Jakoto. Welcome to shared Lunch. I'm Garth Bray. Mercury Energy is one of our largest electricity generators, just over nine point one billion dollars by market cap. A year ago. Mercury's board put Stu Hamilton in the top job, just as dwindling gas supplies and lower rainfall hit generation and retail margins pretty hard. But it's not just how you take the hit, it's how you rise again. So how will Mercury rise and what will the second year look
like for the new CEO? Before we head inside to find out, it's some important information you should always consider when investing.
Investing involves for risk you might lose the money you start with. We recommend talking to a licensed financial advisor. We also recommend reading product disclosure documents before deciding to invest. Everything you're about to see and here is current at the time of recording.
Stu Hamilton, thank you so much for making time for us. Welcome, great happy anniversary. I understand it must be with a few days away from your first year, right. Actually, yeah, so you got your first result that you've put out there, first full year result just the other day. Do you mind sort of running us through the numbers a little bit giving us the highlights.
Yeah, absolutely so first full year result for myself. Obviously, it's been a really challenging twelve months for the sector and actually New Zealand in general. And if you look at the result, we had an even DAFH of seven hundred and eighty six million.
It's a good number.
Considering the year that we had and the reason why we had a challenge in year one was because it was very very dry, one of the driest on record, and that represents itself in the result, but equally quite a good result in that we're actually had a very resilient set of assets and a team which able to perform very well during those tough conditions. I think that a lot of our analysts and our owners were very excited about is what we project for the next year
and beyond. And so for next year we're guiding to one billion dollars, which is a great number for us to be looking at on the way to a one point one to one point two and by twenty thirty and that's exciting. And underneath that even further is excitement around what we're building. Over half of the money we're making is going straight back into new projects or to
maintain our current projects. And that's exciting because we've got a really good balance sheet puts us in a great position to really leverage this electrification sort of movement ahead of us maintain maintenance.
Who spends money on maintenance in New Zealand just wait till it breaks and then fix it kind.
Of thing, And that's a really good thing from our industry. Actually, look at we actually got got a lot of really amazing assets that are up to one hundred years old. We have these amazing hydra assets that have been built.
Now's our time.
To actually reinvest into them, so they've got another hundred years to go in more.
Can you give me a sense of how you can be so confident in a business where basically, if it rains, you make money. How can you be so confident with that forward guidance that people seem.
To have business where we make money when there is fuel, whether that's water or wind or sun. They're our renewable fuels produce electricity. One of the things we have that's very useful and a unique to Mercury is a diversity of our assets or our power stations. Diversity in terms of the types of renewable fuels they use, and also diverse in terms of the geographic location. So we have hydro just water, we have wind, and we have gef thermal.
The great thing about gef thermal is that whether it's blowing or raining or shining, it keeps producing energy. Where we draw this hot liquid out of the ground, extract eltricity and then we reinject that liquid back into the ground, so base load really really nice. Then with wind we actually spread it around the country. So from the far north, which we're building a wind farle at the moment near Dargable called Cola Koa, to the deep south another project
of ours called Cora downs too. And you tend to find in New Zealand that when the wind's not blowing in the north, it's actually the south and vice versas. So having that diversity of location is really good. Diversity of fuel is really good. So if we do have a dryer year, we're better able to manage that risk. Now, it does have an impact, but we pride ourselves and being able to limit that impact as much as we can.
The geo thermal stuff, and I know you're an engineer by training, so you'll probably be happy to nerd out on these things through a bit. But it's not a completely carbon neutral process, isn't it. You do get a little bit of caress CO two and other gases coming out, so it's not a completely net zero. Is there any technology that you guys are working on or working with others to turn that around or to capture more out of that energy stream?
Yeah, absolutely right, So definitely from a from a geo thermal perspective. Firstly, awesome power source, nice space load that operates when you do extract the Brian hot Brian out of the ground does have some dissolved carbon dioxide in it and that gets released to the atmosphere. We have both ourselves and others industry looking at how we can capture that CO two and then reinjected back into the
ground so basically becomes a closed loop. And we've been pretty successful at one of our sites that we've been trialing at the moment, capturing over fifty percent of the CO two and reinjecting it into the ground and really looking at rolling out to other sites. It's it's a little bit like the old soda stream and sodas stream bottles and you kind of pressed the button and inject the CO two into your soda stream bottle.
