Merid­ian re­veals it was will­ing to go long way to re­tain Rio Tinto's smelter

Weekend Herald - - Steven Joyce | Opinion - Jamie Gray

Merid­ian En­ergy has re­vealed just how far it was pre­pared to go to keep its big­gest cus­tomer, the Rio Tin­to­con­trolled alu­minium smelter, at Ti­wai Point.

Rio an­nounced a re­view of the South­land as­set in Oc­to­ber last year and this week said it planned to close the fa­cil­ity in Au­gust 2021.

Chief ex­ec­u­tive Neal Bar­clay said Merid­ian’s per­for­mance this fi­nan­cial year was shap­ing to be strong, but

2022 and 2023 would be “chal­leng­ing” be­cause of the smelter’s clo­sure.

In a con­fer­ence call, Bar­clay said Merid­ian was pre­pared to of­fer Rio cheaper prices in re­turn for some “term” cer­tainty — the min­i­mum be­ing four years. It of­fered even cheaper power over a 10-year term.

He was con­fi­dent Merid­ian’s

10-year deal would have been enough to meet Rio Tinto’s re­quest for a onethird re­duc­tion in its power bill.

“The most re­cent deals that we had on the ta­ble was a four-year com­mit­ment to term.

“It had some re­duced rates. It had a de­mand-re­sponse pre­mium that we felt was in both par­ties’ in­ter­ests.

“More re­cently, the in­dus­try came to­gether and was able to of­fer a trans­mis­sion charge un­der­write.”

All up, the deal was worth ini­tially $50m to Rio Tinto, ris­ing to $70m in two or three years.

“We felt that it was a pretty com­pelling pack­age. We un­der­stood that we met the US dol­lar cost sav­ings tar­get they talked to us about mid­way through last year,” he said.

And Rio “could have done bet­ter than that”, if it had made a com­mit­ment for an­other 10 years.

Bar­clay said Rio’s de­ci­sion looked to be less about power prices and more about its global strat­egy.

“From our per­spec­tive it looks like there is a big­ger is­sue at play in terms of the over­all Rio Tinto port­fo­lio.”

Bar­clay said this year’s or­di­nary div­i­dend would be strong. How­ever, the com­pany would row back on its cap­i­tal man­age­ment pro­gramme — mean­ing no more spe­cial div­i­dends.

“The rea­son for this is that the 2022 and 2023 years will be chal­leng­ing years fi­nan­cially given the trans­mis­sion work that needs to be in place to free up the Manapouri and Clutha schemes.”

In Fe­bru­ary, Merid­ian de­clared an in­terim spe­cial div­i­dend of 2.44 cents per share in line with the pro­gramme.

The race is now on to al­low deep­south power to reach the north.

State-owned grid op­er­a­tor Trans­power needs to build the Clutha Up­per Waitaki Lines Project, due for com­ple­tion in 2023. Then power from the south­ern gen­er­a­tors can read­ily serve the na­tional power grid.

Bar­clay said the com­pany’s fo­cus now was on pre­serv­ing its BBB+ credit rat­ing, which rat­ings agency S&P has placed on a neg­a­tive out­look.

S&P said the clo­sure would dis­rupt the elec­tric­ity mar­ket: “Merid­ian is ma­te­ri­ally ex­posed to the dis­rup­tion and its fi­nan­cial met­rics could weaken without an ad­e­quate cap­i­tal man­age­ment strat­egy.”

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