Labour/Green nationalisation policy may destroy 50% of Meridian’s value

October 31st, 2013 at 1:00 pm by David Farrar

Stuff reports:

Meridian Energy’s partial float on the New Zealand stock exchange was given an initial thumbs up by analysts but they warn the share price is likely to be volatile heading into next year’s general election.

One fund manager said the difference in share price between Labour and National could be as much as 90 cents.

The Government has sold 49 per cent of the country’s largest energy company for $1.50 a share. Investors paid an initial instalment of $1, with a further payment of 50 cents due in 18 months.

The first instalment price at the close of the NZX last evening saw the shares leap 8 per cent to $1.08 on turnover of just over $246 million.

Analysts agreed that day one of the float was successful and the closing share price was in line with expectations.

Devon Funds Management equity analyst Phillip Anderson said new investors would be pleased. “It’s enough for the new investors to be happy – they are feeling good about it – but not so much that it looks like the seller left a lot on the table.”

The general feeling among analysts was that institutions which had their share quotas scaled back had created strong demand for Meridian shares.

But the analysts warned that the general election could affect the share prices of both Meridian and Mighty River Power, which was partly privatised this year.

“My valuation for . . . [Meridian] as a whole is . . . around $1.10 if the Labour Party wins, but business as usual under National at around two bucks,” Anderson said.

That’s a huge amount of destruction of value if there is a change of Government. And consumesr won’t see any of it as Labour/Green changes to the Emissions Trading Scheme will see power prices increase.

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Meridian dates

September 16th, 2013 at 4:59 pm by David Farrar

TVNZ report:

Meridian will be listed on the New Zealand and Australian stock exchanges on October 29, with an offer document set to be lodged with the Financial Markets Authority this Friday.

The offer document will include the price range, the price of the first instalment, the capped price of the second instalment and the expected yield.

It is expected that people will be able to apply for shares from September 30, with the general offer expected to close on October 18.

This will be followed by a book-build process, where institutions will be able to bid for shares.

Excellent to see the Government making progress on implementing its election commitments. I look forward to investing in Meridian as I believe it to be a good solid long-term investment.

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Herald on Meridian sale

August 21st, 2013 at 2:00 pm by David Farrar

The Herald editorial:

The structural drawbacks have largely been remedied for Meridian’s part-float, as needed to be the case given that it is easily the largest of the three power companies on the Government’s privatisation list. The sale will involve instalment receipts that allow investors to pay for the shares in two bites while receiving the full dividend. The first instalment will be for 60 per cent of the share price, payable on application, with the balance to be paid in 18 months. This greater affordability is enhanced further by a minimum application of $1000 for the first instalment. There will also be a share cap for New Zealand retail investors, so they will know the top price they will pay in both instalments.

This approach is not unique. It was used for the float of Australia’s Telstra and, locally, by Ameritech when it exited its Telecom shares. In both cases, it answered a particular need to create a heightened attraction to potential investors. It is understandable that it should also be used for Meridian.

David Shearer was comparing this on TV to doing layby at Harvey Norman. Not sure why Labour would want to use such a positive analogy!! Many Kiwis do shop at Harvey Norman and love using layby to make big purchases more manageable.

It is important that many choose to become Meridian shareholders. On the broadest of fronts, a shareholding democracy is about reducing this country’s unhealthy emphasis on housing investment. 

The companies benefit also from the discipline and transparency of a market listing.

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Rio Tinto screws taxpayers for $30 million

August 8th, 2013 at 9:34 am by David Farrar

The Herald reports:

Meridian Energy has resolved its negotiations with Rio Tinto subsidiary New Zealand Aluminium Smelters locking in the Tiwai smelter until at least January 2017 – with the help of a $30 million subsidy from the New Zealand government.

The deal, which has been a year in the making, will help clear the way for Meridian’s $5 billion float on the stock exchange – expected to go ahead before the end of the year.

Resolution of the negotiations has been viewed as essential for the Government to get a good sales price for Meridian because the smelter is a key customer of Meridian.

It also makes up around 13 per cent of New Zealand electricity demand and closure of the plant would have impacted power prices across the board.

