Contact’s Barnes optimistic Tiwai smelter will stay open
CEO says Rio Tinto decision front of mind but grid upgrade to buffer risk in pipeline
Contact’s chief executive Dennis Barnes is optimistic Rio Tinto will keep its majority-owned Tiwai Point aluminium smelter open, but says an upgrade of the power grid — for when the facility does eventually close — will happen sooner rather than later.
Rio Tinto’s review of the ageing smelter — which uses about 13 per cent of New Zealand’s power output — is due by the end of March.
Contact, which has extensive hydro generation capacity in the south of the South Island, said Rio Tinto’s review of Tiwai remained “firmly on the radar”.
“A disorderly exit of the smelter would be a poor outcome for New Zealand and we are actively engaged in negotiations for revised terms for electricity supply to Tiwai,” it said.
The contract negotiations are between Meridian and the smelter. Contact Energy provides contract support to Meridian.
The Herald asked Barnes after the release of Contact’s first-half result if he was confident that the smelter would stay.
“The logic tells you that the answer is ‘yes’ to that,” Barnes said. “The smelter is one asset in a massive multinational, so we are in the lap of the gods in terms of . . . their long-term ambitions.
“But given its low carbon nature, the smelter’s cross shareholding with Sumitomo Chemical (which owns 20 per cent), and the type of technology they use, it is set it up well for the future of high purity production,” Barnes said.
National grid operator Transpower said in December that work would start on a network upgrade that would help mitigate the risk of Tiwai closing by making it possible to send more power northward.
Transpower had entered into separate agreements with Contact and Meridian to start further work on the Clutha Upper Waitaki Lines Project that will involve Contact and Meridian investing $5 million each.
“We have got to be ready for the smelter to go one day, so why not prepare for it,” Barnes said.
“In fact, that upgrade will happen faster then anyone believes, and if we were to see the smelter close, then that power would move north.”
Contact Energy said first-half operating earnings fell 21 per cent amid tight gas supplies and reduced sales volumes to the firm’s commercial and industrial customers.
Earnings before interest, tax, depreciation, amortisation and changes in financial instruments fell to $221m in the six months ended December 31, from $278m a year earlier on a continuing operations basis, as low lake levels reduced hydro generation and gas shortages increased fuel costs.
Barnes said the first half came down to the availability, reliability and price of gas.
“Now that we have bought some gas we are more confidence about supplies.
“Re-entering the market to sell to larger customers takes some time, so it won’t be an immediate recovery.”
Barnes announced his decision to step down last year. His replacement, former Refining NZ chief executive Mike Fuge, will start on February 24.
Grant Swanepoel, head of institutional research at Craig’s Investment Partners, said the result was bullish relative to expectations.
“They secured gas — which was a major hindrance to their first-half earnings,” he said.
“They are on track towards normal operations so they can start securing commercial and industrial load — which has had a much higher price point, historically.”
Shares in Contact last closed last night at $7.22, down one cent on Friday’s closing level.