VALE ON (BOV:VALE3)
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1 Year : From Jan 2019 to Jan 2020
By David Hodari
LONDON--Iron ore futures jumped on Monday following a fatal dam failure at one of Vale SA's Brazilian mines.
Futures in the ferrous metal were last up 5.3% at $78.53 a ton, after a Vale tailings dam burst on Friday at its Feijao mining complex in Minas Gerais, Brazil, killing at least 60 people. Hundreds of people were still unaccounted for.
The incident came less than four years after the failure of a dam jointly owned by Vale and BHP Group Ltd., also in Minas Gerais, killed 19 people and left hundreds homeless in one of the country's worst environmental disasters.
While the dam that burst last week was relatively minor in terms of output, investors are pricing in the potential for stricter industry oversight going forward that would crimp supply, analysts said.
"The market's always going to react, but the mine that's involved is only about 7% of Vale's output and so not massively material at this stage," said Vivenne Lloyd, senior analyst at Macquarie. "The probability of more stringent inspections and potential shutdown of other mines using similar methods has elevated since the disaster."
Similar "wet" iron ore operations--which require the building of tailings dams--comprise around half of all Vale operations, according to Macquarie.
After falling 8.1% on Friday, New York-listed shares in the Brazilian mining company plunged 19% in premarket trading to $11.42. That would constitute the weakest closing price in more than a year.
Increased scrutiny on Vale's operations could affect investor confidence in the company's stock in the longer term too.
"Although Vale's modest levels of debt should protect the company's solvency, we expect the aftermath of this incident will weigh on the equity for the foreseeable future," RBC analysts in a note.
The incident may both boost steel prices and support the share prices of Vale's competitors in the coming weeks, other analysts say.
"While this is clearly a headline negative for steelmakers, they'll successfully pass on increased cost pressures to their customers in the coming weeks," said Seth Rosenfeld, equity analyst at Jefferies. The dam failure "gives them an easy excuse to push up prices."
The prospect of higher prices ahead and economic stimulus in China could boost demand for the metal in 2019's second quarter.
Steel buyers around the world have been living hand to mouth and are persistently reluctant to sit on supply amid relatively low prices in recent months, Mr. Rosenfeld said. As a result, he said many could move to replenish thin inventories before prices extend their climb
Write to David Hodari at David.Hodari@dowjones.com
(END) Dow Jones Newswires
January 28, 2019 11:23 ET (16:23 GMT)
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