Bond Traders Rocked by $637 Million Loss After Brazil Mine Suit

  • Prosecutors file a $44 billion civil suit after dam burst
  • Suit challenges Vale, BHP and Samarco deal reached in March

Bond investors are reeling after prosecutors in Brazil unexpectedly filed a $44 billion civil suit against Vale SA and Samarco Mineracao SA for their roles in the nation’s worst-ever environmental disaster.

Notes issued by the two mining companies have lost $637 million of their market value since the suit was announced on Tuesday, according to data compiled by Bloomberg. And there may be more pain ahead. 

The 155 billion-real suit threatens to delay the reopening of the Samarco mine, according to Cantor Fitzgerald. The mine has been shut down since a dam rupture in November killed as many as 19 people and unleashed billions of gallons of sludge into the Rio Doce river. Samarco, which is jointly controlled by Vale and Melbourne-based BHP Billiton Ltd., had delivered the biggest gains in Brazil’s bond market this year as the companies reached an agreement with state and federal governments to pay for damages, fueling speculation the mine could restart operations later this year.

“This was a major blow,” said Jorge Piedrahita, the chief executive officer at brokerage Torino Capital in New York. “And until there is some clarity on this situation, there is more downside for the companies involved.”

Samarco’s $ 1 billion in notes due 2022 dropped 0.9 percent to 50 cents on the dollar at 3:34 p.m. in New York, while Vale’s $2.25 billion of bonds with the same maturity declined 0.4 percent to 87.2 cents on the dollar.

Vale, the world’s biggest iron-ore producer, said Wednesday that it will take measures to defend itself. Samarco’s press office said by telephone that officials would be looking at the case.

“BHP Billiton remains committed to helping Samarco to rebuild the community and restore the environment affected by the failure of the dam,” the company said in the filing.

In March, Samarco, Rio de Janeiro-based Vale and BHP reached a settlement with federal and state governments, committing to pay about 12 billion reais over 15 years. This settlement was ratified, the attorney-general’s office said Thursday. Judicial confirmation means the March settlement can’t be overturned even as prosecutors in the country seek a much higher payout.

The civil suit challenges that deal, with the prosecutors’ office demanding the companies provide initial payment of 7.8 billion reais within 30 days.

“This action is much more extensive” than the previous agreement, prosecutor Eduardo Aguiar said Tuesday in a telephone interview. “It includes not just the three companies but the federal government, both state governments and also various agencies.”

In a statement that day, the prosecutors alleged that state and federal agencies failed to provide the oversight necessary to avoid the disaster.

While the size of the civil suit surprised investors, prosecutors in Brazil have a history of demanding outsize payments for environmental disasters that are later reduced. San Ramon-based Chevron Corp. was targeted by a 40 billion-real suit for 2011-2012 offshore oil spills. It agreed to pay 95 million reais in a 2013 deal with prosecutors and environmental regulators; it also paid additional fines to oil regulators of more than 20 million.

“I don’t know how they came up with it, but $44 billion is just crazy,” said Patrik Kauffmann, a money manager at Solitaire Aquila Ltd., which oversees $11 billion and holds Vale bonds.

BHP and Vale have said they would like Samarco, which was the world’s second-largest producer of iron-ore pellets, to resume operations as soon as it’s technically feasible. The joint venture’s chief executive officer, Roberto Carvalho, has said he expects the mine to reopen in the fourth quarter.

The “market will still see a bit more weakness as investors fully digest the possible delays in getting the permits to restart operations given the new developments and that we don’t know what the next steps will be or how long they will take,” said Rafael Elias, the New York-based head of research at Cantor Fitzgerald.

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