Brazil disaster: Assets frozen as dam pressure mounts
BHP Billiton’s problems in Brazil are set to deepen after a court froze the miner’s Brazilian assets.
BHP Billiton’s problems in Brazil are set to deepen after a court in the state where last month’s dam disaster occurred froze the miner’s Brazilian assets and those of its joint venture partner Vale.
The judge in the state of Minas Gerais ruled that BHP and Vale could be held responsible for the burst dam at the iron ore mine after determining their joint venture Samarco was unable to pay for damages.
The Minas Gerais state government is demanding $US7.02 billion ($9.79bn) following the disaster that killed 16 people, left hundreds homeless and polluted an 800km-long river that flows across two states.
A BHP spokesman yesterday said it was too early to comment on the decision.
“BHP Billiton has not received formal notification of the decision and therefore it would not be appropriate to comment,” the spokesman said. He said BHP was committed to supporting Samarco to rebuild the community and restore the environment affected by the dam wall breach.
Further doubts have been raised over BHP’s ability to commit to a progressive dividend with influential credit ratings agency Moody’s placing the mining heavyweight on review for a possible credit downgrade. The move came as BHP faces a further headache in Brazil.
Despite the scale of the disaster, BHP’s partner Vale had argued that Samarco, as an independent legal entity and a sizeable company in its own right, was wholly responsible for the accident and the subsequent damages and fines.
The judgment did not specify the value of assets that had been blocked, but mentioned prosecutor estimates that Samarco did not have the funds to cover more than half of the amount sought in damages.
The move adds to the burden on BHP, which is under pressure to cut dividend payments to preserve cash amid tumbling commodity prices.
Moody’s said on Friday that it was reviewing the credit rating on BHP. Moody’s separately cut the rating of BHP rival Glencore by a notch, to just above junk status.
The commodities rout has sent mining shares falling sharply, triggering moves by many to shore up cash through asset sales and dividend cuts.
BHP, however, enjoys one of the industry’s strongest balance sheets, and its low-cost operations have helped insulate earnings.
Even so, a policy to continually raise its dividend is looking increasingly shakey, particularly after the recent crash in oil prices. Earnings from BHP’s petroleum business slid to $US1.9bn last financial year, from $US3.9bn a year earlier.
Crude oil finished at a six-year low of $US34.73 a barrel on Friday.
BHP has long enjoyed a solid, investment-grade A1 rating from Moody’s. However, the agency was reviewing whether to downgrade that to A2, still comfortably investment grade, after it lowered price assumptions for BHP-produced commodities such as oil, iron ore and coal.
“The review for downgrade reflects Moody’s expectation that weak commodity prices will persist for the next several years, significantly reducing BHP Billiton’s earnings and cashflow generation,” said Matthew Moore, a senior credit officer at the agency.
Moody’s decision to downgrade Glencore’s rating to Baa 3 “primarily reflects our expectations that the pricing environment in mining will remain unfavourable in 2016-17, making a return to the previous level of earnings unlikely”, said Elena Nadtotchi, Moody’s lead analyst on the mining and trading company.
Additional reporting: Dow Jones Newswires
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