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Vale execs: Buybacks, dividends pushed to back burner in wake of Brazil disaster

Executives said Oct. 25 that Vale SA is setting aside dividends and buybacks in favor of reparations as the mining major continues to work to build a "stronger, safer and more reliable" company in the wake of a catastrophic dam failure that killed more than 200 people in Brumadinho, Brazil.

Compared to a net profit of US$3.07 billion in the same period of 2018, Vale recorded a loss of US$121 million for the first three quarters of 2019 related to the Brumadinho dam rupture at the company's Feijao iron ore mine in late January. The company has reported losses of US$6.3 billion related to expenses incurred due to the dam rupture.

Brazilian police accused top Vale executives of ignoring risks at the dam to avoid liability, The Wall Street Journal recently reported. In September, authorities called for criminal charges against Vale, while several senior executives at the company, including former CEO Fábio Schvartsman, left their positions at the company earlier in the year. The disaster occurred about four years after a dam failure at Vale's 50%-owned Samarco iron ore mine in Brazil.

"We are paving the way for new forms to make our business better, safer and more stable," Vale CEO Eduardo Bartolomeo said during the Oct. 25 earnings call. "We are working day after day with a very high level of rigor in the management of our risks, but also with a very keen eye for everything that society is demanding."

Payments of dividends or share buybacks programs will be tied to the progress of reparation payments related to the Brumadinho dam rupture, executives told investors on the call. So far, the company has paid about 2.25 billion Brazilian reais in compensation for "material and moral damages." Agreements made by Vale include monthly emergency compensation to about 108,000 people through January 2020.

"Clearly, we have made progress in this process, and I believe that at some point we'll have the appropriate conditions to talk about dividends, but that moment has not yet arrived," Bartolomeo said.

The company is actively working to reduce uncertainties surrounding it. Pointing to third-quarter results, which showed Vale's highest third-quarter adjusted EBITDA since 2013 if excluding Brumadinho disaster expenses, Bartolomeo said the company is now "on the road to stabilization" after using the second quarter as a "transitional period."

"We know there is still a lot to be done, and we are committed to doing it," Vale said in a section on reparations in its third-quarter earnings report.

Bernstein Research analyst Paul Gait described Vale's results as "solid" in an Oct. 25 note. Gait noted that the resumption of previously halted production drove income statement beats while the release of US$1.8 billion in frozen funds helped the company achieve a significant net debt reduction of US$4.4 billion.

"Overall our thesis still holds given their top-quality assets and our long-term iron ore price target of US$75/t (above consensus) we expect to see the closing of the valuation gap as investor trust returns," Gait wrote. "This will take time, and their communication will be key, but current disclosure on costs, what has been done so far and the plan seems solid to us."

Vale's governance is getting stronger, and its risk management "evolves every day," Bartolomeo assured investors.

"In this context of stabilization, I want to highlight that we are working to ensure that our asset portfolio and operations represent the Vale of the future," Bartolomeo said. "A Vale well-positioned in a scenario for the growing demand for social and environmental responsibility."

The company is budgeting US$25 million this year to decharacterize nine upstream dams, meaning they will no longer receive tailings from operations permanently nor function as containment structures. The company is also building new containment structures and strengthening existing dams.

Vale reported that attributable net income in the third quarter climbed to US$1.65 billion, or 32 U.S. cents per share, year over year from US$1.41 billion, or 27 cents per share. Due to strength in the company's ferrous and base metals segments, adjusted EBITDA climbed to US$4.60 billion, from US$4.33 billion in 2018, despite the impact of the Brumadinho dam burst and negative EBITDA in coal and other parts of the business.

As of Oct. 24, US$1 was equivalent to 4.01 Brazilian reais.