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Vale and the aftermath of a devastating dam failure

FABIO SCHVARTSMAN, a hitherto well-respected businessman, may now be the most detested man in Brazil. As chief executive of Vale, a giant miner and the world’s largest producer of iron ore, it was Mr Schvartsman who had to face the public after the collapse of a company tailings dam in the town of Brumadinho on January 25th. Since then Vale has seen the erasure of 14% of its market value, grave legal allegations, the downgrading of its debt and a devastating body count: 186 people are now confirmed as dead, with 122 still missing.

So it was not a shock when, on March 2nd, Vale said that Mr Schvartsman and three other executives would step down. “Today the dams are impeccable,” Mr Schvartsman had said last year. Tailings dams contain tonnes of waste material from mining operations. The design used at Brumadinho was known to be the least expensive and most risky.

After a deluge of waste burst from the Brumadinho dam, ripping through a perilously located staff canteen and submerging a valley in mud, the company tried to respond quickly. Its board suspended share buybacks, dividends and bonuses for executives. It has made payments of 100,000 reais ($26,000) to 266 families. The resignations of Mr Schvartsman and three other executives follow a letter from prosecutors and police urging their dismissal (and that of others). The removals are temporary, but are unlikely to be reversed. Eduardo de Salles Bartolomeo, a Vale veteran, has been named interim chief executive.

He faces mounting problems. A crucial question is if Mr Schvartsman or other executives knew about problems with the dam. The firm maintains that “the executives had no previous knowledge of a scenario of imminent risk of a dam breach”. Prosecutors allege that Vale colluded with auditors to present the dam as safe, dismissing inspectors who disagreed. Vale’s own procedures suggest that any serious safety concerns would have been reported to senior leaders, prosecutors also argue.

Under Brazilian anticorruption law the company could face $7.2bn in fines, estimates Morgan Stanley, a bank. That does not account for other penalties or costs. Vale must deal with challenges outside court, too. These include accelerating plans to dismantle dams similar to the one at Brumadinho, suspending production at another big mine in Brazil (in response to a court order) and evacuating residents from three areas near other tailings dams.

Despite all these difficulties the firm may prove resilient. That is partly because of Mr Schvartsman’s changes since he took over, in May 2017. He reduced Vale’s debt and cut capital spending, notes Carlos De Alba of Morgan Stanley. With healthy free cashflow and low debt, Vale’s balance sheet can probably withstand even hefty government fines, argues Tyler Broda of RBC Capital Markets, another bank. The fundamentals in metals markets are also helping. In the 2020s, demand is expected to rise for iron ore in emerging markets and for nickel (another of Vale’s key commodities) in electric cars. That increases the odds of Vale surviving the disaster, even as victims remain missing, buried in mud.

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