The dam accident that has claimed the lives of at least 58 people is a huge blow to Brazil’s Vale, the world’s biggest producer of steelmaking ingredient iron ore, and its chief executive Fabio Schvartsman.
Since Mr Schvartsman, one of Brazil’s most experienced executives, took the helm in May 2017, Vale has been transformed from a company that behaved like a quasi-state enterprise to a results-oriented miner feted by the market and mentioned in the same breath as peers such as BHP and Rio Tinto.
Its shares have jumped more than 50 per cent, handsomely outperforming all of its peers as Mr Schvartsman has halved net debt from more than $20bn to about $10bn, boosted returns to shareholders through dividends and share buybacks and reworked several difficult projects. Demand for its high grade ore soared as Chinese steel-makers gobbled up its material.
“Schvartsman has transformed Vale from this megalithic cash-consuming growth monster to a being a leaner, more rational growth focused investment proposition,” said Paul Gait, analyst at Bernstein Research.
Buoyed by his success, Mr Schvartsman recently extended his contract by two years until 2021.
All this is at risk as the company, which has an equity market value of almost $80bn, faces crippling and potentially open-ended fines from the tragedy unfolding at the Córrego do Feijão mine in the southeastern state of Minas Gerais.
The disaster is especially testing for Vale because it comes just over three years after the collapse of another dam holding waste material in the same state.
19 people died when tailings dams at the Samarco iron ore mine, jointly owned by Vale and BHP, broke, submerging the local town of Mariana and spewing millions of tonnes of mud into a river system in what became Brazil’s worst environmental disaster.
It will also be greeted with dismay by the wider mining industry, which has been trying to change perceptions that its activities are bad for the environment and local communities.
“To have something like this happen just three years after the Samarco incident is going to have implications for the company’s ability to operate,” said one analyst, who declined to be named. “There’s going to be a financial impact, which at this point is unquantifiable.”
Courts in Brazil have already blocked almost $3bn of Vale’s assets to pay for the damage caused by the deadly spill, while US lawyers are preparing to launch class-action suits.
Vale’s US-listed shares, which dropped 8 per cent on Friday, are likely to fall further when markets open on Monday as investors digest the full extent of the dam collapse, which has left hundreds of people missing.
Over the weekend, rating agency S&P Global Ratings said it had placed Vale on review for a possible downgrade, saying the company could face fines and the possible loss of its licence to operate in the affected region.
“We believe Vale now faces multiple risks arising from the disaster. Its financial obligations to remediate and compensate for losses might be substantial, and the company would have to face long and complex studies from environmental entities and regulatory bodies that could end up in licence suspensions,” it said.
On Sunday, at a centre set up by Vale to tend to the victims and its families outside the town of Brumadinho in Minas Gerais, there was a real sense of anger toward the company.
Daniela Fernandes de Oliveira could not hide her fury. Her husband was inside the restaurant that was crushed on Friday by an ocean of mud and waste.
“They all knew the dam could break” she said. “The same thing that happened with Mariana happened again. Are they never going to learn? Mariana was the first one, Brumadinho the second. Will there be a third? A fourth? It’s unbelievable.”
Vale is the world’s biggest producer of iron ore. Its mines churned out around 400m tones of the material last year, mostly for export to China. Its operations are divided into three systems: north, south and south-east and at most of its mines it uses tailings dams to store waste material, often referred to as a slurry.
In recent years Vale’s strategy has been to focus on its northern operations in part because its mines in the south — in Minas Gerais in particular — are close to densely populated areas.
This is why the development of Vale’s giant S11D mine in the Amazon rainforest is important, according to analysts. It has unlocked a huge resource in the north of the country that will become Vale’s production base for years to come. It uses dry processing technology and does not have a tailings dam.
While Vale should have no trouble replacing output from Feijão (8.5m tonnes) and the wider Parabopeba complex (27.3m tonnes) if it is closed, increased regulatory scrutiny of its entire south and southeastern systems would present a much bigger challenge.
“I would image there is going to be an impact on those mines but whether it is just an environmental audit of the tailings facilities or a much more significant look that may impact volumes is the big question,” said Mr Gait. “Until we know what the cause of the failure was it is hard to say what the outcome will be.” The tailings dam at Feijão has been inactive since 2015 and was in the process of being decommissioned.
The dam burst could complicate long-running negotiations to settle a lawsuit over the 2015 disaster, potentially presenting another headache for Vale.
Last year Vale and BHP settled a $5.4bn claim with local authorities to form a clean-up fund for Samarco and agreed to suspend a larger $41bn case.
From an investor perspective, the good news is that Vale’s finances are much stronger than they were before Mr Schvartsman took up the reins in 2017. Its balance sheet and cash flow statement are in better shape and its spending obligations are much smaller given that S11D has now been completed.
That said, the deadly dam breach will impair Vale’s ability to return cash to shareholders – the company has suspended dividends and buybacks – and Vale may have to scale back some its growth projects in copper and nickel. These are part of plans by Mr Schvartsman to reduce Vale’s reliance on iron ore and, by extension, the slowing Chinese economy.
“At this point in time I can’t see any shareholder wanting the company to hand back cash,” said Mr Gait. “The thing for Mr Schvartsman to do now is work out what the production profile of the company looks like after this and make sure it has the financial resources to position itself for whatever that looks like.”
