WELLINGTON, Aug 3 (Reuters) - Meridian Energy MEL.NZ said on Monday it had reached a power supply contract with Rio Tinto 's RIO.AX New Zealand aluminium smelter that will keep the plant open at least for another three years.
The power company said it would supply all the power that New Zealand Aluminium Smelters Ltd (NZAS), a joint venture between Rio Tinto (LONDON:RIO) and Sumitomo Chemicals 4005.T , needed to operate at full capacity under a revised contract.
"This variation will give the smelter the flexibility to operate at current production levels for the full contract period should it want to and provide Meridian with an improved overall price for its electricity," Meridian Chief Executive Mark Binns said in a statement.
If no deal had been reached the owners of the 350,000-tonne-per-year smelter, which is the country's single biggest energy consumer, could have given notice they would shut down from 2017. NZAS is now committed to keeping it open at least until 2018.
"The agreement provides short-term security for the smelter and allows time for market fundamentals to improve," said NZAS Chief Executive Gretta Stephens.
She said the smelter was still paying too much for power, including costs for transmission infrastructure it receives no benefit from.
The smelter has struggled with weak aluminium prices and a strong New Zealand dollar for several years and was looking for cheaper power, although it made an underlying profit of NZ$56 million ($36.9 million) in 2014 after two years of losses.
Its economics have been helped by the local dollar falling 15.3 percent so far this year, improving its export returns and helping to offset weak aluminium prices, which hit a six year-low on Friday. CMAL3
The smelter's closure would cause a significant glut of power in a market with little growth in demand.
Separately, Meridian has signed contracts to get some of the smelter's future power supply from rival companies Contact Energy CEN.NZ and Genesis Energy GNE.NZ .
The electricity sector regulator is looking at a revised transmission charging structure that could lower NZAS's power costs by as much as NZ$50 million a year.
The plant, one of a few worldwide to make high grade aluminium used in automotive and electronics industries, was given a NZ$30 million subsidy in 2013 by the New Zealand government to bridge the price gap between Meridian and NZAS.
It is one of several Australian and New Zealand smelters that Rio has grouped into Pacific Aluminium for possible sale.
($1 = 1.5181 New Zealand dollars)