Rio Tinto's last roll of the dice to NZ govt - give us $60M

Thursday 12th September 2013

Tiwai Point aluminium smelter owner Rio Tinto failed to get open-ended government subsidies to lower its electricity and transmission costs, and made a last grab for $60 million rather than the $30 million taxpayer sweetener that sealed the deal.

A series of memoes and emails released today on the Treasury website show matters came to a head in mid-July, when Rio told Treasury officials it had reached a final position with its supplier, state-owned Meridian Energy, but would seek government top-ups to lower the smelter's electricity price further.

Rio also argued vigorously that the smelter was "subsidising" New Zealand's national grid and the arrangement with the government should be viewed as compensation for that too.

Finance Minister Bill English turned that offer down in a phone conference on July 11 with senior company officers of Pacific Aluminium, the Rio subsdiary that controlled the smelter directly, but did repeat the $30 million cash offer made by Prime Minister John Key in March, when it seemed no deal was likely.

In an email the following Monday, July 15, PacAl chief financial officer Phil Baker told Treasury officials that "to be blunt and to the point, there was considerable concern and disappointment on the part of London and Tokyo in respect of last Thursday's proposal," referring the head offices of the smelter's two ultimate owners, Rio and minority shareholder, Sumitomo Chemical Company.

"However, in our view an increase in monetary compensation" would be likely to allay concerns and would "allow all matters to be finalised this week."

"I would be confident that a doubling of the monetary offer would be regarded favourably by the ultimate owners and could be confirmed before the end of the week," said Baker, taking the government's $30 million offer to $60 million.

That attempt was also rejected by the government, which warned Rio that it had negotiated so hard with Meridian that the SOE had reached "the point of indifference" as to whether a new contract succeeded.

Treasury advice relating to Project 14, as the smelter negotiations were code-named, recommended against subsidising the smelter, arguing there was no economic justification for it.

The biggest impact would be electricity prices perhaps 10 percent lower than those prevailing and while there would be big impacts in Southland, the region had a low unemployment rate and smelter workers were likely to find other work. A smelter closure would make Meridian worth less in a partial privatisation, but that did not rule out a float going ahead, the Treasury said.

The $30 million "incentive payment" was at one stage described in Treasury documents as a "signing bonus" after noting Rio's aversion to the term "subsidies."

PacAl's assets, including several Australian aluminium assets as well as Tiwai Point, were absorbed back into Rio Tinto Alcan, Rio's global aluminium business, immediately after the New Zealand electricity deal was announced after a worldwide search for PacAl buyers failed to find interest.

The Treasury papers speculated this could happen, and on the possibility that Rio would come under pressure to sell its entire aluminium business, which has been disastrous for the Anglo-Australian metals giant since the global financial crisis in 2008.

While the reduced value of the Meridian contracts is confidential, it is understood Rio was seeking total cost reductions of more than $1 billion in a combination of concessions from both Meridian and the government.

BusinessDesk.co.nz

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