BHP and Vale Fall as Investors Count Cost of Brazil Dam Disaster

  • Stocks decline after tailings dam breach leads to fatal flood
  • Samarco venture paid $400 million in dividends to Vale 2014

Shares of BHP Billiton Ltd. and Vale SA slumped as mudslides from bursting dams at their joint venture in Brazil signaled a prolonged disruption to operations and costly repairs and legal bills.

BHP, the world’s biggest mining company, fell 5.7 percent in London, the most in six weeks, while Vale lost 5.7 percent in Sao Paulo. Bonds of their Samarco Mineracao SA iron-ore venture tumbled 6.6 cents to 76.8 cents on the dollar.

The two companies were among the worst-performing mining stocks Friday as details emerged of the damage from the mudslides. The 50:50 joint venture is the world’s second-largest producer of pellets used in steel output, and last year paid about $400 million in dividends to Vale, according to BTG Pactual. The accident further dims their earnings outlook amid a global iron-ore glut that’s pushed down prices 32 percent this year.

"This will cause Vale huge losses,” said Aldo Moniz, an equity analyst at brokerage UM Investimentos. “Besides all the compensation for lives lost, the environment and city damages the company will have to pay, the output at this mine will be halted for some time.” The venture makes up about 5 percent of Vale’s revenue, according to Moniz.

More Questions

On Friday, Samarco was working with police, firefighters and other rescue workers to help the injured and homeless, while in Minas Gerais state authorities attempted to clear roads and replace bridges swept away by torrents of muddy water.

One person is confirmed dead, four are injured and 13 are missing, according to the state fire department. A union reported as many as 16 fatalities. BHP Chief Executive Officer Andrew Mackenzie earlier said damage would only become clear at day break.

“It’s still far too premature to come out with any concrete conclusions, and we still wait for further investigations and a position from Vale to better understand implications,” BTG Pactual analyst Leonardo Correa said in a note. “There are still a lot more questions than answers.” The mine provides about 15 percent of the world’s exports of iron ore pellets, used to make steel, according to BTG.

Samarco, which produced about 25 million metric tons of iron pellets last year, is valued at $6.2 billion by Macquarie Group Ltd. analysts.

“The dam failure is a major concern and could have a material impact on the near-term production outlook for Samarco,” analysts at the firm wrote in a report on Friday.

Liberum Capital Ltd. had forecast BHP’s share of earnings before interest, taxes, depreciation and amortization from Samarco of $290 million for fiscal 2016, 58 percent lower than last year due to a falling premium for iron-ore pellets having a “major influence on profitability,” analyst Richard Knights said.

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