Fitch says BHP's Brazil mine will run out of cash soon

A fireman rescues a dog that was trapped in the mud at the village of Bento Rodrigues. Douglas Magno/AFP/Getty Images

Fitch Ratings today issued a warning about the debt held by BHP’s joint venture Samarco mine in Brazil, now in shutdown because of November’s fatal disaster.

The agency says Samarco, 50/50 owned by BHP and Vale, will likely run out of cash this year. Fitch downgraded the debt ratings of Samarco Mineracao to C from CCC.

“The downgrade is due to a change in Fitch’s view of the timing regarding the restart of Samarco’s operations,” Fitch says.

“Given the political climate surrounding the company and an inability to gain traction in obtaining the necessary licenses to restart its business, Fitch now believes that the company will not restart operations until the second half of 2017.”

The iron ore mine’s tailings dam collapsed on November 5, sending a wave of mud downstream, killing 17 people, including five from a village of 12 working at the mine. Two people who were working on the dams are still unaccounted for.

Fitch has previously assumed that Samarco’s operations would be able to restart in the first half of 2017.

“The C rating reflects Fitch’s view that Samarco will be forced to request a standstill or restructure its debt within the next couple of months,” Fitch says.

“It is not likely that government officials will release cash that is trapped by authorities, which would mitigate some of the cash flow pressure the company faces.”

Fitch says the company need to generate income to be able to comply with its various agreements to make good the damage caused by the November tailings dam failure.

A deal between Brazilian authorities and BHP and 50/50 joint venture partner Vale to clean up the environmental mess from the mine disaster last year has fallen apart.

The Federal Court of Appeal in Brasilia ratified the deal in May. However, the Federal Prosecutors’ Office then won an appeal against the ratification.

This increases the potentially liability for BHP. A cap placed on the cost of the cleanup has been lifted and a BRL20 billion ($A8 billion) public civil claim for damages made by the Brazilian Authorities against Samarco, Vale and BHP Brazil has been reinstated.

BHP says it intends to appeal the decision by the Superior Court of Justice.

Last week Samarco confirmed it is unlikely to have approvals to restart mine operations this calendar year.

Analysts calculate impact from the mud slide will strip about 4% from BHP’s profits.

In its latest half year results, BHP recorded a pre-tax impairment of $US1.188 billion or $US858 million after tax for its investment in the Samarco iron ore mine.

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