BHP and Vale Haunted by the Ghosts of Deepwater

There will be no quick or cheap escape for BHP Billiton (BHP) from the hole that it has dug itself in Brazil.

Shares in the world's largest mining company tumbled more than 9% on the Australian exchange on Wednesday after a Brazilian federal prosecutor sued the Anglo-Australian group and Brazil's Vale (VALE) for 155 billion reais ($43.6 billion) following last year's disaster at their Samarco joint venture.

The claim, one of the largest civil lawsuits in Brazilian history, relates to the November collapse of a tailings dam and a resulting wave of mud that destroyed the town of Bento Rodrigues, killed at least 17 people and flooded more than 400 miles of the Rio Doce River with mining waste.

In the wake of the disaster BHP and Vale cut a notably quick compensation deal with the Brazilian government that they, and many investors, hoped would limit the financial impact of the disaster. In March, BHP said its share of that deal would be limited to a maximum $880 million, a sum it would pay in installments between 2016 and 2021.

BHP shares rose in the wake of that announcement even though neither the courts nor the prosecutors investigating the disaster had ratified the deal. It may never be finalized now that the bigger claim is on the table.

The parallels between Samarco and BP's BP Deepwater Horizon oilrig disaster in the Gulf of Mexico haven't been lost on the prosecutors.

"Preliminary studies show the human, economic and socio-environmental impacts of the collapse of the dam are, at least, equivalent to those verified in the Gulf of Mexico," they said in a statement accompanying their new filing.

BHP and Vale shareholders have been understandably rattled.

BP has so far booked $56.4 billion of charges related to Deepwater Horizon. Ominously for BHP, BP only finalized the settlement of federal and state claims relating to the oilrig explosion in April, six years after the disaster occurred.

Precedent suggests that BHP and Vale will get away with paying far less than the Brazilian prosecutor is demanding. Chevron (CVX) was sued for R$40 billion following a 2011 oil spill off the cost of Rio de Janeiro, but eventually settled for about R$300 million.

Yet there is reason to believe that prosecutors will not bend so easily this time. Chevron's oil leak cost no lives and failed to reach the coast of Brazil, meaning its impact was limited and largely unseen. The Samarco disaster is, by any reckoning, on a different scale.

Chevron also had the good fortune to negotiate its settlement in a more forgiving environment. Brazilian's faith in both government and corporations has been stretched to breaking by the unprecedented scandal that has engulfed state oil company Petrobras (PZE) and last month resulted in the commencement of proceedings to impeach President Dilma Rousseff.

BHP on Wednesday was still clinging to hopes that its earlier deal would close the chapter on Samarco.

"We believe that the (March) agreement provides the long-term remedial and compensation framework for responding to the impact of the Samarco tragedy," it said.

Already roiled by a collapse in commodity prices the mining giant can ill afford an expensive settlement or the uncertainty of an extended court battle. It increasingly looks like it will get both.

BHP's London-listed shares traded Wednesday at 817.9 pence ($11.83), down 57.4 pence, or 6.6% on their Tuesday close. Vale's American depositary shares closed Tuesday at $5.21, down $0.44, or almost 8%.

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