SITAWI no Blog da EIRIS sobre a tragédia em Mariana e seus impactos financeiros na Samarco e na Vale

Samarco’s tailing dams failure: lessons to shareholders, ESG and financial analysts

By  on 11 December 2015 | 12:13 pm

The recent case of Samarco’s dam that collapsed in Brazil shows that waste management is key to the mining sector in addressing significant risks. The collapse resulted in the joint owners, Vale and BHP Billiton, dealing in the aftermath with fatalities and serious injury, health risks due to water contamination, community displacement and environmental pollution, as well as serious impacts on local biodiversity.

The challenge of managing mining waste and assessing good practices

Tailing dams are structures aiming to store mine waste and water from the milling process, which generates large amounts of waste. Typically, ESG analysis assesses the policies of mining companies for waste management. Brazilian miner Vale presented problems that could lead to operational issues in tailing dams, such as poor maintenance, internal erosion, extreme inflow, sub-standard construction techniques – mostly in old mines. In 2012 SITAWI, EIRIS’ Global Network Partner in Brazil, estimated that, among operational costs, environmental penalties and other sanctions, waste management risks could generate financial losses of around BRL 5 billion (USD 1.4bn).

Immediate aftermath

On November 5th, the failure of such tailings dams at Samarco caused a mudslide that might be considered one of the worst mining disasters in Brazil’s history. Two of Samarco´s tailing dams in Minas Gerais (Southeastern Brazil) collapsed and devastated local communities. It was estimated that around 60 billion liters of mud containing iron ore and other waste material flowed downstream, destroying hundreds of residences, impacting local biodiversity by polluting the soil and contaminating the Rio Doce, an important river in the region[i]. Flowing downstream over 700km, the mud stain reached the coast of Espírito Santo, a neighboring state characterized by rich and sensitive biodiversity and the potential environmental harms are still being assessed. It has been reported that at least 13 people died and 7 people are still missing, presumed dead[ii]. The company ceased all operations in the region, putting its workforce on paid leave. Specialists estimate that it may take decades to recover the environmental damages caused by Samarco.[iii]

The present direct costs associated with the disaster already add up to BRL 1.6 billion (USD 430m) in sanctions and penalties alone.[iv] The total value of sanctions may still increase while the full impact of the disaster becomes clearer.

Financial impacts of best to worst case scenarios

ESG analysts and investors are now rightly asking questions on the magnitude of the financial impacts of this incident, how the incident could have been avoided, and if we could have predicted the magnitude of the disaster.

We have elaborated three ‘back of the envelope’ scenarios to get a better understanding of what might lay ahead for Samarco, Vale and BHP Billiton:

(i) baseline scenario of enforcement of environmental laws and compensations;

(ii) scenario considering a longer interruption of mining activities than anticipated in the baseline;

(iii) scenario considering the collapse of the third dam, which appears to still be a possible threat.[v]

Summary of main impacts
ImpactsScenario IScenario IIScenario   III
A)   Sanctions and penalties already appliedXXX
B)   Support to evacuated familiesXXX
C)   Decontamination of water resourcesXXX
D)   Repair of TDsXXX
E)   Interrupted activitiesXXX
F)   Costs of employees’ dismissalXX
G) Disruption   of other TDXX
H)   Investments to improve safety standards in TDX
I)   Reputational impactX

Source: Analysis by SITAWI

The financial loss we estimate for Samarco ranges from BRL 6.1 billion (USD 1.6bn) to BRL 12.9 billion (USD 3.5bn) in present value. In the best scenario the company would lose approximately BRL 3.7 billion for temporary suspension of its activities and expend around BRL 22 million in repair and maintenance of its remaining dams (Germano and Santarem), which are exposed to risk of collapse as well. Samarco would also have to bear the costs of decontamination of water resources affected, estimated to total around BRL 4.5 billion.[vi]

It is important to highlight that some of the costs the company will face are under insurance coverage. It is still too early to figure out how much the insurance policies cover, but based on recent news we expect this amount to be around BRL 1.06 billion, far below the damages that Samarco will have to compensate.[vii] Most recently, Vale, BHP and Samarco were sued by the Brazilian Federal Government in BRL 20 billion, to be paid in the next 10 years. This amount aims to mitigate environmental damages, recover biodiversity and compensate affected people.[viii] Although the penalty is well above our estimations, we expect that this value could be reduced during legal procedures.

