The Samarco joint venture has reached settlement with the Brazilian government for a minimum of $US1.7 billion over six years for the tailings spill that killed 19 people last year.
Yesterday BHP and Vale agreed to set up a foundation to run programs for reparation to restore the environment and local communities, and compensation where remediation is not possible.
If granted court approval, the agreement will settle the lawsuit brought against Samarco by the state of Minas Gerais, Espirito Santo and the Brazilian government for $R20.2 billion, or $US5.1 billion worth of damages.
The funds will be paid out at a rate of $US500 million in 2016, followed by $US300 million in 2017 and 2018.
However, payments will continue until 2021, with anywhere between $US200 million and $US400 million paid per year depending on remediation and compensation projects required, meaning Samarco will be liable for between $US1.7 billion and $US2.3 billion over six years.
The agreement will run for 15 years, renewable in one year periods until all obligations under the agreement have been performed.
BHP and Vale will be held liable for any shortfall in making payments by Samarco.
BHP CEO Andrew Mackenzie was positive about the deal, saying it was an important step towards supporting the long-term recovery of the communities and environment affected by the disaster.
“It provides a platform for the parties to work together to support the remediation of affected areas,” he said.
“This agreement demonstrates our commitment to repairing the damage caused and to contributing to a lasting improvement in the Rio Doce.”
BHP shares were trading for $17.36 on the ASX on Thursday morning, however hope is on the horizon for investors given a medium risk "buy" recommendation for the miner with a target of $27.
Shaw and Partners senior analyst Peter O’Connor said it was likely that Samarco would be able to self-fund the new foundation contributions, based on $US1.5 billion EBITDA and capex of $US600-800 million (due to expansion) in each of FY 2014 and 2015.
“More typically we would expect capex to run at around $100-200 million per annum, although tailings dam remediation may keep that number higher initially,” O’Connor said.
“Free cash flow (pre-foundation) would likely be at least $300 million per annum and potentially well north of $500m as capital commitments tail off.
“Hence the above foundation contributions should be covered by Samarco, in the first instance without resort to BHP or Vale top-up.”
AFR reported a rally in Samarco bonds spurred by anticipation of the deal and the prospect of certainty, with notes trading up to 48.2 cents in New York, up from 31 cents immediately following the November disaster. Samarco bonds traded for 80c prior to the spill.
Brazilian Police have recently launched an investigation into the culpability of seven Samarco officials for the deaths caused by the spill, with accusations of qualified homicide, a charge which carries a penalty of between 12 to 30 years in prison.