The Minera Aratiri project's early development is seen by the government of President Jose Mujica as the key likely to open up an underdeveloped part of the country to new business opportunities.
The opposition, local residents and environmentalist groups disagree. They argue the mine's large-scale exploitation will ruin vast tracts of pristine environment and not benefit Uruguayan economy or the region to the extent originally claimed in feasibility reports.
Alarm bells sounded when the Indian iron-ore mining group Zamin Ferrous Resources downgraded the project on its international priority list from the first to the fourth position. Zamin Ferrous planned to invest about $1 billion in the project but now says it will put the funds in its other projects.
Zamin told Uruguayan officials it was surprised by the rising controversy over the project. The Uruguayans in turn told the investors of their disappointment but admitted there had been too much politicking over the project. Mujica condemned it as "political cackling."
Aratiri Project General Manager Fernando Puntigliano said the project was put on the back burner mainly because of the political controversy over its feasibility and delays already affecting a completion schedule.
Critics of the project oppose the plan to exploit the open pit magnetite iron ore deposit, which they see as potentially destructive to the surrounding area. Large deposits of magnetite, a mineral with high iron ore content, have been found on the border of Durazno and Treinta y Tres departments.
Studies have established about 250 million tons of the ore deposits but further projections say the final recoverable quantity may exceed 1 billion tons.
A 130-mile slurry pipeline for transporting the ore to a planned new port on the Atlantic coast has also triggered the wrath of environmentalist groups, local farmers and residents, who challenged the plans for its potential damage to the environment.
Meanwhile, Mujica is exploring the feasibility of turning the mine's development into an equal partnership joint venture.
Puntigliano said Zamin will continue work on the project but welcomed ideas for a state partnership.
All private companies in Uruguay like to have the state as a partner, he said.
Zamin Ferrous is an international group registered in Jersey, Channel Islands, with offices in London, Sao Paulo and Switzerland.
The company has ongoing iron ore and coal projects in Brazil, Chile, Bolivia, Malawi and Mozambique and exports to China, India and the Middle East.