Vale Dam Bursts in Brazil

Vale said the Feijao dam, built in 1976, was used to dispose of tailings from ore production. “It was inactive (no tailings were being added), there was no pond and there was no other type of operational activity in progress. A decommissioning project was also under development.” The dam held 11.7 million liters of mining waste.

This is not the first time Vale has been involved in a dam failure. In November 2015, the Samarco dam, managed in a joint venture by Vale and BHP, ruptured, killing 19 people and causing Brazil’s worst environmental disaster.

A final settlement with victims was reached in October last year. Samarco’s website indicates R $5.26 billion (U.S. $1.4 billion) to date has been allocated for repair and compensation. The mine has been shut down since the incident and is seeking approval to re-open. Samarco has an iron ore capacity of 30.5 million metric tons.

Vales’ shares on the New York Stock Exchange fell 10 percent two hours after the accident.

“While we hope the reports of fatalities are inaccurate, we do believe this is a material negative for Vale and a positive for other iron ore miners due to upside risk to prices resulting from less supply,” a Jefferies equity analysts said in a note.

Cowen Insight said the incident at Feijao may delay the re-opening of the Samarco mine. “Today’s dam failure could lead to increased government scrutiny/disfavor when it comes to issuing needed permits for Samarco to resume operations. We believe it is also conceivable Vale may shift resources and/or attention away from Samarco as the company works to rectify the situation at the Feijao mine.”

The closure of Samarco has restricted pellet supply in the past few years and contributed to higher pricing in the Atlantic basin, said Cowen. The Samarco mine was tentatively scheduled to resume partial production in 2020 and reach normal levels by 2023.

“Should there be a supply disruption for high grade fines, associated pellet feed and/or a further delay in the anticipated restart of Samarco, there could be upside bias to pellet premium pricing in the Atlantic Basin,” said Cowen. “With ’19 annual Atlantic Basin pellet premium negotiations complete or nearing completion and Samarco already out of the picture in ’19, we see a more limited impact to realized ’19 pellet premiums. Should Samarco’s anticipated restart be further delayed and/or a further intermediate term impact to pellet feed from today’s mine collapse, we see more of an impact if any to ’20 premiums.”

Lawyers representing victims in the Samarco disasaster said the Feijao incident may be crippling for Vale. “This calls into question the financial viability of Vale going forward because of the sheer scale of their potential liabilities,” said Tom Goodhead, attorney at SPG Law as quoted by Reuters.