Crunch talks on smelter contract resume in Wellington

Crucial face-to-face talks between the owners of the Tiwai Point aluminium smelter and its electricity supplier, Meridian Energy, resume in Wellington today, with both sides blocking out the rest of the week, if necessary, to try and nut out a new electricity contract.

Representatives of the smelter's 80 percent owner, Pacific Aluminium, are due to arrive for the talks at Meridian's Wellington waterfront head office today, after pre-Easter drama in which the power company said it thought a new contract "unlikely" and the government made an emergency subsidy offer.

Tiwai Point is one of seven Australasian aluminium smelters owned by PacAl, a subsidiary of the Anglo-Australian mining giant Rio Tinto, which is trying to quit older smelters worldwide as it struggles with massive writedowns on an ill-fated $US38 billion investment in aluminium production just ahead of the global financial crisis.

The disastrous purchase of Alcan has forced Rio to make write downs of as much as $US25 billion and was a factor in a change of chief executive earlier this year.

PacAl had signed a new electricity supply contract with Meridian six years ago for a contract of up to 18 years, which kicked in from January 1 this year. It began trying to renegotiate the contract six months ago and has been accused of seeking commercial leverage by pushing for new arrangements ahead of the May partial privatisation of Mighty River Power.

Meridian's announcement on the Thursday before Easter that it thought a new contract was unlikely was met with an opposite view from PacAl and an unexpected short-term subsidy offer, understood to be worth around $30 million in cash, from the government to try and "bridge the gap" between the parties.

That offer, made directly by Prime Minister John Key to Rio Tinto's Australian managing director David Peevers with overnight to think about it, was swiftly rejected. Rio has a global policy of declining "subsidies".

Neither Meridian nor PacAl are discussing the talks, which company sources say are set down for the next several days.

However, Meridian believes it has already ceded several hundred millions of dollars of net present value in its contract, while PacAl continues to argue it should get greater recognition of the fact it costs Meridian about $5 per Megawatt hour to produce electricity from Lake Manapouri and is selling it to the smelter for closer to $50 per MWh.

Wellington boutique investment banking firm Woodward Partners said in a note to clients last week it believed a deal could yet be done.

It assumed the value of the Tiwai Point smelter had been written down along with other assets, and that Meridian standing its ground would "make it clear to Rio that they have taken this negotiation as far as they can and reached the point of diminishing returns".

"Then, we suggest, they would likely move their efforts away from Tiwai to other lower-hanging contractual fruit in the Rio system."

(BusinessDesk)