UPDATE 2-BHP Billiton offers $189 mln for United Minerals

* BHP cash bid conditional on United dropping China deal

* Says target's iron ore prospects in Pilbara region

* Offers A$1.30/shr, 43 pct premium to last traded price.

* United shares surge 40 pct on the bid

(Adds fund manager comments, details)

By Denny Thomas and James Regan

SYDNEY, Oct 16 (Reuters) - BHP Billiton Ltd (BHP.AX) launched a $189 million takeover bid for prospector United Minerals Corp UMC.AX in a bid to grab more land in the iron-ore-rich Pilbara district of west Australia.

As a condition of the deal, BHP wants United Minerals to drop an earlier deal to sell a stake to China Railway Materials Commercial Corp Group (crm).

BHP's interest in the small-sized UMC underscores the frenzy amongst Australia's dominant miners to peg more ground in Pilbara, the world's single-biggest deposit of iron ore, to meet forecasts of growing demand, particularly from China. [ID:nSYD410056]

What makes UMC attractive is the location of its deposit near BHP and Rio Tinto Ltd (RIO.AX). Added to that is UMC's proximity to train lines controlled by BHP and Rio, which would make it easy to transport the ore to the west coast for export.

"The last thing BHP wants is a competing project on the edge of their own projects," said Peter Chilton, a fund manager with Constellation Capital Management, which owns BHP shares.

"So probably it's a question of taking them out so they don't become a thorn in their side," he added.

United Minerals, which has a market value of about A$200 million, is sitting on an estimated 158 million tonnes of ore, more than one year's total output for BHP.

Pilbara sprawls over a half-million square kilometres, supplying more than 300 million tonnes of ore to steel mills worldwide this year.

The latest move comes as BHP and Rio put the final touches to their proposed iron-ore joint venture. On Thursday, the two companies scrapped an earlier plan to jointly market up to 15 percent of the joint venture output. [ID:nSYD270273].

Iron ore prices are expected to soar up to 15 percent this year as China's steel mills boost production, stoking a hunger for iron ore that drove up the country's imports of the resource by 30 percent last month. [ID:nBJD003121]

China has been trying to expand its footprint in Australia, offering funding at a time when Australia's prospectors and miners are hungry for new capital to dig new mines and build new rail lines.

The world's third-largest economy takes almost 80 percent of Australian iron ore exports by volume. [ID:NSYD505802]

Chinese companies are making a big push to help so-called "minnows" such as UMC get up and running as Beijing seeks to reduce its reliance on Rio and BHP for australian iron ore.

MORE DEALS?

BHP's offer is conditional on UMC dropping its earlier deal to sell an 11.4 percent stake to CRM. That deal has yet to receive Australian foreign investment clearance.

BHP's offer also hinges on mineral-rich but capital-poor UMC breaking a preliminary agreement to sell CRM 30 million tonnes of iron ore over 10 years.

BHP is offering A$1.30 a share in cash for all UMC shares, a 43-percent premium to last traded price. UMC shares jumped 40 percent to A$1.27, while BHP added 0.8 percent to A$39.20.

UMC's biggest shareholder Thundelarra Exploration (THX.AX) said it would support BHP's offer in the absence of a superior offer.

UBS is advising United Minerals while Gresham Partners is adviser to BHP.

Constellation Capital Management's Chilton said the BHP deal could herald more mergers or acquisitions in Australia's small iron ore explorers. That speculation boosted junior miners such as Atlas Iron (AGO.AX), Brockman Resources (BRM.AX) and Iron Ore Holdings (IOH.AX) on Friday.

"BHP Billiton is the logical owner and developer of the deposit given the proximity to BHP Billiton's iron ore deposits and established mine and infrastructure," BHP's iron ore division head, Ian Ashby, said in a statement.

UMC's iron ore deposit lies between two of Rio Tinto's haulage rail lines and is a western extension of a zone leading to BHP's large Area C and Area B mines 20 kilometres away.

The purchase of UMC and a quick development start could accelerate BHP's plans to lift its annual Australian iron ore production by 50 million tonnes to 205 million by 2011. (Editing by Valerie Lee) ($1=A$1.08) ((denny.thomas@reuters.com; +61 2 9373 1812; Reuters Messaging: denny.thomas.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com)) ($1=1.080 Australian Dollar)