When the dam breaks
Industrial accidents on the scale of the Brazilian dam collapse that hit BHP Billiton on Nov. 5 are a nightmare for miners. They are also proof that diversity is still the best model for resources companies when it comes to managing such risks.
More than $3.5 billion was wiped off the Anglo-Australian miner’s market value on Nov. 6 after a broken dam co-owned with rival Vale flooded nearby villages, killing at least two people and destroying land and property. The real financial cost will only emerge later. The broken barrier was a “tailings dam”, containing waste from the iron ore mine, which could add to the eventual cleanup bill.
To be sure, safety at mining companies has improved massively in the past two decades. Automation is one reason. Chief executives of companies like BHP, Rio Tinto and Anglo American talk about their zero-fatality goal, even if they rarely meet it.
When disasters on such a scale hit, though, size matters. Resource companies quickly set aside cash on their balance sheet to pay for any future liabilities. BHP has plenty of funds on hand despite the downturn in commodity prices. It had $6.8 billion of cash and cash-like investments on its balance sheet at the end of June. Although the mining group is smaller after the spinoff of its specialist base metals business into South32 in May, it still holds total assets of $125 billion.
Diversification also helps to absorb the hit from lost production. The Samarco joint venture affected by the disaster accounts for roughly 6 percent of BHP’s iron ore output, and iron in turn provides 33 percent of the group’s revenue, according to Eikon data.
Investors have been so focused on falling commodity prices that they may have forgotten about the inherent risk in the industry. Mining is still dirty and dangerous in many parts of the world. And when accidents do happen, big diversified players like BHP recover fastest.