New economic and environmental implications are inevitable for Brazil after the recent mining dam collapse in Minas Gerais, which could devastate the environment in upcoming years.
On November 5, 2015, Minas Gerais in Brazil was hit by devastating floods after two dams burst, spilling mud and debris from an iron ore mine’s waste water lake, the largest ever mining disaster for Brazil to date. The disaster killed more than 14 people and left over 500 homeless. The Deutsche Bank AG estimates that the cleanup could possibly exceed $1 billion USD.
Brazilian mining company Samarco, owned by BHP Billiton and Vale, has had its license suspended following the incident and agreed to pay 1 billion Brazial Reais ($260 million) in compensation.
Brazil’s environmental agency Ibama named the dam burst “the worst mining accident in Brazil’s history”. Environmentalists and investors are concerned about the impact the disaster will have on the future of Minas Gerais’ environment and business interests.
What are the operational losses of this incident, and how might this impact business for big name mining companies like Samarco in Brazil?
Source: www.bloomberg.com/news/articles/2015-11-10/brazil-s-mining-disaster-has-samarco-creditors-bracing-for-worst
Per the graph, above, Samarco bonds hit an extreme low as the death toll from the disaster increases and faced with a threat of a 20 billion reals (US $5.2 billion) fine from Brazil.
In addition to the suit, a court in Brazil confirmed the freezing of an estimated 300 million reals (US $78 million) from the accounts of Samarco, in an effort to help compensate victims.
The mining disasters have investors seriously questioning whether Samarco can withstand the fallout. Investors are concerned a temporary suspension of Samarco’s license to operate in the area may become permanent, dealing a potentially fatal blow to the company.
However, if the temporary suspension were to become permanent, then it could take years before the company is able to resume operations.
At this point, there’s no way for investors to know with confidence how much it will cost to resume operations at the site or whether it will even be possible.
What does this mean, environmentally for Brazil?
While speaking at the COP21 climate change conference in Paris, Brazilian President Dilma Rousseff held the companies totally accountable for the disaster and said that Brazil is “severely punishing those responsible for this tragedy.”
With estimations in the thousands of tons of sludge from the mine flood into the rivers, the mud is being tested for potential toxins. The effect of the sludge produced is forcing authorities to provide emergency drinking water for the people in the area.
According to a United Nations Office of the High Commissioner for Human Rights report, the floodwaters contain toxic contaminants, contrary to Samarco’s previous non-toxic claims. With this revelation, Samarco could face even higher fines from environmental regulators for water pollution and damage to local areas.
The cause of the dam breaches has not yet been determined, but one of the structures was being extended as part of an expansion project at the time.
As for the legal consequences, both Brazil’s federal and state governments are launching a legal campaign for clean-up costs and damages, where a tragedy of this scale will be politically charged and BHP must balance doing all it can to repair the damage, while also protecting its own interests.
