The Failure Of A Tailing Dam In Vale's Córrego Do Feijão Mine In Brazil's Southeastern Minas Gerais State Could Hamper The Mining Licensing Process And Is Already Affecting Iron Ore Prices, Analysts Said.

- Feb 06, 2019-

Iron ore spot prices and futures have come under pressure following the accident.

Fastmarkets' MB 62% Fe iron ore index went up by $3.49 per tonne to $78.18 per tonne cfr Qingdao on Monday, up day on day.

"This is clearly pricing in the volume disruption to Vale, which we think is valid given the pressure to re-certify all tailings dams under their control, particularly the 17 upstream method dams at their operations," BMO Global Commodities Research analyst Colin Hamilton.

One alternative is for Vale to continue moving toward dry processing, Hamilton added. The report also mentions the possibility of mining licenses becoming more difficult to obtain in Brazil.

The trend of moving closer to dry processing is probably irreversible, BTG Pactual, a Brazilian bank, commented in a report on January 27.

According to the report, this move could intensify - not only because this is the second accident involving wet-processing dams in a little more than three years, but also as regulation is poised to toughen from now on.

Brazilian bank Itaú BBA thinks the disaster will act as an alert for other dam operations in the country, while authorities may decide to scrutinize the condition of other mining operations.

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“This event might delay the restart of Samarco’s operations - previously expected for 2020 - if authorities decide to review the security standards adopted for wet processing,” Itaú analysts Marcos Assumpção, Daniel Sasson and Carlos Eduardo Schmidt said in a report on January 27.

"This also makes the return of Samarco to the market less likely, potentially supporting medium-term pellet premium expectations," Hamilton wrote in a report sent to clients on Monday January 28.

Operations at Samarco - a 50:50 joint venture between Vale and BHP Billiton - have been halted since 2015, when its Fundão tailings dam in Minas Gerais collapsed and flooded a nearby village.

“While it's very hard to predict all the implications here, this tragedy is clearly going to increase regulatory scrutiny in the country, which could further complicate the resumption of operations in Samarco,” BTG’s analysts Leonardo Correa and Gerard Roure said.

Itaú and BTG believe a harder regulation could temporarily stop mining operations in Brazil, leading to some supply disruption from the world’s second-largest iron ore exporter. BTG believes that, along with a strong steel demand in China, this could boost iron ore prices above $80 per tonne in the short term.

Credit ratings agency Standard & Poors' (S&P) has started a revision of Vale's ratings after the tailings dam's failure. 

"We could downgrade Vale by up to several notches depending on the impacts of the accident," S&P said on Friday January 25.

The revision includes Vale's BBB- foreign-currency and brAAA national-scale credit ratings.

The company now faces multiple risks after the disaster, with ‘substantial’ financial obligations to compensate for losses and increased scrutiny from regulatory and environmental agencies.

"The company would have to face long and complex studies from environmental entities and regulatory bodies that could end up in license suspensions," the agency said.

Vale's shares value fell by 22.9% in São Paulo's stock exchange on Monday afternoon, traded at 43.29 Reais ($11.47) per share.

Michael Cowden in Chicago contributed to this report.

Felipe Peroni

Renato Rostás