplier of scale for the 172MW shortfall it would face if it wanted to keep running the smelter at full capacity.

Analysis released today by an environmental lobby, Nouveau Eco, suggests Genesis Energy is under the most pressure to supply NZAS at a knockdown price rather than have a glut of excess electricity come onto the market and undermine Genesis's profitability.

"As New Zealand's highest-cost producer of electricity, Genesis Energy is the most vulnerable to these threats and so has the greatest incentive to offer the remaining 170MW of electricity to Rio Tinto at ridiculously low prices," said Nouveau Eco chief executive Belinda Storey.

A spokesman for Genesis said he was unable to comment on the issue.

If Genesis sold the smelter electricity at an even lower price than Meridian's current contract, that would amount to a further subsidy to the smelter, she said, since it was already paying below average wholesale electricity prices for the electricity it already uses. The government also made a $30 million cash payment to Rio Tinto to keep the NZAS plant open in 2013, but has refused any further direct assistance.

(BusinessDesk)