BHP Finally Strikes a Deal with Brazilian Authorities

When the Brazilian dam disaster hit headlines late last year, investors knew it would hang over the company for months. The disaster left thousands homeless, leaving at least 17 dead. And all because two dams burst.

But, instead of months, BHP Billiton [ASX:BHP] will have to deal with the repercussions of this disaster for years. There were talks of BHP having to pay billions of dollars in clean up and humanitarian efforts.

Just to give you a visual perspective, the picture below shows the town of Bento Rodrigues before, and after, the disaster.

BHP Dam Before After

Source: Incakolanews

The Agreement

The environment was not the only thing damaged. The social and economic welfare of surrounding residents were also affected. BHP and Vale, joint owners of the Samarco mine, have already made efforts to remedy the situation.

This morning, BHP announced that an agreement with the Brazilian government was finally formalised. As part of the agreement, foundations will be established to address multiple concerns.

There are two types of programs included in the agreement. The first is a reparatory program which will aim to restore the environment. However, it will also help restore local communities and the social conditions of the affected areas.

The second program will be a compensatory program. As the name suggests, BHP and Vale will need to provide compensation where remediation is not possible. Compensation will be based on a goodwill basis for certain special projects. Some of these projects will include sewage systems and landfill management.

The term of the agreement is expected to be 15 years. And, even though this time period may sound like a lifetime, it’s still better than waiting around having the situation hang over BHP’s head.

But let’s talk in monetary terms now. Starting from 2016 the Samarco fund will provide:

  • US$500 million in 2016;
  • US$300 million in 2017;
  • US$300 million in 2018.

After that, funding will vary between US$200–400 million. If BHP or Vale do not uphold their end of the agreement then they are liable for 50% of their stake in Samarco.

BHP’s CEO Andrew Mackenzie stated ‘this agreement demonstrates our commitment to repairing the damage caused and to contributing to a lasting improvement in Rio Doce.’ He went on further, stating:

This Agreement is an important step forward in supporting the long-term recovery of the communities and environment affected by the Samarco dam failure. It provides a platform for the parties to work together to support the remediation of affected areas.

The curious case of BHP’s share price

Since the start of this week, BHP’s shares have been climbing. Yesterday, shares picked up because of favourable trading at BHP’s London holdings. And having Standard and Poor’s come out to endorse BHP’s credit rating didn’t hurt them either.

The second big jump this week actually came today. You might think that paying over US$5 billion spread across 15 year would encourage shares to trend down. However, it seems investors are just happy there’s a light at the end of the tunnel with the Samarco situation.

Shares opened up 5.16% higher than yesterday’s close. BHP shares are now trading at around $17.50 per share, down only 6% for the year.

BHP Dam Shares

Source: Yahoo Finance

BHP might not be making a miraculous turnaround anytime soon. But this is a start. BHP now needs to focus on future earnings. Growing their business in areas that have positive long term potential will be a start.

Härje Ronngard,

Junior Analyst, Money Morning

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