Brazil’s iron ore industry has seen better days.
On November 5 in Amapá, Brazil, a massive dam collapsed. The ensuing damage killed at least 13 people, and more are still missing. The dam is property of the Samarco mine in the Amazon region, and that mine is shared 50/50 between two of the world’s largest iron ore firms: BHP Billiton and Vale. Both companies hit 10-year valuation lows on November 30.
Brazil is now poised to make the companies pay up to the tune of $5.2 billion, according to a BHP statement. The Samarco joint venture mining operation will be closed for months. It annually produces more than 12 million tons of Brazil’s iron ore, one of the country’s main exports.
BHP is based in Australia, the world’s biggest iron ore market. But Vale, the world’s biggest iron ore producer, is based in Brazil and has a lot more skin in the game. Samarco makes up 3.5 percent of BHP’s revenue, but 9 percent of Vale’s revenue. Brazil had 31 billion tons of iron ore reserves in January 2015, which is 16.3 percent of global reserves. In 2014, Brazil’s iron ore production brought in $25.9 billion.
So, even if we assume Vale produces all of Brazil’s iron, which it doesn’t, the fine by Brazil’s Ministry of Mines would take out 20 percent of revenues for the year.
On the production side, however, Vale might have gotten lucky with a closed mine – China, a major global steelmaker, isn’t buying enough iron as their economy slows its growth. Vale was already trying to cut production for a time, because demand is not high enough to sustain current production levels. It shows on the income statement – Vale posted a $2 billion loss in the third quarter.
At the same time, Vale is building a $19.4 billion mine in Sera Sul, in the Amazon region, that would add 90 million tons of low cost iron ore to its output, while reducing costs from $12.70 per ton to around $10. So, Vale pumped a significant chunk of capital into a bet on China’s growth, meanwhile the opposite occurred. Add in the Samarco disaster, and Vale can count on several quarters of losses before turning around in the latter half of 2016.