Vale Loses License at Dam That Caused Iron Ore Force Majeure

By Bloomberg 6 February 2019
Crushed iron ore is transported in railroad cars, left, next to a conveyer belt at Vale SA's Brucutu mine in Barao de Cocais, Brazil. Bloomberg Photographer: Dado Galdieri/Bloomberg

Vale SA’s license to operate a dam key to production at one of its largest mines was revoked by a Brazilian state regulator on Feb. 5, adding another hurdle to efforts by the iron ore king to return to normal operations. Shares declined.

The world’s largest miner of the steelmaking ingredient declared force majeure on some of its contracts Tuesday after a judge forced it to suspend some operations at its Brucutu mine — a move that it said would result in an annual production loss of 30 million metric tons. Brucutu’s restart is now conditional on both overturning the court injunction and the reinstatement of the dam’s license, Vale said in a statement.

Prospects for the Rio de Janeiro-based company are dimming after January’s fatal accident that left at least 150 people dead and put the miner’s operations under stricter government scrutiny. The revocation of its dam license dampens market optimism that operations could return to normal.

“It’s hard to view Vale as cheap,” James Gulbrandsen, a Rio de Janeiro-based asset manager at NcH Capital said in a telephone interview. “China data is poor, we are in a global growth downshift and they were asleep at the wheel on dam maintenance. How many other Brumadinho ticking time bombs are out there?”

Prior to imposing the force majeure, the company had already said it would be cutting 40 million tons of production as part of a plan to improve safety by decommissioning dams similar to the two that have failed in recent years. Vale also said it will partially offset the losses by lifting output at other mines.

Vale shares resumed losses after Bloomberg reported the license cancellation, and were down 4.1 percent to 42.83 reais ($11.57) at 5:30 p.m. local time.

What Our Analyst Says “Revocation of the mining license for Vale’s Brucutu mine is likely to prolong the time it will be offline. Has Brucutu become Alunorte 2.0? The situation rings all too familiar, given that there doesn’t appear to be any technical basis or risk assessment justifying the suspension as was partly the case for Alunorte, While Alunorte used worker layoffs as leverage to combat a full-fledged shutdown, Vale seems to lack the same ace in the hole, given the mine’s recent transition to a fully autonomous trucking fleet.”– Andrew Cosgrove, BI Senior Industry Analyst

The Rio de Janeiro-based miner’s inability to deliver on its supply contracts could trigger a scramble for the raw material in a market already reeling after the company’s previously announced cuts. Iron ore prices have rallied more than $10 per metric ton in Singapore since Jan. 25, when the dam broke.

Vale shares have fallen about 24 percent since Jan. 24, a day before the dam collapse, while its rivals in Australia have benefited from higher prices and signs of a tightening global seaborne market. DM


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