Meridian chief executive Mark Binns said in an announcement just released that it had reached a deal that was commercially acceptable to both parties and provided a greater level of certainty for Meridian.

The agreement includes Meridian cutting its electricity charges from July 1 2013 and allowing NZ Aluminium Smelters to reduce it contracted volume from 572 MW to 400 MW from 2015.

I’ve got no problem with the pricing agreement between Meridian and Rio Tinto, as that is a commercial contract.

But bloody annoyed they screwed $30 million from the taxpayers as a subsidy. I think the Government shouldn’t have given them a cent. If the smelter closes, so be it. It is not the job of taxpayers to subsidise unprofitable industries.

I guess the risk of losing so many jobs in Southland was too much for the Government. But if they had called Rio Tinto’s bluff, I don’t think they would have closed the smelter. Their strategy is to wait for the global price to recover and then sell it.

Just as taxpayers shouldn’t have to bail out Solid Energy, we also shouldn’t be subsidising Tiwai Point. The best jobs are those that are sustainable without taxpayer funding. The rare exceptions are attracting globally mobile ventures (such as films) to NZ, but that is quite different to subsidising a struggling or failing firm or industry.

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Meridian and Tiwai Point

April 5th, 2013 at 11:00 am by David Farrar

Stuff reports:

Southland Chamber of Commerce chief executive Richard Hay urged people to consider what was really going on.

Pacific Aluminium, a business unit of Rio Tinto and the majority shareholder of New Zealand Aluminium Smelters, had been perceived as playing hard ball, he said.

“If anybody was getting the short end of the stick, it would appear to be the smelter.”

Rio Tinto was shown as begging from the Government and using the Mighty River Power partial asset sales policy as leverage to get what it wanted, he said.

“However, has any consideration been given by the public that it’s Meridian playing hard ball.

“After all, it has been making a yearly profit of $200 million off the Manapouri power generator, while NZAS is losing $50m and is in the shadow of closing,” Mr Hay said. …

“Rio Tinto wants Meridian to reduce the power price in tough times but be prepared to pay more for it again when the market improves.”

I understand that essentially Rio Tinto want the price they pay for electricity to be linked to the price they get for aluminum. This is very understandable from their point of view. Electricity makes up over 30% of their operating costs.

What they are effectively asking Meridian to be more a partner than a supplier. To share both the risks and rewards of the aluminum market.

While Meridian is 100% Government owned, I’d be very reluctant to have a Government owned business getting involved in a risky commercial enterprise such as aluminum – beyond their current role as a supplier. Why should taxpayers be forced to invest in the aluminum market?

But if Meridian was fully or partially privately owned, then Meridian shareholders could well want their Board of Directors to accept a deal where the price they charge is linked to the aluminum price.

So my hope is that Meridian and Rio Tinto can reach an agreement for now. Once Meridian is no longer an SOE, then it should have greater flexibility to consider variable price agreements.

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Tiwai Point

April 4th, 2013 at 9:00 am by David Farrar

Patrick Smellie does some excellent analysis of Tiwai Point:

A UBS research report issued in November 2011, just after Rio put its New Zealand and Australian smelters up for sale as Pacific Aluminium, suggests Tiwai Pt makes metal at around US$1900 per tonne, against US$1700 at Tomago – the lowest cost of the Australian smelters being sold – and US$1400 in Canada.

Since 2007, when Meridian Energy and Rio inked the now disputed contract for up to 18 years’ electricity supply to Tiwai Point from 2013, the price of aluminium has tanked. It was above US$3000 per tonne that year, plunged to below US$1300 a tonne in 2009, and is close to US$1900 a tonne today.

Global commodity prices are highly variable. That risk should be borne by the private sector, not the Government.

His only question will be whether the Tiwai Pt smelter is worth more open than closed. In the absence of buyers, closure grows as an option, despite hundreds of millions of dollars of site remediation costs that a closure would trigger.

In other words, no matter how hard Meridian Energy tries to do a new deal with the smelter, it’s time to get ready to kiss it goodbye. After 42 years, it’s served New Zealand well enough, raking in billions of dollars in foreign exchange earnings, paying a lot of tax in its many profitable years, and creating high-paying jobs in one of our more remote regional economies.

