Brazilian dam collapse confusion weighs on BHP, Vale

Uncertainty over their financial exposure to the tailings dam collapse in Brazil is weighing on BHP Billiton and Vale.

Nineteen workers and nearby residents were killed when the Fundao tailings dam collapsed

Uncertainty over their financial exposure to the deadly iron ore tailings dam collapse in November at the Samarco operation in Brazil is continuing to weigh on the joint venture partners, BHP Billiton and Vale.

Previously in check under a $US2.3 billion March remediation and compensation settlement with the federal and state governments, the issue flared earlier this week when Brazil’s federal prosecutors landed a new $US43bn suit.

BHP shed 9.3 per cent of its value on Wednesday in response, and fell another 2 per cent yesterday to $18.43. It has been a $12.3bn value hit in two days. While other miners have also been hit hard at the same time on commodity price weakness, it has not been to the same extent.

Because of particular nuances of the Brazilian legal system and the over-the-top flourish the prosecutors bring to their cause, questions will be asked in coming days about whether the market has overreacted to the new suit.

After the initial shock factor in the size of the claim, the assessment of analysts and Brazilian legal experts is that the action will be settled for a fraction of the $43bn claimed, or eventually dismissed on the basis it duplicates the earlier government agreement.

The size of the claim is also seen as theatrics from the prosecutors, in that it was based on BP’s Deepwater Horizon oil disaster in the Gulf of Mexico in 2010.

“Preliminary studies show the human, economic and socio-environmental impacts of the collapse of the dam are, at least, equivalent to those verified in the Gulf of Mexico,” the prosecutors said.

“It does not seem credible, neither technically nor morally, that the value of the human, cultural and physical environment in Brazil should be worth less than other countries.”

Vale, which has had the same share price belting as that doled out to BHP, said yesterday the Deepwater Horizon comparison was unjustified, and said it would be take all necessary steps to defend itself. BHP has not said so, but it can be assumed it is on board with Vale.

Vale went on to say that “Samarco had taken all necessary emergency actions in connection with the accident, and that studies and social, economic and environmental remedial measures are already under way, pursuant to the (March) agreement already entered into by Samarco, BHP and Vale with the federal authorities and the Minas Gerais and Espirito Santo state authorities’’.

Even so, the ability of the 30 million tonne a year Samarco mine to be restarted early next year to help fund the March settlement (and reduce the back up call on BHP and Vale) does depend on an agreement being reached with the prosecutors.

Permits for a restart would come from government and government agencies party to the March settlement. But the prosecutors could then go to court seeking to stop the issue of the permits, such is their role in the Brazilian legal system.

The independence of the public prosecutors within Brazil’s Public Ministry is enshrined in the constitution. They do not answer to the federal Attorney General, or any other arm of government.

That power has been derived from decades of distrust of government and state institutions, with the prosecutors presenting themselves as a check and balance on the government, and as champions of the people.

“That’s what you are seeing here,’’ a legal expert said yesterday. “You’re seeing the prosecutors very much acting as an independent force, bringing a case with some massive numbers in it, really to make sure they have a role in what they see is an ongoing negotiation.’’

Because their power base is built on independence, there never was any chance that the prosecutors would have been a party to the March settlement between the Samarco joint venture and the governments.

Dialogue to win them over continues, with the expectation being that if a cheque is eventually written, it will be for a much smaller amount.

Nineteen workers and nearby residents were killed when the Fundao tailings dam collapsed on November 5.