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Will Vale’s Second Dam Burst Overshadow Positive Catalysts?

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Jan. 28 2019, Updated 8:19 a.m. ET

Vale’s dam burst

On January 25, another disaster struck Vale (VALE) when a dam ruptured at its iron ore mine in Brazil’s (EWZ) Minas Gerais state. As of the last report, at least 58 are confirmed dead, and the toll is expected to keep climbing as many are feared buried under the wave of mud that spread into the nearby areas. Vale stock fell 8% after the reports of the accident came out on January 25. In November 2015, a dam jointly owned by Vale and BHP Billiton (BHP) burst, killing 19 people.

Vale’s CEO, Fabio Schvartsman, said during a television interview on January 27 that the disaster happened despite the company following all safety recommendations.

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Positive catalysts overcome by disaster

We had argued in Vale Day Update: What to Expect from Vale in 2019 and Beyond that Vale’s stock should benefit from its focus on increasing shareholder returns, its steps towards getting ready for the electric vehicle (TSLA) revolution, and its progress towards reducing per unit costs. While those points remain true, the fact that such a big disaster originated at its mine within almost three years of a previous dam breach certainly doesn’t bode well for the company and the stock.

Stock to remain under pressure: lawsuits pile up

In the coming few days, Vale will be subject to lawsuits as a result of the tragedy, while the lawsuit from the 2015 disaster has still not settled completely. As reported by Reuters, the Brazilian prosecutor running the talks for the settlement of 2015 dam breach said that the new dam burst could scramble those sensitive negotiations. Moreover, Reuters also reported that a Brazilian judge froze 5 billion reais, or $1.33 billion, in Vale accounts, which was doubled on January 27 in anticipation of damages and fines. Investors should expect continuing pressure on Vale’s stock at least in the short term.

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