But the aluminium industry is changing. Lower cost, larger scale plant is being built, especially in China, and the integrated “mining-to-metal” business model is looking outdated.

Using cheap New Zealand electricity to turn Australian bauxite into high-grade metal is not the money-spinner it once was, all the more so because New Zealand itself can probably use the energy from Manapouri for higher-value activities. Meridian, for example, expects to be more profitable if the smelter closes because it will be free to market its excess power to higher-paying customers.

A sunset industry maybe?

And as to the supposed pressure on the MightyRiverPower float?

Even nine years ago, when the smelter was still owned by Comalco, the company was saying if smelter power was “freed up at Lake Manapouri, a reduction in coal-fired generation at Huntly would remove any benefit of extra power from the national grid.”

That logic is even stronger today. Genesis Energy is desperate to be rid of Huntly, while Contact Energy talks openly of closing one or both the company’s combined cycle gas generation plants at Otahuhu and Stratford. Transpower says it could upgrade the national grid to get smelter load out of Southland “in three summers”.

In other words, Rio has pushed Meridian and the government as hard as it can. It has contractual obligations that would see an orderly closure over the next five-and-a-half years. That would be a blow, but not an unmanageable one for Southland or New Zealand.

Very interesting and useful.

Also Kate Chapman at Stuff reports:

Labour won’t say whether it would step in to save the Tiwai Point aluminium smelter if successful at the next election.

Yet their major funder wants them to:

The Engineering, Printing and Manufacturing Union called on the Government to consider other ways it could help make the smelter viable in the long term.

The question for Rio Tinto is whether they think they will find a buyer. Much more profitable to sell it than close it.

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Comments on Tiwai Point

April 2nd, 2013 at 3:00 pm by David Farrar

Some interesting comments were made yesterday on the Tiwai Point thread, with people disagreeing with me that the Government should not be involved:

Jack5 said:

In a detailed post by “Tempest” in Kiwiblog yesterday, is was spelled out that the new infrastructure required to put Manpouri’s electricity on the NZ market would cost $2 billion and would take eight to ten years to complete.

DPF thinks the SOE board should negotiate this contract. This is about more than some electricity price subsidy. How would Meridian raise $2 billion to bring Manapouri electricity north with a wait of six to eight years before it received any revenue from this spending?

There’s a better case for the Government negotiating here than there was for its role in helping the film industry. And there were film-industry tax subsidies (yes, special industry tax breaks are subsidies), as well as labour rules involved.

The aluminium industry is in upheaval round the world thanks to a dive in demand and prices, and rising competition from China. Australia and New Zealand have a special difficulty because of the two countries well overvalued currencies.

In France the French Government is working with Rio Tinto and local community representatives and unions to try to find a buyer for Rio Tinto’s aluminium smelter at Saint-Jean-de-Maurienne.

Finding a buyer for Bluff, might be harder, however. In Australia, Norsk Hydro announced 12 months ago it was closing its aluminium smelter at Kurri Kurri. Alcoa’s smelter in Victoria is staying open for two years, thanks to a state-federal subsidy.

If Australia is bailing out its smelters, NZ will have to follow or lose a billion a year in foreign currency earnings. It would also have to raise $2 billion for new infrastructure, and spend heaps on social support in Southland (just as it props up farmers in droughts and kiwifruit farmers in disease outbreaks).

Too much is at stake with the smelter to leave it to a State-appointed board.

However, that is where it is. Stuff reports:

Mining giant Rio Tinto has walked away from talks with the Government over the future of Tiwai Point aluminium smelter, Prime Minister John Key has confirmed this morning.

Key said Rio had withdrawn after nine months of negotiations over possible taxpayer subsidies and had now resumed discussions with state-owned power company Meridian.

It was revealed last week the Government had been negotiating with Rio Tinto over the smelter after contract negotiations between subsidiary Pacific Aluminium and Meridian effectively stalled.

The Government had made it clear there would be no long-term support, but agreed to look at short term bridging assistance because of the thousands of jobs at stake, and to facilitate a smoother transition should Tiwai Point close, Key told TV3′s Firstline.

“We made the call that we would look to help bridge a small amount of that gap for a short period of time.

