By Paul Kiernan 

RIO DE JANEIRO--The mining company responsible for a massive dam failure in Brazil earlier this month will set aside 1 billion reais ($262 million) to fund initial cleanup efforts, public prosecutors said Monday.

Samarco Mineração SA, a joint venture between global mining companies Vale SA and BHP Billiton Ltd., struck a deal with state and federal prosecutors to establish a "socio-environmental escrow." The money will be used to bankroll emergency measures and preliminary reparations following the Nov. 5 breach of two tailings dams at Samarco's iron-ore mines in Minas Gerais state.

"The deal establishes a concrete legal guarantee, which didn't previously exist, that the initial emergency resources are being safeguarded," said state prosecutor Carlos Eduardo Ferreira Pinto. "It is still not possible to measure the damage...but by the extension and gravity, we know the necessary amounts may be much greater."

The Samarco accident, which experts say was the mining industry's largest-ever dam failure, sent vast quantities of water, mud and mine detritus rushing downstream. The ensuing flood wiped out several riverside communities and killed fish, livestock and wildlife along hundreds of miles of southeast Brazil's Doce River. As many as 11 people died as a result of the disaster. Another 15 are missing.

Authorities, investors and the companies are only beginning to work out the costs of the disaster. The funds announced Monday come on top of 250 million reais in fines levied against Samarco by Brazil's federal environmental regulator last week.

Deutsche Bank estimates the companies' final bill could top $1 billion. Vale Chief Financial Officer Luciano Siani said in a conference call Monday that it could take "several years for a complete remediation" of the damage.

Mr. Siani also acknowledged that insurance won't cover the whole cost of the accident.

According to Credit Suisse analyst Ivano Westin, Samarco has a $1.17 billion insurance policy for "operational risk."

But Mr. Siani said its coverage for lawsuits, fines and other civil liabilities had already been surpassed by last week's fines.

"We aren't going to disclose the amounts involved here, but one thing I can say is that the insurance covered a large value regarding operational risk, i.e., restoration of material damages and business interruption," Mr. Siani said. "In terms of civil responsibility, Samarco's insurance is well below the initial amounts that are being discussed."

Samarco declined to comment on its insurance policies, citing confidentiality.

Vale and BHP pledged last week to support the joint-venture in its cleanup efforts, including in the creation of the emergency fund.

But the parent companies have steadily denied responsibility for the accident. Mr. Siani and BHP Chief Executive Andrew Mackenzie declined to say Monday whether their companies will provide financial assistance to Samarco in the future if it faces a cash shortage.

Neither Samarco nor its owners have provided any explanation for how the tailings dams, located at its Germano mine, gave way so suddenly.

Mr. Mackenzie said on a separate conference call that the three companies are going to collectively "put in place an inquiry" using a "wide range of experts" and looking at the history of the dams that failed.

"Our intention is to get this going as soon as possible," Mr. Mackenzie said. "But it is going to take its time."

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

 

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(END) Dow Jones Newswires

November 16, 2015 17:24 ET (22:24 GMT)

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