Vale SWOT and PESTLE Analysis

Strength

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Weakness

1. Involved in two catastrophic tailings dam failures in Brazil: In November 2015, in a shocking and horrific incident the Funda˜o tailings dams owned by Samarco S.A. sagged, releasing tailings downstream, flooding certain communities and causing damage on communities and the environment along the Doce river. The failure of the Mariana Dam, led to 19 fatalities, destroyed the village of Bento Rodrigues and cost property and environment heavily in impacted areas. Touted as the worst environmental disaster in Brazil's history, the Mariana dam disaster is still facing investigation. Samarco is a joint venture equally owned by Vale S.A. and BHP Billiton Brasil Ltda. (‘‘BHPB’’). In June 2016, Samarco and its shareholders (Vale and BHPB) gave birth to the Fundac¸a˜o Renova, a not-for-profit private foundation, to develop and implement (i) social and economic remediation and compensation programs and (ii) environmental remediation and compensation programs in the region affected by the dam failure.
In a similar appalling incident, three years and two months after the Mariana dam disaster, Dam I, owned by Vale, a tailings dam at the Córrego do Feijão iron ore mine, 9 km east of Brumadinho, Minas Gerais, Brazil, met with a traumatizing failure on 25th Jan, 2019. Claiming 237 lives as a result of the collapse, the dam generated mudflow that advanced through the mine's offices, including a cafeteria during lunchtime, along with houses, farms, inns and roads downstream. The dam failure released about 12 million cubic meters of tailings. According to experts, the metals in the tailings will likely sediment into the rivers' soil bed and will consequently roil the entire region's ecosystem.

2. Impacts on indebtedness following Brumadinho dam disaster: Experts believe that Brazil's weak regulatory structures and regulatory gaps are accountable for the catastrophic collapse. Three years post the Mariana dam breach, the companies involved in that environmental disaster have been made to rake up only 3.4% of R$785 million in punitive fines. Since then Vale has witnessed an erosion of 14% of its market capitalization, severe legal allegations, the downgrading of its debt and a ludicrous loss of lives - 186 people confirmed dead, with 122 still missing. Vale has faced Judicial freezing of funds worth $16.55 billion in total and paid punitive fines worth $349million to IBAMA (Brazilian Institute of Environment and Renewable Natural Resources) and State of Minas Gerais. Impacts on indebtedness included the following – dropped credit ratings (Fitch – downgraded to BBB- in 01/29/19 − Moody’s – downgraded to Ba1 in 02/27/19 − S&P – reaffirm BBB- rating with negative outlook in 03/21/19), increased cost of funding and Increase in net debt with reduction of average debt maturity (securing funds worth US$ 1.8 billion in commercial credit lines, through short-term credit lines to deal with the freezing of funds.

3. Reduced revenues, and increased costs and expenses, due to the suspension of operations: To take into perspective business sustainability, Brumadinho carved a heavy dent to Vale’s performance and reputation. The company suffered crippling damage to its public image. Subsequent to the catastrophic collapse, on 28 January the Vale S.A. stock price slid 24%, losing 71.3 billion reals (US$19 billion) in market capitalization, the largest single day loss in the history of the Brazilian stock market. Vale incurred $4.5bn in expenses related to the dam failure, which included provisions for a compensation program and the decommissioning of tailings dams, and $450m related to “operational stoppages”. It posted $1.6bn loss following the deadly dam disaster, in the first quarter of 2019. Vale, has also been compelled to stall mining at several locations after January’s tragic dam burst at its Córrego do Feijão mine. The dam breach also led to a $652m loss in earnings before interest, tax, depreciation and amortization — Vale’s first ever negative quarterly ebitda result. During the same time window in the previous the company reported $3.9bn in adjusted ebitda. Vale’s net debt leapt by $2.4bn, versus the previous quarter, topping $12bn attributed to fresh credit lines drawn to make up for funds frozen by authorities following the dam collapse. Sales slumped to 67.7m tonnes of iron ore and pellets in the same quarter of 2019, sliding 30 per cent from the last quarter, and 20 per cent from the same period in fiscal 2018. Worsening the prospects of resurrection, a Brazilian court also commanded the company to stall operations at its Brucutu mine. “Vale now has 92m of its 400m of iron ore mine capacity closed,” said analysts at Jefferies.

Opportunity

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Threat

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Political

1. Political, social and economic instability in Brazil: The market price of Vale’s securities can see potential falls due to political, social and economic instability in Brazil. Like all mining companies, Vale too is highly affected by Brazilian federal government’s economic policies as these have an impact upon the prices of securities as well as market conditions of Brazilian companies. The operations of Vale are also affected by high interest rates, inflation as well as by political, diplomatic, social and economic developments within Brazil. The political instability caused due to corruption within political parties, elected members, or other public figures also impacts Vale’s business. Political instability may exacerbate economic doldrums in Brazil and raise volatility of securities of Brazilian issuers. Brazil held presidential, federal and state legislative elections in October 2018. Elections within the country also affect Vale as it makes it difficult to determine the economic policy changes that the new administration might usher into the mining regimes.

Economic

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Social

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Technological

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Legal

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Environmental

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