Second "imminent" Vale dam collapse will sweep these ASX shares off their feet

ASX iron ore shares could get a giant second tailwind on the back of a potential looming disaster

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ASX iron ore shares have outperformed the market on Friday on a broker upgrade, but another possible dam collapse at Vale SA (NYSE: VALE) could send them skyrocketing.

The BHP Group Ltd (ASX: BHP) share price and Fortescue Metals Group Limited (ASX: FMG) share price jumped by over 1% today.

In contrast, the S&P/ASX 200 Index (Index:^AXJO) inched up 0.1% to 7,312 – a new record high.

Vale's new dam threat a bigger catalyst for ASX miners

ASX iron ore miners were bolstered after Macquarie Group Ltd (ASX: MQG) upgraded its price forecast for the commodity.

But the rally triggered by the broker may pale to the uplift the sector will experience if Brazilian authorities are right.

Vale's decommissioned Xingu dam is at "imminent risk of collapsing" warned the Regional Labour Department for the south eastern Brazilian state of Minas Gerais, reported Reuters.

Second major failing will boost iron ore prices

The warning brings back bad memories of the Brumadinho dam disaster on 25 January 2019. The tragedy killed 270 people and cost the mine owners US$7 billion, and Vale copped the brunt of the blame and payout.

A breach in the Xingu tailings dam killed 19 people in 2015. It had its risk level elevated last October by Brazil's National Mining Agency, according to Reuters.

The Xingu dam may have stopped receiving tailings, or waste from mining operations, in 1998. But it's at risk of liquefaction, a process where water weakens the walls and barriers or the dam.

Bad memories reawakened

It's the same reason that caused the Brumadinho dam to collapse with devastating consequences.

However, Vale contradicted the official warning. It said the Xingu dam was not at "imminent risk" in a regulatory filing on Friday.

The Brazilian iron ore giant only said that it had halted production at its nearby Timbopeba mine and part of its Alegria mine. This was after government officials ordered the evacuation of an area around Xingu.

Brazil's iron ore export could be hit again

But if the dam collapses, it could very well impact on Vale's iron ore exports at a time when it's struggling to meet production guidance.

The COVID-19 pandemic that's raging across Brazil is already hampering exports from the country and contributing to record iron ore prices.

Vale could give second wind for ASX miners

Vale's Aussie competitors like Rio Tinto Limited (ASX: RIO) and BHP are reaping the benefits and are flushed with cash. Investors are expecting generous dividends from both these ASX shares as a result and if Xingu results in further production cuts, that will give the Aussie miners an extra big tailwind.

Vale will have to meet a number of technical conditions before it can get permission to reopen the area.

ASX investors will be hoping that Vale will take a little longer to achieve those conditions.

Brendon Lau owns shares of BHP Group Ltd, Fortescue Metals Group Ltd and Rio Tinto Limited. Connect with me on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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