March 13, 2013 / 4:19 PM / 5 years ago

UPDATE 1-Vale to sell Argentine Rio Colorado potash project -source

* Miner seeks sale to recoup $2.2 bln of investment

* Vale bought mine project in 2009 from Rio Tinto

* Argentina says scrapping project would violate contract

By Sabrina Lorenzi

RIO DE JANEIRO, March 13 (Reuters) - Brazil’s Vale SA plans to sell the Rio Colorado fertilizer project in Argentina to recoup the $2.2 billion it has invested in the suspended potash mine, a source with direct knowledge of Vale’s plans told Reuters on Wednesday.

Vale said on Monday it was halting operations at the $6 billion project after failing to get tax concessions from the Argentine government. Vale asked for the tax breaks to help ease soaring costs it attributes to Argentina’s rampant inflation and controlled exchange rate.

The planned sale comes only four years after Vale bought the project, then in the feasibility study phase, from global miner Rio Tinto Ltd . The Rio Colorado purchase was part of an $850 million deal that also included potash exploration rights near Regina, Canada, according to Rio Tinto.

It is a blow to left-leaning President Cristina Fernandez, and her government warned Vale that scrapping the project for good would violate the terms of the mining concession.

“The rule of law is a two-way track when it comes to investment. The state has to do its part but so do the companies,” Planning Minister Julio De Vido said in a speech.

“If there is a failure to fulfill the terms, as there is flagrantly in this case, (and) Vale fails to exploit the potash reserves, it violates the concession that the province awarded to Vale.”

News of the project’s suspension sent shockwaves through the Andean province of Mendoza due to fears over the impact of some 6,000 job losses.

Local Governor Francisco Perez said Vale had not informed provincial authorities about the project’s future.

“When we were analyzing the different options, (President Fernandez) told us ‘We’re going for it, the project will go ahead whatever happens, with or without Vale,'” Perez said in a televised speech.

In December, just before putting Rio Colorado workers on paid leave and suspending construction, Vale said it was seeking a partner to buy part of the project and help shoulder costs as it focused capital spending on its core iron ore business.

Vale is the world’s largest iron ore producer. Potash is a form of potassium, one of the three main plant nutrients along with nitrogen and phosphorus. There are few major sources of the product in South America, where Brazil and Argentina are among the world’s largest agricultural exporters.

Vale, the world’s second-largest mining company, said it had completed 45 percent of the Rio Colorado project. The project is made up of a potash mine, 800 km (500 miles) of new and upgraded railway and a potash-loading terminal at Bahia Blanca, southwest of Buenos Aires.

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