Pressure to build on BHP over Samarco

Charges against BHP staff reveal that the Big Australian remains exposed to the fallout from the Samarco dam disaster.

The collapse of a tailings dam at the Samarco iron ore mine in Brazil last November killed 19 people and polluted a huge swath of the river basin. (AFP PHOTO/Douglas Magno)

Legally, the Brazilian issues are totally separate but, as the months and years pass, I am sure the Brazilian prosecutors’ $63 billion ($US48bn) Samarco writ against BHP and Vale and the case against current and former BHP and Vale executives will cover very similar issues.

It’s not my job to decide the merits of either the case against the current and former executives or the Brazilian prosecutors claim that BHP and Vale should pay damages that equate to what BP paid in the Gulf of Mexico oil spill.

But, for BHP, the fact that its current and former executives are facing charges that carry jail sentences of up to 54 years adds a whole new dimension to the Samarco affair.

When I alerted BHP shareholders that BHP’s decision to do “the right thing” in the Samarco affair made them more vulnerable to liability, I didn’t know BHP people would be charged with offences that carry such severe penalties (Brazil Dam bust danger rises for BHP, September 26). At the time, I received criticism for the commentary but I believed it was important to alert BHP shareholders to the danger.

I do not contest BHP’s claim that they are not liable to pay damages under claims and that its people are innocent of the charges.

But my experience of matters like this is that while the legalities delay the issues for a considerable time, in the end the matters are decided first by the ability and willingness to pay mixed with willingness to risk the fate of current and former executives to the vagaries of the Brazilian legal system in what will be an emotionally charged matter. Indeed I am afraid that in cases like these being mounted against BHP people, emotion often trumps the law.

And, so, while BHP genuinely believes and will tell shareholders that its executives are innocent and that no large payouts will be required, history is not in its favour. I hope BHP is right but I rate the danger higher than official BHP statements.

Accordingly, conservative analysts now need to write into their worst case scenarios the possibility of a big payout. And, (again leaving aside legalities and blame), because BHP has more money than its partner Vale, it is conceivable that the Big Australian may be more vulnerable.

So, let’s look at a few sums. The market value of BHP’s shareholder funds on a combined basis with its UK company is around $115bn ($US87bn). So, the Brazilian $US48bn ($63bn) claim against both BHP and Vale represents more than half the market value of BHP shareholders funds.

The market value of Vale shareholders has risen threefold during the last year but its shareholders funds are still only $US32bn, less than half of BHP.

Just for pure speculation, let’s say a damages bill could be linked to the executives’ freedom (there no certainty here) and that such a damages bill was half what is claimed — that is $US24bn.

If it were shared equally, then BHP and Vale would have a liability of $US12bn. Vale will not find it easy to pay a sum of that magnitude unless the iron ore market continues to strengthen.

Almost all the Australian-based BHP people who have been charged were in fact based in Perth. Brazil is 14,700 kilometres away from Perth via Africa and more than 16,000 kilometres via Melbourne.

The Australian-based executives were isolated from BHP’s head office and very distant from the site of the disaster — a dangerous cocktail for both the Australian-based BHP executives and those based in Brazil.

Purely on a negotiating basis, BHP shareholders should not be surprised if this matter is settled with a large payment from Australia.

BHP will, and must, strenuously deny that possibility but, as we have all seen countless times, after a long delay, large organisations are prone to pay large sums to rid themselves of a problem.

This whole matter comes just as BHP appears to be heading into a new era of prosperity.

In circumstances like this, the best way to look at BHP is to watch its net debt, which last June 30 was around $US26bn.

Macquarie reckons it could fall to $US22bn in 2017: $US19bn in 2018; $US15bn in 2019 and $US11bn in 2020. And, if current spot prices were to continue for two years, you can then add another $US6bn to the reductions.

Vale’s net debt is higher than BHP’s and the market value of its shareholder funds is not much more than one third of BHP. Accordingly, it has much higher leverage. Again, leaving aside the legalities, the richer partner normally has the bigger exposure.

I emphasise again that there is no way the BHP can even suggest the charging of its people and the damages claim are linked. Nor can it highlight its greater financial strength than its partner Vale. But I can.

I am not going to add any more. I think BHP shareholders will get the message and understand the danger.