Vale SA: Dam Failure

Vale SA: Dam Failure

Another Dam Failure For Vale SA

Imminent Collapse Spells Further Troubles

A dam in Brazil containing 6 million cubic metres of toxic mining waste has been reported to be close to bursting. Vale SA (NYSE: VALE), who operates the site, had witnessed its shares fall by more than 4% to $11.5/share after raising the alarm to local authorities.

Vale SA

Vale SA is one of the largest producers of iron ore and nickel which its sources from its mines in Brazil. Vale also produces other ores such as cobalt, manganese and copper. As a major operator of logistics in the region, it also controls a network of ports, railroads and associated transport vehicles.

Financial standing for Vale SA remains strong up to 2019; since 2016, Vale SA managed to increase its bottom line from $3.9 to $6.9 billion. Future performance remains inextricably linked to China’s economy, which accounted for over 40% of iron sales in 2018. Despite the ongoing trade war between the US and China, its strong position comes from bullish iron ore prices and continued demand from China.

Dam disasters: A troubled past

Its strong financial record belies two disasters that occurred in the span of 5 years.  The first dam disaster occurred in 2015, when the Fundao tailings dam owned by subsidiary Samarco SA failed and flooded the nearby residential communities. 19 casualties were recorded, and substantial damage was done to the nearby environment. Vale SA promised to take an extensive look into its waste disposal program to prevent another disaster.

Preventive measures taken were clearly not enough, as another dam collapsed 4 years later. The Brumadinho mine in Minas Gerais collapsed in early 2019 and caused the deaths of over 200 people, as well as extensive environmental damage. Swift measures were taken against the firm, with assets frozen, operations suspended, and operational costs increased.

Collapse imminent

Dam issues continue to plague Vale SA, which has just informed local authorities that another one was at risk of a collapse. Recent heavy rains have eroded the structural integrity of one of the dams near the unused Gongo Soco mine. The current rate of movement of the embankment suggests that a collapse is imminent, possibly in the upcoming week.

It is expected that the damages this time in terms of casualties and environmental damage will be minimized. Local residents have extensively practiced evacuation drills, and Vale has already begun the construction of a containment structure a few kilometres downstream. It is hoped that this structure can contain the excess waste when the dam breaks.

Since the Brumadinho incident, global iron ore supply retracted by 5.6% as Vale SA was unable to resume operations at full capacity. Normal operations will be further impacted with the bursting of the dam, and iron ore production will almost certainly fall.

The stability of iron ore supply from Brazil has already been called into question, and speculations about a tightened iron ore supply have caused iron ore prices to reach a record high of $100/tonne.

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