Another BHP disaster on the scale of Ok Tedi in Papua New Guinea, which poured its tailings into the river rather than holding them in a dam, ruining large parts of PNG’s Western Province and the lives of 50,000 people…
BHP Billiton chief executive Andrew Mackenzie is now facing the sort of management test, both emotional and financial, that would make other chief executives cross themselves and thanks heavens it’s not them.
And the fallout from the Brazilian tailings dam disaster is only likely to get worse. Evidence is now emerging that the joint venture company that operates the mine, Samarco, was warned two years ago that the tailings dam might be unstable.
According to a report in the Wall Street Journal over the weekend, the Brazilian authorities published a series of warnings about the site in 2013 at the same time as renewing its licence.
“The waste pile requires low humidity and good drainage; the tailings dam has high humidity, as it’s a reservoir of water,” the Instituto Pristino report said, adding that contact between the two structures could saturate the waste pile and cause it to collapse. Depending on the radius of the rupture in this process, several collapses at various levels of the slope can occur, causing a great mass of waste to flow downstream in the direction of the Fundão dam.”
Brazilian public prosecutors have now opened an investigation into whether the company fulfilled the technical requirements contained in the licence.
Andrew Mackenzie has flown to Minas Gerais in Brazil to look at the site of the tailings dam disaster that happened last Thursday at about 4pm, and by all accounts what he will find there is truly horrifying: two confirmed dead and up to 28 missing, including 13 mine workers, and an unimaginable catastrophe for the local towns that have been inundated with tailings.
The number of reported missing is increasing by the day and includes three small children.
The first question to be answered is whether the company properly warned villagers in the path of the sludge. Residents are claiming they only knew about the disaster when they saw clouds of red dust rising from the dam, about seven kilometres away.
However, a Samarco spokesman said over the weekend that the local residents were warned by phone. He couldn’t say how many were contacted, or how quickly, but insisted that Samarco had followed proper emergency procedures.
Samarco is a 50/50 joint venture with Brazil’s Vale that has been operating since 1977. It is set up as a separate company with its own balance sheet, and produces iron ore pellets which are shipped out of a company-owned port on the Brazilian coast.
Last year it made $2.8 billion in revenue and a profit of $1.28bn. According to BHP’s annual report, Samarco has $1.2bn in shareholders’ funds and $6.1bn in debts — in other words, it is heavily geared.
The carrying value of the investment in BHP’s books is $1bn.
It is too early to tell what the clean up at the mine and the surrounding areas will cost, but it would be very surprising if the bill was less than $1bn, and that’s without dealing with the tragic loss of life.
The port and mine are now closed and will be for some time; they may never reopen. Whatever happens, it’s likely that BHP will not only have to write off the value of its investment entirely, but also come up with more than its half share of the rescue and compensation costs.
The question of whether the liability for the disaster is contained within Samarco itself or extends to the shareholders is irrelevant. Samarco clearly does not have the money to fund the clean up or compensation and neither BHP nor Vale will be morally able to rest on any legal niceties to avoid paying.
But the question is whether Vale is much better shape to fund to its share of the mess than Samarco.
Obviously BHP will be looking to its joint venture partner to come up with half the cost, but Vale might struggle. It is also very heavily geared and, with the iron ore price at historically low levels, probably doesn’t have the cash.
For BHP, it may become another lesson in the dangers of weak joint venture partners in countries with weak environmental laws. The first was the Ok Tedi copper mine in Papua New Guinea, which poured its tailings into the river rather than holding them in a dam, ruining large parts of PNG’s Western Province and the lives of 50,000 people.
In 2013 the PNG Government seized 100 per cent of the mine and blocked lawsuits over the disaster, but it was a public relations catastrophe for BHP and the asset was lost.
Something on a similar scale has now happened in Brazil.