Vale, BHP Come to Rescue, But Mine’s Default Bets Are Still High

  • Samarco’s $2.2 billion of bonds have ticked up to 38.5 cents
  • Joint venture faces a $48 billion civil suit after mine spill

In an about-face, mining behemoths BHP Billiton Ltd. and Vale SA are stepping up to support their troubled Brazilian joint-venture. But it may still not be enough to prevent a default.

Samarco’s $1 billion of bonds due 2022 have jumped 11 percent since July 27, when BHP and Vale said they would each book charges of more than $1 billion after a dam spill at a Samarco mine caused Brazil’s worst environmental disaster. The provisions are earmarked to help Samarco pay for a settlement it reached with Brazil’s government in March. BHP and Vale will also provide about $400 million to shore up Samarco’s finances and fund compensation programs in the wake of the accident, which left 19 people dead.

BHP and Vale failed to provide any financial assistance in the immediate aftermath of the Samarco disaster in November. That fueled speculation last month the joint venture may put off bond payments after prosecutors’ unexpectedly filed a $48 billion civil suit against the miner. While the backing from BHP and Vale increases the chances Samarco may reopen its shuttered mine, the company’s notes continue to trade at highly distressed levels, signaling the support may not be sufficient to keep it current on debt. 

“While the support by the two companies is a positive development, it falls short of providing a long-term, viable solution for Samarco,” Cedric Rimaud, a director of emerging-market research at Gimme Credit, said in a note last week. “Until we have the confirmation of a restart of its operations, we believe that Samarco remains a candidate for a debt restructuring.”

Last month, Samarco was running out of cash, according to people with knowledge of the matter. The company had also started exploring ways to restructure about $1.6 billion in bank loans and skip bond payments until it can resume operations, the people said. Notes due 2022 dropped 1.1 percent to 37.2 cents as of 3:13 p.m. in New York.

Samarco’s bonds soared after the multi-billion-dollar settlement with the government in March fueled speculation the mine may reopen this year. But the civil suit filed in May signaled the company was unlikely to get the necessary permits and licenses to restart its operations, triggering a plunge in the notes.

Samarco declined to comment on the performance of its bonds, shareholders’ support, and whether it plans to restructure.

The provisions made by Melbourne-based BHP and Vale signal to authorities that the shareholders are doing what is necessary for Samarco to re-open its mine, said Rafael Elias, Cantor Fitzgerald’s head of research for emerging-markets strategy.

“I want to believe that the resuming operations should now really be only a matter of time,” he said from New York. “This provisioning for the fines shows the authorities that the shareholders are living up to the commitments and that puts the ball back in the government’s court to just issue those permits once and for all.”

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