* Miner has put brakes on $6 billion potash project
* Sources say wants VAT exemption, favorable exchange rate
* Production seen starting three years late in 2017-2018
By Guido Nejamkis
BUENOS AIRES, Feb 4 (Reuters) - Production at Vale's giant potash mine in Argentina could be delayed by three years as the Brazilian company lobbies for tax cuts and a more favorable exchange rate to help meet rising costs, two market sources said.
Vale , the world's second-largest mining company and top iron ore producer, said in December it was putting the brakes on the $6 billion Rio Colorado project.
Last month, it said vacation time for the 4,000 workers had been extended indefinitely, a move that drew an ultimatum for progress from provincial government officials.
Costs at the venture are rising sharply due to annual inflation estimated privately at about 25 percent, and the sources said the company was asking the national government to waive the value-added tax (VAT) until production starts.
"The project's going to go slower than had been planned. It will possibly start to produce in 2017 or 2018," said one market source, asking not to be identified. "Vale is asking to be exempted from VAT until production begins and for a better exchange rate."
Production is currently scheduled to start in the second half of 2014.
A senior government official, who also spoke on condition of anonymity, said Vale had requested a break on the VAT. He did not provide any further details.
Another market source said the Brazilian miner wanted to reduce its tax costs by $1 billion and get a better exchange rate for the foreign currency its brings into the country.
Argentina's central bank controls the level of the peso . While the currency's depreciation against the dollar has sped up in recent months, many industry leaders think it is still overvalued -- further raising their costs in dollar terms.
On the black market, the peso is worth 55 percent less than in formal trade where the central bank intervenes.
Vale spokespeople in Rio de Janeiro and Buenos Aires declined to comment, but one reiterated that construction work would remain on hold while the company "analyzes variations in the project's economic fundamentals."
Argentina's Mining Secretariat did not respond to requests to comment about Rio Colorado, which could make the South American grains exporter one of the world's biggest producers of potash fertilizer with nominal capacity estimated at 4.3 million tonnes per year.
While Vale is reviewing all spending to focus on iron ore, responsible for about 90 percent of profit, it is under pressure from the Brazilian government to boost fertilizer investments.
Brazil, one of the world's biggest agricultural exporters, imports about 90 percent of its potash needs, much of it from as far away as Canada and the Middle East. A potash mine in neighboring Argentina could slash costs, strengthen regional agricultural links and help Argentina address trade imbalances with Brazil.
Demand for potash has been rising due to a growing global population, rising incomes in developing countries and a declining amount of arable land.