Samarco could pay up to US$7.7 billion in damages


The mining company Samarco and its joint owners BHP Billiton Limited (ASX: BHP) and Vale have agreed to pay the Brazilian government an estimated 10 billion reals (US$2.6 billion) in damages for the tailings dam collapse in November 2015. But the costs could spiral much higher.

Brazilian Attorney General Luís Inácio Adams speaking at a press conference with the country’s environment minister Izabella Teixeira said, “It could be as much as R$30 billion. We don’t know and no one knows how much is needed in repairs and compensation.

The settlement was reached overnight, following the collapse of two tailings dams that killed 19 people, left hundreds of people homeless and polluted a major river. It is considered to be Brazil’s worst environmental disaster. Six Samarco executives and one contractor were arrest last week by Brazilian police and accused of murder in connection with the dam spill.

Tailings dams are designed to store much of the by-product produced by mining operations, but much of it can be toxic and include arsenic, lead and mercury. The dams are usually meant to store the mine runoff indefinitely, with the height of the dam walls gradually being increased over time as storage builds up. In some cases, severe rainfall or earthquakes can damage the tailings dam walls. The cause of the two tailings dams failing in Brazil has not yet been identified.

Samarco will pay 4.4 billion reals to a Foundation over the next three years to fund the clean up and pay for compensation, and then between 800 million and 1.6 billion (US$200 million to US$400 million) each year between 2019 and 2021.

240 million reals will be paid each year for 15 years for compensation projects (already included in the first six years contributions), plus a one-time payment of 500 million reals for basic sanitation in the affected areas.

The initial figures above suggest the initial cost to be between 9 billion and 11.4 billion (US$2.3bn to US$2.9bn), but as previously mentioned, costs could run much higher.

Should Samarco be unable to fund the settlement, Vale and BHP would be liable for covering the costs.

BHP CEO Andrew Mackenzie said, “This Agreement is an important step forward in supporting the long-term recovery of the communities and environment affected by the Samarco dam failure. It provides a platform for the parties to work together to support the remediation of affected areas. This agreement demonstrates our commitment to repairing the damage caused and contributing to a lasting improvement in the Rio Doce.

However, the agreement doesn’t cover civil suits, other public civil claims or criminal charges, suggesting the costs could be much higher than the costs set out in the agreement.

Foolish takeaway

It’s not the first time BHP has been involved in an environmental disaster of epic proportions. The Ok Tedi gold and copper mine in Papua New Guinea released millions of tonnes of waste into the river for many years through the 90s and early 2000s – and as a result, BHP handed over its share of the mine to the PNG people in 2002.

The Samarco disaster is also likely to cast its shadow over the giant miner for many years.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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