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UPDATE 2-Eramet reaches deal to convert debt of New Caledonia nickel unit

(Adds background in paragraph 3, French finance ministry reaction in paragraph 7)

PARIS, March 4 (Reuters) - Eramet said on Monday it had reached an agreement with the French government to remove from its balance sheet hundreds of million of euros of debt related to its loss-making nickel subsidiary SLN in New Caledonia.

Existing loans to SLN worth 320 million euros from the government ($347.42 million) plus intra-group debt of a further 325 million euros will be converted into a 'quasi-equity' instrument, the group said.

The government loans to SLN are currently consolidated in Eramet's debt. As of end-December they represented about 40% of the group's net debt of 614 million euros but since then the government has loaned another 60 million euros to SLN, taking its loans to the firm to 320 million euros.

The conversion of the intra-group debt, however, has no impact on the group's consolidated accounts, Eramet added.

The conversion deal will free SLN indefinitely from payments related to the debt but will not alter the shareholder structure of either SLN or Eramet, a spokesperson added.

Eramet has a 56% stake in SLN, while the French state has a 27% stake in Eramet.

Confirming the agreement, France's finance ministry said by email that this would reinforce Eramet's balance sheet without additional financial support from the state.

SLN's debt has been among issues addressed in negotiations to rescue New Caledonia's struggling nickel industry.

Nickel processing in the French South Pacific territory has been sapped by high energy costs, political tensions and competition from cheaper Indonesian supply.

Eramet, which has refused to inject more funds into SLN, said it would continue to provide operational support to SLN "over time", depending on potential financial support for SLN from the French government and New Caledonian authorities.

Paris had been seeking to finalise a deal in January to salvage New Caledonia's three nickel processing firms, but talks are continuing.

SLN faces a deadline of April 10 to emerge from a separate court conciliation process aimed at overhauling its business.

France has offered loans to help avert the collapse of New Caledonia's two other nickel processing companies, Koniambo Nickel SAS (KNS) and Prony Resources.

KNS co-owner Glencore, however, last month suspended output at the KNS processing plant while it seeks a buyer for its stake. ($1 = 0.9211 euros) (Reporting by Gus Trompiz, editing by Tassilo Hummel, Ros Russell and Sandra Maler)

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