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Why Vale’s Problems Will Likely Continue

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Vale’s dam burst

Vale’s (VALE) problems don’t seem to be ending anytime soon. On January 25, a dam ruptured at Vale’s iron ore mine in Brazil’s (EWZ) Minas Gerais state. Due to the collapse, close to 300 people have either been killed or are still missing. Read Will Vale’s Second Dam Burst Overshadow Positive Catalysts? to learn more. In November 2015, a dam jointly owned by Vale and BHP Billiton (BHP) burst and killed 19 people.

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Vale’s compounding problems

Since the disaster on January 25, Vale stock has fallen 13.5% as of March 25. During the same period, the S&P 500 (SPY) and the Dow Jones Industrial Average Index (DIA) have risen 5.9% and 3.9%, respectively. There have been several legal orders on Vale since the disaster. The legal orders are meant to curtail the company’s production or to cease the operations as some of its mines. Vale was hit by a local court injunction on March 25 to halt the operations at 13 of its tailings dams in Brazil. On February 27, credit rating agency Moody’s downgraded Vale’s credit rating to junk status with a negative outlook.

On March 2, Vale’s CEO, Fabio Schvartsman, and three other senior executives temporarily stepped down due to recommendations from the Federal Public Prosecution Office.

Vale’s funds frozen

As reported by Reuters, on March 26, Brazilian state prosecutors and public defenders won a bid to freeze Vale’s assets worth ~$765 million. Vale said, “The company has not yet been formally notified of the decision and will take appropriate action within the legal deadline.”

While the company could make up part of the lost production from other mines. The reduced production could have a significant impact on Vale’s total production going forward.

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).

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