It's the same thing.
We're kind of injecting that CO two back into the liquid stream, so it's captured and sequested underground.
Great, and that's is it Morkinmaki or one of his Somki is the main site we're doing at the moment, and that that's sort of close to topol and then looking at doing a similar thing for our sites from Marcai to Cowado and na Alparua. A lot of those fields if I understand, they were drilled and tested and explored like in the eighties. Yeah, but it's only in the last ten maybe twenty years that there's been construction there to actually capture Have we left it a little
bit late? Should we have been doing much more and much sooner geo thermal and why not?
Yeah? You're right.
Really, New Zealand is actually world leading in geo thermal and New Zealand's electricity grid is twenty percent close to twenty percent GEOFRM. With that that's on a global scale, pretty amazing. It is off the back of work that was done through the nineteen sixties, seventies, eighties to drill to find not only the hot zones, but the hot zones that have the water that you can actually extract
and then reinject back in. So we're really New Zealand built its geo thermal fleet through largely the nineteen nineties to the two thousands on the basis of all that drilling. Now, then what happened in New Zealand was that demand for electricity was very, very flat for the sort of twenty year period. So without that demand, we largely sort of said, well, there's nothing to keep building into. We'll keep operating those
power stations very well. What that means now that we can see the demand going off, we're kind of just getting re against match fit teaching ourselves what does it mean to develop geo thermal And that's one of the really exciting things out of our Natzamriiki obviously five unit we're just expanding at the moment, is that we've built this muscle again, We've learned how to develop power stations and it's almost like a renaissance period of geo thermal
four for us in the industry, because I think it's got a massive role to play in the future of New Zealand's electrification journey.
If you think about that period where there wasn't that much demand, you say, and therefore there was much incentive to try and build more. What was behind that do you think? I mean, some people would say it's we just got more efficient so we didn't need as much to do more. Other people might say we were actually losing, we were deindustrializing, we were losing businesses at quite a high scale that nobody really kind of.
Picked up on.
Yeah, I'd say the first point is absolutely right. What's tended to happen is people are using more appliances electrically, but they're more efficient, So definitely see that the consumption of electricity has stayed about flat from a retail from a household perspective, From an industrial perspective, it's New Zealand's last one hundred years has been off the back of our great resources and energy and that has been led to some pretty significant global companies coming to New Zealand,
one of which I used to work at the Too Point Elements Smelter, New Zealand Steel. Some of those big companies are still doing very strong in New Zealand. Sort of over the last twenty years it has been that not much growth. But the other thing that's been sort of sitting there has been the risk of some companies leaving, like Too Point. Now, if Too Point was to leave,
that's fifteen percent of New Zealand's power. So when you have that risk there, there's a risk that fifteen percent is going to drop out, you can understand why it might be a little bit cautious about what you build because you could build and then that low drops, price crashes and your left not being able to recover your return on those assets. So that's been a big part
of it. And then the other really interesting thing over the last couple of years has been that the sun and drop off and gas, and that has been really challenging because typically we've relied on gas to support us during the dry years because we are dominated by hydro in New Zealand.
Now without those couple.
Of things there, it's meant that we've almost have been a little bit late to actually picking up the rate that we build and now we are a.
Lot of people would say the gas thing though, was a little bit for seeable, because we know from overseas that a lot of gas fields they get old, they stop producing there's only so much you can do. I think in the North Sea there's some talk that they were able to find technologies to ring a little bit more out of there. We're not probably seeing that happening at this stage, are we now.
I think you could foresee that it was going to drop off, but just not at the rate that it's happened. Because the gas industry has continued to keep drilling on the current fields, it just hasn't been able to find or increase the production from those fields and what was expected to happen. So it has caught us a little bit by surprise, just the rate and the quantity that it's dropped off at.
How did that specifically affect mercury? Then, because you're, as you say, you're mostly in those renewables, how much of that is contracted from fields you're an owner of any of those?
That's right.
