Rio Tinto plans smelter closures

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 per cent 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 per cent 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 to make."

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 per cent 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 per cent Rio-owned subsidiary which operates the local smelter, struggles for profitability during aluminium price downturns, such as the 20 per cent slump seen in the last year. Although it reported a $46 million after-tax profit in the year to December 31, that was only thanks to a one-off $65.9 million settlement of a long-standing insurance claim.

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.