The collapse of a Brazilian tailings dam jointly owned by BHP Billiton (NYSE:BHP) and Vale (NYSE:VALE) caused the worst environmental disaster in the country's history and could turn into a calamity on par with the Deepwater Horizon oil spill in the Gulf of Mexico. Worse for the miners, their liability for the catastrophe could exceed that faced by the oil drilling rig's owner, BP (NYSE:BP).
At least 19 people were killed, 700 people made homeless, and hundreds of miles of waterways polluted when a tailings dam failed last November. Brazilian prosecutors said the cost of cleanup of the Fundao dam at the Samarco joint venture project in the state of Minas Gerais would likely be just as costly as the cleanup in the Gulf of Mexico, and BHP just warned it can't calculate how bad the bill will be that it might have to pay.
A laundry list of damages
Earlier this summer BP announced its total tab from the Deepwater Horizon disaster will cost it almost $62 billion when all the claims are finally tallied, but the amount BHP, Vale, and Samarco might be liable for could easily surpass that.
In its annual report filed just last week, BHP Billiton detailed what the potential costs are so far:
- $2.3 billion in civil public actions filed by state prosecutors in Minas Gerais
- $3.1 billion in damages filed by public defenders in Minas Gerais
- $620 million in damages filed by state prosecutors in Espirito Santo
- $6.2 billion in a public civil claim
- $43 billion for reparations, compensation, and "moral damages" in relation to the Samarco dam failure
That totals more than $55 billion, and though some of those claims may overlap, it's possible for the situation to go from bad to worse.
When it rains, it pours -- literally
BHP Billiton noted that work that began immediately after the collapse attempted to reinforce and improve the dam structures to contain the remaining tailings materials at Samarco. But higher than average rainfall between December and April made it difficult to control sediment flowing into the nearby Rio Doce river, and though much of the work will begin before the next wet season starts, it's quite possible the rains will cause additional releases or contamination of the river from movement of tailings. That could result in additional claims, fines, and proceedings against it and might even impact the existing claims against it.
In short, BHP says, "Our potential costs and liabilities in relation to the Samarco dam failure are subject to a high degree of uncertainty and cannot be reliably estimated at this time."
A total write off
The disaster has already cost the miner $2.2 billion as it's written off its entire investment in Samarco because there is no certainty of when the mine will reopen or what its costs will be for compensating families for its portion of the damages. For its part, Vale said in July it took charge of more than $1 billion related to Samarco, which drove a $670 million drop in net profits for the second quarter.
It pointed out that Samarco will be financing a foundation to pay for rehabilitation, remediation, and compensation programs totaling $2.1 billion through 2021 with additional annual contributions of $75 million annually for another 10 years. If Samarco fails to pay these amounts, BHP and Vale will be on the hook equally.
Although work to restore the region is under way, including the rebuilding of homes and business, as well as compensation to affected families, the additional risks of further environmental damage could make BHP Billiton's legacy one that's worse than Deepwater Horizon.
Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.