Vale: The Politics and Consequences of Córrego do Feijão

Base Metals Investing

In this interview with INN, Remi Piet of Americas Market Intelligence shares his thoughts on what’s next for Vale after Córrego do Feijão.

A rash of senior executives at Brazilian iron ore mine Vale (NYSE:VALE) have been stood aside in the aftermath of January’s Córrego do Feijão tailings dam collapse near Brumadinho in south-eastern Brazil, which could have claimed up to 300 lives.

The final death toll of the collapse is yet to be fully tallied — as recovery workers sift through the mud and debris searching for up to 120 missing people more than a month after the disaster.

In a release on Saturday (March 2), Vale said that its CEO, Fabio Schvartzman and other senior executives had been recommended to stand down by the authorities in Brazil — a recommendation that the company had considered and then obeyed after board meetings on Friday (March 1) and Saturday.

Speaking with the Investing News Network, Senior Director at Americas Market Intelligence Remi Piet said that even though the upper levels of Vale had denied any knowledge of issues with the tailings dam in the lead up to the disaster, having them step aside was “completely understandable.”

“When a tailings dam bursts, it’s unacceptable for mining for any company because its a major security flaw — in the case of Vale, it’s even more important because of Samarco in 2015,” which the company is still paying reparations for, 4 years later.

On Schvartzman, Piet said that he had been touted as a “revolutionary” CEO when he was first appointed in early 2017, fresh from his role at Klabin — Brazil’s largest paper and cardboard producer.

“When [Schvartzman] arrived from the paper company probably 2 years ago, he was quite revolutionary — [he] started to change a lot of the ways that business was done in the company.”

Piet said that from conversations he had in Brazil at the time, the feeling was that “Vale was really evolving, was becoming more of a modern player.”

“Which is saying [like] a brontosaur is turning into a crocodile — it’s not exactly turning into an ideal company yet, but at least it was becoming a little more market oriented and efficient.”

Piet added that intelligence coming out of Brazil was indicating that systemic issues still remained within Vale despite “revolutionary” changes at the top, given “the information that has been leaked — not sure how — is that there had been some warning indeed on that specific dam.

“Not only were there eight local engineers that tried to cover it up, but actually those memos went up to the top.”

The causes of the collapse remain a developing story however, with a clear picture of the disaster yet to be revealed as Vale and Brazilian authorities’ investigations are ongoing.

On Saturday, Vale said that the suspension of its CEO and other top executives was a temporary measure. Eduardo de Salles Bartolomeo, who was previously Vale’s executive director of basic metals, was appointed as acting CEO of Vale.

Bolsonaro and Vale

The collapse of the dam also poses an issue for the (relatively) freshly minted administration of the nationalist Jair Bolsonaro — which Piet described as pro-business, pro-mining, harsh on land rights with indigenous communities, populist, and above all: anti-red tape.

“So this ideology … has been faced with a major catastrophe, and what [the administration is] saying in the newspapers and in speeches is probably what they should be saying (demanding justice and site visits), but you still have below the surface the ideology of ‘why do we have all those regulations.”

Because of the intersection of the pro-business finance minister Paulo Guedes working on liberalizing the economy, and the nationalist Bolsonaro, “whose knowledge of the economy is very limited”, said Piet, the key players in the administration have found common ground on liberalizing and deregulating the economy but with a nationalist bent.

In other words: Brazil first.

So what does that mean for mining? “Vale will probably continue to be the cornerstone of that in the mining sector.”

Vale, which was formerly state-owned, is the largest iron ore miner in the world — and the largest mining company operating in Brazil, making it top dog locally when it comes to all things mining.

When asked whether the disaster had changed anything about the government’s approach to Vale, Piet said that he was yet to see any major changes in attitude — besides the current expected response of outrage and punitive measures — which include banning similar tailings facilities.

“When you happen to have a catastrophe like this, it takes time, so it’s going to take six months to know exactly what happened,” though Piet added that the lag in time is typically “a way to procrastinate and try to wing it” when it comes to actual changes to regulations and oversight.

“The whole program of Bolsonaro is in limiting civil servants, limiting red tape — [the bureaucracy] is already seriously understaffed.”

That lack of manpower on a bureaucratic level meant that any reforms that were carried out to strengthen the mining regulator or try to ensure greater compliance with rules would likely fall flat because “no-one wants to sign off on a project because you don’t want to have your name there.”

Vale and BHP

BHP (ASX:BHP,NYSE:BHP,LSE:BLT) was — and indeed still is Vale’s joint-venture partner in the previous dam that collapsed — Samarco in 2015.

A 50-50 arrangement, BHP has been denying rumours that it is seeking an exit from Samarco for years, with information on negotiations between the two coming from “people familiar with the matter” that are never quoted by name.

BHP has been tied up paying reparations alongside Vale since Samarco, which claimed 19 lives and contaminated vital river systems in the same state as Córrego do Feijão.

In the aftermath of the Córrego do Feijão collapse BHP has only shared its condolences and offered its thoughts on what the industry must to do avoid further tragedy.

“I understand BHP wants to get its name out [of Samarco],” said Piet.

That BHP was even in with Vale — a company with a different structure and attitude to operations and litigation — was a head scratcher, said Piet.

“The strategy of BHP … was to enter Latin America with a large, strong partner — just to learn, to get their feet wet.

“And then they stuck with Vale which is the biggest one – probably not the best strategy on that one, but it’s easier to say now.”

Piet explained that the approach of relying on local operators was becoming untenable for companies new to an area.

“That’s not a strategy that will work for companies in the future, because you want to be responsible for your own risks.”

Will Vale pull through?

The short answer, said Piet, was yes.

He said that the budget for paying down damages for the latest tailings dam collape was going to be “very large”, but money was something Vale had plenty of.

“Vale is Vale. Vale is not a junior miner. It will take a serious hit, it will survive this, it might have to get some outsider help, it might have to sell certain assets… I wouldn’t invest in Vale now. But will the company survive this? I think so, but it will need some outside help.”

That ‘outside help,’ said Piet, was likely to be government assistance long term (though not from Bolsonaro), other miners lending a hand, and the ever-present Chinese companies in the wings, ready to step in and snap up lucrative assets.

Until then, Vale’s share price continues to hover at a price around 18 percent below its pre-disaster value on the NYSE, while on the Sao Paulo exchange the story remains much the same.

Historically however, Vale’s value remains well above where it fell to in the aftermath of the Samarco disaster in 2015 — when the companies value wallowed as low as US$2.24. By comparison, on Monday (March 4) Vale sat at US$12.08.

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Securities Disclosure: I, Scott Tibballs, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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