Uncertainty over Brazil Samarco mine hinders restructuring, firm at risk

By Guillermo Parra-Bernal and Stephen Eisenhammer

SAO PAOLO/RIO DE JANEIRO, Sept 8 (Reuters) - Almost a year after a deadly dam spill at the Samarco mine, owned by BHP Billiton and Vale, there is still no date for restarting operations, complicating attempts to restructure Samarco's debt and increasing the possibility the miner may be allowed to run out of money.

Vale and BHP have assured authorities they will cover the cost of Brazil's worst ever environmental disaster, sources familiar with their thinking say, stopping short of saying they will keep Samarco, for whom the closed mine is the only real revenue stream, afloat.

Samarco's debt is trading at distressed levels. The price on Samarco's 4.125 percent dollar-denominated bond due in November 2022, for example, has fallen to 37.50 cents on the dollar to yield 24.17 percent.

Samarco has reached out to creditors to sound out the possibility of renegotiating debt as it faces $50 million in interest payments through November, but sources familiar with the negotiations say they are progressing more slowly than expected.

Vale, BHP and Samarco declined to comment on negotiations.

The main problem, according to seven sources with knowledge of different parts of company and creditor strategy, is a lack of visibility of when the mine may restart.

Originally, Samarco said it expected to resume operations at reduced capacity this year. Now (Frankfurt: 11N.F - news) , it has said this will not happen without setting a new timeframe. A spokesman said the timing was in the hands of licensing authorities.

Semad, the environmental licensing authority that needs to approve a restart, has until June 2017 to decide on Samarco's bid to resume operations, though a decision could be made sooner.

Meanwhile a judge's decision in August to annul the settlement made between the mining companies and the government for the disaster was regarded by the market as further evidence of the hurdles facing a restart.

Prosecutors have also said they expect to decide this month on whether to charge Samarco after a police investigation accused the company and some senior executives of wilful misconduct in relation to the spill. A serious charge could further complicate its application to restart.

For the banks, owed about $1.6 billion, and the bondholders, owed about $2.2 billion, all of this begs the question: How long are Samarco's owners willing to wait?

In June, Vale's Global Controller Director Rogerio Nogueira said any funding would depend on clarity over a restart.

"We will only keep funding Samarco with the perspective that it returns to operations. If there were no perspective, we won't do it," Nogueira said at an event in Sao Paulo. A Vale spokesperson confirmed this still reflected the company's thinking on the matter.

BHP has not been quite so clear in public, but said to Reuters: "If (Samarco) is to be viable it will need to reduce costs, restructure its debts and have clarity on the regulatory processes required to secure the approvals it needs."

"We will consider progress in these areas as we assess any further investment," it added.

In accounting terms, both companies have ruled out receiving cash in the near future from Samarco, dividing entirely between themselves the price of cleaning up the disaster as agreed with Brazil's government in the settlement signed in March.

Having written Samarco's worth down to zero, and with both Vale and BHP battling through an era of lower prices, they appear keen to avoid propping up Samarco indefinitely.

"Don't overestimate the value of the assets," one source familiar with the strategy of Samarco's shareholders said. "No one can just write cheque after cheque."

A different source, also familiar with shareholder strategy, said the option of letting Samarco go into liquidation made some sense but was not something that has been discussed with Samarco.

Samarco, in the meantime, is implementing a huge voluntary redundancy scheme in an attempt to reduce costs. The application with Semad would be for an initial restart running at around 60 percent capacity and it is unclear, given current prices, how profitable the business would be at that production level.

The underlying asset, including the iron ore deposit, slurry pipe to port and pelletizing plant, also appear to have different strategic value for the shareholders.

For BHP, Samarco is the company's only asset in Brazil, a country from which they've continually retreated over the years.

Vale, on the other hand, has a number of iron ore mines close to Samarco's deposit, making the slurry pipe and pelletizing plant a valuable asset that could be used in the company's wider mining system.

(Additional reporting by Tatiana Bautzer, Ana Mano and Marta Nogueira; Editing by Bernadette Baum)