Chile, China working on Gaby copper deal-Minister

SANTIAGO, May 27 (Reuters) - Copper giants Codelco of Chile and Minmetals are trying to rework a deal that would have given the Chinese company a stake in Chile's newest copper mine Gaby, Chilean Mine Minister Santiago Gonzalez said on Tuesday.

The two state companies signed an agreement three years ago giving Minmetals the right to buy an initial 25 percent stake in Gaby, as well as a chunk of the mine's output over the next 15 years in exchange for a $550 million advance.

"I think conditions in the market today merit that we revise the option that was signed," Gonzalez said. "I think that both sides are open to do this and of course Codelco has said it will form a commission of the two companies to reevaluate the (original) agreement."

Gaby harvested its first batch of copper cathodes last week, starting the $1 billion open-pit operation after about two years of construction that was funded in part by money it got from Minmetals as an advance for copper deliveries.

The deal with Minmetals has sparked patriotic opposition from Codelco labor unions who say the state company is not for sale, as a whole or in its parts, even as industry pundits say Codelco must privatize to modernize.

The deal lines up the world's largest copper producer, Codelco, with China, the world's largest copper consumer, and is seen as a pilot program to give the Chinese more ownership of the metal it needs, from mine to market.

The agreement has been pegged by many as a symbol of Chile and China's burgeoning trade relationship after the two countries signed a free trade agreement in 2006. It is a relationship that likely neither wants to jeapardize.

"Undoubtedly relations at the company level between China and Chile are not just about the Gaby project," Gonzalez said.

"Here we have a great future that we must implement, which we must develop, and it must be attractive and sustainable for both sides."

Gaby is due to produce about 80,000 tonnes of copper this year, and 150,000 tonnes per year from 2009. (Reporting by Pav Jordan; Editing by Christian Wiessner)