Shares in Anglo-Australian mining giant BHP Billiton plunged by a tenth to a seven-year low this week. The Samarco project, a tailings dam at a Brazilian mine, which it owns in a joint venture with local iron ore giant Vale, collapsed late last week, causing a mudslide that has left four dead and 22 missing. According to the Sydney Morning Herald, a 2013 report had raised concern over design flaws in the dam. It is unclear whether BHP were aware of this.
What the commentators said
Investors have been so fixated on sliding commodities prices that they “may have forgotten about the inherent risk” in mining, said BreakingViews.com’s Andy Critchlow. When these accidents do happen, however, “big diversified players like BHP recover fastest”. The Samarco project accounts for around 6% of BHP’s iron ore output, which in turn comprises just a third of group sales. BHP also has $6.8bn of cash and highly liquid investments on its balance sheet to cover its liabilities.
Analysts think the clean-up could set BHP back by $1bn, noted Alistair Osborne in The Times. But “the final cost is anybody’s guess”. Expect state and federal inquiries; lawsuits; and “a probable bust-up between BHP and Vale” over who was responsible for the disaster. The damage to BHP’s reputation will complicate or even thwart applications for future mining permits.
One thing’s for sure, though, said Osborne. Part of the share price slide must be due to fears that BHP won’t be able to keep financing the dividend increases it has promised shareholders. Early this week the stock was yielding almost 9%.
The group’s projected free cash flow already appeared insufficient “to meet the dividend and ongoing growth capex requirements without increasing borrowings”, according to Investec analysts. The dividend policy had been “a straightjacket for management”, said the FT, and this disaster may provide an opportunity for BHP “to extricate itself” from it.