Vale (VALE5.SA), the world's second-largest mining company, is likely to make its $19.5 billion Serra Sul iron ore mine project in Brazil a priority over a similar development in the West African nation of Guinea, a source with knowledge of the firm's strategy said.

The emphasis on the project in the Amazon comes as Guinea, which holds rich deposits of iron ore and is the world's top supplier of the aluminum ore bauxite, struggles to maintain foreign investment amid deepening political turmoil, labor unrest and a government review of mining contracts.

The granting in June of a so-called preliminary environmental license for the Sierra Sul project, which includes railway and port investments, means the development of the Simandou site in Guinea is less urgent, the source said on Tuesday.

"All things considered, projects need to be prioritized," said the source, who asked not be named as his employer does not allow him to speak to the press. "The priority has become Serra Sul."

MAJOR HURDLES

Serra Sul is an extension of Vale's giant Carajas iron, copper and nickel mining complex in Brazil's Para state. It is expected to have a capacity of 90 million metric tons a year, about 9 percent of current world iron-ore exports, helping maintain Vale's position as the No. 1 producer.

Simandou, while holding enormous high-quality reserves, faces major political, commercial and transportation hurdles before it can be developed.

Guinea recently revised its mining code, raising the state's mandatory stake in mining projects to 35 percent from 15 percent and plans to change other clauses in the code after consultation with mining companies.

"I believe it will be difficult for Vale to invest in both projects at the same time because it would require very high capital spending for the company," said Marcelo Aguiar, metals and mining company analyst with Goldman Sachs in Sao Paulo.

"Vale investment in Simandou appears to have lost a bit of its urgency after getting the license for Serra Sul."

Vale gained the rights to develop iron ore in Simandou in 2010 when it agreed to pay $2.5 billion for a 51 percent stake in the Guinea iron-ore mining operation of BSG Resources Ltd, the London-based mining group controlled by Israeli businessman Beny Stenmetz.

A newspaper in Brazil reported on Sunday that BSG was preparing to sue investment bank BTG Pactual BTG.UL, which it accuses of misusing its role as an adviser to Guinea's government to win licenses for a holding company at BSG's expense.

Guinea's mines minister Mohamed Lamine Fofana called BSG Resources threat to sue BTG "insulting" in an e-mailed response to questions from Reuters.

AT THE CENTER

The Serra Sul mine is at the center of plans to boost Vale iron ore output by 40 percent to 460 million metric tons a year in 2017.

Serra Sul and Carajas are two of the largest high-grade iron ore projects under development to meet soaring demand for iron ore from China.

Vale produces more than a quarter of the world's sea borne iron ore exports of more than 1 billion metric tons a year. Work to gain the preliminary Serra Sul license took nearly a decade.

Vale, though, has been re-evaluating its investment plans in the wake of a slowdown in China and sluggish growth in the United States, Europe and Japan. In late 2011, it cut planned 2012 spending 11 percent to $21.4 billion.

As iron-ore prices .IO62-CNI=SI fell to three year lows earlier this month, slashing billions from revenue, further cuts came under consideration.