Mujica's surprise move contrasts with sweeping measures taken by governments in Brazil and Chile to go ahead with hugely controversial hydroelectric dam construction projects that are opposed by environmentalists and other groups concerned over their environmental impact.
Objections to the Valentines iron ore project are more wide-ranging and now involve farmers and tourism agencies in addition to the environmental lobby groups. All agree the Anglo-Swiss-financed project could ruin scenic areas on land and by the sea in the absence of adequate safeguards.
A feasibility study that looked into the project appears to have been thrown out of hand and led to intense controversy that shows no sign of subsiding, with more questions raised over the Zamin Ferrous initiative and its potential partners in the $2.1 billion project.
Mujica told Uruguayans, "I won't, nor them (Zamin Ferrous) for that matter will solve the issue; it's the people who will decide, and you'll have to vote," setting the stage but not yet a date for a referendum.
Critics of the referendum idea said the exercise would be expensive and add to the overall costs of the project, even if initially that extra spending is borne by the government. First of all Uruguay's Legislature will have to pass a law allowing for a consultation referendum of this kind. Years of delay are guaranteed, critics said, if the referendum plan is taken forward.
The project involves extensive open pit pining and about 130 miles of a slurry pipeline to transport the ore to a deep water port planned to be built on the Atlantic coast. Early estimates set a target of 18 million tons a year of ore extracted from the site, most of it for export.
Mujica's administration faced tough questioning in the General Assembly, Uruguay's parliament, after vociferous protests from farmers' groups and the tourism industry.
Zamin is pursuing the Valentines project through Minera Aratiri, its Uruguayan subsidiary, and current plans call for the investment going into the target yield, then being boosted to an extraction of up to 5 billion tons in the life of the mine.
In a bid to calm critics, Deputy Industry and Mining Minister Edgardo Ortuno said, "The multinational corporation must give us full guarantees of environment protection. We won't allow the project to advance if we don't have those guarantees."
"The corporation still has to present additional information and the government has also to conclude its own studies about the project and potential environmental and social impacts," he said.
Valentines says it has Asian and Middle Eastern investors interested in the project and has already secured non-binding agreements with Chinese and other Asian steel mills.