BHP slides on Samarco

The collapse of the tailings dam at the Samarco iron ore project in Brazil was supposedly settled earlier this year when the joint venture – comprising BHP and Vale – along with state and federal governments agreed to a staggered US$2.3bn compensation claim.

Implicit in the deal was that Samarco would regain licences to eventually recommence production following cleanup and repairs.  This was supposed to be settled.

Yet Brazil's federal prosecutor has now launched a civil suit against Samarco worth US$43bn. BHP investors responded with shock and worry, sending the share price down almost 10% yesterday.

If accepted, that payment would cost BHP more than $5 per share, almost $30bn. Yesterday's fall, as large as it was, could be far larger if the case is successful. So what are the chances of a penalty of that scale being imposed? In our view, small.

The Brazilian Federal Public Prosecution service has form in asking for outlandish compensation claims and ultimately settling for a smaller sum; a US$20bn claim against Chevron was settled for US$42m in 2011.  

A Brazilian court is yet to ratify the existing US$2.3bn settlement claim but, with state and federal government support, is expected to do so. Payment in a civil case may yet be made by BHP and Vale but it is unlikely to go close to the sum demanded.

Yesterday's price wiped off $10bn from BHP's market capitilisation which suggests the market thinks there is a 30% chance of the claims being paid. Our best guess is far lower – closer to 5%. In our view, the worst is priced in and we are making no change to our recommendation guide.

We maintain that buying in tranches remains the best strategy for acquiring cyclical mining companies. BHP is not far from our downgrade price so take nibbles rather than gulps. BUY.

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