Capital Injection Chances Rising for Vale-BHP Mine, BTG Says

  • Blocking asset sales may become multi-year legal dispute: BTG
  • BTG expects Vale to suspend dividends in 2016 amid iron rout

Vale SA and BHP Billiton Ltd. are increasingly likely to have to inject capital in their iron joint venture as Brazil steps up efforts to guarantee payment of $5 billion in damages for a dam collapse, according to BTG Pactual.

Vale vows to appeal a lien over its Brazilian mining licenses determined Friday by a federal court in Minas Gerais state, where the Samarco mine’s dam breach last month sent billions of gallons of tailings sludge into the valley below, killing at least 17 people and polluting a river.

While Vale’s mines are operating normally, what boils down to a ban on asset sales in the country could unfold into a multi-year judicial dispute, BTG Pactual analysts Leonardo Correa and Caio Ribeiro wrote in a note to clients Tuesday. The court gave Samarco and its owners 30 days to put up an initial 2 billion reais ($503 million) as part of the 20 billion-real in damages being sought by the government over 10 years.

“If Samarco is not able to honor this, then our impression is that Vale/BHP will have to step in,” Correa and Ribeiro wrote. “It’s looking increasingly likely that Samarco will need a capital injection.”

The Samarco disaster and ensuing legal cases come at the worst possible time for Vale and BHP, with prices of the steelmaking ingredient plunging 43 percent this year as part of a global commodities glut fed by slowing Chinese demand at a time of expanding supply.

Dividend Outlook

BTG Pactual expects Vale to temporarily suspend dividend payments in 2016, the analysts said. Vale shares, up 0.6 percent at 12:40 p.m. in Sao Paulo, have lost 49 percent this year.

Both Rio de Janeiro-based Vale and Melbourne-based BHP say they are committed to supporting Samarco to rebuild communities and restore the environment. Vale, which doesn’t consider itself responsible for the dam burst, was voluntarily setting up funds to help clean up the Rio Doce and its tributaries.

The stakes are lower for BHP, which doesn’t have any other direct holdings in Brazil. Samarco’s operations were already suspended.

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