Vale Dam Burst Prompts $1.7 Billion in Blocked Funds, Fines

Vinícius Andrade and R.T. Watson
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Vale Dam Burst Prompts $1.7 Billion in Blocked Funds, Fines

(Bloomberg) -- Brazilian authorities leveled Vale SA a combined $1.7 billion in blocked funds and fines as the human and ecological costs of a tailings dam disaster unfold.

A Minas Gerais state judge has blocked 5 billion reais (1.3 billion) from Vale, prosecutors said in a statement. Earlier Saturday a separate judge also blocked funds from Vale and it was fined by the Ibama environmental agency. The dam rupture is Vale’s second deadly accident in the same mining region in just over three years.

On Saturday, authorities were still searching for 296 people and had recovered 34 bodies. In a statement, Vale said it isn’t necessary to block funds for it to provide emergency services and restoration from the accident. It said that it was notified of the first judicial ruling and will deposit one billion reais, adding that it hadn’t been notified of the second ruling.

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After Brazil’s worst-ever environmental catastrophe in November 2015 -- the Samarco tailings dam spill that killed 19 -- a similar accident unleashed sludge into a rural valley in Minas Gerais state, sweeping up people, cars and buildings in its wake near the city of Brumadinho. President Jair Bolsonaro flew over the site on Saturday and promised to support the victims and investigate the accident.

As a result of the event, S&P Global Ratings placed Vale on CreditWatch with negative implications and said it could downgrade the company up to several notches depending on the impacts of the accident. Vale could face fines and the possible loss of its license to operate in the affected region, the ratings company said.

"Vale now faces multiple risks arising from the disaster," S&P said.

In addition to the blocked funds, Brazil’s Environment agency Ibama will fine Vale 250 million reais ($66 million) due to the dam break, Environment Minister Ricardo Salles told Brazilian news website G1. Ibama’s press office didn’t immediately reply to a request for comment.

While the accident’s financial impact is unlikely to exceed that of the previous Samarco disaster, Bradesco BBI thinks Vale’s share price performance might be hampered in the near term, as news on potential fines and costs intensify, analysts led by Thiago Lofiego wrote in note from Jan. 25. "The final operational impact is still surrounded by uncertainty."

CEO Under Pressure

Friday’s tragedy has been a tough blow for Chief Executive Officer Fabio Schvartsman, who took office in 2017 and had been riding high as customers gobbled up Vale’s iron ore and prices for the raw material used in steelmaking stabilized amid steady economic growth in China.

In recent years Vale has moved the needle further by continuing to increase production volumes. The Rio de Janeiro-based company has also been paying huge dividends to shareholders as profits have soared and it succeeded in slashing billions of dollars in debt.

Unlike his predecessor, whose slow response to the Samarco accident was widely criticized, Schvartsman took a proactive approach on Friday, calling a press conference as startling images of the disaster flooded the airwaves. The CEO was visibly distraught as reporters peppered him with tough questions, demanding he explain how an accident similar to Samarco could be allowed to happen again.

Schvartsman said Vale is investigating the causes of the accident and that the company had doubled down on security after the similar accident in 2015, adding that the dam had been audited by an outside firm.

“It’s an enormous consternation,” he said Friday. “We don’t know what happened.”

(Updates with second judge’s decision on blocked funds.)

To contact the reporters on this story: Vinícius Andrade in São Paulo at vandrade3@bloomberg.net;R.T. Watson in Rio de Janeiro at rwatson71@bloomberg.net

To contact the editors responsible for this story: Daniel Cancel at dcancel@bloomberg.net, Peter Millard, Walter Brandimarte

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