RIO DE JANEIRO—A feud over tax revenues in two small towns is threatening one of Brazil’s best chances to reduce its dependence on imported potassium fertilizers in the near future.
Mining company Vale SA VALE5.BR +1.41% hopes to invest $2 billion in the first phase of a project to produce 1.2 million metric tons a year of potassium chloride in the impoverished northeastern state of Sergipe starting 2017. Production would amount to nearly 20% of Brazilian farmers’ annual needs, 93% of which is imported from distant countries such as Canada and Belarus.
But Vale’s management hasn’t formally sought approval for the project, known as Carnalita, from its board of directors. Sergipe officials say that is because the two towns where Vale plans to mine most of the potash are in disagreement over the distribution of future tax revenues from the venture.
“It’s a very delicate situation,” Jeferson Passos, Sergipe’s state finance secretary, said in an interview. “The state government is extremely worried about the possibility that Vale might delay or temporarily give up on implementing this project.”
The potash deposit that Vale hopes to mine straddles the towns of Capela and Japaratuba, in Sergipe’s interior. Capela, which is more populous and far poorer than its neighbor, holds about 70% of the potash reserves, according to Mr. Passos.
But Vale plans to build its plant to process potash ore in Japaratuba, a decision that Capela’s mayor is fighting because it could mean forfeiting lucrative taxes on sales and services.
“Capela cannot be an exporter of wealth to its neighbor,” Mayor Ezequiel Leite said, noting that Japaratuba already collects “millions” in royalties from oil production.
Taxes from the potash-processing plant would quintuple Capela’s municipal budget of about 40 million Brazilian reais ($16.4 million) and allow the town to build 3,000 low-income houses, a community college, and more schools and urgent-care facilities, Mr. Leite said.
“The choice of location for the industrial plant was based strictly on technical criteria, following intense studies by qualified professionals from diverse fields,” Vale said in an emailed statement. In an environmental-impact study on the project, the company said it would prefer to build the processing plant outside the mining area to avoid making some potash unattainable.
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