SÃO PAOLO – Brazilian mining giant Vale has halted work on its $6 billion Rio Colorado project in Argentina’s Mendoza province, until its demands for special breaks in tax and exchange rates are met by the government in Buenos Aires.
The Argentinian government had given Vale a Feb. 4 deadline to submit a new timeline for the project, threatening to revoke Vale’s mine concession. Even though the deadline has come and gone, the issue, could finally be resolved on March 7, when Brazilian President Dilma Rousseff meets with Argentinian President Cristina Kirchner, sources have told Clarín.
Vale suspended its operations in December, even though it had already invested more than $1 billion in the Rio Colorado mine. It has said it would only resume operations if Argentina accepted two conditions: tax exemptions and a more favorable dollar-peso exchange rate to compensate for inflation.
The mining company, which is the second largest in the world, considers that the exchange rate it is getting for its dollars is outdated, with the Argentinian peso largely overvalued against the dollar. Argentina’s rampant inflation is also an issue, because the peso is not depreciating at the same rate, resulting in a soaring increase in costs for Vale – by 40 to 50%, according to analysts from BofA Merrill Lynch.
Vale also wants Argentina give them “fiscal facilities,” meaning breaks on value-added taxes until mine output starts.
Brasilia has a big interest in the continuity of the mining project, which will extract potassium chloride from a deposit in Malargue, in the Mendoza province. Potassium chloride is a key compound used in the production of fertilizers. However, Brasilia believes that Vale’s demands are “unreal” and could derail the project.
The $6-billion dollar Vale project has 4,500 employees, whose futures are also on hold with the project – something that has Brazilian and Argentinian authorities worried. Vale has extended the workers’ end of year paid holidays while the project is halted.
In the only recent statement by the company, during a presentation to investors in Rio de Janeiro, CFO Luciano Siani said Vale has an "obligation to consider what we've already invested but to look at the perspective going forward" as well. That is, keeping the company’s balance sheet assets profitable, which wouldn’t be possible if Vale’s demands were not met. In Brazil, Vale enjoys important tax breaks and an image that has been tarnished for environmental reasons.
Further meetings will be held in the next few days among Argentinian and Brazilian officials. Argentine Minister of Foreign Relations Hector Timerman will meet with Foreign Minister Antonio Patriota in Brasilia on Feb. 19. Both must prepare the March meeting between Dilma and Cristina, which should decide the future of the Vale mine. On Feb. 28, there will be a second bilateral meeting to advance negotiations.