It was an unnerving sight for Vale’s investors. Dressed in a traditional Andean poncho, Brazil’s former president Luiz Inácio Lula da Silva was pictured in Argentina in May discussing the future of the miner’s suspended potash project.
“We are trying to make the venture viable and he seemed open to the idea,” Francisco Pérez, the governor of Argentina’s Mendoza province where the mine is based, said after their meeting.
The visit came less than a month after President Dilma Rousseff also flew to Argentina to discuss the matter, raising concerns that Vale, the world’s second-biggest miner by volumes, is facing growing political pressure to maintain the cash-draining project.
Vale’s Rio Colorado venture was set to be one of the biggest foreign capital investments in Argentina, turning Brazil’s neighbour into a top supplier of potash – the potassium compounds that Brazilian farms so desperately need as fertiliser.
However, after spending $2.5bn completing more than 40 per cent of the project, which includes a port terminal as well as 790km of railway, Vale officially suspended it in March. Rampant inflation and exchange rate controls in Argentina have made the venture commercially unviable, Vale says, almost doubling its cost to $11bn from initial estimates.
The announcement came as a huge blow to Argentina, threatening to renew trade tensions between the two Latin American countries. As well as employing some 6,000 workers, the mining project would have provided Argentina with enough exportable potash to help protect the country’s all-important trade surplus. Production was set to start in 2014 and estimated at 4.3m tonnes of potassium per year – all of which was destined for Brazil.
Vale’s decision to ditch its only major asset in Argentina also caused discomfort in the Brazilian government, not least because it jeopardised its goal to make Brazil self-sufficient in fertiliser by 2020.
More than 90 per cent of the country’s vast potash consumption comes from imports, leaving the country’s farms largely at the mercy of two producers: Russia’s Uralkali and Canada’s Potash Corporation of Saskatchewan.
Such pressure from both sides of the border will present one of the biggest tests yet of Vale’s independence, analysts say.
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