Brazil's Mining Disaster Has Samarco Creditors Bracing for Worst

  • Burst dams killed at least three, 25 missing after flooding
  • Samarco bonds are worst-performing in emerging markets

Brazil’s deadly mining disaster has investors questioning whether Samarco Mineracao SA can withstand the fallout.

Two dams at the iron-ore producer’s biggest operation burst five days ago, unleashing a torrent of muddy floodwater that killed at least three people and left 25 others missing. The site is now indefinitely closed. Deutsche Bank AG estimates that the cleanup costs may exceed $1 billion.

Notes dropped to lowest level in more than three years

As investigators probe the cause of the disaster, local families mourn the dead and rescue operations continue for the missing, there’s growing skepticism about the future of the joint-venture between BHP Billiton Ltd. and Vale SA, especially among Samarco’s creditors.

The company’s $2.2 billion of notes, which have lost a third of their value since Nov. 5, now trade at 56 cents on the dollar. Investors are concerned a temporary suspension of Samarco’s license to operate in the area may become permanent, dealing a potentially fatal blow to the company, said Patrik Kauffmann, a Zurich-based money manager at Solitaire Aquila Ltd.

“People are skeptical about the name,” Kauffmann said. “If the government removes their license on a company level, this can have a huge financial impact.”

Samarco and BHP said it’s too early to say what caused the accident. Samarco said in an e-mail that all its focus at the moment is on providing assistance to the families and on mitigating damage to the environment. Further impacts of the accident and its consequences will be analyzed in the future by the company, according to the statement.

BHP’s press office declined to comment on the performance of Samarco’s bonds or the financial impact of the disaster. Vale’s press office didn’t reply to requests for comment.

The company’s $1 billion of bonds due 2022 have plummeted to about 60 cents on the dollar as of 3:53 p.m. in New York from 83 cents before the disaster. Its $700 million bonds due in 2023 fell to 60 cents, from 90. The 33 percent loss on Samarco debt is the worst for any company in the Bloomberg USD Emerging Market Corporate Bond Index.

The yield premiums, or spreads to Treasuries, on both securities have shot above the 10 percentage-point threshold that most investors consider indicates distressed debt. The company also has $1.42 billion of loans maturing over the next nine years, data compiled by Bloomberg show.

The company’s bond rating was cut to junk on Tuesday by Moody’s Investors Service, which cited uncertainties regarding Samarco’s ability to resume its mining operations. The ratings are on review for possible downgrade, reflecting continued concern about the loss of production and costs that will be incurred because of the disaster.

Samarco, which has operated for almost four decades and employees some 3,000 people, was one of Brazil’s 10 top exporters last year.

The operation in Minas Gerais state, where the accident occurred, was producing iron ore at an annual rate of about 30 million metric tons in September, using water-filled pipelines to transport the raw material from the site to processing plants near its port. It provides pellets, used in steel output, to about 20 countries, and accounts for about 20 percent of that market, according to Citigroup Inc.

Samarco’s insurance coverage totaled more than $1 billion as of mid-2014. A large-scale disaster such as the one it experienced last week is likely to lead to lawsuits and other actions that may take years to resolve, according to Bloomberg Intelligence analyst Kenneth Hoffman. Its structure as a stand-alone company may shield joint owners BHP and Vale from deep losses related to the dam collapse, Hoffman said.

Environmental officials in Minas Gerais said it was the worst catastrophe of its kind to hit the state as they temporarily suspended Samarco’s license to operate. They did not respond to an e-mailed message on whether they will make the license suspension permanent.

“I don’t see the operations being suspended permanently, but for a long period of time, yes,” said Danilo Miranda, a lawyer at Marcelo Tostes Advogados in Sao Paulo and a specialist in environmental licensing and mining concessions. It could take years before the company is able to resume operations, he said.

“Investors are pretty much pricing in now the fact that it won’t turn out well for the company,” said Klaus Spielkamp, the Miami-based head of fixed income at brokerage Bulltick.

Vale stock has fallen 8.3 percent since Nov. 4, the day before the dam burst. Shares of Melbourne-based BHP have declined 7.3 percent in the same period to the lowest since 2008. BHP’s Chief Executive Officer Andrew McKenzie traveled to Brazil on Monday “to understand first-hand the human, environmental and operational impacts of the incident,” the company said.

Samarco said 612 people have been placed in hotels as the army, police and firefighters helped the injured and homeless. The missing include 12 workers and 13 local residents. There’s little chance of finding the missing alive, Minas Gerais Governor Fernando Pimentel said Sunday, according to a report in O Globo newspaper.

At this point, there’s no way for investors to know with confidence how much it will cost to resume operations at the site or whether it will even be possible, according to Rafael Elias, the head of emerging-market strategy at Cantor Fitzgerald.

“We know that there will be absolutely no revenues once the inventories are depleted, and until operations resume,” he wrote in a message to clients. “There will be many and substantial costs to be incurred, ranging from fines to compensations, restitution, reconstruction, and a long etcetera that at this point is impossible to even estimate.”

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