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Vale to Pay $107M to Workers Impacted by Brazil Dam Disaster

Zacks Equity Research

Vale S.A VALE has announced that it would pay 400 million Brazilian real ($106.52 million) as compensation to workers impacted by the rupture of the Brumadinho tailings dam in January, per reports. It also comprises individual compensation for moral and material damages, including job stability and other benefits.

On Jan 25, 2019, a tailings dam failed at Vale’s Córrego do Feijão mine, in the city of Brumadinho, state of Minas Gerais. The dam failure killed around 300 people and also caused extensive property and environmental damage in the region.

Earlier in June, Vale had reported that since the breach of Dam I of the Córrego do Feijão mine in Brumadinho, Minas Gerais, Brazil, the company has paid emergency compensation to around 100,000 residents of the municipality and region. The company has since been working toward repairing damage with initiatives that include indemnities, donations to public agencies and impacted people, medical and psychological assistance, purchase of medications, among other services. In total, R$ 1.5 billion has been invested in environmental services, health materials, transportation and other logistical costs.

Further, in June, Vale announced that it plans to spend R$1.8 billion ($471 million) by 2023 in several projects to stabilize remaining structures at the Córrego do Feijão mine. Other projects include reducing tailings flow into the Paraopeba river, ensuring proper disposal of tailings and rebuilding public facilities. The projects are expected to generate around 2,500 jobs. Of the total amount, about R$ 400 million to R$ 500 million ($104.7 million- $130.9 million) is earmarked to be spent this year. Vale is also actively involved in rebuilding infrastructure and public facilities of the affected communities.

The company had also announced that it will resume wet processing operations at Brucutu mine as the Superior Court of Justice overruled a previous court ruling that suspended processing at the mine owing to safety concerns regarding a nearby dam. Following the accident, Vale’s Brucutu mine has been producing iron ore at an annual rate of 10 Mt, which is one-third of its total production capacity.

Vale had previously provided iron ore and pellets sales guidance in the range of 307-332 Mt for fiscal 2019. The company now expects current sales volume to be at the mid-point of the range. It had earlier predicted sales volume between the bottom and the middle of the range.

Following the dam disaster, Vale suspended various operations, which impacted the company’s iron ore annualized production by about 92.8 Mt. Consequently, revenues in fiscal 2019 will be lower. Further, as a result of the suspended operations, Vale may have to purchase iron ore and iron ore pellets from the market to meet its obligations under existing commercial contracts, which may lead to higher costs. The company may have to make investments or adjustments in operations unaffected by the dam failure to increase production, mitigate the impact of suspended operations or comply with additional safety requirements. It may also have to utilize alternative disposal methods to continue operating certain of its mines and plants, particularly those that rely on tailings dams which may require significant capital investments in mines and plants. As a result, costs are expected to increase, which in turn will dent margins.

Despite production constraints, the company remains committed to delivering the highest possible margins by managing extensive supply chain and flexible product portfolio. It is also focusing on improving quality and productivity, controlling costs, strengthening logistics infrastructure.

The Brumadinho dam breach and the consequent capacity closures, and Cyclone Veronica in Australia negatively impacted iron ore supply. This led to fears of a supply crunch, which in turn aided the surge in iron ore prices. Although Vale’s production has declined owing to the disaster, it will eventually benefit from rising iron ore prices.

Price Performance

Shares of Vale have gained 5.7% over the past year, in line with the industry.

Zacks Rank & Other Stocks to Consider

Vale currently carries a Zacks Rank #2 (Buy).

Investors interested in the Basic Materials sector can also consider other top-ranked stocks like Flexible Solutions International Inc. FSI , Arconic Inc. ARNC and Franco-Nevada Corporation FNV, each carrying a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Flexible Solutions has an outstanding projected earnings growth rate of 342.9% for the current year. The company’s shares have soared 156.2% in a year’s time.

Arconic has an estimated earnings growth rate of 36.76% for the current year. The stock has appreciated 34.2% in a year’s time.

Franco-Nevada Corporation has a projected earnings growth rate of 16.52% for the ongoing fiscal. Its shares have rallied 16.7% over the past year.

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