The impact from the fatal disaster at the Samarco mine in Brazil will cut BHP’s earnings, profits and share valuations.
The big unknown is what will happen to the global iron ore price with the withdrawal of production from the Samarco mine, a 50/50 joint venture with local giant Vale.
“Iron ore prices may act to mitigate these impacts,” according to a Credit Suisse analysis of the disaster. “However, BHP’s iron ore competitors (for example Rio Tinto) will, proportionally, be greater beneficiaries.”
Credit Suisse has stripped 4.1% from its 2016 BHP profit forecasts.
Last Thursday, tailings dams failed, sending a wall of red mud into the village of Bento Rodrigues. So far four are confirmed dead and at least another 22 are still missing.
“Given the uncertainties around the Samarco operations, we think it prudent to extract Samarco from our BHP earnings forecasts and make a risk adjustment to our valuation,” Credit Suisse analysts write in a note to clients.
“Undoubtedly there will be significant clean-up and rehabilitation/restitution costs which we can’t quantify at this moment but have estimated.”
Credit Suisse is assuming BHP will create a provision of about $US400 million in relation to the Samarco clean-up and rehabilitation and that the money will be spent over two years.
The net profit forecast for 2015 has been reduced by 4.1%, as this chart shows. BHP operating cash flow is cut by 5.1% in 2016 and 6% in 2017.
And if Samarco production is removed from the remaining eight months of this year, then BHP’s full year iron ore guidance should be revised down about 8 million tonnes to 241.
The Samarco mine debt is $US2.93 billion. Taking into account half of that (the other half belonging to Vale), BHP’s net debt will rise to about $30 billion by the end 2017.
In 2015, BHP’s share of Samarco’s net profit was $369 million.
Credit Suisse has kept its NEUTRAL rating but reduced its BHP price target to $A22.50 from $A26.
“We do not see investors paying full value for BHP for some time yet,” the analysts write.
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