Is Vale's Brazilian Potash Project Just a Pipe Dream?

After disastrous monetary policy caused Vale (NYSE: VALE  ) to abandon its $6 billion potash project in Argentina last year, the mining giant looked to its Brazilian Carnalita potash mine to make up some of the lost volume. The country itself is hoping the operation can help alleviate some of its import demands for the fertilizer component as it currently imports 90% of its potash needs from Russia, Canada, and the Middle East. Carnalita is expected to meet some15% to 20% of the demand.

Potash operations. Source: Vale.

However, two local municipalities greedily eyeing the tax revenues the project will throw off may very well doom the project as Vale now considers selling the mine if a resolution can't be reached.

A tale of two cities
Carnalita straddles the towns of Capela and Japaratuba in the state of Sergipe, and the location of a processing plant has set the two municipalities against one another. The vast majority of the potash deposit, around 70% of it, lays in Capela, but Vale wants to locate the plant in Japaratuba because of "technical criteria," according to an emailed statement from the miner to The Wall Street Journal. If the plant was located on the other side of the border, it's estimated Capela would receive in excess of $80 million in tax revenue, a fivefold increase of its current budget .

Vale is willing to toss the municipality a bone by locating a distribution center in the town, and sell the output from the Capela mine from there, thus giving it sales tax revenues, but that's not enough for the politicians who want more.

The seeds of dissent
As the world's largest coffee, ethanol, orange juice, and sugar producer, Brazil's farms place heavy demand on global fertilizer producers. Vale was looking to replace lost Rio Colorado volume with 2 million tonnes of potash production annually from Carnalita and an additional 3 million to 5 million tonnes annually from its Kronau project in Saskatchewan.

The potash industry was thrown into confusion last year when the Belarusian cartel split apart causing the price of the fertilizer ingredient -- and the producers themselves -- to crater. However, there's been some stabilization in the market as China set a floor of $305 per tonne and Uralkali, one-half of the cartel, seeking a $40 increase to $350 for granular prices for Brazil beginning in March. Many analysts also suspect the cartel will get back together, possibly as early as this year.

Canpotex, the cartel's rival North American potash marketing association, comprised of Mosaic (NYSE: MOS  ) , PotashCorp (NYSE: POT  ) , and Agrium (NYSE: AGU  ) , is a major supplier of potash to Brazil, with some analysts estimating it owns 38% of the market. In years past, Latin America -- primarily the Brazilian market -- has comprised as much as 26% of Canpotex's potash sales.

Fertile fields
Carnalita could be producing by 2017 if the miner reaches an agreement with the municipalities, with the first phase being a $2 billion start-up to produce 1.2 million tonnes annually, followed by an additional second $2 billion phase that raises production to 2.4 million tonnes a year.

That Vale is willing to walk away from yet another project and shed its interest in it shows the level of frustration being experienced. Certainly, it's also part negotiating tactic, since the Brazilian government places just as much importance on the project as the miner does. It just approved low-cost financing to Verde Potash, a Canadian-traded producer, to build a mine in Brazil's Minas Gerais state. Even so, the money-hungry politicos shouldn't dismiss Vale's determination out of hand as it has shown resolve in similar situations before.

Roots of a solution
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2849193, ~/Articles/ArticleHandler.aspx, 9/2/2015 11:08:47 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


Today's Market

updated Moments ago Sponsored by:
DOW 16,156.23 97.88 0.61%
S&P 500 1,924.04 10.19 0.53%
NASD 4,665.22 29.11 0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 10:52 AM
AGU $98.39 Down -1.66 -1.66%
Agrium, Inc. (USA) CAPS Rating: ***
MOS $39.12 Down -0.09 -0.23%
The Mosaic Company CAPS Rating: ****
POT $25.26 Down -0.16 -0.63%
PotashCorp CAPS Rating: ****
VALE $4.65 Down -0.07 -1.38%
Companhia Vale Ads CAPS Rating: ****