Global iron ore prices and the share prices of Australia’s biggest iron ore exporters will jump as Vale, the big Brazilian exporter takes 10 of its mines and their 40 million tonnes of ore offline while it replaces potentially dangerous tailings dams.
The move follows that the failure of an iron ore tailings dam at the Feijão mine at Brumadinho in the state of Minas Gerais which burst on Friday, January 25, with waste material flooding the nearby community and the Paraopeba river. More than 80 people are now confirmed dead with upwards of 300 still missing – most of whom are Vale employees.
Vale’s decision will suspend mining at the mines associated with the dams, with an unknown impact on the global iron ore market. The replacement program will cost billions and could take several years.
Vale’s CEO Fabio Schvartsman said on Tuesday the operations in question produced 40 million tonnes of iron ore a year.
“We decided the company should, once and for all, do what it takes to remove any doubt about the safety of Vale’s dams,” Mr. Schvartsman said in Brasilia.
That 40 million tonnes is equal to the quarterly exports from Fortescue Metals mines in WA’s Pilbara. It is about 4% of China’s total iron ore imports of more than 900 million tonnes a year.
Vale has 17 tailings dams in its 151 iron ore mine portfolio that were built using so-called upstream design, which is considered riskier than modern structures. Analysts reckon it would cost about $US3 billion to replace all of them – and it could take several years.
The news helped push up share prices of Australia’s big three iron ore exporters on Wednesday – Rio Tinto, BHP and Fortescue Metals. The news from Brazil has added billions of dollars in value since last Friday in the wake of the second dam disaster for Brazil’s Vale, the world’s biggest iron ore miner.
BHP shares are up 4.6% since last Friday’s close, Rio Tinto shares have added 8.4% and Fortescue shares have jumped more than 12.9% )it reports its December quarter export performance later today) while Vale’s shares have lost more than a third in the same period.
Iron ore prices jumped nearly 5% on Wednesday to easily top the $US80 a tonne level according to the Metal Bulletin iron ore index. The index price for 62% ore (that’s the measure of its iron content) and ended at $US82.63, the highest price for well over a year. Prices are now up close to 10% since last Friday and 22% since the current rebound started on November 26.
Meanwhile, analysts at a Brazilian bank say Vale could be forced to pay as much as 17 billion Reais ($US4.51 billion) in compensation for environmental damage and lives lost after the recent rupture at one of its iron ore tailings dams. This excludes the cost of replacing the 10 dams and the lost iron ore production and exports.
Brazilian bank Itaú BBA said in a report on Tuesday that there will be a 15 billion Reais penalty relating to the flood damage, and another 2 billion Reais in compensation to the families of people who died in the accident.
“The figure is in line with the overall 15-20 billion Reais cost,” the bank said.
Meanwhile, Brazilian federal police have arrested five people related to inspections of the tailing dam that failed last week at Vale’s Córrego do Feijão iron ore mine.
Three of the people arrested on Tuesday work for the Brazilian miner and two are with TÜV SÜD, the German audit firm that certified in 2018 that the dam had met safety standards.
Media reports say the arrests included a search-and-seizure operation for documents that could help the investigation and was aided by the federal and Minas Gerais state prosecutors’ offices.
The search and seizure took place at Vale’s Nova Lima headquarters, located in Minas Gerais, and at TÜV SÜD’s offices in São Paulo. Vale and TÜV SÜD say they are fully cooperating with Brazilian authorities.
Another seven search warrants have also been issued. Minas Gerais state prosecutors say three employees of Vale who were “directly involved in and responsible for the mining venture and its licensing” of its Córrego do Feijão iron ore mine have been arrested by the police.
Ratings agency, Fitch earlier this week cut its rating on Vale to BBB-, or one notch above junk status, from BBB+, and put the company on review for a further downgrade.
“These downgrades reflect Fitch’s expectation that the company will incur heavy reparation costs as a result of this accident,” Fitch said.
“Further factored into these rating actions is an expectation of decreased production in the near-to-intermediate term and additional capex for remediation and other possible expenditures to ensure safety at the company’s numerous other dams or to move toward dry processing.”
Standard & Poor’s has the company on credit watch.
Meanwhile, the Financial Times reported on Wednesday that “German insurer Allianz declined to comment on reports that it had provided cover for the Feijão mine.”
“People familiar with the matter said Allianz’s Brazilian arm was part of a consortium providing re-insurance to Vale’s corporate liability insurance. They refused to give any guidance on the potential financial fallout for Allianz,” the FT reported.
