The 155 billion Brazilian reais in damages sought against - joint venture has been branded excessiveand unlikely to net anywhere near the full amount.
Analyzing the civil lawsuit filed by Brazilian prosecutors earlier this week, analystsat Sanford C. Bernstein said it was clear that a fine should be commensurate withthe damage caused by the accident backward-looking, but also with the possible consequencesof imposing the fine forward-looking.
"An excessive claim would result in Samarco [Mineração]going bankrupt, Vale and BHP refusing to pay the remaining liability, the mine beingcompletely shut down and BHP exiting Brazil," the team around Paul Gait notedMay 6. "Vale, one of the largest employers in the country and a national champion,would not survive a seizure of its domestic assets, resulting in job and tax losses."
The latest action challenges the 15-year payout of 20 billionreais to rehabilitate the damage caused by the spill that was in March between the Brazilian governmentand the involved companies. It was filed before said agreement was by Brazil's Federal Court of Appealon May 5.
The claim, at nearly US$44 billion, exceeds Vale's market capof US$22.37 billion. BHP Billiton's market cap stands at US$69.64 billion.
Prosecutors justified the claim by saying that the damages causedby the November 2015 dam burstwere equivalent to those of the oil spill on the BP plc-operated Macondo prospect,in which some 4 million barrels of crude were spilled into the Gulf of Mexico in2010. The incident affected five U.S. states, killed 11 rig workers, and forcedthe closure of several fisheries. Over the past six years, BP has spent US$56 billionto clean up the aftermath and may face further spill-related expenses, according toFortune.
The incident at the Samarco iron ore mine claimed 19 lives and also pollutedvast terrains of nature.
Though, Bernstein flagged that, Brazilian prosecutors cannotexert the same kind of pressure on the involved companies as the U.S. could imposeon BP. That is because BP was highly exposed to U.S. consumers, with the U.S. marketcomprising one-third of the oil and gas company's revenues.
In comparison, Vale's domestic sales to Brazil account for only7.5% of its revenues and an even smaller 1.6% for BHP Billiton.
Bernstein reckoned that the Brazilian government is aware ofthis principle and, hence, agreed to ratify the initially agreed 20 billion reaisdeal.
"Banning the access to domestic customers is not a seriousoption for Brazil, in our view," Bernstein added, noting that Brazil only represents2% of the world's iron ore demand.
But should Brazil seize the companies' domestic assets, Valewould be more badly hit than BHP Billiton.
About 54% of Vale's assets are in Brazil, representing 75% ofits revenue and 89% of its EBIT. As for BHP Billiton, whose shares in Samarco andAlumar in Brazil comprise only 2% of its global assets, seizing the assets wouldhardly dent the global mining heavyweight's revenue and income.
Regarding the companies' non-Brazilian assets, there is no legalpossibility for Brazil to prosecute them due to mining transactions being settledin U.S. dollars and not Brazilian reais.
Bernstein believes that the civil action is politically motivated,with the prosecutors implying that Brazilian President Dilma Rouseff sold out theBrazilian people for business interests.
"We suspect that this claim is another attempt to diminishPresident Rousseff in the public opinion, among the current political turmoil thatmight lead to [her] impeachment," the analysts said.
As of May 5, US$1 was equivalentto 3.54 Brazilian reais.