BHP and Vale in R$10bn dam disaster deal

Aerial view after a dam burst in the village of Bento Rodrigues, in Mariana, Minas Gerais state, Brazil on November 6, 2015. A dam burst at a mining waste site unleashing a deluge of thick, red toxic mud that smothered a village killing at least 17 people and injuring some 75. The mining company Samarco, which operates the site, is jointly owned by two mining giants, Vale of Brazil and BHP Billiton of Australia. AFP PHOTO / CHRISTOPHE SIMON (Photo credit should read CHRISTOPHE SIMON/AFP/Getty Images)©AFP

Aerial view after the damburst near the village of Bento Rodrigues, Minas Gerais state, in November

Two of the world’s biggest mining companies on Thursday reached a settlement of at least R$ 10bn four months after a dam accident killed 17 people in Brazil, drawing a line under much of the potential claims they faced.

BHP Billiton and Vale have welcomed the out-of-court settlement of what was a R$ 20bn claim by Brazilian authorities for the damage caused when a dam failed at the companies’ jointly owned Samarco iron ore mine.

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The breach in Samarco’s dam in November sent a torrent of mine waste through a nearby village and into the Brazilian river system. The accident shattered BHP’s and Vale’s claim to be among the safest companies in mining and exposed them to a mass of legal action.

The deal with the governments of Brazil and two regions involves a potentially open-ended commitment by Samarco and its owners to make annual financial contributions to rectify the damage. Authorities suggested on Wednesday that the total cost could be between R$ 18bn and R$ 26bn while Luís Inácio Adams, Brazil’s attorney-general, said the bill could be as much as R$ 30bn.

“We don’t know and no one knows how much is needed in repairs and compensation,” he said.

However, the sums so far quantified to be paid over 15 years are below those amounts and short of the worst-case scenario that BHP and Vale had feared.

Analysts at Citi said: “We view this settlement as relatively positive for BHP.”

Shares in BHP and Vale rose following the deal, while bonds issued by Samarco, which plunged after the accident, continued their recovery. They are up 45 per cent this year.

Up to 2018 Samarco and its owners will have to pay R$ 4.4bn in remediation and compensation. For the three subsequent years, the remediation bill will be between R$ 800m and R$ 1.6bn. Annual compensation payments of R$ 240m will continue for 15 years, but the companies hope that the remediation bill will tail off as work is completed.

That is manageable for a company the size of BHP, despite its investment grade credit rating being downgraded two notches on Thursday by Moody’s after its finances have come under pressure from weak commodities prices.

This year BHP expects $ 3bn in free cash flow. In 2014 Samarco generated R$ 2.8bn of income and paid R$ 1.8bn in dividends to Vale and BHP.

It puts us on a constructive path forward — the alternative would have been litigation and ongoing action

– Dean Dalla Valle, BHP

The settlement also helps the companies put an end to wrangling with the government. “It puts us on a constructive path forward — the alternative would have been litigation and ongoing action,” said Dean Dalla Valle, BHP chief commercial officer.

However, the deal fails to clarify a timetable for Samarco to restart operations. That will depend on an explanation of what caused the dam to fail and the measures needed to make operations safe.

Nor does it remove the threat of other civil and criminal litigation by independent judicial authorities. Brazil’s public prosecutors can still file civil lawsuits if they believe the deal is not sufficient.

The prosecutor’s office in the state of Minas Gerais where the dam collapsed has opposed the deal, expressing“caution and concern over the effectiveness and sufficiency of the measures”.

Police have already charged Ricardo Vescovi, Samarco chief executive, and six others with homicide following the disaster. They have said they may file further criminal charges over the environmental impact of the dam’s collapse.

Additional reporting by Thomas Hale

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