February 5, 2013 11:41 pm

Argentina refuses Vale’s call for tax breaks

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Argentina has given Brazil’s Vale until the end of the month to spell out when work will restart at its $5.9bn potash project and its investment timetable for this year, after rejecting the company’s request for as much as $2bn in tax breaks.

Argentine and Brazilian authorities and officials from the company, the world’s biggest producer of iron ore, met in Buenos Aires this week as a deadline passed to spell out plans for the Río Colorado project, which was put on hold indefinitely in December amid soaring costs.

“The company asked for an extension until February 29 and we agreed, provided it pay salaries,” Francisco Pérez, the governor of Mendoza, told reporters. Mendoza officials confirmed he meant the end of this month.

Hit by rising costs for the project and last September’s three-year nadir in the price of iron ore, which makes up 90 per cent of profits, Vale had asked Argentina to defer sales tax until the project was up and running. That is officially scheduled for the second half of next year, but delays of as much as three years have now been mooted.

Mr Pérez said the higher costs were largely because of rail construction plans. To compensate, Vale “asked for sales tax to be delayed from the construction phase to the extraction phase,” he said. “We’re talking about $1.5bn-$2bn”.

He made no mention of Argentina’s rampant inflation, estimated privately to be about 25 per cent, or of reports that Vale had also complained about Argentina’s foreign exchange rate. Argentina’s official peso rate is widely considered seriously overvalued against the dollar and a parallel foreign exchange market exists, in which the peso is nearly 60 per cent cheaper. No one was available at the company in Brazil or in Argentina for comment.

“The president [Cristina Fernández] has already told the president of Brazil that this [tax break] is a great deal of money, that it would cause a very large fiscal imbalance in Argentina and that with this money we could meet commitments such as the Paris Club,” Mr Pérez said. Argentina owes some $10bn to the club of western creditor nations stemming from its 2001 default on nearly $100bn but has yet to agree payment.

But Argentina suggested ways to cut costs on the 2.4bn tonne per year project, such as upgrading existing rail track and constructing only 250km of new lines to transport the potash, rather than 900km as planned, and bringing in a private partner. Mr Pérez did not give any indication of who the partner could be.

Vale, which has slashed its investments this year to the lowest level since 2010 and has chopped the project’s 2013 budget to $611m from $1.08bn in 2012, has admitted to slowing Río Colorado operations and to seeking a possible partner but has given no clue as to whom.

The Río Colorado project, a massive investment in a country where government curbs on repatriating corporate profits at times discourages foreign companies, has long had a bumpy ride. Local authorities suspended work in June 2011 alleging that Vale had flouted regulations on hiring and buying supplies locally.

But Argentina insists Río Colorado will not be axed. “The project will continue moving forward, in whatever way we can develop it, independently of the decision Vale takes in the future,” Mr Pérez said.

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