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* Town plan puts CSN iron ore expansion at risk
* CSN promised $9.4 bln in investment in region
* Town seeks to preserve Baroque heritage, water
* Plan comes as rival Gerdau mulls ore unit IPO
By Alberto Alerigi
SAO PAULO, Feb 28 (Reuters) - The future of one of steelmaker CSN's most cherished assets and $9.4 billion in mining and steel investments is in the hands of nine small-town lawmakers in southeastern Brazil.
Many citizens of the rural town of Congonhas, population 50,000, want to limit iron ore extraction in its surrounding hills to protect its Baroque architectural heritage and its water supply. That could slow CSN's ambitious plans to expand its highly profitable mining unit at a time when rivals are forging ahead with similar programs.
The town's efforts could also threaten CSN's hopes to eventually sell a portion of its mines in the area in an initial public offering. That long-awaited stock sale could bring the company about $2 billion.
Lawmakers in Congonhas, a colonial gem in the mountains of the mineral-rich state of Minas Gerais, are split over a proposal setting limits on mining in the area where CSN extracts iron ore, a key raw material used to make steel. A vote on the issue will probably come in March.
A vote to limit mineral extraction would jeopardize plans by CSN to nearly triple output at its Casa de Pedra and Namisa mining units to 100 million metric tonnes in coming years. Mining is the most profitable of CSN's five business segments, yielding profit margins above 65 percent at competitive costs.
Yet, iron ore prices are expected to fall in coming years after hitting a record high in early 2011.
CSN, which has earmarked 16 billion reais ($9.4 billion) to build a long steel mill and two pellet plants in the area, has been lobbying intensely against the push for stricter curbs on mining. But things do not look good for the S?o Paulo-based conglomerate, whose chief executive officer, Benjamin Steinbruch, is one of Brazil's best-known business leaders.
Casa de Pedra, which has reserves of 3.5 billion tonnes of high-quality iron ore, also has an integrated railway and logistics system that serves CSN's mills in the state of Rio de Janeiro and other customers.
'THE LITTLE CRIPPLE'
Four city councilmen interviewed by Reuters have already pledged their support of tougher limits on mining in the area. Two others said they were undecided, and another said he would endorse a negotiated solution. Efforts to reach an eighth councilman were unsuccessful.
Eduardo Matosinhos, who heads the council and is in charge of seeing the bill through, is against imposing the limits. In the event of a tie, Matosinhos can cast the deciding vote.
"If we don't approve (CSN's plans), any investment by CSN will collapse," Matosinhos said.
Citizens in Congonhas say the town's water supply and its colonial architecture are at risk because of increased mining.
CSN said it had "maintained a solid and transparent dialogue with the town of Congonhas and its council over the Casa de Pedra issue."
The investment plan "seeks a balance between environmental protection and mining activities, which have been a source of development (in the region) for more than a hundred years," the company said.
Little by little, mining companies eager to tap massive reserves of ore and other minerals have stripped away the hills overlooking Congonhas. Asked about the environmental effects of its operations, CSN said it was hard to "measure the long-term impact of any mining plan."
Congonhas blossomed during a 16th- and 17th-century gold boom, which fanned commerce and, in turn, the construction of Baroque churches, sprawling country homes and warehouses by the Portuguese colonizers controlling Brazil at the time.
Of special interest is the work of Ant?nio Francisco Lisboa, an architect and sculptor known in Brazil as "Aleijadinho," or "The Little Cripple." His biggest achievement was his Twelve Prophets at the Sanctuary of Bom Jesus of Matosinhos, a dozen soapstone figures that he sculpted by strapping his hammer and chisels to his fingerless hands.
Some of the lawmakers say the legacy of Aleijadinho, the son of a Portuguese merchant and an African slave who was disfigured and crippled by leprosy, could suffer with further industrial and mining expansion.
The city council vote will come as rival steelmaker Gerdau is considering the spinoff of its own mining unit, which has about 2.9 billion tonnes of iron ore reserves.
Gerdau expects the spinoff to help it either raise more money to develop the operation or bring in a partner with greater expertise in handling ore mines.
($1 = 1.70 Brazilian reais) (Writing and additional reporting by Guillermo Parra-Bernal; Editing by Todd Benson and Lisa Von Ahn)
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