UPDATE 2-Vale may sell Brazil potash project on tax dispute -CEO

Wed Feb 19, 2014 3:53pm EST

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* Sergipe potash mine seen replacing Argentine project

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BRASILIA, Feb 19 (Reuters) - Vale SA may sell a $4 billion potash fertilizer project in Brazil's northeastern state of Sergipe if it is unable to reach a tax accord with municipal authorities, Chief Executive Officer Murilo Ferreira said on Wednesday.

Shareholders "cannot be subject to fiscal uncertainties" about the project Ferreira said during a hearing before a Senate committee in Brasilia. Vale, the world's No. 3 mining company by market value, is the world's largest iron ore producer and a growing fertilizer producer.

Vale plans to shut down its planning work at the site on Feb. 28 if there is no resolution, Ferreira said.

Sergipe Governor Jackson Barreto said at the same hearing that the state will find a solution to the tax problem. The impasse stems from a battle between rival Sergipe towns Capala and Japaratuba over the location of the mine's planned processing facility on their territory so they can reap the expected tax benefits.

"We won't do anything to hurt the state, but lacking a political solution we'll hire a bank to sell the project to somebody interested in developing it," Ferreira said.

Vale plans to build the Carnalita potash mine and processing facility to help meet Brazil's demand for fertilizers. Brazil is the world's largest sugar, coffee and orange-juice producer and is expected to surpass the United States this year as the world's No. 1 soybean producer. But its extensive farmlands have low nutrient levels.

Vale preferred shares, the company's most-traded class of stock, rose 1 percent to 30.90 reais in Sao Paulo on Wednesday, its first gain in three sessions and biggest rise in a week.

Brazil must import 90 percent of its potash, much of it from as far away as Russia, Canada and the Middle East, a situation the government wants to reduce. Potash is a source of potassium, which along with nitrogen and phosphorus are the three main crop nutrients.

On Tuesday, Brazil's government offered to provide low-cost finance to Verde Potash Plc, a company incorporated in England and Wales with operating offices in Belo Horizonte, Brazil and shares traded in Canada. Verde Potash plans to build a mine in Brazil's Minas Gerais state.

Verde Potash rose 55 percent on Tuesday in Toronto and another 11.5 percent on Wednesday.

Vale's Carnalita project is supposed to replace much of the planned output the company lost in 2013 when it abandoned the $6 billion Rio Colorado potash project in neighboring Argentina. That project faltered over a tax and exchange-rate dispute with Argentine federal and provincial governments.

Reuters reported on Oct. 9 that Vale planned to start output at Carnalita before 2017 with 1.2 million tonnes of capacity, enough to supply 15 percent of Brazil's needs. The mine could be doubled in size within two years of opening the first phase.

The Carnalita project will mine potash by injecting water thousands of feet into the earth to dissolve the potassium. The water-potassium solution will then be pumped to the surface where potash will be extracted from the water and dried into a usable form of fertilizer.

Waste water will be sent by pipeline to the Atlantic Ocean.

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