“They came back over the weekend and said ‘no, we are rejecting the Government’s intervention; we will go back and talk to Meridian’. So that’s what they are doing now.”

He acknowledged ultimately that might mean Tiwai Point closed.

Just as Solid Energy suffered due to low global coal prices, Tiwai Point suffers from low global aluminum prices. There is a limited amount one can do locally in the face of global price changes.

This reinforces to me why the state shouldn’t be in commercially risky enterprises. Why should I as a taxpayer be carrying some of the risk around global aluminium prices? If Tiwai Point closes, it will reduce the value of the energy SOEs.

Rio Tinto apparently decided to walk away after the Government made it clear it would not subsidise the deal long-term.

Key confirmed this morning the Government had no interest in that.

Good.

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The best deal is no deal

April 1st, 2013 at 2:00 pm by David Farrar

The Herald editorial:

Rio Tinto is doubtless more than happy that the Government has stepped in to try to broker a deal over the electricity supply contract for the Tiwai Pt aluminium smelter. The global company’s bargaining position has always been strong. Now, the concerns that have brought the Government to the negotiating table make it even stronger. Nonetheless, there remains no reason to bow to the mining giant’s every demand.

I am unconvinced they should be given any special treatment, beyond a commercial volume based discount for electricity which is up to Meridian to negotiate.

As much was confirmed by Contact Energy’s share price dropping 3 per cent in early trading after Meridian announced the negotiation deadlock.

A 3% drop is not the end of the world.

There are other factors for the Government to consider, not least the threat to 750 jobs at the smelter and a further 3000 indirectly in the Southland region.

But will those jobs endure just because the Government comes to the party? I am doubtful. If the smelter is not a going concern, then its closure is inevitable. If the smelter is a going concern, I’m not too keen to subsidise it.

Some people will make comparisons to Sky City and The Hobbit. But I view those two as quite different. Sky City is not threatening anyone. It is not saying that it will pack up shop, if it does not get its way. That negotiation is about Auckland needing a world class convention centre and negotiating some regulatory changes that would allow Sky City to  build it.

And The Hobbit stuff happened because of the malign interference of the Australian union. They instigated a global boycott that led to a possible shift overseas. Their influence had to be negated.

Rio Tinto are just trying to use the asset sales to renegotiate a contract they had already agreed to. Now that is fine for them to try – but the negotiation should be with Meridian.

Rio Tinto’s position is the stronger in that it has made it clear that it wants to sell the smelter. If that is not possible, closure is an alternative response to the sagging world price for aluminium. Even so, there is no reason for the Government to start genuflecting. This country has already given successive Tiwai Pt operators very good deals since it built the Manapouri hydro station to power the smelter more than 40 years ago. The Government’s approach to these negotiations should, therefore, not be markedly different from that of Meridian. If a deal that makes commercial sense cannot be struck, it will not be fatal to the asset-sales programme, the country’s electricity framework, or, in the long term, the Southland economy. On no account should the Government throw in the towel.

I agree. Any concessions should be minor, if at all.

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Would the closure of Tiwai Point impact the sale prices?

March 30th, 2013 at 11:00 am by David Farrar

Tamsyn Parker at NZ Herald reports:

Analysts said the negotiation issue could have a small negative effect on the pricing of Mighty River Power’s shares.

Milford Asset Management senior analyst William Curtayne said the situation would probably result in the bankers having to alter the pricing of the offer moderately.

For those looking to buy Mighty River Power shares it could mean the company would now be cheaper.

But Mighty River Power was still a great company which was giving off a lot of cashflow compared with what savers could get by putting their money in the bank.

Curtayne said it might also be good news for Meridian in the long term.

He said if the company pulled out of selling power to Rio Tinto, it could sell the power to other energy companies such as Genesis or Contact which would enable them to shut down more expensive operations like the Genesis-owned Huntly and Contact’s Otahuhu power station.

“It sounds bad at the headline. But in the long run if the market reacts effectively we could end up with a relatively benign outcome.”

Curtayne said it was better that the situation be revealed now.

“It’s good for them to come out and signal where they are now. It gives the situation more clarity.”

He said it could mean the Government got less money for Mighty River Power, but more for Meridian, which is worth twice as much.

