Energy stocks drain market for second consecutive day

New Zealand shares fell as energy stocks declined for a second day following the announcement Rio Tinto’s New Zealand aluminium smelter will close.

Friday, July 10th 2020, 6:44PM

by BusinessDesk

Chorus led the market lower on the risk of more regulation.

The S&P/NZX 50 Index declined 46.02 points, or 0.4 percent, to 11,394.86. Within the index, 20 stocks fell, 23 rose, and seven were unchanged. Turnover was $144.6 million.

The benchmark dropped as investors continued to sell positions in energy stocks that have been negatively affected by the closure of the aluminium smelter that uses 13 percent of New Zealand’s electricity.

Rio Tinto, which owns nearly 80 percent of New Zealand Aluminium Smelters, advised Meridian early yesterday that the smelter will close in August next year. The news sent energy stocks tumbling and prompted the index’s biggest single-day drop since March.

Today, the worst affected energy firms lost further ground and continued to weigh on the benchmark.

Matthew Goodson, joint managing director of Salt Funds Management, said the widespread impact of the closure was the key focus for investors.

“The initial reaction to Rio’s decision was fairly well ordered, but we are seeing the stocks starting to come off further today,” he said.

“As one would expect Contact and Meridian have borne the brunt of it, to a lesser degree Mercury and Genesis.”

Meridian dropped a further 3.8 percent to $4.51, bringing its total loss for the week to 8.7 percent.

Standard & Poor today downgraded the company’s credit rating outlook to BBB+/negative from BBB+/stable to reflect the “challenging operating environment” in the two to three years following the closure of the smelter in 2021.

Contact Energy shed another 3.1 percent to $5.62, bringing its total fall to 16.1 percent this week.

Other energy stocks were mixed. Genesis Energy declined 0.7 percent to $2.88, Mercury held at $4.68, Vector—which also provides natural gas—rose 0.6 percent to $3.61 and Trustpower gained 1.5 percent at $6.90.

Internet infrastructure company Chorus led the market lower, dropping 8 percent to $7.07 after the Commerce Commission said it would review the way it allowed Chorus to account losses that have been incurred while building its fibre network.

Chorus chief executive JB Rousselot said it was disappointing that a potentially significant change of this nature is being considered this late in the regulator's process.

Goodson described it as a shock from left-field which had injected an element of uncertainty that investors hadn’t priced in. The stock had been up 22 percent year-to-date at market close yesterday.

“Chorus wasn’t priced for any negativity or uncertainty,” he said.

“Wellington regulators just do not understand the importance of certainty to the business community and to investors.”

Infratil dropped 0.2 percent to $4.73 after it said it does not yet have sufficient certainty to provide earnings guidance for the 2021 financial year but made a point of noting the downgrade of Tilt Renewables’ guidance range today.

Tilt Renewables, in which Infratil is a 65 percent shareholder, announced this morning it expects earnings to be between A$65 million and A$80 million, a decrease from its earlier guidance range of A$80 million to A$95 million.

Metlifecare started the day in a trading halt at $5.79 while the board considered a takeover offer at $6 per share. The stock resumed trading at 4:44pm with an announcement that the deal had been approved and its shares rose 0.9 percent to $5.84.

Goodson, speaking to BusinessDesk before the decision, said while he had supported the takeover at $7, in his view $6 was not a good enough price considering the long-term potential for the company.

Restaurant Brands rose 5 percent to $12.07, posting the day's biggest gain.

Tags: Market Close