MENU

Samarco disaster could still sink the BHP Billiton Limited share price

When BHP Billiton Limited (ASX: BHP) reports its full-year earnings results in August, expect to see a provision worth between US$1.1 billion and US$1.3 billion ($1.46 billion and $1.73 billion) added to its accounts.

The charge relates to the Samarco dam disaster that occurred in Brazil late in 2015. More than a dozen individuals were killed during the tragic event, while thousands of homes were destroyed. Billions of dollars’ worth of environmental damage was caused as well.

Samarco is 50% owned by BHP Billiton while the remaining 50% is owned by Brazil-based Vale. As such, the item will be recorded as an exceptional item in BHP’s books and will represent a 50% share of the current estimate of Samarco’s funding obligations. Notably, Vale also announced that it has recognised a provision of US$1.2 billion in its interim financial statements, reflecting its own share of the charge.

BHP also approved US$134 million to support a compensation program, and a further short-term facility of up to US$116 million which will help to carry out the remediation and stabilisation work that is needed to support Samarco’s operations.

The miner confirmed that the safe restart of Samarco’s operations remains an important priority, together with the restructure of the business’s debt following speculation Samarco may be close to defaulting.

Although today’s announcement does provide investors with some clarity, there are still many uncertainties regarding the incident and how much BHP will be responsible for repaying. Indeed, it is currently fighting a multi-billion-dollar civil suit in Brazil in relation to the matter, as well.

BHP Billiton’s share price has actually lifted 0.7% to $19.99 following the announcement, even though shares of a number of other energy producers are sliding following a dive in oil prices overnight. Woodside Petroleum Limited (ASX: WPL), for instance, has fallen 0.5%, while Origin Energy Ltd (ASX: ORG) is down 2.1%.

While BHP Billiton’s shares have rebounded significantly since hitting a low of around $14 earlier in the year, they do seem a risky investment prospect considering the cloudy outlook for commodity prices. I’m certainly not ready to buy shares of the miner at their current price.

Free Report: Why These 3 Blue Chip Shares Are Set to Soar

Forget BHP Billiton. Discover The Motley Fool's Top 3 blue chips for 2016. These 3 'new breed' shares pay fully franked dividends AND offer the prospect of significant capital appreciation. Simply click here to gain access to this comprehensive FREE investment report.

No credit card required!

Motley Fool contributor Ryan Newman has no position in any stocks mentioned. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.