Dublin, UK - (By Reuters) - A hedge fund firm has bought $3.4 million of scrap and waste for a company that will extract strategic and base metals for resale in a deal that could lead to a private equity investment.

Dublin-listed Greater Europe Deep Value Fund, advised by German-based Wermuth Asset Management, betting on high metal prices, has invested the money for a company with operations in Russia, Kazakhstan, Uzbekistan and Tajikistan.

“I would prefer not to name the company as there are some sensitive aspects,” Irina Teplitskaya, director of private equity investments at Wermuth, told Reuters.

“We’ve just done a plain project financing to understand and test the technology and operational capability … We may after that develop the deal into a larger private equity investment.”

Deep Value has also negotiated a share of the profits from the sale of the metals, which will include molybdenum, bismuth, copper and aluminum.

“This deal could potentially be highly profitable for us,” Teplitskaya said. “Commodity prices are rising and there are many companies which would buy the extracted metals.” Aluminum, used in transport, construction and packaging, has moved narrowly in recent months, but copper, used extensively in the construction and power industries, last week hit $8,335, the highest since May 30, 2006.

Bismuth, used in medicinal products, has recently hit all-time highs above $16 a pound on new demand from Japanese and Korean television screen makers as a substitute for lead.

Teplitskaya said the $3.4 million invested was just to secure supplies of scrap and that a second stage of the project will involve upgrading the plants and the technology.

She thinks a private equity deal could happen in the second half of this year if the investment works out.

“But there are operational risks and we need to make sure the plants can deliver the product on time,” she said.

“If we invest a large amount straightaway our returns will fall because the company will simply not be able to process all the waste and scrap in a timely manner.”

Wermuth is working with the company to improve technology…

“The cost of some chemicals used in the process have risen, so production has to be made more economical,” Teplitskaya said.

Deep Value, which manages $300 million and has returned more than 65 percent since it was launched on July 31, 2006, is the only fund invested in the project at the moment.

But Teplitskaya said the project was open to the Dublin-listed Greater Europe Fund, also advised by Wermuth. Greater Europe has $570 million under management and has returned 1,500 percent since it was launched in 1998.