3rd Mar 2016 11:01
LONDON (Alliance News) - BHP Billiton PLC Thursday said the Samarco joint venture has reached a settlement with the Brazilian government over the fatal dam burst last November, which will see the companies initially pay considerably less than expected.
BHP shares were trading up 4.3% to 812.10 pence per share on Thursday, one of the best performers on the FTSE 100.
The FTSE 100-listed giant holds a 50% stake in Samarco Mineracao SA, the joint venture entity that operates the iron ore project in Brazil, with Brazilian-firm Vale SA holding the other 50% stake.
On November 5, a tailings dam burst and flooded the local community, leading to at least 17 fatalities and to the devastation of the local area, displacing many people from the municipalities of Ouro Preto and Mariana in the state of Minas Gerais.
Some people are still missing almost four months after the incident.
The Samarco operations include a three tiered tailings dam complex, and the Fundao dam within the complex failed and the downstream Santarem dam was also affected, resulting in a significant release of mine tailings which flooded the community of Bento Rodrigues and impacting other communities downstream.
The third dam in the complex, the Germano dam, is still being monitored by Samarco.
On Thursday, BHP said it has reached an agreement with its partners and the country's authorities, providing a long-term remedial and compensation framework.
BHP said the agreement is for a 15-year period, but only provided figures for the "contributions" to be made over the first three to six years. The amount the Samarco partners will pay between 2016 and 2021 will be between BRL6.80 billion, or about USD1.70 billion, and the maximum consideration of BRL9.20 billion, roughly USD2.30 billion.
Although the 15-year agreement suggests annual payments will go beyond 2021, potentially to 2031, the maximum consideration of BRL9.20 billion to be paid between now and 2021 is considerably less than what was expected.
Importantly, BHP is only liable for half those "contributions", as it holds a 50% stake in the joint venture responsible for the incident, with Vale responsible for the other half.
At the end of November, the Attorney General of the Union, the Brazilian prosecutor, and the Minas Gerais and Espirito Santo states filed a civil lawsuit against BHP and Vale for up to BRL20.0 billion, or USD5.2 billion.
That was followed by media speculation that the Federal Prosecutor which has led the investigations into the dam failure, Jose Aderico Leite Sampaio, was aiming to significantly increase that BRL20.00 billion target, adding it would take months if not years to correctly calculate the financial cost of the disaster.
The Federal Prosecutor also brought up the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, which was managed by BP PLC, stating BHP and Vale could be looking at a sum closer to BRL45.00 billion by using that huge incident as a parameter.
BHP also seemed to highlight the substantial difference in the settlement amount.
"The agreement is subject to court approval. If approved, the agreement will settle the civil public claim commenced on November 30, 2015 by the Brazilian authorities against Samarco, Vale and BHP Billiton Brasil which sought the establishment of a fund of up to BRL20.00 billion in aggregate for clean-up costs and damages relating to the dam failure," said BHP in a statement Thursday.
Under the agreement unveiled Thursday, BHP said the joint venture will pay BRL2.00 billion, around USD500.0 million, towards re-mediation and compensation programmes in 2016, including what it has already contributed since the incident occurred.
That will be followed by contributions of BRL1.2 billion, or USD300.0 million, per year in 2017 and 2018.
The yearly contributions in 2019, 2020 and 2021 will then amount to a minimum of BRL800.0 million, around USD200.0 million, and a maximum of BRL1.60 billion, around USD400.0 million.
The amount to be paid in those three years will be depending on the "remediation and compensation projects which are to be undertaken in the particular year."
The two types of programmes covered under the agreement are reparatory and compensatory, with the first concerning the restoration of the environmental area and the latter covering compensation payments to those affected by the incident.
Importantly, the initial 15-year framework can be extended for a one year period annually "until all obligations under the agreement have been performed," potentially paving the way for a very lengthy clear up.
A foundation will be set up in the next few months to carry out those programmes, and will be governed by a seven member board, one of which will be a representative from the Brazilian government. BHP, Vale and Samarco will contribute two members to the board each.
"The foundation will submit remediation and compensation programs for approval to a council consisting of representatives of the Brazilian authorities. The foundation's activities will be subject to independent external audit," said BHP.
There were further press reports late last month that executives of Samarco had been arrested and were potentially facing criminal charges. However, BHP has not confirmed this nor did it mention the executives in its statement on Thursday.
The Samarco operations, which have not yet restarted, have the capacity to produce 30.5 million tonnes of iron ore pellets each year, and to process 32 million tonnes of concentrate. In the 2015 financial year, BHP Billiton's share of production was 14.5 million tonnes and the contribution from Samarco was about 3% of the BHP Billiton Group's underlying earnings before interest and tax.
BHP said iron ore production for the full year to end in June 2016 will be around 10.0 million tonnes lower than expected as a result of the incident, causing it to lower its guidance back in January to 237.0 million tonnes from 247.0 million tonnes.
By Joshua Warner; [email protected]; @JoshAlliance
Copyright 2016 Alliance News Limited. All Rights Reserved.
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