Moody’s downgraded Brazil-based mining firm Samarco Mineracao’s CFR to Caa2 from Caa1, with a negative outlook on the company. Ratings on the following debt instruments were also downgraded (outlook: negative):
- $1bn Senior Unsecured Notes due 2022: from Caa1 to Caa2
- $700m Senior Unsecured Notes due 2022: from Caa1 to Caa2
- $500m Senior Unsecured Notes due 2022: from Caa1 to Caa2
Moody’s attributed the downgrade to the continued uncertainty about Samarco’s ability to resume mining operations in Brazil, concerns over liquidity pressures and risk arising from compensation payments the company has to make in light of its dam burst accident.
Samarco’s mining operations have been suspended since November 2015 when a dam rupture at one of its mines caused a massive flood in the Minas Gerais district of Brazil.
In the absence of mining operations, revenue generation has been significantly affected and the company may not have sufficient funds to meet its financial obligations and operating expenses in 2016.
Further, with compensation claims arising from the incident, Samarco could face significant cash outflows in 2016, further pressuring the company’s liquidity.
During March 2016, the miner and its shareholders (BHP Billiton and Vale S.A.) signed a compensation agreement with Brazilian federal authorities which outlined the financial terms Samarco would have to comply with until 2030 in relation to the accident.
As per the agreement, Samarco would have to make payments amounting to a total of BRL 4.4bn from 2016 to 2018, and further annual payments between BRL 0.8 – 1.6bn from 2019 to 2021. Payments to be made from 2022 until 2030 would be defined by the authorities based on the targets set by the agreement.