Gotti: Samarco to bury BHP

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From Gotti:

The BHP accounts reveal that the BHP carrying value of its Samarco shares is about $US1bn. That asset will need to be written off. And in 2014-15, Samarco contributed $US371m to BHP’s operating profit, compared to $607m the year before. This was a very profitable mine.

…According to the BHP accounts, Samarco’s total assets had a book value of $US7.36bn. Those assets were funded $6.1bn by liabilities and only $1.26bn by shareholders’ funds. BHP and Vale therefore had an equity of just $US630m each which, in the case of BHP, was increased to the June 2015 balance sheet carrying value of just over $1bn by various accounting adjustments.

Clearly the Samarco company is the prime group responsible for financial compensation. But as can be seen from the above figures, it does not have the money. And if the mine does not resume operations, most of that $US7bn in Samarco assets becomes worthless. The only way Samarco can pay substantial damages or cover reparation costs is if it can borrow more money (highly unlikely) or if its shareholders inject more money.

And with Vale sinking, BHP is the main one on the hook goes Gotti’s argument. Perhaps. Though Vale’s position is complicated given it is also a Brazilian national champion and as iron ore keeps falling it is not beyond the realms of possibility that it will need a bailout in the not too distant future so hitting it up with Samarco claims could end up being folded into that crisis.

As for Samarco closing, that seems unlikely. It is in everyone’s best interests to reopen it ASAP. The analogous OK Tedi disaster did not close the mine, but BHP did donate it to the PNG government.

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A reopened Samarco could fund its own repairs, though profitability will become an open question as the shakeout advances.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.