19th Jan 2017 14:51
LONDON (Alliance News) - BHP Billiton PLC has more visibility concerning the fatal accident at the Samarco iron ore operation in Brazil back in 2015, after a deadline was set for the company and its partner to reach a final settlement with federal prosecutors.
BHP and its 50:50 partner, Vale SA, have signed a preliminary agreement to pay USD47.50 billion with a view of reaching a final settlement by the middle of 2017.
The figure is on top of the framework agreement that signed with Brazilian authorities in March, when the partners agreed to carry out USD2.40 billion worth of remediation work over the next 15 years, helping rebuild the regions affected by the disaster.
The Samarco iron ore operation is a vast project that has been suspended since the incident in November 2015, when two of the three tailings dam - used to store waste and by-products from the mining operations - failed.
The Fundao tailings dam burst and flooded the local community in the municipalities of Ouro Preto and Mariana in the state of Minas Gerais, leading to multiple deaths. The downstream Santarem dam was also affected, releasing mine tailings into the community of Bento Rodrigues and impacting other communities downstream.
The preliminary agreement signed between BHP, Vale and federal prosecutors covers a civil claim relating the dam failure, but the criminal investigation is ongoing - including qualified homicide charges filed against numerous individuals involved.
Under the agreement, "experts" will now be appointed to advise federal prosecutors on the social and environmental impact of the incident, whether or not any revisions need to be made to the USD2.40 billion framework agreement agreed with Brazilian authorities, and about the ongoing assessment of Samarco under the monitoring programme.
BHP and Vale have committed to signing a final settlement by June 30, after the advisers reach their conclusions.
The preliminary agreement also suspends numerous other claims made against BHP and Vale until the deadline in return for providing USD675 million in interim security. That security take shape as USD400 million in insurance bonds and USD30 million in cash, with Samarco's assets covering the other USD245 million.
The preliminary agreement with federal prosecutors also requires BHP and Vale to forward USD60 million of the funding obligations signed under the framework agreement. The partners will have 90 days to make that advance to the municipalities of Barra Longa, Rio Doce, Santa Cruz do Escalvado, and Ponte Nova in order to advance the planned work programmes.
Three other claims and injunctions filed against the partners will be suspended as a result. Notably, one of them is the USD47.50 billion civil claim against Samarco, along with the associated USD2.40 billion injunction.
Another USD6.00 billion civil claim with a related injunction of USD370 million has also been suspended, as well as the USD6.00 billion asset freezing order under the criminal proceedings undertaken by federal prosecutors.
If BHP and Vale fail to reach a final settlement with prosecutors by the end of June, however, the USD370 million injunction could be reinstated.
While some clarity has been provided with the preliminary settlement, it is likely to be far from the final sum that the partners will have to pay in the long term. Oil behemoth BP took six years to draw a line under the Deepwater Horizon oil spill in the Gulf of Mexico in 2010, and the total cost gradually crept up to USD61.60 billion, while its image remains dented.
Samarco mines iron ore to produce over 30 million tonnes of pellets, typically used in blast furnaces, whilst processing 32 million tonnes of concentrate each year.
The operation accounted for 3% of BHP's overall earnings before interest, tax, depreciation and amortisation in the financial year to the end of June 2015. In the 2016 financial year when the incident happened, BHP was forced to lower its full year iron ore production guidance by 10 million tonnes as a result of the mine being suspended.
Restarting Samarco seems to be supported by authorities, with the idea of getting the local economy moving and people back into work, but BHP and Vale have work to do before the mine can reopen. Convincing authorities that Samarco is safe will be the priority, followed by whether the project remains economically viable for the partners.
New licenses and approvals will need to be gained from the government and local authorities and commercial agreements would need to be signed with Vale covering the use of its infrastructure. Samarco's current debt will also have to be refinanced before reopening.
UBS analyst Myles Allsop said Fernando Coelho Filho, Brazil's mine & energy minister, made a speech at the World Economic Forum in Davos, Switzerland, on Tuesday when he stated Samarco "could probably be operational again in two months, having addressed all the environmental and legal issues".
BHP Billiton shares were trading down 0.6% to 1,446.00 pence per share on Thursday afternoon, still 11% higher than the start of 2017.
By Joshua Warner; [email protected]; @JoshAlliance
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