Meridian hopes NZAS will decide to close the energy deal for its Tiwai Point smelter

On a recent investor day at Meridian Energy, the Government-controlled company said it expected ongoing talks with New Zealand Aluminium Smelters, which operates the Tiwai Point smelter.

NZAS' financial performance was in line with Meridian expectations and Meridian believed NZAS was cashflow positive at current aluminum prices. But NZAS was facing an electricity price increase on January 1, 2017 and Meridian expected NZAS to try to renegotiate.

"Should NZAS decide to close, Meridian has undertaken preliminary work with market participants to quickly formulate contracting arrangements. That said, Meridian maintained its view NZAS was likely to stay around, which is consistent with our view,'' Ms Howe said.

The biggest issue facing the electricity sector was the long-term future of the smelter-owning company.

In May, NZAS received the news the revised transmission pricing methodology (TPM) would probably reduce its transmission charges by about $20 million a year, but not as much as originally hoped ($50 million) and not until April 1, 2019, at the earliest, she said.

While it increased short-term uncertainty, the proposed TPM opened the door to NZAS applying for a prudent discount from Transpower on the grounds it would close the smelter if a discount was not received. The problem with the prudent discount was the uncertainty, she said. NZAS would not know whether it would receive a discount - and if so, how much - until late 2018 at the earliest.

"Our analysis suggests NZAS has ample reasons to remain open and the prudent discount is a bonus,'' she said.

The NZAS financial statements provided a useful understanding of the company's operating costs but were limited in providing profitability assessments as the company was treated as a tolling operation. Alumina and finished aluminium product ownership was retained by Rio Tinto and Sumitomo, Ms Howe said.

Key points to note included: NZAS had done well improving the efficiency of the plant by increasing production for less electricity; operating costs per tonne had fallen to $1700 a tonne, the lowest on record; the rehabilitation provision had increased by $19 million to $185 million (attributed to multiple factors).

"We retain our view NZAS is more likely than not to remain open. Commentary from Rio Tinto remains positive towards the aluminium sector and it expects pricing to gradually improve towards 2020 and beyond given the demand outlook for the sector,'' Ms Howe said.

Rio Tinto also commented all of its aluminium assets were cashflow positive, which corroborated Forsyth Barr's analysis, Ms Howe said.