Source: The Australian

Review of Under Fire BHP Billiton’s 2016 AGM: Jac Nasser to Leave on a Sorry Note

The Samarco dam disaster in Brazil continued to take its toll on BHP with the pending exit of Chairman Jac Nasser now confirmed. The disaster took place on November 5th, 2015, killing 19 people, and has been well documented here for its initial impact, here where the flooded vicinities are shown, and here documenting how protestors and representatives of victims of BHP Billiton’s mining projects not just in Brazil, but also in Indonesia and Columbia, planned to demonstrate outside the Company’s AGM in London.

The Bullish Bear caught up with the 2016 BHP Billiton AGM, and can confirm that representatives from Brazil and Indonesia were there and questioned the management incisively, to which the management replied with little more than platitudes and steps already put in place.

Some background: Samarco (Brazil) iron ore asset

Source: Company Annual Report FY 2016

The Samarco Mineração S.A., which operates the Samarco iron ore operation in Brazil, is held 50% each by BHP Billiton Brasil and Vale S.A. As a result of the tragic dam failure, operations at Samarco have been suspended, with no indication of reopening soon. Samarco’s main product was iron ore pellets. Prior to the suspension of operations, the extraction and beneficiation of iron ore were conducted at the Germano facilities in the municipalities of Mariana and Ouro Preto. In FY2016, BHP’s share of production was 5.2 MT of pellets (4% of Iron Ore production in revenue terms).

Impact and management steps

As at June 30th, 2016, BHP Billiton’s contingent liabilities registered a relatively small uptick from US$ 3.263 Bn a year ago to US$3.442 Bn, a figure which precludes “A number of matters, for which it is not possible at this time to provide a range of possible outcomes or a reliable estimate of potential future exposures.” Hmmm.. the potential potentialities!

Related reading: Is Deadly Dam Collapse BHP Billiton’s “Deepwater Horizon”? (The Motley Fool) >>

Equally noteworthy is that, despite insurance policies in place with Brazilian and international insurers, no insurance receivable has been recognized by Samarco for recoveries yet. Related to Samarco, BHP Billiton is externally insured for up to $360 MM, a figure which is dwarfed by the claims as below.

As at June 30th, 2016, BHP Billiton Brasil has identified contingent liabilities arising as a consequence of the Samarco dam failure as follows: (1) P&L: impairment charge of US$525 million, (2) Balance Sheet: Losses and provisions totaling US$ 1.2 Bn, (3) Environment and socio-economic remediation: An agreement with various authorities and partners to set up a Foundation, with funds of $ 134 MM initially (4) Legal: Various law suits including a claim brought by the Federal Public Prosecution Office on 3 May 2016, seeking approximately $48 Bn, (5) Commitment: a short-term facility to Samarco of up to $116 MM to carry out remediation and stabilization work.

These heady, heavy numbers aside, the management did take many steps, however. For example, (1) it took part in over 500 community meetings over the last year, (2) 41 programs were set up involving Samarco, BHP, Vale S. A. and the  Brazilian government, to focus on and rehabilitate social, economic and environmental impact of the accident, (3) A governance review of non-operating minerals joint ventures has been undertaken, (4) An expert panel’s investigative findings were released in August ’16 and also shared with other resource Companies, and (5) A global centralized dam management function was set up, with global tailings standards for design construction, maintenance of tailings and more frequent usage of independent safety reviews.

Another change was made after the December 2015 results: shareholder dividends were set at a minimum of 50% of underlying attributable profit, against a progressive dividend policy that sought to increase steadily or at least maintain half yearly dividends.

As for the earnings of CEO Andrew Mackenzie, they fell to half as he did not receive any performance-related pay in FY2016 – short-term and long-term  incentives were both zero. This was notably lauded by a keen attendee at the AGM, I noticed.


The failure of the tailings dam was blamed on construction defects in the base drain, while numerous warnings went unheeded

A Fundão Tailings Dam Review Panel was constituted by Cleary Gottlieb Steen & Hamilton LLP, which was retained jointly by Samarco Mineração S.A. and its shareholders, BHP Billiton Brasil Ltd. and Vale S.A., to conduct an investigation to determine the immediate cause of the November 5, 2015 Fundão tailings dam failure.

As I read the disclaimer on the website page here it clearly indicated that this was going to be less a fault-finding mission and more a technical, causation-investigative mission.

[A side note on tailings dam: A tailings dam in a cost effective structure to hold back the water from the mining area, contain the ground-rock tailings from the ore-milling and separation process and recycle the water to be reused in processing.]

It was originally planned to deposit sands behind a compacted earthfill Starter Dam, then raise it by the upstream method to increase progressively its capacity. To preserve the freedraining characteristics of the sands, a 200 m beach width was required to prevent water-borne slimes from being deposited near the dam crest where they would impede drainage.

An incident in 2009, shortly after the Starter Dam was completed, damaged the dam so badly that the original concept could no longer be implemented. This was “due to construction defects in the base drain.” A revised design followed in which more widespread saturation was allowed and accepted, increasing the extent of saturation introduced, which increased the potential for sand liquefaction. Sand liquefaction is a process whereby the material loses nearly all of its strength and flows as a fluid, which is what happened on the fateful afternoon of Thursday, November 5th, 2015, following the likely triggering event of three minor earthquakes in the region.

The foundation was laid, but the summary findings went on to highlight multiple indications and warning signs: (1) In 2011-12, “The 200 m beach width criterion was often not met,” (2) “In late 2012 when a large concrete conduit beneath… was found to be structurally deficient,” (3) During 2013, “Surface seepage began to appear on the left abutment setback at various elevations and times,” (4) By August 2014, “The replacement blanket drain intended to control this saturation reached its maximum capacity”, the saturated mass of tailings having grown meanwhile.

Related reading: A chronology of major tailings dam failures worldwide (WISE Uranium Project) >>

Alas, this narrative points to a pattern of operational negligence, which is what is making the victims, regulators and other stakeholders take action.

Returning to the goings on at the AGM, something else also caught my attention. BHP added this to its Charter (A one page leaflet with a few punchy dictums):

“We are successful when… Our teams are inclusive and diverse.”

Tacit admission of deficient decision-making?

By including the clause of inclusion and diversity in the Company’s Charter, we have a window into the minds of the management, into how they view a possible resolution to the mistakes made in this episode.

It is well-known from many studies [Kellogg, Essec, Houston Journal of Leadership, Skema Business School in France], that diversity boosts decision-making capabilities of a group.

“Our Charter… is the basis of our decision-making.” BHP Billiton Annual Report FY 2016, p. 39.

Reviewing the panel’s findings, it is apparent that despite many warnings, the management of Samarco S.A. continued its operations. Is the new mantra being introduced to improve this facet, and therefore, given the timing of this, is it a tacit admission that poor decision-making while reviewing key incidents through five years of the operation of the tailings dam at Fundão, was the most important cause of its failure?

The Bullish Bear tends to indeed think so.

Unlike The Guardian, BBC, the Financial Times, and many others, all of who suggest that the diversity program is for the sake of it or to improve performance: there is more to it than that. It is for a far more precise, strategic reason – to improve decision-making in high-pressure, high-stakes business scenarios.

Latest update: Brazil lays homicide charges over Samarco dam collapse, BHP Billiton rejects the charges outright (The Australian) >>

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