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Vale Says Suspended Argentina Project to Cost $11 Billion

March 18 (Bloomberg) -- Vale SA, the world’s biggest iron-ore producer, said the cost to develop its suspended potash project in Argentina had almost doubled to near $11 billion amid a dispute with the nation.

Inflation and exchange rate fluctuations led the cost of the Rio Colorado project in Mendoza province to surge from the budgeted $5.9 billion, Murilo Ferreira, chief executive officer of Rio de Janeiro-based Vale, said today at the Credit Suisse Asian Investment Conference in Hong Kong.

Vale has joined BHP Billiton Ltd. and Rio Tinto Group in shelving projects or cutting spending on expectations a decade-long mining boom has peaked as growth slows in China. Vale said March 12 it mothballed the potash project after the government refused to give it tax breaks. Argentina said last week it will strip Vale of licenses for the project if it fails to resume work.

“We’ve tried to reach some agreement with the government for many and many months, in fact, since the beginning of May 2012,” Ferreira said. “We didn’t receive until the end of 2012 any answer about our demand, and our demand was precisely because of the gap we have in terms of the investment of the project.”

Vale gained 0.3 percent to 33.70 reais in Sao Paulo today, its highest close since March 12.

Vale’s decision to shelve the potash project after the government refused to grant $3 billion in tax breaks and other benefits is a breach of concession rules, Julio De Vido, the nation’s planning minister, said March 13. The presidents of Argentina and Brazil will meet within 30 days to resolve the dispute, Neuquen province Governor Jorge Sapag said in a March 15 interview in Buenos Aires.

Seeking Partners

Vale has been hindered by cost uncertainty in its efforts to find partners to eventually buy a stake in the project, Ferreira said today. Asked about the possibility that the company had its project license stripped, he said he expects the law to “prevail.”

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 western Argentina, renovating 440 kilometers (273 miles) of railway tracks and building a 350 kilometer-long railway spur to transport the potash to a terminal in the port of Bahia Blanca 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.

Kirchner said Argentina will complete the project with or without Vale, Mendoza Governor Francisco Perez said March 13. 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, Carlos Molina, Mendoza’s head of mining, said last week.

To contact the reporters on this story: Michelle Yun in Hong Kong at myun11@bloomberg.net; Juan Pablo Spinetto in Rio de Janeiro at jspinetto@bloomberg.net

To contact the editors responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net; James Attwood at jattwood3@bloomberg.net

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