Worst Miner Rout Overdone Says Mizuho as Samarco Can Restart

  • Bonds lose 25% in May amid legal and regulatory headwinds
  • Its controllers, Vale and BHP, recovered in debt market

Brazil’s Samarco is the biggest loser among global mining and metal bonds this month as investors bet a giant lawsuit and regulatory barriers will erode its ability to pay debt. That’s unjustified, says Mizuho.

Bonds sold by Samarco Mineracao SA, as the Vale SA-BHP Billiton Ltd. joint venture is formally known, have lost 25 percent in May, the most among more than 300 notes issued by peers, according to data compiled by Bloomberg. That’s pushed out the yield gap between Samarco and similar Vale and BHP bonds to the widest in four months.

Driving the rout is a $44 billion lawsuit by prosecutors for damage incurred in the mine’s November tailings dam collapse and indications from regulators and government officials that the company’s goal of resuming operations this year may be thwarted. But John Haugh, Mizuho’s strategist in New York, said Brazil has plenty of reasons to make sure the restart happens, including generating cash for compensation and much needed jobs and taxes amid a deep recession.

“We believe the recent under-performance in Samarco bonds since the beginning of May 2016 is overdone and that the market has overreacted,” he wrote in a note to clients.

The tailings dam rupture caused Brazil’s worst ever environmental disaster, unleashing billions of gallons of sludge into towns and waterways. Samarco Chief Executive Officer Roberto Carvalho has said he plans to resume operations at partial capacity by the end of this year. A company spokesman didn’t immediately provide a comment on the bond rout.

‘Positive Development’

A mine restart would support the company’s commitment to pay 4.4 billion reais ($1.2 billion) in compensation over the next three years, as part of a settlement with the government in March and ratified by a court this month.

“The ratification of the settlement was a positive development, however, both Vale’s and BHP’s bonds recovered while Samarco’s bonds languished,” Haugh wrote.

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