How BHP and Vale react next to Brazilian dam failure will be critical

Two of the world’s largest miners, Australia’s BHP and Brazil’s Vale have been rocked by last Friday’s dam burst at the jointly-owned Samarco iron ore mine in Brazil, as efforts to recover the bodies of 28 missing people continue and estimated costs climb.

BHP Billiton has announced its iron ore production guidance for the 2016 financial year is now under review, while the dual-listed miner’s Australian share price dropped 8% on news of the accident, contributing to ongoing share price pressure on the group.

Management of dam failure risks from these two companies should be world’s best and all eyes will be on what Vale and BHP do next.

Recovery teams are searching for 28 people missing after mine waste swept through the Bento Rodrigues district in Minas Gerais state, following the cascade failure of two dams, Fundão and Santarém. A third dam, Germarno, is being monitored.

More than 60 million cubic metres of red muddy iron ore tailings have flooded downstream for almost 80 kilometres of the Rio Doce. The impact on other communities nestled downstream will also be significant.

What led to the disaster?

Although the causes of failure are yet to be established, Santarém is the first dam in Brazil to have the latest inflatable rubber top technology installed and approved by engineers and safety officers to allow storage of additional volume of tailings.

Management will now be examining the technology to see if it had an impact on the cause and scale of the disaster; whether the location of waste storage piles close to the dams were involved; and the adequacy of warning systems in place for local communities.

The risk from cascade dam failures is not new. Large mining tailings systems are often designed in sequence and so the chance of multiple failures is increased. Cumulative dam failures have caused disasters around the world often in unregulated agricultural settings.

Perhaps the worst was in 1975 when 230,000 Chinese died after the Shimantan and Banquia dams burst, triggered by the failure of 60 upstream farm dams.

In 1989 in the United States, the Evans and Lockwood dams both collapsed in a cascade manner, killing two people; Bulgaria in 2012 experienced cumulative failure of farm dams resulting in nine deaths. Five years ago in Brazil a cumulative series of private dams burst leaving 50 people dead and warnings of another 200 dams reported to be at high risk of cumulative failure. Now we have deaths from the Fundão and Santarém disaster in Brazil to add to the list.

Balance between transparency and security

So far, there has been a marked difference in the way the two companies have reacted to the disaster. BHP has moved quickly into damage control, with chief executive Andrew Mackenzie expressing sympathy for the workers and communities and making a site visit. Samarco mine management has placed an “Announcement to Society” on its website outlining its commitment to transparency and emergency plans under way.

In contrast, Vale, placed a small notice on its website recognising the quick initiation of the emergency plan and confirming that it would work with Samarco.

The joint venture partners will now need to weigh the issues of transparency for affected workers and community against its desire to secure the dam failure sites and assess the insurable risks.

There is a real risk to reputation here. It is to be expected that Samarco, with BHP Billiton and Vale will want to seal off the sites and gather evidence for its own purposes, and restrict access to insurers, local authorities, and regulators, who have their own procedures to consider.

But they also face a fine balance between being seen to cover up a larger disaster and being transparent about what happened. Effective management in these circumstances is essential; perceived mismanagement is a real possibility. One only has to look at the consequences for BP in dealing with the 2010 Gulf of Mexico oil spill to understand the flow-on consequences of disaster mismanagement.

In the background, BHP and Vale will have to consider the direct costs of rescheduling iron ore production and shipping which may not recommence for another three years with cleanup costs of $1.4 billion based on preliminary analysis, the impact on its share price, the additional costs of regulation to avoid repeat disasters, educating workers and communities, and possible upgrading of real time information flows about production, waste and seismic activities.

In addition there is likely to be an industry effect whereby the credibility of mining is reduced and costs of capital reassessed, in line with increased insurance premiums.

Loss of trust

But perhaps one of the biggest risks is the loss of trust by workers and communities: this is something that requires an ethical and empathetic approach that reflects concern for vulnerable people and the environment - beyond profit and risk management.

The question is whether multinational managers are capable of such leadership in times of disaster and can they translate this concern into business as usual. The future of the mining industry depends on such a shift in thinking.

The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.