BHP Billiton mired in disaster

Shares in BHP Billiton, the world’s largest miner, fell to a ten-year low this week after the Brazilian government filed a $5.2bn lawsuit against the company. Two dams at BHP’s Samarco iron-ore mine burst in early November, pouring 50 million cubic metres of mine waste over Brazil’s River Doce basin.

Enough sludge to fill 25,000 Olympic swimming pools has covered an 850km area. Thirteen people have died. The Samarco mine is co-owned by Brazil’s Vale, which will share the cost of any damages.

What the commentators said

If BHP does end up paying half of $5.2bn, “investors might… see value” in a stock that is down 25% since the disaster, said Nils Pratey in The Guardian. But “it’s too soon to make that call”. Bills climb after disasters like this. The government could make further demands and regional authorities may pile in. “As with BP, final resolution will take years.”

“With the fallout from the disaster still not fully known, few seem willing to call the bottom for BHP shares,” agreed The Sydney Morning Herald. “The market is pondering just how low this grand old ship can go.” This incident has tightened the financial screws on BHP, said Rhiannon Hoyle and Alex MacDonald in The Wall Street Journal. It has already been hit by a slump in iron ore, one of its key products.

Prices have fallen by 78% from the 2011 peak. Yet its dividend payout is one of the industry’s highest. Citigroup calculates that dwindling operating cash flow of $11.5bn won’t cover estimated dividends of $6.5bn and capital expenditure of $8bn. Many analysts have already recommended the group cut its payout. This episode may provide a convenient excuse.

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