BHP Billiton Limited (ASX: BHP) remains under intense pressure following the catastrophic breach of one of its Brazilian dams on Friday last week which has killed at least four people and left more than two dozen unaccounted for.
Reports suggest that more than 60 million cubic metres of muddy mining waste swept through several villages, some of which were dozens of miles away from the dam itself.
BHP's CEO, Andrew Mackenzie, reportedly flew to Brazil on Monday to gain a better understanding of the human, environmental and operational impacts of the incident. Given the company's focus on remediation and responsibility, I think the response has been appropriate.
Not to take away from the human or environmental tragedy surrounding the incident, but investors have also been hit hard. The shares dipped to a near seven-year low of just $21.27 during yesterday's session and closed at $21.57, representing a loss of 7.3% since Friday and 34% over the last 12 months.
Here's what we know so far about the disaster:
- Where: The incident occurred in the Brazilian state of Minas Gerais at the Samarco Mineracao S.A's iron ore operations. Samarco Mineracao is a 50/50 joint venture between BHP Billiton and the Brazil-based Vale.
- What: The Samarco operations include a three-tiered tailings dam complex. In its second update regarding the disaster, BHP said that the Fundao dam had failed with the downstream Santarem dam also being affected. The third dam, Germano, is being monitored by Samarco.
- Tailings: The dam was holding "tailings" which is a mining waste product of metal filings. It is unclear whether the dam was also holding chemicals which could impact nearby rivers.
- Cause: The cause of the incident is still unknown. There is the possibility of management or engineering miscalculation, seismic activity or other natural causes, or simply a freak accident that could not have been predicted.
- Insurance: Of course, until the cause can be determined, it is unclear whether insurance will cover the costs (in part or in whole).
- Costs: Some estimates suggest the costs could be a few hundred million dollars, while others put the figure at north of US $1 billion (AU $1.42 billion). This would be split between BHP and Vale and would cover clean-up costs, remediation costs and any potential fines.
- Closure: Deutsche Bank thinks the mine is likely to stay shut for at least three years, according to The Sydney Morning Herald (SMH), while others believe it will never reopen for business.
- Contribution: The Samarco operations have the capacity to produce 30.5 million tonnes per annum (Mtpa) of iron ore pellets (BHP's share of production was 14.5 Mt in 2015). BHP said its iron ore production guidance for the 2016 financial year is now under review.
- Financial Impact: BHP said the contribution from Samarco was roughly 3% of its underlying earnings before interest and tax (EBIT). As highlighted by The SMH, Vale's latest accounts put an enterprise value of US $11.5 billion on Samarco while Deutsche Bank predicted it would add US $308 million to BHP's earnings this financial year.
- Dividends. BHP is already under severe pressure as a result of falling commodity prices and reduced cash flows, so an incident of this calibre could be what causes management to finally scrap its progressive dividend policy. It'll do what it can to maintain it, but I wouldn't be so confident.
Indeed, The Wall Street Journal cited one expert as saying "The dam breach was the largest-ever spill of its kind." While it's a disaster for the community, the environment and investors, it could also impact BHP's reputation somewhat and put a question mark on its other tailings dams around the world.
Until the company releases further insights into the cause of the incident and the financial (and social) damage, investors should expect further volatility.
