Brazil's Brumadinho mining disaster will hurt Vale, but iron ore firms and Australia's economy are set to cash in

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Sorry, this video has expired Video: The terrifying moment an entire hillside collapsed in the Brazil dam disaster (ABC News)

When the tailings dam at one of Vale's iron ore mines in the south-eastern Brazilian state of Minas Gerais burst on January 25, it released a torrent of sludge and buried people and buildings in the town of Brumadinho.

Key points: The dam collapse killed scores of people and threatened global iron ore supplies

Miner Vale now faces numerous law suits and its viability is being questioned

But surging iron ore prices could deliver a royalty windfall for Australia

At least 150 people were killed and more than 180 remain missing.

It is a far greater loss of life than the 2015 Samarco Mariana dam disaster (also known as the Bento Rodrigues dam disaster) in Brazil, where a dam at a Vale-BHP joint venture ruptured, killing 19 people.

This year's disaster has threatened global iron ore supply, sending markets into a frenzy and pushing prices up 18 per cent over the past fortnight, as the commodity rockets towards levels not seen since 2014.

Vale, which is the world's largest iron ore miner, has since announced it would decommission a further 10 dams — all built using the same so-called "upstream method" — which would reduce its global iron ore output by 40 million tonnes a year.

A long-term shift in the market

Analysts say the outcome of Vale's move will be felt for some time.

"This isn't a small sum. This is a big reduction in the global seaborne market in a very short period of time, so we do expect that will support higher iron ore prices for the course of the year," Bell Potter investment adviser Giuliano Sala Tenna said.

"When you see a sudden event like this reduce supply in the market, the other suppliers can't respond quickly enough to make that up in full, so we would expect the iron ore market to remain tight.

"This is something that will certainly impact on the rest of calendar '19 and for calendar year '20 and '21," he said.

Credit Suisse, ANZ and the Commonwealth Bank have all predicted prices will go higher amid the uncertainty.

Even Goldman Sachs, which has had a bearish view of iron ore, expected a continued revival of prices as producers outside Brazil failed to boost their output fast enough to fill the vacuum.

All of Australia's major miners have traded up on the news, as investors forecast their margins to be much higher over the coming year.

A big budget boost

The global squeeze is also raking in millions of extra iron ore royalty dollars for the Commonwealth, with prices well above federal Treasury estimates.

In its mid-year economic fiscal outlook (MYEFO), federal Treasury forecast an average iron ore spot price of $US55 a tonne. Prices closed at $US91.5 a tonne on Monday night, up from $US64.50 in November last year.

Every rise of $US10 a tonne above the estimate is worth an extra $1.2 billion to the Federal Government this year, and $3.6 billion in 2019-20.

Bankwest chief economist Alan Langford said the Government would likely be cautious about changing its iron ore price assumptions in its next budget too quickly.

"The surge in the iron ore price will further boost Canberra's coffers, although unless the higher price is sustained for a few months, the federal Treasury is unlikely to upgrade its price assumptions that underpin the forthcoming budget all that much," he said.

"Just how long the spot iron ore price stays at or above current levels will depend on Vale's capacity to replace production lost in the Brumadinho tailings disaster.

"Clearly the Brazilian Government will have a big say, depending on how onerous its safety and environmental oversight of Vale turns out to be."

The cheapest mine dams to build

The Brumadinho disaster has raised serious questions over the safety of Vale's tailings dams, coming just four years after the Bento Rodrigues tragedy which caused 60 million cubic metres of iron ore waste to flow into the Doce River, triggering a humanitarian crisis as hundreds were displaced and cities suffered water shortages.

It was also built using the "upstream method" which is considered the cheapest form of tailings dam, because it requires less material to build.

Mr Sala Tenna said it was concerning the dam in question had only recently been inspected by external consultants.

"So it probably throws a cloud over those previous safety procedures," he said.

"I think this will have ramifications for the company longer term particularly, with increasing costs at some of their mine sites to ensure this is the very last such incident we see.

"I think it would be very unlikely we'd see a similar mine development commenced from now."

The dam system is used across the world, including in Australia.

Of the more than 800 tailings dams in the mining state of Western Australia, 131 of them use upstream dams.

Brazilian authorities are planning to ban the practice altogether, which could have further implications for global iron ore supply.

Partner at SPG Law, Thomas Goodhead, said the long-term picture for the state of Minas Gerais was difficult.

"There are over 150 dams, some of which Vale have announced they are going to decommission, where people are very fearful of similar disasters happening," he said.

Vale faces largest lawsuit in UK history

Mr Goodhead is representing more than 200,000 individual claimants, 24 municipal governments and 700 businesses seeking compensation from BHP Group in relation to the 2015 disaster, in what is considered the largest lawsuit in UK history.

He has travelled to Brazil after being approached by victims of the latest disaster, and said the liabilities facing Vale would run into the billions of dollars, raising questions about the viability of the world's largest iron ore miner.

"In my mind, Vale as it exists currently, and given its current state in the market, they will face a very, very substantial liability," he said.

"Whether you go as far as to say that calls into question the entire viability of the firm, I'm not sure I would go that far. But it certainly raises some significant question marks over the firm as it currently operates and is currently structured.

"We already know in the [US] there are already six or seven case actions which have been instituted by various firms and there will inevitably be more."

Public prosecutors in Brazil are expected to go hard at Vale, with anger building as locals deal with the second major disaster in just four years.

Economic benefits vs growing community anger

In light of the incident, global mining groups like the International Council on Mining and Metals (ICMM), are urging their members to improve their safety procedures to avoid a similar catastrophe.

"We'll be leaving no stone unturned considering what we need to look at," ICMM chief executive Tom Butler said.

ICMM represents 27 miners across the globe, including Vale, and established guidelines for safer mining practices after the Samarco disaster.

"We won't know for some time what caused this event, and it's difficult to pre-judge what should be done in regards to the corrective actions for the event itself …," he said

"But I think it behoves us a global organisation to ask ourselves what else do we need to be doing in regard … to make sure we leave no stone unturned in terms of how we manage these facilities."

"What we identified after the Samarco review was that the governance, accountability and change management for these operations is where there's room for improvement. So in other words, the implementation of the engineering, and I think that's probably one of the areas we need to focus on again ourselves."

The Brazilian Government faces a difficult juggling act in coming months as it aims to manage the economic benefits mining brings the country, versus the growing anger locals have over the rising death toll.

If Brazil's mining agency pushes ahead with plans to ban upstream tailing dams, it is almost certain to have a wide-ranging impact not only on the miners operating within the country, but companies across the globe.

Topics: iron-ore, business-economics-and-finance, industry, mining-industry, markets, mining-environmental-issues, perth-6000, wa, port-hedland-6721, australia, brazil

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