BHP’s Brazil dam disaster rips $6.7bn from value in London

The London market has wiped $6.7bn from the dual-listed miner’s market value in the wake of the Brazil disaster.

The London market has reacted savagely to ongoing reputational and financial damage to BHP Billiton from the Samarco iron ore disaster in Brazil, wiping $6.7 billion from the dual-listed miner’s market value.

The punishment from the London market came as more details emerged about the extent of devastation caused by Thursday’s collapse of two tailings dams at the 30 million tonne-a-year operation in Minas Gerais state.

BHP shares had already fallen by what was an oversized 2.4 per cent to $22.70 on the local market on Friday. But in following trade in London, the shares were slashed by 5.7 per cent as the ­extent of the damage became clearer.

The final death toll from the collapse is still uncertain. But the devastation caused to the town of Bento Rodrigues in the river ­valley downstream from Samarco is palpable.

Possibly triggered by earthquake activity in the hours beforehand, the collapse of the Fundao and Santarem tailings dams sent more than 60 million cubic metres of red sludge — comprised of sand, ultrafine iron ore and water — hurtling down the valley floor.

The waste material has been accumulating behind the dams — they are more like embankments — since mining and processing operations started in 1977.

Local authorities signed off on their safety as early as July. Samarco is a 50:50 joint venture ­between BHP and the world’s ­biggest iron ore miner, Brazil’s Vale.

Despite scant information because of unfolding nature of the disaster, and the technical stewardship of the mining operation by the jointly owned Samarco, BHP chief executive Andrew Mackenzie went against the ­advice of his advisers and called a media conference on the disaster at the group’s Melbourne head ­office on Friday.

A clearly shaken Mr Mackenzie expressed his concern over the devastation and its impact on workers and the local communities. But he said it was too early to say what the cause was, or what the death toll was.

Mr Mackenzie’s call for an immediate company response to the disaster was in keeping with the more proactive communication policies of resources companies since BP’s Macondo oil disaster in the Gulf of Mexico in 2010.

BP chief executive at the time Tony Hayward was criticised for taking time off while the impact of disaster was unfolding to go sailing with his son.

The White House said the jaunt was one of a “long line of gaffes and mistakes’’ in BP’s handling of the crisis. That judgment was not shared by all, with Mr Hayward since having moved on to become chairman of Glencore.

Iron ore produced by Samarco is sent in a slurry pipeline to the coast for processing in to iron pellets, a premium iron ore product that sells at a $US20 a tonne premium to standard iron ore, which is selling for $US48.20 a tonne.

Samarco produces about 30 million tonnes of pellets annually, accounting for some 15 per cent of the global trade in the speciality product which is a small component of the overall 1.4 billion tonnes global trade in iron ore.

BHP’s share of earnings before interest, tax, depreciation and amortisation from Samarco in the 2015 financial year was $US695m. But London’s Liberum Capital forecasts that would have fallen to $US290m this year — before the collapse of the tailings dam — ­because of the collapse in iron ore prices.

Citi said it valued BHP’s share of Samarco at less than 1 per cent of BHP’s net present value.

“But what is not known at this stage is what the clean-up and ­remediation costs will be, in ­addition to the tragic loss of life,’’ Citi said. “The cause for the failure of the tailings dam wall has not been released so it is too early to determine if any insurance coverage is applicable,’’ Citi told investors.

Macquarie said the $US351m in free cash flow to BHP from Samarco in the 2015 financial year showed it was “meaningful’’ to the company.

“The project boasts a large reserve and resource base and is expected to produce 30 million tonnes annually of high grade concentrate for at least 30 years,’’ Macquarie said.

“The dam failure is a major concern and could have a material impact on the near-term production outlook for Samarco. We note that Samarco accounts for around 3 per cent of our earnings for BHP,’’ the broker said.

Analysts at London’s Investec said that while a break in operations at Samarco could be negligible to earnings, the “associated reputation risk/sentiment could be worse.’’