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Vale: More Issues after the Dam Disaster

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Vale’s dam disaster

On January 25, another disaster struck Vale (VALE) when a dam ruptured at its iron ore mine in Brazil’s (EWZ) Minas Gerais state. The collapse killed 150 people. Nearly 200 people are missing and feared dead. Read Will Vale’s Second Dam Burst Overshadow Positive Catalysts? to learn more. Since the disaster struck, Vale stock has been trading down 24% until February 6. In November 2015, a dam jointly owned by Vale and BHP Billiton (BHP) burst and killed 19 people.

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Loss of production

On February 4, a Brazilian court ordered Vale to suspend its mining operations at its Brucutu mine—its largest mine in Minas Gerais state. The suspension would likely cause a loss of ~30 million tons of iron ore production for the company. As a result of the suspension, Vale declared force majeure on the iron ore and pellet contracts related to the mine’s production. In a press release, Vale also announced that “there is no technical basis nor risk assessment to justify the court decision to suspend the operation and is adopting the appropriate legal measures to resume its operations the soonest possible.” 

Latest blow 

On January 30, Vale announced that would decommission its remaining upstream tailing dams. Decommissioning the dams would imply that ~10% of its output or 40 million tons of iron ore and pellet volumes would be impacted.

After these issues, the latest blow to Vale came when a Wall Street Journal report was published on February 6. The report claimed that inspectors had warned the dam’s owners about a potential risk due to faulty water drainage and monitoring systems. Vale stock fell ~6% on February 6 after the report. Investors should expect more pressure on Vale stock at least in the short term.

Iron ore prices are rising due to supply tightness, which is positive for Vale’s peers (XME) including BHP Billiton (BHP), Rio Tinto (RIO), and Cleveland Cliffs (CLF). On January 25–February 6, Vale stock fell 24%. In contrast, Cleveland Cliffs, BHP Billiton, and Rio Tinto stock rose 24%, 9%, and 14%, respectively. During the same period, the S&P 500 (SPY) and the Dow Jones Industrial Average Index (DIA) rose 3.5% and 3.4%, respectively.

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