Vale signals emerging rift with BHP over Samarco
The joint venture partners disagree on waste disposal and debt at Samarco, while Vale reports a Q3 profit.
Vale’s chief executive on Thursday signalled that a rift was starting to emerge between the Brazilian mining giant and BHP Billiton, its partner in the Samarco joint venture that experienced a disastrous dam failure last year.
The disagreements centre on waste disposal and debt at Samarco, Vale CEO Murilo Ferreira said in a conference call.
Samarco’s operations have been halted since its Fundão dam holding mine waste suddenly collapsed last November, killing 19 people and causing what is considered Brazil’s worst-ever environmental catastrophe.
Vale believes that Samarco’s previous method of disposing mine waste, called tailings, won’t be viable in the future, Mr Ferreira said.
“We don’t think it would be viable to rebuild Fundão,” he said.
A BHP Billiton spokesman didn’t immediately respond to an emailed request for comment.
Mr Ferreira said he and BHP Billiton CEO Andrew Mackenzie plan to meet next week to discuss Samarco.
Vale could make some of its own infrastructure available to Samarco as the venture seeks to resume mining iron ore in Brazil’s southeastern state of Minas Gerais, Mr Ferreira said on the conference call. He didn’t elaborate further.
“We think it would be necessary for Samarco to use Vale infrastructure,” Mr Ferreira said. “When you have a joint venture, you need to have a long-term alignment, and this is what we’re looking to develop.”
Mr Ferreira said Vale and BHP have differing ideas as how to handle Samarco’s debt.
Samarco said this week that it missed a debt payment for the second time since having its operations suspended in the wake of the Fundão tragedy, prompting ratings firm Standard & Poor’s to downgrade Samarco to D from CCC. The $US20.1 million interest payment on Samarco’s $US700 million senior unsecured notes was scheduled for Oct. 24.
Samarco has said it “continues to explore options in relation to a restructuring of its debt.”
Meanwhile, Vale swung to a net profit in the third quarter, helped by a combination of increased revenue and lower costs from derivatives operations.
The company reported a net profit of $US575 million, compared with a net loss of $US2.12 billion in the third quarter of 2015. Net operating revenue picked up 13 per cent in the period to $US7.3 billion.
“We’re proud to say we had another quarter of very good operational and financial performances,” said Mr Ferreira in a conference call.
Vale’s shares rose 0.5 per cent to 21.88 reais ($US7.05) on the São Paulo stock exchange in midday trading, while Brazil’s benchmark stocks index, the Ibovespa, was up 0.8 per cent.
Earnings before interest, taxes, depreciation and amortization increased 61 per cent to $US3.02 billion in the period, the company said. Vale reported a smaller loss in its financial result, which consists of financial services such as debt service management and derivative operations, of $US1.04 billion compared with a loss of $US7.1 billion a year ago.
The increase in revenue came as iron ore prices have risen, reaching an average $US65.50 per metric ton in the third quarter, versus $US62.11 in the same period last year, Vale said, citing Metal Bulletin Index.
An upgraded project at Vale’s Carajás mine in northern Brazil is expected to begin operating in late 2016 and shipping iron ore in early 2017. The high-efficiency operation should contribute toward the company’s long-term goal of delivering iron ore to China at a cost of $US25 a ton, Mr Ferreira said.
Doubts about the sustainability of current iron ore price levels, given potentially wavering Chinese demand and other factors, raise some concerns about Vale’s long-term outlook, according to Ivano Westin, an analyst at Credit Suisse.
Vale’s efforts to reduce costs and deliver on key projects have been “extraordinary and very welcome,” Mr Westin said, adding he isn’t optimistic about the company’s share price because “our view is that (the price of) iron ore has to go down.”
Vale’s net debt ended the period at $US25.96 billion, up from $US24.21 billion in the third quarter a year ago. The ratio of total gross debt over adjusted Ebitda fell, however, to 3.6 from 4.2 in the previous quarter.
Mr Ferreira said the company couldn’t say when it would next pay dividends, because the budget for 2017 hasn’t been completed. The company last paid a dividend in 2015.
Vale invested $US1.26 billion in its operations in the third quarter, down from $US1.88 billion a year earlier.
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