BHP Group Ltd (ASX: BHP) just gave an update regarding Brazil, is it a good thing or not?
What did BHP announce?
BHP announced made an announcement regarding Samarco, which is a Brazilian iron ore miner that’s owned 50% by BHP and 50% by Vale.
In 2015 there was a failure of the Fundão tailings dam on 5 November 2015 which led to 19 deaths and two villages being destroyed.
BHP said that Samarco has met the licensing requirement to restart operations at its Germano complex in Minas Gerais and its Ubu complex in Espirito Santo. It has commenced iron ore pellet production again.
Operations have been suspended ever since the failure of the dam. Samarco’s gradual restart of operations incorporates the concentrator 3 at the Germano complex and the pelletising plant 4 at Ubu. There is also a new system of tailings disposal combining a confined pit and tailings filtering system for dry stacking.
BHP tried to be reassuring by stating that independent tests have been carried out on Samarco’s preparations for a safe restart of operations. Samarco expects initially to produce approximately 8 million tonnes of iron ore pellets per annum.
Renova Foundation
The Renova Foundation was established to implement a set of remediation and compensation programs to address the impacts caused by Samarco’s Fundão Dam failure.
BHP said that Renova continues to remediate and compensate for the damages of the dam. By November 2020, Renova had spent approximately US$2.1 billion on remediation and compensation programs. By last month, it had spent approximately US$620 million on indemnities and emergency financial aid to approximately 325,000 people.
Is this good or bad?
It’s good that BHP and Samarco continue to work on fixing the problem. It’s also good that BHP can start to benefit from owning Samarco again. That’s all positive, in my opinion.
However, there is the consideration of supply and demand. The more iron ore production that returns in Brazil, the more pressure that will put on the iron ore price, which would hurt earnings from Australia. Demand doesn’t grow with supply.
Commodity businesses are difficult to value because of the unpredictability of commodity prices. I don’t think it makes sense to buy BHP at the top of the iron ore price cycle, if this is indeed near the top. There are other ASX shares with more consistent growth potential that I’d rather go for like Pushpay Holdings Ltd (ASX: PPH), EML Payments Ltd (ASX: EML) and even CSL Limited (ASX: CSL).
