BHP Billiton is having their ‘BP Moment’

Three days ago a dam owned by a joint venture between BHP Billiton [ASX:BHP] and Vale SA (ADR) [NYSE:VALE] collapsed in Brazil. The fallout from this dam collapse includes the destruction of nearby villages and sadly the loss of life.

As this event unfolds over the next 3 days, and weeks, it could end up being as significant as the British petroleum Gulf of Mexico Oil Spill.

The British petroleum spill took the lives of 11 people as well as saw untold environmental damage. It also cost BP a world-record US$18.7 billion in fines.

The BHP/Vale Dam collapse has already seen 2 lives lost, with as many as 28 still missing. Furthermore, the flood from the busted dam has impacted communities and locations up to 100km away.

What’s important to understand is this isn’t a typical dam. This is a exploration mega dam made up of three individual dams that feed into each other. These dams are ‘tailings dams’ that are specifically made to house tailings from ore mining operations.

What is a tailing dam and what are tailings?

The mining of ore — in this case iron ore — involves an enormous amount of water. So much water that exploration companies will build tailing dams to access during operations.

The Vancouver Sun reviews that the job of a tailings dam is actually,

So the tailings dam holds the tailings from the procedure for producing iron ore. But what exactly are tailings? Well tailings are the excess rock and roll and process effluents from processing the ore.

In order to process ore it’s treated with a variety of mechanical as well as chemical processes. This extracts the required resource from the found ore. The waste from this procedure is the tailings.

Tailings.info explains,

??????????? ‘The unrecoverable as well as uneconomic metals, minerals, chemicals, organics as well as process water are discharged, normally as slurry, to a last storage area commonly known as a Tailings Management Facility (TMF) or Tailings Storage Facility (TSF).‘

This slurry is what was in the BHP/Vale dam which broke. The actual dam itself is the three-tiered dam system.

BHP put out a price delicate announcement about the incident today saying,

??????????? ‘Within this complex the actual Fund?o dam failed and also the downstream Santarm has been affected. This resulted in a significant release of mine tailings, surging the community of Bento Rodrigues and impacting other communities downstream.’

It’s still unfamiliar why the dams unsuccessful. But it’s clearly a significant enough failure that BHP CEO Tim Mackenzie was immediately on a airplane out to Brazil to find out exactly what went wrong.

You can expect there to be serious repercussions for companies if it comes to mild either or both are liable for the tragedy.

For now there is no clear indication as to what caused the failure. But one thing that is for certain, this is going to hurt BHP and Vale long term.

Is this now time to buy BHP?

Already in Monday trading BHP’s stock price was down 5.64%. Vale was down 5.6% on Friday. I expect that because the fallout continues and investigations find out what went wrong the actual stock price of both companies will fall.

You only need to look at what happened to the price of BP Plc. [LON:BP] once the Gulf of Mexico spill occurred. BP’s price cut in half going from 651 pence to 305 pence in a month.

Source: Google Finance

Will BHP’s inventory price halve from here? We doubt it, but you can get there to be some further drops from here. In fact I anticipate that BHP will go sub-$20 this week.

What it is going to mean is ongoing pain for Australia’s mining giant. Currently down 38% in the last year, the actual stock is battling. Actually it’s now at the same price it was at 10 years ago. Additionally, it means BHP has gone from the greatest company in Australia, to the 2nd biggest, with the Commonwealth Financial institution now taking top spot.

At such a cheap price although, is it time to buy BHP? No, I do not think so, not just yet. Expect more pain within the next few months. And maybe, simply maybe in 2016 there might be a perfect time to buy into the big, fighting Aussie miner.

Regards,

Sam?