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Brazil

Samarco again delays investor talks; reiterate Buy

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

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    Tellimer Research
    7 January 2020
    Published byTellimer Research

    A Bloomberg report today stated that Samarco Mineracao S.A. (SAMMIN) "has rejected creditors’ formal request to resume talks to restructure its defaulted debt, signaling heightened risks for bond holders". 

    The company had been expected to resume negotiations with creditors last November, but is now apparently again postponing those conversations. The reason is clear: Samarco cannot and will not be able to make a restructuring proposal unless and until it has a business plan, and it still doesn't have one. A company must first know when it will be able to start making payments and under what circumstances, and how much those payments will be. 

    Our view is that the main problem with Samarco is the continued uncertainty around when the plant will be able to re-start operations – the Brazilian government suspended the company’s operations in 2015 after the catastrophic failure of a pair of dams led to numerous deaths and the flooding of local towns. 

    We have seen a number of projected resumption dates over the past three years but the the Bloomberg report suggests the company might already have the necessary permits, saying "Samarco has said it will restart iron ore mining in the second half of this year after securing all the permits required by authorities". The article goes on to state that "Samarco estimates production to hit as high as 8 million metric tons per year in 2020 and reach full capacity of about 24 million tons of pellets by around 2030", which suggests the company has the permits, rather than merely expects to receive them in H2.

    We reiterate our Buy recommendation on the company's bonds because, according to our calculations, the recovery value is likely to be in in the low to mid 70s, given Samarco will capitalise past due interest (PDI). 

    The bonds trade as follows:

    • The US$1bn 4.125% senior unsecured bonds due 2022 (WR/NR/C) trade at cUS$64.589 (ALLQ). This is way below the 52-week high of US$77.494 reached on 7 October, when consensus was that the company would resume talks with investors the following month. We believe the postponement of the negotiations has been the main driver of the steep price drop.
    • The same situation holds for the company's US$700mn 5.75% senior unsecured bonds due 2023 and the US$500mn 5.375% senior unsecured bonds due 2024 (both also rated WR/NR/C).
    • The 2023 bonds trade at cUS$66.47 (ALLQ), also steeply below their 52-week high of US$80.73 on 7 September.
    • The 2024s trade at cUS$66.121, compared with their 52-week high of US$80.665 on 7 September.

    We believe that if the company has, indeed, obtained its necessary permits, it shouldn't be long before it is able to come up with a feasible business plan that will then be used to determine the company's ability to pay and allow it to present a restructuring proposal to bondholders.

    Although we believe that such a proposal will be a very significant catalyst for the bonds, we cannot determine the timing of it; however, we believe the price upside is there and, on balance, expect a proposal will be made to creditors this year.