BHP, Vale & Brazil Miner Samarco: In JVs, Liability is Never Clean

  

BHP, Vale & Brazil Miner Samarco: In JVs, Liability is Never CleanEARLIER THIS MONTH, Samarco Mineracao S.A., the iron-ore mining joint venture of BHP Billiton Ltd. (the world’s largest miner) and Vale S.A. (Brazil's largest miner), suffered a catastrophic "tailings dam" rupture which, according to The Wall Street Journal, spilled roughly 60 million cubic meters of water and iron ore waste across rural areas of Minas Gerais state. Tragically, at least 17 people are known to have been killed. Obviously, the liability of the involved parties will be determined by Brazil’s legal courts. The company and its parents will also undoubtedly be tried in the court of public opinion.

As is the case with many joint venture mines in Latin America, Samarco is independently operated, meaning it has a Board of Directors, an autonomous management team, and a distinct legal structure. This independent operator approach to running a joint venture helps shield the joint venture from the sometimes competing interests of its shareholders, while shielding the shareholders from at least some of the risks inherent to the business. An independent joint venture operating model is also an effective tool for facilitating domestic hiring, improving the overall value proposition for joint venture employees, and providing a "local skin" to the company. Conversely, this model decreases shareholder involvement in the business, reducing their oversight and limiting the use of their infrastructure and know-how (e.g., data, standards, and systems). For its part, Samarco has already committed to setting aside ~$262 million (1 billion Brazilian reais) to fund initial cleanup efforts, and both BHP and Vale have also been quick to respond and support both Samarco and Brazil in the stabilization and clean-up efforts. But the trick with these types of joint ventures is continually providing critical support in a non-disruptive way.

This is not an easy task.

To better understand the independent joint venture operating model, one must understand the alternatives – the other commonly used joint venture operating models. The first is the “operated-non-operated” approach in which a single shareholder takes responsibility for the operations of the joint venture. The operating shareholder runs the joint venture with its people, systems, and standards, while the non-operating shareholders behave similarly to financial investors. The second is the “interdependent” approach in which a group of shareholders divide the operating responsibilities among themselves leveraging a coordinating body to manage the key interfaces. 

The amount of risk protection provided to joint venture shareholders under each of these models is up for debate. It depends on a number of factors (e.g., legal form, ownership stake, control, etc.) and how one measures or defines liability (e.g., imposed monetary penalties, future prospects in that country or others, and investor interpretation of the available information and its impact on the company’s stock price).

In the case of BP's Deepwater Horizon oil rig explosion in the Gulf of Mexico in 2010, all of the shareholders suffered. BP received the majority of the public criticism and was certainly levied hefty fines. However, it is not hard to make the case that Anadarko, a non-operating partner, suffered equally – at least with respect to its share price in the immediate aftermath. Litigation is still progressing. At this point, it is unclear whether Anadarko will be absolved of responsibility due to its non-operating status.

The outcome was clearer in the Buncefield fire incident – a series of explosions at the Hertfordshire Oil Storage Terminal in the UK on December 11, 2005. The terminal was 60% owned by Total and 40% owned by Texaco. When sentencing was delivered in 2010, Total and others were fined, but Texaco was absolved of guilt as a result of its non-operating role.

The questions of joint venture risk exposure and liability are ones with which many metals and mining, oil and gas, chemicals, and power companies wrestle. Some believe control and operatorship is the only true answer, others are comfortable imposing the concept of “materially equivalent” standards, while still others believe a non-controlling, minority stake without the imposition of standards is the right way to go. Of course, the answer to addressing risk and liability in joint ventures is situation-specific. It relies on a corporate-endorsed set of practices to address the big, common issues and a well-designed operating and governance system tailored to the features of the individual joint venture to address the more nuanced, situation-specific issues.