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Vale, BHP shares drop as prosecutors file $44 billion suit over venture's dam failure

By Paul Kiernan 

RIO DE JANEIRO -- Shares of two of the world's biggest mining companies continued to plummet Wednesday after Brazilian federal prosecutors hit them with a 155 billion real ($43.8 billion) lawsuit in response to a catastrophic dam collapse in November.

The lawsuit cast fresh doubt upon Brazil-based Vale SA's and Australia-based BHP Billiton Ltd.'s hopes for a swift resolution to liabilities stemming from the failure of a tailings dam at their Samarco Mineração SA joint-venture in southeast Brazil. It also threatened to upend a settlement the companies signed in March in which they agreed to fix up to 20.2 billion reais of damage initially estimated by Brazilian government agencies.

A task force of public prosecutors that has been investigating the accident never signed on to the settlement, saying in the lawsuit that it was "incomplete, precarious and partial." Among other things, the prosecutors said, negotiations didn't involve actual victims of the accident, while the ensuing settlement failed to hold various state and federal authorities accountable for their own negligence in monitoring the construction and operation of Samarco's dam, known as Fundão.

"Input from the public prosecutors' office was not considered by the negotiating parties," the lawsuit said, adding that the government and companies appeared to be in a hurry to get a deal signed.

The companies ultimately agreed to spend as little as 9.46 billion reais through 2030 via a foundation run mostly by their own appointees.

The settlement had underpinned a major rally in shares of both Vale and BHP Billiton, which also benefited from a partial recovery in prices for iron ore during recent months. Vale's shares nearly doubled in price between late February and late April. BHP Billiton rose almost 40%.

Both companies' shares have shed more than 11% since prosecutors filed the latest lawsuit, which demanded the companies deposit 7.75 billion reais to a special cleanup and relief fund within 30 days.

"As an investor you want to minimize uncertainties surrounding a company. This here is a giant uncertainty," said Bruno Menezes, head of research at Rio de Janeiro-based asset manager Pacifico Gestão de Recursos, noting that the damages claimed in the lawsuit exceed Vale's total market capitalization. "It's almost like talking about handing the company over to the government because it won't have anything left to sell."

Public prosecutors in Brazil enjoy broad freedom from other institutions and are known for occasionally hitting companies with massive lawsuits.

In 2011, a federal prosecutor sought the equivalent of $11 billion at the time from Chevron Corp. and Transocean Ltd. in response to an offshore oil spill and asked a judge to shut down the companies' operations in Brazil. The companies ended up agreeing to pay about $42 million after reports from regulators showed the damage was relatively minor.

But Samarco's accident is widely considered to be B razil's worst-ever environmental catastrophe. It released an avalanche of sludgy mine waste that killed 19 people, destroyed villages and polluted more than 400 miles of rivers before spewing into the Atlantic Ocean weeks later.

In the lawsuit, prosecutors compared the toll of Samarco's accident to BP's Deepwater Horizon oil spill in the Gulf of Mexico, saying that the former caused more deaths and more damage to the ecosystem.

"Unless one wishes to suppose that the environment of Brazil is worth less than that of the U.S., it's inadmissible that the valuation of the environmental damage caused by the defendant companies falls below, at first glance, the $43.8 billion...acknowledged by the party responsible for the tragedy in the Gulf of Mexico," the prosecutors said in the lawsuit.

A Samarco spokeswoman said the company hasn't been formally notified of the lawsuit and declined to comment. Vale also declined to comment. BHP Billiton said in a statement after the lawsuit was announced that it "remains committed to helping Samarco to rebuild the community and restore the environment affected by the failure of the dam."

A spokeswoman for Brazil's solicitor general, which handles legal matters on behalf of the government, declined to comment.

In addition to civil penalties, the mining companies also face criminal investigations for environmental crimes and the 19 deaths.

Police in Minas Gerais state said in February that they would seek homicide charges against several Samarco officials, blaming the company for attempting to expand the Fundão dam too quickly and without proper monitoring. But an appellate court suspended the investigation in March amid a dispute over whether the criminal case should be tried at the state or federal level.

Write to Paul Kiernan at paul.kiernan@wsj.com

(END) Dow Jones Newswires

May 05, 2016 02:48 ET (06:48 GMT)

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