Dividend Valuation Models

[Snoopy]

Looking at the dividends paid out over the years I haven't included a growth rate as there shouldn't really be one if you are paying out all your cash. I guess they don't see any investing opportunities and power supply in NZ is sufficient if Rio are serious about leaving. I would assume the lockdown will also reduce power demand and therefore prices. Who knows.

Rio are tough negotiators. Threatening to leave is exactly the same tactic they used to try and get a better deal for their renewable power aluminium plant in Iceland. Although it is possible to smelt aluminium elsewhere, the very pure aluminium that Bluff produces would IMO be difficult to replace. It is possible that more of the plant will be mothballed. But I think the full close down costs will be too high.

I don't think it is true to say that Contact cannot see any growth opportunities in NZ.

https://www.thinkgeoenergy.com/conta...thermal-field/

If they do go ahead with a new power station on the Tauhara geothermal field, they will probably have a cash issue to partly fund it (the rest of the funding would be with debt). This is what happened when they built their last power station, Te Mihi.

Some argued at the time is was dumb to keep paying out big dividends only to have to go back to the market to take cash back with a 'cash issue'. With dividends not fully imputed, such a strategy would be even dumber today. It would mean creating a large tax bill for raising new capital. I wouldn't rule out things happening that way though!

Hopefully the pricing model will allow them to up their charges if inflation takes off to provide some inflation protection.

Renewable power stations are their hedge against inflation. They have been built for a large fixed cost but generally have very low running costs. The power pricing system in NZ works via the mechanism of the wholesale power market price creeping higher. Once the wholesale price creeps to a certain level, building a new power station becomes economical. But a rising wholesale price 'lifts all boats' in terms of market price paid for power. Existing renewable power stations pocket all of this increase in the wholesale power price as extra profit. These improved prices usually cover inflation, and more.

SNOOPY

[Aaron]

Thanks Snoopy.