UPDATE 2-Brazil's Vale halts $6 bln Argentine potash project

Mon Mar 11, 2013 5:09pm EDT

* Cost overruns plague mining project in Mendoza province
    * Shares reverse early losses, rise 1.4 pct on news
    * Vale open to negotiating new investment terms


    By Reese Ewing and Sabrina Lorenzi
    SAO PAULO, March 11 (Reuters) - Brazilian miner Vale SA said
on Monday it has suspended a $6 billion potash project in
neighboring Argentina that has been plagued by cost overruns, a
decision that could renew trade tensions between South America's
two largest economies.
    Vale said its Rio Colorado potash project in
Mendoza province was no longer "in line with Vale's commitment
to discipline in capital allocation". The company had put the
project under review for suspension in December.
    Vale left the door open to restarting the project, however,
if terms were to improve. It said more than 4,000 of the project
employees would have preference in rehiring "if construction
resumed," setting the stage for more negotiations with Buenos
Aires over terms that would make it viable. 
    Vale has invested $2.2 billion in Rio Colorado to date, one
of the biggest foreign capital investments in Argentina, and has
completed work on 40 percent of the mine, railway and port. 
    If Vale eventually exits Rio Colorado, it would be a blow to
Argentina's president, Cristina Fernandes, during a legislative
election year. The project would have made Argentina one of the
world's leading suppliers of potash, an essential fertilizer
component in food production.
    
    TRADE TENSIONS
    The failure to find middle ground on the project complicates
relations between Brazil and Argentina at a time when growth in
global trade is slowing and tension between the two countries is
already growing.
    New barriers in Brazil chilled the regional trade in auto
parts last year, contributing to a contraction in Argentina's
auto industry. The two countries also exchanged accusations over
trade obstructions after Argentina started slowing its import
process, helping to prop up local industry and its trade
balance. 
    Brazil's state-run oil company Petrobras is in
talks to sell off some $400 million worth of Argentine
refineries and other assets, Reuters reported last month.
 
    Officials in Argentina did not immediately comment.   
    If Rio Colorado does not go ahead, the farm sectors in
Brazil and Argentina will remain dependent on potash imports
from a small cartel of global suppliers in Canada, Russia and
Jordan. Brazil imports 90 percent of its potash.   
    
    STAKES
    Analysts said Rio Colorado likely will not have a major
financial impact on Vale, no matter whether the project is sold
or resumed, considering that 90 percent of the company's
revenues and much of its investments are still in iron ore.
    "This change was already well-defined," said Aluisio Lemos,
an analyst at Agora Corretora in Rio de Janeiro. "The tone set
by the current management has already been about prioritizing
certain projects and exiting others that are not considered
strategic."
    Vale posted its first quarterly loss in 10 years last month,
taking a $5.7 billion hit from money-losing operations. Though
the world's second largest mining company says it remains
committed to the fertilizer sector, it is part of a broader
shift among miners away from less profitable assets in the face
of lackluster metals prices. 
    Preferred shares of Vale reversed losses in Sao Paulo
trading after the announcement, to gain 1.4 percent at close.
    Brazil's Folha de S.Paulo newspaper reported over the
weekend without naming sources that Rio Colorado's cost overruns
had jumped 86 percent since the initial estimate to $11 billion.
Part of the problem has been inflation in Argentina, which
according to private estimates has surpassed 25 percent per year
and driven up labor and materials costs.
    Vale had been trying to get the Argentine government to
waive value-added taxes until production at the mine starts, a
benefit that could have saved Vale about $1 billion, according
to Argentine market sources.  
    Vale said in response to questions about the Folha report
that it was seeking no changes to Argentine labor or tax law. 
    In his last call with analysts in February, Vale Chief
Executive Murilo Ferreira said the project "needs to remain
attractive and have a foreseeable cash flow," adding that the
company was still open to talks with the Argentine government
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