March 9, 2021

Brazil: the tragedy returns to the 'valley of death' | Economy

Brazil: the tragedy returns to the 'valley of death' | Economy

Brazilian miner Vale is at the center of a hurricane since a dam broke in the small town of Brumadinho, southeast of Brazil, on January 25. They are already 110 dead and the number of victims is growing as firefighters rescue bodies from the sea of ​​mud and waste that swept the entire region, burying a restaurant of the company that was next to the dam, when a good part of the employees of that unit had lunch. There are still 259 missing a week after the collapse, although 192 managed to save themselves. There were 13 million cubic meters of mud that advanced at 80 kilometers per hour at some points, destroying houses, and reaching the river.

It is the second accident in which Vale, which has 100,000 employees, is involved. In 2015, the rupture of another dam of the company, in the city of Mariana, near Brumadinho, killed 19 people and contaminated rivers, devastating the flora and fauna of the area. Now, when it seemed to turn the page, there is another scandal in Brumadinho, a city in the State of Minas Gerais, where Vale was founded in 1942 as a public company (it was privatized in the 1990s). From one day to the next the company has been named "Vale [Valle] of death "- happened to have its name associated with the pain and suffering of the families of its employees.

In addition, the tragedy was also reflected in the stock market. Last Monday, its shares plummeted by 24%, evaporating some 70,000 million reals (about 16,436 million euros) of capitalization. It was the reaction of investors while the images of the accident were still shocking the world and the risk that the death toll rise drastically.

Brazil: the tragedy returns to the 'valley of death'

The company, which had a turnover of 34,000 million dollars (29,565 million euros) in 2017, also lost the confidence of the credit rating agencies after the accident. Fitch was the first to lower his grade, and S & P can second it. The latter, in a note, announced that the risk rating of the mining company is under review and has a downward bias (negative), which could degrade it in "several degrees depending on the impact generated by the accident".

In the United States, investors who have ADRs (shares for foreign companies) of Vale have begun to mobilize, on the understanding that they presented misleading information to the Securities Commission (SEC), ensuring that they carried out periodic inspections of their dams. "Now begins a flood of legal claims on the performance of the company," says Alex Agustini, chief economist at the agency Austin Ratings.

Judicial actions

One of the first movements was given by the Government and the Prosecutor's Office of Minas Gerais, which managed to get Justice to block almost 2,600 million Euros for future reparations and reparations that Vale will have to pay. The company announced that it will defend itself "vigorously" in this case, stating that it is going to start a legal battle. On the other hand, five engineers (three from Vale and two hired by her) have been imprisoned because they were directly involved in the authorization to work on the dam that broke.

The miner was also fined about 60 million euros by the government agency of the environment in Brazil. This journey in Justice is going to take its toll. From the fines that can be imposed if there is criminal liability, to the legal actions in Labor (unlike Mariana, most of the victims of the last accident were their employees). The Brumadinho is already considered the worst collective work accident by the Brazilian Justice, which will generate numerous labor demands.

From the purely business point of view, the rating agencies will closely monitor the investigations to determine what the total impact on their income statement may be. "Another aspect that concerns us is how social and environmental risks can affect the image of the company's current management," explains Flavia Bedran, analyst at S & P. Another point of pressure comes from the Stock Exchange: "There are many international investment funds that have restrictions to invest in companies exposed to corruption or accidents like this," recalls Bedran.

The president of Vale, Fabio Schvartsman, has reacted by taking decisions aimed at calm social pressure. First, it suspends the payment of dividends this year. In addition, it announced that the company will eliminate the dams such as Brumadinho and Mariana, made with cheaper material, and therefore less safe, which are even banned in other countries, such as Chile. That will reduce your production by 10%. "We can not live with this type of prey anymore. For this it will be necessary to paralyze part of the mining operations ", acknowledged the president. The plan to eliminate and modernize Vale's facilities involves an investment of almost 1,200 million euros. The measures have been well received by the market and Vale's shares have rebounded, although they are still well below the level prior to the tragedy.

Vale's hell comes precisely when the company seemed to have left Mariana's nightmare in the past, at least among its investors. The shares of the company had risen 521% from the first accident in 2015, until Friday of the second accident. André Perfeito, from the Necton stock company, points out that the mining company's challenge from now on will depend on the position taken by the new government. "What can become a problem is the institutional issue surrounding the accident," he suggests.

Vale, which has among its shareholders pension funds of Brazilian public companies, is one of the world's leading producers of iron and nickel, highly demanded raw materials, especially by China, which is a support for your business. However, in the short term, it will be the pressure from Justice and the Government that will mark the group's financial future. Being a repeat offender, she can receive exemplary punishment at a time when she is seen as an example of negligence that cost hundreds of lives.


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