Devon Funds Management analyst Phillip Anderson said it would affect the price of Mighty River Power at the margins.

Even more reason for the Government to stay out of this, and leave the negotiations to Meridian.

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Rio Tinto

March 29th, 2013 at 11:00 am by David Farrar

James Weir at Stuff reports:

Opposition parties say Tiwai Point smelter’s majority owner is trying to force the Government into a subsidy for the $1 billion a year aluminium plant in a deal with not enough transparency.

A snag in negotiations between state-owned generator Meridian Energy and Rio Tinto over power prices at the Tiwai Point aluminium smelter may have implications for asset sales, with the Government lining Meridian up for a float after Mighty River Power.

Earlier today it was announced that despite government involvement, talks between Meridian and the smelter company had effectively broken down, with a deal “unlikely”.

Meridian said it still hoped to get a deal, and Prime Minister John Key has cautiously said asset sales can go ahead despite the snag.

Last year, Rio Tinto said the smelter could close if it did not get cheaper power prices from Meridian, even though a long-term electricity contract came into force this year. The smelter uses about 15 per cent of New Zealand’s electricity.

Green party co-leader Russel Norman said today: “Rio Tinto are using the Government’s asset sale programme to screw Meridian Energy for a better deal [on power prices], that is as plain as day.”

Yep, they are.

Rio Tinto are absolutely trying to use the situation to get better terms for a deal they had already signed up to.

Meridian as the commercial operator is best placed to make the decision about what sort of volume discount they give the smelter. The Government should not be involved in any price negotiation.

If Rio Tinto decide to closer the smelter because they can’t get a low enough electricity price, then that is their decision to make. It would be very sad for those who work down there, but would also mean that we’d probably see power prices drop all around New Zealand. That’s not an entirely bad thing.

The market would adjust, with some smaller power stations possibly closing.

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Charles Chauvel on power profits

October 5th, 2009 at 1:00 pm by David Farrar

The Press reported:

Labour yesterday called on the Government to stop taking big profits from the electricity state-owned enterprises (SOEs).

“The Government could do this today, with the instant result of lower electricity prices for hard-working Kiwi families and better security of supply from renewable energy,” Labour energy spokesman Charles Chauvel said.

The Government should tell electricity SOEs to cut dividend payments and invest the money in renewable generation that could flatten power price rises, he said.

I have previously blogged on the hypocrisy of Labour preaching lower profits, after it banked $3.1 billion in dividends from energy companies during their term of Government.

A Ministry of Economic Development energy outlook released this week says wholesale power prices are likely to rise by 40 per cent over the next 20 years.

That is much less than the near-50 per cent rise in some residential tariffs over the past five years.

40% over 20 years sounds a lot better than 50% over five years!

But is this standard hypocrisy, or even worse hypocrisy than normal? Because before Charles become an MP, he was a Director of Meridian Energy.

In fact Charles was Deputy Chairman of Meridian Energy in 2005. And what was the company’s net profit after tax in 2005/06? It was $857 million.

Yes in 2005/06 Meridian had an EBIT of $1.03b on gross revenue of $2.22b. Now some of this was from a one off sale, but that money could have been used to lower power prices, as Charles now claims should be done.

Now maybe in 2005/06 the Government was short of money, and didn’t think it could manage with a lower dividend and profit. So what as the deficit in 2005/06? Oh no – it wasn’t a deficit. It was a whopping $11.5b surplus.

So where was Charles in 2005 demanding Meridian pay a smaller dividend, when the Government had an $11.5 billion surplus? Oh he was writing the cheques out.

And now in 2009, when the Government is running a deficit of $7.2b (over 11 months), Charles and Labour cry out to make Meridian less profitable as he says a dividend of $294 millions is far too high.

I am going to enjoy repeating posts like this, everytime Labour call for reduced profits from Energy SOEs.

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Waitaki River power station approved

December 3rd, 2008 at 8:10 am by David Farrar

Good news that commissioners have given consent to Meridian Energy for a 1100Gwh to 1400GWh power station on the Waitaki River.

If we want to transition away from non-renewable energy to renewables, then projects like these are essential.

Of course this is just the first step of the consent process. There are inevitable appeals to the Environment Court. Actual construction is still four years away from beginning!

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