All of our electricity comes from renewable renewable sources and renewal electricity assets. We do for our household customers who provide eltricity from us, we do provide gas for them, so we do have to go and buy that gas from someone to provide it.
That's an impact on.
Us The other thing though, is gas is important from the whole the eltricity sector. So while we're producing eltricty from hydro and from wind and from geo thermal at various times, it's very useful for the whole of the grid to have a little bit of gas there so when there's a little less rain, it can actually come into the ultricty grid and keep the stability there so that ultimately in New Zealand can keep turning the lights on and have power flowing through our businesses.
Back on that idea about the pipeline for new generation and so on and how we're now catching up, I mean, I get the risk part, but some people would also say there was a sort of an incentive in there not to overbuild, not to take the risk, because obviously you're trying to make a return for showers and so on. That put us in a worse position.
Now, I'd say there are incentives.
There have been incentives to build.
It's just making sure that you are building the right type of assets in the right place at the right time. And so if you look at the last year when we didn't have the rain that was there, prices went up and that has a massive impact on particularly those businesses that don't have long term heages in place. Ultimately it does flow through to household prices, but it's pretty
pretty slow. But the big issue with not having that energy there is that ultimately we are having to ourselves purchase power from somewhere else to.
Provide to our customers.
So last year, when we didn't have so much water in our lakes, we had to go and purchase that power from others and the price was quite high. And that's the main reason why our deft performance. The amount of money we earned last year was down by about nineteen million dollars.
And you've now baked that and along with the other sort of two of your major competitors by sort of buying some firming capacity from Huntley from Genesis.
Right correct.
There's a big part of the risk mitigation or process we have in place now, and it's really really important because the other thing it does is it gives us the confidence to keep building intimate renewables.
Are you do you think you're a completely relaxed that say, the Communce Commission when they take a look at that, aren't going to say, oh, cracky, this is just four big players getting together and funding an asset and not necessarily involving others. What gives you confidence that that's.
Not going to be the case? Absolutely? Right?
Commerce commissions still have to sign off on this deal between four competitors, and it's been two key things that have happened on the way. Firstly, we've had an independent company look across it to make sure that it's.
Fair and reasonable.
The second thing is that it's actually a product that it's now available to others as well, so it's not exclusive. It's been negotiated between the four big gentile and yet it's also there available for anybody else at very similar terms and conditions, very similar. It'll be slightly different depending on we want fifty megawats, you might be slightly smaller.
You might only want one or two megawats, so it'll be different in terms of what you require, but the terms and conditions in terms of price are very very similar.
Because there's that word cartel, which is it's very easy to prove a cartel, isn't it a lot easier than it is to prove that there's a monopoly going on?
Yeah, And it's tough for because there is New Zealand does have some great gen tailors and I can absolutely understand what the ComCom the Comms Commissioner are doing in Eltricity Authority. They're trying to make sure that there's a competition in the market, primarily because they want affordable electricity prices for New Zealand. Perfect absolutely the right thing to be doing. Now, we think that the market is really strong.
There are a lot of retailers out there and there's a lot of there's twenty percent churn happening each year, so that shows that twenty percent of customers move every years. That's a pretty healthy measure of competition going on.
They're mostly moving between the majors right and you are seeing consolidation and so on. You know, TrustPower might have come on board, and what tends to happen is a smaller retailer winds up being brought out by a bigger one.
Yeah, it can happen. You're right.
There's actually about fifty roughly fifty independent retailers in New Zealand compared to a place like the UK where it is about twenty. So there's a lot of independence in New Zealand. It's how do we help transparency of prices so that people can be confident that the prices are competitive and affordable.
So I think the Electricity Authority was talking about making some part of that market kind of compulsory for you and your three major competitors to kind of contribute to you already playing in that. This is the shaped hedges, which has got nothing to do with with topieri or mazes or whatever. It's got to do with, you know, creating a product through the day.
Yeah, we rank in the top ten best markets globally from an euctricity perspective, whether that's affordability, sustainability.
Or security.
So we do have a market that's very good, but can it be better? Absolutely it can be. And what the ComCom and the EA are trying to do is create transparency.
That's part of that is shape hedges, so that.
