$43bn civil lawsuit could sink BHP Billiton plc

Shares in BHP Billiton (LSE: BLT) collapsed by as much as 6% in early trading this morning after news hit the wires last night that the company and its Brazilian partner, Vale are facing one of Brazil’s largest-ever civil lawsuits over the deadly dam collapse at their Samarco mine last year.

Samarco collapse

When the Samarco tailings dam collapsed last year, it unleashed a tsunami of waste-filled mud across two states killing at least 19 people and halted fresh water supplies for at least 260,000 people. 

To their credit, both BHP and Vale acted quickly to initiate clean up efforts, something they later received praise for from Brazil’s government. In total, BHP and Vale had agreed to pay 12bn reals over 15 years to fund the clean-up and rebuilding of the areas affected by what authorities describe as Brazil’s biggest environmental disaster.

However, Brazilian prosecutors have now filed a 155bn reals or $44bn civil suit against Vale and BHP, challenging the previous agreement signed with Brazil’s federal and state governments. 

The new suit is based on six months of research, includes more than 10,000 pages of technical reports and more than 200 claims related to ecological, economic and social damages. What’s more, the report alleges that state and federal agencies failed to provide the oversight necessary to avoid such a disaster.

Prosecutors are demanding that the parties at fault provide an initial payment of 7.8bn reals within 30 days and stated that the value of the damages claim was based on the clean-up costs of the comparable BP oil spill in the Gulf of Mexico in 2010.

A big problem 

There’s no denying that the filing of this $44bn civil suit against the Samarco partners is a huge blow for BHP. The company’s shareholders now face months, or possibly even years of uncertainty as the company fights the allegations and as we saw with BP, even after several years of fighting in the courts, it’s likely that BHP will still be made to pay. 

BHP is now haunted by uncertainty. The company has a potential $20bn liability on its hands, on top of the money it has already put aside to help fund clean up activities. Moreover, the company now faces a potential multi-year lawsuit, which any BP shareholder will tell you, is a taxing process for both the company and investor. 

And if BHP is made to pay $20bn to claimants, the company’s balance sheet will come under considerable strain. At the end of BHP’s 2015 financial year, the company had $31bn in debt and only $6.7bn in cash, so any ruling against the company would likely mean asset sales, or if the prosecutors will allow it, a drawn out payment plan. If the company is forced to borrow to pay the proposed fine, the additional debt will cripple the company’s balance sheet, sending gross gearing from around 50% at the end of 2015, to a concerning 125%. 

All in all, yesterday’s civil case filing is a huge blow for BHP. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.