Samarco’s future in question
Mining disaster could spell financial ruin,
BRAZIL’S deadly mining disaster has investors questioning whether Samarco Mineração can withstand the fallout. Two dams at the iron ore producer’s biggest operation burst five days ago, unleashing a torrent of muddy floodwater that killed at least three people and left 25 missing. The site is now closed indefinitely. Deutsche Bank estimates the clean-up costs may exceed $1bn.
As investigators probe the cause, families mourn the dead and rescue operations continue, there is growing scepticism about the future of the joint venture between BHP Billiton and Brazil’s Vale, especially among Samarco’s creditors.
The company’s $2.2bn of notes, which have lost about a third of their value since November 5, now sell for about 57c on the dollar. It reflects the view that it is almost certain the temporary suspension of Samarco’s licence to operate in the area will be made permanent, dealing a potentially fatal blow to the company, says Patrik Kauffmann, a Zurich-based money manager at Solitaire Aquila.
“People are sceptical about the name,” he says. “If the government removes their licence on a company level, this can have a huge financial impact.”
Samarco and BHP say it is too early to state the cause. Samarco’s $1bn in bonds due in 2022, which traded at 83c on the dollar before the accident, plummeted 19.6c on Monday.
Yields on both securities have shot up to well above the threshold investors consider distressed. The company also has $1.42bn of loans maturing over the next nine years, data compiled by Bloomberg show.
Samarco, which has operated for almost four decades and employs about 3,000 people, was one of Brazil’s 10 top exporters last year.
The operation in Minas Gerais state, where the accident occurred, was producing iron ore at an annual rate of about 30million tonnes in September, using water-filled pipelines to transport the raw material from the site to processing plants near its port. It provides pellets, used in steel output, to about 20 countries, according to Citigroup.
Samarco’s insurance coverage was more than $1bn at the middle of last year. A large-scale disaster is likely to lead to lawsuits and other actions that may take years to resolve, according to Bloomberg Intelligence analyst Kenneth Hoffman. Its structure as a standalone company may shield joint owners BHP and Vale from deep losses related to the dam collapse, he says.
Environmental officials say it is the worst catastrophe of its kind to hit Minas Gerais state as they temporarily suspended its licence to operate.
Shares of Melbourne-based BHP have declined to the lowest since 2008, while Vale’s also fell after the accident.
“Investors are pretty much pricing in now the fact that it won’t turn out well for the company,” says Klaus Spielkamp, Miami-based head of fixed income at Bulltick.