Finally, reputational risk can affect both joint venture owners. The companies might be put under review by several responsible investment funds and indices, which might reduce the attractiveness for responsible investors and increase its cost of equity. Indeed, Vale has just been removed from BM&FBOVESPA Corporate Sustainability Index (ISE) in its 2015-2016 review.[ix] The license to operate in other jurisdictions may also be reviewed, and engaging with local communities at existing and new projects may be more difficult if a lasting impression of the incident is put on both companies.

In a recent event with investors in New York, Vale executives stated that Samarco stockholders have no legal responsibility over the mud disaster[x]. Vale is currently conducting its own investigations in order to figure out the real costs of the incident and then create a voluntary philanthropic fund to support the rescue and recuperation of the Rio Doce river system.

Notably in recent years, Vale has been investing strongly in alternative methods to improve waste management, such as dry stacking, which must reduce substantially the volume of waste generated and the risk of the activity.[xi] However, due to prohibitive costs, such technology will take a long time to be widely applied.

Challenging ESG analysis

The collapse of Samarco’s tailing dams presents a challenge for traditional ESG analysis since the company was regarded a top performer in the sector and had won several sustainability accolades recently[xii].

Some challenges come from the fact that many ESG initiatives focus not specifically on reducing risks or taking advantage of opportunities, but on improving reputation and branding for stakeholders. Therefore, such initiatives may hide fundamentals that are not necessarily solid.

For analysts it is important to search for reliable third party sources in order to test or corroborate information released by the company. The case also highlights the fact that ESG risks do not always materialize in a disruptive way, but may result from subtle underperformance that, in the long run, can trigger significant impacts.

While high impact risks are easily identified and assessed, some small impacts derive from lack of attention to details and processes that as a whole can culminate in high damage to a company’s health.

Our analysis of Vale is insightful here. It seems clear that the disruption of the tailing dams in Minas Gerais will represent a turning point for waste management in the mining sector, and the best way to avoid such incidents is assimilating the mistakes committed in the past and taking advantage of alternative methods to waste management that have been emerging in this sector.

Cristóvão Alves is an ESG Analyst at SITAWI, EIRIS’ Global Network Partner in Brazil. The author would like to thank the input and reviews from Gustavo Pimentel (SITAWI) and Julia Leske (CAER).

[i] EBC, 6/11/2015 –

[ii] G1, 19/11/2015 –

[iii] VALOR, 06/11/2015 –

[iv] Brazil’s environmental agency, Ibama, penalized Samarco over BRL 250 million (USD 67m) due to water pollution and damages to urban areas. (IBAMA , 12/11/2015 – )Minas Gerais State Government and the Public Prosecutors penalized the company in BRL 1 billion (USD 269m) as a preventive measure, aiming to mitigate the immediate impacts derived from the dam failure. (G1, 16/11/2015 – ) A Brazilian court also froze BRL 300 million (USD 81m) of Samarco’s funds that must be directed to support the families that were evacuated due to the mudslide.( G1, 13/11/2015 – In addition, the State Court required the company to develop a plan to outflow the mud to the sea, otherwise Samarco will be penalized in BRL 1 million (USD 270,300) per day.(G1, 16/11/2015 – )

[v] G1, 17/11/2015 –

[vi] In scenario (ii), we assumed that licenses required to operate the mines would be suspended for a longer time, affecting the revenue generation and raising costs due to compensations to workers that lose their jobs. In the worst case scenario, we also considered the failure of the other two of Samarco’s tailing dams, which would increase the compensation for environmental damages and lead to increased penalties from environmental authorities. In this scenario (iii) we also included the investments that might be required if the regulation becomes more severe regarding safety standards in tailing dams.

[vii] VALOR, 10/11/2015 –

[viii] VALOR, 30/11/2015 –

[ix] Folha SP, 26/11/2015 –

[x] JB, 02/12/2015 –

[xi] VALE, 02/10/2015 –

[xii] Isto É Dinheiro, 09/11/2015 –

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