Vale faces ‘serious reputational risk’ following dam disaster: Moody’s

Potential liabilities from the collapse of a tailings dam at Vale’s Feijao iron ore mine in Brazil that has left at least 99 people dead and another 250 people missing has resulted in Moody’s Investors Service placing the company’s senior unsecured ratings on review for downgrade, along with the ratings on debt issues of Vale Overseas Ltd. and the senior unsecured ratings of Vale Canada Ltd.

“Although the disaster’s direct economic effect will be limited since the Feijao mine site accounts for less than 2% of Vale’s total 390 million tonne annual output of iron ore, we expect it to raise environmental, administrative, criminal and civil liabilities, on top of serious reputational risk for the largest iron ore producer globally,” Moody’s states.

Moody’s notes that while Vale “has a good liquidity profile” with US$6.1 billion in cash and US$5 billion in committed credit facilities fully available, as at the end of September 2018, “any potential liabilities and sanctions against Vale and its executives, along with any other costs incurred because of the disaster at Brumadinho, will strain the company’s liquidity and its ability to meet its financial requirements … ”

The collapse of the tailings dam at Feijao follows the dam collapse in 2015 at Vale’s Samarco mine that killed 19 people. Samarco was a joint-venture with BHP Billiton.

“Vale estimates that the environmental disruption at the Corrego do Feijao mine will be less than at Samarco because the tailings volume leaked was much smaller,” Moody’s writes. “However, the social damage from Feijao is far more serious.

“The financial penalties related to the dam collapse may prove even larger than those for Samarco, based on the number of fatalities … Samarco was also a 50-50 joint-venture with BHP Billiton but this accident will be Vale’s sole responsibility.”

The tailings spilled out with no warning to bury several Vale buildings — including a cafeteria, as employees were eating lunch — and then inundated part of the small southeastern city of Brumadinho.

Dead fish and trash extended more than 18 km downstream from the dam along the banks of the Paraopeba River, where Pataxo indigenous members live, catch fish and draw water for cultivation.

The dam was built in 1976 and was 86 metres high and had a crest length of 720 metres. Its waste disposal area was 249,500 sq. metres and the volume of the spill was 11.7 million cubic metres.

According to Moody’s, Brazilian courts have issued preliminary injunctions to block BRL11.8 billion (US$3.1 billion) of Vale’s cash for possible penalties related to the disaster, while the Brazilian Institute of the Environment and Renewable Natural Resources (IBAMA) and the environmental agency of Minas Gerais state have sued Vale for another BRL350 million.

“Even without knowing the full extent of the damage, the Feijao mine accident will have a profound effect on Vale, which generated about US$36 billion in revenue for the 12 months through September 2018,” Moody’s writes.

The United Nations has called for an official investigation into the disaster.