How investors may be affected by Brazilian mining disaster

28 March 2019

After a recent dam collapse hit Brazil’s mining sector, heightened social discord is creating ripe conditions for potential future strikes and riots. Environmental activists are applying pressure which could result in such expressions of social tension.

This should encourage mining firms and their investors to consider whether their current risk management strategy adequately addresses the risk of strikes and civil commotion.

This blog explores these risks and their potential impact on investors. We also investigate the economic risk implications this recent disaster could have for the global mining market and its investors.

SECURITY RISKS

Rioting could cause equipment and property damage, which would economically impact firms and investors.

Strikes or riots, once having flared up, would likely continue until mining companies began de-commissioning the dams, leaving firms and investors in this region, vulnerable for an uncertain time period.

Most upstream tailing dams are located in South-East Brazil. Minas Gerais is a state in this area, which produces 53% of the whole country’s mining output and consequently contains many of these dam sites, including Brumadinho’s collapsed one.

The heightened risk of a similar disaster makes this area particularly vulnerable to strikes and riots. Investors in Vale and similar mining corporations in this region may see profit margins dropping if productivity was to decrease on the back of strikes.

Business interruption - possibly lasting several months - could also decrease the mining output of Brazil as a whole, directly impacting this sector’s economic prosperity.

Additionally, official documents were recently leaked, which suggest Vale ignored warnings that the Brumadinho dam was at an elevated risk of collapse. Therefore, there have been increasingly vocal demands from mining employees for better safety checks.

These have been influential enough to force Vale’s head, Fabio Schvartsman, along with other executives, to resign on the demands of prosecutors.

The increasing strength of Vale opposition would indicate that the risk of strikes and riots run by Vale and the other mega-mining corporations’ employees is increasing.

Tensions will likely escalate if Vale and its competitors do not move to close remaining upstream tailing dams in the short term.

INVESTMENT, TRADING AND ECONOMIC RISKS

However, risks extend beyond the security environment. Vale’s stock dropped by 8% during the week of the dam collapse, due to iron ore prices retreating. Vale’s shares could continue to come under pressure, due to the bad press which the company is receiving internationally.

How investors may be affected by Brazilian mining disaster

This will affect Vale’s shareholders and investors in the short term. International investment in Vale and other mega-mining companies is therefore expected to decline, with Vale’s shares alone taking a nosedive of 24.5% in the aftermath of Brumadinho.

International trading interest in Vale and other Brazilian mining companies may also suffer as a result, as the recent dam collapse is likely to reduce investor confidence.

These knock-on effects all need to be considered by mining firms and their investors, when reviewing their short-term economic risk management strategies.

Post-Brumadinho, environmental movements are becoming more influential and coherent in Brazil. The Mariana dam collapse in 2015 released sediment which killed off whole ecosystems.

The fear is that the same could happen after Brumadinho. This is leading to increased campaigning against the remaining dams, and for awareness surrounding their environmental impact.

This could potentially catalyse rioting risks already posed by locals protesting against mining companies – heightening overall security environment risks.

More stringent environmental regulations were also put in place by the Brazilian government in February 2019, which are likely to weigh on the performance of Brazil’s mining sector in the coming quarters. Brazil’s government has banned any further building of upstream mining dams.

It has also put in place legislation which requires that all current dams of this type must be de-commissioned by 2021.

How investors may be affected by Brazilian mining disaster

Mining firms will have to bear the costs of, first, de-constructing the multi-million dollar dams and then, funding new mining storage methods.

The interim period may see lower profit margins as construction disrupts productivity and business, suggesting the impact will not be limited to Vale.

Recent governmental restrictions are likely to herald a more restrictive tone in Brazilian environmental policy, towards the mining sector.

If protests against the mining sector accelerate, then the government could be forced to revoke the mining contracts of Vale and competitors who own a significant number of high-risk dams, financially hampering the affected firms and the whole Brazilian mining sector.

Brazil’s wider economy is therefore also at risk. Iron ore accounts for USD 20.1 billion of Brazil’s USD 219 billion average exports per annum.

The value of Brazil’s mining industry is forecasted to decrease from USD 118.28 billion in 2019, to USD 113.81 billion in 2020. This is likely to exacerbate Brazil’s tepid economic performance in 2019, with growth forecasted at 2.3%.

Further decline in the productivity and output of Brazil’s mining sector may have significant implications for the wider economy. International investors operating in Brazil are likely to be exposed to these economic risks in the 12-month outlook.

5 Key Takeaways

  • Brazil’s security environment may suffer riots and strikes in opposition to large mining corporations
  • These may cause the property and economic interests of mining companies to be damaged
  • This is likely to impact the financial interests of shareholders and investors in the affected businesses
  • Declining productivity and international trading and investment interest may cause an economic downturn in Brazil’s mining sector
  • Brazil’s largely mining-dependent economy is, consequently, likely to experience the negative economic effects of decreased exports.

Eleanor SmithTALK TO AN EXPERT

For further information, please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0)121 514 8307

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