By Jeb Blount
SÃO JOÃO DA BARRA, Brazil (Reuters) - As Brazilian billionaire Eike Batista breaks up his crumbling EBX Group industrial empire to pay off debt, one of the few assets he's expected to keep is port-development company LLX Logística SA.
But raising the more than $600 million needed to finish LLX's only project, the massive $2 billion Port of Açu north of Rio de Janeiro, may be a struggle. One-and-a-half times the size of Manhattan, Açu is designed to ease delays caused by Brazil's overcrowded ports and serve a booming offshore oil industry. It's also being dogged by scientists' claims that its construction is polluting the surrounding lowlands ecosystem with salt.
Raising money for anything associated with Batista, a serial entrepreneur who once boasted he would become the world's richest man, won't be easy. Since 2010, he has presided over the loss of $50 billion of shareholder value in EBX Group stock. EBX controls LLX and five other traded companies, all branded by Batista with an "X" to signify "the multiplication of wealth."
And while there are strong business reasons to invest in a giant port that eases some of the transportation bottlenecks holding back Brazil's commodities-led exports, some investors may not want exposure to a company facing possible ecological liabilities and potentially costly lawsuits.
Eduardo Santos de Oliveira, an aggressive federal prosecutor, has already launched a case against the port to determine civil liability for alleged environmental damage. Oliveira, the prosecutor in Campos de Goytacazes, the largest city near the port, has previously drawn global attention for launching Brazil's largest-ever environmental lawsuit.
That case sought nearly $20 billion from Chevron Corp and rig contractor Transocean Ltd over an 2011 oil spill. And while criminal charges were eventually dropped in February, and actual civil damages are expected to be a tiny fraction of Oliveira's request, the case sent a chill through the entire Brazilian oil industry.
"I am by no means an environmental specialist," said Will Landers, who manages $6.5 billion of Latin American investments for Blackrock Inc, the world's largest asset manager. "But the fact that you need to be one to invest in this type of project should limit significantly the pool of investors that may one day be willing to entertain giving fresh capital to any company from the EBX group" the São Paulo-born Landers said.
How much environmental damage has occurred is a matter of fierce debate. Officials for LLX and OSX Brasil SA - the EBX company building a shipyard at the port - deny that a "temporary" leak of salt-water into surrounding marshes in late 2012 caused lasting ecological harm to the delta of the Paraíba do Sul River, one of the last large, undeveloped coastal lowlands on Brazil's southeast coast.
Yet scientists at Northern Rio de Janeiro-State University (UENF) in Campos de Goytacazes, a 40-minute drive from Açu, say there is growing evidence that the port's construction threatens a sensitive ecosystem.
While the UENF researchers are careful to say they don't have conclusive proof of long-term damage, they say Açu's surrounding marshes, pastures, lagoons and fields, along with crops and cattle, face a serious threat.
"Preliminary data show salinity could lead to the permanent contamination of the soil," said Carlos Rezende, professor of bio-geochemistry and ecology at UENF. "We also have anecdotal evidence that the ecosystem around Açu is being harmed."
LLX and OSX declined to make Batista or other senior executives available for interviews about the port or the salinity issue.
UENF, LLX, OSX and INEA, Rio de Janeiro's state environmental protection agency agree on at least one point: that water in the Quitingute Channel, which gets run-off from the port, became brackish, or partly salty, in late 2012, documents in the court case show. The salination began after the world's largest dredging ship began digging up beach, dunes and marsh to build 13 kilometers (8 miles) of docks and ship channels.
The salt came from dredging waste saturated with sea water. Deposited in dumps to dry, the sandy soil was then spread on the surrounding lowlands, raising the land as much as 5 meters (16 feet) above the floodplain, Ivo Dworschack, the manager of the OSX shipyard said during a March visit.
"Based on statements presented by INEA, LLX and OSX is it incontrovertible that there was an increase in the salinity of the Quitingute Channel as a result of that (dredging) work," Federal Judge Vinícius Vieira Indarte wrote in a February 15 ruling.
The ruling on prosecutor Oliveira's initial filing accepted that the court had grounds to rule on the case and that the prosecutor had grounds to investigate potential civil liability for salination. The judge, though, denied Oliveira's request to stop work at the port.
