POLITICAL ECONOMY

Vale expects word from Argentina on mine tax breaks this month

The Brazilian miner hopes to build a $6bn potash project in the country but, considers the tax breaks a necessary condition.

Author: Esteban Israel
Posted: Friday , 08 Feb 2013

SAO PAULO (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)