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Vietnam’s state-run chemical giant seeks exit from loss-making mining project in Laos

Tuesday, February 19, 2019, 19:01 GMT+7
Vietnam’s state-run chemical giant seeks exit from loss-making mining project in Laos
The headquarters of the Vietnam National Chemical Group (Vinachem) in Ho Chi Minh City. Photo: Nam Tran / Tuoi Tre

Vietnam’s state inspectorate has announced several issues involving a salt mining plant in Laos developed by a state-run Vietnamese company which has been struggling to pull the plug on the overseas plan.

Vietnam National Chemical Group (Vinachem) has been making losses from the Investment Project of Salt Mining and Processing in Nongbok District of the central Lao province of Khuammouan over the last four years.

To make matters worse, it is not easy for the Vietnamese chemical giant to withdraw from the loss-making project due to legal complexities associated with the engineering, procurement and construction (EPC) contract, the scheme under which the project was developed.

Vinachem initiated its investment in the salt project in Khuammouan with a series of exploration and evaluation activities in 2004-08, but construction only began in 2015.

The US$522.46 million salt mining and processing project was expected to produce some 320,000 tons of potassium salt a year once commissioned. The products were supposed to be transferred to Vietnam, helping the country reduce imports.

Vinachem contributed $105 million to the project and borrowed respective loans of $113 million, $161 million, and $143 million from three Vietnamese lenders, Vietnam Development Bank, BIDV, and VietinBank.

Problems occur

In late 2015, Vinachem said the Laos project would help it rake in $140 million a year, citing salt prices of up to $340 per ton projected by English magazine Fertecon World Fertilizer Review in September that year.

In reality, potassium salt prices in Southeast Asia had dropped by 26.5 percent to about $250 per ton by the end of 2016. Even though prices were a little higher in Vietnam at that time, around $270 per ton, losses were inevitable for Vinachem.

It was at that time that the Vietnamese company began to think about an exit plan, as keeping the project going according to the plan would only result in losses.

The State Inspectorate of Vietnam has looked into the project and found that the estimated total investment in the project was much higher than it should have.

The consulting firm for the project had used a similar project in Germany to estimate the total investment cost and came up with the $522 million estimate, while it should have been only $377 million, according to state inspectors.

As construction began in 2015, three years behind the initial schedule, Vinachem also failed to put the project into operation in 2016 as planned.

The progress of the project was hit by the slow disbursement of the bank loans, as the Vietnamese Ministry of Finance decided to stop granting government guarantees for Vinachem to borrow more loans from October 2016 as it saw no efficiency from the project.

Vinachem sought the prime minister’s approval to cease the project twice in November 2016.

No easy withdrawal

In that context, the government ordered Vinachem to recalculate the economic effectiveness as well as the total investment needed for the project.

Vinachem then hired the National Institute of Mining - Metallurgy Science and Technology (Vimluki) to perform the task.

As Vimluki said it is impossible to make the project economically efficient, the Vietnamese premier assigned the Ministry of Industry and Trade to consider Vinachem’s proposal to ditch the project.

On May 15, 2018, the Ministry of Industry and Trade officially issued a written request to Vinachem, asking it to terminate the investment contract of the potassium salt mining and processing project in Laos.

The trade ministry also required the chemical giant to calculate the total capital it had poured into the project, along with the costs that arose, following its withdrawal.

The ministry admitted that the withdrawal would result in heavy losses for the state budget.

However, the project contractor, a joint venture of TTCL, K.UTEC and CECO, refused to terminate their EPC contract with Vinachem.

The contractor demands that both sides negotiate to handle disputes as per the terms and agreements in the contract.

The joint venture said the project was 57 percent completed as of July 2017, but Vinachem has only settled payment for about 16.25 percent of the workload.

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