Xstrata puts PNG copper stake on the block

SYDNEY/MELBOURNE Thu Jun 21, 2012 7:00am EDT

A logo of the Swiss mining company Xstrata is pictured at its headquaters in Zug, February 6, 2012. REUTERS/Romina Amato

A logo of the Swiss mining company Xstrata is pictured at its headquaters in Zug, February 6, 2012.

Credit: Reuters/Romina Amato

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SYDNEY/MELBOURNE (Reuters) - Global miner Xstrata Plc XTA.L has put up for sale a stake in the Frieda River copper project in Papua New Guinea, potentially worth more than $2 billion, as part of a review of its development projects worldwide.

Like other major miners under pressure to conserve capital amid uncertainty over global growth, rising costs and falling commodity prices, world no.4 copper producer Xstrata has flagged it may slow down project spending.

Xstrata has not yet decided whether to sell all or part of its 81.8 percent stake in Frieda River, an Xstrata spokeswoman said.

"As part of this process we are assessing the interest of other investors in the Frieda River Project in Papua New Guinea," the spokeswoman told Reuters in an email.

Merrill Lynch is advising Xstrata on the potential sale.

A critical concern for any buyer would be the cost of the Frieda River project, last estimated at $5.3 billion.

That cost could fall if it secures natural gas for its power supply, a key factor in a delayed feasibility study that Xstrata has committed to deliver to its partner, Australian-listed Highlands Pacific (HIG.AX), in December.

Chinese companies, possibly including Metallurgical Corp of China (MCC) (601618.SS), could be interested in Xstrata's stake, analysts at broker Euroz have said. MCC is Highlands Pacific's partner on the Ramu nickel project in PNG.

Three analysts on average value Highlands Pacific's 18.2 percent stake in Frieda River at A$477 million ($486 million), which would imply Xstrata's 81.8 percent stake may be worth about $2.15 billion.

Xstrata has said it wants to become the world's top copper producer, unseating Chile's Codelco, BHP Billiton (BHP.AX) and Rio Tinto (RIO.AX) over the next three years.

Charlie Sartain, Xstrata's copper division head, said last month a $7 billion capital expenditure program was under way to beef up copper mining, mainly in South America and Australia.

Since then, a decline in copper prices that began in January has accelerated, with the London 3-month contract fetching $7,545 a tonne, or $3.42 a pound, down from levels above $8,650 a tonne at the start of the year.

Xstrata already has projects under construction designed to boost its copper output by more than 60 percent to 1.5 million tonnes a year over the next three years, including its Antapaccay project in Peru, due to start producing in the second half of this year.

The company's attempt to sell the Frieda River stake suggests it may prefer to back the Tampakan copper and gold project in the Philippines, which it is looking to develop with Indophil Resources (IRN.AX).

Frieda River has an estimated resource of 12 million tonnes of copper and 18.5 million ounces of gold, and could produce 246,000 tonnes of copper a year, according to a pre-feasibility study in 2010.

Highlands Pacific said on Thursday it hoped to seal an agreement in the next two days to sell a cornerstone stake in the company to PNG Sustainable Development Program Ltd (PNGSDP), a large investment company with strong ties in Papua New Guinea, which could assist in future development.

PNGSDP is the majority shareholder in Ok Tedi Mining Ltd, operator of the Ok Tedi copper mine, once owned by BHP Billiton.

Highlands Pacific shares were on a trading halt pending the outcome of talks with its potential PNG backer.

Indophil's shares rose 4.5 percent to A$0.35, bucking a 1.5 percent slide in the metals and mining index .AXMM. ($1=0.9815 Australian dollars)

(Reporting by James Regan and Sonali Paul; Editing by Clarence Fernandez)

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