Everybody, whether you're independent retailer or someone who's actually looking at bringing on a new project, you can see what a megawatt or a killer what is worth. And that gives you the confidence to be able to buy or to sell the electricity very supportable. That One of the things I've been looking at is something called the level playing field provision. Now it's early and it's not a lot of detail associated with that yet, so we're a little bit cautious to see.
What comes out of it. Again, understand that it's trying.
To create a better transparency and ultimately make sure we have affordable prices, just not highly sure that this is the right way to do it. Because if you look at a household bill that you and I get at our houses, only about ten or eleven percent of that is from retail costs. So we can do some work to make sure that retailer is competitive, but it's only
eleven percent of the bill. We believe that actually the bigger parts of the bill, which is about forty percent associative with generation and about maybe thirty percent associator with the lines and transmission, they are things that actually we could do a lot more on. And the things that Mercury can control is around generation, and the best that we can do in that space is to build more projects.
And that would be your profit solution than regulating the market or creating a split or.
Anything like that.
Many of you modeled that, have you looked at whether what sort of impact yeap, you know, breaking the business up might have.
Yeah, so you talked about basically in New Zealand where we have the generators and the retailers connected together so Gen Taylors, and they're called vertically integrated. We believe that they're not just in New Zealand. We've had a lot of lookers cross the world. It's actually a lot of benefit in doing that. A lot of synergies that ultimately some of the studies show do get passed on to customers in.
Terms of what that connection creates.
So by the same token, unwinding those synergies, what have you looked at what that could do for the business?
Yes, again, and it does create things that lead to inefficiencies in the way that the companies work. If they were separated, creates risk that won't be it wouldn't have been there previously. So our belief is that the split will not add additional value either to customers, to New Zealanders.
Or to the owners of those companies.
People said the same thing about Telecom when they broke it off and said, hey, here's Chorus and here's Telecom over here. Will make it spark and then you know whatever it is. Fifteen twenty years later, we've got too well, one pretty successful company and another one that's had had some rough times, but come along and certainly had an interesting journey. If you're talking about Spark, so I mean it's not like a fat company that cutting something in half.
No, even in the electricity industry, the same.
Thing from an investment point of view, I suppose, or for an investor's point of.
View, correct, and even from that in the electricity sector, we do have this split there already. So yes, Spark and Chorus is split. You look at the electricity industry transpower, which looks after the transmition lines, that is separate from the gent tailors, that is separate from the distributed distribution
companies as well the EEDB. So there is actually an element of disegregation that occurs already, which is trying to separate some of their more infrastructure nature to some of the more development and retail side.
Of the businesses.
So that split is there and has been useful just trying to find the right synergies and model that actually ultimately results in lowest cost to customers and ultimately.
Good value for its owners.
We're a year out more or less, maybe fourteen months from an election. Are you worried at all that the politicians are just maybe going, yeah, that's fine, you that's fine, But we need some wins and this is an easy one. Potentially.
The reason why I'm worried is because the Zealander is facing costs lit in crisis still, right, and it has been going on for a while, and I think we'll continue for a while. And that doesn't just apply to energy. It applies to food, it applies to access to money through banks, and so it's part of a broader concern that exists for New Zealanders and energy has a big part to plan that.
So yes, it definitely has an impact.
And so we are working as well as we can to try and address the problem of getting affordable energy as well as we can and make sure it's sustainable. That's a really complicated problem to solve in a small period of time, and it's whether or not we actually have the time to do that and demonstrate that we're on the right path before someone says, you know, going fast enough, we'll do something different. A lot of people say, oh, the government owns you, there must be must be.
Well, there's an intentive there, or certainly there's a mixed mixed incentive, right, there's a shareholding minister on one hand of saying, hey, we need to pay for hospitals, schools, everything else. And this is part of how we do that in this country without taxing people versus we want to try and deliver energy at lowest possible cost.
So that they regres regulating and a concern for New Zealanders from a customer perspective. And at the same time,
government receives dividends from us and taxes from us. So if you look at the money which we made in the last year, about a third of that goes to the government some way, whether it's through dividends because they are our owner, or through taxes, and so that's a great revenue stream that the government can use for hospitals and schools, roads equally, want to make sure that we're doing that a way which is globally competitive and affordable.
And that's really the other conversation we have with the government.
