2nd UPDATE: OZ Minerals Acquires Carrapateena Copper Project

Australian copper miner OZ Minerals Ltd. (OZL.AU) will spend up to US$325 million buying the Carrapateena copper-gold project in South Australia state controlled by mining prospector Rudy Gomez, the company said Wednesday.

The deal, OZ's largest 100% acquisition since it emerged from the wreckage of the merger between Oxiana Ltd. and Zinifex Ltd. after the global financial crisis, could more than double the company's resources of copper and gold and consolidate its land holdings in the Gawler Craton, a geological region of South Australia which is also home to OZ's main Prominent Hill asset and BHP Billiton Ltd.'s (BHP) massive Olympic Dam mine.

"We are truly very excited about this acquisition," said OZ Minerals Chief Executive Terry Burgess in a conference call after the announcement. "This is one of the largest undeveloped copper projects in Australia today."

Mergers and acquisitions have roiled the copper sector in recent months as prices of the base metal have soared, with OZ's peer Equinox Minerals Ltd. (EQN.AU) acquiring Citadel Resource Group Ltd. for A$1.25 billion last year and launching a C$4.8 billion bid for Lundin Mining Corp. (LUN.T) last week.

Three-month copper futures on the London Metal Exchange hit an all-time intraday record of $10,190/ton on Feb. 15, compared to a low of $2,845/ton in the wake of the global financial crisis.

However, OZ has been reluctant to deploy its A$1.33 billion cash pile in the red-hot sector since it took out a 19% share in Western Australian copper miner Sandfire Resources NL (SFR.AU) last July.

"I've been critical of some of the acquisitions we've seen in the marketplace because I just don't see you'll get a good return to your shareholders if you pay that sort of level," said Burgess.

OZ said that Carrapateena could potentially have 2.7 million to 3.3 million tons of copper, 3.6 million to 4.0 million ounces of gold, and 124 million to 138 million pounds of uranium oxide, as well as economic levels of silver and rare earths.

That compares to 2.5 million tons of copper and 3.1 million ounces of gold at Prominent Hill, although the resource at that site has been more carefully measured than the preliminary work done at Carrapateena.

The unusually deep and complex deposit could take at least six years to reach production, Burgess said, but he predicted that continuing scarcity of copper would support Carrapateena's long-term prospects.

"We're not pretending this is something that will reach production in the short term but every day that operations are being mined now, that's copper that's being developed and used and taken out of the system," he said.

Anna Kassianos, a resources analyst at Austock Securities in Sydney, said the deal was "prudent on price", in contrast to some more generous recent offers in the copper sector.

"It's a fairly interesting acquisition. It's a bigger and better step than the one they made for Sandfire and it reinforces their strategy of being in the Gawler Craton," she said.

Rudy Gomez, who started working in a Philippines gold mine aged 16 before emigrating to Australia in the late 1950s, stands to earn up to US$188.5 million from his 58% stake in the project if Carrapateena goes into production.

OZ is paying US$10 million up front and a further US$240 million on completion of the acquisition. A further US$50 million will be paid when copper, uranium, gold or silver is first produced, and a final US$25 million on first production of rare earths, iron or other commodities.

Canadian diversified miner Teck Resources Ltd. (TCK) owns a further 34% of the project and minority shareholders account for the remainder.

Gomez first discovered the site in 1989 and attempted to explore it with a series of joint venture partners, to little success. Following a A$100,000 grant from the South Australian state government in 2004, he drilled a hole that found 905 meters of rock containing 2.17% copper--an unusually high grade at a time when the world's copper deposits are thought to be in terminal decline and grades of more than 1% are regarded as impressive.

"Carrapateena is one of the richest ore deposits you could find, but it's more complex and deeper than Prominent Hill," Gomez told Dow Jones Newswires.

The project has been on the market since early last year and was marketed to potential Chinese acquirers, but disagreements on price and some of the difficulties in developing the deposit deterred some bidders.

"In the end, OZ were the natural owners for this project. It's right next door to Prominent Hill, they've got the right sorts of skills to develop it, and OZ needs a longer-term development project. This is going to need a lot of capital and a lot of love to develop," said one person familiar with the process.

-By David Fickling, Dow Jones Newswires; [phone]; [e-mail]