On 25th January 2019 it happened again. Just three years and two months after Samarco’s tailings dam failed, the world’s largest iron ore producer, Vale, saw one of its tailings dams collapse in Brazil. The death toll is expected to exceed 300.
Aside from the obvious human tragedy the episode holds import lessons for commodity investments and by implication the outlook for commodity prices.
Just as climate concerns and safety failings (e.g. Deepwater Horizon) have arguably deterred investment in the oil industry, the same may happen for the mining industry as poor safety and community relations take centre stage. As Clyde Russel outlines in a recent article for Reuters the recent disaster risks a cascade of negative outcomes for the mining industry:
“If investors don’t want to commit funds to the industry because of fear over damage to their own image from poor mining practices, then the industry will be starved of capital. Lack of capital means it becomes harder and harder to get new mines built or exploration drilling undertaken.”
As international investors scale back funding (perhaps indiscriminately in the short term) then the share price of mining companies will fall while also pushing up the cost of funding for new ventures. Note that the share price of Vale’s competitors are only rallying right now because of the potential iron ore supply deficit that Vale’s difficulties leaves behind.
Governments that have long outsourced the provision of social services to the mining companies, especially in remote regions not easily accessible may be under pressure to take over where the mining companies have failed. Indeed, there may be renewed pressure for the state to have a bigger say in the mining sector and a bigger share of the spoils – a return to resource nationalism. That being said mining accounts for about 5% of Brazil’s GDP and Vale’s biggest shareholders are some of Brazil’s largest pension funds, so in Brazil at least they will be careful not to kill the golden goose. The attitude elsewhere in the world may be different.
According to Amsterdam-based Responsible Mining Foundation many of the world’s largest mining companies are not able to ‘know and show’ how effectively they are addressing the risks of tailings dam failure and seepage. The foundation’s research shows that failure risks are greatest for large, steep and old tailings dams in tropical zones where seismic activity and extreme weather events can precipitate dam collapses.
Although you could argue that iron ore and coal mining are the dirty heaving lifting of the mining sector there is a risk that all mining activities get tarnished with the same brush – that safety isn’t as high up the priority list and not quite as good as the mining companies say it is. The risk of future disasters remains high.
Resource companies are trying to position themselves as the suppliers of the ingredients necessary for an electric future – whether that is cobalt, vanadium or copper. Many people are not aware that commodities like cobalt and vanadium are typically by-products of much larger activities involving the extraction of more conventional commodities. Any negative impact to production of the latter will ultimately affect the former.
There are some parallels between this latest disaster and the BP Deepwater Horizon accident in 2010. Just as with that corporate disaster, rivals are quick to twist the knife but at least then tighter regulations and a long and arduous approval process were introduced. Although activity dropped sharply in the aftermath, oil production in the US Gulf has since rebounded to hit record levels.
There is no sign of a similar response in the mining industry following this latest disaster. But that is arguably what it must get unless it wants to face the cascade of negative outcomes outlined in this post.