How different is it being on the other side of the table from where you were before because you ran the t why point aluminium smell exactly right? It's huge, as you said, massive electricity user. Who's got the power there? The person that's like the government owned company that's selling electricity or this very large, ultimately multinationally owned company that's saying, hey, we represent thousands of jobs and export earnings for this country.
First, So I say there's more similarities than differences. Both if you look at electricity industry large and a large sort of aluminium industry, both employing lots of people and also having massive impact on community.
So lots of similarities.
And actually, if you look at the connection, they are
so connected that they need each other. If you look at two point element smelter that was built because parody of power station was built, and Amnto POWERstation was built because the Ti smelter was there, So they are kind of yin and yang, necessary for each other to exist, and that creates this interesting dynamic between both talking about power prices, and yet you can imagine that from time to time the power balance might move between the two parties,
but they're just so intricately linked that they actually do need to come to a common deal to actually make sure that together they can exist and not sort of almost look at it as there's a pie of value that has to be split between the two. How do you ultimately sort grow that pie in a way that leads to value for both.
We'll probably do it by trying to strike the cheapest price you possibly can for your electricity.
Is that about right?
Having affordable electricity is really important, but equally having the ability to flick. So one of the reasons why the industry got through Winter of last was that ty was able to work out how it can actually drop its load through times.
WI power prices is high.
Now that's value adding to the sector because they can use their electricity to get elsewhere, and ultimately tea wise also is paid and compensated for that as well. And so trying to find those things where the user of eletricity knows how they can best optimize their process but don't really know what the value of that is from a power perspective, and the generator knows what the value of that is but doesn't know how it could be done.
So that's where you can come together to work out how you might actually grow the size of the value together.
Is that making a virtue out of a fault because we're basically saying, in order to keep this country running, we have to ask businesses to shut down. That doesn't sound like a great situation to be in the first place.
Awesome questions.
I get that a lot people saying that it's a form of de industrialization, this is value destruction. I actually see it another way. I see it that we have a choice. We could go out there and spend billions and billions and billions dollars overbuilding lots of projects. From a powerspective, all we could spend a little bit of money engaging with the customer and utilize them as a bit of a battery, and they actually get compensated for
doing it. So it's actually commercially beneficial for that for the power user, and it's better for New Zealand because we don't actually have to overbuild and spend a whole lot of money that might not get the return. So yes, does have an impact on that customer. Ultimately they get compensated for it and still make money. And ultimately for New Zealand, it's actually good because it puts out grid in a much like it is more resilient place.
I think it's even better maybe if it's a very open system so over and can see what those deals are rather than the necessarily being one to one.
Spot on yeh.
So that's that's very much that the work that's been done to give some transparency to what those prices are. So rather than bilateral engagement where you and I can sort of work together on what the prices are, we actually between us know what a fair and a reasonable price for that will be because it's traded, and that's something which the electricity authority in the ComCom I'm looking at and we're very supportive for that.
It's probably a hard question I'm going to ask you now because you're only a year in, but I mean, we've got twenty five years to work out how in this country we're going to be at net zero. Presumably you've got all sorts of plans for how that's going to work. Do you, I mean, do you actually have a clear idea of what this place will look like in twenty five years and what Mercury.
Will look like that We believe that eltricity and electrification has a huge role to play. A lot of the times people look at what percentage is our electricity gred renewable, and at the moment it's hovering around high eighty percent to about ninety percent, and people talk about trying to get to it to one hundred percent. Our view is that should get to maybe mid nineties and we will easily get that, and we've got many projects and training to
get there. And then what you do is actually, rather than focusing on electricity grid, then you turn a focus on the other forms of fossil fuel usage. In New Zealand, cars transportation is about twenty percent of New Zealand's carbon footprint. Many industries contribute to carbon as well, So the electrification of those industries away from fossil fuels, vehicles away from fossil fuels, that's got massive potential and that's a big part of what mercury is good at and that's where
where we can absolutely support. And then the other part of it is actually looking at what New Zealand's actually economies should look.
Like over the next ten to twenty years.
And there's a big part to play in different types of industry. So you'll see the load potentially move away from more heavy industry and they'll still have the load, but the percentage will grow more towards other things like data centers and other forms of electricity which actually create a normost potential for us as well.