The port's iron ore terminal, part owned by global miner Anglo American Plc. and the OSX shipyard were supposed to be open by now. Most things at LLX are months or years behind schedule. Some companies who had planned to build facilities within the complex, such as China's Wuhan Iron and Steel Co, have pulled out.
OSX, once expected to be LLX's biggest tenant, will likely be restructured as part of Batista's efforts to slim down the EBX group and pay down debt, selling the vessels owned by its ship leasing business and shuttering the yard before it has built a single ship, a source with knowledge of Batista's plans told Reuters. EBX declined to comment on the restructuring plans.
SALT IS 'FOREVER'
The leak was serious enough for INEA on February 1 to levy more than 3.3 million reais ($1.45 million) of fines on OSX. INEA said levels in the Quitingute Channel were four times higher than those in fresh water. They've since returned to normal, INEA said in an e-mail.
INEA ordered compensation for farmers, credited UENF with alerting it to the problem and promised a joint INEA-UENF study. It did not explain why it fined OSX and not LLX. OSX is appealing the fine.
The study, though, was never done, and farmers have not been compensated, and salt levels are not normal in the Channel, Rezende's group at UENF said.
On January 29, Rezende's colleague Marina Satika Suzuki, a professor of inland-water-studies, measured salt levels at nearly 16 times the level Brazil's agricultural research agency, Embrapa, considers safe for irrigation. Levels above the limit can permanently damage farmland.
On May 14, those levels were still nearly 6 times higher.
"What does permanent salt build-up mean?" Suzuki asked. "Have you heard of Carthage? The Romans salted the land and destroyed the agriculture. If salt levels are high enough you can basically ruin it forever."
While salinity appears to be falling in surface water - which may be partly explained by a tapering off of dredging in recent months - soil and plants are still being exposed to dangerous salt levels, she said. She has no data for subterranean water and some of the pollution may have migrated into the earth only to be spread further afield, Suzuki said.
UENF's work is not without critics. State-owned water company Cedae challenged UENF's finding of unhealthy salt levels in artesian wells used for drinking water, saying they were too deep to be contaminated by work at Açu.
And Rio de Janeiro's State Agricultural University said its tests found water around Açu to be safe for irrigation after the initial spikes, but those tests are not as recent as UENF's.
SICK CATTLE, DEAD PINEAPPLES
The Quitingute Channel runs through the land of Durval Ribeiro Alvarengo, 59, a tall, wiry and leather-skinned farmer and cattle rancher.
Late last year, Alvarengo told Reuters, he noticed his dairy cattle had diarrhea and their grassy fodder was dying. As milk production plummeted, he had to slaughter most of his herd.
The loss of 150,000 pineapple plants cost him 300,000 reais ($137,743), he said. Many fish, birds and other small wildlife also disappeared from the area, he added.
His story is repeated on nearby farms.
"You can see how my crops have been ruined with your own eyes," said Alvarengo's neighbor, Jose Roberto de Almeida, 51, as he ripped up crackly, dried-out plants from the ground.
Ricardo Hirota, director of the Subterranean Water Center at the University of São Paulo, is conducting two studies for LLX on the impact of dredging.
One examines ways to control the impact of future dredging. The second is assessing the impact of the original waste dumps to prevent a repeat of the salt pollution problem in late 2012.
Hirota suggests that the company has learned from its experience at Açu. "The area is very sensitive and there are many links between surface and underground water," he said. "We're learning a lot. The good thing is they're better prepared than in the past."
He declined to share any data, citing an LLX confidentiality agreement.
"I think you can appreciate how sensitive this is," he said. "The company has been under a lot of pressure."
Much may depend on the case launched by Oliveira. Even if he loses - and courts have often rejected his claims - a Brazilian prosecutors' near-complete independence, coupled with a legal system that encourages multiple appeals, can stretch even flimsy prosecutions into decade-long ordeals.
A senior official in the prosecutor's office said it expects public hearings by the end of August. The official declined to be identified.
"Eike needs to be very careful; Brazilians like to kick you when you're down," said Wilen Manteli, president of Brazil's private port association. "An environmental problem, even if unfounded, can be a lightning rod for a range of attacks. It would be a pity if this port does not get built."
($1 = 2.27 Brazilian reals)
(Additional reporting by Sergio Queiroz; Editing by Martin Howell and Leslie Gevirtz)