Vale Shelves Potash Venture in Argentina to Preserve Cash

Vale SA (VALE3), the third most valuable miner, mothballed a $5.9 billion potash venture in Argentina as the Brazilian company drops projects and writes down assets.

The Rio de Janeiro-based company’s decision was communicated to Argentina’s government today, according to an e- mailed statement. Vale’s shares rallied in Sao Paulo.

Work at Rio Colorado, billed to make Argentina the third- largest exporter of the crop nutrient, was suspended in January so Vale could reassess the project in light of inflation, exchange rate fluctuations and demands from provinces, Chief Executive Officer Murilo Ferreira said Feb. 28. Vale sought tax breaks and partners to make the venture more profitable.

“Major miners are continuing to shed assets, especially those that have greatly surpassed their cost expectations, and slash budgets,” said Robert Verderese, a trader at Knight Capital Group Inc. in New York. “I would expect more to come from Vale.”

Vale erased a loss to rise after the announcement 1.4 percent to 35.22 reais at the close of trading. The stock was the most traded by value on the Brazilian Bovespa index today at 84 percent of its three-month daily average volume.

The project’s economics “are not in line with Vale’s commitment to discipline in capital allocation and value creation,” the company said in today’s statement. “Vale will keep honoring the commitments related to the concessions and searching alternatives that enhance the economics of the project, to then evaluate its resumption.”

Prospective Partners

The company said it will give preference to the project’s current employees if construction resumes.

Ferreira, who took over as CEO in May 2011, is selling assets and cutting spending after a two-year metals boom led by China stalled, causing iron-ore prices to slump 55 percent from a February 2011 peak to a three-year low in September, before rebounding. Reporting a record quarterly loss, he said Feb. 28 that Vale is poised to benefit from a price recovery and a balance sheet cleanup.

Vale, the world’s largest iron-ore producer, announced $1.47 billion of asset sales last year, including a coal mine in Colombia and 10 large vessels, while putting projects on hold in Canada and Guinea. The company announced last month $5.66 billion in writedowns after failed nickel, coal and steel investments.

Abu Dhabi’s Mubadala Development Co. is one of at least two companies interested in investing in Rio Colorado even if Vale decides to exit the project, Carlos Molina, head of mining for Mendoza province, said in a telephone interview today.

Third Largest

Mendoza Governor Francisco Perez had no immediate comment on Vale’s decision, his spokesman Pablo Bicego said by phone.

Brazil’s only potash producer, Vale said Feb. 27 it had spent $2.23 billion on Rio Colorado and completed 45 percent of the project. The venture includes developing a mine in Mendoza, western Argentina, the renovation of 440 kilometers (273 miles) of railway tracks and the construction of a 350 kilometer-long railway spur to transport the potash to a terminal in the port of Bahia Blanca, Buenos Aires province, for export.

With the capacity to produce 4.3 million metric tons, the project would make Argentina the world’s third-largest potash exporter, President Cristina Fernandez de Kirchner said in July after signing agreements with Vale to proceed with the project.

Vale said before putting the project under review that it expected to start production in the second half of 2014.

BHP Billiton Ltd and Rio Tinto Group are the world’s largest mining companies by market value.

To contact the reporter on this story: Juan Pablo Spinetto in Rio de Janeiro at jspinetto@bloomberg.net

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net

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