Yeah, I'm just waiting for the day that they build a massive data center in Coodo.
Actually data centers often people think they should be close to where people are using the data, so build them in the US where there's lots of use for data. And yet there's a big part that New Zealand could play because data centers that therefore artificial intelligence need to be trained. I need to have kindergartens for artificial intelligence and so that doesn't actually need to be close to the load. So there's potential for New Zealand to get
very good at artividual artificial intelligence. Kindergarten centers, training centers, and they can be a long way away from the US. So that's when New Zealand can actually be very strong.
Kindergarten for AI artifices, what a great place to raise children and large language models correctastic It seems like a long way from running a gold mine in Tanzania, an extractive industry in a developing part of the world, and must have brought with that. What on earth took you over there?
Yeah?
When did I go? Kind of?
I spent a career in New Zealand and Australia for twenty years in engineering and largely in aluminum, and I had this really interesting discussion with my boss's boss and they said, Jude, you're doing an amazing job, but you've been in New Zealand all your life. If you've stuck to the same company and you've stuck to you probably.
Need to get out and learn a bit about the world.
So I actually did my MBA and I met some cool people there, and then through this process said, ah, I've been suggested I should do something different, and that person was going to Tanzania and said us to come.
Over to work for us.
So I went back to my boss's boss and said, thank you very much. I appreciate your support of me and my career, but I'm going gold mining in Tanzania.
And so I went over there was very fortunate to be a general manager of a large gold mining operation with about twelve hundred people in the middle of community in northwest Tanzania, and it was fantastic experience, just recognizing again the big thing I took away from that was the value that an organization can have on the community in a country, and you just don't want to take
that for granted. And part of the situation there that we actually fell into was the company was ultimately held to account by the government because they didn't feel like the company was sharing fairly the value of the gold
mine with the company, with the country. And that's something something I take on board coming back to New Zealand is how do we make sure that these amazing assets that New Zealand has and that Mercury has been shared fairly in terms of our owners, in terms of our community, terms of EWI.
And in terms of ultimately customers in New Zealand.
So social license and.
Afraid spot on.
Yeah, yeah, and you think you're handling that pretty well here.
I think Mercury does it pretty well. Can it be better?
It absolutely can be. But I'm very proud well.
I think if you look at the kind of the role that Mercury plays across all people, we're very good at supporting customers and hardship. We're very good at supporting customers who like to have a bundled product. Can we do better in terms of some communities, I think we possibly can be. We have some really strong relationships with EWI. Actually we have some commercial joint ventures with EWE and
or Trust, which is fantastic. I still think part of what happened over a few years ago when TrustPower and Mercury merged is. We have brought ourselves together to be one company, and yet how we show up in some communities can be a little bit different to other communities, and I'd like to make sure we're a bit more consistent than who Mercury is and therefore, how do we show up in Amoru versus Totong versus other parts.
In His Zealand.
It's been a busy year.
Then it has, yeah, but this is a lot to come.
It was the most surprising thing. You think that you didn't realize you'd need to do better, or didn't didn't realize was so important thing for me.
Actually last week was really really amazing because it was the first chance to really talk with a lot of the analysts and a lot of our investors. And it went into there thinking, oh, this will be this will be tough, and it was challenging at times, and yet it which is really nice to see a really good recognition of the work that we've done over the last year.
I've done a lot of work to simplify our strategy, refresh it so it's really really clear on how we add value and communicate that to our owners and our analysts, and they really really like that. It's really clear. We can see what you're doing as a company. You're focusing on efficiencies in your business. You've got a great pipeline,
particularly excited about gfm or, which is awesome. You've got a really strong balance sheet, gives your options to go ahead, and we like what we can see in terms of what you're saying you're going to deliver and then how you're going to I guess return that value back to our owners.
Now we just need to get on and deliver. STU.
Thank you very much for your time, and thank you as well for watching, for listening wherever you're picking this up, whether it's on iHeart or on Apple podcasts or straight off the Shares's app. Let us know what you thought, let us know what we should be taking a look at, and we'll be back next time.
Quimbitu.
That's us for now.