Yovich & Co. Market Update - Tiwai Point Announcement
Jul 8, 2020 | Commentary
9 July 2020
The announcement of Tiwai point closure has seen Gentailer’s share price open the flood gates and share prices are trading at a discount to long term values. We believe these stocks are trading at good value for long term investors, in what we see as a defensive sector.
Comments from Jarden research:
Tiwai announces sudden exit
This will negatively impact the whole sector, but it has come ahead of a material build program and hence the demand hole can be balanced within 2 to 3 years. Expected share price and earnings impacts: Meridian the most negatively impacted in the short term, then Contact. Mercury least negatively impacted. Medium term recovery depends on Industry reaction, cost out, plant closure etc.
Likely dividends impacts:
Our first take would be that Meridian cuts its special and continues with normal 17c dividend. Contact drops its dividend from 39cps down to 32cps. Mercury likely to hold dividend but it has a lower payout ratio currently. Genesis’s dividend is near term protected by Kupe cashflow, but will review.
The Smelter will shut 31 August 2021 removing 5000GWh from current demand creating two key issues:
The upgrade to the Lower South Island link will only be ready post the closure (c. 1 year) trapping c. 1200GWh of Meridian’s and Contact’s water at source. This creates major inter-Island pricing spread, hurting Meridian and Contact the most. Transpower has some cable sourcing issues which if overcome could accelerate the fix.
There is a rebalance needed and the speed of thermal removal is key. There will be a period of getting the correct capacity to energy in the market balanced.
An upside risk is if South Island dairy could be converted to electricity.
Rebalancing demand requires removing 5000GWh of supply
This means that the planned builds over the next 2-4 years will be delayed:
Contact geothermal 1200GWh
Meridian wind 550GWh
Other wind 500GWh
Contact will shut TCC 1200GWh – this was already planned for FY22.
There is still a shortfall of c.1550GWh that will fall on Genesis to pull back its thermal plant, currently producing on average 5000GWH. Due to its take or pay contracts only materially running down from end next year it is likely that the Rankines are shut (source Jarden).
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