Vale expects word from Argentina on mine tax breaks this month

Thu Feb 7, 2013 4:29pm EST

Related Topics

* Vale seeks relief from inflation, forex risk
    * Brazil, Argentina leaders to discuss mine impasse
    * Potash mine to give Argentina jobs, Brazil fertilizer

    By Esteban Israel
    SAO PAULO, Feb 7 (Reuters) - Brazilian mining giant Vale SA
expects Argentina to respond by Feb. 28 to its demand for tax
and exchange-rate breaks it considers necessary to keep building
a $6 billion potash project, a Brazilian government source told
Reuters on Thursday.
    Vale, the world's largest producer of iron ore and
second-largest producer of nickel, halted work on the Rio
Colorado potash project in Argentina's Mendoza province in
December while it "analyzes changes in economic fundamentals" of
the project.
    Reuters reported on Monday that Rio de Janeiro-based Vale
was asking for breaks on value-added taxes until mine output
starts. It also wants a more favorable exchange rate to
compensate for inflation that is galloping forward far faster
than official government rates suggest. 
    "Vale is going to wait until Feb. 28 to see if this
situation gets resolved, if it will get what it asked for," the
source, a member of the Government's economic team with
knowledge of the negotiations. "The ball is in the Argentine's
court."
    He spoke on the condition that he not be identified because
he is not authorized to speak on the record with the press.
    A Vale press offer in Rio de Janeiro declined to comment on
the Rio Colorado issue. 
    After extending paid holidays for workers at the Rio
Colorado project while its budget is under review, the
provincial government in Mendoza said Vale could lose its
concession if work on the project didn't restart soon.
    
    STRATEGIC FERTILIZER
    Doubts about the Vale project, which would turn Argentina
into a major producer of potash, a potassium salt that forms one
of the three main plant nutrients, along with nitrogen and
phosphorus, used in fertilizers.
    These doubts coincided with a deterioration in the economic
climate in Argentina and a reduction in investment by Vale in
the face of August and September declines in the price of iron
ore. .IO62-CNI=SI
    Prices have since rebounded, but many analysts expect lower
average prices and higher volatility in coming years. Iron ore
is responsible for about 90 percent of Vale profit and key
source of cash for new mine projects.
    For Brazil, the world's largest producer of coffee, orange
juice and beef and nearly tied with the U.S. as the world's
largest soybean exporter, potash is a strategic issue. It
imports about 90 percent of its potash needs from countries such
as Canada and Jordan and would prefer sources that are close to
home, and cheaper.
    Vale, though, believes it has already invested more than it
expected in Rio Colorado and that it risks going way over budget
without the tax and exchange-rate breaks, the source said. It
bought the project in 2009 from Australia's Rio Tinto 
    "Vale wants to see what it can do to maintain its original
investment plan for the mine," the Brazilian government source
said.
    The Brazilian mining company has invested $1.81 billion in
the Rio Colorado project. At the end of the third quarter, the
mine and other related work such as rail and port facilities was
40 percent complete.
    Vale wants the Argentine government to waive value added
taxes until production at the mine starts, a benefit that could
save Vale about $1 billion, according to Argentine market
sources.

    PRESIDENTIAL MEETINGS
    The future of the project will be on the table when
Argentine President Christina Fernandez and Brazilian President
Dilma Rousseff meet at the beginning of March in Argentina's
Patagonia region.
    Brazil's Industry and Foreign Commerce Minister Fernando
Pimentel, discussed the issue on Monday in Buenos Aires with
Argentine Planning Minister, Julio de Vido. 
    Brazilian government officials say, in private, that
Argentina needs the investment and this should make an agreement
easier. The Feb. 28 deadline, could, in theory, be extended for
another 20 days.
    
    2014 STARTUP
    The project is expected to start output in 2014 with an
initial capacity of 2.4 million tonnes a year, an amount that
can be expanded to 4.3 million tonnes a year. Market sources say
that operations could be delayed for up to three years.
    The project, in addition to the mine itself, also includes
800 kilometers (500 miles) of railway and a sea terminal at
Bahia Blanca, southwest of Buenos Aires. The project will employ
up to 4,000 people.
    Difficulties in buying and expropriating land for the
railway and port could force Vale to consider a different export
route.
    Vale began applying the breaks to the project in April 2012
when Chief Executive Murilo Ferreira ordered a review of the
project citing a growing preoccupation with Argentina's economic
and political situation.
    This review led to the project being suspended since the
beginning of December.
    With inflation calculated at about 25 percent a year and a
peso that is not depreciating at the same rate, Vale's costs,
and investments, calculated in dollar are growing rapidly.
    Argentine investments have also been hurt by government
restrictions on the purchase of foreign exchange that has caused
the gap between the official and unofficial peso exchange rate
to widen to a point where the unofficial rate is 55 percent
weaker than the official rate.

 (Reporting by Esteban Israel, additional reporting by Guido
Nejamkis in Buenos Aires; Writing by Jeb Blount in Rio de
Janeiro; editing by Sofina Mirza-Reid)
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