Rio Tinto eyeing smelter closures unless they pay their way
By Pattrick Smellie
Aug. 10 (BusinessDesk) - Rio Tinto's attempt to renegotiate New Zealand's largest electricity contract, for its
aluminium smelter at Bluff, comes as the company's chief executive warns of "difficult decisions" ahead if its older
smelters cannot be made commercially viable.
Rio, the world's third-largest mining company, reported a 34 percent drop in profits to US$5.2 billion for the six
months to June 30 on Tuesday, dragged down in particular by the sustained collapse in world aluminium prices.
The same day, NZDX bond issuer Meridian Energy announced it had received a request from Rio to reopen negotiations on
electricity contracts worth around 15 percent of total New Zealand electricity consumption, which kick in from January
next year and were concluded in 2007.
Under the new contracts, which run to 2030, Rio's take or pay obligations will rise from 543.75 Megawatts annually at
present to 572MW annually, with the electricity price calculated on a formula taking into account exchange rates and
global aluminium prices.
The smelter bought an extra 81MW of electricity in 2011 on the wholesale electricity spot market, taking total
consumption to 625MW
Asked by journalists about the future for the aluminium business, Rio's chief executive, Tom Albanese, said it was right
to keep smelters running if they could be made profitable, but ''if they cannot be viable, we have difficult decisions
A Deutsche Bank report suggesting the assets may be sold in the first half of next year “although there is a risk this
is too optimistic," according to Bloomberg reports.
Among assets for sale is a bundle of Australasian smelters, dubbed Pacific Aluminium, which Rio has also indicated it
may try to float by initial public offering.
At the time of the sale announcement last year, observers saw a market for well-run smelters operating at slightly below
world's best practice, with the Bluff smelter well-maintained and upgraded since its construction in 1971.
The price of power to the smelter has been politically contentious throughout its life, and Rio's renegotiation attempt
comes ahead of the likely sale of a 49 percent stake in state-owned Meridian Energy next year, in a market where
industrial electricity demand remains lower than in the mid-2000's.
New Zealand Aluminium Smelters, the 79.4 percent Rio-owned subsidiary which operates the local smelter, struggles for
profitability during aluminium price downturns, such as the 20 percent slump seen in the last year. Although it reported
a $46 million after-tax profit in the year to Dec. 31, that was only thanks to a one-off $65.9 million settlement of a
long-standing insurance claim.
Without that, the local unit would have reported a second year of losses in the region of $20 million.
Writing in the Sydney Morning Herald this week, commentator Colin Maiden said even after Rio wrote down its aluminium
assets by more than US$8.9 billion in February, "it has almost $US27 billion invested in a division that is earning next
NZAS is one of several entities covering Rio's activities in New Zealand. It also owns RTA Pacific (NZ), Rio Tinto Alcan
NZ, and RTA Power (NZ), which administers the smelter contracts.
The company has not replied to questions posed last month by BusinessDesk about the relationships between them, and
which show an advance to NZAS of $250 million by RTA Pacific (NZ) last year, and a recapitalisation that saw 550 million
new shares issued in RTAPNZ.
RTAPNZ reported a $186.4 million profit after tax.