Fears Brazil will force Vale into new Argentine potash deal

Costly exit

The world’s second biggest miner Vale (NYSE:VALE) suspended work on Rio Colorado potash, in the province of Mendoza in Argentina in March, but now former and current presidents of Brazil appear to be working hard at resurrecting the $6 billion-plus project.

Former president Luiz Inácio Lula da Silva, last month visited Mendoza’s governor to see if the venture could be made “viable”. Lula’s visit follows that of current president Dilma Rousseff in April who had also tried to broker a deal given the harsh reaction in Argentina when Vale decided to walk away in January.

Vale – although privatized in 1997 it is still very much exposed to interference from the Brazilian government – has already spent $2.5 billion on the project, which is 40% complete.

FT reports the risk of Brazil pressurizing the Rio de Janeiro-based company into investment decisions has increased since 2011 when independent-minded CEO Roger Agnelli was forced out:

“The risk of government interference has definitely increased since then,” says Ms Pedrosa. Concerns over an upcoming revision of Brazil’s mining code as well as the willingness of current chief executive Murilo Ferreira to back down over government tax demands have helped knock 25 per cent off Vale’s shares this year, says [Catarina Pedrosa from Brazil’s Itaú BBA bank]

The bitterness in Argentina of the failure of the country’s biggest ever foreign investment was such that the provincial court ordered Vale to stay in the country, keep paying the 4,000 workers on site and “abstain from dismantling installations (and) removing tools, machinery and other work implements” from Rio Colorado or face heavy fines.

A deal has since been struck, but left Vale with a $600 million workers compensation bill. Without huge incentives from the Argentine government to prospective buyers few believe Vale would be able to sell the project. As part of a cost-cutting exercise Vale is also said to be selling its Canadian Kronau potash project, after putting the $3 billion project on hold last August.

Vale acquired Rio Colorado from Anglo-Australian miner Rio Tinto in 2009. The mine was schedule to start operations in 2014 and be productive for over 50 years.

Potash has been trading at around the $400 – $430 a tonne level this year, down from $470 in 2012 and above $500 the year before.

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