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Australian exploration firm Exco Resources Ltd hopes to agree a deal to supply copper ore to a processing facility owned by mining group Xstrata, Managing Director Michael Anderson said on Monday.

Such an agreement would allow Exco to reap the benefits of its copper deposits in Queensland without having to build its own concentrator, he told the Australia Day mining conference in London.

At the same time, Xstrata could benefit by filling expected capacity gaps that are due to emerge in a few years. Xstrata declined to comment.

Exco's Queensland copper deposits have a resource of 452,580 tonnes of copper and 439,100 ounces of gold. The bulk of the resource is in the E1 deposits, which are only 8 km away from Xstrata's Ernest Henry mine.

Ernest Henry is nearing the end of its open cast operation before it goes underground and ore volumes decline, which will leave its concentrator running below capacity.

"They have been interested in our projects for a number of years, they have done test work and due diligence," Anderson said.

Exco would have to spend around A$250 million ($160.7 million) to build its own stand-alone project, which would have an operating cost of US$1.73 per lb, versus operating costs of 75-80 cents per lb if the ore was sent to Xstrata's plant.

"There's a margin to be shared there and it's something we're very keen to pursue," he said. "There is a great win-win opportunity to preserve the longevity of Ernest Henry and see our ore bodies transformed without the need for major capital investment."

Exco has no debt and A$10.6 million of cash, enough for the time being, he said. (Reporting by Eric Onstad; Editing by Rupert Winchester)

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