Samarco Mine Disaster Leaves BHP and Vale in Deep Water

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Commodities, Environment

Was the mining accident in Minas Gerais, Brazil last week — the one that killed at least two and with 25 people who are still missing presumed dead — a disaster waiting to happen?

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Carlos Eduardo Pinto, a state prosecutor speaking to Reuters seems to suggest it may have been. Following a tailing dam failure last year in the town of Itabirito, which killed three workers, Pinto set up a task force and identified more than 200 dams that needed safety improvements.

Taller Wall Rather Than New Tailings Ponds

Since then, the Samaraco mine, jointly owned and operated by mining giants BHP Billiton and Vale SA, has increased production by a further 37% putting so much strain on the tailings pond structures that Samarco was already working on a dam wall to raise them further at the time the accident happened.

The authorities would have preferred a new structure to have been built but this would have cost more money than simply raising the existing dam higher, so it’s no surprise that, in a state where a large proportion of revenues come from the mining industry, the wall was raised rather than a new pond constructed and local authorities approved the plan.

60-Mile-Long Area Affected by Flooding

If this had been in the US, rather than Brazil, the accident would have the potential for BHP to suffer a BP moment, facing colossal claims and action for damages. The impact wasn’t restricted to just one village immediately below the dam. Authorities have placed on alert 15 cities that receive their water supplies from the Rio Doce the Financial Times says. The Doce is the river most affected by the dam burst and there are fears that the mud could cause additional flooding.

Some reports say the mud was toxic but the firm says it is merely sand sediment and contains no chemicals,  but expect more on this in the weeks ahead. To CEO Andrew Mackenzie’s credit, he did not try to distance BHP from the issue, or hide behind the joint venture status, but instead caught the first flight to Brazil to see matters for himself.

Mackenzie’s Response

In part, his prompt action may have helped the share price recover a little after losing $4.7 billion on the day and another $1.8 billion yesterday. But there is still plenty of time for recriminations to start flying around as the focus moves on to the cost of clean up, compensation, meeting potential liabilities and the loss of cash flow while mining at Samaraco is put on hold.

For BHP, it will add strain on their previously sacrosanct dividend policy, a position that has looked increasingly precarious this year as revenues have fallen amid commodity prices, themselves, that have fallen almost as fast as the dam wall.

The Fallout

The loss of mine output will have only a minimal impact on the already oversupplied iron ore market, but the very state of the market does call into question whether Vale and BHP will rush to bring the mine back into operation however much the local state would like to see the 6,500 employees back at work and the mine paying royalties.

At the end of the day, neither the financial costs of the clean up, nor the possible impact on the dividend, nor even the loss of production will be the biggest cost to BHP, but rather the loss of brand image as good and responsible stewards of the environment may be the lasting legacy of this disaster.

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Apparently there are 839 mining waste tailing dams in the US alone and at least 3,500 abroad, according the US Army Corps of Engineers and the United Nations, respectively. This won’t be the last disaster associated with a mine tailing dam, let’s hope that BHP at least puts in more stringent practices that mean it is the last for them.

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