Mining Giant Sends Shock Waves Through New Zealand's Stock Market
October 23 2019 - 3:02AM
Dow Jones News
By David Winning and Robb M. Stewart
The lights abruptly went out on New Zealand's long-running
stocks rally Wednesday. The reason: A global mining giant's threat
to pull the plug on the country's biggest buyer of electricity.
The NZX-50 index had been among the world's best-performing
stock benchmarks this year, notching a 26% gain through Tuesday.
But it fell 2.1%, close to a three-week low, after Rio Tinto PLC
said its Tiwai Point smelter is unprofitable, citing high energy
costs and historically low aluminum prices because of oversupply in
the market.
The selloff illustrates how small stock markets can be
especially vulnerable to big corporate decisions. Tiwai Point,
which employs roughly 1,000 people and has been in operation for
nearly half a century, is the single biggest user of electricity in
New Zealand, where it accounts for roughly 14% of energy
demand.
The possible closure risks creating a power-supply glut, which
could drive down electricity prices and industry profits.
Power generators bore the brunt of selling, with Meridian Energy
Ltd. falling 8.7% on the potential loss of a customer that takes
around 40% of its energy output. Meridian is New Zealand's largest
listed company by market value. Other power companies also have
contracts to supply Rio Tinto's smelter, including Contact Energy
Ltd. and Mercury NZ Ltd., which fell 9.7% and 8.4%,
respectively.
The NZX "isn't a huge exchange, and it can be thinly traded,"
said Michael McCarthy, chief market strategist at CMC Markets. "So
when you have stock-specific news on a day when there are negative
leads elsewhere, the reaction can be disproportionate."
Concerns about the future of Tiwai Point have long hung over the
sector. Six years ago, Meridian renegotiated its power-supply
contract with Rio Tinto's majority-owned New Zealand Aluminium
Smelters Ltd., or NZAS, to help the smelter to stay competitive.
The revised deal included a cut in the electricity price.
Investors who bought shares in Meridian when it was privatized
by the New Zealand government that same year were warned about the
risk of the Tiwai Point smelter closing. "In some circumstances the
impact on Meridian is likely to be severe," the listing prospectus
said.
On Wednesday, Rio Tinto said a review of the smelter's future
would be finished early next year. Other options include curtailing
production, it said.
Meridian Chief Executive Neil Barclay said the generator had
offered to overhaul its existing power-supply deal, and remained
open to negotiating with NZAS and its owners. Rio Tinto owns 79.36%
of the smelter, with the rest held by Japan's Sumitomo Chemical
Co.
Alf Barrios, head of Rio Tinto's aluminum business, said his
company is seeking talks with the government and other groups to
"find a solution that will ensure a profitable future for this
plant."
Write to David Winning at david.winning@wsj.com and Robb M.
Stewart at robb.stewart@wsj.com
(END) Dow Jones Newswires
October 23, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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